Buffett and Munger on the Power of Not Being Stupid

Making stupid mistakes can hurt even the most intelligent investors

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Apr 29, 2019
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Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) are undoubtedly two of the greatest business minds in the world today. These two billionaires do not attribute their success to their intelligence, but to their ability to consistently avoid being stupid.

Munger once said:

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

This might seem like an obvious statement at first. Indeed, if you ask any investor if they're being stupid or not, most will reply they are not stupid and never have been. But that is not the point. Most of the time, people do not know they are being stupid. They think they are making entirely intelligent decisions. The problem is these decisions fail to take into account the fact that everybody else is making the same decision and, as a result, the outcome is unlikely to be predictable.

How not to be stupid

At the 2016 Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting, one shareholder asked the two legends if they could share their views on being "able to think ahead of the crowd, and build a clear mental framework." This type of framework enabled them to build Berkshire Hathaway from a struggling textile company into one of the largest conglomerates in the world.

Buffett responded that a great deal of the information he acquired throughout life was gained through observation. "I spent a lifetime looking at businesses and why some work and why some don't," he said. "As Yogi Berra said, you can see a lot just by observing. And that’s pretty much what Charlie and I have been doing for a long time."

Buffett learned by sitting back and watching other businesses grow. By watching other companies, he was able to build a framework in his head of business successes and failures.

He went on to say that every business is different, but successful companies have many things in common -- and so do companies that fail. Recognizing these patterns of success and failure is essential, and it's more important than anything else to recognize "what you can't do."

As Buffett explained:

"So we have tried the department store business and a few things, but we’ve generally tried to only swing at things in the strike zone, and our particular strike zone. And it really hasn’t been much more complicated than that."

Understanding what you can and can't do, your own abilities in business and ability to analyze other companies, isn't particularly challenging, but so many people overestimate their abilities.

This is why so many intelligent people end up failing; they think they can do everything when it is just not possible. Per Buffett:Â

"You don’t need the IQ in the investment business that you need in certain activities in life, but you do have to have emotional control. I mean, we see very smart people do very stupid things, and it’s fascinating how humans do that. Just take the people that get very rich and then leverage themselves up in some way that they lose everything. I mean, they are risking something that’s important to them for something that isn’t important to them. Well, you can say, you could figure that one out in first grade, but people do it time after time. And you see that constantly, self-destructive behavior of one way or another. It doesn’t take a genius to do it, but I think we’ve sort of avoided the self-destructive behavior."

It may seem counterintuitive, but the most self-destructive behavior is trying to be too intelligent and not realizing your own limits and constraints. Even though he has one of the world's greatest business minds, Buffett is well aware of this fact and never tries to move outside of his circle of competence.

Disclosure: The author owns shares of Berkshire Hathaway.

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