Investing Basics

Life does not come with a user manual. But why?
This series of posts is addressed to my baby daughter and documents the aspects of life that I should have learned at school but didn’t.

You may want to read this when you are around 16. I’ve really dug into this topic when I was 32, and of course, I expect you to be at least 2x smarter than me.

TLDR: Here is my best advice about investing

  • Choose Index Funds or ETFs with low fees that are automatically managed. Low fees will accelerate your returns and automatic management will remove human error out of the loop. Right now the best funds are SP500 from Black Rock or Vanguard. Holding an index will give you returns as the economy grows. No worse and no better.
  • Compliment with Government Bonds and Gold (Physical)
  • Dollar-Cost Average your entire portfolio
  • Put your dividend-yielding stock in your tax-protected retirement accounts. That way, the compound interest from the dividend will be tax-free, and it will compound faster.
  • Rebalance often and mercilessly. If you have a target of 60% stocks in your account – if their price falls, you will buy more to adjust your wallet %. When they rise again, you will sell some and convert to bonds. With rebalancing, the market roller coaster works in your favor!

I want to share these learnings with you because I could have really used it back in the day. You see, in 2005 my father (your Grandfather) died, leaving us some money. In 2007 I was approached by a smooth-talking salesman of a managed investment fund. In theory, the whole investment strategy made total sense. On top of that, the investment funds were red-hot in Poland, so my mom and I decided to invest. Only now we know that this was the time of the real estate bubble growing like crazy, but back then information was scarce and hype abundant. The money we lost had me stay away from the market for 10+ years.

Underlying concepts

Here are the concepts you absolutely need to grasp:

Compound Interest

The concept of interest is pretty straightforward. You have 100 USD with 10% Yearly interest – after a year you have 110%.

Compound interest is getting interest on your interest. The first year you will get 10 USD of interest. The next year – 11 (because you are now getting 10% of 110), the third one – 12.1. Not only you get interest, but this interest is accelerating. Over a long enough time, this makes a huge difference. Be extra careful before brushing this off. People are not used to thinking in exponential terms – and this is theoretically simple, but in practice, it’s very unnatural to think in those terms.

Diversification

Over a long enough time period, every asset class will go down significantly. It is very, very important to own asset classes that tend not to move in the same direction at the same time.

Typically what people advise is to own both stocks and bonds. The underlying theory is that when the stock market is doing very well (which means that the companies are having a grand time and people purchase a lot of everything) – bonds are having very mediocre results because people don’t want to keep money tied in bonds and inflation is higher.

When the stock market is doing worse – bonds will be safer because investors want to get out of the stock market and seek returns elsewhere. In practice, in 2008 both stock and bonds tanked because companies and entire banks defaulted. I highly recommend treating this as a serious possibility.

Another benefit of diversification is that when the stock market tanks and you have money stashed away in gold, Real Estate, or other asset class that was unfazed – you can buy stock cheaply which will give you extraordinary results.

The timing of your investment is also a diversification! When you invest the same amount (say $100 each month) regardless of the current price of the stock, you will by definition buy more stock when it’s low and less when it’s high. Do it daily for best results. The best 10 days of US stock exchange is responsible for generating almost 50% of the gains. This strategy is called Dollar Cost Averaging and it’s an extremely good one. I recommend just adopting it blindly.

Long time horizon

Some people get excited about get-rich-quick schemes and consider average returns unacceptable. What’s worse- these people tend to be loud and advocate for you to adopt their strategy (even if they don’t get anything from you participating). This is a mistake. Imagine that you have 1000 USD and you invest in a “Fund” that has only 1% of total failure every month but has a 10% yearly interest rate.

Over 10 years, that small 1% grows to 71% of the possibility of you losing all your money!

With compound interest, that $1000 can grow to $2,707.04, but you can have only a 29% chance of keeping it. That is why it’s very important to keep the possibility of total failure low!

I am only 35 years old, and already I have seen multiple events that “are not supposed to happen”. They were never included in the financial forecast of this or that investment fund manager. The impossible will happen and the only way to protect against that is to diversify aggressively.

So what can you invest in?

