The Exchanges

Q Well, let's, let's actually, let's dive into that. Like, talk about the, the Kindle versus the, um, the physical book. What is it? What do you prefer? Why? How do you use that?

A Well, I used to prefer the written one, of course, because you can underline and, um, you feel, you love the smell of the paper, and you, you have a nostalgic, uh, associations with, uh, with the physical book, uh, what it looks like and where you read it, which you kind of lose when you do it on a Kindle. But over time, I realized that, uh, these are, um, prejudices that should be let go of, because there are other things that are possible with the Kindle, which are not possible with the physical book. And for me, um, As a professor, it really helps me to be able to know that I've read this somewhere, um, you know, the kind of associations that occur in memory when you're experiencing something. You know that you have read about this particular aspect in some book, but you don't know which one. And if it was all physical book, you would go crazy looking for that book. Um, but if you just do a search for a term across all your books in your Kindle library, it comes up in, in a flash, And the interesting thing is that, ah, you sometimes discover things that you didn't know existed. The serendipitous, um, ah, discovery of wonderful, ah, words of wisdom about a certain topic, ah, in your Kindle library are amazing, and when that happens, ah, I, I have my Eureka moments. And, um, the other reason why I love Kindle is because you can underline stuff, ah, and write your own notes, an…

AI assessment note: “over time, I realized that... there are other things that are possible with the Kindle”

Q So what was the course before? Were you still, were you, you were teaching?

A It was pure Graham-style investing. It was called security analysis, and I would mostly talk about risk arbitrage, about Um, bankruptcy investing, about investing in cash bargains, and statistical screens that Graham used to create, um, and talk about in his books. Uh, it was purely that. Uh, the idea that there could be a great business out there, and the idea there could be, uh, a competitive advantage out there was not even known to me at that time. And, uh, most of the discussion was revolving around financial statement analysis. Instead of going So the reason as to why is this business successful, and when you go into the question why, the answers come from many sources. Why, why does a customer buy this product? What is it, um, that the customer likes? Why does he not buy somebody else's product? Why would a competitor not enter this market? Why, why, why would they, um, why wouldn't they even try? Those are very profound questions, and you won't know the answers to those questions unless you ask them, and the answer comes from different disciplines.

AI assessment note: “It was pure Graham-style investing. It was called security analysis”

Q modes. I think you, you teach that there's, I forget how many that you distinguish, right, between low cost and differentiation, and, um, do you find that any are more sustainable in general if all things are considered? Like, which would be the best mode to have if you could have one, one mode? Would it be a product differentiator? Would it be a low cost provider? Would it be

A It would be a low cost provider. If you think about it, the reason why brands are successful is because they give you scale and they give you a cost advantage. Um, I think the low cost model is a far more sustainable model. It's actually a very admirable model in capitalism because there's less wastage. If you, if you look at a Costco, which we both know is a very admirable business model, then why is it an admirable business model? Because It deals with the paradox of choice. You don't need 50 ketchups. Why do you need 50 different kinds of ketchups? It's not good for civilization, if you think of, from a Charlie Munger's perspective, to have consumers get 50 different kinds of ketchup. Three or four are good enough. And when you have only three or four in a business which has scale, then you can offer them at a lower price, because you're buying them in large quantities, much larger than other Vendors who have 50 ketchups. So I think that's very admirable from a civilization's point of view. But if you could have something that will, will be good for civilization, which means enough choice, but not in, not so much, that creates a paradox of choice. At the same time, you can earn a high return on capital, ah, and also pay your employees well, which is what Costco does. I think that's an extremely admirable combination of things that are happening over there. And when you combi…

AI assessment note: “It would be a low cost provider.”

Q myself, and you know, you can't really make these decisions until you know yourself. And therefore, I will be a data-driven person, and I will make these decisions, or I know myself, and I have a more intuitive sense of design, and that's the path I want to pursue, and then burn your bridges to the other one, or do you, do you still, like, how would you approach that?

