Tag: Warren Buffett

Gradually Getting Closer to the Truth

You can use a big idea without a physics-like need for exact precision. The key to remember is moving closer to reality by updating.

Consider this excerpt from Philip Tetlock and Dan Gardner in Superforecasting

The superforecasters are a numerate bunch: many know about Bayes’ theorem and could deploy it if they felt it was worth the trouble. But they rarely crunch the numbers so explicitly. What matters far more to the superforecasters than Bayes’ theorem is Bayes’ core insight of gradually getting closer to the truth by constantly updating in proportion to the weight of the evidence.

So they know the numbers. This numerate filter is the second of Garrett Hardin‘s three filters we need to think about problems.

Hardin writes:

The numerate temperament is one that habitually looks for approximate dimensions, ratios, proportions, and rates of change in trying to grasp what is going on in the world.

[…]

Just as “literacy” is used here to mean more than merely reading and writing, so also will “numeracy” be used to mean more than measuring and counting. Examination of the origins of the sciences shows that many major discoveries were made with very little measuring and counting. The attitude science requires of its practitioners is respect, bordering on reverence, for ration, proportions, and rates of change.

Rough and ready back-of-the-envelope calculations are often sufficient to reveal the outline of a new and important scientific discovery … In truth, the essence of many of the major insights of science can be grasped with no more than child’s ability to measure, count, and calculate.

 

We can find another example in investing. Charlie Munger, commenting at the 1996 Berkshire Hathaway Annual Meeting, said: “Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.” Buffett retorted: “It’s true. If (the value of a company) doesn’t just scream out at you, it’s too close.”

Precision is easy to teach but it’s missing the point.

Warren Buffett: The Inner Scorecard

“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard.”
— Warren Buffett

***

Human beings are, in large part, driven by the admiration of their peers.

We seek to satisfy a deep biological need by acting in such a way that we feel praise and adulation; for our wealth, our success, our skills, our looks. It could be anything. The trait we are admired for matters less than the admiration itself. The admiration is the token we dance for. We feel envy when others are getting more tokens than us, and we pity ourselves when we’re not getting any.

There’s nothing inherently wrong with this. The pursuit of (deserved) admiration causes us to drive and accomplish. It’s a part of the explanation for why the human world has moved along so far from where it started — we’re willing to do extraordinary things that are extraordinarily difficult, like starting a company from scratch, inventing a new and better product, solving some ridiculously complicated theorem, or conquering unknown territory.

This is all well and good.

The problems come when we start compromising our own standards, those we have set for ourselves, in order to earn admiration. False, undeserved admiration.

Warren Buffett frequently relates an interesting way to frame this problem. From Alice Schroeder’s Buffett biography The Snowball:

Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? Now, that’s an interesting question. “Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

Buffett’s getting at a rather fundamental model he’s used most of his life: The Inner Scorecard. It’s a major reason Buffett has stayed so successful for so long, with so little failure or scandal intervening: While most are are “checking the official time,” Buffett is setting his watch by an internal clock!

The investor Guy Spier once won a charity lunch with Buffett, and related his experience in a book called The Education of a Value Investor. He immediately recognized Buffett’s lack of falseness:

One of Buffett’s defining characteristics is that he so clearly lives by his own inner scorecard. It isn’t just that he does what’s right, but that he does what’s right for him. As I saw during our lunch, there’s nothing fake or forced about him. He sees no reason to compromise his standards or violate his beliefs. Indeed, he has told Berkshire’s shareholders that there are things he could do that would make the company bigger and more profitable, but he’s not prepared to do them. For example, he resists laying people off or selling holdings that he could easily replace with more profitable businesses. Likewise, some investors have complained that Berkshire would be much more profitable if he’d moved its tax domicile to Bermuda as many other insurers have done. But Buffett doesn’t want to base his company in Bermuda even though it would be legal and would have saved tens of billions in taxes.

