Great Investors See Things Differently (Are Mental Models Actually Pointless?)
Michael Steinhardt: "The only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did."
Last time, I wondered whether focusing on the qualities and virtues of great investors remains too vague and impractical to be of much use. Great investors act differently. They make different and better decisions, at least occasionally. These moments are examples of what Michael Steinhardt called variant perception:
I often said that the only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were.
Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit. — Michael Steinhardt, No Bull
But how does one create the conditions for developing a variant perception? Steinhardt points out both ‘knowing more’ and ‘perceiving better’. I think it requires a balance of becoming a domain expert, armed with a mental library that allows one to spot key patterns in complexity, and yet also remaining open-minded.
In 2001, Buffett explained the cumulative nature of knowledge in markets:
One of the beauties of the business that Charlie and I are in is that everything is cumulative. The stuff I learned when I was 20 is useful today. Not necessarily in the same way and not necessarily every day. But it’s useful.
Just keep accumulating knowledge. You’re building a database in your mind that is going to pay off over time. You can have a lot of fun, if your mind goes along that track, as you get older.”
But outdated knowledge in your database becomes a handicap. In Investing’s Big Blindspot Tom Morgan highlighted openness, the “appreciation and tolerance of new ideas, values, and experiences” as a key trait. Gathering knowledge and experience alone are not enough because “we all know people for whom intelligence and seniority have become arrogance and inflexibility.”
During my conversation with Michael Mauboussin he noted that “the one thing you find across almost every great investor is this idea of curiosity, which leads to this idea of open-mindedness.” Druckenmiller has commented on it many times:
Probably one of my greatest assets over the last 30 years is that I’m open-minded and I can change my mind very quickly.
Mauboussin quoted Phil Tetlock, author of Superforecasting: great investors treat their ideas as “hypotheses to be tested, not treasures to be protected.”
Great investors do two things that most of us do not. They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy.
The best investors among us recognize that the world changes constantly and that all of the views that we hold are tenuous. They actively seek varied points of view and update their beliefs as new information dictates.
This is difficult because, as Mauboussin wrote, “the need for consistency tends to grow with age.” The more experienced we are, the more we are tempted to fit any new situation in our existing model of the world. At the same time, the longer we operate in markets, the more likely it is that our knowledge has become outdated. To succeed, we need to accumulate a mental database of case studies but resist drawing simplistic lessons or clinging to them too tightly.
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