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Think Like an Investor: Avoid Mistakes (and why you should play the loser’s game)

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avoid mistakes

“An investor needs to make very few things right as long as he avoids big mistakes.”

–Warren Buffett

Charles Ellis wrote the now famous essay The Loser’s Game in 1946. In it, he compares sports — tennis in particular — to investing.

Ellis makes the distinction between a “loser’s game” and a “winner’s game”. In tennis it looks something like this. . .

Winner’s game

Played by professional tennis players.

The way to score — and win — is by hitting that special serve you’ve been working on for so long. Or by hitting that power shot that can only be used when the timing is perfect.

Loser’s game

Played by everyone who’s not a professional tennis player.

The way to score — and win — is by keeping the ball in play and not taking any unnecessary risks. Just focus on avoiding mistakes and you’ll be fine. Don’t give your opponent any easy points, for example by giving him the chance to smash.

These two styles rely on completely different strategies.

The winner’s game is about hitting fancy moves, mastering timing, outsmarting your opponent and taking risks.

The loser’s game is about sticking to fundamentals, avoiding mistakes and minimizing unnecessary risks.

However, investing is more complicated than sports. Success in life is also more complex (and less predictable) than sports are. . .

. . . But the analogy still holds true.

So, which of these two strategies is it most important that you use in your own life?

You guessed it: The loser’s game.

Even if it’s tempting to play the winner’s game, you should only play it in those rare circumstances when you’re actually the pro. Usually you’re not the pro.

Yet most people think they are.

–And so, they end up doing stupid things because they overestimate their own skill or intelligence. They suffer from inflated egos.

To be able to outperform the market you must be able to outthink the consensus. Are you capable of doing so? What makes you think so?

–Howard Marks, The Most Important Thing

If you’re going to outthink the consensus you have to be above average — and that doesn’t just go for investing. That goes for anything.

There have been all sorts of research on this, and the general conclusion is that: Most people think they’re above average at just about everything.

There’s a famous study done in Sweden (of all places!) that asked people whether they believed they were better than average at driving. What were the results?

About 90 % of the people asked believed they were better than average drivers.

Obviously this cannot be true, as only 49 % of people can be above average. This cognitive bias of overestimating your own abilities is sometimes called excessive self-regard tendency.

Then there was a test that was done twice, first in 1945 and then in 2003. It asked “are you an important person?” In the first instance 2 out of 10 respondents answered “Yes, I’m an important person”. The second time, in 2003, 6 out of 10 respondents answered the same. The evidence is in. . .

. . . We live in a society with a lot of ego-deluded people.

There’s a saying in poker, I’m sure you’ve heard it:

If you can’t spot the sucker at the table, then guess what? You’re the sucker.

Whenever you cannot spot the sucker you should assume you’re it, and:

  1. Hold on dearly to your money and get out of there ASAP, or
  2. Play for fun and set a clear limit to your commitment of resources and when you’ll quit (like a rich guy in Vegas)
  3. If you must play, you should play the loser’s game (and avoid mistakes)

Yet, because of excessive self-regard tendency, most people won’t do any of these things. They’ll play the winner’s game instead.

This is because they think they’re better than they really are, even though they don’t have any solid experience to base that belief on.

I know what you’re thinking:

How can they be so incompetent?

Because the more incompetent someone is, the less likely they are to realize how incompetent they are.

And vice versa: The more you know, the more likely you are to realize how much MORE there is to know. Or how limited your knowledge on a topic is. Intelligent people know their limitations.

Overestimating what you’re capable of knowing or doing can be extremely dangerous–in brain surgery, trans-ocean racing or investing.

–Howard Marks, The Most Important Thing

You should only play the winner’s game when you can easily spot the sucker.

However. . .

Not All Pros Play the Winner’s Game

Not even in professional sports:

Ted Williams is the only baseball player who had a .400 single-season hitting record in the last seven decades. In the Science of Hitting, he explained his technique. He divided the strike zone into seventy-seven cells, each representing the size of a baseball. He would insist on swinging only at balls in his ‘best’ cells, even at the risk of striking out, because reaching for the ‘worst’ spots would seriously reduce his chances of success.

And some of the best investors — Like Warren Buffett — don’t do it either:

As a securities investor, you can watch all sorts of business propositions in the form of security prices thrown at you all the time. For the most part, you don’t have to do a thing other than be amused. Once in a while, you will find a ‘fat pitch’ that is slow, straight, and right in the middle of your sweet spot. Then you swing hard. This way, no matter what natural ability you start with, you will substantially increase your hitting average. One common problem for investors is that they tend to swing too often.

–Peter Bevelin, Seeking Wisdom

According to Ellis, here’s what you must do to win the loser’s game:

For those who are determined to try to win the Loser’s Game, however, there are a few specific things they might consider. First, be sure you are playing your own game. Know your policies very well and play according to them all the time.

You have to stick to the system you have cleverly devised.

