— Charlie Munger, November 14, 2023

Over the course of this year, I was pleasantly surprised to see Charlie Munger agree to several interviews. He clearly felt a need to communicate something important as he approached his 100th birthday. Perhaps he was compelled to share his wisdom due to an acknowledgement of the limits of time as he drew near to a milestone or maybe his health had taken a turn for the worse. Regardless of the reason, I am thankful that Charlie Munger shared so much of his wisdom with us prior to his death last week.

In his final interview with Becky Quick two weeks before his death, Mr. Munger spoke candidly about many aspects of his life that he typically preferred to keep private. In particular, he spoke about his son, Teddy, who died in 1955 at the age of nine from leukemia. At the time, leukemia was a certain death sentence and there was nothing a parent could do but watch his child slowly die.

As a boy, Charlie Munger was an avid reader of biographies and he particularly looked up to Benjamin Franklin. Most Americans know about Franklin’s major achievements over a long lifetime but few know about a painful loss he suffered as a young man.

In 1736, Benjamin Franklin’s four year old son died of smallpox, an event that Franklin forever regretted since he could have given his son an early version of a smallpox inoculation. I suspect that Franklin’s ability to move on after the death of his son provided comfort and inspiration. The loss of a child was a common experience throughout most of human history. Having an understanding of this reality of the human experience does not eliminate personal pain but can help deal with it.

Charlie Munger advised us to “soldier on” when we encounter the inevitable reverses in life. He soldiered on for nearly seven decades after the loss of his son. I am sure that no other loss in his life compared to what he experienced in 1955.

Wealth can solve many problems, but in 1955 no amount of money could have saved Teddy Munger’s life. At the time, Charlie Munger was nearly broke after a divorce and still had other children to provide for. But even if he had been a billionaire in 1955, money would have been completely powerless to save his son.

When you have suffered massive personal loss, especially ones that money cannot solve, financial losses are put in a proper perspective. Charlie Munger always wanted to be rich, but after providing for his family, his purpose was independence:

“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris — I wanted the independence. I desperately wanted it.”

— Charlie Munger

Money could not bring back Charlie Munger’s son but it could provide him with the independence needed to pursue his goals in life.

But what were his goals?

Why soldier on?

Two weeks ago, I read Viktor E. Frankl’s Man’s Search for Meaning for the third time.1 When I read the book for the second time a few years ago, my main purpose was to better understand Frankl’s experience in concentration camps during World War II. As I read it again recently, my attention turned more toward Frankl’s ideas on how human beings find meaning in life even under the most extreme conditions.

Viktor Frankl knew the meaning of loss. He witnessed the deaths of countless friends in the concentration camps. When he was finally liberated at the end of the war, he returned to Vienna to discover that his family had not survived. However, Frankl “soldiered on” for decades, serving his patients in his role as a psychologist and neurologist, as well as gaining prominence as a public intellectual and philosopher. He died in 1997 at the age of 92, more than fifty years after his liberation.2

How do you carry on when you’ve suffered awful personal turmoil? It is hardly something that can be taken for granted. It is very common for people in terrible situations to descend into depression, drug and alcohol abuse, and other self-destructive behaviors including suicide.

Why soldier on?

Ultimately, Frankl believed that human beings cannot live, much less thrive, without understanding their meaning and purpose in life. The premise of logotherapy, Frankl’s psychological framework, was that man’s search for meaning is the primary motivation in his life. Furthermore, man can find meaning even in the most awful situations when most people succumb to hopelessness and fall into nihilism.

Victor Frankl believed that we can discover the meaning in life in three ways:

1. By creating a work or doing a deed.

2. By experiencing something or encountering someone.

3. By the attitude we take toward unavoidable suffering.

If a human being has a reason to become happy, he or she will achieve happiness. And the reason to become happy is the achievement of one’s purpose in life.

Did Charlie Munger find meaning in life by becoming a billionaire?

Is that why he chose to soldier on? There is little doubt that Mr. Munger aspired to become wealthy and many eyebrows were raised when he made the following statement in his final interview with Becky Quick:

CHARLIE MUNGER: … But I’m not all that pleased. I could have done a lot better if I had been a little smarter, a little quicker.

BECKY QUICK: What are you talking about? Like, you’ve had success in everything you’ve done in life. What would you like to do differently.

CHARLIE MUNGER: Well, no, but I might have had multiple trillions instead of multiple billions.

BECKY QUICK: Do you sit around thinking about this? What would you have done differently?

CHARLIE MUNGER: Yes, I do think about it. I think about it. Yes, I think about it, about what I nearly missed by being just not quite smart enough or hardworking enough.

Could it really be that Charlie Munger was disappointed, in his last weeks of life, because he failed to amass enough wealth? Did he really believe that his life would have been better if he had multiple trillions instead of multiple billions?

For those who have been exposed to Mr. Munger’s thinking for the first time over the past week, I can understand the confusion. But I believe that there is a deeper meaning in these comments that has not been widely understood.

In my opinion, Charlie Munger’s purpose in life, after he had provided all that his family could possibly ever need, was to serve as an example for others. He said on many occasions that it is a moral duty to be rational and to serve as an exemplar. So, when I heard those comments, I immediately sensed that Mr. Munger was frustrated that he did not always act as rationally as he could have. Had he acted more rationally, he believes that more wealth would have ensued, and that this wealth would have been some sort of proof that rationality and worldly wisdom was worth pursuing.

I cannot read minds, nor would I be presumptuous enough to declare that this is what Charlie Munger meant, because he did not explicitly say so. But the idea that a man worth several billion dollars, even after giving away a great deal of money during his lifetime, could be frustrated by not having more spending power seems absurd. This is especially true in the context of paying close attention to everything he has said for nearly a quarter century as well as researching his life.

I believe that Charlie Munger found meaning in life not through the spending power of his wealth but by “creating a work or doing a deed”, in Viktor Frankl’s framework. His primary work was his role in the development of Berkshire Hathaway, but he also contributed mightily to the cause of rationality and worldly wisdom.

No one can know what goes through the mind of another human being in his final days and hours, but I doubt Charlie Munger was disappointed about not being richer. He said on many occasions that he had defeated envy. If he had any disappointment, it might have been related to not doing even more to promote rationality. One would hope that this was not really the case because few have done more for that cause.

I’ll conclude with these additional comments from Charlie Munger on soldiering on:

BECKY QUICK: I try and think back of what the toughest moments might’ve been and how you got through some of those. And, I mean--

CHARLIE MUNGER: Well, we all know how to get through them. The great philosophers of realism are also the great philosophers of what I call soldiering through. If you soldier through, you can get through almost anything. And it’s your only option. You can’t bring back the dead, you can’t cure the dying child. You can’t do all kinds of things. You have to soldier through it. You just somehow you soldier through. If you have to walk through the streets, crying for a few hours a day as part of the soldiering, go ahead and cry away. But you have to – you can’t quit. You can cry all right, but you can’t quit.

BECKY QUICK: You’ve had time in your life when you’ve done that?

CHARLIE MUNGER: Sure. I cried all the time when my first child died. But I knew I couldn’t change the fate. In those days, the fatality with childhood leukemia was 100%.

BECKY QUICK: That was your son, Teddy.

CHARLIE MUNGER: That’s gone away. Now the cure rate is way up in the 90s. And it’s an amazing development. Think of how much pleasure it’s given me to watch the cure rate for leukemia. What mankind did, what mankind and civilization did was soldier through those tough years that took away my cousin, Tommy, from meningitis, and then took away my son Teddy from leukemia. Imagine a cure. Imagine pretty well fixing that disease for families who came into life later. It’s a huge achievement. You can see why I like civilization. To me, civilization is what man has done with the last two centuries. And it’s been a good thing to watch.

Soldier on.

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— Warren Buffett

Warren Buffett did not achieve his success in the business world by worrying about what others thought of his investment decisions. He has never sought the external validation that addicts so many investors. He does not care about winning the approval of media pundits or analysts chattering about stocks every day. For someone like Warren Buffett, success is measured in years and decades, not hours or days.

There is a mismatch between the frequency of feedback an investor gets from market quotes and the time required to determine whether a specific investment strategy is working. There will always be critics who are not shy about second guessing your decisions. The concept of discarding the transient opinions of others and breaking the addiction to external validation is known as living by an inner scorecard.

What is the lesson we should take from the concept of living by an inner scorecard, by marching to the beat of own’s own drummer rather than being subject to the judgment of others?

When it comes to investing, there are massive benefits that accrue to those of us who only manage our own capital. The individual investor’s enduring edge is that one can ignore short term market movements. Professional managers must provide quarterly and annual updates to investors no matter how much they may wish to create their own scorecard. While they can attempt to attract investors who share their broad philosophy regarding long-term investing, it is well known that many self-professed long-term investors shift to a short term focus when markets are going down.

The question of the inner scorecard gets more interesting when the concept is extended beyond the narrow realm of judging investment performance. When it comes to living a good life, at some point the opinions of your family, friends, business associates, and peers have to matter.

When Warren Buffett says that your life is a disaster if no one thinks well of you when you reach old age, he is implicitly acknowledging the importance of an outer scorecard in life.

In the business world, how do you ultimately gain the approval of others? Is it by the empty virtue signaling that comes from adopting a policy statement regarding environmental, social, and governance matters, known today as “ESG”? Or are you more likely to win the approval of others by acting in an ethical manner and, most importantly, adding value to all of your relationships?

Zero-sum thinking says that for one side of a relationship to win, the other must lose. Positive-sum thinking involves creating win-win relationships across the spectrum. From a business perspective, lasting positive relationships are built when there is economic surplus enjoyed by all parties to the relationship. The value customers receive from buying your products and services should greatly exceed what they must pay. Employees should stick around for decades without the need for employment contracts. When one evaluates a business, these are the factors that count, not some vapid ESG statement written up by consultants for a disengaged board of directors.

But Warren Buffett was not thinking only of business relationships. Here is the full context of the quote that appears at the beginning of this article:

“I know people who have a lot of money, and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is — your life is a disaster. That’s the ultimate test of how you have lived your life.”

Living by an inner scorecard is a good policy in many ways. But that begs the question of what factors should appear on the scorecard!

A sociopath has an inner scorecard … one that is unconstrained by the judgment of his family, business associates, and society at large. The hallmarks of narcissistic sociopaths include an elevated sense of self-importance and a lack of empathy for the experience of other individuals. Someone with a good moral compass will have an inner scorecard congruent with getting to old age and having people think highly of their accomplishments and who they are as human beings. The sociopath will have an inner scorecard that leads to isolation and scorn. And, of course, there are many gradients in between.

The lesson to take away from the inner scorecard concept is to be fiercely independent when it comes to exercising your professional judgement in areas where you are well within your circle of competence. At a personal level, the inner scorecard is of critical importance when it comes to what type of career to pursue and the types of people to associate with. But, ultimately, no life can be well-lived without eventually subjecting yourself to an outer scorecard. The good news is that an inner scorecard that is consistent with win-win outcomes is highly likely to lead to a favorable outer scorecard in the long run.

Copyright, Disclosures, and Privacy Information

Nothing in this article constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

Several years ago, I was chased down a trail by a goose because I accidentally ran too close to its goslings.1 I’m sure this seems ridiculous but at the time I had no doubt that the goose meant business. Geese are monogamous birds that pair up for life to raise their young, and they are fiercely protective. Do geese fall in love with each other and love their offspring? I am not sure if geese feel what human beings would call “love”, but there is little doubt that animals are capable of forming attachments with others of their own species and, in the case of pets, with their human owners.

Few humans would want to live in a world devoid of love, and a good case can be made that humans who are incapable of love have sociopathic tendencies. However, love is an emotional attachment that cannot be ruled by rational self-interest and requires significant levels of trust. Granting others any level of trust obviously involves a degree of risk, but without a baseline level of trust in society and in our personal lives, life would be an unpleasant and degraded experience.

Every writer should know their circle of competence, and I am not qualified to provide advice on how to manage personal relationships other than to be alert to unmistakable signs of deceit and other indications of sociopathy. However, I do feel qualified to comment on the subject in the context of business relationships and investments. In a business context, emotional attachments might provide some ballast during adversity, but also present formidable obstacles to rational behavior.

Liking/Loving Tendency

One of the most important speeches that Charlie Munger ever made involved what he refers to as the Psychology of Human Misjudgment. With no formal training in the field of psychology, Mr. Munger nevertheless identified numerous pitfalls in life that we should all be careful to avoid. Over the years, I have written several articles covering the ideas discussed in the speech, but progress has been slow. In many cases, it has taken years for me to internalize the risks of individual misjudgments to the point where I feel qualified to write about them.

Liking/Loving Tendency is the opposite of Disliking/Hating Tendency which I wrote about in The Futility of Hatred last year. Writing about hatred is much easier than writing about liking and loving because hatred is a completely unproductive emotion that cannot lead anywhere but misery. Therefore, hatred is to be avoided at all costs, and discussion of the subject really involves how we can mentally come to terms with the futility of hating people who have given us ample reason to hate them. We avoid hatred not to benefit those who transgress against us but to avoid destroying ourselves. Hatred is stupid, and the prescription is simple even if it is not easy.

In contrast, Liking/Loving Tendency has positive and negative implications. While it is true that we risk impairing rational thought when we permit ourselves to like or love a person, an institution, or even our country, there are real benefits that accrue when we allow this emotion and enormous detriments for those who like or love nothing at all. We must balance the positive aspects of Liking/Loving with the risks.

“One very practical consequence of Liking/ Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection (as we shall see when we get to ‘Influence-from-Mere-Association Tendency,’ and (3) to distort other facts to facilitate love.”

Most of us have encountered situations where we interact with an individual who has annoying characteristics that are seemingly invisible to his or her spouse. We might think, “Why in the world would he tolerate this type of behavior!” But the reality is that ignoring faults is one of the hallmarks of love and why love can be “blind”.

Distorting reality to avoid the cognitive dissonance caused by an object of one’s love failing to behave properly is very common. Making excuses for bad behavior is also par for the course. It is easy to fall from giving a reasonable benefit of the doubt into justifying clearly terrible behavior:

“The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this ‘feedback mode’ in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved.”

