The Munger Series - Learning from Robert Cialdini

We all know how important an understanding of psychology is to sound investment practices. And when Charlie Munger espouses the virtues of someone he considers a leader in the Psychology field, its well worth taking note of his opinion. 

Robert Cialdini is the author of an incredibly insightful book, 'Influence'. Dr. Cialdini has spent his entire career researching the science of Influence, earning him an international reputation as an expert in the fields of persuasion, compliance, and negotiation. He currently holds the position of Professor Emeritus of Psychology & Marketing at Arizona State University.

Upon reading Cialdini's book, Munger was so appreciative of the collected wisdom in Cialdini's work that he sent him a share of Berkshire Hathaway A-stock to thank him.

“I was in my office and went to the mail box and got a big envelope that came from Berkshire Hathaway. Of course I had heard of Berkshire Hathaway, everyone had by that time about 15 years ago. When I opened it, it was a share of Berkshire stock. The letter from Charlie saying ‘this is by way of thanks, Warren and I have read your books, we’ve made hundreds of millions of dollars. This is our way of saying thanks.’” Robert Cialdini

"You couldn’t start with a better book than Cialdini’s 'Influence'” Charlie Munger

"Academic psychology has some very important merits alongside its defects. I learnt this eventually, in the course of general reading, from a book, 'Influence', aimed at a popular audience, by a distinguished psychology professor, Robert Cialdini… I immediately sent copies of Cialdini's book to all my children. I also gave a share of Berkshire stock [A share] to thank him for what he had done for me and the public." Charlie Munger

"Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob Cialdini.. Well, it’s an academic book aimed at a popular audience that filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a system that was a good-working tool." Charlie Munger

Charlie Munger has been Buffett's business partner for the best part of 50 years. Together they're the world's undisputed Investment Masters. And while it's Buffett who basks in the spotlight, it's Munger who directed Berkshire away from buying companies cheaply to instead focus on buying high quality businesses at reasonable prices.

Munger's forte is mental models, and over the years he has drawn on these to sculpt investment theses that have generated billions of dollars in profits for shareholders. And when it comes to mental models, some of the most powerful are psychological. It is in psychology that Munger credits Dr. Robert Cialdini with filling in a lot of the gaps in his understanding.

Over the years, reading about the businesses that have attracted Buffett and Munger, I've seen the insights of Cialdini permeate through their thought processes. I've often drawn on the lessons in Cialdani's book myself to help understand a company's competitive advantage, why share prices may be acting in a particular way, why a board has engaged in a certain manner or why shareholders or analysts have taken a certain stand.

I was fortunate enough to meet Robert Cialdini in Omaha at the recent Berkshire meeting.

In his best-selling book 'Influence', Cialdini addresses six psychological principles of influencing - Consistency and Commitment, Reciprocation, Social proof, Authority, Liking, and Scarcity. Each principle tends to have a basis as a useful mental short cut which has evolved with human development and aided society's functioning. The book is an easy and enjoyable read, as Cialdini provides vivid and entertaining anecdotes on each.

When it comes to investing, understanding each of these fundamental principles can provide invaluable insights. In this post I'll cover off on the first two principles, 'consistency & commitment' and 'reciprocation', and provide some relevant investment analogies.  The other principles will be covered in a later post. 

Consistency and Commitment

Humans have evolved to value and desire consistency. Cialdini explains "It is, quite simply, our nearly obsessive desire to be (and to appear) consistent with what we have already done." Inconsistency is commonly thought to be an undesirable personality trait, yet a high degree of consistency is normally associated with personal and intellectual strength.

"It allows us a convenient, relatively effortless, and efficient method for dealing with complex daily environments that make severe demands on our mental energies and capacities. It is not hard to understand, then, why automatic consistency is a difficult reaction to curb. It offers us a way to evade the rigors of continuing thought. And as Sir Joshua Reynolds noted, 'There is no expedient to which a man will resort to avoid the real labour of thinking'." Robert Cialdini

The associated bias is commitment. When we make a commitment to something, we like to remain consistent. As humans, we don't like changing our mind.

"Whenever one takes a stand that is visible to others, there arises a drive to maintain that stand in order to look like a consistent person." Robert Cialdini

The dangerous side-effect for investors of commitment and consistency tendencies lies in situations that are changing or when there is contrary information to our initial assumptions. 

"The humankind works a lot like the human egg. When one sperm gets into a human egg, there's an automatic shut-off device that bars any other sperm getting in. The human mind tends strongly toward the same sort of result. And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often re-examined or changed, even though there is plenty of good evidence that they are wrong." Charlie Munger

Investors often don't change their minds when contradictory evidence makes it obvious they should. As a relevant example, I remember a hedge fund manager who cleaned up in the Financial Crisis. Following this, he made a name for himself as an able short seller and inflows naturally  followed. Unfortunately he'd become committed to shorting stocks; never able to take-off the so-called 'bear suit'. As a result he gave back a good portion of his earlier profits.

"Oscar Wilde said that 'consistency' is the last refuge of the unimaginative." Peter Cundill

Even today, I can think of one reasonably well known manager, a true 'perma-bear' in every sense of the word, whose monthly missives have been a cacophony of doom and gloom since 2009. Here's a very small sample ...  'Strenuously Overbought' (2009), 'Don't Take the Bait' (2010), 'Betting on a Bubble, Bracing for a Fall' (2010), 'Reduce Risk' (2011), 'Hard-Negative' (2011),  'Warning: A New Who's Who of Awful Times to Invest' (2012), 'Dancing at the Edge of a Cliff ' (2012), 'The Endgame is Forced Liquidation' (2013), 'A Textbook Pre-Crash Bubble' (2013), 'Market Peaks are a Process' (2014), 'Ingredients of a Market Crash' (2014), 'Fair Value on the S&P 500 Has Three Digits' (2015), 'Warning with a Capital "W"' (2016). While he's maintained his commitment, his fund has delivered -8%pa return over the last 5 years and -6%pa over 10 years. Like a broken clock, you can expect that his bearish thesis will be right one day, but in the meantime he's lost his investors a lot of money.

