Notes - Big Mistakes - Lessons from Legendary Investors

July 8, 2025

Chapter 1: Benjamin Graham: There Are No Iron‐Clad Laws

This chapter introduces Benjamin Graham, often referred to as the "Dean of Wall Street," whose teachings on investing are considered timeless. Graham's foundational works, "Security Analysis" (published in 1934) and "The Intelligent Investor," are highlighted as central to the field of financial analysis. "The Intelligent Investor," specifically, was written for laymen and left a profound impression on figures like Warren Buffett, who deemed it "by far the best book about investing ever written". Graham is credited with inventing financial analysis, and his influence is so profound that "Investing without Graham would be like communism without Marx".

Graham's genius stemmed from his understanding that stock prices, as quoted in newspapers, and the underlying value of a business are not always equivalent. He emphasized the concept of a "margin of safety," defined as "the discount at which the stock is selling below its minimum intrinsic value". This principle allowed investors to make sound decisions without needing to pinpoint an exact intrinsic value, much like determining if someone is old enough to vote without knowing their exact age. Graham also wrote about behavioral economics, identifying cognitive and emotional biases that lead investors to irrational decisions. He famously illustrated this with the concept of "Mr. Market," a hypothetical partner whose daily mood swings offer opportunities to buy or sell at prices that often seem "silly" compared to intrinsic value.

Despite his profound insights and success in managing money and teaching, Graham's career was not without its "trying times". He started his investment partnerships in the 1920s, with notable early success. However, in the severe market downturn of the early 1930s, Graham suffered significant losses, losing 70% of his money between 1929 and 1932. He learned that "margins of safety don't matter when the baby is getting thrown out with the proverbial bathwater". Even for a careful and thoughtful analyst like Graham, "value investing is not a panacea. Cheap can get cheaper". This personal experience reinforced his understanding that while value investing is a "wonderful option over the long term," it is not immune to short-term market fluctuations.

The chapter also touches on how Graham evolved his thinking, acknowledging that the landscape of investing changes. By 1976, he noted that "elaborate techniques of security analysis" were less rewarding due to the "enormous amount of research now being carried on," aligning to a "limited extent" with the "efficient market" school of thought. He humorously observed that Wall Street professionals' brilliance often "offsets each other," making their market forecasts no more dependable than tossing coins. The ultimate lesson from Graham's experiences is that "there are no iron‐clad laws in finance and that cheap can get cheaper". Investors, even those who start with Graham's teachings, must "discover their own paths".

Chapter 2: Jesse Livermore: Manage Your Risk

This chapter delves into the career of Jesse Livermore, the famous market speculator, highlighting the dangers of relying on "rules of thumb" or axioms like "Buy low, sell high". Such phrases, while seemingly simple, often mask the underlying complexity of market dynamics and can lead to "systematic biases, blind spots and bad decisions". Livermore himself, despite being the source of many well-known trading sayings, often failed to adhere to them.

Livermore began his career as a board boy at Paine Webber at 14, soon moving to "bucket shops" where he quickly accumulated $1,200 by age 17. His early success, however, led to him being banned from many bucket shops. His first significant loss as a professional speculator came in 1901 when, using leverage, he shorted U.S. Steel and Santa Fe Railroad, losing $50,000 in a few hours and finding himself broke. He realized that his experience from bucket shops, where the ticker price was the actual price, did not translate to professional trading, where the ticker was merely a communication medium and real prices could differ.

Livermore's career was marked by making and losing several fortunes. A notable success was in 1906, when he made $250,000 (over $6 million in today's dollars) by shorting Union Pacific just before the San Francisco earthquake caused the market to crack. Despite this, he quickly lost 90% of his windfall by selling too soon. He reflected, "My position was right, but my play was wrong". He rebounded again, accumulating $750,000 by shorting into rallies. In 1907, during a market panic triggered by a failed attempt to corner United Copper, Livermore made $3 million by being short, a fortune for a man under 30.

However, his success often led to his downfall. In 1908, after earning $2 million in cotton and gaining the nickname "Cotton King," he was seduced by the fundamental knowledge of Teddy Price. Ignoring his own established rules, Livermore sold his winning positions and added to his losing cotton position, stating, "Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse". This blunder cost him $4.5 million and contributed to him being "wiped out completely" by 1909. He was also "taken for a ride" by a senior broker who used his account to sell railroad stock, leading to over $1 million in debt and his first bankruptcy at age 38.

Livermore did stage a remarkable comeback, leveraging World War I stock explosions to become a rich man again, and achieving his biggest payday ever by shorting $450 million across 100 stocks before the 1929 crash, making $100 million (equivalent to $1.4 billion today). This was the "height of his powers". Yet, he made his "final mistake" by going long at the market bottom in 1932, then flipping to the wrong side again as stocks continued to fall. By 1934, he was broke again, owing $5 million, and found it hard to adjust to the newly imposed rules by the Securities and Exchange Commission. Livermore tragically took his own life in 1940. His story is a poignant illustration that "the most quoted trader of all time exhibited such poor risk management," and that "the mistake family is so large that there is always one of them around when you want to see what you can do in the fool‐play line". The crucial lesson is that "losing money is a part of investing. Risk management is a part of investing. Repeating mistakes is part of investing".

Chapter 3: Mark Twain: Don't Get Attached

This chapter focuses on the investment mistakes of Samuel Clemens, better known as Mark Twain, and the crucial lesson of not getting emotionally attached to losing investments. The author emphasizes the natural human tendency to "hold onto the losers longer than we should" to defer defeat and keep our ego intact, a behavior that can turn "small losses... into big losses". This is exacerbated by the often-painful math of recovery, where a 20% loss requires a 25% gain to break even, and an 80% loss needs a 400% gain. The danger is compounded when investors "add to the position" of a losing stock.

Twain is presented as an "abysmal investor, an absolute magnet for con men and fool schemes," who lost his and his wife's fortune through "appalling investments". He failed to learn the "law of holes," continuing to pour money into losing ventures. Twain's financial struggles, ironically, led to some of his brilliant literary quotes about speculation and hindsight.

His "list of failed investments" was extensive, including gold mining, the New York Vaporizing Co. (a steam engine improvement that failed, costing him $35 weekly payments to the inventor), Plasmon (a milk powder extract), a steam pulley, and an insurance company. He also lost money the "old-fashioned way" by buying and selling stocks at the wrong time, such as purchasing Oregon Transcontinental Railroad at $78 and selling it at $12. Twain's experiences led to "errors of omission" as well, most notably passing on investing in Alexander Graham Bell's telephone, a decision he later regretted bitterly after a friend became wealthy from it.

