The famous theoretical physicist, Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” But in the world of value investing, not all compounding returns are monetary. Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, often responds to those who ask that the secret to getting smart is simply to go to bed smarter than you wake up. Every single day. It might not sound like much at first, but if you imagine that each day, you go to bed just 1% smarter than when you wake up, by the end of the year, you’d theoretically be thirty-eight times smarter than at the start of the year. That’s the “wonder” of compounding.
Like capital and intelligence, another thing you can compound on a daily basis is, “influence”. When you think of the word influential, who’s the first person that comes to mind? Perhaps a politician like: Barack Obama, Hillary Clinton, or Angela Merkel? Or, maybe it’s a world-famous artist like: Beyoncé, Jay Z, or Bono from U2? If you’re looking for a more traditional definition of “influence” the general consensus seems to suggest that influence is all about catalyzing change. Those people who are highly influential have the capacity to change people and circumstances. Time Magazine, whose annual list of “100 Most Influential People” always attracts a high number of readers shares the following criteria about their selection process:
Influence is hard to measure, and what we look for is people whose ideas, whose example, whose talent, whose discoveries transform the world we live in. Influence is less about the hard power of force than the soft power of ideas and example.
One of today’s most forefront experts on the field of influence is psychologist and Professor Emeritus at Arizona State University, Dr. Robert Cialdini. In 2006, Dr. Cialdini published the best-selling book, Influence: Psychology of Persuasion, now a highly regarded authority in breaking down what and how exactly our behavior has influence on someone else. The six principles of Cialdini’s book: reciprocity, scarcity, liking, authority, social proof, and commitment/consistency, are comparable to DNA building-blocks for inducing change. In other words, if you understand these core ideas, you have the power to become highly influential in any endeavor.
While all six of Cialdini’s principles are worth studying and practicing, there are some that are particularly relevant for intelligent investors. Take for example the “consistency/commitment” bias. What Cialdini explains in his book is that if you make an initial commitment to something, you’re more likely to stay consistent to your initial agreement in the future, even if the circumstances have changed and now the proposition is less favorable. It’s not that people don’t recognize the change, but they rationalize the difference by sticking by their initial judgement. Zürich-based value investor Guy Spier, manager of Aquamarine Fund, now includes this idea as one of his fund’s core operating principles. Included in his 2015 annual report, Guy explains why he doesn’t like sharing his fund’s current positions publicly:
“As the psychologist Robert Cialdini explains, we need to be careful about taking public positions. Once we’ve made a public statement, the “commitment and consistency principle” makes it difficult for us to back away from our position, even if we have come to regret that opinion. With this in mind, I try to avoid walking into the trap of making statements about any stocks that we currently own, since the situation might later change or I might discover that I was wrong. This is why I prefer not to discuss our current investments in public settings such as annual meetings, shareholder letters, and media interviews.”
See what else Guy is reading in this exclusive tour of his Zürich office library
Another world-famous superinvestor who also recognizes the power of consistency bias is, Marc Andreessen. Andreessen is a co-creator of Netscape and partner in the $4B venture capital firm, Andreessen Horowitz. One of the firm’s unofficial mottos is, “Strong opinions, loosely held.” In other words, you’ve got to be convicted in your investing thesis, but also open to changing your mind if presented with contrasting evidence.
One of Warren Buffett’s all-time favorite books is the 1937 classic, How to Win Friends and Influence People. Along with Benjamin Graham’s Security Analysis and The Intelligent Investor, Buffett credits Dale Carnegie’s, How to Win Friends as one of the few books that changed his life. The simple ideas in the book all lend to Cialdini’s “Liking” principle. Buffett realized early in his career that he could be the smartest guy in the room, but if nobody liked him or wanted to work with him, it wouldn’t matter. So, he turned to Carnegie, and the following ideas to “win friends”: show genuine interest in others, remember first names, listen, sincerely make someone feel important, and smile.
The good thing about practicing Cialdini’s influence principles today, as opposed to 1937, when Carnegie’s book was first published, is that today we’re able to apply these ideas at scale using the tools of “new media”. Investors who want to compound social track records in addition to capital allocating track records, can leverage the scalability of digital content. For example, readers of this blog can come and go as they please, and the cost to publish is essentially free. So if you’re still on the fence about whether it’s worth sharing your ideas, consider the wise advice of Derek Sivers, who sold his company, CD Baby in 2008 for $22M.
Strong opinions are very useful to others. Those who were undecided or ambivalent can just adopt your stance. But those who disagree can solidify their stance by arguing against yours. Even if you invent an opinion for the sole sake of argument, boldly sharing a strong opinion is very useful to others.
If you take another look at Cialdini’s six influence principles: reciprocity, scarcity, liking, authority, social proof, and commitment and transform them into actionable ideas, you get the following advice: be generous, visible, consistent, convicted, agreeable, and unique. Whether you want to leverage these ideas to attract new capital to your fund, or you just want to build a stronger personal brand, remember Einstein’s words about the “wonder” of compounding. You goal shouldn’t be to become Beyoncé or Oprah Winfrey overnight. A simple 1% increase day-after-day-after-day, will do just fine.