Asset classes:

  • Cash deposits
  • Bonds
  • Stock
  • Commodities, like Gold or Oil
  • Real Estate
  • Other currencies
  • Alternative investments – cars, wine, collectibles

Investment vehicles

  • Managed Investment Funds
  • Index Funds
  • Contracts, options and other exotic financial instruments

Cash deposits / Certificates of Deposit

If you decide, that the “investing game” is not for you – you are in fact defaulting to investing in cash deposits. This is what “Money in the bank” refers to. Broadly, banks are paying you to lend them money – you get a certain interest rate every year. Once they have this money, they can lend it to other people at a much higher interest rate, issuing credit. A mortgage for example is a form of credit from the bank to the person buying a house.

If you put money in the bank on a Certificate of Deposit (PL “Lokata”), you tell the bank that you won’t be needing this money for say 3 months. Then, the bank can be more certain it will have that money to lend to other folks.

Banks are somewhat safer than the other stores of value. That usually means, that you won’t be getting rich off this capital. There are a few points to keep in mind:

  • “Money in the bank” is NOT actually 100% safe. In 2008 the world has seen banks disappear and restructure. I expect these kinds of events to continue in the years to come. To make banks somewhat safe-ish, each country has some form of Deposit Protection Scheme (Here is the EU one). If a bank defaults, your funds are protected by the country to a certain limit (in Poland 100 000 EUR).
    • For example – let’s say you have 30 000 EUR in a bank and the bank was irresponsible with its investments and had to declare bankruptcy. You will get that money back unless the country decides to default (that can happen too in case of a major international financial crisis).
    • If you had 130 000 EUR in the bank, you can be certain to get 100 000 back, but the fate of the remaining 30 000 is uncertain. That amount is per bank – which means that you can spread the risk a bit by holding money in a few different banks.
  • The interest rate you get on deposits is tied to the “base interest rates” which government controls. In theory, the government may stimulate the economy by lowering the interest rates:
    1. People will get less interest from their money
    2. They will decide do spend it instead
    3. That spending will stimulate economy
  • At the time of writing this, we are experiencing economic suffering caused by the Coronavirus Pandemic. The base rates in Poland are now 0.1%. In theory, these base interest rates may be negative and it was the case in Germany for a while.
  • [[Inflation]] is when prices of everything gradually rise. In a healthy economy, it’s a by-product of people getting richer and an expected development. What you want to avoid is of course hyper-inflation. Historically, there have been periods where prices would rise uncontrollably:
  • “A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923” Currently – since we are battling with the economic effects of the Coronavirus pandemic, all the governments are printing money. We are all uncertain about how it will end up.
  • {Your Real Interest} = {Deposit Interest} – Inflation
  • If your deposit interest is lower than inflation then you will be consistently losing money over the long term. Your loss will be accelerated by compound interest, which works both ways.

Bonds

Bonds are a form of lending money as well. A Bond is a promise from the Emitter (say the Polish National Bank) to the holder (say, you) that it will buy back that bond. To motivate you to agree – it will add some interest rate to make it worth it for you.

  • Bond emitter may be a country, corporation, or even a city (these are called municipal bonds)
  • Usually, bonds are tied to interest rates as well – that is why they are a real bad business right now when the interest rates are close to 0.
  • The riskier the bond, the more interest you get. But you have to remember that if you buy a corporate bond emitted by a company and that company defaults – you never see your money back! That can even happen with countries too – Greece defaulted on their bonds in 2015. That is why Greek bonds are now having better interest rates than German ones.

Stock

Stock is pretty magical. When you buy company stock on the stock exchange, you are owning a piece of the company itself, with all the privileges and risks. If you really want, you even get to attend the shareholders’ meetings. Some companies decide to even pay dividends to their shareholders. I own some stock that is paying me dividends every half a year.

To buy stock you need a brokerage account. This only sounds complicated – most of the banks running these will let you access stock with the push of the button.

Commodities

Commodities are metals (gold included), oil, and a variety of other materials. Since Oil was the major source of energy during the 20th century, it has been historically a good way to include something “tangible” in your investments. With soaring inflation, oil was bound to skyrocket as well. I sure hope that oil is no longer a good investment in your time.