Twain's most significant financial disaster was his investment in James Paige's typesetter, an 18,000-piece machine he hoped would revolutionize printing. He was "blinded by his own hubris," pouring an estimated $5 million (in today's dollars) into it, paying the inventor $7,000 a year, and refusing to admit he was wrong despite mounting evidence of failure. This "bottomless money pit" drained his resources and was a major factor in the bankruptcy of Webster & Company, his publishing house, in 1894.

The public criticism of his financial failures was harsh. Despite the humiliation, Twain, at 59, embarked on a global stand-up comedy tour to repay all 101 of his creditors, demonstrating a strong sense of honor. He successfully cleared his debts by 1898 but never entirely lost his "speculative gene". The core lesson from Twain's story is the importance of keeping losses manageable and deciding "before you invest how much you're willing to lose". This approach allows decisions to be "driven by logic rather than fear—or some other emotional attachment to a position". Twain himself, a few years after bankruptcy, learned this lesson by walking away from a losing investment in the American Mechanical Cashier Company after eight months.

Chapter 4: John Meriwether: Genius's Limits

This chapter explores the idea that intelligence alone is not a guarantee of investment success, using the cautionary tales of Isaac Newton and, primarily, John Meriwether's Long-Term Capital Management (LTCM). The author posits that investment success accrues more to the disciplined than to the brilliant.

The example of Isaac Newton highlights this point: despite his extraordinary intellect, he fell prey to "greed and envy" during the South Sea Company bubble. After making a 100% return, he re-entered the market with three times his original investment, only to lose nearly all of it when the bubble burst. Newton's famous quote, "I can calculate the motions of the heavenly bodies, but not the madness of the people," underscores the limits of pure intellect in predicting human behavior in markets. The author notes that many investors, like professors in a classic study, "feel we're above average," a confidence that often doesn't align with reality in a market filled with "super humans".

The concept of the "paradox of skill" is introduced, explaining that as skill and intelligence in a field improve, luck or chance plays an increasing role in outcomes because the competition is also highly skilled. This brings us to John Meriwether and LTCM, which exemplified the limits of genius. Meriwether, a legendary figure at Salomon Brothers, assembled a team of "Einsteins"—"the brightest minds in the industry," including Nobel laureates Robert Merton and Myron Scholes (co-creator of the Black-Scholes option pricing model). LTCM launched in 1994 with $1.25 billion, the largest hedge fund opening at the time, and delivered phenomenal early returns, quadrupling capital without a single losing quarter.

However, their downfall began when their arbitrage opportunities started to vanish as "Everyone else started catching up to us". In response, they returned $2.7 billion in capital to investors but did not reduce their position sizes, increasing their leverage from 18:1 to 28:1. At one point, LTCM had $1.25 trillion in open positions and was levered 100:1. Their highly sophisticated models, which calculated daily "Value at Risk" (VAR) at $35 million, spectacularly failed in August 1998 when they lost $550 million in a single day and $1.9 billion by month-end. The Russian financial crisis was at the epicenter of their "death spiral".

Ultimately, the Federal Reserve Bank of New York had to orchestrate a $3.6 billion takeover by 14 Wall Street banks to prevent LTCM's failure from "poisoning the entire financial system". The core mistake of these "smart people" was "trusting that their models could capture how humans would behave when money and serotonin are simultaneously exploding". While they could "calculate the odds of everything," they "understood the possibility of nothing". The chapter concludes with the powerful lesson that "Intelligence combined with overconfidence is a dangerous recipe when it comes to the markets".

Chapter 5: Jack Bogle: Find What Works for You

This chapter champions the philosophy of Jack Bogle, the founder of Vanguard, emphasizing that investing is a "long journey, often lasting a lifetime," and the importance of finding a methodology that works for you. Bogle, who didn't create the index fund until he was 47, exemplifies this journey.

The chapter begins by highlighting the massive success of the Vanguard 500 Index fund, now the world's largest mutual fund, and the shift of trillions of dollars from active to index funds in recent years. However, the idea of "settling for average" market returns, championed by Bogle, was initially met with "resentment from the investment community and apathy from investors," even being derided as "Bogle's folly". The First Index Trust in 1976 only raised $11.3 million against a target of $150 million.

Bogle's career started at the Wellington Fund in 1951, where he had written in his Princeton thesis that mutual funds "should make no claim to superiority over the market averages". He was handpicked to succeed Walter Morgan as president in 1965. However, under Bogle's watch, the Wellington Fund "quickly lose its way" as performance sputtered. Lured by the "siren song of the Go-Go years," management made the fateful decision to merge with Thorndike, Doran, Paine & Lewis Inc. (TDP&L), a move Bogle later described as "the worst merger in history, including AOL and Time Warner".

This merger transformed the conservative Wellington Fund into its "antithesis," increasing turnover and equity ratios. The new "dynamic conservatism" philosophy, with its emphasis on "a strong offense" for growth stocks, proved disastrous when the go-go years ended in a "bloody ending in 1969". Funds like Ivest, Explorer, Morgan Growth, and Technivest (a fund based on technical analysis, ironically) suffered massive declines. The crown jewel, the Wellington Fund, lost 40% and did not recoup losses until 1983. Bogle expressed deep "regret and then my anger at myself for having made so many bad choices".

Bogle was fired as CEO of Wellington Management in 1974, a "abject failure" that paradoxically "give birth to the most important financial innovation the world has ever seen, the index fund". By September 1974, Bogle had convinced the board to form The Vanguard Group Inc., a "truly mutual mutual funds structure". Sixteen months later, the First Index Investment Trust was born. Despite a challenging market environment in 1976, Bogle persevered, confident that index funds offered investors the "best chance at capturing their fair share of market returns over the long-term".

The index fund's success was slow, but ultimately decisive, vindicating Bogle's vision. The author shares his own experience of losing nearly $20,000 in commissions over five years before realizing he was "not destined to be the next Paul Tudor Jones" and embracing index funds. The chapter stresses that investing is a "lifelong journey of self-discovery" and that while the market "throws far too many curve balls for you to wing it," finding a "repeatable" methodology that suits one's personality is paramount.

Chapter 6: Michael Steinhardt: Stay in Your Lane

This chapter highlights the critical importance of defining and staying within one's "circle of competence" in investing, illustrated by the costly mistakes of Michael Steinhardt. The author contrasts this with Warren Buffett, who famously avoided the tech bubble of the late 1990s because he "knew nothing about semiconductors and even less about the Internet," thereby never paying an "ridiculously inflated price". Buffett's Berkshire Hathaway saw its value cut in half, but he remained "committed to value investing, and it paid off".

