Charlie Munger once said that he can’t afford ($) to have too many friends like Peter Bevelin because when you recommend a book to him, it is so good that Charlie feels compelled to buy a copy for all of his friends and family
I found that I could increase my chance of making better judgments if I could learn what works and not, if I adapt what I do to my personal situation, and if I could establish some values and preferences. If I then could set up some avoid-rules and filters/tests to judge what make sense or is important or not, life could be improved (even if I still do some mistakes; but hopefully I am less of a fool now). Also remember that all decisions aren’t important. Some people spend more time making a judgment on what TV to buy or where to go on vacation than a life-changing decision like marriage.
In some cases the “Smith-model” is superior and in other cases I may learn better in some other fashion. For example, I learnt a lot from reading The Autobiography of Charles Darwin. But I also learnt a lot of Einstein’s ideas by reading Mr. Tompkins in Paperback by George Gamow.
Read, read and think about what you have read. Look for understanding. What is going on here? What is the core idea? What is the evidence that it is right? Also remember what Richard Feynman once asked someone who remarked that he had read a book. “But, did you learn anything?” Understand an idea’s meaning and applications. Focus on useful and obviously important and correct general ideas, concepts and principles. What does it mean? What happens? What is the effect?
Personally, I started with biology and psychology since knowing some human constraints and “brain traps” I could avoid some things by for example using some “avoid-rules.” Why can’t we all be nice, honest and rational? (And why can’t we all have wings and thus eliminate department store escalators?). I favor ideas that explain a whole range of phenomena.
For example, biology (evolution and natural selection) explains why people: fear losses but take big risks when threatened, fear strangers, trust similar people, cooperate, imitate, fear social disapproval, make fast judgments, and overreact to vivid information. Mathematics (scaling) explain how living things are shaped and constrained by basic mathematical principles. For example, why: no giants exist, a mouse can survive a big fall but not a human, some animals have short and thick legs, larger plants have leaves, small animals can’t live in cold countries, ants can lift such a big load, and grasshoppers can jump so high relative to their body sizes. Mathematics (combinatorics) and Physics (systems theory) explain why: we can’t predict the economy, it is hard to make money on new ventures, most projects take more time and money than we anticipate, nuclear accidents happen, we will have more electrical black-outs, coincidences occur, and some mutual funds beat the index.
Some books that I really learnt a lot from (in no order of preference):
Cialdini Robert B., Influence: The Psychology of Persuasion
Darwin Francis (editor), The Autobiography of Charles Darwin and Selected Letters
Dawes Robyn M., Everyday Irrationality: How Pseudo-Scientists,Lunatics, and the Rest of Us Systematically Fail to Think Rationally (it really introduced me to the value of always asking: Why should I believe this? – Show me the evidence + Compared to what?)
Feynman Richard, The Character of Physical Law and The Meaning of it All: Thoughts of a Citizen Scientist
Hardin Garrett, Filters Against Folly: How to Survive Despite Economists, Ecologists, and the Merely Eloquent
Lowenstein Roger, Buffett: The Making of an American Capitalist
Montaigne Michel de, The Complete Essays
Nassim Nicholas Taleb, The Black Swan
As Benjamin Franklin said: “ If a man empties his purse into his head, no one can take it away from him. An investment in knowledge always pays the best interest.”
I believe there are some general characteristics that are important to reduce investment sorrow (no order of importance and not considering the eternal virtues of price, management and moat). Some examples:
1. The importance of knowing what you know and don’t know. There is a lot of wisdom in this remark from Eitan Wertheimer: “I had a very big lesson from Warren: the use of the word discipline…We learned very quickly that our most important asset is our limitations…The second thing we understand is that when we respect our limitations we don’t suffer from them anymore.”
2. Not putting all your trust in checklists (causing a false sense of security and control, just like wearing a seat belt makes drivers feel more secure, making them drive faster or more recklessly). Trouble often comes from the direction we least expect.
3. Related to the above is the importance of resilience and redundancy.
Buffett: “We want to always keep a lot of money around. We have so many extra levels of safety we follow at Berkshire…. in financial markets, almost anything that can happen does happen. And it pays to conduct your affairs so that no matter how foolish other people get, you’re still around to play the game next day.”