One very interesting asset is gold – it is one of the oldest and psychologically safest stores of value. People “flee to gold” in uncertain economic times and when everything else is falling. I hope you will grow up in a stable economy, but I have seen gold skyrocket twice in 35 years of my life and I am sure to see that again in the future.

Real Estate

Polish people love to invest in real estate and buy apartments.

  • You can buy actual apartents / houses for rent
  • You can “flip them” – buy cheaply, renovate and sell with a profit
  • You can buy shares REITs (Real Estate Investment Trusts) – it’s similar to an Investment Fund, but you own a piece of a fund that holds Real Estate.

Real Estate is fraught with psychological risks. People like it because it’s very tangilble, but don’t trust anyone telling you it’s a sure-fire investment. In general, not trusting anybody that will try to convince you of a surefire investment is a good rule of thumb.

Managed Investment Funds

An Investment Fund is created by a group of people that pool their money to buy a wider portfolio of different stocks, bonds, or other vehicles.

Managed Investment Funds have smart people running around in suits and trying to use their knowledge to make the best deals and theoretically give the fund shareholders better returns. In theory that makes sense and I’m sure there are fantastic funds to invest in somewhere. But in practice:

  • Managed funds are very rarely outperforming the average market returns. They are very often worse than just buying an average slice of the market (see next header). The companies creating those funds hide losses by creating many similar funds and killing off those who perform badly. That way, the fund that they promote in ads is one that has beat the market by chance so far, but it is unlikely to continue doing so.
  • Because they are managed, they frantically buy and sell new assets, incurring transaction fees. It’s standard right now to see funds that take 2.5% of your money for their management – and they are losing it on top of this!
  • What is infuriating – these funds are very often a matryoshka made of other funds with their own fees, making understanding the returns really hard.

Index Funds / ETFs

A stock index is a measure of how a broad set of companies is doing. An example of it is the S&P500 – an index of the 500 biggest american companies. Since most of these companies are global, it’s also a good approximation of the world economy.

This is a natural way of diversification – you don’t have to worry about picking stocks and you should not try that. Index Fund is managed by a computer. It monitors the Index – say S&P500 and allocates its money proportionately to all the companies in the index. Most of the index funds are market-capitalization-weighted. So if a company is worth more – it will “make up” more of the index. If I were to make an index fund consisting of 3 companies:

  • Artur & Associates, worth 1000 USD, it would be 10% of the index.
  • Borys Chemicals, worth 2000 USD , it would be 20% of the index.
  • Piszek Pencils, worth 7000 USD, it would be 70% of the index.

Index funds are often Exchange-Traded Funds (ETFs – but not ETFs are Index funds). It means, that you can buy shares in them on the Stock Exchange, using the same account that you use for Stocks. In fact, it should be all that you do with your Brokerage Account. The fees for holding ETFs are:

  • TER (“Total Expense Ratio”). For example, GPW:ETFSP500 noted on the Warsaw Stock Exchange has a fee of yearly 0.15%
  • You also have to pay brokerage provision for buying and selling the shares of this index fund, just like any other stock. In Poland, it’s around 0.39% today. But if you don’t trade – just buy and hold these shares as long as possible, this won’t be much of an issue.

Exotic financial instruments

Options, CFDs, Currency fluctuation schemes, or leveraged options are parasitic instruments that are trying to make quick money. They are often doing pretty great over a short financial history, usually riding the wave of market inefficiencies. But almost always investors get wiped out by an “unforeseen” event. Noobs take their place in the money bleeding game until they also run out of cash.

These instruments have their uses for institutional investors – say a bakery that wants to limit their risk of grain price fluctuations, but this is not how you build wealth.

Cryptocurrencies

The same holds for Bitcoin (which is emerging as the major cryptocurrency now). I own some bitcoin – I buy it using my dollar-cost-averaging bot because dollar-cost averaging works extremely well with volatile assets.

I am doing this because I am curious about the hype, not counting on BTC funding my retirement.

Further reading

By no means don’t stop here. The goal of this post was to make things a little bit less scary, but you will need to educate yourself throught your entire life. For starters, I recommend reading:

Book: Life Principles

9781501124020_p1_v3_s550x406Ray Dalio is one of the most successful investors in the world. Tony Robbins and Tim Ferris call him the Steve Jobs of investing.

