QAV #649 — Farewell Charlie / Ryan’s Analysis

QAV 649 Club

[00:00:00] Cameron: ​Wel­come to QAV episode 649. I’m record­ing this on Tues­day the 5th of Decem­ber 2023. Hap­py share mar­ket every­one. So as you may have picked up from last week’s episode, TK is down in Vic­to­ria play­ing a char­i­ty golf tour­na­ment this week. So we pre record­ed a bit last week, which I’m going to play in a few min­utes.

[00:00:38] Cameron: That’s going to be Tony and I, most­ly Tony, talk­ing about Ryan’s analy­sis. So as you are prob­a­bly aware, if you’ve been lis­ten­ing for a while, over the last year or so, Tony had a num­ber of interns. Help­ing him out doing some regres­sion analy­sis, exper­i­ment­ing with a few of [00:01:00] the vari­ables that we use in the sys­tem, and he final­ly has a bit of a report on that, that he’s going to run through with you.

[00:01:08] Cameron: So I’ll start with that, because that’s prob­a­bly the most impor­tant part of the episode, and then after­wards, I’m going to do a lit­tle bit of a memo­r­i­al for Char­lie Munger. Charles T. Munger, who passed away, as you know, last week, aged 99 and 11 months, about a month before his 100th birth­day, final­ly kicked the buck­et.

[00:01:32] Cameron: You know, Char­lie famous­ly always said that, uh, He just want­ed to know where he was going to die so he would nev­er go there. Appar­ent­ly no one told him it was the hos­pi­tal. But, uh, that is a life very well lived. We’re all very grate­ful, of course, for Char­lie’s wis­dom and wit and teach­ing over the years. I pulled out poor Char­lie’s almanac, The Wit and Wis­dom of Charles T.

[00:01:57] Cameron: Munger. Been reread­ing it over the last week. A [00:02:00] book, by the way, Tony rec­om­mend­ed to me prob­a­bly 10 years ago, 15 years ago, well before I was a val­ue investor any­way. And I did get a copy of it at the time and skimmed it. But it was­n’t until we start­ed doing the show that I real­ly read it cov­er to cov­er and it’s a fan­tas­tic book.

[00:02:19] Cameron: A lot of anec­dotes about Char­lie by friends and fam­i­ly. Friends includ­ing Buf­fett and Bill Gates and peo­ple he’s worked with for decades. But then 11 speech­es that he had giv­en over the years. copied in there. So it’s, um, it’s a ter­rif­ic read and I’ll cov­er what I think are some of the high­lights of that and a lit­tle bit about his life, his biog­ra­phy.

[00:02:46] Cameron: But first let’s cut to Tony’s chat about Ryan’s analy­sis and then I’ll come back and talk about the great Charles Munger.

[00:02:55] Tony: I’m going down to Mel­bourne and to Cape [00:03:00] Schanck and it’s my annu­al golf trip down to play some of the good cours­es in Mel­bourne with a group of guys. It’s not real­ly a fill in show, it’s still going to be excel­lent con­tent, up to par. Yes.

[00:03:17] Tony: Yes. And I sent you through a Pow­er­Point pre­sen­ta­tion that Ryan and I put togeth­er. So I don’t know if you might want to put that on the web­site or some­thing. I guess, um, I think this has been an issue for me over the last cou­ple of years that, um, there’s been lots of, uh, ques­tions asked about the QAV process and how might it change and how might it improve, but I’ve been, I guess it pains to do it, um, the right ana­lyt­ics for it, which has just been both cost­ly and time con­sum­ing and And, and there are some lim­i­ta­tions, right?

[00:03:55] Tony: So if, uh, what Ryan has, has been giv­en is the, [00:04:00] all the buy lists that we’ve been using, uh, since we sort of for­mal­ized QAV three or four years ago, and using that as a start, as the start to put togeth­er some tri­al port­fo­lios and then look at the results under cer­tain cir­cum­stances, which is, Good, good work and use­ful work, but you know, there’s lim­i­ta­tions for it.

[00:04:20] Tony: It’s real­ly only three or four years of data. And, and if this is a dif­fer­ent peri­od to all, all the oth­er peri­ods that have gone by, then we could just be solv­ing for one prob­lem. So I kind of want to put that out there first

of

[00:04:34] Tony: all, and, and also put it out there that, uh, What­ev­er we come up with as find­ings out of this analy­sis, I think we need to run them through a paper port­fo­lio first in some tri­als to real­ly, you know, feel com­fort­able that they’re going to work going for­ward, which is what I’ve been doing.

