AI Summary #
Here are the main takeaways and insights from the podcast:
Trying too hard in investing
The host emphasizes that trying too hard in investing can be detrimental, as it may lead to overconfidence and anchoring to previous outcomes. This phenomenon is often referred to as “Harvard Stupid,” where experts make mistakes due to their own intelligence and ego.
Mistakes made by experts
The host shares the story of Thomas McCray, a young doctor who was taught by his professor to diagnose a patient with a rare disease, which turned out to be incorrect. The moral of this story is that sometimes ignorance or lack of knowledge can lead to better outcomes than overthinking and trying too hard.
Expertise vs. simplicity
The host discusses how expertise can create an inability to accept new ideas and may lead to mistakes that only experts can make. This phenomenon applies not only to investing but also to other fields, such as medicine, law, and writing.
Career incentives pushing complexity
In some fields, career incentives can push complexity, even when simplicity leads to better outcomes. For example, stock brokers may churn accounts to earn commissions, while doctors may over-prescribe treatments due to fear of appearing useless if they advise patients not to take action.
The importance of humility and trust-building
The host highlights the importance of establishing trust and confidence with patients and families, particularly in medical settings. This requires a delicate balance between providing expert advice and acknowledging the patient’s perspective and wishes.
Notable quotes:
- “Expertise is great, but it has a bad side effect: it tends to create an inability to accept new ideas.”
- “The trouble is that even doctors who hate to administer full-code care must find a way to address the wishes of patients and families.”
- “I am not particularly anxious for the men to remember what someone else has tried to do in the past… For then we might quickly accumulate far too many things that could not be done.”
Actionable advice:
- Be aware of your own biases and try to approach problems with a fresh perspective.
- Recognize when overthinking or trying too hard may lead to mistakes, and take a step back to reassess.
- Prioritize simplicity and clarity in your work, especially in fields where expertise can create unnecessary complexity.
AI Transcription #
Welcome back.
I took a couple weeks off, but it’s good to be back here.
I’ve always thought that investing is one of the few fields in the world in which it is possible to try to hard.
And it’s actually very common that people try to hard.
People’s normal inclination is that if you want to do better at something in life, you try harder, you practice more, you put in more effort.
And in most areas of life, that’s true.
That’s the proper mindset that you want.
I just think there’s so much evidence that it’s not like that in investing.
Like the proper amount of intelligence that you want is like an upside down you.
It’s possible to be too smart in investing to try too hard and in a way that’s going to come back to haunt you.
My old colleague Bill Mann has his phrase that I love during the financial crisis in 2008.
He said a lot of the problems that were happening were what he called Harvard Stupid.
And he defined Harvard Stupid as mistakes that only somebody who is extremely well educated and has a natural propensity to complicate things and has a huge ego might make.
You know, blowing up your bank with a trillion dollars of derivatives is not something that somebody who went to community college could ever do.
Like you need a certain level of intelligence to make that kind of mistake.
So this is just idea that it’s possible to try too hard.
I see it all the time in investing, but I think it actually applies to a lot of areas in life.
And it’s so easy to overlook.
So let me tell you a story or two about how it’s possible to try too hard.
Thomas McCray was a young 19th century doctor who was still unsure of his skills.
One day he diagnosed a patient with a common and insignificant stomach ailment.
Thomas McCray’s medical school professor watched the diagnosis and he interrupted with every student’s nightmare.
The professor said in fact this patient had a very rare and very serious disease.
Thomas McCray had never heard of this disease before.
The professor’s diagnosis required immediate surgery and after opening the patient up, the professor realized it actually McCray’s initial diagnosis was correct.
The patient was fine.
Thomas McCray later wrote in his diary that he actually felt fortunate for never having heard of the rare disease the professor talked about because it allowed his mind to settle on the most likely diagnosis rather than be searching for the rare disease like the more educated professor did.
McCray wrote quote, The moral of this is not that ignorance is an advantage, but some of us are too much attracted by the thought of rare things and forget the law of averages in diagnosis.
I think that is so true and a truth that applies to almost every field.
Instead it’s possible to try too hard.
And when doing so you can get worse results than those who knew less or cared less or put in less effort than you did.
This is not intuitive at all so it can drive you absolutely crazy.
And it’s hard to pinpoint when it occurs, like maybe McCray’s professor was being appropriately cautious, that’s possible too.
But as I said earlier, there are mistakes that only an expert can make.
There are mistakes that only an expert can make.
There are errors, often catastrophic errors, that novices are not smart enough to make because they lack the information and the expertise needed to try to exploit an opportunity that doesn’t exist.
Let me tell you two big ones that I think about a lot.
The first one is being an expert from an era that no longer exists.
Back in the 1980s there was this investor named Dean Williams.
He was so smart one of my favorite people and he has a quote that I love.
He says quote, expertise is great but it has a bad side effect.
It tends to create an inability to accept new ideas.
Henry Ford, back in the early days of Ford, banned his factory workers from documenting new ideas that didn’t work because he feared that it would create a list of things that people refused to try again, even when new technologies improved their chances of success.
So what was impossible in one era might later end up not only doable but the key to success?
Ford wrote in his biography that quote, I am not particularly anxious for the men to remember what someone else has tried to do in the past.
For then we might quickly accumulate far too many things that could not be done.
Probably a week passes without some improvement being made somewhere in the machine or process and sometimes this is made in defiance of what is called quote the best shop practices.
In more recent times, Mark and Jason has explained how this worked in technology.
He once wrote quote, all of the ideas that people had tried in the 1990s were basically all correct.
They were just early.
I think that’s so true.
The infrastructure that was needed to make most dot coms work in the late 1990s just didn’t exist yet, but it does exist today.