Michael Steinhardt, an early pioneer in the hedge fund business and one of the "big three" (along with George Soros and Julian Robertson), had an "amazing performance record". His firm, Steinhardt, Fine, Berkowitz & Company, returned an average of 24.5% annually from 1967 until his retirement in 1995, turning $1 into $481. Steinhardt was known for his "fiery passion for the stock market," thriving in most market environments and even emerging as the largest hedge fund during the "Hedge Fund Miseries" of the early 1970s. He was also known for his "tyrannical behavior" and arrogance.

However, Steinhardt's "steady performance" and the "easy money" flowing into hedge funds in the mid-1990s led to his downfall. His firm's assets under management grew to nearly $5 billion, an amount that made it increasingly difficult to move the needle with his bread-and-butter small and midcap US stocks. This "newfound size" forced him to "venture off into areas where he had no expertise," like foreign bonds and emerging markets. He admitted, "Unfortunately, we walked forward unafraid". He also expanded into directional bets on European, Australian, and Japanese debt using swaps, leading to indecipherable daily profit-and-loss statements.

The "overconfidence drove them to grow much more quickly than was prudent". Steinhardt, accustomed to close relationships with US brokers, found himself without that advantage in Europe when "things got hairy". Trouble arrived on February 4, 1994, when the Federal Reserve raised interest rates, causing European bonds to plummet far more than expected. Steinhardt lost "$800 million in four days". This experience left him "mentally drained," and he later reflected that 1994 "had been devastating. It had taken a part of me that could not be retrieved".

Despite a comeback in 1995, Steinhardt retired at 54, with his firm's assets shrinking from $5 billion to $2.1 billion. The chapter's key takeaway is that "Bad behavior is one of the greatest dangers investors face, and traveling outside your circle of competence is one of the most common ways that investors misbehave". It is not the width of the circle that matters, but the discipline to "stay inside it". If one must venture outside, it should be done cautiously, with small investments and limited losses.

Chapter 7: Jerry Tsai: You're Not as Smart as You Think

This chapter uses the story of Jerry Tsai, the first celebrity money manager, to illustrate the danger of confusing skill with bull market conditions, a phenomenon known as "attribution bias". The author explains that in a rising market, investors often "attribute their gains to skill rather than to favorable market conditions," leading to increased trading and subsequent underperformance.

The historical context of the 1950s and 1960s is provided: after the Great Depression, a whole generation of investors was wiped out, and Wall Street lacked "new blood". By the 1960s, a younger, more aggressive breed of managers emerged, including Tsai. In 1957, before his 30th birthday, Tsai began running the Fidelity Capital Fund, becoming "the first celebrity money manager ever". His "rapid-fire" trading style, with portfolio turnover often exceeding 100%, and his "timing, grace, and most important, his returns," drew immense money to the fund. From 1958 to 1965, he returned 296%, significantly outperforming conservative equity funds.

However, the author contends that what investors and Tsai himself perceived as "skill and genius was nothing more than luck". In 1965, Tsai left Fidelity to launch his own Manhattan Fund, which became the "biggest offering ever for an investment company" at the time, raising $247 million, with investors even willing to pay an 8.5% sales load. Tsai's "larger-than-life presence on Wall Street" and "lightning-quick moves" made him a constant topic of conversation.

The Manhattan Fund initially performed well, up almost 40% in 1967. But in 1968, it was down 7% and ranked 299th out of 305 funds. When the "market crash came" in 1969-1970, the high-flying stocks that Tsai favored, like National Student Marketing, collapsed dramatically. The "gunslingers of the 1960s" paid little attention to risk, having experienced a period of "virtually no turbulence at all" in the market. The "carefree attitude was a result of the market they were playing in".

Tsai eventually sold his management company in 1968. Looking back, he felt the press had been "very unkind," focusing on his "one bad year" in 1968 after "ten good games". However, the author argues that the "game he was playing was like bowling with bumpers in the gutters". When those "bumpers were taken away" in 1968, the Manhattan Fund lost 90% of its assets over the next few years, and by 1974, it had the "worst eight-year performance in mutual fund history to date". The core lesson is powerfully reiterated: "Don't confuse brains with a bull market!".

Chapter 8: Warren Buffett: Beware of Overconfidence

This chapter focuses on the pervasive and dangerous cognitive bias of overconfidence in investing, exemplified by even the "greatest investors of all time" like Warren Buffett. The author notes that investors are inherently "a confident bunch," often believing they know more about the unpredictable future than they can.

The "endowment effect" is introduced, explaining how once consumers or investors make a purchase, they value that possession more, not because its appeal has enhanced, but because of the "pain of giving it up". This makes it difficult to change one's mind, as "Confidence grows exponentially once you've decided on something you were previously unsure about". This bias affects everyone, including financial professionals, as shown by a study where analysts' price estimates missed the target range far more often than anticipated.

Warren Buffett, the "Oracle of Omaha," boasts an unparalleled long-term track record. His Berkshire Hathaway stock has grown 33,333-fold since 1962, compounding at 20.8% annually. Prior to Berkshire, his limited partnership from 1957-1969 achieved gross returns of 2,610%. Despite these "monstrous returns" and his youth, Buffett actively sought to temper his partners' expectations, consistently warning them against overconfidence and acknowledging that "we are going to have loss years and are going to have years inferior to the Dow". He even shut down his partnership in 1969 at age 39 before his warnings came to fruition.

However, even Buffett, later in his career, succumbed to overconfidence. While he built his empire on successful acquisitions like See's Candy and Nebraska Furniture Mart, and his immensely profitable insurance business (GEICO, National Indemnity), he also had less stellar investments like Salomon Brothers and US Air. Buffett's "single costliest mistake of his investing career" was the 1993 acquisition of Dexter Shoes for $433 million. The "problem" was not just that Dexter would eventually be worth "zero," but that Berkshire paid for it by issuing its own shares, which were trading at $16,765 at the time. These shares would later be worth $6 billion, representing a significant portion of Berkshire's market cap at the time of the transaction.

Buffett was experienced in buying companies, even shoe companies, and spoke highly of Dexter and its management, even stating, "Dexter, I can assure you, needs no fixing". However, as Alice Schroeder noted in her biography, Buffett was "a little outside his 'circle of competence,' making a bet that demand for imported shoes would wane". He was overly confident in the management and in himself, drawing on the recent success of his H.H. Brown acquisition. Dexter's performance declined, and by 2000, Buffett publicly acknowledged his "mistake in paying what I did for Dexter in 1993," calling it "a financial disaster...a spot in the Guinness Book of World Records". He frequently uses the word "mistake" in his annual letters, showing his capacity to acknowledge errors.

The chapter concludes by advising "mere mortals" to "take a minute and think about why we're investing and what we really know". The best way to guard against overconfidence in speculative investments is to "have a plan ahead of time," setting "price levels, dollar loss levels, or percentage loss levels" at which one would cut losses, allowing decisions to be "driven by logic rather than fear".

