Learning from UCLA's John Wooden

In his last interview, Charlie Munger recognized the foundation of Berkshire's triumph, attributing it to what he termed the 'Wooden Effect'—a concept inspired by John Wooden's method of allocating playing time to the team's most exceptional players.

Munger hailed John Wooden as the preeminent basketball coach of his era, boasting an impressive track record that included 10 NCAA championships in a remarkable 12-year span, seven consecutive titles, and an unparalleled 88-game winning streak.

What sets Wooden apart is not merely his extraordinary success but his unconventional approach to attaining it. Rather than relentlessly pursuing victory, he embraced a philosophy that transcended the fixation on winning. Wooden articulated, "I never talked about winning to our players. When you start fixating on winning, you lose sight of doing your job." This perspective imparts a profound lesson extending well beyond the basketball court: success is not the primary goal; instead, it's the natural outcome of pursuing a higher purpose. Wooden's unwavering commitment to the process, hard work, and dedication not only yielded an extraordinary basketball record but also offers profound insights applicable to businesses striving for success.

Wooden's leadership principles extended to empowerment and granting permission to fail, recognizing that 'over-coaching' can dampen intrinsic motivation and impede self-driven growth. He understood that encouraging autonomy and embracing failure as part of the journey are essential components of success, whether on the court or in the corporate world.

Wooden's success resulted from what Charlie Munger terms 'Lollapalooza' effects—greatness achieved not through a single grand strategy but through countless small deliveries of excellence. This dedication to continuous improvement aligns with the core tenets of many great businesses, emphasizing that the culmination of lots of little things creates a competitive edge that's almost impossible to compete with.

Wooden's emphasis on developing everyone within the organization created a team spirit from which emergent effects arose—an enchanting synergy that occurs when individuals willingly sacrifice personal interests for the collective good. Effective business leaders should aim to create an environment where each member's contribution is valued and vital to the organization's success, echoing Wooden's belief in unlocking the potential of every team member. Learning and continuous improvement were non-negotiable in Wooden's playbook—never settling for the status quo. His philosophy echoes the idea that success is a journey rather than a destination, demanding a perpetual drive to become a little better each day. Wooden's wisdom illuminates the path to building great businesses, reminding us that success isn't a finite goal but an ever-evolving expedition.

Over the years, my reading list has been filled with numerous books on great businesses, exceptional managers, and successful leaders. Yet, John Wooden's book, penned in his ninth decade of life, stands out as one of the most inspiring and deeply insightful works I've encountered. Delving into 'Wooden on Leadership' is akin to enrolling in a master class on the essential traits necessary for both personal success and the effective management of a thriving organization. At its core, whether discussing an elite sports team or a prosperous business enterprise, the common denominator is people.

The undeniable parallels between Wooden's wisdom and the principles of the great CEOs we've studied make it challenging to envision anyone applying the insights from this book not achieving success. I've ordered copies for my older sons entering their careers, ensuring they benefit from its invaluable wisdom.

Below are some favorite passages, offering a glimpse into the wealth of insights within.

Obliquity

‘I never talked about winning to our players. When you start thinking about winning, you stop thinking about doing your job.’

‘For most of my life I have believed that success is found in the running of the race. How you run the race, your planning, preparation, practice, and performance counts for everything. Winning or losing is a by-product, an after-effect, of that effort.’

‘I do not judge success based on championships; rather, I judge it on how close we came to realising our potential.’

‘Winning is a by-product. Focus on the product: effort.’

‘I never fixated on winning - didn’t even mention it.’

‘An organisation – a team – that’s always looking up at the scoreboard will find a worthy opponent stealing the ball right out from under you. You must keep your eye on the ball, not up on the scoreboard or somewhere out in the distant future. This task, however, is not always easy to do.’

‘The score will take care of itself when you take care of the effort that precedes the score.’

‘Let me be clear; Results matter. They matter a great deal. But if this is an organisation’s singular purpose, then the people who sign on are often often doing it for the wrong reasons.’

‘A person who values winning above anything will do anything to win. And such people are threats to their organisations.’

Success and The Controllables

‘There is a standard higher than merely winning the race: Effort is the ultimate measure of your success.’

‘I do not judge success based on championships; rather, I judge it on how close we came to realising our potential.’

‘Success - peace of mind which is the direct result of self-satisfaction in knowing you did the best of which you are capable - became the stated objective or destination for those I was teaching and coaching.’

‘I gradually disciplined myself and later the teams I taught, coached, and led, to focus on and worry about only those things we controlled, namely, getting as good as we could get, striving to reach the ultimate of our capabilities both mentally and physically. Whether that might, or did, result in outscoring our opponent - ‘winning the race’ - was something I didn't lose much sleep over.’

‘My final words were always about the same: ‘When it's over, I want your heads up. And there's only one way your heads can be up that's to give it your best out there, everything you have.’ This is all I ever asked of them because it was all they could ever give.’

‘To my way of thinking, when you give your total effort - everything you have - the score can never make you a loser. And when you do less, it can't somehow magically turn you into a winner.’

Source: UCLA

“For most of my life I have believed that success is found in the running of the race. How you run the race - your planning, preparation, practice, and performance counts for everything. Winning or losing is a by-product, an aftereffect, of that effort. For me, it's the quality of your effort that counts most and offers the greatest and most long-lasting satisfaction.

Cervantes had it right: "The journey is better than the inn." Most people don't understand what he means, but thanks to my father I do. The joy is in the journey of pushing yourself to the outward limits of your ability and teaching your organization to do the same.

I believe most great competitors share this feeling. They recognize that the ultimate reward is in the competitive process itself rather than some subsequent gain or glory brought about by winning. Thus, in all my years of coaching I rarely, if ever, even uttered the word win, talked about "beating" an opponent, or exhorted a team to be number one, including those picked by experts to win national championships.”

‘We are paid to deal with fate. Those who prevail look fate in the eye and say, ‘Welcome,’ and then move ahead without complaint, excuse, or whining. While we can't control fate, we are or should be able to control our response to it. In leadership, your response becomes crucially important, because ultimately it is the response of your organization.’

‘As a coach and leader I tried hard to avoid letting those things I couldn't control affect the things I could control. In more than nine decades I have yet to control fate. Neither have you, I'm sure.’

Value, Empower and Teach

‘When the best leader’s work is done the people say, ‘We did it ourselves.’’ Lao-tse

‘As a teacher, coach, and leader, my goal was always to help those under my leadership reach the ultimate level of their competency, both individually and as productive members of our team.’

‘From my earliest days I have viewed my primary job as one of educating others: I am a teacher. I believe effective leaders, are first and foremost, good teachers. We are in the education business.’

‘Knowledge is not enough. You must be able to effectively transfer what you know to those you manage - not just the nuts-and-bolts material, but your standards, values, ideals, beliefs, as well as your way of doing things.’

‘Many managers and coaches take for granted that people who work with them know how their efforts help the organisation. This is often not the case, especially for those in lesser roles. Go out of your way to make them feel included rather than excluded from the productivity you seek. Thank them for their efforts - if deserved - and explain why their work matters band how it contributes to the welfare of the group.’

‘‘Over-coaching’ can be more harmful than ‘under-coaching.’ Don’t give them too much and don’t take away their initiative.’

‘I didn’t want UCLA to crash because people weren’t doing their jobs because they felt their contributions didn’t count much.’

‘Acknowledge the unacknowledged. I was conscious about making those with less significant roles feel valued and appreciated. I singled out individuals who seldom saw the limelight - the player who made an assist on an important basket, a pivotal defensive play, or a free throw at a crucial moment in the game.’

‘All members of your organisation need to feel their jobs make a difference, that they are connected to the success of their team.’

‘The person who answers the telephone at your company plays a role in your success (or lack thereof). Do this person and the others who perform the tasks that make your organisation really ‘hum’ understand their connection and contribution? Do you let these individuals know, for example, how important that first contact with a potential customer or client is? Or do you let them operate in a vacuum, unconnected to everything around them? The telephone operator and all others who may perform less ‘important’ tasks will not feel important unless you, the leader, teach that them they are valued and explain how their contribution helps the company as a whole. Individuals who feel they don't matter will perform their jobs as if they don't count.’

‘I believe that personal greatness is measured against one’s own potential, not against that of someone else on the team or elsewhere.’

‘Some years, the teams I taught were blessed with significant talent. Other years, this was not the case. But in all years - with all levels of talent - my goal was the same, namely, to get the most out of what we had.’

Hard Work

‘There is no trick, no easy way to accomplish the difficult task, no substitute for old-fashioned work.’

‘For the Wooden family, hard work was as common as dirt - and dirt is common on a farm.’

Fun and Optimism

‘Work without joy is drudgery. Drudgery does not produce champions, nor does it produce great organisations.’

‘Coach Wooden dealt in the positive. He would not spend time on the negative - he was always focusing on moving forward with what we had to learn to make us better.’ Fred Slaughter

Hiring

‘Seek players who will make the best team rather than the best players. Astute leadership understands the chemistry of teams and organisations. Often the most talented individuals will not be a good for your group. Be alert to overall impact - chemistry.’

‘Bad habits are even tougher to break when it comes to character issues [ie good values]. I didn't kid myself into thinking that just because a player had great athletic talent, I could change his bad habits in these most important areas. I believe effective leadership is very cautious about bringing bad habits into the group. More often than not, before you can break their bad habits, they have taught those habits to others on your team.’

Kareem Abdul-Jabbar and John Wooden

‘Surround yourself with people strong enough to change your mind. I believe that you must have people around you willing to ask questions and express opinions, people who seek improvement for the organization rather than merely gaining favor with the boss. Look for these people when hiring and making promotion decisions.’

‘Throughout my career I had a policy of doing virtually no off-campus recruiting of student-athletes. If he wasn't eager to join us, then perhaps it was best he attended another school.’

‘Seek those with fire-in-the-belly enthusiasm for your organisation.’

‘I sought character in players rather than players who were characters.’

‘If you don’t care what kind of person you have on your team so long as they help the team win, I question whether you’ll attain consistent long-term success.’

‘Character is not taught easily to adults who arrive at your desk lacking it. Be cautious about taking on ‘reclamation projects’ regardless of the talent they may possess.’

Permission to Fail

‘The most effective leaders understand that failure is a necessary ingredient of success.’

‘A basketball team that won’t risk mistakes will not outscore opponents. The same is true for any organisation. Fouls, errors, and mistakes are part of the competitive process in sports, business and elsewhere. Don’t live in fear of making a mistake.’

‘Do not be afraid of mistakes, even of failure. Use good judgement based on all available information and then use initiative. The leader who has a fear of failure, who is afraid to act, seldom will face success.’

‘Even well-reasoned actions can fail. Mistakes and failed action are part of progress.. When you punish your people for making a mistake or falling short of a goal, you create an environment of extreme caution, even fearfulness. In sports it’s similar to playing ‘not to lose’ - a formula that often brings on defeat.’

‘Members of an organisation always fearful or penalty and punishment are at a great disadvantage when competing against a team filled with pride. This is so particularly over the long haul.’

Lollapalooza

‘There was no single big thing that made our UCLA basketball teams effective, not the press or the fast break, not size, not condition- no single big thing. Instead, it was hundreds of small things done the right way, and done consistently.’

‘High performance and production are achieved only through the identification and perfection of small but relevant details - little things done well. Those under your leadership must be taught that little things make the big things happen. In fact, they must first learn there are no big things, only a logical accumulation of little things done at a very high standard of performance.’

‘I derived great satisfaction from identifying and perfecting those ‘trivial’ and often troublesome details, because I knew, without doubt, that each one brought UCLA a bit closer to our goal; competitive greatness.’

‘Little things done well, make big things happen for you and your organisation.’

‘When you derive pleasure and pride in perfecting seemingly "minor" details and teach those you lead to do the same--big things eventually start falling into place. This is what separates achievers from the also-rans, the great from the good, the doers from the dreamers.’

Emotions

‘Although you may not be able to control what fate brings your way, you can control how you react and respond to it. At least you should be able to.’

‘Emotionalism destroys consistency. A leader who is ruled by emotions, whose temperament is mercurial, produces a team whose trademark is the roller coaster - ups and downs in performance; unpredictability and undependability in effort and concentration; one day good, the next day bad.

This is a pattern I sought to avoid at all costs. I would not accept inconsistency - the pitfalls of repeated highs and lows. I wanted the individuals on our team to play the same way, game to game, that is, with the greatest intensity while executing at the highest performance level of which they were capable. Emotional ups and downs preclude this. Consequently, I never gave rah-rah speeches or contrived pep talks. There was no ranting or raving, histrionics or theatrics before, during, or after practice and games.’

‘I wanted to conduct myself in a manner that would not reveal to an observer whether UCLA had outscored an opponent or not. Even my dear wife, Nellie, said she couldn’t tell from my expression.’

John Wooden’s 10th NCAA Title 1975 [source AP]

‘Emotional control is a primary component of consistency, which, in turn, is a primary component of success.’

‘I wanted to see fervour during UCLA basketball practice and games, intensity that didn’t boil up and over into emotionalism.’

‘Good judgement, common sense, and reason all fly out the window when emotions kick down your door.’

‘Emotionalism - ups and downs in moods, displays of temperament - is almost always counter-productive, and at times disastrous.’

‘My teaching stressed that ‘losing your temper will get us outplayed because you’ll make unnecessary errors; your judgement will be impaired.’ I didn’t mind an occasional mistake unless it was caused by loss of self-control.’

Marginal Gains

‘You have to apply yourself each day to becoming a little better. By applying yourself to the task of becoming a little better each and every day over a period of time, you will become a lot better.’

Tone at the Top

‘Your own example counts most.’

‘I believe there is no more powerful leadership tool than your own personal example. In almost every way the team ultimately becomes a reflection of their leader.’

‘The leader’s attitude, conscious and subconscious, inevitably becomes the attitude of those he leads. Winston Churchill’s resolution, courage, and defiance nourished an entire nation in the worst of times; his attitude became the attitude of those he lead. The same things happens with effective basketball coaches and business leaders.’

‘As a leader, you must be filled with energy and eagerness, joy and love for what you do.’

‘As leader, my behaviour set the bounds of acceptability. And letting emotions spill over onto the court was simply unacceptable.’

Leaping Emergent Effects

‘Team Spirit - an eagerness to sacrifice personal interests or glory for the welfare of all is a tangible driving force that transforms individuals who are ‘doing their jobs correctly’ into an organization whose members are totally committed to working at their highest levels for the good of the group. When this happens and the leader is the one who makes is happen - the result is almost magical.’

‘A leader can get the unseen potential of individuals to blossom when she or he leads the entire team and not just the star players. This type of leader creates an environment in which every job matters and every member of the organisation counts. In this atmosphere, everyone know the team’s success rests, in part, on their efforts to seek personal greatness.’

Pyramid of Success [Wooden on Leadership]

‘Each member of your team has a potential for personal greatness: the leader’s job is to help them achieve it.’

‘An organization that has all members focused first and foremost on doing what benefits the group is a force to be reckoned with. I know personally what can happen when everyone truly believes it takes 10 hands to make a basket.’'

‘Team spirit has the potential to increase the productivity of you organisation exponentially; Your team becomes greater than the sum of its players; the organisation greater than the number of employees on its payroll. Each individual revels in the glory of the group rather than the glory of the individual. ‘What can I do to help our team today’ replaces ‘How can I get ahead?’ (of course, I believe the answer to the latter is found in the former.)’

‘Some individuals are more difficult to replace than others, but every person contributes - or should - to overall organizational success. Each individual must feel valued, from the secretary to the superstar salesperson and the senior manager. And, above all, each person must comprehend precisely how his or her own job performance is linked to the team's welfare and survival. When this is accomplished, you have made each one feel a part of something much bigger than her or his individual job.’

‘A team filled with people striving to reach 100 percent of their potential in ways that serve the team becomes a force with exponential power and productivity.’

‘A leader or who can get the unseen potential of individuals to blossom when she or he leads the entire team and not just the star players. This type of leader creates an environment in which every job matters and every member of the organisation counts. In this atmosphere, everyone knows that the team’s success rests, in part, on their efforts to seek personal greatness.’

Team

'The star of every successful team is the team. Individuals don't win games, teams do.’

‘There is only one star that counts: the team.’

‘A player who is more concerned with his or her own statistics rather than those of the team is a player I welcome on the opponent's side of the court. The presence of such an individual weakens the team and makes it vulnerable during competition to a disciplined group filled with Team Spirit.’

‘Team Spirit is one of the most tangible ‘intangibles’ I have ever encountered. It's difficult to see; you feel it. And it's a powerful feeling for an organization to have.’

‘Getting your people to think ‘Team First’ is vital. It starts when you teach each member of the group how she or he contributes to the organization, when you make each one feel connected to the team's efforts, productivity, and ultimate success.’

