Marketing The Buffett And Munger Way Nus Class Spring 2008

Slide 1: Marketing, Decision Making and Learning - the Munger/Buffett Way Anand Chandrasekaran NUS Global New Venture Creation Class Spring 2008

Slide 2: 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!! 2

Slide 3: 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 3

Slide 4: Munger / Buffett track record 4

Slide 5: 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 5

Slide 6: 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? 6

Slide 7: 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. 7

Slide 8: 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 8

Slide 9: 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/) 9

Slide 10: 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” 10

Slide 11: 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 11

Slide 12: 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 12

Slide 13: 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 13

Slide 14: 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? 14

Slide 15: 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 15

Slide 16: Solution: Practical thought about practical thought 1. Trade mark your name; protect it strongly 2. Product with universal appeal – harnesses powerful elemental forces… not a name like Glotz’s Sugared Water 3. 8 billion people; 64 lbs of water/day 4. 50% of market; 25% water substitute = 2.92 trillion servings in 2034 5. At 4 cents profit/serving = $117 billion 6. Key is cutting costs as technology to produce gets better Source: “Practical thought about practical thought”, Charlie Munger speech 16

Slide 17: Solution: Practical thought about practical thought 1. Operant conditioning; classical conditioning (both reinforce for lollapalooza results) 2. Minimize bitter after taste (so they can drink more than one!) 3. Competitor’s effect cannot be known if never tried (every spouse knows that) 4. Pavlovian effects around conditioned reflexes (for 50% market) 5. Liking; Scarcity; Social Proof (monkey-see; monkey do) 6. a)syrup to restaurants and b)complete carbonated product 7. Just an arm’s length away from anyone who needs it Source: “Practical thought about practical thought”, Charlie Munger speech 17

Slide 18: Solution: Practical thought about practical thought: what to avoid? 1. Cloying stop-consumption effects and after taste 2. Losing control of trademarked name 3. Losing the secrecy of the syrup’s formula 4. If there is ever a peppy-cola we should own that name 5. Bad effects of envy from our success (we should deserve what we get) 6. Making huge or sudden changes in our formula once it dominates the market Source: “Practical thought about practical thought”, Charlie Munger speech 18

Slide 19: 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 19

Slide 20: 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 20

Slide 21: Questions and discussion Anand Chandrasekaran anand.chandrasekaran@gmail.com NUS Global New Venture Creation Class Spring 2008