He argues that there most of the hard problems in life are „another one of those”. Situation is somewhat similar to a pattern recognized before and the real trick is to correctly identify the pattern and auto play the correct behavior.

By using the same tactic in his investment work, he analyzed how asset classes perform in certain situations and what usually leads to an economic downturn.

By properly recognizing the signs and probable outcomes, his firm has become a worlds largest hedge fund – Bridgewater Associates.

He calls his learnings „principles” and when he cans, he tries to make them into computer algorithms because computers are so much better than people at avoiding cognitive biases.

The methaphors used thought this book speak to me very strongly. He uses the metaphor „machine” for life circumstantces and argues that you can either be a cog or look at it from a higher level and design it. You are a worker in the machine, but you always have the power to zoom out and design the machine itself.

Amazon link

The book has 2 parts: Life principles and Work principles. This post is about the first one – life.

Small notes:

  • I really need to write my own principles and playbooks for different scenarios that occur often in life
  • Biggest motivator to change is the pain you feel after the mistake. That is why it is very crucial not to run away from it, but use it as a cue to change behavior.
  • Kindness instead of truth is sometimes tricky because it leads to dishonesty and that – to poor communication

Habits, again.

This comes over and over again. The key to success is helpful habits.

Every habit consists of Cue, Behaviour and reward. Identyfying proper cues and rewarding behavior gets you there.

 

This book is essentially a goldmine. I truly can have no hope of summarizing it. Highlights speak for themselves.

 

