038: Think Different

Think Different

Color Commentary

Table of Contents

1. Spin Me Right Round
2. Thinking in Bets
3. Resulting
4. Post-Mortem

1. Spin Me Right Round

First of all, happy Independence Day to all the Americans! I’m wishing all of us good health. The news of the virus spreading more and more is scaring me a bit, and I suspect we are heading into the period of the dreaded second wave. Much discussed in vague, apocalyptic tones; little discussed in detail how exactly we the world would deal with it. Would we lock down again? Would we risk transmission in order to keep our lives and livelihoods moving forward? I don’t know, and I”m not sure anyone else does either.

Healthcare workers are starting to burn out (or already have), and seeing the virus spread even more has to be so demoralizing. I want to acknowledge their sacrifice and efforts, and I know we have some in our community, and I know I speak for all of us when I say we are hugely grateful for everything you’ve done and everything you continue to do. Thank you. I hope things get easier.

We’ve danced this dance before. For a few weeks as coronavirus spread around the world, the market did not react – until the market fell, massively, and precipitously. Now, as coronavirus is spreading around the world and especially in the United States, the market is not reacting. Traders seem to be banking on government support, and they’re probably not wrong. Governments have learned they can create magic money and that it works to prop up the economy and the market. Will it keep working? I don’t know. Maybe.

So, what do we do? First of all, obviously, take measures to protect ourselves, our families, our jobs, and the people around us. Second, in a world in which it is impossible to know what will happen, we have to – in the theme of Independence Day – escape the idea that we can ever find certainty, and start thinking in bets.

2. Thinking in Bets

Expert poker player Annie Duke wrote a fantastic book, Thinking in Bets, which has given me an entirely new thought process when it comes to my level of certainty for investing decisions. This is a book that, after about the first half, I’d get to the end of each chapter and I think “well she could this book right now, and I would consider it one of the most helpful, thought-provoking books I’ve ever read.” And then, but wait – there’s more!

Also, I got the audiobook, which is read by the author, and by the way she reads it, it is somehow both excellently entertaining and extremely motivating. Literally. I busted out two of my best hiking times ever while hiking up our local hill and listening to Thinking in Bets. I hoofed it up the hill thinking, “Yeah, I’m going to be a better truth-seeker, according to Mertonian ideals! I’ve got this!” I don’t know. Maybe I’m weird. But seriously, try exercising to this book, it makes you want to be the best you can be in every area of your life.

It’s so liberating to know that certainty is not possible. Instead, Duke suggests that by thinking in terms of making a bet on every decision, we simultaneously learn to hold our intellectual honesty to the highest possible standard, and ALSO make it ok to be wrong.

I admit, I resisted reading this book for a few months after investor Matthew Peterson recommended it to me because it was about betting, and I don’t think about long-term investing like a bet. I think about investing like I don’t want to buy a company without having a very high level of certainty that it’s going to do well in the long run. Well, I was completely wrong (as I should have expected, since Matthew is a great value investor and wouldn’t have liked the book unless it was actually helpful to value investors) and I learned that betting is not something I want to avoid. Betting is something to embrace.

Here’s the main point: there is no certainty. Everything is a question of probability of a prediction. If the probability my prediction will turn out the way I think it will is 100%, then, cool, I just found the once in a lifetime 100% bet. But, for all the other millions of choices and decisions we must make, knowing whether that bet is 95%, 90%, or 20%, will really change how we think about the bet, feel about the bet, how MUCH we bet, and especially how we view the outcome.

Basically, people who think they are right all the time will hate this book.

3. Resulting

Consider all my comments about this book in this issue to be very beta-level thoughts. There is SO much to learn in Thinking in Bets that I want to read her source material to truly understand the bigger picture of how to think in bets, and learn to structure my investing practice to benefit from it. So, there is a lot more to come on this. Two major points to convey now, and then honestly I hope you will read this book so we can have productive discussions about it. The first point to take away is “resulting.” When the result of a decision determines whether you made a good decision or not, that’s resulting.

Duke opens the book with a story about the coach of the Seattle Seahawks football team, Pete Carroll, calling a play that ended up losing his team the 2015 Super Bowl. Now, here’s the thing: that play didn’t work, but does that mean that it was a bad call, given the information he had at the time? The book answers that question, and it’s a resounding NOPE, the result not working does not necessarily mean it was a bad call.

“Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players have a word for this: “resulting.” When I started playing poker, more experienced players warned me about the dangers of resulting, cautioning me to resist the temptation to change my strategy just because a few hands didn’t turn out well in the short run.”
(Chapter 1, p.7, Kindle Edition.)

Resulting is such a danger for us investors. We make a decision to buy a company, the company goes down and doesn’t come back. Almost all of us would, at that point, say to ourselves that we must have made a mistake. That’s resulting, and that’s wrong thinking. We might actually have made a great decisions with – here’s the key – the information we had at the time of the decision. No one, not Warren Buffett himself, knows the outcome of an investing decision when that decision is made. Our task is to make our decision-making process better and better so that our prediction ability – our betting – becomes more accurate over time.

“Take a moment to imagine your best decision in the last year. Now take a moment to imagine your worst decision. I’m willing to bet that your best decision preceded a good result and the worst decision preceded a bad result. That is a safe bet for me because resulting isn’t just something we do from afar. Monday Morning Quarterbacks are an easy target, as are writers and bloggers providing instant analysis to a mass audience. But, as I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.” (Chapter 1, p. 8, Kindle Edition.)

