Given at USC Marshall School of Business
- facts are not enough, you need models which is the structure facts hang off.
- you need many models, otherwise you'll see everything through the narrow lense of a single pattern
- models are effective ways to understand aspects of complex systems
- therefore models should come from a variety of disciplines, to capture more aspects of the whole interconnected complexity
- a minority of models will carry the majority of weight. 80/20 rule.
learn the fundamental ideas in each major discipline, always prefer the explanation that uses more fundamental ideas –> use the checklist style for these fundamental ideas
use a big bag of multidisciplinary tricks, mastered to fluency, applied to all complex problems in life
- This talk discusses models and their application in investing
- math
- permutations
- combinations
- basic probability as discovered by Fermat/Pascal are highly applicable to the real world
- know the basics of accounting; know enough to understand it's limitations. Double entry bookkeeping accounting is a fundamental and important invention: https://matheusportela.com/double-entry-bookkeeping-as-a-directed-graph
- Carl Braun's notion of the 5 W's – who, what, where, when and why, why, why
- Engineering models and hard science are the most reliable
- quality control
- breakpoint controls
- backup system
- critical mass
- bell curve from statistics
- cost benefit analysis
- biology and physiology models are the next most useful
- psychology models
- the brain has shortcuts which can be manipulated, don't fall victim
- think of an economy as an ecosystem. Similar rules apply from nature to a competitive market economy
- specialization, for example
- surface area vs volume
- special access to expensive opportunities
- efficiencies with volumne
- social proof
- cascading one-winner take all industries
- chain store effect – advantage of scale with small units for experiment and local specialization
disadvantages of scale
- big, fat, dumb, unmotivated, corrupt beucrocracy
- Avoid natural antipathy towards information that runs counter to your current belief. Learn to destroy your own favorite ideas/beliefs.
- copy what's working for others
- management matters - but, on balance, good business is safer to bet on than merely good management
why do some industries lose margin from fierce competition and others leave a margin for owners?
- brand identity
- competitive tendencies of the players
- airlines vs cereals example
- efficiency gains don't always benefit owners. Increase efficiency in a low margin business will still flow mostly to the end customer
- rapid tech development result in sometimes unpredictable competitive destruction
- stock market behaves like a pari-mutuel system at racetrack. Intelligent, intentional bets should out perform the average, plus the house take a %
- Bet big when a golden opportunity arrives; otherwise, don't. It's that simple
- Investment managers are in the business of selling their product to people; not primarily buying stock
- Ben Graham's Mr. Market concept
In the long run, it's hard for a stock to outperform the underlying business
- get in early
- find great businesses w/ great managers
- avoid taxes by buying and selling
Buying great companies can get overdone at times. It always needs to be bought at a good price.
3 Rules for work
- Never sell something you wouldn't buy
- Never work for whom you don't respect and admire
- Work only with people you enjoy