
Compounding Knowledge - golyi
https://fs.blog/2019/02/compounding-knowledge/
======
iambateman
Buffet’s approach to life is interesting for the same reason an Olympic
gymnast is interesting. He has specialized to an extreme and is taking
advantage of the rewards of that specialization and natural talent in a unique
way.

It’s easy for me to feel shame that I don’t read 8 hours per day, as Warren
and Charlie do. Buffett is a phenomenal investor but by all accounts, rather
odd. He eats like crap, doesn’t exercise, had a profoundly weird relationship
with his wife, and seems addicted to his work at the expense of everything
else.

My point is this: his practice of reading income statements and business
reports 8 hours per day for 60 years doesn’t make him the kind of person I
wish to emulate.

Don’t get me wrong, I respect his levelheadedness toward money, lack of polish
wrt PR, and generous philanthropic efforts. There’s a lot of good. But it’s
easy to idolize the guy.

~~~
jboneal
Controversial take: Buffett is actually not a great investor in the way people
think. Via the float in his insurance companies, he receives a 0% infinite
maturity loan to plow into the market. That financial leverage gives him the
ability to beat the market year after year - not his own stockpicking prowess.

If you were to start with $1B, then get an extra $2B that you never had to pay
back, you too would do quite well holding Coca-Cola and other safe companies
with moats. Your returns would be 3x everyone else's.

Buffett himself has tried to explain the impact of float on Berkshire Hathaway
but it never seems to sink in with people.

~~~
mattferderer
I was unaware of this additional advantage he has.

Reading up on floats it seems they are the money his insurance companies
receive from premiums that has yet to get paid out in claims. Essentially a
reserve that can be invested. Since they have a large scale of customers, this
float ends up being rather high.

I'm wondering how much trouble an insurance company of smaller scale would get
into if they used their float in such a manner but then ended up needing that
money due to some natural disaster. Is this type of risk betting money you
technically don't own similar to the 2008 housing crisis or the often talked
about 1930's issue with everyone wanting to take their money out of the
market?

~~~
skybrian
Yes, the tricky bit is not losing any advantage the float might bring via
underwriting losses.

It requires understanding risks very well and being willing to stop selling
insurance (and losing market share) if the market for insurance gets too
competitive.

------
keiferski
This concept is essentially the reason why “being able to quickly google the
answers to questions” is inferior to “learning, knowing and remembering the
answer.” The former treats a piece of information as an independent, context-
free item, while the latter allows you to “digest” the information and
understand the answer at a deeper level, to the point where it changes the
types of questions you ask.

Unfortunately our society doesn’t seem to recognize this and actively
encourages not learning certain facts because they are easily googleable.

~~~
vp8989
There is also, practically, a massive gulf between:

1) Being vaguely aware that something exists and knowing you can Google for
it.

2) Having such a deep, intuitive understanding of said thing that you can
actually use knowledge of that thing to solve complex problems.

~~~
collyw
You can google for two, no?

Seems like a good deal of my job as a software engineer.

~~~
yetihehe
If you know what to google for. It happened many times to me that I was unable
to even know what/how to search for something or didn't know someone already
solved that problem in ingenious ways and every specialist knew that, but I
wasn't a specialist.

I'm a programmer but when I watch machining videos on YT I discover solutions
to problems I've never thought would exist.

~~~
Kye
This is circle of competence, another common topic on Farnam Street. It's
knowing what you don't know so you can find out rather than puff up and fake
it.

------
yingw787
This reminded me of what Jeff Bezos told the founders of Basecamp: "Focus on
the things that don't change". In software, the global implementation-specific
knowledge changes quickly, but the global first principles knowledge expands
much more slowly. Implementation-specific knowledge is "crumbly"; it can't
compound effectively over time because the foundational premises for its usage
disappear. Investing in knowing first principles may pay off more in this
regards because first principles actively build upon each other (compilers -->
just-in-time compilation, distributed memory models | distributed systems,
etc.)

------
stakhanov
I wonder to what extent Warren Buffet is Warren Buffet because of how he
thinks and acts (like all of these non-fiction authors selling books by using
his name would have us believe), and to what extent he is the product of media
selection bias. -- If you take a large enough group of people who take risky
stakes that are large enough (like the world of financial asset management),
then one of them is bound to be as successful as Warren Buffet, even if they
all behave randomly.

