Monday, June 12, 2006
As far as I can tell, nearly all of my mistakes are "obvious" ones. They never seem to involve missing some tiny fact buried within a contract or some obscure detail. But that doesn't mean I can skip looking at all the details because you just know that as soon as I do, that's where something will be seriously wrong, not to mention that the collection of all the details is what paints the big picture.
No, my mistakes are things that can best be seen by stepping back and looking at the big picture as a whole. Buffett and Munger say this and it seems correct to me. What are the big, long term trends and how do they affect the investment? What are the real characteristics of the management? What things can happen without warning? What's the 2 sentence story of what's going on here?
Here's a true story that's somewhat relevant:
For something like a decade, I commuted a long distance to work along a high-speed highway that was fairly dangerous mostly because of the large amount of time I spent driving on it. I took a step back at one point and considered where were my biggest risks of death and I figured that a severe accident on that road was the overwhelming risk. So I focused a fair amount of effort to reduce it. I spent a lot of commuting time studying the behavior of drivers and trying to figure out the things that can go wrong. After several years, I got to where I could predict fairly accurately when someone was going to do something dangerous. On the very last trip on the very last day, driving home, I realized that after all those years, the risk was finally ending. Of course, then a few minutes later.... For all the worries and preparation, the accident was so minor that there was almost no damage. It clearly wasn't my fault, since the other guy bumped into the back of my car as traffic unexpectedly slowed down. And it would have been worse if I hadn't let my car roll as close as possible to the car in front of me (I could see the guy approaching too fast in the rear-view mirror and gave him as much room as I could).
I believe preparation and focusing on the important things pays off. It is time well spent. For investing, reading about business history, watching lots of companies over time is valuable experience. In the driving example above, time was a liability: every day commuting was another roll of the dice. But time could also become an asset by observing and learning.