Rational Enlightenment Essay: Life Investments

Watering the Flowers and Cutting the Weeds
My favorite things in life don’t cost any money.  It’s really clear that the most precious resource we all have is time
Steve Jobs
In the game of Go, stones can be played at any open location on a large grid.  Because of this openness and flexibility, a Go player is never locked into any particular position on the board.  When I was learning to play, my uncle observed that wherever you focus your attention is where the game develops—many times a player can shift the outcome of the game dramatically by simply playing in a new area rather than continuing to “fight it out” in one particular are of the board.  This lesson also applies to life—whether we realize it or not, we have choices as to where we invest our energy and time, and it is worthwhile to evaluate the performance of those investments.  To that end, some of the wisdom from great capital investors may also be useful in improving our life investments. 
What to avoid
Mathematician Carl Gustav Jacobi’s approach to solving problems was to “Invert, always invert”.  Charlie Munger often relies on this technique in investing and living a good life.  Thus, rather than initially focusing on how to invest time and energy well, it may be easier to prune out the poorer choices.
Warren Buffett has often talked about avoiding investments in struggling companies, particularly ones attempting to “turn around” operations.  
Both our operating and investment experience cause us to conclude that turnarounds seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.
While people are capable of changing, by and large, it is rare for someone to have a major shift for the better, hence the oft-quoted aphorism: “When people show you who they are, believe them.”  Thus, one of the easiest ways to get better outcomes is to avoid relationships with people that consistently take energy, but give little or nothing back.  For example, avoid toxic personal relationships that are a constant emotional drain, CYA managers that neither make decisions nor delegate authority, low-competency employees that nonetheless require constant attention, or the like.  Similarly, a host of bad outcomes can be avoided by cutting out addictive habits that take up significant time but provide relatively low enjoyment or personal growth.  Although these habits may differ for different people, common examples include excessive drug usage or dependency, obsession with social media, news, or politics, arguing with strangers on the Internet, video games designed to occupy as much time as possible, or watching videos with few or no redeeming qualities.
Although avoiding these relationships and activities may seem simple or obvious, simply avoiding bad decisions can have outsized results.  Charlie Munger explains the success of Berkshire Hathaway by saying: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Where to Invest
Although pruning the worst relationships and activities can yield strong outcomes on its own, pairing it with even a few good ones can add a multiplier effect.  Fortunately, great investments are usually fairly obvious.  Buffett and Munger have discussed this a few times over the years:
The difference between a good business and a bad business is usually the good business throws up one easy decision after another, whereas the bad business throws up awful decisions time after time after time.
Find the relationships and activities that consistently give at least as much reward as the energy they take, e.g.: the friendships that get stronger and better the more time and energy you put into them; the job that rewards your hard work; the activities that make you a better person; and the relationships that enhance your best attributes while helping correct your worst. 
Water the Flowers, Not the Weeds
This is not to say that time and energy should only be invested in things that are easy or that everything that is difficult should be avoided—grit and hard work are important, but it is critical not to over-commit to people or activities that consistently yield bad outcomes.
Peter Lynch was one of the greatest mutual fund managers of all time.  He noticed that investors often sold their best companies and continued to hold or even invest more in the worst.  He likened these to flowers and weeds: “You won’t improve results by pulling out the flowers and watering the weeds.” 
We must remember to water the flowers and not the weeds.

December 26, 2019

Rational Enlightenment Essay: Building Social Wealth

Building Social Wealth

How to Win Friends and Cultivate Relationships

You must be the change you wish to see in the world.
Mahatma Gandhi

I don’t have many original ideas, and this essay isn’t one of them. I’ve always tried to synthesize the best ideas from other people, and over the past few years, I have shamelessly cloned the shameless cloning espoused by Mohnish Pabrai. In that vein, this essay is almost entirely a combination of ideas from Peter Kaufman (editor of Poor Charlie’s Almanack) and Guy Spier (author of The Education of a Value Investor) regarding how to build social wealth.

Negativity Bias and the Elevator

The term 'negativity bias' refers to the notion that negative experiences have a greater effect on a person’s psychological state than those that are neutral or positive. It isn’t clear exactly how much more a negative experience affects a person than a positive one, but there seems to be some consensus that a 3:1 ratio (positive:negative) allows for flourishing. John Gottman famously studied marriages and found that successful marriages had a ratio of 5 positive interactions to 1 negative interaction. Daniel Kahneman (author of Thinking Fast and Slow) found that people had a loss aversion ratio of between 1.5 and 2.5, meaning that a loss that is identical to a gain is valued between 1.5 and 2.5 times more than the gain.

This bias has a pervasive effect on how we interact with each other. Peter Kaufman uses a story about an elevator as an example, which goes like this:
You’re standing in front of an elevator. The doors open. And inside the elevator is one solitary stranger, you’ve never met this person before in your whole life. You have three choices for how you’re going to behave as you walk into this elevator: choice number one you can smile say ‘good morning’; choice number two, you can scowl at this stranger; and choice number three, you can do nothing.
The most likely outcome for each of these choices is a mirrored or neutral response: if you smile and say ‘good morning’, then it is likely the stranger will do the same; if you scowl, then the stranger will likely make a weird face or ignore you, and if you do nothing, the stranger will also likely do nothing. However, in the instances where you smile and say ‘good morning’, and the stranger ignores you or scowls at you, the negativity bias comes into play. While this uneven response may not happen that often, psychologically, it has a much more negative effect than the times when the stranger mirrors back positivity. As a result, to avoid this negativity, we default to being neutral, rather than positive.

