I started with Ben Franklin, and then Einstein, and then Steve Jobs—[they were all] innovative and creative. And I said, “Well, what pattern [leads to] that?” The pattern wasn’t that they were smart, because you’ve met lots of smart people, and they don’t usually amount to much. The pattern tends to be curiosity across disciplines
Innovators and creative people tend to be very different, and the people who are the most innovative and successful realize that you have to put together a team of people with different styles and different talents.
My peculiarity is that I don’t have a particular style of investing or, more exactly, I try to change my style to fit the conditions... I would put it this way: I do not play according to a given set of rules; I look for changes in the rules of the game.
I work with hypotheses. I form a thesis about the anticipated sequence of events and then I compare the actual course of events with my thesis; that gives me a criterion by which I can evaluate my hypothesis. This involves a certain element of intuition. I work with investment hypotheses. I watch whether the actual course of events corresponds to my expectations. If not, I realize that I am on the wrong track.
But I’m not sure the role of intuition is so great, because I also have a theoretical framework. In my investing, I tend to select situations that fit into that framework. I look for conditions of disequilibrium. They send out certain signals that activate me. So my decisions are really made using a combination of theory and instinct. If you like, you may call it intuition.
I recognize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors. I do this on two levels. On the abstract level, I have turned the belief in my own fallibility into the cornerstone of an elaborate philosophy. On a personal level, I am a very critical person who looks for defects in myself as well as in others. To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.
When there is a discrepancy between my expectations and the actual course of events, it doesn’t mean that I dump my stock. I reexamine the thesis and try to establish what has gone wrong. I may adjust my thesis or I may find that there is some extraneous influence that has come into the picture. I may end up actually adding to my position rather than dumping it. But I certainly don’t stay still and I don’t ignore the discrepancy. I start a critical examination. And generally, I’m quite leery of changing my thesis to suit the changed circumstances, although I don’t rule it out completely.
According to my theory of initially self-reinforcing, but eventually self-defeating trends, the trend is your friend most of the way; trend followers only get hurt at inflection points, where the trend changes.
Most of the time I am a trend follower, but all the time I am aware that I am a member of a herd and I am on the lookout for inflection points. The prevailing wisdom is that markets are always right. I take the opposite position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis.
It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend.
This line of reasoning leads me to look for the flaw in every investment thesis. My sense of insecurity is satisfied when I know what the flaw is. It doesn’t make me discard the thesis. Rather, I can play it with greater confidence because I know what is wrong with it while the market does not. I am ahead of the curve. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.
There is nothing more self-destructive than to deny your feelings. Once you are aware of your feelings you may not feel the need to show them. But sometimes, especially when you are under great strain, the need to hide it may make the strain intolerable.