Poor Charlie’s Almanack

Business is an ecosystem, just as animals flourish when they find niches, so to do humans. In business, we often find that the winners go ridiculously far in maximizing as few variables as possible.

The Lolapalooza Effect: Charlie has around 100 mental models, instead of thinking in terms of the tradeoffs, he thinks about where these mental models accelerate each other. Once you have 1,2,3,4 forces all pushing in the same direction you can get to critical mass very quickly.

Charlie's biggest guiding principles: preparation, patience, discipline, and objectivity.

The big money is not in the buying and selling, but in the waiting. It takes character to sit there and do nothing. I didn't get where I am by going after mediocre opportunities.

Charlie strives to reduce complex problems to their fundamentals without sacrificing needed information. Investing is not physics, you can't distill something into a one-size-fits-all formula. Instead, follow the Einstein principle of "simple as possible, but no simpler." When dealing with highly complex problems, everything is related.

If you can train yourself to be objective and multi-disciplinary, you will outsmart people who are smarter than you.

Our biggest strength is recognizing when we are in our circle of competence and when we are approaching the outskirts of it.

Search for risk that are easily understandable.

When it comes to investing, spend more time learning and thinking than doing.

Practice extreme patience with extreme decisiveness.

An investing principles checklist is important, but even more important is realizing they all work together and not as individual points. They aren't even easy to prioritize in most cases.

Checklists are vital to successful investing

The only way to win is to work, work, work and hope to have a few insights.

Develop into a life-long learner through reading, curiosity, and make the goal to become a little wiser every day.

More important than the will to win is the will to prepare.

Acknowledging what you don't know is the dawning of wisdom.

Never fool yourself, and remember you are the easiest person to fool.

Enjoy the process over the proceeds because you live in the process.

Always invert! Think forwards and backwards.

Don't overlook the obvious when digging into the details.

Buy a few great companies, then you can sit on your ass.

Try to be consistently not stupid, instead of trying to be very intelligent.

Passion is more important than brain power

Don't be resentful

Don't be envious

Be reliable

Learn from others

"If I have seen further than other men, it is because I stood on the shoulders of giants"

When you go down, get back up.

Never make a bet you can't come back from

Give more attention to the evidence that tends to disconfirm your beliefs - especially if those beliefs are strongly held.

You know nothing if you only know facts in isolation, there has to be a theory that holds them together

First rule: you have to have multiple models

"to a man with a hammer, everything looks like a nail"

You have to understand basic math and probability really well

Accounting is the starting place, but its a crude approximation and it's limitations are easy to understand

Communication requires the 5 Ws

Tell who

To do what

where it needs to happen

when it needs to happen by

and why you need them to do it

If you tell people why, they'll understand it better, consider it more important

Psychology says that even if they don't understand the why, people still comply more often

You don't need to understand everything well, just well enough to apply it. Learn things like:

Backup systems from engineering

Breakpoints

Critical mass from physics

The brain does not have unlimited circuitry, it has shortcuts and we must be aware of them

We can take advantage of them in others

We can be aware of them to slow down and clarify our own thinking

The two-track analysis:

What are the factors that govern the interests involved? Rationally considered?

real probabilities, real interests

What are the subconscious influences where the brain is automatically doing these things?

biases, instincts

People who narrowly specialize can get terrible good at occupying a niche

Scale makes you more efficient through things like informational advantage, but the bigger you get the slower you move and the more human nature you have to navigate

People naturally retreat when they hear things they don't want to hear - it's automatic. We have to train ourselves out of that.

Capturing value matters - there are markets that get down to 5 real competitors and no one makes any money (airlines). There are markets that have the same dynamic and everyone makes huge margins. (CPG food)

In some industries all of the innovations flow down to the customer

You have to figure out your circle of competence and stay within it, figure out where you have an edge and play to that edge.

The best investors find that edge, bet big when they find opportunities within it.

You don't need many insights in a lifetime, maybe 10 total and when you find them bet big.

A company selling at a high multiple can still be a bargain if you believe the position has room to run.

Betting on the quality of a business is better than betting on the quality of a manager. It's hard to find managers so good that you'd follow them into any business.

