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Classic Richard Feynman - The Difference Between Knowing the Name of Something and Knowing Something

May 23, 2014 | About:
Grahamites

Grahamites

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The next Monday, when the fathers were all back at work, we kids were playing in a field. One kid says to me, “See that bird? What kind of bird is that?” I said, “I haven’t the slightest idea what kind of a bird it is.” He says, “It’s a brown-throated thrush. Your father doesn’t teach you anything!” But it was the opposite. He had already taught me: “See that bird?” he says. “It’s a Spencer’s warbler.” (I knew he didn’t know the real name.) “Well, in Italian, it’s a Chutto Lapittida. In Portuguese, it’s a Bom da Peida. In Chinese, it’s a Chung-long-tah, and in Japanese, it’s a Katano Tekeda. You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird. You’ll only know about humans in different places, and what they call the bird. So let’s look at the bird and see what it’s doing—that’s what counts.” (I learned very early the difference between knowing the name of something and knowing something.)

- Richard Feynman

You may find the above quote a little odd in anarticle posted on a value investing website. After all, how is the name of a bird in different languages related to value investing? Well, it’s not on the surface. However, if we ponder very deeply from another level, Richard Feynman’s above quote could have profound impact on how we think about investing. My own thinking has led me to this conclusion: There is a huge difference between knowing the terms of investing and facts (especially numbers) of a company and knowing the meanings and implications of the terms and facts.

Let me use Facebook (FB) as an example. When an analyst was promoting the stock of Facebook on CNBC earlier this year, he cited the following numbers:

802 million daily active users

609 million mobile monthly active users

1.27 billion monthly active users

And based on the above numbers, he had no problem with projecting out a couple of years of more growth to conclude that Facebook’s stock is still attractive at this price.

I don’t have a problem with his number quoting behavior. My problem with promotions like this is that they ignore the most important questions: What do these number mean? And whether/how are they reflected in the valuation? The fact that Facebook has 1.27 billion monthly active users means very little to me as an investor if I don’t know how to incorporate that into valuation. Same goes for daily active users and mobile monthly active users. You can know all the different numbers about a company, just like you know all the names of a bird. But you are doing yourself a great harm if you don’t know the implications of these numbers, or if the implications are too hard to figure out, or if you pretend to know the implications of the numbers.

This also applies to valuation terms. We often apply a multiple such as P/E or P/B to a business. We hear statements like Markel is cheap at 1.2 times book, or Bank of America is cheap at 0.7 times book. Warren Buffett (Trades, Portfolio) said book value is a good proxy for Berkshire’s intrinsic value and buying Berkshire up to 120% book value makes a lot of sense. So we know Berkshire is cheap below 1.2 times book. But what’s so special about book value and why 120%? Do we just know the name of the multiple to use? Do we just know the numerical number? Do we understand why?

Now I feel obligated to confess, for a very long time, I don’t understand the why's. It was upon deep reflection that I came up with the idea of this article. Investing buzzwords such as P/E, EV/EBITD and P/B are so popular that we assume we understand what they are and how to apply them because we know the names. This is dangerous. We should start cultivating the habit of exploring the meanings and implications of investment terms and company (industry) specific numbers.

But how do we do that? I propose we begin by trying to make sense of the numbers. And how do we do that? Fortunately we have two great examples. One is from Richard Feynman and his father, and one from the Oracle of Omaha:

“We had the Encyclopedia Britannica at home and even when I was a small boy my father used to sit me on his lap and read to me from the Encyclopedia Britannica, and we would read, say, about dinosaurs and maybe it would be talking about the brontosaurus or something, or tyrannosaurus rex, and it would say something like, ‘This thing is twenty-five feet high and the head is six feet across,’ you see, and so he’d stop and say, 'let’s see what that means. That would mean that if he stood in our front yard he would be high enough to put his head through the window but not quite because the head is a little bit too wide and it would break the window as it came by.’ Everything we’d read would be translated as best as we could into some reality and so I learned to do that - everything that I read I try to figure out what it really means, what it’s really saying by translating.”