The Investment Masters recognize the risk of commitment bias. When facts change, you must change. There are numerous techniques to combat this bias. Being a generalist allows you take a wider view of the investment landscape rather than committing to a certain type of investment. By refraining from publicly disclosing an investment idea there is less risk of becoming committed to it. Consider the following from Buffett's lieutenants:

"I never liked talking to my limited partners about ideas I had, because you become somewhat wedded to it, it's harder to change your mind over time, you become pre-committed to your positions and so forth. That's always been my stance." Todd Combs

"If you speak up and put it [investment idea] on record, you end up getting too wedded to your thesis and that's dangerous because everything your'e invested in is a function of the facts and circumstances on a given day, it changes." Ted Weschler

Getting others to continually test your ideas, or appointing a devil's advocate, can help force you to consider alternative theses and help avoid investment mistakes. Writing an investment thesis prior to investing and then regularly re-checking your reasons can help you maintain an unbiased and rational view should developments evolve contrary to your original expectations. Simply asking yourself if you'd buy the stock today if you didn't own it is another good self-check. 

"You've made an enormous commitment to something. You've poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, 'Now it has to work. If I put in just a little more, then it will 'all work'. People go broke that way, because they can't stop, rethink, and say, "I can afford to write this one off and live to fight again. I don't have to pursue this thing as an obsession in a way that will break me."  Charlie Munger

Remaining flexible, keeping an open-mind and maintaining a sense of humility is essential. Recognize there are things you can't know. Recognize that you will make mistakes. And when you enter an investment, acknowledge you may be wrong and you'll be far better placed to adjust your thesis if and when required. Remember stocks are just 'three letters' - don't fall in love with ideas.

It's not only investors that get caught in the commitment bias. When a company's management commits to earning guidance or an acquisition policy, they may be inclined to take actions which aren't in the interest of shareholders. The Investment Masters tend to be leery of companies with aggressive growth targets and/or acquisition strategies.

"Over the years, Charlie and I have observed many instances in which CEOs engaged in uneconomic operating manoeuvres so that they could meet earnings targets they had announced. Worse still, after exhausting all that operating acrobatics would do, they sometimes played a wide variety of accounting games to 'make the numbers'.” Warren Buffett

“Organisations expected to grow rapidly, usually because of pressure from investors, often turn to acquisitions to meet expectations. This may dilute an organizations strategy, by tempting it to extend its reach beyond its area of expertise. At least one research study has called this practice ‘premature core abandonment,’ citing it as one of the primary reasons that an organization’s growth stalls.” James Heskett, 'The Culture Cycle'

"Number's pressure impairs judgement and robs dignity.. [It] makes good, smart people do ethically dumb things and takes them closer toward ethical collapse." Marianne Jennings, 'The Seven Signs of Ethical Collapse'

Reciprocation

As humans we have benefited from placing a high value on reciprocation. Our ancestors learned to share their food and their skills in an honored network of obligations. We feel an obligation to give, an obligation to receive and an obligation to repay. This is particularly relevant for things like gifts and favors. And then there are what are known as 'reciprocal concessions'; someone makes a concession to us and we feel obliged to respond in kind.

In business, the implications can be positive. A good example lies in the intangible qualities of culture. They're hard to replicate. When a company looks after it's staff, when it pays them well, values them, trusts them and empowers them, it can provide a significant competitive advantage. A cultural 'flywheel' develops.

"Corporate culture becomes self-reinforcing after a point." Warren Buffett

"Cultures seem to perpetuate themselves, good and bad." Shad Rowe

The company rewards the staff, the staff go the extra mile for customers, the customers reciprocate.

“You long forget about the price, but you never forget whether you had a good experience or a poor experience with the purchase experience. You’ll have a hard time finding a person who has a wonderful, delighted experience buying anything who isn’t going to come back. Similarly if the memory is of rudeness, indifference, they’re never going to come back. As a small business owner grows you have to not only project that interest yourself but you have to do it through other people. You won’t be able to do it through people who themselves do not feel are being fairly treated, that their views aren’t being appropriately considered, so you really do have to learn to multiply yourself through other people." Warren Buffett

“What I consider a great company. These are companies that delight and bring value to their customers, suppliers and shareholders, and provide a culture of fulfillment to their employees." Shad Rowe

"Generally, if you take care of your customer, the customer takes care of you." Warren Buffett

"Customer reciprocation is a super-factor in business performance.” Nicholas Sleep

Home Depot is a good example, they support their staff and they also support their communities, particularly in times of need.

"Traditionally, we hire the best people in the industry, so they make more money than their counterparts do at our competition. That breeds initial loyalty when they are hired; receiving company stock further deepens that loyalty; and then they fall in love with the way they are treated .. Every associate at Home Depot has an opportunity to be an owner of the company. Everyone has a stake in the company that goes beyond a day's wages. Associates have a real vested interest in cultivating customers and building lifelong relationships with them." Bernie Marcus, Founder - Home Depot

One of the best predictors of a company's performance is when staff work together, which starts with reciprocation. Adam Grant, a professor at the Wharton School of the University of Pennsylvania explains:

"Evidence from studies led by Indiana University’s Philip Podsakoff demonstrates that the frequency with which employees help one another predicts sales revenues in pharmaceutical units and retail stores; profits, costs, and customer service in banks; creativity in consulting and engineering firms; productivity in paper mills; and revenues, operating efficiency, customer satisfaction, and performance quality in restaurants." 

Across these diverse contexts, organizations benefit when employees freely contribute their knowledge and skills to others. 

While reciprocation tendencies can be positive, they can often lead to sub-optimal investment outcomes.  

"Reciprocation tendency subtly causes many extreme and dangerous consequences, not just on rare occasions but pretty much all the time."  Charlie Munger

An example may be a corporate acquisition. The seller makes a small concession; drops the price a little, waives a condition or two and then the acquirer feels an obligation to respond in kind. Or consider when a company provides assistance for an analyst report or invites the Wall Street analyst on a company tour; is the analyst more or less inclined to write a favourable report? When so-called 'Independent Experts' are appointed to report on the fairness of takeovers, I've noticed they rarely recommend against a transaction. Ditto auditors on company accounts. On the latter, Buffett has opined 'whose bread I eat, his song I sing.'