‘Whether in business or in basketball, no superstar or top performer, regardless of his or her level of God-given talent and productivity, does it alone. Every basket Bill Walton ever made utilised ‘10 hands.’ In truth, it involved many more than 10 - the hands, the heads, and hearts of nonstarters, the assistant coaches, the trainer, the managers, and of course, the coach.’

‘‘Ten Hands’ was one of the most important principles that a player or employee can be taught... my own firm belief is that a player who made the team great is better than a great player.’

‘‘For the strength of the pack is the wolf; and the strength of the wolf is the pack.’ That describes the relationship between the individual and the organization - the player and the team.’

‘A player who is thumping his chest after he makes a basket is acknowledging the wrong person. Thus, I insisted the player who scores gives a nod or ‘thumb’s up’ to the teammate who helped - the one who provided the assist. That way it was more likely to happen again.’

‘By insisting that the scorer acknowledge others, I was strengthening the connection those ‘others’ felt to the production process.’

‘It takes 10 hands to make a basket. Don't just reward the two hands scoring points. Recognize the additional hands that make the points possible. They are crucial underpinnings of a winning organization.’

Recognition and Incentives

‘Sharing credit is a surefire way of improving the performance results for any organisation. Everyone starts helping everyone.’

‘When choosing between the carrot and the stick as a motivational tool, the well chosen-carrot was almost always more powerful and longer lasting than the stick.’

‘Conventional carrots include money, of course, as well as advancement, awards, a corner office, or a more prominent role in the team or in the organisation. Carrots come in many forms. However, I believe the strongest and most meaningful motivators are not necessarily the materialistic, but the intangible. In this regard, there is perhaps no better carrot that approval from someone you truly respect, whose recognition you seek. Acknowledgement, a pat of the back, a wink, a nod of recognition or praise from someone you hold in high esteem is most powerful - the most valuable carrot of all. At least, this has been my experience.’

‘Dictator-style coaches and leaders have their own approach (all sticks, no carrots) and can also rise to great heights. But for me, the fear and ill feelings that arise from intimidation, punishment, and cruel words have far less power than pride.’

Caring and Family

‘I believe most people, the overwhelming majority of us, wish to be in an organization whose leadership cares about them, provides, fairness and respect, dignity and consideration.’

‘For a parent, the family counts most of all; for a good leader, the team is nothing less than extended family. Those you lead are not just a random collection of people who show up at your doorstep, put in time, and collect a paycheck. At least, they shouldn't be.’

‘For me the members of our teams were never plug-in parts, ‘jocks’ whose individual value was in direct proportion to the number of points they could score. Never. In fact, next to my own flesh and blood they were the ones closest to me. Those I led were my extended family. And love is present in every good family. You must truly care about the lives and welfare of your team members, and demonstrate it with concern and support within a disciplined environment.’

‘A team - your organisation - is a family. Love must be the glue that holds it together, and love must start with the leader.’

‘Success is much more likely when love is present in your heart for the people who make you organisation a real team, that is, a family.’

‘Teams with a sense of family have uncommon strength and resiliency.’

‘The small considerations often mean the most - a genuine expression of interest or concern, a helpful hand, individual recognition. I knew about players families and their challenges away from basketball. Oftentimes, it really is the thought that counts most.’

New Ideas and Listening

‘Being an effective leader – one who can build a winning organisation – requires being an effective listener. The most productive leaders are usually those who are consistently willing to listen and learn.’ 

‘New ideas and perspective from those under your leadership are essential for achieving and maintaining a competitive edge. Welcome those people strong enough to speak up and offer alternative ideas.’

Source: ASUCLA

‘An effective leader understands that it is a sign of strength to welcome honest difference and new ways of thinking from those on your teams as well as from others. Progress is difficult when you won’t listen.’

‘The best leaders are more interested in finding what’s right than in always being right. They understand how much more can be accomplished if no one cares who gets the credit.’

‘I don’t need ‘yes men.’ If they’re going to yes everything I do, I don’t need them around.’

Change

‘Seek significant change. Be uncomfortable being comfortable, discontent being content.’

‘My philosophy of leadership stood me in good stead during nearly half a century in the competitive arena, and, in spite of all of the changes we see around us, I believe it can be equally effective in the twenty-first century. Some things don't change. Some rules remain the same.’

Learning

‘The path to success lies in the realisation that there is always more to learn. Strive to create an environment where individuals continually seek knowledge that will benefit their team, where you and those in the organisation aren’t afraid to ask questions - to admit, ‘I don’t know’’’

‘Of course, knowledge is never static or complete. A leader who is through learning is through. You must never become satisfied with your ability or level of knowledge. Subsequently, after each season I picked one particular aspect of basketball to study intensively.’

‘The best CEOs are often those credited with developing ‘learning institutions.’ Take meaningful steps to make this a reality. Invite managers from other companies to speak to your people on a key topic. Encourage others to take relevant courses and, most of all, lead by example; specifically, let those you lead see their leader continually learning.’

‘I draw inspiration and direction from a wide array of sources, including my father, Coach Ward Lambert, Abraham Lincoln, Mother Teresa and the Great Pyramid of Giza.’

Continuous Improvement

‘Success is not a destination, it is a journey.’

‘A good leader always seeks improvement - always.’

‘The best leaders understand that to successfully compete at any level requires continuous learning and improvement. Unless the leader communicates this up and down the line - and puts mechanisms in place to ensure it gets done - your team will not be 100 percent in its performance level.’

‘Never be satisfied. Work constantly to improve. Perfection is a goal that can never be reached, but it must be the objective. The uphill climb is slow, but the downhill road is fast.’

‘Accepting the status quo means a leader feels no further improvement can be made. I never reached a point in 40 years of teaching basketball where I felt no further improvement could be made. And that applied to every area of the game, including my own leadership skills.’

Self-Control

‘Self control in little things leads to control of bigger things. For example, the reason I prohibited profanity - a small issue - during practices was because it was usually caused by frustration or anger… I believed and taught that a team lacking self-control will get boutplayed and, usually out-scored.’

‘In fact, as I watched a game unfold there would occasionally be an almost guilty pleasure in seeing our team exert enough pressure to cause the opponent to lose control. I never wanted to see the situation reversed.’

Complacency

‘Success breeds satisfaction; satisfaction breeds failure. A leader must set realistic goals, but once they are achieved, you must not become satisfied. Achievement will continue at the same or a greater level only if you do not permit the infection of success to take hold of you and your organization. The symptom of that infection is called complacency. Contentment with past accomplishments or acceptance of the status quo can derail an organization quickly. In sports or business, getting to the top is difficult. One of the reasons staying there is so rare is because the infection sets in.’

Do the Right Thing

‘Character - doing the right thing - is fundamental to successful leadership.’

‘Good values are like a magnet - they attract good people.’

‘Aristotle said: ‘We are what we repeatedly do.’ He was referring to character - the values and habits of our daily behaviour that reveal who and what we are. I wanted to create good habits in those under my leadership, not only in the mechanics of playing basketball, but also in the fundamentals of being a good person. Thus, a small issue such as putting towels in the towel basket where they belonged was something I viewed as big, something that connected to my overall principles and beliefs -values that went beyond just picking up after yourself.’

Appearances

‘I insisted that jerseys always be tucked in, because I felt it helped create a sense of self-identity and unity. It was a detail that helped teach our players that sloppiness was not tolerated - in anything. Eliminating sloppiness and creating unity were very important to me and were effectively instilled by attending to such details.’

‘From the minute a UCLA Bruin put on a UCLA uniform - even a practice uniform - I wanted him to recognize that he was now part of something special, an organization, a team, a group that did things differently. And it did things the right way all the time, starting from the ground up.’

Mentors

‘Mentors are available at all stages of your leadership life; absorb their knowledge and use it.’

Transparency

‘Insist that Members of Your Team Share the ‘Ball’ - Information, Ideas, and More. The most effective leaders understand the importance of making sure that no member of the team hoards data, information, ideas, and the like. In business, it is the sharing of ideas and putting them to work that leads to a ‘best practice’ mindset.’

Cross-Training

‘Sometimes during practice Coach Wooden would have the guards switch positions with the forwards have us do the other guy's job. He wanted everybody to understand the requirements of the player in the other positions. Coach Wooden wanted the guard to appreciate the challenges a forward faced and the forward to appreciate what a guard had to deal with.’ Gail Goodrich

‘Whether in basketball or business, you must be able to perform all aspects of your job, not just part of it. You must be able to ‘get open’ and ‘shoot'. One without the other makes you a partial performer, someone who can be replaced because your skills are incomplete.’

Listening & ‘Yes-Men’

‘Surround yourself with people strong enough to change your mind.’

‘Being an effective leader, one who can build a winning organization - requires being an effective listener. The most productive leaders are usually those who are consistently willing to listen and learn. New ideas and perspective from those under your leadership are essential for achieving and maintaining a competitive edge. Welcome those people strong enough to speak up and offer alternatives and ideas.’

‘John Wooden did not want "yes men" around him. We were encouraged to argue our points, knowing he'd come back at us strong with his own opinions.’ Gary Cunningham

Repetition

‘John Wooden always used the laws of learning: explanation, demonstration, imitation, and repetition. Lots of repetition. You can't believe the repetition.’ Gary Cunningham

Resilience and Crisis

‘Adversity can make us stronger, smarter, better, tougher. Blaming your troubles on bad luck makes you weaker. Most worthwhile things in the competitive world come wrapped in adversity. Good leaders understand this.’ 

‘When the going gets tough, the tough get going. Don't beg, cry, alibi, sulk, or lose your self-control; but do maintain poise, condition, alertness, confidence, industriousness, enthusiasm, fight, and desire.’

‘Although you may not be able to control what fate brings your way, you can control how you react and respond to it. At least, you should be able to.’

‘Walt Disney once said, ‘There is no education like adversity.’ However, to gain this education you must be tough enough to overcome adversity rather than allowing adversity to overcome you.’

Optimism

‘I don't know exactly why, but I began accepting what fate offered and tried to make the best of the situation to move forward with optimism and the determination to make the most of the hand I was dealt, whether it was good or bad.’

‘Be a realistic optimist and remind yourself that things turn out best for those who make the best of the way things turn out.’

‘Always believe there is a positive to be found in the negative. Things usually happen for a reason, even when you are unable to discern the reason.’

Trust

‘When you say you'll do it, do it. Don't give your word unless you intend to keep it. A leader whose promise means something is trusted. Trust counts for everything in leadership.’

Checklists

‘When I was coaching, I had a pretty good memory for facts and figures, names and faces, and the rules of behavior that members of the team were expected to follow. Nevertheless, I wrote things down, including lists of personal qualities that I wanted our players to have or develop the ingredients necessary for a successful team. While my memory served me very well, I took no chances that something would be overlooked or forgotten. Lists. Lots of lists resulted.’

Unconventional

‘The 1961-1962 season would be a turning point for UCLA basketball, one that eventually produced 10 NCAA championships including seven in consecutive years and an 88-game winning streak. I had no idea it was all about to happen.

Starting in 1962-1963, my new policy was to go primarily with seven main players virtually, seven starters in both practice and games. My previous goal of doling out playing time in a democratic manner was discarded. I changed a fundamental policy for how I did things.

I didn't intend to ignore the eighth to twelfth players, obviously, but I let them know very clearly what their roles in the group would be and for what purpose. More important, I tried very hard to make them understand the great value of their role and how it would contribute to the overall welfare of the team. In part, this meant they would be the stone that sharpened the sword, that is, the starting lineup.’

‘One of the challenges I faced with the Bruins during practice was dealing with the distraction caused by a player's natural instinct and desire to score baskets or grab rebounds. I attempted to solve this particular problem at UCLA by occasionally removing the siren song; specifically, I made them practice and play basketball without the ball. Without the basketball, player can neither score baskets nor grab rebounds. Without those distractions, he was better able to fully concentrate on what I was teaching.’

‘I would never retire a player's number, because it suggests that a single individual is the greatest to ever wear it. Retiring the number in their name dismisses the great effort and contributions of all others who have worn that same number.’

‘I also used a somewhat unusual approach in helping individuals learn correct habits the fundamentals - for rebounding. Again, it stemmed from my desire to use time as efficiently as possible. Obviously, it's difficult to practice rebounding if there's no rebound -if the shot goes through the hoop. Thus, at times we practiced rebounding with a cover over the basket, which meant that every shot produced a rebound opportunity.’

‘When it came to perfecting details I worked ‘feet first,’ from the ground up. Socks? During our first team meeting I personally showed players how to put them on properly. Shoes? We didn’t ask players what size they wore. I insisted our trainer measure each student-athlete’s foot - to ensure that newly issued sneakers fit properly. I wanted no slippage.’

Legacy

‘A leader truly dedicated to the team's welfare doesn't make himself irreplaceable. Things did not fall apart just because I was gone.’

‘Who are your assistant leaders? Are you allowing them the opportunity to learn and grow as leaders? Is there someone ready to take the reins of leadership in case something happens to you? Or do you feel threatened by having someone in the organization potentially be your replacement?’

Summary

At first glance, basketball and business may appear worlds apart, yet the traits that defined the greatest college basketball coach, John Wooden, echo in the triumphs of the world's most successful businesses. Wooden was a fanatic. He realized that while perfection was unattainable, striving for it ensured the team produced at the highest levels. He took emotion out of the game, something as relevant for sporting success as it is for business and investment.

Nurturing his players, instilling autonomy, embracing unconventional methodologies, fostering a culture steeped in integrity and respect, and establishing a top-down leadership tone comprised essential elements of his triumph. Acknowledging every team member, integrating them into the mission, and acknowledging their successes triggered emergent effects, where the collective impact surpassed individual contributions. In the business landscape, akin to a basketball team, an organization is an assembly of individuals. Employing strategies to unlock each person's potential yields extraordinary outcomes. This understanding, exemplified by John Wooden, is a shared ethos among exceptional CEOs who recognize the transformative power of cultivating a unified and empowered team.

Source:
‘Wooden on Leadership,’ John Wooden and Steve Jamison. McGraw-Hill. 2005.

Further Material:
‘Ted Talk - The difference between winning and succeeding,’ John Wooden, 2001.

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Learning From the Santa Fe Institute

If only we had perfect foresight and understanding. It certainly would make investing easy, but unfortunately, the infinite complexity of the world makes it impossible for us to make sense of it all. To help us cope with the complexity we develop mental models - short cuts or maps - that simplify what’s in front of us. These mental models become the tools we use to interpret the world, and while useful, they’re often but a crude guide to reality. Through curiosity, exploration and study we can upgrade our toolkit of mental models providing us a better window into the future. We can develop what Charlie Munger refers to as ‘worldly wisdom.’

“As Thoreau said, ‘It's not what you look at that matters, it's what you see.’" Warren Buffett

"Visionaries are not people who see things that are not there, but who see things that others do not. As Einstein quipped, ‘Why do some people see the unseen?’" Bennett Goodspeed

"The real voyage of discovery consists, not in seeking new landscapes, but in having new eyes." Marcel Proust

“Theory shapes the observation.” Albert Einstein

When it comes to investing and businesses, the mental models in our head help us answer the question, ‘what does the future hold?’ Ordinarily such models deal with businesses, industry structure, markets, politics, history, economics, etc. Ultimately, they manifest themselves in the numbers that fill an analyst’s or investor’s spreadsheet model. Devoid of the right mental models, or applying the wrong ones, is likely to result in failure. By way of example, applying the mental model of ‘mean reversion’ for a ‘fade-defying’ business model will lead to an erroneous conclusion. If the mental models are wrong, the spreadsheet model will be wrong. Period.

“I would argue rationality, which is seeing the world the way it is, instead of the way you hope it is. I’d say that’s the most important thing. If you don’t see the world the way it is, it’s like judging something through a distorted lens, you think the world is one way and it’s different. And of course, that leads to terrible mistakes. You want to think correctly.” Charlie Munger

It’s for this reason that developing a broad ensemble of mental models can provide an investment edge; offering insights others can’t see. A striking example is Nick Sleep’s prescient analysis of Amazon some fifteen years ago. The recent FT article, “Cult figure of investing one of few to grasp early promise of internet stocks,” picked up on this: ‘what remains remarkable about [Nick Sleep’s] observations made more than 15 years ago is that many are only now starting to be accepted by mainstream financial analysis, while some remain controversial to this day’.

Nick Sleep is undoubtedly one of the best investors nobody’s heard of. His fund, Nomad Partners, delivered returns of more than 20 percent a year for thirteen years before he closed up shop to pursue more ‘caring pursuits.’ What differentiates Sleep are the diversity of the mental models he internalised and crafted into unique investment theses. Many of these mental models were drawn from a think-tank nestled in the Sangre de Cristo Mountains in New Mexico known as the ‘Santa Fe Institute’ [SFI].

Source: Nomad Letter 2007

If Charlie Munger, the epitome of a multi-disciplinary mindset, were to design a ‘think-tank’, the ‘Santa Fe Institute’ would be it. Drawing on fields as diverse as physics, chemistry, biology, information processing, economics, political science and every other aspect of human affairs, the Institute endeavours to see the world as it is, a complex non-linear web of incentives and constraints and connections.