Otherwise you will get swept up in somebody else’s system.

Warren Buffett tells a story of how his mentor Benjamin Graham taught him to stick with what he knew best:

“He gave us a quiz,” Buffett said, “A true-false quiz. And there were all these guys who were very smart. He [Graham] told us ahead of time that half were true and half were false. There were 20 questions. Most of us got less than 10 right. If we’d marked every one true or every one false, we would have gotten 10 right.”

Graham made up the deceptively simple historical puzzler himself, Buffett explained. “It was to illustrate a point, that the smart fellow kind of rigs the game. It was 1968, when all this phony accounting was going on. You’d think you could profit from it by riding along on the coattails, but (the quiz) was to illustrate that if you tried to play the other guy’s game, it was not easy to do.

The moral of this story is. . .

Don’t participate in competitions where you’re not the one making the rules.

It will leave you exposed to unnecessary mistakes.

Lots of normal — non-professional — people believe they can outsmart the stock market and speculate over the short-term. What makes them think they can do this?

Do they have inside info?

Do they have a ton of capital?

Are they dealing with a business in an industry where they’re supremely knowledgeable?

–Nope.

They just think they’re smart. And when things — for some weird reason — go poorly and they lose their money, they blame it on bad luck.

They’re foolishly playing the winner’s game, and they’ll get slaughtered for it.

What they should do is to focus on. . .

Avoiding Mistakes And Minimizing Stupidity

Because as Charlie Munger (Warren Buffett’s business partner and possibly the smartest man on the planet) says:

A lot of success in life and success in business comes from knowing what you really want to avoid — like early death and a bad marriage.

And. . .

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently “not stupid”, instead of trying to be very intelligent.

If you want to be successful, and you have a long-term oriented outlook, there are some basic — yet very serious — things you want to stay the heck away from. You want to avoid things like:

  • Marrying the wrong partner

–By not settling for the first person who comes along.

  • Getting into business with a loser (someone that cannot be trusted)

–By checking their track record and judging their character accurately.

  • Getting addicted to (heavy) drugs

–By not doing them, obviously.

  • Getting fat and addicted to sugar

–By having a healthy diet.

  • Getting sick and unhealthy

–By working out and getting a good physique early in life.

  • Getting into debt

–By not buying things you don’t need, and never buying anything on credit (I’ve never understood how people can do this).

  • Associating with criminals and stupid people

–By not living in the ghetto, not hanging out where low-lives meet, or by politely ignoring them.

The point is for you to think of some worst-case scenarios and make sure that they NEVER happen.

When it comes to avoiding mistakes and minimizing stupidity, your best strategy is prevention.

“What the wise man does in the beginning, the fool does in the end.”

The best practical method for prevention is to. . .

Figure Out the Root Cause And Solve it!

Have you got a problem?

What sort?

General problems — the type that happen often — are the ones that it’s most important you solve.

But first you have to find the problem and know when it happens.

There are two smart ways to FIND general problems:

  1. Write down daily lessons (make a section in your commonplace)
  2. Ask “Why” five time

Daily lessons:

Write down a few takeaways (or just noteworthy things) each day.

Once a month (or at some other interval) you go through all the notes. Chances are you’ll find that you’re having a problem that’s happening over and over.

Here’s an example of my “daily lessons” section. Notice the bolded part in the TOP of the screenshot. That’s the solution.

daily lessons and avoiding mistakes

Now I have to figure out the root cause and find a way to prevent it by. . .

Asking “why?” x 5:

 

Example of mistake: “I sent an email with typos in it.”

Why?

–Because I was distracted.

Why?

–Because my concentration was weak.

Why?

–Because I was mentally fatigued from not having taken a break in over four hours.

Why?

–Because I thought I was being efficient.

Why [did you think you were being efficient]?

Because I was putting in time.

Boom.

This misunderstanding — mistaking time for efficiency — is the root cause for the mistake. I will take more short restorative breaks to prevent it from happening again.

Sometimes you need to go even deeper and ask why more times. But usually five times is enough.

Why Smart People Do Dumb Things

Are stupid people the only ones who do dumb things or make big mistakes?

No.

Even some of the smartest people in the world make huge mistakes. Roger Lowenstein tells the cautionary tale of how the hedge fund Long-Term Capital Management failed in his book When Genius Failed.

What is Long-Term Capital Management?

I’ll let Wikipedia answer that:

“LTCM was founded in 1994 by John W. Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers. Members of LTCM’s board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a new method to determine the value of derivatives. Initially successful with annualized return of over 21% (after fees) in its first year, 43% in the second year and 41% in the third year, in 1998 it lost $4.6 billion in less than four months.

In short: LTCM consisted of a group of incredibly intelligent people who all had brilliant track records. They made money by arbitraging (profiting on price differences) based on mathematical models. At one point, Institutional Investor called them “the best finance faculty in the world”.

