The Inner vs. Outer Scorecard


We all have egos in the psychological sense – defined as “a person’s sense of self-esteem or self-importance.” It’s the degree that denotes the positive or negative association that’s often attached to the term “ego.” There are two passages below, one from Howard Marks and the other from Warren Buffett, that share a common denominator: the role of ego upon an individual’s investment philosophy & decisions.

Howard Marks (The Most Important Thing, Chapter 10):

“…thoughtful investors can toil in obscurity, achieving solid gains in the good years and losing less than others in the bad. They avoid sharing in the riskiest behavior because they’re so aware of how much they don’t know and because they have their egos in check. This, in my opinion, is the greatest formula for long-term wealth creation – but it doesn’t provide much ego gratification in the short-term. It’s just not that glamorous to follow a path that emphasizes humility, prudence, and risk control. Of course, investing shouldn’t be about glamour, but often it is.”

Warren Buffett (The Snowball, Chapter 3):

“The big question about how people behave is whether they’ve got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. I always posed it this way. I say: ‘Lookit. Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover?’ Now that’s an interesting question.

Here’s another one. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

In teaching your kids, I think the lesson they’re learning at a very, very early age is what their parents put the emphasis on. If all the emphasis is on what the world’s going to think about you, forgetting about how you really behave, you’ll end up with an Outer Scorecard. Now, my dad: He was a hundred percent Inner Scorecard guy.

He was really a maverick. But he wasn’t a maverick for the sake of being a maverick. He just didn’t care what other people thought. My dad taught me how life should be lived…”

Also, notice Marks’ statement that the best method of wealth creation is capturing portfolio return (volatility) asymmetry: “solid gains in the good years [compounding] and losing less than others [capital preservation] in the bad.” I think Buffett would agree with this approach - see Buffett 1966 Part 1 article.