In 2007, Nick Sleep discussed the Santa Fe Institute professor Geoffrey West’s work on ‘Scaling’ and the universal laws of growth, innovation and sustainability. Sleep proposed the simple elemental structure of scaling found in organisms might apply to companies, with specific reference to internet retailing and Amazon.

Source: Nomad Letter 2007

In 2010, SFI professor Ole Peter’s work on decision trees was utilised to clarify the risk a company poses as it moves down the various branches of future possible realities. Sleep concluded the stock market mistakenly prices all possible future outcomes concurrently, yet the range of future scenarios lessen as a company moves down each consecutive branch, leaving long-term success under-valued.

Source: Nomad Letter 2010

Nick Sleep is not alone in drawing on the learnings of the Santa Fe Institute. James Anderson, Bill Gurley, Josh Wolfe, Bill Miller, Michael Mauboussin and Chris Davis are passionate adherents.

“It is my personal opinion that the thinking presented by Zeckhauser, and at the Santa Fe Institute should be thought of as the new economics in waiting, but it will likely only become mainstream consensus once the old guard has died off. The fact that these courses are still considered Moonie conventions and are rejected by the Harvard economics department shows how far away establishment, consensus thinking is.” Nick Sleep

“For a long time I’ve thought that the Santa Fe Institute was the best academic link that we have. ‘Best’ in almost every sense: highest intellectual calibre (as partially evidenced by how little I grasp), interdisciplinary devotion, collegiate atmosphere and obliquity. Yet Santa Fe has turned out to be directly relevant to how I, at least, invest. Indeed I can scarcely think of any significant investment I’ve made that hasn’t been fundamentally driven by ideas emanating from Santa Fe. From Brian Arthur’s views on the economics of increasing returns to Geoffrey West’s work on scaling, to Jessika Trancik’s tracking of innovation rates (especially in energy), to the basic notion of complexity itself, their thoughts have altered my mind a lot. In fact it’s simply been the most important material I’ve come across.” James Anderson

"You don't come [to the Santa Fe Institute] to get an answer to something, you come here to understand things in a different way." Bill Miller

“My favourite book of all time is a book called “Complexity,” about the rise of the Santa Fe Institute where I’m now fortunate enough to serve on the board. It’s really an analysis of multi-variable nonlinear systems & how they behave. And that includes things like stock markets or weather, the pandemics. A lot of the tools that we think are scientific like linear interpolation actually don’t work very well in these chaotic systems. One of the early people there was Brian Arthur [who was] the first to write about network effects back in the early 90’s, and that had a big impact [on me].” Bill Gurley

Summary

Developing a diverse toolkit of mental models for investing is a proven path to success. Nick Sleep, Charlie Munger and James Anderson, mavericks when it comes to investment thinking, are evidence of such. The learnings these Masters have extracted from nature, biology, physics, psychology, economics, politics and complexity science have lead to investment insights and success others couldn’t see.

'Wordly wisdom is a good phrase for the intellectual capital in which investment decisions are made, and at the end of the day, it is the source of any superior investment results we may enjoy." Nick Sleep

The Financial Times article concluded, “the story of Mr Sleep is a reminder that a small number of investors who possess genuinely differentiated insights about the world can generate vastly superior results to the herd.”

Every single human being on earth is blessed with the power of thought. And every single one of us utilises our capacity for thinking every single day. Some of us are very good at it, yet others are not, and most of us will tend to hang onto the thoughts that have been presented to us during our education or working lives, and never question their veracity, accuracy or even relevance in today’s world. Even more, very few of us can attain the idea of an original thought; that is, an idea or opinion that has never been previously imagined in the past. But don’t be discouraged, even a genius like Nick Sleep has identified there is a body that can. So, if you’re looking for differentiated insights and vastly superior results, the Santa Fe Institute might be a rabbit hole worth venturing down.

Further Reading:

‘Complexity - The Emerging Science at the Edge of Order and Chaos,’ Mitchell Waldrop, 1992.
Santa Fe Institute - Website.
‘Multi-Disciplinary Mindset’ - Investment Masters Class Tutorial.
‘How to Build a Better Investing Mind’ - Investment Masters Class, 2017.

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Learning from Rory Sutherland

What if, as an investment opportunity, I offered you a stake in a beverage business that had one drink as their product and that the drink possessed a taste that everyone hated. Would you invest in that? Probably not, right? And why? Because it wouldn’t be logical.

But what if I offered you a stake in the same business, but in this instance I told you the business was Red Bull? How about now? Would you invest?

As human beings we are often shackled by our beliefs and indeed, need for things to fit into neat, logical reasoning. We search for validation for our decisions based on mathematical models; if the spreadsheet says it will be successful, then, logically, it must be.

By contrast, some of the most innovative products ever to grace our markets were developed using everything but. Logic simply never came into it. They were the product of imagination and daring and luck, and often in fact, despite this, those truly innovative products were at first rubbish. The first cars were certainly no better than horses, and the first airplanes were nothing more than flying death traps. Would you have invested in those businesses when those products were first invented? Few would, because there was no logical argument to support doing so. Yet now, those same products are revered in our society and their markets are worth billions. If we had of applied logic to the business cases when they were first developed, those two products alone would probably still be sitting on the scrap heap, and no one would have wanted a stake. No one would buy a plane that had a high propensity for killing its passengers, and certainly no one would want a car that was slower than a horse.

Some of man’s most noble achievements have been the product of imagination, daring to dream and in some cases, pure luck. Or so says Rory Sutherland.

‘Alchemy: The dark art and curious science of creating magic in brands, business, and life.” Rory Sutherland

I stumbled across Rory Sutherland on a podcast discussing a press release about the recently refurbished London St Pancras Station, which promoted the station’s champagne bar as ‘The Longest in Europe’. Sutherland’s curiosity was piqued when this bizarre fact seemed to resonate with journalists, who all faithfully reported the news. Most people wouldn’t think twice about a statement like that, but to Rory it was pure ‘Alchemy’.

Sutherland noted ‘Generally, people don’t care all that much how long champagne bars are. No one has ever, I think, asked the question ‘I feel like going to a champagne bar – can you tell me some nearby places – ordered in declining order of length.’ But to human perception, that sentence was a burst of pure green light. Because in one sentence it conveyed that this station was not a mere utilitarian transit hub – it was a place of entertainment; a destination in its own right.” Rory sees things most people don’t. He understands the foibles of human nature on a much deeper level. Curiosity and thinking are his calling cards.

If there’s such a thing as the ‘Charlie Munger of Advertising’, Rory Sutherland’s it. Rory is the Vice Chairman of Ogilvy, and co-founded a behavioural science practice within the agency. Like Munger, Rory draws on an immense catalogue of disciplines. In his recent book ‘Alchemy’, Sutherland shows us that the answers to many of our problems won’t be found in science and logic, but instead through an alchemy drawing on observation, psychology, human nature, evolution, trial and error - a process he refers to as psycho-logic.

The book contains an abundance of useful analogies and mental models. Upon completing the read, you’ll have another perspective to observe the world. Little wonder, it’s recommended reading by some of the world’s most successful investors - Rajiv Jain, James O’Shaughnessy and Clifford Sosin - to name a few.

“Looking around you is the most important skill.” Nick Sleep

The book’s usefulness stems from the many stories it contains about the seemingly irrationality of human behaviour, businesses and life which can be explained through psycho-logic. I’ve collected some of my favourite extracts below. While they only just scratch the surface of the book’s wisdom, hopefully they provide a glimpse into a different type of seeing and thinking.

Logic

“The models that dominate all human decision-making today are duly heavy on simplistic logic, and light on magic - a spreadsheet leaves no room for miracles.”

“The economy is not a machine - it is a highly complex system. Machines don’t allow for magic, but complex systems do.”

“Problems almost always have a plethora of seemingly irrational solutions waiting to be discovered, but that nobody is looking for them; everyone is too preoccupied with logic to look anywhere else.”

“Entrepreneurs are disproportionately valuable precisely because they are not confined to doing only those things that makes sense to a committee. Interestingly, the likes of Steve Jobs, James Dyson, Elon Musk and Peter Thiel often seem certifiably bonkers.”

“When you demand logic, you pay a hidden price: you destroy magic.”

“The human mind does not run on logic any more than a horse runs on petrol.”

“Logic is what makes a successful engineer or mathematician, but psycho-logic is what made us a successful breed of monkey, that has survived and flourished over time.”

“We have faster trains with uncomfortable seats departing from stark, modernist stations, whereas our unconscious may well prefer the opposite; slower trains with comfortable seats departing from ornate structures.”

Emotions Rule

“Think about it. There are some phrases that just wouldn’t appear in the English language:

‘I chose not to be angry.’
‘He plans to fall in love at 4.30pm tomorrow.’
‘She decided that she was no longer to feel uneasy in his presence.’
‘From that moment on, she determined no longer to be afraid of heights.’
‘He decided to like spiders and snakes.’”

Data

“More data leads to better decisions. Except when it doesn’t.”

“The need to rely on data can also blind you to important facts that lie outside your model.”

“Strangely, as we have gained access to more information, data, processing power and better communications, we may also be losing the ability to see things in more than one way, the more data we have, the less room there is for things that can’t easily be used in computation.”

“Bad maths can lead to collective insanity, and it is far easier to be massively wrong mathematically than most people realise - a single dud data point or false assumption can lead to results that are wrong by many orders of magnitude.”

“Just a few wrong assumptions in statistics, when compounded, can lead to an intelligent man being wrong by a factor of about 100,000,000 - tarot cards are rarely this dangerous.”

“A single rogue outlier can lead to an extraordinary distortion of reality - just as when Bill Gates can walk into a football stadium and raise the average level of wealth of everyone in it by $1m.”

“We should at times be wary of paying too much attention to numerical metrics. When buying a house, numbers (such as number of rooms, floor space or journey time to work) are easy to compare, and tend to monopolise our attention. Architectural quality does not have a numerical score, and tends to sink lower in our priorities as a result, but there is no reason to assume that something is more important just because it is numerically expressible.”

“Our brains did not evolve to make perfect decisions using mathematical precision - there wasn’t much call for this kind of thing on the African savannah. Instead we have developed the ability to arrive at pretty good, non-catastrophic decisions based on limited non-numerical information, some of which may be deceptive.”

“The risk with the growing use of cheap computational power is that it encourages us to take simple, mathematically expressible part of a complicated question, solve it to a high degree of mathematical precision, and assume we have solved the whole problem.”

“We fetishise precise numerical answers because they make us look scientific - and we crave the illusion of certainty. But the real genius of humanity lies in being vaguely right - the reason that we do not follow the assumptions of economists about what is rational behaviour is not because we are stupid. It may be because part of our brain has evolved to ignore the map, or to replace the initial question with another one - not so much to find a right answer as to avoid a disastrously wrong one.”

“To use the analogy of the needle in the haystack, more data does increase the number of needles, but it also increases the volume of hay, as well as the frequency of false needles — things we will believe are significant when really they aren’t. The risk of spurious correlations, ephemeral correlations, confounding variables, or confirmation bias can lead to more dumb decisions than insightful ones, with the data giving us a confidence in these decisions that is simply not warranted.”

“In reality, all valuable information starts with very little data - the lookout on the Titanic only had one data point .. ‘Iceberg ahead,’ but they were more important than any huge survey on iceberg frequency.”

“The data might suggest people won’t pay £49 for a jar of coffee and that’s true, mostly. However people will pay 30p for a single Nespresso capsule which amounts to a similar cost - without understanding human perception it is unable to distinguish between the two. Big data makes the assumption that reality maps neatly on to behaviour but it doesn’t. Context changes everything.”

“We should also remember that all big data comes from the same place: the past. Yet a single change in the context can change human behaviour significantly. For instance, all the behavioural data in 1993 would have predicted a great future for the fax machine.”

“It is possible to construct a plausible reason for any course of action, by cherry-picking the data you choose to include in your model and ignoring inconvenient facts. The more data you have, the easier it is to find support for some spurious, self-serving narrative. The profusion of data will not settle arguments: it will make them worse.”

Innovation

“Metrics, and especially averages, encourage you to focus on the middle of a market, but innovation happens at the extremes.”

“If you look at the history of inventions and discoveries, sequential deductive reasoning has contributed to relatively few of them.”

“A good guess which stands up to observation is still science. So is a lucky accident.”

“Business and politics have become far more boring and sensible than they need to be.”

“Most valuable discoveries don’t make sense at first; if they did, somebody would have discovered them already.”

“In coming up with anything genuinely new, unconscious instinct, luck and simple random experimentation play a far greater part in the problem-solving process than we ever admit.”

“We constantly rewrite the past to form a narrative which cuts out the non-critical points - and which replaces luck and random experimentation with conscious intent. In reality almost everything is more evolutionary than we care to admit.”

“It is surprisingly common for significant innovations to emerge from the removal of features rather than the addition. Google is, to put it bluntly, Yahoo without all the extraneous crap cluttering up the search page. Similarly, Twitter’s entire raison d’etre came from the limitation on the number of characters it allowed. McDonalds deleted 99% of items from traditional American diner repertoire; Starbucks placed little emphasis on food for the first decade of its existence.”

“In the early stages of any significant innovation, there may be an awkward stage where the new product is no better that what it is seeking to replace. For instance, early cars were in most respects worse than horses. Early aircraft were insanely dangerous. Early washing machines were unreliable. The appeal of these products was based on their status as much as their utility.”

More Logic

“To solve logic-proof problems requires intelligent, logical people to admit the possibility they might be wrong about something, but these people’s minds are often most resistant to change - perhaps because their status is deeply entwined with their capacity for reason.. Highly educated people don’t merely use logic; it is part of their identity. When I told one economist that you can often increase the sales of a product by increasing its price, the reaction was one not of curiosity, but of anger.”

“It is perfectly possible to be both rational and wrong. Logical ideas often fail because logic demands universally applicable laws but humans, unlike atoms, are not consistent enough in their behaviour for such laws to hold very broadly.”

“Imagine you are a company whose product is not selling well. Which of the following proposals would be easier to make in a board meeting called to resolve the problem? a) ‘We should reduce the price’ or b) ‘We should feature more ducks in our advertising.’ The first of course - and yet the second could, in fact, be much more profitable.”

“The fatal issue is that logic always gets you to exactly the same place as your competitors. Our mantra is, ‘Test counterintuitive things, because no-one else ever does.'"

“Stubborn problems are probably stubborn, because they are logic proof.”

“All progress involves guesswork, but it helps to start with a wide range of guesses.”

“If a problem is solved using a discipline other than that practised by those who believe themselves the rightful guardians of the solution, you’ll face an uphill struggle no matter how much evidence you can amass… Surgeons felt challenged by keyhole surgery and other less invasive procedures that can be carried out with the support of radiographers, because they used skills different from those that they had spent a lifetime perfecting.”

“Human behaviour is an enigma. Learn to crack the code.”

“Real life is not a conventional science - the tools which work so well when designing a Boeing 787, say, will not work so well when designing a customer experience or a tax programme. People are not nearly as pliable or predictable as carbon fibre or metal alloys, and we should not pretend that they are.”

“Hillary thinks like an economist, while Donald is a game theorist, and is able to achieve with one tweet what would take Clinton four years of congressional infighting. That’s alchemy; you may hate it, but it works.”

“The single worst thing that can happen in a criminal investigation is for everyone involved to become fixated on the same theory, because one false assumption shared by everyone can undermine the entire investigation. There’s a name for this - it’s called ‘privileging the hypothesis.’

“If science did not allow for such lucky accidents, its record would be much poorer - imagine if we forbade the use of penicillin, because its discovery was not predicted in advance. Yet policy and business decisions are overwhelmingly based on a ‘reason first, discovery later’ methodology, which seems wasteful in the extreme. Evolution, too, is a haphazard process that discovers what can survive in the world where some things are predictable but others aren’t. It works because each gene reaps the rewards and costs from its lucky or unlucky mistakes, but it doesn’t give a damn about reasons.”

“Conventional logic is a straightforward mental process that is equally available to all and will therefore get you to the same place as everyone else.”

Models

“The models of human behaviour devised and promoted by economists and other conventionally rational people are wholly inadequate at predicting human behaviour.”

“Notice that ordinary people are never allowed to pronounce on complex problems. When do you ever hear an immigration officer interviewed about immigration, or a street cop interviewed about crime? These people patently know far more about these issues than economists or sociologists, and yet we instead seek wisdom from people with models and theories rather than actual experience.”

“If this book provides you with nothing else, I hope it gives you permission to suggest slightly silly things from time to time. To fail a little more often. To think unlike an economist.”

“The 2008 financial crisis arose after people placed unquestioning faith in mathematically neat models of an artificially simple reality.”

“In any complex system, an overemphasis on the importance of some metrics will lead to weaknesses developing in other over-looked ones. It’s surely better to find satisfactory solutions for a realistic world, than perfect solutions for an unrealistic one.”