Chapter 9: Bill Ackman: Get Of Your Soapbox

This chapter examines the human tendency towards cognitive dissonance and confirmation bias, particularly how these traits make it difficult for investors, especially public ones, to admit being wrong. The author highlights the contrast between the advice to "love changing my mind" and the reality that "straying far from our original feelings is too painful for most to bear".

The social aspect of investing is explored, where people prefer to share profitable trades over failures, leading to a decline in investment clubs due to market downturns and the mental exhaustion of being repeatedly wrong. The chapter argues that investors would be "a lot better off financially if they would just keep their personal finances personal".

Bill Ackman, a highly competitive and public activist investor, serves as the main example. His first hedge fund, Gotham Partners, found early success but "got into trouble...by straying from where their bread was buttered," leading to "ill-timed bets, a surprising lack of diversification and a dangerous concentration in illiquid investments," and eventually, its winding down in 2002. Undeterred, Ackman launched Pershing Square Capital Management in 2004, becoming one of his era's most aggressive activist investors, aiming to "enact changes" in companies. He had notable successes with Wendy's and McDonald's.

However, Ackman is most famously "joined at the hip" with his highly public and aggressive short bet against Herbalife, a multi-level marketing company. In December 2012, Ackman delivered a three-hour, 334-slide presentation titled "Who Wants to Be a Millionaire?", accusing Herbalife of being a "pyramid scheme" and declaring he would donate any profits, calling them "blood money". He emphasized Herbalife's unusual business model, high gross margins, and selling to distributors rather than consumers. Ackman called this his "highest conviction" investment ever.

His public declaration, however, put a "big, fat bull's-eye on his back". Competitors like Dan Loeb and Carl Icahn publicly took significant long positions in Herbalife, triggering a short squeeze that sent the stock rising dramatically. The stock never returned to its low point after Ackman's presentation. Despite a $200 million settlement with the Federal Trade Commission in 2016 (which Herbalife described as "an acknowledgment that our business model is sound"), the stock continued to rise. Ackman, however, refused to acknowledge his short strategy was failing, even when faced with rising stock prices.

The key lesson from Ackman's Herbalife saga is that publicly committing to an investment makes it "so much harder" to admit defeat. "Dealing with your own emotions is challenging enough. Dealing with the emotions and pressure of others is even harder". The author suggests that for investors, the primary goal is "to make money," and external pressures can compromise this. Ackman's story serves as a potent reminder that while "having big public scores is incredibly profitable," the associated public commitment can prevent an investor from preserving capital by cutting losses.

Chapter 10: Stanley Druckenmiller: Hard Lessons Can Be Necessary

This chapter discusses the difference between a "winner's game" and a "loser's game" in investing, positing that professionals win points while amateurs lose them through "unforced errors". The "behavior gap," where investors underperform the market due to emotional reactions like buying after gains and selling after declines, is highlighted as a "permanent feature".

The author explains that investors often make unforced errors at market tops and bottoms because "the story will seem so compelling" that not making a change "almost seems irresponsible". Great investors, in contrast, practice "second-level thinking," buying what others don't want and selling what others crave, rather than just focusing on whether a company is "good".

Stanley Druckenmiller, a "global macro investor" and George Soros's protégé, is introduced as one of the best investors of all time, having compounded at 30% a year for 30 years with "no losses" for his limited partners. His philosophy was to be a "pig" and "aggressive" when opportunities arose. Druckenmiller's early career at Pittsburgh National Bank saw him promoted rapidly due to his youth and lack of "scars" from past bear markets, allowing him to "charge" into opportunities. He later launched Duquesne Capital Management in 1981 and evolved his strategy.

Druckenmiller's ability to play the game at an elite level was demonstrated during Black Monday in 1987: despite being 130% net long going into the crash, he quickly reversed position and went short, making 25% in less than 24 hours. His partnership with George Soros led to legendary success, most notably their $1 billion gain from shorting the British pound in 1992, a trade so confident that Soros encouraged him to leverage "200 percent of our net worth" into it. Druckenmiller achieved remarkable returns of 30-68% in the early 1990s.

However, even Druckenmiller experienced setbacks and "unforced errors." In 1994, he lost $650 million on an $8 billion bet against the yen. In 1998, Quantum lost $2 billion in Russia. But his most significant unforced error, which mirrored those of amateur investors, occurred in 1999 during the dot-com bubble. Druckenmiller initially bet against "overvalued" Internet stocks, losing $600 million. However, seeing younger traders making massive gains in tech, his "pride got in the way of his fear", and he "couldn't bear to see Quantum grinding its gears as a bunch of small-potato upstarts were racking up huge returns". Despite knowing better, he "plowed his money back into tech," doubling down on stocks like VeriSign.

When the NASDAQ peaked and then crashed in 2000, VeriSign plummeted. Druckenmiller admitted, "It would have been nice to go out on top...But I overplayed my hand". He candidly reflected, "I bought $6 billion worth of tech stocks, and in six weeks I had lost $3 billion in that one play. You asked me what I learned. I didn't learn anything. I already knew that I wasn't supposed to do that. I was just an emotional basketcase and couldn't help myself". The chapter concludes that such "hard lessons can be necessary," as some things "can't be taught, they have to be learned the hard way".

Chapter 11: Sequoia The Risks of Concentrated Investing

The chapter begins by quoting Miguel de Cervantes's Don Quixote, which advises against putting "all your eggs in one basket," a timeless piece of wisdom for smart risk management and common sense. From a mathematical perspective, a diversified portfolio of 100 equally weighted stocks means a 1% loss if one stock goes to zero, whereas in a 10-stock portfolio, the loss would be 10%. Historically, a diversified US stock portfolio could yield about 8% annually, doubling money in nine years, which is not enough for early retirement for most people.

An old adage in finance suggests, "Concentrate to get rich, diversify to stay rich". The chapter points to Warren Buffett's journey with Berkshire Hathaway as an example of concentrating to get rich; his company grew from a $22 million market capitalization in 1962 to $450 billion today, compounding at nearly 21% for 53 years. Berkshire is part of a rare group of "super compounders" that have accounted for all of the market's long-term gains. Less than 4% of public companies since 1926 (the top 1,000 stocks) have generated all the market's gains, with companies like Exxon Mobil, Apple, Microsoft, General Electric, and IBM creating over half a trillion dollars in shareholder wealth each. However, for every success story like IBM, there are failures like Sears Holdings or GoPro. The author notes that while "concentrate to get rich" is true, it is not wise financial advice because finding and holding these "life-changing stocks" is extremely difficult in real-time. Concentrating in a few losers can lead to being out of business.