- Richard Feynman

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side… Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States… For $7 trillion dollars… you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money… And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

I would say exercise like this is hard, but not impossible to do. The key is to cultivate the habit of doing it routinely. Again, this is easier said than done. But if you can, it will give you a tremendous edge in the world of value investing.


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Comments

goforit
Goforit premium member - 7 months ago

Richard Feynman was mistaken in his famous ascertain which implied that knowing the name of something, such as a bird, was useless information. Your second Feynman quote illustrates why this is the case. Once one knows the bird's name, you have the "key word" that allows you to use the Encyclopedia Britanica (or a Google search in the Internet age) to learn everything known about the bird. Feynman missed this because it was usually not the way he "learned" about a physics topic. He just computed everything on his own from first principles, rather than first researching prior work in the area. His often abbreviated list of references in his published works illustrates this. I knew Richard Feynman - he was a professor of mine.

SeaBud
SeaBud premium member - 6 months ago

No, Goforit, Feynman was not wrong. Read the quote: Feynman said if you "know the name (even in all the languages of the world)", you "still know nothing about the bird." He did not say the name was useless, he said "you know nothing about the bird." Obviously, you can use the name to go learn about the bird, but the name alone tells you nothing.

I like this article. I find people often confuse data with information, and to cite Nate Silver, confuse noise with signal. Was the market expensive at a P/E of 18 in 2009 or were earnings depressed as companies threw everything into bad quarters?

mlkarel
Mlkarel premium member - 6 months ago

Often, if you know the name, you know a little. Feynman surely understood that and the utility of having a handle for getting information. After all, the guy did learn stuff from conversations, and, without doubt, from reading papers. My experience is that knowing the name of something is, in itself, not much. Example: I knew from its name that the yellow-shafted flicker must have yellow feather shafts, visible if you have a specimen in hand, but this past Saturday my wife noticed a male flicker displaying to a nearby female by spreading his tail feathers apart, which revealed the bright yellow feather shafts, impressing both us and his lady friend.

vgm
Vgm - 6 months ago

I also enjoyed this article. And I agree there's a (huge) difference in 'knowing' and 'knowing a name'.

It's perhaps worth adding that there are progressively deeper levels of 'knowing' too. The greatest physicists like Feynman and Einstein understood their subject matter on a more profound level than other, even highly accomplished, peers. Similarly, in investing, the best practicioners not only 'know', they know more deeply than the rest of us - in part due to inherent excellence and temperament, and in part as a result of experience. I agree with the author that we need to cultivate (their) good habits.

Thanks for the stimulation. (Goforit, awesome to have been a student of Feynman)

Cogito
Cogito premium member - 6 months ago

Good article! And I agree: the terms P/E or EV/EBITD, or P/B are often used without understanding what they mean. What puzzles me a lot is that even though these figures belong to the most used metrics in investing, they may be used in an ambigous manner.

For example, if we talk about the "E" in P/E, do we talk about GARP or IFRS earnings, or about earnings in another national accounting framework? And if we are talking about IFRS, are we considering its American or its European interpretation (which are slightly different, to my knowlege)?. Is P/E for an U.S. firm (probably based on GARP?) comparable to P/E of a German firm (usually calculated via European IFRS for firms traded publicly). And if we are talking in IFRS terms, should we correct earnings by OCI in order to get a good view on the company? And as IFRS rules are being changed all the time: is an IFRS based P/E for this year comparable to IFRS based P/E figures for recent years?

I am not an expert on accounting, and thus I usually neglect these details and simply believe / hope that all these possible interpretations of P/E are at approximately comparable. But nonetheless, knowing that these differences exist puzzles me and gives me a bad feeling when using these figures. I am trying to learn, but these fine aspects of accounting are difficult and take a lot of time to learn...

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