Seeking Wisdom

by Peter Bevelin

  Make fewer and better decisions. Why? Because it forces us to think more on each decision and thereby reduces our chance of mistakes. Warren Buffett gives another compelling reason:

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  Charlie and I decided long ago that in an investment lifetime, it's just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire's capital mushroomed and the universe of investments that could significantly affect our result shrank dramatically. Therefore, we adopted a strategy that required our being smart

  - and not too smart at that - only a very few times.

  William James said: "The art of being wise is the art of knowing what to overlook." Charles Munger tells us about the importance of eliminating nonsense: "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 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.

  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. Charles Munger says: "The harder you work, the more confidence you get. But you may be working hard on something that is false."

  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."

  Turn off the noise or what's irrelevant and look at the big picture. Ask: Why am I doing this? What really matters? What is important for what I want to achieve? Will more information affect my decision? Don't collect data randomly. Start with why the particular information is needed in the first place.

  When asked if he used a computer, Charles Munger said:

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  I'm a follower of what I call the Thomas Hunt Morgan school. Morgan was one of the great biologists in the history of the world who figured out a lot of genetics [Morgan established that chromosomes carried the units of inheritance] with very slender resources in a so-called "fly room" - first at Columbia and then at Caltech. And when Morgan reached Caltech, he did something that was very peculiar. He banned the Friden calculator

  - which was the computer of that age - from the biology department. Everybody else at Caltech used the Friden calculator endlessly for all kinds of statistical correlations and much else. Morgan banned it.

  And they asked, "Why are you doing this?" He said, 'Tm so located in life that I'm like

  a gold miner in 1848 who could just walk along the banks of the river and pick up enormous nuggets of gold with organized common sense. And as long as I can do this, I'm not going to use scarce resources in placer mining."

  Well, that's the way I go at life. I think if you get the big points with organized common sense, it's amazing the placer mining you never have to do ...

  But is there still enormous gain to be made with organized common sense that doesn't require a computer? I think the answer is "yes." Are there dangers in getting too caught up in the minutiae of using a computer so that you miss the organized common sense? There are huge dangers. There'll always be huge dangers. People calculate too much and think too little.

  Avoid certain things

  There are things that we stay away from. Were like the man who said he had three baskets on his desk: in, out and too tough. We have such baskets - mental baskets - in our office. An awfal lot ofstujfgoes in the "too tough" basket.

  - Charles Munger

  Deal with the situations in life by knowing what to avoid. Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it. 13th Century jurist and priest Henry de Bracton said: "An ounce of prevention is worth a pound of cure."

  Warren Buffett describes how he and Charles Munger do it:

  Easy does it. After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any

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  ability to clear seven-footers. The finding may seem unfair, but in both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult.

  We basically have the attitude that you can't make a good deal with a bad person. We don't try to protect ourselves by contracts or all kinds of due diligence - we just forget about it. We can do fine over time dealing with people we like and admire and trust.

  And the bad actor will try to tantalize you in one way or another. But you won't win. It pays to just avoid him. We started out with that attitude. However, one or two experiences have convinced us even more so that that's the way to play the game.

  Charles Munger follows up with:

  I've heard Warren say since very early in his life that the difference between agood business and a bad one is that a good business throws up one easy decision after another, whereas a bad one gives you horrible choices - decisions that are extremely hard to make: "Can it work?" "Is it worth the money?"

  One way to determine which is the good business and which is the bad one is to see which one is throwing management bloopers - pleasant, no-brainer decisions - time after time after time.

  Focus leads to understanding and efficiency

  Those who attain to any excellence commonly spend life in some single pursuit, for excellence is not often gained upon easier terms.

  - Samuel Johnson

  It is impossible for our brain to think too many things at the same time and expect to do well. Shifting our mental attention between tasks costs time and comprehension, especially when we switch between more complicated and unfamiliar tasks.

  Actions and decisions are simpler when we focus on one thing at the time. Publilius Syrus said: "To do two things at once is to do neither." If we only have one thing to focus on, we tend to do it well and build knowledge.

  Always think with a purpose in mind. Ask: What do I want to achieve or avoid? Is focus important in business and for management? Warren Buffett says:

  A... serious problem occurs when the management of a great company gets sidetracked and neglects its wonderful base business while purchasing other businesses that are so-so

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  or worse... (Would you believe that a few decades back they were growing shrimp at Coke and exploring for oil at Gillette?) Loss of focus is what most worries Charlie and me when we contemplate investing in businesses that in general look outstanding. All too often, we've seen value stagnate in the presence of hubris or of boredom that caused the attention of managers to wander ...‌

  I love focused management ... And when you lose that focus - it shows... GEICO

  actually started fooling around in a number of things in the early 1980s. And they paid a price for it - actually a very big price. They paid a direct price in terms of the cost for those things - because they almost all worked out badly. And then they paid an
additional price in terms of the loss of focus on the main business.

  Focus on what you can know and that makes a difference

  Before attacking a problem ask if it is worth solving or spending time on. Warren Buffett explains one of the reasons for his and Charles Munger's success in life and business:

  There are two questions you ask yourself as you look at the decision you'll make. A) is it knowable? B) is it important? Ifit is not knowable, as you know there are all kinds of things that are important but not knowable, we forget about those. And if it's unimportant, whether it's knowable or not, it won't make any difference. We don't care.

  What's knowable and important? And what can be translated into useful action? Some important things we can't know. Like where the stock market is going. Other things we can know but they are not important.

  Ask the right questions

  The formulation ofa problem is often more essential than its solution, which may be merely a matter of mathematical or experimental skill.

  - Albert Einstein

  Sometimes it is harder to understand a problem than to solve it. Asking the important questions may help. Start with basic questions like: What does it mean? What is the simplest example? What is the number one question? How can I tell if the answer is right? Can I come up with an example that makes it clear what the problem is?