You will get opportunities to profit from underpricing.

To be a great thinker, you have to develop a mind that can jump jurisdictional boundaries. Take the big ideas from the core disciplines.

Ideology is the most extreme distorter of human cognition

Ideology is better at pounding out ideas than reasoning them out

Being totally sure on something makes you a lazy thinker

Take all the models from psychology and other disciplines and use them as a checklist when reviewing complex systems

Psychology severally under-estimates the power of human misery because you aren't allowed to run experiments that harm people

The same goes for stress - we make terrible decisions under duress.

Lollapalooza effects:: when 4-5 forces from the basic disciplines come together to accelerate one another

Ex. incentive caused bias - people do bad things to get rewards

2 people see this, and social proof bias kicks in "if they do it, it's okay"

There's no system for automatic good judgement

Make the world easy for yourself, don't focus on hard problems

It is possible to make fewer mistakes than other people simply by focusing and learning from mistakes intentionally once you do make them - Circle of Competence

Part of what you have to learn is how to handle mistakes and new facts that change the odds. Life, in part, is a poker game, wherin you have to learn to quit when holding a much-loved hand.

You must have the confidence to override people with more credentials than you whose cognition is impaired by incentive-caused bias or some other psychological force that is present. But, there are also cases where you must admit you have no wisdom to add and you must trust the expert.

Good literature (and leadership) makes the reader reach for understanding. It works better, the reader holds it better. The commitment and consistency tendency - if you reach for it, you feel like you own it.

People are heavily influenced by what other people do and think

People repeat what worked for them the last time

Everything should be as simple as possible, but no more.

Be passionate about wisdom, about accuracy, and curiosity.

Believe in the discipline of mastering the best people have ever figured out. Don't try to re-invent the wheel.

When deciding, simplify the problem by deciding on the no-brainer questions first

Reality is revealed by math

It's not enough to think problems forward, you must also think about them backwards.

Think in a multi-disciplinary manner - learn the concepts from freshman level college courses

Really big effects come only from a combination of effects

This chapter builds Coca-Cola backwards using only basic concepts

If academia and business functioned well, everyone could explain the success of Coca-Cola through the use of basic concepts and problem-solving techniques

There are frequent, negative effects from subconscious mental tendencies

Incentive-caused bias: the natural cognitive drift toward the conclusion that what is good for the professional must be good for the client

Man with a Hammer Tendency

To a man with only a hammer, every problem looks like a nail

When someone obtains a broad enough understanding of the basic disciplines, and that he must fight the incentive bias he has taken a step toward wisdom

Problems by definition cross many academic disciplines

Pilots learn not just to pass a test or two, but instead to practice-based fluency to the point they can handle 2-3 intertwined problems at once

He learns when to concentrate mostly on what he wants to happen, and when to avoid what he doesn't want to happen

Checklists are mandatory

Training time is allocated among subjects so as to minimize damage from malfunctions, so what is most important in his performance gets the most training and everything else is raised to high fluency levels

Even after original training, he is forced into a special knowledge maintenance routine

The truly big ideas in each discipline, learned only in essence, carry most of the freight

Winning answers rely on fundamental concepts before anything else: agency costs, marginal utility, etc...

When organizing the disciplines:

Rank and use in order of fundamentalness (sciences, engineering and math first)

Master to tested fluency and routinely use the essential parts of all four

Don't remove a principle unless you can prove that it isn't true

Take a simple, basic idea and take it very seriously.

If you were to persuade, appeal to interest and not reason.

The study of economics, like anything is a matter of timing. Economics became popular because it was used to defend the free market when democracy was battling communism in the Cold War.

Opportunity costs and incentives are superpowers

Academic subjects are too disconnected from one another

By using a checklist, you won't overlook things that you might have otherwise forgotten

Everyone overweighs things that can be numbered because it yields to the methods we are taught in school. The hard-to-measure stuff is often just as important, if not more so.

Physics Envy: trying to to fit a problem and solution perfectly together using math - results in false precision.

