Robert Hagstrom:


070 – The Return on Investment of Mental Models with Robert Hagstrom

Robert Hagstrom:


070 – The Return on Investment of Mental Models with Robert Hagstrom

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In this episode, we are joined by Robert Hagstrom, who is an author, investment strategist, and portfolio manager. His books include The New York Times bestselling The Warren Buffett Way and The NASCAR Way: The Business That Drives the Sport and the recently republished Investing: The Last Liberal Art, in which he investigates investment concepts that lie out with traditional economics.

  • Robert’s commitment to the “latticework” theory of investing, which is based on building connections between different mental models and disciplines
  • The reasons that Robert views biology as the better discipline to think about markets rather than the physics based approach most commonly used in modern portfolio theory
  • The risks of comparative analysis for decision making given our tendency to look for what is similar more than what is different

Key Takeaways and Learnings

  • Steps to being a better investor by using multiple models of comparison and analysis and observing multiple perspectives
  • Robert’s advice on the questions to ask yourself before investing in companies, and how he personally looks for growth in potential new investments
  • How to think outside of traditional economic theory and use concepts from biology, philosophy, and psychology to make better business decisions

Links and Resources Mentioned in this Episode

Summary

In this episode, we are joined by Robert Hagstrom, who is an author, investment strategist, and portfolio manager. His books include The New York Times bestselling The Warren Buffett Way and The NASCAR Way: The Business That Drives the Sport and the recently republished Investing: The Last Liberal Art, in which he investigates investment concepts that lie out with traditional economics.

Robert Hagstrom

As investment Strategist and Portfolio Manager, Robert Hagstrom provides comprehensive solutions for clients through expertise in strategy, marketing, sales, and client service, combined with a strong academic rigor and deep market knowledge. He is the author of eight books on investing including the New York Times Best Seller “The Warren Buffett Way” and the upcoming “Investing: the Last Liberal Art” published by Columbia University Press. Robert  regularly provides commentary and opinions about market and investing in media outlets including CNBC, Bloomberg, the Nightly Business Report. He is frequently quoted in the Wall Street Journal, Financial Times, and the New York Times.

What Was Covered

  • Robert’s commitment to the “latticework” theory of investing, which is based on building connections between different mental models and disciplines
  • The reasons that Robert views biology as the better discipline to think about markets rather than the physics based approach most commonly used in modern portfolio theory
  • The risks of comparative analysis for decision making given our tendency to look for what is similar more than what is different

Key Takeaways and Learnings

  • Steps to being a better investor by using multiple models of comparison and analysis and observing multiple perspectives
  • Robert’s advice on the questions to ask yourself before investing in companies, and how he personally looks for growth in potential new investments
  • How to think outside of traditional economic theory and use concepts from biology, philosophy, and psychology to make better business decisions

Links and Resources Mentioned in this Episode

Robert, very nice to have you on the show. Welcome to the Innovation Ecosystem podcast.

Thanks, Mark.

So, I first came across you with your book, Latticework: The New Investing, and I’ve actually also read The Warren Buffett Way. Now, the original book as I said was called Latticework then you changed the title to Investing: The Last Liberal Art and it took off and was very successful. First of all, what do you mean by ‘latticework’ and maybe just outline the central thesis of the book?

Well, thanks, Mark. We’ll get some clarification here. Latticework was a nod if you will to Charlie Munger who inspired the writing of the book. Charlie Munger, vice chairman at Berkshire, who is the partner of Warren Buffett who is more well-known. Charlie may be less known globally but he’s an intellectual giant and has been a multi-discipline thinker his whole life and has counselled us over the years that we need to broaden our view, and I came across a lecture that he gave us at USC at business school at Professor Babcock’s class and he really went through this kind of worldly wisdom, how to achieve worldly wisdom, and you do it by building a latticework of mental models, and lattice work is obviously a metaphor, an analogy of when you think about fences that have lattice work and how everything connects together, and so it was his view, Mark, that if you really want to get good at anything, whether it’s investing or just being a better person, a better educator, a better manager whatever the case may be, you’re going to be better at it if you have a more worldly view that relies or at least is able to draw on disciplines of the things that you wouldn’t find in a liberal arts college if you will.

