Last year, I stumbled on an insight that permanently changed my trajectory as an investor.
The best investors think across disciplines. They’re philosophers, psychologists, biologists, historians.
They’re people who stay endlessly curious about how the world works.
Charlie Munger - one of the most admired investors of our time - was an advocate of this approach to investing. While scrolling through Farnam Street blog, I came across an article titled:
“Charlie Munger: Book Recommendations That Will Make You Smarter.”
These recommendations were not books on valuation models or portfolio theory. They were recommendations on psychology, history, biology, physics, and entrepreneurship. Here’s Munger telling me that if I wanted to be a better investor I must read Darwin instead of McKinsey? That sparked up some curiosity within me. So I began digging.
One name that kept resurfacing among disciplines was Richard Feynman.
He was a Nobel Prize-winning physicist known for his ability to boil down the complexity of physics into simple ideas for us mere mortals to grasp.
I soon realised that his way of thinking was magnificent; clear, curious, honest, and deeply skeptical of easy answers.
In other words, he embodied the mind that the best investors cultivate. He was a brilliant man. To not study him is to lose out on becoming a better investor.
If you are someone who does not typically venture beyond the four walls of business and finance, I encourage you to open your mind today, to explore what lies beyond those walls.
What you will find might just leave you looking at the world in a whole new way. I hope it does, because it had that effect on me.
You don’t just come away smarter from studying Feynman, you come away inspired.
Feynman’s ideas can revolutionise your investment philosophy.
Let’s dive into them.
On Embracing Uncertainty
Feynman was unapologetic about what he didn’t know.
He openly admitted his blind spots, he embraced uncertainty.
He believed life was all the more interesting to live not knowing, instead of living with incorrect answers.
Watch this wonderful clip where he explains his embrace of uncertainty.
Investors crave certainty like a drug.
We need constant price targets, forecasts, and news; if we create some certainty out of thin air for ourselves we can then believe our decisions are built on rock solid foundations.
Certainty in investing is a fools game, investing is a game of probabilities.
Howard Marks believes that an investsment decision should be concluded after analysing a range of possibilities. The investor that deals in certainties will not be an investor for long.
Nothing is ever certain, especially in complex adaptive systems such as financial markets.
This is why investing is hard, Feynman admitted this himself:
“Imagine how much harder physics would be if electrons had feelings.”
- Richard Feynman
Embracing uncertainty isn’t admitting defeat to the almighty being we know as Mr. Market.
You don’t have to go and buy an index fund under the somber realisation that we know nothing, in fact it is rather the opposite.
After embracing uncertainty your investment behaviour will take a drastic turn for the good.
Consider these improvements:
Portfolio Allocation: Probabilistic thinking helps you size your positions not based on how much you like a stock, but based on the expected value of the investment. Joel Greenblatt always says that his biggest positions were not those that he might make the most money on - but those where the probability of losing money was lowest. That is the beauty of probabilistic thinking.
Stock Selection: No investment is ever a guarantee. A company may look strong, but the future is unknowable. Thinking in probabilities, you avoid narratives that blind you to risks, you avoid story stocks and stick to the facts.
Risk Management: Most investment errors are not from getting a thesis slightly wrong, they come from failing to account for what could go disastrously wrong. Probabilistic thinkers focus on tail risks and protect their downside.
Embracing uncertainty is brave, and it opens your eyes to the risks you ignore.
The Joys of Intellectual Curiosity
A common trait among successful investors is insatiable curiosity.
They are deeply interested in the world around them, they learn about sociology, biology, psychology, physics; they learn everything about everything.
This is a clip from a lecture given by Li Lu - founder of Himalaya Capital and the only man Charlie Munger entrusted with his own money - where he discusses the importance of curiosity in investing.
If you love the process of understanding how things work, you will have an excellent intellectual foundation to build in becoming a successful investor.
The video below is a clip of Feynman discussing curiosity. It is longer, but it’s a must watch. It left me feeling inspired, and curious. I hope you enjoy it.
Curiosity is like an invitation of serendipity; looking at that extra stock, reading the extra page, looking at the extra article - with each curious act you invite a chance that something positive might fall onto your lap.
Some of the best stock opportunities I have found were in deep, deep rabbit holes - just following my nose, satisfying my curiosity.
It’s importance cannot be overstated, and Feynman preached this religiously. Curiosity is wonderful, it’s exciting. There is a stock out there right now - waiting to be found - ready to give you mouth watering returns.
Curiosity will carve the path that leads you to that stock.
Always Challenge Assumptions
Feynman was someone who loved to challenge accepted assumptions.
There are plenty of ways of getting from A to B.
Assumptions squash our ideas, trapping us into thinking there is only one way of getting from A to B.
You must buy companies with high ROIC to succeed, you must invest in high quality compounders if you want to win.
These are assumptions, and they narrow our thinking.
In this clip, Feynman explains the importance of challenging assumptions - where understanding is the higher goal, not some arbitrary mathematical process required to reach an answer.
Think about valuation models.
People have their gorgeous, meticulously crafted excel spreadsheets where you simply need to plug a few details and out pops a per share value. Time to go beat the market, right? If only the valuation assumptions were so simple.
Buffett didn’t use Excel. He understood businesses, read voraciously, thought in probabilities and used mental models. That’s not a spreadsheet skill. That’s a thinking skill.
Ask yourself:
What assumptions underlie this model?
