Oh, I just love this story told by Charlie Munger at 2002 shareholders meeting of Wesco:
“[Our investment in] USG obviously hasn’t worked out very well. It wasn’t just asbestos — the market for wallboard went to hell. We missed that too. What can I say? It reminds me of a story about a man who had a wife and three kids. He conceived an illegitimate child with a woman he’d just met. When asked why he did it, he said, ‘It seemed like a good idea at the time.'”
Hilarious, isn’t it? But it explains so well how we think before making dumb decisions.
Like the explanation I give to my students in my class on why couples have unwanted pregnancies. I mean, what the hell were they thinking? Why didn’t they use protection?
The answer is that when people are in a “hot state,” they think differently. And they get into situations which clearly look like a dumb idea to anyone in a “cold state.”
Now, this is a very important point. What is obviously a very dumb idea to anyone in a “cold state” doesn’t look like a dumb idea at all to someone in a “hot state.”
People in a “hot state” never think of risks. They only think of the returns. Later, when they are facing the consequences of their prior dumb behavior, their explanation is usually along the lines that Munger gave: It seemed like a good idea at the time.
And there are all sorts of “hot states” in the world of business and investing. The second highest bidder in an auction which is about to end is in a hot state. The investor/speculator who just made a killing in the market is in a hot state.
Hot states make people do very dumb things. And just a recognition of that fact is worth something, isn’t it?
I think it’s a great idea to use the Munger joke on yourself because it makes you laugh at your own dumbness. At least it works for me. I laugh at some of my past dumb decisions. I first ask myself: What the hell was I thinking before doing so-and-so. And then I say to myself: “It seemed like a good idea at the time.”
And that makes me laugh. But hopefully, post that laugh, I also learn some important lessons for the future about how not to make the same type of mistake again.
I think a lot of people out there take life too seriously. They never laugh at their own dumb behavior. That’s a shame. Laughter reduces stress caused by mistakes without taking away the lessons that mistakes teach us.
Every year I go to Flame University in Pune to conduct a workshop on Behavioral Finance. In the last workshop in July 2017, I spent three awesome days @ Flame engaging with participants who had come from all over India. Some came from overseas. My friend Saurabh Madaan came all the way from San Francisco to attend. He also took one of the sessions.
One of the participants, whom I have known for a while, sent me a copy of the notes he took during the workshop. I found them to be astonishingly beautiful. And so I asked him if I could publish them. Graciously, he accepted on the condition that his identity should be kept confidential. You can find some of notes here. I am not publishing all of them because some of the notes pertain to businesses…
The only other person I know who can write and draw like this is Vishal Khandelwal. Take at look at a few examples of his excellent drawing skills:
This type of visual thinking and note taking ability is, in my view, a very powerful way to learn. Indeed, recently I talked about the subject of visual thinking at the OctoberQuest conference. Will publish a transcript soon.