An interview I gave that I think you’ll enjoy as I talk about reading, mental models, investing, learning and more.
Shane Parrish is the curator for the popular Farnam Street Blog, an intellectual hub of curated interestingness that covers topics like human misjudgment, decision making, strategy, and philosophy. Shane is a strategist for both individuals and organizations and is dedicated to mastering the best of what other people have already figured out.
Can you discuss your background and the origins of Farnam Street?
Farnam Street started as a byproduct of my MBA. As I was going through that program it became evident that we were being taught to regurgitate material in a way that made marking easier. We weren’t honing our critical thinking skills or integrating multiple disciplines. We couldn’t challenge anything.
Eventually, I got frustrated. I didn’t give up on the MBA, but I did start using the time that I was previously investing in homework and started to focus on my own learning and development. At first it was mostly academic. I started going back to the original Kahneman and Tversky papers, and other material that was journal based, because I figured I’d probably never have access to such a wealth of journals again outside of school.
So I started the website and it was really just for me, not for anybody else. The original URL of the website was the zipcode for Berkshire Hathaway. I didn’t think anyone would find it. It eventually grew into a community of people interested in continuous learning, applying different models to certain problems, and developing ways to improve our minds in a practical way. The strong reception surprised me at first, but now the community has become very large, stimulating, and encouraging. I should point out that I don’t come up with anything original myself—I’m just trying to master the best of what other people like Buffett, Kaufman, Bevelin, and Munger have already figured out. In fact, that’s our tagline. It reminds me of something Munger said once when asked what he learned from Einstein, and he replied, only half-jokingly, “Well he taught me relativity. I wasn’t smart enough to figure that out on my own.” That seems like a bit of a wiseass remark, but there’s some untapped wisdom there.
What are your motivations for Farnam Street?
I want to embrace the opportunity I have, which has been created largely through luck, and I want to give readers and subscribers enormous value in three ways.
First, I want to help them make better decisions. To do our best to figure out how the world really works. Second, I want to help people discover new interests and connections across disciplines. Finally, I want to help people explore what it means to live a good life and how we should live. I hope by sharing my intellectual and personal journey I can help people better navigate theirs.
It seems pretty clear that you have a profound admiration for investors. Farnam Street is the street Berkshire Hathaway is located on, and you discuss Charlie Munger’s views quite a bit. What appeals to you about investing?
For Munger and Buffett specifically, it’s not necessarily that they’re just investors, it is that they’ve modeled a path of life that resonates with me. I also appreciate the values that are associated with their investment success. I think what they’ve done is they’ve taken other people’s ideas, stood on the shoulders of giants, so to speak, and applied those ideas in better ways than the people who came up with the ideas. For example, with regard to psychological biases and Kahneman’s work, Munger and Buffett have found a way to institutionalize this to a point where they can actually avoid most of these biases.
Whereas Kahneman himself just says something along the lines of, “I’ve studied biases all my life, but I’m not better.” Yet, these two guys from Omaha actually figured out how to be better.
It’s not just Kahneman and human biases. They’ve done it in a variety of disciplines like Michael Porter’s work on Competitive Strategy. They separately derived the same basic ideas, except in a way that gives them an enormous investing advantage. To my knowledge, Michael Porter has not done that. Of course, he may not have been trying to do so. Another great example is Ben Graham. He provided the bedrock that Warren Buffett built his brain on, but if you really think about it, Buffett was and is a much better investor. And lastly, regarding Munger, in my opinion, his method of organizing practical psychology is a lot better than the actual residents of that discipline, even the people who “taught” him the ideas through books.
Returning to investing, the field resonates with me because investors have skin in the game. Investors have clear accountability and measurable performance. That contrasts with many other types organizations. For the most part, investors are searching for the truth and constantly looking for ways they could be wrong and that they could be fooling themselves. There’s a pretty clear scoreboard.
Are you an investor yourself?
