#002: Mental Models and How to Use Them

If you want to invest like the best, you need to think like the best.
One of the best ways to do this is to learn about their “Mental Models”.
In other words, learn about how they perceive and understand the world. By understanding their thought process, you will develop a greater appreciation to how they make decisions.
And if your goal is to make similar decisions as them… then this can be a very effective skill to learn.

First, let’s discuss 5 mental models of some of the most successful investors:

1. Long-term Thinking

Focus on the future potential of your investments, not short-term gains.
This is also referred to as having low-time preference.
One of Warren Buffett’s most iconic quotes is that his “favorite holding period is forever”.
Stop chasing short-term gains, and focus on how your investments will perform over years and decades.

2. Margin of Safety

Always have a margin of safety in your investments to ensure a sufficient buffer against potential losses.
Never lose money.
This is another one of Warren Buffett’s great quotes. Losing money sets you back unnecessarily.
Losing 50% of you money means you then need a 100% gain to get back to where you started.

3. Value Investing

Investing in undervalued assets provides a unique opportunity for higher returns in the future.
If everyone is already talking about a particular investment, it’s probably not undervalued.
Find the diamonds in the rough.
That is where you will find the outsized returns.

4. Patience

Be disciplined. Wait for the right opportunity instead of making rash decisions based on emotions.
Warren Buffett became a billionaire at age 56.
Are you willing to put in the work, and wait patiently?
Play the long game.

5. Growth Mindset

Always have a growth mindset. Never stop learning and adapting to new investment opportunities and challenges.
And especially, resist the temptation to believe you are always right.
This is where younger investors like Chamath Palihapitiya, Luke Gromen, and Lyn Alden have an advantage.
Older investors are more likely to be stuck in their ways.

Bonus: How to incorporate mental models

People often talk about mental models, what they are, and even share the best mental models like above. But very few talk about how to actually incorporate them into your thinking.
The most common mistake is trying to incorporate too many mental models at once.
Instead of trying to incorporate all 5 of the above mental models immediately, as yourself:
“Which of these mental models do I lack the most today?”
Be honest with yourself. Reflect on your own weakness. Then, focus on that mental model. This will help you build a stronger foundation and will avoid you feeling overwhelmed.

To your prosperity,
Wealth Potion