Tuesday, October 31, 2017

Destroying Bad Ideas - Part I

Back in 2010, Warren Buffett said that the biggest mistake he ever made had cost $ 200 billion. The mistake he was referring to was the initial purchase of Berkshire Hathaway (BRKa) more than 50 years ago.

"Berkshire Hathaway was carrying this anchor, all these textile assets. So initially, it was all textile assets that weren't any good. And then, gradually, we built more things on to it. But always, we were carrying this anchor. And for 20 years, I fought the textile business before I gave up. As instead of putting that money into the textile business originally, we just started out with the insurance company, Berkshire would be worth twice as much as it is now... This is $200 billion.... Because the genius here thought he could run a textile business."

One thing to keep in mind is that the cost of that mistake keeps getting bigger. It was a $ 200 billion mistake in 2010 when Berkshire was less than half its current value. As Berkshire increases in value the compounded cost of that mistake grows along with it.

The non-gift that keeps on not giving.

Now imagine if Buffett didn't learn from such an outcome. What if his original ways of thinking about business and investing over time didn't change much? In other words, instead of learning from this misjudgment, he continued to try and prove that he was 'right all along' -- to himself and to others -- about the textile business. If the fact that textiles, as a business, would prove to be terrible over time seems obvious now, well, lots of things appear to be obvious after the fact.

The mistake itself can't be undone, of course, but the flawed thinking that led to such a mistake can certainly be discarded and replaced with something better.

A willingness to destroy the bad ideas -- even those previously thought to be brilliant -- is necessary in order to make room for fresh ways of thinking. Unfortunately, too often energy is expended doing just the opposite. The desire to have been 'right all along' prevents the better ideas from dislodging the inferior ones.

It's about developing, over time, the right kind mental habits. It requires enough smarts and self-confidence tempered by humility. It means that even what seem like the most genius ways of thinking need to be reevaluated from time to time. It's basically learning to enjoy being wrong about something without doing excessive damage to the psyche.

A couple of questions come to mind:

What cherished ideas being held onto today -- in business and beyond -- should be jettisoned in favor of better ones?

What ideas might come along down the road that'll deserve a similar fate?

When new evidence comes along that challenges an existing model, it's probably time to change the model. Yet some, instead, prefer to creatively convince themselves that the contravening evidence actually fits the existing model.

It's certainly easier to just ignore when something comes along that conflicts with a long held, assumed to be correct, way of looking at the world.

It's also a great way to feel at ease about being less right.

Better to get in the habit of challenging assumptions -- and the models that are built upon those assumptions -- early and often.

Expect new information to come along now and again that will demand an altered worldview.

By all means discount that new information if feeling better via the illusion of being right takes priority over veracity.

Adam

Long position in BRKb established at much lower than recent market prices

Related posts:
Investing Blunders
Buffett's $ 200 Billion Blunder

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