Yes. I used to be involved with a small registered investment advisor based in Massachusetts. I still invest personally and hope to return more of my focus to investing in the future. (Which, I’ve now done at Syrus Partners) Right now I’m focused on Farnam Street, which I see as the biggest opportunity ahead of me and the opportunity that I’m most excited about. There’s a lot to do.
Can you talk about what you have planned for Farnam Street?
I just hired somebody to help out at Farnam Street for the first time. It’s become more of a sustainable business. We are developing products. We have two courses coming out next year that we’re incredibly excited about (Update: These two are now only available for members. I think we have put over a year’s effort into one of the products, and we’re just starting the other one right now which will be released next fall.
[quote]Adapting your reading style to consider the type of material you are reading and why you are reading it makes you much more effective at skimming, understanding, synthesizing, and connecting ideas. If you take the same approach to reading everything, you will end up overwhelmed and frustrated.[/quote]
We are launching “The Art of Reading” early in the year. That course is aimed at adapting Mortimer Adler’s theory of reading to the modern age, and giving people a structured way of going about learning from books, as opposed to simply reading them. Seems simple, but most of us never really pick it up.
Today we are bombarded constantly with information, and we often read all types of material in the same way. But that’s pretty ineffective. We don’t have to read everything the same way.
Reading is something you seem to know quite a lot about, but in a recent post, you discussed that you are purposefully reading fewer books. What is your thinking around that decision?
I fell into a trap with reading. It almost became a personal challenge that you can easily get wrapped up in. In 2014, I was basically reading a book every few days. I think I ended the year with over 140 books read, but I must have started at least 300. I realized I was reading just to finish the book. That meant I wasn’t getting as much out of it as I should. I ended up wasting a lot of time using that approach and it also impacted what I read. You have these subtle pressures to read smaller books and to digest things in a really quick way. I wasn’t spending enough time synthesizing the material with what I already knew and honing my understanding of an idea.
[quote]It’s not about how many books you read but what you get out of the books you read.[/quote]
It’s not about how many books you read but what you get out of the books you read. One great book, read thoroughly and understood deeply, can have a more profound impact on your life than reading 300 books without really understanding the ideas in depth and having them available for practical problem-solving.
Can you discuss some of your techniques for absorbing and synthesizing as much information as possible?
There is a lot that can be done after simply finishing a chapter. I like to summarize the chapter in my own words. I also like to apply any learnings from the chapter to my life, either by looking backward to see where concepts may have applied or by looking forward to seeing if it might make sense to incorporate something into my daily routine. I think the reason to do that is twofold. One is to give me a better understanding of that learning, and two is really a check and balance, and a feedback loop. Have you ever watched TV and somebody comes in on a commercial and says, “What are you watching,” and you’re like, “I have no idea,” but you’ve been sitting there 20 minutes? Well, we can do that with books too. You’ll start reading, and paragraphs will fly by, and then you’ll have no idea what you were reading. It’s fine if you’re reading for entertainment, you might be able to catch up later, but if you’re reading for understanding, that’s something you want to avoid.
Part of what I want to do is develop a feedback process to make sure that I’m not doing that.
I try to make extensive use of book covers for notes about areas to revisit, potential connections to other concepts, and outlining the structure of the author’s argument. After I’ve finished a book, I usually put it on my desk for a week or two, let it sit, and then I come back to it. I reread all of my margin notes, my underlines, and highlights. Then I apply a different level of filtering to it and make a decision about what I want to do with the information now.
You also talk about the Feynman technique in some of your posts.
The Feynman technique is essentially explaining a concept or idea to yourself, on a piece of paper, as if you were teaching it to someone else with little background knowledge. When you’re learning something new, it’s all about going back and making sure you understand it.
Can you explain it in simple, jargon-free, language? Can you explain it in a way that is complete and demonstrates understanding? Can you take an idea and apply it to a problem outside of the original domain? Take out a piece of paper and find out.
