FILL THE BATHTUB

Despite being awash in information, it seems harder than ever to uncover the truth. This is troubling because when people can’t find the truth, they don’t know where to turn. They don’t know how to respond. They don’t know where to look for guidance. As a result, they wander aimlessly searching for it.

Yet, the good news is that when people eventually find the truth, they immediately know it because, as Winston Churchill said, “The truth is incontrovertible. Malice may attack it and ignorance may deride it, but in the end, there it is.”

I have thought about this a lot in recent weeks and, in doing so, was reminded of a lesson my father imparted on me and my brother when we were kids. We commonly referred to it as “filling the bathtub”.

My most vivid memory of this lesson came after one of us lost something that was important to him. When he got home from work, he was clearly disappointed, so he sat us down and said,

“Alright boys. Imagine you have an empty bathtub and an eyedropper filled with water. How long do you think it would take to fill that bathtub if you added one drop at a time?”

Confused, and likely a bit scared, we replied,

“Uhhh…a long time?”

My dad replied,

“That’s right. A long, LONG time, but if you have enough time, you will eventually fill that tub.”

The two of us nodded in agreement as he continued,  

“The same goes for trust. Each time you two do something trustworthy, you get to add a drop. Over time, those tiny drops accumulate until the bathtub is full. And, when the bathtub is full, you will have earned my trust.”

I remember thinking to myself,

“Got it dad. Makes sense.”

But he wasn’t finished. His lesson had another leg to it,

“However, boys…when you do something that is significantly untrustworthy, you pull the plug and all that water you’ve earned over time goes down the drain.”

This image has stuck with me, especially today given how hard it seems to know who or what to trust.

So, this raises two questions — Why is this the case and what can we do about it?

I found it helpful to turn to a few quotes from the late Charlie Munger who, alongside Warren Buffett, managed Berkshire Hathaway for close to six decades and, in doing so, earned the trust of countless people.

“Show me the incentives and I will show you the outcome.” 

While technology has materially decreased the time it takes do many things (i.e., book reservations, send messages, check the weather, get directions, etc.), it has also increased peoples’ desire for immediate results. As a result, this has significantly altered the incentives that drive the economy, and society at large.

Look no further than people on social media clamoring for “likes”, politicians catering to their bases instead of “crossing the aisle” to appeal to voters in the middle, the media thriving on soundbites and scandals as opposed to simply reporting the news, and investors making extremely confident forecasts instead of acknowledging an uncertain future.

So, where does this leave us?

While this behavior can generate their desired results (i.e., often money and fame), it typically entails stretching the truth. Even more troubling, sustaining these results often requires consistently “one upping” yourself, which means stretching the truth even further.

Think of it this way.

To increase their “likes”, an “influencer” on social media must paint a picture of an even better life (i.e., more airbrushed photos, exotic vacations, fancy cars, private jets, etc.).

To get more attention, a politician must move their stances even further to the extremes (i.e., think about who gets on MSNBC and Fox News most often…it is not the boring centrists).

To get more viewers, MSNBC and Fox News have to do the same.

To entice limited partners to invest in a company, deal, or fund with a payoff well into the future, not only does management have to make bold forecasts that increase expectations regarding how large the opportunity is, they have to then exceed these forecasts over time (often by a considerable amount).

The trouble is that when the truth gets stretched far enough, something eventually breaks.

In recent years, influencers have resorted to doing more extreme things for attention, political disfunction has reached a nadir, the media sensationalizes the news at best (or flat out makes it up at worst), and many companies that hyped their “massive total addressable markets” rose quickly to dramatic heights, only to fall in spectacular fashion (see Robinhood, WeWork, Peloton, and FTX, just to name a few).

As a result, it shouldn’t surprise anyone that confidence across countless parts of society has fallen to levels not seen in decades.

That is just a glimpse of how we got here.

How about where we’re going?

“The first rule of compounding is to never interrupt it unnecessarily” 

Like a tree that spends many years as a small sapling before growing into a towering oak, trust’s earliest drops are negligible and barely visible. Yet, over time they compound on one another as trust increases. It just takes a lot of patience and persistence to wait for that tub to fill up.

Herein lies the opportunity. 

In this empty tub of a world we seem to be living in, several paths forward will likely emerge for those interested in seeking the truth.

Three stand out:

The first is likely the easiest — to accept and live with the status quo. Those who choose this path will argue, “Sure, the bathtub is empty, but this is just the world we live in” and “Given that it is harder than ever to determine who and what we can trust, why waste the effort trying?” While this is not the path I would suggesting taking, I can’t blame those who do. Afterall, seeking the truth today is exhausting, and potentially damaging if you accidentally hitch yourself to the wrong wagon.

The second is more difficult, but will likely be the most promoted path. It will center around developing and leveraging technologies like artificial intelligence that attempt to “find the truth”. To “fact check” and “validate”. These technologies will likely aim to help people counter those that spread “untruths”. While this path will be tempting, it will only be a shortcut, which as Morgan Housel describes in “The Greatest Show on Earth”, is not sustainable. Think of it as a more robust version of X’s “community notes”. Helpful? Sure. A durable way to determine and build trust? Unlikely.

Then there is a third option. The good old-fashioned way — seeking out, following, partnering with, and investing in those who are committed to filling the bathtub gradually. This path requires identifying those who repeatedly do the right thing. These are the people willing to resist this new incentive structure centered around shorter attention spans and instantaneous feedback. These are the companies and investors who favor long-term compounding and are committed to staying the course, even if it means enduring periods that test even the most determined souls.

Surely this will require time and patience, but it will be worth it.

Don’t believe me?

Look no further than Munger’s philosophy on hiring,

“It is simple…trust first, ability second.”

Munger elaborated,

“Warren and I have a system where we spend a lot of time identifying very trustworthy people and then pass along that trust. As they practice that trust, they get more confirmed in being trustworthy. Eventually this creates a seamless web of trust, which is incredibly efficient and useful. By the way, this isn’t just my doctrine, there is the doctrine in economics that tries to explain why firms come into existence and it states that ‘firms come into existence because a lot of people who trust one another operating within a firm are more efficient than they would be if they were a bunch of independent proprietors’.” 

In essence, Munger is describing his own version of the bathtub. By creating a “seamless web” of people he and Buffett could trust, and then empowering them, the duo created a unique compounding machine.

This created significant advantages — like being able to buy companies more cheaply because sellers were willing to accept a lower price in exchange for retaining more control. Then, given management teams had Buffett and Munger’s trust, they could operate their companies with more freedom, which enabled them to make better long-term decisions.

As a result, Berkshire built an incredibly loyal shareholder base, an even larger and loyal collection of admirers, and one of the strongest long-term performance track records of all-time (~20% compounded since 1965) despite enduring multiple material downturns, difficult moments (see their original investment in Berkshire Hathaway in the early 1960’s and then in Salomon Brothers in the early 1990’s), and prolonged periods of relative underperformance (Berkshire trailed the NASDAQ by more than 30% annually from 1995-1999).

Today, it feels like we are reaching an inflection point. I could be wrong, but it feels like people are tired of being lied to. Instead of airbrushed versions of life, they want to witness reality. They want politicians who tell it straight. They want a media that reports all sides of a story. They want to invest in companies and funds that are transparent, forthright, and aim to be around for decades instead of days. They want all the facts. They simply want the truth.

In short, they want people willing to fill the tub.