Tag: Investing

Shane Parrish on Mental Models, Decision Making, Charlie Munger, Farnam Street, And More

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 part of the learning community now). 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.

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.

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.

It’s not about how many books you read but what you get out of the books you read.

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.

Nothing sucks up your time like poor decisions.

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.

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.

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.

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.

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.

have the organization learn and get better, we need to expose our decision-making process to others.

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.

You need to understand how that fits with the company culture.

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.

Avoiding stupidity is easier than seeking brilliance. But that by itself is suboptimal. You also want to copy models of success.

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.

The Psychology of Risk and Reward

The Psychology of Risk and Reward

An excerpt from The Aspirational Investor: Taming the Markets to Achieve Your Life’s Goals that I think you’d enjoy.

Most of us have a healthy understanding of risk in the short term.

When crossing the street, for example, you would no doubt speed up to avoid an oncoming car that suddenly rounds the corner.

Humans are wired to survive: it’s a basic instinct that takes command almost instantly, enabling our brains to resolve ambiguity quickly so that we can take decisive action in the face of a threat.

The impulse to resolve ambiguity manifests itself in many ways and in many contexts, even those less fraught with danger. Glance at the (above) picture for no more than a couple of seconds. What do you see?

Some observers perceive the profile of a young woman with flowing hair, an elegant dress, and a bonnet. Others see the image of a woman stooped in old age with a wart on her large nose. Still others—in the gifted minority—are able to see both of the images simultaneously.

What is interesting about this illusion is that our brains instantly decide what image we are looking at, based on our first glance. If your initial glance was toward the vertical profile on the left-hand side, you were all but destined to see the image of the elegant young woman: it was just a matter of your brain interpreting every line in the picture according to the mental image that you already formed, even though each line can be interpreted in two different ways. Conversely, if your first glance fell on the central dark horizontal line that emphasizes the mouth and chin, your brain quickly formed an image of the older woman.

Regardless of your interpretation, your brain wasn’t confused. It simply decided what the picture was and filled in the missing pieces. Your brain resolved ambiguity and extracted order from conflicting information.

What does this have to do with decision making? Every bit of information can be interpreted differently according to our perspective. Ashvin Chhabra directs us to investing. I suggest you reframe this in the context of decision making in general.

Every trade has a seller and a buyer: your state of mind is paramount. If you are in a risk-averse mental framework, then you are likely to interpret a further fall in stocks as additional confirmation of your sell bias. If instead your framework is positive, you will interpret the same event as a buying opportunity.

The challenge of investing is compounded by the fact that our brains, which excel at resolving ambiguity in the face of a threat, are less well equipped to navigate the long term intelligently. Since none of us can predict the future, successful investing requires planning and discipline.

Unfortunately, when reason is in apparent conflict with our instincts—about markets or a “hot stock,” for example—it is our instincts that typically prevail. Our “reptilian brain” wins out over our “rational brain,” as it so often does in other facets of our lives. And as we have seen, investors trade too frequently, and often at the wrong time.

One way our brains resolve conflicting information is to seek out safety in numbers. In the animal kingdom, this is called “moving with the herd,” and it serves a very important purpose: helping to ensure survival. Just as a buffalo will try to stay with the herd in order to minimize its individual vulnerability to predators, we tend to feel safer and more confident investing alongside equally bullish investors in a rising market, and we tend to sell when everyone around us is doing the same. Even the so-called smart money falls prey to a herd mentality: one study, aptly titled “Thy Neighbor’s Portfolio,” found that professional mutual fund managers were more likely to buy or sell a particular stock if other managers in the same city were also buying or selling.

This comfort is costly. The surge in buying activity and the resulting bullish sentiment is self-reinforcing, propelling markets to react even faster. That leads to overvaluation and the inevitable crash when sentiment reverses. As we shall see, such booms and busts are characteristic of all financial markets, regardless of size, location, or even the era in which they exist.

Even though the role of instinct and human emotions in driving speculative bubbles has been well documented in popular books, newspapers, and magazines for hundreds of years, these factors were virtually ignored in conventional financial and economic models until the 1970s.