~~~
bgroat
Funnily enough, Buffett actually calculated this in his essay "The Super
Investors of Graham and Doddsville"

Basically, advocates of the Free Market Hypotheses believed that it was
impossible for anyone to deliberately, repeatedly generate alpha. The market
was rational, and success was probabilistically distributed. With a large
enough population, you will get Buffett level returns - therefor Buffett is a
fluke.

However, Buffett calculated that there weren't enough investors for his
success to be a factor of random distribution, plus there were 2 dozen others
who followed a similar strategy who also consistently generate alpha

~~~
throwawaymath
It's worth noting that Fama has since then walked back on the strong statement
of the Efficient Market Hypothesis. I don't know that he ever intended to say
beating the market _is_ impossible; rather that beating the market _must_ be
impossible, under the rigorously definition of an idealized, "efficient"
market.

Unfortunately a lot of proponents of the EMH (especially non-academics) have
taken this concept and run with it in ways Fama didn't intend. His position
would be more accurately stated as the claim that modern markets are
_eventually_ informationally efficient, for any given instance of information
asymmetry.

It's a useful model that approximates markets, not an empirical claim about
the world.

~~~
rbavocadotree
He definitely never said that beating the market is impossible. He said you
can beat the market long term by taking on more risk, but not by market timing
and stock selection. Everyone leaves out risk when talking about the EMH.

------
Bucephalus355
“Hard to become an expert. Easy to be an expert.”

I spent many years learning how to do cloud architecture. Now I can briefly
look at AWS documentation for new services out of the corner of my eye and
know all I need to for the next 6 months.

Yet the other day I opened a book on Java, which I haven’t studied since
college, and literally had no idea what in the world I was reading.

~~~
saberience
I’m curious as to how/why you could have spent years learning cloud
architecture, it’s not that complicated surely. My company is recently
transitioning to GCP and I’m architecting big data solutions. I started doing
this in November or so and well, it’s not rocket science, in fact, it’s
considerably easier than building systems ten years ago was.

I’d hazard a guess that you’re not learning particularly efficiently if it
took you years to learn this. In my opinion, any smart engineer could learn
cloud architecture in a month or two if they’re studying two/three hours per
day in their own time.

~~~
tekkk
You must joking right? Sure you can learn how to graph down some services
using draw.io or something, but to actually implement the architecture and
have it working without hiccups is another matter entirely. There is a vast
amount of different types of application architectures with different
requirements that require completely different architecting compared to some
"big data solutions". Maybe try architecting massive scale game servers next
time? Or some other highly specialized solution with very strict performance
requirements, it's not that easy. Sure you can again just graph down some
vague lines and boxes with draw.io but the actual implementation with
Terraform or whatnot is definitely not something you learn in a "month or
two". Jezus what arrogance.

~~~
saberience
I'm building Hadoop clusters in the cloud with massive streaming piplines
using Kafka, then feeding stream processing jobs using Flink on Dataproc for
driving machine learning models.

We're doing this at a massive scale, bigger than most production games. So I
don't know why you're talking about massive scale game servers, we are
literally doing this at massive scale.

------
pan_peter
Information arbitrage is also a factor. Here's an interesting case study using
the Jan 3rd $75B Celgene acquisition 'Generating Alpha from Information
Arbitrage in the Financial Markets with NLP Datasets: 水涨船高'
[https://hackernoon.com/profiting-from-information-
arbitrage-...](https://hackernoon.com/profiting-from-information-arbitrage-in-
the-financial-markets-3abfca9806d8)

~~~
sireat
Those findings while interesting need more work:

The clusters were from back-tested stock data. Ie we knew ahead of the time
that there were profits to be made. Was this akin to p-hacking? That is where
there more stocks selected with some sort of correlation without the profit
potential.

The article alludes that there were more stocks without the raise in stock
price after Celgene acquisition.

So the real 'show me the money', 'skin in the game' for this kind of research
would be to make predictions on a real time event(merger, acquisition etc).

------
thesausageking
If his knowledge were compounding, we'd expect his performance to getting over
time, not worse. But that's the opposite of what happened.