So, for example, what kind of disciplines, in particular, do you cover in the book?

Yeah. Well, when we did the original book we started with what we thought was probably the most important. We start with physics which is the hardest course to take, right? We moved into biology, psychology, and philosophy, and then continued to move through and then we ended up with kind of a decision-making chapter at the end. We did works on literature and then in the new edition, which came out, I guess, about 2012, it’s now called Investing: The Last Liberal Art which I think people resonate to the idea of a liberal art because many people in the US have liberal arts degrees and so that was recognizable to them whereas latticework was kind of an odd term. We added a chapter on mathematics and broadened out to the other chapters after ten years. I was really quite surprised that when we revisited the book ten years later, almost twelve years later, I had another hundred additions to the bibliography, so it continues to evolve.

And we’ll come back to Charlie Munger in a minute but maybe we can just get into a specific example. If we can take a stock that you know well because you’re actively involved as an investor as well as an author and maybe you could just illustrate with a couple of examples what happens when you use the lessons from biology or the lessons from psychology in looking at a stock versus a more traditional, just running it through the spreadsheet and look at it perhaps through one lens, and we haven’t discussed which stock to use but maybe you can find one that’s reasonably not well known but at least people recognize the name of it perhaps?

Yeah, sure. Well, I think personally you have to recall or remember that investing, if you go get an MBA or you get a master’s in finance or whatever the case may be, it’s very physics based. That’s basically the origins of modern portfolio theory was the notion of more of a physics-based model where it was very repeatable, you could run the same model over and over through time and you get the same results whatever the case may be and obviously it’s a very flawed way in which to think about the market. I believe the better discipline to think about markets as based on biology, it’s more of a living system. It is a living system when you think about the people involved, and the companies involved and the strategies in the competition, it really is a living system that evolves and adapts over time, and therefore, really the kind of model thinking that you do about markets and whether it’s investing or managing businesses, whatever the case may be, you really have to rely on the biological models a lot more than you would rely on Isaac Newton in the physics models, but physics really carries still a heavyweight in the investing world. The idea of equilibrium, reversion to the mean, supply and demand, things of that nature still carry a big weight and it’s not that they are irrelevant, they’re not, it’s just that they’re not highly repeatable, they’re not always repeatable I should say, and  you get tripped up in the world when you bet on reversion to the mean or equilibrium and things like that and it doesn’t happen, and in physics based models they do happen but in biological models they don’t necessarily happen. Biological systems are non-linear and they behave in totally different ways.

Yeah, because I think in the book you have a table with examples from biological ecology versus financial ecology, so, for instance, you compare a species with a trading strategy or a mutation with the creation of new strategies.

Yeah, yeah. Well, it just seems to me it fits better. When you’re describing markets or businesses or economics it just seems to me using the metaphors from biology and living systems seem to me to be more appropriate and more sensible than the physics-based models which are, electrons and neutrons and they bounce around and you can repeat the same experiment ten thousand times and get the same results but it doesn’t work in biological systems like that and of course, it doesn’t work in markets. So, it seemed to me that the biological metaphor is much more appropriate but we’ve built up a lot of intellectual capital on the physics-based models and there are a lot of people who went to school learning physics-based models and so it’s very hard for them to give up a physics-based view of the world when they spend all their time getting educated about it. Now they’re teaching it or investing in it that way and to have them shift gears is kind of problematic but hopefully, the book will get them to think about things a little differently.

Yeah, yeah. And so, if you were looking at a stock today, what do you specifically do to make sure you’re bringing in these different perspectives? What does biology mean from a practical point of view as you’re looking at a, I mean, I don’t know what’s in your portfolio, but I mean, maybe a Costco or an Amazon?

Yeah. You know I think of them as all kind of animals in the kingdom, right? First of all, they have to have certain characteristics for them to be included in the portfolio which is they have to generate free cash flow. I mean, if you’re a business owner and you’re not generating cash you’re not going to be in business very long and the same is true for stocks, and they have to earn above the cost of capital, that’s the only way that you really can increase shareholder value, intrinsic value, is that you’re in fact reinvesting your cash at returns that are above the cost of your equity capital, that makes sense. So, that’s kind of a first screen and that’s very financial but then after that, these are living systems out here and they’re in the world evolving, struggling, fighting, adapting, and it’s not necessarily like Wild Kingdom or anything like that but in some cases it can be, so I’m looking at companies that have a competitive advantage and I want to know that they can maintain that competitive advantage and furthermore, do they have an economic environment that they can prosper in for a long period of time? Is it a fertile area for you and can you continue to generate economic returns on this fertile land of yours while you compete against other species, not other species but other companies and other things like that like animals do and how long does this last?