  But it is not enough to ask the right questions. We must look at the right place and ask the right person. We can't rely too much on assumptions since we can't be sure that someone else's assumptions are the same as ours, unless we ask them to explain.

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  Patience

  It's not that I'm so smart; it's just that I stay with problems longer.

  Albert Einstein

  The best thinking is often done when there is no stress, time limit, threats, or judging. Thinking takes time and the simple truths often reveal themselves when we're doing something else.

  We are more likely to solve a specific problem or gain new insight if we leave the problem alone for awhile and let our subconscious mind work. This is well illustrated by the physicists Albert Einstein and Leopold Infeld:

  In nearly every detective novel since the admirable stories of Conan Doyle there comes a time where the investigator has collected all the facts he needs for at least some phase of his problem. These facts often seem quite strange, incoherent, and wholly unrelated. The great detective, however, realizes that no further investigation is needed at the moment, and that only pure thinking will lead to a correlation of the facts collected. So he plays his violin, or lounges in his armchair enjoying a pipe, when suddenly, by Jove, he has it!

  Roger Lowenstein describes Warren Buffett in Buffett: The Making of an American Capitalist: "Buffett's genius was largely a genius of character - of patience, discipline and rationality...His talent sprang from his unrivaled independence of mind and ability to focus on his work and shut out the world." Have patience in waiting for opportunities. Resist the temptation to always do something. If we are in a hurry, it's easier to make misjudgments. This is key in investing. Warren Buffett says, "In allocating capital, activity does not correlate with achievement. Indeed, in the fields of investments and acquisitions, frenetic behavior is often counterproductive." He continues: "If you feel like you have to invest every day, you're going to make a lot of mistakes. It isn't that kind of a

  business. You have to wait for the fat pitch." Charles Munger adds:

  A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.

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  - FOUR -

  RULES AND FILTERS

  Rules are for the obedience of fools and the guidance of wise men.

  David Ogilvy (Advertising executive, 1911-1999)

  What can help us avoid problems and act as guidelines when making decisions? Based on our knowledge of reality and our personal situation we should establish some "what to do" and "what to avoid" rules.

  Charles Munger gives an example of a rule:

  Any time anybody offers you anything with a big commission and a 200-page prospectus, don't buy it. Occasionally, you'll be wrong if you adopt "Munger's Rule". However, over a lifetime, you'll be a long way ahead - and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.

  Another rule comes from Benjamin Franklin: "To apply myself industriously to whatever business I take at hand, and not divert my mind from my business by any foolish project of growing suddenly rich; for industry and patience are the surest means of plenty."

  Other rules could be, "Walk away from anything I don't understand or can't quantify or doesn't work. Only deal with people I trust. "

  Warren Buffett provides us with guidelines on how to win in insurance, which applies to other areas as well:

  What counts in this business is underwriting discipline. The winners are those that unfailingly stick to three key principles:

  They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy ofprofit. These insurers ignore market-share considerations andare sanguine about losing business to competitors that are offering foolish prices or policy conditions.

  They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses.from a single event or.from related events that will threaten their solvency. They ceaselessly search for possible correlation among seemingly-unrelated risks.

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  3. They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn't work. While most policyholders and clients are honorable and ethical, doing business with the few exceptions is usually expensive, sometimes extraordinarily so.

  I have known the details of almost every policy that Ajit [Ajit Jain] has written... and never on even a single occasion have I seen him break any of our three underwriting rules. His extraordinary discipline, of course, does not eliminate losses; it does, however, prevent foolish losses. And that's the key: Just as in the case of investing, insurers produce outstanding long term results primarily by avoiding dumb decisions, rather than by making brilliant ones.

  Filters

  We really can say no in 10 seconds or so to 90% + of all the things that come along simply because we have these filters.

  - Warren Buffett

  Filters help us prioritize and figure out what makes sense.

  When we know what we want, we need criteria to evaluate alternatives. Ask: What are the most critical (and knowable) factors that will cause what I want to achieve or avoid? Criteria must be based on evidence and be reasonably predictive, i.e., we must do better than chance by relying on them. Try to use as few criteria as necessary to make your judgment. Then rank them in order of their importance and use them as filters. Set decision thresholds in a way that minimizes the likelihood of false alarms and misses (in investing, choosing a bad investment or missing a good investment). Consider the consequences of being wrong. For example, in medicine, a threshold depends on factors such as the prevalence of a condition, its seriousness, the availability of corrective measures, and the emotional and financial costs of false alarms.

  Past criminal and prison records are more reliable than expert criminologists in predicting success on parole.

  Studies show that in some fields, when based on the same evidence, a more mechanical prediction process involving a small number of relevant variables is more reliable than the predictions of trained and experienced experts. This has been shown in diagnoses of medical conditions, predictions of academic performance, in determining gambling odds, and loan and credit
risk. Why does it work better? Because we humans are not always consistent. As we have seen, recent experiences, suggestions, or how information is presented may influence us. Add to this our natural limitations in memory, attention, and processing.

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  More information doesn't mean we are better off. Sometimes extra information is useless and confusing.

  A man is rushed to a hospital in the throes ofa heart attack. The doctor needs to decide whether the victim should be treated as a low risk or high-risk patient.

  Criteria don't have to be numerous or complicated. Late Statistics Professor Leo Breiman and colleagues at University of California, Berkeley, developed a method to classify high-risk heart attack patients using only a maximum of 3 variables. Blood pressure, age and sinus tachycardia (rapid heartbeat).

  If a patient's minimum systolic blood pressure over the initial 24-hour period is less than 91, he is immediately classified as high risk. If not, the second variable is age. If the patient is over 62.5 years old, then one more variable - sinus tachycardia