The natural voice...

As I go back through Josh Waitzkin's book The Art of Learning, which I had originally read several years ago, I'm paying special attention to things that might be applicable to business and investing; ideas that may lead one to achieve peak performance, and things that may lead one to failure. As I came across the excerpt below, it made me think that there may be some insight into why certain partnerships and groups of people can work incredibly well together, and why some are likely to end in failure. I haven't read Michael Eisner's book yet, Working Together: Why Great Partnerships Succeed, but I know Warren Buffett and Charlie Munger are included in it, so I may need to look into it.

After reading the excerpt below, it made me think that one of the reasons they may have succeeded so well together is that their relationship is structured in a way that allows them to both learn and pursue their interests in their own way; with Buffett spending more time with Berkshire businesses and managers and Munger spending more time pursuing worldly wisdom. Their pursuits and the way they spend their time have plenty of overlap, but the details are more personalized to each of them. And the knowledge they've gained and the progress they've made individually come together in a way that leads to a smarter and more objective way to make decisions over time. In essence, they have structured their environments in a way where they can pursue what they are passionate about, and that allows them to stay interested and keep on tap dancing to work every day. 

From The Art of Learning:

A key component of high-level learning is cultivating a resilient awareness that is the older, conscious embodiment of a child’s playful obliviousness. My chess career ended with me teetering on a string above leaping flames, and in time, through a different medium, I rediscovered a relationship to ambition and art that has allowed me the freedom to create like a child under world championship pressure. This journey, from child back to child again, is at the very core of my understanding of success.  

I believe that one of the most critical factors in the transition to becoming a conscious high performer is the degree to which your relationship to your pursuit stays in harmony with your unique disposition. There will inevitably be times when we need to try new ideas, release our current knowledge to take in new information—but it is critical to integrate this new information in a manner that does not violate who we are. By taking away our natural voice, we leave ourselves without a center of gravity to balance us as we navigate the countless obstacles along our way.

Links

Getting caught up on a few links after a little time away...

Notes from the Berkshire Hathaway 50th Anniversary Symposium (Market Folly, ValueWalk)

Prominent film company focuses documentary lens on Buffett [H/T Linc] (LINK)

How does Charlie Munger recommend dealing with adversity? (LINK)

Shane Parrish talks to Chris Dixon on The Knowledge Project (LINK) [Shane is also starting a membership program that is worth considering, HERE.]

John Malone interview on CNBC (video) [H/T Santangel's Review] (LINK) 

"I'm an investor. When I see opportunity to create value for my shareholders, I tend to want to dabble in that. So that effort to position capital, to anticipate value creation, I think is my job."

How to Become a Better Reader (LINK)

Related book: How to Read a Book

Latticework of Mental Models: Reciprocation Tendency (LINK)

Related book: Influence: The Psychology of Persuasion

Robert Shiller at the LSE discussing Phishing for Phools (LINK)

Robert Shiller's Talk at Google for Phishing for Phools (video) (LINK)

Beyond Banking: under attack on all sides (LINK)

Huge Valeant Stake Exposes Rift at Sequoia Fund [H/T Linc] (LINK)

ACHAL BAKERI, LEARNING MACHINE - by Sanjay Bakshi (LINK)

Managing a creative culture (LINK)

Related book: Creativity, Inc.

The Bill Simmons Podcast - Episode 19: Malcolm Gladwell (LINK)

HBO's Bill Simmons talks to best-selling author Malcolm Gladwell about Grantland's abrupt demise, public funded sports arenas/stadiums, new owner syndrome, Tom Brady's never-ending career, the corrupt NCAA, Obama's next job and how America needs a sports czar more than ever.

The Saudi Wahhabis are the real foe: We must take our fight to the preachers and financiers of terror - By Nassim Nicholas Taleb (LINK)

Some highlights from the book Seneca: A Life (Part 1, Part 2, Part 3, Part 4)

Some interesting books I've seen recommended by others: 

The Food Lab: Better Home Cooking Through Science

Rationality for Mortals: How People Cope with Uncertainty

Homicide

I Think You'll Find it's a Bit More Complicated Than That

Regaining and clarity of mind after making a mistake...

