Archive for the ‘The Charlie Munger Checklists’ Category

The Charlie Munger Checklists

September 7, 2008

“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

“It is not given to human beings to have such talent that they can just know everything about everything all the time but it is given to human beings who work hard at it, who look and sift the world for a mispriced bet, that they can occasionally find one. The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

The Charlie Munger Checklist…for Psychology…
“Grand General Principle of Social Psychology: Cognition is ordinarily situation-dependent so that different situations often cause different conclusions, even when the same person is thinking in the same general subject area.”
– reward/punishment
– liking/loving
– disliking/hating
– doubt avoidance
– inconsistency avoidance
– curiosity
– Kantian fairness
– envy/jealousy
– reciprocation
– influence from mere association
– simple pain avoiding psychological denial
– excessive self regard
– overoptimism
– deprival
– social proof
– contrast misreaction
– stress influence
– availability misweighing
– authority misinfluence
– reason respecting
– drug misinfluence
– use it or lose it
– senescence misinfluence
– twaddle
– LOLLAPALOOZA of the above forces
“The 25 standard causes of human misjudgment…Reward/Punishement, Liking/Loving, Disliking/Hating, Doubt-Avoidance, Inconsistency-Avoidance, Curiosity, Kantian Fairness, Envy/Jealousy, Reciprocation, Influence From Mere Association/Association, Simple Pain Avoiding Psychological Denial, Excessive Self Regard, Overoptimism, Deprival Reaction (loss experience of possessed or almost possessed reward), Social Proof, Contrast Misreaction, Stress Influence, Availability Misweighting, Use It Or Lose It, Drug Misinfluence, Senescence Misinfluence, Authority Misinfluence, Reason Respecting, Twaddle, Lollapalooza (in getting extreme consequences from streams flowing together/confluences of psychological tendencies acting in favor of a particular outcome)”

The Charlie Munger Checklist…of Ultra Simple General Problem Solving Notions…
Decide the big ‘no brainer’ questions first, Apply numerical fluency, Invert (think the problem through in reverse), Apply elementary multidisciplinary wisdom never relying entirely upon others, Watch for combinations of factors the Lollapalooza effect
1. Decide big no brainer questions first
2. Apply numerical fluency
3. Invert – think problems through in reverse
4. Apply elementary multidisciplinary wisdom never relying entirely upon others
5. Watch for combination of factors – Lollapalooza effect

The Charlie Munger Checklist…for Investing and Decision Making…
…Preparation. Discipline. Patience. Decisiveness…
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 yourself, and remember that you are the easiest person to fool
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
…Preparation. Discipline. Patience. Decisiveness…

The Charlie Munger Checklist…for 2-track analysis…
“what are the factors that really govern the interests involved rationally considered (i.e. macro and micro level economic factors) and what are the subconscious influences where the brain at a subconscious level is automatically”
“2 track analysis: what are the factors that really govern the interests involved here rationally considered (i.e. macro and micro level economic factors) and what are the subconscious influences where the brain at a subconscious level is automatically forming conclusions (i.e. influences from instincts, emotions, cravings, and so on)”

