How Warren Buffett Gets Smarter Every Day
Buffett has an information network that keeps him from making mistakes. It is why we don’t find him on Twitter.
“When we respond to social media without a filter, it turns us into screaming monsters or slavish consumers.”
Warren Buffett is a technophobe (not true, 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 all the facts first. He routes information through his information networks to find out who is fake and what is verifiable. It is why he’s worth nearly $100 billion and the rest of us, well, a bit less.
When Buffett and I spoke about his decision making, he said, “When I think about whether the BNSF railroad is worth $34 billion, I act like a journalist and assign myself the story. I want to be sure the facts support my hypothesis. If they don’t, I change the hypothesis.”
When he assigns himself the story, he’s not looking for confirmation. To Buffett, solid, reliable information is gold. It means he doesn’t allow himself to be fooled by publications whose purpose is to generate clicks. His algorithm is to use diversity as a hedge, find several sources to figure out what is really going on. Although we may never match Buffett’s intelligence, any of us can copy his method of filtering information.
He organizes information into a 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 key, 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, especially 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 would 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 it 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 certain 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.