[00:04:52] Tony: I’ve tak­en some of these and have been try­ing them myself. So let me go, let me go through it. So, uh, Ryan [00:05:00] looked at whether the ques­tion I asked Ryan was should QAV have a cut­off score of 0. 1, or should it be a QAV cut­off score of 0. 2? And that ques­tion was raised by Ryan’s pre­de­ces­sor, Dylan, who did some analy­sis, um, and came up with the idea that the QAV score should be raised to 0.

[00:05:24] Tony: 2. But there are a whole lot of oth­er ques­tions raised by Dylan’s analy­sis, because as good as it was, and it was good, and he had 10 years of data, because I sub­scribed to Refini­tiv and paid for that. data access, but we did­n’t have all the met­rics in Refini­tiv that we use for QAV. And he had no way of, I think at that stage, we did­n’t have the bread lighter.

[00:05:47] Tony: So we had no way of sort of automat­ing three point trend line checks. And so we decid­ed we would rebal­ance the port­fo­lio every month. I think it was. Um, for the analy­sis work that he was doing. [00:06:00] So rebal­anc­ing every month and using a QAV score of 0. 2 was bet­ter than rebal­anc­ing every month at QAV score of 0.

[00:06:06] Tony: 1. So I was­n’t con­vinced that that was nec­es­sar­i­ly the right answer. And I’ve been test­ing it with a tri­al port­fo­lio ever since, and it’s not going too bad­ly, but I’m not see­ing sort of, um, knock it out of the park results. So I thought, let’s get Ryan to have a look at it. And again, it was dif­fi­cult because some­times our buy list only has a small num­ber of stocks above 0.

[00:06:30] Tony: 2, um, to score with. And some­times those stocks are very small and we want­ed to have an ADT thresh­old. Uh, so we did­n’t want to buy real­ly small stocks, which is, would make the analy­sis skewed towards that. Uh, so we, you know, we, we looked at, um, uh, kind of a proxy for it. So we said, why don’t Why don’t we buy from the top of the buy list going down ver­sus buy­ing from the bot­tom of the buy list going up and see which one per­forms bet­ter.

[00:06:59] Tony: So don’t wor­ry about whether [00:07:00] the cut­off is 0. 2. If you’re buy­ing from the top down, you’re going to have high­er scores. Some of them are going to be in the 0. 2s or high­er. And if you’re buy­ing from the bot­tom, you’re going to have scores in the 0. 1s and the teens rather than the real­ly high end. And let’s look at the results there.

[00:07:18] Tony: And we also did it Did a com­par­i­son with large ADT stocks. So a 500k ADT port­fo­lio in case there was some­thing dis­tort­ing about small­er stocks. So three years worth of buy list from August 2020. This is the method­ol­o­gy that was used. Ryan put togeth­er 10 stock port­fo­lios con­struct­ed by buy­ing from top down and bot­tom up.

[00:07:40] Tony: So 20 port­fo­lios and he used six dif­fer­ent start­ing dates. So We did­n’t just all start these port­fo­lios on the same day, we used dif­fer­ent start­ing dates. 6th of August 2020 was the first one, and the last one start­ed on the 19th of July 2021. So almost a [00:08:00] year’s dif­fer­ence there, which means the lat­er ones have less time than the ear­li­er ones, but we did­n’t want to have all the port­fo­lios start­ing in August 2020.

[00:08:10] Tony: We want­ed to spread them out a bit to make sure that there was noth­ing sea­son­al in the results. Um, and then we also did a A 500k ADT top down port­fo­lio for the same six start dates. I guess it’s a bit of a bench­mark, but to see if there was a big dif­fer­ence. Each, um, each pur­chase start­ed at 100k. So we were look­ing for a rea­son­able sort of size of port­fo­lio.

[00:08:33] Tony: The method­ol­o­gy was that Ryan would check the buy list and see, um, if the stock was a buy, and not a Josephine, for exam­ple. So he used the bread loader, and the bread loader has the abil­i­ty to put a, um, a date in togeth­er. Um, a snap­shot in his­to­ry of five years worth of data. And if it was a com­mod­i­ty stock, he would then go and look at the under­ly­ing com­mod­i­ty graph and see if it was a buy.

[00:08:55] Tony: Um, for the, for the tri­al, we [00:09:00] used a min­i­mum ADT of 10, 000 as a fil­ter. And then, um, going for­ward, uh, he would run the port­fo­lio month by month and check to see if there were bret­to­la­tor times for three point trend­line sells. And whether there was, in the min­ing sec­tor, com­mod­i­ty sales dur­ing that time peri­od.

