Warren Buffett has had a profound impact on my life. The many books I have read about him, the interviews I have watched of him, and the annual reports I’ve enjoyed written by him, have, simply, altered the way I view the world. It is crazy to think a man in his 80’s can have such a deep impact on a man in his 30’s. But, it has happened. Big time.
There are so many important ideas I have taken away from Buffett when it comes not just to investing, but to life in general. I mean, this is the same guy who tells young college grads they should not be taking jobs for the sake of building their resume. He says, instead, they should be going to work doing what they love. Because not doing what you love when you are young is a lot like, “Saving sex for your old age”. Talk about advice!
One of the more important ideas I have embraced from Buffett is the idea his business partner, Charlie Munger, refers to as their “propensity to disbelieve”. This idea is something we should all embrace; it may even be one of their keys to success.
The propensity to disbelieve
After watching many interviews with Munger and Buffett, you start to understand just how effectively they question their previous conclusions. They consider themselves lifelong learners and, because of this, it has helped them question their previous conclusions for decades. When most people are stubborn with their conclusions, these two are fluid with many of their previous ideas.
Buffett has talked for years about how much of a mistake it has been to purchase stock in the airline industry. Then, shockingly, he purchased billions of dollars’ worth of stock in multiple airlines in 2016. This is a prime example of Buffett’s destruction of his previous conclusion.
Buffett’s destruction of his early investment strategy
Imagine, by 1965, at age 35, Buffett was already a multimillionaire. This is a time when the median household income was less than $4,700! A millionaire back then is a multi-millionaire today.
Buffett built his initial wealth using a strategy he learned from his mentor, Benjamin Graham. Graham was a professor at Columbia University who wrote The Intelligent Investor and was Buffett’s professor.
Up until 1965, Buffett had amassed his fortune using the strategies Graham taught him. Que Warren Buffett’s friend and business partner, Charlie Munger, and Buffett started to change his previous conclusions about investing.
Buying wonderful companies at fair prices
Buffett’s early wealth was created by purchasing what he refers to as “cigar butts”. The basic premise was to buy fair companies at wonderful prices. He bought them cheap, and they only had about one puff left in them – hence the cigar butt.
According to Munger, he, over time, convinced Buffett, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Eventually, Munger prevailed in convincing Buffett to follow his idea, and his investing style hasn’t been the same since. From then on, Buffett purchased high quality companies with barriers to entry and great franchises. He purchased them at fair prices, instead of fair companies at very cheap prices.
Now, think about this for a second. How many multi-millionaires do you know who would challenge their previous conclusions? The very conclusions about investing, mind you, that had already created massive wealth for Buffett before he was even 40 years old.
I would imagine there are not many people who can do this, and maybe some successful people have this very characteristic?
Is the propensity to disbelieve the key to success?
This makes me wonder if this idea of challenging your previous conclusions is one of the keys to success? Is the ability to admit you were wrong, to be fluid in your previous conclusions, to change the way you think, to be humble about the limits of your intellect, the key to success?
Buffett says “it is better to be approximately right than precisely wrong” and to stay within your “circle of competence”. Being able to admit there is not a precise answer; knowing if your conclusions fall within your circle of competence. Maybe these are all keys to success?
I believe those who know their circle of competence will do better in business, investing and life. Those who “know what they don’t know”, that they have a limit to their understanding, and embrace new ideas, will make better decisions.
Don’t plan for the distant future
I’ve heard Munger quote Scottish philosopher Thomas Carlyle, saying, “Our main business is not to see what lies dimly at a distance, but to do what lies clearly at hand.” If you design the entire rest of your life today – say you develop some master plan – you will be doing so using today’s conclusions.
Tomorrow, the next day, and for many years down the road, your conclusions should change. You should be intelligent enough to understand where you have been wrong; that your intelligence is limited. Those who don’t change end up like Uncle Rico in Napoleon Dynamite – just living in the over-glorified past.
You should be open to destroying your previous conclusion. You should be wary of trying to see what lies “dimly at the distance” instead of what lies “clearly at hand”. Be fluid in your ideas and accept there is a limit to your knowledge. If you do these things, you may avert the pitfalls of the stubborn, and may end up like the successful; you may end up like Warren Buffett and Charlie Munger.
Thanks for reading!
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