We don’t, by the way, claim Buffett has an unblemished record. That would not be accurate. But it does seem that his record is far more spotless than others who have climbed as far as he has.

If Buffett was “setting his clock externally” — living by the standards of others — he would not have been able to maintain the independence of mind that led him to avoid a number of financial bubbles and tremendous personal misery.

What Buffett and a lot of other people who have been successful in life — true success, not money — have in common is that they’re able to remember what we all set out to do: live a fulfilling life! Not get rich. Not get famous. Not even get admiration, necessarily. But to live a satisfying existence and help others around them do the same.

It’s not that getting rich or famous or admired can’t be deeply satisfying. It can be! I’m positive Buffett deeply enjoys his wealth and status. He’s got more “admiration tokens” than almost anyone in the world.

But all of that can be ruined very, very easily along the way by making too many compromises, by living according to an external scorecard rather than an internal one. How many stories have you heard of famous and/or wealthy folks becoming entrapped in constant lawsuits, bickering, loneliness, and pure unhappiness? A countless number, right?

Bernie Madoff achieved great admiration and wealth, but was he happy? He made it clear, after he’d been caught, that he wasn’t. Here was a guy who had all the admiration tokens in the world, an External Scorecard showing an A+, and what happened when he lost it all? He felt relieved.

So, did fame or wealth actually work in giving him a satisfying and fulfilling life? No!

The little mental trick is to remember that success, money, fame, and beauty, all the things we pursue, are merely the numeratorIf the denominator — shame, regret, unhappiness, loneliness — is too large, our “Life Satisfaction Score” ends up being tiny, worthless. Even if we have all that good stuff!

Nassim Taleb once related a very similar idea:

The optimal solution to being independent and upright while remaining a social animal is: to seek first your own self-respect and, secondarily and conditionally, that of others, provided your external image does not conflict with your own self-respect. Most people get it backwards and seek the admiration of the collective and something called “a good reputation” at the expense of self-worth for, alas, the two are in frequent conflict under modernity.

It’s so simple. This is why you see people that “should be happy” who are not. Big denominators destroy self-worth.

***

Adam Smith addressed this issue similarly about 225 years ago in his lesser known, though equally useful book The Theory of Moral Sentiments. Here’s how he put it:

Man naturally desires, not only to be loved, but to be lovely; or to be that thing which is the natural and proper object of love. He naturally dreads, not only to be hated, but to be hateful; or to be that thing which is the natural and proper object of hatred. He desires, not only praise, but praiseworthiness; or to be that thing which, though it should be praised by nobody, is, however, the natural and proper object of praise. He dreads, not only blame, but blame-worthiness; or to be that thing which, though it should be blamed by nobody, is, however, the natural and proper object of blame.

To Smith, happiness was a combination of being loved and lovely: In modern terms, his wording makes it sound like he means “loved by others and also beautiful.”

But as you read on, you see that’s not what he meant. He adds “Hated, but hateful.” “Praise, but praiseworthiness.” “Blame, but blame-worthiness.”

He’s saying we’re only happy if we’re successful by an Inner Scorecard! We can’t just earn praise, we must be praiseworthy. We can’t just be loved, we must be loveable. It makes all the difference in the world. Our dissatisfaction with ourselves will always trump the satisfaction we feel with false rewards. We must, as Charlie Munger puts itearn and deserve the success we desire.

There’s a simple word for this: Authenticity. We seek it, and we’re only happy when we feel we’ve achieved it. It can’t be faked. And the way to get there is to remember the Inner Scorecard and start grading yourself accordingly.

The Best Way to Get Smarter? Learn to Read the Right Way.

There is a Buffett & Munger interview from 2013 that we reflect on frequently. They discuss how they’ve leaped ahead of their peers and competitors time and time again:

Munger: We’ve learned how to outsmart people who are clearly smarter [than we are].

Buffett: Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament. Otherwise, something will snap you.

Munger: The other big secret is that we’re good at lifelong learning. Warren is better in his 70s and 80s, in many ways, than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.