This is especially surprising given that, in 1951, a young PhD student from the University of Chicago, Harry Markowitz, published two very important papers. The first, entitled “Portfolio Selection,” published in the Journal of Finance, led to the creation of what we call modern portfolio theory, together with the widespread adoption of its important ideas such as asset allocation and diversification. It earned Harry Markowitz a Nobel Prize in Economics.

The second paper, entitled “The Utility of Wealth” and published in the prestigious Journal of Political Economy, was about the propensity of people to hold insurance (safety) and to buy lottery tickets at the same time. It delved deeper into the psychological aspects of investing but was largely forgotten for decades.

The field of behavioral finance really came into its own through the pioneering work of two academic psychologists, Amos Tversky and Daniel Kahneman, who challenged conventional wisdom about how people make decisions involving risk. Their work garnered Kahneman the Nobel Prize in Economics in 2002. Behavioral finance and neuroeconomics are relatively new fields of study that seek to identify and understand human behavior and decision making with regard to choices involving trade-offs between risk and reward. Of particular interest are the human biases that prevent individuals from making fully rational financial decisions in the face of uncertainty.

As behavioral economists have documented, our propensity for herd behavior is just the tip of the iceberg. Kahneman and Tversky, for example, showed that people who were asked to choose between a certain loss and a gamble, in which they could either lose more money or break even, would tend to choose the double down (that is, gamble to avoid the prospect of losses), a behavior the authors called “loss aversion.” Building on this work, Hersh Shefrin and Meir Statman, professors at the University of Santa Clara Leavey School of Business, have linked the propensity for loss aversion to investors’ tendency to hold losing investments too long and to sell winners too soon. They called this bias the disposition effect.

The lengthy list of behaviorally driven market effects often converge in an investor’s tale of woe. Overconfidence causes investors to hold concentrated portfolios and to trade excessively, behaviors that can destroy wealth. The illusion of control causes investors to overestimate the probability of success and underestimate risk because of familiarity—for example, causing investors to hold too much employer stock in their 401(k) plans, resulting in under-diversification. Cognitive dissonance causes us to ignore evidence that is contrary to our opinions, leading to myopic investing behavior. And the representativeness bias leads investors to assess risk and return based on superficial characteristics—for example, by assuming that shares of companies that make products you like are good investments.

Several other key behavioral biases come into play in the realm of investing. Framing can cause investors to make a decision based on how the question is worded and the choices presented. Anchoring often leads investors to unconsciously create a reference point, say for securities prices, and then adjust decisions or expectations with respect to that anchor. This bias might impede your ability to sell a losing stock, for example, in the false hope that you can earn your money back. Similarly, the endowment bias might lead you to overvalue a stock that you own and thus hold on to the position too long. And regret aversion may lead you to avoid taking a tough action for fear that it will turn out badly. This can lead to decision paralysis in the wake of a market crash, even though, statistically, it is a good buying opportunity.

Behavioral finance has generated plenty of debate. Some observers have hailed the field as revolutionary; others bemoan the discipline’s seeming lack of a transcendent, unifying theory. This much is clear: behavioral finance treats biases as mistakes that, in academic parlance, prevent investors from thinking “rationally” and cause them to hold “suboptimal” portfolios.

But is that really true? In investing, as in life, the answer is more complex than it appears. Effective decision making requires us to balance our “reptilian brain,” which governs instinctive thinking, with our “rational brain,” which is responsible for strategic thinking. Instinct must integrate with experience.

Put another way, behavioral biases are nothing more than a series of complex trade-offs between risk and reward. When the stock market is taking off, for example, a failure to rebalance by selling winners is considered a mistake. The same goes for a failure to add to a position in a plummeting market. That’s because conventional finance theory assumes markets to be inherently stable, or “mean-reverting,” so most deviations from the historical rate of return are viewed as fluctuations that will revert to the mean, or self-correct, over time.

But what if a precipitous market drop is slicing into your peace of mind, affecting your sleep, your relationships, and your professional life? What if that assumption about markets reverting to the mean doesn’t hold true and you cannot afford to hold on for an extended period of time? In both cases, it might just be “rational” to sell and accept your losses precisely when investment theory says you should be buying. A concentrated bet might also make sense, if you possess the skill or knowledge to exploit an opportunity that others might not see, even if it flies in the face of conventional diversification principles.