He's underperformed the S&P 500 over the last 10 years. And it's been decades
since he's been able to match the great returns he had very early in his
career which he built his reputation on.

~~~
nabla9
You make solid observations but there are good explanations for this.

1) Investment opportunities are inversely related to the size. Buffet has
constantly warned shareholders that as the size of the company grows, it
becomes harder and harder to find good investments. Assuming he can analyze
only fixed number of companies, we should expect that there is less potential
companies to buy. Buffet has changed his investment strategies several times
to reflect changes in his opportunities.

2) Timing. BRK is a company with incredible patience. If you compare SP500TR
and BRK over decades, you notice that BRK makes permanent break from SP500
during stock market crashes and long recessions. During stock market booms BRK
starts to lose to to the inflated market prices.

We are currently riding on the top of 10 year stock market boom. BRK is
patiently buying companies with long term steady profits. For example, Buffet
is buying energy companies and electricity transmission businesses all over
the the west. These companies are geographically linked and there will be
benefits from smart grid investments in the future, especially if the future
is solar.

------
RickJWagner
One of the greatest things about Warren Buffet is that he wants to share with
everybody the techniques for accumulating wealth.

YouTube is loaded with videos in which Buffet explains clearly how to get rich
slowly but surely.

He's even got a cartoon series for kids, the Secret Millionaire's Club.
([http://www.smckids.com/](http://www.smckids.com/))

Buffet has figured out how to reliably win the game, he wants everybody to
have that ability. He's a good guy.

~~~
jonstewart
Marketing himself as a folksy Nebraskan also does wonders for his dealflow,
which is one of the secrets of his success. He gets first pass at a lot of
privately-owned companies who agree to sell at a low price, because he’s
Warren Buffett and won’t ruin their companies.

~~~
hopler
That's not just "marketing himself". That's a reputation earned over decades
of buying companies and making the previous owners and managers into winners.

~~~
jonstewart
I don't think we disagree. Having run my own company, the biggest lesson
learned is that marketing should never have "just" in front of it.

------
pasta
I strongly believe that compunding knowledge is also helping to create good
software.

And I think software companies should give a team the opportunity to invest
time to know more about the subject.

For example when you write WMS software you should go to a warehouse and see
what is going on, talk to the people who work there and understand why things
are the way they are.

Because there is a huge difference between knowing that 1+1=2 and knowing why
1+1=2.

~~~
aarondf
You've sent me down a real philosophical rabbit hole here... Do I know why
1+1=2?

~~~
vharuck
Probably not, but there is a proof in "Principia Mathematica" on page 379.

[https://en.m.wikipedia.org/wiki/Principia_Mathematica](https://en.m.wikipedia.org/wiki/Principia_Mathematica)

------
stcredzero
_A lot of us are on the treadmill of consuming expiring information. Not
Buffett. He filled his mental filing cabinet with information that had a long
half-life._

I remember being in grad school, encountering fellow students who would say,
"I want to learn X-Windows, so I can get a job doing that." Not such a huge
market for that now. This is why you want to have a working knowledge about
the whole stack. You won't necessarily build a compiler or write a low level
library in your job, but if you actually needed something like that, you'd
know enough to shop around for the right one or hire someone to build it for
you.

I all you're learning is how to jockey around one opinionated framework, or
just barely learning how to glue libraries together, you're not learning
information with a long shelf life.

------
westurner
This book probably doesn't mention that he's given away over 71% to charity
since Y2K. Or that it's really cold and windy and snowy in Omaha; which makes
for lots of reading time.

"Warren Buffett and the Interpretation of Financial Statements: The Search for
the Company with a Durable Competitive Advantage" (2008) [1], "Buffetology"
(1999) [2], and "The Intelligent Investor" (1949, 2009) [3] are more
investment-strategy-focused texts.

[1] [https://smile.amazon.com/Warren-Buffett-Interpretation-
Finan...](https://smile.amazon.com/Warren-Buffett-Interpretation-Financial-
Statements/dp/1849833192/)

[2] [https://smile.amazon.com/Buffettology-Previously-
Unexplained...](https://smile.amazon.com/Buffettology-Previously-Unexplained-
Techniques-Buffett/dp/068484821X/)

[3] [https://smile.amazon.com/Intelligent-Investor-Definitive-
Inv...](https://smile.amazon.com/Intelligent-Investor-Definitive-Investing-
Essentials/dp/0060555661/)

Value Investing:
[https://en.wikipedia.org/wiki/Value_investing](https://en.wikipedia.org/wiki/Value_investing)
[https://www.investopedia.com/terms/v/valueinvesting.asp](https://www.investopedia.com/terms/v/valueinvesting.asp)

------
robnagler
People have been saying Buffet is a lucky outlier for decades. Is his success
in the following decades survivorship bias or a valid ex post facto test of
success? If you believed in Buffett's investment philosophy in the 1980s based
on decades of results, and had a thousand bucks to buy a Berkshire A share,
would it have been a lucky pick?

