Tomas Vik

Charles T. Munger, Peter D. Kaufman - Poor Charlie's Almanack

cover

OpenLibrary

My rating: ★★★★☆ (85%)

Following is an assorted list of notes I made during reading the book. I wish I had something like this before I read it so that I could beforehand decide what areas of the book are most interesting to me and pay attention accordingly.

Mental models:

  • Inversion - change the question and instead of asking how to reach great outcome, ask how to reach the worst possible outcome and then avoid doing that.
    • This change in thinking allows you to solve problems you otherwise wouldn’t be able to.
  • Permutations and combinations - probability
  • Bell curve (Gaussian distribution)
  • Double entry bookkeeping
  • Who, when, where, what, why
    • Method of communication used in the Braun company. It gave the reader full context. Similar to GitLab’s low context communication
  • Breaking point - material science
  • Critical mass - physics
  • Cognitive biases and heuristics
  • Microeconomics
    • Think about it as ecosystem
    • People/companies who specialise get really good in some niche
    • Trademarks (legally registered symbol or name), patents, exclusive franchises
    • Some process upgrades (new machine, new software) go straight to the customer and some go to the bottom line, depending on the competition and probably some other factors
    • Surfing - being early bird in an emerging market (Microsoft, Intel, National Cache Register)
  • Advantages of scale
    • Doing complicated things in large volume enables better specialization than low volume
    • Physics, larger spheric tank takes more content for less steel
    • TV advertising - in the past only available to large companies
    • Brand name
    • One news paper per town
    • Story of Walmart
      • Sam Walton destroyed all other small merchants in his area (he was fighting low for the territory) because he couldn’t fight head on the big companies
  • Disadvantages of scale
    • Birocracy - brings established way of thinking, if you poke your head up with unconventional ideas, you make yourself a target
    • Corruption (in a sense that people start looking out for themselves and their departments and if you don’t bother them, they don’t bother you)
  • Circle of competence
    • figure out your aptitudes, if you play games where other people have these aptitudes and you don’t you’ll lose
    • Natural talent combined with hard work
  • Man with a hammer - if you only have one tool (e.g. mathemtatics) you try to apply it to everythign (e.g. economics) even if the reality doesn’t fit the model
  • Incentives - do the employees/business aligned incentives with what you want?
    • Example of Federal Express when they were paying flight crews by an hour and could never get them on time and then they started paying by flight and it worked out
  • Cut the cancer model: Part of the business works well and you keep that and cut out everything else (example GEICO)
  • Opportunity cost
  • Tragedy of the commons
  • Psychology
    • Denial - you make a wrong investment and then you are in denial that it’s wrong and commit to it more, or you put in more money to recoup the cost
      • Antidote: “I can write this one off and live to fight another day. I don’t have to obsessively pursue this thing till it breaks me.”
    • Appeal to man’s interests - when you are convincing a person to do something, always take the point of view “how does the action help them/prevent them from mistake” - only moral reasoning won’t help.

      • If you would persuade, appeal to interest, not to reason.

        Benjamin Franklin

    • Self-serving bias - doing something that’s good to you and then rationalising that it’s good for the civilisation and that you are doing good deeds.
    • Rewards and punishment super-response - this is pretty much the same as the incentives mental model
      • How to receive an advice congruently with Rewards principle?
          1. Fear professional advice, especially if it’s good for the adviser
          1. Learn basics of your adviser’s trade as you deal with the adviser
          1. double-check, disbelieve, or replace most of what you are told
      • Don’t reward people for behaviour that can be easily faked (lines of code, slack responsiveness)
      • Granny principle: eat your vegetables before the desert - if you make a habit of taking the most unpleasant work first in the day, you won’t be procrastinating on it
    • Liking/loving tendency
      • If you like someone your thinking is impeded
      • you ignore their faults and comply with their wishes
      • favour things/people associated with that person
      • distort other facts to keep loving/liking the person
    • Disliking/hating tendency
      • Similar to liking tendency
      • You ignore virtues of people/things you dislike (Seth and Apple, me and Windows)
      • dislike things/people associated with the object of disliking
      • distort other facts to keep hating
    • doubt avoidance tendency
      • People tend to quickly remove doubt from their thinking and be certain about their opinions. Probably evolutionary benefit from being decisive.
      • This tendency triggers due to combination of stress and puzzlement.
      • The best way to avoid this is not to make early conclusions (e.g. jury on a case can’t discuss the case)
    • Inconsistency-avoidance tendency
      • people like things as they always were
      • people keep repeating behaviour that works
      • this tendency makes it much easier to avoid bad habit than to change it
      • human mind works like a human egg, once a sperm/idea gets in, it doesn’t let any other in
      • people accumulate large mental holdings of fixed conclusions
      • person who makes sacrifices assuming new identity holds on to it proportionately to the sacrifices

      • It’s important not to put one’s brain in chains before one has come anywhere near his full potentiality as a rational person

    • Envy/jelousy tendency

      • Envy is taboo and you can’t label someone’s actions as envy driven even if they are

      • It’s not greed that drives the word, but envy

        Warren Buffet

    • Reciprocation tendency
      • People tend to reciprocate kindness and hostility

      • You can always tell the man off tomorrow, if it is such a good idea.

      • This tendency can be misused for manipulation. If salesman gives threats you nicely and gives you a present, you feel obliged to reciprocate and buy something more expensive.
      • Walmart and many other companies completely ban their employees accepting any presents.
      • Psychology experiment by Cialdini - ask people to take group of juvenile delinquents to zoo -> 1/6 acceptance rate, ask the people first to dedicate huge chunk of time weekly for two years to supervise them and when they refuse, ask if they would at least take them to the zoo -> 1/2 acceptance rate.
        • People reciprocated the concession
    • Mere association tendency
      • messengers can be associated with the bad news. That’s why Berkshire Heathway has a policy that bad news has to be communicated immediately, so people don’t avoid being the messenger
      • Charlie says that when you help someone in need, this tendency can kick in and the person will associate you with the bad situation they were in.
        • I’m not sure about this
    • Excessive self-regard tendency

      • All man’s decisions are suddenly regarded by him as better than would have been the case just before he made them.