A I would do that from a data-driven perspective. Uh, you know, there are these intuitive people out there. Uh, in capitalism, we have found, uh, a Steve Jobs who can create something beautiful that people relate to, and they don't, they become price insensitive. They just want what he is offering to the world out there, and it is beautiful, but you can't spot these people at the beginning of their careers. You can spot them maybe in the middle of their careers. So there has to be past track record of somebody who's intuitive and right over and over again. Once you found that, that's based, based on actual data. Uh, and on the other hand, you have these other kinds of entrepreneurs who are like Jeff Bezos, who are data driven, who don't mind, who have no idea about what will happen. But who don't mind making a series of small bets on a number of, on hundreds of experiments, and have the ability to be absolutely unbiased about where to put money, and they would bet heavily when they know that this bet is likely to pay off, and then if bets that are not paying off, they wouldn't hesitate to withdraw capital from those. I think there is, in capitalism, as investors, for, for us, it's, uh, it, it, We, we shouldn't have, um, at least I don't feel the need to have a preference of one or the other. If you can find both kinds of entrepreneurs, it's wonderful, because you are trying to bu…

AI assessment note: “I would do that from a data-driven perspective.”

Q So what's your process for reading? So you, you, you purchase a Kindle book, you get it to your Kindle. Uh, take me through how you, uh, How you read in terms of are you reading one book at a time? Are you reading multiple? Do you put it aside at the end and then go back to it? Or do you immediately take your notes out?

A Well, I, I don't like to read one book, um, I mean, I read, maybe read about three or four books, uh, at any given point of time, and I finish them, then I'll pick up another two or three books, uh, to read, um, one reason is, um, uh, you get kind of bored by reading the same thing, uh, same subject, uh, and, you know, based on what Charlie said, that you should have multidisciplinary mindset, so it's good to have different books from different disciplines, and read them, and then, one of the amazing things that I discovered is that you kind of, Associate one for the, with the other ones, uh, and that really is helpful to me. Um, so far as note taking is concerned, I underline stuff on the fly as I read it, and, uh, once the book is over, I go back on the cloud and, uh, take out whatever I've under, underlined in that particular book, whatever notes I have, whatever annotations that are there, and I would, um, put them in a different document, uh, and then, uh, I'll, I'll let that be. Um, because I've already studied, uh, the underlying text the second time, so I've done, in a sense, a second reading of the things that I like the most in that particular book, and I let that be, uh, kind of reside in my memory for some time, and then when I'm, uh, experiencing the world out there, and, uh, there is a moment when I would remember that there is, this is something which relates to …

AI assessment note: “I read, maybe read about three or four books, uh, at any given point”

Q So not only are you a professor, you're a prolific, world-renowned investor. You started in 96. Did you, uh, I think investing is... 94. 94. Did you originally take the multidisciplinary approach?

A Oh, not at all. I had no idea about all that, all of that, uh, not until 2004. So I, um, I, I was a one-trick pony at that time. I was only, uh, I was an accountant. Uh, I knew how, um, Uh, how financial statements get created from, from, uh, transactions. I knew all of that. But I had no idea what a good business, and what is a bad business, and what is a mediocre business, and why. And I was, um, studying at the London School of Economics, uh, in 1990 when I chanced upon an article on an obscure guy, uh, operates out of Omaha, has a wonderful track record, uh, says the markets are quite inefficient, which is quite the opposite of what I was being taught at the LSE. So I found that very interesting. And, um, that particular article also said that, uh, he writes wonderful letters, and you can, uh, you can get them, um, for free if you write to him. So I wrote to Mr. Buffett, and, uh, within four days, I got the, I got those annual reports. Debbie, his secretary, sent, uh, wrote a letter to me that you have to send the postage money, which was probably the best investment I ever made. So I, um, I got those, um, Annual reports on letters of Baksha Hathaway. As I read through them, I discovered Graham. And I picked up on Graham because I was an accountant, as I mentioned earlier, and I could relate to what Graham was saying. Um, up until now, I knew that there is, um, how financia…

AI assessment note: “Oh, not at all. I had no idea about all that, all of that”

Q everybody, including Farnham Street, I mean, it competes for eyeballs, and it competes for attention, and those are scarce resources on behalf of people, and it seems like the pace or the velocity of that information coming at you is increasing the Um, people feel overwhelmed. They feel like they can't separate the signal from the noise. Is there anything that you do that helps you eliminate, reduce, filter, sift?

