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The Warren Buffett formula: How you can get smarter

Shane Parrish
Buffett says reading is the most important part of his job. Mario Tama/Getty Images
September 6, 2013
"The best thing a human being can do is to help another human being know more."
Charlie Munger
"Go to bed smarter than when you woke up."
Charlie Munger
Most people go though life not really getting any smarter. Why? They simply won't do the work
required.
It's easy to come home, sit on the couch, watch TV, and zone out until bedtime rolls around. But
that's not really going to help you get smarter.
Sure you can go into the office the next day and discuss the details of last night's episode of Mad
Men or Game of Thrones. Sure you know what happened on Survivor. But that's not knowledge
accumulation, it's a mind-numbing sedative.
You can acquire knowledge if you want it.
In fact there is a simple formula, which if followed is almost certain to make you smarter over
time. Simple but not easy.
It involves a lot of hard work.
We'll call it the Buffett formula, named after Warren Buffett and his longtime business partner at
Berkshire Hathaway, Charlie Munger. These two are an extraordinary combination of minds. They
are also learning machines.
"I can see, he can hear. We make a great combination."
Warren Buffett, speaking of his partner and friend, Charlie Munger.
We can learn a lot from them. They didn't get smart because they are both billionaires. No, in fact
they became billionaires, in part, because they are smart. More importantly, they keep getting
smarter. And it turns out that they have a lot to say on the subject.
How to get smarter
Read. A lot.
Warren Buffett says, "I just sit in my office and read all day."
What does that mean? He estimates that he spends 80 percent of his working day reading and
thinking.
"You could hardly find a partnership in which two people settle on reading more hours of the day
than in ours," Charlie Munger commented.
When asked how to get smarter, Buffett once held up stacks of paper and said he "read 500
pages like this every day. That's how knowledge builds up, like compound interest."
All of us can build our knowledge but most of us won't put in the effort.

One person who took Buffett's advice, Todd Combs, now works for the legendary investor. He
took Buffett's advice seriously and started keeping track of what he read and how many pages he
was reading.
The Omaha World-Herald writes:
Eventually finding and reading productive material became second nature, a habit. As he began
his investing career, he would read even more, hitting 600, 750, even 1,000 pages a day.
Combs discovered that Buffett's formula worked, giving him more knowledge that helped him with
what became his primary job seeking the truth about potential investments. [Omaha WorldHerald]
But how you read matters too.
You need to be critical and always thinking. You need to do the mental work required to hold an
opinion.
In Working Together: Why Great Partnerships Succeed Buffett comments to author Michael
Eisner:
Look, my job is essentially just corralling more and more and more facts and information, and
occasionally seeing whether that leads to some action. And Charlie his children call him a book
with legs. [Working Together: Why Great Partnerships Succeed]
Continuous learning
Eisner continues:
Maybe that's why both men agree it's better that they never lived in the same city, or worked in
the same office. They would have wanted to talk all the time, leaving no time for the reading,
which Munger describes as part of an essential continuing education program for the men who
run one of the largest conglomerates in the world.
"I don't think any other twosome in business was better at continuous learning than we were," he
says, talking in the past tense but not really meaning it. "And if we hadn't been continuous
learners, the record wouldn't have been as good. And we were so extreme about it that we both
spent the better part of our days reading, so we could learn more, which is not a common pattern
in business." [Working Together: Why Great Partnerships Succeed]
It doesn't work how you think it works
If you're thinking they sit in front of a computer all day obsessing over numbers and figures?
You'd be dead wrong.
"No," says Warren. "We don't read other people's opinions. We want to get the facts, and then
think." And when it gets to the thinking part, for Buffett and Munger, there's no one better to think
with than their partners. "Charlie can't encounter a problem without thinking of an answer," posits
Warren. "He has the best thirty-second mind I've ever seen. I'll call him up, and within thirty
seconds, he'll grasp it. He just sees things immediately." [Working Together: Why Great
Partnerships Succeed]
Munger sees his knowledge accumulation as an acquired, rather than natural, genius. And he'd
give all the credit to the studying he does.
"Neither Warren nor I is smart enough to make the decisions with no time to think," Munger once

