Marketing The Buffett And Munger Way Nus Class Spring 2008

Marketing, Decision Making and Learning - the Munger/Buffett Way Anand Chandrasekaran NUS Global New Venture Creation Class Spring 2008

Personal Background
Stanford EE, Aeroprise, MEA, Carma , Tapestries of Hope , Stanford GEM teaching team ‘08, MIT Technovators’, Huffington Post blogger
CURRENT: Advising 3 companies in Valley, 1 in India
A love for Ben Franklin
Story of the easter egg in the US Constitution
The original ‘renaissance man’
Inventor, Philosopher, Businessman, diplomat, politician, Librarian, Scientist, Engineer
Meeting Mohnish Pabrai, Managing Director of Pabrai Funds
The books start to arrive in the mail… and they don’t stop!
A new way of thinking…
… driven by values and sound principles, not buzzwords
Don’t be overwhelmed. You have a lifetime to learn and apply these principles!!

Munger / Buffett track record
BRK is one of the world’s most valuable companies
Stakes (current or former) in Coca-Cola, Gillette, ABC, Wells Fargo, See’s Candies, Saloman Smith barney, GEICO, NetJets, CostCo, AmEx, Washington Post…
… no whiff of scandal, greed or accounting ‘irregularities’
2007 revenues of $118 billion (mostly through subsidiaries)
217,000 employees overall
Based out of Omaha, Nebraska
Early students of Ben Graham
‘ Moat’ Philosophy
‘ Cigarette Butt’ Investing and approach to evaluating ideas / businesses

Munger / Buffett track record

Who is Charlie Munger?
Vice-Chairman, Berkshire Hathaway
Modern day Ben Franklin?
Close collaborator of Warren Buffett
Fair business at a great price VS great business at a fair price! (changing Buffett’s thinking)
Expounded “worldly wisdom”, “latticework of mental models” and “lollapalooza results”
We’ll hear these several times in this lecture!
Concentration, Curiosity, Perseverence, Thrift, Simplicity, Duty

Key themes to take away
Meet the eminent dead
Meet the one-legged guy in an ass-kicking contest
Worldly Wisdom: “man with the hammer” tendency
Invert, always invert
Latticework of Mental Models
Multi-disciplinary approach
Web of deserved Trust
The 6 themes of influence (a la Robert Cialdini)
Self-serving bias
The ability to kill your best ideas
Inventing VS the method of invention
Bad bridge VS bad business
How do you build a 2 trillion $ brand from scratch?

Meet the eminent dead…
Benjamin Franklin
Carl Jacobi
Charles Darwin
Adam Smith
Linus Pauling
Instead of explaining concepts in the abstract, it’s a lot more fun to make friends with the eminent dead!
Source: “Poor Charlie’s Almanack”, Edited by Peter D Kaufman.

Worldly Wisdom
The man with the hammer…
… the one-legged guy in an ass-kicking contest
How do I acquire Worldly Wisdom?
Multi-disciplinary approach
Self-serving bias: appealing to bias, not to rationality
Causality VS Consequence

How does one acquire and retain WW?
Latticework of Mental Models
Invert, always invert
Pavlovian Models (See ‘building a $1 trillion brand’)
Weather Patterns
Adam Smith’s “invisible hand”
Linus Pauling’s mining of physics to improve chemistry
HOMEWORK ASSIGNMENT: Look at the reading list of the Santa Fe Institute students (http://www.santafe.edu/)

The multi-disciplinary approach
Arriving at a checklist
Tools to evaluate marketing and business problems
Avoiding the “man with the hammer” tendency
CostCo: optimizing on a single variable (to the extreme)
Gillette: commitment and consistency
Nebraska Furniture Mart: customer service, low prices
Knowing when to apply the “extraordinary routine”

Case Study : The 6 themes of INFLUENCE
Look for reinforcing effects in marketing situations (for Lollapalooza results)
RECIPROCITY
LinkedIn endorsements; chain letters
COMMITMENT AND CONSISTENCY
Only one sperm can get in and then the egg shuts off
New physics VS old physics; New technology VS old technology
Phil Zimbardo (Stanford)’s prison experiment
SOCIAL ACCEPTANCE
Tupperware Parties
LIKING
AUTHORITY
#1 brand always has the highest market share
SCARCITY
iPod launch
Source: “Psychology of human misjudgement”, Charlie Munger speech at Harvard law school, 1995