“It’s a Wall Street truism that good management is important to any company’s success, but the typical analysts report ignores the subject.” Chris Davis

"Analysts are competent gatherers of facts and figures, but few can be relied upon for much more. Their assessments of managements are superficial and far too uncritical." Ralph Wanger

“Broker/analysts rarely comment on management in any detail and if so they tend not to criticise." Marathon Asset Management

"Wall Street analysts are unlikely to issue sell recommendations due to an understandable reluctance to say negative things, however truthful they may be, about the  companies they follow. This is especially true when these companies  are corporate-finance clients of the firm." Seth Klarman

"Enron represents another instance, like the dot-coms, where a) most benignly, we’d have to say brokerage house analysts possess little insight and their opinions are of no value, and (b) cynically, it seems they’re not there to help investors as much as their companies’ investment banking efforts.” Howard Marks

"By occasionally giving privileged information to particular analysts, the recipient may have felt (consciously or not) that he or she owed management a favor - what is known as 'reciprocation tendency'." Marathon Asset Management

Directors fees may be considered another form of reciprocation.

"A director getting $150,000 a year from a company, who needs it, is not an independent director." Charlie Munger

"I’ve been on 19 boards. I have never seen a director, where the directors’ fees were important to them, object to an acquisition proposal, object to a compensation arrangement of the CEO. It’s just never happened." Warren Buffett

"The liberal pay [of boards of directors] is counterproductive to good management of the company. There’s a sort of a reciprocation. You know, “You keep raising me, and I keep raising you.” And it gets very club-like. And I think, by and large, the corporations of America would be managed better if the directors weren’t paid at all." Charlie Munger

You can see, even though I have only addressed two of Cialdini's tenets within this post, that the information is more than just valuable, its invaluable to investors. How many people or companies do you know that blindly follow 'consistency' to their detriment? I love Munger's humility in this - being able to acknowledge that he is able to learn from someone else is remarkable for someone with his track record. And not only did he learn, he turned that knowledge to profit and was able to reward Dr Robert Cialdini for the lessons. And when you consider what that single A Class share is worth today, it may seem a high price to pay for the knowledge. For me, the lesson is perhaps beyond invaluable - $300,000 for a book that earnt Munger's shareholders hundreds of millions of dollars is priceless as far as I'm concerned. So read the book - it may well be the best twenty bucks you'll ever spend.

Further Reading:
The Munger Series - ‘Learning from Robert Cialdini - Part II’
The Munger Series - ‘Learnings from Robert Cialdini - Part III’
The Munger Series - Lee Kuan  Yew - Charles Darwin

Follow us on Twitter: @mastersinvest

TERMS OF USE: DISCLAIMER

Learning from Einstein

In my post on Leonardo DaVinci, I spoke about the man's defining success characteristic - curiousity. Despite his multi-disciplinary genius and innovative mindset, his natural curiousity set him apart in his time and allowed him to develop skills and ideas that still shape the world 500 years later.

But he was not alone.

We know that successful investing requires a curious mind, a multi-disciplinary approach and an ability to see what others can't. The same characteristics that defined DaVinci also are encompassed in Albert Einstein, who was eloquently described by Walter Isaacson as 'the most thoughtful wonderer who appeared among us in three centuries.' It's little wonder many of the Investment Masters admire Albert Einstein, and that they have spent time studying his characteristics and processes as an aid to better thinking and more successful investing.

"To me, heroes were people like Albert Schweitzer, Albert Einstein, and David Ben-Gurion, none of whom was rich but each of whom had enriched the world." Michael Steinhardt

"For Einstein simplicity was simply then the highest level of intellect. Everything about Warren Buffett's investment style is simple. It is the thinkers like Einstein and Buffett, who fixate on simplicity, who triumph." Mohnish Pabrai

"One of my favourite books is 'Einstein's Mistakes' ... Provide people with as much exposure as possible to what’s going on around them. Allowing people direct access lets them form their own views and greatly enhances accuracy and the pursuit of truth." Ray Dalio

"There are many historical figures that I admire greatly. Newton, Einstein, and Darwin among them." Ed Thorp

"I read scientific biography as a permanent, lifelong habit. That has given me insight into how the scientific achievements have occurred. The most interesting man to me is Einstein. Einstein came very close to dying in total obscurity. If it had not been for his friends, his pals with whom he discussed physics he never would have gotten the job in the patent office that enabled him to survive in life at a time when he was failing. If he had not had people to talk to about physics he would not have been able to make his discoveries. He got a reputation for being alone, but he wasn’t totally alone. Even Einstein needed to talk to other people who knew a lot about physics." Charlie Munger

"Visionaries are not people who see things that are not there, but who see things that others do not see. As Einstein quipped, "Why do some people see the unseen?" (It should be noted that Einstein's 'thought experiences' were frequently visual)." Bennett Goodspeed

“I admit that I have always harbored an exaggerated view of my self-importance—to put it bluntly, I  fancied myself as some kind of god or an economic reformer like Keynes (each with his General Theory) or, even better, a scientist like Einstein" George Soros

I always enjoy reading those books recommended by the Investment Masters and Walter Isaacson's biographies are regular fare. Ray Dalio, in his recently released book 'Principles' shares his endeavors to learn more about the people he considered 'shapers.' These are people whom he defines as, 'a person who comes up with unique and valuable visions and builds them out beautifully, typically over the doubts and opposition of others.' Examples Dalio cites include Jeff Bezos, Elon Musk, Steve Jobs, Lee Kuan Yew, Andrew Carnegie, Einstein, Darwin et al.

After reading Isaacson's book on Steve Jobs, Dalio sought out Isaacson to help understand Steve Job's qualities and principles in an attempt to form an archetype of a typical 'shaper.' Dalio explains, "I started by exploring the qualities of Jobs and other shapers with Isaacson, at first in a private conversation in his office, and later at a public forum at Bridgewater. Since Isaacson had also written biographies of Albert Einstein and Ben Franklin - two other great shapers - I read them and probed him about them to try to glean what characteristics they had in common."

I've included some of my favourite excerpts from Isaacson's 'Einstein - His Life and Universe' below...

"In 1915, he [Einstein] wrestled from nature his crowning glory, one of the most beautiful theories in all of science, the general theory of relativity. As with the special theory, his thinking had evolved through thought experiments." 

"[Einstein] was comfortable not conforming. Independent in his thinking, he was driven by an imagination that broke from the confines of conventional wisdom."