My highlights

  • Whatever success I’ve had in life has had more to do with my knowing how to deal with my not knowing than anything I know.
  • reflect on and write down my decision-making criteria whenever I made a decision,
  • My most obvious weakness was my bad rote memory. I couldn’t, and still can’t, remember facts that don’t have reasons for being what they are
  • great is better than terrible, and terrible is better than mediocre, because terrible at least gives life flavor.
  • My business has always been a way to get me into exotic places and allow me to meet interesting people. If I make any money from those trips, that’s just icing on the cake.
  • I believe one of the most valuable things you can do to improve your decision making is to think through your principles for making decisions, write them out in both words and computer algorithms, back-test them if possible, and use them on a real-time basis to run in parallel with your brain’s decision making.
  • I never valued more traditional, antiseptic relationships where people put on a façade of politeness and don’t say what they really think.
  • believe that all organizations basically have two types of people: those who work to be part of a mission, and those who work for a paycheck.
  • Moreover, I recognized that managers who do not understand people’s different thinking styles cannot understand how the people working for them will handle different situations,
  • matching the right types of people to the right types of situations is key.
  • “Capable people are those who sit there worrying about the future. The unwise are those who worry about nothing.
  • a. Dreams + Reality + Determination = A Successful Life.
  • 1.2 Truth—or, more precisely, an accurate understanding of reality—is the essential foundation for any good outcome.
  • Besides giving me the freedom to be me, it has allowed me to understand others and for them to understand me, which is much more efficient and much more enjoyable than not having this understanding.
  • Don’t get hung up on your views of how things “should” be because you will miss out on learning how they really are.
  • Whenever I observe something in nature that I (or mankind) think is wrong, I assume that I’m wrong and try to figure out why what nature is doing makes sense.
  • now realize that nature optimizes for the whole, not for the individual, but most people judge good and bad based only on how it affects them.
  • To be “good” something must operate consistently with the laws of reality and contribute to the evolution of the whole; that is what is most rewarded.
  • So rather than getting stuck hiding our mistakes and pretending we’re perfect, it makes sense to find our imperfections and deal with them. You will either learn valuable lessons from your mistakes and press on, better equipped to succeed—or you won’t and you will fail.
  • The individual’s incentives must be aligned with the group’s goals.
  • Contribute to the whole and you will likely be rewarded.
  • It is a great paradox that individually we are simultaneously everything and nothing.
  • I realized that most everything that at first seemed “bad” to me—like rainy days, weaknesses, and even death—was because I held preconceived notions of what I personally wanted.
  • But if you can remember to reflect after it passes, that’s valuable too. (I created a Pain Button app to help people do this, which I describe in the appendix.)
  • If you don’t let up on yourself and instead become comfortable always operating with some level of pain, you will evolve at a faster pace.
  • you have the opportunity to choose healthy and painful truth or
  • At some point in your life you will crash in a big way.
  • Look at the machine from the higher level.
  • One of the hardest things for people to do is to objectively look down on themselves within their circumstances (i.e., their machine) so that they can act as the machine’s designer and manager.
  • You shouldn’t be upset if you find out that you’re bad at something—you should be happy that you found out, because knowing that and dealing with it will improve your chances of getting what you want.
  • Don’t confuse what you wish were true with what is really true.
  • Don’t overweight first-order consequences relative to second- and third-order ones.
  • Dawkins’s River Out of Eden.
  • Achieving goals
    • 1. Have clear goals.
    • 2. Identify and don’t tolerate the problems that stand in the way of your achieving those goals.
    • 3. Accurately diagnose the problems to get at their root causes.
    • 4. Design plans that will get you around them.
    • 5. Do what’s necessary to push these designs through to results.
  • For example, when setting goals, just set goals.
  • Decide what you really want in life by reconciling your goals and your desires.
  • Remember that great expectations create great capabilities.