New Ideas

“After all, no big business idea makes sense at first. I mean, just imagine proposing the following ideas to a group of skeptical investors .. ‘What people want is a really cool vacuum cleaner’ (Dyson), ‘And best of all the drink has a taste which consumers say they hate.’ (Red Bull), ‘.. and just watch as perfectly sane people pay $5 for a drink they can make at home for a few pence’ (Starbucks).”

Reasoning

“The evolutionary psychologist Robert Kurzban, explains that we do not have full access to the reasons behind our decision-making because, in evolutionary terms, we are better off not knowing, we have evolved to deceive ourselves, in order that we are better at deceiving others.”

“If you want to change people’s behaviour, listening to their rational explanations for their behaviour may be misleading, because it isn’t the real why.”

“We consciously believe our actions are guided by reason, but this does not mean that they are - it may simply be evolutionary advantageous for us to believe this.”

“One astonishing possible explanation for the function of reason only emerged about ten years ago: the argumentative hypothesis suggests reason arose in the human brain not to inform our actions and beliefs, but to explain them and defend them to others. In other words, it was an adaption necessitated by our being a highly social species. We may use reason to detect lying in others, to resolve disputes, to attempt to influence other people or to explain our actions in retrospect, but it seems not to play the decisive role in individual decision-making. In this model, reason is not as Descartes thought, the brain’s science and research and development function - it is the brains legal and PR department.”

“The fact that we can deploy reason to explain our actions post-hoc does not mean that it was reason that decided on that action in the first place, or indeed that the use of reason can help obtain it.”

Customers

“Just as we infer a great deal about an air carrier from their on-board catering, while neglecting to care about the $150m aircraft or make of the engines, we are just as likely to be unhappy with a hospital because the reception area is neglected, the magazines are out of date and the nurse didn’t spare us much time. The truth is that ancillary details have a far greater effect on our emotional response, and hence our behaviour, than measured outcomes.”

“For a business to be truly customer-focused it needs to ignore what people say. Instead it needs to concentrate of what people feel.”

Short Term Optimisation

“A company pursuing only profit but not considering the impact of its profit seeking upon customer satisfaction, trust or long-term resilience, could do very well in the short term, but its long term future may be perilous. There is a parallel in the behaviour of bees, which do not make the most of the system they have evolved to collect nectar and pollen. Although they have an efficient way of communicating about the direction of reliable food sources, the waggle dance, a significant proportion of the hive seems to ignore it altogether and journeys off at random. In the short term, the hive would be better off all bees slavishly followed the waggle dance, and for a time this random behaviour baffled scientists, who wondered why 20 million years of bee evolution had not enforced a greater level of behavioural compliance. However, what they discovered was fascinating: without these rogue bees, the hive would get stuck in what complexity theorists call ‘a local maximum'; they would be so efficient at collecting food from known sources that, once these existing sources of food dried up, they wouldn’t know where to go next and the hive would starve to death. So the rogues bees are, in a sense, the hive’s research and development function, and their efficiency pays off handsomely when they discover a fresh source of food. It is precisely because they do not concentrate exclusively on short-term efficiency that bees have survived so many million years. If you optimise something in one direction, you may be creating a weakness somewhere else.”

Silly Questions

“The reason we do not ask basic questions is because, once our brain provides a logical answer, we stop looking for better ones: with a little alchemy, better answers can be found.”

“To reach intelligent answers, you often need to ask really dumb questions.”

“Perhaps advertising agencies are largely valuable simply because they create a culture in which it is acceptable to ask daft questions and make foolish suggestions.”

How You Ask Questions

“One of the great contributions to the profit of high-end restaurants is the fact that bottled water comes in two types, enabling a waiter to ask ‘still or sparkling?’, making it rather difficult to say ‘just tap.’”

Change

“An inability to change perspective is equivalent to a loss of intelligence.”

Efficiency Doesn’t Always Pay

“I rang a company’s call centre the other day, and the experience was exemplary: helpful, knowledgeable and charming. The firm was a client of ours, so I asked them what they did to make their telephone operators so good. The response was unexpected: ‘to be perfectly honest, we probably overpay them.’.. The staff weren’t regarded as a ‘cost’ - they were a significant reason for the company’s success. However, modern capitalism dictates that it will only be a matter of time before some beady-eyed consultants pitch up at a board meeting with a PowerPoint presentation entitled ‘Rightsizing Customer Service Costs Through Offshoring and Resource Management.’ or something similar. Soon nobody will phone to place orders because they won’t be able to understand a word they are saying, but that won’t matter when the company presents its quarterly earnings to analysts and one chart contains the bullet point: ‘Labour cost reduction through call centre relocation/downsizing.”

“Today the principal activity of any publicly held company is rarely the creation of products to satisfy a market need. Management attention is instead largely directed towards the invention of plausible sounding efficiency narratives to satisfy financial analysts, many of whom know nothing about the businesses they claim to analyse, beyond what they can read on a spreadsheet.”

Psychology

“In psychology, one plus one can equal three.”

“We don’t value things we value their meaning. What they bare is determined by the laws of physics, but what they mean is determined by the laws of psychology. Companies which look for opportunities to make magic, like Apple or Disney, routinely feature in lists of the most valuable and profitable brands in the world; you might think economists would have notice this by now.”

“Nearly all really successful businesses, as much as they pretend to be popular for rational reasons, owe most of their success to have stumbled on a psychological magic trick, sometimes unwittingly. Google, Dyson, Uber, Red Bull, Diet Coke, McDonalds, Just Eat, Apple, Starbucks and Amazon have all deliberately or accidentally happened on a form of mental alchemy.”

“According to research from the University of Illinois, descriptive menu labels raised sales by 27% in restaurants, compared to food items without descriptors.”

“So much for economic orthodoxy - in fact, it is not uncommon for premium priced products to have a high market share, as any of those financial analysts might have realised had they reached into their pockets to find an I-phone or the key to an Audi.”

“If there is a mystery at the heart of this book, it is why psychology has been so peculiarly uninfluential in business and in policy making when, whether done well or badly, it makes a spectacular difference.”

“If a customer has a problem and a brand resolves it in a satisfactory manner, the customer becomes a more loyal customer than if the fault had not occurred in the first place.”

“Much of the paraphernalia and practice of the military - flags, drums, uniforms, square-bashing, regalia, mascots and so forth - might be effectively bravery placebos, environmental cues designed to foster bravery and solidarity.”

“People want cheap, abundant and nice tasting drinks, surely? And yet the success of Red Bull proves they don’t.”

Hiring

“I have never seen evidence that academic success accurately predicts workplace success.”

“It is now common practice in British firms to interview people with an upper second-class degree or above, a criterion that is applied with no evidence but simply because it is logical.”

“An unconventional rule for spotting talent that nobody else uses may be far better than a ‘better’ rule which is in common use, because it will allow you to find talent that is undervalued by everyone else.”

Diversity

“As I always advise young people, ‘Find one or two things your boss is rubbish at and be quite good at them.’ Complementary talent is far more valuable than conformist talent.”

Summary

Every investor needs an edge and seeing things that others don’t can be one of those. Building a latticework of mental models provides more tools. As Charlie Munger warns, ‘to a man with a hammer, every problem looks like a nail.’ One of my favourite mental models is Sutherland’s observation about the bees and the waggle dance. There’s a real analogy here for investors. If you keep doing the same things, buying the same types of investments, you might risk missing the changing world. In our portfolio we’ve started to experiment with very small positions in businesses we’d likely have overlooked a few years ago. We make an effort to read and listen to investors in adjacent disciplines like venture capital and private equity. We keep pushing into broader intellectual fields to identify lessons and mental models we can incorporate in our own investing. And we listen to investors we disagree with who test our long held assumptions about how we define successful investing. We’re hoping, like the bees and the waggle dance, it will help us survive and flourish over the long term.

Sources:
‘Alchemy’ by Rory Sutherland. 2019. Harper Collins

Podcasts:
‘My Conversation with Rory Sutherland’, Farnham Street.
‘Rory Sutherland: The Alchemist's Mix of Behavioral Science’, The Behaviourist.

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Learning From Podcasts

"Nothing has served me better in my long life than continuous learning." Charlie Munger

If there is one common trait that links the world's greatest investors, it's a desire to learn. And to keep learning.

When I was younger, the available learning sources were much fewer than we have available to us today. We had newspapers and magazines, libraries and universities, but none of it was instantaneous; we had to travel somewhere else to grab the latest information. Nowadays its much different - Enter the Internet. These days there's an incredible volume of high quality, free material available to us to supplement our learning experiences. 

Of course, one of the downsides to having all this information is that we don't always have the time to review it. Our lives are so busy with work and family, there's usually not much spare time to devote to learning. Enter the humble Podcast.

Podcasts are like audio-blogs. When stuck in traffic, working out at the gym, sitting on a plane or waiting for a bus, a podcast is a great way to better utilize that downtime and keep learning. 

Over the last few years I've taken to regularly listening to podcasts, and have enjoyed many which have challenged my thought processes, provided numerous investment insights and added to my knowledge base. If I'm reading a book recommended by one of the Investment Masters, I'll often search the Apple podcast App to see if I can catch a quick podcast with the author first. I also often subscribe to a series and save individual podcasts to come back to. 

Below are some of my favorite Podcast series along with some great episodes worth listening to [click on the images to access] ... 

The series that I've included above are those I regularly enjoy, however you'll find there are plenty of other great podcasts available to you. To date, despite listening to copious amounts of these wonderful audio blogs, I've barely scratched the surface when it comes to those devoted to great businesses and investing. 

Others I've also enjoyed listening to include episodes from FT's Alphachat, McKinsey on Finance, The Tim Ferris Show, Knowledge@Wharton, Inquiring Minds and Value Investing Podcast to name but a few.

If you're embarking on a new book, studying a new discipline or learning about a favourite investor, take a trip to the App store to see what you can find. You might be surprised. And whether you're driving, about to travel on a plane or are stuck in traffic on the way to a meeting, throw on those headphones and listen to a podcast. Its one of the best ways I know to keep learning!

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Staying Curious

Are you a curious person? Do you always ask questions, determinedly seek out new information or continually want to know why? If there is one thing the Investment Masters seem to agree on, it's that you don't need a sky-high IQ or advanced mathematical skills to be a successful investor. What you do need is curiosity. And curiosity is an unbelievably powerful tool. Some of the most famous thinkers and innovators in human history (think DaVinci, Marie Curie, Thomas Edison and Einstein, to name but a few) have had one simple thing in common - curiosity. Einstein himself attributes curiosity to his success: 'I have no special talent. I am only passionately curious." 

Curiosity can be described as the drive that brings learners to knowledge. Curiosity is about being aware and open, checking things out, experimenting, and interacting within one's surroundings. Other physical manifestations include observing, reading, wondering, thinking and questioning.

Fostering curiosity can often provide an edge the market has overlooked. It can lead to new ideas and provide insights for further analysis. We know the Investment Masters are all voracious readers. What you may not know is they read widely; newspapers, annual reports, trade magazines, history books, business books, biographies; basically anything they can get their hands to accumulate large, mental databases of information.

"My policy [is] reading every annual report in sight that can further my knowledge about anything." Warren Buffett

"Be widely read and curious.” Ed Thorp

“You can’t have enough curiosity.” Todd Combs

“Being a successful investor you need to be hungry, intellectually curious, interested, read all the time.” Ted Weschler

“[Investing] requires endless curiosity, the relentless pursuit of additional information, the raising of questions, and the search for answers.” Seth Klarman

"Curiosity is the engine of civilization. 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. This helps to develop one's sense of perspective in all matters." Peter Cundill

“I'm always super curious. I just want to learn... I just want to keep learning and meeting interesting people and being in interesting situations, using my mind, but trying to always learn from somebody. And so I'm always excited to be in new places and try to learn.” Marc Lasry

“My whole life I’ve been a reader. I’m curious; I want to know how things work. Even more importantly I want to know what is going to happen. And what’s going to happen is often related to what has happened. I read history, I read psychology, I read finance and business. I read a lot of biographies. I’m drawn to anything that makes me a better person, makes me a better investor and makes me a better philanthropist or just makes me more knowledgeable about the world.” Seth Klarman

“I learn and I’m curious about all businesses. That’s why when opportunities come, within a few seconds you can smell it. How can you develop that smell? The only way to really do that is just reading page after page.” Li Lu

“I’m interested in millions of things. I’m on the verge of Curious George sometimes. I’m just curious about everything.” Pierre Lagrange

"I have an insatiable curiosity, and as a kid I thrived on wandering around my Chicago neighborhood on my own.” Sam Zell

Often they'll stumble on a snippet of information that provides inspiration for further analysis.

“Who knows when some little fact stored in the back of your mind pops up and really does make a difference.” Warren Buffett

When Buffett reads annual reports he's seeking as much information as he can about the person running the business and how they think about what's really going on in the business. At the 1996 Berkshire meeting Buffett expanded on the idea:

"What I’m trying to do as I read [annual reports], I like to understand just generally what’s going on in all kinds of businesses. If we own stock in a company and in an industry, and there are eight other companies that are in the same industry, I want to own or be on the mailing list for the reports for the other eight, because I can’t understand how my company is doing unless I understand what the other eight are doing. I want to have the perspective of, in terms of market share, what’s going on in the business or their margins or the trend of margins, all kinds of things. If I’m thinking about investing in a specific company, I try to size up their business and the people that are running it. And over the years, I have found reading a lot of reports to be quite useful in terms of making business decisions at Berkshire."

"The way you learn about businesses is by absorbing information about them, thinking, deciding what counts and what doesn’t count, relating one thing to another. And, you know, that’s the job. And you can’t get that by looking at a bunch of little numbers on a chart bobbing up and down about a — or reading, you know, market commentary and periodicals or anything of the sort. That just won’t do it. You’ve got to understand the businesses. That’s where it all begins and ends." Warren Buffett

Buffett is curious; he's a learning machine. Alice Schroeder, Buffett's biographer, explains;

"[Warren] expends a lot of energy checking out details and ferreting out nuggets of information, way beyond the balance sheet. He would go back and look at the company's history in depth for decades. He used to pay people to attend shareholder meetings and ask questions for him. He checked out the personal lives of people who ran companies he invested in. He wanted to know about their financial status, their personal habits, what motivated them. He behaves like an investigative journalist. All this stuff about flipping through Moody's Manual's picking stocks, it was a screen for him, but he didn't stop there." Alice Schroeder

It's unlikely you'll find the information you need without asking questions. I'm often amazed when I attend company briefings that investment managers don't ask any questions. I always try to come from the angle that there are no stupid questions.

“There are no foolish questions and no man becomes a fool until he has stopped asking questions.” Charles Proteus Steinmetz

“Always ask questions and never be afraid to do so. The only dumb question is the one you do not ask.” Jim Rogers

"[It's important] not to be afraid to be ignorant and ask questions." Jim Leitner

“There is no poor question to ask, and we always want to know more.” John Britton

“The smart ones ask when they don’t know. And sometimes, when they do.” Malcolm Forbes

"I spend almost my entire day listening to other people, I ask questions, I probe, I raise possibilities." Sam Zell

Most companies presentations focus on what they think investors want to hear, the positives. Only by asking questions can you address areas of likely concern. Directed questions can facilitate learning and understanding and give you the confidence to do the right thing in times of uncertainty. Be attentive and ask questions.

"You have to be very careful to look hard at what’s really happening. You know, as Yogi said, 'You can observe a lot just by looking.'” Warren Buffett

"If you want to get smart, the question you’ve got to keep asking is: Why? Why? Why? Why?" Charlie Munger

"You just keep asking questions." Warren Buffett

If you find a business with characteristics that defy expectations, it is vitally important to determine how they have been achieved. And the answer to that question starts with a question.

“Well, I love [the] example of State Farm. I mean, the idea of picking some extreme example and asking my favorite question, which is 'what in hell is going on here?'; that is the way to wisdom in this world.” Charlie Munger

It's little wonder a hallmark of the Investment Masters is curiosity.