Casual investors typically avoid concentrated portfolios due to the time and effort required for research and monitoring. For fundamental investors, the more time spent researching a company, the harder it is to change their mind when the stock goes against them due to the "sunk cost" phenomenon. If a stock bought at $100 falls to $90, an investor might buy more, feeling it's even more attractive. But this strategy can be dangerous as many stocks never recover from a significant decline. Since 1980, 40% of stocks have experienced a 70% decline from which they never recovered.

Investors can learn about the dangers of concentrated portfolios by studying the Sequoia Fund, one of the most successful mutual funds of all time that focused on separating winners from losers and going all-in on their best ideas. Sequoia, managed by Ruane, Cunniff & Goldfarb, employs a long-term, value-oriented strategy involving extensive research to outperform the S&P 500 Index. An analyst at Sequoia might spend a decade researching a company before investing.

An example of Sequoia's success is O'Reilly Automotive, an auto parts retailer purchased in 2004 for $19.84, which was worth about $240 by the end of 2017, despite a nearly 40% drawdown that year. This success, a "10-bagger," involved significant due diligence, such as a fund director visiting 100 stores.

Sequoia's philosophy, emphasizing buying high-quality businesses with durable competitive advantages at a discount to intrinsic value, closely resembles Warren Buffett's approach. This is not a coincidence, as Buffett is fundamental to Sequoia's existence. In 1969, when Buffett closed his limited partnership due to limited investment opportunities, he hand-selected Bill Ruane to manage his partners' capital, leading to the creation of the Sequoia Fund.

Sequoia faced a rough start, underperforming the S&P 500 in its first three years (1970-1973), with $1 shrinking to $0.85. Despite these difficulties, the fund persevered, and early investors were handsomely rewarded, with the fund outperforming the S&P 500 by 2.6% annually for 47 years. An investment of $10,000 in July 1970 would have grown to nearly $4 million by today.

Like other value investors, Sequoia struggled during the dot-com bubble, losing 16.5% in 1999 while the S&P 500 gained 21%. However, they were vindicated when value investing returned, with the fund gaining 29% from 2000 to 2002 while the S&P 500 fell 38%.

In 2010, Sequoia's annual report indicated a shift towards a less concentrated portfolio, with 34 stock holdings, an all-time high for the fund. Ironically, in that same report, they introduced what would become an extraordinarily large and problematic position: Valeant Pharmaceuticals. They began buying shares in April 2010 at $16, and Valeant quickly became their second-largest holding. By early 2011, Valeant had gained another 76% and surpassed Berkshire Hathaway as Sequoia's largest holding. Due to strong investor demand, Sequoia closed its fund to new investors, as it had done previously from 1982 to 2008.

Sequoia's leadership praised Valeant CEO Mike Pearson as "exceptionally capable and shareholder focused," viewing him as ideally suited to run a pharmaceutical company that operated like a value investor. Valeant's business model was unique: instead of investing heavily in research and development, it acquired existing drugs and then drastically raised their prices. For example, after buying Medicis in 2013, Valeant raised the price of its lead poisoning drug from $950 to $27,000. Warren Buffett, contrasting Pearson's approach, stated that if a manager lacks morality, their intelligence and energy are undesirable.

Trouble began for Valeant in September 2015 when presidential candidate Hillary Clinton criticized "price gouging" in the specialty drug market, causing Valeant shares to fall 31%. On October 21, 2015, Citron Research accused Valeant of accounting fraud, comparing it to Enron, leading to a nearly 40% collapse in shares that day. As a result, Sequoia underperformed the S&P 500 by 17.47% that month.

Despite the accusations and stock drop, Sequoia publicly defended Pearson and Valeant in a letter to shareholders, believing he had done "a masterful job". Sequoia then increased its position, making Valeant its single largest holding at 32% of the fund's assets. David Poppe, Sequoia's CEO, invoked Buffett's advice to "Be greedy when others are fearful," and used Berkshire Hathaway's past recovery as a parallel. However, the author emphasizes, "Michael Pearson is no Warren Buffett and Valeant is no Berkshire Hathaway".

Eight months after defending Valeant, Sequoia sold its entire position. Valeant lost more than 90% of its value in just a few months, and Sequoia's assets were cut in half. The fund, which had previously closed to new investors, now saw its assets plummet from over $9 billion to under $5 billion due to the Valeant crisis. The chapter concludes by warning that a single stock can devastate even the most successful funds, urging readers to think twice before taking highly concentrated positions.

The chapter offers practical advice: if investing in a stock with specific hopes (e.g., a chipmaker for an iPhone), write down your reasoning to combat the endowment effect. Also, establish an exit plan beforehand, defining price levels or percentage losses at which you will cut your losses. The author states that while diversification is slow and boring, concentration is fun and exciting, but the stock market can be an expensive place for "fun and exciting".

Chapter 12: John Maynard Keynes The Most Addictive Game

The chapter opens by questioning why billionaires continue to invest even after accumulating more wealth than they could spend in multiple lifetimes. The author suggests that for these individuals, the market is an "Everest of intellectual challenges". Paul Tudor Jones, a renowned investor, described the market as "the most exciting and most challenging" game of all. The market is an "addictive game" that never ends, with constantly changing rules and a continuous stream of clues for "would-be market detectives".

A key insight presented is that markets are not governed by the laws of physics; there is no formula like E=MC² to predict their movements. Even if one knew with certainty that a company's earnings would grow by 8% annually for a decade, it would not guarantee investment success. The missing element is "investor's moods and expectations," which cannot be modeled by any PhD. Investing with imperfect information and cognitive biases has historically led to the downfall of millions of investors.

The chapter draws parallels between investing and betting on sports or horses. While odds are quantifiable in sports betting, the odds in investing are "determined by investor's expectations, and they're not published on any website". They are "subject to our manic highs and depressive lows".

John Maynard Keynes, a central figure in finance, understood this disconnect between what the market should do and what it actually does. He famously likened professional investment to newspaper competitions where participants pick faces "not those which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors". This concept, known as the "beauty contest" analogy, highlights that investors often anticipate "what average opinion expects the average opinion to be". The author asserts that playing this game of anticipating average opinion is "a game that's not worth playing".

Keynes's Chapter 12 of The General Theory of Employment, Interest and Money is highlighted as one of the most influential writings in finance, inspiring investment philosophies for figures like Jack Bogle and Warren Buffett. George Soros even "fancied himself as some kind of god or an economic reformer like Keynes". Peter Bernstein credited Keynes with defining risk as it's understood today.

Keynes's influence extended beyond theory; he wrote best-selling books, revolutionized institutional asset management, and helped shape the global monetary system, including England's WWII financing and the Bretton Woods agreement. John Kenneth Galbraith noted that economists of established reputation initially resisted Keynes's "General Theory".