I think that being able to do this at the end of a book is really important, especially if it’s a new subject for you. The process of doing that shows you where your gaps are; this is important feedback. If you have a gap in your understanding, you can circle back to the book to better understand that point. If you can’t explain it to somebody else, then you probably don’t understand it as well as you think you do. It doesn’t mean you don’t understand it, but the inability to articulate it is definitely a flag that it’s something you need to circle back to, or pay more attention to.
“Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.”— Andy Benoit
It seems like feedback mechanisms are a key part of your approach.
I think at the heart of it, you want to be an active reader. You want to selectively be an active reader and not a passive reader. These types of activities make sure that you’re reading actively. Writing notes in a book, for example, is really just a way to pound what you’re reading into your brain. You need engagement.
In a recent post, you brought up Peter Thiel’s concept of a “secret”. Essentially, what important truth do very few people agree with you on? I’d be really curious if you have something in mind that would fit this concept.
Ever since I came across this question I’ve been toying with it over and over in my head. I’m not sure I have a decent answer, but I’ll offer one of the things that I run into a lot but couldn’t really describe until Peter Kaufman pointed me to a quote by Andy Benoit, who wrote a piece in Sports Illustrated a while back. Benoit said “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” I think he nailed it. This explains Berkshire Hathaway, the New England Patriots, Costco, Glenair, and a host of amazing organizations.
I’ve long had a feeling about this but couldn’t really pull it out of my subconscious into my conscious mind before. Benoit gave me the words. I think we generally believe that things need to be complicated but in essence, there is great value in getting the simple things right and then sticking with them, and that takes discipline. As military folks know, great discipline can beat great brainpower.
I know of many companies that invest millions of dollars into complicated leadership development programs, but they fail to treat their people right so the return on this investment isn’t even positive it’s negative because it fosters cynicism. Or consider companies that focus on complicated incentive plans—they never work. It’s very simple. If you relentlessly focus on the basics and develop a good corporate culture—like the one Ken Iverson mentions in his book Plain Talk—you surpass people who focus on the complex. Where I might disagree with Benoit a little is that I don’t think these are unrecognized as much as under-appreciated. People think the catechism has to be more complicated.
You discuss the power of multidisciplinary learning. Do you have any example where the multidisciplinary learning has been especially powerful for you? Munger has a number of examples of him arriving at a solution faster than an expert in a field as a virtue of Munger using concepts from other fields.
If you were a carpenter you wouldn’t want to show up for a job with an empty toolbox or only a hammer. No, you’d want to have as many different tools at your disposal as possible.
[quote]Nothing sucks up your time like poor decisions.[/quote]
Furthermore, you’d want to know how to use them. You can’t build a house with only a hammer. And there is no point in having a saw in your toolbox if you don’t know how to use it. In this sense, we’re all carpenters. Only, our tools are the big ideas from multiple academic disciplines. If we have a lot of mental tools and the knowledge of how to wield them properly, we can start to think rationally about the world.
These tools allow us to make better initial decisions, help us better scramble out of bad situations, and think critically about what other people are telling us. You can’t overestimate the value of making good initial decisions. Nothing sucks up your time like poor decisions and yet, perversely, we often reward people for solving the very problems they should have avoided in the first place.
It’s a little weird, but in some organizations, you’re better off screwing up and fixing it than making a simple, correct, decision the first time. Think about portfolio managers trumpeting how they’ve “smartly sold” a stock at a loss of 20%, saving them a loss of 50%, but which a wiser person never would have purchased in the first place. The sale looks smart, but the easier decision would have been avoiding misery from the get-go. That kind of thing happens all over the place.
Multidisciplinary thinking also helps with cognitive diversity. In our annual workshop on decision making, Re:Think Decision Making, we talk about the importance of looking at a problem in multiple dimensions to better understand reality and identify the variables that will govern the situation—whether it’s incentives, adaptation, or proximity effects. But the only way you’re going to get to this level of understanding is to hold up the problem and look at it through the lens of multiple disciplines. These models represent how the world really works. Why wouldn’t you use them?