The Charlie Munger Investment Criteria Logic – The High Quality Business
“Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return – even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result. So the trick is getting into better businesses.”
“I’d say that Berkshire Hathaway’s system is adapting to the nature of the investment problem as it really is. We’ve really made the money out of high quality businesses. In some cases, we bought the whole business. And in some cases, we just bought a big block of stock. But when you analyze what happened, the big money’s been made in the high quality businesses. And most of the other people who’ve made a lot of money have done so in high quality businesses.”
a. Find them small b. Find them big c. And ideally – and we’ve done a lot of this – you get into a great business which also has a great manager because management matters.
“So you do get an occasional opportunity to get into a wonderful business that’s being run by a wonderful manager. And, of course, that’s hog heaven day. If you don’t load up when you get those opportunities, it’s a big mistake…Occasionally, you’ll find a human being who’s so talented that he can do things that ordinary skilled mortals can’t. I would argue that Simon Marks – who was second generation in Marks & Spencer of England – was such a man. Patterson was such a man at National Cash Register. And Sam Walton was such a man. These people do come along – and in many cases, they’re not all that hard to identify. If they’ve got a reasonable hand – with the fanaticism and intelligence and so on that these people generally bring to the party – then management can matter much…However, averaged out, betting on the quality of a business is better than betting on the quality of management. In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But, very rarely. you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business…”
“If you’re going to buy something which compounds for 30 years at 15% per annum and you pay one 35% tax at the very end, the way that works out is that after taxes, you keep 13.3% per annum. In contrast, if you bought the same investment, but had to pay taxes every year of 35% out of the 15% that you earned, then your return would be 15% minus 35% of 15% – or only 9.75% per year compounded. So the difference there is over 3.5%. And what 3.5% does to the numbers over long holding periods like 30 years is truly eye-opening.”
“There are huge advantages for an individual to get into a position where you make a few great investments and just sit back and wait: You’re paying less to brokers. You’re listening to less nonsense. And if it works, the governmental tax system gives you an extra 1, 2 or 3 percentage points per annum compounded”
Risks: paying 50 or 70 times earnings like in the Nifty Fifties. But if you can find some fairly priced great company and buy it and sit, that tend to work out very, very well indeed.

Some of Charlie’s Models
* Growth Sub-position Untapped Pricing Power
* Graham Style+Great Management+Winner Take All
* Low Priced+Marketing Advantage(+Surfing New Technology)
* Cancer Surgery Formula (Perfectly magnificent business submerged in a mess but still working where you find something sound and cut away everything and if doesn’t work liquidate, sick-business-fix-up, bunch of foolishness that could easily be cut out and cut out all the folly and go back to the perfectly wonderful business that was lying there and people come in temperamentally and intellectually designed so they are going to cut it out)

COLLECT INANITIES … become a collector of inanities. You’ll never run out or get bored.

“The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor. We just keep our heads down and handle the headwinds and tailwinds as best we can, and take the result after a periods of years.”

“We’re trying to buy businesses with sustainable competitive advantages at a low, or even fair, price.”

…betting on sure things…

“Keep learning and get better over time gradually. Warren has learned alot which allowed him to expand his circle of competence so he could invest in something like PetroChina. Get a little better over time so you’re virtually certain to make investments that are virtually certain to be good over time. Discipline, hard work and patience are the keys. Other people pass you by when you don’t learn. You have to work on it.”

“light on financial yardsticks w/ lots of subjective criteria; can we trust management? can it harm our reputation? what can go wrong? do we understand the business? does it require capital infusions to keep it going? what is the expected cash flow? We don’t expect linear growth; cyclicality is fine with us as long as the price is appropriate.”

“don’t sell anything you wouldn’t buy yourself
don’t work for anyone you don’t respect and admire
work only with people you enjoy”

“There’s no limit to what a man can do or where he can go if he doesn’t mind who gets the credit.”

– seamless web of deserved trust
– false precision, false certainty
– invert everything…just in case
– avoid extremely intense ideology
– “pounding it in” vs flexibility/destroying best loved ideas/adaptive

“The best investing opportunities as mispriced bets on horses
“What we’re really looking for are 50-50 odds which pay three to one””

“”Regard your good name as the richest jewel you can possibly be possessed of – for credit is like fire; when once you have kindled it you may easily preserve it, but if you once extinguish it, you will find it an arduous task to rekindle it again. The way to gain a good reputation is to endeavor to be what you desire to appear.” – Socrates”

“Taiwan 7.6 magnitude earthquake damage -> “Much of the damage resulted from inadequate steel reinforcement in concrete structures””

“The antidote to man with a hammer is a tool kit full of tools, not just a hammer. And use the tools checklist style because you’ll miss a lot if you hope the right tool just pops up unaided whenever you need it. But if you’ve got a full list of tools and you go through them in your mind checklist-style, you will find a lot of the answers you won’t find any other way.”

