Albert Einstein was a genius. But his biggest skill wasn't math or physics. It was his approach to science.
Science has two types of thinking. There's horizontal thinking, which is weaving together bits of information. It's where creativity comes from, seeing what others don't. Then there's vertical thinking, which is drilling down deep on one topic. It's where expertise comes from.
A lot of scientists master one or the other. Einstein mastered both. The science writer John Barry once wrote:
Einstein reportedly once said that his own major scientific talent was his ability to look at an enormous number of experiments and journal articles, select the very few that were both correct and important, ignore the rest, and build a theory on the right ones ... his genius was an instinct for what mattered and the ability to pursue it vertically and connect it horizontally.
According to Barry, there's one question that links horizontal and vertical thinking: "So what?"
Asking "So what?" is the most powerful filter for separating the irrelevant from the important. It's probably the most vital question to ask when you come across any theory or piece of information -- the first litmus test of whether to pass or dig deeper.
It's especially powerful in investing, where theories and data are commonly plagued by bias, bad information, incomplete thinking, poor context, and general stupidity.
When you start asking "So what?" about everything you see, three things happen.
1. Information from one field teaches you about another
A lot of the the best investors aren't financial geniuses. They probably couldn't pass the CFA. Instead, they're common-sense folks who have a pretty good grasp on how a lot of different disciplines work. Knowledge in one field is great, but it limits you to a few thinkers or professors who dominated that field.
Broadening your thinking to as many fields as possible -- even if it's just the basics -- can put you closer to the truth than deep knowledge in a single field. Every field figures out its own piece of the puzzle, so connecting the dots between multiple fields works like compound interest on figuring out how the world works.
Investing columnist Jason Zweig once wrote:
My happiest moments last year came as I reported an investigative article on how elderly investors are increasingly being scammed by elderly con artists. I later realized, to my secret delight, that the article had been enriched by a series of papers I had been reading on altruistic behavior among fish.
If I do my job right, my regular readers will never realize that I spend a fair amount of my leisure time reading Current Biology, The Journal of Neuroscience, and Organizational Behavior and Human Decision Processes. If that reading helps me find new ways to understand the financial world, as I suspect it does, my readers will indirectly be smarter for it. If not, the only harm done is my own spare time wasted.
In my view, we should each invest a few hours a week in reading research that ostensibly has nothing to do with our day jobs, in a setting that has nothing in common with our regular workspaces.
Here's one I've found: Watching how people react to sports and politics is a good example of how dumb we can be when the desire to win is stronger than the ability to change your mind. It's a powerful investing lesson about the need to be open-minded.
2. You'll discard what's either flagrant nonsense or not relevant to your situation
Warren Buffett has a file on his desk labeled "too hard." Most things probably aren't too hard for him, but the idea of quickly passing on stuff that isn't relevant is a life-saving skill in the information age.
If you constantly ask, "So what?" the first thing you'll do is discard flagrant nonsense. Flagrant nonsense comes in four flavors:
- Self-interest. If someone is on commission, you're not getting the full story.
- Personal vendetta. If someone is trying to smear someone, you're not getting the full story.
- Clear lack of authority. Butchering basic facts, burying track records.
- Yelling/caps lock. Dead giveaway that you're out of substantive points.
You'll also ignore information that might be relevant to some people, but not you. The main problem with financial news is that it's presented as one-size-fits-all in a world where everyone's a different size. Some people are day traders, others are retired widows. Some people are saving for college, others are trust funders.
I'm a few decades away from retirement, so I have no interest in anyone's one-year market forecast. Why should I? But others are retired and need money this year, in which case you better have liquidity on your side. Asking "so what?" quickly filters out what's relevant to your own situation.
3. You'll take the few things that matter most really seriously
In his book Succeeding, John Reed writes:
When you first start to study a field, it seems like you have to memorize a zillion things. You don't. What you need is to identify the core principles -- generally three to twelve of them -- that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.
Investing is the same. It's guided by a few rules that, if mastered and taken seriously, will make you ask "so what?" when presented with details about other theories.
If you understand compound interest, the normality of volatility, diversification, the link between valuation and future return, and the tyranny of costs, you've figured out most of the investing game. Take them seriously, learn as much about them as you can, become an expert on them, and you'll do great over time.