One important thing, for example, we can learn from ecology, is second-order thinking—“and then what?” I think that a lot of people forget that there’s a next phase to your thinking, and there’s a second and third order effect. I’ve been in a lot of meetings where decisions are made and very few people think to the second level. They get an idea that sounds good and they simply stop thinking. The brain shuts down. For example, we change classification systems or incentive systems in a way that addresses the available problems, but we rarely anticipate the new problems that will arise. It’s not easy. This is hard work.
Another example is when a salesman comes into a company and offers you some software program he claims is going to lower your operating costs and increase your profits. He’s got all these charts on how much more competitive you’ll be and how it will improve everything. You think this is great. You’re sold. Well, the second order thinking is to ask, how much of those cost savings are going to go to you and how much will be passed on to the customer? Well to a large extent that depends on the business you’re in. However, you can be damn sure the salesman is now knocking on your competitors’ door and telling them you just bought their product. We know thanks to people like Garrett Hardin, Howard Marks, and disciplines like ecology that there are second and third order effects. This is how the world really works.
Munger’s got a brain that I don’t have. I have to deal with what I’ve got. I’m not trying to come up with the fastest solution to a problem. It’s great to have a 30-second mind, but it’s not a race. Part of the issue I see over and over again is not that people don’t have the cognitive tools, but rather they don’t have time to actually think about a problem in a three-dimensional way.
[quote]If you think you’re going to come up with good solutions to complicated problems in 30 seconds and your name is not Charlie Munger, I wish you luck.[/quote]
The rest of us should learn to say “I don’t know” or “Let me think about it” about ten times more frequently than we do.
It makes sense that second-order and third-order effects are underappreciated.
I think a lot of people get incentives wrong and it has disastrous implications on corporate culture. Let’s look at it from another angle – how would you intentionally design an incentive system that functioned horribly? You’d make it so complicated that few people understood it. You’d make everyone measured on individual and not team success. You’d have different variables and clauses and sub-clauses. No one would understand how their work impacts someone else. To make it even worse, you’d offer infrequent and small rewards. You’d offer a yearly bonus of maybe 5% of salary or something. And of course, you’d allow the people in it to game the system and the people running it to turn it into politics. I think we can all agree those are not desired outcomes and yet that is how many incentive systems work.
[quote]I think it’s important to focus on getting better at making decisions over time. It is about making the process slightly better than it was last time.[/quote]
Do you have any thoughts on particularly powerful concepts or process implementations that can help investment organizations pursue investment excellence?
I think it’s important to focus on getting better at making decisions over time. It is about making the process slightly better than it was last time. These improvements compound like money. You really have to flip it on its head. What’s likely to not work well? Generally speaking, analysts tend to have a focused view of the world and they stay in their lane. Specialization certainly helps develop specific knowledge, but it also makes it hard to learn from the guy or girl next to you who has knowledge in a different industry, so you’re not improving your intuition as much as you’d probably want. It’s like chess. People once thought great chess players were great thinkers, but they’re not any better at general problem-solving than the rest of us. They’re just great chess players. Investment analysis is often the same way, especially if you’re siloed in some industry analyst position. It’s probably not making you a great thinker, but you are learning more about your industry.
[quote] have the organization learn and get better, we need to expose our decision-making process to others.[/quote]
In order to have the organization learn and get better, we need to expose our decision making process to others. One way to do this is to highlight the variables we think are relevant. Start making clear why we made our decisions and the range of outcomes we thought were possible. It needs to be done in advance. A lot of people do this through a decision journal. Some accomplish this through a discussion that flushes out which variables you think will dominate the outcome and most importantly, why. Not only does that facilitate an environment where others can challenge your thought process, but over time it enables them to get a good feel for what you think are the key variables in that particular industry. That helps me expand my circle of competence. You don’t want an organization where the automobile analyst knows nothing about banking and the chemicals guy knows little about consumer products, and then a portfolio manager with a little surface knowledge of everything is pulling the trigger. I have never seen that work, but I’ve seen a lot of people try. The “everyone’s a generalist” approach has its own limitations, like a crippling lack of specialized knowledge.