“Economics should emulate physics’ basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics.”

“Well, how did I solve those problems? Obviously, I was using a simple search engine in my mind to go through checklist-style, and I was using some rough algorithms that work pretty well in a great many complex systems, and those algorithms run something like this: Extreme success is likely to be caused by some combination of the following factors:
A) Extreme maximization or minimization of one or two variables. (Examples, costco or our funiture appliance store)
B) Adding success factors so that a bigger combination drives success, often in non-linear fashion, as one is reminded of the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass, and you get a lollapalooza result. And, of course, I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurence.
C) An extreme of good performance over many factors. (Example, Toyota or Les Schwab)
D) Catching and riding some sort of big wave. (Example, Oracle)”

“Too little attention to second and higher order effects. They chose not to consider effects of effects on effects, and so on…hence why predictions and projections can be so far off. (The movement of any individual piece affects, sometimes dramatically, the overall composition)”
“Avoid creating easily gameable systems and take into account second-order effects and the third-order effects in lying and cheating (i.e. Niederhoffer gaming the economics department system at Harvard to get straight A’s). One must think through consequences of consequences.”
“Economic systems work better when there’s an extreme reliability ethos (i.e. cash register, double entry bookkeeping). And the traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religion instilled guilt. And this guilt, derived from religion, has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man.”
“The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us. Thus, there can be virtue in apparent non-fariness.”
“Paradox: “private vices are public benefits””
“”It’s not bringing in new ideas that’s so hard. It’s getting rid of the old ones.” Einstein attributing his mental success to “curiosity, concentration, perserverence, and self criticism”. By self critisism, he meant becoming good at destroying your own best loved and hardest won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.”
“Theme of TRUST: deserved reliance upon the character, values and integrity of those you live and work with. No matter how smart you are, there are smart people out there who can fool you if they really want to. So, be sure you can trust the smart people you work with.”

“I have succeeded mostly by restricting action to jobs and methods in which I was unlikely to fail”

“The Perception system of man – as man is easily fooled, either by cleverly thought out manipulation of man, by circumstances occuring by accident, or by very effective manipulation practices that man has stumbled into during ‘practice evolution’ and kept in place because they work so well. One such outcome is caused by a quantum effect in human perception. If stimulus is kept below a certain level, it does not get through. And even when perception does get through to man’s brain, it is often misweighed, because what is registered in perception is in shockingness of apparent contrast, not the standard scientific units that make possible science and good engineering.”
“Inadequacy of contrast-based perception (i.e. stick one hand in hot, one hand in cold, and now both in luke warm and they are both hot and cold respectively) One thus sees perception so easily fooled by mere contrast, where a simple temperature gauge would make no error, and realizes cognition mimics perception in being misled by mere contrast. Thus, one is one the way to understanding how magicians, and life, fools one.
This can occur, through deliberate human manipulation or otherwise, if one doesn’t take certain precautions against often-wrong effects from generally useful tendencies in his perception and cognition.”

“Super strong ideology left or right should be avoided. Best-form multidisciplinarity requires an objectivity such passionate people have lost, and a difficult synthesis is not likely to be achieved by minds in ideological fetters. Ideology-based folly.”

“The fundamental organizing ethos I am talking about:
1. you must both rank and use disciplines in order of fundamentalness
2. You must master the tested fluency and routinely use the essential parts of all four constitutents of the fundamental four-discipline combination, with particularly intense attention given to disciplines more fundamental than your own
3. You may never practice cross-disciplinary absorption without attribution or departure from a ‘principle of economy’ that forbids explaining in any other way anything readily explainable from more fundamental material in your own or any other discipline
4. But when step 3 doesn’t produce much new and useful insight, you should hypothesize and test to establishment new principles, ordinarily by using methods similar to those that created succcessful old principles. But you may not use any new principles inconsistent with an old one unless you can now prove that the old principle is not true.”