Yeah, and I guess this is getting into the famous ‘moat’ concept which Charlie Munger and Warren Buffett – but we had Brad Feld, I don’t know if you’re aware of him he was a founder of Techstars, he’s a very accomplished angel investor, on the show, and he’s a great Charlie Munger fan and he was talking about how a lot of these moats no longer exist and they’ve just been taken out and shot as a result of technology and changing consumer habits. He also talked about this very interesting concept of, he thinks about the surface area of a business which I hadn’t come across before which I found quite interesting, which is again a physics metaphor, I suppose, isn’t it?

Yeah, I don’t know specifically what his references is to surface area, but if I interpret that word, it seems to me as how big is your opportunity set-

Yes.

What is your customer base? What is your geographic base? Things of that nature and that’s very important. I run a global portfolio and what we’re looking at is the four and a half billion new middle-class consumers that are now crossing over into disposable income and so we want companies that are able to participate in that environment and that surface space if that’s the right analogy, because that’s going to be a very large space and it will give you a long fertile period in which you can earn a lot of returns for your shareholders over time and so I do think about that from a biological standpoint. I’m not sure I would agree that there are no more moats, I’m not sure that’s right. Certainly, there’s been a lot of disruption from technology but there are also a lot of moats within technology and I think that’s important to remember and there’s still brand value. It’s easier to launch new brands and it’s easier to get new products but to get scale which you’re going to need in large markets to be successful, typically brand value is a way in which you can build scale and so I still think the brand has some value and it has some moat characteristics. Maybe the moat is not as wide as it used to be but it’s still earning excess returns which means there’s a moat around the business.

And you talk about brand, I think Charlie and Warren, they talk about psychology is one of the big areas or disciplines where they learn from and they bring their models in, and I guess, brand is all around – I mean, the Coca-Cola example of the psychology of connecting the brand to – you know, they don’t sponsor funerals, they sponsor wonderfully exciting events and all of that. Maybe you can just talk about what does understanding psychology do for investment if you like? How important is it?

Well, the discipline of psychology as it relates to investing and thinking about businesses is both very wide and very, very deep. I mean, you could have written a three hundred, four hundred page book just on that one chapter and I mention in the book that this is a kind of a brief overview of these major disciplines but we kept them brief so people wouldn’t be too intimidated to take the tour, but any one of the chapters as you know, Mark, could have been three hundred, four hundred pages and psychology is certainly a discipline that is very deep and wide in investing. So, a brand, a psychological attachment to a brand, we know that that’s reinforced through advertising and marketing and other things that happen. I remember I wrote a book about NASCAR which is a racing sport here in the US that goes around the oval tracks not the road courses like Formula 1 but very big in sponsorship based marketing and there’s a big emotional attachment to the brands that sponsor NASCAR, and consumers will reach out to those brands as they walk down the grocery aisle because they remember the experience that they had at the racetrack and it’s an emotional, intense, exciting, vivid color and sounds and everything and when they see that brand on the shelf that was the same brand that was on a car going around the racetrack, it does inspire them to make purchases so there’s a lot there. But investing and psychology is probably – you know, if you were to say ‘I’ve got to take one course other than finance to be a better investor’ it would definitely be a psychology course.

Interesting. Yeah, my son’s interested in it but my wife actually worked for the CEO of Novartis and he was trained in psychology and he was a remarkable businessman but it is rare that you find people running large businesses with that background but it is very, very powerful and it’s a remarkably useful training ground I think.

Yeah, for sure, absolutely. Well, every day you’re making decisions and we talk about the work of Amos Tversky and Daniel Kahneman and their contributions to psychology and there are so many, the great book Judgement Under Uncertainty is just stock full of how people make bad decisions not only in life but in investing as well so yeah, it would be very worthwhile to spend time in psychology if you’re an investor that’s for sure.

