HomeExperienceSingle thinking model is the source of many investment disasters
January 24, 2019
Single thinking model is the source of many investment disasters
How to make a good decision? How to become a good investor? Forming our own thoughts and choices in our thinking model is a good start. Building these modes of thinking is the key to making the right decisions.
There can't be only one "hammer" in the hand.
The mental model is a prediction of the development of things. To make it clear, how you want things to develop is not a mental model, but how do you think things will develop is your mental model.
If a person has a complete and sound mental model, he can make accurate predictions about the development of things, so he can make better judgments than others. We describe people, sometimes with vision and foresight, to praise those whose mental models are more precise than ordinary people.
Wikipedia believes that the core of the mental model is that there must be multiple models. If you compare it to a tool, the more tools you have, the better. It may not be possible to have many “tools” in reality, but you have to allow as many “tools” as possible in your own “toolbox”.
Imagine what would happen if you had to fix something without the right tools. From my experience, if you have the right tools, you might have solved the problem easily
It’s similar to mental models. The more mental models you have, the more you tend to make more correct decisions.
This seems natural on the surface, but in reality it’s not so natural in the process of thinking. If people's brains are not properly trained, then the brain is more inclined to think about problems in patterns that they know and like.
Munger’s argument is to compare it to a man with only one hammer: “If a person has only a hammer as a weapon, then the way he solves all the problems is only through a hammer.”
When you are just used to thinking with a mental model, you tend to put everything into the mental model, regardless of the situation. This can lead to dangerous thinking or wrong decisions.
How can we avoid it? Then try to include different models in your existing mental model, and allow these models to compete and compare with each other.
In the beginning, the brain will feel uncomfortable doing this, but you need to know that this means a different mental model is working.
Do you remember when you learn to ride a bicycle for the first time? In the beginning, you may not think or believe that you can ride your own bicycle, but in the end you know how to ride the bike, and you can't imagine how it is done. Once you know how to do it, you will never forget this skill.
There are many different tools in your brain kit, and don't be a person with only one "hammer".
Charlie Munger said: "You must learn the essence of these major subjects, and regularly use all that you have learned, not just a little. However, most people just learn a single subject and content, for example, many investors just learn economics, and only solve it in one way when they encounter all the problems."
Munger thinks that thinking clearly is a response to a person's educational level. He believes that people's brains are just like muscles and need exercise.
Munger specifically mentioned these major subjects that can help expand thinking about mental models, and said that you don't need to know everything in these subjects, but you need to know the main content. These subjects are: Physics, Psychology, Biology, Mathematics, Philosophy, History, Sociology, and many others.
Develop a list of investments
For investors, it is necessary to have a list to check.
The list can help investors make better decisions in their investments, but there is no law. Investors need to learn from mistakes and constantly add new factors to their lists.
This list can help us and help investors stay rational in the face of uncertainty and chaos.
The well-known successful investor Seth Klarman (the world's fourth-ranked hedge fund Baupost founder) and Monis Pablo (Mohnish Pabrai, Buffett’s disciple, a new generation of value investors) are active users of checklist method. They all say that the use of the checklist method in the investment is the basic step in the decision-making process.
Munger himself never said how he used the list, but he reminded us of the importance of the list through lectures, writing and conversations on various occasions. He wants each of us to think for ourselves and list one by yourself that suits you.
Munger said: "To learn to turn things around and think about it, reverse thinking will help you find many problems. Many problems are discovered and solved in the process of reverse thinking."
In investing, do you want to make a profit by pursuing good grades, or do you want to make yourself more successful by constantly practicing your risk aversion? To live a happy life is to try to avoid the situation that might puts you in a bad situation.
Most people think that big risks mean big returns, but Buffett earns wealth by avoiding risks.
Munger once said that he and Buffett's success was not because they were smart, but because they tried to "avoid stupidity."
Here is an example related to the stock market. If you find a stock and want to buy it, and it’s supported after inferring all the analysis. You also need to do reverse thinking to find out why you can't buy this stock.
By doing this, you can ensure that your research is comprehensive and that every aspect of the investment is thoroughly considered.
Good at learning from mistakes
This may not require much explanation. Be sure to learn from others’ mistakes and your own mistakes. The only way to make investors smarter is to keep learning from mistakes. This is not only an attitude issue, but also to raise the height of your view of the problem,
After Edison invented the light bulb, someone told him that he had found the most suitable material for the invention of the light bulb after 3,000 failures. Edison’s answer was that he did not fail 3,000 times. He just learned 3,000 ways that cannot make the light bulb. This is an amazing height of view to look at the problem.
Buffett also said many times that he also learned a lot from failures. Buffett used to invest millions of dollars in the Dexter shoe factory. The factory closed a few years later. During Buffett’s subsequent investigation of the company, he found his previous mistakes and decided to summarize the “investment moat” theory. Buffett, the billionaire, also learned from mistakes and failures.
Recently, the billionaire, Pershing Square hedge fund founder, Bill Ackman suffered setbacks in his investment. He was the largest investor in Valeant Pharmaceuticals Inc., and his investment in the company caused Ackman to lose $1.09 billion.
He appeared on TV frequently in recent to explain his failure process of investment and the impact on the Pershing Fund. What we need to see is his humility toward mistakes. Ackman is smarter and richer than many other investors in the world. Even so, he publicly acknowledges his mistakes on TV shows. Every investor must have such an attitude.
There are still some investors in our lives who have not done a lot of tangible research, and simply follow the propaganda of newspapers and other media to invest. Such investment has the potential to get a return, but this is just a matter of luck.
In the end, blindly following must put themselves into loss. If you don't do real research and study, you should always remind yourself that you may make mistakes.
Find an excellent person to follow
Charlie Munger said: “I have been looking for someone who is exceptionally good in my life to observe their investment. I am very interested in what happened to them.
What you observe and learn will increase the factors that make your investment successful. Learning and emulating these excellent people should not stay on the surface, emulate their nonlinear thinking and style. This kind of emulation and learning will have a positive effect.”
Munger particularly recommends that investors take time to watch the movie "Big Short". This movie is not only very entertaining, but also a true portrayal of the world of investment in real life.
Reading makes people rational
As investment becomes more and more rational, these rationalities do not come overnight. It is necessary to have the patience to practice the methods of thinking about problems with different mental models.
Reading is one of the tricks of learning. Reason is a way that can be learned. We all have a natural preference for certain behaviors and ideas, but investors can become more rational through learning.
Reading the works of famous investors, you can find out what "functional disorders" you have in thinking by comparison. Reading can also help you find the way to overcome these "functional disorders" and find the right direction of development.
Train falsification ability
Learn to protest against your own idea. It's easy to choose the stocks that you like in your subconscious, and filter out the opposite ideas that block your chosen stock before deciding to buy.
But remember that the stock market doesn't care how much you love the stock, and the market is the most ruthless.
Mr. Munger highly praised Charlie Darwin's falsification spirit. He commented that Darwin is the model of rational and objective thinking at the opening ceremony of the 2007 Ivy League School in the United States, especially his ability to continually correct his initial conclusions.
Munger said: "We have to learn Darwin's remarkable and profound analytical spirit. When Darwin had his original thoughts, he quickly put down the books to find evidence that could contradict his own ideas. If you can continually exercise yourself just like Darwin, you will become an amazing perfect thinker, not just staying in the study of your original thoughts."
How to apply this into investment? Munger explained: "Investing also needs to be applied in the same way. When you find a company you like or an idea that you think is great, you need to break down the idea and try to prove that you are wrong, If you can't prove your investment idea is wrong, then you have a good investment."