Latticework Investor

Value Investing

Posts Tagged ‘munger

Interview with Alice Schroeder

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NotMakingThisUp‘s interview with Alice Schroeder outlines her story in writing The Snowball (the story of Warren Buffett’s life).

Couple of quotes that stand out for me are:

Warren has a term, the Institutional Imperative, to describe the empire-building and other foolishness that leads to overpriced acquisitions, underutilized capital, stock repurchased above its intrinsic value, stock issued below its intrinsic value, and all the other failures of capital management that companies are so prone to commit. CEOs are rewarded in all sorts of ways for creating bigger companies, not more profitable companies.

The first time I came across the term “Institutional Imperative” was in the books Poor Charlie’s Almanac and Seeking Wisdom.

Leading on to a quote about what Alice makes of Charlie Munger:

It’s hard to sum up Charlie in a couple of sentences or a paragraph. He’s quite humble in his genuine respect for the achievements of others, as long as they equal or exceed his own intelligence, in his opinion. He is so ungodly judgmental that some people find him insufferable, yet his fundamental kindness shines through. Politically … if you look up “politically incorrect” in the dictionary you’ll find a picture of Charlie there instead of a definition. That’s part of why Charlie is refreshing to be around, though. He’s always himself. There is not a phony cell in his body.

Your time will not be wasted talking to Charlie. Usually he’s got something very interesting and insightful to say. It’s better to listen when you’re around Charlie than to try to talk. The phenomenon I wrote about in the book, about him turning his head off when other people are talking, is very much in evidence at times. He’s really a treasure. I enjoyed interviewing Charlie immensely.



Written by latticework01

December 10, 2009 at 11:59 am

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Mental Models

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The title of this blog is based on a quote from Charlie Munger about getting worldly wisdom from having a number of mental models

In multiple speeches, and in the book Poor Charlie’s Almanack, Munger has introduced the concept of “Elementary, Worldly Wisdom” as it relates to business and finance. Munger’s worldly wisdom consists of a set of mental models framed as a latticework to help solve critical business problems. According to Munger, only 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person.

Conveniently Farnam Street posts daily about mental models, and provides a pretty complete list below.

Each of the links should take you to the appropriate Farnam Street post.

Psychology (misjudgments)

  1. Bias from Availability — including ease of recall, vividness, exposure, memory structure limitations, Von Restorff Effect, and love of a story. (introduction | all posts)
  2. Bias from the most recent evidence
  3. Bias from denial
  4. Bias from insensitivity to base rates
  5. Bias from insensitivity to sample size
  6. Bias from misconceptions of change
  7. Bias from insensitivity to regression
  8. Bias from conjunction fallacy
  9. Confirmation bias (all posts)
  10. Bias from anchoring (all posts)
  11. Conjunctive and disjunctive-events bias (all posts)
  12. Bias from over-confidence (all posts)
  13. Hindsight Bias (introduction | all posts )
  14. Bias from incentives and reinforcement (all posts)
  15. Bias from self-interest — self deception and denial to reduce pain or increase pleasure; regret avoidance. (all posts)
  16. Bias from association (all posts)
  17. Bias from liking/loving
  18. Bias from disliking/hating
  19. Commitment and Consistency Bias (introduction | all posts)
  20. Bias from excessive fairness (all posts)
  21. Bias from envy and jealousy
  22. Reciprocation tendency (introduction | all posts)
  23. over-influence from authority; halo effect? or is that liking?
  24. Tendency to super-react to deprival; strong reacting when something we have or almost have is (or threatens to be) taken away. loss aversion?
  25. Bias from contrast (all posts)
  26. Bias from stress-influence (introduction | all posts)
  27. Bias from emotional arousal (introduction | all posts)
  28. Bias from physical or psychological pain
  29. Bias from mis-reading people; character
  30. Attribution Error; underestimating situation factors (including roles) when explaining reasons; one to one versus one to many relationships
  31. Bias fro the status quo (introduction | all posts)
  32. Do something tendency (introduction | all posts)
  33. Do nothing tendency (introduction | all posts)
  34. Over-influence from precision/models
  35. Simplicity Bias
  36. Uncertainty avoidance
  37. Ideological bias (all posts)
  38. Not invented here bias — thinking that our own ideas are the best ones
  39. Bias from over-weighting the short-term
  40. Tendency to avoid extremes
  41. Tendency to solve problems using only the field we know best / favored ideas. Man with a hammer.
  42. Bias from social proof (all posts)
  43. Over-influence from framing effects (all posts)
  44. Lollapalozza.