From Josh Waitzkin in The Art of Learning:

One idea I taught was the importance of regaining presence and clarity of mind after making a serious error. This is a hard lesson for all competitors and performers. The first mistake rarely proves disastrous, but the downward spiral of the second, third, and fourth error creates a devastating chain reaction. Any sports fan has seen professional football, basketball, and baseball games won and lost because of a shift in psychological advantage. People speak about momentum as if it were an entity of its own, an unpredictable player on the field, and from my own competitive experience, I can vouch for it seeming that way. The key is to bring that player onto your team by riding the psychological wave when it is behind you, and snapping back into a fresh presence when your clarity of mind begins to be swept away. 

With young chess players, the downward spiral dominates competitive lives. In game after game, beginners fall to pieces after making the first mistake. With older, more accomplished players the mistakes are subtler, but the pattern of error begetting error remains true and deadly.

The delicate balance of process vs. goal...

From Josh Waitzkin in The Art of Learning:

Chess was a constant challenge. My whole career, my father and I searched out opponents who were a little stronger than me, so even as I dominated the scholastic circuit, losing was part of my regular experience. I believe this was important for maintaining a healthy perspective on the game. While there was a lot of pressure on my shoulders, fear of failure didn’t move me so much as an intense passion for the game. I think the arc of losing a heartbreaker before winning my first big title gave me license to compete on the edge.  

This is not to say that losing didn’t hurt. It did. There is something particularly painful about being beaten in a chess game. In the course of a battle, each player puts every ounce of his or her tactical, strategical, emotional, physical, and spiritual being into the struggle. The brain is pushed through terrible trials; we stretch every fiber of our mental capacity; the whole body aches from exhaustion after hours of rapt concentration. In the course of a dynamic chess fight, there will be shifts in momentum, near misses, narrow escapes, innovative creations, and precise refutations. When your position teeters on the brink of disaster, it feels like your life is on the line. When you win, you survive another day. When you lose, it is as if someone has torn out your heart and stepped on it. No exaggeration. Losing is brutal.  

This brings up an incipient danger in what may appear to be an incremental approach. I have seen many people in diverse fields take some version of the process-first philosophy and transform it into an excuse for never putting themselves on the line or pretending not to care about results. They claim to be egoless, to care only about learning, but really this is an excuse to avoid confronting themselves. This issue of process vs. goal is very delicate, and I want to carefully define how I feel the question should be navigated.  

It would be easy to read about the studies on entity vs. incremental theories of intelligence and come to the conclusion that a child should never win or lose. I don’t believe this is the case. If that child discovers any ambition to pursue excellence in a given field later in life, he or she may lack the toughness to handle inevitable obstacles. While a fixation on results is certainly unhealthy, short-term goals can be useful developmental tools if they are balanced within a nurturing long-term philosophy. Too much sheltering from results can be stunting. The road to success is not easy or else everyone would be the greatest at what they do—we need to be psychologically prepared to face the unavoidable challenges along our way, and when it comes down to it, the only way to learn how to swim is by getting in the water.

Studying the endgame

I think there's a good analogy to be made between the excerpted paragraphs below, from The Art of Learning, and investing. The opening variations in chess are like short-term results and the time spent looking at everything that looks cheap on a current, statistical basis. Whereas the endgame is comparable to focusing on long-term results, the qualitative aspects of a company, and the time one spends studying great businesses (both current and historical) and how they became that way. And I think it's important because as Waitzkin says below, "Once you start with openings, there is no way out." While I wouldn't say "no way out" when it comes to one's investing process, once you develop certain habits and a certain definition of what you think is worth spending time on, it can be hard to reverse course, so the time spent getting the theory and core principles behind one's process correct is vital.

Let’s return to the scholastic chess world, and focus on the ingredients to my early success. I mentioned that Bruce and I studied the endgame while other young players focused on the opening. In light of the entity/incremental discussion, I’d like to plunge a little more deeply into the approach that Bruce and I adopted.  

