Jeff Aronson warns that prolonged success breeds dangerous overconfidence. When an investor is on a hot streak and feels they can do no wrong, their perception of risk becomes warped. This psychological shift, where they think "I must be good," is precisely when underlying risk is escalating, not diminishing.

During due diligence, it's crucial to look beyond returns. Top allocators analyze a manager's decision-making process, not just the outcome. They penalize managers who were “right for the wrong reasons” (luck) and give credit to those who were “wrong for the right reasons” (good process, bad luck).

Some companies execute a 3-5 year plan and then revert to average returns. Others 'win by winning'—their success creates new opportunities and network effects, turning them into decade-long compounders that investors often sell too early.

Following George Soros's theory of reflexivity, markets act like thermostats, not barometers. Rising AI stock prices attract capital, which further drives up prices, creating a self-reinforcing loop. This feedback mechanism detaches asset values from underlying business fundamentals, inflating a bubble based on pure belief.

Investment philosophy often aligns with psychological disposition. Growth investing demands an optimistic view of the future, betting on innovation and expansion. In contrast, value investing is inherently more pessimistic, focusing on buying assets below their current worth with the hope of mean reversion.

Corporate leaders are incentivized and wired to pursue growth through acquisition, constantly getting bigger. However, they consistently fail at the strategically crucial, but less glamorous, task of divesting assets at the right time, often holding on until value has significantly eroded.

When WCM refreshed its portfolio, the new holdings initially lagged behind the old ones as the market snapped back. This created a "lonely" period of intense self-doubt and internal questioning. This highlights the emotional difficulty of sticking with a process change before results validate the decision.

Research on contentious topics finds that individuals with the most passionate and extreme views often possess the least objective knowledge. Their strong feelings create an illusion of understanding that blocks them from seeking or accepting new information.

Munger argued that academic psychology missed the most critical pattern: real-world irrationality stems from multiple psychological tendencies combining and reinforcing each other. This "Lollapalooza effect," not a single bias, explains extreme outcomes like the Milgram experiment and major business disasters.