"We made some of our luck by being curious and seeking wisdom, and we certainly recommend that to anybody else." Charlie Munger

"You have to have a real curiosity about it. I mean, you — I don’t think you can do it because your mother’s telling you to do it, or something of the sort. I think you — it really has to turn you on." Warren Buffett

“There are many paths to investment success but deep curiosity is a prerequisite.” Jake Rosser

“A broad curiosity blended with some contrarianism and a sense of what makes you money is the right combination of traits.” Seth Klarman

"People who are curious are going to be better investors and better stewards of others’ money. If there’s no curiosity, you’re basically doing something that’s already been done by someone else." Henry Kravis

“Curiosity, hard work and more than a little luck goes a long way.” Chuck Akre

“I’m curious; I want to know how things work. Even more importantly I want to know what is going to happen.” Seth Klarman

“You’ve got to be extremely intellectually curious.” Clint Carlson

“It’s the best business in the world for those who are curious and emotionally resilient”. Yen Liow

“Imagination and curiosity are what’s hugely important. We’ve discovered things over the years purely by being curious and continuing to keep involved in the search process to find these exceptional businesses.” Chuck Akre

"If you have a passionate interest in knowing why things are happening, you always are trying to figure out the world in terms of why is this happening or why is this not happening, that cast of mind, kept over long periods, gradually improves your ability to cope with reality. And if you don’t have that cast of mind, I think you’re destined, probably, for failure, even if you’ve got a pretty high IQ." Charlie Munger

“Good ideas generally come from individual curiosity.” Michael McConnell

“I’m a curious guy.” Paul Singer

“The great thing about investing is you get to cultivate your curiosity about the world at large.” Jake Rosser

“I generally find the best investors are very open and have almost a child-like curiosity about how everything works. They don’t come to the table with preconceived notions.” Oliver Kratz

"You have to keep at it with a lot of curiosity for a long, long time." Charlie Munger

“You have to be naturally interested in interested and curious about everything – any kind of businesses, politics, science, technology, humanities, history, poetry, literature, everything really effects your business. It will help you. And then occasionally you will find a few insights out of those studies that will give you tremendous opportunities that other people couldn’t think of.” Li Lu

"We like people who are intellectually curious. I don't see how you can wise up over time if you aren't working at it." Charlie Munger

“[You] must have a true passion for investing, a genuine curiosity about businesses, and the ability to get the details right while still seeing the big picture.” Dan Davidowitz

“Most of our investment professionals begin their career on Baillie Gifford’s graduate training programme and few come from a traditional finance education. We value curious thinkers willing to contemplate an uncertain future.” Baillie Gifford

Even better, the results from asking questions, digging deeper, being attentive, observing anomalies and testing ideas are unlikely to be competed away by computer systems. It is the qualitative factors rather than quantitative factors that often explain extraordinary company results.

“There are a lot of things that involve thinking that artificial intelligence isn’t going to find.” Ed Thorp

"Curiosity is an inherent kind of arbitrage that no amount of computer technology can overcome." Alice Schroeder

“Computers will never, in my opinion, replace the judgement and intellect, and the ability to connect the dots, that people do.” Ken Griffin

In his latest letter, Oaktree's Howard Marks surmised a similar train of thought...

"Computers can do an unmatched job dealing with the things that can be counted: things that are quantitative and objective. But many other things – qualitative, subjective things – count for a great deal, and I doubt computers can do what the very best investors do:

• Can they sit down with a CEO and figure out whether he’s the next Steve Jobs?

• Can they listen to a bunch of venture capital pitches and know which is the next Amazon?

• Can they look at several new buildings and tell which one will attract the most tenants?

• Can they predict the outcome of a bankruptcy reorganization where the parties may have motivations other than economic maximization?

The greatest investors aren’t necessarily better than others at arithmetic, accounting or finance; their main advantage is that they see merit in qualitative attributes and/or in the long run that average investors miss.  And if computers miss them too, I doubt the best few percent of investors will be retired anytime soon." Howard Marks

It's little wonder Ray Dalio places curiosity at the top of the list of priorities he looks for when hiring someone to work at Bridgewater.

"[I look for the] five Cs—character, curiosity, creativity, common-sense, and consideration." Ray Dalio

Curiosity is a vital tool for investors. In fact it may be the most vital. We need information to make our investment decisions, and Munger's view that you have to keep asking 'why?' is one of the simplest ways to get there. I once read that the CEO of Toyota had a belief that to get to the heart or root of any problem, you had to ask 'why?' seven times. And that makes sense. If we are curious, and really want to know something, we should never stop seeking information and we should never stop asking that most simplest of questions. Just think what would have happened had Thomas Edison not been curious. Or Isaac Newton, or Henry Ford. Or Marie Curie or DaVinci for that matter.  Would we possess their incredible inventions or innovations today?

So never stop being curious. "Why?" I hear you say. Because quite simply it makes all the difference in the world.

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Books to Read... Masters thoughts ...

We've spent some time in recent posts going over many of the similarities that exist between the methodology and practices of the great Investors. Most of these people have been enshrined in our minds because of their outstanding track records, and their exemplary approach to creating innovative investment ideas. 

One of the things that holds them apart from others is how they can pull all that disparate information together and corral it into a new idea.

But where do they get the information from? From whence comes those brilliant insights? It has to be said the details come from many sources, like talking and watching and listening, but one of the most common is also one of the most humble. A book.

I love to read and you've no doubt seen how many of the great Investors do the same. And the benefits are many with very little downside.  If we read widely, our Vocabulary, Comprehension, Awareness, Intuitive Capabilities, Intelligence and Wisdom all end up on the right side of the ledger - basically the more we read the more we grow and develop. But the biggest benefit lies in the growth of our knowledge base.

Every Investment Master has learnt from a book, or more than one. They all talk about the the little gems they uncovered in this book or that, or how another person's writing challenged their perceptions on an important business or investment paradigm. In almost every case, the authors are invariably providing their knowledge and in many cases the secrets to their success. This is invaluable to us all.

"I have been accused of telling all my secrets. I have written a number of books, and I reveal them all in these books." Benjamin Graham

I also find it fascinating that so many of the great Investors find similar value in much the same authors, such as Benjamin Graham and his brilliant book, The Intelligent Investor.

"By far the best book on investing ever written." Warren Buffett

"I read The Intelligent Investor. Right away, I Said, "Voila!, this is the investment concept I've been looking for." Jean-Marie Eveillard

“My life would have been different if Ben Graham hadn’t gone to the trouble of writing a book, which he had no financial need to do at all. You know, I would have a very different life.” Warren Buffett

"Chapters 8 and Chapters 20 [of the Intelligent Investor] are really all you need to do to get rich in this world." Warren Buffett

"Since 1993, the cornerstone of our investment philosophy is based on Benjamin Graham’s book 'The Intelligent Investor', first published in 1949." Francois Rochon

"I can’t remember what I paid for that first copy of The Intelligent Investor. Whatever the cost, it would underscore the truth of Ben’s adage: Price is what you pay, value is what you get. Of all the investments I ever made, buying Ben’s book was the best (except for my purchase of two marriage licenses)." Warren Buffett

Beyond knowing the value they place on books written by other people, one of the biggest upsides for us is that many of the Investment Masters have also put those same ideas into one of more of their own books. Warren Buffett has long been recognised for his annual letters.

"I actually think by reading Berkshire’s reports, you should be able to get more — I would think you’d get more of our philosophy than in any other manner." Warren Buffett

Many investors, including me, wait hungrily for his latest instalment. And he never disappoints.

"I have read everything I could on Buffett. He is our business/investment role model." Frank Martin

“I think I have read almost everything Warren Buffett has written and I agree with more than 95% of his thinking.” Lee Ainslee

“You should read the Berkshire Hathaway Letters to Shareholders’ which are on the Berkshire website so they are free. That will be a great start.” Mohnish Pabrai

"By far, the best investor of all time is Warren Buffett. I have read everything I could find (past and present) about him." Francois Rochon

"Going back and reading Berkshire Hathaway annual reports is worth the time." Arnold Van Den Berg.

"In my opinion, Warren Buffett’s group of annual letters is the best teaching anyone could find in the history of business." Francois Rochon

"I started reading [Buffett’s shareholder letters etc.] and I’ve read over the years, just about everything, I think, Warren’s put out there." Ted Weschler

Every single Investment Master reads widely. Biographies, History, Philosophy, Psychology, Investment and Business Journals; all are examples of the breadth of genres that are consumed almost daily by these people. I've mentioned how they are able to pull disparate bits of information together - finding the information in the first place would not always be possible without their reading such a wide variety of books.

"Personal biographies, the histories, are the most interesting. I have Benjamin Graham’s personal biography, also the biography of Leon Levy, The Mind of Wall Street. These are all great. It’s not that they’re uncovering something that no one knows about, but these are personal stories about things that they actually experienced in the investment world. How did they deal with the 1973 to 1974 bear market? What did they invest in that worked? What did they invest in that didn’t work? What were the mistakes they made? What did they learn? You’re basically absorbing all of this knowledge that’s out there and you can learn from it and apply it to your own experiences." Chris Mittleman

Beyond Benjamin Graham's treatise which many seem to favour, other books appear frequently in the recommended lists from each Investment Master. Here are some of the more commonly recommended treatises on Investing...

MARGIN OF SAFETY, By Seth Klarman.

“I had very few actual mentors in this business because I didn’t really know anyone. I bought Seth Klarman’s book Margin of Safety which was published my first year of business school.” Bill Ackman

"Seth Klarman's 'Margin of Safety' is a good book about risk." Arnold Van Den Berg

ONE UP ON WALL STREET, By Peter Lynch.

"Peter Lynch's books have some great insights [and] would be great for anyone to read." Julian Robertson

"I came across a book titled 'One up on Wall Street' by Peter Lynch. I found it so exciting I read it straight into the night. I have found the the book to be, along with Benjamin Graham's 'The Intelligent Investor', the best ever written on investment. The book helped me discover a passion for the stock market that has never left me." Francois Rochon

"I still remember when the book came out in 1989, and I read a review in BusinessWeek. I went out and bought it, and it changed my life forever." Francisco Garcia Parames

“I still think ‘One Up on Wall Street’, even written thirty years ago, is a hugely valuable book.” Lindsell Train

“One book that probably made the biggest impact on my career in those early formidable years back in the day was Peter Lynch's ‘One Up on Wall Street.’” David Rolfe

THE DAVIS DYNASTY, By Shelby Davis.

"One of the great investors I've tried to learn from is Shelby Davis." Thomas Gayner

“When John Rothchild combines history and biography with investing in one package, history illuminates the biography and investing, biography illuminates the history and investing, and investing illuminates the history and biography. This is a sparkling book on each level, but even more so as an adroitly mixed cocktail of all three.” Peter Bernstein

YOU CAN BE A STOCK MARKET GENIUS, By Joel Greenblatt.

“Joel Greenblatt wrote probably the best book ever, ‘You can be a Stock Market Genius’.” Dan Loeb

"Joel Greenblatt's 'You Can be a Stock Market Genius' is tactical and includes some very specific and interesting strategies." Seth Klarman

"Joel Greenblatt’s ‘You to be a Stock Market Genius’ is required reading for all new Third Point employees. On the topic of spin-offs, Greenblatt writes: ‘When a business and its management are freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility and more direct incentives take their natural course’.”  Dan Loeb

POOR CHARLIE'S ALMANAC, By Peter D. Kaufman.

"I think if you assimilate everything in that simple book [Poor Charlie's Almanac] you will know a lot more than about 95 percent of your compatriots. And it’s not that hard to do." Charlie Munger

"[Poor Charlie's Almanac], it’s a sensational book. And anybody that reads it is going to learn a whole, whole lot about life. And you’ll learn even — to get you to read it, I’ll tell you you’ll even learn something about making money." Warren Buffett

"Poor Charlie’s Almanac - I rate that as the best book I’ve ever read. If your looking for one book, Poor Charlie’s Almanac is loaded with a lot of wisdom. If you spend some time on that book, it’s pretty much all the wisdom picked up in 82 years of living, so there’s a lot of it digested and condensed in that book.” Mohnish Pabrai

"Another book that should be in the hall of fame is Poor Charlie’s Almanac by Peter D. Kaufman. This book is about Charlie Munger, the long-term business partner of Warren Buffett. This great book goes well beyond the field of finance and into philosophy and life values. It highlights the extraordinary mind of Charlie Munger, and I can guarantee hours of fun." Francois Rochon

“Poor Charlie’s Almanack is by far the most comprehensive publication that captures the essence of Charlie’s philosophy. When the first edition was published in 2005, I treated the book as a treasure and read it cover to cover multiple times. Each time I read it, I learned something new.” Li Lu

ALCHEMY OF FINANCE, By George Soros.

“And then I read The Alchemy of Finance because I’d heard about this guy Soros. And when I read The Alchemy of Finance, I understood very quickly that he was already employing an advanced version of the philosophy I was developing in my fund.” Stanley Druckenmiller

"There are a few books - really not that many which I believe are indispensable reading for every serious investor in whatever facet of investment practice they may favour - The Alchemy of Finance." Peter Cundill

"The Alchemy joins Reminiscences of a Stock Operator as a timeless instructional guide to the marketplace." Paul Tudor Jones

COMMON STOCKS AND UNCOMMON PROFITS, By Phil Fisher.

"I am an eager reader of whatever Phil [Fisher] has to say, and I recommend him to you." Warren Buffett

"I owe a lot to Mr Fisher. He wrote books out of pure altruism (he was already wealthy at that time) to simply share his experience with us. I thanked him then and I thank him again. Giverny Capital owes a part of its existence to him." Francois Rochon

"I sought out Phil Fisher after reading his 'Common Stocks and Uncommon Profits'. When I met him, I was impressed by the man and his ideas. A thorough understanding of a business, by using Phil's techniques … enables one to make intelligent investment commitments." Warren Buffett

“If I had to narrow it down to my favourite book it would be Phil Fisher’s ‘Common Stocks and Uncommon Profits’.” Kurt Winrich

"I always like it when someone attractive to me agrees with me, so I have fond memories of Phil Fisher." Charlie Munger

"I was very influenced by Phil Fisher when I first read his two books, back around 1960 or thereabouts. And I think that they’re terrific books, and I think Phil is a terrific guy." Warren Buffett

“Philip Fisher’s book Common Stocks & Uncommon Profits is obviously great.” Bill Stewart

"The late Philip Fisher wrote several books that are very good [including] Common Stocks and Uncommon Profits." A Van Den Berg

"A book that ranks behind only 'The Intelligent Investor' and 'Security Analysis' in the all-time best list for the serious investor." Warren Buffett

SO FAR, SO GOOD: THE FIRST 94 YEARS, By Roy Neuberger.

"Roy [Neuberger] never fails to amuse and enlighten. Over the years, he's taught me many things I didn't know I didn't know." Jim Rogers

"I sometimes re-read older books like “So Far, So Good - the First 94 Years,” written by Roy Neuberger in 1997. It always fascinates me how things are basically the same on Wall Street. Sound principles do not change. And so is human nature towards money and markets." Francois Rochon

FOOLED BY RANDOMNESS, By Nassim Nicholas Taleb.

"Fooled by Randomness - I consider it one of the most important books an investor can read." Howard Marks

"Fooled by Randomness is a serious, intellectually sophisticated book, well worth reading carefully. At times, the book is condescending as though the author had discovered the holy grail of investing. There ain't no holy grail, and the cosmopolitan tone can be somewhat off-putting. Nevertheless, there are some great insights." Barton Biggs

INFLUENCE, By Robert Cialdini.

"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

"There are a couple of valuable resources when it comes to behavioral biases: Cialdini's work on the influence of psychology in human decisions and Charlie Munger’s speech on the “Psychology of Human Misjudgment.” Christopher Begg

SPECULATIVE CONTAGION, By Frank Martin.

"For many years I've enjoyed reading Frank Martin's letters. This collection contains much investment wisdom and, just as important, sets a standard for advisor-client relationship." Warren Buffett

"What a unique opportunity to traverse the Bubble and post-Bubble years with Frank Martin, exactly as he described them to his clients in real time. Here is market history from the disciplined perspective of a value investor, as he wrestles with the financial beast. Speculative Contagion is sure to enlighten aspiring value investors for years to come." Seth Klarman

THINKING FAST AND SLOW, By Daniel Kahneman

“Daniel Kahneman, a psychologist who won the Nobel Prize in Economic Sciences for his work that challenged a rational model of judgement and decision-making, recently published a remarkable account of his intellectual journey; Thinking Fast and Slow.” Seth Klarman

“I just read Daniel Kahneman’s Thinking, Fast and Slow, and I think that he and the late Amos Tversky are some of the great behavioural scientists. Since nobody in our industry thinks about this very much, I think about it a lot.” Frank Martin

"Daniel Kahneman’s books should be read." Charles de Vaulx

REMINISCENCES OF A STOCK OPERATOR, By Edwin LeFevre.

"It is a textbook for trading. I hand a copy to every new trader we have." Paul Tudor Jones

“When I was 17 I was backpacking across Europe. I was in Rome and had run out of books to reads. I went to a local open market where there was a book vendor, and literally, the only book they had in English was Reminiscences of a Stock Operator. It was an old tattered copy. I still have it. It’s the only possession in the world I care about. The book is amazing. It brought everything in my life together.” Colm O’Shea

“As the book states very early on, there is nothing new under the sun in the art of speculation, and everything that was said then completely applies to the markets of today. My guess is that the same will hold true for time eternal as long as man’s basic emotions remain intact.” Paul Tudor Jones

“The finest trading book ever written is Reminiscences of a Stock Operator by Edwin LeFevre. This book is not a “how I made a billion in the stock market” nauseating ego trip or self-serving fiction. Instead it is colloquial reminiscences by a legendary speculator of the mistakes and lessons he learned over a trading lifetime.” Barton Biggs.