Keynes began his professional career in 1906 and later lectured at Cambridge University. After WWI, he resigned from the peace conference in Versailles due to strong disagreement with the punitive reparations imposed on Germany, believing it would "destroy the country's currency as well as their economy". He articulated these views in his best-selling book, The Economic Consequences of the Peace, stating, "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency".

With his newfound wealth from book royalties, Keynes ventured into currency speculation, shorting the French franc and German Reichsmark, believing postwar inflation would harm them. He initially saw success, making $30,000 in months and then $80,000 with a syndicate. However, a brief wave of optimism on the continent led to the currencies rising, wiping out all the syndicate's capital. All his currency positions were underwater, and he was forced to close the syndicate. Despite this, he rebounded, building a capital base of $120,000 by the end of 1922.

Keynes then heavily engaged in commodity speculation (tin, cotton, wheat), using a top-down approach. This also ended badly, with Keynes losing 80% of his net worth during a major commodity crash. The author points out that many investors, like Keynes in the 1920s, attempt to construct top-down views of the market, which is akin to solving a complex, ever-moving puzzle.

In 1924, Keynes became First Bursar at King's College and took control of its finances. Initially, the college's endowment was heavily invested in real estate and bonds, as stocks were considered too risky by institutional managers. Keynes convinced them to create a discretionary portfolio, which he managed. From 1922-1946, this portfolio returned 16% annually on average, significantly outperforming the market index's 10.4%.

However, his early tenure was not smooth. He was highly levered during the 1929 crash, and his macro insights failed him. The fund lost 32% in 1930 and another 24% in 1931. The author notes that Keynes's "superior intellect did not provide him with superior insights into short-term market movements". His high turnover in commodity trading, driven by an "illusion of control," led to negative alpha in the early years of the King's College endowment.

Keynes underwent a complete transformation, shifting from a short-term speculator to a long-term investor. The psychological forces of the market overwhelmed him, making his macro-economic obsession seem "completely irrelevant". He began focusing on individual companies, analyzing "cash flows and earnings and dividends," and seeking businesses selling for less than their intrinsic value. This shift from "macro to micro, top down to bottom up," allowed him to build a fortune for himself, King's College, and two insurance companies.

Keynes wrote in The General Theory, acknowledging the extreme difficulty of estimating future yields of businesses, even five years out. Despite his success as a value investor, the approach had its challenges, and Keynes lost two-thirds of his wealth from 1936 to 1938. When pressed by the boards of insurance companies for his performance, he defended his long-term approach, arguing against selling on a falling market and emphasizing that "The idea that we should all be selling out to the other fellow and should all be finding ourselves with nothing but cash at the bottom of the market is not merely fantastic, but destructive of the whole system".

In a memo to King's College, Keynes outlined three principles for successful investment:

1. Careful selection of a few investments based on cheapness relative to intrinsic value and alternatives.
2. Steadfast holding of these large positions "through thick and thin," for several years, until their promise is fulfilled or a mistake is evident.
3. A balanced investment position, meaning a variety of "opposed risks" despite large individual holdings.

This intellectual flexibility, shifting from macro-forecasting to bottom-up value investing, was remarkable. Keynes surrendered to the reality that forecasting investor moods is "nearly impossible and mostly a waste of time".

Keynes famously wrote, "In the long run we are all dead," highlighting that while long-term returns matter, "life is lived in the short term". He termed the tendency to be swept up by short-term thinking "animal spirits". He was a rare investor who recognized and effectively combated his own cognitive biases.

From 1928-1931, King's College's assets fell nearly 50%, but from 1932-1945, Keynes grew the fund by 869%, compared to the UK market's 23%. This success was attributed to his shift from short-term speculation to long-term investing, reflected in a drop in portfolio turnover from 56% to 14% in the second half of his tenure. The chapter concludes by advising "us mortals" not to play the game of outthinking everyone in the near term but to think long term and focus on asset allocation. Successful investors build portfolios that allow them to participate in bull markets without feeling left behind and survive bear markets. They accept that a "perfect portfolio" doesn't exist and embrace the idea that "It is better to be roughly right than precisely wrong".

Chapter 13: John Paulson You Only Need to Win Once

The chapter explores the common phenomenon of lottery winners losing their fortunes, citing examples like William "Bud" Post III and Evelyn Adams, noting that nearly one-third of all lottery winners go bust. This contrasts with successful investing, which is a combination of luck and skill.

The stock market is described as the "biggest casino in the world," offering numerous ways to cash in through options, levered ETFs, and futures contracts. The author emphasizes that money earned by luck is indistinguishable from money earned by skill. However, the downside of getting lucky in the market is the tendency to attribute success to skill rather than randomness, which leads to overconfidence. The author states that "three-thirds of lucky investors revert to the mean".

The chapter then focuses on John Paulson, who started his hedge fund, Paulson & Co., in 1994, specializing in merger arbitrage. However, what put him on the map was his "massive wager, a full-on assault against the United States housing bubble". After the housing market implosion, his assets grew to $36 billion, making his fund the second-largest in the world. Despite this, ten years later, his assets had shrunk by nearly 75% to less than $10 billion, with 80% belonging to him and his staff. This serves as a cautionary tale: "Once you've achieved a great deal of success, failure is usually not far behind". The author argues that when investors get lucky, it's rare for them to "walk to the cashier, hand in their chips, and ride off into the sunset," often chasing the next big rush.

In the mid-2000s, while others were leveraging mortgages and flipping houses, Paulson and his analyst Paolo Pellegrini took a pessimistic view, identifying an inflating bubble in the US real estate market. Examples of the bubble's irrationality include mariachi singers and strawberry pickers "qualifying" for large mortgages despite low incomes. By 2005, subprime mortgages constituted a fifth of all home mortgages, and 24% were originated with no money down. Pellegrini believed that housing prices, which had soared five times their annual average during the bubble, were destined for a serious nosedive.

Since one cannot directly short a house, Paulson bet against the market by purchasing credit default swaps on mortgage bonds and major lenders like MBIA Inc., Countrywide Financial, and Washington Financial. This strategy initially led to losses as home prices peaked in September 2005 but his swaps continued to lose money.

To win big (e.g., "1,000% or more"), one must "bet against consensus" to the point where others "think you're insane". Paulson's contrarian stance was met with skepticism from established mortgage experts, who thought he was "crazy". However, Paulson remained confident in his team's analysis, highlighting the emotional price contrarians must pay: not liking to have their judgment questioned.