Of course, sometimes admiration is deserved and looking up to an exemplar is exactly what we should be doing as a matter of self-interest. It is interesting to note that both Charlie Munger and Warren Buffett found such an exemplar in Fred Buffett:

“This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas. One common, beneficial example for us both was Warren’s uncle, Fred Buffett, who cheerfully did the endless grocery-store work that Warren and I ended up admiring from a safe distance. Even now, after I have known so many other people, I doubt if it is possible to be a nicer man than Fred Buffett was, and he changed me for the better.”

The main lesson we should take from studying Liking/Loving Tendency, at least when it comes to business relationships, is to be smart about the individuals or institutions that we admire even when we know that we will lose some objectivity in the process. Obviously, this is easier said than done, but dealing with Liking/Loving Tendency in business is infinitely easier than navigating the pitfalls in personal life.

In business, I think it is fair to say that admiration and respect can be productive when directed in the right way but outright adulation and unquestioned love is dysfunctional. One might need to drop most guardrails in personal life or risk isolation and misery, but in business we should always retain objectivity.

Cults of Personality

We see the most extreme examples of Liking/Loving Tendency in cults where a charismatic leader so mesmerizes his followers that they are willing to consciously take self-destructive actions up to an including mass suicide. All objectivity is lost in such settings where the leader is endowed with God-like infallibility.

In the business world, there are naturally charismatic leaders who inspire much admiration and loyalty, although it rarely gets to the extremes of actual cults. Again, we are faced with a need to approach the charismatic leader with some nuance. There are certainly charismatic leaders in business who act with enthusiasm due to sincere belief in their companies and missions. Natural charisma leads to loyal shareholders.

All of this is fine up to a point, and the charismatic leader can perform a great service to shareholders if he or she inspires owners to act rationally and with a long-term focus during periods of adversity. Just as Charlie Munger saw Fred Buffett’s example at the grocery store and felt inspired to emulate him, we can benefit from picking the right examples in the business world.

Of course, the flip side is picking the wrong charismatic business leader and allowing a business relationship to grow into adulation and credulity. We can see examples of this when it comes to well-known business leaders with large followings. For example, although they are radically different individuals, both Warren Buffett and Elon Musk have enormous numbers of followers, many of whom are anything but rational when their hero is attacked. If you doubt this, try posting a negative (or even mildly critical) comment about either of these men on Twitter and check your replies.

My own sentiments regarding Warren Buffett and Elon Musk are well known to longtime readers and perhaps best explained in A Tale of Three Acquisitions published last year. I’ve owned shares of Berkshire Hathaway for over twenty-three years and have much admiration for Warren Buffett and Charlie Munger. This brings up the question of whether Berkshire Hathaway is a “cult” and if I’m a “member”.

Is Berkshire Hathaway a Cult?

For over a decade after buying shares in 2000, I attended every Berkshire Hathaway annual meeting. For those who have never attended, it is an event that should be experienced at least once to get a sense of the community that gathers in Omaha every year to hear two nonagenarians expound on business and life for five hours.2

I use the word “community” although some might characterize it as a “cult”. I use the word “community” because of all of the public companies in existence today, I think it would be difficult to select a group of more knowledgeable shareholders than those who gather every year in Omaha. Sure, there are plenty of people at the meeting who know little about business and have some personal attachments to the leaders, but by and large, the attendees have internalized the business message conveyed in Mr. Buffett’s letters to shareholders and other communications over the years.

Still, if I was a member of a “cult”, it is reasonable to conclude that I would be the last to admit it. In my defense, I have written critically about certain aspects of Berkshire over the years and I have based my evaluation of the company on facts and figures laboriously collected and analyzed on a quarterly basis. In a cult, I would have been excommunicated long ago because I dared to question certain decisions of the leaders.

I am very thankful for Warren Buffett and Charlie Munger’s stewardship of Berkshire Hathaway over many decades and cognizant of the fact that they have taken far less compensation out of the business than they could have easily taken. Both Mr. Buffett and Mr. Munger could have net worths far greater than they have today if they had taken reasonable compensation over the years rather than essentially working for free.

In what sort of evil cult would the leaders disadvantage themselves to such an extent and essentially make gifts to their followers decade after decade? The fact that the company’s leaders have worked for free is a financial gift to shareholders and I am personally richer as a result. So, of course I am grateful and admire their actions.

I view Mr. Buffett and Mr. Munger as business exemplars and among the best investors of our times, but I do not view them as omniscient deities, especially in areas unrelated to business. I have had strong disagreements with their political views on multiple topics over the years. I often shake my head in dismay during annual meeting Q&As that delve deeply into politics. And don’t get me started when it comes to their advice on a healthy diet and what constitutes a solid fitness regimen!

Ultimately, I am a shareholder of Berkshire Hathaway because my financial analysis over the years led me to believe that long-term ownership would result in attractive returns and because management’s stewardship as fiduciaries was rock solid, a belief not based on faith but on actions over multiple decades.

From Loving to Hating

Human beings are prone to swing from love to hate when events become severe enough to shatter the psychological edifice upon which their love was based. We can see this all the time in personal relationships because the shattering of love often is accompanied by various types of betrayal that appear unforgivable and deserving of scorn and hatred. Hatred is dysfunctional but part of the human condition.

What is true in personal life is also true in business when a leader who enjoys the personal devotion of followers takes an action that shatters the world view of his devotees to the point where they feel personally betrayed.

For years, Elon Musk was a hero of those who viewed themselves as environmentally and socially responsible. Not only was Elon in the process of somehow solving climate change by selling luxury electric automobiles to wealthy people, but he was also committed to making human beings an interplanetary species. He was viewed as a real life Tony Stark, a modern day superhero who literally might be the key to saving the world. All of Elon’s flaws and lapses as a fiduciary were excused or ignored by his followers because he was engaged in such important work for society.

For a significant number of Elon’s followers, this all changed over the past year due to the train wreck known as Twitter. In addition to claiming to espouse “free speech” principles that ran afoul of the censorship many advocated, Elon took several controversial positions and expressed support for a number of political views perceived to be “right wing”. This was too much for many Tesla customers, including some high profile celebrities who went from extreme fandom to extreme scorn in just a few years. The superhero went to the “dark side” and transformed into a “villain”.

A former adherent to a cause who becomes an apostate is often treated with far more scorn than an outsider who was never a member in good standing. This seems to be the case when it comes to Elon Musk and the political left, although it should be noted that many of Elon’s recent troubles were self-inflicted.

Conclusion

Nassim Taleb’s famous “Thanksgiving Turkey” anecdote tells the tale of the unfortunate bird that considered the human who feeds him daily to be his best friend on earth until reality was revealed in November. The turkey’s sense of love and well-being, so well established due to long experience, is shattered in just a few minutes.

We want to avoid being the Thanksgiving turkey in business and personal life. But it is impossible to live fully without opening ourselves up to a certain level of vulnerability. There are certain risks in life that are worth taking. Liking/Loving Tendency is not a bug but a feature of humanity. If we close ourselves off to all risk associated with establishing affinity with other humans, we forfeit much of what makes us human to begin with and resign ourselves to leading a very diminished life.

There is no easy answer when it comes to navigating this minefield in personal life where the longest lasting relationships are built on unconditional love, with all of its dangers and pitfalls. However, in business, we should never approach relationships with the level of vulnerability that is a necessity in our personal lives.

It is fine to deeply admire our business associates as well as managers of public companies that we do not know personally. But ultimately we must always fall back on a sober assessment of reality if we hope to remain rational. Indeed, those of us who are fiduciaries for our own families would be derelict in our duties if we fail to be aware of Liking/Loving Tendency when it comes to business and investing.

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Copyright and Disclaimer

Nothing in this article constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

Individuals associated with The Rational Walk own shares of Berkshire Hathaway.

— Leo Tolstoy, A Calendar of Wisdom, January 17

At the age of 73, Leo Tolstoy started to obsessively focus on “collecting the wisdom of the centuries in one book.” Tolstoy first dreamt about putting together a collection in the mid 1880s when he decided that he had to “create a circle of reading for myself: Epictetus, Marcus Aurelius, Lao-Tzu, Buddha, Pascal, The New Testament.”

Tolstoy’s ambition was realized in three editions of A Calendar of Wisdom published between 1904 and 1910. Tolstoy was a lifelong learner and never stopped thinking, reading, and writing, so perhaps there would have been additional editions of the book if he had not died of pneumonia in 1910 at the age of 82.

For each day of the year, the reader is presented with a series of quotes along with Tolstoy’s own thoughts. Due to many quotes with religious and spiritual themes, the book was banned by the Soviet regime after the Russian Revolution. In 1995, it was again published in Russia and quickly sold over 300,000 copies. The book was translated into English by Peter Sekirin and published in the United States in 1997.

Tolstoy’s entry for January 17 recommends that readers resolve to make a serious effort to obtain wisdom from those who already possess it — in other words, to learn from the experiences of others. While exposure to wisdom is surely better than nothing, it is not enough to simply be exposed. We must make a concerted effort to internalize and understand the wisdom we read and put it into practice in our lives.

I purchased A Calendar of Wisdom a couple of weeks into the new year, but it was not difficult to catch up. I have also been reading entries from The Daily Stoic by Ryan Holiday which follows a similar format. In both cases, each entry appears on a single page and serves as a prompt for reflection. Tolstoy’s selections and his own thoughts have a decidedly religious theme whereas Holiday’s selections are often more secular.

It is far better to start the day grounded in timeless wisdom rather than in a flurry of mindless activity leading into an even more frenzied day. But, as Tolstoy says, simply reading brief quotes and then not doing anything with that information is insufficient. We need to find ways to take wisdom we are exposed to and somehow apply it. What are some ways we can take this important step?

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The Power of Writing

I have started each day since October 2019 by writing for about fifteen minutes. I adopted a practice created by Julia Cameron called morning pages and I wrote an article about my experience with the technique a few months later. My initial goal was to improve my focus and productivity:

“The concept behind morning pages is simple, so simple that it is tempting to dismiss it as a gimmick out of hand. The only rule is that you are supposed to sit down first thing in the morning immediately after waking up and write three pages of longhand, in a stream-of-consciousness style.

That’s it.

There are no rules regarding what you should write about or how long you should spend writing. When the three pages are written, you simply stop and proceed with the rest of your day.

Why is this valuable and how can it help you to be more productive?”

While morning pages has probably made me more productive, it has also served as an opportunity to internalize wisdom in materials that I read. At first, I would often write about a book that I had read the prior evening. Morning pages is supposed to be a stream of consciousness experience, so if I am still thinking about a book after waking up the next day, that is a good signal to write about it. In some cases, I picked up the book and copied a quotation from it, and then wrote about the quote.

When I read Tolstoy’s entry today, I immediately copied it down in my morning pages journal. It occurs to me that the simple act of writing down a quote helped to internalize the message and to, in a sense, “own” it. Tolstoy wrote that piece of wisdom over a hundred years ago and I wrote it down this morning. The thought did not originate with me, but the act of writing it down made it part of my thought process. And obviously it made enough of an impression to inspire the article you are now reading.

Internalizing the wisdom of others through writing goes well beyond writing down quotes verbatim. We should write about what we are reading in our own words and apply our reading to our day to day lives. This is not limited to philosophical musings. If you read an article or listen to a podcast by a successful investor, you should write down your takeaways immediately. Better yet, read the 10-K of a company that the investor mentioned and see if you can spot the attributes that he or she discussed.

Good writing is good thinking. When you force yourself to put your own independent thoughts down in written form, the flaws in your knowledge and logic quickly emerge and become impossible to ignore. Consider this recent tweet by Paul Graham:

The beauty of obtaining wisdom through writing, whether from philosophers or from successful investors, is that anyone can do this sitting quietly in a room. With nothing more than an electronic device and an internet connection, we have the entire world of wisdom at our fingertips and we have the freedom to write down our thoughts about what we have read.

This incredible privilege was reserved for the wealthy not very long ago yet very few people today leverage this massive advantage of modernity. Instead, most people just keep passively and mindlessly scrolling — perhaps this is best thought of as a scourge of modernity.

Writing Is Not Always Enough

While it is possible to internalize a great deal of wisdom just by reading and writing, it would be naive to think that worldly wisdom about all subjects could be obtained by sitting quietly in a room consuming information and writing about it. There are obviously many areas of human endeavor that require taking action, especially when taking action shapes our own psychological response to events.

No matter how much you read about great investors and write about them, and no matter how many “paper portfolios” you create applying their wisdom, there is absolutely no substitute for risking your own hard earned money on investments that you have personally selected.

But shouldn’t it be possible to gauge your personal investing skill based on a “paper portfolio” consisting of pretend positions that you invest in with hypothetical money? Why not see if you have skill before risking your own hard earned money?

Deprival-Superreaction Tendency refers to reactions to the experience of loss — both the loss of something one already possesses as well as the loss of something that one has almost obtained. It is one of Charlie Munger’s twenty-five psychological tendencies that lead to human misjudgment and closely related to prospect theory developed by Daniel Kahneman and Amos Tversky.

We feel the benefits of a gain much less forcefully than the pain of an equivalent loss:

Anyone who has risked real money in markets can relate to prospect theory. From a trader’s perspective, gain and loss corresponds to quotational gains and losses while a value investor will usually think of permanent gains and losses, but the principle is the same. Losses sting far more than the pleasure we get from an equivalent gain.

Any investor who intends to have staying power over years and decades must be able to come to terms with our tendency to react emotionally to losses. It is not enough to read about prospect theory on Wikipedia or even to read Daniel Kahneman’s excellent book, Thinking, Fast and Slow. It is not enough to write about these topics without having experienced anything for yourself in the real world. And it is not enough to “risk” gains and losses on paper without any real money being at stake. Our psyche knows that paper portfolios are not real and we will not experience authentic emotions.

Doing the Work

We live in an age of abundant information and even more noise. Building wisdom requires time, the ability to differentiate valuable information from noise, and then taking steps to do something useful with newly acquired knowledge. As Tolstoy said, “to obtain wisdom, you must make an independent, serious effort of your own.” It is much easier to do this today than during Tolstoy’s life, but few actually take action.

Here is the action plan I have adopted that has worked well in recent years:

• Improve my information diet by exposing myself to sources more likely to represent useful signals rather than noise. I am not an advocate of completely avoiding the news, but I recognize that the news is almost all noise. It is important to be aware of the Lindy effect and to tilt reading toward older books.

