Tag: Life Lessons

Munger’s Tao

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I recently came across this awesome Tweet & Podcast from David Senra of Founders Podcast, wherein he captures learnings from his dinner with Charlie Munger, as well as his reading of The Tao of Charlier Munger.

Here are some insightful ideas & quotes from Munger that stayed with me from David’s experience:

1/ Buy wonderful businesses at fair prices

Before Munger joined Berkshire, Buffet used to invest in Ben Graham’s “cigar-butt” style – buying super-cheap stocks, often trading below book value.

Munger gave him a new blueprint: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices”. This is what led to Berkshire becoming the compounding machine it is today.

2/ Cash is king

Through a company called Blue Chip Stamp, Munger & Buffet learned about the value of “float”- excess cash that a business throws up due to the timing difference between receiving payments & settling payouts. This excess cash could then be re-invested in profitable companies.

Through his early investing experiences, Munger started seeing the advantages of investing in better businesses that didn’t have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses.

Munger advises keeping enough cash at all times, in order to take advantage of stock market crashes.

We made so much money because when the great deals came during an economic crisis, we had cash and could move fast.

Charlie Munger

3/ Acting on the few big ideas that matter

Munger says that very few times, you will be presented with an opportunity to buy a great business run by a great manager. Not buying enough when presented with this opportunity is a big mistake.

You have to be willing to act when the right opportunity comes along. ‘Cos great opportunities don’t last very long in this world.

Good ideas are rare. When you find one, bet big.

Charlier Munger

4/ Portfolio concentration creates outlier outcomes

Real wealth is created via concentration. Or to put it in another way, over time, one should expect 1-2 outlier winners to constitute a majority of the portfolio.

When Munger wrapped up his pre-Berkshire fund, Blue Chip Stamp accounted for ~61% of his portfolio.

Worshipping at the altar of diversification is crazy. One truly great business will make your unborn grand children wealthy.

Charlie Munger

5/ Chase unfair advantage

Competition is for losers! Why would you want to compete with people?

Some quotes from Munger on this:

  • “My idea of shooting fish in the barrel is to first drain the barrel”.
  • “Only play games where you have an edge”.
  • “Differentiation is survival”.
  • “Aim for durability”.

Munger talks about how size and market domination has its own kind of competitive advantage. When a company is deeply entrenched with customers, it acts as a deterrent for other players to enter the space.

Sectors that are generally considered to be “bad businesses” (eg. retail, textile, airlines etc.) are intensely competitive. Players beat each other over price and drive down profit margins for everyone, killing cash flows and bringing down chances for long term survival.

That’s why Berskhire looks for great businesses that have a durable competitive advantage. 

Mimicking the herd invites regression to the mean. 

Charlier Munger

6/ The power of Compounding

Find an exceptional business where underlying economics are going to keep increasing its value, and then hold on to it over time.

Quoting Munger – “Time is the greatest friend of an exceptional business. It’s the greatest enemy of a mediocre business”.

Compounding also works in knowledge. Munger gives an example of how over 50 years of consistently reading Barrons, he found just 1 idea worth investing in but that made him $80Mn, which he then gave to Chinese fund manager Li Lu, who turned it into $400-500Mn!

7/ The value of Rationality

To quote Munger:

  • “We don’t let other people’s opinions interfere with our rationality”.
  • “Life is like poker. You have to be willing to fold a much loved hand when new info or facts come to light“.
  • “It’s remarkable how much long term advantage people like us have got by trying to be consistently not-stupid, instead of being highly intelligent”.

8/ Focus is a super-power

Munger says:

  • “I succeed because I have long attention spans. People who multi-task give up their advantage”.
  • “You will always lose in a race to that one guy who sacrifices everything he has in service of one idea”.
  • “Extreme specialization is the key to success”.
  • “Intense interest in a subject matter is super powerful”.

He cites examples of how great companies tend to focus on optimizing one specific lever in their business:

  • Costco – optimizes costs
  • Geico – optimizes distribution via direct-to-consumer
  • Nebraska Furniture Mart – optimizes price for the end customer

What’s the one thing that both Warren Buffet & Bill Gates said was the key to success? Focus!

9/ Frugality drives value

Munger cites one common quality amongst all Berkshire businesses – they will go to great lengths to keep operating costs low. Even Berkshire itself demonstrates the same behavior:

  • It has no PR department.
  • It has no investor relations office.
  • For many years, its annual report was published on the cheapest possible paper & had no expensive color photos.

10/ Brands are magic

Munger says – “A great brand is a piece of magic”.

Brands like Coca Cola & See’s Candies have a piece of a consumer’s mind & therefore, have no competition. Charlie calls them “consumer monopolies”.

A lot changed the day Berkshire realized the power of brands.

11/ Business plans are useless

Munger says Berkshire has no master plan – “We always wants to be accounting for new information. We are individual-opportunity driven. Our acquisition style is driven by simplicity”.

He shares an interesting anecdote. When Mrs. B (Rose Blumkin), Founder of Nebraska Furniture Mart, was asked about having a business plan, she said – “yes, sell cheap & tell the truth”.

12/ Patience is rare

Human nature is all about being impatient. People just can’t sit around, waiting patiently. They want to feel useful. So they end up taking action and doing something stupid.

13/ Learning from mistakes is crucial

Learning from history is a big form of leverage. The biggest financial disasters get forgotten in a few years.

Munger says:

  • “Wise people step on troubles early”.
  • “Every missed chance is an opportunity to learn”.
  • “Be willing to take life’s blows”. 

I love rubbing my nose in my mistakes. It’s an extremely smart thing to do.

