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A Dozen Ways You Can Use Seth Klarman’s “Margin of Safety” Approach When Voting

When you cast a vote you are making an investment. You should vote using a sound process, just as you should use a sound process when investing. Having a sound decision making process means reading a lot and talking to people you trust who have good judgment before making a decision. When it comes to a decision about a particular candidate in an election I would frankly rather read a transcript of a speech than listen to it. But if you like listening to speeches, do that. In general, I prefer an interview to a scripted speech anyway since you get a better sense of whether the candidate has any sense when they are not scripted. Yes, I would rather read a transcript of the interview. Reading any policy papers that are available is also helpful but few people will actually do that. Of course, more than just getting the facts is required. As Charlie Munger has said: “I don’t know anyone who’s wise who doesn’t read a lot. But that’s not enough: You have to have a temperament to grab ideas and do sensible things. Most people don’t grab the right ideas or don’t know what to do with them.” As an aside, if you don’t like reading about Munger’s ideas, this may not be a good blog for you to read.

In writing blog posts about what people like Bill Murray, Rza and Louis CK can teach about investing, I am trying to make a point about sound decision-making principles being universally applicable. Investing is about making good decisions. For example, someone like Charlie Munger does not use a different decision making methodology when voting than he does when he is investing or making a charitable donation. A key point about making decisions of any kind is stated simply by Munger: “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.” This applies both to the way you vote and how you analyze a candidate. The best way to be smart, is to not be stupid.

I have previously written a blog post on Seth Klarman that included some quotes from his excellent book Margin of Safety. Few people reading this post will be willing to pay the $1,000 that a used copy of that book sells for on Amazon. I suggest that you instead borrow a copy of Margin of Safety from a friend or somehow find another way to read it. As an aside, I’m hoping that Klarman allows someone to republish this book soon since the world needs books like this now more than ever. Any sane publisher would do so in a heartbeat. “Hey Seth. The investing world needs you! Please republish the book!”

The quotes from Margin of Safety in the text below are in bold as is usual, but in this post I have substituted the words “voter” for “investor” and “candidate” for “investment” to make my points.

1. “Rather than targeting a desired rate of return, even an eminently reasonable one, [voters] should target risk.”  Klarman is using the term “risk” in the broadest sense. He knows that very few things in life involve just “risk” if you use Richard Zeckhauser’s definitions. Almost everything in life involves decisions that have outcomes which will be determined by “uncertainty and ignorance” rather than “risk” since it is rare that the probability distribution of future outcomes is known. In other words, life is almost never like roulette, where you know the odds and the probability distribution. The way Howard Marks puts it is that there is no definitive future at any given point in time and instead what we all face when looking forward in time can only be represented by probability distributions.


Given the inevitable risk, uncertainty and ignorance that you face in life, one thing you want to avoid is a candidate who will often create “concave” situations (small upside and big downside). Stated differently, what you want to avoid is a candidate who is what Taleb calls a fragilista. Taleb’s fragilistas develop and promote concave propositions that promise low or modest upside gains, but ignore the possibility of catastrophic risks. Does the candidate understand this concept? Do they have a sound decision-making process? Or are they oblivious to actions which exhibit negative outcome asymmetry?  Nassim Taleb elaborates:  When you inject uncertainty and errors into airplane ride (the fragile or concave case) the result is worsened, as errors invariably lead to plane delays and increased costs —not counting a potential plane crash.” Taleb continues by saying that The fragilista “defaults to thinking that what he doesn’t see is not there, or what he does not understand does not exist. At the core, he tends to mistake the unknown for the nonexistent.”

2. “Smart [voters] stick to [candidates who stay] within their circle of competence, within which … they have the capability to understand.” This is the only quote of Klarman’s in bold in this post that wasn’t in Margin of Safety, but it is something Klarman believes in as evidenced by this bolded quote from another source. The book Margin of Safety has a great index but I can’t find the “circle of competence” in the index or text. This is a bit odd, but it is what it is. I would say that in general that Margin of Safety is not a book that digs into investor psychology like Thinking Fast, and Slow or Influence. In any event, the circle of competence idea when applied to an election decision is simple:  Does the candidate know what they do not know? Do they understand what a circle of competence is? Do they stay within that circle?  Do they seek experts when they are outside their circle of competence? Do they avoid getting advice from poseur faux experts who don’t know what they don’t know and stray from their circle of completence?

