On Wordly Wisdom
Fascinating notes from a lecture by Charlie Munger
Some notes from a lecture given by Charlie Munger…
1. You have to have different ways of thinking borrowed from various disciplines. These “models” let you analyze different types of situations/scenarios. People who only know or understand one model try to fit everything that happens in life in that one model.
These models are things like:
- Elementary math of permutations and combinations (The Fermat/Pascal system)….
- Accounting; It’s the language of practical business life
- Psychology
- Communication (five W’s—you had to tell who was going to do what, where, when and why)
2. Microeconomics and the advatages of scale.
Doing something repeatedly (large scale), will eventually improve your efficiency. Simple geometrical advatages:
If you’re building a great spherical tank, obviously as you build it bigger, the amount of steel you use in the surface goes up with the square and the cubic volume goes up with the cube. So as you increase the dimensions, you can hold a lot more volume per unit area of steel.
Other advantages brought on by scale are access to the newest technology from manufacturing to advertising. Informational advantage also exists. When you reach scale people know about your product and are simply more likely to buy it over something they do not know. Lastly, social proof advantage makes it so new customers purchase a product simply because their peers already have.
3. Disadvantages of scale and specialization.
A specialized product provides a higher value than a general one to those whom it is targeting. Small scale operations also allow a business to avoid bureaucracy and to stay flat from a hierarchy perspective which allows such businesses to move faster and iterate quickly.
In big bureaucracies each department has a task to perform and has no interest in the overall success of the business. Therefore when things that are non-optimal are identified they are ignored if they are not part of that team’s mission.
4. A model that is hard to understand.
Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.
Mainly it happens when it’s a commodity business and when advances in technology will only benefit the buyers of the product and not the manufacturer. But the investment in such technologies is require to simply keep up.
5. Investing
Surfing
This is the idea of riding a wave brought on by a new technology that you know will be adopted by all players so investing in the inventor or distributor of the new technology is like riding the wave. This is reccomended for fields where the investor has a high degree of competence and can easily understand the impact of technological advancement on that field.
Market Inefficiency investing
The market is considered to be mostly efficient meaning that prices go hand in hand with risk (it’s like the pari-mutuel system in horse racing). There are however inefficiencies once in a while. An investor who is disciplined and only invests in such obvious inefficiencies can make a killing and beat the market in the long term. Bet seldom when an insight presents itself. Investment managers need to sell you as much as possible so this concept remains foreign to most people but it is the key principle of investing at Berkshire Hathaway. Get into good businesses, no matter the price as they will generate the big results. (read my note on the side if that last statement confused you)