Poker players have the great advantage of seeing the same cards and same hands over and over and over, so as they become more expert, they start to see that sometimes good hands lose and bad hands win, but more often, good hands win and bad hands lose. Investors, by strong contrast, rarely if ever get the same hands, and can’t practice the same scenario over and over. Results are highly variable. (To be fair to poker players, Duke does an excellent job of describing all the variables expert poker players consider when making their bets, and there are indeed many.) Which means, we investors have to be even more focused on making good predictions and have clarity in our bets, because it is so easy to get sucked into resulting.

4. Post-Mortem

The second point to take away is how important a post-mortem thought process is – both to avoid resulting and to improve our skills to make better decisions the next time. Analyze your decisions in a calm and clear manner, usually without even considering what the outcome was, unless that outcome imparted new information that you knew or should have known at the time of the decision.

One of the ways Duke suggests in her book to avoid resulting is to be precise with how likely it is your bet will come out the way you predict. This strategy of putting a number on a bet is something I have never done with my investing, but I think it’s a great tip. So, I think there’s a 90% chance that Company X will grow by 20% per year in the next five years. I then have to decide if that level of certainty meets my standard for investment.

“When we work toward belief calibration, we become less judgmental of ourselves. Incorporating percentages or ranges of alternatives into the expression of our beliefs means that our personal narrative no longer hinges on whether we were wrong or right but on how well we incorporate new information to adjust the estimate of how accurate our beliefs are. There is no sin in finding out there is evidence that contradicts what we believe. The only sin is in not using that evidence as objectively as possible to refine that belief going forward.” (Chapter 2, p. 70, Kindle Edition.)

Then, once you know the outcome, go back and calibrate your decision-making process to be more precise for the next time. Duke advised a charity on how to use predictions and post-mortems to refine their grant application process and prediction ability, to great effect.

“Because coming up with an expected value required estimating the likelihood of getting the grant, they increasingly focused on improving the accuracy of their estimates. This prompted them to close the loop by going back to the grantors. They had previously, after rejections, followed up with grantors. Because they were now focusing on checking and calibrating their probabilities, they expanded this to the grants they won. Overall, their post-outcome reviews focused on understanding what worked, what didn’t work, what was luck, and how to do better, improving both their probability estimates and the quality of their grant applications. (Chapter 6, p.214, Kindle Edition.)

This is what we want for ourselves, in our investing practices.

Post-mortems, though, require discipline. They’re usually not fun. They take time from looking up new companies. However, they’re necessary to avoid resulting. How to get better at post-mortems is about to become a major focus of mine in my investing practice. My dad and I have been discussing checklists extensively in our podcast, and it dovetails perfectly into focusing on post-mortems. As the checklist gets better, so does the post-mortem, and vice-versa.

I’m super excited to dig into these ideas more this summer, and I wish you all a bit of a break coming up. I hope you have some rest and relaxation planned, and to that end, I’ve put a bunch of interesting and long articles below – so, along with Thinking in Bets, lots to read! Enjoy.


I don’t have any additional comments on this article’s assertions about CLOs – YET – but it blew my mind how many risky loans the banks might potentially have at risk. Housing crisis part 2, the sequel? Well worth reading.

Interesting views on the insularity of a Whatsapp group.

As a non-wine industry person, I knew that the wine world is horribly elitist, but had no idea how few minority winemakers there are, and found this article on it quite eye-opening – especially with South Africa’s excellent wines and its history of apartheid.

If you had asked me two years ago what industry would not go away, I would have said travel. Well. Tourism is not over. But this could be a ripe time to create better tourism, to re-build tourism, in a way, and I enjoyed reading these possibilities with an investor’s eye.

Incredible interview with cellist Yo-Yo Ma that is advice for life, becoming great at anything, and uplifting, somehow all at once. Everything is uncomfortable until it becomes comfortable.

John Oliver’s screed about the impending eviction crisis in the US spun me a bit, also. I’m not a rabid John Oliver fan by any means. The few subjects into which he has delved, on which I knew enough to have an opinion of my own, showed me how many corners he cuts in his effort to be the officially-pissed-off-expert on everything. However, acknowledging that probably not everything he says here is accurate, how many evictions are coming is pretty scary.

2 thoughts on “038: Think Different”

  1. Question: I’m having trouble with a few retail cash flow statements that don’t list accounts receivable, but have a line for accounts payable. It’s tripping me up on my owner earnings calculations… For example the 2019 Tractor Supply cash flow statement has a line for inventories (13239), no line for receivables, then lists a line for payables 23055. Originally I just used the inventories listing as receivables, but I think that’s the wrong move. This could be inherent to the retail model. Thoughts?


  2. I was hoping that you would be providing reading material. I’m always looking for good suggestions, so thank you. I find that most of my “reading” is through audiobooks and I’m glad to hear that someone has listened to it (some books don’t make very good audiobooks). Anyway, I was just going to comment that I really like Pabrai’s philosophy of “Heads I win; tails I don’t lose much”. I have found that to be helpful when thinking about investments. The other advice I like was Taleb’s account of when he was in a discussion meeting and someone asked him about his views on the stock market. Taleb replied that he thought it would go up with a high probability. Someone then reminded Taleb that he had also said he was shorting the market. Taleb said, “the market was more likely to go up but that it was preferable to short it, because, in the event of its going down, it could go down a lot.”

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