Warren Buffett and Charlie Munger are the Batman and Robin of Berkshire Hathaway, one of the greatest investing superhero duos in the history of Wall Street.
To be as successful as they have in building Berkshire into a $535-billion-dollar market cap behemoth (individual shares are worth a staggering $320,000), Buffett and Munger have to be incredibly smart guys.
However, it’s not their intelligence they attribute to their massive successes over the years. In fact, it’s more about avoiding stupid mistakes than how smart you are, they say.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent,” Munger once said.
Of course, this might seem obvious at first. If you ask anyone if they’re being stupid or not, they’ll likely say they aren’t and never have been. But the vast majority of time, people don’t realize when they’re making a dumb mistake. When it comes to investing, they might think they’re doing something smart, but so do countless other people. And when everyone is making the same decision, like jumping on the latest hot stock, the outcome goes from a smart decision to an unpredictable outcome.
How not to be stupid
At the 2016 Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) annual meeting, one shareholder asked the two legends if they could share their views on being “able to think ahead of the crowd, and build a clear mental framework.” This type of framework enabled them to build Berkshire Hathaway from a struggling textile company into one of the largest conglomerates in the world.
Buffett responded that a great deal of the information he acquired throughout life was gained through observation. “I spent a lifetime looking at businesses and why some work and why some don’t,” he said. “As Yogi Berra said, you can see a lot just by observing. And that’s pretty much what Charlie and I have been doing for a long time.”
Buffett learned by sitting back and watching other businesses grow. By watching other companies, he was able to build a framework in his head of business successes and failures.
He went on to say that every business is different, but successful companies have many things in common — and so do companies that fail. Recognizing these patterns of success and failure is essential, and it’s more important than anything else to recognize “what you can’t do.”
As Buffett explained:
“So we have tried the department store business and a few things, but we’ve generally tried to only swing at things in the strike zone, and our particular strike zone. And it really hasn’t been much more complicated than that.”
Understanding what you can and can’t do, your own abilities in business and ability to analyze other companies, isn’t particularly challenging, but so many people overestimate their abilities.
This is why so many intelligent people end up failing; they think they can do everything when it is just not possible. Per Buffett:
“You don’t need the IQ in the investment business that you need in certain activities in life, but you do have to have emotional control. I mean, we see very smart people do very stupid things, and it’s fascinating how humans do that. Just take the people that get very rich and then leverage themselves up in some way that they lose everything. I mean, they are risking something that’s important to them for something that isn’t important to them. Well, you can say, you could figure that one out in first grade, but people do it time after time. And you see that constantly, self-destructive behavior of one way or another. It doesn’t take a genius to do it, but I think we’ve sort of avoided the self-destructive behavior.”
It may seem counterintuitive, but the most self-destructive behavior is trying to be too intelligent and not realizing your own limits and constraints. Even though he has one of the world’s greatest business minds, Buffett is well aware of this fact and never tries to move outside of his circle of competence.