• Write about what I read either for myself in morning pages or other writing or, better yet, for public consumption. I have found that writing for others forces me to improve the quality of my thinking. I often realize that my knowledge is superficial or non-existent when I try to explain a subject to others.

• Take action when appropriate. Not all worldly wisdom can be obtained sitting quietly in a room while reading and writing. Warren Buffett has said that “if history books were the key to riches, the Forbes 400 would consist of librarians.” Obviously, Mr. Buffett is not saying that we should ignore books. He has been a voracious reader all his life. My interpretation is that he is telling us that we eventually must engage with the real world in addition to learning vicariously.

It is easy to be a passive consumer of nothing but noise, doom scrolling on social media and getting engaged in topics that will be long forgotten within hours or days. Almost all social media is a pointless, frustrating, dystopian waste of time and I almost always regret logging into Twitter. At least I am aware of the problem.

True wisdom requires doing the work. Fortunately, having a curious mindset and remaining persistent for a long time eventually pays off.

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—  George Washington resigns from the military, December 23, 1783

The Founding Fathers tend to be shrouded in a certain mystique in the minds of modern Americans. We learn about all of the key characters in elementary school, but most take on an almost superhuman form, frozen forever in time like figures in a larger than life statue. Part of this is simply due to the two centuries that have passed since the last of the founders left the scene, but it is also related to the lack of visual and auditory clues regarding who these men really were. Without photographs and videos, a generation raised on YouTube has trouble relating to these men who seem totally alien and artificial.

Within a generation of men who seem larger than life, George Washington towers even higher. Yet Washington seems particularly inaccessible to modern Americans. We know the story of his refusal to lie about damaging a cherry tree as a child, his legendary military history and service to the country during the American Revolution, and of course, everyone knows that he served as the first President of the United States. Beyond that, a random citizen is unlikely to have much of feel for exactly who George Washington really was or what he believed.

In contrast, Benjamin Franklin seems far more human, far more accessible, and we imagine that we really know what he might have been like at a dinner party or after having a few too many drinks at a cocktail party. It doesn’t take too much imagination to think of Ben Franklin making sarcastic comments on Twitter about the follies of the day. One can imagine John Adams replying in an angry and serious tone. Alexander Hamilton would be the master of (very) lengthy Twitter threads. But George Washington? Perhaps he would occasionally publish a link to a press release on Twitter from an account managed by an aide.

All of the history of the world might be a click away, but the conventional wisdom of modernity all too often relies on artificially construed caricatures. In my mind, I can imagine these men acting in certain ways based on decades of impressions I have accumulated regarding their characters. But how can we really know people who lived long ago who we cannot actually see or hear? Only through the records they have left behind —  books, letters, speeches, and other artifacts known as primary sources of information.

So should we look to primary sources exclusively? The risk of doing so is that we construe the words of men who lived long ago in a way that they did not intend, or attempt to apply their words to modern situations that they had no conception of. To avoid this peril, we need to use common sense and also read widely so we can understand the context of the times of these individuals. Otherwise, we risk twisting the words of the long dead to fit some preconceived political agenda or personal bias.

What can we learn from George Washington’s writing? It seems to me that a great deal of his famous Farewell Address contains insights that continue to apply to the United States in the early twenty-first century. The reader should be aware that the following selection of excerpts and commentary necessarily incorporates my own view of history and my interpretation of George Washington’s words will inevitably be colored by my own political ideology, even as I make a good-faith effort to honestly assess what his intentions were and how his sentiments apply to modern times.

Washington Gives Up Power

The voluntary and peaceful transfer of power is something Americans have come to take for granted thanks to over two centuries of precedent and self-restraint. So it is difficult to imagine the novelty of a man who was nearly universally acknowledged as a national hero giving up his military commission at the age of fifty-one in 1783 in order to retire to his plantation. It is conventional wisdom that George Washington could have easily been crowned King at that point, and this is one example of conventional wisdom being true.

George Washington’s idyllic retirement at Mt. Vernon didn’t last very long.

Under heavy pressure by his peers to take an active role in the Constitutional Convention of 1787, Washington reluctantly returned to public life knowing that the union faced a moment of existential peril. It quickly became obvious that no other man could credibly serve as the first President. Washington again reluctantly acceded to the wishes of the people but tried to retire after one term, only to again relent and serve a second term.

By 1796, Washington really wanted to retire and finally insisted on stepping down, releasing his famous Farewell Address on September 19, 1796. He opens with a lengthy section that is almost apologetic in tone:

“The acceptance of, and continuance hitherto in, the office to which your suffrages have twice called me, have been a uniform sacrifice of inclination to the opinion of duty and to a deference for what appeared to be your desire. I constantly hoped that it would have been much earlier in my power, consistently with motives which I was not at liberty to disregard, to return to that retirement from which I had been reluctantly drawn. The strength of my inclination to do this, previous to the last election, had even led to the preparation of an address to declare it to you; but mature reflection on the then perplexed and critical posture of our affairs with foreign nations, and the unanimous advice of persons entitled to my confidence, impelled me to abandon the idea.

I rejoice that the state of your concerns, external as well as internal, no longer renders the pursuit of inclination incompatible with the sentiment of duty or propriety, and am persuaded whatever partiality may be retained for my services, that in the present circumstances of our country, you will not disapprove my determination to retire.”

To modern eyes, the tone of Washington’s statement might seem contrived and self-serving. After all, how many modern sixty-four year old politicians at the peak of power would pine for retirement? However, in the context of Washington’s life and long-established desire to return to a life of domestic tranquility, it seems justified to take him at his word.

By 1796, Washington was tired and worn out by the “increasing weight of years”:

Not unconscious in the outset of the inferiority of my qualifications, experience in my own eyes, perhaps still more in the eyes of others, has strengthened the motives to diffidence of myself; and every day the increasing weight of years admonishes me more and more that the shade of retirement is as necessary to me as it will be welcome. Satisfied that if any circumstances have given peculiar value to my services, they were temporary, I have the consolation to believe, that while choice and prudence invite me to quit the political scene, patriotism does not forbid it.

It is worth noting that in our times, a man in his mid-sixties might expect to live another two decades, but such was not the baseline expectation in the late eighteenth century. Indeed, Washington would have only a brief retirement before dying in 1799 at the age of sixty-seven.

A formulaic farewell letter might have stopped after expressing a sense of gratitude and well wishes for the future. However, Washington still had more to say, and felt a duty to say it:

Here, perhaps, I ought to stop. But a solicitude for your welfare, which cannot end but with my life, and the apprehension of danger, natural to that solicitude, urge me on an occasion like the present, to offer to your solemn contemplation, and to recommend to your frequent review, some sentiments which are the result of much reflection, of no inconsiderable observation, and which appear to me all important to the permanency of your felicity as a people. These will be offered to you with the more freedom as you can only see in them the disinterested warnings of a parting friend, who can possibly have no personal motive to bias his counsel.

The Perils of Factionalism and Parties

Political parties were not conceived of at the time of the Constitutional Convention in 1787. The nearly universal respect for George Washington had a unifying effect on the country during his two terms in office, but beneath the surface, the emergence of political factions began almost immediately.

Within Washington’s cabinet, a stark divide soon emerged between the Federalists, led by Alexander Hamilton, serving as Secretary of the Treasury, and the Republicans led by Thomas Jefferson, serving as Secretary of State.1

A detailed discussion of the differences between the Hamiltonian Federalists and the Jeffersonian Republicans is beyond the scope of this article. However, at a high level, it is fair to say that the Federalists were far more willing to accept a larger and more robust Federal government whereas Jeffersonian Republicans preferred a smaller Federal government with individual states playing the leading role.

While nearly all of the Founders believed in the principle of subsidiarity, which is enshrined in the tenth amendment to the Constitution, there were still widely divergent opinions regarding the proper Federal role. Of course, this fundamental dispute is still a major fault line animating political discourse today!

George Washington strove to stay above the political fray, and for the most part he succeeded in doing so. His cabinet reflected both factions, although Thomas Jefferson’s retirement after Washington’s first term skewed the balance toward the Federalists.

Regardless of the divisions within his own administration, Washington counseled his fellow citizens to cherish and protect the unity of the country:

Citizens by birth or choice, of a common country, that country has a right to concentrate your affections. The name of American, which belongs to you, in your national capacity, must always exalt the just pride of patriotism more than any appellation derived from local discriminations.

With slight shades of difference, you have the same religion, manners, habits, and political principles. You have in a common cause fought and triumphed together. The independence and liberty you possess are the work of joint councils and joint efforts—of common dangers, sufferings, and successes.

At the time, regional factionalism threatened to upend the union, and there was a tendency of individual states and regions to pit themselves against people living in distant locations. Washington urged a national perspective by making explicit the mutual benefits accruing to specific regions, citing examples of how each benefits from union with the others. In addition to internal economic benefits, Washington believed that the union would prevent armed conflicts between the states:

While then every part of our country thus feels an immediate and particular interest in union, all the parts combined cannot fail to find in the united mass of means and efforts greater strength, greater resource, proportionably greater security from external danger, a less frequent interruption of their peace by foreign nations; and, what is of inestimable value! they must derive from union an exemption from those broils and wars between themselves, which so frequently afflict neighboring countries not tied together by the same government; which their own rivalships alone would be sufficient to produce, but which opposite foreign alliances, attachments, and intrigues would stimulate and embitter.

Washington goes on to warn Americans of the tendency of factions to distort and misrepresent the views of their opponents. Of course, this applies equally well to twenty-first century America:

One of the expedients of party to acquire influence within particular districts is to misrepresent the opinions and aims of other districts. You cannot shield yourselves too much against the jealousies and heart burnings which spring from these misrepresentations. They tend to render alien to each other those who ought to be bound together by fraternal affection.

Washington also saw the potential of parties to open the door to foreign influence of the government:

It serves always to distract the public councils and enfeeble the public administration. It agitates the community with ill founded jealousies and false alarms, kindles the animosity of one part against another, foments occasionally riot and insurrection. It opens the door to foreign influence and corruption, which find a facilitated access to the government itself through the channels of party passions. Thus the policy and the will of one country are subjected to the policy and will of another.

It is hard not to see the prophetic nature of George Washington’s cautions against factionalism and political parties. He saw the dangers clearly, but were his recommendations realistic?

In a large country, it is inevitable to have regional interests and philosophical disagreements. It is inevitable that a document like the United States Constitution would be interpreted differently by people based on their underlying temperament and ideology as well as financial and regional interests. It seems like the admonition against parties was something that Washington felt compelled to do, if only to serve as a warning. I think he hoped that Americans would refer back to his warnings in the future at times when partisan politics threatened to get out of hand.

Respect for the Constitution

Without respect for the Constitution, Washington believed that the country would fall apart. He alludes to the failure of the Articles of Confederation and extols the virtues of the eight year old Constitution as the law of the land. While he did not object to modifications to the Constitution passed via amendments, he had little patience for shenanigans that would subvert the law of the land as it stands at any given point in time:

Respect for its authority, compliance with its laws, acquiescence in its measures, are duties enjoined by the fundamental maxims of true liberty. The basis of our political systems is the right of the people to make and to alter their constitutions of government. But the Constitution which at any time exists, until changed by an explicit and authentic act of the whole people, is sacredly obligatory upon all. The very idea of the power and the right of the people to establish government presupposes the duty of every individual to obey the established government.

All obstructions to the execution of the laws, all combinations and associations under whatever plausible character, with the real design to direct, control, counteract, or awe the regular deliberation and action of the constituted authorities, are destructive of this fundamental principle and of fatal tendency.

Washington saw the risk of ambitious men using factions as a tool, “by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government.” He tended to see a strong Federal government not as a threat to the liberty of the people but as its guarantor:

Liberty itself will find in such a government, with powers properly distributed and adjusted, its surest guardian. It is indeed little else than a name, where the government is too feeble to withstand the enterprises of faction, to confine each member of the society within the limits prescribed by the laws, and to maintain all in the secure and tranquil enjoyment of the rights of person and property.

Was George Washington an authoritarian? He counsels subservience to the extent that every citizen is duty-bound to respect the Constitution as it stands at any given point in time. While it is fine to attempt to amend the Constitution, until changes are approved by the people, he had no patience for selective obedience to the letter of the law. He uses strong language in this section of the address, but I believe it is to be taken in the spirit of the Constitution being very young and untested.

Washington’s words would soon be tested by the Kentucky and Virginia Resolutions which asserted the right of states to declare the Alien and Sedition Acts unconstitutional and inapplicable in their jurisdictions. This was before the landmark Marbury v. Madison ruling of 1803 which established the principle of judicial review giving the judiciary the right to strike down laws as unconstitutional. Washington’s Farewell Address has to be read with an understanding that it predated these seminal events of American history. At the time of his writing, the determination of the constitutionality of laws was still in flux.

How are we to regard Washington’s words from our twenty-first century perspective? It seems obvious that Washington would want us to obey the Constitution as written and interpreted by the Supreme Court. What would he think of how the Supreme Court interprets the Constitution’s “original intent”? We obviously cannot know the answer to that question, other than by looking for clues in Washington’s writings and statements.

Separation of Powers

George Washington took a dim view of politicians who justified ad-hoc encroachment of one branch of government in the business of another branch. The Constitution has clearly delineated roles and responsibilities for the legislative, executive, and judicial branches of government, and Washington reminds us of the perils of setting aside the concept of separation of powers:

It is important, likewise, that the habits of thinking in a free country should inspire caution in those entrusted with its administration, to confine themselves within their respective constitutional spheres, avoiding in the exercise of the powers of one department to encroach upon another. The spirit of encroachment tends to consolidate the powers of all the departments in one and thus to create, whatever the form of government, a real despotism.

This is not merely an academic point, but one that is necessary to prevent despotism that is possible when too much power is concentrated in the hands of a single politician. The risk of monarchism was ever-present during the early days of the country. The desire for a monarch was real among a significant number of Americans who were not yet convinced that the republican form of government could work. Washington certainly believed in the necessity of a strong executive but also believed in the checks and balances that come from a of separation of powers:

The necessity of reciprocal checks in the exercise of political power, by dividing and distributing it into different depositories and constituting each the guardian of the public weal against invasions by the others, has been evinced by experiments ancient and modern, some of them in our country and under our own eyes. To preserve them must be as necessary as to institute them.