I didn't believe you could beat the market until about 2000, and I'm happy I
started investing in Berkshire then. If I had bought Apple instead, it would
have been a lucky pick imho. I think of investing in Berkshire to be based on
ex post facto results, not survivorship bias.

A decade ago I did an analysis of the top 25 on the Forbes list[1], and the
TL;DR is that they 1) inherited their wealth, 2) had bet on a single company,
or 3) been a value investor. Nobody in the top 25 is a "trader" or "quant"
(e.g. Paulson or Soros). That analysis is still true, btw.

[1] [https://www.robnagler.com/2009/06/13/Objectively-
Rich.html](https://www.robnagler.com/2009/06/13/Objectively-Rich.html)

~~~
tim333
Few people who analyse Buffett think he's just been lucky. He's more like a
chess master who is just better at his game than most he competes with.

------
mswen
Central points:

> focus time and effort on knowledge and skills that endure

> read more seriously

> think for yourself don't just take the opinions of others

> focus in a particular domain so that pattern recognition develops

> persist over time so that real knowledge has opportunity to compound

What kinds of knowledge actually compound? Are there specific kinds of
knowledge that deliver value now, make it easier to acquire knowledge later,
make new knowledge more valuable because of rich context, or give us new
models and paradigms for thinking?

------
misiti3780
Buffet is a smart investor and obviously he is successful, but I always wonder
why articles like this don't realize there is a large component of
survivorship-bias involved also.

I always like to think about this paragraph From "Fooled By Randomness" when I
read this read articles on TechCrunch etc about how great and talented someone
is (but it obviously easily maps to people like Buffet)

>Let’s push the argument further to make it more interesting. We create a
cohort that is composed exclusively of incompetent managers. We will define an
incompetent manager as someone who has a negative expected return, the
equivalent of the odds being stacked against him. We instruct the Monte Carlo
generator now to draw from an urn. The urn has 100 balls, 45 black and 55 red.
By drawing with replacement, the ratio of red to black balls will remain the
same. If we draw a black ball, the manager will earn $10,000. If we draw a red
ball, he will lose $10,000. The manager is thus expected to earn $10,000 with
45% probability, and lose $10,000 with 55%. On average, the manager will lose
$1,000 each round—but only on average. At the end of the first year, we still
expect to have 4,500 managers turning a profit (45% of them), the second, 45%
of that number, 2,025. The third, 911; the fourth, 410; the fifth, 184. Let us
give the surviving managers names and dress them in business suits. True, they
represent less than 2% of the original cohort. But they will get attention.
Nobody will mention the other 98%.What can we conclude? The first
counterintuitive point is that a population entirely composed of bad managers
will produce a small amount of great track records. As a matter of fact,
assuming the manager shows up unsolicited at your door, it will be practically
impossible to figure out whether he is good or bad. The results would not
markedly change even if the population were composed entirely of managers who
are expected in the long run to lose money. Why? Because owing to volatility,
some of them will make money. We can see here that volatility actually helps
bad investment decisions. The second counterintuitive point is that the
expectation of the maximum of track records, with which we are concerned,
depends more on the size of the initial sample than on the individual odds per
manager. In other words, the number of managers with great track records in a
given market depends far more on the number of people who started in the
investment business (in place of going to dental school), rather than on their
ability to produce profits. It also depends on the volatility. Why do I use
the notion of expectation of the maximum? Because I am not concerned at all
with the average track record. I will get to see only the best of the
managers, not all of the managers.

------
miguelmota
Warren Buffet is a pattern recognizing machine that can forecast trend growth
by analyzing a boat load of data and has learned how to be a master of
negotiation.

With that said, Warren Buffet is not someone who invents things and or is very
creative such as Bill Gates, Jeff Bezos, Steve Jobs, etc..

But someone like Buffet can amplify adoption of products and ideas by
investing early and seeing potential of the companies.

~~~
tim333
He's been quite creative with the company he's built. It's hard to think of
much like it apart from Fairfax Financial which was modeled on Berkshire.

------
deepGem
why “being able to quickly google the answers to questions” is inferior to
“learning, knowing and remembering the answer

At least in the world of programming, this is not necessarily true. There is
so much flux that you do need to rely on Google for the semantics at least. In
some instances or in time crunch, it is a make or break scenario and how fast
one can get to a solution trumps everything else. So the ability to quickly
Google what you want is indeed not inferior. To quickly quote an anecdote, a
couple of my fellow programmers couldn't start a Flask application on AWS to
listen on all interfaces. Smart guys but they couldn't figure this out. 'What'
to google for is also valuable.

