An Art Leveraging A Science
Albert Einstein’s favorite idea was called gedankenerfahrung.
It’s when he’d close his eyes and imagine how physics worked in the real world, instead of formulas drawn on a chalkboard.
When he was 16 he started imagined what it would be like to ride on a beam of light – how it would travel and how it would bend. Soon after he began imagining what would your body would feel like if you were in an enclosed elevator riding through space. He contemplated gravity by imagining bowling balls and billiard balls competing for space on a trampoline surface.
Einstein’s biography tells stories of him ditching school to practice gedankenerfahrung, where his real learning took place. “From the very beginning he was inclined to separate himself from other children his own age and engage in meditative musing,” Phillip Frank, a classmate, recalled.
Gedankenerfahrung means “thought experiment.” Daydreaming, basically.
Imagination has nothing to do with physics. They’re opposites – one is the study of real things, the other is the ability to conjure up fake things.
But Einstein’s imagination is what made him a genius physicist. “He never did well with rote learning,” Walter Isaacson writes in his biography. His success came from connecting his math skills to his imagination in a way that let him see what others couldn’t.
Outlier successes usually have something like this. Two skills that have nothing to do with each other colliding to create something neither could accomplish on its own. It’s tempting to think of great physicists as great just because they’re great at physics. Or great investors as great just because they’re great at investing. But there’s usually some unrelated skill that helps drive the success. An art that leverages a science.
One that sticks out to me in our business is good communication skills leveraging good investing skills.
Communicating and allocating capital are miles apart. Completely different topics. But look around, and the two are constantly paired.
Warren Buffett is a great writer. Paul Graham is a great writer. John Bogle is a great writer. Howard Marks is a great writer. Josh Brown is a great writer. Brent Beshore, Seth Klarman, Joel Greenblat, Ben Graham – the list goes on.
None of this is a coincidence. These aren’t just great investors who happen to be good communicators; their ability to communicate well helped make them great investors.
There are two reasons why.
The first is that no investment strategy will work in the long run unless you can convince your investors/clients/employees to stick around when it inevitably doesn’t work in the short run. This is an iron rule of investing that applies to every investment style.
It’s fun to think that investment performance will speak for itself. And over time it will. But there are three types of performance:
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Bad.
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Net good but occasionally bad.
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Always good and fraudulent.
The glorious second bucket requires excellent communication skills to pull off.
It’s hard for stakeholders in real time to distinguish between something that’s temporarily out of favor and a manager who can’t execute any longer. Convincing them it’s the former requires trust. And trust is built when you can clearly articulate to people what you do, why you do it, what might happen next, and how you’ll respond when it does. There is reciprocity in this. If investors trust you they’ll be more likely to stick around. If they stick around you’ll have long-term capital. And long-term capital is one of the most lucrative edges in the business.
That isn’t easy to do. Writing isn’t emphasized in a field that’s heavily analytical. No finance textbook has a chapter on how to write a shareholder letter, despite it being infinitely more tangible to the success of a professional investor than most finance concepts. And sophisticated investors underestimate how hard it is to explain investing in layman’s terms to impatient people. Ben Carlson once wrote:
Investment people who deal with finance stuff on a daily basis take for granted the fact that the majority of the public doesn’t pay much attention to the markets, asset allocation strategies, investment products, the Fed, interest rates, valuations and such. The ability to not only understand this stuff, but also effectively communicate it to clients or prospective clients is a skill that far too many financial firms and practitioners overlook.
I saw this firsthand after a financial advisor told a friend of mine, who knows nothing about investments, that a higher bond allocation didn’t make sense because of the shape of the yield curve. She had no idea what that meant, and told me experiences like this eroded trust because she couldn’t distinguish confusion from obfuscation. This is as true for sophisticated investors as novice ones: When in doubt, people will assume your poor communication is intentional.
Jason Zweig explained how the best managers focus on client communications:
There are a lot of active managers who have a great approach and philosophy and implementation. But I think the ones who are most admirable are the ones who think a lot about managing their investors as well as the investments.
The second part is that writing is one of the only ways to separate emotions from logic.
You can have a powerful feeling to want to do something – buy, sell, whatever. But feelings can make sense in your head because they’re driven by half-baked emotions that feel good yet, when put on paper, instantly appear ridiculous.
Buffett once said:
Some of the things I think I think, I find don’t make any sense when I start trying to write them down. And if it can’t stand applying pencil to paper, you’d better think it through some more. I never buy anything unless I can fill out on a piece of paper my reasons.
Some people can write a smart thesis about their crypto investments. But many, if forced, would write something like, “Crypto is going to be big and it’s gone up a lot.” Smart people, too! Thinking about your strategy for winning feels more accurate than it should because in your thought process you likely immediately jump to your desired conclusion, which feels great. It’s not until you sit down and write about something that emotions floating around your head are laid bare to objectively analyze, especially if you let others read and critique that writing.
Many quotes are misattributed to Einstein. But one he actually said was, “Imagination is more important than knowledge.”
For him, it was an art leveraging a science.
Communication is the same to investing.