What if practical experience indicates that the definition of powers enumerated in the Constitution no longer serve our purposes? As a practical man, Washington understood this and again suggests that the Constitutional amendment process is the way to formally modify the spheres of influence of each branch:

If in the opinion of the people the distribution or modification of the constitutional powers be in any particular wrong, let it be corrected by an amendment in the way which the Constitution designates. But let there be no change by usurpation; for though this, in one instance, may be the instrument of good, it is the customary weapon by which free governments are destroyed. The precedent must always greatly overbalance in permanent evil any partial or transient benefit which the use can at any time yield.

In other words, it isn’t the thought that counts, even if in a particular situation the usurpation of power is done for what the actors honestly believe is in the national interest. Ad-hoc changes to the separation of powers creates dangerous precedents that could come back to haunt the country in the future.

Article 1, Section 8 of the Constitution clearly gives Congress the power to declare war. The Constitution also names the President as Commander in Chief of the armed forces. Congress has declared war eleven times with the last formal declaration taking place during World War II. All of America’s subsequent wars were fought without a formal declaration.

Do we still believe that Congress has the power to declare war today, and that war is not to be fought without such a formal declaration? Washington would probably tell us that we should either revert to what the Constitution clearly states or amend the Constitution to better meet our current needs.

Public Debt and Taxes

I have tried not to presumptuously project George Washington’s opinion into the modern era, but I feel comfortable saying that he would look upon our current fiscal situation and the $30 trillion national debt with absolute horror:

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.

Washington understood that taxes are distasteful and universally hated, but urged citizens to recognize that taxes are the only way for the Federal government to raise revenue and to establish and maintain credit:

To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment inseparable from the selection of the proper objects (which is always a choice of difficulties) ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue which the public exigencies may at any time dictate.

One can only imagine what George Washington would think about our twenty-first century monetization of the national debt by the Federal Reserve and the more general fascination with free lunches and modern monetary theory. From the mists of time, President Washington might be trying to tell us something.

Foreign Policy

We now arrive at what is perhaps the most famous part of George Washington’s farewell — that is, the section that many construe to counsel a policy of isolationism. Is this a fair assessment?

To consider this question, we must first acknowledge that Washington lived at a time when no one moved faster than a horse on land and it could take six weeks or more to cross the Atlantic Ocean. The United States was physically isolated from Europe, although heavily dependent on trade with the great European powers. Most importantly, the United States was an infant republic, not yet anywhere near a world power. Considering Washington’s views outside this context seems like a grave error.

With that caveat clearly stated, it is hard to argue with the universality of his opening statement:

Observe good faith and justice towards all nations; cultivate peace and harmony with all—religion and morality enjoin this conduct; and can it be that good policy does not equally enjoin it? It will be worthy of a free, enlightened, and, at no distant period, a great nation, to give to mankind the magnanimous and too novel example of a people always guided by an exalted justice and benevolence.

The United States was an infant republic in Washington’s lifetime, but he clearly saw the day when the country would be a great nation, a world power that has an obligation to act with good faith toward all. All of Washington’s foreign policy views are grounded in this basic principle.

We are also warned to avoid both unnecessary antipathy and attachments to foreign countries because both carry the hazard of being led astray in ways that frustrate the national interest. It seems that he is more worried about irrational hatred than anything else, and perhaps he would agree that hatred is futile:

In the execution of such a plan nothing is more essential than that permanent, inveterate antipathies against particular nations and passionate attachments for others should be excluded and that in place of them just and amicable feelings towards all should be cultivated. The nation which indulges towards another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest. Antipathy in one nation against another disposes each more readily to offer insult and injury, to lay hold of slight causes of umbrage, and to be haughty and intractable when accidental or trifling occasions of dispute occur. Hence frequent collisions, obstinate, envenomed, and bloody contests. The nation, prompted by ill will and resentment, sometimes impels to war the government, contrary to the best calculations of policy.

Hatred muddles the mind and releases passions that reason would reject. But perhaps counterintuitively, excessive attachment to a foreign country also carries risks:

So likewise, a passionate attachment of one nation for another produces a variety of evils. Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases where no real common interest exists, and infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter without adequate inducement or justification. It leads also to concessions to the favorite nation of privileges denied to others, which is apt doubly to injure the nation making the concessions—by unnecessarily parting with what ought to have been retained—and by exciting jealousy, ill will, and a disposition to retaliate in the parties from whom equal privileges are withheld.

As a young country, the United States also had to be on guard against establishing too-close ties with great powers lest the country become a de-facto satellite state and thereby undoing the blessings of liberty fought for during the Revolution:

As avenues to foreign influence in innumerable ways, such attachments are particularly alarming to the truly enlightened and independent patriot. How many opportunities do they afford to tamper with domestic factions, to practice the arts of seduction, to mislead public opinion, to influence or awe the public councils! Such an attachment of a small or weak towards a great and powerful nation dooms the former to be the satellite of the latter.

Washington’s particular warning was to avoid entanglements in the affairs of Europe, and he wanted to warn Americans who had ties to European states, most importantly England and France, to understand that it was not in our interests to take sides in the wars that were taking place at the time:

Europe has a set of primary interests, which to us have none, or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence therefore it must be unwise in us to implicate ourselves, by artificial ties, in the ordinary vicissitudes of her politics or the ordinary combinations and collisions of her friendships or enmities.

…

Why forgo the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground? Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor, or caprice?

Does this mean that George Washington disapproved of all alliances during his times or that he would not approve of our modern-day alliances? Not necessarily. He saw the legitimacy of temporary alliances to meet specific objectives, but he advised steering clear of permanent alliances:

It is our true policy to steer clear of permanent alliances with any portion of the foreign world—so far, I mean, as we are now at liberty to do it—for let me not be understood as capable of patronizing infidelity to existing engagements (I hold the maxim no less applicable to public than to private affairs, that honesty is always the best policy)—I repeat it therefore, let those engagements be observed in their genuine sense. But in my opinion it is unnecessary and would be unwise to extend them.

Taking care always to keep ourselves, by suitable establishments, on a respectably defensive posture, we may safely trust to temporary alliances for extraordinary emergencies.

Washington counseled a similar policy of neutrality and equal goodwill toward all nations when it comes to commercial trade policy. The overall message that clearly resonates is that the United States should chart its own course in the world and should remain cognizant of the fact that it was a young country still finding its way in the world. At that stage of development, there was little to gain and much to lose through an alliance with one of the great powers. The better course of action was neutrality and trade with all. Washington wanted to ensure that no impediments existed for America to be the master of its own destiny:

With me, a predominant motive has been to endeavor to gain time to our country to settle and mature its yet recent institutions and to progress without interruption to that degree of strength and consistency which is necessary to give it, humanly speaking, the command of its own fortunes.

It is almost impossible to know what George Washington would think about our foreign policy in the early twenty-first century. Obviously, the world has completely changed in terms of the speed of travel and the nature of warfare. It would be absurd to take the text of an address given in 1796 and attempt to apply it directly in the 2020s.

Yet, beneath the surface, there are indeed general principles that we can take away from Washington’s views on foreign policy. The general attitude of friendship toward all, but at a healthy distance, still rings true today. Getting overly involved in the affairs of other countries, especially when there are limited or no direct American interests at stake, is something that I think Washington would oppose even given the changes that have taken place since his time.

George Washington’s Birthday

This has been a longer than anticipated rumination on George Washington’s farewell address that was initially motivated by a desire to write something topical on what is commonly known as “Presidents Day”, which in the year 2022 falls on February 21. But actually there is no such holiday, at least as far as the Federal government is concerned. The national holiday celebrated each year on the third Monday of February is officially known as “Washington’s Birthday”.

It seems proper that America should honor George Washington and dubious that we should have a holiday to honor all Presidents collectively, especially because there are several Presidents who were clearly unworthy to follow in President Washington’s footsteps. Every American is likely to have a different list of unworthy former Presidents, so singling out which presidents are unworthy isn’t the point.

It is unfortunate that the Uniform Monday Holiday Act of 1968 designated Washington’s Birthday as the third Monday of February which means that the holiday will always fall into the date range of February 15 to 21 even though George Washington was born on February 22!

The desire to create a three day weekend and the informal designation of the day as a collective holiday for all Presidents cheapens the memory of George Washington. We should go back to celebrating Washington’s Birthday on February 22, regardless of which day of the week it falls on.

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— Richard Nixon’s farewell address to White House staff, August 9, 1974

The fact that hatred can destroy is no secret. Ever since the dawn of humanity, continuous war has been the most obvious manifestation of mankind’s tendency to hate. Why is hatred so intractable?

Charlie Munger believes that just as man is born to like and love, we are also born with a tendency to dislike and hate. Modern civilization has channeled hatred in ways that can be less lethal, such as substituting elections for wars, but the underlying tendency never really goes away. We most likely inherited this tendency from our primate ancestors, and we can still see it manifested in monkeys and apes today.

It is obvious that hate has the potential to destroy. How many murders have been committed by people in an uncontrolled fit of rage? What is less obvious is that hatred almost always boomerangs in the end and negatively impacts the person doing the hating. A murderer who is apprehended and convicted of the crime will face decades in prison, often dying behind bars, and still has a chance of facing the death penalty in many jurisdictions. Sure, some murderers are never apprehended but do they really escape destruction in the end?

I am not aware of any religion that does not condemn cold blooded murder or promise consequences for such acts in the afterlife. But it isn’t necessary to delve into religion to understand how hatred can be corrosive to the person doing the hating. With some examination, it also becomes quickly apparent that hatred is destructive even when it falls far short of criminal activity. The mere act of hating other human beings unleashes highly dysfunctional psychological elements that can easily lead to destruction.

When I first read Charlie Munger’s speech on the psychology of human misjudgment in Poor Charlie’s Almanack, I could not help but think of former President Richard Nixon. Although President Nixon was in office when I was born, I was too young to remember his final disgrace and resignation in 1974. What I do remember in later years is the former President occasionally appearing in the news after engaging in various efforts to rehabilitate his reputation and honor. He was clearly trying very hard to appear rehabilitated and to improve his standing in the history books.

But I don’t think it really worked and I think that President Nixon almost certainly knew it wouldn’t work.

Can you image being President of the United States, resigning in disgrace, and then living nearly two more decades knowing that you’ve forever disgraced yourself and will forever appear in history books as the first President ever to resign from office?

I don’t have much sympathy for President Nixon’s plight since it was self-inflicted. He certainly harbored hatred for his political enemies, used the power of his office to battle them, and then covered up crimes committed during the Watergate scandal which ultimately led to his downfall.

No matter what you think about President Nixon, it is hard to not to see the poignancy of his words on hatred as he was leaving the White House. Those are the words of a man who realized his errors far too late.

Hatred is a corrosive force that robs us of our ability to think rationally:

“Disliking/Hating Tendency also acts as a conditioning device that makes the disliker/hater tend to (1) ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of his dislike, and (3) distort other facts to facilitate hatred.”

Poor Charlie’s Almanack, P. 459

Take political differences as an example of hatred in today’s society. The rise of social media and the resulting mob mentality has created an environment of intense hatred over the past decade. It is now common for people to not only disagree with friends and family members who do not share their party affiliation but to totally disassociate from them for no reason other than politics. We have divided ourselves into “red” and “blue” tribes that no longer merely represent political affiliations. I don’t think that it is hyperbolic to wonder whether our politics will eventually result in the murderous “Blue vs. Green” factionalism of the Byzantine Empire.

On a much more practical level, the world is too competitive to allow hatred to impact your dispassionate view of the facts. You may hurt your competitor with an irrational price war, but you also will undoubtedly hurt yourself. You will hurt the highly qualified minority applicant who you pass over for a job, but you will also harm your business by not hiring the best person for the job. Snubbing a longtime friend for posting a political opinion on Facebook that you disagree with may hurt your friend, but you’ve also deprived yourself of friendship.

It is one thing to intellectually understand that hatred is dysfunctional and quite another to decide that we are not going to hate others. After all, there are certainly people in this world who have done great harm, either to society at large or to us personally. Are we not justified when we hate someone who has caused pain and misery, especially when the action was personal and spiteful?

It is possible for two things to be true at the same time: We might be “justified” if we hate someone AND it is still in our best interests to refrain from hating.

Easier said than done, perhaps, but there are viable alternatives to hatred.

You can move from hatred to indifference.

If you have been treated poorly in a personal or business context, disassociate and move on.

Advice columnist Ann Landers had it right when she said that “hanging onto resentment is letting someone you despise live rent-free in your head.”

The only way to halt the boomeranging effect that hatred will have on your own well-being is to decide not to throw the boomerang to begin with.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.

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In 250 AD, Emperor Decius issued an edict requiring all subjects to perform a sacrifice to the Roman gods and to the well-being of the emperor. The emperor exempted Jews from this requirement, respecting their ancient religion, but viewed Christianity as a breakaway sect, not as a legitimate religion. Christians had to choose between betraying their religious beliefs or suffering the consequences, including exile or execution. High rank did not offer protection. Pope Fabian himself died a martyr.

Edward Gibbon, in his epic history, The Decline and Fall of the Roman Empire, tells the tale of the Seven Sleepers, a group of seven young Christians who attempted to conceal themselves in a cavern in the side of a mountain near the ancient city of Ephesus. They were discovered and the entrance to the cavern was sealed with rocks. At this point, the fable says that the seven youths fell into a deep slumber which lasted a very long time — one hundred and eighty-seven years in Gibbon’s estimation.

Around the year 437 AD, the slaves of a local landowner removed the rocks to use as materials for a new building. Miraculously, the seven sleepers woke up thinking that they had been asleep for just a few hours. Not knowing that the world had changed and being very hungry, the group selected one young man to venture into town to buy bread using some of the coins bearing the image of Emperor Decius.

To the shock of the young man, he found a large cross displayed over the main gate leading into Ephesus. He recognized no one in town and observed that people were dressed differently. When he presented his ancient coins to the baker, he was hauled into court on suspicion of harboring an ancient lost treasure. To his shock, Christianity was not being persecuted anymore and was now the official state religion of the Roman Empire.

