Do you feel anxious about your investments all day long? You panic when prices fall, and you panic when they rise. Why? Most likely because you do not really know what you bought and what you are holding. You need to settle one question at a fundamental level: what is real investing? In Duan Yongping’s words, buying a stock is buying a company, and buying a company is buying the present value of its future cash flows. ...

What separates people who achieve something from people who do not may not be talent at all. It may be one habit that everybody can adopt but 90% of people cannot sustain: reading every day. Charlie Munger said that most of the smart people he met in his life shared one excellent habit — they read every day. Buffett is a library on wheels; Munger is a bookshelf with two legs. The sheer volume they read astonishes me. ...

If you have $1,000,000 and plan to retire early on it, how much can you actually spend each year? Spend too much and you risk running out of money before you run out of time. Spend too little and you shortchange yourself for decades. Is there a withdrawal rate that is safe enough to last forever? There is. It is called the 4% rule. What the rule says Assume inflation runs at 2%. If your portfolio compounds at 6% a year, you can withdraw 4% of it every year without your capital shrinking. ...

Do you think price is the most important thing when you buy a stock? In practice, most people who fixate on the share price lose money. I used to be one of them: I looked at the price first and barely asked what the company actually did. It cost me years of detours and a lot of tuition. Then I read Duan Yongping’s investing Q&A, and it clicked. What matters most is the business model, then the corporate culture, and only then the price. ...

If you earn 10% a year, what is your total return after ten years? Most people answer 100%. That answer is wrong, because it ignores compounding. The correct answer is 159%. The mechanism is simple. The first year’s gain takes part in the second year’s growth, and the second year’s gain produces gains of its own. The longer the horizon, the more dramatic the effect. Einstein is said to have called compound interest the eighth wonder of the world: those who understand it earn it, and those who do not pay it. So how do ordinary investors put it to work? Two things matter. ...

The bar for financial freedom may be much lower than you think. Take an ordinary person who spends $60,000 a year. By the 4% rule, they need $1.5 million to be financially free. Spend $100,000 a year and the number is $2.5 million. The next question is usually: how on earth do I accumulate that? Buffett’s answer is straightforward — invest regularly and for the long term in low-cost index funds, which have compounded at roughly 7% a year. Subtract 3% inflation and you keep about 4% in real terms. ...

Why do investors either lose money consistently, or make money and then give it all back? The answer is simple: if the method is wrong, how could the result be right? So stop, and ask yourself honestly: from the first day you started investing until today, are you up or down? If you are up — can you sustain a return above 10% a year for five, ten, even twenty consecutive years? If you can, congratulations: you could write a book about investing, and you can stop reading here, because the rest will only waste your time. ...

Thinking is a skill — and most people, myself included in the past, are not very good at it. Why? Because we tend to think in a straight line: we only approach a problem from the front, so some problems never get solved. The fix is simple. When a problem has resisted you for years, try Charlie Munger’s inversion: think it through backwards. Always invert. One example makes it clear. ...

By investing regularly in an index fund, an investor who knows nothing can outperform most professionals. When dumb money admits it is dumb, it stops being dumb. For most investors, institutional or individual, the best way to own stocks is to hold a lowest-cost index fund. Those who follow that path will, after fees and costs, end up ahead of the vast majority of professionals. Very low-cost index funds are extraordinarily friendly to investors. For most people, they are the best choice there is.

Charlie Munger says an amateur investor only needs to ask two questions to decide whether index funds are right for them. First: how good am I as an investor? Is my own ability above the market average? Second: can I find an excellent fund manager? And are the managers I pick actually able to beat the market? Answer those two questions honestly, and you will know whether — as an amateur investor — you should be buying index funds. ...