[00:09:20] Tony: And also he checked the graph for any Rule 1 sales. So a fair­ly painstak­ing man­u­al process to go through. Um, He, if the, if the stock was a sell, then he, he’d find the near­est buy­er list after that sell date and buy a replace­ment stock with it. So kind of a, a man­u­al, uh, pro man­u­al process. Repli­cat­ing the QAV pro QAV check­list process, uh, for d.

[00:09:48] Tony: Um, top types of port­fo­lios, one from top down, one from bot­tom up. Uh, basi­cal­ly what he found was there was lit­tle dif­fer­ence in those port­fo­lios in terms of RRI. [00:10:00] So the top, the buy list, uh, from the bot­tom up was slight­ly bet­ter from the top down, which was a bit sur­pris­ing. So the num­bers were, from the bot­tom up, the aver­age RRI was 19.

[00:10:11] Tony: 5. That’s a CAGA num­ber. RRI is that sim­ple CAGA for­mu­la in Excel. From the top down, the RRI was 18. 5, so about a 1 per­cent dif­fer­ence. And I know 1 per­cent mat­ters, but it’s sta­tis­ti­cal­ly, you know, in the three years of data and the num­ber of port­fo­lios used, it’s not real­ly a big dif­fer­ence to be able to And inter­est­ing­ly enough, my expe­ri­ence over time has been, even though I like to buy from the top down, I’m not get­ting, I have nev­er real­ly felt uncom­fort­able buy­ing stocks from the bot­tom of the buy list.

[00:10:50] Tony: I’ve nev­er been able to say that buy­ing from the top has pro­duced much bet­ter returns than buy­ing from the bot­tom. So, I con­sid­er that the [00:11:00] results too close to sug­gest a bias, and I also think that hav­ing a QAV cut­off score at 0. 2, which forces us more up the buy list, is maybe not the way to go, although I’ve done a, so I set up a dum­my port­fo­lio Um, which I’ve been track­ing of QAV stocks above 0.

[00:11:20] Tony: 2 and it is out­per­form­ing for the last three months. It’s kind of come back more towards the STW and I’m hap­py to share those results. Um, when I get a chance to tidy up the port­fo­lio, uh, so yeah, STW. STW, so I’ve got a, yeah, sor­ry, I need to, I need some time to pull that port­fo­lio, to tidy up that port­fo­lio, so let me just call it up and see what I’ve got there at the moment.

[00:11:55] Tony: No, it’s, it’s being, it’s being bench­marked against the dum­my [00:12:00] port­fo­lio and against the STW. Let me, I haven’t updat­ed it for a while. Let me have a look. So, Yeah, it’s actu­al­ly, okay. So where’s the port­fo­lio per­for­mance? The last time I did the analy­sis, the, the, the port­fo­lio start­ed in. Uh, it’s been like, it took a long time to become invest­ed. The first pur­chase was made back in April, 2023, and it did­n’t become ful­ly invest­ed until about August. So it took a while to cre­ate the port­fo­lio.

[00:12:33] Tony: over that peri­od, SDW is down 4%. Um, the lat­est num­bers I’ve got in here for the dum­my port­fo­lio are down 3%, but that’s not, I haven’t updat­ed that today. And I’m just try­ing to find the port­fo­lio per­for­mance for this. Oh, here we go. The QO, the 0. 2 port­fo­lio has, is down 2%. So, Um, but 1 per­cent again is not a huge dif­fer­ence, so, um, I’m not [00:13:00] see­ing, Any­thing at this stage to say that the QAV cut­off should be 0.

[00:13:04] Tony: 2. what else though? So, some of the issues, so then we looked at, um, Okay, so when, when Ryan did the analy­sis, he, he and I went through it, and we both said, Gee, there’s a lot of these death spi­rals going on, so he would sell a stock because of a rule 1, buy a stock, sell it again because of a rule 1, buy a stock, sell it.

[00:13:25] Tony: So, over the three years, some­times there were, in some cas­es, 6 or 7. Buys and sells. And that, that por­tion of the port­fo­lio was drop­ping, you know, instead of

drop­ping

[00:13:37] Tony: 10 per­cent and then going on to buy some­thing that went up, it was drop­ping, you know, um, 60 per­cent after all the buys and sells were tak­en into account.

[00:13:45] Tony: So then I asked him to go back. And in fact, in the case of the analy­sis, there were 116 rule one con­sec­u­tive sells at 10%, a 10 per­cent stop loss, stop loss. So I asked him to go back and run the whole analy­sis again, [00:14:00] using a 20%. Rule One Stop Loss. And there was only 10 con­sec­u­tive rule one sales using a 20 per­cent stop loss.