Extreme success in business is caused by the following:

Extreme maximization or minimization of 1-2 variables

Adding success factors so that a bigger combination drives success

Extreme good performance over many factors (Toyota manufacturing)

Catching and riding a big wave

Instances where you can raise the price and demand goes up:

Luxury goods - price indicates quality

Non-luxury goods where reliability is a purchasing factory and price again indicates quality

Raise the price and use the revenue to make sales work better through inentives

Raise the price and use the revenue in unethical ways like mutual fund commissions

Bringing in new ideas is easy, getting rid of old ones is hard.

Reward and Punishment: Super-response Tendency

Incentives and disincentives change cognition and behavior and we always under-estimate them

Appeal to interest, not reason

Never think about anything before you think about the power of incentives

Prompt rewards work better than delayed rewards

Incentive-caused bias - man drifts into bad behavior in order to get what he wants, that's normally driven by incentives

Real examples: sales teams forced to live only on commissions will bend the rules to increase them, whereas salary based one sales teams may not work hard enough - it's all about tradeoffs

Granny's Rule: eat your carrots before desert, do the daily unpleasant stuff and reward yourself with the things you enjoy doing

Liking/Loving Tendency

People like and love being liked and loved

Doubt Avoidance Tendency

We will reach a decision quickly to avoid doubt - we hate doubt.

Inconsistency Avoidance Tendency

Our brains conserve space by being reluctant to change, which is a form of inconsistency avoidance.

An ounce of prevention is worth a pound of cure - it's better to avoid bad habits altogether than to have to reverse them.

We're reluctant to change for the following reasons:

It facilitates faster decisions which was a necessary evolutionary trait

It facilitates group cooperation

New ideas aren't adopted because they are more difficult, they aren't adopted because they are inconsistent with the current norms.

People tend to accumulate mental holdings of fixed conclusions that are not re-examined even though they are wrong.

Charlies Darwin used the opposite of confirmation bias. If he thought he had a particularly good idea, he searched for and considered the evidence that would prove his theories wrong.

Curiosity Tendancy

Curiosity is what separates us from the other animals, the curious also have more fun and earn more wisdom long after their formal education has ended.

Kantian Fairness Tendency

Any rule that if followed by everyone, makes the system work better for everyone - when violated, we become extremely upset as a collective.

Envy/Jealousy Tendency

It is not greed that runs the world, but envy.

Envy and jealousy tend to ruin cognitive thought and good organizations, they are also natural human emotions.

Reciprocation Tendency

The automatic tendency of humans to reciprocate favors and disfavors. This is the click-whirr response from Influence

You can always tell someone off tomorrow if it's still a good idea.

Often joins forces with incentives and inconsistency avoidance

Applies no matter the size of the concession or relevance to the transaction

We're actually pre-programmed to please rather than being pleased

Influence from Association Tendency

Creating a new habit is triggered by rewards previously bestowed

People associate things like price with quality

Works even when the association appears trival

Antidotes to being influenced by association

examine the past reasoning, looking for factors that existed and no longer exist

look for new aspects that apply to the new situation and didn't apply previously

We need to under-appraise the talent of people we dislike

IFA can swamp the normal reciprocation theory, when someone receives a favor while they are down - the favor triggers a envy-driven dislike associating with people who have good fortune or are rich

We must be aware that the average dimension in some group will not reliably guide us to the dimension of a specific person or item

Pain avoidance

When reality is too painful, we distort the facts to make them bearable

Excessive self-regard tendency

We mostly appraise ourselves on the high side

Once we own something, we over value it and would pay more for it than if we didn't

Our excess regard for ourself makes us like people more like us

We love our own conclusions more

Overoptimism

What a man wishes, he will believe

Antidote is stats and math

Deprival Super-reaction tendency

Losses seem to hurt more than gains seem to feel good

We react irrationally to small losses

Often protects groupthink because we don't want to lose colleagues or partners

Combines with inconsistency avoidance to make us continually bet on losers: we don't want to lose something that we own and believed in

Social Proof Tendency

We have a tendency to simplify - to think and do - what we observe around us.

Manipulating the quality of your peers is more effective than teaching them

Applies to action and inaction

Learn how to ignore others when they are wrong

Contrast-misreaction Tendency

As perception goes, so goes cognition.