So, what are the common biases that you see around mistakes that are made in terms of when people are allocating capital? I’m interested in what are you seeing most people making mistakes in either as investors or as executives in large organizations?

Well, they both can be the same and the mistakes that I think that I’ve observed and have made and observed in others is that they have a tendency to make decisions today based upon a recollection of what worked previously and so when you do a comparative systems analysis, you’re comparing one system or one company or one investment and you’re comparing it whether its current or historical or whatever the case may be, the tendency is that you look at the commonalities between the two when you do comparative systems analysis, you’re looking for what’s in common, you latch on to that very quickly, it’s a psychological thing. And you think that by looking at the commonalities that you have the solution but the weak link in comparative system analysis is not to latch on to what’s common between the two but what’s different and it’s often the differences and they can be minute, they can be very small, they can be not quite recognizable, you don’t think that they’re very significant but oftentimes, the mistakes that people make by doing comparative systems analysis which is a way in which to make decisions is that they don’t recognize that the differences can be significant even though they might not appear to be significant when you’re doing your analysis.

So, is there a simple way of saying that this is about extrapolating the future from the past? Is that what you’re talking about essentially?

Well, sure. I mean, that’s the easiest way, right? The easiest way is to look back in history and say, ‘What happened in the past? What were the factors?’ and then you look at the current situation and you go, ‘Well, there’s a lot in common here, there’s a lot of commonalities between the two, and the outcome in history was this and so, therefore, I could expect a similar outcome’. Well, that’s not always the case because there can be differences and there often are differences, particularly over the historical record between the two events and you’ve got to be very careful. Sometimes the differences matter and sometimes they don’t but oftentimes we don’t weight the differences quite heavily, we probably discount them because we latch on to what’s common or what is similar between the two episodes and that’s really what drives the decision making and sometimes it works out but sometimes it can lead to mistakes.

Yeah. So, I’m curious, we’ve talked about investing. How applicable is this approach of multidisciplinary thinking to other areas of work or life?

Well, I guess obviously I’ve drunk the Kool-Aid and I’m all in on it and I live my life in a multi-disciplinary fashion even though I’m an investor. I’m a broad reader and so I can’t imagine that anyone wouldn’t get pleasure or success. The likelihood that you would be more successful relying on more models than just one seems to me to be an obvious statement. Why would you not want to think about other disciplines and other models and other disciplines to see if they could help you be better at what you’re doing? I think that’s just kind of a simple but obvious statement. So, I don’t care if you run a business or you’re a teacher or whatever you’re doing in life, even if you just want to be a better person, a husband, a father, a friend, being more widely read, being more aware of the world and not having a narrow view is probably going to be more helpful to you. You know Charlie Munger’s metaphor was always ‘to the man that only has a hammer everything looks like a nail.’ That’s a very simple-minded way in which to solve all problems.

Yeah, he also uses the other metaphor which is a bit more colorful about ‘Having one model is like’ -oh, what is it – ‘A one-legged man in an arse-kicking competition.’

That’s one of the better ones. That’s what they call a Mungerism.

Yeah, absolutely. Well, listen, I can’t wait to get into Charlie because I’ve got a huge amount of time. I’ve actually got a bust of Charlie Munger in my office, but you can’t see it because we’re on Skype.

Oh, do you really?

Yeah.

Great, yeah.

But, very quickly, are there any areas of work where this, applying multi-disciplinary thinking, actually gets in the way? Are there any situations where you say, ‘You know what? This isn’t a helpful resource to draw on?’