  • Focus on the “what is” before deciding “what to do about it.”
  • Everyone has at least one big thing that stands in the way of their success; find yours and deal with
  • The two biggest barriers to good decision making are your ego and your blind spots.
  • Sincerely believe that you might not know the best possible path and recognize that your ability to deal well with “not knowing” is more important than whatever it is you do know.
  • Radically open-minded people know that coming up with the right questions and asking other smart people what they think is as important as having all the answers.
  • Don’t worry about looking good; worry about achieving your goal.
  • That is because what exists within the area of “not knowing” is so much greater and more exciting than anything any one of us knows.
  • Be clear on whether you are arguing or seeking to understand, and think about which is most appropriate based on your and others’ believability.
  • you should make it clear that you are asking questions because you are seeking to understand their perspective.
  • also recommend that both parties observe a “two-minute rule” in which neither interrupts the other, so they both have time to get all their thoughts out.
  • a. Plan for the worst-case scenario to make it as good as possible.
  • right then and there I called the other doctor to see what each would say about the other’s views.
  • Recognize the signs of closed-mindedness and open-mindedness that you should watch out for.
  • circumstances, truly open-minded people, even the most believable people I know, always ask a lot of questions.
  • Nonbelievable people often tell me that their statements are actually implicit questions, though they’re phrased as low-confidence statements. While that’s sometimes true, in my experience it’s more often not.
  • 3. Closed-minded people focus much more on being understood than on understanding others.
  • 4. Closed-minded people say things like “I could be wrong . . . but here’s my opinion.” This is a classic cue I hear all the time. It’s often a perfunctory gesture that allows people to hold their own opinion while convincing themselves that they are being open-minded.
  • Mental pain often comes from being too attached to an idea when a person or an event comes along to challenge it.
  • Make being open-minded a habit.
  • If you consistently use feelings of anger/frustration as cues to calm down, slow down, and approach the subject at hand thoughtfully,
  • Get to know your blind spots. When you are closed-minded and form an opinion in an area where you have a blind spot, it can be deadly. So take some time to record the circumstances in which you’ve consistently made bad decisions because you failed to see what others saw.
  • This led to one of my most valuable management tools: Baseball Cards,
  • like “conceptual,” “reliable,” “creative,” and “determined”; the
  • while many people have an instinctual fear of snakes, no one has an instinctual fear of flowers.
  • The Spiritual Brain
  • Beyond Religion,
  • Choose your habits well.
  • The most valuable habit I’ve acquired is using pain to trigger quality reflections.
  • Our experience has been that left-brained folks tend to see right-brained folks as “spacey” or “abstract,” while right-brained thinkers tend to find left-brained thinkers “literal” or “narrow.”
  • barry bassbal cards
  • Myers-Briggs Type Indicator (MBTI), the Workplace Personality Inventory, the Team Dimensions Profile, and Stratified Systems Theory.
  • Introversion vs. extroversion. Introverts
  • Intuiting vs. sensing.
  • Thinking vs. feeling.
  • Planning vs. perceiving.
  • Creators vs. refiners vs. advancers vs. executors vs. flexors.
  • Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.
  • Everything looks bigger up close.
  • it is smarter to choose the great over the new.
  • Be an imperfectionist.
  • When a line of reasoning is jumbled and confusing, it’s often because the speaker has gotten caught up in below-the-line details without connecting them back to the major points.
  • “Until you make the unconscious conscious, it will direct your life and you will call it fate.”
  • 5.6 Make your decisions as expected value calculations.
  • Let’s say the reward for being right is $100 and its probability is 60 percent, while the penalty for being wrong is also $100. If you multiply the reward by the probability of being right you get $60 and if you multiply the penalty by the probability of being wrong (40 percent) you get $40. If you subtract the penalty from the reward, the difference is the expected value, which in this case is positive (+$20).
  • Convert your principles into algorithms and have the computer make decisions alongside you.
  • setting goals, identifying and not tolerating problems, diagnosing problems, coming up with designs to get around them, and then doing the tasks required.

