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!!

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

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

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

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.

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!

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 The 6 themes of influence (a la Robert Cialdini) Self-serving bias: appealing to bias, not to rationality Causality VS Consequence

The man with the hammer…

… the one-legged guy in an ass-kicking contest

How do I acquire Worldly Wisdom?

Multi-disciplinary approach

The 6 themes of influence (a la Robert Cialdini)

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 The 6 themes of influence (a la Robert Cialdini) Inventing VS the method of invention 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/)

Latticework of Mental Models

Invert, always invert

The 6 themes of influence (a la Robert Cialdini)

Inventing VS the method of invention

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”

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

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

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

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

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

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 Inventing VS the method of invention 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?

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

Inventing VS the method of invention

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

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!

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 Source: “Practical thought about practical thought”, Charlie Munger speech

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 Source: “Practical thought about practical thought”, Charlie Munger speech

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 Source: “Practical thought about practical thought”, Charlie Munger speech

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 Source: “Practical thought about practical thought”, Charlie Munger speech

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

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