“Like pilot training, the ethos of hard science does not say ‘take what you wish’ but ‘learn it all to fluency, like it or not.'”


“Wrong incentives are a major cause because truth is hard to assimilate in any mind when opposed by interest. And, if institutional incentives cause the problem, then a remedy is feasible – because incentives can be changed.”
“And if duty will not move improvement, advantage is also available.”

“”I read everything: annual reports, 10k’s, 10q’s, biographies, histories, five newspapers a day. On airplanes, I read the instructions on the backs of seats. Reading is key. Reading has made me rich over time” – Buffett”

“Using Forbes, WSJ, Fortune magazines periodicals to perform the function of the aircraft simulator if used to prompt practice in relating events to multidisciplinary causes, often intertwined (i.e. ‘use it or lose it’) And sometimes the periodicals even introduce new models for causes instead of merely refreshing old knowledge. I know no person in business, respected for verified good judgement, whose wisdom-maintenance system does not include use of such periodicals. Why should academia be different?”

“”This business field and this particular business, in its particular location, present crucial problems that are so difficult that unworldly old ladies can not wisely try and solve them through hired help. Given the difficulties and unavoidable agency costs, the old ladies should promptly sell the shoe factory, probably to the competitor who would enjoy the greatest marginal-utility advantage””

“”We regard the present state of the universe as the effect of its past and the cause of its future. And intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movement of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes.” – Pierre-Simon Laplace”

“Truly big ideas in each discipline, learned only in essence, carry most of the freight. And they are not so numerous, nor are their interactions so complex, that a large and multidisciplinary understanding is impossible for many, given large amounts of talent and time.”

“Thinking by inversion and through use of ‘checklists’ is easily learned – in broadscale life as in piloting.”

“In my life there are not many questions I can’t properly deal with using my $40 adding machine and dog-eared compound interest table”

“Four causes of Einstein’s achievements being self criticism, curiosity, concentration, and perseverance.”

“If, in many high places, a universal product as successful as Coca-Cola is not properly understood and explained, it can’t bode well for our competency in dealing with much else that is important.”

“People are often massively irrational in ways predicted by psychology that must be taken into account in microeconomics.”

“Think in reverse as you try and disprove your own hardest-won and best-loved ideas.”

“”We build too many walls and not enough bridges” – Isaac Newton”

“Academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis. In particular, not enough attention is given to lollapalooza effects coming from combinations of psychological tendancies. This is like rounding pi to an even three. It violates the injunction that everything should be made as simple as possible, but not simpler. In general, psychology is laid out and misunderstood as electromagnetism would now be misunderstood if physics had produced many brilliant experiments like Michael Faraday and no grand synthesizer like James Clerk Maxwell.
Second, there is truly horrible lack of synthesis blending psychology and other academic subjects. But only an interdisciplinary approach will correctly deal with reality – in academia as with the Coca-Cola company.”

“Not understanding elementary psychology well enough to avoid “new coke” – very bright people – is not satisfactory. These bad effects are a lollapalooza.”

“The correct strategies are clear after being related to the elementary academic ideas brought into play by the helpful notions.”

“Yeah. I’m passionate about wisdom. I’m passionate about accuracy and some kinds of curiosity. Perhaps I have some streak of generosity in my nature and a desire to serve values that transcend my brief life. But maybe I’m just here to show off. Who knows?”

“I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…”

“There’s a lot of simple stuff that many of you are quite capable of learning. And your lives will work way better, too, if you do. Plus, learning it is a lot of fun. So I urge you to learn it. ”

“”Science cannot solve the ultimate mystery of nature. And that is because, in the last analysis, we ourselves are a part of the mystery that we are trying to solve” – Max Planck”

“”It is not the possession of truth, but the success which attends the seeking after it, that enriches the seeker and brings happiness to him.” – Max Planck”

“But, whatever you decide, I think it’s a huge mistake not to absorb the elementary worldly wisdom if you’re capable of doing it because it makes you better able to serve others, it makes you better able to serve yourself, and it makes life more fun. So if you have an aptitude for doing it, I think you’d be crazy not to. Your life will be enriched – not only financially, but in a host of other ways – if you do.”