A Yes. So, um, depends on what context you're speaking about. So let me pick up the context of, uh, analyzing businesses. You have all this data. I mean, there's real-time information out there. There's Bloomberg, and I don't have Bloomberg, and there's CNBC, and I don't have a television. So there's all these, ah, sources of so-called information. Most of it is, in my view, noise. So if you shut out all of it, you have, um, filtered out a lot of the noise. But there's more. Um, as you go through analyzing a business, you come across, um, data. For example, quarterly results. You, you start thinking about See's Candy. If you think about See's Candy, See's Candy loses money as, as if I recall correctly, about eight, Eight months in a year, it loses money. Four months in a year, it makes money, and it's a fabulous business. We all know that. So here is a business, which is a fabulous business, which has created a wonderful cash flow, which has helped Berkshire become what it is today, but it loses money eight months in a year, which means there are several quarters when it is loss making, and there is one, one, there is one big quarter when they make a lot of money. I think that's a very powerful way of thinking, that there are these businesses out there Which are not going to do well, and therefore if you put a lot of emphasis on short-term quarterly results, you are really lookin…

AI assessment note: “if you shut out all of it, you have, um, filtered out”

Q integrate that into the Word documents afterwards. Do you also integrate it into your courses, and how do you go about connecting the different ideas other than, um, you mentioned the Kindle search earlier, but how do you go about adding or refining, I guess, the mental models that you have in your head And adding new mental models, and how do you know you've come across a new model?

A Well, um, over a period of time, when you experience something, and you find answers to that, questions that keep on occurring, uh, in, in a manner which, uh, provides you with answers which are different from what you thought earlier, then you might have chanced upon a new model. Uh, you never know for sure, of course, and it's just a way of organizing your thoughts. So, you're trying to evaluate a situation, and maybe five years ago, you would have looked at it differently. Today, you look at it differently because you read so many things, And you have a better understanding of the world, and, um, maybe some answer to that question will help you figure out the problem better than five years earlier, then I think there's a good reason to give a name to that, and that's how I go about doing that, and Charlie has provided you with a, with a framework. There are all these disciplines, and there are all these names. He uses, uh, things like the boiling frog syndrome, which is a model Which deals with the low contrast effect, which talks about the idea that slow changes tend to go unnoticed, and that's a very powerful notion, if you think about it, because if you look at a business, hugely value creating business, or a value destroying business, and if you look at the financial statements, or a quarterly period, you will miss a lot of the change, but if you put gaps in between, if …

AI assessment note: “provides you with answers which are different from what you thought earlier, then you might have chanced upon”

Q people think you're crazy. So, when you're trying to get promoted, and the psychology of being that mid-level manager in an organization who's very career-oriented, and has a lot at stake in reducing the variability, how do you go about implementing Creativity. How do you, like, how do you balance that tension? And some companies do it really well, and I have no idea how they, how they do that.

A So that's a great question, and I thought about that over the years, and over the years I've come across a few entrepreneurs which have, I think, been what I would describe as what Charlie would call as a learning machine. They made mistakes, um, they learned, and they haven't made those mistakes again. Uh, and you know, as a, as a financial analyst, I do know a few things about risk management. So, uh, what I, the way I think about it is that I'm looking for businesses that, that are risk averse, but not loss averse. And those two things are very different. So what you're really looking for is somebody who doesn't mind making a few small bets. Many of them will go bad, but they have potential. And if they, if, if they pay off, they'll pay big. Uh, and if none of them pay off, it won't impair the company. It won't impair the business. And that's exactly what, how Buffett thinks. So when he, ah, is in a position to write, ah, an esoteric insurance policy, which will maybe pay off if he has to, to make good on his promise, he may have to pay a couple of billion dollars, or even more than that. But the premium that he receives, ah, in return of that promise is several times more than the actuarial value of that bet. And the reason why he can do that is because nobody else is willing to make that bet. And the reason why nobody else is willing to make that bet is because of the poin…

AI assessment note: “looking for somebody who doesn't mind making a few small bets”

Q that transfers to relationships and friendships and books and a whole bunch of other things in the concept of there's a point at which you should stop reading, there's a point at which a relationship becomes unhealthy, there's a point at which, do you think about it in those ways, or do you approach Outside relationships differently, or do you always have that kind of multidisciplinary mental model filter on?