Warren Buffett gives his take on how remarkable the failure of LTCM was:

The whole story of Long-Term Capital is fascinating. Because if you take Eric Rosefelt, Larry Hilibrand, Grek Hawkins, Victor Hagani, the two Nobel Prize winners: Merton and Scholes. . . If you take the 16 of them, they probably have as high an average IQ as any 16 people working together in one business in the country. Including at Microsoft, or whatever business you want to name. So you have an INCREDIBLE amount of intellect in that room.

Now, you combine that with the fact that those 16 had EXTENSIVE experience in the field they were operating. These were not a bunch of guys who’d made their money selling men’s clothing and all of a sudden got into the securities business. They had an aggregate of probably 350-400 years of experience doing exactly what they were doing.

And then you throw in the third factor — that most of them had nearly all of their very substantial net worths in the business. So, they had their own money up.

Hundreds and hundreds of millions of dollars of their own money up, super high intellect, and working in a field they knew. . . And essentially, they went broke.

–So they had a lot of incentives acting in their favor, which should have motivated them to act intelligently.

But it didn’t.

And the underlying reason why they lost everything is because they. . .

. . . Risked what they needed to get what they did NOT need.

They wanted to make a little bit more money than they were already making. So they risked their reputations, their own money, and most importantly: The funds of their investors. . .

. . . And lost it all!

The potential profit was clearly NOT compensatory to the potential losses they might suffer.

But they went ahead and did it anyway.

And — Nobel Prize winner or not — if you risk something that is important to you, for something that is UNIMPORTANT to you, then you are a fool.

How to Make Fewer Stupid Mistakes in Life:

  • When you’re a pro — and you can clearly spot the suckers — you should play the winner’s game. It makes sense to take calculated risks and to use your fancy moves if the odds are in your favor. For example, when the game is rigged to your advantage.
  • When you’re not the pro — and you usually aren’t (!) — you should play the loser’s game. That means you want to stick to the fundamentals, avoid mistakes and minimize stupidity.

Key Strategies to Avoid Mistakes:

  1. Figure out the root cause by asking why (x5) and solving the problem.
  2. Figure out some worst-case scenarios in different areas of your life and make damn sure those things never happen.
  3. Never risk what you have and NEED for what you don’t have and DON’T need.

Learn from the example of Long-Term Capital Management (ironic name, huh?). Even Nobel Prize winners make stupid mistakes — especially when they don’t stick to a set of core principles.

Photo credit:

fedupusa


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Comments

  1. Fantastic article. A related point but perhaps slightly off topic, is the difference between intellect and smartness:

    Intellect is natural ability, which is a great thing to have no doubt, but smartness is what one should aim for (where a person has trained his brain to TRULY learn).

    You will find a lot of intelligent obese people. They know they shouldn’t buy that doughnut, but they do, and then they eat it, go home and regret it. Come next, the cycle repeats. THEY DON’T LEARN. Of course their smartness varies with the field where they apply it to (they may be amazing academically), but you get my drift.

    The difference between an intelligent but not smart person and a person of average intellect who is smart = the difference between a guy with great muscle-building genetics who has never been to the gym, and a the opposite.

    Weight training makes a HUGE difference! The good-genetic-no-training guy will at best squat 40 kg, but the bad-genetics-well-trained guy could squat 160 kg!!! Thats 4 times!!!

    I believe the same applies to intelligence and smartness. You have to constantly train to brain to learn, and to establish a mechanism to learn to achieve its true potential.

    Laziness is what might stop the good-genetics-no-training-guy…
    Similarly, various forms of “resistance” (art of war reference) will stop an intelligent guy becoming smart.

    Is it any wonder that the people that score the highest on IQ tests arent the worlds leading scientists, mathematicians or investment bankers?

    • I have thought in similar paths. But this made me think of something new.

      What would you say is the difference between
      Intellect
      Intelligence
      Smartness
      IQ
      Being “bright” vs “talented”

      ??

    • “You will find a lot of intelligent obese people. They know they shouldn’t buy that doughnut”

      –Yup. Intelligence does not equal willpower.

    • I see three basic components to what we might call “smartness”:

      1. The raw material – IQ, intelligence, or whatever you want to call it. This is almost entirely genetic; except for brain damage, there is very little than can be done to change it.

      2. A body of acquired knowledge, experience, and skills. Obviously the person with high IQ can learn a wider range of things, and learn them faster, than a person with low IQ, but they may not choose to do so, or they may learn a lot of worthless crap like movie trivia.

      3. Actually using the acquired knowledge. Here again a high IQ is advantageous (able to use knowledge more effectively), but not sufficient in itself. It’s easy to find people with high intelligence, extensive knowledge, or both, who think, say, and do stupid things constantly. One can also find people of modest intelligence and learning who are quite shrewd. I suspect that much of the difference is environmentally conditioned; thus the /habit of thinking/ can be learned.

    • Thanks Mr Abgrund for answering my questions. I like what you say it makes one optimistic.

