The Checklist Manifesto_ How to Get Things Right - Atul Gawande [66]
“You go into greed mode,” he said. Guy Spier called it “cocaine brain.” Neuroscientists have found that the prospect of making money stimulates the same primitive reward circuits in the brain that cocaine does. And that, Pabrai said, is when serious investors like himself try to become systematic. They focus on dispassionate analysis, on avoiding both irrational exuberance and panic. They pore over the company’s financial reports, investigate its liabilities and risks, examine its management team’s track record, weigh its competitors, consider the future of the market it is in—trying to gauge both the magnitude of opportunity and the margin of safety.
The patron saint of value investors is Warren Buffett, among the most successful financiers in history and one of the two richest men in the world, even after the losses he suffered in the crash of 2008. Pabrai has studied every deal Buffett and his company, Berkshire Hathaway, have made—good or bad—and read every book he could find about them. He even pledged $650,000 at a charity auction to have lunch with Buffett.
“Warren,” Pabrai said—and after a $650,000 lunch, I guess first names are in order—“Warren uses a ‘mental checklist’ process” when looking at potential investments. So that’s more or less what Pabrai did from his fund’s inception. He was disciplined. He made sure to take his time when studying a company. The process could require weeks. And he did very well following this method—but not always, he found. He also made mistakes, some of them disastrous.
These were not mistakes merely in the sense that he lost money on his bets or missed making money on investments he’d rejected. That’s bound to happen. Risk is unavoidable in Pabrai’s line of work. No, these were mistakes in the sense that he had miscalculated the risks involved, made errors of analysis. For example, looking back, he noticed that he had repeatedly erred in determining how “leveraged” companies were—how much cash was really theirs, how much was borrowed, and how risky those debts were. The information was available; he just hadn’t looked for it carefully enough.
In large part, he believes, the mistakes happened because he wasn’t able to damp down the cocaine brain. Pabrai is a forty-five-year-old former engineer. He comes from India, where he clawed his way up its fiercely competitive educational system. Then he secured admission to Clemson University, in South Carolina, to study engineering. From there he climbed the ranks of technology companies in Chicago and California. Before going into investment, he built a successful informational technology company of his own. All this is to say he knows a thing or two about being dispassionate and avoiding the lure of instant gratification. Yet no matter how objective he tried to be about a potentially exciting investment, he said, he found his brain working against him, latching onto evidence that confirmed his initial hunch and dismissing the signs of a downside. It’s what the brain does.
“You get seduced,” he said. “You start cutting corners.”
Or, in the midst of a bear market, the opposite happens. You go into “fear mode,” he said. You see people around you losing their bespoke shirts, and you overestimate the dangers.
He also found he made mistakes in handling complexity. A good decision requires looking at so many different features of companies in so many ways that, even without the cocaine brain, he was missing obvious patterns. His mental checklist wasn’t good enough. “I am not Warren,” he said. “I don’t have a 300 IQ.” He needed an approach that could work for someone with an ordinary IQ. So he devised a written checklist.
Apparently, Buffett himself could have used one. Pabrai noticed that even he made certain repeated mistakes. “That’s when I knew he wasn’t really using a checklist,