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How to make better decisions: What I learned from Buffett and Munger
Read this book if you want to learn a counter-intuitive approach to life and decision-making from Buffett and Munger. The book is structured as a conversation between Munger, a “seeker” looking for wisdom and a Librarian. It draws from a lifetime of Buffett and Munger writing and speeches, all referenced in the lengthy bibliography. This was one of the best books I’ve ever read and I will re-read this at least once a year. Other things that stood out to me are below:
Worry more about avoiding stupid things than being right
You only have to be right a few times in your life as long as you don’t make any mistakes.
It’s impossible to be right all the time, however you have a chance if you’re still playing the game. This is a reminder of the risk of ruin. Avoid mistakes that will take you out of the game. This is true in life as it is in investing. For example, in looking for a job or evaluating an investment opportunity, how can you avoid doing stupid things or betting the farm? How can you make sure you stay alive and keep yourself in the game? This is not an argument for inactivity and being rooted in one place. It’s realizing that while it’s impossible to win or be right on things that are by nature indeterministic, it’s easier and more achievable to avoid mistakes very often. Now, you will miss some wins this way, but over the long run, you will do just fine. For example, Buffett & Munger have been able to become very rich despite missing out on most of the wealth created by technology companies in the past two decades.
It matters how you define the problem
Invert, always invert. For example, to understand how to be happy in life, study how to make life miserable.
If you’re thinking of a solution to a difficult problem, think forwards as well as backwards. Say you want to be happy in life, you’d have to think about what you’d do if you wanted to be sad in life. When solving difficult problems, invert, and you’re likely to find new approaches to solve the problem. In life and work, spend as much time defining the problem as you do on solving it.
Be wary of complexity as it leads to false confidence
This one is important. I’ve seen companies get so obsessed with data and metrics that they become far removed from the business goals those metrics are set up to drive and measure. Also, some people are not comfortable saying, “I don’t know” or know an accept the limits of things that are unknowable. The more powerful and useful any model, the more error it tends to produce through overconfident misuse. The more complex the metric, the more likely for it to be divorced from what it was set out to measure. Additional complexity does not mean a better solution. One quote that this reminds me of.
How do you know macroeconomists have a sense of humor? They use decimal points.
Stay away from complicated rules and filters. They do not necessarily improve accuracy and they provide false precision. For each big decision, ask yourself: “What are the 2 or 3 things that matter most?”. Very quickly, narrow your decision making criteria to the most important and knowable facts.
Ask yourself: What evidence should exist if my argument or hypothesis is correct?
Always remember the things that do not affect whether something is true or not
- The complexity and precision of your approach / math.
- How strongly you believe it to be true
- The number of people who agree with you and their qualifications
Some things are either true or not. You cannot use any of the above as a proxy for good decision-making all the time. This is especially true in complex systems, where the interactions of all the components are not fully understood. Hold yourself to a higher bar and do the work required to have an opinion.
Positive Return on Investment (ROI) is not enough reason to make an investment
You cannot merely do one thing
Second-order effects are important. In business and in life, demand more than positive ROI to justify investing money or time. Buffett gives an example of Berkshire Hathaway as a textile company. There were always positive ROI investment opportunities, but once you did invest, competitors will do the same things right away, wiping away any returns above the market. Of course, there are investments that will have to be made for defensive purposes or meeting parity with competitors. However, many positive ROI investment opportunities can make a business or industry look better than it does. The US textile industry was in dire straits for reasons that had little do with investment: pressure from lower-cost exports, changing consumer tastes. But there were always opportunities to “invest X and break even in 3 months”. Once you invest, however, competitors invest, lower prices and you are forced to give those savings to customers to compete. Those are not the investments that will set your business apart. Those investments are the price of entry. As a business or individual, you should have investments in parity categories of course, but also in areas that can give you a lasting advantage. Those take longer to develop and execute but more beneficial.