🔑 Charlie Munger’s battle with his mind - Part 1

Charlie Munger of Berkshire Hathaway is an incredible thinker.

He is also an avid reader. So much so that his kids lovingly call him a “book with legs”.

His goal is to collect information to avoid mistakes. He famously said:

All I want to know is where I will die, so I’ll never go there.

Charlie once gave a talk to a room of MBAs about all of the cognitive biases he has observed in his career, along with specific examples of these at work.

I try to learn these to protect against my own worst enemy: my mind.

He opens his speech with one of my favorite lines of all time

Soon after leaving Harvard, I began a long struggle to get rid of the most dysfunctional part of my psychological ignorance.

Charlie is keenly aware that there are unlimited things that we “don’t know”. So his job as an investor is to relentlessly uncover these blind spots.

Here are some of the biases he shares:

Bias 1. Rewards and Punishment Tendency

Incentives drive behavior.

Reward people for behavior, and you are more likely to get more of that behavior.

Punish people, and you are less likely to get the undesired behavior.

My favorite example of this is FedEx

FedEx needed staff to load all packages on a plane during the night shift.

They tried a lot of things, but nothing worked. It was taking too long. Finally, they started to pay per shift, rather than pay per hour.

“Finish loading, and you can go home” they told the staff.

The planes were magically filled early and people got to go home.

Good incentives result in a Win-Win.

Questions to ask yourself:

- What behaviors are you accidentally rewarding that you don’t want?

- Who’s advice are you taking who doesn’t have an aligned downside with you?

- What practices do you have in your business to audit for bad behavior?

Bias 2. Liking and Loving Tendency

We ignore the faults and flaws of people we like. Even a mistake that would otherwise be unforgivable, we accept if we like them.

Also, be careful of pretty people❗️

Those who are physically attractive tend to be rated higher in intelligence and competence.

Actions to take to protect yourself:

- Operate with your eyes wide open. Make a list of who you ‘like’ in your life that may be harming you or your business.

- Regain your power of objective thought. Make a list of things you dislike most about those you like.

Bias 3: Disliking/Hating Tendency

Disliking someone or a group of people distorts our ability to make good decisions.

If you find yourself reacting to a situation with “this person always messes up”, ask yourself if this person is on your “naughty list”.

Anything they do may ellicit a negative reaction for you.

Also, be careful about hating your competition.

Your hate for them will skew your grasp of your own skills.

If you find yourself saying “we will crush them”, that may be a sign that your judgement of your own abilities is being clouded by your emotion.

Lacking understanding of your own abilities can lead to your failure. Respect your competition.

How to protect yourself:

- Invert hate. Identify the things/people you hate. Make a list of good things you can say about them.

- Respect your competition’s strength and virtues. Make a list of areas where your competition is better than you.

Bias 4: Doubt-Avoidance Tendency

Humans hate doubt and uncertainty. We are creatures of comfort.

When faced with the choice to continue down a current path, or doubt our direction, we pick the former. We fear upheaval that may come with doubt.

This is an important evolutionary trait because if you spent too much time doubting your decisions, you could get eaten by a tiger.

An example I observe regularly: firing employees.

When a CEO receives signals that a company’s prospects have changed, the right action is usually: cut costs + prepare to change direction.

What I see often is CEOs will keep employees for too long, and avoid changing strategy. It’s easier to continue with the current strategy so you rationalize why that is the best decision.

Bias 5: Inconsistency-Avoidance Tendency

Also known as Confirmation Bias.

Changing one’s mind is incredibly difficult. Nearly impossible.

Lord Keynes once said:

The human mind is like a human egg (but with ideas).

When one sperm gets into a human egg, there’s an automatic shot-off that bars any other sperm from getting in.

We as humans think we are rational objective beings.

That’s entirely untrue.

Once we commit to an idea, we bend all future reality to conform to this idea.

We can also be manipulated in the opposite direction.

When your behavior conflicts with a prior belief, you correct your beliefs to accommodate the new behavior.

Ben Franklin had a well-documented technique to get others to like him. He would ask them for small favors. Upon completing the favor, that person would now tell themselves they did the favor for Ben because they like him.

Similarly, during the Korean war, American POWs were required to write long letters about the virtues of North Korea. Upon returning back to the US, these prisoners were found to be supportive of the Communist regime.

Way to apply this in your life:

- Hazing rituals prove to strengthen ties in communities. Without hazing your teammates, can you bring initiation rituals to your work to create more “buy-in” and solidarity?

- Ask for a favor. Think of someone’s favor who you hope to gain, or someone who you’re worried doesn’t like you. Ask them for a simple favor, like borrowing a book they already have.

- Share both sides of an idea. If you find yourself arguing a position, take care to communicate the other side of the position too. This will help you avoid entering a confirmation bias trap.

- Reorient your personal brand. The way you position yourself in your mind, is the person you become. Don’t seek to be identified as “the genius” or “someone who is always right”. Tell yourself “I am the person who finds the truth” or “I am the person who is willing to work the hardest to succeed”.

Charlie Munger has a total of 25 lessons, which can be a bit overwhelming. So I’ll share more in the coming weeks :)

🔑 What is seller financing and how to use it

Many folks I talk to are unfamiliar with the concept of a ‘seller note’.

Nick Huber has a good thread on it here.

A seller note is simply when the owner of the property or the business becomes your lender on the deal.

I’ve seen deals with 90%+ seller notes.

Why would a seller want to play the bank? Don’t they want all the cash upfront?

The answer is both: Yes and Not always.

Here are some reasons an owner may take a seller's note:

They are not getting other offers at the price they want.

As interest rates go up buyers can’t get the financing they need to buy a business.

The “bid-ask spread” is increasing. This means sellers still have high expectations for the value of their business, while buyers can no longer pay them as much.

A seller note is a way for the seller to get the price they want for their business, by taking on a little bit of risk.

Deferred taxes.

You only pay taxes on the money you receive.

By deferring payments to a future date, you defer taxes to a time when you may be in a lower tax bracket. Bonus points if you move to a state like Florida or Texas (with no income tax) from a place with a high-income tax.

This could save you a lot of money.

Make money on interest.

If you sell a business for $2 Million, the bank that finances this purchase will make close $1 Million on the interest alone in 10 years!

Some smart sellers will choose to play the bank and collect the interest instead.

The owner must believe in the buyer for a seller note to be possible.

If the buyer can’t pay their loan, the seller has the property/business as collateral. Meaning they get it back if you miss their payments.

In the case of a small business sale, the owner must believe you (the buyer) won’t hurt the business value during this period. Preferably you’ll improve the business or property.

In real estate, it’s harder to destroy property value, so it’s easier to say yes to a large seller note.

Tomorrow I’ll be with family, camping in the woods for our first “Campsgiving”. We’re cooking the whole meal on outdoor fire pits…wish us luck.

Have a fantastic Thanksgiving,

~ Sieva

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