#79 Charlie Munger (The Complete Investor)

What I learned from reading Charlie Munger: The Complete Investor by Tren Griffin ---- Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work. Get access to Founders Notes here. ---- “I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — Gareth Be like Gareth. Buy a book: All the books featured on Founders Podcast

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• 0:00David Senra?

  What is most interesting about Munger is not his success as an investor, but the way he thinks and keeps his emotions under control. Munger's ability to cut to the heart of an issue with a few well-chosen words is legendary, as is his desire to think independently. A fundamentally important truth is that people rarely make decisions independently. This means that people who can think independently, gain control of their emotions, and avoid psychological errors, have an advantage. Warren Buffett once illustrated Munger's desire to do his own thinking with this story. "In 1985, a major investment banking house undertook to sell Scott Fetzer." Real quick, Scott Fetzer is the name of a company.

• 0:41David Senra?

  It's best well-known for selling the Kirby vacuum and the World Book Encyclopedia, but it also owns about a dozen or so other businesses. I had never heard of it before, so I had to look it up. So it says, "A major investment banking house undertook to sell Scott Fetzer, offering it widely, but with no success. Upon reading of this strikeout, I wrote Ralph Shea, then and now Scott Fetzer's CEO, expressing an interest in buying the business. I had never met Ralph, but within a week, we had a deal. Unfortunately, Scott Fetzer's letter of engagement with the banking firm provided it with a $2.5 million fee upon sale, even if it had nothing to do with finding the buyer. I guess the lead banker felt he should do something for his payment, so he graciously

• 1:26David Senra?

  offered us a copy of the book on Scott Fetzer that the firm had prepared. With his customary tack, Charlie responded, 'I'll give you $2.5 million not to read it.'" So that is from the introduction of the book that I read this week and the one I'm going to talk to you about today, which is Charlie Munger: The Complete Investor by Tren Griffin. And what I was just reading from was actually a direct quote from Warren Buffett from his chairman's letter, all the way back in 1999. So last week, we did an introduction to Charlie Munger with the book, the wonderful book, The Tao of Charlie Munger, which I'd recommend everybody go out and buy. It's a fantastically easy to read book and a good introduction into the beautiful mind

• 2:11David Senra?

  of Charlie Munger. It contains like 130 or so individual essays where the author would take like a quote or a statement by Charlie and then use that to like expound on his own thoughts. And like I said, it's a really easy read and a really good introduction to getting to know Charlie Munger, which I think everybody obviously should get to know. So in that book, and in last week's podcast, I covered a little bit about like Charlie's early life and how he got into investing and everything. So I'm not going to like cover that this week. Definitely go back and read that. What I'm going to do is just jump right into the highlights and notes that I took while I was reading the book and the things that really stuck out to me.

• 2:53David Senra?

  This book is formatted in a similar, but at the same time, different way. There's a lot of quotes from Charlie and Warren in this book, but Trent breaks it down into like more like regular chapters. So it reads more like a book than than last week's book where I consider that more like a reference book where you could just pick it up, read one or two or three essays, put it down and so on and so forth. You can read Trent's book straight through and it kind of follows in like a, you can understand why Trent organized the way he did. And if you're not familiar with Tren Griffin, I'd recommend, first of all, he's a good follower on Twitter, but I'd also recommend checking out his blog, which I've learned

• 3:37David Senra?

  a lot from, 25IQ.com. Okay, so let's just jump right into the book. And I love how, I talk about this all the time on the podcast. So this is Charlie just telling us that we should read biographies. But I love the point that Trent's making here, which is his interpretation of how Charlie Munger thinks, because I say this all the time, like, listen, we're here to learn from these people, we're not here to idolize them. Because, you know, all humans are imperfect. So Trent picks that point up right here. He says, "The point is not to treat anyone like a hero, but rather to consider whether Munger, like his idol Benjamin Franklin, may have qualities, attributes, systems, or approaches to life that we might want to emulate even in part."

• 4:22David Senra?

  This same process explains why Munger has read hundreds of biographies. Learning from the success and failures of others is the fastest way to get smarter and wiser without a lot of pain. And undoubtedly, a lot of other smart people, current smart people and people from the past have picked up on this idea. I always say, like, the genesis, the little kernel of idea that saved my mind for a year or two before I started this podcast and kind of influenced me to start it was when I was listening to Elon Musk on another podcast and he was asked, you know, you started a business really young, how did you even think to learn about these things? Like, did you read a bunch of business books? And he's like, "No, I didn't read business books, I read biographies." And he thought they were really helpful. I talk last week, in the first like five or six minutes of last week's podcast, how

• 5:06David Senra?

  every single one of the entrepreneurs I've studied for this podcast, or nearly every single one, they did the exact same thing, whether it's Jeff Bezos studying Sam Walton or the founder of Costco, which Jeff talked about, like, I think he had breakfast with him or something like that. The meeting he had with, his name's Jim Sinigal, I think, was life-changing. So this is definitely a good idea for us to use. And what he's saying here, like, I love what he says, is like, "Listen, we just want to consider whether they have qualities, attributes, systems, or approaches to life that we might want to emulate even in part." Okay, so let me skip ahead a little bit. And I love this idea, which I think applies to a lot in life, which is simple but not easy.

• 5:49David Senra?

  It says, "Much of what is interesting about Munger is explained by this simple sentence: 'I observe what works and what doesn't, and why.'" That's a direct quote from him. "Life happens to Munger as it does to everyone, but unlike many people, he thinks deeply about why things happen and works hard to learn from that experience." So again, just sitting down and thinking and analyzing, it's really simple, but for some reason, for our species, this is actually not easy for us to do. And if you're able to do that, you have an advantage over a long period of time. And I think I'll touch on this later, but just in case I don't, Charlie brings up a lot about the importance of leaving your, like, do not pack your schedule.

• 6:30David Senra?

  He's like, "You wouldn't believe how much time Warren and I leave to just thinking and reading." That he's even said like if someone was to follow around Warren Buffett or himself like it looks very academic. They're just sitting and reading. They're sitting on their, he calls it sitting on their ass. Sitting on their ass and reading or talking one-on-one with people that have information that is valuable to them. But not like, uh, one of the most, uh, famous quirks about Warren is that he won't, he schedules very rarely, like he won't fill up his calendar and he won't make a commitment that far in the future. He does that very rarely. So for example, if you want to meet, let's say you want to meet him next Thursday. Or let's say you want to meet him three months from now, right? He's like, well, call me the day before and if I can do it, I'll do it. But he, he, he, um, is rather, uh, strict

• 7:15David Senra?

  about keeping, like controlling his time, which I think is, uh, smart for everybody, uh, to do. Alright, so, um, Munger's gonna tell us we need to use checklist here. He says Munger's a strong proponent of a checklist approach to life's challenges. Direct quote from Charlie. It says, "I'm a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you. Otherwise, it's easy to miss something important. Part of the benefit of creating a checklist is the process of writing down your ideas. I've always loved the point Buffett made about the importance of making the effort to actually put your ideas in writing. In Buffett's view, if you cannot write it down, you have not thought it through."

• 7:55David Senra?