Well, I think you might, if you think about it very narrowly, for a specialist you might say, ‘My heart surgeon doesn’t need to be multi-discipline, he just needs to know how to operate properly and be very good at it, he doesn’t need to understand physics or mathematics and things of that nature, just know how to operate on my heart, that’s all I need you to know.’ And maybe fighter pilots, you think about the areas of specialty, you don’t need the liberal arts so much as you need just the facts of the moment and you understand how to be the best at it, whether it’s a fighter pilot, a surgeon, a dentist whatever the case may be but it’s interesting. I wrote a book about detectives years ago and it kind of came out of Latticework, the literature chapter, and it was looking at how detectives solve mysteries and taking the commonalities and how they solve mysteries into markets and so it’s in the literature chapter of the book but one of the things that I came across in doing descriptions, because descriptions are very important to how people think, I came across a professor at Yale University at the medical school that actually had his doctors take art appreciation classes, and the reason was that he wanted them to be able to see more than just what is obvious. A lot of the mistakes that are made in doctors making decisions, making judgments, whatever the case may be, they oftentimes just look at the surface, the obvious about it and don’t look at the details or get behind it if you will, like someone in art appreciation. So, he had his doctors that were going through med-school actually take an art appreciation class so there’s a kind of an example that maybe even a heart surgeon or somebody like that could benefit from having a little bit more broader view of the world than just their discipline in itself.

Yeah. So, let’s come on to Charlie, because Charlie, he’s kind of like the wellspring as you said for this work, but he was preceded by Ben Franklin who was preceded by Leonardo da Vinci. There’s a there’s a long history of people who are explicitly multi-disciplinary in their approaches. My question is who is carrying on this tradition in the business world? Charlie is what, mid-nineties now? Where do you look for or who do you see being sort of prime in this area? I mean, there are lots of people who are trying to do this but who is the new wellspring of this kind of thinking if you like?

Well, if you think about who the great business titans of are today, and Warren has made this observation many times, you’d have to put Jeff Bezos up there as somebody who thinks outside the box, thinks broadly. I’ve met Jeff many, many years ago and we didn’t have a discussion about multi-discipline thinking but he’s obviously a well-read, well-thought person who sees the world through broader lenses not narrow lenses, and Warren’s made that comment that if you look at probably who is the most remarkable business manager or business person, you have to put Jeff Bezos right up there, and you might think of Steve Jobs and other people that have just had tremendous success in the past, you think about what those people were and almost all of them didn’t take the predictable path or didn’t take the repeatable path, they broke new ground and they took their businesses in different directions and had tremendous success for their owners, so those are the kinds of people you look at the great companies in the world and think who is running that company, what are they doing that’s so different that’s made them so successful and you’ve got to be thinking that’s a very good decision maker. In the investing world, there’s quite a number of people that are multi-disciplined. Clearly at the top of the list is a guy that I used to work with at Legg Mason named Bill Miller and I actually dedicated the original Latticework to him-

Yes, I saw that.

A great mentor. This is the guy that didn’t go and get an MBA, he did his graduate work in philosophy at Johns Hopkins, that’s how he really became a decision maker and he’s probably the one that turned me on to the Santa Fe Institute which is a multidisciplinary research institute in Santa Fe, New Mexico, that studies complex adaptive systems of which there are many, one being the economy and the stock market is a complex adaptive system and he introduced me to Santa Fe, the Institute, in the nineties and it was just a tremendous eye opening experience, and being able to interact with so many people in so many different disciplines was just huge, and to that list I’d also add Michael Mauboussin-

Yeah, he’s chairman or CEO or president of Santa Fe?

Now chairman of the board of governors out there but he started as a consumer staples analyst at Credit Suisse so many years ago but latched on to the Buffett way in which to think about valuation and then became friends with Bill and came to work with us at Legg Mason where I worked for sixteen years running Bill’s global product, his global growth product, and Michael has carried on the tradition I think as an academician, he’s not a practitioner so much as an academician, a great writer, he teaches the original Security Analysis course at Columbia University that Ben Graham taught-

Does he? Ok.

But he’s a perfect, remarkable example of a multi-discipline thinker and you can see it in his work and his writings. So, they’re out there but I would put those as the giants in the field right now for sure.

Yeah, there’s a guy, and I haven’t managed to track him down, I think he’s in California, is it Li Lu? I don’t know whether you’ve come across him, he came out of China and I think Charlie Munger’s referred to him several times. I’m just wondering if he’s on the list, I mean, he’s quite-

Yeah, I’ve heard his name before, Mark. I just haven’t dived deep into anything, I’m not sure that he’s – I just haven’t come across anything that he’s publicly read, and I know he’s highly regarded in the name and I know Charlie’s talked about him as being quite a brilliant person so, it’s possibly somebody that you should pay attention to.