Confirmation arrived in February 2007 when New Century Financial, a major subprime lender, saw its stock fall 36%. As the ABX index (measuring subprime mortgages) plummeted, Paulson's gains reached $1.25 billion. Despite a rebound in the ABX index that cut his gains in half, defaults from subprime borrowers accelerated. In 2007, Paulson's two credit funds gained 590% and 350%, earning Paulson & Co. $15 billion and Paulson personally $4 billion, marking the highest single-year earnings in financial markets history.

The chapter notes the problems that arise after a huge market win: ordinary gains no longer provide the same emotional thrill, leading to a continuous search for the "next big trade". Paulson, for instance, turned to gold in 2010, investing $5 billion in gold-related assets, believing inflation was coming. However, gold has since lost 30% from its 2011 high, and Paulson & Co.'s Advantage Fund has suffered significant losses, including a 49% decline in a sister fund leveraging for steeper returns and a 25% loss in his merger arbitrage fund in 2016.

In 2010, Paulson earned $4.9 billion, a staggering $13.4 million per day. The author emphasizes that while there are plenty of opportunities for large returns (e.g., 40 US stocks doubling in five years), "swinging for the fences" comes with problems. It is incredibly difficult to achieve consistently, especially when competing against institutions with vast resources like Jim Simons' Renaissance Technologies. The second problem is the "craving" for similar rushes after experiencing outsized success, making less exciting but stable investments (like municipal bonds) feel insufficient. The chapter concludes with the advice: "You only need to get rich once. If you've worked hard or just got lucky and now find yourself in the top 1%, stop trying to hit home runs, you've already won".

Chapter 14: Charlie Munger Handling Big Losses

The chapter highlights that even with successful companies like Netflix, Amazon, and Google, shareholders must possess immense discipline to endure significant drawdowns to realize tremendous long-term profits. Amazon, for example, returned 38,600% since its 1997 IPO but was cut in half three times, including a 95% loss from December 1999 to October 2001. Similarly, Netflix, compounding at 38% since its 2002 IPO, experienced four 50% cuts and an 82% decline from July 2011 to September 2012. Google, while having a smoother ride, still saw a 65% loss from November 2007 to November 2008. The author stresses that looking at long-term winners in hindsight and wishing one had bought in is a "fool's errand" because the "inhuman amount of discipline" required to hold through such declines is often underestimated.

Charlie Munger, known for his "Mungerisms," emphasizes the importance of simplicity in investing and staying within one's "circle of competence". He famously stated, "All I want to know is where I'm going to die so I'll never go there," and advised investors to "calculate too much and think too little". Munger categorizes opportunities into "three baskets: in, out, and too tough". He uses an analogy of fishing tackle, where the seller focuses on what attracts buyers, not what the fish want, to illustrate the irrationality in investment management.

Munger, a Harvard Law School graduate, built his first million in real estate development before fully committing to investing. His passion for investing grew after meeting Warren Buffett in 1959. In 1962, Munger founded Wheeler, Munger & Company, a highly successful hedge fund that averaged a mind-boggling 37.1% annual return before fees from 1962 to 1969, significantly outperforming the S&P 500's 6.6%. Over its entire 14-year existence, the fund achieved 19.82% compounded annually, far exceeding the S&P 500's 5.2%.

The chapter's central lesson from Munger is that "there are no good times without the bad times." Long-term investing inherently includes "big losses". Munger asserted, "If you're not willing to react with equanimity to a market price decline of 50 percent or more two or three times a century, you're not fit to be a common shareholder and you deserve the mediocre result you're going to get". Buffett noted Munger's willingness to accept "greater peaks and valleys of performance" and his "whole psyche goes toward concentration".

Munger's concentrated positions led to significant pain. By 1974, 61% of his fund was in Blue Chip Stamps, which was crushed in the bear market. (Blue Chip Stamps' original business declined by 99.99%). While Blue Chip Stamps eventually recovered and was vital for Berkshire Hathaway acquisitions like See's Candies, the Buffalo Evening News, and Wesco Financial, Munger's fund suffered. Wheeler, Munger lost 31.9% in 1973 and another 31.5% in 1974, a "very unpleasant stretch" for many investors, including Buffett, whose Berkshire Hathaway shares fell 50%. An initial $1,000 investment with Munger on January 1, 1973, would have been worth just $467 two years later. Despite a strong rebound in 1975, Munger closed the partnership due to losing a significant investor, feeling mentally and emotionally depleted.

The Dow Jones Industrial Average itself, a "blue chip index," has experienced nine separate 30%+ losses since 1914, including a 90% decline during the Great Depression. Even a diversified 50/50 stock and bond portfolio lost a quarter of its value during the Great Financial Recession.

The chapter distinguishes between absolute losses (how an investment performs on its own) and relative losses (what could have been earned elsewhere). Berkshire Hathaway, for instance, experienced six separate 20% drawdowns. In terms of relative losses, Berkshire underperformed the S&P 500 by 117% in the five years leading up to the dot-com bubble's peak, leading many to question if Munger and Buffett were "out of touch". Munger, however, remained steadfast, attributing his wealth compounding to a "temperamental advantage that more than compensates for a lack of IQ points".

The key takeaway for "mere mortals" is that if you seek big returns, big losses are "just part of the deal". The chapter advises that the time to sell an investment is not after it has declined in price, as this leads to "disappointing returns". Instead, focus on not becoming a forced seller by ensuring you don't own more than you're comfortable with. A practical example is provided: if you have a $100,000 portfolio and can only stomach losing $30,000, and assume stocks might fall 50% while bonds hold value, then do not allocate more than 60% to stocks.

Chapter 15: Chris Sacca Dealing with Regret

The core message of this chapter, and indeed the book, is that "lousy investments cannot be avoided." Tough times are an inevitable part of investing. Human beings are not naturally wired for financial decisions, having spent millennia focused on survival and passing on genes. Modern financial concepts like index funds are very recent in human history.

The "run first, ask questions later" instinct, beneficial for survival in the wild (e.g., from a saber-toothed tiger), is detrimental in financial markets. The average intra-year decline for US stocks is 14%, meaning "a little wind in the bushes is to be expected". Selling every time stocks fall a little and waiting for the dust to settle is a "great way to buy high and sell low" and leads to a constant state of regret. "Saber-toothed tigers" (backbreaking bear markets like the Great Depression or the Great Financial Crisis) are rare.

Investors often carry past experiences, leading them to draw parallels where none exist and become overly reliant on these experiences for future scenarios. A study on brain-damaged individuals with normal IQs but impaired emotional responses showed they had an advantage in investment games because they "lacked fear" and were "more willing to take gambles that had high payoffs".

Hindsight bias, a "defect in our software," falsely leads us to believe we knew what would happen all along. This bias then leads to regret, which in turn causes poor decision-making. Regret manifests in two ways:

1. Inaction: Holding onto losing investments out of fear of selling at the bottom.
2. Action: Compulsion to buy into speculative investments to avoid regretting missing out on "the next Bitcoin".

