Value Investing

Marketing, Decision Making & Learning: The Buffett – Munger Way

Marketing, Decision Making & Learning: The Buffett – Munger Way by Anand Chandrasekaran via Slide Share

Munger / Buffett track record

  • Berkshire Hathaway is one of the world’s most valuable companies
  • Stakes (current or former) in Coca-Cola, Gillette, ABC, Wells Fargo, See’s Candies, Saloman Smith barney, GEICO, NetJets, CostCo, AmEx, Washington Post…
  • … no whiff of scandal, greed or accounting ‘irregularities’
  • 2007 revenues of $118 billion (mostly through subsidiaries)
  • 217,000 employees overall
  • Based out of Omaha, Nebraska
  • Early students of Ben Graham

– ‘Moat’ Philosophy

– ‘Cigarette Butt’ Investing and approach to evaluating ideas / businesses

Who is Charlie Munger?

  • Vice-Chairman, Berkshire Hathaway
  • Modern day Ben Franklin?
  • Close collaborator of Warren Buffett
  • Fair business at a great price VS great business at a fair price! (changing Buffett’s thinking)
  • Expounded “worldly wisdom”, “latticework of mental models” and “lollapalooza results”

– We’ll hear these several times in this lecture!

– Concentration, Curiosity, Perseverence, Thrift, Simplicity, Duty

Key themes to take away

  • Meet the eminent dead
  • Meet the one-legged guy in an ass-kicking contest
  • Worldly Wisdom: “man with the hammer” tendency
  • Invert, always invert
  • Latticework of Mental Models
  • Multi-disciplinary approach
  • Web of deserved Trust
  • The 6 themes of influence (a la Robert Cialdini)
  • Self-serving bias
  • The ability to kill your best ideas
  • Inventing VS the method of invention
  • Bad bridge VS bad business
  • How do you build a 2 trillion $ brand from scratch?

Meet the eminent dead…

  • Benjamin Franklin
  • Carl Jacobi
  • Charles Darwin
  • Adam Smith
  • Linus Pauling
  • Instead of explaining concepts in the abstract, it’s a lot more fun to make friends with the eminent dead!

Source: “Poor Charlie’s Almanack“, Edited by Peter D Kaufman.

Worldly Wisdom

  • The man with the hammer…
  • … the one-legged guy in an ass-kicking contest
  • How do I acquire Worldly Wisdom?
  • Multi-disciplinary approach
  • The 6 themes of influence (a la Robert Cialdini)
  • Self-serving bias: appealing to bias, not to rationality
  • Causality VS Consequence

How does one acquire and retain WW?

  • Latticework of Mental Models
  • Invert, always invert
  • The 6 themes of influence (a la Robert Cialdini)
  • Inventing VS the method of invention
  • Pavlovian Models (See ‘building a $1 trillion brand’)
  • Weather Patterns
  • Adam Smith’s “invisible hand”
  • Linus Pauling’s mining of physics to improve chemistry
  • HOMEWORK ASSIGNMENT: Look at the reading list of the Santa Fe Institute students (http://www.santafe.edu/)

The multi-disciplinary approach

  • Arriving at a checklist
  • Tools to evaluate marketing and business problems
  • Avoiding the “man with the hammer” tendency
  • CostCo: optimizing on a single variable (to the extreme)
  • Gillette: commitment and consistency
  • Nebraska Furniture Mart: customer service, low prices
  • Knowing when to apply the “extraordinary routine”

Case Study : The 6 themes of INFLUENCE

  • Look for reinforcing effects in marketing situations (for Lollapalooza results)
  • RECIPROCITY
    • LinkedIn endorsements; chain letters
  • COMMITMENT AND CONSISTENCY
    • Only one sperm can get in and then the egg shuts off
    • New physics VS old physics; New technology VS old technology
    • Phil Zimbardo (Stanford)’s prison experiment
  • SOCIAL ACCEPTANCE
    • Tupperware Parties
  • LIKING
  • AUTHORITY
    • #1 brand always has the highest market share
  • SCARCITY
    • iPod launch

Source: “Psychology of human misjudgement”, Charlie Munger speech at Harvard law school, 1995

Case Study: The 6 themes of INFLUENCE (practical examples)

  • Alcoholics Anonymous
  • Real Estate and Car Dealers
  • Tupperware Parties
  • Coca-Cola and the launch of new Coke
  • Darwin VS other evolutionary biology researchers
  • “Limited Edition” sneakers, cars, watches, credit cards

Source: “Psychology of human misjudgement”, Charlie Munger speech at Harvard law school, 1995

Case Study: Incentive caused bias

  • Economists call this “agency costs”
  • Appeal to bias
  • Always note what people are paid to believe
  • Incentives can drive behavior (sales commissions? Bonus objectives?)
  • Motivation for the right goals
    • FedEx shift / hour compensation

A return to values…

  • Invert, always invert…
    • Tell me where I’m gonna die and I’ll make sure I don’t go there!
  • The ability to kill your best ideas
  • Inventing VS the method of invention
  • A web of deserved trust
    • The best way to succeed is to deserve what you get!
  • Lollapalooza results
    • Two things to avoid: Sloth, unreliability
  • Bad bridge VS bad business
  • Are you comfortable with this appearing in the front page of the NY Times tomorrow morning?

Can you build a 2 trillion $ brand from first principles?

  • It is the year 1884. Mr.Glotz has a challenge!
  • You and Mr Glotz know nothing that happened after 1884
  • 50% of equity goes to you if you can make it happen within 150 years (from 1884) = 2034
  • You cannot make alcoholic beverages
  • Makes the whole corp. worth $2 trillion
  • This is after paying out several billion $ in dividends
  • You can only use principles that a smart high school sophomore can understand
  • You can draw from any subject, to make your case…
  • You have 15 min. to make a pitch!

Marketing, Decision Making & Learning: The Buffett - Munger Way

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