In an interview with Charlie Rose in 2007, Buffett explains about his succession strategy and what he wants from the few key CIOs/CEOs he plans to hire. Warren states that he clearly wants smart people but that smartness is not enough. More importantly Buffett wants to know “how they swing at the ball” or essentially the process they use, how they behave and how they reason/think. Warren Buffett (Trades, Portfolio) famously has said numerous times “temperament is more important that IQ” but for once he also goes into a little detail explaining this quote in a speech he gave with Bill Gates (Trades, Portfolio) in 1998.
“How I got here is pretty simple in my case. It's not IQ, I'm sure you'll be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output--the efficiency with which that motor works--depends on rationality. A lot of people start out with 400-horsepower motors but only get a hundred horsepower of output. It's way better to have a 200- horsepower motor and get it all into output.
So why do smart people do things that interfere with getting the output they're entitled to? It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way. As I said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won't. For the ones who won't, it will be because you get in your own way, not because the world doesn't allow you. The chains of habit are too light to be felt until they are too heavy to be broken. At my age, I can't change any of my habits. I'm stuck. But you will have the habits 20 years from now that you decide to put into practice today.”
This is a very morally philosophical statement from Warren that begs one to reflect on their past behavior and be aware of their present reasoning, decision making and thinking processes. Being aware of the processes includes all the biases, assumptions and heuristics that may hinder or undermine the efficiency of the process. By reflecting and practicing meta-cognition or thinking about thinking, we enable ourselves with a higher probability of avoiding un-rational behavior.
It is the daily choices that compound in to habits over weeks, months or years and eventually becomes character or as Gandhi famously said, “Your beliefs become your thoughts, Your thoughts become your words, Your words become your actions, Your actions become your habits, Your habits become your values, Your values become your destiny.”
So, what does temperament really mean?
Temperament is a psychological term referring to the attributes of ones personality and is believed to be an innate disposition, rather than learned. If you have taken a cognitive psychology class, read a textbook, or any other curriculum, you know there is myriad conflicting evidence in almost every domain (of psychology) against the nature hypothesis and clear indications that our environment does have a role in molding us. Chess and Thomas were two researchers that continued temperament research based on original studies by Birch and classified temperament traits into 9 key categories.
- Activity – Physical Energy, constantly moving or relaxed state? A lower activity level may indicate a higher reliance on mental activity such as reading, deep thinking, meta-cognition, abstract reasoning etc.
- Regularity – Predictability of biological functions? Does one thrive with routine or prefer sporadic and serendipitous actions.
- Initial Reaction – Approach or Withdrawal in new environments with new people? Do you jump right in or prefer to watch for a little while before approaching?
- Adaptability – How adaptable are you to a changing environment, is it easy to settle back into a routine and change or are you met with resistance and a difficult time?
- Mood – General tendency towards optimism or pessimism.
- Distractibility – Focused at the task at hand or easily distracted by external events in your environment?
- Persistence and attention span – Ability to stay with a task when frustrations or setbacks are met.
- Sensitivity – Does external stimuli like noises or lights or other movements distract or hinder or is their an ability to remain focused?
- Intensity – How are your behavioral responses in a given situation, do you remain calm or become very excited shouting with joy?
This is the mixed bag of traits that make up ones temperament and who the person is based on behavior. There are a whole host of other attributes that could be included but that it the core of them. Buffett has not explicitly stated these attributes as the key qualities an investor or successor of Berkshire needs to have but did say three qualities he felt were crucial to Charlie Rose.
- 1) An ability to recognize and avoid risk
- 2) Independent thinking, emotional stability and a keen understanding of both human and institutional behavior
- 3) Integrity – specifically loyalty and honesty
- Charlie Munger (Trades, Portfolio) has also chimed in (at another time) that a love for continuous life long learning is also an important attribute of an investor or any person seeking wisdom.