Other Mental Models:

  1. Asymmetric Information
  2. Occam’s Razor
  3. Deduction and Induction
  4. Basic Decision Making Process (introduction | all posts)
  5. Scientific Method
  6. Process versus Outcome
  7. and then what?
  8. The Agency Problem
  9. 7 Deadly Sins
  10. Network Effect

Business

  1. Ability to raise prices
  2. Scale
  3. Distribution
  4. Cost
  5. Brand
  6. Improving returns
  7. Porters 5 forces
  8. Decision trees
  9. Diminishing Returns

Investing

  1. Mr. Market
  2. Margin of Safety
  3. Circle of competence

Ecology

  1. Complex adaptive systems
  2. Systems Thinking

Economics

  1. Utility
  2. Diminishing Utility
  3. Supply and Demand (introduction | all posts)
  4. Scarcity
  5. Opportunity Cost
  6. Marginal Cost
  7. Comparative Advantage (introduction | all posts )
  8. Trade-offs
  9. Price Discrimination
  10. Positive and Negative Externalities
  11. Sunk Costs
  12. Moral Hazard
  13. Game Theory (all posts)
  14. Prisoners’ Dilemma (all posts)
  15. Tragedy of the Commons (all posts)
  16. Bottlenecks
  17. The invisible hand

Engineering

  1. Feedback loops (Introduction | posts)
  2. Redundancy (Introduction | posts)

Mathematics

  1. Bayes Theorem
  2. Power Law
  3. Law of large numbers
  4. Compounding
  5. Permutations
  6. Combinations
  7. Statistics
  8. Mean, Medium, Mode
  9. Distribution
  10. Varability
  11. Trend
  12. Inversion

Statistics

  1. Outliers and self fulfilling prophecy
  2. Correlation versus Causation
Chemistry

  1. Thermodynamics
  2. Kinetics
  3. Autocatalytic reactions

Physics

  1. Newton’s Laws
  2. Momentum
  3. Quantum Mechanics
  4. Critical Mass (introduction | posts)

Biology?

  1. Evolution (all posts)

Written by latticework01

November 24, 2009 at 5:13 pm

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Investment Checklist

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An Investing Principles Checklist from Poor Charlie ‘s Almanack, which I found on Scribd.

Risk – All investment evaluations should begin by measuring risk, especially reputational

  • Incorporate an appropriate margin of safety
  • Avoid dealing with people of questionable character
  • Insist upon proper compensation for risk assumed
  • Always beware of inflation and interest rate exposures
  • Avoid big mistakes; shun permanent capital loss

Independence – “Only in fairy tales are emperors told they are naked”

  • Objectivity and rationality require independence of thought
  • Remember that just because other people agree or disagree with you doesn’t make you right or wrong — the only thing that matters is the correctness of your analysis and judgment
  • Mimicking the herd invites regression to the mean (merely average performance)

Preparation – “The only way to win is to work, work, work, work, and hope to have a few insights”

  • Develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day
  • More important than the will to win is the will to prepare
  • Develop fluency in mental models from the major academic disciplines
  • If you want to get smart, the question you have to keep asking is “why, why, why?”

Intellectual humility – Acknowledging what you don’t know is the dawning of wisdom

  • Stay within a well-defined circle of competence
  • Identify and reconcile disconfirming evidence
  • Resist the craving for false precision, false certainties, etc.
  • Above all, never fool yourseltç and remember that you are the easiest person to fool
  • “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

Analytic rigor – Use of the scientific method and effective checklists minimizes errors and omissions

  • Determine value apart from price; progress apart from activity; wealth apart from size
  • It is better to remember the obvious than to grasp the esoteric
  • Be a business analyst, not a market, macroeconomic, or security analyst
  • Consider totality of risk and effect; look always at potential second order and higher level impacts
  • Think forwards and backwards – Invert, always invert

Allocation – Proper allocation of capital is an investor’s number one job

  • Remember that highest and best use is always measured by the next best use (opportunity cost)
  • Good ideas are rare – when the odds are greatly in your favor, bet (allocate) heavily
  • Don’t “fall in love” with an investment – be situation-dependent and opportunity-driven

Patience – Resist the natural human bias to act

  • “Compound interest is the eighth wonder of the world” (Einstein); never interrupt it unnecessarily
  • Avoid unnecessary transactional taxes and frictional costs; never take action for its own sake
  • Be alert for the arrival of luck
  • Enjoy the process along with the proceeds, because the process is where you live

Decisiveness – When proper circumstances present themselves, act with decisiveness and conviction

  • Be fearful when others are greedy, and greedy when others are fearful
  • Opportunity doesn’t come often, so seize it when it comes
  • Opportunity meeting the prepared mind; that’s the game

Change – Live with change and accept unremovable complexity

  • Recognize and adapt to the true nature of the world around you; don’t expect it to adapt to you
  • Continually challenge and willingly amend your “best-loved ideas”
  • Recognize reality even when you don’t like it – especially when you don’t like it

Focus – Keep things simple and remember what you set out to do

  • Remember that reputation and integrity are your most valuable assets — and can be lost in a heartbeat
  • Guard against the effects of hubris (arrogance) and boredom
  • Don’t overlook the obvious by drowning in minutiae (the small details)
  • Be careful to exclude unneeded information or slop: “A small leak can sink a great ship”
  • Face your big troubles; don’t sweep them under the rug

In the end, it comes down to Charlie’s most basic guiding principles, his fundamental philosophy of life: Preparation. Discipline. Patience. Decisiveness.

Written by latticework01

May 12, 2009 at 9:18 am

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