We Study Billionaires - The Investor’s Podcast Network

TIP641: Improve Decision Making with Mental Models w/ Clay Finck & Kyle Grieve

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Jun 30, 2024

Dive into the world of mental models and their impact on investment decisions. Discover how narratives shape market perceptions using Tesla as a case study. Learn simple techniques to enhance reading and comprehension for better investment insights. Explore the balance between intuition and deliberate thinking in decision-making. Plus, hear about Bayesian analysis as a tool for refining your investment strategies. It's a treasure trove of tips to elevate your investment game and sharpen your analytical skills!

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INSIGHT

Importance of Proper Descriptions

Use the right descriptions when analyzing a business.
Comparing similar-looking businesses can be misleading if their models differ.

ANECDOTE

Amazon vs. Dell

Robert Hagstrom compared Amazon to Dell, not Walmart, in its early days.
This highlighted the importance of understanding underlying business models.

ANECDOTE

Tesla's Misunderstood Model

Tesla's comparison with traditional car manufacturers often overlooks its tech and energy aspects.
Clay Finck highlights Tesla's optionality, vertical integration, and scale economies.

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Investing The Last Liberal Art

Robert G Hagstrom

In 'Investing: The Last Liberal Art', Robert G. Hagstrom delves into fundamental investing concepts by drawing from multiple fields outside of economics. Inspired by Charlie Munger's 'latticework of mental models', Hagstrom argues that good investment decisions cannot be made solely on finance theory. The book discusses how theories from physics, biology, sociology, psychology, philosophy, and literature can be applied to investing research. It also includes a new chapter on mathematics and updates reflecting the economic developments since 2008. The book emphasizes the importance of a broad education and critical thinking in investment performance[1][3][4].

Mastering the market cycle

Getting the Odds on Your Side

Howard Marks

In 'Mastering the Market Cycle: Getting the Odds on Your Side,' Howard Marks provides a comprehensive overview of market cycles, emphasizing the importance of understanding the patterns of ups and downs influenced by economics, markets, companies, and human psychology. Marks draws on his decades of experience to explain how investors can position their portfolios to take advantage of market cycles by studying past cycles, understanding their origins, and remaining alert for the next cycle. The book highlights that market cycles are driven by cause-and-effect relationships and that investors should prepare rather than predict market outcomes. It also delves into the psychological markers and emotional factors that influence investor behavior during different phases of the cycle.

The (mis)behavior of markets

Benoît B. Mandelbrot

Richard L. Hudson

In 'The (Mis)Behavior of Markets', Benoît Mandelbrot and Richard L. Hudson challenge conventional financial theories by applying fractal geometry to market dynamics. They argue that markets exhibit complex patterns and extreme events more frequently than traditional models predict, highlighting the importance of recognizing these patterns for better risk management. The book critiques the efficient market hypothesis and modern portfolio theory, advocating for a more nuanced approach to financial markets.

Thinking, Fast and Slow

Daniel Kahneman

In this book, Daniel Kahneman takes readers on a tour of the mind, explaining how the two systems of thought shape our judgments and decisions. System 1 is fast, automatic, and emotional, while System 2 is slower, effortful, and logical. Kahneman discusses the impact of cognitive biases, the difficulties of predicting future happiness, and the effects of overconfidence on corporate strategies. He offers practical insights into how to guard against mental glitches and how to benefit from slow thinking in both personal and business life. The book also explores the distinction between the 'experiencing self' and the 'remembering self' and their roles in our perception of happiness.

Quality Investing

John William

Narrative and numbers

The Value of Stories in Business

Aswath Damodaran

In this book, Aswath Damodaran argues that the power of storytelling is crucial in driving corporate value, complementing numerical data. He outlines a five-step process for valuation: developing a narrative, testing its plausibility, converting the narrative into value drivers, connecting these drivers to a valuation, and maintaining an open feedback loop. The book uses case studies of companies like Uber, Twitter, Facebook, Apple, and Vale to demonstrate how narratives influence financial models and projections.

