Source: Kigaku Club

1. There are no shortcuts to unconscious abilities

As your knowledge becomes richer, as your skills gradually improve, and as you use these knowledge and skills over and over to accumulate experience, they become more and more “automated”, moving from your consciousness to your unconscious mind. You'll eventually reach the final stage — unconscious ability. This is the Master's realm. He only acts, and he may not even know exactly how he acts.

On the face of it, the Master is effortless when it comes to making decisions based on his unconscious ability, and the way he acts may scare you and me to death.

We believe that the Master's actions are fraught with risk. But what we really mean is that these actions are risky for us — if we do the same.

You've definitely done things in your life that are risky to others but have no risk in your own eyes. This is because you've gained experience and unconscious ability for this type of behavior over the years. You know what you're doing, and you know what not to do.

What you are doing seems risky to anyone without your knowledge and experience.

This could be a sport, such as skiing, rock climbing, diving, or racing, or it could be an instantaneous judgment you made in your own business or professional activity that seemed intuitive.

Let me give you a personal case. Since you probably don't know anything about this field, I'd like to introduce some background first. When I published my business newsletter “World Financial Analyst,” profits from mail-in advertisements (a tool to solicit new subscribers) were a steady source of income for me. Sometimes I spent hundreds of thousands of dollars and didn't include a little promotional content in my emails, but I never thought I was risking it.

In order to send an email, you have to pay for printing, packing the letter (packing everything into an envelope), filling out a mailing list, and mailing it. Advance payment is required for mail only, and for everything else, you get a 30-90 day credit period. Based on the mailing stubs I keep, I know that I will receive about half of my expected income by the 7th response date. Since these are more than postage, I can start paying them before my other bills are due.

Ha, you might be asking, how do you know that money will come?

The number of respondents depends on three factors: the title, the original (advertisement text), and the mailing list. When you design a new ad and don't know if it works, you have to test it: send 10,000 to 20,000 copies based on the best list available. Unless the manuscript is pure gibberish, you're unlikely to lose much money. Even if there was no response, it would only be a loss of a few thousand dollars. There is nothing to worry about!

Can you walk and talk? Walking and speaking are two unconscious abilities that almost every person on Earth has. Are you aware that you are working dozens of different muscles in your feet and legs with every step you take? If you only walk one step, you don't even know what muscles you're working. If you try to consciously direct each muscle to contract or relax in the right order as you take a step, you'll fall head over heels.

While walking, you only need to consciously decide where to go, and your subconscious mind will do the rest. The same goes for talking. You are fluent in your native language, and possibly others. But you, like me, can't explain exactly how you store vocabulary, how to find them when you need them, and how to turn them into grammatical (at least understandable) sentences. Generally speaking, when you're speaking, you don't know which word you'll say next. All you can realize is what you're trying to convey.

Unconscious ability is a way for the brain to deal with the limitations of consciousness. At the same moment, our consciousness can only hold about 7 bits of information (maximum 9, minimum 5). When our subconscious mind comes into play, our consciousness is freed to focus on what really matters.

Practice makes ingenuity: Repetition and experience are our tools to transfer functionality to the subconscious mind.

If the test email works (that is, profitable), you send it to others in bulk. Since I often send emails like this, I know which mailing lists work, which don't work, and which sometimes work, so I can select batch mailing lists based on test profit margins. If the test had a very high profit margin, I'd probably send more than 500,000 emails, if all I had to pay in advance was postage.

Do you still think I'm taking unnecessary risks? I'm guessing you would. I'm not trying to convince you to change your mind. But I know what I'm doing, so there's no risk at all for me.

I think if you think about this example a little bit, you can think of a few similar examples: you think your risk is minimal or no, but you can't convince outsiders that risk doesn't exist.

Experience reduces risk: Many of your actions now seem risk-free to you personally. But once upon a time, until you had the necessary knowledge and experience, they were also high-risk behaviors for you.

As Warren Buffett said, “It's risky because you don't know what you're doing.” Highly successful investors will avoid (and more likely to avoid) any investment that is risky for them.