Yeah, yeah. But I suppose what you’re saying is from a learning point of view the Santa Fe Institute is probably the place to go to for this kind of thinking.

Yeah, well clearly, it’s a great wellspring of multi-discipline thinking. You could spend forever there. I’d put the Aspen Institute up there, I think it’s a great organization, multi-disciplined, it reaches out into different places but connects it back to business and investing, I think they do a great job.

And of course, I guess, the CEO is Walter Isaacson who has written some of these wonderful books about some of these people you’ve mentioned, right?

Yeah, including Leonardo da Vinci.

Well, yeah, and including Steve Jobs and including a number of the other folks in technology who are perhaps not quite as well-known but still have done some remarkable things. Fascinating.

Walter Isaacson is a tremendous writer and he’s just a great communicator and been a great benefit to the Aspen Institute no doubt.

So, just beginning to wrap this up, a couple of other questions. We all live in bubbles, you know, our lives are more and more controlled by algorithms, be it recommendations from Netflix or Amazon or Facebook and I’m just really curious about how do you personally avoid being sucked into this bubble or how do you burst out of this bubble to ensure that you continue to have these fresh perspectives? What disciplines or what habits or what hacks have you got to avoid being forced down a certain route if you like?

Yeah, well, clearly, I’m not sure bubble is the right term to use but I mean clearly you just don’t want to get to a point in life where you think you know it all and ‘This is what it is and I don’t need to go any further’. That’s obviously not appropriate and not going to work because the world continues to grow and become more knowledgeable and evolve and change direction, so for me the way in which I think, and protect is not the right word, but the way in which I try to stay competitive and try to stay curious, and I have a natural curiosity, is you’ve just got to continue to be a reader and I know that’s a very simplistic notion but the thing that I enjoy other than annual reports, I love reading about companies, I love the markets, I love coming in every day and seeing the puzzle change a little bit and the new information so it’s always a great day to start, but I absolutely just love book reviews. I just am a junkie about book reviews and whether it’s the New York Times whether it’s The New York Review of Books or The London Review or whether it’s from literary supplements, whatever it is, I just love reading about books and what people are writing and what they’re thinking about. So, I think if you have that as a habit, ‘the habit of mind’ which is a Ben Franklin term, he had a tremendous habit of mind, if that’s your habit of mind that you’re going to read book reviews, let’s just keep it at that level, I’m going to absorb book reviews from the New York Times, the Financial Times or The Wall Street Journal or the other specialty magazines and reviews because there’s always something new every week. There’s always something new that you don’t know or you hadn’t thought about or now you’re thinking about it because somebody brought it up, and you buy the book and it comes in and you get to flip through it and you read it and it just sparks something in you that keeps you alive, keeps you growing, keeps you competitive, keeps you entertaining, you’re never at a loss for a conversation at the dinner party. So, if I were in a prison cell and I could only have one source of information I would say, ‘Just give me the book reviews of all the major magazines each week and I’ll be satisfied.’

Yeah, yeah. And of course, Charlie Munger, I think his family describes him as ‘a book on legs’, and Buffett, they both read religiously. Just again, coming back to Charlie, forgive me but you started it because you started the book referring back to him right at the beginning so I feel like I can probably ask this question. How has his thinking evolved since you first came across him in the mid or the late eighties I think it was or maybe it was the early nineties, I can’t remember?

Yeah, it was ’94 we’d meet in Babcock’s class and lecture. You know, Warren says Charlie, just always when he met, it’s interesting – you know the story, the history is they both were in Omaha at the same time and Charlie actually worked at Warren’s grandfather’s grocery store. Charlie’s six years older so they might not have been running in the same circles, they never met and they kind of came full circle around in their late twenties, early thirties, and met again and then just hit it off, but he said when he first met Charlie he was a wide reader. He just had that passion in him and was born and trained, not born but trained as a lawyer and as a lawyer you’re well read, there’s no doubt about it, about law and politics and history and so many things, so to be a lawyer you’re going to be a good reader, and Charlie just seemed to continue to sprout in different directions and that was just part of his DNA, that’s who he was and Warren said that’s just who he was on day one so he was kind of wired that way. Warren was a voracious reader too, but he was very narrow and would say, ‘I just read investment books, and I read annual reports, and I read about business management’ and stuff like that. He wouldn’t dive off into science and other areas that Charlie did and so, therefore, Charlie’s a much wider reader than Warren, but Warren drills down deeper into business and investing than maybe Charlie did.