There are lessons here that go beyond a simple and implausible ancient fable. Gibbon wrote the following after presenting his account of the Seven Sleepers:

We imperceptibly advance from youth to age without observing the gradual, but incessant, change of human affairs; and even in our larger experience of history, the imagination is accustomed, by a perpetual series of causes and effects, to unite the most distant revolutions.

But if the interval between two memorable eras could be instantly annihilated; if it were possible, after a momentary slumber of two hundred years, to display the new world to the eyes of a spectator who still retained a lively and recent impression of the old, his surprise and his reflections would furnish the pleasing subject of a philosophical romance.

— The Decline and Fall of the Roman Empire, Vol 3, p. 391-2

During a reasonably long lifetime, human beings witness many changes in the world that seem to progress slowly but have massive cumulative effects. We see one version of history unfolding before our eyes, not necessarily cognizant of the fact that many alternative histories could have unfolded based on forks in the road that were not taken.

When the seven sleepers fell into their long slumber in 250 AD, they had no way of knowing that only a half-century later, Emperor Constantine would take power and put the Roman Empire on the path of eventually making Christianity the state religion. They could not conceive of the sequence of events that led to that massive shift in the course of human history.

As Gibbon points out, viewing history retrospectively is very different from viewing it going forward, in real-time. Just imagine someone who was in a terrible accident in 1996 and fell into a long coma only to awaken in 2021, emerge from the hospital, and see people wearing masks, staring at small glass objects while walking down the street, and wearing things in their ears resembling plastic white earrings while appearing to talk to themselves.

Then, imagine this person sitting down to read a list of major events that took place over the past quarter century and trying to interpret the cause and effect of various developments. Without being subject to the conventional wisdom of popular narratives, might this person form a more nuanced and accurate interpretation of what actually took place?

The fable of the Seven Sleepers has captured the imagination of people for over a thousand years and has been incorporated into stories in Christianity and Islam. It is not a story that I was familiar with prior to reading Gibbon but I think it has lessons to teach us regarding the narrative fallacy and hindsight bias. Gibbon wrote in the late 18th century but his insights seem just as timely today.

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Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

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“Never, ever, think about something else when you should be thinking about the power of incentives.”

— Charlie Munger

The power of incentives is obvious. Even small children will modify their behavior in response to incentives set by their parents.  “Now, Johnny, you must eat your peas or you will not get ice cream for dessert!” When thoughtfully considered and consistently applied, incentives can be used to promote social good, from the micro level at the dinner table to behavior that impacts society as a whole. However, a naive and simplistic understanding of incentives can easily cause much more harm than good. 

The Road to Hell is Paved With Good Intentions

On many occasions, poorly thought out incentive structures have caused serious harm. A famous example of this phenomenon is known as The Cobra Effect. When India was under British colonial rule, government officials were alarmed by the number of venomous cobras that infested the city of Delhi. This was an obvious public health menace. The scope of the problem was so great that the government could not hope to catch and exterminate all of the cobras without the help of the public. 

A scheme was developed that compensated citizens who turned in cobra skins. Surely enough, this caught the attention of the people. However, the government did not anticipate that industrious citizens would begin farming cobras just to profit from bounties. Eventually, the bounty scheme was abandoned. Without a market for cobra skins, the farmers released the snakes into the city and the problem was worse than it ever had been before. 

We can laugh at this today because, in hindsight, it seems so obvious that this would occur. However, the cobra effect is alive and well today. One must consider not only the direct effects of an incentive but the long-run side effects as well. As Howard Marks advocates, we must be sure to give adequate attention to second-order effects. Marks calls this second-level thinking and it’s what the British rulers failed to do. 

Recently, there has been a great need for blood plasma from individuals who have survived a COVID infection. Antibody therapy has been useful for treatment of COVID so why not offer incentives for people who have been exposed to make plasma donations? It makes sense until you consider the incentives this creates for people to expose themselves to COVID in order to sell their plasma. Ridiculous, you say! Maybe not, at least not for college students at BYU who found the $100-200 they could earn from plasma donations to be worth the risk of intentionally getting infected. 

Incentives in Business

My favorite example of misaligned incentives in business involves the case of the Federal Express distribution system. Charlie Munger uses the FedEx example in a talk on the psychology of human misjudgment, which appears as a chapter in Poor Charlie’s Almanack. FedEx was having a terrible time shifting packages between airplanes at its central distribution site each night. No matter what management tried, the night shift kept failing to complete its task. Of course, this had a cascading impact on delivery times and customers did not receive the service they thought they were paying for. 

The problem was that management was paying the night shift an hourly wage. As soon as management switched its pay model to a fixed amount of pay per shift, the problem disappeared. Employees now had an incentive to complete the sorting process as quickly as possible so they could go home. Of course, presumably management had to ensure accountability to prevent sloppy and inaccurate work, but the existential problem disappeared immediately. Without timely delivery, the entire premise of FedEx’s business model would have failed.

Incentive problems extend all the way from the shift worker sorting packages to the very top of an organization. Every year, public companies prepare what is known as a proxy statement that describes, among other things, the compensation program that rewards top executives. Most large companies employ compensation consultants to develop programs that supposedly align the incentives of management with shareholders. Unfortunately, compensation programs often reward undesirable behavior. For example, any compensation scheme that is tied to the short-term price of a company’s stock will inevitably result in executives watching the ticker constantly and they will have a laser-focus on managing Wall Street expectations on a quarter-to-quarter basis. 

The intrinsic value of a company depends on its ability to generate free cash flow for years and decades to come, but it is often possible to juice short-term results in a way that is nearly certain to reduce long term value. This is most obvious in matters of capital allocation. If a certain capital investment is likely to depress profitability for several years before it begins to bear fruit, why would a 62 year old CEO three years from mandatory retirement opt for it if his compensation is tied to the stock price over the next twelve months? Compensation arrangements that are complicated can have a cascading series of negative incentive effects that are very difficult to understand. However, no compensation consultant who proposes a simple arrangement is likely to be viewed as earning his or her pay.

Incentive Caused Bias

“The compensation committee relies on its own good judgment in carrying out its duties and does not waste shareholder money on compensation consultants.”

— Daily Journal’s 2020 Proxy Statement

One way to avoid incentive-caused bias is to avoid advisors. This is what Charlie Munger’s Daily Journal does when it comes to arranging compensation agreements with its top executives. However, sometimes you cannot avoid advisors and in these situations Munger suggests the following antidotes:

The general antidotes here are: (1) especially fear professional advice when it is especially good for the advisor; (2) learn and use the basic elements of your advisor’s trade as you deal with your advisor; and (3) double check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.

Learning and using basic elements of your advisor’s trade is perhaps the most effective antidote. If you approach your auto mechanic speaking the language of someone who understands cars, you are far less likely to be ripped off than if you seem naive and confused. I always make it a point to mention to realtors some detail about the local market that obviously took research to learn, such as the average recent selling price per square foot for comparable properties. 

The cash register is an invention that Munger often lauds as one of the greatest moral instruments of its time. As I discussed in a recent article, the invention of the cash register had the effect of reducing the temptation to steal. Those who have ingrained criminal minds would not be deterred from following a morally bankrupt path and would attempt to find ways to defeat the cash register. But those who are basically good people yet have a surface-level incentive to steal can be “kept honest” by the fact that they know theft is likely to be detected. Making dishonest behavior unpleasant and difficult to accomplish is a moral imperative.

Retroactive Bribery

One especially pernicious incentive effect that we have seen all too often is the phenomenon that I think of as “retroactive bribery”. In conventional bribery, someone in a position of authority is offered something of value in order to favor the interests of the briber. This type of bribery is common but can be discovered, especially when the bribe involves money in an age where almost every monetary transaction leaves an electronic fingerprint. In contrast, retroactive bribery is devilishly difficult to detect and often the “bribe” itself is not even discussed; it is instead implicitly assumed.

Consider the case of a member of Congress who serves on committees that have a significant influence on military procurement. The scourge of lobbying is well known in Washington and the stereotype is the explicit bribe:  Please vote for this bill and we will give you a suitcase with $100,000 in cash.  However, this type of bribery is for amateurs. Instead, lobbyists and members of Congress develop cozy relationships over long periods of time. Members of the committee might see a longtime colleague retire from Congress and then magically end up on the board of directors of a major defense contractor earning a quarter-million dollar sinecure annually. The next time the lobbyist approaches the Congressman asking for support on a bill, the member will understand the incentive effects well enough. Not a word need be spoken. Friends take care of friends.

Trust and Incentives

As I discussed in The Paradox of Trust, it would be truly exhausting to go through life without extending a basic level of trust to others, at least when it comes to routine and low-stakes matters. The power of incentives is present everywhere but it would be exhausting to attempt to study and examine the incentives involved in every small interaction of life. Instead, we rely on the norms and customs of society to function on a day-to-day basis and accept some risk, including the risk that the incentives of someone we are dealing with might lead them to cheat us.

When the stakes are high, however, we are well served to internalize Charlie Munger’s advice regarding the superpower of incentives. When you are buying a car or a home, you should carefully think about the incentives of the seller as well as the intermediaries who are involved in the process because the purchase could have consequences that last years or decades. But do not restrict your awareness just to incentive effects. By going through a list of potential areas of misjudgment check-list style, you will likely spot cognitive errors in time to take corrective action. Failure to do so can be disastrous when the stakes are high.

Copyright, Disclosures, and Privacy Information

Nothing in this newsletter constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscribers information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

— Alfred, Lord Tennyson

The pursuit of worldly wisdom requires us to understand the human psychology that drives decision making and behavior. What may appear to be undeniably rational and optimal from a purely logical standpoint often fails to account for the fact that human beings do not view the world in the same way as a computer.

Thousands of years of evolution have left humanity with a set of psychological impulses that might have been necessary to ensure the perpetuation of the species centuries ago but can lead to miscalculations in the modern world.

While we should acknowledge that all of us are subject to the legacy of evolutionary psychology, by understanding common areas of misjudgment we may be able to give ourselves a slight edge.

Was Lord Tennyson correct?

It certainly seems like his poem contains a great deal of wisdom. Surely it is better if one has strong connections with other human beings even if circumstances change that later deprive us of those relationships. It is inevitable that anyone going through life will suffer loss, whether it might be due to a break-up of a relationship, the death of a romantic partner, or the loss of a friend or close relative.

Loss in a social context can also occur when economic dislocations cause us to lose contact with colleagues even when they might not be close personal friends. The only way to guarantee that one suffers no loss is to become a hermit and avoid interacting with anyone. Almost all human beings are social creatures and the cost of avoiding the risk of social loss — a lifetime of isolation — clearly exceeds the cost of dealing with the losses that will inevitably occur.

While Lord Tennyson’s perceptions regarding human relationships seems to match practical experience, his words cannot be applied when it comes to human emotions related to economics.

From a practical perspective, in the way a computer might regard well-being, it certainly seems like the happiness of an individual who experiences transient wealth might be greater than someone who never experienced wealth at all.

Consider two neighbors who both earn the median household income. One individual wins a $10 million lottery but, within a few years, manages to squander half of it through frivolous spending and loses the other half in bad investments. From an economic standpoint, the lottery winner enjoys higher lifetime consumption than the person who never won the lottery, but from a psychological standpoint, the lottery winner is far worse off. His higher lifetime consumption, boosted in a fleeting manner, is no consolation for losing what he became accustomed to.

The lottery winner, for a brief period of time, is relieved of any financial worries, has no need to work, and can finally acquire most of the possessions he has ever dreamed about. His lifestyle immediately ratchets up to the limits of his newfound wealth which provides temporary joy, but the hedonic treadmill soon causes him to regard all of this as the new baseline. Soon, half of his winnings have been consumed and the rest of it evaporates due to poor investments.

Does anyone intuitively think that this man will go back to his old neighborhood, get a job working at the median income, and be satisfied with his life? In contrast, his neighbor who never won the lottery has continued living his life — not necessarily satisfied with everything and perhaps always aspiring for more, but at least not having tasted what he can no longer have.

Starting in the 1990s, Charlie Munger began to give public talks about his framework of human misjudgment which was later significantly expanded in written form as a chapter in Poor Charlie’s Almanack. Deprival-Superreaction Tendency refers to the human reactions to the experience of loss — both the loss of something one already possesses as well as the loss of something that one has almost obtained. Munger likens the human reaction to loss to the reaction of his dog when someone tried to take food out of his mouth. The dog, normally tame and good natured, would bite his master. This was a totally irrational act but an instinctive and automatic reaction to loss.

In 2011, Daniel Kahneman published Thinking, Fast and Slow, a book that describes prospect theory and many additional topics in a format intended for a non-academic audience.  Through a series of experiments and surveys, Kahneman demonstrates that individuals feel the benefits of gains much less forcefully than the pain of losses. Consider the exhibit below:

Charlie Munger’s dog felt the pain of loss much more than the pleasure of gain in terms of a food reward just as the lottery winner feels the loss of his fortune much more intensely than the pleasure of his win.

There are many other contexts in which the deprival-superreaction tendency can influence decision making as well as government policy. One excellent example is the psychology behind payroll tax withholdings. In the United States, as well as in most developed countries, it is mandatory to have an estimate of a worker’s tax liability deducted from each paycheck before the worker ever sees the funds. If a worker’s gross pay is $10,000 per month, she might only see $7,000 deposited into her bank account at the end of the month because $3,000 has already been claimed for payroll taxes as well as federal and state income taxes. Additionally, many people voluntarily authorize deductions for retirement contributions.

What would happen if the gross amount of the worker’s pay of $10,000 was deposited in her account and she wrote checks totaling $3,000 to the various government agencies as well as to her retirement account provider? The answer, for almost everyone, is that she would feel worse off than if she had never seen the $3,000 hit her account to begin with. One might think that she feels worse off because of the hassle of having to write checks, but the same would be true if the payments were automated. Merely seeing her account balance go up by $10,000 and having $3,000 taken from the account makes her feel worse than if she simply had the $7,000 net pay deposited and never consciously thought about the withheld taxes.