  So I, I actually just heard, um, the founder of WordPress, Matt Mullenweg, talk about that. How when he's looking for people to hire, he always sees how they write. And he's like, "Listen, writing is important, but it's not the most important thing. Thinking is the most important thing, but it's really hard to think if you don't write it down." Um, this is something I definitely trying to work on in my own life as well. Um, okay, so this is another, um, another trend that you're gonna see over and over again. And this Munger is telling us, like, if, if you want to have a good life, if you want to succeed at what you're doing, you need to become what he calls a "learning machine." He says, so this is trend writing. He says, "The learning and teaching opportunities related to investing are essentially unlimited." And so this book is about investing. Our purpose is we're just gonna, every time you hear the word investing, just think about

• 8:40David Senra?

  entrepreneurship, running a company. It's really very similar activities. Obviously entrepreneurship is where our focus is. Munger likes to say that a successful investor, read successful entrepreneur, never stops being a learning machine. This need to learn and relearn means that an entrepreneur must read and think constantly. Munger has said he does not know a single successful entrepreneur, remember I'm just changing every time he says investor to entrepreneur, who does not read voraciously. Learning about Munger's ideas and methods will forever change the way you think about investing and about life. You will make better decisions, be happier, and live a more fulfilling life. Okay, so that's the end of the introduction. Let's go ahead, right into, so they're both proponents.

• 9:24David Senra?

  He's gonna start off with like who influenced them. Ben Graham, obviously like the godfather of value investing, heavily influenced Warren and Charlie. And then Charlie did some tweaking to his system where it's just not just about buying fair businesses at great prices, it's about buying great businesses at fair prices. And just a few quotes here I'm gonna pull out that I don't think need expounding on. And it's Charlie Munger's distaste for complexity. And the note I left myself is, "Complexity is not your friend." So here's Charlie, says, "We have a passion for keeping things simple." Another quote, "If something is too hard, we move on to something else.

• 10:09David Senra?

  What could be simpler than that?" And another quote, I love this, he says, "We have three baskets: in, out, and too tough. We have to have a special insight, or we'll put it into the too tough basket and just move on." And then here's Charlie quoting one of, somebody from history that's heavily influenced him, that's Confucius. He says, "Confucius said that the real knowledge, that real knowledge is knowing the extent of one's ignorance. Aristotle and Socrates said the same thing."

• 10:39David Senra?

  And so now I want to get into this concept which I really like. So this is Munger's concept of worldly wisdom. And there's an entire chapter in this book dedicated to this. And I think it's a really useful idea. So he says, "Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines (psychology, history, mathematics, physics, philosophy, biology, and so on), a person can use the combined output of the synthesis of the synthesis to produce something that has more value than the sum of its parts. In developing his worldly wisdom approach, Munger uses what he calls," I'm hoping I'm pronouncing this word correctly, but you know I can't pronounce any words, "a lattice

• 11:22David Senra?

  of mental models." So the lattice metaphor was also carefully chosen by Munger to convey the idea that multiple models needed to acquire worldly wisdom must be interconnected. And so this is Munger expounding on that. He says, "You've got to have models in your head, and you've got to array your experience, both vicarious (through reading) and direct on this lattice work of models." And now this is Tran expounding on that. It says, "Understanding the worldly wisdom methodology is made easier if you see it applied in example. To illustrate the method, Munger gave the example of a business that raises the prices of its product and yet sells more of the product.

• 12:05David Senra?

  This would appear to violate the rule of supply and demand as taught in economics." So if you only, his point here is if you only study economics, you might never attempt something like this because you're, like what Munger was saying, like you've got to connect all these models in your mind. Well, if you only have one model, you're going to think it's right and it's a good approximation of reality, and it's not. However, if one thinks about the discipline of psychology, one might conclude that the product is a Geffen good. I've also never heard this term before. And what that means is people desire more of it at higher prices. Or another explanation, or one could conclude that low prices signal poor quality to buyers and that raising prices will result in more sales. So again, he's studying human behavior from different angles.

• 12:49David Senra?

  So it could be economics, it could be philosophy, it could be psychology. And he's applying why it makes sense. And they actually use, this is actually a rather important tenet to help Berkshire think about their businesses. They don't want to buy businesses where they're not able to raise prices. And we'll get into more of that later. Simply put, Munger believes that people who think very broadly and understand many different models from many different disciplines make better decisions. This view should not be a surprise because he believes the world is composed of many complex systems that are constantly interacting. Okay, before I read his quote, "There's many ways to think about this." Munger's gonna call them "complex systems." Mark Andreessen calls the act of starting a company and living in the world in general as a "complex adaptive system."

• 13:32David Senra?

  Bill Gurley would call it a "multivariable nonlinear system." They're all describing the same thing. And so, here's Munger talking about that. He says, "You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, yet there's no precise numbering you can put to these factors." This is a really important point. "You know they're important, but you don't have the numbers." Well, practically, one, everybody overweight the stuff that can be numbered because it yields to the statistical techniques that are taught in academia, and two, doesn't mix in the hard-to-measure stuff that may be important. "That is a mistake I've tried all my life to avoid, and I have no regrets for having done that."

• 14:15David Senra?

  I also say on point number two, you've heard me reference that as a "human scorn the abstract." Like, if there's not a number, if it's not right in front of us, we kind of ignore it, even though it's really important. Okay, so, again, the best way to survive in a complex system is to, one, what he was just saying about Confucius and Socrates and Aristotle, so you have to know the limits of your knowledge. I think he calls this, like, knowing the circle of your competence. And also, just being well-read is a way to spot, like, BS. Okay, so, here's Munger on why he feels reading is so important. This is something, like, through, I don't know, decades, he talks about. "Munger's speeches and essays are filled with thoughts of great people from the past

• 14:59David Senra?

  and present from many different domains." So, it's kind of an extension of what we're just talking about, right? Munger is also careful to set aside a lot of time in his schedule for reading. This is Charlie Munger speaking in 1998. "I believe in the discipline of mastering the best that other people have already figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart." connects again to what he was saying about the complexity of the world. It's impossible for one person to understand everything. He also applies this to businesses, and I think I've heard Warren Buffett say this as well. He's like, "Listen, there's only a certain amount of businesses that one human being can know intimately, enough that they can put a large percentage of their assets into."

• 15:42David Senra?

  So he talked about why they're not fans of diversification. It's like, "I can't understand six, like, one individual can't understand 30 or 40 different great businesses, and you don't need to." They always say, like, "If you have a handful," I think the number's like, "two or three great businesses in your lifetime, you can get fabulously rich." So, again, these are all, when you start studying and understanding how their minds work, you see how their philosophies connected in, like, it's the same philosophy applied to different parts of life, whether it's learning, investing, managing, whatever the case is. And then here's more importance on reading. He's going to continue on this. He says, "I constantly see people rise in life who are not the smartest, sometimes not even the most diligent." This is one of my favorite quotes of Munger.

• 16:26David Senra?

  I've talked about it in many different places. I may have even mentioned it last week on last week's podcast, but also on my email list. So he said, "I constantly see people in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and, boy, does that help, particularly when you have a long run ahead of you. So if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning. Nothing has served me better in my long life than continuous learning. I went through life constantly practicing, because if you don't practice it, you lose it, the multidisciplinary approach, and I can't tell you what that's done for me.

• 17:10David Senra?

  It's made life more fun, it's made me more constructive, it's made me more helpful to others, and it's made me enormously rich. You name it, that attitude really helps."

• 17:23David Senra?

  And so Munger applies that to reading. I think it like, obviously, like, I love reading as well, and that's the single best way for me to learn. But I think it applies to so many other things. It applies to podcasts, audiobooks, lectures, videos, like, I don't, like, however, you've got to figure out however you learn. You know, I know some people that they just absolutely cannot sit down and read a book, but they will consume audiobooks, you know, voraciously. It doesn't, to me, it's all the same. It doesn't matter. Okay. Just whatever works for you. What is, okay, so now, he's got this famous speech on YouTube,

• 18:03David Senra?

  and it's called "The Psychology of Human Misjudgment," and it's like an hour and a half, an hour and a half lecture. I'd recommend reading it. But this chapter I'm in has the same title, and I'm just going to pick out some things where he feels like, he's identified through studying the humans, like, where we're most likely to make mistakes, and then, you know, being aware of that mistake, and then trying to avoid it in our own life. So I'm just going to pull out some of the parts that I found most interesting. And the first one is this thing called "Reward and Punishment Super Response Tendency." And so let me just, let me just read this quote from Munger. He was talking at Harvard University in 1985, and this is what he said. "Almost everyone thinks he fully recognizes how important

• 18:48David Senra?

  incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I've been in the top 5% of my age cohort almost all of my adult life in understanding the power of incentives. And yet I've always underestimated that power. Never a year passes, never a year passes, but I get some surprises that pushes a little further my appreciation of incentive superpower." And another way to say this, he said a few years later, was, "The iron rule of nature is that you get what you reward for. If you want ants to come, put sugar on the floor."