“Reminiscence of a Stock Operator is a book that up until a couple of years ago I read every year because it is such a great lesson in psychology, how psychology works through the markets and how markets behave.” Bill Miller

“Everyone had to read, because its such great history, Edwin Lefevre’s Reminiscences of a Stock Operator.” Dan Loeb

"My favourite book on investing is Reminiscences of a Stock Operator. It was first published in 1923, and is filled with the jargon of the day, so you have to learn the language. But once you do, it is a fascinating book about trading and speculation. You realize that nothing has changed. Everything is the same. Even though the markets are global today, and there is so much more regulation, it is still just speculation and human nature." Jeffrey Gundlach

THE OUTSIDERS, By William Thorndike.

"An outstanding book about CEO's who excelled at capital allocation." Warren Buffett

“A book like the Outsiders is a good example of what I like to read. It uses eight case studies to illustrate how unconventional managers can make a huge difference in creating per share value for shareholders." Wally Weitz

"The Outsiders is a terrific book by William Thorndike that profiles eight cases of terrific CEOs and their “radically rational blueprint for success." The book highlights the importance of capital allocation and should be a benefit to both investors and executives." Francois Rochon

THE MONEY GAME, By Adam Smith.

“For a magnificent account of the current financial scene, you should hurry out and get a copy of ‘The Money Game’ by Adam Smith. It is loaded with insights and supreme wit.” Warren Buffett

"One of the great books about investing is Adam Smith's 'The Money Game' which was published in 1967." Barton Biggs

These are merely some of the recommended books from the Investment Masters. Thousands of books exist out there, each with their own piece of wisdom. So let's get reading! Which books are on your recommended list for 2018?

Further Reading: The Top 12 Investment Books

Connecting the Dots

'Munger' by James Cochran

Creative challenges are something we all face from an early age. Whether its learning to colour-in between the lines, or discovering that art work belongs on paper rather than on your parents' walls, being creative as a kid allows us to develop our skills at the same time as having fun.

One of the first real creative challenges we face as children is the Connect the Dots exercise. This is the first time we are forced to integrate a number of concepts at the same time - visual, numerical and conceptual. We are required to follow a numerical sequence, draw straight lines with a degree of accuracy and skill and somehow also believe that once complete we will have created something we would never have been able to draw on our own. "Look at me dad! I drew a bird!"

As we get older, our need to integrate different disciplines simultaneously becomes more common in our daily lives, and never more so than in Investment. Often we are faced with disparate information, incomplete data, only parts of the puzzle rather than the whole, or hints and innuendo rather than verifiable fact, and then are required to make important investment decisions where the downside if we get it wrong can be quite painful.

"Investing invariable requires making judgements with incomplete or often inaccurate data." Michael Steinhardt

"The stock market is a game of imperfect information and even resembles bridge in that both have their deceptions." Ed Thorp

Even the great Investment Masters see this as one of the most important attributes for success. The ability to gather a wide range of abstract informational pieces, and then string them together to identify a trend or investment opportunity is invaluable if you want to remain ahead of the game.

"Over the years I have spent a great deal of time pouring a lot of stuff into my head. It is all part of a big, three-dimensional puzzle that is always changing." Jim Rogers

I find that quite often my best ideas, or the most valuable opportunities I can identify, come from a variety of sources which I need to integrate. It could be things I have read, heard, listened to or saw; all of it is important when gathering context for my investing. I read extensively; even Warren Buffett digests over 500 pages of information a week. As human beings we can't know it all, and only through a constant thirst for information and learning can we achieve something valuable in this arena.

"Look, my job is essentially just corralling more and more and more facts and information, and occasionally seeing whether that leads to some action." Warren Buffett

"Investing is kind of a game of connecting the dots. The nice thing about it is the longer you are in the business, as long as you are intellectually curious, your collection of data points of dots gets bigger and bigger." Ted Weschler

"I combine lots of information coming at me from all directions." Steve Cohen

"It is important to know that idea generation comes from having a consistent understanding of the world and synchronizing it will all the information you have accumulated. It is a disciplined process, and the sooner you begin this exercise, the more prepared you will be when opportunities arise. Ideas are not generated simply by waking up one day and saying, "Let's look for an idea!" They require the accumulation of investment experience and the desire to learn over time." Francisco Garcia Parames

“Tremendous insight is built from intense curiosity and study for your whole life.” Li Lu

As I have said before, rarely will the information be presented in a form which is easily understandable. All the pieces are abstract, and taken by themselves mean very little. It only makes sense when they are corralled in a manner which allows you to truly see.

"As Thoreau said, "It's not what you look at that matters, it's what you see." Warren Buffett

"Visionaries are not people who see things that are not there, but who see things that others do not. As Einstein quipped, "Why do some people see the unseen?" Bennett Goodspeed

"You really have to keep your eyes open." Peter Lynch

I look at the market as a great big puzzle, and every day I try to solve another aspect of it to make a difference and add value to my investment activities. Others look at it in similar fashion, but all agree its not something that can be easily understood - it needs research and analysis and curiosity before we get to the solutions.

"For me, market analysis is like a tremendous multi-dimensional chess board. The pleasure is purely intellectual." Bruce Kovner

“I tried to understand the market as it was a puzzle, not with a presupposition of 'this is what it is.”  John Burbank

"The money game is played in the third and fourth dimension." Barton Biggs

"I enjoyed using mathematics to solve certain interesting puzzles, which I found first in the world of gambling, then in the world of investing. Making money confirmed my theories by showing that they worked in the real world." Ed Thorp

“I’ve always thought of my profession as a challenging three-dimensional chess game that never ends.” William P Stewart

"We view investments as puzzles. There are a few things you can know but they are not the most important things as everybody knows them. The most important thing is what is it you can infer and how good you are at assessing a possible range of outcomes, either the known unknowns and the unknown unknowns and how you can construct that into a portfolio." David Einhorn

"It‘s an intellectual puzzle with partial information. The process is messy and imprecise." Howard Marks

“I love doing puzzles. Investing to a large extent is trying to look forward at an infinite number of variables and trying to figure out the future. To me that’s inherently interesting. It’s a little world where you get a chance to think really hard about a specific problem.” Tom Steyer

Information has become more readily available these days, and one of the issues with that is that everyone has access to the same material. So how do you differentiate? How do you take that same information and turn it into investment gold? Through curiousity and imagination. First by being interested enough to look for the information, and then imaginative enough to turn it into something so different that its valuable.

“The biggest challenge in today’s world is that knowledge has increasingly become a commodity. How do you find that kernel of information, that anomaly that enables you to generate alpha?  When I began in the business, a Quotron provided market quotes on screen as opposed to the ‘tape,’ and enabled the aggregation of portfolios. These were advantages. Bloomberg has very deep analytical tools available. Today most people have a smartphone and can access masses of information and analysis. The key is to be able to place knowledge in context and to have imagination and judgement to gain insight. Clearly, you then need to construct an investment, trade it and then risk manage it.” Michael Hintze

"I believe that being a stock market investor is a lifestyle. A capitalist’s antennas must always be tuned and receptive. Being interested and passionate about the business world provides a continuous source of new ideas, while staying in front of your computer or a Bloomberg Terminal is not enough. You learn much more in movie houses, in restaurants, in shopping centres and even by going to a library." Francois Rochon

And ideas are hard to come by. Even though information is readily available, those great ideas remain like hens' teeth to most of us. Most of the ideas that the Investment Masters come up with spring from sometimes unexpected sources. Constant searching, reading, learning, talking and listening are all invaluable for providing the springboard to innovation and imagination.

“You can never tell from where an idea will spring, whether from an ancient historian, an art critic, an economist, a journalist or even a politician.” Leon Levy

“Who knows when some little fact stored in the back of your mind pops up and really does make a difference.” Warren Buffett

“Ideas come to me from all sources, principally from reading and talking. I don’t discriminate how they come, as long as they are good ideas. You can recognize good ideas by reading a great deal and also by studying a lot of companies and constantly learning from intelligent people – hopefully more intelligent than you, especially in their field. I try to read as much as I can.” Li Lu

"Our game is to recognise a big idea when it comes along, when one doesn't come along very often.  Opportunity comes to the prepared mind." Charlie Munger

"Our ideas come from reading newspapers, books, magazines, analyst reports, and even our competitors' investment holdings. We also frequently brainstorm with people from different industries." Francisco Garcia Parames

“We do find, if you just show up every day, like Woody Allen said, and you answer the phone and read the paper, every now and then, you see something that makes sense to do.” Warren Buffett

"Where do we find our investment ideas? There’s no one answer to that. It comes down to reading, a lot of reading, be it SEC filings, conference-call transcripts, Street research and a variety of industry publications. Our network of professional contacts also serves as a good source for new ideas, and clients even have contributed some of the better names that we’ve come out with. So when people ask where we get these ideas, I don’t have one answer because they come from all different places." Chris Mittleman

"The way you find things to buy low and sell high is to look for unrecognised or undiscovered concepts or changes." Jim Rogers

"The further you look for ideas the greater the chance you will see a unique idea.” Jim Chanos

“We have no standard way of identifying prospective investment ideas. The only common factor in our search is fervent curiosity, which drives us to read voraciously, engage actively with management teams and industry experts, and run down the leads and ideas that result.” John Neff, Akre

Like Buffett and Munger, and Da Vinci before them, being versatile in your knowledge and thinking disciplines create more opportunities. 

True creativity and imagination is very rare, which is why the world is full of mediocre investors, while only a few truly great Investment Masters exist. It is vital to seek information, and to continue to seek it, and then integrate that knowledge using multi-disciplinary skills. Its not enough to know a lot about finance and investment; you need to know about the businesses and industries you are investing in as well. Having a variety of sources that provide you with information on a regular basis is important, too, as is the imagination to pull it all together. Only then will you be connecting the dots and revealing your truly creative potential.

Learning from the Masters

Have you ever noticed how the great minds of human history are best known for one particular idea, despite having many others to their credit? They're often acknowledged for that one giant breakthrough, the massive leap forward in technology or scientific theory yet the plethora of their other ideas remains largely unknown to most of us. Einstein and his theory of relativity; Newton discovering Gravity; Darwin and Human Evolution; the Wright Brothers and the First Aeroplane; Alan Turing and Computers; all are great people who are regarded with a large amount of respect for each of these creations, yet they have so much more to offer if we would only look.

Investigation into these people and their other ideas can be particularly enlightening, and the study of the Investment Masters is no different.

Over the years, researching the great minds of investing I've found many common threads that define those outstanding investors with long term track records of success. Deconstructing the psychology and play books of these great investors forms the foundation of the Investment Masters Class Tutorials. Through reading autobiographies, annual letters, interviews and investment books by the Masters, I've found each of the Masters has either taught me a new insight or emphasised a concept or mindset that has helped me in my career navigating markets and advising institutional clients. I've spent my time reading and listening to their insights - which form the basis of the tutorials.

“I’ve been exposed to the most brilliant thinkers in different fields. I’ve studied the patterns behind them and I’ve studied the people who study them and one of the things we have to be wary of in life is studying the people who study the artists as opposed to the artists themselves.... We have to be very careful when we study excellence and we are thinking about our own path to excellence that we are studying and tuning in to the direct experience, to people who have been there as opposed to the armchair critic who are talking about it.” Josh Waitzkin

There is no doubt that Warren Buffett and Charlie Munger have worked out most of the ingredients for successful investing. Every time I re-read a Buffett letter or interview, or one of Charlie's essays I pick up another nugget of wisdom.

Notwithstanding, I've learnt a lot from many of the other Investment Masters: Soros can help you understand how asset bubbles form and why they collapse; Chanos can teach you why shorting stocks on low PE's might be more fruitful than shorting high flyers; Ed Wachenheim will teach you to look beyond the typical investors timeframe; Greenblatt can help you with spin-offs; Francois Rochon will keep you focused on your company's earnings rather than share price, while Ray Dalio will emphasise the value of studying history and learning from mistakes. Michael Steinhardt will put you on the path toward seeking the truth; while Thomas Russo will show the benefits that accrue to companies who invest for the future; accepting short term pain for long term gain. 

Interestingly, all of these Investment Masters have also learnt from other people. And they never stop; learning is endless. The day you decide that you know enough, or worse that you know it all, is the day to stop what you're doing and start again.

“I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” Charlie Munger

"I have been inspired by many investment practitioners and authors. I started reading the now legendary Berkshire Hathaway annual chairman's letter in the 1980s. I have read literally hundreds of books and studied the investment process of many investors, ranging across almost every style of investment when I was an analyst and head of research. I knew many of the most famous investors, because I provided research to them. To be a success, I think you need to synthesize a lot of sources." Terry Smith

It goes without saying that I recommend continuing to learn from the Investment Masters. They each have other lessons you can utilise to improve your investment results. Bill Nygren, articulated it nicely in his recent letter....

"I’ve always found it interesting that most value investors like to read only about other value investors. If you ask any value investor about their investment hero, Warren Buffett will be on the top of their list. He is on top of our list too, but once you’ve read seven books on Buffett, is the eighth one going to add more value? Would not reading about somebody else, who did things very differently from you but who also succeeded tremendously, be more valuable? I find that I learnt a lot by reading about some of the hedge fund managers such as Michael Steinhardt, Paul Tudor Jones and George Soros, all of whose approach was very different from what ours is. Perhaps you may find one thing from their approach that is consistent with your own philosophy. 

One of the things that Michael Steinhardt famously relied on was variant perception. On every company he had a position in, he knew what the bulls and bears thought, and why his point of view was different. Sometimes, as value investors, we don’t spend enough time doing that. We assume that if a company has a low P/E, or a low price to book, that’s enough to conclude it’s cheap. But we’ve learnt by studying Steinhardt that we can add value in our process even in a stock that looks statistically cheap by stating our different and distinct point of view. Anybody at Oakmark will be able to tell you what our variant perception is of a stock that we own. 

Source: The Trader Documentary 1987

There is a famous picture of Paul Tudor Jones with a piece of paper on his bulletin board that says ‘Losers average losers’. As value investors, we always want to believe that the stock is overreacting to bad news. A typical analyst report goes: This is a disappointing quarter but my value estimate fell only 5% while the stock fell 15%, so it’s a lot cheaper than what it was yesterday. This led us to do a lot of research into our own ideas. When the fundamentals start deviating from what our analysts had projected, averaging down on those names tend to not work. It made us alter how we thought a little bit more, which for us is certainly more valuable than learning what Warren Buffett eats for breakfast. What Warren does — buying great businesses that are run by good people, buying and holding, thinking about long term — is still the core of our investment approach. Nothing pleases me more than when somebody says that what we do at Oakmark is very similar to Buffett. At the same time, that doesn’t mean we can’t learn from people who do things very differently from what we do."

Drawing on the lessons of other great investors, particularly when their style contrasts yours, offers the opportunity for new investing insights.

“I think you can and you should try and think about a set of people who come from different areas and there’s some with very different philosophical backgrounds. So, you know, we don’t remotely do the type of macro he does, but I think we’ve tried to learn quite a lot from George Soros.” James Anderson

And learning from others is a privilege. Consider this; many of the greats and their discoveries were made after long years of trial and error, making mistakes and learning from them, starting from scratch a number of times before success came their way. By learning from others we can avoid the pain they went through and yet achieve success of our own. That's got to be a win-win scenario for everyone. I hope I never stop learning; the rich gifts these great people have bestowed upon us is immeasurably valuable. So what have you learnt today?

Further Reading: IM Tutorials: Learning, Imitation Game

Learning from Josh Waitzkin

Do you remember the first investment you ever made? How nervous you were? Worrying about whether the stock would grow or tank? What things you had missed or whether the information you had was outdated? We've all been there; that perilous moment when you first dip your toe into the investment pool, all while asking yourself whether a piranha lurks just out of sight beneath the surface.

Now, as a comparison, take an investment you made recently and compare how you felt. I bet your comfort levels are much higher these days. As is your confidence. So what's the difference? Knowledge and Experience, that's what. You're more confident now because you know more and have experienced more. Many parts of your investment activity have become intuitive, or second nature. 

One of my favourite books that deals with this type of thinking, and one coincidentally recommended by numerous Investment Masters, is Josh Waitzkin's 'The Art of Learning.' Josh was the US National Chess Champion at age nine and later became World Champion in the martial art, Tai Chi Chuan. 

As an adult, Josh now trains high level performers as well as many successful investment managers. I recently watched an interview with Josh on the Alan Howard Series, which prompted me to write a post on this subject that I've been thinking about for a long time. Like the financial markets, chess is a dynamic endeavour involving complexity, uncertainty and emotions. It follows that Josh's approach to chess and martial arts have striking parallels with the approach of many of the Investment Masters [refer study notes for more detail.]

Two powerful concepts Josh discusses in his book are the focus on the 'end-game' and the concept of 'the study of numbers to leave numbers.'