Of course, the time to create decision rules for extreme market scenarios and concentrated bets is when you are building your investment strategy, not in the middle of a market crisis or at the moment a high-risk, high-reward opportunity from a former business partner lands on your desk and gives you an adrenaline jolt. A disciplined process for managing risk in relation to a clear set of goals will enable you to use the insights offered by behavioral finance to your advantage, rather than fall prey to the common pitfalls. This is one of the central insights of the Wealth Allocation Framework. But before we can put these insights to practical use, we need to understand the true nature of financial markets.

Keeping Things Simple and Tuning out Folly

Keeping things simple makes a huge difference and yet we are drawn to the sexiness of complexity. Einstein was a master of sifting the essential from the non-essential.

And consider this from Charlie Munger: The Complete Investor:

Peter Bevelin’s book Seeking Wisdom: From Darwin to Munger has a section on the importance of simplicity.

Bevelin advised: “Turn complicated problems into simple ones. Break down a problem into its components, but look at the problem holistically.” Keeping things as simple as possible, but no more so, is a constant theme in Munger’s public statements. In a joint letter to shareholders, Munger and Buffett once wrote: “Simplicity has a way of improving performance through enabling us to better understand what we are doing.”


By focusing on finding decisions and bets that are easy, avoiding what is hard, and stripping away anything that is extraneous, Munger believes that an investor can make better decisions. By “tuning out folly” and swatting away unimportant things “so your mind isn’t cluttered with them … you’re better able to pick up a few sensible things to do,” said Munger. Focus enables both simplicity and clarity of thought, which in Munger’s view leads to a more positive investing result.

“If something is too hard, we move on to something else. What could be simpler than that?”

— Charlie Munger

There is a compelling advantage in life to be found in exploiting unrecognized simplicities, something Peter Thiel tries to tease out in interviews. Essential to recognizing simplicity is scheduling time to think.

“We have three baskets: in, out, and too tough… We have to have a special insight, or we’ll put it in the too tough basket.”

— Charlie Munger

Simplicity is Filtering

William James said: “The art of being wise is the art of knowing what to overlook.” And there are no truer words that have been spoken.

In Arthur Conan Doyle’s The Reigate Puzzle, Sherlock Holmes says: “It is of the highest importance in the art of detection to be able to recognize, out of a number of facts, which are incidental and which vital.”

And part of filtering is understanding what you know and what you don’t know, that is, understanding your circle of competence.

“We have a passion for keeping things simple.”

— Charlie Munger

In an interview with Jason Zweig, Munger said:

Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years—and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know.

Another time he offered:

Part of that [having uncommon sense], I think, is being able to tune out folly, as distinguished from recognizing wisdom. You’ve got whole categories of things you just bat away so your brain isn’t cluttered with them. That way, you’re better able to pick up a few sensible things to do.

Warren Buffett, the CEO of Berkshire Hathaway agrees:

Yeah, we don’t consider many stupid things. I mean, we get rid of ’em fast.. Just getting rid of the nonsense — just figuring out that if people call you and say, “I’ve got this great, wonderful idea”, you don’t spend 10 minutes once you know in the first sentence that it isn’t a great, wonderful idea… Don’t be polite and go through the whole process.

And Peter Bevelin, writing in Seeking Wisdom, offers:

Often we try to get too much information, including misinformation, or information of no use to explain or predict. We also focus on details and what’s irrelevant or unknowable and overlook the obvious truths. Dealing with what’s important forces us to prioritize. There are often just a few actions that produce most of what we are trying to achieve. There are only a few decisions of real importance.

More information doesn’t equal more knowledge or better decisions. And remember that today we not only have access to more information, but also misinformation.

And the harder we work at something the more confident we become.

It’s worth pausing to reflect on three things at this point: 1) understanding and seeking simplicity; 2) dealing with the easy problems first; and 3) honing your skills by learning what to overlook and getting rid of bad ideas quickly (how many organizations do that!?)… this goes hand in hand with understanding your circle of competence.