• 19:30David Senra?

  Okay, so he's just saying, "Listen, we are heavily influenced by incentives." So whether you're thinking about that from product design, or dealing with other people, or just analyzing, like, "Why would somebody do that?" There's usually an incentive hiding behind that. So it says, "Then this applies to..." They talk a lot about the importance of incentives when you're figuring out compensation in your company, right? So it says, "Munger believes that structuring compensation incentives is critical. If the right structure exists, then a seamless web of deserved trust..." This is also a term that's repeated over and over again. "...can be created, which lessens problems related to this tendency. For example, it is surprising how many people fail to recognize how performance suffers if you pay someone in advance, rather than after the work has been completed.

• 20:13David Senra?

  It's precisely because of the dangers of misaligned incentives that Munger and Buffett choose to make compensation decisions themselves, whereas they delegate almost all management responsibilities." So what they're talking about there is this weird... Actually, maybe weird's not the word. This unique way that, you know, the conglomerate that is Berkshire Hathaway is structured, where it's almost completely decentralized. They're famous for buying businesses and then leaving the people, like, alone to run them. But when it comes to... They do control some decisions are centralized. One, where to invest, obviously, the profits from that business.

• 20:56David Senra?

  And two, the compensation of the people in the business. So, again, I think that's a signal to us, like, that's obviously important to them if they're saying, "No, no, no, we're gonna do this ourselves."

• 21:07David Senra?

  Okay, another one of the psychologies of human misjudgment is something they call "doubt avoidance tendency." And I think this...

• 21:20David Senra?

  This paragraph describes, uh, that gives you a good like summary of it. Says, "The confidence of entrepreneurs bolstered by doubt avoidance tendency creates positive benefits for society in the aggregate by generating productivity and genuine growth in the economy, even if legions of entrepreneurs may fail." Nassim Taleb put it this way, quote, "Most of you will fail, disrespected, impoverished, but we are grateful for the risks you're taking and the sacrifices you're making for the sake of the economic growth of the planet and pulling others out of poverty. You're the source of our antifragility. Our nation thanks you." And it says, "Researchers believe that doubt avoidance tendency exists because a brain's

• 22:04David Senra?

  processing load can be substantially reduced if a person rejects doubt." That's very dangerous, though.

• 22:12David Senra?

  Another one, curiosity tendency. And I'm not reading all of them. These are just the ones that I find most, personally most interesting. There's a bunch of them in here. Alright, so curiosity tendency. This is Charlie Munger on that. "Experience tends to confirm a long-held notion that being prepared on a few occasions in a lifetime to act promptly in scale in doing some simple and logical thing will often dramatically improve the financial results of that lifetime." So it's kind of a core tenet of the way they invest, right? "A few major opportunities clearly recognizable as such will usually come to one who continuously searches and waits with a curious mind that loves diagnosis involving multiple variables."

• 22:55David Senra?

  Okay, so there's the whole complexity thing again, and the whole reason to be a learning machine, because he's saying it's a curious mind. And usually if you're curious, that means you want to learn. And then, Charlie continues here. "And then, all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past." So prudence, he's meaning frugality, sitting on tons of cash, keeping your operating expenses low, and then he preaches over and over, patience. That's actually a really good, now that I've read two books on Munger and I've watched a ton of his talks and things, this is actually really good. I didn't think about this when I took that, when I highlighted this. But that, that one paragraph is actually a really good, um, like, uh...

• 23:41David Senra?

  View into like the mind of Charlie Munger. Let me read that again. "Experience tends to confirm a long-held notion that being prepared on a few occasions in a lifetime to act promptly in scale." Okay, so that means go all in. He's not one of like, oh, like if you really believe in something like they talk about if you if you look at them, it looks like they're doing nothing and then they they move fast and they move like they make an investment fast and they do it like they don't put a they usually don't put a tiny bit of money in. They're kind of um kind of like a self-confidence in their own like skills. So to act promptly in scale and doing some simple and logical thing will often dramatically there's the whole simplicity thing again, right? Will improve dramatic will dramatically improve the financial results of that lifetime.

• 24:26David Senra?

  "A few major opportunities," remember what I was just saying a few minutes ago, how they say you just need a few good, a few wonderful businesses to make yourself really rich. "Clearly recognizable such will usually come to one who continuously searches and waits, learning machine, with a curious mind that loves diagnosis involving multiple variables, complexity. And then all that is required is a willingness to bet heavily. They're not they're not fans of diversification when odds are extremely favorable. Using resources available, saving your money, as for prudence and patience in the past." So yeah, that is a really good um combination of every a lot of the things I've learned from Munger. Uh, now this is tren, uh, expounding on that. He said curiosity can uh

• 25:04David Senra?

  Okay, so this is this is important. "Curiosity can uh, cause an investor to engage in too many activities, or a business owner to offer too many products and services. Startup founders can end up repeatedly pivoting their business into oblivion if they overload on curiosity. At the same time, curiosity can lead to important breakthroughs for a business." So you see this a lot. Um, somebody made the point on Twitter and I wish I saved the tweet, but I didn't. They're like, if you really analyze some of the most successful businesses in the world. Right now, and I guess in the past even then, they were founded on extremely simple ideas. And I'm not, so let's go through like some, some of the example.

• 25:49David Senra?

  Like, Apple has a bunch of different products, but the vast majority of the profits they will ever make come from one product, the iPhone, right? Google, I know they try to do all this other stuff, but all their profits come from one thing, making the world's information online searchable, right? So these are, they're, they're, simple ideas, that doesn't mean they're easy to do. Uber, press a button, get a ride. Like, these are, again, simple ideas, not easy, but very simple. So I love this idea where, it goes back to what I was saying about Andrew Carnegie, where he was lecturing Henry Frick and other people, he's like, "Go study how the great fortunes of the world are made." It's like, don't, it's not a scatter, he called it like a scattershot approach. Focus on what you're doing, one thing. His case is, "I'm just gonna make money on steel."

• 26:34David Senra?

  So I really like this, what Trent is saying here, "Startup founders can end up repeatedly pivoting their business into oblivion if they overload on curiosity."

• 26:43David Senra?

  A business owner can offer too many products and services.

• 26:48David Senra?

  And then that last sentence, I think, is also important. It's like, "At the same time, curiosity can lead to important breakthroughs for a business." So there's a dichotomy there.

• 26:57David Senra?

  Moving forward, another one is, and this is, I know I left myself, is another reason we should all be nicer. Reciprocation, you know the word I'm trying to pronounce.

• 27:11David Senra?

  You know what, here, my, my co-host will pronounce it. This YouTube channel is a lifesaver for me.

• 27:18David Senra?

  Reciprocation. Okay, so reciprocation tendency.

• 27:25David Senra?

  So this is Charlie Munger on it, "The automatic tendency of humans to reciprocate favors and disfavors has long been noticed as extreme." What an interesting choice of words, extreme. So this is Trent talking about this, actually, he's quoting...

• 27:40David Senra?

