Compounding Knowledge = Better Financial Decisions
The filing cabinet of knowledge stored in Warren Buffett’s brain has helped make him the most successful investor of our time. But it takes much more than simply reading a lot. In this article, learn how to create your own “snowball effect” to compound what you know into opportunity.
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Alice Schroeder, the author of Warren Buffett’s authorized biography The Snowball, tells the story of getting into Buffet’s thinking in this informative talk. In her words,
Starting [at a young age] he’s read everything that he could find about business. The subject that interests him, he’s read newspapers, biographies, trade press. He went over to his grandfather who was a grocer and he read the progressive grocer magazine, and he read articles on how to stock a meat department. He’s gone to visit every company that he could find that was even slightly interesting to him, he went down to visit a barrel maker and spent hours talking about how to make barrels. He went to American Express, and he spent hours talking about that business, he went to GEICO and learned about the insurance business. He has stacks of reports on his desk from the companies he owns, pig stalls, jewelry, boat winches, everything you can imagine. He reads hundreds of annual reports every year from companies that he doesn’t own yet, because he just wants to understand their businesses, and then when the opportunity arises, then he’s ready and he can make a decision. What he’s really done is he’s created this immense vertical filing cabinet in his brain of layers and layers and layers of files of information that he can draw back on now for more than 70 years worth of data.
Compounding Knowledge = Better Financial Decisions Expiring Information
A lot of us are on the treadmill of consuming expiring information. Not Buffett. He filled his mental filing cabinet with information that had a long half-life.
While most of us focus on consuming information that we won’t care about next month, let alone next year, Buffett focused on knowledge and companies that change very, very slowly or not at all. And because the information he was learning changed slowly he could compound his knowledge over time. And as Schroeder notes, Buffett has been in business for a long time, giving him incredible opportunities to create a cumulative base of knowledge.
Expiring information is sexy but it’s not knowledge. Here are a few telltale signs you’re dealing with expiring information. First, it’s marketed to you. Second, lacking details and nuance, it’s easily digestible. This is why it’s commonly telling you what happened, not why it happened or under what conditions it might happen again. Third, it won’t be relevant in a month or a year. Expiring information is one reason I stopped reading most news. It’s a false map.
Compounding Knowledge = Better Financial Decisions But there is another subtle difference to Buffett’s approach that often goes unnoticed and few people talk about.
Matching Patterns
Buffett insists on doing his own thinking and vacuums up the details. When we don’t think for ourselves it’s easy to put the blame on someone else, to “pass the buck” so to speak. When we consume information that doesn’t expire or expires slowly; is very detailed; and we spend time thinking about it not passing the buck, we can match patterns. This is how you learn to see what other people are missing. The longer you do this, the more advantage you get.
Most of us use a computer to store information so that we can retrieve it when we need it. We’ve organized our knowledge around a computer. Not Buffett.
The biggest thing he’s done is to learn and create this cumulative base of knowledge in his head. One reason that he doesn’t use a computer is that in a sense, he is one. He also needs a computer to get…he uses it for news. He wants to know what’s going on in the world. So he is on the internet a lot to get news reports, and he’s up late at night seeing what’s going on. He doesn’t use it as a filing cabinet or for computation.
Just like the rest of us, Buffett’s dependent on information and knowledge to make great decisions. Unlike most of us, he has a great memory—perhaps because he’s not trying to outsource his memory or thinking to others.
A lot of what the snowball is about the concept of learning, and creating, and the advantage of having the information and knowing it. When I came here today one of the things that I was thinking is that what you do is so much at the intersection, because retrieving information is different from having it already in your head. The internet is wonderful for being able to retrieve and get information.
What you do is different. You work on manipulating how you use the information. In fact, Warren Buffett and Charlie Munger have the files in their head. That’s why they aren’t really out there googling all the time looking for, trying to look stuff up, because they already know it.
There are applications that somebody who doesn’t have the upper digits memory and their computational power would need in order to be as successful as them. Sometimes when they say, we don’t use computers. An ordinary person can be them.
I think a lot of the work that you do here is helpful to the ordinary person, but Warren Buffett or Charlie Munger don’t need it. At the same time, the lesson that they have, which is that learning yourself, making yourself as smart as you can is extremely valid, and not just relying on a library where you can look something up all the time, because a lot of times when you need to make a decision, and you need 50 pieces of information, you need to know it then.
That’s been one of Warren Buffet’s greatest secrets of success.
I’m not suggesting we all copy Buffett.
While there is no denying he’s successful, the way we think he developed his remarkable facility owes a great deal to living in a certain time period, with a certain biology, and a level of focus and dedication to a single pursuit that few of us can manage. That doesn’t mean we should go to the other extreme and ignore him.
There is much we can learn from him. The key questions are: what’s he doing that works, why does it work, and can I adapt it to my circumstances?
Further Considerations:
Will you care about what you’re reading in a month? In a year? In five years?
Are you focused enough on the same thing to build cumulative knowledge or are you too spread out?
What do you spend time on that’s likely to change in the next few years? What’s not likely to change?
What would need to happen for you to stop outsourcing organization of information to the computer?
The Snowball is about learning, lifelong learning. Spending some time with these questions will allow you to find ways to make your own learning and your knowledge base more powerfully productive for you. Compounding Knowledge = Better Financial Decisions. That's it. Compounding Knowledge = Better Financial Decisions