Warren Buffett

Human Brain is wired for linear thinking. Learn how to shift to Non-linear thinking to gain the Edge

Shortest distance between 2 points is a straight line and our human brains are wired to think straight and linear. Decades of deep research in cognitive psychology shows that the human mind struggles to grasp nonlinear relationships. But the world is a non-linear one out there, whether its relationships, technology innovations, business growth, climate change or even making wealth.

While like in any bell curve, thinking straight and linear helps in our day to day activities which occupies 80% of our mind/ time space, we need to shift our thoughts to exponential when it comes to gaining edge in careers, innovations, businesses or networks. That shift to remaining 20% of the bell curve helps.

How to Shift to Non-Linear Thinking? Lets understand with some practical real life examples.

1. Understand Leverage (Archimedes Lever):

Story of Facebook and Threads: It took 4 and half years for Facebook to reach first 100 Million users on its platform. The same company now called Meta launched Threads to compete with Twitter (now called X). And guess what? Threads took 5 days to reach 100 Million users on its platform. How did this happen with no promotions? Threads allowed Instagram users to automatically follow their users on the new service, giving it a quick boost in amassing new signups. Meta just leveraged its massive 2 Billion user base in Instagram. This word “Leverage” will repeat a lot because its closely linked to non-linear results. One of my favourite quotes was from the most influential scientists in history Archimedes who said “Give me one firm spot on which to stand, and I shall move the earth.” 

Even ancient Egyptians used levers to lift heavy stones like 100s of tons in order to build the pyramids and obelisks. The concept of leverage can be applied across areas of life like building a business using financial leverage, building a network leveraging the connections. Concept of applying leverage simply means small changes applied at the right points in optimal balanced way can achieve super normal large outcomes (Non-linear)

2. Lindy Effect: Power of Consistency with Incremental Gains:

The Lindy Effect is the idea that the older something is, the longer it’s likely to be around in the future. And the old idea of building brick by brick consistently leading to incremental gains will never die and this idea is likely to lead the world for centuries ahead.

Examples: India`s Growth Story:  In 1820, India’s GDP was 16% of the global GDP. For over 1700 years, India was the richest country till British colonized and looted the country and left to rags. India took Independence in 1947 and the GDP of the country at that time was less than $30 Billion. It took 60 years for India to reach the First Trillion Dollar GDP. The next Trillion came in less than 5 years and the next in 3 years and the next could be in a year.

Tesla Growth Story: It took 12 years for EV leader Tesla to build its first million vehicles. Recently Tesla Just Built Its 4 Millionth Vehicle, Seven Months After It Crossed 3 Million Mark.

Whether its a country or a company, these growth stories are perfect examples of Non-Linear Applications in life.

3. Compounding (Snowball Effect):

Einstein called it the 8th Wonder of the world for a reason. Principle of compounding is difficult because human minds cannot perceive geometric progression. We can easily calculate linear progression in minds but when it comes to geometric progression, it gets extremely difficult beyond a few steps. Warren Buffett compares it to the Snowball effect.

When you push a small snowball down a hill, it continuously picks up snow. When it reaches the bottom of the hill it is a giant snow boulder. The bigger it gets, the more snow it packs on with each turn. The snowball effect explains how small actions carried out over time can lead to big results.

Compounding is mostly considered as a wealth creation phenomenon but it applies to every aspect of life. Whether it is compounding knowledge or skills or relationships or habits, this non-linear principle applies.

The best book I`ve read in recent times was Atomic Habits written by James Clear and he has best comprehended compounding in a picture. Take a look at the image below.

Only Lesson I took away from 2023 Berkshire Annual Conference

This was my second visit to the Berkshire annual convention or as the popular parlance state ‘woodstock for capitalists’. Not to worry. I didn’t take away anything specific to business or investing this time around since all of that has been spoken or written enough about Mr. Buffett and Mr. Munger through several mediums. What instead I took away was something that I observed keenly during the meeting – ‘Their long attention Span’!! Yes the two nonagenarians sat there for 5-6 hours and attended with utmost concentration fielding all the questions and answering them in detail. They have been doing these meetings since last 3 or 4 decades consistently.

There were no phones ringing, no checking mobiles or any other distractions during the meeting and what is commendable is their ability to sit there, focus and concentrate with such long attention span.

Charlie Munger had famously attributed this to his success. To quote him

I think people that multitask pay a huge price. They think they’re being extra productive, and I think they’re out of their mind. I use the metaphor of the one-legged man in the ass-kicking contest.

I think when you multi-task so much, you don’t have time to think about anything deeply. You’re giving the world an advantage you shouldn’t do. Practically everybody is drifting into that mistake.

Concentrating hard on something that is important is .. I can’t succeed at all without doing it. I did not succeed in life by intelligence. I succeeded because I have a long attention span.

Both of them are known to read hundreds of pages of books, analysts reports, company reports and so on for hours together every day. This practice is extremely difficult in today`s world of digital distraction. Humans are now officially worse at focusing than a goldfish.

A recent study by Microsoft concluded that the human attention span has dropped to eight seconds – shrinking nearly 25% in just a few years. On average, people spend 3 hours and 15 minutes on their phones per day. Individuals check their phones an average of 58 times each day and is increasing by day.

We feel we are effective multitasking but humans cannot multitask because of the ways that our building blocks of attention and executive control inherently work. To this end, when we attempt to multitask, we are usually switching between one task and another. The human brain has evolved to single task. And on top, all these are taking a toll on our mental health.

We cannot undo any of the digital distractions that are taking over our lives but we atleast can try to zone out for few hours everyday from gadgets, that might help reduce the stress and the urge to attend to notifications. And more importantly, it helps improve our focus on one task in hand thereby elongating the attention span.