  He's the guy that wrote Influence, Gialdini. I think is how you pronounce his last name. "People will help if they owe you for something you did in the past to advance their goals. That's the rule of reciprocity." That's the end of his quote. "The reverse is also true if you have done something that negatively affects a person. The urge to reciprocate favors and disfavors is so strong that even someone smiling at you is hard not to reciprocate. The indebted feeling that humans have when they receive a gift tends to make that person feel uncomfortable until he or she can extinguish the debt." So this is him, obviously, studying psychology. And the reason I said this, another reason we should be nicer is because, you know, you might be having a bad day and taking on somebody else, but then what is he saying?

• 28:23David Senra?

  He's like, "The automatic tendency of humans to reciprocate favors and disfavors has long been noticed as an extreme." And what I always talk about on the podcast, something I've learned from studying other areas of history is like, humans are virtuosos, what I call virtuosos of violence. And you just don't, you can, we're unpredictable. And you just don't, there's no reason to go around making enemies. Just be nicer and that person's, hopefully, is not going to feel the need to reciprocate what Trent here is calling a disfavor. Okay. Moving ahead.

• 28:58David Senra?

  This is funny. This one is called "Excessive Self-Regard Tendency." So it says, this is Trent talking. "Companies are not immune from this excessive self-regard tendency, including Berkshire's portfolio companies." And now Charlie's going to talk about this. He said, "Geico got to thinking that because they were making a lot of money, they knew everything." So anybody with the experience of, in the ecosystem of entrepreneurship, has seen this behavior before. "Because they were making a lot of money, thought they knew everything. And they suffered huge losses. All they had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there." And this, this happens to people that should have a high, you know, regard.

• 29:42David Senra?

  We're all prone to excessive self-regard. I think about, I mean, think about the entire podcast I just did on Steve Jobs, Time and Next. You know, when you're, when you create an amazing product and in your, you're in your early twenties, you're worth hundreds of millions of dollars in the eight, in the seventies? I think the early seventies, eighties? And you do that for a decade, then you come back and the entire book, Randall Strauss's book, The Next Big Thing, in case you haven't listened to the podcast yet, is all about this, excessive self-regard. It's amazing to me, the difference between the quality of entrepreneur in Mike Moritz's book, Return to the Little Kingdom, which at the beginning, focused on just the beginning of Steve Jobs, where, you know, he's still like a young and immature, but he's undoubtedly like a talented entrepreneur.

• 30:24David Senra?

  And then obviously what we see when he comes back to Apple in the late nineties and early two thousands, compared, that, that's the same person that in the, let's say, the late eighties, early nineties, was doing everything incorrectly. So, we're all prone to this. I'm definitely prone to it as well. So, it's something to like be aware of. Another one, social proof tendency. Here's Charlie Munger on that. "Big shop businessmen get into these waves of social proof. Do you remember some years ago, when an oil company bought a fertilizer company? And then every other major oil company practically ran out and brought, and bought a fertilizer company? And there was no more damn reason for all these oil companies to buy fertilizer companies? But they didn't know exactly what to do?

• 31:07David Senra?

  And if Exxon was doing it, it was good enough for mobile and vice versa? I think they're all gone now, but it was a total disaster." And Trent expounding on that. "Humans have a natural tendency to follow a herd of other humans. In other words, because humans do not have unlimited time and complete information, they tend to copy the behavior of other humans." I love the Munger's use of this word constantly. So this is the twaddle tendency. Charlie Munger speaking, it says, "It's obvious that if a company generates high returns on capital and reinvests at high returns, it will do well." So right, another thing that's simple but not easy. But this wouldn't sell books.

• 31:49David Senra?

  So there's a lot of twaddle and fuzzy concepts that have been introduced that don't add much. And so he talks about that constantly, about modern finance, it's all twaddle, which is just really a polite way of saying bullshit. And I just love, I absolutely love this idea about like, you know, what we're doing here is very simple, it's not easy, but again, like, no one can sell you it. And another reason I think why he's read hundreds of biographies as opposed to hundreds of like the latest business book. And I used to, I felt when I, when I was, let's say, I have to go back and look at Amazon, but let's say the last like 12, 14 years. I bet you when I started college, I read a lot of business books.

• 32:33David Senra?

  Like, here's this one idea, and then it took me way later in life to actually skip over and get over that phenomenon. Because you're, you know, you're young, you don't know anything about the world. I still don't know that much about the world. And you're just looking for answers. And you're trying to see, like, oh, this guy must know, or this girl might know, must know what's going on, because they have a book and it was published, and the idea is obviously good. And you realize that's not an indication that the idea is good. So I love this quote, and I just want these traits. This is Roger, an author, Roger Lowenstein, who's, this is a quote from the biography he wrote on Warren Buffett. He says, "Genius was largely a genius of character," right? Not intellect, which is very important, interesting distinction, in my opinion.

• 33:17David Senra?

  So what, it's saying largely a genius of character, of patience. And now he's going to list off the traits. "Patience, discipline, and rationality." That's what I mean by, I want those traits. "His talents sprang from his unrivaled independence of mind." I'd also like to do that, I'd also like to be capable of that. "And ability to focus on his work and shut out the world." So yeah, those are just great, I mean, who doesn't want that? Who doesn't want to be patient? I'm not patient. Disciplined? I'm somewhat disciplined. Rational? I have no idea. And then independent of mind and ability to focus on work and shut out the world. I think that, I mean, those are fantastic traits, right? Oh, so I didn't explain. I just transitioned out of the psychology of human misjudgment.

• 33:59David Senra?

  And now they have this concept, Charlie and I think Warren has the concept, they call it the right stuff. And it's just like, well, I guess that's a good opening of it. It's just traits and ideas that people have which they consider like to be successful at what they're doing, investing and starting companies, buying companies, et cetera, et cetera. Like this is the stuff you need to do, right? So it says, "The chapter identifies a few of the attributes that make up the right stuff of a successful entrepreneur investor as identified over the years by Munger." Okay, so there's a bunch of traits in here. I'm only, I'm not going to obviously read all of them. We're just going to pick out the ones that I found interesting. So this one's on patience.

• 34:38David Senra?

  "Success means being," these are quotes from Charlie, "success means being very patient but aggressive when it's time." Another one, "It would be nice if finding great investments happened all the time. Unfortunately, it doesn't, hence the need for patience." Another one, "Patience combined with opportunity is a great thing to have. My grandfather taught me that opportunity is infrequent and one has to be ready when it strikes." That's what Berkshire is. And then later on, this is interesting, he's telling us that, or he's telling, yeah, he's telling us that we need to study probability. Here's a quote, "If you don't get elementary probability into your repertoire,

• 35:19David Senra?

  you go through a long life like a one-legged man in an ass-kicking contest." And if you want to learn more about probability, I would read, I'd read the entire inserto, but if you could only read one of the collection, I'd read Fooled by Randomness. I think like a little trick that I have as far as if you want to be good at like conversations, I always like to ask questions like that, like, okay, if you could only recommend one book for somebody to read, that's it, they can only read one book, what would that be? My answer to that question would be Fooled by Randomness by Nassim Taleb. But even last night, like I was texting friends, I was like, hey, if you could only visit one country that you haven't gone to yet, what would it be? When you put these artificially, like, artificial constraints on it,

• 36:02David Senra?

  you really get like to know people better, to know their thinking. Sometimes I'll ask the question like when I'm at dinner, okay, you're trapped on a desert island, you're going to be trapped on a desert island, you can only bring one album. What like, what are you bringing with you? Like, you're gonna listen to this one album for the rest of your life. What is it? Gets you a good idea how they think about music. And this just works for everything. Books, podcasts, just anything. Cities to visit, experiences to have. So anyways, if you want to learn probability, I think one of the best books you can read is Fooled by Randomness on that. Okay, so this is Munger's unique definition of being disciplined. "We've got great flexibility and a certain discipline in terms of not doing some foolish

• 36:47David Senra?

  things just to be active." Remember, that goes against human nature. "Discipline in avoiding just doing any damn thing just because you can't stand inactivity." So I think that little idea comes from his lifelong study of human nature. Another quote on this. "I think it's possible for a great many people to live a life, I think it's possible for a great many people to live a life like that, where there isn't much risk of disaster and where they're virtually sure to get ahead a reasonable amount. It takes a lot of judgment, a lot of discipline, and an absence of hyperactivity." Absence of hyperactivity. "By this method, I think most intelligent people can take a lot of risk out of their life."