[Einstein] made imaginative leaps and discerned great principles through thought experiments rather than by methodical inductions based on experimental data"

"As a young student he never did well with rote learning. And later as a theorist, his success came not from the brute strength of his mental processing power but from his imagination and creativity."

"He was very uncomfortable in school. He found the style of teaching - rote drills, impatience with questioning - to be repugnant."

"[Einstein said] 'The value of a college education is not the learning of many facts but the training of the mind to think.'"

"Skepticism and a resistance to received wisdom became a hallmark of his life."

'Einstein once explained, 'The ordinary adult never bothers his head about the problems of space and time. These are things he had thought of as a child. But I developed so slowly that I began to wonder about space and time only when I was already grown up. Consequently, I have probed more deeply into the problem that an ordinary child would have.'"

"[Einstein] wrote a friend in later life: 'We never cease to stand like curious children before the great mystery into which we were born."

"[Einstein] generally preferred to think in pictures, most notably in famous thought experiments, such as watching lightning strikes from a moving train or experiencing gravity while inside an elevator. 'I rarely think in words at all', he later told a psychologist."

"The visual understanding of concepts .. became a significant aspect of Einstein's genius"

"[Einstein's] visual imagination allowed him to make the conceptional leaps that eluded more traditional thinkers"

"His success came from questioning conventional wisdom, challenging authority, and marveling at mysteries that struck others as mundane."

"[Einstein's] view of maths and physics as well as of Mozart, 'like all great beauty, his music was pure simplicity'."

"Throughout his life, Albert Einstein would retain the intuition and the awe of a child. He never lost his sense of wonder at the magic of nature's phenomena - magnetic fields, gravity, inertia, acceleration, light beams - which grown-ups find so commonplace."

"'A new idea comes suddenly and in a rather intuitive way,' Einstein once said."

"Einsteins's discovery of special relativity involved an intuition based on a decade of intellectual as well as personal experiences."

"He postulates grand theories while minimising the role played by data ... he described his approach .. 'The truly great advances in our understanding of nature originated in a way almost diametrically opposed to induction. The intuitive grasp of the essentials of a large complex of facts leads the scientist to the postulation of a hypothetical basic law or laws. From these laws, he derives his conclusions.'"

"Einstein invited Saint-John Perse to Princeton to find out how the poet worked. 'How does the idea of a poem come?' Einstein asked. The poet spoke of the role played by intuition and imagination. 'It's the same for a man of science,' Einstein responded with delight. 'It is a sudden illumination, almost a rapture. Later, to be sure, intelligence analyses and experiments confirm or validate the intuition. But initially there is a great forward leap of the imagination.'"

"There was a link between his [Einstein's] creativity and his willingness to defy authority. He had no sentimental attachment to the old order, thus was energised by upending it."

"Among many surprising things about the life of Albert Einstein was the trouble he had in getting an academic job."

"Einstein believed there was 'a definite connection between the knowledge acquired at the patent office and the theoretical results.'"

"[Poincare spoke of Einstein, noting he] 'adapts himself to new concepts. He does not remain attached to classical principles, and, when presented with a problem in physics, is prompt to envision all the possibilities.'"

"Although he was tenacious, he was not mindlessly stubborn. When he finally decided his 'Entswurf' approach was untenable, he was willing to abandon it abruptly."

"Like a good scientist, Einstein could change his attitudes when confronted with new evidence."

"For a scientist, altering your doctrines when the facts change is not a sign of weakness."

"For a scientist to change his philosophical beliefs so fundamentally is rare."

"When shown his office [at Princeton], he was asked what equipment he might need. 'A desk or table, a chair, paper and pencils," he replied. "Oh yes, and a large wastebasket, so I can throw away all my mistakes."

"His life was a constant quest for unifying theories."

"When excited discussion failed to break the deadlock, Einstein would quietly say in his quaint English, 'I will a little tink.'"

"Einstein proclaimed 'Blind respect for authority is the greatest enemy of truth.'" 

"[Einstein] had an urge - indeed, a compulsion, to unify concepts from different branches of physics. 'It is a glorious feeling to discover the unity of a set of phenomena that seem at first to be completely separate' he wrote."

"The wariness of authority reflected the most fundamental of all Einstein's moral principles: Freedom and individualism are necessary for creativity and imagination to flourish."

"Creativity requires a willingness not to conform. That required nurturing free minds and free spirits, which in turn required a 'spirit of tolerance', And the underpinning of tolerance was humility - the belief that no one had the right to impose ideas and beliefs on others."

"[Einstein's] mind and soul were tempered by this humility. He could be serenely self-confident in his lonely course yet also humbly awed by the beauty of nature's handiwork."

"How did he get his ideas? 'I'm enough of an artist to draw freely on my imagination. Imagination is more important than knowledge. Knowledge is limited. Imaginations encircles the world.'"

"Simplicity and unity, he believed, were hallmarks of the Old One's handiwork. 'A theory is more impressive the greater the simplicity of its premises, the more different things it relates, and the more expanded its area of applicability' he wrote."

'[Einstein said] 'I simply enjoy giving more than receiving in every respect, do not take myself nor the doings of the masses seriously, am not ashamed of my weaknesses and vices, and naturally take things as they come with equanimity and humour."

"As he put it near the end of his life, "I have no special talents: I am only passionately curious." 

And a few of my favorite quotes ... 

"The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift." Albert Einstein

“Don’t think about why you question, simply don’t stop questioning. Don’t worry about what you can’t answer, and don’t try to explain what you can’t know. Curiosity is its own reason. Aren’t you in awe when you contemplate the mysteries of eternity, of life, of the marvelous structure behind reality? And this is the miracle of the human mind—to use its constructions, concepts, and formulas as tools to explain what man sees, feels and touches. Try to comprehend a little more each day. Have holy curiosity.” Albert Einstein

"Life is like riding a bicycle. To keep your balance you must keep moving." Albert Einstein

Like many of the individual Investment Masters, Einstein's genius stems from those same traits that define so many of the Investment and Business success stories of both our time and history. Challenging conventional wisdom and rational thought, non conformism, humility, independent thinking, intuition above induction, adopting a multi-disciplinary mindset, learning from mistakes and indeed, happily abandoning the ideas he knew were wrong; creativity and imagination and of course, curiosity. These traits allowed Einstein, like so few others, to see what others couldn't and to develop insights that have helped shape our world. Despite knowing all this, you don't need to be 'Einstein' to be successful in the world of Investing. These traits can be found in many ordinary people and the smartest people out there aren't necessarily good at investing. Remember: Imagination is more important than knowledge... 

