The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life
Here is the latest issue of The Journal of Investing Wisdom, where I share insightful stuff on investing I am reading and thinking about. Let’s get started.
Have you heard of Kent Evans? No?
Okay, have you heard of Bill Gates? Yes?
Kent Evans was Bill Gates’ first best friend, his classmate at Lakeside School in Seattle, and a co-member of a school-sanctioned computer club called the Lakeside Programmers Group.
In the documentary Inside Bill’s Brain, Bill Gates described Kent as extremely clever, carrying a briefcase with all kinds of gadgets and magazines everywhere he went.
The two self-proclaimed geeks loved scheming about what they would be doing in the future, much to the eye rolls of their classmates who were more concerned with the activities of that moment, the upcoming school dance.
Together, they would read Fortune Magazine and imagine, “If you went into the civil service, what did you make? Should we go be CEOs? What kind of impact could you have? Should we go be generals? Should we go be ambassadors?”
Bill and Kent believed they would go on to do extraordinary things.
Just one of them did it. Bill Gates went on to start Microsoft and the rest, we know, is history.
What happened to Kent Evans?
He died in a mountaineering accident before he graduated high school.
I first read about Kent Evans in Morgan Housel’s brilliant book The Psychology of Money. Explaining the concept of luck and risk, while sharing Kent’s story, Morgan wrote –
Bill Gates experienced one in a million luck by ending up at Lakeside (being one of the rare schools to have a computer those days). Kent Evans experienced one in a million risk (dying in a rare mountaineering accident) by never getting to finish what he and Gates set out to achieve. The same force, the same magnitude, working in opposite directions.
This is just one of the wonderful stories Morgan has shared in his book to explain the important ideas around the subject of money.
Extending the topic of luck vs risk, he wrote –
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.
They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
Apply this to investing and you would realize that when you judge the financial success of others, and even your own, you must not just look at the returns made but also the risks assumed.
Doing well with money is, after all, is less about what you know and more about how you behave. The earlier you understand and appreciate it, the better off your financial return will be over the long run.
But just avoid dying early.
A Super Text
When you’re on fire with the hope of striking it rich on some investment, remember to consider not just how much you will make if you are right but how much you will lose if you are wrong. In what’s known as “Pascal’s Wager,” the mathematician and theologian Blaise Pascal provided a model for how to think about this problem. Since God’s existence is a matter of faith, not scientific proof, how should you live? Let’s say you gamble that God exists, so you lead a virtuous life —but it turns out that there is no God. You miss enjoying a few sins while you are alive, but that’s all your gamble costs you. Now let’s say you gamble that there is no God and sin your way through life without a qualm— and it turns out that God does exist. The payoff on this gamble is a few decades of cheap thrills— then an eternity burning in Hell.
In Peter Bernstein’s words, Pascal’s Wager shows that whether you should take a risk depends not just on the probability that you are right but also on the consequences if you are wrong. To make reliably good decisions, you must always weigh how right you think you are against how sorry you will be if you turn out to be mistaken.
The speed at which information can be shared matters because of how we form beliefs. As Annie Duke explained in Thinking in Bets, we tend to form beliefs in the following way:
- We hear something;
- We believe it to be true;
- Only sometimes later, if we have the time or inclination, we think about it and vet it, determining whether it is, in fact, true or false.
As you can see, the checking part comes at the end, if at all. This is the problem.
Because it’s never been easier to spread financial information, but also never been harder to check it.
“What I have learnt is don’t sell the compounders when they get fully priced or they get over-priced. Only sell the compounders when its absolutely obvious to you that it is egregiously priced. The big money is in riding the compounders but you have to try to get in at a reasonable valuation and you have to be right on the fact they are compounders. It’s a forgiving business, so you can be wrong quite a few times and still be okay.
~ Mohnish Pabrai
That’s about it from me for today.
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