  2. Liked to read this ludvig, but why do you say those guys at LTCM “risked what they needed for what they did NOT need”?

    Maybe they didn’t think their hedge fund strategy for money-making would work much longer?? So they thought ‘we will try hard one more time!’

    And maybe then they have money for rest of their lives they thought??

  3. Alexander says:

    Ludvig just provided something truly valuable.I could be saying this is what i needed now but as long as anyone is living(life) then they can relate to this.

    Great post Ludvig.Now let me go play the loser’s game.

  4. Hey Ludvig

    These are some very insightful things throughout the entire essay I must say!

    I have been reading the site for the past few weeks and really like your approach to self-development/long-term success or whatever you want to call it. I share much of your philosophy and I must say that reading your essays have got me inspired to start writing myself. You are wise well beyond your years and I wish I had your attitude when I was your age. I’d be a lot more successful. Not that I’m complaining, my life’s pretty good. :)

    Here are some of my own rules/principles for things I’ve avoided during my life so far, with good results, while many of my colleagues and friends have done less well:

    –Don’t make major purchases and get into debt at an early age
    –Don’t get (heavily) involved in a cult, major religion, or ideology.
    –Don’t get married young (especially not with someone who spends money and has bad habits)
    –Don’t be around negative people, life is too short for negativity.
    –Don’t do things you don’t think are fun/interesting for longer than you have to and don’t feel guilty for quitting
    –Don’t lie or be dishonest to people — and don’t keep quiet if you want to say somethng. It’s better to be direct, stand for what you have to say, and get it overwith
    –Don’t postpone making important decisions once you have enough information to act
    –Don’t complain about things. You either be stoic about it, positive about it, or you shut up.
    –Don’t do (heavy) drugs. Unless it’s a social event, and it’s done in moderation.
    –Don’t invest in things you don’t know or understand
    –Don’t speak before you know what to say, in business/meetings, and don’t waste people’s time

    Out of these things, I have found — through expreience — that the one about cult/major religion/ideology is most often overlooked. People think that it could never happen to them, just like they think advertising does not work!
    But I have found that most people are often unknowing members of some type of ideology or “cult”.

    A few good examples of this, in order of severity:

    1) People in the mainstream who are blissfully unaware of how the world works, and rely on the media, popular magazines, news channels, etc., to get their information. (and never take to reading books)
    2) Students, academics, professors, and educated people who think their field of study is the only one that matters
    3) Young men in the pickup community
    4) Young men in the so-called manopshere
    5) Young women (and men?) in the YOLO movement

    Final thoughts:

    I want to clarify that this doesn’t have to be a serious problem (and it’s nowhere near as bad as being brainwashed by a cult in a major religion), but it CAN be. And DO NOT underestimate how common this is, EVEN STEVE JOBS fell for it!!

    But he learned his lesson, which I believe to the be important thing in life. For as Epictetus said, you cannot control events, only respond to them. (Although you certainly can try to predict/prevent/avoid them from happening in the first place, as you so brilliantly have illustrated in this essay)

    Lars

    • Very good comment Lars. I’m featuring it.

      Thanks for the kind words.

    • Well Lars, for each his own. I’m severly “brainwashed” by Catholicism. I attribute to this fact 100% of my personal progress. If not my religion, I would happily succumb to mediocrity.

    • Excellent list Lars. To your examples of functional cults, I would add Feminism and “reverse” racism. These are more dangerous than most cults because they discourage individual initiative and are sharply pessimistic. The victims are taught that the rest of the world, or at least those in charge of it, are out to crush them, and that all adversity in life is due to this persecution. Imagine trying to better yourself in a world where you are being thwarted at every turn and there’s nothing you can do about it because your enemy is a giant, sinister, nebulous conspiracy that controls nearly everything. It’s an extreme form of learned helplessness, or (to put it more succinctly) taught helplessness.

    • Thank you Abgrund. It’s nice to hear you like my ideas as I put some time into that comment ;)
      Your comments are (always?) very good too, the ones I have seen over the past weeks, and I definitely agree regarding reverse racism. I don’t know where you’re from, but in most Scandinavian countries this is a major ‘hidden’ problem that isn’t spoken about or covered in the mainstream.

      Michal:
      I see. I am glad to hear that! I meant no offense with what I was saying, but you are an ‘unusual specimen’ based on my own experience.

      • Thank you Lars. I reside in a certain former superpower and emerging police state – not the one in your backyard, but the one across the street. Anti-white racism is slowly losing momentum here, but Feminism, unfortunately, is not.

  5. “If you can’t spot the sucker in the first half an hour at the table, then you are the sucker!”
    ~Matt Damon, Rounders

  6. Heathenwinds says:

    I don’t really have much to contribute about this post. It’s a good one and it had me thinking about things in novel (for me) ways. I like that.