And I guess, when they came together and started investing I think the breadth that Charlie brought combined with Warren’s depth, that got them into companies like, and I’m probably going to get this wrong but companies that were not ‘cigar butt’ companies but which had brands, which had franchise, which had pricing power, and it changed, well, not completely, but it added to Warren’s understanding of how to allocate capital essentially?

Yeah, that’s absolutely true, and Charlie Munger, the big crossroads in Warren’s investing life which made all the difference in the world was when he bought See’s Candies, which if you would have put it under the Excel spreadsheet would have violated every one of Ben Graham’s tenets about low price earnings, low price to book, whatever the case may be, it just didn’t have the markers that Warren had grown up on, and he had spent a good deal of money, his partnerships money and other investments on the Ben Graham principles of value investing which had served him partly well for a time being but were now starting to cause him problems, whether it was the textile business, Berkshire Hathaway or the farm implementation business, retailing business, he was running into cheap businesses but they were lousy long term investments and Charlie says, ‘Hey, take a look at this company See’s Candies’ and Warren was saying, ‘Gee, this is way too expensive,’ and Charlie goes, ‘No, no, no it’s not, let’s walk through the cash, let’s walk through how much capital it needs and let’s look at its pricing power’ and blah blah blah, and Warren paid up and it was through that experience that ultimately led him to things like Coca-Cola and things down the road, so there are two things there that I think are very important. One is that Charlie opened his eyes to how to think about, ‘Let’s look at this company too, this is a very interesting company’ but it was also Warren I think. Can you imagine a guy that was so deeply intellectually invested into Ben Graham? I mean, he was the guy, he was the guy that turned on the light for him when he read the Intelligent Investor and then went back to security analysis and then raced out to New York to be in his security analysis class and eventually became a partnership, became a member of the partnership, the Graham Partnership, and then went on to run the Buffett Partnership, and it was all Ben Graham. So, when you think about a person that had such a huge, huge impact on his intellectual evolution if you will and investing, and there he was at See’s Candies with Charlie and he took a right turn, metaphorically right and accurately right, but he took a different turn in investing and boy, just made – but that had to have been a great strength of Warren, for him to adapt, willing to change, willing to try something new, and maybe it was fostered on the fact that he had some failures, that things were becoming difficult, he was buying cheap things that he wasn’t getting paid for, and maybe it was that he looked and said, ‘Maybe what I’m doing right now is not working very well, maybe I need to look.’ But often people will get very rigid in how they see the world, how they behave, how they think and not make the move when they need to make them but Warren did with Charlie’s help and it’s been a great partnership ever since.

Yeah, yeah. So, this feeds perfectly into the questions I sent across. So, first one – what have you changed your mind about recently, Robert? It’s a big question. How do you answer that?

Well, you certainly learn more by your mistakes than you probably do from your successes. We do post-mortems and Michael Mauboussin was a great teacher about keeping a daily journal and going through your failures post-mortem more so than the successes, and clearly, the thing that I got wrong during the financial crisis was not understanding that politics and politicians can make decisions that would be inconsistent with what I think would be the rational way in which to solve a problem. So, when politics become involved in investing and business and it becomes a heavy hand and big decisions are being made by politicians, it’s probably best just to step back and let them work it out and then when the dust settles reengage. I said, ‘A rational person would do this’ or ‘If you look-’ – now here once again, historically, I went back to the savings and loans crisis in the early nineties which was a real estate bubble, was a commercial real estate bubble and it bankrupt a lot of savings  and loans and I said, ‘If you looked at how politicians behaved in 1991, they would do something similar in 2008’ and that’s the way we thought about things back then, and boy, what a big mistake that was. It turned out the politicians behaved in a totally different way, so my big lesson is that when you’re in big financial situations whether there are bubbles or crashes, recessions or whatever, and you think they naturally run their course as they have in the past, but politics surfaces to become a very, very big deal and kind of consumes all the oxygen in what’s going on, the predictability, that process is oftentimes very difficult to do and it’s probably best that you step back and let the air clear and then once it’s settled, reengage. That’s kind of the lesson I’ve learned.