Of course, the irrationality gets even worse when people willingly have excess funds withheld from their paychecks in order to get a tax refund the following April. However, from a psychological standpoint, the extra withholding doesn’t sting very much because it is not money the worker ever “had” to begin with, and the windfall refund is like manna from heaven. Almost everyone understands that this isn’t free money from an intellectual standpoint, but for some reason people still enjoy getting tax refunds so much that they willingly provide an interest free loan to the government through excessive payroll withholdings.

Charlie Munger also notes that deprival-superreaction has important implications for labor-relations. Whether in the form of union contracts or discussions with individuals regarding their pay package, it is nearly impossible for employers to reduce wages even when necessary and warranted. Even in cases where a business has an unsustainable cost structure and failure to reduce wages would result in an elimination of all jobs, and even in industries where employees may have trouble finding new work, it is not uncommon for unions to reject pay cuts. In such cases, a business failure would leave both the owners of the business and the employees in worse shape than if employees made a difficult decision to accept lower wages.

The difficulty of wages and prices to adjust downward due to the deprival-superreaction tendency is one reason the government policy seeks to leverage the concept of money illusion through inflation. Aside from economies suffering from hyperinflation, people think of wages and prices in nominal terms. An employer that needs to cut wages by two percent in real terms will have a much easier time implementing a pay freeze in a year when inflation is two percent than trying to impose a two percent pay cut in a year when there is no inflation. The need to allow real prices and wages to adjust downward, when warranted, is one of the more compelling arguments in favor of low levels of inflation (as opposed to zero inflation), although it is questionable whether it is ethical for government to harness money illusion as a policy tool in this manner.

It is tempting to consider issues like this and pretend that we have immunity because we understand the issues at an intellectual level. The reality is that no one is immune but we are capable of incrementally acting in a more rational manner by going through checklists and being aware of the biases that could be influencing our decisions. I still feel the pain of permanent losses of capital much more acutely than the pleasure of gains. But I have never sought to artificially receive tax refunds every April by overpaying during the prior year. I will take that as a small victory.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.

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Nothing in this article constitutes investment advice and all content is subject to the copyright and disclaimer policy of The Rational Walk LLC.  

Your privacy is taken very seriously. No email addresses or any other subscriber information is ever sold or provided to third parties. If you choose to unsubscribe at any time, you will no longer receive any further communications of any kind.

The Rational Walk is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

— Ronald Reagan

Trust is the foundation of society. Without a basic level of trust regarding the intentions and expected behavior of other human beings, our modern civilization would very quickly disintegrate into total chaos. If you need to be convinced regarding this basic premise, consider your activities over the past day. Chances are that you made countless implicit decisions to trust other people, whether you realized it at the time or not, and misplaced trust would have produced severely negative consequences.

Did you take the subway to work this morning? You trusted that the dozens of people standing nearby on the platform would not push you from behind onto the tracks. Maybe you stopped for a sandwich at the deli near your office. You trusted that the person who prepared your food practiced basic hygiene and did not sneeze over your food or, even worse, purposely contaminate it, and you trusted that the food supply chain was safe. For something that is about as personal as it gets – food that you ingest into your body. After work, you stopped by the local barber for a haircut and shave. You trusted that the barber had the skill to use that straight blade near your neck, and that he was not a murderous lunatic who would slit your throat.

It would be ridiculous to consider every one of these possibilities in day to day life. Your life would grind to a halt, and your mental state would be in tatters as you see threats lurking around every corner. And if everyone in society felt the same way, the consequences would grow exponentially. We need a certain level of trust in society to function as individuals and for the system to remain intact. A civilization that falls below a certain level of trust will descend into anarchy.

Trust in Society

Relatively small groups of people can form cohesive groups and social hierarchies based on close personal relationships and communication within the group. In his best-selling book, Sapiens: A Brief History of Humankind, Yuval Noah Harari pegs the upper limit of social cohesion based on such personal relationships and “gossip” at approximately 150:

Even today, a critical threshold in human organizations falls somewhere around this magic number [150]. Below this threshold, communities, businesses, social networks and military units can maintain themselves based mainly on intimate acquaintance and rumormongering. There is no need for formal ranks, titles and law books to keep order … But once the threshold of 150 individuals is crossed, things can no longer work that way. You cannot run a division with thousands of soldiers the same way you run a platoon.

SAPIENS: A BRIEF HISTORY OF HUMANKIND, PAGE 27

Harari believes that larger groups are able to function based on what he refers to as the “appearance of fiction”. This is described in more detail in this excerpt from our review of Sapiens:

Fictive language involves the ability to use imagination to describe things that are entirely abstract.  The concept of religion, for example, describes a set of beliefs that cannot be observed by ordinary human beings but, nonetheless, allows humans to form a common set of beliefs and customs.  Without fictive language, it is difficult for groups larger than about 150 individuals to form a cohesive society because they lack the ability to develop “fictions” that bind together larger populations.  The development of the notion of religion and nationality allowed much larger groups of humans to form social bonds.  

Harari’s use of the term “fiction” in the context of religion is unfortunate, but for our purposes we can simply regard what he is saying to mean that society on a large scale requires common value systems in order to properly function. Without these value systems, it would have been impossible to scale society beyond the tribal level. The concepts enshrined in religion and national identity allow individuals to assume a certain set of common beliefs when encountering strangers — to trust that strangers are very likely to behave in certain ways.

The written and unwritten rules of the road, established formally by governments and religions and informally through social conventions and habits, governs how we all interact with each other on a daily basis and what baseline expectations we have. Outside of deeply dysfunctional communities, in the United States most of us assume that those we meet on the street or in casual business contexts are basically honest and mean us no harm. This is why we can wait for a subway train, eat a sandwich, or have our hair cut without suffering a panic attack.

A Moral Imperative

Charlie Munger has often stated that it is a moral imperative to act in a rational manner and for those in charge of important institutions to create systems that promote rational and honest behavior. In other words, those who are entrusted with political and economic power must do their utmost to maintain an environment in which trust continues to exist.

The highest form which civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another.

CHARLIE MUNGER, USC LAW SCHOOL COMMENCEMENT ADDRESS, 2007

Such a seamless web of deserved trust is extremely rare in today’s world but, if attained, can produce tremendous dividends. For most of us, at least for the fortunate among us, a seamless web of deserved trust is reserved for very close family members and friends but not often extended to coworkers or employers.

In Mr. Munger’s case, the seamless web of deserved trust extends into his professional life and sixty year business partnership with Warren Buffett. It is unlikely that a large society can ever approach that level of trust, but we must at least comfortably surpass the threshold needed for society to function reasonably well. At the very least, institutions should avoid creating systems that promote distrust. Perverse systems are much more common than one would expect.

The Cash Register

Consider the case of Eve, a woman who is well liked within her small community, active within her church, and seen as a solid employee and citizen by those in positions of authority. Eve was widowed at an early age, lives with her three pre-teenage children, and works paycheck-to-paycheck as a general manager at local small business. It is early November and Eve suddenly falls ill and is unable to work for several days. Her employer feels too financially insecure to offer any kind of paid leave so this sets Eve back financially. She’s able to cut back on enough spending in November to pay her rent on December 1 but is flat out broke heading into the Christmas season. She’s ashamed that she took a turkey and a few other groceries from the store for Thanksgiving dinner, but that seemed like a minor one-time indiscretion.

Eve’s employer is an elderly man who has owned the small market on Main Street for well over a half century and he has known Eve since she was a child. The business is run on a cash basis and there is no real inventory system in place. Most customers are known to Eve and some of the older folks still run a tab with the store. There are no barcodes on products, there is no scanner, and Eve uses a hand calculator to total up orders, accepts cash, puts it into a drawer, and takes cash out of the drawer to make change. The old man might come into the store every few days to socialize at the counter with old friends but he has long spent most of his days on the front porch of his house on the outskirts of town. Other than Eve, the store has a handful of part time employees who are mostly the grandchildren of the old man’s friends.

It is obvious that this type of scenario is tailor made to create massive temptation on the part of Eve and other employees to steal from the old man. She could steal inventory easily because there is no system in place to track what should be on the shelves. She could steal cash from the drawer. There is no real limit beyond her inherent honesty and, heading into Christmas flat out broke, her willpower gives in and she steals food and enough money to buy presents for her children.

In Charlie Munger’s worldview, the store owner has acted in an immoral manner. He was a man in a position of authority within the community and he failed to establish systems in which virtue and honesty are promoted within his business. Eve was wrong to steal, regardless of her situation, but the old man also had a responsibility as the owner of the business to promote good behavior even if he did not particularly care about the theft. Tempting an otherwise decent person to act immorally is itself immoral.

Obviously, the scenario here is a fantasy in today’s world. Almost no business would be run in such a lax manner. But this was the norm in the late nineteenth century. Temptation was rampant in retail businesses because there were few effective controls to promote trust. This began to change with the invention of the cash register:

The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms.

CHARLIE MUNGER AT U.C. SANTA BARBARA, 2003

Like many other inventions that change the world, the inventor of the cash register was not the man who popularized its use. James Ritty owned a saloon in Dayton, Ohio and suffered a great deal of theft from employees. Facing this “shrinkage” of inventory and outright thefts of cash, Ritty developed a machine that he referred to as an “Incorruptible Cashier” and filed a patent for the invention in 1883. John Patterson was one of the early customers of this new invention and saw the potential more clearly than Ritty. Patterson purchased the patents from Ritty and went on to found National Cash Register which dominated this market for decades to come. By 1915, the cash register was an essential piece of equipment for nearly all retail establishments.

It is obvious that the cash register reduced the temptation to steal from retail businesses, but how did it do so? It increased the perceived cost of theft by increasing the probability that one would be caught. By doing so, it also keeps fundamentally honest people honest by removing the temptation to act immorally in a way that carries little risk of detection. One might wonder how employees reacted to early versions of the cash register. Did they operate in a seamless web of deserved trust if the owner of a business felt a need to introduce this type of technology?

A Seamless Web of Suspicion

Let’s fast forward about a hundred years to the present time, nearly one-fifth of the way through the twenty-first century. Technology has advanced by leaps and bounds which allows for checks and balances that James Ritty and John Patterson could have only dreamed about. Over the past 150 years, we have gone from a world where almost nothing could be monitored without human eyes and ears to a world where literally every movement of every individual can be tracked and recorded. In the context of a private business, video cameras and facial recognition software can be used to track known shoplifters and to serve as evidence in criminal cases. Employees are under constant surveillance as they do their jobs and any kind of theft is far more risky than anything Eve could have contemplated.

For all of its intrusiveness, video cameras and facial recognition are relatively invisible technologies allowing people to go about their daily lives imagining that they are not being closely monitored. However, certain retailers have taken very visible steps to deter theft. For example, Wal-Mart has implemented increasingly drastic security measures recently. Initially, locked shelves for small, high value products such as razor blades were introduced. When one wants an item from a locked shelf, it is necessary to find a store employee to unlock the cabinet. This creates an environment of distrust and inconvenience.

Over time, my local Wal-Mart has added locked shelves for products such as deodorant, bath soap, over-the-counter drugs such as Tylenol, home cleaning products such as laundry detergent, and more. On my latest visit, the underwear section was entirely locked up. These are products that sell for $10-20 and are bulky. It is one thing for someone to steal a $20 packet of small razor blades and quite another to attempt to steal a twelve-pack of briefs or a 100 count bin of Tide Pods.

The seamless web of suspicion continues with very obvious facial recognition and video recording at the self-checkout registers. Wal-Mart has increasingly substituted capital for labor in its stores even in regions where the minimum wage remains at the relatively low Federal floor of $7.25. Customers are now the workers responsible for scanning their own purchases, and you are told that you are being watched and can even see an image of yourself as you check out. The cash registers of 1900 are nothing compared to these technological marvels of the twenty-first century. The final strand in the web of distrust occurs as you are leaving the store where an employee is stationed to inspect your cart and your receipt to detect signs of theft.

When I posted some of these details about my recent Wal-Mart experience on Twitter, I got my share of snarky responses regarding my neighborhood. Granted, this Wal-Mart is not in the best of neighborhoods but it is the closest Wal-Mart to my home and only four miles away. What is interesting is that the Walgreens on my street, in a much better neighborhood, has also started to lock up products in recent months including laundry detergent. The web of distrust seems to be spreading. And it might be bad for business. I would rather order underwear on Amazon than ask an employee at Wal-Mart, if I can even find one, to unlock a shelf. In a low-margin retail business, perhaps the calculation is that shrinkage is so costly that giving up on sales due to customer frustration is an acceptable trade-off.

Where is the Balance?

All of this brings us back to the essential role of trust in a functional society. Is it realistic to ever approach the “seamless web of deserved trust” idealized by Charlie Munger? The cash register was clearly a major advance in human civilization because it promoted virtue and discouraged vice, but what about modern advances in technology? If the cash register of 1919 was a positive impact on society and did not create an environment of distrust, why would the modern equivalent of monitored self-checkout registers be a problem in 2019?

A possible way to think about this question is to acknowledge that new technology almost always causes suspicion when it is introduced. If the old man who owns the market suddenly installs a cash register and inventory system at his store, Eve might think that her employer does not fully trust her. However, in due course, the cash register will become a familiar part of her work life. It also makes her job much easier and this is, in fact, the primary benefit of the technology. In addition to increasing her productivity, the register encourages her to live up to her true nature as an honest person.

Perhaps we can then differentiate between technologies such as background facial recognition and monitoring at self-checkout lanes and steps such as locking up products behind secure shelves. The former might eventually fade into the background and not be seen as an element of distrust. But the latter will never be seen by customers or employees as anything other than a sign that Wal-Mart or Walgreens distrusts those who they do business with. When there is distrust, people begin to question motives such as in the case of a Wal-Mart that locked up products commonly purchased by African-Americans while leaving other products out in the open.

Society should strive for systems that promote trust and keep people honest while avoiding systems that encourage people to think that everyone around them is dishonest. Trust is fragile and when society is full of cues that lead people to believe that no one is to be trusted, this can very well become a self-fulfilling prophesy. Striking the right balance is difficult but essential and the political, business, and community leaders in a society have a moral duty to get it right.

— Charlie Munger, The Psychology of Human Misjudgment

We have all come across people who seem to soak up our time, break our state of flow, and generally act as impediments to getting anything meaningful accomplished. When Charlie Munger gave his now-famous speech regarding psychological misjudgments over a quarter century ago, most of these distractions took place in person or over the telephone. Today, we have infinitely more opportunities for twaddle induced distractions due to our constant state of connectivity.