Routinely used in CPG where a price will be listed that high artificially high, then a "sale" price is listed next to it

Cognition, mislead by tiny changes involving low contrast, will often miss a trend that is destiny. "A small leak, will sink a great ship"

Think oil and gas today, Blockbuster, Kodak, etc... they were killed by multi-year, decade long-trends, not one, singular event.

Stress-Influence Tendency

Light stress improves performance, heavy stress causes disfunction

Often made more powerful by social proof tendency

Availability Mis-weighing Tendency

We can't use what we can't remember, so we tend to overweight knowledge that is closer in memory or available to us

The antidote is checklists, process, etc... which are helpful in making sure we don't forget what we know

Vivid evidence becomes more powerful

An idea or fact is not worth more just because it's easy for your brain to access

Use it or lose it tendency

All skill decline with disuse

If you are diligent, the tendency fades - i.e. the more time you spend learning and understanding the harder it is to lose it - it will also come back faster once refreshed

Authority Misinfluence Tendency

Humans have a tendency to follow leaders blindly

Be an over-quiet mouse around your pilots

Be careful who you appoint to power because authority figures are hard to remove, and their leadership lingers

Twaddle Tendency

Man is a social animal that has the gift of language - we can do serious damage with that gift and prevent real work from getting done

The principal job of a leader is to keep people who don't matter from interfering with the work of people who do

Reason-respecting Tendency

Humans have a natural love of accurate cognition and exercise of problem solving. We learn best when a would be teacher or leader gives correct reasons for what is taught.

Few practices are wiser than thinking through those reasons and communicating them to the recipient of the order

Always tell your subordinates: what, where, when, and why

Lollapalooza Tendency

Psychology is exponential and all of the above tendencies can work with or against one another, when they compound the results are drastic one way or the other

Other notes:

Tendencies are much more good than bad, or else we wouldn't have evolved with them

Tendencies are not destiny

Psychology should use more inversion, create more checklists, and emphasize the combinations of effects

Fewer levers equals better

Trade offs aren't the only way market or business forces work, they can also compound on one another to accelerate growth.

Be patient, prepare, have discipline and be objective.

Simple, but no simpler.

Stick mostly to what you know, and when you venture outside of it be extra self-aware.

Invest with extreme patience and only when the conviction is so strong you want to act decisively.

The only way to win is to work, work, work and have a few unique insights.

Life-long learning is essential to success - read, stay curious, and become a little smarter each day.

Will-to-prepare > will-to-win, the greats love to practice and practice never feels like work.

Passion is more important than brain power.

Try not to be stupid, instead of trying to be intelligent.

Facts are worthless in isolation

Understand the basics of several core disciplines well. Math, stats, sciences, psychology...

Always give the reason for asking someone to do something, they'll almost always do it regardless of the reason

The brain has shortcuts, no when to use them to your advantage and ignore them to prevent your own downfall.

Consider the rational, and the irrational with all decsisions

The larger an organization, the more human nature you have to navigate.

Find your edge, stay there, bet big on insights with in it.

Business > team

Don'd define yourself by an ideology. Naval Ravikant said a similar thing in The Almanack of Naval Ravikant

Look for opportunity where multiple forces from multiple disciplines are acting on one another

Part of life is learning how to act when the odds change or new information comes to light

Good teaching in all forms makes the student reach for understanding

We're heavily influenced by others and our past successes.

Be passionate about collecting wisdom and accuracy.

Master what people have already figured out.

Have and maintain several tools for problem solving that are routed in the sciences + psychology

Concentrate on what you want to happen and what you want to avoid - what does this look like in success form, what does it look like in failure?

Big ideas carry the most weight

Take simple ideas, and take them seriously.

Bringing in new ideas is easy, getting rid of old ones is hard. Become good at destroying old ideas.

Appeal to interest, not reason.

People like and love being liked and loved

We reach decisions quickly because we hate doubt

We conserve space by being reluctant to change

Curiosity separates us from the other animals

Envy runs the world

We want to return favors and disfavors

When reality is too painful, we distort it to make it barable

We appraise ourselves on the high side and over value what we already own

What a man wishes, he will believe

We follow leaders blindly, be careful who you follow and how you lead

We love to problem solve and to follow reason