Rewind to those days when I was a six-year-old prankster. Once he had won my confidence, Bruce began our study with a barren chessboard. We took on positions of reduced complexity and clear principles. Our first focus was king and pawn against king— just three pieces on the table. Over time, I gained an excellent intuitive feel for the power of the king and the subtlety of the pawn. I learned the principle of opposition, the hidden potency of empty space, the idea of zugzwang (putting your opponent in a position where any move he makes will destroy his position). Layer by layer we built up my knowledge and my understanding of how to transform axioms into fuel for creative insight. Then we turned to rook endings, bishop endings, knight endings, spending hundreds of hours as I turned seven and eight years old, exploring the operating principles behind positions that I might never see again. This method of study gave me a feeling for the beautiful subtleties of each chess piece, because in relatively clear-cut positions I could focus on what was essential. I was also gradually internalizing a marvelous methodology of learning—the play between knowledge, intuition, and creativity. From both educational and technical perspectives, I learned from the foundation up.  

Most of my rivals, on the other hand, began by studying opening variations. There is a vast body of theory that begins from the starting position of all chess games, and it is very tempting to teach children openings right off the bat, because built into this theoretical part of the game there are many imbedded traps, land mines that allow a player to win quickly and easily—in effect, to win without having to struggle to win. At first thought, it seems logical for a novice to study positions that he or she will see all the time at the outset of games. Why not begin from the beginning, especially if it leads to instant success? The answer is quicksand. Once you start with openings, there is no way out. Lifetimes can be spent memorizing and keeping up with the evolving Encyclopedia of Chess Openings (ECO). They are an addiction, with perilous psychological effects.  

It is a little like developing the habit of stealing the test from your teacher’s desk instead of learning how to do the math. You may pass the test, but you learn absolutely nothing—and most critically, you don’t gain an appreciation for the value or beauty of learning itself.

Learning and fundamentals...

From Josh Waitzkin in The Art of Learning, and applicable to investing and just about everything else as well:

As I struggled for a more precise grasp of my own learning process, I was forced to retrace my steps and remember what had been internalized and forgotten. In both my chess and martial arts lives, there is a method of study that has been critical to my growth. I sometimes refer to it as the study of numbers to leave numbers, or form to leave form . A basic example of this process, which applies to any discipline, can easily be illustrated through chess: A chess student must initially become immersed in the fundamentals in order to have any potential to reach a high level of skill. He or she will learn the principles of endgame, middlegame, and opening play. Initially one or two critical themes will be considered at once, but over time the intuition learns to integrate more and more principles into a sense of flow. Eventually the foundation is so deeply internalized that it is no longer consciously considered, but is lived. This process continuously cycles along as deeper layers of the art are soaked in.   

Very strong chess players will rarely speak of the fundamentals, but these beacons are the building blocks of their mastery. Similarly, a great pianist or violinist does not think about individual notes, but hits them all perfectly in a virtuoso performance. In fact, thinking about a “C” while playing Beethoven’s 5th Symphony could be a real hitch because the flow might be lost. The problem is that if you want to write an instructional chess book for beginners, you have to dig up all the stuff that is buried in your unconscious—I had this issue when I wrote my first book, Attacking Chess. In order to write for beginners, I had to break down my chess knowledge incrementally, whereas for years I had been cultivating a seamless integration of the critical information.  

The same pattern can be seen when the art of learning is analyzed: themes can be internalized, lived by, and forgotten. I figured out how to learn efficiently in the brutally competitive world of chess, where a a moment without growth spells a front-row seat to rivals mercilessly passing you by. Then I intuitively applied my hard-earned lessons to the martial arts. I avoided the pitfalls and tempting divergences that a learner is confronted with, but I didn’t really think about them because the road map was deep inside me—just like the chess principles.

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Related quote: "Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning." -Charlie Munger

Related previous post: Fundamentals...

Howard Marks quote

From The Most Important Thing:

Superior investors know—and buy—when the price of something is lower than it should be. And the price of an investment can be lower than it should be only when most people don’t see its merit. Yogi Berra is famous for having said, “Nobody goes to that restaurant anymore; it’s too crowded.” It’s just as nonsensical to say, “Everyone realizes that investment’s a bargain.” If everyone realizes it, they’ll buy, in which case the price will no longer be low. . . .  Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates. . . . 