Peter’s Solution

Peter likes to say: “When you do as everyone else does, don’t be surprised when you get what everyone else gets.” Thus, to get a better outcome, you have to do something different and better. If 90% of the time, positivity would yield a positive result, but 10% of the time it doesn’t, our psychological biases are making us miss out on the 90%! This is not rational behavior. Peter talks about this beautifully, so I’ll let him speak for himself (from a transcript provided by Richard Lewis at Latticework Investing, with minor editing for brevity):
Now let me tie this to your lives. I’m going to do a psychic reading of anybody in this room. What’s your name? (Answer: “Emily”) Emily, your entire life you’ve been on a quest, an odyssey, a search for that individual that you can 100 percent absolutely and completely trust. But who’s not just trustworthy, but principled, and courageous, and competent, and kind, and loyal, and understanding, and forgiving, and unselfish.
I’m right aren’t I? (Answer: “Dead on”) You know what else? If you ever think you may have encountered this person, you are going to probe and probe and test and test to make sure that they are real, that you’re not being fooled. And the paradox is that it looks like you’re probing for weakness, but you’re not. You’re probing for strength. And the worst day of your life is if instead of strength you get back weakness. And now you feel betrayed. You know why? You’ve got to start your search all over again. It’s the worst thing in the whole world isn’t it? Does everybody here agree with me on this? Look how simple this is.
Here’s your 22 second course in leadership. That’s all it takes. All you have to do is take that list that’s in Emily’s head, and every single other person in this room, every single other person in the whole world, has this list in their head – trustworthy, principled, courageous, competent, loyal, kind, understanding, forgiving, unselfish, and in every single one of your interactions with others, be the list! 
Have you all heard of opportunity cost? Here’s the classic illustration of opportunity cost. You have a finite number of something, it’s important. If you’re doing ‘A’ with it, it means what? It means you’re not doing B or C or D or E. What do you have to do? You have to evaluate all the different alternatives and pick the one that’s most optimal. Is that fair? So you’ve got one lifetime. How do you want to spend your one lifetime? Do you want to spend your one lifetime like most people do, fighting with everybody around them? No. I just told you how to avoid that. And in exchange have what? A celebratory life. Instead of an antagonistic fighting life. All you have to do is go positive, go first, be patient enough. You know we have to be patient for a week with a puppy. Do you know how long it usually takes for a human being to do all the probing and testing that Emily was going to do and to find out that you’re for real? It takes six months. This is why nobody does it. ‘Oh it takes too long.’ Compared to what? Look at the plan B that everybody uses. It’s terrible! It doesn’t work. They spend their whole lives fighting with everybody.

Cultivating the Right Relationships

Peter’s solution is excellent for being the person that deserves good relationships, but it doesn’t address the selection process. Charlie Munger (Vice Chairman of Berkshire Hathaway) has said:
The difference between a good business and a bad business is that good businesses throw up one easy decision after another. The bad businesses throw up painful decisions time after time.

I believe this sentiment also applies to relationships, but identifying whether a relationship will be good or bad at the outset is difficult. In his book, The Education of a Value Investor, Guy Spier talks about an interesting, and I believe effective, strategy to quickly identify high-quality relationships.

First, Guy casts a wide net: he is typically open to conversation from strangers, and he sends thank you notes to an incredible number of people that he interacts with. Additionally, when he meets someone, he tries to do something nice or helpful for them, which could be as simple as a sincere compliment or an introduction that might be beneficial. It is important that whatever is given is done freely and without an expectation of recompense; in other words, follow Peter’s advice: be generous and go first! Once he has given something, Guy watches to see how the person responds. Some people are takers, who take whatever help is given and do not reciprocate; clearly, these relationships are asymmetric and not worth pursuing. Some matchers, who will try to match whatever they have received; these relationships are perfectly good for acquaintances. And finally, there are the givers, who will more than match whatever they receive; these are the relationships to pursue, as they cultivate a virtuous cycle of giving. These relationships will improve the lives of everyone involved and will yield one serendipity after another. As Guy puts it: “What I’m trying to do is simply create an ecosystem for myself in which everybody is the type of person who wants to find ways of helping others.”

This method has a lot of positive side effects, which Guy describes in his book:
The crazy thing is that, when you start to live this way, everything becomes so much more joyful. There is a sense of flow and alignment with the universe that I never felt when everything was about what I could take for myself. Again, I don’t want to make this sound like I’m some kind of saint. But this experience of finding ways to serve others has been so overwhelmingly positive that I now find myself looking for more and more opportunities to help.