So, obviously, any investment organization has to find a middle ground. How could it be otherwise? You must start with this basic and obvious truth to solve the problem.
Another challenge in the investment world is dealing with the sheer volume of the information. I get questions from portfolio managers all the time about how best to keep up with the information flow. They say “I get 500 emails a day. I have researchers’ work come to me at all hours. I have thousands of pages of material to read.”
Clearly, Berkshire Hathaway has done a really good job with this, with basically two guys doing all of the information processing—two really smart guys, but only two.
How do they do that?
Well, part of the answer is that Buffett and Munger are continuously learning about companies that do not change rapidly. They’re learning about companies that change slowly. That in and of itself is a major advantage. They also are operating in industries in which they know the key variables of determining an organization’s success or failure, and more importantly, ignoring the industries where they don’t. It’s a huge step to be able say to yourself “Look, I’m going to miss some enormous winners that were incredibly hard to see ahead of time. I’m OK with that.” Buffett and Munger can do it, but most struggle. So they stretch and invest in things where they really cannot accurately predict the odds of success or failure, all forces considered.
Probabilities being what they are, if you consistently invest in things with middling odds, you’ll have middling results. Again, how could it be otherwise? The key is knowing the difference between an obviously attractive situation and a difficult-to-predict one and being able to act on the former and sit on the latter. Of course, I’m over-simplifying a bit, but you can’t get around the fact that reality is reality. You have to find a way. And this will help you solve your information flow problem, because you’ll be tossing a lot of ideas out very quickly.
It seems like you would prefer the Buffett and Munger model over the approach of the average hedge fund with specialists?
If my job is being a neurosurgeon, I need to keep up-to-date with all the latest neurosurgery papers, academic articles, books, and talks because I’m very specialized in that one particular area and it’s relevant to my job and relevant to my livelihood.
If you look at investing holistically you can’t do that for every company in every industry. In my understanding, part of the reason Buffett and Munger have accumulated so much knowledge is that they focus on learning things that change slowly. That makes it easier to identify potential outcomes and determine the relevant variables. David Foster Wallace had this great quote, “Bees have to move very fast to stay still.” And that’s what most of us do. We move a lot to stay in the same place. Buffett and Munger are getting further ahead each day.
Unless physics changes, for example, it’s unlikely that we’ll see the development of more efficient ways to move bulk freight. It doesn’t seem subject to technological disruption, but instead will likely be aided by technology. Technology helps improve the management of your rail network, but it’s not going to replace the entire network anytime soon. I think that Berkshire is actually moving away from uncertainty by pursuing companies like this. If you don’t know the range of outcomes, you will have a hard time assessing probabilities. One of the things that decision journals help identify is outcomes outside of what we expected. That’s a very humbling experience. After identifying possible outcomes and applying confidence levels, it’s humbling to get it so wrong
You have also studied an investment firm that’s probably as different from Berkshire Hathaway as possible with your most recent podcast with Chris Dixon of Andreessen Horowitz. What are your thoughts on good decision making as applied in the venture capital world and how is it different than Berkshire Hathaway?
Chris was an excellent guest to have on The Knowledge Project. He operates in Venture Capital—a world I don’t get much exposure to. He has insight on things I know very little about: venture funding, how to structure a venture capital firm so that you are adding value, etc. And they’ve been very successful.
I think we’re largely operating in unprecedented territory given the magnitude of private valuations. In past decades, companies IPO’d at much lower valuations so public market investors could more easily participate in their success. I don’t know how this plays out, but talking to Chris was fascinating.
