A Weekend in Omaha 2016

"'Strong Opinions, Weakly Held' Is The Most Useful Phrase In Investing"

Microsoft’s Tren Griffin on what makes Charlie Munger’s investment strategy work and why direct investing is not for everyone

Published 8 years ago on Jun 29, 2016 11 minutes Read

Tren Griffin loves to read. He wakes up, reads, then reads some more and when he is tired of reading, reads even more. When he is not reading, he is busy writing. Writing his blog 25iq every Saturday, with the title “A dozen things I learned from…”, about various business and investing personalities is almost like a religion, says Griffin, who works on strategy for Microsoft and was earlier a partner at Eagle River, a private equity firm established by Craig McCaw. His blog posts are all about business models, investing, technology and other aspects of life. Given his love for reading and writing, Griffin not only envies journalists for their interesting life but says journalism is as important a public good as public health or defence, adding that it needs to be supported with philanthropic capital. Griffin has authored six books, of which the most famous is on Charlie Munger, titled, The Complete Investor. About his next book, Griffin says, “It will be a distillation of what I have learnt. It will be more like my blog. There I am more me whereas in the Munger book, I had to put down what Charlie would do.” Having caught up with Griffin, we realised that his spontaneity and candor exceed the generosity of his blog posts.

>>> You are a voracious reader. How do you manage to read and write so much about business and investing?

I have been doing this for 30 years. When I am tired of reading, I like to relax by reading! I just change the topic. I know the idea seems weird but it works for me. Because the more I read, the more I know. The more I know, the more I don’t know. It makes me humble. Charlie Munger says he wanted to get rich not because he needed a lot of things, but so that he could have the freedom to do whatever he wanted. He too spends his maximum time reading. 

Coming to writing, it is an art. I write my blog every Saturday, about 4,000-5,000 words — it’s cathartic. My goal is that even a plumber should be able to understand my writing. Words on paper is nothing short of magic. Warren Buffett says if you can’t write it down, you haven’t thought it through. By writing, you know what you understand and what you don’t understand. 

>>> What’s your favourite “A dozen things I learnt…” post? You had mentioned Nassim Taleb once…

Taleb is such a force of nature. When I wrote it, I was thinking he is going to explode, saying you don’t know anything about my ideas! I was terrified! I learnt the most from that Taleb post. He is so intense that people have intense emotions about him. And even though he is controversial, there is value there. 

You can learn something from everyone, sometimes it can be how to not do things. Some people come with some fundamentally new ideas — Jeff Bezos, Bill Gates, Steve Jobs, Nassim Taleb, they all have fundamentally new ideas. You can learn a lot from such people. In the world of investing, Howard Marks, I think is the logical successor to Charlie Munger. 

>>> You have met and written about so many investors. Are there any common traits they share? 

I have never met a really good investor who was not curious. I have never met a great investor who knows only about a small range of life. I have met several great businessmen, who are amazing, but it’s not rare to find people who know only about their business and very little outside of that. Munger says he has never met anybody who is wise but isn’t reading all the time. 

To get through academia, you don’t need any common sense. Judgement is not something you can get better at. Some people fundamentally have bad judgement. Great investors have good judgement and control over emotions. It’s partly nature, partly nurture. 

>>> Is there anything about Charlie Munger that came as a surprise to you when you wrote the book? 

Nothing really, because I had been writing it in my head for 20 years. 

>>> The story of See’s Candies and Munger’s philosophy of buying quality is commonly known. Is there any aspect of Munger’s investing style that is underappreciated or less known?

The one aspect of Munger’s style that is least appreciated and hardest to understand is the use of “worldly wisdom.” Unless careful attention is devoted to the decision-making processes, the brain can be a mistake-making machine. Munger says: “It is remarkable how much long-term advantage people have gotten by trying to be consistently ‘not stupid’, instead of trying to be very intelligent.” One way to “be less stupid” is to adopt what Munger calls a “lattice of mental models”. He believes that by using a range of different “models” from different disciplines such as psychology, history, mathematics, physics, biology and economics, better decisions can be made by making fewer mistakes. 

Munger illustrates this idea by pointing out that many professionals often think about their own discipline. They think that whatever they do for a living will cure all problems.  A nutritionist may feel he/she can cure anything. Munger calls this the “man with a hammer” syndrome since to such a person “everything looks like a nail” even though it may not be a nail. He often says that someone who is really smart but has devoted all their time to being an expert in a narrow area may actually be dangerous to themselves and others. Marketing experts think that everything can be solved via that discipline. Financiers have similar tendencies. Too many people believe what they do at work is hard and what others do is easy.

>>> What makes Charlie Munger’s investment strategy work? Can you explain the contours of his strategy?

Munger uses a two-part approach to make investment decisions. He first asks: What are the factors that really govern the interests involved. Second, what are the influences where the brain at a subconscious level is automatically forming conclusions that may be dysfunctional or incorrect? 

Munger’s style is to first assemble all the relevant facts and then apply a rational process to analyse those facts. To increase the probability that the process is actually rational, Munger applies multiple models from various disciplines, looking for potential problems that may cause human misjudgment. It is in effect a form of “double/multiple check” on the investing process.  He believes that by going over your decision making process carefully using these additional “filters” you can more consistently “not be stupid”.  You will always make some bone-headed mistakes even if you are careful, but Munger’s process is designed to decrease the probability of mistakes.