• 37:32David Senra?

  So he's telling us, you need to have judgment, discipline, and an absence of hyperactivity.

• 37:45David Senra?

  Another, one of his traits, what he calls the right stuff, is honesty. And here's him talking about that. "Generally speaking, when Berkshire has the power, we try to be more than fair to the minority who don't have the power and who depend on us. You can say, aren't they wonderful moral people? I'm not sure we get credit for a lot of morality because we early knew how advantageous that would be to get a reputation for doing the right thing, and it's worked out well for us." My friend Peter Kaufman said, "If the rascals really knew how well honor worked, they would come to it." So this idea that being honest and being honorable is actually a long-term competitive advantage. Most people optimize for the short term is what they're talking about. Munger continues. "It really has worked well."

• 38:30David Senra?

  People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don't. There's an old expression on this subject, which is really an expression on moral theory. How nice it is to have a tyrant's strength and how wrong it is to use it like a tyrant. It is such a simple idea, but it's a correct idea. I just love Munger's own love of simplicity. Continuing, this is another quote on honesty. "More often, we've made extra money out of morality. Ben Franklin was right for us. He didn't say honesty was the best morals. He said that it was the best policy."

• 39:15David Senra?

  Another trait for the right stuff is long-term oriented. Charlie says, "Almost all good businesses engage in 'pain today, gain tomorrow' activities." And this is Trent expounding on that. He says, "Munger has recognized that it is hard to think on a long-term basis when you're just getting started or starting over. For this reason, he said once that accumulating the first $100,000 is a bitch. That is reason enough to work hard to assemble a basic financial cushion. Not only is it not fun, it is a handicap to live on the edge of financial ruin." This applies to your personal finances as well as your company finances. It's amazing to see how few people actually, and businesses actually adhere to this very simple idea. "In the long term, the power of compounding becomes ever more evident.

• 40:00David Senra?

  Unfortunately, understanding the power of compounding is not a natural state for the human race." I always wondered why people used "human race." Why isn't it "human species"? However, it is a critical task." This is more on Charlie, or Charlie speaking about this again. "Understanding about the power of compound interest and difficulty of getting it is the heart and soul of understanding a lot of things." What does he mean by that? That all good things in life compound? So he says, "Many things that are not," this is Trent speaking, "many things that are not directly financial will compound. Skills, relationships, and other aspects of life can compound and benefit a person who invests time and money wisely to cultivate these things."

• 40:43David Senra?

  Another trait that he identifies is passion. This is Charlie speaking about that. What matters most? He's asking a question. What matters most? Passion or competence that was born in? Berkshire is full of people who have a peculiar passion for their own business. I would argue, passion is more important than brain power. That's a hell of a statement. This is Tran expounding on that. If you do not know about the link between passion and success, you have not been paying attention. People who are passionate tend to work harder and invest more in achieving their goals. Passionate people also read and think more. Passionate people tend to have an informational edge over others who are not as passionate. This is also an indictment. If this is true, which I tend to believe it is, it's an indictment on our education system.

• 41:26David Senra?

  And then, I just read, who knows how they come up with these calculations, if it's true or not, but, like, 75% of people, I think this was just in the United States, are working in a job that they don't like. They're just literally doing it for money. Well, it's really hard to be really great at something that you don't actually care about. And if you don't actually care about it, you're not going to invest the time outside of work to get better at your skill, whether it's reading and understanding the history of the industry that you're in, or doing what Danny Meyer and Bill Gurley call professional research. Often, the level of passion you have for a topic will grow over time. So this is another idea about compounding they keep hitting on, right? The more you know about some topics, the more passionate you will get. That's probably true. Some of the best passions in life grow on you in a nonlinear way after a slow start,

• 42:10David Senra?

  which is just another word for compounding. Another trait that they consider is the right stuff. Studious. This is Charlie. Learning from other people's mistakes is much more pleasant. Here's, he's continuing on this idea that you need to be studious. And I think they kind of go, passion and, like, they kind of go hand in hand. Like, if you're naturally passionate about something, like, you're just gonna, you can't help but study and want to learn everything about it. So, I think finding passion is the key to unlocking, like, your inner studious person. And really, what they're talking about is, like, being studious. It's just about ignorance removal. So it says, "In my whole life, I've known no wise people who didn't read all the time.

• 42:55David Senra?

  None. Zero. You'd be amazed at how much Warren reads and how much I read." Now, they're quote, "Development into a lifelong self-learner through voracious reading cultivate curiosity and..." Oh, I put the enunciation on the wrong part. Let me read that again. Develop into a lifelong self-learner through a voracious reading. Cultivate curiosity and strive to become a little wiser every day. So again, he's already hit on that, he's just saying it a different way. And another way to think about this is you gotta work where you're turned on. And again, I think passions and being studious is, um, they're, they're connected. Um, oh, and here, here's, he's still talking about being studious here. He's got a lot of quotes on this, apparently it's important to him.

• 43:39David Senra?

  "The main contribution of buying Sees candies," they mentioned Sees candies constantly, "was ignorance removal. If it weren't good, if it weren't good, if it weren't good at removing ignorance, if it weren't, who's, what's it, maybe Berkshire? If it weren't good at removing ignorance, we'd be nothing today. We were pretty damn stupid when we bought Sees. Just a little less stupid enough to buy it. The best thing about Berkshire," yeah, they were talking about Berkshire. "The best thing about Berkshire is that we have removed a lot of ignorance. The nice thing is we still have a lot more ignorance left." I love this guy. "Another trick is scrambling out your mistakes, which is enormously useful. We have a sure to fail department store, a trading stamp business sure to fold, and a textile mill.

• 44:24David Senra?

  Out of that comes Berkshire." That's a really fascinating way to look at things. "Think about how we would have done if we had had my," "think about how we would have done if we had a better start." This guy's hilarious, man. I, I love, um, and some people call him like, uh, like an ass or arrogant, but I, I don't interpret it that way. And again, I always say like, I'd, I'd appreciate, and I think what he's, it's kind of the opposite of arrogance, isn't he saying that like, I know such a, like, there's so much more things that I, that I, like, I'm ignorant about and I haven't fixed yet. And he's saying these words and he's in his 90s. He's saying, um, we, uh, what is it? "The nice thing is we still have a lot more ignorance left."

• 45:07David Senra?

  I just think it's, um, again, I mean, if you want to call it arrogant, whatever, but I would, I, I prefer real arrogance to false modesty. And I like that he, you know, he has an independent of thought. It does like, he gets to say what is actually on his mind, where I feel a lot of public statements is, you know, basically a performance art. Um, okay. So, another trait. We're still on the right stuff. This one is frugal. And I had this thought, um, Okay, so I had this idea, I had this thought rather, that if you were able to transcribe every single word spoken so far in Founder's Podcast,

• 45:47David Senra?

  that the most common word uttered on this podcast has got to be the word frugal. And when I read this, when I read this quote from Charlie Munger about the importance of frugality, which obviously he's gonna, is gonna be very important to them, it made me think of one of my favorite scenes. So I've said before, like, I was fairly obsessed with Game of Thrones. So when I read this part earlier, I left a note on one of my favorite scenes in Game of Thrones. Two of my favorite characters are talking, and it's Tywin Lannister and Elena Tyrell. And they're paying for this huge royal wedding. And Tywin walks up to her and he's just like, "This is a bit much, don't you think? Like, this is ridiculous." And she's like, "Oh, no, it's what the people expect."