 

SUMMARY AND TABLE OF LIFE PRINCIPLES

  • Think for yourself to decide
    • 1) what you want,
    • 2) what is true, and
    • 3) what you should do to achieve #1 in light of #2, and do that with humility and open-mindedness so that you consider the best thinking available to you.
  • LIFE PRINCIPLES INTRODUCTION
    • • Look to the patterns of those things that affect you in order to understand the cause-effect relationships that drive them and to learn principles for dealing with them effectively.

PART II: LIFE PRINCIPLES

  • 1 Embrace Reality and Deal with It
    • 1.1 Be a hyperrealist.
      • a. Dreams + Reality + Determination = A Successful Life.
    • 1.2 Truth—or, more precisely, an accurate understanding of reality—is the essential foundation for any good outcome.
    • 1.3 Be radically open-minded and radically transparent.
      • a. Radical open-mindedness and radical transparency are invaluable for rapid learning and effective change.
      • b. Don’t let fears of what others think of you stand in your way.
      • c. Embracing radical truth and radical transparency will bring more meaningful work and more meaningful relationships
    • 1.4 Look to nature to learn how reality works.
      • a. Don’t get hung up on your views of how things “should” be because you will miss out on learning how they really are.
      • b. To be “good,” something must operate consistently with the laws of reality and contribute to the evolution of the whole; that is what is most rewarded.
      • c. Evolution is the single greatest force in the universe; it is the only thing that is permanent and it drives everything.
      • d. Evolve or die.
    • 1.5 Evolving is life’s greatest accomplishment and its greatest reward.
      • a. The individual’s incentives must be aligned with the group’s goals.
      • b. Reality is optimizing for the whole—not for you.
      • c. Adaptation through rapid trial and error is invaluable.
      • d. Realize that you are simultaneously everything and nothing—and decide what you want to be.
      • e. What you will be will depend on the perspective you have.
    • 1.6 Understand nature’s practical lessons.
      • a. Maximize your evolution.
      • b. Remember “no pain, no gain.”
      • c. It is a fundamental law of nature that in order to gain strength one has to push one’s limits, which is painful.
    • 1.7 Pain + Reflection = Progress.
      • a. Go to the pain rather than avoid it.
      • b. Embrace tough love.
    • 1.8 Weigh second- and third-order consequences.
    • 1.9 Own your outcomes.
    • 1.10 Look at the machine from the higher level.
      • a. Think of yourself as a machine operating within a machine and know that you have the ability to alter your machines to produce better outcomes.
      • b. By comparing your outcomes with your goals, you can determine how to modify your machine.
      • c. Distinguish between you as the designer of your machine and you as a worker with your machine.
      • d. The biggest mistake most people make is to not see themselves and others objectively, which leads them to bump into their own and others’ weaknesses again and again.
      • e. Successful people are those who can go above themselves to see things objectively and manage those things to shape change.
      • f. Asking others who are strong in areas where you are weak to help you is a great skill that you should develop no matter what, as it will help you develop guardrails that will prevent you from doing what you shouldn’t be doing.
      • g. Because it is difficult to see oneself objectively, you need to rely on the input of others and the whole body of evidence.
      • h. If you are open-minded enough and determined, you can get virtually anything you want.
  •  2 Use the 5-Step Process to Get What You Want Out of Life
    • 2.1 Have clear goals.
      • a. Prioritize: While you can have virtually anything you want, you can’t have everything you want.
      • b. Don’t confuse goals with desires.
      • c. Decide what you really want in life by reconciling your goals and your desires.
      • d. Don’t mistake the trappings of success for success itself.
      • e. Never rule out a goal because you think it’s unattainable.
      • f. Remember that great expectations create great capabilities.
      • g. Almost nothing can stop you from succeeding if you have
        • a) flexibility and
        • b) self-accountability.
      • h. Knowing how to deal well with your setbacks is as important as knowing how to move forward.
    • 2.2 Identify and don’t tolerate problems.
      • a. View painful problems as potential improvements that are screaming at you.
      • b. Don’t avoid confronting problems because they are rooted in harsh realities that are unpleasant to look at.
      • c. Be specific in identifying your problems.
      • d. Don’t mistake a cause of a problem with the real problem.
      • e. Distinguish big problems from small ones.
      • f. Once you identify a problem, don’t tolerate it.
    • 2.3 Diagnose problems to get at their root causes.
      • a. Focus on the “what is” before deciding “what to do about it.”
      • b. Distinguish proximate causes from root causes.
      • c. Recognize that knowing what someone (including you) is like will tell you what you can expect from them.
    • 2.4 Design a plan.
      •  a. Go back before you go forward.
      • b. Think about your problem as a set of outcomes produced by a machine.
      • c. Remember that there are typically many paths to achieving your goals.
      • d. Think of your plan as being like a movie script in that you visualize who will do what through time.
      • e. Write down your plan for everyone to see and to measure your progress against.
      • f. Recognize that it doesn’t take a lot of time to design a good plan.
    • 2.5 Push through to completion.
      • a. Great planners who don’t execute their plans go nowhere.
      • b. Good work habits are vastly underrated.
      • c. Establish clear metrics to make certain that you are following your plan.
    • 2.6 Remember that weaknesses don’t matter if you find solutions.
      • a. Look at the patterns of your mistakes and identify at which step in the 5-Step Process you typically fail.
      • b. Everyone has at least one big thing that stands in the way of their success; find yours and deal with it.
    • 2.7 Understand your own and others’ mental maps and humility.
  • 3 Be Radically Open-Minded
    • 3.1 Recognize your two barriers.
      • a. Understand your ego barrier.
      • b. Your two “yous” fight to control you.
