This weekend, I shared with a friend what I learned about psychology from rereading The Warren Buffett Way by Robert Hagstrom. One of the things he found interesting was the concept of impetuosity and how it negatively impacts investors.

Impetuosity is the tendency to act quickly, without thinking about the consequences. It can be considered a casino mentality—an itch to go into action. You get caught up in what other people are doing and place a bet or make an investment without taking time to think it through.

Impetuosity can result in investors making bets when the probabilities are against them, upsides are low, and downside risks are high.

This section of the book reminded me of 2020 and 2021. ZIRP made investors comfortable paying high valuations for a growth company. Early-stage venture capital deals were getting done in a few days with limited diligence. In 2022 and 2023, companies that raised at these high valuations and didn’t grow into them struggled to raise capital. Some raised down rounds with brutal terms. Some didn’t make it.

Looking back, it was a period of impetuosity. Investors were doing deals they otherwise wouldn’t have because of what other investors were doing. Founders were raising at sky-high valuations because other founders were. Many didn’t think about the long-term consequences. They were caught up in the hype, doing what seemed normal.

Some founders and investors were aware of impetuosity and recognized what was happening. They took note and acted differently. The shrewd investors were selling assets at peak prices, not buying. And the shrewd founders were raising reasonable sums at valuations that wouldn’t hinder future fundraising, or they were selling their companies outright at peak multiples.

Hagstrom details how Warren Buffett and Charlie Munger avoided impetuosity. The most important thing they did before making an investment was calculate the probability that it would be favorable for them. If it wasn’t favorable, they continually took in more information and monitored the situation. They had the patience to wait until the odds were in their favor, which reduced their risk of losing money. And if the odds tilted in their favor, their research and calculated probability gave them the confidence to bet big even when others were doing the opposite.

Their use of facts and probabilities helped them act counter to the crowd and overcome impetuosity.

I’m wrapping up The Warren Buffett Way by Robert Hagstrom for the second time. The first time I read it last year, I got a ton of information about the mechanics of how Warren Buffett invests. This time, I’ve gotten just as much, but more around psychology and mindset. It’s interesting how the book hasn’t changed, but what I got from it changed because what I’m interested in has changed.

The book helped me understand how a rational temperament is Buffett’s main competitive advantage. Here’s a passage that stuck with me:

The cornerstone of rationality is the ability to see past the present and analyze several possible scenarios, eventually making a deliberate choice. That, in a nutshell, is Warren Buffett.

Speaking to students at the University of Seattle, Buffett was asked how he got where he is and how he amassed such a large fortune. His response was thought provoking:

Buffett took a deep breath and began:

How I got here is pretty simple in my case. It is not IQ, I’m sure you will be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output—the efficiency with which the motor works—depends on rationality. A lot of people start out with 400-horsepower motors but only get 100 horsepower of output. It’s way better to have a 200-horsepower motor and get it all into output.

So why do smart people do things that interfere with getting the output they’re entitled to? It gets into the habits and character and temperament, and behaving in a rational manner. Not getting in your own way. As I have said, everybody here has the ability absolutely to do anything I do and much beyond. Some of you will, and some of you won’t. For those who won’t, it will be because you get in your own way, not because the world doesn’t allow you.

I’ve always thought high IQ is an edge. High mental acuity is genetic—you were either born with it or weren’t. But Buffett makes a great point about the efficiency with which someone uses their mental acuity materially impacting their output. You don’t have to be the smartest to win; you just need to avoid acting illogically.

You can’t change your IQ, but you can learn to think and act more rationally. This is a superpower hiding in plain sight. It’s something that everyone can do, but as with many superpowers hiding in plain sight, many people won’t.

Buffett built a fortune buying and overseeing businesses by being rational (he’s also pretty sharp). Entrepreneurs of all IQ levels should take note of his simple, but not easy, strategy and borrow a page from the Buffett playbook. Being rational and not shooting yourself in the foot is something everyone can do. It trumps intelligence in the long run and can lead to outsize success.

I’m finishing up The Warren Buffett Way by Robert Hagstrom. I’m interested in learning more about psychology to improve my decision-making. Hagstrom addresses the psychology of Warren Buffett throughout the book but also dives into broader psychological concepts. One that resonated with me was rationality. Here are a few passages I highlighted:

Rationalism, according to the Oxford American Dictionary, is a belief that one’s opinions or actions should be based on reason and knowledge rather than emotions. A rational person thinks clearly, sensibly, and logically.

