The blended brain: Why the right hemisphere should be calling the shots
In part two of the blended brain series, I discuss why the left hemisphere is crucial but the right hemisphere should be calling the shots, using examples from some of the world's greatest investors.
Last year I stumbled across the work of Dr Iain McGhilchrist, who has spent decades researching the differences between the two brain hemispheres. My understanding of the relationship between the left and right brain hemispheres (LH and RH) fundamentally changed.
As a result, I have come to see the role of the RH and LH as quite different for an investor. The following metaphor best describes how I see the two different roles:
The RH is the older, wiser portfolio manager who sees the portfolio as a whole, who has been through multiple market cycles, who has made the mistakes and had the successes that inevitably come with being an investor for decades.
The LH is the young, bright investment analyst who can build complex models and beautiful PowerPoint presentations, who has had much academic success, and who tends to be overconfident and opinionated based on theory rather than experience.
The analyst can spend all weekend building a 1,000 row model with all sorts of whizz-bang formulas. The PM can look at the model on Monday morning for five minutes and, much to the analyst’s frustration, sense there is something not quite right and pick out the mistake on row 573.
Both the PM and the analyst play important roles in the investment process. But we want the PM to be in charge of the capital allocation decisions!
In part one of the blended brain series, The blended brain: why both hemispheres matter when it comes to investing, I explored McGhilchrist’s work on the differences between our left and right brain hemispheres and raised the question of whether a tendency to lead with the RH is an attribute that has led to the success of many of the world’s greatest investors.
In this article, I’ll be delving into why the LH is crucial but the RH should be calling the shots, using more examples from some of the greatest investors of our time.
But first…
Before we get into some of the roles the left and right hemispheres play in investing, it is important to point out that we all tend to naturally have a dominant side. That dominance can be innate or driven by environmental factors or both.
Some people have a much larger discrepancy between left and right hemisphere strength. Too much discrepancy or imbalance—whether left or right side dominant—can lead to problems. Balance is the key. My thesis is that great investors like Buffett and Munger have smaller discrepancies. They are strong in both the LH and RH.
Let’s discuss.
Focus on the detail (LH) versus seeing the big picture (RH)
As an investor, we need to do both. But look at Buffett. The greatest of all time. He famously doesn’t get “caught in the detail”. For example, he understands very clearly the value and mechanics of a discounted cash flow (DCF) model but, according to Charlie Munger:
“Warren often talks about these discounted cash flows, but I’ve never seen him do one. If it isn’t perfectly obvious that it’s going to work out well if you do the calculation, then he tends to go on to the next idea.”
Over the years at TDM, our financial models became incredibly complex. Thousands of lines and dozens of worksheets for a single company. I would say they became very LH dominant —too LH dominant. It’s not that all the detailed information isn’t valuable, but it had got to a point where we all felt there was too much noise and not enough signal. In the early days, we successfully relied on models that could fit “on the back of the envelope”.
As a team, we have gone back to focusing on much simpler models and emphasized “thinking in ranges”.
Again, going back to Buffett and Munger:
Munger: “Some of the worst business decisions I’ve seen came with detailed analysis. The higher math was false precision. They do that in business schools, because they’ve got to do something.”
Buffett: “The priesthood has to look like they know more than “a bird in the hand.” You won’t get tenure if you say “a bird in the hand.” False precision is totally crazy.”
Explicit information (LH) versus implicit information (RH)
The LH relies on explicit information and pays little attention to context. The RH is more adept at comprehending implicit information and the context of a situation—body language, tone of voice, subtext, cultural nuances and group dynamics.
As an example, at TDM backing the right CEOs and management teams is critically important to us. We have found Zoom calls a far inferior alternative to in-person meetings, especially meetings in the HQ of the company or more informal settings such as a dinner. We feel like we miss so much of the context, body language and other more subtle, environmental information that is so valuable to us in getting to know a person and company.
The “devil’s advocate” RH versus unreasonably optimistic and over-confident LH
Behavioural neurologist, V.S. Ramachandran, dubbed the RH “the devil's advocate”. It is better at detecting and dealing with anomalies or new information that might be contrary to the status quo. The RH is better at shifting belief appropriately in light of new evidence. As John Maynard Keynes said: “When the facts change, I change my mind.”
The LH defers to what is more familiar, the status quo. To make matters worse for a LH dominant investor, the LH is unreasonably optimistic and it lacks insight into its limitations. The RH is more realistic but tends towards the pessimistic.