    I finished reading Information Overload. I’m able to address problems that I couldn’t quite put into words before, and waste a whole lot less time doing it. Most likely the smartest single time investment I’ve made recently.

  7. “…be sure you are playing your own game. Know your policies very well and play according to them all the time.” “. . . Don’t participate in competitions where you’re not the one making the rules.”

    I am really appreciate these two quotes in context of this article. They help me to see that one of the key ways to win the loser’s game is to create your own game within the larger game. Rather than trying to be the best at the whole game, you choose one area of the game that you ARE great at and only play by those rules/system.

    This can also help minimize distraction and increase focus, since you’re only dealing with investments that fall within very specific perameters.

    I don’t know if you’ve seen the movie “the princess bride”, but there’s a great example in there of what I’m trying to say. One character thinks he is the most intelligent man alive, and has laid out a grand plan to start a war. By rights he should have no problem carrying out his plan as he has henchmen with great abilities, etc.. The main protagonist catches up to the intelligent guy and proposes a battle of wits, or a game within the game, and ends up winning because he set the rules.

    A great post from which I have a lot to learn. I also loved the reminder to stay humble. Thank you!

    • That’s a great example of a game within a game.

      I think it can also be understood as a kind of distraction. By presenting someone with a certain set of options, you draw their attention away from other options they might have considered. High pressure salesmen sometimes do this very crudely by asking their mark /which/ product they will buy (not /whether/ the mark will buy).

      The ultimate game within a game is perhaps the American democracy (so-called). It is surrounded with a tremendous (and expensive) amount of pageantry, even taught as a religion in the schools, and it is a game with only two players. The attention of the people is focused on the largely inconsequential struggle between Demlicans and Repocrats – two luchadors working for the same manager – and very few even have a concept that alternatives could be imagined. From the manager’s point of view, the game within the game must never be really won, but from the luchador’s point of view it is a serious battle, deciding which of them, from year to year, is to prey on the public and which has to wait at ringside, posturing and shouting threats.

      • Yes, great point. You get the other person into your playing field without them noticing.

        Haha, I would say that’s quite an accurate description of American politics, sadly. “Lu chadors”…I love it.

    • “This can also help minimize distraction and increase focus, since you’re only dealing with investments that fall within very specific perameters. ”

      –Certainly. Gotta have a filtering process.

      Would you recommend me watching the Princess Bride some time?

  8. In favor of the “winner’s game”: Winners take informed risks; they know the odds and the consequences and can make good bets. More, they know how to maximize their chance of success and what to do if things go wrong, to minimize their loss. But how do they learn these things, and earn the confidence to play the winner’s game? Partly by putting extra effort into research, study, practice – but also by making mistakes, by taking /uninformed/ chances and sometimes catching a haymaker to the snout. You can’t get there only by playing the “loser’s” game, i.e. by steering clear of real danger.

    So when should you play the winner’s game? I think there are three conditions that must be met, or you are probably doomed:

    1. It has to be a real commitment to something truly important to you. Otherwise, you will quit when you get burned. I’ve known several people who dabbled in stocks until they got skinned. They weren’t really committed to playing the market, it wasn’t “in their blood” – they just saw what they thought was an easy way to make money, and there are other ways to make money.

    2. You should already have built a solid foundation of experience by playing the “loser’s game” as far as you can take it. The worst thing you can do is to play the “winner’s game” as a novice – but that’s what most people do. Don’t try to show off your diving skills until you’ve learned how to swim, and don’t hire an agent until you’ve already sold a few books.

    3. You have to have the innate potential to *be* a master. Even if you devote your life to something, you will lose the “winner’s game” unless your natural ability is well above average (or you have found a niche with very little competition). There is scant demand for someone who is neither a virtuoso nor a solid, steady performer, and the world is littered with the sad remains of failed entrepreneurs who could have been good managers.

    “About 90 % of the people asked believed they were better than average drivers.” I’ve read of a similar study done in the U.S., with about the same proportion considering themselves above average drivers. However, when it came to math, a large majority of Americans thought themselves /below/ average. The writer reporting the study considered that this was because American culture places a high value on common practical skills like driving and very little value on “academic” type skills.

    My take on avoiding major mistakes:

    Marrying the wrong partner:

    –Don’t get married. There is zero benefit to a man in marriage.

    Getting into business with a loser:

    –Be especially wary of friends and relatives, as your judgment will be skewed. It will also make a very difficult situation if they turn out to be incompetent or dishonest.

    Getting addicted to (heavy) drugs

    –You won’t even have the opportunity to get involved if you are busy doing positive things in your life instead of hanging out with mangy idlers.

    Getting into debt

    –Occasionally it may be a good idea to borrow for a car, home, or business. In this case, you should have a concrete plan for paying off the debt so that your /equity/ is always /positive/ (i.e. the loan and property together /increase/ your net worth). If you can’t *readily* pay the debt off fast enough to meet this standard, don’t take the loan. Note this rules out borrowing for almost all consumer goods, as their resale value drops with extreme rapidity. Also it pretty much rules out borrowing at the exorbitant rates charged for credit cards. Be careful not to get caught in a situation (like a “balloon” mortgage, or a revolving line of credit) where a higher interest rate can be arbitrarily forced on you.