Best Books for Investors: A Short Shelf

I’ve already outlined 12 books the sophisticated investor should read.

Now Jason Zweig, Knowledge Project Guest and author of Your Money and Your Brain, chimes in with the books he recommends for investors.

(If you’re not looking to be a practitioner, I’d recommend reading Buffettology, which is very under-appreciated).

Gary Belsky and Thomas Gilovich, Why Smart People Make Big Money Mistakes and How to Correct Them

In clear, simple prose, Belsky and Gilovich explain some of the most common quirks that cause people to make foolish financial decisions. If you read this book, you should be able to recognize most of them in yourself and have a fighting chance of counteracting some of them. Otherwise, you will end up learning about your cognitive shortcomings the hard way: at the Wall Street campus of the School of Hard Knocks.

Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk

The late polymath Peter Bernstein poured a long lifetime of erudition and insight into this intellectual history of risk, luck, probability and the problems of trying to forecast what the future holds. Combining a stupendous depth of research with some of the most elegant prose ever written about finance, Bernstein chronicles the halting human march toward a better understanding of risk—and reminds us that, after centuries of progress, we still have a long way to go.

John C. Bogle, Common Sense on Mutual Funds

The founder of the Vanguard Group and father of the index-fund industry methodically sorts fact from fiction. Following his logical arguments can benefit you even if you never invest in a mutual fund, since Bogle touches on just about every crucial aspect of investing, including taxes, trading costs, diversification, performance measurement and the power of patience.

Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists

Neither light reading nor cheap (it’s hard to find online for less than about $75), this book is the most thoughtful and objective analysis of the long-term returns on stocks, bonds, cash and inflation available anywhere, purged of the pom-pom waving and statistical biases that contaminate other books on the subject. The sober conclusion here: Stocks are likely, although not certain, to be the highest-performing asset over the long run. But if you overpay at the top of a bull market, your future returns on stocks will probably be poor.

Richard Feynman, Surely You’re Joking, Mr. Feynman! or What Do You Care What Other People Think?

These captivating oral histories of the great Nobel Prize-winning physicist ostensibly have nothing to do with investing. In my view, however, the three qualities an investor needs above all others are independence, skepticism and emotional self-control. Reading Feynman’s recollections of his career of intellectual discovery, you’ll see how hard he worked at honing his skepticism and learning to think for himself. You’ll also be inspired to try emulating him in your own way.

Benjamin Graham, The Intelligent Investor

Originally published in 1949, called by Warren Buffett “by far the best book on investing ever written,” this handbook covers far more than just how to determine how much a company’s stock is worth. Graham discusses how to allocate your capital across stocks and bonds, how to analyze mutual funds, how to take inflation into account, how to think wisely about risk and, especially, how to understand yourself as an investor. After all, as Graham wrote, “the investor’s chief problem—and even his worst enemy—is likely to be himself.” (Disclosure: I edited the 2003 revised edition and receive a royalty on its sales.) Advanced readers can move on to Benjamin Graham and David Dodd, Security Analysis, the much longer masterpiece upon which The Intelligent Investor is based.

Darrell Huff, How to Lie with Statistics

This puckish riff on how math can be manipulated is only 142 pages; most people could read it on a train ride or two, or in an afternoon at the beach. As light as the book is, however, it is nevertheless profound. In one short take after another, Huff picks apart the ways in which marketers use statistics, charts, graphics and other ways of presenting numbers to baffle and trick the public. The chapter “How to Talk Back to a Statistic” is a brilliant step-by-step guide to figuring out how someone is trying to deceive you with data.

Daniel Kahneman, Thinking, Fast and Slow

Successful investing isn’t about outsmarting the next guy, but rather about minimizing your own stupidity. Psychologist Daniel Kahneman, who shared the Nobel Prize in Economics in 2oo2, probably understands how the human mind works better than anyone else alive. This book can make you think more deeply about how you think than you ever thought possible. As Kahneman would be the first to say, that can’t inoculate you completely against your own flaws. But it can’t hurt, and it might well help. (Disclosure: I helped Kahneman research, write and edit the book, although I don’t earn any royalties from it.)

