Edward Quince’s Wisdom Bites: OPV Page 73

“Buffett’s style is to tackle problems his intellectual brilliance can solve but to steer clear of problems it cannot. Often he has said he’s trying to step over one-foot obstacles, not jump over seven-foot obstacles.  He strives to make things as easy as possible by seeking commonsense, efficient ways of doing things, making the layups he talks about.  He works hard at the possible and avoids the impossible. One of his great messages is to avoid trouble.  In the stock market, that means staying away from capital losses.”

Buffett’s advice and style seems so simple and intuitive, focus on what you know, make layups, not half-court shots and stay away from big losses.  Despite that it seems like advice that is so incredibly out of reach for most investors. Why?  I think it’s because we live in a very “additive culture”, one centered on reaching goals by doing, by activity. A culture that looks to the stock market as the place to get rich.  One where many investors believe the path is one where you need to pick the best investment manager, the best macro-forecaster, find the right voices to follow on X, just find the right data, etc. and that’s the win.  A world where the more complex story feels more ‘right’.

Wall Street capitalizes on the culture of addition and complexity.  It sells complex products, complex narratives, elaborate models, forecasts and the like to convince investors they have ‘an edge.’  A chance to be spectacular, to have fast, superior returns.

What Buffett and Munger have shown over the past 50 years is that the real game of life is not about being spectacular; it’s about being consistently not stupid.  Buffett strives to “step over one-foot obstacles, not jump over seven-foot ones.”  A reminder that ‘genius has the fewest moving parts’ and true understanding is often found in the simplicity of your explanations.  Buffett was staking away from areas where the investment case required complicated, financial engineering or black-box explanations or fanciful extrapolations

But he’s Buffett and we’re not.  Most of us are not built for the type of bottoms up stock selection that was a one-foot hurdle for Buffett, for us finding those compounders that will 100x over the next 20 years is a seven foot hurdle.

So how can we, the ‘lay’ investors, translate Buffett’s advice into a practical strategy? We can do it by embracing the Art of Subtraction and applying the principles of Inversion.

Inversion shifts our focus from trying to find the things that will guarantee success, a mindset built on trying to predict the future, to a focus on the bad habits that guarantee ruin - a much more knowable set of habits.  We don’t need to build the perfect portfolio; we need to build the portfolio that won’t blow us up.

And the Art of Subtraction goes hand in hand with this focus, instead of attempting to find the things that will definitely make our portfolio go up in value, we can seek to remove the things that we know with certainty will cause our portfolio to fall in value.  

We can remove the things that stop us from succeeding.  There are three subtractions we talk about often on this blog:

1. Subtract Leverage: Debt is the ultimate double-edged sword. It does not add value; it merely magnifies risk and introduces the "risk of ruin"—the catastrophic downside to which there is no corresponding upside. If you eliminate leverage, you pre-purchase your own survival.

2. Subtract the Noise: Nassim Taleb calls it the "Noise Bottleneck"—the reality that the more data you consume, the less you actually know. If a piece of news won’t matter in five years, do not give it more than five minutes of your attention. Turn off the alerts, mute the financial TV, and let go of the "need for certainty," which Robert Greene calls the greatest disease of the mind.

3. Subtract the Ego: Acknowledge your limitations. As Munger famously warned, “It’s hardly a competence if you don’t know the edge of it.”. If you do not have the skill to analyze businesses, be honest about it. Do not pretend to be an enterprising investor when you are a speculator.

When you subtract complexity, you reveal the ultimate layup: the low-cost, highly diversified index fund. As Ben Graham wisely noted, “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”.

For those who rely on others or lack a micro-edge, Graham’s advice is simple: limit yourself strictly to standard, conservative, and even unimaginative forms of investment. By owning the entire "haystack" through a passive index, you ensure you capture the long-term compound interest of human progress without needing to pick the individual needles.

Sometimes, the most courageous and profitable action is to simply do nothing. When the market is shouting "don't just sit there, do something!", wisdom whispers back: "don't just do something, sit there!". Put your head down, do excellent work in your own career, and let time do the heavy lifting