3. “One of the recurrent themes of this book is that the future is unpredictable.”  “[A nation] must be prepared for any eventuality.” If a country has done its preparation correctly it has this thing called a constitution that prevents an idiot who somehow gets elected to office from ruining a nation and its way of life. Every nation needs a constitution that is structured so well that an idiot could be elected to the highest office in the land and the nations will get through that difficult time, “because sooner or later, one will” to paraphrase Warren Buffett. There is a separation of powers and checks and balances in the US Constitution for very good reasons. The people who wrote the US Constitution were aware that someone might someday end up being president who was unwise or had a lousy temperament. So they wrote it carefully to limit the power of  a single person by making sure political power was distributed. Not only is there a constitution that provides protection in the case of the United States but there is also the extraordinary people of the nation itself as a buffer against idiocy.

4. “An irresolvable contradiction exists: to [vote intelligently], you must predict the future, yet the future is not reliably predictable.” If the candidate for elected office believes they have an IQ that is greater than t actually is that is a red flag on their suitability to perform the duties of an elected official. Munger again:

“A [elected official] with an IQ of 160 and thinks it’s 180 will kill you,” he said. “Going with a [candidate for office] with an IQ of 130 who thinks its 125 could serve you well.” “Smart people aren’t exempt from professional disasters from overconfidence. Often, they just run aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.” “You need to have a passionate interest in why things are happening. That cast of mind, kept over long periods, gradually improves your ability to focus on reality. If you don’t have the cast of mind, you’re destined for failure even if you have a high IQ.”

5. “A margin of safety is [is intended to] allow for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world.” As Charlie Munger has said: “Proper [voting] is like engineering. You need a margin of safety. Thank God we don’t design bridges and airplanes the way we [vote for political candidates].” When choosing who to vote for it is wise to ask yourself questions like: Do the candidate’s previous actions reflect margin of safety principles?  Do they leave a margin for error, bad luck or extreme volatility?  Are they thoughtful in making decisions using a sound process or are they quick to make judgments before they think through an issue? Do they make decisions like an engineer designs a bridge? Does the candidate have a temperament that will allow them to make the right decisions in a crisis? Will they conduct themselves in a way that does not precipitate crisis after crisis?

6. “The river may overflow its banks only once or twice in a century, but you still buy flood insurance.” Black swans are highly unlikely but very impactful events that have causes which are explainable, but only after the fact. We know Black Swans happen. Does the political candidate in the election understand that you must invest to capture the benefits of positive Black Swans and also invest to prepare for unpredictable negative Black Swans? Do they know that you can’t predict when negative Black Swans will arrive but that you can prepare?

7. “Think for yourself.” If you consider yourself a member of a political party and it nominates candidate X, why would you vote for that candidate if you have actually done your own research and drawn you own conclusions?  Why would you not do your own research and draw your own conclusions? Think! The power of thinking for yourself has been a consistent message on this blog.

8.“[Smart voters] pay attention to financial reality in making their decisions.” Does the candidate make promises that are grounded in financial reality? Do they make proposals that are achievable? In making a decision a voter should use an opportunity cost approach as described by Munger: “If you take the best text in economics by Mankinaw, he says intelligent people make decisions based on opportunity costs — in other words, it’s your alternatives that matter. That’s how we make all of our decisions. The rest of the world has gone off on some kick — there’s even a cost of equity capital. A perfectly amazing mental malfunction.  In the real world, you uncover an opportunity, and then you compare other opportunities with that. And you only invest in the most attractive opportunities. That’s your opportunity cost. That’s what you learn in freshman economics.”

9.“Successful [voters] tend to be unemotional, have confidence in their own analysis and  judgment.” Here’s Charlie Munger again on the importance of avoiding mistakes that can be made due to emotional or psychological factors. Increasing rationality and improving as much as you can no matter your age or experience is a moral duty. Too many people graduate from [college] today and think they know how to do everything. It’s a considerable mistake.” Be rational. Decide carefully, but do decide.