• 46:32David Senra?

  And then he says something that I love. And he says, "People who spend money on this sort of nonsense tend not to have it for long." And again, I think that applies to your personal finances and also to your company finances. And this is an example, you know, Berkshire Hathaway is one of the most successful companies in existence. And this is Charlie describing it. He says, "We don't, we don't have an isolated group of managers surrounded by servants. Berkshire's headquarters is a tiny little suite." And trend continues to expound on Munger's frugality and maybe what influenced, maybe who influenced him to be, to be frugal. He says, "Like his idol Benjamin Franklin and his partner Buffett,

• 47:17David Senra?

  Munger is relatively frugal given his wealth, especially when it comes to operating and investment expenses. In addition to the axiom, 'A penny saved is two pence dear,' Benjamin Franklin wrote, 'The way to wealth is as plain as the way to market. It depends chiefly on two words: industry and frugality. That is, waste neither time nor money, but make the best use of both.'" That's the best description of frugality. And I think why, you know, it's not a coincidence that... Some of the entrepreneurs that we study adhere to this principle. You're not going to be able to build a successful company, especially on the scale that these people do, wasting time or money. "Without industry and frugality, nothing will do, and with them, everything." That's the end of Benjamin Franklin's quote.

• 48:02David Senra?

  Other Graham value investors have a similar focus on frugality. This guy named Walter Schloss was famous for running his investment firm out of a single room leased from another investment firm. "I suspect that some of the frugality that can be seen in Graham value investors springs from their understa-" this is interesting. Why are you doing this, right? Other than just being a miser and sitting on a bunch of money? Says, "I suspect that some of the frugality that can be seen in Graham value investors springs from their understanding of opportunity costs and the power of compounding. They naturally compare the value of consumption today with the value of greater consumption tomorrow, which causes them to be frugal." That's fantastic.

• 48:41David Senra?

  This is being, the idea of being risk averse. Really, what Charlie's telling us here is how to run your business. And again, I know I love myself, this is also good for your personal life as well. Here's Charlie. "You can easily see how risk averse Berkshire is. In the first place, we try to behave in such a way that no rational person is going to worry about our credit. And after we have done that, we also behave in such a way that if the world suddenly didn't like our credit, we wouldn't even notice it for months because we have so much liquidity. That double layering of protection against risk is as natural as breathing around Berkshire. It is just part of our culture."

• 49:20David Senra?

  Okay, so I'm skipping way ahead in the book now. Towards the end, they have another chapter. It's called "The Right Stuff," but this is "The Right Stuff in Business," and talking about like how they actually manage Berkshire and what they prioritize. So this is on the importance of capital allocation and the management of a business. "One major fundamental aspect of any business is management. Munger and Buffett are famous for delegating almost all authority and responsibility to Berkshire subsidiaries to run their own business." This is what I was mentioning earlier. "With the exception of capital allocation and the creation of compensation systems. In other words, while management of the business within Berkshire is extremely decentralized, the management of capital allocation and compensation systems is extremely centralized."

• 50:00David Senra?

  So you have a decentralized management of the business, of the subsidiaries, and yet the complete control of capital allocation and compensation systems. Munger and Buffett believe that capital allocation is a skill that many managers simply do not learn before they become chief executive officers of companies. They believe this could create big problems for a business because CEO will often not know how to make critical decisions that will maximize shareholder return. And you could argue that's one of, in addition to many of his other talents, Jeff Bezos is fantastic at this. The most important task in a capital allocation is to take cash generated by a company and deploy it to the very best opportunity and avoid what Buffett called "the institutional imperative." Now, what's the institutional imperative?

• 50:45David Senra?

  This is a quote from 1989 from Warren Buffett. "Rationality frequently wilts when the institutional imperative comes into play. For example, number one, as if governed by Newton's first law of motion, an institution will resist any change in its current direction. Number two, this is such an important point, "just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds." I don't think I've ever heard anybody else say that. Three, "any business craving of the leader, however foolish, will be quickly supported

• 51:25David Senra?

  by detailed rate of return and strategic studies prepared by his troops." So, fake work. Four, "the behavior of peer companies, whether they are expanding, acquiring, setting executive compensation, or whatever, will be mindlessly imitated." So, he's telling you to avoid all this. And that's, and those four things he calls institutional imperative. This is trend now. "The culture at Berkshire has been created by Buffett and Munger so as to reject the institutional imperative like a foreign body. The heads of many companies are not skilled in capital acquisition."

• 52:02David Senra?

  Another thing that they say is a skill that you need to develop in business, and I'll expand on this because they have an entire chapter just on moats, but they say you need to develop moat widening skills. This is what I mean about the ability to raise prices that they love. Charlie says, "I can see instance after instance where that isn't what people do in business," meaning widening the moat. "One must keep their eye on the ball of widening the moat to be a steward of the competitive advantage that came to you." Munger once manages of the business who have an ownership mentality toward the business, and Munger's now going to quote Carnegie and others. "Carnegie was always very proud that he took very little salary. Rockefeller and Vanderbilt were the same.

• 52:46David Senra?

  It was a common culture in a different era. All of these people thought of themselves as the founder, and their partners as founders." If you think about Carnegie's unique private partnership, you know, they all had a small percentage of the business. And so, what are they actually taught? Like, why would you do that? And the importance was, the importance is they want risk and benefits to be symmetrically allocated. So, skin in the game in other words. This is an interesting thought I've never heard of. This is Munger on the curse of scale. "For example, if you worked for AT&T in my day, it was a great bureaucracy. Who in the hell was really thinking about the shareholder or anything else?

• 53:30David Senra?

  And in a bureaucracy, you think the work is done when it goes out of your in-basket into somebody else's in-basket. But of course, it isn't. It's not done until AT&T delivers what it's supposed to deliver. So you get big, fat, dumb, unmotivated bureaucracies. The constant curse of scale is that it leads to big, dumb bureaucracy." This is kind of... I never articulated this way, but this is kind of why I would say like I favor smaller companies and I try to support independent entrepreneurs whenever I can. Because as businesses grow, inevitably, as they scale, the end result for the, the result for the end user is usually worse. Some of the best service you're ever going to get and some of the best products you're

• 54:15David Senra?

  going to get are, you know, small batch, independent owners, people that are actually there. You know, in a large company, they, the owners are separated from the customers in many, in many cases. So I love that. The constant curse of scale is that it leads to a big dumb bureaucracy. And who's going to get great products or services from a big dumb bureaucracy? Uh, let's see. This is, this is Charlie telling us how to make decisions. Intelligent people make decisions based on opportunity costs. In other words, it's your alternatives that matter. That's how we make all of our decisions. And this is the, the chapter on moats. So I'm, there's a bunch of, just like anything else, he's got like a bunch of numbered lists

• 55:00David Senra?

  about what he feels builds a moat. Some of them I, I don't even know if, like they made sense to me, so I skipped over a bunch. But I'm just going to pull out the ones that are interesting. So one, supply side economies of scale and scope. If a company's average costs, this is how you widen a moat. So basically they're saying, hey, if you don't have a moat, you can't raise prices. If you don't have a moat, uh, if you can't raise prices, uh, you might have a commodity business, which means you have heavy competition and all your profits are going to be competed away eventually. So it says, supply side economies of scale and scope. If a company's average costs fall, when more of a product or service is produced, there are supply side economies of scale. Intel is a classic example of a business that benefits from economies of scale.