“Giving rules like “Judges shouldn’t talk about legal issues that aren’t before them” without giving reasons is crazy.
The human mind is not constructed so that it works well without those reasons.
You’ve got to hang reality on a theoretical structure with reasons. That’s the way it hangs together in a usable form so that you’re an effective thinker.”
“And to teach doctrines – either with no reasons or with poorly explained reasons?! That’s wrong!”

“Many of the legal doctrines are tied to other doctrines. They’re joined at the hip. And, yet, they teach you those legal doctrines without pointing out how they’re tied to other important doctrines?! That’s insanity – absolute insanity.”

“Hard science and engineering tend to be pretty reliably done [in schools]. But the minute you get outside those areas, a certain amount of inanity seems to creep into academia – even [in] academia involving people with very high IQ’s.”

“The whole [law] school experience would be much more fun if the really basic ideas were integrated and pounded in with good examples for a month or so before you got into conventional [law] school material. I think the whole system of education would work better. But nobody has any interest in doing it.”

“If you’re like me, it’s kind of fun for it to be a little complicated. If you want it totally easy and laid out, maybe you should join some cult that claims to provide all the answers.”

“Everything should be made as simple as possible, but no more simple.”

“If there are 20 factors and they interact some, you’ll just have to learn to handle it – because that’s the way the world is. But you won’t find it that hard if you go at it Darwin-like, step by step with curious persistence. You’ll be amazed at how good you can get. ”

“To the extent you become a person who thinks correctly, you can add great value.”

“You have to know when to trust experts where you have no wisdom at all and when you override experts who may have incentive caused bias decisions.
In effect, you got to know what you know and what you don’t know. What could possibly be more useful in life than that?
When you don’t know and don’t have any special competence, don’t be afraid to say so.
Don’t screw up the hive and do a bee dance you have no knowledge of. Nobody expects you to know everything about everything. Confidently answering questions about which you don’t have any real knowledge is asinine.”

“What I’m against is being very confident and feeling that you know, for sure, that your particular intervention will do more good than harm, given that you’re dealing with highly complex systems wherein everything is interacting with everything else.”

“Each person has to play the game given his own marginal utility consideration and in a way that takes into account his own psychology.
So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.
Mine works for me. But, in part, that’s because I’m good at taking losses. I can take em’ psychologically. And, besides, I have very few. That combination works fine.”

“You will make mistakes, but you can learn to make fewer of them than other people and fix your mistakes faster when you do make them. But there’s no way to live an adequate life without mistakes. The trick is to get so you can handle mistakes. Part of what you must learn is how to handle mistakes and new facts that change the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much loved hand.
The tendancy is to put in ‘just a little more’ – and people go broke this way by failing to stop, rethink, and say they can afford to write this one off and live to fight again and not pursue things with obsession in a way that will break you.”

“If you try and succeed at what you’re worst at, you’re going to have a very lousy career. Guaranteed. You have to figure out where your talents lie. And you’ll have to use your advantages. Why play a competitive game in a field where you have no advantage – maybe a disadvantage – instead of in a field where you have a clear advantage? The advantage of low tech stuff for us is that we think we understand it fairly well. The other stuff we don’t. And we’d rather deal with what we understand.”

“Have low expectations
Have a sense of humor
Surround yourself with the love of friends and family”

“Above all, live with change and adapt to it.”

“We look for no brainer decisions. We don’t leap over seven foot fences…we look for one foot fences with big rewards on the other side. Succeed by making the world easy for yourself, not by solving hard problems.”