The first thing to understand is that rationality is not the same as intelligence. Smart people can do dumb things.

In Keith Stanovich’s book What Intelligence Tests Miss: The Psychology of Rational Thought, Stanovich coined the term dysrationalia: the inability to think and behave rationally despite high intelligence. Research in cognitive psychology suggests there are two principal causes of dysrationalia. The first is a processing problem. The second is a content problem. Let’s look at them closely, one at a time.

Stanovich believes we humans process poorly. When solving a problem, he says, people have different cognitive mechanisms to choose from. At one end of the thinking spectrum are mechanisms that have great computational power. But they come with a cost. They require slower thinking and a great deal of concentration. At the opposite end of the thinking spectrum are mechanisms with very little computational power; they require very little concentration and permit quick decisions. “Humans are cognitive misers,” wrote Stanovich, “because our basic tendency is to default to the processing mechanisms that require less computational effort, even if they are less accurate.” In a word, humans are lazy thinkers. They take the easy way out when solving problems; as a result, their solutions are often illogical.

I’ve never considered the processing power it takes to think rationally, but this framing makes sense. When solving a complex problem, I’ve found that quick decisions usually aren’t the right decisions. I must sit back and focus on the problem. Think a few layers deep. When I’ve done this, I’ve often come up with some of my best ideas.

I like this framing of rational thinking: It’s the result of concentration and deep thought. If you try to solve a hard problem without them, you aren’t being rational; you’re being a lazy thinker and increasing your odds of making illogical decisions.

Some passages in The Warren Buffett Way by Robert Hagstrom reminded me of this post from a few months ago. I shared that taxes are a successful entrepreneur’s biggest expense. Allocating appropriate time to optimizing that expense, just as entrepreneurs do with all other major expenses, can have a material impact on a company’s ability to reinvest in growth opportunities. Here are the passages:

Except in the case of nontaxable accounts, taxes are the biggest expense that investors face—higher than brokerage commissions and often higher than the expense ratio of running a fund.

In a nutshell, the key strategy involves another of those commonsense notions that is often underappreciated: the enormous value of the unrealized gain. When a stock appreciates in price but is not sold, the increase in value is an unrealized gain. No capital gains tax is owed until the stock is sold. If you leave the gain in place, your money compounds more forcefully.

Overall, investors have too often underestimated the enormous value of this unrealized gain—what Buffett calls an “interest-free loan from the Treasury.” To make his point, Buffett asks us to imagine what happens if you buy a $1 investment that doubles in price each year. If you sell the investment at the end of the first year, you would have a net gain of $0.66 (assuming you’re in the 34 percent tax bracket). Let’s say you reinvest the $1.66 and it doubles in value by the second year-end. If the investment continues to double each year, and you continue to sell, pay the tax, and reinvest the proceeds, at the end of 20 years you have a net gain of $25,200 after paying taxes of $13,000. If, instead, you purchase a $1 investment that doubles each year and is not sold until the end of 20 years, you would gain $692,000 after paying taxes of approximately $356,000.

This is a great mathematical example demonstrating the power of compounding and the impact taxes can have on investment returns over a long period. It reminded me that playing the long game in investing gives you twin tailwinds, which can lead to explosive results.

I’m rereading The Warren Buffett Way by Robert Hagstrom. I enjoyed this book last year, and I decided to read it again after reading Hagstrom’s book Warren Buffett: Inside the Ultimate Money Mind.

The book contains lots of insightful information about Buffett’s investing approach and how he thinks about capital allocations as the CEO of Berkshire Hathaway. One part of the book I found invaluable was the chapter called “Common Stock Purchases.” In this chapter, Hagstrom walks through Buffett’s process to analyze and value nine of his biggest investments: GEICO, Capital Cities/ABC, Coca-Cola, and others.

Many people are familiar with Buffett’s investing strategy, but how he applied it when making investment decisions isn’t always clear. Hagstrom explains how Buffett valued each company and compares his valuations to the prices he paid. He walks through the math and shows how Buffett’s investments were made for prices below the intrinsic values that Buffett calculated. Buying for less than intrinsic value is core to his strategy of investing only when there’s a margin of safety.