Andreessen Horowitz has a very different operational approach as compared to Berkshire Hathaway. As I understood it, they are trying to add value to the entrepreneurs. Also, they’ve moved away from a business or idea based sourcing process to one that is almost exclusively focused on the entrepreneur. That directly contradicts some of Buffett’s thoughts on the relative importance of a management team versus the underlying business.
It makes sense that they would have different approaches. I think it’s important to understand that there are things that we want to have in our mental tool box. But part of being an effective craftsman is knowing when they work and when they don’t. You can’t just pull out random tools and expect them to work.
In 2013, I did some consulting work on improving innovation in organizations and the most common thing that people were doing at the time to solve the innovation problem was copying Google’s 20% of time spent on independent innovative ideas.
[quote]You need to understand how that fits with the company culture.[/quote]
I found this interesting for a number of reasons. It surprised me that every executive had it on the tip of their tongue, but there’s no large sample size for a successful innovation like this 20% idea. Google and, I think, 3M are the two most prominent examples. Google, at the time, I think they had only been around for 15 years. That’s a pretty small sample size for continuous innovation. Also, you need to understand how that fits with the company culture, and why it works even if you’re seeing it work. Why does it work at Google? Is it because of how it fits in the overall culture? The problem I see is that people are taking one piece of a large puzzle and thinking that it’s going to solve their problem. It might help. It might not. It’s just a tool. It reminds me of the group of blind people touching the different parts of the elephant.
Also, some of these innovation projects get done for the wrong reasons, and with the wrong incentives. If my boss asks me for ideas to help the company innovate and I give him an idea that sounds good, one that subconsciously reminds him of an article he read in Fortune about innovation, isn’t that basically good enough for me as an employee? Does it even matter if it works? In most organizations, am I really going to be held responsible for the success or failure of my innovation prescription? The organization might suffer, but will I suffer personally? Probably not. My lack of ability to think the problem through will probably be forgotten in time if the idea sounded good and relevant at the time. If it was defensible via Powerpoint. This is one reason hiring consultants rarely works as well as hoped.
So, we copy Google’s twenty percent innovation time. They’re an innovative company; they’re hip; they’re cool; we’re going to copy them. Okay, well, we can do that. It’s a good story. What gets lost is a potentially useful discussion like, “Maybe we should remove the things in our environment that take away from natural innovation, like all these meetings.” That’s a much tougher conversation, but just like taking away sugar works better than adding broccoli to your diet, taking things out of the corporate culture is often a better solution than adding new stuff. Munger has us paying attention to incentives because they really are driving the train. You have to get it right.
One big theme for you is the concept of life-long learning. What is your motivation to pursue it? Munger has called it a moral duty. Do you have similar feelings?
I wish I were as eloquent as him. I’ve always had to work harder. You just have to keep getting better every day. You have to keep learning. If you’re going to accomplish what you want to accomplish, it’s probably not through going home and watching Netflix every night, right? You have to learn how the world works. We have a huge statistical sample size of things that aren’t changing. There is an excellent letter by Chris Begg at East Coast Asset Management that discusses Peter Kaufman’s thoughts on this. Physics, math, and biology are things that change very, very slowly, if at all. Learning things in those disciplines is good. It’s practical, because that’s how the world works. Those are things that don’t change over time.
I think that, for me, it’s just become “How can I pass people that are smarter than me?” I think if I can get incrementally better every day, compounding will kick in and over a long enough time, I’m going to achieve the things that I want in life.
What could be better than constantly learning new things and discovering that you’re still curious? Most of us forget what it’s like to be six years old and asking “why?” all the time and trying to understand why things operate the way they do. It’s hard to still do that, but you can still carry that wonder with you into life and try to understand why things are happening and why success or failure happens.