In short, there are two primary elements in superior investing: 

• seeing some quality that others don’t see or appreciate (and that isn’t reflected in the price), and 

• having it turn out to be true (or at least accepted by the market). 

It should be clear from the first element that the process has to begin with investors who are unusually perceptive, unconventional, iconoclastic or early. That’s why successful investors are said to spend a lot of their time being lonely.

Misfortune weighs most heavily on those who expect nothing but good fortune...

"He who fears death will never do anything worthy of a man who is alive, but he who knows that these were the terms drawn up for him at the moment of his conception will live according to the bond, and at the same time will also with like strength of mind guarantee that none of the things that happen shall be unexpected. For by looking forward to whatever can happen as though it would happen, he will soften the attacks of all ills, which bring nothing strange to those who have been prepared beforehand and are expecting them; it is the unconcerned and those that expect nothing but good fortune upon whom they fall heavily. Sickness comes, captivity, disaster, conflagration, but none of them is unexpected — I always knew in what disorderly company Nature had confined me." -Seneca, "On Tranquility of Mind" 

John Maynard Keynes' change in investment philosophy

Via Chris Mayer in his book, 100 Baggers:

Keynes’s investment performance improved markedly after adopting these ideas. Whereas in the 1920s he generally trailed the market, he was a great performer after the crash. Walsh dates Keynes’s adoption of what we might think of as a Warren Buffett sort of approach as beginning in 1931. From that time to 1945, the Chest Fund rose tenfold in value in 15 years, versus no return for the overall market. That is a truly awesome performance in an awfully tough environment. 

A more recent paper is “Keynes the Stock Market Investor,” by David Chambers and Elroy Dimson. They add more interesting details about how his investing style changed. As Chambers and Dimson note, “As a young man, Keynes was supremely self-assured about his capabilities, and he traded most actively to the detriment of performance in the first period of his stewardship of the College endowment up to the early 1930s.”  

In the early 1930s, he changed his approach. With the exception of 1938, he would never trail the market again. This change showed up in a number of ways. First, he traded less frequently. He became more patient and more focused on the long-term. 

Here is his portfolio turnover by decade: 

1921–1929:  55%

1930–1939:  30%

1940–1946:  14% 

Turnover was just one aspect of Keynes’s change. Another was how he reacted during market declines. From 1929 to 1930, Keynes sold one-fifth of his holdings and switched to bonds. But when the market fell in the 1937–1938, he added to his positions. He stayed 90 percent invested throughout. 

This is a remarkable change. It again reflects less concern about short-term stock prices. He was clearly more focused on the value of what he owned, as his letters show. The authors of the paper note of Keynes’s change, “Essentially, he switched from a macro market-timing approach to bottom-up stock-picking.” 

In a memorandum in May of 1938, Keynes offered the best summing up of his own philosophy: 

1. careful selection of a few investments (or a few types of investment) based on their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments; 

2. a steadfast holding of these investments in fairly large units through thick and thin, perhaps for several years, until either they have fulfilled their promise or it has become evident that their purchase was a mistake; and 

3. a balanced investment position, that is, a portfolio exposed to a variety of risks in spite of individual holdings being large, and if possible, opposed risks. 

Here is one last bit of advice from the same memo: 

In the main, therefore, slumps are experiences to be lived through and survived with as much equanimity and patience as possible. Advantage can be taken of them more because individual securities fall out of their reasonable parity with other securities on such occasions, than by attempts at wholesale shifts into and out of equities as a whole. One must not allow one’s attitude to securities which have a daily market quotation to be disturbed by this fact.

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Related book: Keynes and the Market: How the World's Greatest Economist Overturned Conventional Wisdom and Made a Fortune on the Stock Market

Related video: John Wasik on "Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist"

John Maynard Keynes quote

"To suppose that safety-first consists in having a small gamble in a large number of different [companies] where I have no information to reach a good judgment, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy." - John Maynard Keynes