The Language Instinct

How the Mind Creates Language

Steven Pinker

In this book, Steven Pinker argues that language is an innate human ability, produced by evolution to solve the problem of communication among social hunter-gatherers. He explains how language works, how children learn it, how it changes, and how the brain computes it. Pinker refutes common ideas such as the Sapir–Whorf hypothesis and the notion that language is a human invention. He supports his argument with examples from linguistics, psychology, and popular culture, emphasizing that language is a specialized 'mental module' rather than a mark of advanced intelligence. The book also includes updates on advances in the science of language since its initial publication.

When Genius Failed

Roger Lowenstein

When Genius Failed is a detailed account of the spectacular collapse of Long-Term Capital Management (LTCM), a hedge fund that was founded by Nobel Prize-winning economists and managed by some of the most brilliant minds in finance. The book explores the fund's rapid ascent, its complex trading strategies, and the catastrophic events that led to its downfall. Lowenstein provides a gripping narrative that delves into the psychological and financial factors that contributed to LTCM's failure, offering insights into the risks and consequences of high-stakes financial speculation.

Elon Musk Biography

UFF EDITION

This biography, written by Walter Isaacson, provides an in-depth look at the life of Elon Musk, from his tumultuous childhood in South Africa to his rise as a visionary entrepreneur behind companies like SpaceX, Tesla, and SolarCity. The book is based on two years of shadowing Musk, attending his meetings, and conducting extensive interviews with him, his family, friends, coworkers, and adversaries. It explores the triumphs and turmoil of Musk's life, addressing the question of whether the demons that drive him are also what drive his innovation and progress.

Quit

The Power of Knowing When to Walk Away

Annie Duke

The Great Mental Models, Volume 1

General Thinking Concepts

Shane Parrish

The Great Mental Models: General Thinking Concepts is the first book in The Great Mental Models series. It details nine fundamental thinking concepts that form the bedrock of clear reasoning and effective decision-making. Drawing on examples from history, business, art, and science, this book teaches how to avoid blind spots, find non-obvious solutions, anticipate and achieve desired outcomes, and play to your strengths while avoiding your weaknesses. The book covers mental models such as first principles thinking, Hanlon’s razor, inversion, and probabilistic thinking, among others, to help readers better understand the world, solve problems, and gain an advantage.

Zen and the Art of Motorcycle Maintenance

Robert Pirsig

This classic novel by Robert M. Pirsig is a personal and philosophical odyssey that delves into the author's search for meaning. The narrative follows a father and his son on a summer motorcycle trip from the Midwest to California, intertwining a travelogue with deep philosophical discussions. The book explores the concept of 'quality' and how it informs a well-lived life, reconciling science, religion, and humanism. It also touches on the author's own struggles with his past and his philosophical quest, making it a touching and transcendent exploration of human experience and endeavor.

How to Read a Book

The Classic Guide to Intelligent Reading

Edward Holland

Mortimer J. Adler

Charles Lincoln Van Doren

Originally published in 1940 and revised in 1972, this book is a classic guide to intelligent reading. It describes the art of reading as the process by which a mind elevates itself through its own operations on the symbols of readable matter. The authors emphasize active reading, highlighting the importance of keen observation, available memory, range of imagination, and an intellect trained in analysis and reflection. The book provides practical lessons on how to read books effectively, including inspectional reading, analytical reading, and syntopical reading, to achieve a deeper understanding of the material.

Same as Ever

A Guide to What Never Changes

Morgan Housel

In 'Same as Ever,' Morgan Housel presents a master class on optimizing risk, seizing opportunity, and living a fulfilling life by focusing on what remains constant in a changing world. Through engaging stories and examples, Housel shows how understanding permanent truths about human behavior can help readers make better decisions and navigate uncertainties. The book emphasizes the importance of recognizing and adapting to timeless principles in finance, business, and personal life, rather than trying to predict specific future events[2][4][5].

Poor Charlie's Almanack

The Essential Wit and Wisdom of Charles T. Munger

Charles T. Munger

Peter D. Kaufman

Originally published in 2005, Poor Charlie's Almanack is a collection of eleven talks delivered by Charles T. Munger between 1986 and 2007. Edited by Peter D. Kaufman, this book draws on Munger's extensive knowledge across various fields to provide a framework for rational and rigorous approaches to life, learning, and decision-making. It is renowned for its sharp wit and rhetorical flair, making it an essential read for investors, entrepreneurs, and anyone seeking to enhance their wisdom and critical thinking skills.

