Critical thinking is a fundamental tool for every investor. As we already saw in this blog, the value investing has in critical thinking one of its fundamental pillars. Therefore, every value investor must try to be as rational as possible (yes, within our limitations as human beings). In this article we will see the 5 bases of critical thinking and we will analyze their applicability to the world of investment with some practical examples. This entry is based on the article “Paul Gary Wyckoff, a professor at Hamilton College, who I discovered thanks to the blog of value investingNot only is it backed by logic, it has also proven to be the safest and most profitable investment method in practice.
Nº2: The ability to think of multiple, not unique causes
Human beings have an innate tendency to simplify thinking. This simplification helps to better understand the world around us, drawing conclusions that we can apply to our daily lives. However, the world is too complex, full of factors that influence everything that happens in various ways.
We must bear in mind that although there are multiple causes and factors for the same event, not all of them have the same importance. Therefore, it is important to know how to combine this skill with number 3.
Nº3: The ability to think in quantities, not just in directions
It is not enough to know and a fact has positive or negative effects, it is necessary to know the impact of that fact.
The key to mastering this skill is having the ability to weigh the intensity of the various factors that influence an event.
For example, all companies face problems of various kinds and intensity throughout their lives. Knowing how to value the importance of these problems is an essential trait of large investors.
No. 4: The ability to think like foxes, not hedgehogs
This skill is based on the book the 4 rules of the entrepreneurial investor de Benjamin Graham, although this goes further. Graham talks about the need to be aware of our knowledge and our experience, while Wyckoff talks about understanding our prejudices, which implies going one step further.
Learning to think, our duty as investors
It is very common, especially at the beginning, to believe that we are better in a discipline than we really are. This prejudice is called Dunning-Kruger effect. In many cases, our worst enemy is ourselves.
Possibly, Charlie Munger, which you already know well if you follow this blog, be the best example of a critical and multidisciplinary investor.
My goal as an investor is clear: to be a little more like Charlie Munger every day.
It is not an easy path, it is not a fast path, but it is worth it.