    Education is a special case that may be worth getting into negative equity for. Another common way to get into crushing debt (in America) is medical bills, which you may have no control over.

    Associating with criminals and stupid people

    –I’d call this more of a cause of mistakes than a mistake, i.e. don’t associate with thugs and you’re unlikely to be addicted, imprisoned, robbed, etc.

    Other things to avoid in life:

    Frequent job changes, especially getting fired.
    Any felony conviction.
    Dependence on legal chemicals like alcohol or caffeine.
    Getting VD (as we euphemized it back in the day).
    Student loans not accompanied by a commensurately valuable degree.

    I like your system of asking “why” five times to trace the causation of a problem to a treatable root. I wouldn’t stick to any specific number of steps though, I would just say “follow the chain until I find a cause that I can and will stop.” Five steps is probably enough in most cases. Unfortunately most people don’t seem to ask “why” more than once (if that!), even though it rarely solves anything (I’m sometimes guilty of this myself). I don’t remember if this was in your 75 (or so) tips, but it should be #1.

    On typos: when a letter/report/whatever truly needs to be flawless, it needs to be proofread. The problem is that when you’ve just written something, you already know what you meant to say and your brain will tend to fill it in for you as you read, so you don’t notice errors. I know two ways of dealing with this. One is to have someone else proof it; the other is to wait (as long as practical) before proofreading. These methods can reveal not just typos but much more serious flaws such as omission of key information or an ambiguous sentence. Double-checking math is easier: I do the problem two different ways, so the same error can’t appear in both calculations. A simple example is adding a series of numbers; I add them first to last and again from last to first.

    “Figure out some worst-case scenarios in different areas of your life and make damn sure those things never happen.”

    I believe in an earlier article you suggested the best way to do this was to try to think of /how/ such major disasters might come about. Here again it’s helpful to have someone else help, because we tend to be optimistic about our projects and blind to our weaknesses. It’s therefore very important not to reject naysayers (unless they are incontrovertibly stupid), no matter how annoying. One of them might keep you from being that guy who built too low of a seawall around the Fukushima power station.

    • Hey Abgrund!

      Great comment as per usual.

      “You can’t get there only by playing the “loser’s” game”

      –That’s usually true. But you can’t play it in more than a few areas. Most people should perhaps not play it at all. Ever.

      “Unfortunately most people don’t seem to ask “why” more than once (if that!), even though it rarely solves anything (I’m sometimes guilty of this myself). I don’t remember if this was in your 75 (or so) tips, but it should be #1.”

      –Yes. It’s sad.

      No it’s not in there. I may do a revised version called 100-150 practical tips some time in the future. And focus more on long-term ideas.

      “Here again it’s helpful to have someone else help, because we tend to be optimistic about our projects and blind to our weaknesses. ”

      –Absolutely.

  9. Ludvig:
    1. Amazing image at the beginning.
    2. I should assume I’m a sucker. Every time. That’s a safe bet.
    3. “If you risk something that is important to you, for something that is UNIMPORTANT to you, then you are a fool.” – one day you will be famous for this quote.
    4. Very interesting stories, esp. the one about LTCM.

  10. God, Ludvig, you write some incredibly powerful, life changing stuff. I usually have to take a break in your posts to digest, reflect, and so forth on the first half before I can finish them, but damn it is always worth it to pop over here and read.

    ” Don’t participate in competitions where you’re not the one making the rules.”

    This should be everyone’s golden rule for life.

  11. sidingilizwe ndiweni says:

    I read the Bard Notes and spotted two typos and l thought to myself ” this is so unlike Ludvig!” l wanted to comment about it but then thought against it! I’m glad you spoke about the issue.
    Great article once again.

  12. Ludvig I like this one :)
    Also Lars that’s a terrific comment you posted.

  13. A powerful, yet somewhat ambiguous, post Ludvig!

    I think you have to be careful when giving people advice about winning strategy etc. It’s my own experience that you have to “play” the game in order to even have a chance of winning. The difference between the winners & losers is that the winners will stick at it until they *are* really good. If this means taking lessons, seeking out inspirational people, and maintaining a rigorous schedule of practice, they do it.

    What happens, over time, is those players who want to “win” will gain the edge which others never get. You alluded to this in the “winners’ game” above – the winners will embark on their “quest”, and eventually carve out certain “niches” which they will then use as their “special shot”. This is the same in whatever “game” you play – “pickup”, software development, video games, public speaking, makeup, marketing, etc (hence the wide appeal of your blog).

    I believe the notion that you “shouldn’t make mistakes” is incorrect, as mistakes give you such a strong platform to move forward from. When you have problems, you feel like a failure for about 5 minutes, but if you’re determined enough, you’ll wake up the next day with new ideas built on top of the issues you just overcame.

