Words for a distinguished style are impossible without having produced and shaped the thoughts, and no thought can shine clearly without the enlightening power of words.
- Marcus Tullius Cicero.
Question: What do Warren Buffett (Trades, Portfolio), Ben Graham, Charlie Munger (Trades, Portfolio), Howard Marks (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) have in common, aside from the fact that they are all great investors?
Well, there are many answers such as they are all Caucasians or they are all males. But the answer I want you to pay attention to is one that may very well be hidden in plain sight – they are all great writers. If you think this is a coincidence, Johnson O’Connor’s study may make you think twice. Johnson O’Connor was hired by GE in the 1920s to do a study on the successful traits of GE(GE, Financial)’s most successful employees. To many people’s surprise, the study showed that a person’s vocabulary level was the best single predictor of success in any area. Said differently, “an understanding of not only general language but the words specific to the activity was the most important factor that separated the unsuccessful from the successful.”
Now let’s think about this from the perspective of investing. If it is not incidental that the aforementioned great investors are also great writers, there must be some link between writing and thinking. In my mind this link can be summarized as the following – the clarity of thinking comes from the clear understanding of concepts, which Warren Buffett (Trades, Portfolio) explains as the following: “if you understand an idea, you can express it so others can understand it. I find that every year when I write the annual report. I hit these blocks. The block isn’t because I’ve run out of words in the dictionary. The block is because I haven’t got it straight in my own mind yet. There is nothing like writing to force you to think and to get your thoughts straight. ”
I agree wholeheartedly with Mr. Buffett that “there is nothing like writing to force you to think and to get your thoughts straight.” It is much easier not to write and think you understand something. But when you start writing, you realize how much you do not understand or misunderstand even a simple concept. This has certainly been true based on my experiences. Before I started writing on this forum, I was confident that I had very solid understanding of investing related concepts as my college and graduate education involved taking numerous accounting and finance classes. However, once I started writing, I was immediately humbled by my lack of clarity in thinking and lack of understanding of some of the key concepts. For example, I struggled enormously with my article series on pension footnotes, tax footnotes and why Warren Buffett (Trades, Portfolio) uses book value as a proxy for intrinsic value. I almost wanted to give up finishing the article series because at one point I was so damn disappointed with myself. Fortunately, by chunking the concepts into different pieces, I gave myself some breathing room to reorganize my thoughts after all the frustration.
The hardest part for me is to explain the concepts/words in the simplest understandable way. In my opinion. There are three levels of explanation-
- Introducing the name/term of something, or making a statement
- Explaining the meaning of something, or explaining the reasons why you made your statement.
- Using an analogy/example to make sense of it all.
An example that we are all familiar with involves how Warren Buffett (Trades, Portfolio) thinks about gold.
Level 1 – He wouldn’t buy gold.
Level 2 – Gold is not a productive asset. It is better to buy productive assets such as farmland or Exxon Mobil (XOM, Financial).
Level 3 – The famous gold cube and how you can buy all the farmland and Exxon Mobil instead of owning all the gold that has ever been dug out.
You can see, as you go from level 1 to level 3, your level of understanding gets deeper and deeper because Buffett explained it so well. But at the same time, it is also harder to get to level 3 if you are on the side of explaining. What seemed easy for the Oracle requires an understanding and knowledge of the following:
- The nature of gold and productive assets.
- Total ounces of gold ever produced.
- An estimate of the length, height, and width of the imaginary gold cube.
- Total acreage of all the farmland in the U.S. and total value of all the farmland in the U.S.
- Market value of the Exxon Mobil Company
The ability to put all these together in a simple and understandable way is absolutely critical. One of the reasons why Buffett is a prodigy is that he has the ability to reduce the complicated to the simple. Naturally you may wonder whether this ability can be learned. I think the answer is yes. I challenge the readers to do this exercise:
Step 1 – Think of a topic, such as share repurchase.
Step 2 – Write down, in your own words, what share buybacks are, when and why does it make sense for a company to buy back shares.
Step 3 – Use an analogy to make your case.
It can take you half an hour, 4 hours or a day. The important thing is to go through the exercise. Francis Bacon once said that “natural abilities are like natural plants – they need pruning by study.” What I’ve suggested above may help you sow the seeds of ability and then grow and prune them into a plant full of competence and intelligence that will make you a better thinker and investor. As Confucius would say, “The will to win, the desire to succeed, the urge to reach your full potential are the keys that will unlock the door to personal excellence.”
Don’t wait. Start writing now.
