I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, "My God, they're purple and green. Do fish really take these lures?" And he said, "Mister, I don't sell to fish.”
So you can get very remarkable investment results if you think more like a winning pari-mutuel player. Just think of it as a heavy odds against game full of bullshit and craziness with an occasional mispriced something or other. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple.
When Warren lectures at business schools, he says, “I could improve your ultimate
financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all."
He says, “Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much
It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced bet—that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don't. It's just that simple.
That's such an obvious concept—that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy. The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.
If one little guy is trying to buy across twenty-seven different merchandise categories influenced by traveling salesmen, he's going to make a lot of dumb decisions. But if your buying is done in headquarters for a huge bunch of stores, you can get very bright people that know a lot about refrigerators and so forth to do the buying
The reverse is demonstrated by the little store where one guy is doing all the buying. It's like the old story about the little store with salt all over its walls. And a stranger comes in and says to the store owner, "You must sell a lot of salt." And he replies, “No, I don't. But you should see the guy who sells me salt."
So there are huge purchasing advantages. And then there are the slick systems of forcing everyone to do what works. So a chain store can be a fantastic enterprise
Change, as in the case of the Internet, can be the friend of society. But it is the absence of change that is often the friend of the investor. While the Internet will change many things, it will not likely change the brand of gum people chew. Charlie and I like stable businesses like chewing gum and try to leave life's more unpredictable things to someone else." -Buffett
Personally, I've gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things—which, by and large, are useful but which often misfunction?
One approach is rationality—the way you'd work out a bridge problem: by evaluating the real interests, the real probabilities, and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions-many of which are wrong.
There's another saying that comes from Pascal that I've always considered one of the really accurate observations in the history of thought. Pascal said, "The mind of man at one and the same time is both the glory and the shame of the universe." And that's exactly right. It has this enormous powe. However, it also has these standard misfunctions that often cause it to reach wrong conclusions. lt also makes man extraordinarily subject to manipulation by others. For example, roughly half of the army of Adolf Hitler was composed of believing Catholics. Given enough clever psychological manipulation, what human beings will do is quite interesting.
Aad the reason why is that the perceptual apparatus of man has shortcuts in it. ave unlimited circuitry. So someone who knows how to take shortcuts and cause the brain to miscalculate in certain ways The brain cannot advantage of those can cause you to see things that aren't there.
His rule for all the Braun Company's communications was called the five Ws-you had to tell who was going to do what, where, when, and why. And if you wrote a letter or directive in the Braun Company telling somebody to do something, and you didn't tell him why, you could get fired. In fact, you would get fired if you did it twice. You might ask why is that so important? Well, again, that's a rule of psychology. Just as you think better if you array knowledge on a bunch of models that are basically answers to the question, why, why, why, if you always tell people why, they'll understand it better, they'll consider it more important, and they'll be more likely to comply. Even if they don't understand your reason, they'll be more likely to comply.
If you don't get this elementary, but mildly unnatural, mathematics of
elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest. You're giving a huge advantage to
What are the models? Well, the first rule is that you've got to have multiple models-because if you have just one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. You become the equivalent of a chiropractor, who, of course. is the great boob in medicine.
It's like the old saying, "To the man with only a hammer, every problem looks like a nail." And, of coursc, that's the way the chiropractor goes about practicing medicine. But that's a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you've got to have multiple models. And the models have to come from multiple disciplines-because all the wisdom of the world is not to be found in one little academic department. That's why poetry professors, by and large, are so unwise in a worldly sense. They don't have enough models in their heads. So you've got to have models across a fair array of disciplines.
What is clementary, worldly wisdom? Well, the first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If rh facts don't hang together on a latticework of thcory, you dont have them in a usable form. You've got to have models in your head. And you've got to array your experience-both vicarious and direct-on this latticework of models. You may ave noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You've got to hang experience on a latticework of models in your head.
irst, be unreliable. Do not faithfully do what you have engaged to do, It you will only master this one habit, you will more than counterbalance thc combined effect of all your virtues, howsoever great. If you like being distrusted and excluded from the best human contribution and company, this preseriptiOn 1S for you. Master this one habit, and you will always play the role of the nare
in the fable, except that instead of being outrun by one fine turtle, you will be outrun by hordes and hordes of mediocre turtles and even some mediocre turtles on crutches.
Darwin's result was due in large measure to his working method, which violated all my rules for misery and particularly emphasized a backward twist in that he always gave priority attention to evidence tending to disconfirm whatever cherished and hard-won theory he already had. In contrast, most people early achieve and later intensify a tendency to process new and disconfirming information so that any original conclusion remains intact. They become people of whom Philip Wylie observed: "You couldn't squeeze a dime between what they already know and what they will never learn."
he life of Darwin demonstrates how a turtle may outrun a hare, aided by Cxtreme objectivity, which helps the objective person end up like the only player without a blindfold in a game of Pin the Tail on the Donkey.
If you minimize objectivity, you ignore not only a lesson from Darwin but also one from Einstein. Einstein said that his successful theories came from Curiosity, concentration, perseverance, and self-criticism." And by self- criticism, he meant the testingg and destruction of his own well-loved ideas.