Follow us on Twitter: @mastersinvest

Learning from Leonardo

And that's Da Vinci, not DiCaprio, although I'm sure many believe the latter to be a master of his craft as well. Leonardo Da Vinci has long been recognised as a genius across many modalities, not only in his art. In his life he was also an inventor, philosopher, architect, sculptor, engineer, scientist, astronomer, writer and mathematician, and all of that with little formal education behind him. What drove him to success in all these fields was one simple trait - curiousity.

Charlie Munger has long espoused the benefits of making friends with the eminent dead. He's an avid reader, affectionately characterised by his own children as a 'book with a couple of legs sticking out.' Charlie has spent a lifetime learning lessons from history's storied intellectual powerhouses. 

As arguably the greatest Investing Mind of the last century, I've taken a leaf out of Charlie's book and picked up biographies on some of his heroes over the last year including Lee Kuan Yew, Albert Einstein and Charles Darwin. In a similar fashion to the commonalities between the Investment Masters, I've recognised many commonalities that run through the habits, traits and character of these Intellectual Masters.

Having just put down Walter Isaacson's wonderful biography on Albert Einstein, the recent news of the record breaking $450m sale of Leonardo Da Vinci's 'Salvator Mundi' painting prompted me to start Isaacson's latest tome, 'Leonardo Da Vinci'. A truly beautiful book that gave me a momentous appreciation for Da Vinci's ground-breaking discoveries, and allowed me to look at not only his masterpieces such as the Mona Lisa and Salvator Mundi, but nature for that matter, in a completely new light.

Isaacson was drawn to Da Vinci as the ultimate example of the main thematic of his previous biographies, many of which, coincidentally are heroes of Charlie Munger - Einstein, Franklin and Newton. Isaacson describes that thematic as "How the ability to make connections across disciplines - arts and sciences, humanities and technology - is a key to innovation, imagination, and genius."  

What distinguished Leonardo's genius was its universal nature. Like Einstein, Leonardo was better at visualisations than equations. While the world has produced other thinkers who were more profound or logical, and many who were more practical, there have been none as creative in so many different fields. Some people are geniuses in a particular arena, such as Mozart in music and Euler in math, but Leonardo's brilliance spanned multiple disciplines. Leonardo had a profound feel for nature's patterns and cross currents.

Many of histories greatest thinkers draw on diverse disciplines to make creative leaps that lead to innovative breakthroughs. Of all the Investment Masters I've studied, it's Charlie Munger who is the most vocal advocate of developing a mutli-disciplinary mindset.

It was Leonardo's love of learning and his intense, relentless and insatiable curiosity that led to many of his ground-breaking discoveries, inventions and innovations. Many of which were hundreds and hundreds of years ahead of their time and in some cases 500 years!  Isaacson noted that "by allowing himself to be driven by intense curiosity, he got to explore more horizons and see more connections than anyone else of his era."

Leonardo constantly asked why, why, why? He had a child-like sense of wonder. He sought knowledge from others and delved incredibly deeply into subjects and experiments in a quest to find answers. Whether it was answers to the body and movement of water, the mechanics of the human heart and body, the motion of the planets or to discover why birds fly, or how the human eye perceives light and distant images, or why fossils are found on mountains, his quest for knowledge was extraordinary.

Likewise, the Investment Masters are driven by curiosity. 

"You want to have a curiosity about business." Warren Buffett

“Curiosity is the engine of civilisation.  If I were to elaborate it would be to say read, read, read and don’t forget to talk to people, really talk, listening with attention and having conversations, on whatever topic, that are an exchange of thoughts. Keep the reading broad, beyond just the professional.” Peter Cundill

“Most of your time being a value investor is as an academic, a researcher, a journalist actually, to have insatiable curiosity and try and figure out how just about everything works. Because in investing the more you know the better off you are.” Li Lu

“I’m curious; I want to know how things work" Seth Klarman

"A few major opportunities, clearly recognisable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables." Charlie Munger

Leonardo's $450m 'Salvator Mundi'

Isaacson noted Da Vinci's "willingness to challenge received wisdom would lead him to craft an empirical approach for understanding nature that foreshadowed the scientific method developed more than century later... His method was rooted in experiment, curiosity, and the ability to marvel at phenomena that the rest of us rarely pause to ponder after we've outgrown our wonder years". Charles Darwin's autobiography similarly noted "I think that I am superior to the common run of men in noticing things which easily escape attention, and in observing them carefully."

Isaacson noted Leonardo's acuteness of his observational skill was not some superpower he possessed. Instead it was a product of his own effort. 

Leonardo drew on diverse disciplines seeking to understand and explain natural phenomena.. "Analogies and spotting patterns became for him a rudimentary method of theorizing".

Like Charles Darwin, Leonardo had an instinct for keeping records, "jotting down observations, lists, ideas and sketches came naturally. He had "a lifelong practice of keeping notebooks on a regular basis." From this emerged his creativity ... "His creativity came from his combinatory imagination." Darwin, too, collected information. He explains in his autobiography "I keep thirty to forty large portfolios, in cabinets with labelled shelves, into which I can at once put a detached reference or memorandum. I have bought many books and at their ends I make an index of all the facts that concern my work; or, if the book is not my own, write out a separate abstract, and of such abstracts I have large drawers full."

In a similar fashion, Buffett consumes masses of information, reading 500 pages per week. It is connecting the disparate information that sometimes provides the insight for a successful investment. Buffett explains "Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action."

Leonardo also read widely. Isaacson wrote that "his appetite for soaking up information from books was voracious and wide-ranging." He also collaborated with others to develop his theories and thoughts. Isaacson explains; "Conceiving ideas was for Leonardo, as it has been throughout history for most other cross-disciplinary thinkers, a collaborative endeavour. In his notebook, we find scores of people with whom he wanted to discuss ideas. The process of bouncing around thoughts and jointly formulating ideas was facilitated by hanging around a Renaissance court like the one in Milan."