told a reporter. "We make actual decisions very rapidly, but that's because we've spent so much
time preparing ourselves by quietly sitting and reading and thinking."
How can you find time to read?
It takes time and energy to read. One way to help make that happen is to carve an hour out of
your day just for yourself.
In an interview he gave for his authorized biography The Snowball, Buffett told the story:
Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, 'Who's
my most valuable client?' And he decided it was himself. So he decided to sell himself an hour
each day. He did it early in the morning, working on these construction projects and real estate
deals. Everybody should do this, be the client, and then work for other people, too, and sell
yourself an hour a day. [The Snowball]
It's important to think about the opportunity cost of this hour. On one hand you can check Twitter,
read some online news, and reply to a few emails while pretending to finish the memo that is
supposed to be the focus of your attention. On the other hand, you can dedicate the time to
improving yourself. In the short term, you're better off with the dopamine laced rush of email and
Twitter while multitasking. In the long term, the investment in learning something new and
improving yourself goes further.
"I have always wanted to improve what I do," Munger comments, "even if it reduces my income in
any given year. And I always set aside time so I can play my own self-amusement and
improvement game."
Reading is only part of the equation
But reading isn't enough. Charlie Munger says, "We read a lot. I don't know anyone who's wise
who doesn't read a lot. But that's not enough: You have to have a temperament to grab ideas and
do sensible things. Most people don't grab the right ideas or don't know what to do with them."
Commenting on what it means to have knowledge, in How To Read A Book, Mortimer Adler
writes: "The person who says he knows what he thinks but cannot express it usually does not
know what he thinks."
Can you explain what you know to someone else? Try it. Pick an idea you think you have a grasp
of and write it out on a sheet of paper as if you were explaining it to someone else. (see The
Feynman Technique and here, if you want to improve retention.)
Nature or nurture?
Another way to get smarter, outside of reading, is to start surround yourself with people who are
not afraid to challenge your ideas.
More from Farnam Street...
Warren Buffett the best book on investing and what it can teach you
Worldly wisdom from Charlie Munger
Rethinking the value of a business major
==========================================

Joshua Rogers Joshua Rogers Contributor


I explore novel and contrarian ways some smart, wealthy people invest.
Opinions expressed by Forbes Contributors are their own.
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Retirement 8/07/2013 @ 11:58AM 10,319 views
Buffett Doesn't Tweet: Mindful Investors Read Books, But Ignore Twitter, CNBC And The WSJ
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Cover of "The Warren Buffett Way, Second ...
Want to invest like champ? Consider tuning out the newsand the noiseand reading a book
instead.
A few weeks ago I had lunch with a friend who shares my passion for collecting emerging
contemporary art and who also happens to be in the investment business. He runs a very
successful private-equity fund based here in Chicago. As our conversation turned from investing
in art to investing in companies, he mentioned to me that he has scarcely looked at, much less
read, The Wall Street Journal in over 10 years.
Hes so focused on learning about the industries and companies his fund invests in that, as he
explained, theres really nothing in The Wall Street Journal that would be helpful to him. His firms
portfolio companies, many of which are struggling at first, look to him for leadership expertise and
his ability to bring in new managers who can turn their fortunes around. Theyre wrestling with
human issues, he explained, not markets related issues. He spends a lot of time working with
his chief executives to help them inspire, motivate and lead people to access their best efforts.
Theres nothing in the Journal that helps you with real leadership, he said, or with figuring out
whether you should buy a particular company or not.
Then our conversation turned to books that each of us has been reading, and we recommended
a few to each other.
After our lunch, as I walked back to my office, I thought: Heres one of the countrys most
successful investors, and he essentially never reads The Wall Street Journal or Barrons, watches
CNBC or skims Twitter. And guess what? Neither do I. Warren Buffett doesnt Tweet. (Many of his
540,959 Twitter followers may be unaware that the man doesnt have a computer in his office.)
And George Soros has written fewer Tweets than he has articles for The New York Review of
Books. I wonder if people have thought deeply about this? (Note: I dont want to suggest that Im
in the same league with these guys Im just an aspirant!)
Meanwhile, I think of how many investors tell me that they never read anymore. Theyre too
busy to read books or even long articles, they say. Most Americans read very littlethe average
was less than 16 minutes per day in 2006, according to a National Endowment for the Arts study.
(We reportedly read far less than people in India, Thailand and China do.)
Let me explain why people in general and investors especially should read more, particularly
books.
The art of investing is not about figuring out what has already happened. Its about anticipating
the future and creating the future that others will read about in The Wall Street Journal. In order to
create something new, to invent a new product or idea, you need to anticipate where things are
headed. That requires a mixture of certain habits of mind. You need to foster imagination,
thoroughly understand the origins of past ideas, learn from others mistakes, talk to lots of people