II. The risk is measurable

Limiting investments to areas where you have unconscious abilities is one of the ways investment gurus can avoid risk while earning extraordinary profits. But why was he able to acquire this unconscious ability in the first place? This is because he realized that risk is measurable and learned how to measure it.

An investment guru thinks about issues from the perspective of certainty and uncertainty; what he places the most importance on is achieving certainty. He doesn't really “measure risk” at all; he measures the possibility of profit in the process of relentlessly searching for “high-probability events” of the kind Buffett called. He found these events by answering the question below.

What are you measuring

Once, I asked an investor what his goals were. He answered, “Profit 10% a year.”

“So how do you measure whether you'll achieve this goal?”

He answered, “Let's see if I've earned 10%.”

It's like an architect judging the quality of a house based on whether the house he built is still standing there. No matter what your goal is, you're only measuring whether you've achieved it, not whether you've achieved it.

A good architect knew the house would stand when he drew the blueprint. He knows this by measuring the strength of materials, their weight capacity, and the quality of design and construction.

Similarly, an investment guru knows if he's likely to make a profit before he invests.

Profit (or loss) is a difference: the difference between income and expenses. So you can only measure it after the fact.

For example, a company cannot make a profit by setting profit goals alone. Managers must focus on actions that can be measured now and will bring profit in the future: actions that can increase sales and revenue and reduce costs. Also, they only do what they believe the revenue will outweigh the cost.

Investment standards

Investment gurus focus not on profit, but on how to measure that necessarily brings profit: that is, their investment criteria.

Warren Buffett didn't buy a stock because he expected it to rise. He won't hesitate to tell you that the price of the stock is likely to drop as soon as he buys it.

He bought a stock because it met his investment criteria, because experience taught him that he would eventually be rewarded: either a rise in the stock price or an increase in corporate profits.

For example, Buffett began buying shares of The Washington Post in February 1973 for $27. When the stock price fell, Buffett instead continued to buy, and by October he had become the company's largest external shareholder. For Buffett, The Washington Post is a $400 million business with a market price of only $80 million. But Wall Street doesn't see it that way — although most publishing analysts agree with Buffett's assessment of the Washington Post.

What Wall Street saw was a collapsing market. The Dow fell 40%, and “Nifty Fifty” (Nifty Fifty) stocks like IBM, Polaroid, and Xerox, that is, stocks that Wall Street was willing to buy just a few years ago at a price-earnings ratio of 80 times, have fallen by more than 80%. The economy is sluggish, and the inflation rate is rising. This is surprising since depression generally dampens inflation. For Wall Street, it seems like the “end of the world” is just around the corner. This is definitely not the time to buy stocks; even bonds aren't necessarily safe in the face of rising inflation.

When professional investors look at the “Washington Post” stock, they think that it is only a stock that has fallen from $38 to $20; like the entire market, there is only a possibility that it will continue to decline. The risk of “buying” is just too great.

Ironically, the Washington Post could have sold its newspaper and magazine business to another publisher for around $400 million, yet Wall Street wouldn't buy it for $80 million!

For Buffett, if you can buy a well-known and excellent company at 20% off, there's no risk at all.

Buffett isn't watching the market or the economy. He's using his investment standards to measure the quality of the Washington Post. He knows the company: because of its effective monopoly on the Washington area, it has a sustainable economic advantage (and the “monopoly” allows it to rise in price with inflation, so it's not afraid of inflation); it's not capital-intensive; it's well-managed; and of course, it sells for an attractively low price.

Wall Street is afraid of loss and calls it “risk,” but Buffett and other investors who know what to measure are starting to make a profit. Interestingly, when the market collapses, professional investors often suddenly discover the importance of preserving capital and have a “wait-and-see” attitude... while investors who follow the first investment rule “never lose money” do the opposite and actively participate in market transactions.

After Buffett invested in The Washington Post, its stock price continued to fall. In fact, the “Washington Post” stock price only rebounded to Buffett's average purchase price in dollars after two years. However, Buffett doesn't care about stock prices; what he values is his investment standard, that is, the standard for measuring the quality of a company. And just looking at the level of earnings, you can see that the quality of this enterprise is improving.

In the investment market, what you measure is entirely up to you.

edit/lambor