Charles P. Kindleberger, Manias, Panics, and Crashes

In this classic, first published in 1978, the late financial economist Charles Kindleberger looks back at the South Sea Bubble, Ponzi schemes, banking crises and other mass disturbances of purportedly efficient markets. He explores the common features of market disruptions as they build and burst. If you remember nothing from the book other than Kindleberger’s quip, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich,” you are ahead of the game.

Roger Lowenstein, Buffett: The Making of an American Capitalist

This book remains the most comprehensive and illuminating study of Warren Buffett’s investing and analytical methods, covering his career in remarkable detail up until the mid-1990s. If you read it in conjunction with Alice Schroeder’s The Snowball, you will have a fuller grasp on what makes the world’s greatest investor tick.

Burton G. Malkiel, A Random Walk Down Wall Street

In this encyclopedic and lively book, Malkiel, a finance professor at Princeton University, bases his judgments on rigorous and objective analysis of long-term data. The first edition, published in 1973, is widely credited with helping foster the adoption of index funds. The latest edition casts a skeptical eye on technical analysis, “smart beta” and other market fashions.

Bertrand Russell, Sceptical Essays or The Scientific Outlook

Russell is Buffett’s favorite philosopher, and these short essay collections show why. Russell wrote beautifully and thought with crystalline clarity. Immersing yourself in his ideas will sharpen your own skepticism. My favorite passage: “When a man tells you that he knows the exact truth about anything, you are safe in inferring that he is an inexact man…. It is an odd fact that subjective certainty is inversely proportional to objective certainty. The less reason a man has to suppose himself in the right, the more vehemently he asserts that there is no doubt whatever that he is exactly right.” Think about that the next time a financial adviser begins a sentence with the words “Studies have proven that….”

Alice Schroeder, The Snowball: Warren Buffett and the Business of Life

With unprecedented access to Buffett, Schroeder crafted a sensitive, personal and insightful profile, focusing even more on him as a person than as an investor—and detailing the remarkable sacrifices he made along the way. If you read it alongside Lowenstein’s Buffett, you will have an even deeper understanding of the master.

Fred Schwed, Where Are the Customers’ Yachts?

First published in 1940, this is the funniest book ever written about investing—and one of the wisest. Schwed, a veteran of Wall Street who survived the Crash of 1929, knew exactly how the markets worked back then. Nothing has changed. Turning to any page at random, you will find gleefully sarcastic observations that ring at least as true today as they did three-quarters of a century ago. My favorite: “At the end of the day [fund managers] take all the money and throw it up in the air. Everything that sticks to the ceiling belongs to the clients.”

“Adam Smith,” The Money Game

In the late 1960s, the stock market was dominated by fast-talking, fast-trading young whizzes. The former money manager George J.W. Goodman, who wrote under the pen name “Adam Smith,” christened them “gunslingers.” In this marvelously entertaining book, Goodman skewers the pretensions, guesswork and sheer hogwash of professional money management. Reading his mockery can help sharpen your own skepticism toward the next great new investing idea—which almost certainly will turn out to be neither great nor new.

The Education of a Value Investor: A Quest for Wealth, Wisdom, and Enlightenment

I read Guy Spier’s book, The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment, in a single sitting.

The section of the book I was most interested in reading was on his charity lunch with Warren Buffett. While details of what transpires at these lunches are fairly scant, there is a whole chapter on it in this book. I tore into that chapter first, eager to find out the pearl of wisdom that eluded me. Finding no secret, I flipped to the front and fell into the story.

I had the serendipitous pleasure of running into Guy at the Omaha airport earlier this year. What I loved about him – and his book – is that he’s open about his struggles. In a world where so many of us, myself included, are closed and guarded about things we don’t want other people to know or see, Guy is an open book. He has struggles. He’s human. He’s real. Things are not black and white. He didn’t come out of the womb fully formed with uncompromising ethics.

