Knowing what not to do is an important part of the secret to success.
Do you know what Farnam Street is? It is an online publication named after the street on which Berkshire Hathaway is headquartered in the small city of Omaha, United States. The Farnam Street website (fs.blog) describes itself as ‘brain food’. It is not just dedicated to investing or Warren Buffett Even though anyone reading this will notice a sort of connection, the similarity of themes between the ideas and method on the blog buffett and their sub-approach investing.
One of the most interesting such topics is the ‘circle of merit’. On the Farnam Street blog, there’s a fascinating story about a baseball player named Ted Williams Joe blog says he was the biggest hitter ever in that game. I know nothing about baseball, so bear with me here. This man was able to hit the ball 40 percent of the time which is clearly exceptional in that game. Using an interesting diagram, the article shows the key to Williams’ success that he didn’t attempt to hit. As far as the balls came (almost like line and length in cricket, as far as I can understand), he knew where his area of success was and tried to avoid everything outside of him.
This area was his ‘circle of potential’. Outside of that, what one might call the ‘donut of inaction’, which is my phrase to describe whatever is outside the circle. It’s good to have a circle as big and as small a doughnut Go as far as possible, but the important thing is to know where the limit is and stay within it. Buffett and Munger The famous with technology stocks has never dabbled much. He now has a huge stake in Apple but only invested in the stock when it effectively became a luxury consumer durables company. Historically, people have said that the pair misjudged the development of the technology.
Munger has an amusing incident from the beginning of his career. One of the earliest shares he bought was William Miller Instruments, a company whose founder invented a better way to record sound, something like an improved wax cylinder. He thought it would take over all recording technology and Munger thought so too. However, around the same time someone else invented magnetic tape. The tape was so much better that the company Munger had invested in sold just three instruments. The entire investment was a write-off.
The general response to this would have been to learn more about each technology and thus make better predictions. But no, this was not Munger’s conclusion. Instead they decided that changing technologies should be avoided. If you have two things to invest in, one you understand and the other you can’t, what’s the point of investing in what you don’t? 75 years have passed since then, but this idea of living in one’s ‘circle of potential’ has served Munger and Buffett well. As they say, “I try to avoid being stupid. I’m not trying to succeed in my too-tough pile. The most important thing is to know where you are capable and where you are not. The human mind will let you know.” It tries to make you believe that you are smarter than you. Rub your nose in your mistakes.”
It’s a tough job – rub your nose in your mistakes, but it’s one of the secrets to success. Most of us, when our investments go wrong, try to justify why we weren’t actually to blame, that something unexpected happened.
Of course, to say that one should not fall into the trap of incompetence is easy, it may be hard to do so. When we start investing, very few of us know anything about anything. Given the range of one’s life experiences, the circle of merit is like a point so how does one begin? The obvious – and very practical – answer is mutual funds, complemented by a self-conscious effort to gain knowledge. The statement ‘I don’t know X’ should never be acceptable, instead, it should be ‘I don’t know X yet’.
The author is the founder and CEO of Value Research
Do you know what Farnam Street is? It is an online publication named after the street on which Berkshire Hathaway is headquartered in the small city of Omaha, United States. The Farnam Street website (fs.blog) describes itself as ‘brain food’. It is not just dedicated to investing or Warren Buffett Even though anyone reading this will notice a sort of connection, the similarity of themes between the ideas and method on the blog buffett and their sub-approach investing.
One of the most interesting such topics is the ‘circle of merit’. On the Farnam Street blog, there’s a fascinating story about a baseball player named Ted Williams Joe blog says he was the biggest hitter ever in that game. I know nothing about baseball, so bear with me here. This man was able to hit the ball 40 percent of the time which is clearly exceptional in that game. Using an interesting diagram, the article shows the key to Williams’ success that he didn’t attempt to hit. As far as the balls came (almost like line and length in cricket, as far as I can understand), he knew where his area of success was and tried to avoid everything outside of him.
This area was his ‘circle of potential’. Outside of that, what one might call the ‘donut of inaction’, which is my phrase to describe whatever is outside the circle. It’s good to have a circle as big and as small a doughnut Go as far as possible, but the important thing is to know where the limit is and stay within it. Buffett and Munger The famous with technology stocks has never dabbled much. He now has a huge stake in Apple but only invested in the stock when it effectively became a luxury consumer durables company. Historically, people have said that the pair misjudged the development of the technology.
Munger has an amusing incident from the beginning of his career. One of the earliest shares he bought was William Miller Instruments, a company whose founder invented a better way to record sound, something like an improved wax cylinder. He thought it would take over all recording technology and Munger thought so too. However, around the same time someone else invented magnetic tape. The tape was so much better that the company Munger had invested in sold just three instruments. The entire investment was a write-off.
The general response to this would have been to learn more about each technology and thus make better predictions. But no, this was not Munger’s conclusion. Instead they decided that changing technologies should be avoided. If you have two things to invest in, one you understand and the other you can’t, what’s the point of investing in what you don’t? 75 years have passed since then, but this idea of living in one’s ‘circle of potential’ has served Munger and Buffett well. As they say, “I try to avoid being stupid. I’m not trying to succeed in my too-tough pile. The most important thing is to know where you are capable and where you are not. The human mind will let you know.” It tries to make you believe that you are smarter than you. Rub your nose in your mistakes.”
It’s a tough job – rub your nose in your mistakes, but it’s one of the secrets to success. Most of us, when our investments go wrong, try to justify why we weren’t actually to blame, that something unexpected happened.
Of course, to say that one should not fall into the trap of incompetence is easy, it may be hard to do so. When we start investing, very few of us know anything about anything. Given the range of one’s life experiences, the circle of merit is like a point so how does one begin? The obvious – and very practical – answer is mutual funds, complemented by a self-conscious effort to gain knowledge. The statement ‘I don’t know X’ should never be acceptable, instead, it should be ‘I don’t know X yet’.
The author is the founder and CEO of Value Research
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