OK, super. Second question, and we’ve touched on it, you’ve already given one answer but maybe there’s another one as well. Where do you go beyond reading book reviews to get fresh perspectives to help you solve problems or make decisions?

Yeah, well, we talked about the Institutes in Aspen and Santa Fe and places like that and book reviews. You try to keep going to conferences, you try to stay engaged with your peers, you try to stay, you want to stay social, you really want to know because you could spend ninety-percent of your day and you’re not learning anything new but one fifteen minute conversation or that one lecture or that one conference that you went to one presentation that happens so infrequently that can actually change what you think, it’s still very valuable. So, oftentimes I go to many conferences and try to stay very engaged in my discipline and sometimes I walk away and I got nothing, it’s like, ‘I know that’ or ‘I’ve already heard that’ or ‘That’s nothing new’ but every once in a while you’ll get something and you never would have gotten it had you sat in your office and not travelled or not got on the plane or not made the phone call, you’ve got to continue to cast as I say in the book, John Holland talks about the way in which you get really smart about these things is that you’ve got to continue to spread out into different directions and stay very engaged, and he talked about the Norwegian fishermen. They would fish out the school that they had located but they’d always send a trawler or a fishing boat in a different direction each day because you never know what they would find, something new and something different. So, it’s a process, you’ve got to stay engaged with the world, you’ve got to stay engaged with your peers, you’ve got to stay engaged with your profession for sure, something will always pop up somewhere along the way even though ninety-percent of the time you go, ‘Jeez, this is a waste, I’m not learning anything’ but every once in a while you get that nugget and it can make a big difference. So, just because I’m multi-disciplined doesn’t mean that I don’t allocate a lot of time to my profession to see what’s going on with my peers and try to stay engaged with them.

Yeah, yeah, super. And then the third question was, I think you’ve already answered that around your most significant low which was around the rubble of the meltdown, so-

Yeah, the train wreck that was 2008, yeah.

Yeah, well it feels like a long time ago but obviously, the wounds are still fresh for other people, I guess?

Well, in some ways I’m glad they are. That was a horrible lesson to learn, very painful and very financially painful for so many that you don’t want to forget that. That was an important one and you want to learn from that and you want to carry that for the rest of your life and you want to write about it, you want to confess it, you want to continue to bring it up so people that are younger than me are hearing the stories. I remember as I started out as a stockbroker in the eighties, it was ’84 when I joined Legg Mason with Walter as a stockbroker and I would hear the older guys say, ‘You haven’t really-’ – you know, we went through ’87 and the stock market crash in ‘87 and they’d say, ‘You know what, you have not seen anything until you go through ’73 and ’74’ and they would talk about it and talk about it talk and of course, you hadn’t gone through ’73 and ‘74 so you didn’t really have the scars that occurred with the other older brokers but hearing it certainly made you aware that those things can happen, and you’d hear the stories and you’d stay aware of, you know, markets are not always friendly and they can be very brutal at times and even though you weren’t there in ’73 and ’74, to hear it is very important and for me 2008 is a story that I feel like I’m telling to the younger professionals saying, ‘Look, 2008 was a very big deal and you’ve got to remember the stories here and think about them.’ That comes up again. Like I said though, it could be similarities, but the lessons learned here are you’ve got to pay attention when politics becomes a heavy hand and that’s the lesson I learned.

Yeah, absolutely. So, where can people get in touch with you?

Well, the easiest way is through my firm Equity Compass Strategies and we have a website that you can access that will get to me and access the emails and things of that nature.

OK.

You can also – that’s probably the easiest way I’m thinking to myself. If I were to kind of start it, the web address is www.equitycompass.com, and if you went there you would have all the access points to get to me, to get to what we’re working on and things of that nature.

Super, well we’ll put that in the show notes along with links on Amazon to your books and stuff but it’s been, as I said to you when I reached out, this is a remarkable book I really enjoyed it. Sorry, we can’t meet in Omaha but very much looking forward to either next AGM or when I’m next in Philadelphia, but many thanks for your time and have a great day.

Mark, appreciate it, it was enjoyable.

Super. I’ve lost you. Thank you very much indeed, Robert.

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