I noticed that Buffett sometimes broke his own rules, such as when he invested in GEICO. Buffett usually invests only in companies with a consistent operating history that are generating increased free cash flow. However, when he invested significantly in GEICO in 1976, the company was on the verge of bankruptcy, had zero earnings, and needed a turnaround. Over several years, Buffett bought roughly 33% of the company. Hagstrom does a great job of detailing why he made this seemingly risky investment. Needless to say, Buffett was right, as GEICO is now a household name. This example reinforces that rules sometimes need to be broken when great investing opportunities present themselves. It also shows how Buffett spent decades preparing for this investment by reading and learning about insurance, and how that preparation positioned him to act swiftly when he needed to.

Last week, I shared that I want to learn more about psychology to improve my decision-making and because it seems like a fun topic. Charlie Munger famously studied the failures of others to understand thinking errors. That approach resonates with me, and I decided it’s best to start by regularly analyzing my own failures. I wasn’t sure how, though, so I started looking for ways others have done this.

I started rereading The Warren Buffett Way by Robert Hagstrom and found a great idea. Hagstrom says that Buffett included in his Berkshire Hathaway annual shareholder letter a section called Mistake Du Jour. In it, he “confessed not only mistakes made but opportunities lost because he failed to act appropriately.” He was transparent about his mistakes and shared them broadly.

I’m a huge fan of update emails (see here, here, and here). But I can’t recall ever seeing an update email with a section dedicated to the founder's mistakes. The more I thought about it, the more I thought it’s brilliant. It’s a great way to make a habit of analyzing your own mistakes—and also to build trust with others and maybe even get unexpected advice based on how other people navigated similar mistakes.

My weekly update blog posts are inspired by update emails. Including a mistake du jour–type section in them would be cool. It would check the box regarding forming a habit to analyze my mistakes and force me to crystallize and communicate them concisely. If I also force myself to include the lesson learned, this could be even better. I’m not sure about some things and need to think about them (e.g., will I have enough to do this weekly, or should I do it monthly?). But I like this idea and want to add my mistakes to my 2025 weekly updates.

I finished reading Newspaperman: S.I. Newhouse and the Business of News by Richard H. Meeker. The biography is about Samuel Irving Newhouse Sr., who founded Advance Publications. At Sr.’s death, Advance Publications owned multiple newspapers and Condé Nast, which publishes famous magazines such as Vogue, Vanity Fair, GQ, and The New Yorker. Since then the company has grown rapidly, and it owned 26.5% of Reddit when Reddit began trading on the public stock market this year (see here, page 194). Reddit’s market capitalization (i.e., valuation) is just under $12 billion as of this writing.

This book and Newhouse: All the Glitter, Power, & Glory of America's Richest Media Empire & the Secretive Man Behind It by Thomas Maier detail one key strategy the Newhouse family used to grow their wealth: they optimized their tax liability and maximized the compounding of their wealth. The family studied the tax laws and implemented strategies that reduced their tax liability. This gave them more capital to reinvest in growing their companies or acquiring new companies.

Both books contain numerous examples. Their estate tax strategy especially caught my attention. When someone dies, their estate is transferred to heirs and a tax is due on the value of the estate being transferred if it exceeds that year’s federal threshold. When Sr. died in 1979, his sons filed a return valuing his ownership in Advance Publications at roughly $182 million and showing an estate tax due of roughly $49 million. The IRS said his estate was worth somewhere between $1 billion and $2 billion and that the estate tax due was, at a minimum, $600 million, and as high as $1.2 billion. At the time, Advance Publication owned thirty newspapers and various magazines. Its two most prosperous newspaper properties alone were worth more than $182 million.

Sr. had studied other publishing families to understand how death and estate taxes negatively impacted their family empires. Families often had to sell all or some of the company’s assets to pay the estate tax upon the founder’s death. Sr. developed a dual-share-class strategy to avoid that outcome. Sr. owned common shares in Advance Publications but issued preferred shares to his siblings, wife, and sons. His common shares carried voting rights and, essentially, control of company decision-making, but the preferred shares gave holders the right to vote on a company liquidation or sale. Said differently, if a buyer wanted control of the company, the buyer had to get the approval of the preferred shareholders first. The result was a gray area in the tax law. It could be argued that the fair market value of the company—the price a willing buyer and seller would transact at—was significantly lower than the IRS’s figure because there would be fewer buyers willing to buy a minority stake in a family-owned company that had such a bizarre ownership structure. Most buyers spending that kind of money would want majority ownership so they could have control. To gain control, they’d have to convince multiple family members to sell, a prospect many buyers would rather avoid. There’s more to this, but that’s the gist of it.