5 Life Lessons from Warren Buffett that changed my life forever

‘Happiness’ is ‘Freedom’ to do what we love every day. Am already celebrating 1 year anniversary since I quit job to pursue my passions!

We have all learnt a lot about investing, business and finance from Warren Buffett

But I think there are many life lessons I gleaned away from Mr. Buffett on how to lead a great life. Here are 5 such powerful Life lessons that turned my life for ever:

Lesson 1: Inner Score Card

This is the most powerful lesson I learnt from Warren and I implemented but with great difficulty. The idea is simple – To have a set of inner principles or scorecard that drives you everyday even when no one is watching. This means paying no heed to what society or external world think about you or your work or the way you live. Paying no heed to how others rate you or appreciate you or critique you.

Why is it difficult for humans to practice this everyday?: Because humans are social animals and needs social validation in every deed of his or hers. This is one reason social media thrives where everyone gets a chance to share what they buy or where they travel or how people live and so on. People feel great in accumulating subscribers, likes, followers for the same herd mentality that gives the dopamine effect.

Buffett himself has given a great example to drive this point: He says, “Would you be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you be the world’s worst lover but have everyone think you’re the world’s greatest lover?”

One Outcome from this lesson for me: I learnt to keep calendar empty to ‘Keep Focus’ on what really matters.

Lesson 2: Saying “No” to almost EverythingBuild Focus

Another extremely easy but painful habit to inculcate in a world where people constantly look at their mobile or spend time streaming series constantly or saying ‘yes’ to so many activities thereby multitasking.

But how to improve your focus? By learning to say ‘No’ to almost anything. This helps in investing as well where you let go ideas after ideas and only choose ones where the odds are heavily stacked in your favor.

Warren Buffet’s 5/25 rule based on three simple steps to do this:

  1. Write down a list of your top 25 goals
  2. Circle the five most important ones that truly matter to you
  3. And the real kicker is – Eliminate completely other 20 from your list

Lesson 3: Best Investment = Invest in ‘Yourself’

-Invest in Anything that improves your own talents

“The best thing you can do is to be exceptionally good at something, Whatever abilities you have can’t be taken away from you” said Buffett

One Outcome from this lesson for me: I no longer worry if I have to spend for courses or programs relating to my field of knowledge.

Lesson 4: ‘Knowledge’ Builds and Compounds like capital

Keep Reading, learning and mastering in your “Field of Work”

Buffett spends 80% of his working day ‘reading’ and ‘thinking’ — Critical for success in his business Of Capital Allocation (Investing)

One Outcome from this lesson for me: To dedicate my day reading books, annual reports, magazines and listening to business/investing/company videos in youtube everyday.

Lesson 5: Secret to Happiness = ‘Low Expectations’

I still dont think I have mastered this habit of lowering my expectations. Another extremely difficult habit to practice since humans are by nature have greed and fear. This for sure but reduces stress in life to a great extent like not running behind corporate titles, playing status game in society (closely related to inner score card concept)

Buffett famously said “The secret to a long marriage is lowering your expectations”

Charlie Munger also alludes to this principle, the 99 year old said “The first rule of a happy life is low expectations.”

Well there you have it now —How to Lead a Great Life!! Hope this helps you too.

Why Benjamin Graham value investing approach is anti-thesis to compounding

‘The Intelligent Investor’ by Benjamin Graham is the most commonly referred book for beginners in Investing field. While there is no doubt this is a great book as often quoted by Warren Buffett, the traditional concept of value investing is actually anti-thesis to creating wealth through the principle of compounding.

Benjamin Graham

What is great about the book? Margin of Safety: The most famous concept introduced by Benjamin Graham was the ‘Margin of Safety principle’. This definitely is the highlight of the book as well as a path breaking idea in the world of equity investing. Margin of Safety in its crude definition states buying something that is worth $1 for 60 or 70 cents. In other words, Margin of safety is a principle of investing in which an investor only purchases securities when their trading price is significantly below their intrinsic value. This gives sufficient cushion for investors against market volatilities. Second great idea from the book is to look at investing in stocks as part ownership of businesses.

Now why traditional value investing approach practiced by Benjamin Graham is anti-thesis to the concept of compounding?

To answer this question, we need to understand what he practiced through value investing approach. The approach states to buy a security whose intrinsic value is $1 but buying it for 60 cents. And sell the security, when the stock retraces back to its intrinsic value thereabouts. Lets see what are the issues with this approach?

  1. Reinvestment risk: The biggest risk every time you sell a security is, to find another idea to reinvest that money. This will be a non-stop process if we practice Graham`s traditional value investing process. We need to keep selling securities and keep buying the next bargain. This causes reinvestment risk because, one its extremely difficult to keep finding bargains and two, we are increasing the probability of errors by taking so many attempts of reinvesting.
  2. Interrupting Compounding Process: The biggest disservice an investor can do to his or her portfolio is to keep interrupting their compounding process. Great Companies continues to grow 50 times or 100 times over long term. So how can investor achieve a 100X returns when we sell after it doubles or triples following traditional value investing methodology. Charlie Munger once said famously,
  3. Frictional Cost: The biggest issue with constantly selling securities and booking profits is Tax. Take a look at the table below how much Tax can affect compounding as a frictional cost. This is a serious dragger on the process of compounding. Over 20-30 years period of compounding, the returns can come down by 5 – 10 times which is huge.

But does that mean you should never sell securities that you invest in? No, its just that we need to find investing ideas with long runway and buy it at a decent bargain. If we did the job right in identifying the right business, then selling becomes relatively an easy decision which is “Few years later when the growth has runout”