When you couple this with the fact that Buffett & Munger estimate that they spend 80% of their day reading or thinking about what they’ve read, a philosophy is born:

The way to get better results in life is to learn constantly.
And the best way to learn is to read effectively, and read a lot.

The truth is, most styles of reading won’t deliver big results. In fact, most reading delivers few practical advantages; shallow reading is really another form of entertainment. That’s totally fine, but much more is available to the dedicated few.

In a literal sense, we all know how to read. We learned in elementary school. But few of us take the time to improve our skills from the elementary, passive, cover-to-cover reading into a skill set that affords us real and lasting advantages.

Those advantages don’t come from the type of reading that most of us employ most of the time. Real learning stems from a deliberate reading process and a set of principles that are simple, yet challenging.

Simple principles like: Some books demand to be read in their entirety. Most don’t. It’s your job to decide.

Deep, thorough reading doesn’t come naturally or easily to most people. It isn’t achieved by passively absorbing content while reading at max speed. But wisdom and deep understanding can be teased out when you know how to do it.

We can teach you the best of what we’ve learned about reading and how to mold that into an uncommon, sustaining advantage. And with that, we introduce our new course:

Farnam Street’s Guide to How to Read a Book

How to Read a Book is a comprehensive online course that offers observations and strategies on everything from how to build strong reading habits to how to achieve novel insight on topics that already seem mastered by others. We believe this course has the ability to seriously impact any wisdom seeker’s life by enhancing your ability to learn.

Find out more information here:

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For those of you not interested, no problem. Thank you for listening. We’ll be back to our regularly scheduled programming later this week.

Life Changing Books (New Guy Edition)

Back in 2013, I posted the Books that Changed my Life. In doing so, I was responding to a reader request to post up the books that “literally changed my life.”

Now that we have Jeff on board, I’ve asked him to do the same. Here are his choices, presented in a somewhat chronological order. As always, these lists leave off a lot of important books in the name of brevity.

Rich Dad, Poor Dad – Robert Kiyosaki

Before I get hanged for apostasy, let me explain. The list is about books that changed my life and this one absolutely did. I pulled this off my father’s shelf and read it in high school, and it kicked off a lifelong interest in investments, business, and the magic of compound interest. That eventually led me to find Warren Buffett and Charlie Munger, affecting the path of my life considerably. With that said, I would probably not recommend you start here. I haven’t re-read the book since high school and what I’ve learned about Kiyosaki doesn’t make me want to recommend anything to you from him. But for better or worse, this book had an impact. Another one that probably holds up better is The Millionaire Next Door, which my father recommended when I was in high school and stuck with me for a long time too.

Buffett: Making of an American Capitalist/Buffett’s Letters to Shareholders – Roger Lowenstein, Warren Buffett

These two and the next book are duplicates off Shane’s list, but they are also probably the reason we know each other. Learning about Warren Buffett took the kid who liked “Rich Dad, Poor Dad” and watched The Apprentice, and might have been on a path to highly leveraged real estate speculation and who knows what else, and put him on a more sound path. I read this biography many times in college, and decided I wanted to emulate some of Buffett’s qualities. (I actually now prefer The Snowball, by Alice Schroeder, but Lowenstein’s came first and changed my life more.) Although I have a business degree, I learned a lot more from reading and applying the collected Letters to Shareholders.

Poor Charlie’s Almanack – Peter Kaufman, Charlie Munger et al.

The Almanack is the greatest book I have ever read, and I knew it from the first time I read it. As Charlie says in the book, there is no going back from the multi-disciplinary approach. It would feel like cutting off your hands. I re-read this book every year in whole or in part, and so far, 8 years on, I haven’t failed to pick up a meaningful new insight. Like any great book, it grows as you grow. I like to think I understand about 40% of it on a deep level now, and I hope to add a few percent every year. I literally cannot conceive of a world in which I didn’t read this.