“It doesn’t help us merely for favourable odds to exist. They have to be in a place you can recognize them. So it takes a mispriced opportunity that you’re smart enough to recognize. And that combination doesn’t occur often. BUT IT DOESN’T HAVE TO. If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you need? Take the top ten business investments Berkshire’s ever made. We would be very rich if we’d never done anything else – in two lifetimes.
So, again, there isn’t any system for giving you perfect investment judgment on all subjects at all times. You have here, rather, a method you can use to sift reality to obtain an occasional opportunity for rational reaction.
If you take that method into something as competitive as common stock picking, you’re competing with many brilliant people. So, even with our method, we only get a few opportunities. Fortunately, that happens to be enough.”

The Multi Disciplinary Munger Discussion Notes
Math – compound interest, permutations/combination/decision tree theory, cost/benefit analysis
Accounting – limitations
Engineering – quality control, back up systems, breakpoints
Statistics – gaussian/normal distribution/bell shaped curve
Physics – critical mass

Biology/Psychology – why why why for compliance and giving why, perceptual apparatus and function and know it’s limitations, who is going to do what where when and why, rational and subconscious influences, pavlonian ie Paley, munger misjudgement list (reward/punishment incentives, liking/love-disliking/hating, doubt avoidance, inconsistency avoidance, curiosity, kantian fairness, envy/jealousy, reciprocation, influence from mere association, simple pain avoiding psychological denial, excessive self regard, overoptimism, deprival, social proof, contrast misreaction, stress influence, availability misweighing, authority misinfluence, reason respecting, drug misinfluence, use it or lose it, sensescence misinfluence, twaddle)

Microeconomics – ecosystem niche, advantages of scale (cost reductions along experience curve and more volume via incentives and more efficient output, geometry ie more volume per unit area of steel, advertising media usage capability, informational ie glotz gum, psychological social proof subconscious and conscious, overwhelming cascade winner take all dominance ie city newspaper, allowance for greater specialization vs big fat beaucracy, purchasing power thus lower merchandise cost and little labratories ie chainstores, patents/trademarks (ie trademark system well known big operation)/exclusive franchise (ie 1 of 3 stations with limited play or small monopoly of store inside airport), new capital flow through invested into lousy business that will kill or biz that will help and ‘stick to ribs’ idea ie for technology knowing when it helps and hinders, competitive destruction surfing

High quality businesses/Getting into better business for over long term (i.e 6% over 40 year paid cheaply or 18% return over 20 years paid a little more expensively … trick is getting into better businesses, and that involves all these advantages of scale you could consider momentum effects)
Circle of competence
Bet seldom, bet heavy
How find great companies? a. when small b. when big c. great managers (if had to choose bet on the business momentum, not the brilliance of the manager. But rarely you find a manager so good you’re wise to follow him into what looks like a mediocre business)
Frictional costs
Find a few, sit back and wait (large disaster can come from large investment too high priced but if you can find some fairly-priced great company and buy it and sit, that tends to work out very well)
Ultimate no brainer: UNDERPRICING … Untapped Pricing Power (growth stock model sub position [sub position of graham future earning power idea], with brilliant management is perfect …this model is like finding money in the street if you have the courage of your convictions)

Washington Post Dream Model: bought at about 20% of value to a private owner [graham style basis at 1/5th obvious value] and in addition faced ‘winner take all’ situation [you had both the top hand in a game that was clearly going to end up with one winner] and great management [lot of integrity and intelligence/high class people the Katharine Graham family which is why it was a damn dream]

Gillette/Coke Model: Low priced items and tremendous marketing advantage all over the world, and in gillettes case surfing simply technology hard for competitors to do [90% shaving market in whole countries]

GEICO model: Surgery formula – Mess to soundness to Liquidation if doesn’t pan out/Perfectly magnificent business submerged in a mess but still working/Easy to cut out foolishness to go back to perfectly wonderful business lying there