Richer, Wiser, Happier — William Green on how investors avoid stupidity

Have you tried not being stupid?

People want to know the secret sauce behind investment greats like Charlie Munger. As William Green explains in his book Richer, Wiser, Happier, Munger’s response is rather straightforward: “reduce [your] capacity for foolish thinking, idiotic behaviour, unoriginal error and standard stupidities”. While “other people are trying to be smart”, Munger is “trying to be non-idiotic”.

Indeed, being smart isn’t easy. Whether we’re talking about nature or business, there are many more failures and harmful errors than there are successes. So, it makes sense to try to be non-stupid, right? Yet most of us do not have a strategy to achieve this. Where do we even begin?

Inversion, collection, and duality

Well, Munger himself advocates the process of inversion. This involves: (1) imagining a disaster scenario; (2) understanding what might cause such a scenario; and (3) taking actions to avoid such devastation. Inversion is a useful trick, not only in mathematics and engineering, but in life, business, and investing too.

“It’s counterintuitive that you go at the problem backward. If you try [to] be smart, it’s difficult. If you just go around and identify all of the disasters and say, ‘What caused that?’ and try to avoid it, it turns out to be a very simple way to find opportunities and avoid troubles.”
Charlie Munger in William Green. (2021). Richer, Wiser, Happier.

Collecting absurdities

To invert well, studying history is important. Chess grandmasters, for example, review their moves to uncover mistakes and novelties. Professional athletes watch game films to analyze their performance and mechanics. And Munger? He collects “absurdities”, “asininities”, and “inanities”.

Dual narratives

Munger isn’t the only thinker with a good bag of tricks. Green writes, for example, about fund manager Michael Steinhardt — who enjoys talking to “the biggest bull and the biggest bear” over lunch. He likes to hear disparate and sometimes contradictory views before making a decision.

Spencer Capital’s Kenneth Shubin Stein, likewise, gets his students to prepare a bull and bear thesis for every opportunity they study. The goal is to “consistently challenge our assumptions, contemplate counterarguments, and resist the brain’s tendency to conserve energy by taking shortcuts”, Green explains.

After all, if you’re buying an investment, don’t you want to know why the stranger on the other end is selling? Indeed, the risk of distortion, misperception, and exploitation is higher when you cannot understand the prevailing narrative on both sides of the deal.

Shameless cloning and ego control

Similarly, investor Mohnish Pabrai offers a two-step idea for not being stupid. First, you find someone whose process, values, and philosophy you admire. Second, you imitate them. He calls this “shameless cloning”. While there’s nothing original about this idea, as the saying goes: nothing succeeds like success.

Pabrai emulates many aspects of Warren Buffett’s investment philosophy, which Buffett himself adapted from Ben Graham. Pabrai, like Buffett, views stocks not as a vehicle for speculation but as an opportunity to own a part of a business. His goal is to buy companies with a wide margin of safety and to wait patiently for prices to reflect their intrinsic value.

(Although you might argue that Pabrai is a little crazy himself. According to Green, “Pabrai had half of his funds’ assets in just two investments: Fiat Chrysler and General Motors warrants” in 2015. While Pabrai’s bet paid off, where does one draw the line between concentration and excessive risk?)

In How Life Imitates Chess, Garry Kasparov reminds us that imitation can only take us so far. To reach new frontiers, we have to go beyond our predecessors. This is true if you want to be the best chess player or tennis player. But for an investor that seeks satisfactory results, thoughtful imitation can be a reasonable strategy.

So it is curious then, given Buffett’s extraordinary success, that his simple philosophy remains somewhat muted on Wall Street and academic finance. Pabrai believes it has something to do with ego. “They’re not as shameless as me”, he says. “To be a great cloner you have to check your ego at the door”.

“If you learn, basically, from other people, you don’t have to get too many ideas on your own. You can just apply the best of what you see… The difference between successful people and really successful people is that really successful people say no to almost everything.”
Warren Buffett in William Green. (2021). Richer, Wiser, Happier.