• 55:44David Senra?

  And so this is, uh, it says regarding the impact of supply side economies of scale, Munger has pointed out, now we're going to go some quotes that illustrate how he's thinking on this. In some businesses, the very nature of things cascades toward the overwhelming dominance of one firm. It tends to cascade to a winner take all result. And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, to hell with it. We're either going to be number one or number two in every field we're in, or we're going to be out. That was a very tough minded thing to do, but I think it was a correct decision if you're thinking about maximizing shareholder wealth. Another quote. Um, actually no, this is Trent speaking now. If it is cost efficient for a company to produce several different products or services, a company can also benefit from supply-side economies of scope.

• 56:28David Senra?

  So now that he said economies of scale and economies of scope. Economies of scale, everybody knows what that is. Economies of scope is different. So you're benefiting because, to benefit from economies of scope, a business must share resources across markets while keeping the amount of those resources largely fixed. Businesses, the desire to benefit from economies of scope, must avoid running as isolated units. So basically, you have one successful product, the customer already knows who you are. If they already know who you are, they're more likely to buy another product from you. That's economies of scope. This is the benefits of expanding a moat with demand-side economies of scale, which almost no one uses that term, and everybody uses the other moniker for this, which is network effects.

• 57:13David Senra?

  I'm not going to spend too much time on this because it's talked about ad nauseam. It says, "Demand-side economies of scale, also known as network effects, results when a product or service becomes more valuable as more people use it." So Craigslist, eBay, Twitter, Facebook, you all know this already, but American Express is an example of a company in the Berkshire portfolio with a network effect benefits. The more merchants that accept a card, the more valuable the service gets, the more people use their card, the more valuable the services are for the merchants. Thus, over time, that constant expansion expands their moat. Another way to expand a moat is brand, and that's very different. So it says, "A moat powered by brand is something very different from one created via supply-side or demand-side economies of scale." Now, they're going to use, regarding brand power, this is Charlie Munger.

• 57:57David Senra?

  He says, "The informa-" this is really interesting, talking about, thinking about what, like, you know, everybody's like, "I'm building a personal brand," or I'm, we think about branding, all this, you know, that, kind of like, I hate when people talk like that. But, um, and the reason I hate that people talk like that is because they're not really, like, adding anything new to discussion, they're just kind of mimicking other people, right? I never thought about... And maybe I, maybe that's my fault for not listening intently. Maybe people have made this point. But Munger is the first person to talk about like what a brand is. A brand is just an informational advantage. It's a way in a, in a small amount, whether it's the name of a company, a logo, an image, whatever, to convey a lot of information about that, right?

• 58:40David Senra?

  And think about that, like, think about when you hear the word Disney. That's one word. What is that? Six, six letters. Think about all the stuff that pops into your mind. Like that is a brand that is conveying, it has an informational advantage. Because in six letters, it tells you, you know, hundreds of different things that may come to mind. So this is what, this is the way Charlie thinks about brands, which I think is really smart. The informational advantage of brands is hard to beat. And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotzes chewing gum. Well, I know what Wrigley is. Well, I know that Wrigley is a satisfactory product, whereas I don't know anything about Glotzes.

• 59:21David Senra?

  So he talks about the ability for Wrigley to increase prices just on that informational advantage. So in effect, Wrigley simply being so well-known has an advantage of scale. What you might call an informational advantage. Everyone is influenced by what others do and approve. We already covered this earlier. Another advantage of scale comes from psychology. The psychologists use the term social proof. We are all influenced subconsciously, and to some extent consciously, by what we see in other, by what we see others do and approve of. Therefore, if everybody buying something, if everybody's buying something, we think it's human. All told, your advantages can add up to one tough moat. A very important test for Buffett and Munger in determining, now this is Trent talking,

• 1:00:04David Senra?

  in determining the strength of a brand-based moat is whether a competitor can replicate, this is another interesting idea. Okay, so a very important test for Buffett and Munger in determining the strength of a brand-based moat. So how do you check that? How do you know this? Is whether a competitor can replicate or weaken the moat with a massive checkbook. As just one example, here's what Buffett said about Coke at the 2012 Berkshire meeting. If you gave me 10, 20, or 30 billion dollars to knock off Coca-Cola, I couldn't do it. And now what's interesting is in this chapter on moats, then trends like, okay, let me analyze Berkshire and see what kind of moats they have. And he says, "Some companies like Berkshire have been able to create a moat as a result of a combination of better systems and culture than their competitors."

• 1:00:48David Senra?

  So he's just going to go over some of the ideas that he has. Number one, what adds to the moat of Berkshire? It says Berkshire is tax efficient. They're well-known for buying something and then holding it forever. And if you let something compound for 30 years and you don't pay taxes on it once, you save a ton of money over that time period. Another one, which is just another way to say they're frugal, is they have low overhead. And this is a quote from New York Times. It says Berkshire has a corporate headquarters with a mere 25 people on a single floor of an office building. From there, Mr. Buffett and his staff allocate capital and contemplate acquisitions of sales, hire or fire people to run those portfolio companies, and otherwise stay out of the way. Another way they expand their moat is they're the private buyer of first resort, and this

• 1:01:31David Senra?

  ties into what Charlie was saying earlier. If people understood the long-term benefits of acting with integrity and honesty and morality, it's going to add to your reputation. That reputation of future can give you access to opportunities that other people just won't have. So it says, "If you've spent your life building a business and decide to sell the company, Buffett and Munger offer you a unique opportunity. They will let you, and in fact want you to, continue running the business. Your other option is selling the business to a private equity firm that does not give a damn about your business and will probably load it up with debt, creating a serious risk that the company will fail." Another one, Berkshire has what they call permanent capital.

• 1:02:14David Senra?

  They basically say, this is some guy, I don't know who he is, his name's Bruce that they're quoting, that is describing Berkshire, it says, "That's why we keep a lot of cash around. Cash is the equivalent of financial valium. It keeps you cool, calm, and collected."

• 1:02:32David Senra?

  And I'm gonna skip the other ones.

• 1:02:37David Senra?

  But I want to describe, well, this is them talking about moats again, and then I'll I'll leave the idea of moats alone. It says, "So you know you have a moat when you can raise prices." There, this is, is this Munger again? Just quote, yep, this is Munger again. Just quote from Munger. "There are actually businesses that you will find a few times in a lifetime where any manager could raise the return enormously just by raising prices. And yet they haven't done it. So they have huge untapped pricing power that they're not using. That is the ultimate no-brainer. Disney found that it could raise those prices a lot," anybody with little kids knows this, it's ridiculous, "and the attendance stayed right up. So a lot of the great record of," they're just naming some old CEOs of Disney,

• 1:03:21David Senra?

  "came from just raising prices at Disneyland and Disney World and through video sales of classic animated movies. At Berkshire Hathaway, Warren and I raised the prices of Sees candy a little faster than others might have. And of course, we invested in Coca-Cola, which has some untapped pricing power. Creating a moat is something that people like Ray Kroc, founder of McDonald's, Sam Walton, Estee Lauder, Mary Kay Ash, and Bill Gates have accomplished."

• 1:03:52David Senra?

  And finally, I'll close on this.

• 1:03:58David Senra?

  And this is trend talking, and this is really, this is really my def- other people throw around the term mental model a lot, and for a while I didn't even know what the hell it was. And I think this is just the easiest way to think about what it is. At least in terms of what we're trying to accomplish here on the podcast. So it says, "With that last bit of wisdom, I send you off into the world, hoping that you two learn to concentrate and invest successfully. Whenever in doubt about making a decision related to investing or otherwise, ask yourself this: What would Charlie Munger do?" And so what I mean is like, what I mean by, that's my definition of a mental model. The reason that I read, so, you know, so I didn't just read one book on Steve Jobs. I've read like six.