Leonardo was a seeker of truth. He was not afraid to challenge conventional wisdom and he used observations to formulate general principles and then used those principles to predict outcomes. Da Vinci's curiosity and deep study led to an intuitive feel for nature... "because of his intuitive feel for the unity of nature, his mind and eye and pen darted across disciplines, sensing connections."

And Leonardo was imaginative. Isaacson recognised that "true creativity involves the ability to combine observation with imagination, thereby blurring the border between reality and fantasy." He recognised painting was both an art and a science. To convey three-dimensional objects on a flat surface, the painter needs to understand perspective and optics. Therefore painting is a creation of the intellect as well as the hands. Leonardo advised young artists that "the mind is stimulated to new inventions by obscure things."

In markets, it's often the accumulation and integration of information from varied sources that leads to investment success. One of my favourite investors, the late Leon Levy explains .. "If intelligence is the ability to integrate, creativity is the ability to integrate information from seemingly unconnected sources, and a measure of both abilities is necessary for long term success in markets."

And Leonardo himself recognised the need to take the time to think. Leonardo once explained to a Duke, who was complaining a painting was not progressing, "Men of lofty genius sometimes accomplish the most when they work the least, for their minds are occupied with their ideas and the perfection of their conceptions, to which they afterwards give form."

Like Charles Darwin, Leonardo was not afraid to change his mind when the facts warranted it. Isaacson noted, "he engaged in a dialogue between theories and experience, and when they conflicted he was receptive to trying a new theory. That willingness to surrender preconceptions was a key to his creativity".

I hope you are starting to notice the common traits that manifest themselves across history's Intellectual and Investment Masters. Each was not afraid to question conventional wisdom, to remain open-minded, to adopt a child-like curiosity, to work hard, to seek wisdom from other disciplines, to learn from others, to challenge ideas and to be willing to admit and learn from mistakes.

We can all learn from Leonardo. As Isaacson observed "Leonardo's genius was a human one, wrought by his own will and ambition. It did not come from being the divine recipient, like Newton or Einstein, of a mind with so much processing power that we mere mortals cannot fathom. Leonardo had almost no schooling and could barely read Latin or do long division. His genius was of a type we can understand, even take lessons from. It was based on skills we can aspire to improve ourselves, such as curiosity and intense observation." 

While you or I will never paint a Mona Lisa, we can look to Leonardo to help us see the world more clearly and reignite that sense of wonder we all had in our childhood years. We should never stop learning and we should never stop asking why. The word 'why' is one of the most powerful words to have in your vocabulary. Without it, and without its use, we will stagnate, believing we understand all, and that is quite simply absurd when you think about it. Even the greats still ask why, and if they can do it, so should we. And if we do it well, we might even crack the Da Vinci code...

Further Reading:
Ray Dalio - Leonardo's Principles
Broyhill Asset Managment - Bruce Wayne vs Leonardo
How to build a better Investing Mind

The Munger Series - Learning from Charles Darwin

"The life of Darwin demonstrates how a turtle may outrun the hares, aided by extreme objectivity, which helps the objective person end up like the only player without a blindfold in a game of Pin the Tail on the Donkey" Charlie Munger

Charlie Munger, one of the most successful Investment Masters, has referred to the brilliance of Charles Darwin on numerous occasions. This prompted my interest in the 'Autobiography of Charles Darwin'. I found it insightful, and as fresh and relevant today despite almost 150 years passing since its writing. At just 120 pages, it's an easy read.

"[Darwin] is precisely the type of example you should learn nothing from if bent on minimizing your results from your own endowment" Charlie Munger

"One of the most successful users of an antidote to first conclusion basis was Charles Darwin. He trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one. The opposite of what Darwin did is now called confirmation bias, a term of opprobrium.  Darwin's practice came from his acute recognition of man's natural cognitive faults arising from Inconsistency-Avoidance Tendency. He provides a great example of psychological insight used correctly to advance some of the finest mental work ever done" Charlie Munger

I've included some of the more interesting observations below. You'll notice nearly all of the headings I've chosen are tutorial topics from the Investment Masters Class and have as much relevance to investing as they do to Darwin's grand discovery. Whether you are looking to make the next scientific breakthrough or seeking investment wisdom, like Charlie Munger, you can learn a lot from Charles Darwin.

Education and Smarts

"I have been told that I was slower in learning than my younger sister Catherine, and I believe that I was in many ways a naughty boy"

"When I left school I was for my age neither high nor low in it; and I believe that I was considered by all my masters and by my Father as a very ordinary boy, rather below the common standard of intellect"

"During the three years which I spent at Cambridge my time was wasted, as far as academical studies were concerned"

"I have deeply regretted that I did not proceed far enough at least to understand something of the great leading principles of mathematics"

Learning

"I had strong and diversified tastes, much zeal for whatever interested me, and a keen pleasure in understanding any complex subject or thing"

Reading

"I was fond of reading various books, and I used to sit for hours reading the historical plays of Shakespeare, generally sitting in an old window in the thick wall of the school"

"During my last year at Cambridge I read with care and profound interest Humboldt's Personal Narrative. This work and Sir J. Herschel's Introduction to the Study of Natural Philosophy stirred up in me a burning zeal to add even the most humble contribution to the noble structure of Natural Science. No one or a dozen other books influenced me nearly so much as these two"

"When I see the list of books of all kinds which I read and abstracted, including whole series of Journal and Transactions, I am surprised at my industry"

Love

"Looking backwards, I can now perceive how my love for science gradually preponderated over every other taste"

"My love of natural science has been steady and ardent"

Consensus

"On this [first geology] tour I had a striking instance how easy it is to overlook phenomena, however conspicuous, before they have been observed by anyone"

"As far as I can judge, I am not apt to follow blindly the lead of other men.

