Last weekend was Berkshire Hathaway’s annual shareholder meeting in Omaha, which is now turned into a Tomorrowland of sorts for investing geeks from all over the world who turn up in thousands to listen to the two grand old men of investing Warren Buffett and Charlie Munger, the company’s Chairman and Vice-Chairman respectively. So, this week we feature a long and short each on the legends. The long piece here, a powerful one by Tom Morgan of Sapient Capital, tries to bust a myth of sorts about first principles and mental models:
“Like most people, I was told that thinking from first principles is the way you understand anything. Rules come first. But CFT argues that “ill-structured” domains like investing are so variable that there are rarely any consistent first principles that apply to every situation. Reality is simply too messy. Instead, the right approach is to consume a vast number of case studies, in order to understand all the various ways principles may appear in the real world.
This approach is somewhat at odds with the blogs, threads, listicles and books that are focused on revealing the “10 universal principles of success.” Sure, these may exist, but they’re useless without understanding how to apply the principles- especially given the way the principles show up are always different. It’s about understanding the power of context. This is why you can’t get as rich as Warren and Charlie by following rules. Intelligence can quote Warren and Charlie, chapter and verse, but wisdom might actually help reproduce their results.
Cedric tells us that true experts tend to do two things:
1. They construct temporary schemas by combining FRAGMENTS of prior cases.
2. They have something called an ‘adaptive worldview’, which means they do NOT think there is one root cause or framework or model for any event.
Put simply- their “openness” gives them a powerful intuitive database to draw from.
One of my friends is an experienced heart doctor. He told me that the single most predictive factor in whether a patient was going to go into cardiac arrest was the subjective assessment of a veteran nurse. But the nurse could never isolate one single factor, it was an intuitive sense of the patient’s entire demeanor, their whole self. She was “combining fragments” of prior cases by noticing an endlessly variable combination of potential signals.
…What an adaptive worldview means is that whenever you learn a new concept in an ill-structured domain, you know not to oversimplify — that is, to represent it as a single principle or concept. You do not try to reduce. You instead know to search for new, different cases in order to collect a cluster of prototypes in your head, and let that cluster inform your understanding of the concept. If you encounter a new case, you update the concept, because the concept is only useful when you know how it is instantiated in reality.
…Experts consume a wealth of case studies, stories and history, but not only to create hard-and-fast rules. They also do it to build a massive database for their intuition. Each new situation is an opportunity to update the model, rather than something to be overfitted to a stale one. One way to think of it is that reality is so variable and complex that you don’t always know which part of which story will be useful in advance.
….Frederik Gieschen exploded the myth of Buffet as some kind of reclusive reading machine. He utilized a vast network and spent a huge amount of time in face-to-face meetings building an intuitive feel for the real world.
What is subtly profound to me is the idea that experts literally experience a different world within their specialism, especially in embodied reality. As Matthew B. Crawford writes in his tremendous book The World Beyond Your Head:
It follows that when we become skilled in some particular domain, we begin to see and feel things we otherwise wouldn’t see or feel. The world acquires new “affordances” that guide us in what amounts to a new ecological niche that we have begun to inhabit. This new ecological niche is a new space for action.
As you become more fitted into your niche, your area of expertise, it discloses more information back to you. An elite martial artist squaring off in a bar fight will instantly notice the balance of his opponent, striking distance and potential weapons nearby. This gives him more options for action. He literally inhabits a richer world, and this makes him more powerful than an average person. He quite literally “sees through the matrix.” When it comes to understanding the connection between “openness” and wisdom, the expert is more open to the world, and the world is more open to him.
So when Charlie Munger “reasons by analogy” he’s reaching back into his case studies to find a relevant comparison to the current situation. By extracting and recombining multiple pertinent details (what Cedric calls “fragments”), he might literally be seeing a pattern nobody else can see, which is why he can invest in a totally differentiated way. Like the cardiac nurse, he’s observing the entire whole, rather than applying a single concept to the situation.
The apex of wisdom is a sage. His disciplined usage of his attention has helped him become flexible, because he can literally see more and act decisively with less effort. But his domain isn’t limited to stock markets, a tennis court or a chessboard. He sees the whole world that way, and he is more powerful within it. It’s why sages are associated with miracles of congruence like snapping one’s fingers to make a thunderstorm appear. They have harmonized with deep reality and act from within it, rather than the modern man who too often tries to rigidly impose his rules from without.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