Charlier Munger

14/ It takes many, many attempts to find your life’s work

For context, Munger started working on Berkshire in its current form only in his 40s.

15/ Finally, lots of life advice…

“Build relationships with A players”.

“Problems are a part of life. So why are you letting them bother you?”.

“The best way of reducing problems is to go for quality – Go for Great!”.

“It’s the strong swimmers who drown”.

“Envy has no utility. The key to living a well-lived life is killing envy”.

“The best armor for old age is a well spent life preceding it”.

PS: If you love Charlie Munger’s wisdom, you might enjoy my post capturing his musings from the 2o23 Daily Journal Shareholder’s Meeting.

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The Familiarity Conundrum

Earlier this year, my younger son got admitted to the same preschool that the older one attended in SF. As parents, we were elated! Our older one loved this school, we know the Principal and teachers really well, and it significantly reduces uncertainty for us given this school goes up to Middle. A win-win in every respect!

Except, we were caught completely off-guard by how the first few weeks turned out. That the kid was having “adjustment issues” would be an understatement. Everything from sleep schedules & toilet training to eating & social behavior went majorly South. While this is normally expected when kids change schools, what surprised me was how much this derailed us as parents. We were maniacally struggling to manage the kid in this transition while trying to cope with all the mood swings & changes this was bringing to our daily routine.

Of course, things started improving after a couple of months & as we speak, the kid seems all settled in the new environment🤞🏽. But I couldn’t stop introspecting on why we got caught so off-balance in this episode, even when we knew the school intimately & had gone through this exact experience before with our older one?

This was a manifestation of what I call the Familiarity Conundrum. When we deal with things we are intimately familiar with, there is a double-edged sword at play. While familiarity arms us with high-fidelity, experiential data that can be incredibly useful in making a smart decision, it also creates overconfidence-driven blind spots in our ability to deal with the familiar.

In highly familiar situations, our brain tends to short-circuit the decision-making process, perhaps gathering comfort from past anecdotal experience regarding similar situations. The result is a quick decision based on 1st order thinking. We went through this in the above school episode – our brains used a quick, 1st order heuristic – “because this school was so great for our older son, it will be equally good for our younger one too”. We failed to ask even a basic set of questions regarding this decision eg. are the teachers the same this year, is our younger son starting at the same age as the older one, should we expect any changes to the school routines post-Covid etc. These are basic diligence questions that we would have definitely tried to answer had this been an unfamiliar school for us.

This Familiarity Conundrum often leads to sub-optimal decisions in other aspects of life as well. Some examples that I have personally experienced or witnessed:

  • When hiring someone we are highly familiar with eg. an ex-colleague or classmate, our brain tends to unfairly magnify our last, dated view of their strengths, not pushing us enough to evaluate them independently, especially with respect to fit with the current opportunity.
  • When a trusted person introduces us to a deal, say an investment opportunity, our brain wrongly transfers trust with the referrer onto the referred deal, without a rigorous evaluation of the deal on a stand-alone basis as well as the referrer’s true competence in the specific area being evaluated.
  • When operating in an area where we have prior work experience, we tend to under-diligence the opportunity & overestimate our likelihood of success. In areas of perceived expertise, our brain doesn’t push hard enough on 2nd & 3rd order thinking like figuring out ways in which this context is different from our prior experience, trying to see around corners for lurking risks etc.

So what can we do to effectively deal with this Conundrum? Based on what I have learned from my experience as well as studying great rationalists like Charlie Munger, here are a few ideas:

1/ First step is spotting it at the right time – training your mind to spot times when familiarity could be creating blind spots for you, is itself a major part of keeping biases at bay. Personally, I tend to keep a matrix of such mental models both layered in my head as well as often as part of a diligence checklist. For decisions that cross the bar of impact and/or irreversibility, I like to run them through this matrix to check for potential blind spots.

2/ Don’t deviate from the “checklist” – Dr. Atul Gawande argued for the importance of checklists as a tool to make surgeries safer in his popular book “The Checklist Manifesto – how to get things right“. Professionals as diverse as surgeons, pilots & public market investors leverage checklists to handle uncertainty & make better decisions under stress.

The key is not deviating from your operating process even when the context is highly familiar and your brain is pushing you to use crude heuristics to arrive at a quick decision. Like a pilot who will diligently run through the aviation checklist even on the best-weather days, one needs to strive to do the same, each time, every time while taking high-impact decisions.

3/ Always have an independent feedback mechanism – even in areas where you believe you have deep knowledge and/or extensive on-ground experience, it’s always good to get feedback from independent players who are likely to see the opportunity in an unbiased way.

During my early days as an angel investor, I had a tendency to predominantly rely on my own judgment of a startup & often made decisions without taking the time to gather feedback from other sources. Having learned from several missteps, I have now incorporated gathering feedback from several sources including market experts, customers, founder references & other investors, as a core part of my investing process.

In this context, I find the idea of having a “feedback buddy” incredibly useful. For important projects eg. buying a house, a product launch, a big investment, it’s good to have someone who is unrelated to the project be a sounding board to bounce off ideas, poke holes in current thinking & simply provide common-sense feedback.

The bottom line is this – as opposed to explicitly unfamiliar terrain where our natural survival mode gets alerted, familiar contexts are significantly more likely to get our brains in “lazy thinking” mode, creating blind spots that will catch us off-guard. Proactively spotting this dynamic, having the discipline to stick to a rigorous process at all times & consciously incorporating an independent feedback mechanism within it, goes a long way in offsetting this Familiarity Conundrum.

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to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.