The chapter illustrates this with the example of Ronald Wayne, the third founder of Apple, who sold his 10% stake for $800 in 1976; that stake would be worth over $90 billion today. "You cannot avoid regrets in this game." Investors will inevitably buy what they wish they hadn't and sell what they wish they had held.

Chris Sacca, founder of Lowercase Capital, is presented as an investor who has "arguably left more money on the table than anyone in the twenty-first century," yet has also achieved immense success. His first fund returned 250 times the original investment, and he became a billionaire before age 40 by spotting "unicorns" (private companies valued at $1 billion or more). His investments include Uber (a 5,000-bagger), Instagram (a 50-bagger), Kickstarter, Slack, Automattic, Twilio, and notably, Twitter, which returned an astonishing $5 billion for his investors.

Sacca's four rules of investing are:

1. He must know he can have a direct and personal impact on the outcome.
2. The investment must be excellent before he gets involved; he aims to make good things better, not fix bad ones.
3. He allows time for a deal to make him rich.
4. He selects deals he will be proud of and commits to them.

Despite his success, Sacca openly discusses his regrets. He passed on investing in GoPro (due to doubts about competing with Asian hardware manufacturers), Dropbox (fearing competition with Google Drive, costing him "hundreds of millions of dollars"), Snap (Snapchat's parent company), and Airbnb (fearing safety issues with shared houses). Airbnb is now worth over $30 billion. Sacca's ability to speak openly about his misses comes from his numerous winners, understanding that "swinging and missing, or in these cases watching the pitch and not swinging is part of the game". For most people, however, missing a significant opportunity or selling too early can have "disastrous and long-lasting effects".

Regret is highly correlated with emotional extremes, which occur with large gains or losses. For instance, if a stock doubles, an investor fears leaving money on the table by selling or losing gains by holding. If a stock halves, they fear selling at the bottom or watching it fall further. The author suggests that holding a stock and seeing all gains evaporate is more mentally straining than locking in gains and watching the stock rise further.

To minimize future regret when facing big gains or losses, sell some of the position. There's no "right amount," but selling a portion (e.g., 20%) allows an investor to feel better whether the stock doubles further (still have 80%) or halves (at least sold some). Harry Markowitz, inventor of modern portfolio theory, stated his intention was to "minimize my future regret" by balancing his portfolio to avoid extreme grief from market rallies or crashes. The chapter concludes that thinking in "all or nothing" terms is almost guaranteed to end with regret, and minimizing regret maximizes the chances of long-term investment success.

Chapter 16: Michael Batnick Looking in the Mirror

This concluding chapter by Michael Batnick serves as a personal reflection on his own "thousands" of investment mistakes, emphasizing that behavioral finance is a mirror one must hold up to oneself. He describes his early trading habits, including spending $12,000 in commissions in 2012 and losing $12,000 in 2013 while the market rose 32%. He admits to making "almost every mistake in this book," from overconfidence and anchoring to purchase price to cutting winners short and letting losers run. He considers himself fortunate to have "jam packed" these failures into a few years, realizing what works for him much faster than many others.

Batnick recounts his academic struggles: poor high school performance, getting dismissed from college twice with low GPAs (1.2 and 1.1). He notes his lack of readiness for college and the humiliation of hitting "rock bottom at 20 years old". After graduating late with an economics degree in 2008, he struggled to find a job in the financial industry during the recession.

His first job at a financial planning company was a "lousy experience," focused on selling insurance with no salary and required rent payments. He realized he was "paying for [his] big mistake". Inspired by a "real financial adviser" and daily sell-side research reports, he became obsessed with learning about Wall Street, studying for the CFA exam, and reading finance books to "catch up for lost time". This mission was challenged by his "garbage" resume, the financial crisis, and his mother's terminal illness.

In 2011, after passing Level 1 of the CFA exam, he took Level 2, feeling proud of his transformation into a "laser-focused learning machine," despite his lack of industry experience. His mother passed away days after he failed the Level 2 exam, marking "the hardest thing [he'd] ever experienced".

After his mother's passing, Batnick inherited some money. Despite having read Jack Bogle's The Little Book of Common Sense Investing and understanding index funds, he was more drawn to Jack Schwager's Market Wizards and the allure of becoming "the next Paul Tudor Jones". In 2011, amidst volatile markets, he began trading 3x levered ETFs, believing he could "control [his] destiny" through frequent trading—a cognitive bias known as "the illusion of control". He also experimented with weekly options, making a 10x return on a bearish Netflix bet but soon realizing that "76% of all options held to expiration expire worthless".

Returning to the library, he immersed himself in various trading strategies, from technical analysis to traditional valuation and economic indicators, describing his process as "chaos". He slowly came to realize that "beating the market is a fool's errand," largely influenced by observing "charlatans" on Twitter who pretended to "crush the market". He saw that even if one had "tomorrow's news today," it's impossible to consistently predict market reactions. Bernard Baruch's quote on the intense discipline, intuition, and courage required for market success resonated deeply.

Batnick faced several rejections in his job search. He was dismissed from an interview for an "internal wholesaler" role because his CFA studies suggested he sought an analyst position. Later, a job offer at a discount brokerage was rescinded due to a "ding on [his] credit report" from a past roommate's unpaid damages. These setbacks led him to question if a career in finance was simply "not in the cards".

A chance encounter with Josh Brown, a prominent financial commentator he followed on Twitter, at a train station in New York City proved to be a turning point. Batnick, whose phone had coincidentally died moments before, seized the opportunity to introduce himself to Brown. This led to an interview and ultimately a job offer from Brown and Barry. He began working for them in 2012 when they managed $50 million with a small team; five years later, he owned part of a business responsible for $700 million and employing 20 people.

Batnick acknowledges his "irrational confidence" but primarily attributes his success to extreme luck, combined with his dedication to studying the market and proving himself. He states, "There is no doubt in my mind that I am extremely lucky to be where I am today".

Reflecting on his "biggest mistake" in the market, he notes that while he cut most losses short (never exceeding 1% of his trading account), his most significant error was investing money that he knew he would need for short-term liabilities, such as his wedding in December 2013 and a house purchase shortly after. He chose to remain "fully invested and hedged by shorting the S&P 500" rather than holding cash, a "not smart" decision because "the market doesn't care about your goals".

The chapter concludes with a quote from Peter Bernstein: "Mistakes are an inevitable part of the process". Batnick accepts his mistakes in investing and life, stating that "A perfect history in either endeavor has never been achieved". The key lesson is that great investors learn and grow from their mistakes, while "normal people are set back by them".