8 Mental Models For Investing Success

Buffett says that Munger has the best 30-second mind in the world.

He sees the essence of everything before you even finish the sentence.

That’s because Munger has a robust latticework of mental models in his mind.

These 8 mental models will help your investment process:

1. Occam’s Razor

It states that “it is futile to do with more what can be done with fewer”.

The simplest explanation is most likely the right one.

Similar to Peter Lynch’s 2-min drill: If truly understood, the thesis could be summed up in 2-min.

2. Loss Aversion Bias

The pain of losing is twice as immense as the pleasure of gaining.

We tend to avoid losses over earning gains.

This can lead to an overly conservative portfolio that does not deliver the returns needed for an investor to achieve their financial goals.

3. Mean Reversion

Most things revert to the mean.

In investing, this usually refers to profitability, growth & valuation. If an industry is high profitability, it’ll start attracting competition. Unless there’s an economic moat, excess profits will be competed away.

4. Economic Moat

A strong economic moat exists when there’s a long-term competitive advantage.

Moat protects a company’s profitability and growth from competition.

Examples:

•High switching costs

•Economies of scale

•Network effects

•Regulations

•Branding

5. Luck-Skill Continuum

Unlike chess, investing is more like a game of poker.

Success in investing is partially determined by luck.

A good outcome may be the result of either a good or bad process.

Evaluate your investments by your process, and less on outcomes.

6. Survivorship Bias

Without considering companies that have failed, we assume that a company’s success represents the entire industry.

It is common for investors to cite Salesforce’s success as a yardstick for what other loss-making SaaS companies can accomplish.

7. Parkinson’s Law

Work expands based on the time allocated for its completion.

Ever heard of analysis paralysis?

Sometimes investors spend way too long analyzing a company.

Or worse, spend way too much time reading investing books.

Without actually investing 😅

8. Authority Bias

Blindly believing the opinions of authority figures and attributing greater accuracy to them.

E.g. Jim Rogers sounds the bells of pessimism every year.

He’s wrong WAY more often than he is right. But some folks buys it.

Do you want a complete guide to mental models on investing?  

I have launched guide with OVER 50 mental models for investors.

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