Latticework of Mental Models: Better Decisions, Better Investors

14 minutes

 

latticework of mental models

How do we become better investors? Better decision makers? Having a latticework of mental models to hang our thoughts and choices on is a great start. Creating these models is how we learn to become better decision makers. Before creating our latticework of mental models we need to create the mental models that we will use. We must explore the big ideas from the major disciplines.

Physics, biology, psychology, philosophy, literature, history, sociology, and others.

These are the big disciplines that we call the models.

Our goal is not to remember facts and be able to repeat them, like on a test in college. The goal is to hang these models on a latticework of mental models with concrete examples in our head to help us remember them. And apply them in our life.

The latticework of mental models puts them in a form that we can use analyze a wide variety of situations. This enables us to make better decisions. When these big ideas from multiple disciplines all point toward the same conclusion. Then we can begin to make the conclusion that we have come across an important truth.

Charlie Munger and the latticework of mental models

This idea of a latticework comes Charlie Munger, co-chairman of Berkshire Hathaway. Munger is one of the greatest cross-disciplinary thinkers in the world.

I could try to explain his thoughts on worldly wisdom, but I would fail miserably. So instead we will use his words.

Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. Continue reading “Latticework of Mental Models: Better Decisions, Better Investors”

Tools That I Use to Be a Better Investor

6 minutes

 

Photo courtesy of engineerblogs.org

This is a list of the different tools that I use to help me find the stocks that I investigate, track, and purchase. It is an ongoing list and I discover new tools all the time. Please check back from time to time to see what may have changed. I will update as I discover new things. This is the fun part as we discover more ways to learn about stocks and how to invest. It is never over, the learning. 

Stock Screeners:

FINVIZ

This is hands down my favorite screener. It is super easy to use and has great information on all sorts of financial data. It is sortable by rows and you can edit out the data you don’t want. It does have a premium edition that enables you to export your picks into an excel spreadsheet.

One of the things I like about this particular screener is that you can sort by all the financial data I am looking for to weed out the stocks I won’t be interested in. For the value investing metrics that I look for it gives me great flexibility to edit those metrics out to help narrow down the choices.

It also has links to different news sources relating to the particular company you are investigating. Another perk of this site is that if you are looking for in-depth info on a company and need the data quickly it is easy to search for that data on their site.

One last perk, it is free!

GOOGLE FINANCE

This is another great screener that I will use to get additional ideas. I came across this website in general thru Preston & Stig from The Investors Podcast. They use this site for their stock screener. They send out a checklist for signing up for their newsletters that have some great ratios for you to screen for.

One of the things that I like about the Google screener is not only the ability to screen for stocks but also the ability to check on all the news in the financial world.

An additional plus is you can download the app as well so you can access all of these features from your smartphone as well.

Also free.

FINANCIAL DATA:

Morningstar

This is one of the best sites to gather financial data on any company that you are interested in. It has ten years of data, which can be difficult to find on many sites.

Continue reading “Tools That I Use to Be a Better Investor”

Value Investing Advice from the Dhando Investor

12 minutes

51gn-ygw5ol-_sx330_bo1204203200_The Dhando Investor, the low-risk value method to high returns is a wonderful book written by hedge fund manager Monish Pabrai. In it, he gives a comprehensive value investing framework for the individual investor.

The book is written in a straightforward style that is easy to read and comprehend. The Dhando Investor lays out the amazingly powerful value investing framework. Written with the intelligent individual investor in mind.

The Dhando method expands on the value investing principles expounded by Benjamin Graham, Warren Buffett, and Charlie Munger. In this book, we will come across phrases like “Heads I Win! Tails, I don’t lose much”, “Few bets, Big bets, Infrequent bet.”

Other concepts discussed are Abhimanyu’s dilemma, a detailed breakdown of the Kelly formula to invest in undervalued stocks.

So who is Monish Pabrai? I can hear you asking who is this guy and why are we talking about his book?

Let’s dig in a little and learn more about Monish.

Monish was born in 1964 in Mumbai, India and he moved to the US in 1983 to study at Clemson University. After graduation, he worked in the tech world until branching out on his own.

He started his own tech company with $30,000 from his 401k and $70,000 in credit card debt. In 2000 he sold the company for $20 million.

In 1999 he started Pabrai Investment Funds, that he still runs today. Since the fund’s inception, he has generated net returns of 517% versus the 43% return of the S&P 500 for the same time period. We are talking 16 years that he has made these returns.

His focus is long-only equities that are deeply distressed. He looks for two to three ideas a year, which he feels is enough. His portfolio is highly concentrated in that he generally only holds 10-20 stocks at one time. Currently, he has seven positions.

Buying and holding are only part of his strategy, he also looks very closely at his mistakes as well. Investing is a field where mistakes can be very costly and they must be looked into. He is unusual in that he doesn’t gloss over mistakes but rather spends time breaking down what happened so he can learn from the mistake. So he doesn’t repeat it in the future.

He uses a checklist of what not to do in the markets. Pabrai built this list by analyzing investors that he admires and deconstructing their mistakes. As a result, he ended up with hundreds of checkboxes on his investing checklist. This is not his exact checklist but rather an outline of his checklist and how he things about constructing his. He feels that each individual investor should come up with their own checklist as they learn more about investing.

Monish Pabrai’s primary source of investment ideas come from the 13F SEC filings from other value investment managers that he admires. 13F SEC filings are a quarterly filing required of all institutional investment managers with over $100 million in assets. In this filing, they will list all the current holdings for each fund. It will also list the prices purchased or sold as well.

This is a great source of investing ideas and is a whole investment strategy in and of itself. We will dig into this topic in a future post.

Continue reading “Value Investing Advice from the Dhando Investor”