[00:14:09] Tony: Um, and the num­bers over­all, so there were still lots of rule one sales, um, because there was a large num­ber of stocks. We had what? 120 stocks in 12 port­fo­lios, track­ing over Say three years, um, with 10, a 10% rule. One in invoked there was 545 cells, uh, with a 20% rule. One invoked there was 366 cells, so much less.

[00:14:35] Tony: And you know, only 10 con­sec­u­tive rule rule one cells at 20%. Um. So, that sort of caught my atten­tion, and the oth­er inter­est­ing thing though was that, um, using a 10 per­cent Rule 1, the RRI was slight­ly bet­ter, so even though there was a lot more

trad­ing

[00:14:55] Tony: going on, 10 per­cent RRI was 19. 95 per­cent [00:15:00] ver­sus 18 per­cent with a 20 per­cent stop loss, so, you know, I guess the rea­son for that is if you’re wait­ing for it to drop 20%, um, and you’re still hav­ing Rule 1 sales, you’re los­ing more.

[00:15:11] Tony: But you’re not going into that death spi­ral of con­tin­u­ous­ly buy­ing some­thing and then sell­ing it, um, for a 10%, because the 10 per­cent num­ber was too small. Um The oth­er thing which was, um, so, you know, again, giv­en the small sam­ple size, giv­en the small time peri­od, um, even though there’s a two, near­ly two per­cent­age point dif­fer­ence there for 10%, it’s not sta­tis­ti­cal­ly a big num­ber, a big dif­fer­ence.

[00:15:37] Tony: And also too, the oth­er thing which was, um, dri­ving per­for­mance was there was, in both cas­es, a small num­ber of stocks that had out­sized returns. And you’ve men­tioned that with the dum­my port­fo­lio. There’s gen­er­al­ly one stock which has done real­ly well. And it’s kind of a luck of the draw as to which port­fo­lios had that or not.

[00:15:54] Tony: Um, and where­as the num­bers I’m talk­ing about are aver­ages across the dif­fer­ent port­fo­lios. [00:16:00] So, uh, I guess the, the The think­ing was that even though you’re get­ting into these death spi­rals by rapid­ly sell­ing and buy­ing 10 per­cent Rule 1 stop loss­es, you were, you did actu­al­ly have a big­ger chance of pick­ing up that high per­form­ing stock.

[00:16:16] Tony: So, it’s kind of swings and round­abouts. So, then I asked Ryan to have a look at trans­ac­tion fees. So, it was a port­fo­lio that was cycling a lot more, 545. Sales ver­sus 366. Was it going to cost us much more in trans­ac­tion fees? But it was kind of neg­li­gi­ble, giv­en that trans­ac­tion fees are fair­ly small. It was basi­cal­ly 2, 000 to 3, 000 dif­fer­ence per port­fo­lio, which was­n’t a big deal in the num­bers.

[00:16:45] Tony: So kind of, um,

[00:16:47] Tony: Kind of not draw­ing big con­clu­sions from it, so what I’ve been doing is tri­alling the 0. 2 QAV score, which is not show­ing a huge dif­fer­ence com­pared to dum­my port­fo­lio and STW, [00:17:00] but it is bet­ter, and then in my own port­fo­lio, Pick­ing some stocks and using a 20 per­cent stop loss on those, and that has worked bet­ter for my own port­fo­lio over the last few months.

[00:17:12] Tony: Um, so there’s, I think there’s only been about 4, 3 or 4, um, stocks which I would have sold at a 10 per­cent rule 1 stop loss, and I, I, you know, did­n’t, and, and, Kept them and put a 20 per­cent rule one stop loss in and all, all of those turned around. So, um, three of them I can think of quick­ly. There was, um, Remil­ius Resources and Perseus Min­ing that both went through my 10 per­cent rule one sell and I held onto them and put a 20 per­cent alert in and they both have turned around and been at least break even if not pos­i­tive for me since then.

[00:17:51] Tony: And there was anoth­er one which isn’t a QAV stock but Fron­tier, um, Fron­tier Hydro, Fron­tier Ener­gy, FHE, which I, you know, have as a non QAV [00:18:00] stock in the port­fo­lio, a very small hold­ing of it, did the same thing. It went, it actu­al­ly went down through its 10 per­cent and 20 per­cent and kept going and I said I’ll bug­ger, I’ll just see if it comes back and it did.

[00:18:10] Tony: So it’s now back to being, um, Break even for me as well. So the next, the sort of ques­tion that pos­es to me is, uh, do we need a rule one stop loss or should we just be rely­ing on com­mod­i­ty sales and three point trend line sales? So that’s the fur­ther bit of work that, that, um, I should, I think should come next.

