2 Steps To Build Strong Decision-Making Skills (& Avoid Costly Mistakes)

Charlie Munger's "Exemplar"

October 26, 2024

Read Time: 5-minutes

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Today, we're going to look at 2 steps to build strong decision-making skills & avoid costly mistakes.

This continues our review of lessons from the New York Times bestselling book "Clear Thinking"1 by Shane Parrish. Parrish’s book was inspired by Charlie Munger, as he had a direct relationship with Munger.

In a recent newsletter, we began by covering Parrish's "4 Enemies of Clear Thinking" and the 4 traits (Self-Accountability, Self-Knowledge, Self-Control, & Self-Confidence) to help overcome these obstacles.

The first step to building these 4 traits is to begin following higher standards. Parrish believes one of the best ways to maintain high standards is to surround ourselves with those whose default behavior is our desired behavior.

But what if we don't have personal relationships, like Parrish, with some of the greatest minds of our time?

Don't worry, we cover that, too.

Let's get started.

Worth Exploring:

Maintaining High Standards

Parrish explains the 2 steps to raise our standards are to pick the right "Exemplars" and to consistently practice our desired behaviors (with a couple of special techniques).

1. Pick “Exemplars”

Parrish defines Exemplars as "someone who model[s] an exemplary way of being." "Exemplars can be people you work with, people you admire, or even people who lived long ago. It doesn't matter. What matters is they make you better in a certain area, like a skill, trait, or value."

This is in line with Buffett's beliefs:

Parrish continues:

"Working with a master firsthand is the best education; it's the surest way of raising the bar. Their excellence demands your excellence. But most of us aren't lucky enough to have that opportunity. Still, not all is lost. If you don't have the chance to work with a master directly, you can still surround yourself with people who have higher standards by reading about them and their work."

— Shane Parrish

This is how we get around not having direct relationships with those we admire.

In today's age, there are plenty of books, podcasts, & videos covering the values, goals, and strategies of whichever exemplars we choose. Both for the living and for those who have passed.

Munger even did this despite his access to some of today's best minds, including Warren Buffett. Munger was fond of the highly accomplished & multifaceted Benjamin Franklin:

"A second idea that I got very early was that there is no love that’s so right as admiration-based love, and that love should include the instructive dead. Somehow, I got that idea and I lived with it all my life and it’s been very very useful to me."

"I've tried to imitate...the life of Benjamin Franklin."

"We've never had anybody quite like Franklin in this country. Never again."

— Charlie Munger

According to Parrish, the benefit of choosing "the right exemplars—people with standards higher than yours" is that "you can transcend the standards you've inherited from parents, friends and acquaintances. Your exemplars show you what your standards should be."

Parrish went on to provide a personal example:

"One of my exemplars is Charlie Munger, the billionaire business partner of Warren Buffett. He raised my standards for holding an opinion.

One night at dinner, he commented, 'I never allow myself to have an opinion on anything unless I know the other side's argument better than they do."

— Shane Parrish

After choosing our exemplars, Parrish encourages imagining them as our "Personal Board of Directors." A group that we wouldn't want to disappoint and raises the bar in our everyday actions.

Parrish points out that none of these individuals will be perfect or without flaws (no one can meet such an impossible standard) and our board will likely change over time. As we learn & grow, we'll encounter new challenges & need to replace past directors with new ones.

As we study the behavior of our directors, we'll begin to accumulate what Parrish calls a "repository of good behavior" or a "database of situations and responses.”

Parrish:

"Building this database is one of the most important things you'll ever do because it helps create space for reason in your life. Instead of reacting, and simply copying those around you, you think, 'Here's what the outliers do.'“

— Shane Parrish

For example, when the next market crash inevitably happens, rather than emotionally react like others on social media, we can think about what our exemplars would do in this kind of situation:

2. “Practice, Practice, Practice.”

The second step of maintaining high standards is repeated practice of our desired behaviors:

"It's not enough just to pick exemplars and assemble a personal board of directors. You have to follow their example—not just once or twice, but again and again.

Only then will you internalize the standards they embody, and become the kind of person you want to be."

— Shane Parrish

As Munger put it:

“The keys are discipline, hard work, and practice.”

— Charlie Munger

Parrish encouraged a thought exercise: when practicing “imagine your exemplars watching you" because you "tend to do all the things you know they'd want you to do and avoid the things you know would get in the way."

An example:

"If, for instance, you're making an investment decision, ask yourself, 'What would Warren Buffett do?' Likewise, ask yourself, 'How would I pitch this idea to my personal board of directors? What kinds of factors would they care about? What kinds of factors would they dismiss as irrelevant?"

— Shane Parrish

This exercise keeps us accountable to focus, for example, on the criteria Buffett prioritizes in an investment.

Another key aspect is considering first practicing in low-stakes environments. Parrish describes this as practicing "in a sandbox."

"As you may have guessed, the sandbox is metaphorical—a situation in which any mistakes you make are relatively inconsequential and easily reversed."

— Shane Parrish

Just as a sandbox is a safe place for children to play & an area where structures can be rebuilt if a mistake is made, designing a sandbox for investing skills is key…

Benjamin Graham advocated for this idea, encouraging new investors & experienced investors testing new strategies to paper trade (simulating investing without real money) for a year. Then:

"If you enjoyed the experiment and earned sufficiently good returns, gradually assemble a basket of stocks—but limit it to a maximum of 10% of your overall portfolio (keep the rest in an index fund). And remember, you can always stop if it no longer interests you or your returns turn bad."

— Benjamin Graham

The upside:

"Practicing in a sandbox increases the likelihood that you'll be successful when the stakes are higher and the outcomes more consequential and less reversible."

— Shane Parrish

Conclusion

Those are the 2 steps to begin following higher standards & build strong decision-making traits. Let's recap:

  1. Select Exemplars & Study Them:

    These are individuals who are exemplary in their behavior and results. We admire them and have placed them on our "Personal Board of Directors" as those who demonstrate behavior we wish to emulate. Through studying their stories, we can build a "repository of good behavior" to be able to recognize patterns & respond, rather than react, with logic & sound decisions.

  2. Practice, Practice, Practice

    Of course, studying the greats isn't enough. We must put their standards into practice. One helpful exercise is to consider whether our exemplars would invest in any opportunity we're considering. A final key aspect of practicing is to design a "Sandbox," or a low-stakes environment where it's safe to learn from any common beginner mistakes.

Well, that’s all for this week.

I hope you found it helpful.

See you next Saturday.

Two resources I think you might like:

  1. Book Summaries: One of the most important lessons from Charlie Munger is to strive to become a little bit wiser each day. To accelerate my learning on everything from investing & decision-making to negotiating & habit-building, I use Blinkist (Thank you to the Blinkist team as their affiliate program helps keep this newsletter free to the reader). Blinkist offers easily readable book summaries to help you get the most valuable ideas from the most popular books. You can check out Blinkist here.

  2. Mental Exercises: To paraphrase Morgan Housel, the common factor among elite investors is they have complete control over the space in between their ears. Financial news networks and social media can create a lot of "noise" for investors. To stay focused and calm, I like to use Headspace (I don't receive any compensation from Headspace currently). Headspace offers mindset and breathing exercises to help you keep control over the space between your ears. You can check out Headspace here.

Footnotes:

1 — I do not receive any compensation on purchases made through Amazon.com

Disclaimers

This material is not investment advice. No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading this material can be accepted by the publisher. Additional disclaimers here.

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