Understanding and Patience

"From my early youth, I have had the strongest desire to understand or explain whatever I observed - that is, to group all facts under some general laws. These causes combined have given me the patience to reflect or ponder for any number of years over any unexplained problem"

Commitment/Confirmation Bias

"I have steadily endeavoured to keep my mind free, so as to give up any hypothesis, however much beloved (and I cannot resist forming one on every subject) as soon as facts are shown to be opposed to it. Indeed I have had no choice but to act in this manner"

"I cannot remember [with the exception of the Coral Reefs] a single formed hypothesis which had not after a time to be given up or greatly modified"

Collect the Facts

"On first examining a new [geological] district nothing can appear more hopeless than the chaos of rocks, but by recording the stratification and nature of the rocks and fossils at many points, always reasoning and predicting what will be found elsewhere, light soon begins to dawn on the district, and the structure of the whole becomes more or less intelligible"

"I think I am superior to the common run of man in noticing things which easily escape attention, and in observing them carefully"

"I was very glad to learn from him [H. Spencer] his system of collecting facts. He told me that he bought all the books which he read, and made a full index to each, of the facts which he thought might prove serviceable to him, and that he could always remember in what book he had read anything, for his memory was wonderful. I then asked how at first he could judge what facts would be serviceable and he answered that he did not know, but that sort of instinct guided him. From this habit of making indices, he was enabled to give the astonishing number of references on all sorts of subjects, which may be found in his History of Civilization"

"In several of my books facts observed by others have been extensively used"

"I keep thirty to forty large portfolios, in cabinets with labelled shelves, into which I can at once put a detached reference or memorandum. I have bought many books and at their ends I make an index of all the facts that concern my work; or, if the book is not my own, write out a separate extract, and of such abstracts I have a large drawer full. Before beginning on any subject I look to all the short indexes and make a general and classified index, and by taking the one or more portfolios I have all the information collected during my life ready for use"

".. it appeared to me that by following the example of Lyell in Geology, and by collecting all facts which bore in any way on the variation of animals and plants under domestication and nature some light might perhaps be thrown on the whole subject"

"I worked on true Baconian principles, and without any theory collected facts on a wholesale scale, more especially with respect to domesticated productions, by printed enquiries, by conversation with skilful breeders and gardeners, and by extensive reading"

Hard Work

".. no importance compared with the habit of energetic industry and of concentration to whatever I was engaged in"

Writing

"I wrote my Journal, and took much pains in describing carefully and vividly all that I had seen; and this was good practice"

Intuition

"My mind seems to have become a kind of machine for grinding general laws out of large collections of facts"

Mistakes

"This paper [published on a geological formation] was a great failure, and I am ashamed of it... my error has been a good lesson to me to never trust in science to the principle of exclusion"

"It was necessary for science that [such] mistakes should be exposed"

"Whenever I have found out that I have blundered, or that my work has been imperfect, and when I have been contemptuously criticized, and even when I have been overpraised, so that I have felt mortified, it has been my greatest comfort to say hundreds of times to myself that "I have worked as hard and as well as I could, and no man can do more than this"

Thinking and Age

"A man after a long interval can criticize his own work, almost as well as if it were that of another person"

"I think I have become a little more skilful in guessing right explanations and in devising experimental tests; but this may probably be the result of mere practice, and a larger store of knowledge. I have as much difficulty as ever expressing myself clearly and concisely; and this difficulty has caused me a very great loss of time; but it has had the compensating advantage of forcing me to think long and intently about every sentence, and this I have been often led to see errors in reasoning and in my own observations or those of others"

Testing ideas

"I saw more of Lyell than any other man both before and after my marriage. His mind was characterized, as it appeared to me, by clearness, caution, sound judgement and a good deal or originality. When I made any remark to him on Geology, he never rested until he saw the whole case clearly and often made me see it more clearly than I had done before. He would advance all possible objections to my suggestion; and even after these were exhausted would long remain dubious"

"While in thought, he [Lyell] would throw himself into the strangest attitudes, often resting his head on the seat of a chair, while standing up"

Avoiding Bias

"Fifteen months after I began my systematic enquiry, I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favourable variations would tend to be preserved, and unfavourable ones to be destroyed. The result of this would be the formation of new species. Here then I had last got a theory to work with, but I was so anxious not to avoid prejudice, that i determined not for some time to write even the briefest sketch of it."

"I had, also during many years, followed a golden rule, namely whenever a published fact, a new observation or thought came across me, which was opposed to my general results, to make a memorandum of it without fail and at once; for I had found by experience that such facts and thoughts were far more apt to escape from memory than favorable one. Owing to this habit, very few objections were raised against my views which I had not at least noticed and attempted to answer"

Humility in conclusion..

"Therefore, my success as a man of science, whatever this may have amounted to, has been determined, as far as I can judge, by complex and diversified mental qualities and conditions. Of these the most important have been - the love of science - unbounded patience in long reflecting over any subject - industry in observing and collecting facts - and a fair share of invention as well as common sense. With such moderate abilities as I possess, it is truly surprising that thus I should have influenced to a considerable extent the beliefs of the scientific men on some important points

Let Charles Darwin give you an edge in the struggle for investment survival ...

The Munger Series - Learning from Lee Kuan Yew

“If you will make a study of the life and work of Lee Kuan Yew, you will find one of the most interesting and instructive political stories written in the history of mankind. This is better than Athens, this is an unbelievable history. And you will learn a lot that will be useful in life. Study the life and work of Lee Kuan Yew, you are going to be flabbergasted” Charlie Munger

I often choose books to read from recommendations of the Investment Masters. I wanted to learn more about the late Lee Kuan Yew, the Prime Minister of Singapore for three decades, given Charlie Munger often praises him. Lee Kuan Lew took a swampland and turned it into a developed country in one generation.

The book 'Lee Kuan Yew - The Grand Master's Insights on China, the United States, and the World' gathers key insights from interviews, speeches, and Lee's voluminous published writings and presents them in an engaging question and answer format.

Lee Kuan Yew thought deeply about how to take Singapore up the ladder of economic prosperity and had incredible insights into how the world worked.

I was fascinated by the extent to which the lessons and insights of this great leader and his country overlap with those of great businesses and their CEOs. In many ways Lee Kuan Yew thought about, and ran his country, like a business. His thinking process mirrors many of the great investors.

It's a very easy book to read, I finished it over a weekend. I've included some of the more interesting observations..