[00:18:32] Tony: And, uh, I’m also think­ing too. The way I might approach all these dif­fer­ent ques­tions and I guess the­o­ries that I have going for­ward is not to try and regres­sion test them because even though it’s use­ful, I can always sta­tis­ti­cal­ly say, well, we did­n’t have enough data or, um, it was, it was a cer­tain peri­od in time and it’s not, it’s not like we have a large data set to work from.

[00:18:58] Tony: Um, and cod­ing that can give us [00:19:00] all of the QAV process with­out spend­ing a lot of time and effort doing things man­u­al­ly. So what I’ve changed to be doing is to just set up a port­fo­lio of 10, 10 or 20 stocks in spread, in a spread­sheet. Use the auto­mat­ic stock price fea­ture. Bench­mark it against dum­my port­fo­lio and STW and see if these things work.

[00:19:20] Tony: And so going for­ward over maybe 12 month peri­od and see if they work and whether that is worth­while look­ing at start­ing up as a tri­al. But, you know, I’m kind of think­ing that’s the bet­ter way to do this rather than to try and spend mon­ey and time. man­u­al­ly regres­sion test­ing them?

[00:19:36] Tony: [00:20:00] Yeah, I think, I think if I was to design the ide­al world for regres­sion test­ing, you would have to have a large his­to­ry of data, and ide­al­ly going back to GFC time. So you’re com­par­ing reces­sion­ary times ver­sus good times in the mar­ket. Um, and then the abil­i­ty to, to have all the met­rics that we use, which is going to be hard to auto­mate, right?

[00:20:39] Tony: Because we don’t auto­mate qual­i­fied audits, for exam­ple, that You know, that’s a small num­ber of stocks, but there are oth­er things that, um, we were find­ing it dif­fi­cult to auto­mate. Even the process like com­mod­i­ty checks were dif­fi­cult to, you know, to go through man­u­al­ly look­ing for them. Yeah.[00:21:00]

[00:21:01] Tony: Yeah. Cor­rect. Finan­cial health. Yeah. Yeah. Mm

[00:21:12] Tony: hmm. Mm

[00:21:27] Tony: hmm.

[00:21:37] Tony: I think I’m tri­alling the 20%. I was con­vinced enough that that was, even though it had the same or sim­i­lar RRI num­ber, it just churn­ing the stocks less, I think has got to have a ben­e­fit for us some­where, either in trans­ac­tion fees or just mak­ing the whole process eas­i­er to man­age. Yeah, so I’m try­ing that, and at this stage it’s [00:22:00] work­ing for me, so I’m going to let it go for, you know, maybe through until next report­ing sea­son and see how it works, uh, and then report back.

[00:22:06] Tony: But we might want to go to 20%, and I’m going to set up anoth­er port­fo­lio to test hav­ing no rule 1 in there. Yeah.

[00:22:17] Tony: Mm hmm.

[00:22:21] Tony: No. Yeah. Yeah. So if, uh, it may be a change to QAV score of 0. 2, but at this stage, it’s, it’s bet­ter, but it’s not, it’s not, it’s not a whole lot bet­ter, and it’s very dif­fi­cult to put togeth­er a port­fo­lio of stocks that are above a QAV score of 0. 2. They’re big enough, because I’m using, for my tri­al, I’m using 50, 000 and above ADT.

[00:22:46] Tony: Um, so it’s hard to find. Biggest stocks above a QAV score of 0. 2 and under Josephine or a com­mod­i­ty sale or a three point trend line sale. It was took me months to put togeth­er a 10 stock port­fo­lio to [00:23:00] test.

[00:23:06] Tony: Mm hmm. Yeah, because of this fact that we think because of the fact that if you saw if you’re cycling through stock pur­chas­es you’re more like­ly to come across the one that Is the rock­et ship and that, you know, coun­ter­acts all the cycling you’ve been doing and sell­ing, which is kind of that. Okay. That makes sense, but it’s, that’s a bit of a punt, isn’t it?

[00:23:28] Tony: Cause if you don’t get that rock­et ship, then you’ve, you’re worse off.

[00:23:46] Tony: I’m think­ing, I’m think­ing that even though 10 per­cent is bet­ter return, it’s only bet­ter by per­cent­age point or so. So, um, I don’t think that’s sta­tis­ti­cal­ly sig­nif­i­cant. Um, [00:24:00] so for exam­ple, I did­n’t read it out, but from mem­o­ry, the, the port­fo­lio that was, we also did where the ADT was 500, 000 or more, um, that per­formed much dif­fer­ent­ly.