      • c. Understand your blind spot barrier.
    • 3.2 Practice radical open-mindedness.
      • a. Sincerely believe that you might not know the best possible path and recognize that your ability to deal well with “not knowing” is more important than whatever it is you do know.
      • b. Recognize that decision making is a two-step process: First take in all the relevant information, then decide.
      • c. Don’t worry about looking good; worry about achieving your goal.
      • d. Realize that you can’t put out without taking in.
      • e. Recognize that to gain the perspective that comes from seeing things through another’s eyes, you must suspend judgment for a time—only by empathizing can you properly evaluate another point of view.
      • f. Remember that you’re looking for the best answer, not simply the best answer that you can come up with yourself.
      • g. Be clear on whether you are arguing or seeking to understand, and think about which is most appropriate based on your and others’ believability.
    • 3.3  Appreciate the art of thoughtful disagreement.
    • 3.4 Triangulate your view with believable people who are willing to disagree.
      • a. Plan for the worst-case scenario to make it as good as possible.
    • 3.5 Recognize the signs of closed-mindedness and open-mindedness that you should watch out for.
    • 3.6 Understand how you can become radically open-minded.
      • a. Regularly use pain as your guide toward quality reflection.
      • b. Make being open-minded a habit.
      • c. Get to know your blind spots.
      • d. If a number of different believable people say you are doing something wrong and you are the only one who doesn’t see it that way, assume that you are probably biased.
      • e. Meditate.
      • f. Be evidence-based and encourage others to be the same.
      • g. Do everything in your power to help others also be open-minded.
      • h. Use evidence-based decision-making tools.
      • i. Know when it’s best to stop fighting and have faith in your decision-making process.
  • 4 Understand That People Are Wired Very Differently
    • 4.1 Understand the power that comes from knowing how you and others are wired.
      • a. We are born with attributes that can both help us and hurt us, depending on their application.
    • 4.2 Meaningful work and meaningful relationships aren’t just nice things we chose for ourselves—they are genetically programmed into us.
    • 4.3 Understand the great brain battles and how to control them to get what “you” want.
      • a. Realize that the conscious mind is in a battle with the subconscious mind.
      • b. Know that the most constant struggle is between feeling and thinking.
      • c. Reconcile your feelings and your thinking.
      • d. Choose your habits well.
      •  e. Train your “lower-level you” with kindness and persistence to build the right habits.
      • f. Understand the differences between right-brained and left-brained thinking.
      • g. Understand how much the brain can and cannot change.
    • 4.4 Find out what you and others are like.
      • a. Introversion vs. extroversion.
      • b. Intuiting vs. sensing.
      • c. Thinking vs. feeling.
      • d. Planning vs. perceiving.
      • e. Creators vs. refiners vs. advancers vs. executors vs. flexors.
      • f. Focusing on tasks vs. focusing on goals.
      • g. Workplace Personality Inventory.
      • h. Shapers are people who can go from visualization to actualization.
    • 4.5 Getting the right people in the right roles in support of your goal is the key to succeeding at whatever you choose to accomplish.
      • a. Manage yourself and orchestrate others to get what you want.
  • 5 Learn How to Make Decisions Effectively
    • 5.1 Recognize that
      • 1) the biggest threat to good decision making is harmful emotions, and
      • 2) decision making is a two-step process (first learning and then deciding).
    • 5.2 Synthesize the situation at hand.
      • a. One of the most important decisions you can make is who you ask questions of.
      • b. Don’t believe everything you hear.
      • c. Everything looks bigger up close.
      • d. New is overvalued relative to great.
      • e. Don’t oversqueeze dots.
    • 5.3 Synthesize the situation through time.
      • a. Keep in mind both the rates of change and the levels of things, and the relationships between them.
      • b. Be imprecise.
      • c. Remember the 80/20 Rule and know what the key 20 percent is.
      • d. Be an imperfectionist.
    • 5.4 Navigate levels effectively.
      • a. Use the terms “above the line” and “below the line” to establish which level a conversation is on.
      • b. Remember that decisions need to be made at the appropriate level, but they should also be consistent across levels.
    • 5.5 Logic, reason, and common sense are your best tools for synthesizing reality and understanding what to do about it.
    • 5.6 Make your decisions as expected value calculations.
      • a. Raising the probability of being right is valuable no matter what your probability of being right already is.
      • b. Knowing when not to bet is as important as knowing what bets are probably worth making.
      • c. The best choices are the ones that have more pros than cons, not those that don’t have any cons at all.
    • 5.7 Prioritize by weighing the value of additional information against the cost of not deciding.
      • a. All of your “must-dos” must be above the bar before you do your “like-to-dos.”
      • b. Chances are you won’t have time to deal with the unimportant things, which is better than not having time to deal with the important things.
      • c. Don’t mistake possibilities for probabilities.
    • 5.8 Simplify!
    • 5.9 Use principles.
    • 5.10 Believability weight your decision making.
    • 5.11 Convert your principles into algorithms and have the computer make decisions alongside you.
    • 5.12 Be cautious about trusting AI without having deep understanding.

 

Work Principles

I did start on “Work principles” part, but I had to stop to take a breathe 🙂

  • Don’t let loyalty to people stand in the way of truth and the well-being of the organization
  • Speak up, own it, or get out
  • Distinguish between idle complaints and complaints meant to lead to improvement
  • but I often hear people complaining about the style or tone of a criticism in order to deflect from its substance. If you think someone’s style is an issue, box it as a separate issue to get in sync on.
  • Use “double-do” rather than “double-check” to make sure mission-critical tasks are done correctly.