He’s a testament to the fact that we can make mistakes, admit them, and get better. We can change. We can even change our nature. We can find ourselves in compromising positions – be they professional, moral, or ethical – and recognize that we’ve made poor choices and find a better path forward. Guy is living proof that we can teeter on a moral cliff and change the path we are on. First, however, we must stop digging. That requires recognition that what we’re doing or about to do is wrong. “These moments of clarity are so rare in life,” he writes, “and even the people closest to us may question whether we should act on such instincts.” We only have a few of these moments in life, we must learn to recognize them and act. “If you’re going to do something, it’s best to commit to it with wholehearted gusto.”

And Guy did commit to changing himself. “When you begin to change yourself internally,” he writes, “the world around you responds.”

I hope this idea resonates because it’s important—more important, perhaps, than the fact that I had lunch with Warren Buffett. As I hope you can see from my experience, when your consciousness or mental attitude shifts, remarkable things begin to happen. That shift is the ultimate business tool and life tool.

But the question worth exploring at this point is how you go about changing yourself? It sounds so simple, doesn’t it? I want to change and poof. Change. It doesn’t work like that.

One lesson that Guy reinforces is that your environment matters to the decisions you make.

“It’s important,” he writes, “to discuss just how easy it is for any of us to get caught up in things that might seem unthinkable—to get sucked into the wrong environment and make more compromises that can tarnish us terribly.” While we think that we change our environment, it changes us.

Part of the problem (of working on Wall Street) was that the competition was so fierce. This led to the belief that, if I wasn’t willing to do something, someone else would quickly step in to do it. This kind of environment is perfectly designed to get people to push the boundaries in order to succeed. It’s a pattern that’s repeated again and again on Wall Street. Through ambition, greed, arrogance, or naïveté, many bright, hard-working people have strayed into grey areas.

One non-intuitive way to improve your environment is to choose the right teachers that have already discovered the truths you want to learn.

There is wisdom here that goes far beyond the narrow world of investing. What I’m about to tell you may be the single most important secret I’ve discovered in all my decades of studying and stumbling. If you truly apply this lesson, I’m certain that you will have a much better life, even if you ignore everything else I write.

What I stumbled upon was this. Desperate to figure out how to lead a life that was more like his, I began constantly to ask myself one simple question: “What would Warren Buffett do if he were in my shoes?”

I didn’t ask this question idly while sitting in a coffee shop sipping a cappuccino. No. I sat down at my desk and actively imagined that I was Buffett. I imagined what the first thing would be that he would do if he were in my shoes, sitting at my desk.

Self-help guru Tony Robbins calls this “modeling” our heroes. “The key,” Spier writes, “is to be as precise as possible, picturing them in as much detail as we can. A related technique that he teaches is called matching and mirroring, which might involve changing the way you move or even breathe to match the other person’s movement or breathing. In my experience, you start to feel what they feel, and you even start to think like them.”

A few other lessons from the book are worth noting, one of which is the fundamental nature of Guy’s approach to life (not investing.)

I’ve come to see that this is a smart strategy for life: whenever I have the choice of doing something with an uncertain but potentially high upside, I try to do it. The payoffs may be infrequent, but sometimes they are huge. And the more often I pick up these lottery tickets, the more likely I am to hit the jackpot.

Remind you of anyone? That’s an approach that Nassim Taleb employs. It’s also the one that investor Mohnish Pabrai describes in his book The Dhandho Investor: The Low-Risk Value Method to High Returns. As Pabrai puts it, “Heads I win. Tails, I don’t lose much.”

Another lesson is that small differences in behavior over time can lead to incredible impacts. Sending thank-you notes is A Simple Act of Gratitude, with profound benefits:

At first my letter-writing experiment was quite calculated, since I did it with an explicit desire to improve my business. I had a clear expectation of what the results would be. But it started to feel really good, and I became addicted to the positive emotions that this activity stirred in me. As I looked for more opportunities to thank people, I found that I truly did become more thankful. And the more I expressed goodwill, the more I began to feel it. There was something magical about this process of getting outside myself and focusing on other people.


In sending out this cascade of letters, I began to open up to people in a way that I never had before, and I started to see everyone around me as someone I can learn from. As I now understand, this habit of writing letters is an incredibly effective way of compounding goodwill and relationships instead of merely compounding money. Einstein is often said to have called compounding the eighth wonder of the world. But the narrow financial application of compounding may be the least valuable and least interesting aspect of this phenomenon.