Simplicity and satisficing

What’s more, in contrast to the straightforward philosophies of Buffett, Pabrai, and other value-oriented practitioners, financial services and academia “tends not to favor simplicity”. Just look at all the financial engineering, off-balance sheet arrangements, and complex investment vehicles we have today. Sure, some of it is value adding. But a lot of it is snake oil masquerading as innovation. There is, after all, plenty of money to be made by preserving the veneer of sophistication, and rationalizing the status quo.

As Jack Bogle observes:

“Financial institutions operate by a kind of reverse Occam’s razor. They have a large incentive to favor the complex and costly over the simple and cheap, quite the opposite of what most investors need and ought to want.”
Jack Bogle. (2008). Enough.

Green captures it just as well:

“Much of the investment world is engaged in fruitless nonsense. … [Economists] pontificate about macroeconomic headwinds and tailwinds that nobody can reliably or consistently predict. Media pundits muse about the significance of short-term price fluctuations that are random and meaningless. … [Analysts] squander their time calculating next quarter’s corporate earnings to the exact penny… Not to be outdone, academics teach complicated mathematical formulas and speak in a private code about Sharpe ratios, Sortino ratios,… and other arcane concepts that lend an air of scientific exactitude… Meanwhile, investment consultants harness these highfalutin notions to convince clients that their portfolios need frequent, subtle fine-tuning. Buffett has derided these high-priced peddlers of complexity as “hyper-helpers” whose “advice is often delivered in esoteric gibberish.”
William Green. (2021). Richer, Wiser, Happier.

Good enough

As financial history over the last three centuries shows, trying to be too clever is a reliable recipe for stupidity. A simple, repeatable process based on good principles can be quite effective. Green points, for example, to Markel’s Tom Gayner, who seeks incremental improvements and directional corrections over perfection.

This is also reminiscent of Herbert Simon’s theory of bounded rationality — that to make good decisions under complexity and uncertainty, we should look for satisfactory strategies, not optimal solutions. Optimal in any case is usually ill-defined in the real-world without strong abstractions or assumptions.

“As Buffett has said, “Business schools reward difficult, complex behavior more than simple behavior. But simple behavior is more effective.” … Remember: investing isn’t like Olympic diving, where the judges award extra points for difficulty.”
William Green. (2021). Richer, Wiser, Happier.

Loneliness and contrarianism

To not be stupid, one has to tolerate occasional bouts of loneliness. Successful investors, Green writes, “are iconoclasts, mavericks, and misfits who see the world differently from the crowd and follow their own peculiar path” — they have “the willingness to be lonely”.

Most of us are familiar with Buffett’s penchant for solitary reading, empty calendars, hamburgers and coke far away from the whirlwind of Wall Street. But can you imagine being in the shoes of John Templeton who invested aggressively during the Second World War as the world grappled with maximum fear and uncertainty?

Making and fixing mistakes

With all that said, we are still going to make mistakes. This is a statistical inevitability, both in life and business. Green writes, for example, about Bill Miller, who suffered horrendous losses after “[loading] up on radioactive stocks such as Bear Stearns, AIG,… and Countrywide Financial” during the subprime crisis. “Miller’s assets under management plunged from around $77 billion to $800 million… [and] about a hundred members of his team lost their jobs”. In these cases, there are no simple alternatives. We simply have to live with the fallout and learn from our mistakes. That’s life.

“There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.”
Charlie Munger in David Clark. (2017). The Tao of Charlie Munger.

Take a simple idea and take it seriously

Being not stupid isn’t rocket science. Even simple, no-brainer actions like eating, sleeping, and exercising well can make a big difference. We just have to build the right habits and principles, and apply ourselves tenaciously. Positive compounding is a powerful force if we can get it going. We just have to look for directional improvements each and every day. As Charlie Munger says, “take a simple idea and take it seriously”.

Sources and further reading

Clark, David., & Munger, Charlie. (2017). The Tao of Charlie Munger.
Green, William. (2021). Richer, Wiser, Happier.
Bogle, Jack. (2008). Enough: True Measures of Money, Business, and Life.
Munger, Charlie. (1995). The Psychology of Human Misjudgement.

Richer, Wiser, Happier — William Green on Avoiding Stupidity