The Benefits of Self-Doubt

Warren Buffett and Ray Dalio are two of the most well-known, successful investors in the world. And The Wall Street Journal’s Jason Zweig says they have at least one key trait in common: They are open to criticism and self-doubt.

“A deliberate, lifelong effort to find people to tell him why he might be wrong is one of the keys to Mr. Buffett’s success,” Zweig writes on WSJ’s MoneyBeat blog, discussing how Buffett took the rare step of inviting questions from a bearish investor at Berkshire Hathaway’s recent shareholder meeting. “It doesn’t come naturally to most investors.” (Hat tip to The Stingy Investor for highlighting the piece)

Buffett, Zweig says, once noted about scientist Charles Darwin that “whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man’s natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience.”

Dalio, meanwhile, believes in “thoughtful disagreement”. He told Zweig that “when two intelligent parties disagree, that’s when the potential for learning and moving ahead begins. The most powerful thing that [an investor] can do to be effective is to find people you respect who have opposite, different points of view [from yours] — and have an open-minded exchange with them about what’s true and what to do about it.” Dalio says investors could improve their chances of being right by 30% to 40% by seeking out those who disagree with them in an intelligent way, and trying to understand the opposing argument.

Cabot Research Chief Executive Mike Ervolini recommends that investors look back through their account statements to see how long it typically takes for their average winners to stop outperforming. When future winners reach that average, he says to seek out a contrary opinion to re-evaluate whether the stock is still a good one to hold.

grahamad