Josh tells the story of how, as a child competing in chess tournaments, he would confront other children who had been drilled in the 'opening variations' of the game.  These children had been taught to memorise strong opening positions to overcome their opponents early in the game. In contrast, Josh spent his time looking at 'end-games.' He would study chess with just two or three pieces on the board, learning the subtlety of pieces, and gaining an intuitive feel for their power. Layer by layer, he learnt the principles of opposition and the hidden potency of empty space and built up the knowledge to transform axioms into fuel for creative thought. At first, he practiced with just the pawn and the king, and then moved to rook endings, bishop endings, and knight endings. By focusing on what was essential he internalised a methodology of learning - the inter-play between knowledge, intuition and creativity.

"Bruce and I also spent a lot of time studying endgames, where the board is nearly empty and high-level principles combine with deep calculations to create fascinating battles. While my opponents wanted to win in the openings, right off the bat, I guided positions into complicated middle games and abstract endings." Josh Waitzkin

"Bruce began our study with a barren chessboard. We took positions of reduced complexity and clear principles. Our first focus was king and pawn against king - just three pieces on the table. Over time, I gained an excellent intuitive feel for the power of the king and the subtlety of the pawn .. Most of my rivals, on the other hand, began by studying openings .. Why not begin from the beginning, especially if it leads to instant success? The answer is quicksand. Once you start with openings, there is no way out. Lifetimes can be spent memorizing and keeping up with the evolving Encyclopedia of Chess Openings. They are an addiction, with perilous psychological effects." Josh Waitzkin

Such a deep understanding of the pieces and their inter-connectedness gave Josh an edge once the opening variations developed into complex random and chaotic game-play. By spending time studying end-games Josh would be at ease as the game unfolded. In contrast, his opponents would crumble if the game was not won quickly, as both their memories and confidence would fail them as the game ventured into the unpredictable and unexpected. 

Josh's success came from adopting a different perspective from the typical chess player. Likewise, many of the Investment Masters have succeeded by adopting a different perspective and focussing on the end-game.

In investing, like chess, most players are focused on the opening game. They spend their time deciphering the factors impacting the stock right now, and trying to answer questions such as - will next quarters earnings meet expectations? In contrast, the Investment Masters lengthen their time horizons, move away from the current stock market noise and spend more time focusing on the end-game. They learn the subtlety of what makes a company strong, the factors that have allowed the company to thrive in the past and the two or three key factors that will ensure a profitable future. They lengthen the time horizon to an area where other investors aren't focused. They ask - how will the business look in three to five years? Will the company be able to maintain its competitive position? Will the earnings be significantly higher and how will the market value those earnings? This process of looking towards the future is often referred to as time arbitrage.

"The forecasting horizon trap lures you into spending all your time on what's more knowable - the same immediate horizon that occupies everyone else. If you fall into the trap, competing with all the other investors concentrating on these short term events, it is impossible to outperform the market. You have to escape to a longer term horizon."  Ralph Wanger

"Over the last few decades, investors' timeframes have shrunk. They've become obsessed with quarterly returns. In fact, technology now enables them to become distracted by returns on a daily basis, and even minute-by-minute. Thus one way to gain an advantage is by ignoring the "noise" created by the manic swings of others and focusing on the things that matter in the long term." Howard Marks

The Investment Masters also work backwards from the end-game. They try and imagine that the company has failed and then ask - what could have been the contributing factors that led to failure? Inverting the questioning process opens up avenues of creativity to identify potential investment risks that others may miss. By putting themselves into the future they create different perspectives that may not be obvious to those anchored in the present.

"Charlie Munger is famous for the pioneering concept of inverting as an investor, of thinking backwards to find one's way to the beginning of an idea or concept.  In our application, an advantage can be gained in the competitive world of active investment management by preparing for the unknown by inverting, reasoning backwards to attempt to learn how others in the past have coped with the unforeseeable and the unpredictable." Frank Martin

"When Charlie [Munger] thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: All I want to know is where I’m going to die, so I will never go there." Li Lu

The second insightful concept Josh discusses is the 'study of numbers to leave numbers'. In essence this refers to mastering a discipline to the extent that it becomes intuitive, or second nature.

"As I struggled for a more precise grasp of my own learning process, I was forced to retrace my steps and remember what had been internalized and forgotten. In both my chess and martial arts lives, there is a method of study that has been critical to my growth. I sometimes refer to it as the study of numbers to leave numbers, or form to leave form. A basic example of this process, which applies to any discipline, can easily be illustrated through chess: A chess student must initially become immersed in the fundamentals in order to have any potential to reach a high level of skill. He or she will learn the principles of endgame, middlegame, and opening play. Initially one or two critical themes will be considered at once but over time the intuition learns to integrate more and more principles into a sense of flow. Eventually the foundation is so deeply internalized that it is no longer consciously considered, but is lived. This process continuously cycles along as deeper layers of the art are soaked in." Josh Waitzkin

“It is important to understand that by numbers to leave numbers, or form to leave form, I am describing a process in which technical information is integrated into what feels like a natural intelligence.” Josh Waitzkin

"Most people would be surprised to discover that if you compare the thought process of a Grandmaster to that of an expert (a much weaker, but quite competent chess player), you will often find that the Grandmaster consciously looks at less, not more. That said the chunks of information that have been put together in his mind allow him to see much more with much less conscious thought. So he is looking at very little and seeing quite a lot. The Grandmaster looks at less and sees more, because his unconscious skill set is much more highly evolved." Josh Waitzkin

"In my opinion intuition is our most valuable compass in the world." Josh Waitzkin

Studying broadly and consistently produces a detailed database of information that an individual can draw upon. Creativity is provoked by the association and integration of disparate pieces of information. So to the Investment Masters recognise the role of intuition in successful investing.

"[Intuition, instinct, hunch] .. it's critical. And it's also, by the way, what the computer can't do well. In other words, it's the subconscious. As you know, man, although it's only 200,000 years old, the brain is much older. And we came programmed with many of these things in our brain, intuition and those things. And they're in our subconscious. And so by opening up one's subconscious to one's consciousness so they come up, you know, creativity comes from not working hard at it, it comes from relaxation. It bubbles up from the subconscious. Transcendental meditation has been invaluable to me because it helps to do that. But that intuition, that creativity, man is still unique at being able to do those things. So you let that bubble up, but you have to reconcile it with your logic. So when the subconscious creativity and intuition comes up and replicate it with your logic, it's fabulous." Ray Dalio

"Superior results generally require insight, judgement and intuition." Howard Marks

One of the greatest investment minds of all time, Charlie Munger, certainly understands the concept of 'the study of numbers to leave numbers' ... 

“The deep structure of the human mind requires that the way to full scope competency of virtually any kind is to learn it all to fluency—like it or not.” Charlie Munger

So how does your thinking look by comparison? Are you anchored in the present and distracted by the noise in the market? Focused on quarterly earnings and the price of the stock today? Or are you inverting; deciphering the future by working backward from potential outcomes? It's time to leave the now behind and study the end-game, looking at what's to come and using your intuition to the right advantage. And if you do it right, then its check-mate to you.  

Further Reading:
'The Art of Learning" Josh Waitzkin
MastersInvest.com Study Notes - 'Art of Learning'
Alan Howard Series Interview - Josh Waitzkin
Tim Ferris Podcast - Josh Waitzkin Interview

Investing Mentors

Many of the Investment Masters had the opportunity to work under great investors. Larry Robbins worked with Leon Cooperman, Warren Buffett and Walter Schloss with Benjamin Graham, Stanley Druckenmiller with George Soros, Lee Ainslie & Steve Mandel with Julian Robertson to name just a few.

When starting your professional life it's important you choose the right career and the right people to work with - where you can learn. It shouldn't be about the money. To be successful you're going to have to love what you do, and that's a lot easier if you enjoy who you're working with.

"If you're early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. It’s not even close. And don't even think about leaving that mentor until your learning curve peaks." Stanley Druckenmiller

“Don’t worry about making the most money this week or next month. When I went and offered to work for Ben Graham, I said I’d work for nothing and I meant it. Just the idea of being turned on, look for the job that is going to turn you on.” Warren Buffett

“In terms of starting something right out of business school… I wouldn’t worry very much about how much money you make. I’d worry much less about compensation than I would about what you can learn.” Bill Ackman

“It is important to find a decent, successful person to mentor you. If you work with the right people and do what you like to do, then you’ve got it made.” Bruce Berkowitz

"For young people just getting started, I say apprentice yourself to somebody who's good and knowledgeable, and you'll learn the ropes much more rapidly." Ed Thorp

“In terms of career, take the job you would take if you weren’t getting paid. As Buffett says, go work for someone you like, admire, and trust. Those are the jobs you want. Don’t take the job with the most prestigious firm or offering the most money. Those are both very stupid things.” Mohnish Pabrai

“I think the most important thing [for young people] is to get themselves into a organization, it could be public markets, private markets, it doesn't really matter, where they are mentored by people who teach them really good fundamentals.” Steve Mandel

“When you're young, only take a job that provides you with a steep learning curve and strong training. First jobs are foundational. Don't take a job just because it seems prestigious.” Steven Schwarzman

“I always say to young people that are trying to get jobs, the first job is your hardest job because once you get your first job, you get into the mix, you get to know people, other opportunities will open up to you. That’s the first thing. Then if you have choices, the most important thing is sizing up the very people you’ll be working with, the half a dozen, dozen people you’ll be working with. Those are the people who are going to influence you. That is the key thing. It’s not the prestige of the firm, it’s not whether your parents or your mother-in-law knows, has heard of the place that you work. It’s the people that you’re going to be working with. There are a lot of great people.” David Abrams

“Avoid working directly under somebody you don’t admire and don’t want to be like.”
Charlie Munger

“If you can’t see yourself working with someone for life, don’t work with them for a day.” Naval Ravikant

“.. one of the things about good mentors is you can learn on someone else's nickel. It's something you don't realize when you’re younger. But it struck me at a very early age to try to go find people that were the best in their particular businesses” John Phelan

“I had the benefit of working at three different places before I started Lone Pine. I learned a ton and had really good mentors at each of those three places.” Steve Mandel

“Try and find a mentor. Try and find a mentor, somebody who knows how it works and is prepared to take the time and effort and share that with you.” Terry Smith

“Look for people who have your interests and want to move you along – not somebody who thinks that they’re going to chew you up in two or three years and find some more ambitious person. I was determined in my career to have great mentors and I’ve been super fortunate in my life to find them.” Scott Bessent

If you can't land the exact job you want, you can continue your investing journey by learning from the Investment Masters. If you take the time to go through the Investment Masters Class tutorials you'll notice many common threads between the Investment Masters.  

Warren Buffett himself recognises the value of role-models:

“I’ve had half a dozen or so heroes in my life. I think it’s very important to have the right heroes. Now they call them role models or whatever, but you’re going to take your cues from somebody. So I say, choose your heroes carefully, and then figure out what it is about them you admire. Then figure out how to do the same thing. It’s not impossible.”

Many of the Investment Masters also find heroes outside of investing...

“I have a mentor wall that is the first thing you see in my small office. By identifying men who you really admire, you shortcut your learning curve tremendously.” Frank Martin

"It is important to have a mentor and/or great heroes. If you don't have the former, the latter is really important. Pick the right heroes in investing, and in life, and then learn as much as you can from them. Over my career, I have been lucky and grateful to have mentors, but heroes are available to everyone and the reservoir of their wisdom is infinite." Christopher Begg

One of the greatest investors of our age, Buffett’s partner, Charlie Munger, studied the great minds from history.:

"I am a biography nut myself, and I think when you’re trying to teach the great concepts that work, it helps to tie them into the lives and personal ties of the people who developed them. I think that you learn economics better if you make Adam Smith your friend. That sounds funny, making friends among the eminent dead, but if you go through life making friends with the eminent dead who had the right ideas, I think it will work better in life and work better in education. It’s way better than just giving the basic concepts." Charlie Munger

"I would say that you’re not restricted to living people when picking your mentors. Some of the very best people are dead." Charlie Munger

A great place to start is with the most successful investor of our time, Warren Buffett. Buffett shares his wisdom through his annual letters, Berkshire meetings and interviews. Many of the Investment Masters have studied him. Over the years I and many others have learnt a great deal from Buffett. I don't think there's much he and Charlie haven't worked out.

"I have read everything I could on Buffett. He is our business/investment role model." Frank Martin

“I think I have read almost everything Warren Buffett has written and I agree with more than 95% of his thinking.” Lee Ainslie

“You should read the Berkshire Hathaway ‘Letters to Shareholders’ which are on the Berkshire website so they are free. That will be a great start.” Mohnish Pabrai

"By far, the best investor of all time is Warren Buffett. I have read everything I could find (past and present) about him." Francois Rochon

"Going back and reading Berkshire Hathaway annual reports is worth the time." Arnold Van Den Berg

"Berkshire Hathaway annual reports - one has to not only read them, but re-read them." Charles de Vaulx

"In my opinion, Warren Buffett’s group of annual letters is the best teaching anyone could find in the history of business." Francois Rochon

"I started reading [Buffett’s shareholder letters etc.] and I’ve read over the years, just about everything, I think, Warren’s put out there." Ted Weschler

“I consider him [Buffett] a mentor, but while we see each other from time to time, I have learned mainly from watching what he does with Berkshire and reading his letters.” Wally Weitz

“Warren Buffett is one of my investing heroes... I admire Warren Buffett and would say if you are going to read about only one investor, pick him.” Bill Nygren

“Warren Buffett, he has been a wonderful role model even though I know him only a very tiny bit. He was a role model long before I ever met him. What I think he’s done wonderfully, in the tradition of Benjamin Graham, is he is a brilliant investor, and he’s a teacher. He teaches us through his writings, through his interviews, and through his behavour. I think some of the best things that any investor today can read are his early partnership letters. The world is totally different, but there’s wisdom in them for the ages.” Seth Klarman

"Over the years, I have been most significantly influenced by the writings of Warren Buffett." Chuck Akre

"Warren Buffett is a hero. Pick some good heroes and read everything you can about them." Thomas Gayner

“Warren Buffett [is] my hero.” Bruce Karsch

“I got into this business because someone tipped me off about Warren Buffett early on. So he’s certainly, he’s obviously a hero… A big part of my education as an investor came from reading everything Buffett’s written.” Bill Ackman

“I can’t say I walked with any individual investor who has mentored me, but obviously you learn a lot from reading Buffett. Anything Buffett has written is worth reading and re-reading.” Rajiv Jain

"Warren Buffett is in a league by himself, I would say, in terms of his business skills and so forth." David Rubenstein

"Warren Buffett influenced me tremendously. I'm an expert in his writings and his views." Leon Cooperman

"I started reading the now legendary Berkshire Hathaway annual chairman's letter in the 1980s.” Terry Smith

"Warren Buffett has been a major influence on my life because he's so brilliant and I've read a lot of what Buffett has said and memorized many of the things that he said." Ed Wachenheim

“Like millions of Warren Buffett and Charlie Munger admirers around the world, the teachings of these two teachers and Berkshire Hathaway’s amazing performance have shaped my investment career… I found all the books written about Buffett, including his annual letters to Berkshire shareholders and articles about him. I also learned that Charlie Munger was Buffett’s decades-long partner. I spent nearly two years studying them.” Li Lu

“About 20 years ago I began studying the lessons of the masters — both Benjamin Graham and his star student in the 1950s up at Columbia University, Warren Buffett — and through the study of the writings of and speeches by, and books that have been written by and about those two gentlemen, I was able to develop a certain investment philosophy.” David Polen

“I read an article in a newspaper and they talked about Warren Buffett and I had never heard of him. So pretty quickly, I wrote him a letter, so probably early ‘93, and I told him I was interested in investing, and I would like to read his Annual Letters, so that was before the internet. So he sent me a big package in the mail of all of the Annual Letters since I think 1977. And I read that, and had a vision of investing in the stock market change overnight.” Francois Rochon

"Like many other investors, Marathon never tires of quoting Warren Buffett." Marathon Asset Management

“Like so many others, Munger and Buffett have been the inspiration behind my general investment philosophy and the way I've structured my firm.” John Huber

"Another cornerstone of my re-education involved studying Buffett's investment strategy with even greater intensity.  There's no better way to do this than to read Berkshire Hathaway's annual reports... This wasn't a matter of idol worship. It was about choosing a teacher who had already discovered the truths that I still needed to learn." Guy Spier

“When people ask me, ‘I’d love to be an investor, who should I read? what are the books?’ I say go and get all the Buffett letters and read them because he has re-defined the way to think about investing for the world, for much more than this generation. He is our Benjamin Franklin. People don’t realise that. He has said so many things that have changed the way people think. He is a brilliant writer, but he is a much more brilliant thinker.” Tom Steyer

“I owe more gratitude to the two gentlemen running Berkshire as mentors than to any others by a country mile.” Christopher Bloomstran

“The lessons [Benjamin Graham taught] are fresh and pertinent every single day of our lives as investors — as is the philosophy of Warren Buffett. And you can’t leave out Mr. Charles Munger. What they’ve done and said and laid out for us over the years is all we really need.” David Polen

“As a young(ish) man there is something slightly depressing about thinking things through for a while, arriving at a somewhat reasoned conclusion only to find that others have been there before, and years earlier. In some respects we are fifty years behind Buffett, but that’s ok so long as the average investor is at least fifty-one years behind!” Nick Sleep

“One of the things we learned [from studying Warren Buffett]: invest in great businesses; let them continue to compound so they pay you cash flow; and allocate that cash back [to] new investments. That's one of those insights [from] looking at what Buffett's done.” Scott Nuttall, KKR

Start learning from your mentors..

