8 Lessons From The New York Times Bestselling Book "Clear Thinking"

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Today, we're going to look at 8 lessons from The New York Times bestselling book "Clear Thinking"¹ by Shane Parrish.

Parrish, called "Wall Street's foremost influencer" by Business Insider, has impacted some of Wall Street's biggest names including Ray Dalio, Daniel Loeb, and Chuck Royce. He's also been fortunate enough to discuss decision-making principles directly with Charlie Munger and Daniel Kahneman.

As Munger himself put it:

Of course, equally important to scheduling time to think is developing the ability to minimize common cognitive mistakes & maximize clear thinking. After all:

And in an investing environment full of distracting noise, clarity of thought can be an enormous edge:

So, let’s dive in.

The 4 Enemies of Clear Thinking:

True to one of Munger's beloved principles, the Inversion Principle, Parrish inverts clear thinking & first focuses on 4 sources of common mistakes (before later getting into solutions). There are 4 default behaviors that can easily trip us up:

1. The Emotion Default:

Parrish defines The Emotion Default as the tendency "to respond to feelings rather than reasons and facts."

As investors, we can feel a range of emotions including fear, greed, anger, & more. When we experience these emotions, Parrish explains that we tend to "feel compelled to act immediately. But in these moments, the action you're pushed toward rarely serves you."

As Howard Marks put it:

2. The Ego Default

We're also not immune from our ego. The Ego Default "prompts us to promote and protect our self-image at all costs," Parrish explains. It is the tendency to react "to anything that threatens our sense of self-worth or our position in a group hierarchy."

In investing, this can show up as overconfidence. We can spend relatively little time learning about a company and suddenly we feel we're an expert.

To complicate matters, we can then invest in that company and the stock may still skyrocket—seemingly confirming our newfound "expertise."

We intuitively know this process is on shaky grounds and is bound to hurt us over time:

3. The Social Default:

Perhaps the most pervasive of the 4 behavioral defaults, given the nature of the stock market, Parrish defines the Social Default as the tendency "to conform to the norms of our larger social group." It creates "…conformity. It coaxes us to fall in line with an idea or behavior simply because other people do."

If another investor is doing well with an investment, we don't want to miss out. So, we feel compelled to invest similarly. While our desire to fit in has historically provided benefits to our basic survival needs, in investing, independent thinking is what's generally rewarded.

Even more challenging:

It feels good when you're investing in what's popular. But as Buffett explains:

Parrish included another important aspect from Buffett:

4. The Inertia Default

Parrish explains the Inertia Default as pushing "us to maintain the status quo. Starting something is hard but so too is stopping something. We resist change even when change is for the best."

More specifically, the Inertia Default is the tendency to "resist change, and to prefer ideas, processes, and environments that are familiar."

The Inertia Default can show up in investing in at least 2 ways.

Parrish shares a story of one of his own investments. He noted the opportunity was compelling & it started off well. The CEO said and did "all the right things."

Over several years, though, the CEO's attitude changed. Parrish was hesitant to exit the position too quickly & it took a while for him to change his mind. While he eventually got out in time, he "came awfully close to losing a whole lot of money."

When we've already invested in a position, and there are negative signs, our desire to keep the status quo, to shy from change can be costly.

The second way the Inertia Default can show up in investing is by preventing us from seizing opportunities. Rather than risk capital on a new idea, we can be more comfortable with the status quo.

This is an obstacle even the best investors have had to overcome. In Buffett's 1989 letter to Berkshire shareholders, he explained:

We need to be aware of these 4 "enemies" of clear thinking to be able to pause before reacting to our circumstances.

Only after taking a moment to reflect can we deliberately use reasoning & decision-making tools to maximize our opportunities.

Building Strengths

To counteract the 4 enemies of clear thinking, Parrish explains we must strengthen 4 key traits:

1. Self-Accountability

Parrish defines Self-Accountability as "Holding yourself accountable for developing your abilities, managing your inabilities, and using reason to govern your actions."

In other words, "Self-accountability is the strength of realizing that even though you don't control everything, you do control how you respond to everything."

We're all tempted by what's called "self-serving bias," or a "habit of evaluating things in ways that protect or enhance our self-image."

For example, when a trade goes our way, it's easy to think it's because we're so great. But when a trade goes south, it's easy to blame external sources: the Fed, the government, Short Sellers, etc. This is the Ego Default at work—and it's the opposite of holding ourselves accountable.

How do we maintain our Self-Accountability?

It's a decision, like any other (one that shows maturity). Parrish explains that one of the easiest ways to build all 4 of these traits is to surround ourselves with others where they are the default behavior.

So, the key is to surround ourselves with those who take responsibility. Rather than victimhood.

Munger seemed to share a similar sentiment:

2. Self-Knowledge

Parrish explains that self-knowledge is "knowing your own strengths and weaknesses—what you're capable of doing and what you're not."

During dinner with Munger, Munger explained to Parrish:

Other investors may make a fortune with a specific strategy. But that doesn't necessarily mean it's right for us. Our strategy must be in line with our beliefs, strengths, & circle of competence.

Investor Li Lu put it this way:

How do we get better at this? Parrish explains:

Buffett:

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3. Self-Control

Parrish defines Self-Control as "Mastering your fears, desires, and emotions"

While emotions are inescapable, we can manage how we respond to them. Which is crucial, as Parrish explains:

Successful people and investors:

4. Self-Confidence

Self-confidence is "Trusting in your abilities and your value to others," according to Parrish.

In investing, we're bound to encounter challenges and ever-changing investing environments.

So, developing self-confidence is key:

Self-confidence also allows us to fully take advantage of the rare opportunity when it comes our way:

A big part of developing confidence is taking action. Part of taking action is "failure," or undesirable results. So, a major part of developing self-confidence, as Parrish explains, "also comes from how you talk to yourself."

As the saying goes, the most important story is the one you tell yourself.

Conclusion

Those are 8 lessons from Shane Parrish's bestselling book "Clear Thinking." Let’s recap:

First, Parrish "inverted" clear thinking and began with sources of mistakes that we want to avoid.

While our default behaviors have served us well throughout history, they can often trip us up in more modern times. The 4 problematic default behaviors include:

1. The Emotion Default: the tendency “to respond to feelings rather than reasons and facts.”

2. The Ego Default: reacting “to anything that threatens our sense of self-worth or our position in a group hierarchy.”

3. The Social Default: we “tend to conform to the norms of our larger social group.”

4. The Inertia Default: the tendency for us to “resist change, and to prefer ideas, processes, and environments that are familiar.”

Part of the equation for beating our defaults is to strengthen 4 key traits: Self-Accountability, Self-Knowledge, Self-Control, & Self-Confidence. One of the best ways to build these strengths is by surrounding ourselves with others where these traits are the default behavior.

The rest of the equation? "Clear Thinking"¹ also covers how to manage our weaknesses along with loads of tricks & tools for clear thinking & sound decision-making…

We'll explore the rest of these ideas in an upcoming newsletter (next week or the following).

That's it for today.

I hope you found it valuable.

See you next Saturday.

Two resources I think you might like:

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 and their affiliate program for helping 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.

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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