• 1:04:42David Senra?

  And I try to go deeper on these peoples because you're exposing yourself to a lot of information and more importantly, how they think. And to me, that's what the mental model is. Like if you constantly reading biographies on Henry Ford, Steve Jobs, etc., etc., you're going to eventually be able to, in your own mind, develop a mental model of how they think. And then when you're presented with a decision, like this is kind of the transmission of these ideas that are in these biographies, right? The practical application of these ideas, is you can sit there and say, okay, I'm presented with an opportunity, what would Charlie Munger do? What would Henry Ford do? What would whoever you personally identify with their philosophy of business do? Same reason if you're on my email list.

• 1:05:26David Senra?

  Like I take notes on a lot of the same people over and over again. Because what I'm doing is I've identified people that I admire their mind, and I'm trying to go deeper so I can develop mental models on them. So I was, one example is this Mark Andreessen was giving a talk, and he's one of the people that I'm interested in how he thinks. But he's done his own research on Peter Thiel. And I think he thinks Peter Thiel's like one of the smartest people around. And so he says he has a mental model of Peter Thiel. And as he goes about his day, he says he has a little Peter Thiel on his shoulder. And he'll ask himself, well, what would Peter Thiel say? Or what would Peter Thiel think or do, or whatever the case is? And I don't think you need mental models, you know, there's been what, like, I don't even know how many founders we've covered so far. But over time, being exposed to more of these ideas, you're going to identify the people

• 1:06:10David Senra?

  that they're just, they click with you. You can't even really, I don't even think you can, you can explain why. Maybe you can, you can point to certain ideas that you like of theirs, or certain ways they run their business, or whatever it is. But it's like deeper than that. It's like a, more of like an abstraction. So that's the way I think whenever I hear people talk about mental models. I think of them like personal, like personal mental models. I know other people's like, this is my framework on how I make decisions. I wish I could say I have those, I just don't. I think of things in like, like I said, and maybe it's because I spend so much time studying people, as opposed to just, you know, decision frameworks, or whatever the case is. So anyways, Charlie Munger.

• 1:06:55David Senra?

  If you want to learn more about them, if you want to, if you thought this podcast was interesting, you probably liked the book. So if you want to read the book, there's a link in the show notes. You can just click it and it takes you right there to the book. You can buy it. If not, you can go to amazon.com/shop/founderspodcast. You'll see this and every other single book. It's like the visual representation of this podcast, presented in reverse chronological order. If you purchase using either the links in the show notes or going to that URL, the Amazon will give me a small percentage of the sale and no additional cost to use. It's a great way for, I always say, like, you're supporting yourself because you're getting a book that'll benefit your life and you can apply those, the ideas that you learned in

• 1:07:38David Senra?

  that book to your own work and get an unbelievable return on that investment. You're supporting the author who's taken a lot of time writing these books and you're supporting me who's hopefully introduced you to these ideas and expanding it to an audience that may not have known about those ideas. Other than that, if you're listening to this and you have not become a misfit yet, misfits are the people that financially support this podcast. As you see, I don't do any ads on the podcast. I rely on the people that give value out of my work. As a result, half of my podcasts, like this one, are ad-free and free to everybody. You don't have to do anything but press play and listen and you get the benefit of me reading, taking notes and doing all this work. But if you want more, every other podcast I do is

• 1:08:21David Senra?

  reserved exclusively for misfits. So if you haven't signed up yet, you're missing out on half the podcasts. You can click the link. Oh, so I need to bring this up. Several people have sent me messages and said, "David, you are not being clear. You're not communicating clearly." So I've gotten this message enough times that I need to like figure out another way to do this. They're like, "I wanted to sign up for Misfits. I couldn't figure it out." Or it's not like, they had to like, it wasn't making it easy. So... I thought I was making it easy because I include every single link in your podcast player and 90 something percent of the people that listen to me, listen to me on Apple Podcasts or Overcast and they make links clickable. So when you're listening to me, just click

• 1:09:02David Senra?

  on the link. If you want to sign up for Misfit, you click on it, you can use Apple Pay in like 10 to 20 seconds, you'll have the private RSS feed, which is all what a podcast really is, the private podcast feed installed into your podcast player of choice and then you can listen to all the unlocked, you can, basically you're unlocking all the other, the Misfit podcasts that you haven't, that you haven't heard yet if you haven't upgraded. So I thought that was really easy. Some people prefer just to go to the URL. So you can open up the browser on your phone, go to glow, G L O W, dot FM, you know, every podcast, like the dot FM extensions, like every podcast service or podcast loves that, that extension.

• 1:09:45David Senra?

  But anyways, glow.fm forward slash founders. So you can either go directly to the URL and do that, or you can tap the link that's in the show notes, or if you want to take a roundabout way for some weird reason, you can also go to founderspodcast.com and I have the link on every single podcast I've done, although people said that I should have it like right in the, like the beginning of when you go to the website. So anyways, I appreciate the feedback and I know that I'm obviously making a mistake if multiple people have run into the same thing and that's not, obviously not my desire. My desire is to make it as simple and easy for you to support. So if you sign up for, here's the thing, if you sign up for Misfits, you pay a small monthly fee. If you're willing to

• 1:10:28David Senra?

  pay a small monthly fee and press play, you're going to get four podcasts, because I have two free and two Misfit podcasts a month. All you have to do is sign up and then listen and then you're going to have some of the best ideas from some of the greatest entrepreneurs in history, just injected right into your ear every month. And undoubtedly, you will get more back than the small amount of money that you pay every month. And if you don't, say, David, you know, I didn't give value of this, I'll give you a refund. I don't like, it's impossible that that would happen. So if you haven't done it, I know some people are like, oh, it's kind of a pain in the ass. I promise you, the company I use, Glow, they made it all, the only thing better than the way they did it is if Apple did it themselves and Apple's not going to do it themselves. So they did it beautifully. Like they use,

• 1:11:11David Senra?

  it's almost like you're, you're paying for an app on your iPhone, which you've probably done a million times. I've actually talked to the founders at Glow.

• 1:11:20David Senra?

  Two separate times for over an hour each, just because I've tested every single other like podcast product and this one was by far the best. And they just have their shit together over there. They design a beautiful, beautiful, beautiful product. They, they make it so, super easy to have a private podcast feed, to listen to, you know, because some people sell private podcast feed and then you have to listen to it in a browser. That's not ideal. I understand that. I think all audio, literally all audio is better in a podcast feed. So even if they had like, uh, like people that do YouTube videos that some people only listen to, um, I think that the, at least for me, the experience of listening to audio in a podcast player is the single best experience. So that's the experience that you get.

• 1:12:05David Senra?

  I would very much appreciate if you support the podcast, but if you're going to buy the books, and I know a lot of people have sent me messages that, you know, they've bought a lot of books, they haven't used the link and they're going to use it in the future. Listen, it's really more important to me that you buy the books and read than it is that you use the link. But at the same time, if you're going to buy the book, why not just click the link and benefit the podcast at the same time? What else? What am I doing next week? Oh, and if you go to amazon.com/4/4/4/4/4/podcast, usually I put the book that I'm doing that week up there so you can kind of have like a sneak, it's a way to have like a sneak preview of what I'm working on. I'm not sure which one I'm going to do. I have like 30 or 30 to 50 books to choose from. So I can't tell you that. Unfortunately, I don't know why I brought that up.

• 1:12:50David Senra?

  Other thing is, uh, actually, that's it. I've talked enough. Please sign up, become a misfit, tell your friends about the podcast, and I'll talk to you next week.