The Nurture Assumption – Judith Rich Harris

This book affected my thinking considerably. I noticed in the Almanack that Munger recommended this book and another, No Two Alike, towards the end. Once I read it, I could see why. It is a monument to clear and careful thinking. Munger calls the author Judith Rich Harris a combination of Darwin and Sherlock Holmes, and he’s right. If this book doesn’t change how you think about parenting, social development, peer pressure, education, and a number of other topics, then re-read it.

Filters Against Folly/Living within Limits – Garrett Hardin

Like The Nurture Assumption, these two books are brilliantly well thought-through. Pillars of careful thought. It wasn’t until years after I read them that I realized Garrett Hardin was friends with, and in fact funded by, Charlie Munger. The ideas about overpopulation in Living within Limits made a deep impression on me, but the quality of thought in general hit me the hardest. Like the Almanack, it made me want to become a better and more careful thinker.

The Black Swan – Nassim Taleb

Who has read this and not been affected by it? Like many, Nassim’s books changed how I think about the world. The ideas from The Black Swan and Fooled by Randomness about the narrative fallacy and the ludic fallacy cannot be forgotten, as well as the central idea of the book itself that rare events are not predictable and yet dominate our landscape. Also, Nassim’s writing style made me realize deep, practical writing didn’t have to be dry and sanitized. Like him or not, he wears his soul on his sleeve.

Good Calories, Bad Calories / Why We Get Fat: And What to do About it – Gary Taubes

I’ve been interested in nutrition since I was young, and these books made me realize most of what I knew was not very accurate. Gary Taubes is a scientific journalist of the highest order. Like Hardin, Munger, and Harris, he thinks much more carefully than most of his peers. Nutrition is a field that is still sort of growing up, and the quality of the research and thought shows it. Taubes made me recognize that nutrition can be a real science if it’s done more carefully, more Feynman-like. Hopefully his NuSi initiative will help shove the field in the right direction.

The (Honest) Truth about Dishonesty – Dan Ariely

This book by Ariely was a game-changer in that it helped me realize the extent to which we rationalize our behavior in a million little ways. I had a lot of nights thinking about my own propensity for dishonesty and cheating after I read this one, and I like to think I’m a pretty moral person to start with. I had never considered how situational dishonesty was, but now that I do, I see it constantly in myself and others. There are also good sections on incentive-caused bias and social pressure that made an impact.

Sapiens – Yuval Noah Harrari

This is fairly new so I’m still digesting this book, and I have a feeling it will take many years. But Sapiens has a lot of (for me) deep insights about humanity and how we got here. I think Yuval is a very good thinker and an excellent writer. A lot of the ideas in this book will set some people off, and not in a good way. But that doesn’t mean they’re not correct. Highly recommended if you’re open-minded and want to learn.

***

At the end of the day, what gets me excited is my Antilibrary, all the books I have on my shelf or on my Amazon wish list that I haven’t read yet. The prospect of reading another great book that changes my life like these books did is an exciting quest.

How Warren Buffett Keeps up with a Torrent of Information

A telling excerpt from an interview of Warren Buffett (below) on the value of reading.

Seems like he’s taking the opposite approach to Nassim Taleb in some ways.

How Warren Buffett Keeps up with a Torrent of Information

Interviewer: How do you keep up with all the media and information that goes on in our crazy world and in your world of Berkshire Hathaway? What’s your media routine?

Warren Buffett: I read and read and read. I probably read five to six hours a day. I don’t read as fast now as when I was younger. But I read five daily newspapers. I read a fair number of magazines. I read 10-Ks. I read annual reports. I read a lot of other things, too. I’ve always enjoyed reading. I love reading biographies, for example.

Interviewer: You process information very quickly.

Warren Buffett: I have filters in my mind. If somebody calls me about an investment in a business or an investment in securities, I usually know in two or three minutes whether I have an interest. I don’t waste any time with the ones which I don’t have an interest.