    In all, it depends on who you want to be. If you prefer to be risk averse, then you’ll be better playing the “loser’s game” (which will bring consistent, not spectacular, results). Over time, the results of this will be truly incredible (I believe Warren Buffet is a great example of this). If you love the thrill of the challenge, you’ll be better to embark on the “winner’s game”, as people like Alexander and Caesar did.

    Remember, you only live once, and whatever you invest comes back. You’re never going to be a “winner” by playing the “loser’s game” – it just doesn’t happen. The reason we remember the Caesars, Alexanders and Hannibals of history is because they adopted the “winner’s mindset”, which is to get it done no matter what. (“Aut inveniam viam aut faciam”).

    Although I am an advocate for neither strategy, I feel the “way” in which someone conducts themselves is a direct determinant of how they’ll progress. I believe that if you’re a “sucker”, it simply means you’re not invested enough in what you’re doing. The more you invest, the more you get back. If you sit there with your thumb in your mouth, you’re going to be the patsy.

    As always, an incredible post & I eagerly look forward to part III :)

    Rich

    • Richard you pack a lot of wisdom.

      “I believe the notion that you “shouldn’t make mistakes” is incorrect, as mistakes give you such a strong platform to move forward from”

      –Sure. But it’s about not making UNNECESSARY mistakes. And to maximize learning when you DO make mistakes, create a problem-solving process, to avoid them from happening again.

      “. The reason we remember the Caesars, Alexanders and Hannibals of history is because they adopted the “winner’s mindset”,

      –Yes.

      Look forward to hearing what you say next time!

      • Spasibo Ludvig!

        I suppose you’re explaining the petty mistakes people make, solutions to which should be assimilated & fed back into their “way” of doing things :)

    • Richard, I think you are confusing the “winner’s game” and “loser’s game”
      /strategies/ with the /outcomes/ of “winning” and “losing”. It is possible to
      win at the loser’s game and to lose at the winner’s game. It’s true that you
      can’t be Julius Caesar if you plan conservatively, but let’s be realistic:
      most people don’t have any shot at being Julius Caeser. Hard work and
      persistence do NOT guarantee success, or even a chance of success, at the
      “winner’s game”. Nor do many people aspire to build literal empires; I think
      most would be more than satisfied with Warren Buffet’s career.

      And I don’t think the mistakes that Ludvig suggests avoiding are the kind that
      make you “feel like a failure for about 5 minutes”, but the kind that can result in
      dire consequences like bankruptcy, marriage, or death. “Whatever you invest comes back” is simply not true. Sometimes it doesn’t come back; that is what “risk” means.

      • Cripes look at that mess. I need a better text editor.

      • Points taken sir!

        You’re right that most won’t be a Caesar; what I was trying to highlight was that if you want to “go for glory” (however successful that will turn out), you’ll *never* do it by playing it safe. That doesn’t mean to say incessant risk-taking will lead to a “gloried” legacy, but it will certainly improve your odds, however slim they may be ^_^


        RE outcomes vs process – you’re right. However, I was trying to highlight the “superstar” effect, which in my opinion, is invariably linked to the way in which someone conducts themselves (“winner” vs “loser”). I’m not sure of this myself yet, but still will be good to debate!

        It’s often the case that a lot of the people you “remember” (the “superstars”) are not that different than their contemporaries (ability-wise); but they have that “magic” formula which somehow makes people googly-eyed for them. Steve Jobs, again, is an example of this. Why is it that he is so revered? What about Napoleon? Michelangelo?

        Caesar, about whom I’ve just been reading, had a very able lieutenant, Labienus. He was a soldier of great stature, but was completely outshone by Caesar. Indeed, if he had lived a generation prior or after, it’s arguable that he’d have a LOT more recognition than he did. Why did Caesar outshine his subordinate? The answer, to me, is that Caesar represented MORE than just being a commander. He wanted to make the Republic much stronger, and his command was simply a way to achieve this. Indeed, if you mention “Caesar” to someone, you think of unnerving will & clement power, not a balding, slightly high-pitched, middle-aged man who spent 9 years living in a tent in rainy Gaul.

        You could argue similarly with Jobs (he wanted to help people be better human beings…. …. …. maybe). Alexander wanted to see the “outer ocean”; Hitler wanted to create a “new world order” with Germany at its heart, etc.

        This is why a lot of people say that “love” for something is the answer to success. Although the standard “democratic” response to success, it holds *some* truth, as only with the unwavering love for something can you ever surmount the obstacles presented to stop you achieving it. Simon Sinek touches on this when he alludes to “start with why”.

        A good recent example of this is Salesforce. These are going from strength-to-strength (will likely plateau in a few years), but are unquestionably the leader in their field. Microsoft Dynamics, Hubspot (who just IPOd) & other “CRM” systems are all vying for the same eyeballs, but yet Salesforce is by far the leader. Why? What makes it so that their “DreamForce” conference attracts 140,000 attendees?