Of course, the ability to learn, know and remember is tremendously useful and
this is what most of the interviews test for, but the ability to quickly
Google and find answers in the nick of time is not inferior at all.

~~~
eswat
Understandable that you’d want to exploit any resource that can give you
answers during a time crunch.

But if given enough time, going through the pain of debugging and fixing
something on your own – with at the most some documentation – is still
superior.

If one has learned, knows and remembers the first principles of their domain,
then knowing what to Google becomes less valuable (not saying your colleagues
don’t know their stuff). You can rely on yourself for even the trickier
situations you get into.

~~~
deepGem
Agreed, this is what I strive for but rarely do it in practice. Somehow, you
are always in a hurry, you always want the solution now!. I think this has to
change, the initial time spent on the understanding the debugging process has
immense long term benefits.The time to solution decreases with time, in my
kind of approach it remains linear or sometimes even increase.

------
csomar
This article is full of bul __ __. Here is another article where WB suggests
that you don 't need such a big a brain:
[https://www.cnbc.com/2017/10/12/heres-the-iq-score-warren-
bu...](https://www.cnbc.com/2017/10/12/heres-the-iq-score-warren-buffett-says-
is-all-you-need-to-succeed.html)

There are many things going on here:

1\. WB came at a time where little IQ could get you a lot ahead. People were
not skilled. There was a time where some knowledge of writing, reading and
basic math could make a factory director. Now the same knowledge might not get
you at the door of that same factory.

2\. WB came at a time where it was easy to acquire and build. These were times
when land was cheap. Competition was easy. And lots of sectors were not
developed yet. Not the same circumstances now. Or, it is. I mean if I tell you
there is some cheap land somewhere: let's go and build and invest. In 20 years
it'll be worth a lot. Would you go for the deal?

3\. WB age is 88. I'd rather have a couple million USD in my thirties than
having a billion by the time I'm 80.

4\. WB probably made extreme lifestyle sacrifices to have more digits in his
bank account and more troubles/reports to read everyday.

TL;DR: WB suggests that you should be wise and reasonable. That's good. People
suggests that you should follow WB. That's bad (unless reading financial
statements is your hobby).

~~~
flexie
Warran Buffet did indeed have a couple million USD when he was in his 30s,
back 55 years ago when a couple of million were worth around 20 million in
today's money. Measured in today's money he probably had 2 million at some
point in his mid/late 20s. He became a billionaire at 50-something.

[https://www.statista.com/statistics/378439/net-worth-of-
warr...](https://www.statista.com/statistics/378439/net-worth-of-warren-
buffett-by-age/)

[https://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=2400000&year1=...](https://data.bls.gov/cgi-
bin/cpicalc.pl?cost1=2400000&year1=196301&year2=201812)

------
dna_polymerase
(Slightly Off-Topic) Question to those who subscribe to Farnam Street: Would
you recommend it? Does it add value to your life?

~~~
bgroat
I loved it for about 18 months than I figured that I'd learned everything I
needed from it.

The quality remained stellar, I just didn't need it anymore

~~~
Jimpulse
What are your big take aways?

------
dugluak
In today's world things like "2 week sprints" or "move fast and break things"
are considered cool. Not many people get the luxury of spending too much time
on a topic unless of course you are Warren Buffet. The world around you pushes
you or steals yours attention all the time.

~~~
quickthrower2
It doesn't have to be like that for anyone though. Maybe in the short term,
but you can get out of those situations if you need. Also 2 week sprints
doesn't mean not focusing on one thing. It can mean breaking it down into
chunks. Whatever Warren Buffet does, it comes down to stuff he does in 2 weeks
every 2 weeks anyway.

------
code_scrapping
Anyone else has the feeling that Shane Parrish is just a classier version of
Tim Ferriss? Can't shake the "let me sell you tricks" approach.

------
hi41
>>Buffett focused on knowledge and companies that change very, very slowly or
not at all

Can someone please tell me what exactly non-changing knowledge is?

~~~
sobani
Basic human psychology like cognitive biases seems like a good candidate.

------
westurner
> _This is why it’s commonly telling you what happened, not why it happened or
> under what conditions it might happen again._

------
thegabez
Sound like Buffets approach to investing is ripe for machine learning. Has
anyone tried building a ML model based off 10ks?

~~~
hodder
Nope. No one has ever attempted to use computers to make money off of stocks.