I always worry a little bit about even appearing rude because I can tell very, very, very quickly whether it’s going to be something that will lead to something, or whether it’s a half an hour or an hour or two hours of chatter.

What’s interesting about these filters is that Buffett has consciously developed them as heuristics to allow for rapid processing. They allow him to move quickly with few mistakes — that’s what heuristics are designed to do. Most of us are trying to get rid of our heuristics to reduce error but here is one of the smartest people alive and he’s doing the opposite: he’s creating these filters as a means for allowing for information processing. He’s moving fast and in the right direction.

When Things Go Wrong: The Warren Buffett Way to Handle Problems

Warren Buffett

“Get it right, get it fast, get it out, get it over.”

***

In an interview with Jeff Cunningham, Warren Buffett hits on two principles that elude most of us.

Interviewer: I was reading a Lincoln quote the other day, “With public sentiment, nothing can fail. Without it, nothing can succeed.” Of course, he was talking about what led to the Emancipation Proclamation. When I think about your world, 330,000 people who are employees of Berkshire Hathaway or its subsidiaries, how do you send the message that they are being scrutinized under the microscope by the media at all times?

Buffett: I send a message to their managers. Those 330,000 people work for maybe 70 or so CEOs and in turn work for me. My job is to have those 70 CEOs sending out the right message. Every two years, I write them a very simple letter. It’s a page-and-a-half. I don’t believe in 200-page manuals because if you put out a 200-page manual, everybody’s looking for loopholes basically.

Page-and-a-half, it’s very hard for them to argue about what I’m talking about. I tell them that my reputation, Berkshire’s reputation, is in their hands. We’ve got all the money we need. We’d like to make more money but we’ve got all the money we need. We don’t have an ounce of reputation beyond what we need. We can’t afford to lose it. We never will trade reputation away for money.

They’re the ones that are the guardians of that. I want them to not only do what’s legal obviously, but I want them to judge every action by how it would appear on the front page of their local paper written by a smart but semi-unfriendly reporter who really understood it to be read by their family, their neighbors, their friends.

It has to pass that test as well. I tell them I don’t want anything around the lines. I tell them there’s plenty of money to be made in the center of the court. I’m 84. My eyes aren’t that good anymore. I can’t quite see the lines that well. Just keep it in the center of the court. If they have any questions, call me.

As for advice on what to do when you face a problem …

Interviewer: Even the occasional dust-up at Berkshire is big news. I’ll pick on Salomon only because it’s history now. It’s got a lot of time to reflect on that. When you think about what you went through there, what advice do you have for a CEO who’s on the media hot seat because of a similar situation?

Buffett: There are a couple pieces of advice on that. The first is that when you find out a bad news, correct that and if it’s necessary to report it, then the authorities report it to the media. The big problem with Salomon was not what a fellow named Mozer did which was to defy the US government, not ever a very good idea. But that could have been handled, but he reported…He didn’t report it.

John Meriwether, his supervisor, picked up on it in late April of 1991 and went to the president, the chairman and the chief legal counsel of Salomon and said, “Here’s what this fellow Mozer has been doing.” They all agreed it was wrong. They all agreed it was reportable to the Federal Reserve promptly. Unfortunately, nobody did anything.

In the middle of May, Mozer went out and did it again. Now, you’ve got a terrible problem because you knew the guy was a bad actor a few weeks earlier and he hadn’t reported it and that compounded there. Then, you’re in a real pickle.

When you find bad news, I say get it right, get it fast, get it out, get it over. Get it right is important. When they questioned, Mozer had done it there. But the get it fast and get it out, they missed on.

You’re going to get bad news. I got 330,000 people. I will guarantee you that probably dozens of them are doing something wrong right now. I just hope I find out about it early and the person below me finds out and lets me know if it’s bad enough and that they stop it.

You can’t have a city of 330,000 without an occasional [laughs] crime of some sort. It’s going to happen. You’ve got to do something about it fast when it does happen.