The number of distractions that can impede serious work has risen exponentially. Achieving anything meaningful in life requires avoiding twaddle as much as possible, both in terms of generating it and being subjected to it. Like most things, this is easier said than done.

How can we avoid twaddle and preserve our state of flow?

Charlie Munger started his professional life as an attorney who made a living billing clients for legal work. The legal profession is known for its focus on producing as many billable hours as possible. If an individual attorney in private practice wishes to increase his or her income, the two levers to do so are to increase the number of hours billed or to increase the hourly rate. At an early age, Mr. Munger grew dissatisfied with the limitations of billing people for his time:

“I had a considerable passion to get rich. Not because I wanted Ferraris — I wanted the independence. I desperately wanted it. I thought it was undignified to have to send invoices to other people. I don’t know where I got that notion from, but I had it.”

— Charlie Munger, The Snowball, pages 226-227

Diligence and hard work as an attorney will eventually lead to a higher hourly rate and more legal work and this will lead to a higher income. However, this type of work has inherent limitations because it depends on a finite resource: the limited hours of an individual human being.

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Having the desire to increase his wealth exponentially, Mr. Munger started a legal practice in which he and his partners employed associate attorneys and he also began investing his capital in real estate ventures. How did he find the time to do this while also continuing to bill clients in order to support his large family?

“Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.”

— Warren Buffett, The Snowball, page 226

The mindset of considering yourself to be your most valuable “client” is incredibly important. It recognizes the fact that the only way in which you can leverage your financial outcome is by not selling all of your time to others. Even more importantly, you cannot allow your most precious resource to be consumed by pointless twaddle that not only does not result in any immediate income but steals your ability to invest your attention toward pursuits that might have exponential outcomes.

Never before has it been easier to be consumed by pointless twaddle, and to mistake twaddle for actual information. The most obvious distractions today stem from our constant connectivity which, by default, is very permissive in allowing twaddle to enter into our lives. Incoming phone calls and texts are classic disrupters of the state of flow and require constant context shifting in which deep thinking is impossible. Nearly every app one installs on a smart phone will send notifications and other interruptions unless we explicitly turn them off. Smart watches and smart speakers are even more intrusive than phones.

We can turn off many sources of twaddle, but do we want to?

If we are going to be honest with ourselves, the truth is that many of us not only enjoy distractions but actively seek out twaddle as often as possible. Twitter is an excellent example of a source of noise that many people actively seek out, compulsively, multiple times every hour. The signal-to-noise ratio on Twitter, particularly on what is known as “fintwit”, is abysmally low unless one carefully limits followed accounts. Even then, what you’re mostly engaged in is the modern day equivalent of water cooler talk. Sure, it is entertaining, there are many links to worthwhile articles, you can communicate with some very smart and interesting people, and sometimes you might get an actual idea, but it’s hard to see most of it as much more than twaddle.

The concept of selling yourself your best hour can begin to counteract the malign effects of being subjected to noise.

That “best hour” will vary from person to person. If, like Charlie Munger, you find that your most productive time of day is in the morning, don’t waste that time reading the newspaper, checking Twitter, or even doing paid work for others. Instead, reserve that time to pursue projects that will add long term value and have the potential to produce exponential gains in your professional and financial life. Ruthlessly eliminate sources of potential noise during this most important hour by not being in the presence of your phone and making yourself totally unavailable to others.

There is much that we can learn from Charlie Munger’s latticework of mental models as well as the psychological framework he created entirely through self-study, observation of human nature, and practical application over a long lifetime. One of the purposes of Mr. Munger’s study of psychology was the realization that understanding irrational and harmful behavior and then doing your best to avoid such behavior can provide an enormous advantage in life.

Over time, dysfunctional behavior will change with technological innovation but human nature will change very slowly, if at all. The internet and connectivity in general has exponentially increased the amount of twaddle we are subjected to. But by creating so many productivity penalties that most people enthusiastically accept, it has also increased the dividends that will accrue to those who can resist the distractions that consume others.

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— Charlie Munger, Poor Charlie’s Almanack

This is not the article that I planned to publish today. Early last week, I came up with an idea for a timely article that I would post after the end of the second quarter. Imagine my surprise when I sat down on Saturday morning to download and review supporting data and found that the underlying assumptions for my article were entirely incorrect! I had fallen for one of the more common errors explained by Charlie Munger in his examination of the psychology of human misjudgment.

Berkshire Hathaway’s repurchase policy has long been a topic of interest in the value investing community due to the ever-increasing pile of cash that Warren Buffett has been unable to deploy. Repurchases have been quite minor in recent quarters since the policy was changed last year. During the recent annual meeting, both Warren Buffett and Charlie Munger reaffirmed that Berkshire could indeed make meaningful repurchases at prices judged to be well below intrinsic value. The significant drop in Berkshire shares in the weeks following the annual meeting led me to believe that the prospects for major repurchases had increased and that repurchase activity for Q2 was likely to be higher than in Q1.

Berkshire’s Class B shares closed at $218.60 on May 3, 2019, the day before the annual meeting, which represented the highest level for the stock since before the December 2018 stock market swoon. Following the meeting, the stock began a month-long decline taking the price down nearly 10 percent by May 31 when it closed at $197.42. The shares subsequently recovered most of the decline during June ending the quarter at $213.17.

Why present a paragraph covering the wiggles in the stock price over the span of a couple of months? Long term owners of businesses should not really care about short term stock price movements or even follow them closely. However, I was watching the price of Berkshire stock during the May stock market decline and the days immediately following the annual meeting were most available in my mind over the past several weeks. This led me to the incorrect assumption that opportunities for repurchase in the second quarter were greater than during the first quarter.

Daniel Kahneman, in his brilliant book, Thinking, Fast and Slow, explains that the ease with which events come to mind heavily influences our cognitive abilities and increases the risk of poor judgment:

The availability heuristic, like other heuristics of judgment, substitutes one question for another: you wish to estimate the size of a category or the frequency of an event, but you report an impression of the ease with which instances come to mind. Substitution of questions inevitably produces systematic errors.

THINKING, FAST AND SLOW, P. 130

The following exhibit from Berkshire’s first quarter report shows that the company spent $1.69 billion to repurchase Class A and Class B common stock during the quarter:

We can see that repurchases for the quarter commenced on February 26 when shares closed at $201.90 and continued through the last trading day of the quarter on March 29 when shares closed at $200.89. Additionally, Berkshire’s disclosure in the 10-Q of the total share count as of April 25 suggests that modest repurchases continued into April as shares began to rise. The size of the repurchase from April 1 to 25 appears to be approximately 157 Class A share equivalents, and it seems likely that those shares were purchased early in April and that repurchase activity then halted as shares continued to rise.

The following charts (click to enlarge) show trading activity for Berkshire’s Class A and Class B common stock for the first half of 2019:

We can see immediately that the decline in Berkshire shares in May only brought the stock back to levels that were far more common during the first quarter. If we assume that repurchases are probable in significant size under $205 per Class B share, there were 26 trading days between May 1 and June 30 when shares traded below that level at some point during the day. In contrast, there were 56 trading days during the first quarter when shares traded below $205.

We have no way of knowing what Warren Buffett’s current upper limit might be for share repurchases. We can only deduce what he is likely to do based on very recent history, which in this case leads us to look at his pattern of repurchases during the first quarter. It is notable that Berkshire repurchased shares at average prices in excess of $205 during the third and fourth quarters of 2018. Repurchase activity is going to depend on a number of factors including Mr. Buffett’s assessment of the current stock price relative to intrinsic value, which moves upward slowly over time, as well as alternate uses of cash.

The main point of this article isn’t to speculate on the magnitude of repurchases at Berkshire during the second quarter, although that would have been the intent of the original article I had planned to write based on my incorrect “gut feeling” about the May stock price decline. Instead, it serves to remind us that we can be our own worst enemy when it comes to falling victim to cognitive biases, even when we are fully aware of what those biases are and how they have impacted other people. Reading Kahneman and Munger and understanding how these biases work does not confer any sort of immunity on us as human beings. We have to continue to be vigilant to ensure that we are making decisions rationally rather than falling back on lazy heuristics.

It is also worth noting that those who focus too much on current events are at increased risk of falling for the availability-misweighing tendency. The concept of via negativa, or wisdom through subtraction, applies here. Focusing less on current news (and stock market quotations) and more on subjects of enduring value can insulate us against weighing events of the recent past too heavily. Although I refrain from actually updating the quotations in my investment tracking spreadsheets very often, I do follow market activity every day reasoning that my overriding philosophy will prevent me from reacting rashly to short term news. In this case, my misjudgment only resulted in planning to write an article that wasn’t supported by facts. However, the outcome could be much worse if it involved an actual investment decision. I don’t think that I would make a stupid investment decision based on rash judgments precipitated by short terms news. But am I certain? Perhaps a lower information diet shunning day to day market news is in order.

Disclosure: Individuals association with The Rational Walk LLC own shares of Berkshire Hathaway.

Note to readers: This article is part of a series on Charlie Munger’s Psychology of Human Misjudgment.

How many times have we heard people express this frustration? For many of us, it seems like there are never enough hours in the day to accomplish all that we set out to do. The day starts off in a mad rush, proceeds through a blur of activity, and ends with a sense of dissatisfaction regarding what has actually been accomplished. Then we repeat the same process the next day, a week goes by in a blur, then a month, and then a year. How is it possible to be so busy but not achieve much at all and remain dissatisfied and pressured to always “do more”?

We might think that these problems are primarily a function of modernity and advances in technology but people have been struggling with how to best use their time for millennia. Seneca’s essay, On the Shortness of Life, was written around 49 AD, nearly two thousand years ago, yet many passages make it clear that humans suffered from precisely the same problems regarding how to effectively allocate their time.

Despite talk today of potential immortality being achievable in the not-so-distant future, for now human life is still limited to several decades with very few of us living more than a century. Human beings are probably the only species that fully understands that our earthly existence will one day end, yet Seneca points out that we do not translate this knowledge into how we live our day-to-day lives:

“You are living as if destined to live forever; your own frailty never occurs to you; you don’t notice how much time has already passed, but squander it as though you had a full and overflowing supply — though all the while that very day which you are devoting to somebody or something may be your last.”

SENECA, “ON THE SHORTNESS OF LIFE”

Seneca urges people to be as vigilant in guarding their time as they are when it comes to protecting their personal property because time is truly the one resource that is limited for everyone. There are great disparities in human talent, wealth, and income in the world but there are no exceptions, so far, when it comes to our ultimate mortality. Jeff Bezos has orders of magnitude more wealth than anyone reading these words, yet his ultimate fate a century from now is the same as for all of us. But despite the inherent limitations of our lifespan, Seneca says that “life is long if you know how to use it.”

Seneca is saying that we should strive to achieve a “state of flow” rather than being tied up in an endless treadmill of engaging in activity for the sake of activity, or being mindlessly “busy”.

“A flow state, also known colloquially as being in the zone, is the mental state of operation in which a person performing an activity is fully immersed in a feeling of energized focus, full involvement, and enjoyment in the process of the activity. In essence, flow is characterized by complete absorption in what one does, and a resulting loss in one’s sense of space and time.”

WIKIPEDIA

One of the ironies of achieving a flow state is that, just like the unfortunate person spinning his wheels on useless activity, it feels like the hours have flown by. However, the sense of satisfaction at the end of the process is far greater for those occupied in tasks conducive to the state of flow.

The question becomes how one can structure life in a way that results in more time in a flow state and less on useless and forgettable tasks. Clearly, the way to accomplish this is to actively remove things that are keeping us busy but achieve no useful results, an approach also known as via negativa. This is far easier said than done for people who are stuck in employment that seems to require all kinds of busy work and pointless activities such as excessive meetings, endless email, and having to maintain “face time” for purposes of career advancement.

“Many pursue no fixed goal, but are tossed about in ever-changing designs by a fickleness which is shifting, inconsistent, and never satisfied with itself.”

SENECA, “ON THE SHORTNESS OF LIFE”

Achieving a state of flow might seem like an impossible task for those who feel “stuck” in routines that make focused concentration all but impossible. The problems have become far worse in recent decades due to the increasing prevalence of technology in our lives. As a college student in the early 1990s, there were certainly opportunities to get distracted from immersion in studies, but those distractions were primarily in the physical world. With some discipline, it was still possible to disappear into the library and focus on specific topics for hours at a time, free of distraction. Cell phones were not common and “going online” was something to do for brief periods of time and only possible on a computer attached to a physical network.

Contrast the experience of the early 1990s with the temptations facing everyone today. We now are connected on a 24/7 basis by default unless we take unusual steps to isolate ourselves, and even worse, it is considered unusual or eccentric to put oneself out of reach for more than brief periods of time. We are, for the most part, “expected” to be reachable all the time in our professional and personal lives.

Electronic devices are a constant cause of context switching. Context switching is the exact opposite of the state of flow that we should aspire to. In computer science, context switching refers to switching the task of working on one process to move on to another one. One process is stored in memory, the computer switches to the other process, and then eventually it may come back to the original one. Context switching has a cost in computing. The system has to store one process in memory, switch to another one, and then reload the original process when it goes back to it. However, the cost of context switching to a computer is nothing compared to the cost of switching contexts for human beings.

When we are engaged in any task requiring in depth thinking, whether it involves reading an annual report or preparing a presentation, any chance of being in a state of flow is destroyed when we allow interruptions. Unlike computers, the cost of context switching for human beings goes far beyond the need to store one thought process in our memory, switch quickly to another, and then immediately restore our prior state of mind. In fact, this is impossible to do. A context switch breaks the state of flow.

How many times have you been in a state of flow when your cell phone makes some sort of noise – whether a text message, a phone call, notification of a new email, or countless other interruptions? Human beings are naturally curious and the temptation to check the device is overwhelming when there is any kind of notification. So, you interrupt your state of flow to check what’s happening on your phone. Maybe it was an email. But it doesn’t end there. Now that you are interacting with your phone, maybe the email requires some further action. Or, if not, maybe it is too tempting to see how many “likes” your latest Twitter post generated. Or perhaps check in on Facebook to see how outraged your virtual friends are regarding various political issues.