about ideas and test your hypotheses against people both alive and dead.
Creativity doesnt come from glancing quickly at your Twitter feed while in line at Starbucks SBUX
+0.3%. It comes from deep thought. It comes from voraciously reading bookslong books that
require focused attention. It comes from meaningful discourse with other intellectually curious
people. It comes from listening and asking good questions. Reading books is a way for you to
communicate with and learn from the best thinkers that are writing today and that have ever lived.
Reading is a time machine that allows you to acquire wisdom from the past and to analyze and
imagine another persons vision of the future. This is the fuel for the creativity engine. It helps a
great investor anticipate, analyze and avoid missteps.
One book that I recently read speaks to exactly this point: Investing: The Last Liberal Art, by
Robert Hagstrom. You may know Hagstrom as author of The Warren Buffett Way. Hagstroms
focus in this book is the investing philosophy and thoughts of Charlie Munger, Buffetts partner at
Berkshire Hathaway .
This book was recommended to me by Chris Nelson, President of my alma mater, St. Johns
College in Annapolis, Md. In researching his book, Hagstrom took an interest in the St. Johns
College curriculum, which emphasizes reading. Chris recently shared his thoughts on Hagstroms
book with my Arete Wealth colleagues and me at our national conference. Heres an excerpt:
Back in 1994, Munger gave an hour-and-a-half lecture to a stunned group of students at USCs
Marshall School of Business in which he talked about stock picking as a subdivision of the art of
worldly wisdom. He challenged the students to see that their study of the markets, economics,
and finance were not stand-alone disciplines but part of a larger body of knowledge that also
incorporates physics, biology, social science, philosophy, literature, and mathematics. According
to Hagstrom, Munger then used a memorable metaphor to describe the interlocking structure of
ideas: a latticework of models on which to apply ones experience. You have probably used this
metaphor from time to time yourselves. Hagstroms entire book is a development of that idea.
How does one acquire the worldly wisdom Munger recommends? By educating oneself in a
latticework of disciplines, educating oneself broadly and not specializing too early.
Hagstrom argues that most people pay lip service to the notion that an education in a broad
curriculum grounded in the liberal arts is a good thing. But under todays pressures, they resist
such an education in favor of a specialty major. This leaves them without a sufficiently rich and
broad background to cultivate the habits of mind necessary to link together different bodies of
knowledge. Hagstrom then spends the next seven chapters of his book talking about the ways
that understanding several disciplines through the reading of seminal texts can help investment
managers be better at their work.
Chris took particular interest in this passage from Hagstroms book:
You will recall that both Charlie Munger and Warren Buffett stress the importance of
understanding the fundamentals of a companythe business model you invest in. And they
mean real understanding, not mere data gathering; the sort of understanding that comes only
from careful study and intelligent analysis. Thoughtfully choosing investments requires the same
mental skills as thoughtfully reading a book.
And this one:
The art of achieving what Charlie Munger calls worldly wisdom is a pursuit that appears to
have more in common with the ancient and medieval periods than with contemporary studies,
which mostly emphasize gaining specific knowledge in one particular field. No one would
disagree that over the years we have increased our baskets of knowledge, but what is surely
missing today is wisdom. Our institutions of higher learning may separate knowledge into
categories, but wisdom is what unites them.

After reading the book myself and integrating it with my own experience in the financial advisory
and investment banking business over many years, Ive come to a few conclusions that I think
accurately sum up the lessons as they apply specifically to investors:
In order to be a good investor, you must actually read.
In order to be a good investor, you must read more than Facebook posts, Twitter feeds, and
the front-page bullet points of The Wall Street Journal.
You cannot be a good investor if you rely on watching CNBC and listening to a few pundits tell
you their hot picks of the day.
Making smart investments requires a tremendous commitment to thoroughly educating
yourself, which de facto means you must read tons of books, magazines, journals, and have
thoughtful discussions with a wide range of people.
Being a great investor requires one to be broadly well-educated and naturally curious so that
you can see connections across numerous and potentially disparate bodies of knowledge.
If youve been putting off reading books until after youre wealthy and you have plenty of time, I
think youre getting it exactly wrong. Take the time youve been spending on Netflix, reality
television and the Internet and dedicate that to reading a book. Expand your mind. You may find
that snappy investment idea youve been dreaming of buried in its pages.

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