A I think there's something to be, uh, learned on that from the experience of Charlie and, uh, Warren. Uh, I think we all know this, that, uh, they really sell out of a business, even though it's not doing well. Even though economically it should be closed, but the, why don't they, why don't they shut it down? Why don't they get out of a business? Usually they don't. And I think the reason is that they, they've created a culture when they want to be a natural partner for a, for a business. To be owned by Berkshire. And you don't get to that kind of a state if you start, ah, treating businesses as a game of rummy. You don't discard your least performing businesses. And I think they've done that, and, and, and they've done, done that over decades. And I've created a position in the minds of the owners of admirable businesses out there that here is a place where I can give my business To somebody, and that's not going to be sold off to a private equity investor, or to be liquidated, because it doesn't make sense. Even though in the short term, it might cost Berkshire some money, in the long run, it has created a huge reputational advantage for them, uh, and of course, that has helped Berkshire. Uh, I think there is something to be learned from that, um, but, um, you know, when you're running a fund, uh, when you have investors who can, um, pull the money out at a short notice, You p…

AI assessment note: “I think there's something to be, uh, learned on that from the experience of Charlie”

Q So the role of mental models and multidisciplinary thinking has played an incredible role through investing for you, and changed the way that you teach. Has it changed the way you live outside of those domains? How so?

A It has, uh, in, in many ways, and, um, when you look at the world out there, you can't think about it without thinking about incentives, and that's one of the most important lessons of Ah, that Charlie has given. That you must have a two-tier system in trying to understand the world out there. And, ah, you know, we talk about economics, and economics is incomplete without psychology. Ah, and, you know, we have all these notions about the rational man, models and economics, and most of economics is based on the idea that human beings are rational, but most of social psychology actually tells you that we are quite dumb. Very often we make, ah, very foolish mistakes. And I think, um, both the, the disciplines of economics and psychology are kind of connected, ah, and, ah, if you, if you put that in the context, let me give an example. As an accountant, I learned about the idea of shutdown point. That there is a point in a business's life when you should shut it down. Ah, but if you study Charlie, and if you study Warren Buffett's life, you'll find out that actually you should shut it down well before when it makes sense for you to shut it down, because you have to think about opportunity costs. And a lot of people will not shut down, even if it makes sense to shut down, because they figured that the other guy is going to blink first. So they operate in a competitive market, and we…

AI assessment note: “It has, uh, in, in many ways, and, um, when you look at the world”

Q value investing kind of community in the sense that people look up to Charlie Munger, Warren Buffett, and yourself, and they try to bring that approach on their problems. Do you know anybody outside of value investing who's taking that sort of approach and how they're applying it to broader policies or anything, or is it just, do you think that it resonates with people in this particular context, or?

A I think, um, it's wrong to assume that the idea of multidisciplinary thinking that Charlie Munger talks about should be applied only to investing. In fact, ah, you should use investing merely as an excuse to be able to illustrate the idea that you can use multidisciplinary thinking in pretty much everything that you do. And I think that's a very useful skill to acquire, and Charlie offers you a way to do that. And of course, the way he has done that is to be a, you know, Invest successfully. But if you read through his letters and his, uh, talks, he is very rarely actually only talking about things which have to do with investing. There are other applications and, um, if you look around the world, the really good thinkers, they do think in terms of multidisciplinary applications. I do think that there is, um, there are, there are a lot of Charlie Munger, um, fans out there, even though they don't know of Charlie. And I think there is a important, a role that people like you are playing in bringing that kind of knowledge to the world out there. It's not just about investing. You have to be able to apply it in, in, in, in other disciplines as well.

AI assessment note: “if you look around the world, the really good thinkers, they do think in terms”