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 ābook with legsā.
His goal is to collect information to avoid mistakes. He famously said:
All I want to know is where I will die, so Iāll 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 ādonāt knowā. So his job as an investor is to relentlessly uncover these blind spots.
Here are some of the biases he shares:
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.
āFinish loading, and you can go homeā 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 donāt want?
- Whoās advice are you taking who doesnāt have an aligned downside with you?
- What practices do you have in your business to audit for bad behavior?
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 peopleāļø
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 ālikeā 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.
Disliking someone or a group of people distorts our ability to make good decisions.
If you find yourself reacting to a situation with āthis person always messes upā, ask yourself if this person is on your ānaughty listā.
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 āwe will crush themā, 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 competitionās strength and virtues. Make a list of areas where your competition is better than you.
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 companyās 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. Itās easier to continue with the current strategy so you rationalize why that is the best decision.
Also known as Confirmation Bias.
Changing oneās 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, thereās an automatic shot-off that bars any other sperm from getting in.
We as humans think we are rational objective beings.
Thatās 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 ābuy-inā and solidarity?
- Ask for a favor. Think of someoneās favor who you hope to gain, or someone who youāre worried doesnāt 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. Donāt seek to be identified as āthe geniusā or āsomeone who is always rightā. Tell yourself āI am the person who finds the truthā or āI am the person who is willing to work the hardest to succeedā.
Charlie Munger has a total of 25 lessons, which can be a bit overwhelming. So Iāll share more in the coming weeks :)
Many folks I talk to are unfamiliar with the concept of a āseller noteā.
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.
Iāve seen deals with 90%+ seller notes.
Why would a seller want to play the bank? Donāt 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 canāt get the financing they need to buy a business.
The ābid-ask spreadā 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 canāt 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) wonāt hurt the business value during this period. Preferably youāll improve the business or property.
In real estate, itās harder to destroy property value, so itās easier to say yes to a large seller note.
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