At Marcellus, we are obsessed about the concept of compounding. Our purpose is to help our clients fulfil their financial goals by delivering healthy long term returns on their savings with our flagship “Consistent Compounders” investment strategy. Compounding returns is driven by compounding in earnings which in turn is driven by the compounded effects of several things the company does to build competitive advantages or moats around itself. In what is Farnam Street’s best piece of 2019, this article extends the concept of compounding to knowledge, citing the example of Warren Buffett whose voracious reading habits, the type of information consumed and the resulting ability to connect the dots and draw meaningful insights have helped him succeed enormously in the world of investing.
Voracious reading: “Alice Schroeder, the author of Warren Buffett’s authorized biography The Snowball, tells the story of getting into Buffet’s thinking in this informative talk. In her words,
Starting [at a young age] he’s read everything that he could find about business. The subject that interests him, he’s read newspapers, biographies, trade press. He went over to his grandfather who was a grocer and he read the progressive grocer magazine, and he read articles on how to stock a meat department. He’s gone to visit every company that he could find that was even slightly interesting to him, he went down to visit a barrel maker and spent hours talking about how to make barrels. He went to American Express, and he spent hours talking about that business, he went to GEICO and learned about the insurance business. He has stacks of reports on his desk from the companies he owns, pig stalls, jewelry, boat winches, everything you can imagine. He reads hundreds of annual reports every year from companies that he doesn’t own yet, because he just wants to understand their businesses, and then when the opportunity arises, then he’s ready and he can make a decision. What he’s really done is he’s created this immense vertical filing cabinet in his brain of layers and layers and layers of files of information that he can draw back on now for more than 70 years worth of data.”
Information with long shelf life: “A lot of us are on the treadmill of consuming expiring information. Not Buffett. He filled his mental filing cabinet with information that had a long half-life. While most of us focus on consuming information that we won’t care about next month, let alone next year, Buffett focused on knowledge and companies that change very, very slowly or not at all. And because the information he was learning changed slowly he could compound his knowledge over time. And as Schroeder notes, Buffett has been in business for a long time, giving him incredible opportunities to create a cumulative base of knowledge.”
Matching patterns: “Buffett insists on doing his own thinking and vacuums up the details. When we don’t think for ourselves it’s easy to put the blame on someone else, to “pass the buck” so to speak. When we consume information that doesn’t expire or expires slowly; is very detailed; and we spend time thinking about it not passing the buck, we can match patterns. This is how you learn to see what other people are missing. The longer you do this, the more advantage you get.
Most of us use a computer to store information so that we can retrieve it when we need it. We’ve organized our knowledge around a computer. Not Buffett.
The biggest thing he’s done is to learn and create this cumulative base of knowledge in his head. One reason that he doesn’t use a computer is that in a sense, he is one. He also needs a computer to get…he uses it for news. He wants to know what’s going on in the world. So he is on the internet a lot to get news reports, and he’s up late at night seeing what’s going on. He doesn’t use it as a filing cabinet or for computation.
Just like the rest of us, Buffett’s dependent on information and knowledge to make great decisions. Unlike most of us, he has a great memory—perhaps because he’s not trying to outsource his memory or thinking to others.”