1/10 🧵Today, we’re diving into the concept of base rates in investing, a principle drawn from the work of Michael Mauboussin and various academic research. Let’s discuss its relevance to investment decision-making, complete with real business examples. 2/10 Base rates are historical averages or outcomes across a population or a sample in a certain context. Though widely used across disciplines, they’re often overlooked in investing. Investors tend to focus on the specifics of a company—the “inside view.”

1/12 🧵”The Joys of Compounding” by @Gautam__Baid is an essential read for every investor. Packed with timeless wisdom, the book teaches the art of value investing and the power of compounding. Here are the top 10 key takeaways. #Investing #BookSummary 2/12 1️⃣ Lifelong Learning: Baid emphasizes the need for constant learning to become a successful investor. He believes an investor’s mind should be a growing, living thing, akin to a ‘latticework’ of mental models. #LifelongLearning #Investing

In my opinion, a wonderful business is one that has a moat, a strong management team, and a good long-term outlook.
A terrible business is one that has a weak position, poor management, and lacks innovation or transparency.

Here's what others think...🧵👇 "A wonderful business is one that has a durable competitive advantage, is run by able and owner-oriented management, and has a long-term outlook." - Warren Buffett

1/ Have you ever heard of the endowment bias? It's a cognitive bias that causes people to place more value on things they already own. This can be a big problem when it comes to managing your stock portfolio. 2/ If you have an endowment bias, you may be reluctant to sell stocks that you already own, even if they're no longer performing well. You may hold onto them because you feel a sense of attachment or because you don't want to admit that you made a mistake.

Microcap investing is almost certainly the best pond for the individual investor to fish in.

There are many advantages that bigger investors and funds don’t have…🧵 These businesses are often simpler to understand

An example: $ACQ.TO
open.substack.com/pub/margarineo…

1/ The durability of a business is one of the keys for any long term investment success.

The concept of the Lindy Effect is the idea that for non perishable things, the length of time it survives is evidence that it will have a long future life. marginofsafetyinvesting.com/p/lindy-busine… 2/ The businesses I talk briefly about in this article include some extremely long lasting models that have stood the test of time to be iconic, high quality and with management teams with long term vision.

Some have been around since the 1800’s!

Which would you bet is more likely?

1/ Successful Outcome = A

2/ Successful Outcome = B + C

A = 30% chance to occur
B = 75% chance to occur
C = 75% chance to occur

For 2 to be successful, B must occur prior to C and both must occur (say the order has a 50/50 chance) Initially, A appears way less likely. Quickly, you determine that for both B and C to occur, the odds are simply multiplied which lowers the chances quickly to 56% for scenario 2.

1/ Being a concentrated investor means having to say no to most investment ideas.

How to say NO…🧵 👇🏽 2/ Recognize that the safety of crowds is something you will need to avoid. Social proof has value but the concentrated investor has to be comfortable being the black sheep walking against the crowd.

1/ Read the market strategy news all you want but keep in mind how useful it might be. The following are headlines preceding and during the great recession and stock market crash of 1929… 2/ Stocks in the aggregate, though bucking a 15% rate for loans, enjoyed the greatest advance they have known in a single day in the last two years. Not even the surging bull markets of the memorable year 1928 saw such a day of buying.

— New York Herald Tribune, March 28, 1929

Quality of revenues is one of the best indicators of long term investment success.

What types of businesses have these characteristics?

🧵 👇🏽 1/ Recurring revenue businesses.

Sales that are not descrete mean more efficient sales costs and marketing can focus on new customers as opposed to maintaining old.

Examples include software as a service, subscription models, maintenance for regulatory required equipment.

Ten impactful takeaways from Peter Lynch’s 📚One up on Wall Street 📚

A must read for individual stock pickers and investors!

🧵 👇🏽 1./ Insiders selling is not necessarily a solid signal about anything compared to insiders buying.

1/ The philosophy of margin of safety in investing is not a complicated one. It was popularized by Ben Graham and then carried on by many other great investors who had different views and ways to apply the philosophy.

Here’s some of their views… 🧵 2/ A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.

Seth Klarman

1/ The value of making mistakes is learning from them. A prerequisite for learning is recognizing and owning these errors.

Even Warren Buffett of Berkshire Hathaway $BRK makes mistakes in investing to this day. Here are some mistakes and what we can take away…🧵 👇🏽 2/ Being able to recognize your past mistakes is a key to learning. Luck plays a big role in outcomes but being honest about past misjudgments as soon as possible is a strong ability to future improvements.

1/ A high quality long term investment is not easy to find. Having a mental model for what to look for in a business and a management team can be helpful.

Chuck Akre’s three legged stool model is an interesting way to frame it…

🧵 👇🏽 2/ A three legged stool framework was imagined after seeing the utility, flexibility, and robust sturdiness of a milking stool that only had three legs.

The three legs are:

1. Extraordinary businesses
2. Talented management
3. Great reinvestment opportunities

1/ Too much activity is the demise of even the smartest investors.

The coffee can portfolio could be a solution to this. How can we all learn from the idea of a coffee can approach to holding stocks?

☕️ 💴 🧵 … 2/ The coffee can portfolio was an idea written by Robert Kirby in 1984. Kirby noticed how fees and a focus on the short term often lead to underperformance for managers and even more so for investors.

1/ A thread on serial acquirers 🧵 👇🏽

Profitable growth via acquisitions can be difficult but when done well can mean compounding shareholder value for long periods at high rates.

What are the signs to look for and what are some things to avoid? 2/ Most serial acquirers suffer when they get larger as it is a difficult concept to scale. Growth of the business causes a couple issues:

1. acquisition valuations go higher, lowering returns.
2. the company has to do more acquisitions, making it difficult to find and execute

1/ Asset light businesses can require no capital to fund growth.

Stock exchanges like $ndaq and the nyse (owned by $ice) would fit this description as well as $v and $ma and smaller ones like $otcm.

They can be great long term investments. 🧵 2/ See’s Candies which Buffett and Munger at $brk often used as an example of a “Wonderful” business that requires very little new capital to grow and could raise prices for a very long time. It had the capacity to sell a little more for higher prices for a long time.

1/ boring compounders are some of the best businesses to own over the long term.

why is that? 🧵 2/ boring businesses that operate in slow or non-changing industries often don’t attract attention from media, young retail investors looking to change the world in the “new age”

unlikely to attract over-investment of new capital

1/ Knowing and investing within your “circle of competence” is often quoted. I suspect I do not strictly follow it as I should. I need to be better.

How to quickly know if you are inside your circle of competence 🧵 👇🏽 2/ Write ✍️ the business model out in plain english. Can you articulate how/why the business gets revenues? Explain it to your mom. If you can’t, you don’t know shit.

1/ Microcap businesses are one of the last places where the small retail investor can find an edge without being brilliant.

I look for compelling businesses that are already or within reach of predictable and growing profits, run by great management. A growing moat helps! 🧵 2/ Avoid story stocks. There are so many businesses selling the stock as the product. Look for businesses that are proven to provide value to their customers and not some shiny new technology that is always just a few years away.

Capital allocation is something great CEO's do.

Mark Leonard of Constellation Software $CSU has shared insights into his rational way of thinking about allocation. He is disciplined, humble, open-minded and aligned with shareholders.

Coffee time ☕️.
🧵👇 Monitor performance to influence decisions

“..Several of the Initiatives became very successful. Others languished, and many of the worst Initiatives were terminated before they consumed significant amounts of capital.”