In the end, the biggest lesson that I took away from meeting with Guy and reading his book is that we need to stop living our life through other people. I can play basketball every day for 18 hours, and I’m never going to be Michael Jordan. I can study financial reports until I’m blue in the face, and I’m never going to be the next Warren Buffett.

The Education of a Value Investor is an important reminder that the being who we are not who we are supposed to be matters. We need to do what is right for us, and that might not be what is right for others. We need to stop pretending to be other people and compromising our internal standards or ethics. We need to find who we are and how we want to live. “Instead of trying to compete with Buffett,” Guy writes, “I should focus on the real opportunity, which is to become the best version of Guy Spier that I can be.”

12 Books Every Investor Should Read

If you’re looking for something to read that will improve your ability as an investor, I’d recommend any of the books below. All 12 of them are deeply informative and will leave an impact on you.

1. The Intelligent Investor by Benjamin Graham
Described as “by far the best book on investing ever written” by none other than Warren Buffett. “Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years,” he says. “I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.”

2. The Little Book that Beats the Market by Joel Greenblatt
As Buffett says, investing is simple but not easy. This book focuses on the simplicity of investing. Greenblatt, who has average annualized returns of about 40% for over 20 years, explains investing using 6th grade math and plain language. Putting it into practice is another story.

3. Fooled by Randomness by Nassim Taleb
The core of Taleb’s other books — The Black Swan and Antifragile — can be found in this early work. One of the best parts, for me, was the notion of alternative histories. “Mother Nature,” he writes, “does not tell you how many holes there are on the roulette table.” This book teaches you how to look at the world probabilistically. After you start doing that, nothing is ever the same again.

4. The Most Important Thing by Howard Marks
“This is a rarity,” Buffett writes of Howard Marks’ book, “a useful book.” More than teaching you the keys to successful investment, it will teach you about critical thinking.

5. Poor Charlie’s Almanack by Charlie Munger
Charlie Munger is perhaps the smartest man I don’t know. This book is a curated collection of his speeches and talks that can’t help but leave you smarter. Munger’s wit and wisdom come across on every page. This book will improve your thinking and decisions. It will also shine light upon psychological forces that make you a one-legged man in an ass-kicking contest. Read and re-read.

6. Common Stocks and Uncommon Profits by Philip Fisher
Buffett used to say that he was 85% Benjamin Graham and 15% Phil Fisher. That was a long time ago, the Buffett of today resembles more Fisher than Graham. Maybe there is something to buying and holding great companies.

7. The Dao of Capital by Mark Spitznagel
Spitznagel presents the methodology of Austrian Investing, where one looks for positional advantage. Nassim Taleb, commenting on the book wrote: “At last, a real book by a real risk-taking practitioner. You cannot afford not to read this!”

8. Buffett: The Making of an American Capitalist by Roger Lowenstein
This book, perhaps more than any other, has changed the lives of many of my friends and investors because this is how many of them first discovered Warren Buffett and value investing.

9. The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
An outstanding book detailing eight extraordinary CEOs and the unconventional methods they used for capital allocation. One of them, Henry Singleton, had a unique view on strategic planning.

10. The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot
A critique of modern finance theories, which usually gets built on the underlying assumption that distributions are normal. Nassim Taleb calls this “the most realistic finance book ever published.”

11. Why Stocks Go Up (and Down) by William Pike
This is a basics book on the fundamentals of equity and bond investing – financial statements, cash flows, etc. A good place to start on the nuts and bolts. If you’re looking to learn accounting also check out The Accounting Game: Basic Accounting Fresh from the Lemonade Stand, I’m serious. This is the book I recommended to classmates in business school with no accounting background to get them up to speed quickly.

12. Bull: A History of the Boom and Bust, 1982-2004 by Maggie Mahar
The first and perhaps best book written on the market’s historic run, which started in 1982 and ended in the early 2000s. Mahar reminds readers that euphoria and blindness are a regular part of bull markets – lessons we should have learned from studying history.

Keep in mind that if investing were as easy as buying a book and reading it, we’d all be rich.