How to Build Social Wealth

Putting these ideas together:

  1.  Be the person you are looking for and go first.
  2.  Be generous with people you meet, and observe their response.
  3.  Prune the takers, keep the matchers, and cultivate the givers.

September 27, 2018

Financial Essay: A Few Thoughts on Banks

A Few Thoughts on Banks - Joel Stevens, June 7, 2018
This essay discusses the current state and potential returns for the large four U.S. banks.

Rational Enlightenment Essay: Seeking Wisdom

Seeking Wisdom
Better Behavior and Interpretations
Any year that passes in which you don't destroy one of your best loved ideas is a wasted year.
Charlie Munger
Every so often, I think about my former self, and there’s always at least one behavior or assumption that just makes me think: “How could I have been so stupid?”.  Of course, at the same time, I usually think that now I’ve got it mostly figured out, and I won’t have a nasty surprise later—except that somehow, the same cycle repeats the next time.  Sadly, it took me quite a few iterations to realize that I’m pretty much always doing something stupid; I just haven’t figured out what it is yet.  Clearly, the trick is to be self-aware enough to identify the current idiocy now rather than waiting to figure it out later! Given that the new year is upon us, I thought it might be helpful to review some of my own past mistakes, as it might be helpful to others.
For most of growing up and even into my early adult life, I assumed my behavior and language would be interpreted by others in a fairly specific manner. First, I assumed that those who did not know me would interpret me in a neutral or slightly negative manner.  For example, if I were to say or do something rude, then these people would judge me to be a rude person.  Perhaps more subtly, if I were to say something that could be interpreted negatively even when that wasn’t my intention, then it would likely be interpreted in the more negative manner.  This assumption still seems to make sense to me, as in my experience people do not tend to give the benefit of the doubt except to those that have shown they deserve it.  So this first assumption seems to be fairly well founded at this point in my life.
For those that were close to me, it seemed logical to give them the benefit of the doubt and interpret them as positively as possible, and since this was my underlying belief, I assumed they would also interpret me in the same manner.  Said another way, I assumed that those I was closest to would always interpret my behavior in the way that it was intended rather than the neutral or negative lens I assumed for strangers.  This line of thinking seemed to make sense to me at the time, since they loved me, and shouldn’t love include interpreting someone in the best possible manner?
Over time, I’ve realized that while this assumption is true to some extent, it doesn’t always hold.  As usual, reality is more nuanced—the interpretations I received depended on many factors, such as the type of relationship, the psychological health of the people involved, whether they were having a good day or a bad day, whether they were distracted, or even if they were in the dreaded ‘hangry’ state.  Moreover, this faulty assumption resulted in some strange behavior on my part, in retrospect.  For strangers or acquaintances, I put effort into interactions, trying to be careful of how I said things, how my behavior might be interpreted, and how my behavior might make them feel.  For my loved ones, this effort did not seem necessary—why waste all that energy, since they would interpret me positively anyway?  As some more extreme examples: if my best friend came up with a business idea that I didn’t think was particularly good, I’d say that bluntly, similar to how I would think to myself.  If my dad said something I didn’t think made sense, I’d argue until it was resolved—after all, I don’t tolerate internal inconsistencies in myself, so why tolerate them with him? 
The results of both the assumption and the resultant behavior are probably obvious to the reader at this point, but they were confusing for my younger self.  Many times I hurt people’s feelings without knowing why, or I would try to do something positive, only to be interpreted in a bewildering way.  As I reflect now, I’m surprised at the extent to which this behavior was tolerated.  The reality is that those I was closest to were more affected by and more sensitive to my unfiltered behavior than the strangers I tried to protect.  Thus, while my loved ones probably did interpret me in a more positive way, I had reached the wrong conclusion—more care and consideration should be taken for those you are closest to.
Being Better
On interpretations, I believe even more that it is important to interpret loved ones as positively as possible—presumably those that are closest have earned that spot, and positive interpretations only make everyone’s life easier and better.  With regard to behavior, I think it is important to be kind to everyone, but doubly so for those that are closest.
On the broader point of rooting out poor behavior, I started with a Munger quote and finishing with his comments on destroying bad ideas seems fitting—to quote him yet again, “I have nothing to add.”
Well I've done so many dumb things that I'm very busy destroying bad ideas because I keep having them. So it's hard for me to just single out one from such a multitude. But I actually like it when I destroy a bad idea because...I think it's my duty to destroy old ideas. I know so many people whose main problem of life, is that the old ideas displace the entry of new ideas that are better. That is the absolute standard outcome in life. There's an old German folk saying...'We're too soon old and we're too late smart.' That's everybody's problem. And the reason we're too late smart is that the stupid ideas we...already have, we can't get rid of!...in most fields you want to get rid of your old ideas. And it's a good habit, and it gives you a big advantage in the competitive game of life since other people are so very bad at it. What happens is, as you spout ideas out, what you're doing is you're pounding them in. And so you get these ideas and then you start agitating and saying them and so forth. And of course, the person you're really convincing is you who already had the ideas. You're just pounding them in harder and harder…The price we pay for [not] being able to accept a new idea is just awesomely large. Indeed a lot of people die because they can't get new ideas through their head. 

December 31, 2017