There is a balance to be struck between these two opposing forces but the fact that we have a built-in devil’s advocate is good to know as an investor. I have felt at times that the literature and rhetoric on biases has portrayed individuals as almost helpless in managing them.
For years at TDM, we have debated the value of a “red team” when making investment decisions (a red team is a team whose specific task is to argue against making an investment). Some members of the team argued it was unnecessary and that the onus should be on each individual to perform the red team task for themselves. I’ve got a foot in both camps.
We have used traditional red teams to good effect in the last 12 months. But the good news is for the red team sceptics—we should be able to perform this function ourselves by leaning into our RH capability.
Grey thinking RH versus black-and-white thinking LH
The LH tends towards more black-and-white thinking. It sees the world as an “either/or” environment. It also tends to jump to conclusions, always pushing for a concrete answer.
The RH is much better at holding seemingly opposites or conflicting arguments as potentially true at the same time. It sees the world from an “and/also” perspective.
“Grey thinking” is a critical skill for successful investing. Rarely are there black-and-white truths. After all, we are in the business of trying to predict the future. Grey thinking enables an investor to see the simultaneous risks and opportunities, not just one or the other.
Mental models
Mental models are a tool of the LH. They are a simplified, categorised representation of reality. The RH sees reality. Where the LH sees the parts, the RH sees the whole. McGhilchrist states: “One could say that the LH is the hemisphere of theory; the RH that of experience; the LH that of the map, the RH that of the terrain.”
Mental models are helpful tools in investing and life, but it is important to know their limitations. A prescriptive, compartmentalised LH application of mental models can miss the nuances and uniqueness of something or someone in reality.
Using an investing example from the TDM portfolio, for many years Mineral Resources (ASX: MIN) was categorised by analysts and investors as a mining services company. The prevailing mental model for mining services companies is a hyper-competitive, low margin, high working capital, crappy business that often goes broke. When we first invested in MIN in 2005, it was earning $10m after tax net profit. Last year, the company's profit had increased to more than $750m.
In 2005 (and for many years after), the LH would have crudely applied the mining services mental model and missed the opportunity. The RH would have been better at seeing “the whole” and the uniqueness, the culture of the organization, and the nuanced competitive advantages that were different to other mining services companies. The RH would have been less likely to miss the opportunity.
In the investing world, there would not be too many better at appropriately applying mental models than the late, great Charlie Munger. In a 1994 USC Business School speech, Munger inadvertently describes the LH and RH roles in successfully using mental models.
“You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.”
“The LH is the hemisphere of theory; the RH that of experience.” Mental models are useful but it’s the RH that has the wisdom to use them appropriately.
Commercial acumen, common sense and “worldly wisdom”
Over the years of recruiting team members, I have observed that outstanding academic results often don’t correlate with common sense and commercial acumen. Until I read McGhilchrist’s work, I struggled to reconcile the lack of correlation. Now that reconciliation is more clear.
The LH is excellent for narrow, focused attention, apprehending things, and “getting shit done”. It is better than the RH at analytic sequencing. It has a larger linguistic vocabulary and more complex syntax than the RH. Most traditional education systems are very much designed to favour the LH.
Common sense, commercial acumen, intuition and pragmatism are the domain of the RH. To refer back to Buffett and Munger again, I would say they are all exemplars of combining both. But this is not the analytic power of the LH that they emphasize in their teachings. It is “worldly wisdom” as Munger puts it.
Emotional and social intelligence
It’s difficult to overstate how important emotional and social intelligence are to the way we invest at TDM. We place great emphasis on the people and culture of a company in all investment decisions. We are almost always minority investors with only the ability to influence, not control, decisions at our portfolio companies. We are often board members who need to navigate and add value to the board teams we are a part of. We have always said that emotional stability is one of our most important strengths. This is all the domain of the RH.
The RH tends to be more emotionally intelligent. It is essential for empathy. It is generally more expressive and receptive to emotion. It is much more adept at seeing and understanding the human content of the world. It is also better at sniffing out BS. In the film, The Divided Brain, neuroanatomist Jill Boyle Taylor suggests that people with LH strokes (leaving them RH dominant) should be employed as lie detectors. Perhaps the board members and funders of Theranos were all too LH dominant!
In the final article of the blended brain series, I’ll be delving into my strategies for enhancing RH function and how they can be purposefully incorporated into the investment process and life in general.