      • When betting lotto, people thing that they have better chances because they picked the numbers. Random numbers would have the same chance of winning.
      • Executives have high self-appraisal and they overestimate how much they’ll contribute to the company during personal interviews. Charlie suggests to pick people purely on their previous track record.
      • The self-regard tendency causes people to make excuses for their poor fixable performance.
      • When son was taking candy saying that he would later replace it, father responded: Son, it would be better for you to simply take all you want and call yourself a thief every time you do it.
        • This illustrates how people tell themself stories about their character being good.
    • Optimism tendency

      • What a man wishes he also believes

        Demosthenes

      • A way to counter this tendency is to write down the expected probabilities of all events that have to happen

    • Deprival-superreactoin tendency
      • People perceive loss as much worse than what it really is
      • They hold on to unimportant small things
    • Social-proof tendency
      • In psychology experiments, people can make huge errors if they are peer-pressured into guessing wrong.
      • People want to fit in and so they are rather wrong in crowd than right alone
      • Judith Rich Haris demonstrated that super-respect of teenagers for their peers makes it very hard to guide their behaviour. It’s better to manipulate their selection of peers.
      • Triggered most easily when stress and puzzlement are present

      • Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

    • Contrast-misreaction tendency
      • Brain doesn’t have an absolute scale in it and it instead uses the contrast/difference between two things
      • This makes people make buy expensive $1000 leather seats when they are already buying $65,000 car because relatively it’s not that much money.
      • Realestate scam: salesmen shows 3 terrible largely overpriced houses and then shows one average house slightly overpriced and in comparison it looks like a bargain.
  • Avoid ideology - it kills independent thinking
    • Charlie doesn’t let himself to have an opinion unless he can state the counter-argument better that the opposing side. This will help him understand both sides of an argument and make sure his thinking is not badly affected by ideology.
    • Darwin was really good at this. He spent 20 years trying to disprove his theory.

Markets are mostly efficient by sometimes there is a mispriced opportunity

Only make bet when you see an opportunity

  • Munger talks about horce racing and says that his friend was able to make a living (even after paying 17% “tax” to the racetrack) by betting only sometimes when he saw a mispriced bet
  • Berkshire Hathaway got most of their profit (at the 1995) from roughly 10 bets they placed

Better business strategy

  • If business earns 6% on capital and you hold the stock for 40 years, you’ll make roughly 6% even if you buy the stock at a great discount
  • If business earns 18% on capital over 20 years, you earn more even if you buy it at expensive looking price
  • Business is more important than manager. Ideally you want both to be great.
  • Finding them small - buy Walmart when it goes public - doesn’t work for BH because they have too much money
  • Finding them big - also look for a great manager (Jack Welsh in GE)
  • Sometimes you find business that can rise prices but consumption will stay up (Disney with its parks)

Taxes - you want to hold onto assets and pay one tax at the end

  • But Munger recommends paying your taxes and not try to avoid them at all cost by sketchy means

The more ideology you follow, the harder it will be for you to think clearly

If you design a system that’s easy to cheat, you are ruining civilization. It’s better to have unfair system than system that’s easy to cheat.

  • E.g. compensation for injuries together with crooked chiropractors
  • you need to stop slop early, it’s hard to stop when you let it run
  • Systems that allow cheating will cause much larger damage than a the few people who can’t be treated fairly.
  • Navy, if your ship sinks, your career is over even if it wasn’t your fault. This might be unfair, but it creates strong incentive not to sink ships so in total, the navy is better off.

On designing systems: Charlie is saying how great systems are reliable and how religion in US was great for reliability because it instilled guilt in people.

  • Charlie says that you want to maximise experience of the people who have the most aptitude and determination. You don’t want to give equal access to resource to people once you know the winners, that’s how the civilization will advance. You don’t want to design ariplanes or pick a surgeon for your child in a egalitarian fashion.

Charlie on gambling: With simple mechanical house odds against me, why in the world would I ever want to do that.

Deliver to the world what you would buy if you were on the other end.

If you don’t have competence to answer a question, just say so.

  • Don’t be like the confused bee which doesn’t have genetic programming to tell other bees that the nectar is straight up and dances confusing dance instead.

When Charlie asked his father (a lawyer) about two clients one good and one bad, father responded that the good client is treating everyone right and so he alone wouldn’t bring enough business. This was a partially hidden lesson about how to behave in life.

  • He made Charlie to reach the conclusion himself and the lesson stuck better.

Charlie talks about how his company designed great police helmets and he gave away the intellectual property because if he started making the helmets, his company would be exposed to lawsuits.

How can rising price increase consumption?

  • Legally: people perceive the goods as higher quality
  • Illegally: you use the extra money to bribe purchasing agent at your customer’s company
    • I haven’t thought about illegal possibilities to explain the economy. I should be.

Theory of [[comparative advantage]].

Sample of Warren Buffet’s time:

  • Half is spent reading
  • Half is spent talking one-on-one with highly qualified people he trusts

Avoid envy, it’s the only mortal sin that you won’t have any fun at.

  • Also avoid resentment, revange, and self-pitty. Charlie can tell you to suck it up, he had to when his son died of cancer.

Charlie early in his career tried to always manoeuvre his position so he reports to them.

Epictetus believed that any misfortune in life provides learning opportunity and opportunity to behave well. One shouldn’t become immersed in self-pity