Mental Models Library

A curated garden of timeless investing wisdom. Master the cognitive tools used by legends like Buffett, Munger, and Lynch to navigate complex markets.

By Guru:

Topics:

strategy

Circle of Competence

Stick to what you know. Defining what you don't know is more important than being brilliant.

"You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence."

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psychology

Mr. Market

The market is a manic-depressive partner, not an instructor.

"Mr. Market is your servant, not your master."

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strategy

Inversion

Solve problems backwards. Avoid stupidity rather than seeking brilliance.

"Invert, always invert."

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psychology

Lollapalooza Effect

Multiple biases acting together create extreme outcomes.

"When you get a lollapalooza effect, you will get results that are widely different from what linear extrapolation would predict."

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strategy

Second-Level Thinking

Thinking deeper than the consensus to find an edge.

"You can't do the same things others do and expect to outperform."

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risk

Market Cycles

Trees don't grow to the sky, and markets don't fall to zero.

"Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one."

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strategy

Buy What You Know

Use your consumer experience to find growth stocks.

"The person that turns over the most rocks wins the game."

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valuation

The Tenbagger

Finding stocks that can grow 10x to make a portfolio.

"All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don't work out."

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psychology

Reflexivity

Market participants' views influence the market, which influences views.

"Stock market bubbles don't grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception."

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valuation

Margin of Safety

Buying at a price far below intrinsic value to protect against error.

"You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. Then you do not buy a stock for $80 when you think it is worth $83."

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strategy

Economic Moat

A sustainable competitive advantage that protects profits.

"In business, I look for economic castles protected by unbreachable 'moats'."

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strategy

Sit-On-Your-Ass Investing

Inactivity is intelligent behavior when you hold great businesses.

"The big money is not in the buying and selling, but in the waiting."

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