A Lesson on Elementary Worldly Wisdom as it Relates to Investment Management & Business
Too little wisdom is delivered by modern education. One needs models from different disciplines to succeed in life. Learn about decision trees and accounting. Tell people why they need to do something. Understand the bell curve and basic engineering concepts. Learn the psychology of misjudgement.
Well, the first rule is that you have got to have multiple thinking models—because if you have just one or two that you are using, the nature of human psychology is such that you will torture reality so that it fits your models, or at least you will think that it does. – Charlie Munger
Learn to specialize in some niche. Brand advantage can make people pay a premium for the products/services. Everyone needs social proof. This is known as social herding. In life, small advantages count. It is usually winner take all. Bigger is not always better. If you are big, there is more bureaucracy and slower decision making. GE dealt with bureaucracy well by using decentralized units etc. Don’t just listen to the things you like to hear. Walmart won the small merchants because they were more efficient and bureaucracy undid Sears.
There are industries where there are a lot of shareholder destruction of wealth. An example is air travel. It was too commodity like and with intense competition and government regulation. Now, patent owners make a lot of money. The same applies for trademarks and franchises. Technology can kill you if you’re not careful. It can either help or destroy you. Early worm very often catches the worm.
And when you are an early bird, there is a model that I call “surfing”—when a surfer gets up and catches the wave and just stays there, he can go a long, long time. But if he gets off the wave, he becomes mired in the shadows…. – Charlie Munger, on early birds
If you don’t believe you have an advantage, don’t play. Figure out where you have an edge, and stay there. Success takes will, intelligence, mastering the art and discipline.
So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you are going to lose. And that is as close to certain as any prediction that you can make. You have to figure out where you have got an edge. And you have got to play within your own circle of competence. – Charlie Munger
Markets are not fully efficient. The stock market is pari-mutual. If there is a winner, there usually is a loser. The key is to place big bets when the odds are in your favour. You just need a handful of brilliant ideas. Think about a punch-card with only 20 holes in it. If you use up all 20, then you won’t be able to pick any more new stocks. The winner must bet selectively. You must get the incentives right. It is hard to beat the market because the value is usually indicated by the market price already. Sector rotation does not work. It is good to have a margin of safety. Significant discount = more upside + margin of safety.
We were also different because they bought businesses in better industries. Do not fear short-term volatility. Always aim for something that is attainable. Look for great companies when they were little and small. It is harder for Berkshire because they have too much cash and cannot look for too small investments. Management is important too, but not more important than the type of business. Bet on the business momentum, not the brilliance of the manager. If there are no good investments, do nothing. Buy good investments and sit on them. Do not overpay for a stock. There are businesses which can raise prices and get even more market share. An example was Disney. A low priced item + a global marketing strategy was Gillette. They generally don’t add value.
Take the best from every discipline and call it your own. You need a latticework of mental models. You don’t need to be an expert, but you must learn them right. Thinking through things backwards. Think both forward and backwards. Try to disprove your initial assumptions.
Learn to see relatedness from the different models you learn. Be objective. Be multi-disciplinary. Create a trademark and a brand. People like to associate something with something else. This distorts cognition. Get two or three forces to work together to create a boom. You don’t want people to stop drinking after they had a few of the same drinks. Keep your formula a secret if you can’t copyright or trademark it. Spend a bulk of your expenses in advertising. The fastest way to spread your product is to franchise.
We know, in matrimony, that if you are always available, the spouse is less likely to shift brands. And people don’t tend to organize marriage to include permanent long separations. Similarly, if you are selling a product and it is always available, people are less likely to shift to some other product and get reinforced by it. – Charlie Munger
People like to look at graphs, not numbers. Graphs display figures so that people can understand them. Predict how long the trademarks will continue to last. People’s conclusions are affected by ideological biases. Ideology can distort cognition terribly. Be wary of heavy ideology and its effects on you. Don’t ask the barber if you need a haircut. For complex tasks, it is best to use a checklist. Do not ignore the lollapalooza effects. Play the game of persuasion.
You want lollapalooza effects, which often come best from a combination of factors operating in the same direction. It is foolish to use just good, clever marketing when good clever marketing plus a superior product works so much better. – Charlie Munger
Create systems that are hard to cheat. Catch moral failures instantly and punish them and do so without delay. People react to losses differently as compared to gains. People are hooked to gambling because it after a near miss, they want to keep gambling as they think they can win.
All you have to do is open up the psychology texts, assimilate about 16 little doctrines into your repertoire, add the four or five that the books don’t contain or explain well and add better recognition of how these things combine. And boom—you’ve got an edge on the rest of humanity. It’ll help you in business. It will help you in law. It will help you in life. It will help you in love. It will help you in everything. – Charlie Munger
I’m just saying that you can learn to make fewer mistakes than other people—and how to fix your mistakes faster when you do make them. But there is no way that you can live an adequate life without making many mistakes. – Charlie Munger
Learn to quit sometimes, know when to give up. Learn how to handle mistakes. Disney had a lot of tailwind as well when video cassettes were invented. Know what you know and don’t know. When you don’t know, don’t be afraid to say so. Nobody expects you to know everything. Humor can increase persuasion too. Appeal to someone else’s interest and it will work wonders. Appeal to a man’s interest.
To the extent that you have learned it so well that you have enough confidence to intervene where it takes a little courage, you can add great value. And to the extent that you can prevent or stop some asininity, which would otherwise destroy your firm, your client or something or someone that you care about, you can add great value. – Charlie Munger