Just as a large amount of information does not translate into wisdom, frenzied activity and context switching does not lead to productivity or happiness. Instead, it leads to a sense of time slipping away. The state of flow also leads to a sense of time passing quickly, but in a positive way. If you come back from lunch and sit down to a state of flow, you might look up at the clock and find that it is time to go home. Time has flown by, but in a way that might have increased your wisdom or achieved some level of productivity.

When people wish for a “long life”, few wish to be bored and watch the days, months, and years slowly pass by. That’s not the kind of “long life” people aspire to achieve. Instead, humans wish for a sense of satisfaction, or a sense of a life well-lived. This desire has existed for millennia, but has become more difficult to achieve with technology that simultaneously gives up the opportunity to access a wealth of information but also tempts most of us to waste a great deal of time.

Seneca’s prescription is clear: we need to disconnect and pursue a state of flow, even if doing so is unconventional or frowned upon by others.

If reading one newspaper is a good idea, perhaps adding a second or third will generate further enlightenment.  If a tidbit or two of information can be found on Facebook, then maybe adding Twitter, LinkedIn, or other social networks will reveal additional tidbits. There are always numerous new books, many of which should have instead been a series of blog posts, purporting to solve complicated problems by adopting new ways to achieve some seemingly important objective.  

The problem is that in our modern world, the noise can become overwhelming and any relevant signals can easily be lost in the cacophony.  Look around in any public setting and you will see people glued to their smart phones consuming “information”, some even while driving their cars or walking across busy intersections completely oblivious to the real world surrounding them.

Bill Gates has long been known to take semi-annual retreats where he goes into seclusion for seven days in order to ponder various topics.  These retreats, which he characterizes as “think weeks”, were originally intended to consider Microsoft’s future but most likely have taken a broader view as Mr. Gates turned his attention toward philanthropy in recent years.  Removing oneself from the noise of day to day life is sometimes a pre-requisite for gaining insights.  In some cases, it is a requirement.

Inspired by the concept of a “think week”, I recently decided to disconnect for a few days with the goal of reading books, limiting consumption of news, completely eliminating consumption of and participation in “social media”, and giving myself the space to … think about various topics.

The silence was overwhelming.

Less Is Much More 

The concept of subtractive knowledge is discussed in quite a bit of detail in Nassim Nicholas Taleb’s Antifragile, one of the books in the Incerto series.  In life, understanding what to avoid is more important than constantly searching for positive advice to do something new. This is expressed well in the following brief excerpt:

“So the central tenet of the epistemology I advocate is as follows: we know a lot more what is wrong than what is right, or, phrased according to the fragile/robust classification, negative knowledge (what is wrong, what does not work) is more robust to error than positive knowledge (what is right, what works).  So knowledge grows by subtraction much more than by addition — given that what we know today might turn out to be wrong but what we know to be wrong cannot turn out to be right, at least not easily.  If I spot a black swan (not capitalized), I can be quite certain that the statement “all swans are white” is wrong.  But even if I have never seen a black swan, I can never hold such a statement to be true.”

Translated into the concept of a “think week”, the first and most obvious benefit was surprisingly not the content in the books I had selected to read but in the absence of the noise and useless chatter of everyday life that I left behind.  I did not completely avoid the news but strictly limited my news diet to thirty minutes right after waking up in the morning and I did not return to any form of news until late in the day.  

I banned all forms of social media, turned off the ringer on my phone, and responded only to personal correspondence.  Doing this was equivalent to a fog lifting and facilitated the ability to think.  Therefore, without even turning the page of the first book I had selected, I had gained mental bandwidth by subtraction of “news” and chatter — Via Negativa.

Social Media and Emerging Events

Anyone who has been active on social media knows that reasoned discussion is rare and meaningless chatter is the norm.  On Twitter, in particular, the vast majority of “fintwit” participants are looking for actionable information that they can trade on … immediately.  Others are there for nefarious reasons such as hyping a company that they are long or attacking a company that they are short. The majority of accounts seem to be anonymous which could be understandable if they are not financially independent and rely on the benevolence of an employer who they are afraid of offending.  In general, it is best to judge these accounts based on the quality of their content rather than their anonymity, but if one chooses to not be anonymous yet interact with anonymous accounts, an important asymmetry exists in which one side is accountable for their actions while the other is not.

The following example is not related to investments but perfectly illustrates the group think and noise prevalent on the internet in general and social media in particular.

On April 4, 2017 reports of a chemical weapons attack on the town of Khan Shaykhun in Syria horrified anyone with access to the internet who observed the pictures of dead and dying civilians, many of whom were innocent children.  In the hours immediately after the attack, before any facts were known regarding the situation, it quickly became apparent that it was not permissible to even ask the following basic questions regarding the attack:

1. Are we sure that Syrian dictator Bashar Assad ordered and oversaw the attack?

2. Did Assad have an incentive to order such an attack?

3. Is it possible that one or more of the rebel groups executed a “false flag” operation intended to frame the Assad regime and generate a U.S. response?

4. Did Assad lose control of his military chain of command – was the attack unauthorized?

5. Are we sure that Russia was involved?  What are the motives/incentives?

The only permissible opinion, both in “polite company” as well as the noise of the internet was to unequivocally declare that Assad ordered and oversaw the attack.  Anyone who dared to even ask the additional questions above was immediately branded an Assad regime apologist or, more commonly, a stooge of Russian President Vladimir Putin, an ally of the Assad regime.

Three days later, on April 7, the Trump Administration launched 59 cruise missiles in an attack on the Shayrat Air Base where the administration believed planes took off to execute the attack on Khan Shaykhun.  Yet the attacks failed to halt the use of the base for Syrian flights which resumed shortly after the attack.  Asking any of the following questions was deemed to be not only politically incorrect but disloyal:

1. What was the goal of the operation and was it fulfilled if the air base was again being used for Syrian flights shortly after the attack?

2. Were the benefits of attacking an air base with Russian troops present outweighed by the benefits of the attack – and, if so, please name the benefits.

3. What U.S. interests were involved and why was Congress not asked to authorize the attack?

4. What is the evidence that further chemical attacks will now be thwarted, whether by the Syrian regime or by rebel forces?

5. What makes us confident in current intelligence reports given prior intelligence reports stating that 100% of chemical weapons were removed from Syria?

On April 11, four days after the missile attacks on the Shayrat Air Base, the Trump Administration released declassified information that supports the decision to attack.  The declassified report, drawing on information provided by the military and intelligence services, appears to answer some of the questions posed above.

Silencing the Jackals

There is a certain asymmetry that one must understand on social media – if one is not anonymous and chooses to interact with those hiding behind a cloak of anonymity, prepare for relentless attack if you have several thousand followers and have expressed a non-consensus view – whether it is about a particular investment or the wisdom of engaging in warfare.

What is clear is that social media, despite claims to the contrary, does not add to the discussion during times when news is breaking and the facts are foggy, at best.  There might be some exceptions when it comes to verifiable eyewitnesses, but the commentary from observers removed from the action is of very little value.  Removing such information actually adds to knowledge by eliminating mental pollution.  

One of the common sentiments on Twitter, in response to posts where some of these questions on Syria were asked, was to inform me that I should “stick to my topic” – presumably meaning investing.  But who other than the individual gets to decide what “his topic” should be, particularly when we are talking about a free website?

Nassim Taleb came up with the concept of “F*** You Money”, which in other words means that an individual has the financial freedom to say goodbye to his employer, if warranted.  Much the same, when it comes to social media, one has the right to say “F*** You” to those who would even suggest that one should “stick to” some predefined topic that they approve of.  In the case of social media, that means an unconditional policy of blocking any and all such “critics”, to say nothing of the many who would threaten or engage in personal attacks with knowledge of my identity.

Taking the Best, Discarding the Worst

Why does anyone choose to engage with others on social media, particularly strangers, and particularly when there is an asymmetry created by not being anonymous in a sea of anonymity?  Self interest should be the main guiding light.  Disagreements on principle or concepts, as long as they are informed, should be sought out because by doing so we can counteract tendencies to become wedded to our prior beliefs.  

Testing ideas can also be beneficial, although I am highly skeptical of the wisdom of widely sharing investment ideas, particularly because of the negative psychological effects this can cause.  But any form of unethical or intellectually devoid discussion, particularly straw man arguments (“You don’t care about the children who were gassed!”, “You must be short that stock”, “You should be running a 7/11 or a Comfort Inn”, “You are a stooge of Putin”, “You must hate puppies”) should immediately result in blocking the individual, no warnings given.

Via Negativa is a good way to view life in general and it seems to have special applicability when it comes to “information” that we are inundated with on a daily basis.  Little additional insight seems to occur when spending two hours with newspapers compared to fifteen to thirty minutes (at the most).  Hardly any loss occurs when eliminating social media interactions entirely.  Turning off the cell phone and taking a walk while actually observing the world is more conductive to thinking about a topic, in some depth, than being constantly connected.  Removing bad elements from your life can be far more conducive to acquisition of wisdom than adding something new.

This is not to say that the acquisition of worldly wisdom is not important.  It is vitally important, particularly to venture beyond one’s narrow discipline in order to acquire the best knowledge from other fields.  However, Via Negativa applies when venturing into new territory as well.  Taking the best from the field, preferably focusing on old sources that have stood the test of time, is preferable to reading blog posts or new bestsellers in the field.

Lest we skip an obvious point, only the reader can decide whether this article in particular or the website in general is additive to his or her knowledge.  It is perfectly possible that this content is a net negative – “information” that is not helpful and should be eliminated from your information diet.

The challenge comes when making decisions where mistakes result in serious negative consequences. Most people have enough common sense to at least pause when making decisions involving important business or personal matters. However, when we pause, we may not be directing our attention in ways that necessarily reduce risk or improve outcomes. Many decisions of great magnitude are made without any real analytical rigor, relying instead on “gut feelings” and other emotional shortcuts. How many investors, for example, prepare detailed financial models, read company filings, listen to management presentations, and take the other standard steps only to make the final buy or sell decision based on instinct? And, let’s be honest, making important decisions of a personal nature based on instinct alone is even more common.

Charlie Munger always had a strong interest in the study of standard thinking errors associated with human misjudgment, yet he found that his time in academia failed to provide adequate knowledge of the practical application of human psychology in everyday life. As is the case with many professional disciplines, psychologists tended to operate in silos populated by other psychologists rather than in consultation with individuals from multiple disciplines. Furthermore, other disciplines, such as economics, were taught without much regard for psychology. In a series of talks, Mr. Munger outlined his framework of human misjudgment which was later significantly expanded in written form as a chapter in Poor Charlie’s Almanack.

Given the failure of academia to provide a coherent framework, Charlie Munger began his law practice surrounded by “much extreme irrationality, displayed in patterns and sub-patterns.”:

So surrounded, I could see that I was not going to cope as well as I wished with life unless I could acquire a better theory-structure on which to hang my observations and experiences. By then, my craving for more theory had a long history. Partly, I had always loved theory as an aid in puzzle solving and as a means of satisfying my monkey-like curiosity. And, partly, I had found that theory-structure was a superpower in helping one get what one wanted, as I had early discovered in school wherein I had excelled without labor, guided by theory, while many others, without master of theory, failed despite monstrous effort. Better theory, I thought, had always worked for me and, if now available, could make me acquire capital and independence faster and better assist everything I loved. And so I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin and with the determination displayed in the refrain of the nursery story: “‘Then I’ll do it myself,’ said the little red hen.”

At the outset, Mr. Munger made two unconventional decisions regarding how he would construct his system. First, he did not attempt to study instances of good judgment but rather focused on cases of bad judgment. Most people seeking to achieve a certain outcome would naturally look to others who had succeeded rather than those who have failed. However, by inverting and looking at causes of human misjudgment and then attempting to avoid those pitfalls, one has the potential to get on the path to success. Second, Mr. Munger made no attempt to restrict his system to the field of academic psychology, instead opting to pay no attention to which academic discipline a concept belonged to. By using a multi-disciplinary approach, it is possible to take the best that individual disciplines have to offer and meld them into a coherent overall system.

Charlie Munger began his law practice in the 1950s and his type of multi-disciplinary thinking was uncommon, to say the least. In recent decades, much more progress has been made in understanding the practical implications of human psychology with perhaps the most important work being Daniel Kahneman’s Thinking, Fast and Slow. Mr. Munger credits Robert Cialdini’s Influence: The Psychology of Persuasion with bringing many of the principles of academic psychology to a popular audience and inspiring him to make a more formal study of psychology textbooks. The combination of Mr. Munger’s early thinking on human misjudgment coupled with his study of psychology decades later resulted in a fully developed set of psychological tendencies associated with human misjudgment.

Of course, these are tendencies that we want to avoid, or at least be conscious of and control, when making decisions but most of us will identify many that have negatively impacted our prior decisions. A case can be made to go through the list of tendencies prior to making any major professional or personal decision to ensure that one is not falling into these traps.

Each of the twenty-five tendencies listed below deserve separate consideration and we plan to look at several of them in the coming months. When one of the tendencies is covered in a separate article, a link will appear in the list below. In the meantime, we highly recommend buying and reading Poor Charlie’s Almanack since the subject matter that is covered goes far beyond the chapter on human misjudgment.

1. Reward and Punishment Superresponse Tendency

2. Liking/Loving Tendency

3. Disliking/Hating Tendency

4. Doubt-Avoidance Tendency

5. Inconsistency-Avoidance Tendency

6. Curiosity Tendency

7. Kantian Fairness Tendency

8. Envy/Jealousy Tendency

9. Reciprocation Tendency

10. Influence-from-Mere-Association Tendency

11. Simple, Pain-Avoiding Psychological Denial

12. Excessive Self-Regard Tendency

13. Overoptimism Tendency

14. Deprival-Superreaction Tendency

15. Social-Proof Tendency

16. Contrast-Misreaction Tendency

17. Stress-Influence Tendency

18. Availability-Misweighing Tendency

19. Use-It-or-Lose-It Tendency

20. Drug-Misinfluence Tendency

21. Senescence-Misinfluence Tendency

22. Authority-Misinfluence Tendency

23. Twaddle Tendency

24. Reason-Respecting Tendency

25. Lollapalooza Tendency