>>> Can you illustrate with some examples Munger’s ‘mental models’ approach? Is there a systematic way in which one can train oneself in this direction? 

Read widely and be curious. Think for yourself and be open to new ideas. Use many models from many disciplines when thinking about a problem. For example, when thinking about an economy or a business, Munger suggests it is useful to apply models from biology.  One particularly important phenomenon related to mental models is what are called “complex adaptive systems.”

If you adopt the model of complex adaptive systems, you accept the idea that the whole of many things is more than the sum of the arts, and that there are many systems that cannot be modeled with certainty. Even after the fact, causation is impossible to prove with certainty when it comes to this phenomenon. Once you accept the idea that some things are simply not predictable, your world view changes. In Munger’s view, it is better to have common sense and be “worldly wise” than use a lot of models that are precisely wrong rather than approximately right. This is in part why Munger says: “People calculate too much and think too little.”

You don’t need to know every mental model or even know them all deeply to make better decisions, but you do need to understand how most of them work at a basic level at least. It is also important that you read often and broadly, especially since these models do change and are updated over time. The goal is to acquire wisdom and common sense rather than to be an academic expert in one or even a few narrow domains. The good news is that each new model is easier to learn since the other models give you a foundation. 

>>> Is there a way to think and act so you become a more rational investor and human being? How have Munger and Buffett done this? Tell us more about the psychology of human misjudgment and how do you overcome it?

To be “rational” is to think in terms of expected value, which Michael Mauboussin describes as “the weighted average value for a distribution of possible outcomes.” Charlie Munger is saying that the expected value aspects of investing are relatively simple to learn but that it is not a natural way of thinking. He believes that using this process skillfully in real life is a trained response since it will require you to overcome certain biases as well as certain often dysfunctional emotional and psychological tendencies.

Munger says: “So you have to learn in a very usable way this very elementary math and use it routinely in life  just the way if you want to become a golfer, you can’t use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realise your full potential as a golfer.” 

>>> Having written about so many business personalities and investors, what have been your biggest investing lessons so far? 

Howard Marks believes: “The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.” Faced with the tendency of humans to fall down when making decisions based on the use of dysfunctional heuristics, they can benefit from using tools or nudges to stay rational. Checklist is such a tool.  Despite the fact that a checklist is helpful in developing a better decision making process, there is no formula or recipe for success. Even with the best investing systems, judgment and wisdom are required since risk, uncertainty and ignorance are constants in life.

Life is always throwing new situations at you but they sometimes are quite familiar. To cope with information and computation overload, humans have developed simple “rules of thumb” called “heuristics”, which allow them to make decisions. It would be great if people could do what Munger describes above, but it is just not possible. 

Decision-making heuristics are sometimes beneficial and sometimes not.  Catching a ball in a cricket game involves a heuristic, which works very well.  Really skillful people who know their limitations well can sometimes use heuristics to their advantage.  Unfortunately, particularly in the context of human activities that are not really part of our evolutionary past (such as investing), heuristics can produce boneheaded mistake after mistake. The best defense is to: (1) have a margin of safety so even if you make a mistake you will still have an acceptable result (2) stay as rational as you can and (3) double check for psychological mistakes.  

>>> What are your favourite investment books?

Seth Klarman’s Margin of Safety is the best investment book ever written. Howard Marks’ The Most Important Thing. All of Michael Mauboussin’s books, George Soros’ The Alchemy of Finance, which is hard to read. I leave out Ben Graham books because they are dense and hard to read for most people.

But before anything else, I would suggest that if you want to learn about investing, you should listen to two investing talks before reading anything. Charlie Munger’s two famous speeches – “The Worldly Wisdom” speech and “Human Misjudgement” speech. It’s the best piece ever done on investing, business and life. 

>>> Is there a single piece of wisdom that is most useful in investing?

The phrase — ‘Strong opinions, weakly held’. If you don’t have “strong opinions” that means you have not done your homework well enough but “weakly held” means you are open enough not to get into trouble. That idea resonates with me. It means you have done the work, have good ideas but you realise that you could still be proved wrong by someone.

Munger’s goal is to have one of his treasured ideas proven wrong every year. Statistically, if that happens, it means you have a healthy process. You are always searching for ways to be smarter and know more. It’s a great way to learn because you are then questioning your own ideas.

>>> The concept of value investing sounds really simple. You want to write books that even plumbers understand. But can an ordinary investor really hope to beat the market?

Ben Graham made investing accessible to everyone. You could do high school arithmetic and be a value investor. But the fact is 90% of people can’t be value investors, they should be investing in the index. They should not try to outperform the market because they can’t control their emotions. The problem is that even if 90% people can’t do it, they think they are in the 10% who can. At most 3-5% of the world should be trying to actively outperform the market as they are willing to do the work.

You have to understand that you are not Warren Buffett. You have to ask yourself if it is a Saturday morning, are you watching cricket scores or reading annual reports? Then, you got to write down your results, and keep track, so you know where you stand. That’s not everybody’s cup of tea. As Buffett says, once you realise you are the ‘dumb’ money and choose to buy an index fund, you have transformed your weakness into a strength. If the market is going up, as equities grow over time, eventually you will do fine.