[quote]Avoiding stupidity is easier than seeking brilliance. But that by itself is suboptimal. You also want to copy models of success. [/quote]
We don’t necessarily have to come up with all of this stuff ourselves. We can see a better model and adopt it or, the parts of it that will help us along. Giving up on holding on to our own ideas is really important.
I don’t come up with almost anything that’s original. I aggregate and synthesize other people’s thoughts and put it into context for people. I think that those are things that I like to focus on, I have a passion for doing that. I’m doing it anyway because I get a lot of value out of reading, learning, and exploring the world, and I share that with people.
With regard to Mental Models, you spend a lot of time discussing their importance, but you also highlight their shortcomings. Can you discuss your view of the value of mental models?
It’s important to understand how we are likely to fool ourselves. Aside from the psychological factors, which Munger and Bevelin talk about extensively, there are other ways.
For example, we run organizations based on dashboards and metrics and we make decisions based on these numbers. Investors look at financial reports to make investment decisions.
We think that those numbers tell a story and, to some extent, they do. However, they don’t tell the full story. They are limited. For example, a strike-out can be a good thing in baseball. Players who suck statistically in one system can thrive as a part of another – the whole “Moneyball” idea lives here, and the Patriots have been extremely successful with a wide variety of talent. In business, reported depreciation can be widely off. The accounting could be gamed. A tailwind could be benefitting a business temporarily, soon to dissipate. Many companies look their absolute best, on historical figures, just before the big denouement.
“All models are false but some are useful.”— George Box
There is a great quote by George Box who said “All models are false but some are useful.” Practically speaking, we have to work with reductions—like maps. A map with a scale of one foot to one foot wouldn’t be useful, would it? Knowing that we’re working with reductions of reality, not reality itself, should give us pause. We recently wrote a piece on Farnam Street called “The Map is Not the Territory,” which is a more in-depth exploration of the nuances behind this.
Knowing how to dig in and understand these maps and their limitations is important. A lot of models are core – they don’t change very much. Social proof is real. Incentives do drive human behavior, financial and otherwise. The margin of safety approach from engineering works across many, many practical areas of life. Those are the types of huge, important models you want to focus on as a part of becoming a generally wise person. You need to learn them and learn how to synthesize with them. From there, you layer in the models that are specific to your job or your area of desired expertise. If you’re a bank investor, you’re going to look to attain a deep fluency in bank accounting that a neurosurgeon wouldn’t need. But both the analyst and the surgeon can understand and use the margin of safety idea practically and profitably.
Essentially, they can be powerful if used correctly, but we can also over apply them in some ways?
They work sometimes and not other times. You need to be aware of limitations. The point here is just to be cautious—the map is not the terrain. It doesn’t tell the full story.
Do you have any other investors or companies outside of Berkshire Hathaway that really have some profound thinking or you really love reading their shareholder letters or you’ve learned a lot from? Anything like that that we can talk about?
Berkshire has an incredibly unique model of writing to shareholders, and frankly no one else is as good. One that’s slightly off the beaten path, although it’s become a lot better known over the past few years, is a Canadian company called Constellation Software (CSU). The CEO there is truly doing God’s work as far as how he reports to shareholders. Very clear presentation of the financial performance of the business, and a lucid and honest discussion of what’s going on.
There are two key components to reporting to shareholders well, as I see it. One is presenting, in as clear a way as possible, the results in the prior periods. Presented consistently and honestly over time. The second is being extremely forthcoming about why these figures came out the way they did; good or bad, warts and all. When Blue Chip Stamps was still a reporting company, Munger would write about See’s Candy. What did his summary table show every year? Pounds of candy sold, stores open, total revenue, total profits. The key variables. Then he explained in clear language why See’s was a good business and what had occurred in the most recent period, and if possible, what he foresaw in general for the following year. That’s what we need more of: give investors an updated report of the major drivers and then tell us what happened. Leave out the fluff. You don’t need to write essays like Buffett. Just help us understand the business and what’s going on.
This has been great, Shane. Thanks so much for your time.