1Successful investors must have a sensitivity to numbers Investment decisions often do not require complex calculations, yet the most successful investors possess a nuanced “feel” for numbers and probabilities. Distinguishing between true performance metrics can set apart effective strategies from naïve assumptions in the financial landscape. A prime aspect of this sensitivity is the ability to understand financial statements thoroughly. Great investors can easily navigate through these documents, discerning between growth in earnings versus growth in actual value. The realization that a company can destroy value even as it increases revenue, if it fails to invest properly for the future, is crucial. This understanding underscores why astute investors focus more on the present value of future free cash flows rather than merely the current period’s earnings. Moreover, financial statements are instrumental in establishing a connection between strategic decisions and value creation. They allow for comparisons among companies within the same industry, assessing resource allocation and competitive advantages. Companies with high profit margins and low capital turnover typically pursue differentiated competition strategies, while those with lower profit margins but higher capital turnover lean towards price competition. Ultimately, assessing a company's capacity to earn is intrinsically linked to evaluating how long it can sustain its competitive advantage. 2Understanding Value For most publicly traded companies, the investable lifespan is relatively short, often around a decade, filled with uncertainties such as technological disruption, shifts in consumer preferences, or changes in competitive landscapes. Amidst all this, the present value of future free cash flows remains the critical determinant of financial asset value. Great investors recognize that superficial metrics like price-to-earnings ratios or enterprise value multiples do not measure a company's genuine worth; they are merely simplified tools that aid in the valuation process. As the saying goes, “Cash is the truth; profits are merely an ‘idea’.” 3Correctly Evaluating Company Strategy On a micro level, great investors possess a clear understanding of how a company generates its revenue and are acutely aware of the driving forces behind profit changes. On a macro level, they grasp the unique positioning of the companies they invest in within the industry, assessing the sustainability of competitive advantages. Strategy and valuation influence each other and interact in meaningful ways. 4Investment is a Comparative Discipline The ability to juxtapose fundamental metrics against expectations sets apart average investors from great ones, highlighting the importance of recognizing market mispricing. Using the metaphor of horse racing, the odds displayed for a horse represent expectations, while the horse's actual racing speed reflects the fundamentals. As Charlie Munger famously noted, "We seek out horses with a one in two chance of winning and odds of three to one.” Humans naturally think through analogies, making it easier to grasp relative values and rank them according to personal preferences. Yet, understanding absolute value can be a significant challenge. If one confines comparisons to a single feature while disregarding external factors, valuable insights could be easily lost. Exceptional investors also endeavor to think beyond surface comparisons when weighing current conditions against historical contexts. They delve into the underlying drivers that created those historical trends rather than merely comparing prices or other surface phenomena, thus avoiding cognitive pitfalls. 5Learning to Use Probabilistic Thinking Investing is fundamentally an art of probability. Great investors build their entire framework on probabilities and seek opportunities arising from mismatches between price and probability in the market. Skilled investors constantly seek to outline their advantages while focusing more on the process rather than merely the results. Given the inherent nature of probabilities, good decisions can sometimes lead to poor outcomes, and bad decisions may yield favorable results. In the long run, a proper decision-making process can yield satisfying “total returns” even if occasionally faced with negative results, as it requires adequate time and a sufficiently large number of investment decisions to allow probability to take effect. Warren Buffett has summed this up succinctly: “I continuously strive to amplify the probability of correct outcomes multiplied by their potential returns while minimizing the probability of mistakes and their potential losses.” 6Update Your Perspectives Perspectives should be viewed as hypotheses open to verification, rather than fixed principles. Many individuals exhibit a tendency to cling to consistent viewpoints, and there is often an expectation for others to do the same. This desire for consistency tends to strengthen with age. Great investors do two things that set them apart: they actively seek information and viewpoints that challenge their own, and when presented with evidence that contradicts their beliefs, they update their perspectives and take action. Research shows that individuals who actively seek out opposing arguments often perform remarkably better in predictions. This effort, which often goes against human nature, can help counter biases that protect one’s established views. The best investors understand that the world around them is in constant flux, and their perspectives must similarly reflect this fluidity. 