wisdom of charlie munger part 1 jan 2012
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Wisdom of a great masterMr. Charlie Munger
MANISH BANSALJeetay Investments
Email: [email protected]
Phone: +91 98924 86751
Website www.jeetay.com
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If I have seen further. It is by standing upon
the shoulders of GIANTS.Sir Isaac Newton
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Brain
I think it isundeniably truethat the human
brain must work inmodels.Understand themost fundamentalmodels - ones thatwill do most workper unit.
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Money
There are a lot of things in life way more
important than money. All that said, some
people do get confused. I play golf with a man
who says, What good is health? You cant buy
money with it.
He that is of the opinion that money will do
everything may well be suspected to doingeverything for money. Ben Franklin
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Money and Value
Observe your behavior in following situations:
Spending your money on yourself
Spending your money on some one else Spending some one elses money on you
Result is:
1. Focus is on both value and price
2. Price (budget) is the focus; Relevance/utility (value) of the product to theperson is of least importance Gifting is an example
3. Value is the focus; Price is of least botheration Going out on officiallunch with customer is a testimony
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Money and Value
Observe your behavior on cancellation of movie show infollowing situations (intimated in advance):
You bought the ticket You were gifted the ticket
First situation how do I claim my money back?
Second situation that is fine.. Good I got theintimation, otherwise, I would have wasted mytime.
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Money and Value
Observe your behavior on spending followingmoney:
You hard earned You were gifted the money
You found the money on the road (some lottery)
Different mental accounting for money based onsources (most careful in first situation to most casualin last situation)
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Money and Value
Observe your behavior on reaction to your babys cryin following situations:
Baby is crying for 100 cents item Baby is crying for $100 item
First situation, let us give baby what he wants.
This is anyway a small request. Second situation, analyze closely. If doesnt
make sense, let the baby cry for some time.
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EfficientMarket Theory
Markets prices reflect/discount every bit ofrelevant information.
Questions are:
Is every bit of information available to the marketplace.
If yes, whether it is reflected appropriately on theprices.
Rationality of human being is a big question mark
here. Man is not a rational animal, he is a rationalizing
one. Robert A. Heinlein
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EfficientMarket Theory
Read the book influence by psychology
professor Robert Cialdini:
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EfficientMarket Theory
Let us play a game
Bid for this Rs. 500 note.
Winner takes it for the bid amount. Second last bidder pays penalty of double the bid
amount.
All other bidders stay put anyway out of the
game.
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EfficientMarket Theory
What do you note from this exercise
Bids started inefficient
Bids ended inefficient First, economics drove the prices
Then, psychology drove the prices
Economic models are incapable enough to define
the psychological models
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Market is less logical and more psychological
Human beings decide price of assets in
the market and they are subject to
greed and fear
At times, they price assets away from
their intrinsic value
Market is a pendulum that forever
swings between unsustainable
optimism and unjustified pessimism In short term, market is a voting
machine and in long term, it is a
weighing machine
Are markets efficient?
Benjamin Graham
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Are markets efficient?
I could calculate the motions of the
heavenly bodies, but not the
madness of the people - Sir Isaac
Newton (loss on South Sea Company
stock in the 1720s)
Psychology is probably the most
important factor in the market and one that is least understood
- David Dreman
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Are markets efficient?
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Read this book on madness of crowd and irrationality
by Charles Mackey
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Are markets efficient?
Mr. Market hates uncertainty
During uncertain times, it gets nervous and is in hurry to
liquidate everything
Fear of uncertainty presides over rationality
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Are markets efficient?
Human beings are not just irrational, they are
predictably irrational Dan Ariely, Behavioral Economist
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EfficientMarket Theory
I think it is roughly right that the market is
efficient, which makes it very hard to beat
merely by being an intelligent investor. But I
dont think its totally efficient at all. And the
difference between being totally efficient and
somewhat efficient leaves an enormous
opportunity for people like us to get theseunusual records.
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EfficientMarket Theory
The possibility that stock value in aggregate
can become irrationally high is contrary to the
hard-form efficient market theory that many
of you once learned as gospel from your
mistaken professors. Your mistaken professors
were too much influenced by rational man
models of human behavior from economicsand too little by foolish man models from
psychology and real-world experience.
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EfficientMarket Theory
Efficient market theory is a wonderful economicdoctrine that had a long vogue in spite of theexperience of Berkshire Hathaway. In fact, one of theeconomists, who won (he shared) a Nobel Prize and ashe looked at Berkshire Hathaway year after year (which
people would throw on his face as saying maybe themarket isnt quite as efficient as you think), he said,Well, its a two-sigma event. And then he said we werea three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas - better
to add a sigma than change a theory, just because theevidence comes in differently. And, of course, whenthis share of a Nobel Prize went into moneymanagement himself, he sank like a stone.
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EfficientMarket Theory
Efficient market theory is taught at 99% of the
B-Schools
Students are made to believe. It works..
I would not like to conclude but, encourage
you to discover yourself whether world is
really rational! And,
So, whether efficient market doctrine reallyworks!!
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