What would need to happen for this to be wrong?
What if the best opportunities lie in businesses that defy these frameworks altogether?
Whilst listening to an interview with value investor Bill Nygren - I noticed he stated a new opportunity is arising for value investors.
He says they should hunt for situations where the P/E ratio is extremely bad at displaying underlying value.
That is an assumption challenged: low P/E = Value Stock
Some stocks may be great value at 100X P/E because the earnings are not the primary source of value in the investment, it may be an intangible asset for example.
To understand the value of a business you have to understand the business, metrics don’t cut it. Feynman was a strong believer in challenging assumptions - and so are the most successful investors. Without challenged assumptions, Warren Buffett would have been an index investor believing in efficient markets.
Thinking In First Principles
First principle thinking is the process of boiling down scenarios into their fundamental, underlying truths.
It forces you to question anything taken on face value.
Feynman once said that “The first principle is that you must not fool yourself and you are the easiest person to fool.”
This reminds me of the Ben Graham line: “The investor's chief problem - and even his worst enemy - is likely to be himself.”
First principle thinking acts as a mental barricade - protecting you from your own foolishness.
Elon Musk is an advocate of this mental model, here he explains it and its benefits much better than I could:
Instead of relying on common assumptions, you think for yourself and find out what is true.
For example:
You stop thinking “tech stocks are overvalued” and start asking, what is the business actually worth based on its fundamentals?
You don’t anchor to price action. You build your view from scratch. You may average up on a position because the fundamentals have improved more than the price has increased. You don’t let arbitrary factors affect your decision-making.
When markets panic, you hold stronger because your thesis isn’t borrowed, it’s built from the ground up. It is easier to hold on when you truly know what you own, when you understand what is fundamentally true about the business.
In thinking this way, you begin to cut away the noise, it clears your mind and affords you the mental capacity to focus on what is important.
The Technique To Learn Anything
Feynman had a method for mastering complex ideas.
It’s not flashy, but it works.
It is a five-step process to learn any idea in the world.
Step 1: Choose a concept you want to learn.
Step 2: Explain it in simple language as if teaching a 12-year-old.
Step 3: Identify the gaps in your understanding.
Step 4: Revisit the material. Refine your explanation.
Step 5: Repeat until you achieve true clarity.
Here is the process visualised:
It sounds simple, but try explaining how to perform a discounted cash flow valuation without using buzzwords. Try writing out your investment thesis in plain English on one side of A4 paper. You'll quickly see where you're guessing.
Feynman believed that if you can’t explain it simply, you don’t really understand it. Investors should take this seriously. When your reasoning is vague, your decisions are fragile.
When it’s clear, you gain real conviction; I have noticed it msyelf, the stocks I fully understand are the ones I could write a thesis on in a single paragraph.
It is hard to appreciate the technique’s effectiveness until you try it yourself.
The Feynman Technique is one of the key motivators for me starting this substack.
By writing up my ideas and clicking send I am forced to review the gaps in my knowledge. I am most likely the person benefiting most from these weekly letters - I am forced to fully grasp what I discuss before I talk about it with you. If you are considering writing, I would recommend it for this reason alone.
If you want to understand a business, go and learn about it and try to explain it to someone - you will very quickly realise the things you don’t know about that business.
Feynman never set out to be an investing hero, but in many ways he became one, at least for those of us who enjoy the intellectual stimulation that investing brings. He taught us that the path to understanding doesn’t come from memorising formulas, it comes from questioning, simplifying, and being curious.
The best know what they know, and more importantly, what they don’t. Like me, if you aspire to be the kind of investor that thinks like Munger, Li Lu, and Buffett, you could do far worse than to start with Feynman.
I’ll leave you with one of my favourite Feynman quotes.
“Fall in love with some activity, and do it! Nobody ever figures out what life is all about, and it doesn't matter. Explore the world. Nearly everything is really interesting if you go into it deeply enough. Work as hard and as much as you want to on the things you like to do the best. Don't think about what you want to be, but what you want to do. Keep up some kind of a minimum with other things so that society doesn't stop you from doing anything at all.”
- Richard P. Feynman
Thank you so much for reading
Sincerely,
The Intellectual Edge
Additional Resources on Feynman
Farnam Street Blog:
https://fs.blog/richard-feynman-on-why-questions/
https://fs.blog/tag/richard-feynman/
https://fs.blog/mental-tools-richard-feynman/
https://fs.blog/richard-feynman-curiosity/
https://fs.blog/richard-feynman-what-problems-to-solve/
Safal Niveshak:
https://www.safalniveshak.com/read-richard-feynman-before-you-buy-banking-stock/
William Digby:
https://williamdigby.com/memos/the-investors-mind-here-be-monsters
Stansberry Research:
https://stansberryresearch.com/articles/you-dont-have-to-be-a-genius-to-win-at-investing
The Feynman Lectures:
https://www.youtube.com/playlist?list=PLoRB4sng_ZKtb-4JIsHR4FsEAUWcO7TLj
This Peace is something I never read before!
So much information and knowledge in the much simplify manner
Thank You for this 💐
I think this may be my favorite article on Substack. It is beautifully written and it resonates so much with what I try to do everyday as an investor and the reason I started my newsletter. Curiosity is so useful in investing and your knowledge only compounds with time so it is never too late to start! Being able to understand a business deeply enough to write down what it does and your thesis to a large audience only enhances your understanding and ultimately your conviction.