Think twice

harnessing the power of counterintuition

Michael J. Mauboussin

More Than You Know

Finding Financial Wisdom in Unconventional Places

Michael J. Mauboussin

This book offers a unique blend of practical advice and sound theory, drawing from various sources and disciplines such as casino gambling, horse racing, psychology, and evolutionary biology. Mauboussin emphasizes the importance of a multidisciplinary approach to investing, covering topics like investment philosophy, psychology of investing, innovation and competitive strategy, and science and complexity theory. The book is written for professional investors but extends beyond the world of economics and finance, providing tools to better understand concepts of choice and risk. It includes fresh thoughts on human cognition, management assessment, game theory, and the mechanisms driving market mood swings, making it a valuable resource for long-term financial results.

Superforecasting

The Art and Science of Prediction

Dan Gardner

Philip E. Tetlock

Santiago Foz (argentino)

In this book, Tetlock and Gardner present the results of the Good Judgment Project, a massive forecasting tournament that identified a small group of 'superforecasters' who are exceptionally good at predicting future events. The authors explain that good forecasting does not require powerful computers or arcane methods but involves gathering evidence from various sources, thinking probabilistically, working in teams, keeping score, and being willing to admit error and change course. The book uses stories of forecasting successes and failures, as well as interviews with high-level decision makers, to illustrate these principles and demonstrate how anyone can improve their forecasting abilities[3][4][5].

Limitless

Core Techniques to Improve Performance, Productivity, and Focus

Jim Kwik

In 'Limitless,' Jim Kwik offers a comprehensive guide to upgrading brain performance. The book is divided into three main parts: Mindset, Motivation, and Methods. Kwik provides tools to challenge limiting beliefs, ignite motivation, and master methods for accelerated learning. He introduces the 'Limitless Model,' which includes the FASTER method for quick content absorption and strategies to improve focus, study habits, memory, and speed reading. The book also addresses modern-day 'supervillains' of learning, such as digital deluge, and offers practical exercises to implement these strategies immediately[2][4][6].

What Intelligence Tests Miss

Keith E. Stanovich

In 'What Intelligence Tests Miss: The Psychology of Rational Thought', Keith E. Stanovich argues that intelligence tests fail to assess crucial cognitive skills such as judgment and decision-making, which are essential for rational thought. He explores how these skills differ from traditional intelligence and why they are vital for real-world success. The book provides insights into why intelligent individuals may make irrational decisions and emphasizes the importance of teaching rational thinking skills.

How Do You Know

Chris Mayer

On today’s episode, Kyle Grieve and Clay Finck continue their conversation on Investing: The Last Liberal Art by Robert Hagstrom. We discuss details on why using the right explanation for a business is so important to a good investment thesis, simple ways to improve your reading to get more out of the books and content that you consume, how to use simple mathematical concepts to improve your decision making in real-time, how to understand better System I and System II thinking and how it directly applies to investing, some of the latest mental models Kyle has learned from interviewing recent guests, and a whole lot more!

IN THIS EPISODE YOU’LL LEARN:

00:00 - Intro

03:34 - How to use the proper explanations in your analysis to determine the right comparable best.

06:18 - Why Tesla is so misunderstood.

10:33 - Why the economics of Dino Polska make it an invalid comparison to other grocers.

12:02 - The power of narratives in investing and how we can guard ourselves from getting overly optimistic.

17:43 - How to optimize reading for learning.

40:18 - How to use Bayes theorem to tip odds in your favour and change your position sizing.

45:45 - Why value and prices become disconnected, and how human psychology plays into this.

50:20 - Why intuition (system I thinking) is so difficult to rely on in the stock market.

01:09:22 - How to make thinking in mental models a habit.

01:14:59 - Some of the latest mental models Kyle has learned from interviewing some of his latest guests.

And so much more!

Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences.

BOOKS AND RESOURCES

Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, Kyle, and the other community members.
Buy Investing: The Last Liberal Art here.
Buy The Great Mental Models here.
Learn more about Mental Models here.
Buy Poor Charlie’s Almanck here.
Buy More Than You Know here
Follow Clay on Twitter and LinkedIn.
Follow Kyle on Twitter and LinkedIn
Check out all the books mentioned and discussed in our podcast episodes here.
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