Try to follow the advice of Confucius: “The superior man, when resting in safety, does not forget that danger may come. When in a state of security he does not forget the possibility of ruin. When all is orderly, he does not forget that disorder may come. Thus his person is not endangered, and his States and all their clans are preserved.”
4. Pascal’s lesson as told by Buffett: “If we can't tolerate a possible consequence, remote though it may be, we steer clear of planting its seeds.”
5. Absence of a need to invest all the time. As Buffett said: “You only have to do a few things right in your life as long as you don’t do too many things wrong.” Also, Seneca said: “The mind must be given relaxation; it will arise better and keener after resting.”
6. Knowing what to avoid. As Buffett recently said on Wells Fargo: “The real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do. And what Wells didn't do is what defines their greatness.” Isn’t that wise? My favorite Munger quote on this is: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
7. Temperament is more important than intelligence. As Buffett said: “Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior are vital to long-term investment success.”
8. Keynes’ advice: “It is better to be roughly right than precisely wrong.”
9. Thinking like a businessman and investor. As Buffett said: "Being a businessman makes me a better investor and being an investor makes me a better businessman."
10. Keeping things simple. I love this Munger quote: “We use a lot of experience and do it [investment returns] in our heads. We don’t like complexity and we distrust other systems and think it many times leads to false confidence. The harder you work, the more confidence you get. But you may be working hard on something that is false. We’re so afraid of that process so we don’t do it.”
11. Understanding the fundamental importance of trust to life and business. As Oliver Wendell Holmes said: “Put not your trust in money, but put your money in trust.” And to quote Seneca in the choice of friends: “After friendship is formed you must trust, but before that you must judge.” Think about how much life is improved by being around people you can trust. Or to invert – think about the misery of being around people you can’t trust. And it simplifies life. As Munger said: “When you get a seamless web of deserved trust, you get enormous efficiencies.”
12. An ability to tune out folly and noise. For example, physicists have a wonderful ability to eliminate unimportant details and focus on what matters. Professor Douglas Hofstadter once said that thinking is all about the ability to look at complex situations and strip away things that don’t count – the ability to filter out situations, and [find] what’s at their core. Something Buffett and Munger are extremely good at.
Buffett has said over and over again: “The most important question in economics is, “And then what?”
Personally, I read a lot. I have to work things out for myself to understand them. I try to use the “see one, do one, teach one” approach used in medical education (but change it to “do many” and in multiple situations and over time). I often go from reality (something I have seen) to find answers among ideas. I don’t try to fit reality to an idea. And then I try to find more examples on an idea from reality. Finally, I try to explain it to someone else. Writing Seeking Wisdom was such an exercise – I forced myself to learn by teaching someone else. And reading Feynman at an early point helped me where I clearly learnt the difference between knowing the name of something and knowing what goes on since knowledge is only valuable if it’s useful and something is only useful if I understand what it means. What I in my book called meaning and asking, “what happens?”
I try to concentrate on learning practical and consequential things that can help me reduce the chance of sorrow.
When you talk about deliberate practice or working on what you’re bad at, just remember this Munger quote: “Each of you will have to figure out where your talents lie. And you’ll have to use your advantages. But if you try to succeed in what you’re worst at, you’re going to have a very lousy career. I can almost guarantee it. To do otherwise, you'd have to buy a winning lottery ticket or get very lucky somewhere else.” Also, as Munger said, what often causes greatness or a Lollapalooza is when many factors work together in the same direction (as in the case of Buffett).
What do we need to teach? A preparation for real life; that is [composed of] useful knowledge of practical consequence, not recitation of facts. The purpose of education is not to fill the minds of students with facts – it is to teach them to think, and to think for themselves.
First of all, I try to follow Pascal’s philosophy – only be skeptical about matters that really can hurt me if I’m wrong. So by this, I eliminate a lot – I don’t even think about it. Second, I try to learn how to recognize crap, including my own. There are many things I don’t do or think about – elimination is a great conservator of effort.
Generally, keep it simple and use some filters. Some questions I ask myself: Is it important? If yes, is it knowable? If yes, is this within my circle of competence? Which of course assumes that I know what I know and can do, and what I don’t know and can’t do. Otherwise I exclude and throw it in to too hard pile. If within, then, any testable argument should be tested – What is the evidence? Can I disprove it? Compared to what (including negative cases and non-events)? Randomness content? If I believe this, what would follow? What would I have to check out? What ideas can help me? I wrote more about this in part three of my book.