What is a Standard Stupidity? I discovered that term when I read the chapter on Charlie Munger in William Green’s (2021) book Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life. The chapter particularly highlights Charlie Munger’s focus on inverted thinking and his special humor…
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
Other people are trying to be smart. All I’m trying to be is non-idiotic. I find that all you have to do to get ahead in life is to be non-idiotic and live a long time. It’s harder to be non-idiotic than most people think.
Charlie Munger Quotes from Chapter 8 of Green (2021)
Avoid crazy at all costs. Crazy is way more common than you think. It’s easy to slip into crazy. Just avoid it, avoid it, avoid it.
Charlie Munger, CNBC Interview, November 2023
The idea of inversion is simple but powerful. Being non-idiotic or non-crazy is in most cases much easier than being brilliant. Instead of asking “How do I become great?”, ask “How can I fail badly?”. Then focus on avoiding everything that could lead to a disastrous outcome.1The manifestation of this approach is Munger’s speech that become known as How to Guarantee a Life of Misery. This is counter-intuitive but very useful. Practically, it means we should aim to avoid all sorts of stupid behavior, foolish thinking, and what Munger calls Standard Stupidities.
That brings us back to the initial question. For me, a Standard Stupidity is a situation or problem with a clear rational solution which many people still screw up massively. Remarkably, this has often nothing to do with intelligence.2I definitely don’t want to sound like the master here. I have more than enough Standard Stupidities myself. A good example for this is the bicycle helmet. Wearing a helmet is almost no effort, yet it clearly prevents a potentially disastrous outcome. The expected benefit of the helmet during a crash is heavily positive, so you should always wear it.3There are many other examples for small and almost free actions that drastically reduce the probability of disastrous outcomes. Seat-belts, COVID-masks, sun-blocker, … At least in my perception, not wearing a helmet is thus a very badly compensated risk. I mean, what is the small comfort gain of not wearing the helmet compared to a potentially fatal or disabling injury? Well, I recently saw a LinkedIn post from a German comedian who says that only 18% of the population wear bicycle helmets whereas 91% protect their phones with cases. I have no idea whether those statistics are accurate, but I think you got the point.
The example also shows that Munger’s inverted thinking actually works. Suppose you want to become the safest cyclist in the world. The Munger-inversion-way of attempting this challenge is not to ask “How do I become the safest cyclist in the world?”, but rather “How do I become the most insecure cyclist in the world?” and avoid everything that comes to mind. The answers to this second question are usually much clearer. Don’t wear a helmet, cycle too fast, use your phone while cycling, don’t check your tires, … Avoiding all those easy-to-solve Standard Stupidities won’t make you the safest cyclist in the world, but it probably gives you a considerable edge and a solid base to build on.
The more I thought about this, the more I realized how universal these principles are. Being consistently non-idiotic is often sufficient to be very good. Not brilliant or the best in the world, but very good.
Avoiding Standard Stupidities becomes even more important in chaotic environments. As you can imagine, the concept is therefore highly relevant for investing. Finding great investments is very difficult because we all compete for them. So again, don’t ask “How can I make the highest return?”, ask “How can I lose all my money quickly?” and avoid everything that comes to mind. Once again, it is probably much easier to avoid disastrous investments (being non-idiotic) than to pick outstanding ones (being brilliant).4Interestingly, I also found in my master thesis that it is easier to identify underperforming stocks than outperforming ones. The manifestation of this idea are passive investments in index funds or ETFs. By avoiding all kinds of stupidities, passive investors usually end up better than the great majority of active investors. This is of course not a brilliant best-in-the-world outcome, but it is a very good outcome with relatively low effort.
Apart from general Standard Stupidities, there are a lot of concepts in finance and investing that are misunderstood or even actively abused. This brought me to the idea for this series.5Another inspiration were the very entertaining Top 10 Peeves of Cliff Asness. Whenever I find something that violates basic concepts, I will write about it and (hopefully) show the rational thinking. Fortunately, there is a large supply of stupid material on investing and I am looking forward to disentangle some of it in this series.
This content is for educational and informational purposes only and no substitute for professional or financial advice. The use of any information on this website is solely on your own risk and I do not take responsibility or liability for any damages that may occur. The views expressed on this website are solely my own and do not necessarily reflect the views of any organisation I am associated with. Income- or benefit-generating links are marked with a star (*). All content that is not my intellectual property is marked as such. If you own the intellectual property displayed on this website and do not agree with my use of it, please send me an e-mail and I will remedy the situation immediately. Please also read the Disclaimer.
Endnotes
| 1 | The manifestation of this approach is Munger’s speech that become known as How to Guarantee a Life of Misery. |
|---|---|
| 2 | I definitely don’t want to sound like the master here. I have more than enough Standard Stupidities myself. |
| 3 | There are many other examples for small and almost free actions that drastically reduce the probability of disastrous outcomes. Seat-belts, COVID-masks, sun-blocker, … |
| 4 | Interestingly, I also found in my master thesis that it is easier to identify underperforming stocks than outperforming ones. |
| 5 | Another inspiration were the very entertaining Top 10 Peeves of Cliff Asness. |