The IRS took the family to court, and the family prevailed. The result was that the family paid an estate tax bill that was a fraction of what it would have been if Sr. hadn’t planned so carefully. It wasn’t a material amount for the company, so it didn’t have to sell any assets to pay the tax. The Newhouse family’s empire could continue compounding for another generation and grow exponentially under Samuel “Si” Newhouse Jr.’s leadership for the next forty years.

I haven’t been a fan of books that tell the history of a company or a group of people (i.e., a family). These books introduce numerous people but don’t go very deep into any of their journeys. I enjoy biographies more because the in-depth coverage of a single person’s journey usually includes challenges encountered, lessons learned overcoming adversity, and details about how they applied lessons learned to achieve their goals. Biographies get me thinking and often lead to new ideas and insights, which excites me.

Though books about the history of a company or group of people aren’t my favorite, I now recognize they’re useful for something: links to other people or companies in an industry or time period.

I’m currently reading Newhouse: All the Glitter, Power, & Glory of America’s Richest Media Empire & the Secretive Man Behind It by Thomas Maier. It’s about the Newhouse family and their media empire. But because it covers so many decades and so many people, it’s introduced me to other companies and founders I wasn’t aware of. I’ve ordered biographies about several people mentioned in this book.

My thinking on the value of reading this type of book has changed. While I’m not learning as much about an individual as I’d like, I’m being introduced to more people in the publishing industry and can read about each person’s journey. These books are good discovery mechanisms and help me understand industry periods. I don’t want these to be the majority of my reading, but they’re a helpful supplement to biographies.

I had a conversation with an entrepreneur who’s an avid reader and history buff. He pointed out something that stuck with me: biographies and autobiographies about business founders are the most challenging historical books to write. He based that on a few insights:

• Authors who write about entrepreneurs aren’t entrepreneurs and don’t usually understand business. They focus on telling a compelling story and don’t deep dive into an entrepreneur’s actions or why they took them. This leaves entrepreneurs who read their book craving more details about some parts of the journey.
• Entrepreneurs who write autobiographies usually aren’t gifted writers. They know all the details about their journey, but putting it down on paper is challenging for many of them, and they need help. If they move forward with the book, many will get a coauthor to fill the gap.
• The more time that passes, the harder it is to piece together exactly what an entrepreneur did and why they did it. This isn’t as true of other historical events, such as wars.

The details of what an entrepreneur did and why they did it are what make a journey resonate with me and help me figure out how to apply it to my situation. When that’s missing from a biography, I tend not to enjoy it as much. My favorite books are autobiographies. Reading them is the closest you can come to getting inside an entrepreneur’s mind without talking to them. They usually include the nitty-gritty, reasoning, and emotions.

This entrepreneur made a great point today. I’m going to think about this more.

Last week, I finished reading Roy Thomson’s autobiography, the second book I’ve read about him in the last month. I found another biography about him, and I’m considering reading that, too. Last month, I read a biography about Felix Dennis, the second book I’d read about him.

I initially resisted reading more than one book about an entrepreneur, but I don’t feel that way anymore. Some material may be repetitive, but subsequent books usually contain new information too. Multiple books provide multiple perspectives on an entrepreneur’s life and get closer to a 360-degree view of that person’s journey. Reading too many books about a person would yield diminishing returns, but right now, my gut tells me that two or three books about a person is likely a good number.

I’ve also changed my thinking about how I record information about entrepreneurs I’m studying. Before, I thought in terms of books. Each book was an individual record, and I created a digest for each book. This meant I could have multiple digests about a single person. But now I’m thinking in terms of people. I need to consider how I want to capture the information. Ultimately, I want to do more than create blog posts and podcasts with these digests. Do I create one digest per person and add information from multiple books? Do I keep creating one digest per book? Or do I do something completely different?

I’ll be thinking about this question more and getting perspectives from people with relevant data management experience. In the meantime, I might experiment with my digest and blog post formats a bit.