STUDY HISTORY

"History never repeats itself but it rhymes." Mark Twain

Studying history can provide an enormous edge in investing. While history never exactly repeats itself I have witnessed plenty of examples over the last twenty plus years that leave me convinced that a lot of what happens we've seen before. Hopefully this post will highlight that there is never much new in investing.

One of the most memorable examples for me was just ahead of the Financial Crisis when the credit markets had slammed shut in late 2007 after the initial Bear Stearns hedge fund liquidity problems in June was followed by a run on the UK lender Northern Rock in September. Northern Rock was subsequently bailed out by the UK government. I was in charge of the Hedge Fund advisory business at a global investment bank which had just IPO'd a 'shadow banking' home lender whose funding relied on the wholesale credit markets. While the credit markets were effectively closed, the equity market did not peak for another month [See chart below]. At the time I was reading about Jessie Livermore. This paragraph about Jessie Livermore stood out to me at the time..

"While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy. His first successful “raid” on the stock market based on his sound, fundamental studies occurred during the Panic of 1907. As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong – despite the hopes of the public evident in the still-rising stock market. Sooner or later, Livermore concluded, there will be a huge break of epic proportions. Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric. J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market."

Keen to learn more about this era, I picked up the book 'The House of Morgan' by Ron Chenow which chronicled the history of J.P Morgan. A few chapters provided an excellent summary of the booming stock market of the late 1920's ahead of the ensuing crash and great depression.

During the 2009 Financial Crisis I wrote a note to my clients titled, ‘How Will We Look Back on This Crisis’. The note was a compilation of quotes from this 1990 book and while they referred to the 1920's and 1930's they were just as apt to the modern times. Consider the following ...

"Prophets of the age espoused an ideology of endless prosperity and talked of a new economic era."

The Fed's Greenspan and others, ahead of the Financial Crisis, were espousing the 'Great Moderation.' Greenspan presided over nearly two decades of prosperity and the lavish praise on the economy reflected the belief that Greenspan's deft changes in interest rates and crisis interventions had stabilised the economy without rekindling inflation.

In his book 'The Most Important Thing,' Howard Marks noted, "On November 15, 1996 The Wall Street Journal reported on a growing consensus, ‘From boardrooms to living rooms and from government offices to trading floors, a new consensus is emerging; The big, bad business cycle has been tamed.’"

"For many pundits, the sheer abundance of cash precluded any crash."

"There is a vast amount of money awaiting investment. Thousands of traders have been waiting for an opportunity to buy stocks on just such a break as has occurred over the last several weeks. The excess cash was viewed as a sign of wealth, not an omen of dwindling opportunities for productive investment."

Greenspan cut interest rates after the tech crash and left rates low which fuelled a rally in asset prices.

"Riding this cash boom, the American financial services industry grew explosively."

The American financial system also grew explosively ahead of the Financial Crisis. During the peak of the housing boom, in October 2007, the S&P Financials sector reached 20.1% of the S&P 500. Not even two years later in March 2009, that weighting had collapsed to 8.9% - the same level of twenty year’s prior. In tandem, the shadow banking market had expanded rapidly.

"There was a fad for foreign bonds, especially from Latin America, with small investors assured of their safety. The pitfalls were not exposed until later on, when it became known that Wall Street banks had taken their bad Latin American debt and packaged it in bonds that were sold through their securities affiliates."

Let's rephrase that … "There was a fad for mortgage backed bonds, especially from sub-prime borrowers with global investors assured of their safety. The pitfalls were not exposed until later on, when it became known that Wall Street banks had taken their bad mortgage debt and packaged it in bonds that were sold through their securities affiliates."

"The 1920s were also a time of manic deal making. As Otto Kahn recalled, there was a perfect mania of everybody trying to buy everybody else's property .. new organisations sprung up. Money was so easy to get. The public was so eager to buy equities and pieces of paper that money was .. pressed upon domestic corporations as upon foreign governments."

Let's rephrase that … "The years leading into the Financial Crisis were also a time of manic deal making. There was a perfect mania of everybody trying to buy everybody else's property .. new organisations sprung up. Money was so easy to get. The private equity funds were so eager to buy equities and pieces of paper that money was .. pressed upon domestic corporations as upon foreign governments."

"Wall Street was being swept by new forms of leveraging… many brokerage houses, including Goldman Sachs, introduced leveraged mutual funds, called "investment trusts". A second favourite device was the holding company. Holding companies would take over many small operating companies and use their dividends to pay off their bond holders, who had financed the takeovers in the first place. This permitted an infinite chain of acquisitions."

Wall Street was awash with new forms of leveraging before the Financial Crisis. RMBS', CDO's, CDS, SIV's, PIK loans and many other types of credit derivatives were growing exponentially. In April 2007, The Economist noted "According to the Bank for International Settlements, the nominal amount of credit-default swaps had reached $20 trillion by June last year. With volumes almost doubling every year since 2000, some reckon the CDS market will soon be worth more than $30 trillion. The investment banks and private equity firms were up to their eyeballs in debt fuelled acquisitions.”

"As masters of leverage, the Van Sweringens used each new purchase as collateral for the next. Their holding companies took control of other holding companies in an endless hall of mirrors, all supported by little cash but powerful Morgan connections. By 1929, the Van Sweringen railroads ruled America's fifth largest railroad system atop a forty story Cleveland tower and controlled trackage equal in length to all Britains railroads."

This was close to home for me. It sounded very much like Babcock & Brown [which ultimately went bust], not to mention the investment banks and private equity firms.

"Leffingwell subscribed to the cheap-money theory of the crash, that is he blamed excessively low interest rates for the speculation in stock. In 1927, Monty Norman had visited New York and asked Ben Strong [Governor of Federal Reserve] for lower interest rates to take pressure off the pound. Strong obliged by lowering the discount rate. Leffingwell believed this had triggered the stock market boom. In early March 1929, when Leffingwell heard reports that Monty was getting 'panicky' about frothy condition on Wall Street he impatiently told Lamont "Monty and Ben have sowed the wind. I expect we shall have to reap the whirlwind .. I think we are going to have a world credit crisis"

Many observers also blamed The Fed's Greenspan for keeping rates artificially low after the tech bubble for inflating the housing bubble and booming stock market. It too ended in a world credit crisis.

"Were the increasing number of stock mergers grounds for concern? And should the federal government take action to stop speculation on Wall Street."

Mergers and acquisitions surged in the year before the Financial Crisis, all funded with cheap debt and lax lending covenants. Ahead of the crisis, the Fed's Greenspan was confident the stability and structure of the financial markets had improved and it was not the Fed's job to address asset bubbles.

"Both the market and public faith in bankers were collapsing."

The public at large and the publics faith in bankers collapsed after Bear Stearns was bailed out, Lehman went bust and the Fed had to bail out the banking system at large.

"Harrison [took over the Fed in 1928 after Strong's death] lowered interest rates and pumped in billions of dollars in credit to buoy banks with heavy loans to brokers."

Ben Bernanke, Harrison's equivalent, also aggressively lowered interest rates and the US Treasury pumped more than a trillion dollars into the financial companies via TARP, swap lines and other measures in an attempt to stabilise the system. 

"He bought up to $100 million in government bonds per day and made sure Wall Street banks had adequate reserves with which to deal with the emergency. In scale and sophistication, his post crash actions made Pierpont's in 1907 look antediluvian in comparison, for he expanded credit as needed. Harrison confirmed the principle of government responsibility in financial panics."

Bernanke also expanded the Fed's balance sheet and provided credit to financial institutions. He expanded the collateral accepted and his actions were on an unprecedented scale. On numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority to authorise new broad-based programs and financial assistance to individual institutions to stabilise financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008.

"The stereotype of bankers as conservative, careful, prudent individuals was shattered in 1929."

Certainly bankers reputations were decimated following the Financial Crisis.

"The consequences of such an economic debauch are inevitable," said the Philadelphia Fed Governor. "Can they be corrected and removed by cheap money? We do not believe they can." .. That fall Hoover complained to Lamont about bear raids, short selling and other unpatriotic assaults against national pride. The following year would be the worst in stock market history."

The Fed also attempted to resolve the crisis with cheap money. In 2008 the US's SEC banned short selling of financial companies to ‘protect the integrity and quality of the securities market and strengthen investor confidence.’ The U.K. FSA took similar action.

"The House of Morgan arranged a $10m line of credit. Under Whitney's tutelage, the old Kidder, Peabody was folded."

On Friday March 14, 2008, Bear Stearns secured a 28-day loan from JPMorgan and thought it would receive access to the New York Federal Reserve’s discount window for additional funding. Those hopes were dashed before the weekend was out though, and by that Sunday the firm had been sold to JPMorgan for $2, a price ultimately raised to $10 two weeks later.

"A proposed rescue plan for the Bank of the United States got a cool reception on Wall Street, even after Leutenant Governor Herbert H. Lehman, the state banking authorities, and the new York Fed all pleaded for it. The regulators wanted to merge the Bank of the United States with three other banks, backed by a $30 million loan from Wall Street Banks."

"At an emotional meeting, Joseph A Broderick, the state banking chief warned that if the bankers rejected the rescue plan, it might drag down ten other banks… As the Wall Street bankers sat stony-faced Broderick reminded them how they had just rescued Kidder, Peabody and how they had banded together years before to save Guarantee Trust."

"But they refused to save the Jewish bank, pulling out of their $30 million commitment at the last minute. "I asked if their decision to drop the plan was final", Broderick recalled. "They told me it was. Then I warned them they were making a colossal mistake in the banking history of New York." The biggest bank failure in American history, the Bank of the United States bankruptcy fed a psychology of fear that already gripped depositors across the country."

Let's rephrase that … "A proposed rescue plan for Lehman Brothers got a cool reception on Wall Street, even after Henry Paulsen, the US Treasury Secretary , and the New York Fed all pleaded for it. The regulators wanted to merge Lehman Brothers with Barclays Bank or Bank of America."

"At an emotional meeting, Timothy Geithner, the NY Fed chief warned that if the bankers rejected the rescue plan, it might drag down ten other banks… As the Wall Street bankers sat stony-faced Geithner reminded them how they had just rescued Bear Stearns and how they had banded together years before to save Long Term Capital Management."

"But the UK regulator refused to approve the deal with Barclays and save the bank at the last minute. ‘I asked if their decision to drop the plan was final,’ Geithner recalled. ‘They told me it was. Then I warned them they were making a colossal mistake in the banking history of New York.’ The biggest bank failure in American history, Lehman Brothers bankruptcy fed a psychology of fear that already gripped depositors across the country."

".. The banks failure shook confidence across America, It was a failure that could have been easily avoided by the proposed merger."

The failure of Lehman Brothers shook confidence across America.

"The Morgan-Hoover feud over debt was mild compared with their debate over short selling on Wall Street.. Hoover now shared the average American's view of Wall Street as a giant casino rigged by professionals."

"Now the crisis shifted to London, as investors traced financial ties between Germany and England. During the summer of 1931, investors dumped sterling in massive amounts."

"Prime Minister Ramsay MacDonald and Philip Snowden knew the pound couldn't be defended without a foreign loan."

"Foreign bankers insisted that he close the budget gap as the pre-condition for a loan. But any such austerity talk bought outcries from Labour ministers, who saw it as a betrayal of their followers to appease rich bankers".

Similarly, the crisis in the US travelled to Europe where the Euro came under pressure as a result of the PIGS [Portugal, Italy, Greece and Spain] economic turmoil and their inability to pay off their debts. The German government demanded austerity measures as a condition of a bail-out.

The Global Financial Crisis and the early 1920's and 1930's had strikingly similar conditions. Many of the issues that arose had been experienced before. Most of what occurred was not new. The packaging of sub-prime loans ahead of the crisis was a replay of banks activities in the late 1920's. Once again, from the 'House of Morgan'..

"Pecora also studied the operations of the National City Company whose 1900 salesmen had unloaded risky Latin American bonds on the masses. It emerged that in touting bonds from Brazil, Peru, Chile and Cuba to investors, the bank hushed up internal reports on problems in these countries. After bank examiners criticised sugar loans made by the parent bank, the securities affiliates sold them as bonds to investors.”

In the Financial Crisis the Investment Banks were also charged with unloading poor quality loans on unsuspecting buyers. The rating agencies aided and abetted this process by placing AAA ratings on some of the sub-prime loan tranches. That too had happened before in the junk bond crisis of the 1980's. In Seth Klarman's 1991 book, 'Margin of Safety' he notes..

"One of the last junk-bond-market innovations was the collateralised bond obligation [CBO]."

"What attracted underwriters as well as investors to junk-bond CBO's was that the ratings agencies, in a very accommodating decision, gave the senior tranche, usually about 75 percent of the total issue, an investment grade rating."

"The existence of CBO's was predicated on the receipt of the investment-grade credit rating on the senior tranche. Greedy institutional buyers of the senior tranche earned a handful of extra basis points above the yield on other investment-grade securities.”

"The rating agencies performed studies showing the investment-grade rating was warranted. Predictably these studies used historical default-rate analysis and neglected to consider the implications of either a prolonged economic downturn or a credit crunch that might virtually eliminate re-financings. Under such circumstances, a great many junk bonds would default; even the senior tranche of a CBO could experience significant capital losses. In other words, a pile of junk is still junk no matter how you stack it."

History repeats, it's deja vu all over again. Spending the time to understand the history of financial markets will help you avoid some of the pitfalls investors often fall into. Some of my favourite books that touch on the history of the markets include The Davis Dynasty [1930's onwards], A Decade of Delusions [Tech Crash and Financial Crisis], Too Big to Fail [Financial Crisis] and the House of Morgan [great chapters on the 1920's and 1930's]. 

Edward Chancellor in 'Capital Returns' noted, ‘It's not true, however, to say nobody in the financial world saw it [the Financial Crisis] coming. On the contrary, in the years prior to 2008 many serious investors and strategists were alert to the dangers posed by strong credit growth, dubious financial innovation and the appearance of various housing bubbles around the world.’ Seth Klarman noted in 2008, ‘People say that what has happened recently was completely unpredictable and god knows how many sigma event, but that's just not right. This was completely predictable and I could cite eight or ten people who in one way or another predicted it.’ I concur. In the Baupost’s 2005 Annual Letter, Klarman noted..

"Finally, as Northern Trust’s Paul Kasriel recently highlighted in the New York Times, household borrowing is out of control, and this debt is clearly propping up the U.S. economy. By way of example, in the third quarter of 2005, households spent a record annual rate of $531 billion more than their after-tax earnings. Historically, consumers regularly earned more than they spent; the recent binge in borrowing for consumption is truly unprecedented. It has (thus far) resulted in consumer spending at a record high 76% share of GDP.

"Consumers are using their increasingly valuable homes as quasi-ATMs, extracting $280 billion of cash through home equity borrowings in the second quarter of 2005 alone. This is a surprisingly new phenomenon; in the last three decades of the 1900s, there was virtually no net home equity extraction by consumers. While we cannot predict how these excesses will play out, it seems clear that such trends cannot continue indefinitely, and that a restoration of fiscal sanity will bring with it wrenching, largely unexpected, and painful adjustments.

The world could well be setting up for considerable upheaval and with it an avalanche of opportunity. As we have said, nearly every investment professional is fully invested, and many are leveraged. With massive trade imbalances and huge U.S. government budget deficits, tremendous leverage everywhere you look, massive and unanalysable exposures to untested products like credit derivatives, still low interest rates, rising inflation, a housing bubble that is starting to burst, and record and unprecedentedly low quality junk bond issuance, there appears to be little, if any, margin of safety in the global financial system."

If you remain in doubt I suggest you read Frank Martin's excellent book. ‘A Decade of Delusions’ which contain his annual letters from before and during the crisis. He laid out a prescient roadmap of the carnage that was to become the Global Financial Crisis. The 2005 and 2006 annual letters include the following headers “The Perfect Storm?,” “The Blossoming of the Financial Economy: The Cataclysm in the Creation of Credit,” “Bubbles Are Indigenous to the Financial Economy,” and “If Housing Prices Roll Over.” Chapter 10 (2007 MCM annual report excerpts) included a draft letter to clients in 2007 proposing a strategy to buy put options on selected investment banks, as well as subtitles that included, “Edging toward the Precipice” and “Credit-Default Swap Alchemy: Transmuting Junk into Gold.”