How Ted Williams Taught Warren Buffett to Make better Decisions
When Ted Williams (1918–2002) wanted to become the best hitter in baseball, he worked on one skill more than any other: making better decisions.
When people make bad decisions they hit poorly. They become over-confident. They swing at pitches that don’t give them the best odds of success. They disregard what they know, ignore coaches and become impulsive. They stop thinking clearly.
These are all the things that Williams, who went on to become the greatest pure hitter to ever play the game of baseball, wanted to avoid.
Williams wrote a book on the subject called The Science of Hitting. The book contained an interesting picture of Williams at bat where the strike zone is carved into 77 individual squares, each the size of a baseball.
An important aspect to improving the odds of making good choices is to recognize when the odds are in our favor.
If Williams waited for a pitch in his sweet spot, he would get a hit 40% of the time. If, however, he was impatient and swung at something on the lower corners he would only get a hit 23–25 percent of the time.
While small this difference over enough at bats means the difference between a trip to the minors or the hall of fame.
Williams understood that the way we make decisions — our decision process — matters. A good process increases the odds of good outcomes. When possible we should wait for decisions we can make easily. The first step in baseball to getting a hit is to wait for a good pitch.
The best way to make good decisions is to use a system that allows you to know when you have an edge. To know when you have an edge, you need to know a lot about yourself and your limitations.
Williams was playing baseball but we’re all playing something. Knowing what game we’re playing and where our strengths and weaknesses are is enormously important.
This edge, is called our circle of competence. This is an area in which we are capable of understanding with a high degree of probability the relevant variables and likely outcome.
Making decisions within our circle improves the odds we’ll do well. This is our sweet spot and it is different for all of us.
All well and good right? The problem is Ego. Everyone wants to have a large circle. We intuitively think that bigger is better, but the size of the circle is not nearly as important as how you use it.
More valuable than the size of the circle is an understanding of its boundaries. Often we mistake familiarity with knowledge. But as Richard Feynman, pointed out, knowing the name of something does not mean you have any knowledge. These edges are where we are most likely to fool ourselves, which makes the difference between good outcomes and bad ones.
Warren Buffett, the famous CEO of Berkshire Hathaway, read Ted Williams book and applied the lessons to investing.
If we have a strength, it is in recognizing when we are well within our cycle of competence and when we are approaching the perimeter. Predicting the long term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skills in those industries — and seem to have claims validated by the behaviour of the stock market we neither envy nor emulate them. Instead, we just stick with what we understand. If we stray, we will have done so inadvertently, not because we got restless and substituted hope for rationality.
Buffett is no doubt lucky, but he’s also smart. Unlike Williams, Buffett plays a game where he can’t be called out on strikes. He can wait and wait and wait. Buffett doesn’t have to worry about pitches in the lower corners being called a strike if he doesn’t swing.
He can, quite literally, wait for the perfect pitch — looking at thousands of different investments before finding one that is just right. That explains why he bats at a hall of fame level and is known as the world’s greatest investor.
In some decisions, such as investing, we can choose to wait for the perfect pitch. We can sit around, read, and wait for the right opportunity.
If only life worked like that. Unfortunately, most of us, can’t only make decisions in our circle of competence.
Knowing the boundary of our aptitude, where we bat above average and where we don’t, can help guide those decisions and the process by which we make them.
Making decisions outside of our circle of competence (i.e., we don’t know what we’re doing) is riskier than making decisions inside our circle (i.e., where we do know what we’re doing.)
Williams batting average dropped off when he swung outside his core, and so to will ours.
If we have to decide something and we know we’re not in our sweet spot, we can take steps to improve the odds of making the a better decision. Or, at the very least, acknowledge that we’re the patsy.
Whatever decision you’re making, know where it falls in your strike zone. If it’s in your sweet spot it’s easier and your normal process for making decisions probably works. If it’s not in your sweet spot and you still have to make a decision you can adjust your process. Talk to someone for whom this pitch would be in their sweet spot.