So almost every business plan that was mocked for being ridiculous 20 or 30 years ago is a viable industry today.
The poster child of what didn’t work in the 1990s was pets dot com and people ridiculed like how could that ever work shipping dog food to people’s houses.
But guess what?
Shoee dot com today.
The new business is now worth like $10 billion at it works.
So experiencing what did not work in 1995 may have left you incapable of realizing what was possible in 2015.
The experts of one era were disadvantaged over the new crop of thinkers who weren’t burdened with old wisdom.
The same thing happens in investing.
My friend Michael Bannock made this point years ago that having experienced a big event doesn’t necessarily make you better prepared for the next big event.
So of course we went 40 years with interest rates basically going in one direction down.
And even if you were a grizzled veteran, very few people had lived through a sustained rise in interest rates.
But years ago Michael made this great point.
He wrote quote, so what will the current rate hikes look like the last one or the one before that?
Will different asset classes behave similarly or the same or the exact opposite?
We have no idea.
He wrote quote on the one hand, people that have been investing through the events of 1987 and the year 2000 and 2008 have experienced a lot of different markets.
On the other hand, isn’t it possible that this experience can lead to overconfidence or failing to admit that you are wrong or anchoring to previous outcomes?
And I think that’s exactly what’s happening.
Of course that’s possible.
It happens all the time.
The feeling of power that you get from a hard thought experience is stronger than the urge to change your mind even when it’s necessary.
All right, the next one is career incentives can push complexity in fields where simplicity leads to the best outcome.
Jason Zweiiger, the Wall Street Journal says there are three ways to earn money as a writer.
Number one, lie to people who want to be lied to and you’ll get rich.
Number two, tell the truth to those who want the truth and you’ll make a living.
Or number three, tell the truth to those who want to be lied to and you’ll go broke.
Some, that is so perfect and some variation of this applies to a lot of fields, especially in service industries where someone pays for an expert’s opinion.
There could be a huge difference between knowing what’s right and making a living, delivering what you know to be right.
This may be the most common in investing or a law or even in medicine when do nothing is the best answer a lot of the time.
But do something is the career incentive for you to do.
Sometimes your willingness as an expert to take an action is not moral.
You think of like a stock broker churning your account and telling you to make trades that you don’t need to make.
And mostly though, I think it’s just an advisor feels useless if they tell a client that they don’t need to do anything, that there’s no action that needs to be taken.
In the quest to be helpful, they add complexity, even when none is needed or even when it might backfire.
Many years ago, John Stewart on the Daily Show, he interviewed Jim Kramer, the CABC stock market, pundit.
And when pressed on why CABC content ranges from contradictory to a name sometimes, Jim Kramer said, quote, look, we’ve got 17 hours of live TV to do every day.
And John Stewart responded quote, maybe you could cut down on that.
Like that’s the answer.
That’s what you should do here.
But if you’re in the TV business, if you’re a producer on CBC, you can’t do that.
You have to fill the TV hours with something to say, even if nothing needs to be said that day.
Most of the time, I think this is truly innocent.
The experts believe that their complexity adds value because reality is too painful to bear, especially in a competitive career where there’s a lot of stress and long hours.
There was a doctor who once told me that the biggest thing that they don’t teach you in medical school is the difference between medicine and being a good doctor.
Medicine is like a biological science while being a doctor is often a social skill of managing expectations and understanding the insurance system.
And communicating effectively and on and on.
And the gap between those two, which applies to many fields beyond medicine can lead to mistakes that only an expert can make.
Where only an expert can advise.
And again, it’s the same in investing.
Many years ago, the financial times wrote this amazing piece on the fact of how many professional investors don’t own the funds that they manage.
It writes, quote, half of the 15,000 mutual funds in the United States are run by portfolio managers who do not invest a single dollar of their own money in their own products.
And frankly, I think doctors have their own version of this.
There’s an article many years ago written by a doctor who talked about the difference between the care that doctors prescribe to their patients.
And the care that those doctors themselves choose for themselves when they get sick.
This article writes, quote, almost all medical professionals have seen what we call few tile care being performed on people.
It’s when doctors bring the cutting edge of technology to bear on a grievously ill person near the end of their life.
The patient will get cut open and perforated with tubes and hooked up to machines and assaulted with drugs.
All of this occurs in the intensive care unit at a cost of tens of thousands of dollars per day.
And what it buys is misery that we would not inflict on a terrorist.
This doctor writes, quote, I cannot count the number of times fellow physicians have told me in words that very only slightly to promise me that if you ever find me like this, that you will kill me.
And they meet it.
Some medical personnel will wear medallions stamped no code to tell physicians not to perform CPR on them.
I have seen it even as a tattoo.
The last portion of this great essay by this doctor writes, quote, the trouble is that even doctors who hate to administer few tile care must find a way to address the wishes of patients and families.
Imagine once again the emergency room with those grieving and possibly hysterical family members.
They don’t know the doctor.
So establishing trust and confidence under such circumstances is a very delicate thing.
People are prepared to think the doctor is acting out of base motives, trying to save them or money or effort, especially if the doctor is advising against further treatment.
This, of course, is a huge problem.
It affects many fields.
And I don’t know what a good solution is here.
I don’t have the answer for what to do here, but it’s very helpful to acknowledge in lots of areas of life that there is one set of skills that comes from being an expert.
And there’s another set of skills that comes from being a novice unburdened by the weight of experience or incentives.
The former being skilled from your expertise is obvious.
The latter, the skills that come from your lack of experience or your lack of education or even your ignorance is very easy to ignore.
That’s all for this week.
We’ll see you next time.