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The Charlie Munger Checklists

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 dont. Its just that simple.
The Charlie Munger Checklistfor 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 misjudgmentReward/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 Checklistof 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 Checklistfor 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 doesnt 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
* 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 dont 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
* 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
* Think forwards and backwards Invert, always invert
Allocation Proper allocation of capital is an investors 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
* Dont 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
* 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
* Be fearful when others are greedy, and greedy when others are fearful
* Opportunity doesnt come often, so seize it when it comes
* Opportunity meeting the prepared mind; thats the game
Change Live with change and accept unremovable complexity
* Recognize and adapt to the true nature of the world around you; dont expect it to adapt to you
* Continually challenge and willingly amend your best-loved ideas
* Recognize reality even when you dont like it especially when you dont 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
* Guard against the effects of hubris (arrogance) and boredom
* Dont 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; dont sweep them under the rug
Preparation. Discipline. Patience. Decisiveness
The Charlie Munger Checklistfor 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, its 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, youre 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, youll end up with a fine result. So the trick is getting into better
Id say that Berkshire Hathaways system is adapting to the nature of the investment problem as
it really is. Weve 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 moneys been made in the high quality businesses. And most
of the other people whove made a lot of money have done so in high quality businesses.
a. Find them small b. Find them big c. And ideally and weve 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 thats being run by a
wonderful manager. And, of course, thats hog heaven day. If you dont load up when you get
those opportunities, its a big mistakeOccasionally, youll find a human being whos so
talented that he can do things that ordinary skilled mortals cant. 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, theyre not all that hard to identify. If theyve got a reasonable hand
with the fanaticism and intelligence and so on that these people generally bring to the party
then management can matter muchHowever, 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 whos so good that youre wise to follow him into what looks like a mediocre
If youre 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: Youre paying less to brokers. Youre 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 Charlies 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 doesnt work liquidate, sickbusiness-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. Youll 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 youre paying for. Move only when you have an advantage. Its
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.
Were trying to buy businesses with sustainable competitive advantages at a low, or even fair,
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 youre 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 dont 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 dont expect linear growth;
cyclicality is fine with us as long as the price is appropriate.
dont sell anything you wouldnt buy yourself
dont work for anyone you dont respect and admire
work only with people you enjoy
Theres no limit to what a man can do or where he can go if he doesnt mind who gets the
- seamless web of deserved trust
- false precision, false certainty
- invert everythingjust 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 were 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 youll miss a lot if you hope the right tool just pops up unaided
whenever you need it. But if youve 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 wont 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, Ive been searching for lollapalooza results all my life, so Im 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 onhence 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 As). One must think through consequences of consequences.
Economic systems work better when theres 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 theyll be fairer on average for
all of us. Thus, there can be virtue in apparent non-fariness.
Paradox: private vices are public benefits"
Its not bringing in new ideas thats so hard. Its 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
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 mans 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 doesnt take certain
precautions against often-wrong effects from generally useful tendencies in his perception and
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 doesnt 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, 10ks, 10qs, 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
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
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
In my life there are not many questions I cant properly deal with using my $40 adding machine
and dog-eared compound interest table
Four causes of Einsteins achievements being self criticism, curiosity, concentration, and
If, in many high places, a universal product as successful as Coca-Cola is not properly

understood and explained, it cant bode well for our competency in dealing with much else that is
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. Im passionate about wisdom. Im 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 Im just here to show off. Who knows?
I believe in the discipline of mastering the best that other people have figured out. I dont
believe in just sitting down and trying to dream it all up yourself. Nobodys that smart
Theres 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 its a huge mistake not to absorb the elementary worldly
wisdom if youre 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 youd 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 shouldnt talk about legal issues that arent before them without
giving reasons is crazy.
The human mind is not constructed so that it works well without those reasons.
Youve got to hang reality on a theoretical structure with reasons. Thats the way it hangs
together in a usable form so that youre an effective thinker.
And to teach doctrines either with no reasons or with poorly explained reasons?! Thats
Many of the legal doctrines are tied to other doctrines. Theyre joined at the hip. And, yet, they
teach you those legal doctrines without pointing out how theyre tied to other important
doctrines?! Thats 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 IQs.
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 youre like me, its 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, youll just have to learn to handle it because
thats the way the world is. But you wont find it that hard if you go at it Darwin-like, step by
step with curious persistence. Youll 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 dont know. What could possibly be
more useful in life than that?
When you dont know and dont have any special competence, dont be afraid to say so.
Dont 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 dont have
any real knowledge is asinine.
What Im against is being very confident and feeling that you know, for sure, that your
particular intervention will do more good than harm, given that youre 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 dont think theres
a one-size-fits-all investment strategy that I can give you.
Mine works for me. But, in part, thats because Im 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 theres 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 youre worst at, youre going to have a very lousy career.
Guaranteed. You have to figure out where your talents lie. And youll 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 dont. And wed
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 dont leap over seven foot fenceswe 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 doesnt 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 youre smart enough to recognize. And
that combination doesnt occur often. BUT IT DOESNT 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 Berkshires ever made. We would be very rich if
wed never done anything else in two lifetimes.
So, again, there isnt 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, youre
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 its 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

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 youre 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
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 doesnt 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