wisdom of charlie munger part 1 jan 2012

8/3/2019 Wisdom of Charlie Munger Part 1 Jan 2012

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Wisdom of a great masterMr. Charlie Munger

MANISH BANSALJeetay Investments

Email: [email protected]

Phone: +91 98924 86751

Website www.jeetay.com

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If I have seen further. It is by standing upon

the shoulders of GIANTS.Sir Isaac Newton


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Brain

I think it isundeniably truethat the human

brain must work inmodels.Understand themost fundamentalmodels - ones thatwill do most workper unit.

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Money

There are a lot of things in life way more

important than money. All that said, some

people do get confused. I play golf with a man

who says, What good is health? You cant buy

money with it.

He that is of the opinion that money will do

everything may well be suspected to doingeverything for money. Ben Franklin

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Money and Value

Observe your behavior in following situations:

Spending your money on yourself

Spending your money on some one else Spending some one elses money on you

Result is:

1. Focus is on both value and price

2. Price (budget) is the focus; Relevance/utility (value) of the product to theperson is of least importance Gifting is an example

3. Value is the focus; Price is of least botheration Going out on officiallunch with customer is a testimony


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Money and Value

Observe your behavior on cancellation of movie show infollowing situations (intimated in advance):

You bought the ticket You were gifted the ticket

First situation how do I claim my money back?

Second situation that is fine.. Good I got theintimation, otherwise, I would have wasted mytime.


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Money and Value

Observe your behavior on spending followingmoney:

You hard earned You were gifted the money

You found the money on the road (some lottery)

Different mental accounting for money based onsources (most careful in first situation to most casualin last situation)


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Money and Value

Observe your behavior on reaction to your babys cryin following situations:

Baby is crying for 100 cents item Baby is crying for $100 item

First situation, let us give baby what he wants.

This is anyway a small request. Second situation, analyze closely. If doesnt

make sense, let the baby cry for some time.


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EfficientMarket Theory

Markets prices reflect/discount every bit ofrelevant information.

Questions are:

Is every bit of information available to the marketplace.

If yes, whether it is reflected appropriately on theprices.

Rationality of human being is a big question mark

here. Man is not a rational animal, he is a rationalizing

one. Robert A. Heinlein

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Read the book influence by psychology

professor Robert Cialdini:

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Let us play a game

Bid for this Rs. 500 note.

Winner takes it for the bid amount. Second last bidder pays penalty of double the bid

amount.

All other bidders stay put anyway out of the

game.

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What do you note from this exercise

Bids started inefficient

Bids ended inefficient First, economics drove the prices

Then, psychology drove the prices

Economic models are incapable enough to define

the psychological models

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Market is less logical and more psychological

Human beings decide price of assets in

the market and they are subject to

greed and fear

At times, they price assets away from

their intrinsic value

Market is a pendulum that forever

swings between unsustainable

optimism and unjustified pessimism In short term, market is a voting

machine and in long term, it is a

weighing machine

Are markets efficient?

Benjamin Graham


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I could calculate the motions of the

heavenly bodies, but not the

madness of the people - Sir Isaac

Newton (loss on South Sea Company

stock in the 1720s)

Psychology is probably the most

important factor in the market and one that is least understood

- David Dreman


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Read this book on madness of crowd and irrationality

by Charles Mackey


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Mr. Market hates uncertainty

During uncertain times, it gets nervous and is in hurry to

liquidate everything

Fear of uncertainty presides over rationality


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Human beings are not just irrational, they are

predictably irrational Dan Ariely, Behavioral Economist


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I think it is roughly right that the market is

efficient, which makes it very hard to beat

merely by being an intelligent investor. But I

dont think its totally efficient at all. And the

difference between being totally efficient and

somewhat efficient leaves an enormous

opportunity for people like us to get theseunusual records.

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The possibility that stock value in aggregate

can become irrationally high is contrary to the

hard-form efficient market theory that many

of you once learned as gospel from your

mistaken professors. Your mistaken professors

were too much influenced by rational man

models of human behavior from economicsand too little by foolish man models from

psychology and real-world experience.

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Efficient market theory is a wonderful economicdoctrine that had a long vogue in spite of theexperience of Berkshire Hathaway. In fact, one of theeconomists, who won (he shared) a Nobel Prize and ashe looked at Berkshire Hathaway year after year (which

people would throw on his face as saying maybe themarket isnt quite as efficient as you think), he said,Well, its a two-sigma event. And then he said we werea three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas - better

to add a sigma than change a theory, just because theevidence comes in differently. And, of course, whenthis share of a Nobel Prize went into moneymanagement himself, he sank like a stone.

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Efficient market theory is taught at 99% of the

B-Schools

Students are made to believe. It works..

I would not like to conclude but, encourage

you to discover yourself whether world is

really rational! And,

So, whether efficient market doctrine reallyworks!!

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wisdom of charlie munger part 1 jan 2012

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