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1/

Get a cup of coffee.

In this thread, I'll help you understand the basics of Binomial Thinking.

The future is always uncertain. There are many different ways it can unfold -- some more likely than others. Binomial thinking helps us embrace this view.

Get a cup of coffee.

In this thread, I'll help you understand the basics of Binomial Thinking.

The future is always uncertain. There are many different ways it can unfold -- some more likely than others. Binomial thinking helps us embrace this view.

2/

The S&P 500 index is at ~3768 today.

Suppose we want to predict where it will be 10 years from now.

Historically, we know that this index has returned ~10% per year.

If we simply extrapolate this, we get an estimate of ~9773 for the index 10 years from now:

The S&P 500 index is at ~3768 today.

Suppose we want to predict where it will be 10 years from now.

Historically, we know that this index has returned ~10% per year.

If we simply extrapolate this, we get an estimate of ~9773 for the index 10 years from now:

3/

What we just did is called a "point estimate" -- a prediction about the future that's a single number (9773).

But of course, we know the future is uncertain. It's impossible to predict it so precisely.

So, there's a sense of *false precision* in point estimates like this.

What we just did is called a "point estimate" -- a prediction about the future that's a single number (9773).

But of course, we know the future is uncertain. It's impossible to predict it so precisely.

So, there's a sense of *false precision* in point estimates like this.

1/

Get a cup of coffee.

Let's talk about the Birthday Paradox.

This is a simple exercise in probability.

But from it, we can learn so much about life.

About strategic problem solving.

About non-linear thinking -- convexity, concavity, S curves, etc.

So let's dive in!

Get a cup of coffee.

Let's talk about the Birthday Paradox.

This is a simple exercise in probability.

But from it, we can learn so much about life.

About strategic problem solving.

About non-linear thinking -- convexity, concavity, S curves, etc.

So let's dive in!

2/

Suppose we came across a "30 under 30" Forbes list.

The list features 30 highly accomplished people.

What are the chances that at least 2 of these 30 share the same birthday?

Same birthday means they were born on the same day (eg, Jan 5). But not necessarily the same year.

Suppose we came across a "30 under 30" Forbes list.

The list features 30 highly accomplished people.

What are the chances that at least 2 of these 30 share the same birthday?

Same birthday means they were born on the same day (eg, Jan 5). But not necessarily the same year.

3/

What if it was a "40 under 40" list?

Or a "50 under 50" list?

Or in general: if we put M people on a list, what are the chances that *some* 2 of them will share the same birthday?

What if it was a "40 under 40" list?

Or a "50 under 50" list?

Or in general: if we put M people on a list, what are the chances that *some* 2 of them will share the same birthday?

1/

Get a cup of coffee.

In this thread, we'll cover *State Quantities* and *Flow Quantities*.

This mental model can help us analyze many different entities -- from complex engineering systems to publicly traded companies.

Get a cup of coffee.

In this thread, we'll cover *State Quantities* and *Flow Quantities*.

This mental model can help us analyze many different entities -- from complex engineering systems to publicly traded companies.

2/

A "State Quantity" is something that's associated with a *specific point in time*.

For example, the number of followers a Twitter account has is a state quantity. This number can go up and down over time. But at any one *specific* time point, it's fixed.

A "State Quantity" is something that's associated with a *specific point in time*.

For example, the number of followers a Twitter account has is a state quantity. This number can go up and down over time. But at any one *specific* time point, it's fixed.

3/

Similarly, the amount of cash a company has is a state quantity.

This cash balance can also rise and fall over time.

But pick any one *specific* time point -- and the company can only have one *specific* cash balance at that time point.

Similarly, the amount of cash a company has is a state quantity.

This cash balance can also rise and fall over time.

But pick any one *specific* time point -- and the company can only have one *specific* cash balance at that time point.

1/

Get a cup of coffee.

In this thread, let's talk snowballs.

Snowballs are super fun! And they can teach us so much about life, about things that grow over time, their rates of growth, compounding, etc.

Get a cup of coffee.

In this thread, let's talk snowballs.

Snowballs are super fun! And they can teach us so much about life, about things that grow over time, their rates of growth, compounding, etc.

2/

Snowballs are often used as a metaphor for compounding.

A snowball starts small at the top of a hill. As it rolls downhill, it picks up speed and grows in size. This is like money compounding over time.

For example, here's Buffett's famous "snowball quote":

Snowballs are often used as a metaphor for compounding.

A snowball starts small at the top of a hill. As it rolls downhill, it picks up speed and grows in size. This is like money compounding over time.

For example, here's Buffett's famous "snowball quote":

3/

There's even a famous book about Buffett with "snowball" in the title.

The book's theme is similar to the quote above: the process of compounding is like a snowball that grows over time as it rolls downhill.

Link: amazon.com/Snowball-Warre…

There's even a famous book about Buffett with "snowball" in the title.

The book's theme is similar to the quote above: the process of compounding is like a snowball that grows over time as it rolls downhill.

Link: amazon.com/Snowball-Warre…

1/

Get a cup of coffee.

In this thread, I'll walk you through the Rule of 72 -- and related "mental math tricks" for investors.

Get a cup of coffee.

In this thread, I'll walk you through the Rule of 72 -- and related "mental math tricks" for investors.

2/

As humans, we tend to think *linearly*.

When we see a curve, we like to mentally approximate it by a straight line.

This helps us cope with changes in the world around us. Changes that happen a *constant* pace. Changes that don't need our attention for very long.

As humans, we tend to think *linearly*.

When we see a curve, we like to mentally approximate it by a straight line.

This helps us cope with changes in the world around us. Changes that happen a *constant* pace. Changes that don't need our attention for very long.

1/

Get a cup of coffee.

In this thread, I'll help you understand Warren Buffett's famous quote: it's better to buy a wonderful business at a fair price than a fair business at a wonderful price.

Get a cup of coffee.

In this thread, I'll help you understand Warren Buffett's famous quote: it's better to buy a wonderful business at a fair price than a fair business at a wonderful price.

2/

This quote has 2 parts:

Part 1. Business Quality. To understand this, we need a way to distinguish *wonderful* businesses from just fair/mediocre ones.

Part 2. Price. We should know when we're getting a business for a wonderful price, and when we're paying too much for it.

This quote has 2 parts:

Part 1. Business Quality. To understand this, we need a way to distinguish *wonderful* businesses from just fair/mediocre ones.

Part 2. Price. We should know when we're getting a business for a wonderful price, and when we're paying too much for it.

3/

And the quote itself says that Part 1 (Business Quality) is way more important than Part 2 (Price).

So let's dive into Part 1. What makes a business *wonderful*?

And the quote itself says that Part 1 (Business Quality) is way more important than Part 2 (Price).

So let's dive into Part 1. What makes a business *wonderful*?