        The answer is they stand for more than just making a CRM product. They stand for helping companies become “customer companies” – ultimately helping their community become more successful (as highlighted by the recent mantra of the “customer success platform” – http://blogs.salesforce.com/company/2014/10/marc-benioff-analytics-cloud.html). Might be bullshit hype, BUT the way in which Salesforce achieve this is legendary.

        People who buy Salesforce want to grow the bottom-line. They don’t care “how” it’s done, as long as it’s the most amazing & inspired product. This is why Salesforce is so attractive, especially to more established brands – they are there to help those companies to be successful. Anything they can do to achieve that, are the lengths they’re prepared to go to.

        Thirdly, I do believe that you get back what you invest, BUT (something I should have stipulated), it won’t be direct. Most would interpret what I wrote with “the more money you invest, the more you’ll get back”.

        That isn’t the case – what I meant was that if you want to “invest” into a company or individual, the more of your “resources” (time, friends, energy, recommendations, etc), you invest will increase the amount of return over time. Again, this is not directly with money; in fact, 90% will not be financial; but this is where the “superstars” begin to shine.

        All the best people realize that the 90% people don’t see has a direct influence on the 10% you do (monetary returns). This is why people like Jobs, Caesar etc shine so brightly — they invested (some knowingly, many unknowingly) into the stuff which mattered in the long run, foregoing many of their own luxuries in order to pay for them. This culmination of broad investment eventually (takes years) shows in the 10% of results you begin to see, thus making people see you in a particular light.

        That’s what I was trying to explain — if you just want to “earn some money”, you’ll do that if you play the non-risky game. However, if you want to be a “winner” (one who’s remembered / renowned), you’ll have to be prepared to invest into the things which don’t count directly.

        It’s actually the difference between celebrity and fame.

        Finally RE the mistakes – yes it depends on how you see them. Some people can take many hits and keep coming back (apart from death).

        The strong ones always thrive no matter what – it’s telling how someone like Elon Musk or Richard Branson are prepared to risk everything, and come out the other side much stronger; whilst others shit themselves when the stock price dips.

      • Sure, you can’t be a Caesar without taking aggressive chances. The point is that nearly all the people who do make the attempt still fail, no matter how persistent they are. There are a thousand George McClellans for every George Washington.

        Most “superstars”, so-called, owe their fame mostly or wholly to luck, not to any “magic formula”. You’ve heard of Charles Lindbergh perhaps? How about Charles Nungesser? Napoleon and Michelangelo, though, had some truly exceptional ability and have been remembered better for longer. After a few centuries, or millenia, most of the Biebers are mercifully forgotten, but a few soar to wholly unwarranted mythological heights, like Robin Hood – a petty felon so obscure that no one can be sure he really lived.

        In general, if you invest more (time, money, energy) you will get more back (in money, connections, experience, whatever). But there’s no guarantee, especially if you play a high stakes winner’s game: what did Bakunin earn for his sacrifices, or Spartacus? Was Huss not strong enough to thrive?

        It is certainly true that a great many investments do not yield any kind of commensurate return, even if they are not wholly wasted or counterproductive. Maybe we can discuss it over a New Coke sometime.

  14. Word – everything in life is about investment mindset, gotta think like an investor even when theres no $ involved.

  15. Hey I found your site last week and have read nearly all your articles since! I have yet to read 75 Practical Tips but I hope and expect it to be equally helpful. I have begun doing IF, Commonplacing, and more. I have emailed you my system for commonplacing and hope you will find it helpful or possibly give me feedback on how it can be improven!

    I look forward to learning more frön you and other like-minded people.

  16. The First Step is to get our of scarcity think, and into abundance
    The Second Step is to stick to a single idea in an world filled with opportunity.

    Another great article, Sir.
    I havn’t had the time to read up on your recents posts, but i sure hope they are as good as this one!

  17. What is art?

  18. A sucker is someone who’s easily deceived, right? Someone who lacks some basic understanding of how things work.

    If so;
    Another practical way to avoid being the sucker is to “Become a jack-of-all-trades in the basics of life” meaning you should know a little bit about everything, so you don’t delegate all your responsibility to others.

    A bit of construction, plumbing, finances, health, … (any area you can be easily fooled in) Got this from Tai Lopez the other day,

    When do you know you can start playing the winners game? I presume there’s a transition phase?

    Great article, as usual.

    Take care Ludvig,

  19. ‘Because the more incompetent someone is, the less likely they are to realize how incompetent they are.’

    This made me laugh hard. The comparison with the self-regard tendency across time is interesting, I’m guessing the degree to which people fall prey to this bias is shaped by culture too.

  20. Amazing contributions in your comments. The variety in discussion is very refreshing.

    I enjoy reading the comments just as much as the article.

    Naomi

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