[00:24:12] Tony: That was like a 5 per­cent RRI, 5 or 6 per­cent from mem­o­ry RRI. So the fact that we were hav­ing small stocks into those port­fo­lios as well, even though I think they were above, I can’t remem­ber what cut off we used. Um, they weren’t real­ly very, very small stocks. There was, you know, some vol­ume to trade in.

[00:24:33] Tony: Uh, that was a big dif­fer­ence. I mean, they were get­ting 18 and 19 per­cent in the, um, in the, The Rule 1 test ver­sus 5 or 6 per­cent if we put an ADT of 500k in. So there’s so many vari­ables in this and if you’re only get­ting a slight dif­fer­ence, I’m not, I’m not going to say that Rule 1 at 10 per­cent is bet­ter than Rule 2.[00:25:00]

[00:25:00] Tony: A real one at 20%, but what it does do is slow down the churn in the port­fo­lio, which I, you know, I think makes it eas­i­er to man­age the port­fo­lio and prob­a­bly also calms things down a bit as well that we’re not sort of get­ting into this death spi­ral of, and becom­ing dis­heart­ened that we’re sell­ing stocks and then we sell them and then we see them go up again too, because there’s a num­ber of sold some­thing and in the future time re bought it again in the analy­sis as well.

[00:25:37] Tony: Yeah, right. Yeah. Yeah.

[00:25:47] Tony: No. Yeah.

[00:25:53] Tony: Cor­rect. And we might change the QAV score from 0. 1 to 0. 2. And I’ll start a [00:26:00] new, a new Rule 1 port­fo­lio of 0%, or sor­ry, no Rule 1 in the port­fo­lio and see how that goes as well.

[00:26:11] Tony: Cor­rect. Yep.

[00:26:22] Tony: Yeah, it was. It was very time con­sum­ing for him.

[00:26:28] Tony: Yeah.

[00:26:38] Tony: Yeah. Or if there’s a lis­ten­er out there who can shed some light on an eas­i­er way to do it, that’s good. And I’m also going to throw it out there too for lis­ten­ers to maybe do what I’m doing now. Just build a 10 stock port­fo­lio and man­age that under dif­fer­ent. Sce­nar­ios, you know, for the QAV process and see if you can come up with ideas for change to the process.[00:27:00]

[00:27:00] Tony: Paper port­fo­lios, def­i­nite­ly, yeah. Yeah,

[00:27:26] Tony: yeah, thank you. I think, I think if I’m, if I’m hon­est, I, I’ve been try­ing to do it, um, in the best way pos­si­ble. And that’s prob­a­bly not how I’ve done it in the past. I’ve been a bit more quick and dirty. in the past and, and, and prob­a­bly also if I’m hon­est, the QAV process has been sta­t­ic for the last three or four years, large­ly sta­t­ic for the last three or four years and maybe, maybe there needs to be a bit more of evo­lu­tion going on in it to keep evolv­ing as things, as the invest­ing sce­nar­ios change.

[00:27:56] Tony: So, um, you know, I’m going to set up a [00:28:00] num­ber of these tri­al port­fo­lios and we might see some more changes com­ing in the future.

[00:28:13] Tony: Hmm.

[00:28:16] Tony: Cor­rect. Yeah. So I’ll be, I’ll be play­ing golf when you put this out, Cam. So, uh, have a, have a good week, every­one.

[00:28:55] Tony: Yeah. You can do that. It’s yeah. No, good. [00:29:00] Yeah. Good. Yeah. Okay. Yeah. As I was, it’s inter­est­ing. I was talk­ing to Alex today about, about invest­ment. invest­ment groups. And, um, and I said how, you know, I tried a cou­ple of them and it did­n’t work out for me. I pre­ferred to work alone and then, um, share results at the end.

[00:29:19] Tony: So every­one’s dif­fer­ent. Um, I prob­a­bly won’t join into the Google Sheets com­mu­ni­ty, but, uh, oth­ers can.

[00:29:30] Tony: Yes. Yeah. Right. Well, it was­n’t that like, as I said to Alex, if you join. Um, if you join an invest­ment com­mu­ni­ty and you’re the only per­son who’s oper­at­ing in a fact based way, it very quick­ly becomes what’s your opin­ion on the future of a par­tic­u­lar stock. And I, I just, you know, it’s just a lot of hot air, you know, no one was sort of debat­ing the fact that this com­pa­ny had good oper­at­ing cash­flow.

