Mungerisms
- Multiple Mental Models appraoch to business analysis and assesment.
- Business as an ecosystem.
- Especiallv important examples of these models include:
- redundancy/backup system model from engineering.
- compound interest model from mathematics.
- breakpoint/ tipping-moment/autocatalysis models from physics and chemistry.
- modern Darwinian synthesis model from biology.
- cognitive misjudgment models from psychology.
- The combinations of mental models help with seeing second-order lollapolooza effects. These can be good or bad.
- Discipline and patience
- Also avoid the “physics envy” effect - where you try to bake complex systems into one-size-fits-all physics equations.
- Two-track anaylsis: Apply a rational analysis + psycological analysis. This is how you get find mispriced opportunities. (See talk 11).
- General appraoch: (1) Identify what not to do, (2) Use multiple models on what is left (3) act decisively.
- Investment Process:
- Figure out the intrinsic value of a business.
- Differentiate value (what you get) from price (what you pay).
- Don’t get bogged down by useless details that others fall prey to. Reduce a decision to it’s most salient factors.
- After this you get a “feel” which you are quite confident in.
- Then use the investing principles checklist as a second track.
- Once the decision is make: objectively view the whole process and asses so you can improve the next time.
- Honesty is the best policy.
- It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.
- We don’t claim to have perfect morals …. I’d like to believe that we’ve made extra money from doing the right thing.
- Berkshire is a hell of a business
- We are like the hedgehog that knows one big thing: If you can generate float [cash from insurance premiums that Bershire can invest before the claim must be paid] at 3% and invest it in the business that generates 13%, that’s pretty good business.
- The business that Berkshire has acquired will return 13% pre-tax, with a cost of capital at 3%.
- Bershire’s future
- We’re so big - It limits our investment options to more competitive areas that are examined by other smart people. All large aggregations of capital eventually find it hell on earth to grow and thus find lower returns. The one thing that we’ve always guaranteed is that the future will be a lot worse than than the past.
- Culture: old-fashioned and conservative. Modelled off Ben Franklin and Andrew Cargenie. Invest a lot in building a disaster-resistant base.
TODO (jovsa): Page 179/552
Books
Talks
The Psycology of Human Misjudgement
References