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!

See full slides below.