RESEARCH
  • Behaviour

Truth, Trust and Ignorance Removal – The Wisdom of Elders



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Research recently conducted by Maastricht School of Management showed that, contrary to popular belief, retired people had some greater mental agility than their still-working peers. The research explored four different cognitive abilities: immediate and delayed recall, cognitive flexibility and processing speed. While processing speeds were slower amongst retirees than their working peers, the cognitive flexibility was greater amongst the retirees.

Cognitive flexibility is the ability to switch between thinking about two different concepts or multiple concepts simultaneously. In terms of dealing with modern-day complexity it is a powerful asset.

This research was much in the mind of IEDP recently when it attended the annual ‘Woodstock for Capitalists’ - the Berkshire Hathaway AGM in Omaha, Nebraska at the beginning of the month. It is a unique occasion on several counts. Few public companies manage to get upward of a thousand people to their AGMs, none can match the 38,000 that started lining up at the CenturyLink Center in Omaha, Nebraska from 5am on the Saturday morning.

They are there to have a chance to share some space with the business's 83 year old Chairman and his less well-known but equally remarkable 90-year old, Vice-Chairman, and hear, first-hand their down-to-earth wisdom on investment, business and management, as well as their clear-sighted views on life in general.

Warren Buffett, the Chairman, is the undisputed king of value investing, and in the process the third richest man on the planet; to some though his Vice-Chairman, Charlie Munger, is the more remarkable of the two. Both Munger and Buffett are clearly into normal retirement age, and although slightly frail in climbing the steps onto the stage at 9.30 in the morning, they showed no sign of cognitive decline, either in flexibility or processing speed. They both were acutely focused and engaged for the six hour Q&A session, jumping from topic to topic and recalling detailed data with extraordinary precision from across the spectrum of their investments.

For IEDP however – the fact that these two elderly gents were still mentally agile and energy-filled was only part of the revelation. For it became apparent that the key elements of Buffett and Mungers’ investment approach is actually very similar to the key elements of what is now being highlighted as great management and leadership practice.

The very things that are often seen as managerial weakness in many businesses are core parts of the Berkshire Hathaway approach. Primary amongst these are those two much touted, but rarely actioned, words: truth and trust.

What Buffett and Munger are seemingly extremely good at is seeing the truth in situations, where so many others manage to convince themselves of possible outcomes that ‘in truth’ are never likely to occur. Sir Terry Leahy, who built Tesco into the giant business it is today, spent much of his time ‘walking the floor’ of his supermarkets chatting to the employees on the frontline, so that he could get the simple truths of how the business was working without having it filtered through the spin of several layers of management. Buffett and Munger do not do that, but their unending curiosity about business and businesses – reading, reading and reading more – allows them to build pictures of the sectors they operate in where they can apply their lens of truth effectively.

From having this confidence of the truth of situations, they can then give the management of the companies they invest in – and own outright – considerably more leeway to operate without management interference. They invest enormous sums in the businesses, but perhaps they invest even more trust in them. Referring to Forest River, a motor-home manufacturer, Berkshire Hathaway bought in 2005 that turns over in excess of $4 billion per year, Buffett said “I’ve never been to the company, it’s based in Elkhart, Indiana…. At least, I hope it is!”. Buffett bought the company after a day’s notice of its existence, and on a handshake with the founder Peter Liegl. After exchanging phone numbers, Buffett famously told Liegl to give him a call if he needed anything “otherwise I’ll be in touch with you in a year or so”. Today Buffett has the same view, saying “He just knows what’s going on in the place. I couldn’t run an RV company – he can”.

Behind this folksy approach though, Buffett’s cognitive flexibility had no doubt computed that the business was in a good growth sector and the fundamentals were sound – as well as an instant decision that Pete Liegl was someone he could trust. Those were the ‘truths’ behind his decision – and with them in place the trust just followed.

Munger noted that “by the standards of the rest of the world we ‘overtrust’ – but I think a lot of places work better where there is a culture of trust.” Buffett reflected on their ‘lack of supervision’ of companies. “We think giving managers this degree of freedom allows them to accomplish a lot more – our lack of supervision does mean we miss some things…. but on balance it is a benefit.”

The truth and trust elements are very much in the ‘human’ approach that Munger has long advocated. Buffett admitted at the meeting that he was originally obsessed by the quantitative metrics of investing until Munger enlightened him to the qualitative elements around the people too – and while not ignoring the quantitative (which anyone can ‘crunch’, and is fundamental to the truth of a situation) it is in the qualitative judgements that the Buffett magic probably lies.

The third element that plays directly from their investment approach to a leadership one is the postioning of Berkshire Hathaway and their subsidiary companies as ‘learning organizations’. This is a construct that Peter Drucker advocated back in the 1960’s and Senge in the early 1990’s – and one that Buffett has engaged with (whether by accident or design is not clear) throughout. It is embodied by endless curiosity and the continual desire to experiment – and learn from those activities. Munger summed it up as ‘ignorance removal’ – “the purchase of See’s (a boxed chocolate business) … If it weren’t for fact that we weren’t so good at removing ignorance, we’d be nothing today. We were pretty damn stupid when we bought.

See’s - just a little less stupid enough to buy it. The best thing about Berkshire is that we have removed a lot of ignorance. The nice thing is we still have a lot more ignorance left..”

The wisdom of the crowds is often discussed today – but we should not overlook the wisdom of the elders either – particularly those who still have formidable cognitive flexibility and processing power. Truth, trust and ignorance removal – not a bad triptych for anyone to recall.

Read the research paper: ‘Retirement and Cognitive Development: Are the Retired Really Inactive?’, Andries de Grip, Arnaud Dupuy, Jelle Jolles and Martin van Boxtel, Maastricht School of Management (MsM), May 25, 2012 

 




 
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