Case Study : The 6 themes of INFLUENCE (practical examples)
Alcoholics Anonymous
Real Estate and Car Dealers
Tupperware Parties
Coca-Cola and the launch of new Coke
Darwin VS other evolutionary biology researchers
“ Limited Edition” sneakers, cars, watches, credit cards
Source: “Psychology of human misjudgement”, Charlie Munger speech at Harvard law school, 1995

Case Study: Incentive caused bias
Economists call this “agency costs”
Appeal to bias
Always note what people are paid to believe
Incentives can drive behavior (sales commissions? Bonus objectives?)
Motivation for the right goals
FedEx shift / hour compensation

A return to values…
Invert, always invert…
Tell me where I’m gonna die and I’ll make sure I don’t go there!
The ability to kill your best ideas
A web of deserved trust
The best way to succeed is to deserve what you get!
Lollapalooza results
Two things to avoid: Sloth, unreliability
Bad bridge VS bad business
Are you comfortable with this appearing in the front page of the NY Times tomorrow morning?

Can you build a 2 trillion $ brand from first principles?
It is the year 1884. Mr.Glotz has a challenge!
You and Mr Glotz know nothing that happened after 1884
50% of equity goes to you if you can make it happen within 150 years (from 1884) = 2034
You cannot make alcoholic beverages
Makes the whole corp. worth $2 trillion
This is after paying out several billion $ in dividends
You can only use principles that a smart high school sophomore can understand
You can draw from any subject, to make your case…
You have 15 min. to make a pitch!
Source: “Practical thought about practical thought”, Charlie Munger speech

Solution: Practical thought about practical thought
Trade mark your name; protect it strongly
Product with universal appeal – harnesses powerful elemental forces… not a name like Glotz’s Sugared Water
8 billion people; 64 lbs of water/day
50% of market; 25% water substitute = 2.92 trillion servings in 2034
At 4 cents profit/serving = $117 billion
Key is cutting costs as technology to produce gets better

Solution: Practical thought about practical thought
Operant conditioning; classical conditioning (both reinforce for lollapalooza results)
Minimize bitter after taste (so they can drink more than one!)
Competitor’s effect cannot be known if never tried (every spouse knows that)
Pavlovian effects around conditioned reflexes (for 50% market)
Liking; Scarcity; Social Proof ( monkey-see; monkey do )
a)syrup to restaurants and b)complete carbonated product
Just an arm’s length away from anyone who needs it

Solution: Practical thought about practical thought: what to avoid?
Cloying stop-consumption effects and after taste
Losing control of trademarked name
Losing the secrecy of the syrup’s formula
If there is ever a peppy-cola we should own that name
Bad effects of envy from our success (we should deserve what we get)
Making huge or sudden changes in our formula once it dominates the market

Solution: Practical thought about practical thought: REPORT CARD
1896: Coca-Cola Corp. worth under $150k
Lost half its trademark since founding in 1884
Does not own peppy-cola or related names
Rest went according to plan
Currently worth $125 billion in market cap
Need to grow only at 8% a year to reach $2 trillion value in 2034
Scary Part: how many scientists, academicians and industry experts can explain Coca-Cola from scratch?
‘ New Coke’ fiasco
Self-criticism; curiosity; concentration; perseverence

Bibliography
Poor Charlie’s Almanack
The Intelligent investor
Mosaic
The essays of Warren Buffett
The Wealth of Nations
Benjamin Franklin: An American Life
Influence
Damn Right!
Buffett: making of an american capitalist
Annual Shareholder reports of Berkshire Hathaway

Questions and discussion Anand Chandrasekaran [email_address] NUS Global New Venture Creation Class Spring 2008

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Marketing The Buffett And Munger Way Nus Class Spring 2008

by anand chandrasekaran on May 07, 2008

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Marketing The Buffett And Munger Way Nus Class Spring 2008 — Presentation Transcript