[00:29:57] Tony: It was more about, Oh, I think Chi­na’s [00:30:00] going to blow up and it’s going to, you know, the iron ore price will drop. Well, that’s good. That’s good. You know, but I’m look­ing at BHP has got lots of oper­at­ing cash flow. I can prob­a­bly absorb it. And it’s like, it’s a use­less debate, right? And that’s what the stock mar­ket is.

[00:30:12] Tony: It’s a, it’s a score­card for those debates. So they’re use­less to actu­al­ly have them. You’d be bet­ter off just going with what you think is going to hap­pen and using your frame­work and then buy­ing and see­ing what hap­pens.

[00:30:33] Tony: I hope so. Yeah, no, that’s a good idea. The oth­er thing I think, the oth­er thing I haven’t done yet, but I think is worth doing is to iso­late para­me­ters and like set up a port­fo­lio of own­er founders or set up a port­fo­lio of, um, what else, uh, shares with con­sis­tent­ly increas­ing equi­ty, and that’s the only com­mon met­ric and see how, you know, see, cause that was always going to be the work I want­ed Dylan to do, which we nev­er.

[00:30:59] Tony: Got round [00:31:00] to because we kept get­ting bogged down and try­ing to, you know, make the QAV process work with the data we had. Um, but yeah, because at the moment You know, most things score a one in the check­list and some things score a two. But I remem­ber Dylan say­ing, Hey, I think Prop­Caf and con­sis­tent­ly increas­ing equi­ty are the things that are dri­ving QAV.

[00:31:19] Tony: And if that’s the case, then A, we per­haps could take some things out of the check­list and sim­pli­fy the process. And, but B, um, they should be scor­ing more than just a one or a two in the process as well. So that would be the oth­er piece of work that I’m going to try and focus on going for­ward as well.

[00:31:48] Tony: Yeah, good. That’d be very help­ful. And also too, the bench­mark­ing. So it’s, you know, STW is pret­ty easy. You just have a STW price at the day you start the port­fo­lio and then just use stock his­to­ry to give you [00:32:00] a today’s price. The dum­my port­fo­lio, I had to jump into Navexa a lot to update, but there must be a way of Get­ting a feed from that some­how to bench­mark.

[00:32:10] Tony: Cause the dum­my port­fo­lio was how QAV is now, right? So if we’re think­ing about chang­ing, it’s got to be bet­ter than the STW and the dum­my port­fo­lio. I think they’re valid bench­marks to use. Yeah.

[00:32:25] Tony: Thank you. We’re going down to, any golfers out there would have heard of uh, Penin­su­lar Kingswood North. It’s a, it’s a, an old course which has a, um, a new upgrade and it’s get­ting rave reviews in the golf­ing world.

[00:32:44] Tony: Yeah, so after we fin­ish I’ll go down to Cape Schanck until prob­a­bly about the first week in Jan­u­ary. So I’ll try and get a month down there, in June I’ll come down as well. Yeah. Yep. Okay. Cheers mate.

All right. [00:33:00] Well, let me talk about Char­lie Munger. The man bill gates called the broad­est thinker I have ever encoun­tered that was in the wit and wis­dom of Charles’ T Munger poor Char­lie’s Almanack. So I’m going to start off with a bit of a bio on him. And then I might fin­ish with just cher­ry pick­ing some of the quotes from him from his speech­es. He was born Jan­u­ary 1st, 1924 in Oma­ha, Nebras­ka. As a kid, he worked for buf­fet and son, a gro­cery store in Oma­ha, about six blocks from the house he grew up in. And the boss was War­ren’s grand­fa­ther.

Now, as Char­lie was six years old­er than War­ren, they did­n’t actu­al­ly meet as kids sur­pris­ing­ly enough, because I think of Oma­ha, Nebras­ka as a. To horse town. You want to put all the kids? Between cer­tain ages knew each oth­er, but no, they did­n’t know each oth­er. Char­lie. Had gone or left buf­fin son by the time War­ren also [00:34:00] worked there some years lat­er, so they did­n’t meet until lat­er in life. Char­lie was appar­ent­ly a very big read­er from ear­ly child­hood and became fas­ci­nat­ed with sci­ence. After read­ing. The med­ical library of his fam­i­ly, doc­tor Dr.

Davis, who was a neigh­bor and a fam­i­ly friend. And Char­lie’s teach­ers described him as a smart kid who was also a bit of a smar­tass, always chal­leng­ing teach­ers and fel­low stu­dents. This is obvi­ous­ly some­thing that start­ed ear­ly in life with Char­lie being a bit of a smar­tass. His grand­fa­ther was a respect­ed fed­er­al judge and his father became a very pros­per­ous lawyer.