7Awareness of Behavioral Biases If IQ represents cognitive ability, then RQ (Rationality Quotient) signifies decision-making capability. The overlap between these two is often less than one would imagine, emphasizing the need to nurture our RQ. Buffett has provided a poignant analogy: “I believe IQ and talent represent the engine’s horsepower, whereas RQ represents output power. Many begin with what seems like 400 horsepower but achieve only 100 horsepower in actual output, whereas others might output 200 horsepower at full capacity.” Decision-making ability fundamentally aligns one’s beliefs with the world. One method to enhance this is through self-assessment. The ability to mitigate behavioral biases may stem partly from personality, partly from training, and partly from the environment. Excellent investors grasp their biases and devise methods to counteract them, situating themselves within an enabling environment conducive to sound thinking. 8Distinguishing Information from Its Impact Consider the example of prices: in the financial markets, prices serve as valuable information. However, due to the inherently social nature of investment activities, prices can shift from being mere information sources to becoming sources of influence. Take the dot-com bubble, for instance. As stock prices surged, investors experienced increased apparent wealth, influencing those who did not own shares, eventually leading many to buy in and contributing to the bubble. Negative feedback loops gave way to positive feedback loops, creating a distortion in the system where buying occurred when prices rose, and selling ensued when they fell. Great investors possess the resilience to resist these influences, a trait that often requires indifference to others' opinions, which is contrary to human nature. Successful investment decisions involve forming well-considered viewpoints that diverge from the consensus based on a comprehensive consideration of varied perspectives. While collective wisdom can often be correct, encountering errors necessitates a robust psychological fortitude to act contrary to popular belief. This difficulty arises not just from the intellectual challenge but often involves risking one’s career. 9The Courage to Bet Heavily on Advantages Nearly all investment institutions grow around their respective advantages, yet positioning allocation often receives insufficient emphasis. The construction of a typical investment portfolio involves several steps: defining the strategy execution method, identifying investment opportunity sets, and thoroughly considering any constraints that the portfolio may face (such as liquidity, potential cash withdrawals during the investment period, and leverage). Only after thoroughly addressing these three questions can effective position allocation occur. Common methodologies include mean-variance optimization (maximizing returns for a given level of risk) and the Kelly criterion (maximizing the collective mean return of the portfolio). The choice between these methodologies depends on how investors analyze investment targets, opportunities, and limitations. This differentiation marks a significant contrast between mediocre and exceptional investors. The difference between long-term profitable investors and average investors lies in the understanding that properly allocating positions and identifying investment opportunities are equally crucial to sustainable profitability. 10The Importance of Reading Students at Columbia Business School, as alumni, have opportunities to visit Warren Buffett and his colleague Todd Combs each year. As a teacher, I care about their experiences, and students are often most surprised by the suggestion to complete 500 pages of reading daily. In an age overflowing with meetings, emails, and tasks, the prospect of such a reading volume is indeed daunting. Munger has stated that one of his favorite Einstein quotes points out, “Success arises from curiosity, focus, persistence, and self-criticism, where the latter refers to the ability to alter one's inherent thinking, even if it concerns the most cherished beliefs.” Reading is a vital means to cultivate these attributes. Munger has also remarked, “Among the smart people I know, not a single one has avoided reading.” Great investors exhibit three essential reading habits: First, place reading above all else. Buffett mentions that he allocates 80% of his work time to reading. Second, adopt a wide-ranging approach. Avoid confinement to business and finance; instead, allow your curiosity to dictate your reading matter. Insights from other fields can often unexpectedly transform into valuable investment references. Third, practice critical thinking. Do not merely seek aligned viewpoints; instead, read to grasp the arguments of those who may hold different yet equally well-considered opinions, maintaining an open mindset. Reading is particularly significant for investors as it requires synthesizing diverse information and ideas to continuously uncover new opportunities for profit.