Investing time — reading stock investors
As a young person, I will be investing something precious than money — TIME (and money too). What can picking stocks teach about that? (rough notes, didn’t spend time composing. But contain some wisdom and pointer. Original worth reading — https://old.ycombinator.com/munger.html)
Sharing my observations reading a talk by Charlie munger from Berkshire Hathaway –
First, observations. Next, quotes.
Observations -
• He questions if traditional education provides much of the basic worldly wisdom that is required
• Why is it important to understand investment — because as a young person. I am going to investing time if not money into stuff into my life. That’s why I am learning about investments, I want to be wise at it. There are so many things that ask for my time and I need to learn how to pick good opportunities (stocks.)
• We need many different mental models to understand things.
• First — mathematics — numbers, compound interest, permutations and combinations
• Decision tree theory is taught in first year harvard business school and people love it. Its like applying basic algebra to life.
• Double entry book keeping — limitation- guess the life of a jet plane, depreciation rates wont tell you
• His rule for all the Braun Company’s communications was called the five W’s — you had to tell who was going to do what, where, when and why. If you don’t you would get fired.
• Statistics, engineering quality control — normal and gaussian distribution
• Critical mass, breakpoint, backup system
• Psychology of misjudgement — some 20 principles
• Microeconomics — advantages of scale — economy as ecosystem
• Volume makes it more efficient
• Informational advantage — wrigley vs other chewing gum
• Advantages and disadvantages of scale
• Big bureaucracy is a curse and slow, you need strategems and fancy motivational programs
• Pavlovian association — can you hear what you don’t like? How to talk when your audience doesn’t like your word?
• Patents — did more money go into the patent than out of it? What is my circle of competence? I am not learning music to become great among the music community, I am learning it to become connect better in the social and ecological community.
Replacing business as the idea and manager as the leader
From <https://old.ycombinator.com/munger.html>
What time investments can reduce my love for my fellow humans?
Quotes
Basic worldy wisdom
What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.
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.
• — one patent court system
n all cases, the people who sell the machinery — and, by and large, even the internal bureaucrats urging you to buy the equipment — show you projections with the amount you’ll save at current prices with the new technology. However, they don’t do the second step of the analysis which is to determine how much is going stay home and how much is just going to flow through to the customer. I’ve never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read:
“This capital outlay will save you so much money that it will pay for itself in three years.”
Again, that is a very, very powerful idea. Every person is going to have a circle of competence. And it’s going to be very hard to advance that circle. If I had to make my living as a musician…. I can’t even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization.
As I always say, the iron rule of life is that only 20% of the people can be in the top fifth. That’s just the
way it is. So the answer is that it’s partly efficient and partly inefficient.
The way to win is to work, work, work, work and hope to have a few insights.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
When Warren lectures at business schools, he says, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches — representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”
I think the reason why we got into such idiocy in investment management is best illustrated by a story that I tell about the guy who sold fishing tackle. I asked him, “My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.”
Finally, somebody got the idea to pay all these people not so much an hour, but so much a shift — and when it’s all done, they can all go home. Well, their problems cleared up overnight.
So getting the incentives right is a very, very important lesson. It was not obvious to Federal Express what the solution was. But maybe now, it will hereafter more often be obvious to you.
And it makes sense to load up on the very few good insights you have instead of pretending to know everything about everything at all times. You’re much more likely to do well if you start out to do something feasible instead of something that isn’t feasible. Isn’t that perfectly obvious?
However, averaged out, betting on the quality of a business is better than betting on the quality of
management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager.
Even with a 10% per annum investment, paying a 35% tax at the end gives you 8.3% after taxes as an annual compounded result after 30 years. In contrast, if you pay the 35% each year instead of at the end, your annual result goes down to 6.5%. So you add nearly 2% of after-tax return per annum if you only achieve an average return by historical standards from common stock investments in companies with tiny dividend payout ratios.
But in terms of business mistakes that I’ve seen over a long lifetime, I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.
Warren and I personally don’t drill oil wells. We pay our taxes. And we’ve done pretty well, so far. Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.
Taxes are the time you need to spend to just exist in that business, how much is that?
But are tax shelters really worth it?
“GEICO is a very interesting model. It’s another one of the 100 or so models you ought to have in your head. I’ve had many friends in the sick business fixup game over a long lifetime. And they practically all use the following formula — I call it the cancer surgery formula:
They look at this mess. And they figure out if there’s anything sound left that can live on its own if they cut away everything else. And if they find anything sound, they just cut away everything else. Of course, if that doesn’t work, they liquidate the business. But it frequently
Within the growth stock model, there’s a sub-position: There are actually businesses, that you will find a few times in a lifetime, where any manager could raise the return enormously just by raising prices — and yet they haven’t done it. So they have huge untapped pricing power that they’re not using. That is the ultimate no-brainer.
That existed in Disney. It’s such a unique experience to take your grandchild to Disneyland. You’re not doing it that often. And there are lots of people in the country. And Disney found that it could raise those prices a lot and the attendance stayed right up.
From <https://old.ycombinator.com/munger.html>
In fact, any time anybody offers you anything with a big commission and a 200-page prospectus, don’t buy it. Occasionally, you’ll be wrong if you adopt “Munger’s Rule”. However, over a lifetime, you’ll be a long way ahead — and you will miss a lot of unhappy experiences that might otherwise reduce your love for your fellow man.
