Warren Buffett has made huge mistakes throughout his life. He bet on airlines before they tanked. He bought an investment bank prior to a bond trader defrauded the U.S. government. He trusted a senior partner to help him find good deals and didn’t know the partner was on the take. So why is he so rich, successful, and happy?
How does he maintain the balance that allows him to come back each day and find value for his shareholders and personal pleasure for himself? To learn from mistakes so that not only does he not repeat, but he improves the odds? It’s called the Buffett System of Compounding Intelligence. The other word for it is wisdom.
“When we respond to information without a filter, it turns us into screaming monsters or slavish consumers.”
Warren Buffett is a technophobe (not actually), yet he uses a noise-canceling device every day. It is a news filter called quality information or QI for short. It also happens to be a more reliable predictor of sound decision making than its better-known cousin, IQ.
While some of us react automatically to a social media post by joining the nearest protest or demonizing someone on Twitter, Buffett analyzes the facts first. He routes information through trusted intelligence networks to find out what is fake and what is verifiable. It is why he’s worth nearly $100 billion and the rest of us a bit less.
When Buffett and I spoke about decision making, he said, “When I think about whether the BNSF railroad is worth $34 billion, I act like a journalist and assign myself a story to find out. I want to be sure the facts support my hypothesis. If they don’t, I change the hypothesis.” It is an homage to John Maynard Keynes, who said, “when the facts change, I change my mind. What do you do?”
When Buffett assigns himself a story, he’s not looking for confirmation like most of us. That is why we buy Tesla at the top or sell Netflix at the bottom. (The CEO of Blockbuster refused to buy Netflix for $50 million when it was offered to him. He went bankrupt one year later.)
To Buffett, reliable information is gold. It means he doesn’t allow himself to be fooled by publications or pundits whose purpose is to generate clicks. His algorithm is to use a diversity of opinions as a hedge, find multiple sources to figure out what is really going on. To ordinary mortals, we call it “getting a second opinion.” Although we may never match Buffett’s intelligence, any of us can copy his method.
He has created a virtual feedback loop from three networks that serve to confirm or cancel out the noise:
Buffett said he talks to more journalists than any CEO in America. Why? Because Buffett is using them as informants. They aren’t always accurate, but he cancels out misinformation by relying on a broad range of sources. If your thing is politics, Buffett’s rule is to watch Fox News and CNN. He looks at this network as “listening posts” which have valuable information if you are willing to dig deeper. Take food bloggers, some are practically genius, while others are shills for a product or a cause. Identifying the motive or bias is vital, according to Buffett, and this applies to the popular news media as well.
Buffett reserves the second circle of the QI food chain for experts who help him understand a complex issue. He would put significant books in this category, primarily written by known experts. He never relies on people who have an incentive to take a position. If the subject is the 2020 pandemic, he will seek out Dr. Fauci, whose goal is medical discovery, not personal glory. With social media, if we want to be as informed as Buffett, healthy skepticism is a must or should be avoided altogether.
Finally, Buffett turns to a trusted partner for the big deals. Charlie Munger is his confidante of choice, and Buffett admires him because he knows his opinion can’t be bought, stapled, or mutilated. Munger is there for those times Buffett’s instincts might fail.
When Buffett held off investing in technology stocks back in 2000, there was pressure to throw in the towel. Berkshire’s value languished, tech equities were sky-high. Buffett was an old guy; techies were barely out of their teens. Who was winning, the investment chorus asked? The tea leaves weren’t promising. Buffett, for the first time, began to question his judgment.
He turned to Munger, who reminded him of his original investing thesis that made him so successful. “do things that are safe, easy, profitable, and pleasant.” Investing in high flying tech stocks with a business model that gave things away without profit just didn’t fit the thesis. Then, internet stocks crashed a few months later. Munger proved again that a trusted partner makes the difference. He is Buffett’s “Black Swan” radar.
The story of how the two met is worth telling. In 1959. They were both invited to a dinner party, and it was love at first wisecrack: “We went to dinner, and in five minutes, Charlie was rolling on the floor laughing — and I do the same thing. We were sort of made for each other,” Buffett told CNBC. The result is the most successful investing act in business history. “We’ve never had an argument in the entire time we’ve known each other, which is almost 60 years,” He added, “We always learn something” from each other and “have a great time together.”
Buffett’s information feedback loop has made him the most successful investor in history. His Quality Information or QI is a food chain where some sources are useful, others dependable, a few are trustworthy. Even Twitter allows us to check specific trends as spam, a tool that improves our feed and our minds. When we respond to social media without a quality filter, we risk becoming the foolish victims of someone’s warped algorithm. It turns us into screaming monsters or slavish consumers. That is a lousy way to go through life, or Buffett would add, build a career or investment portfolio.