10. “A [candidate for office] should be inspected and re-inspected for possible flaws.” Who should I quote now? Yep, Munger: “The best single way to teach ethics is by example: take in people who demonstrate in all their daily conduct a good ethical framework. But if your ethics slip and people are rewarded it cascades downward. Ethics are terribly important, but best taught indirectly by example. If you just learn a few rules [by having ethics taught in school] so they can pass the test, it doesn’t do much. But if you see people you respect behaving in a certain way, especially under stress, [that has a real impact].” “I think we have lost our way when people …fail to realize they have a duty to the rest of us to act as exemplars. You do not want your do not want your [public officials] to be setting the wrong moral example.”

11. “What appears  to be new and improved today may prove to be flawed or even fallacious tomorrow.” Sometimes an electorate is hoping for “a change” from the status quo. This is understandable. But it is wise to make sure that the change is for the better. Sometimes people jump out of what they think is a frying pan and into a fire. Munger again: “Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter opportunities.”

12. “[Voting] is serious business, not entertainment.” When you vote you are making decisions that can have a major impact on something that is precious. Your voting decision should not be decided on the basis of a talk show performance or other events with entertainment value. Do the research. Think.  Select wisely.  And do actually make a selection. Not voting is voting. Protest votes have no place in elections, especially in 2016. Make your vote count.

I will have attempted to be relatively apolitical in this post. I have also tried to make the explanation of a sound decision making process applicable to any election, not just the US Presidential election that will take place soon. Reuters reports that Klarman himself: “is registered as an independent voter and has given money to candidates from both parties in the past.” In the United States presidential election Klarman has said: “I will continue to find ways to support Hillary Clinton and defeat Donald Trump. He is completely unqualified for the highest office in the land.” The views of Klarman are similar to Munger’s statement on the  election: “The last person, almost, I’d want to be president of the United States is Donald Trump.”

My intent in writing these blog posts is to teach people how to make better decisions and making this post partisan interferes too much with that mission in this case. I would rather teach someone to fish than hand them one.  I’ve set out my decision making process many times. It should not be hard to figure out who I will vote for in a given case. What I hope that you do is think for yourself after doing the research, just as you should do in investing. Be rational rather than emotional. Decide based on facts. Be smart by not being stupid, stay in your circle of competence and find candidates who think the same way.

One of my favorite recent stories took place at the recent Rio Olympics: “The U.S. boat was in third place halfway through the race when coxswain Katelin Snyder shouted the magic words: ‘This is the U.S. women’s eight!’ In the bow seat, Emily Regan could feel her end of the boat rise, as if the whole shell were taking flight. ‘It was like I wasn’t even touching the water,’ she said.” For an American citizen it is helpful right now to remind yourself that: “This is the United States of America!” We will get through this year, the next four years, or anything else that is thrown at us. Despite the existence of that buffer, every American who is eligible needs to vote. Get the hell out and vote. Your country needs you.


25iq on Seth Klarman https://25iq.com/2013/07/15/a-dozen-things-ive-learned-from-seth-klarman/

Margin of Safety: https://www.25iqbooks.com/books/109-margin-of-safety-risk-averse-value-investing-strategies-for-the-thoughtful-investor

Klarman on the US presidential election: http://www.politico.com/story/2016/08/seth-klarman-supports-clinton-226663

Munger on the US presidential election: https://www.youtube.com/watch?v=1Bb3cvrxdVs

Antifragile:  https://www.25iqbooks.com/books/12-antifragile-things-that-gain-from-disorder-incerto

Poor Charlie’s Almanack: https://www.25iqbooks.com/books/215-poor-charlie-s-almanack-the-wit-and-wisdom-of-charles-t-munger-expanded-third-edition

Charlie Munger: https://www.25iqbooks.com/books/54-charlie-munger-the-complete-investor-columbia-business-school-publishing

Michael Mauboussin: http://www.michaelmauboussin.com/excerpts/MTYKexcerpt.pdf

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