The challenge at hand is not to learn or grasp the investing and business concepts but rather in the willpower to execute the plan. Personally I enjoy thinking about businesses and investing like poker, with a focus on the process not the outcome. Just because you were dealt a single bad beat because someone strung the nuts on the river doesn’t mean your process is flawed and you should change your approach. If you had the edge and odds, playing them correctly and bet based on an expected value or probability, you did all you could. Sometimes the improbable happens leaving one with short-term losses but over the long-term we will end up with the optimal solution.
Investors can learn a great deal from studying poker, bridge or even stoic philosophers and stoicism in general. Some of my personal favorites are Seneca, Marcus Aurelius, Epictetus, and Zeno of Citium.
What is stoicism?
Well stoicism was a philosophical movement that sprung from the Hellenistic period (the time between Alexander the great and the Roman Empire, about 300B.C) with the beliefs that philosophy was not a hobby but a way of life. Over 10,000 words could easily be written about stoicism, the history and the practitioners (much more already has) but I would much rather briefly focus on logic, beliefs and emotion of the stoic.
A stoic recognizes and focuses on what is within his or her control and ignores (but is aware of) what is uncontrollable. Only your thoughts, intentions and actions are within your control, all else should be supressed. It was not in the interest of the stoic to remain dormant in seclusion but to share with the world remaining resilient in the face of hardship.
Emotion is a choice. Some may argue with the statement but when I was a child, I would tell my parents they were making me angry or sad because of their behavior they simple proclaimed back, “Son, we do not make you angry or sad . . . we do not make you do anything . . . You are in control of your emotions. You are choosing to be angry right now.”
Regardless of your opinion on the matter, investors with emotional stability (based on my personal observations) have much better performance than peers. Think about Seth Klarman (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Warren Buffett (Trades, Portfolio), Howard Marks (Trades, Portfolio), David Einhorn (Trades, Portfolio), Bill Ackman (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Graham etc. – all in public appearances seem emotionless, no excitement, no shouting, but cool, calm and collected with a skew to optimism. Do away with fear, anger or other emotions that we are in control of. Focus on happiness and reamining relaxed.
Now there is a difference between modern fatalism and belief/fate and the stoic belief in fate. That is, the present state of affairs is governed by past choices and actions. So the present state or choices/actions determine the future state of affairs. Yes, we are in control of our fate but not where we are at present time. Amor Fati.
Nassim Taleb says it best in the book Antifragile, “Seen this way, Stoicism is about the domestication, not necessarily the elimination, of emotions. It is not about turning humans into vegetables. My idea of the modern Stoic sage is someone who transforms fear into prudence, pain into information, mistakes into initiation, and desire into undertaking.”
Brilliant!
Summing up the personal psychological components of investing and our own behavior, I think it would be important to recognize, what I believe to be, 10 key attributes of successful investors.
- Rationality
- Patience
- Prudence, focus on process, discipline, persistence, and a desire of excellence
- Emotionless or emotional stability
- An understanding of human behavior and cognitive psychology
- Thrive with routine but are adaptable in the face of adversity (Ackman, JCP)
- Loyalty, Honesty and Integrity
- Awareness (of biases, risk, assumptions, etc.)
- Confidence (Einhorn, Allied Capital)
- Independent Thinking and Reasoning
Don’t fall for the misconceptions that it is innate temperament alone that allows successful investors to succeed, these attributes can be learned through routine daily choices and weekly habits, essentially programming our brains with a procedural/implicit input. Above all remember why investing is the greatest business in the world and how you can gain an edge over other participants.
“I call investing the greatest business in the world, because you never have to swing. You stand at the plate and the pitcher throws you General Motors at $47! U.S. Steel at $39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” -WB
Essentially everyone is boozing on emotions and the ones who aren’t were taught to play bridge without looking at the cards or without thinking, to paraphrase Buffett. In addition to studying stoic philosophy, poker and bridge, it may be a good idea to start playing bridge as Ben Graham stated all those years ago, “playing a hand right, rather than on playing it successfully” is what is important whether playing bridge or in the stock market, playing the hand right is what leads to success in the long-term.
