Most VCs are emotionally uncomfortable underwriting stigmatized markets like addiction. This creates a significant opportunity for investors with personal experience or deep conviction. These overlooked markets harbor alpha because the lack of investor competition suppresses valuations and allows for outsized returns.

Counterintuitively, companies with 'bad' governance ratings have financially outperformed those with 'good' ratings since 2008. This suggests that so-called 'best practices' often enforce short-termism, while 'bad' governance can actually protect a company's long-term, value-creating mission.

The only way ESG investing can effect change is by starving "bad" companies of capital, raising their cost of capital. For the market to clear, non-ESG investors must own those stocks and will only do so if compensated with a higher expected return. Therefore, the ESG portfolio must, by definition, have a lower expected return.

There's an inverse correlation between an industry's "sex appeal" and its return on capital. Glamorous sectors attract overinvestment of human and financial capital, compressing returns. Boring, essential industries like senior care face less competition, leading to higher success rates and profitability.

High-quality stocks are often expensive, meaning they trade at a high multiple of their earnings. In uncertain times, these multiples can shrink even if the company remains strong, leading to negative returns. Conversely, cheap, low-quality stocks have room for their multiples to expand, delivering positive returns.

High-growth stocks that miss expectations get punished severely. In contrast, low-growth stocks that merely meet low expectations only slightly underperform, but the 50% of them that deliver an upside surprise massively outperform. This creates a favorable asymmetric risk/reward for betting on low-expectation companies.

When a sector becomes universally loved, investors become complacent, lending too much money on overly favorable terms (e.g., high leverage, low yields), which creates hidden risks. Howard Marks warns that avoiding what is popular is as crucial as buying what is hated, because high prices driven by popularity rarely offer fair, let alone excess, returns.

Apps with questionable premises, like gambling to pay off debt, often receive public scorn on social media (e.g., extremely low like-to-view ratios). This negative sentiment is a poor predictor of success, as these apps can quietly build massive businesses by serving a real, albeit hidden, user need.

To achieve excess returns, one must buy assets for less than they are worth. This requires finding a seller willing to transact at that low price—someone making a mistake. These mistakes arise from emotional biases, forced selling due to mandates, or misunderstanding complexity, creating bargain opportunities for disciplined, “second-level” thinkers.