Simplicity Is The Ultimate Sophistication
The author emphasizes simplicity as it helps us make better decisions by breaking down complex problems into parts.
For example, one should ask four inverted questions whenever they are looking at a stock. These questions break the mindset of finding supportive bullish reasons and force you to seek out disconfirming evidence actively.
1. How can I lose money? Versus How can I make money?
Again, if you focus on preventing the downside, the upside takes care of itself.
2. What is this stock not worth of? Versus What is this stock going to be worth?
If you can identify the floor price or a low price for a stock.
3. What can go wrong? Versus What growth drivers are there?
Rather than focusing on the growth catalysts, think probabilistically about a range of possible outcomes, and contemplate the potential risks, especially those that have never occurred.
4. What is the growth rate being implied by the market in the current valuation of the stock? Versus What is my future growth rate assumption?
a reverse discounted cash flow fleshes out the current assumptions of the market for the stock. Then the investor can compare the market’s assumptions with their own and make a decision accordingly.