I read an article today about successful marriage. In it, the author says that if you want to have a successful marriage, you only need to do two things: 1) find a good person; 2) deserve a good person yourself by being one.
If the two simple requirements can’t be met, then it becomes four things: 1) tolerate and try to influence or change your partner; 2) make a habit of compromise if you can’t change your partner; 3) be a fool of that habit; and 4) stay foolish throughout the marriage.
And if you still can’t do the four things above, then you’ll have to deal with 16 things.
Somehow this message in marriage reminds me of Buffett and Munger. In order to have lifetime long rewarding relationships, we only need to do two things: 1) be a high quality friend ourselves and 2) find other high quality friends. To achieve great investment results, we also need to do two things: 1) find good companies and keep learning about them; 2) be patient and concentrate.
Let’s take relationship rules for example. Many people can’t do the simplest two things above, what do they do instead? 1) Meet many people; 2) juggle numerous relationships 3) weigh what they get from others and what others get from them; 4) if they think others get more from them, they find ways to recoup. Then it becomes 16 things. For instance, if you want to make sure you always extract more from a relationship, what do you do? 1) Keep track of every favor you have offered to friend A 2) keep track of every favor that has been offered to you by friend A; 3) repeat1) and 2) for friends B,C,D,E,F and etc. 4) think about different ways friends A-F can help you; 5) Ask friends A-F for favor; 6) repeat the cycle.
What about investing? If you can’t do the aforementioned two simplest things investing, which Munger advocated earlier this year at the DJCO meeting, what do you do then? 1) diversify; 2) trade more often;3) have a shorter time horizon; and 4) forecast the future. The decision tree quickly becomes more complicated exponentially:
1. Diversify
- Design a diversification strategy – region, industry and etc.
- Choose at least 30 companies and follow them.
- Decide the portfolio weighting of each of the 30 companies.
- Keep evaluating whether diversification actually works.
2. Trade more often
- Keep track of daily stock prices.
- Watch the price of the stock movement during the day of trading.
- Place frequent orders and hope they can be filled.
- Decide whether to trim or add a 1% position.
3. Have a shorter time horizon
- Figure out the reasonable multiple during the next 1-3 years.
- Keep track of quarterly earnings.
- Spend more time on short term headwinds and tailwinds.
- Gauge short term investor sentiments.
4. Make future forecast
- Learn macroeconomics.
- Learn forecasting models.
- Find data that support the forecast
- Implement forecast into fundamentals.
I actually haven’t thought about the virtues of concentration and patience in investing from the decision tree perspective before. But once I lay it out, it becomes so clear that in investing, we can use simple math concepts to design better processes.
- Add and compound knowledge and experiences.
- Deduct and divide the number of decisions that we need to make.
It also totally explains Ted William’s “the science of hitting” and Warren Buffett (Trades, Portfolio) “20 punch principles.”
Now it’s time to make some changes in my life.