China

"The Chinese have calculated that they need 30 to 40, maybe 50 years of peace and quiet to catch up, build up their system, change it from the communist system to the market system"

"I believe the Chinese leadership has learnt that if you compete with America in armaments you will lose. You will bankrupt yourself. So avoid it, keep your head down, and smile, for 40 or 50 years"

"China will inevitably catch up to the US in absolute GDP. But it's creativity may never match Americas, because its culture does not permit free exchange and contest of ideas"

"Technology is going to make their system of governance obsolete."

"[Not having English as a first language] is a serious handicap.. Talent will not go to China"

America

"The US is the most militarily powerful and economically dynamic country in the world. It is the engine for global growth through its innovation and consumption"

"Throughout history, all empires that succeeded have embraced and included in their midst people of other races, languages, religions and cultures"

"What has made the US economy preeminent is its entrepreneurial culture .. Entrepreneurs and investors alike see risk and failure as natural and necessary for success"

"In an era of rapid technological change, Americans have shown that those countries with the largest number of start-ups, especially in the IT sector, which venture capitalists finance, will be winners in this next phase"

"Many American practices go against the grain of the more comfortable and communitarian cultural systems of their own societies [the European and Japanese]"

"The Americans have succeeded as against the Europeans and the Japanese because they have more extremes of random behaviour"

"America has a clear advantage over China, because its use of the English language enables America to attract millions of English-speaking foreign talent from Asia and Europe"

"Security, prosperity, and the consumer society plus mass communications have made for a different kind of person getting elected as a leader .. who can present himself and his programs in a polished way... From such a process, I doubt if a Churchill, a Roosevelt, or a de Gaulle can emerge"

"The US must not let is fiscal deficits come to grief"

"The world has developed because of the stability America established. If that stability is rocked, we are going to have a different situation"

America and China

"There will be a struggle for influence, I think it will be subdued because the Chinese need the US, need US markets, US technology, need to have students going to the US to study ways and means of doing business so they can improve their lot. It will take them 10,20, 30 years"

India

"India has wasted decades in state planning and controls that have bogged it down in bureaucracy and corruption'. The caste system has been the enemy of meritocracy"

"India has poor infrastucture, high administrative and regulatory barriers to business, and large fiscal deficits, especially at the state level which are a drag on investment and job creation"

"It is not one nation, but 32 different nations speaking 330 different dialects"

"India's private sector is superior to China's .. Indian companies follow international rules of corporate governance and higher return on equity as against Chinese companies. And India has transparent and functioning capital markets"

"The moment India has the infrastructure in place, investments will come in, and it will catch up very fast"

"India's system of democracy and rule of law gives it a long-term advantage over China, although in the early phases, China has the advantage of faster implementation of its reforms"

Singapore

"My definition of Singapore.. is that we accept that whoever joins us is part of us"

"[How did] Singapore make a living against neighbours who have more natural resources, human resources, and bigger space? How did we differentiate ourselves from them? They are not clean systems; we run clean systems. Their rule of law is wonky, we stick to the law. Once we come to an agreement or make a decision, we stick to it. We become credible to investors."

"I offered every parent a choice of English and their mother tongue, in whatever order they chose"

"The quality of a nation's manpower resources is the single most important factor determining competitiveness. It is people's innovativeness, entrepreneurship, team work, and their work ethic that give them that sharp keen edge in competitiveness"

"Standing still is a sure way to extinction"

"Our education system is being revamped to nurture innovation and creativity, from kindergarten to university, and on to lifelong learning"

"The internet makes markets more contestable, businesses in Asia must compete on this platform or be swept aside"

"Societies that succeed are those which easily assimilate foreigners. Silicon valley is such a place"

"For a modern economy to succeed, a whole population must be educated"

"We have to start experimenting. The easy things - just getting a blank mind to take knowledge in and become trainable - we have done. Now comes the difficult part. To get literate and numerate minds to be more innovative, to be more productive, is not easy. It requires a mindset change, a different set of values"

"Once established, like a language a society speaks, the habits tend to become a self-reproducing, self perpetuating cycle"

"In one generation (1965-1990) we made it from the third world to the first"

Developing Countries

"One 'X' factor remains a key differentiator, especially for developing countries; that is ethical leadership. A clean, efficient, rational, and predictable government is a competitive advantage"

Governing

"I learned to ignore criticism and advice from experts and quasi-experts, especially academics in the social and political sciences"

"If you want to be popular all the time, you will misgovern"

"One person, one vote is a most difficult form of government. From time to time, the results can be erratic. People are sometimes fickle. They get bored with stable, steady improvements in life, and in a reckless moment, they vote for change for change's sake"

"If everybody gets the same rewards.. nobody strives to excel; society will not prosper, and progress will be minimal"

"[The most common public policy mistakes are when leaders sometimes] succumb to hubris and over-confidence"

Thinking

"We may have conquered space, but we have not learned to conquer our own primeval instincts and emotions that were necessary for our survival in the Stone Age, not in the space age"

"We read many things. The fact that it is in print and repeated by three, four authors does not make it true. They may all be wrong"

"You must not overlook the importance of discussion with knowledgeable people. I would say it is much more productive than absorbing or running through masses of documents"

"I do not work on a theory. Instead I ask: what will make this work? If after a series of solutions, I find that a certain approach worked, then I try to find out what was the principle behind the solution"

"Our test was: does it work? Does is bring benefits to the people?"

"I do not believe that because a theory sounds good, looks logical on paper, or is presented logically, therefore that is the way it will work out. The final test is life"

"If you do not know history, you think short term. If you know history you think medium and long term"

"To understand the present and anticipate the future, one must know enough of the past, enough to have a sense of the history of a people"

"Do not try to impress by big words. Impress by the clarity of your ideas. I speak as a practitioner. If I had not been able to reduce complex ideas into simple words and project them vividly for mass understanding, I would not be here today"

"To create wealth, high motivation and incentives are crucial to drive people to achieve, to take risks for profit, or there will be nothing to share"

"Realism and pragmatism are necessary to overcome new problems"

"[Of all my Cabinet colleagues, Goh Keng Swee made the greatest difference to the outcome of Singapore ..] he had a capricious mind and a strong character. When he held a contrary view, he would challenge my decisions and make me re-examine the premises on which they were made. As a result we reached better decisions for Singapore. In the middle of a crisis, his analysis was always sharp, with an academic detachment and objectivity that reassured me"