Saturday Serendipity
Quote, Mental Model, Twitter Thread.
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Quote
“We have a passion to keep things simple”- Charlie Munger
Mental Model
Physics Envy
This mental model can be explained in one line.
“Better roughly right than precisely wrong.”- Sir John Maynard Keynes
We tend to feel like we are right when we give a precise answer. Let’s say you did not know anything about investing and stocks and you needed an advisor. You have two people that you are looking at Rajiv and Anshul. Rajiv says that Asian Paints will touch 3450 by the end of the year and Anshul says that Asian Paints is a very good business and it is a good time to buy but he does not predict where the stock is going to be at the end of the year.
I hope you would choose Anshul but sadly most of us listen to the advisors who are like Rajiv. We think the more accurate the answer the more chances of it being right. But we could not be more wrong. Especially in the financial markets it is very hard to predict what the stock price is going to be. Whenever someone says this stock will reach X amount I simply ignore it. You simply cannot predict the exact price and you also don’t need to.
This concept of being precise is taken from science but while we should follow what scientists do in economics since the system is so complex you cannot have accuracy down to the decimal. You might think that one formula can solve the market but it is not possible because investing is not a science it is an art.
In Poor Charlie’s Almanack, Peter Kaufman writes –
Charlie strives to reduce complex situations to their most basic, unemotional fundamentals. Yet, within this pursuit of rationality and simplicity, he is careful to avoid what he calls “physics envy,” the common human craving to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas. Instead, he faithfully honors Albert Einstein’s admonition, “A scientific theory should be as simple as possible, but no simpler.” Or in his own words, “What I’m against is being very confident and feeling that you know, for sure, that your particular action will do more good than harm. You’re dealing with highly complex systems wherein everything is interacting with everything else.”
Ben Graham spoke about this in his book Security Analysis where he said you don’t need to know the exact weight of a woman to tell if she is fat. In a similar way you don’t need to value a company down to the exact number. Valuation of a company does not have to be precise.
Physics envy is an important model to keep in mind as an investor. Even in life sometimes we waste a lot of time figuring out the precise things when the approximate things are good enough.
Twitter Thread
That’s it for this week! Enjoy your weekend!