And dur­ing the great depres­sion, these things helped out a lot. His imme­di­ate fam­i­ly. Char­lie’s imme­di­ate fam­i­ly did. Okay. Dur­ing the depres­sion. Char­lie’s father actu­al­ly belonged to a law firm. [00:35:00] There’s some sto­ry where they had to. Um, defend some S local, I think it was a soap or a sham­poo com­pa­ny. But it, the, the sort of out­come of the case was going to have an impact.

I think it was on Proc­ter and gam­ble. So Proc­ter and gam­ble. Offered to like by. Char­lie’s father’s legal firm out of the case, so they could replace him with a big city firm to han­dle the case. Uh, the big city firm end­ed up los­ing the case, but Char­lie’s father got paid a ton of mon­ey to sit this one out and they coast­ed through the depres­sion on that. But some of his extend­ed fam­i­ly, weren’t so lucky.

His uncle Tom had a bank in Nebras­ka that near­ly col­lapsed. So his Char­lie’s grand­fa­ther, his uncle Thomas father. Came in and bought out the bad loans to save the bank. End­ed up get­ting his mon­ey back appar­ent­ly, but it took a long [00:36:00] time. So he came from. Some mon­ey, obvi­ous­ly not. Munga mon­ey as we think of it now, but he came from some mon­ey in a fam­i­ly of suc­cess­ful judges and lawyers and bankers.

When he went to uni­ver­si­ty, Char­lie ini­tial­ly chose math­e­mat­ics as his major while he was there.

He became inter­est­ed in physics. And lat­er in life phas­es, we’ll see, uh, he said that every­one should study physics because it demon­strates how sound the­o­ries can explain. Uh, com­pli­cat­ed con­cepts. When he turned 19, 19 43, he enlist­ed in the army air Corps and was sent to study sci­ence and engi­neer­ing end­ed up study­ing ther­mo­dy­nam­ics and mete­o­rol­o­gy at Cal­tech. And then he went and stud­ied Lau­ra at Har­vard. Where his father had gone.

Appar­ent­ly he did­n’t fin­ish any of his under­grad­u­ate degrees. And so Har­vard reject­ed him, but again, fam­i­ly [00:37:00] con­nec­tions played a good role. He had. Fam­i­ly friend pulled some strings at Har­vard and they let him in. Uh, end­ed up grad­u­at­ing cum­ber­some Loudy and was one of the top of his class. And also appar­ent­ly upset a lot of peo­ple when he was at Har­vard with his abrupt atti­tude. A bit of a smar­tass, even at Har­vard. Instead of work­ing in his father’s law firm, he joined a larg­er firm in South­ern Cal­i­for­nia.

This was his father’s idea. She’d go and work in a big­ger city.

And in col­lege and in army, he devel­oped what he called an impor­tant skill, which was card play­ing. And he used to say lat­er on that he used his knowl­edge of cards in his approach to busi­ness. Here’s a quote. What you have to learn is to fold ear­ly when the odds are against you. Or if you have a big edge back at heav­i­ly, because you don’t get a big edge, often oppor­tu­ni­ty comes, but it does­n’t come often.

So seize it when it does come. [00:38:00] And of course, I think of our cell trig­gers, par­tic­u­lar­ly our rule one, which a lot of peo­ple. Strug­gle with, but that’s the fold­ing ear­ly when the odds are against you. I think that’s exact­ly what that is. He was mar­ried, fair­ly young, had a few kids, uh, And includ­ing a young son who sad­ly became ter­mi­nal­ly ill with leukemia and. And back then, I think this is the late for­ties. They, uh, did­n’t real­ly have a cure for leukemia.

They did­n’t know how to do bone mar­row trans­plants and his son died. Broke his heart obvi­ous­ly, and also broke his mar­riage at the time. He end­ed up get­ting remar­ried to a woman who also had a cou­ple of kids from a pre­vi­ous mar­riage. They then had more kids. For a total of eight and he stayed mar­ried to that wife until she passed away in 2010.

Now he was quite suc­cess­ful as a lawyer. Uh, start­ed his own law firm end­ed up becom­ing, [00:39:00] uh, Munga tallers and Olson MTO. But he was nev­er real­ly hap­py with the amount of mon­ey that he owned as a lawyer. So he start­ed invest­ing in stocks and also in the busi­ness­es of his clients, which was appar­ent­ly a fair­ly com­mon prac­tice back then. In the ear­ly six­ties, he got involved in prop­er­ty devel­op­ment.

Cal­i­for­nia made a lot of mon­ey out of that. And he also set up an invest­ment part­ner­ship, like the ones War­ren had. And this hap­pened after he met War­ren, final­ly. At a din­ner par­ty in 1959. So the sto­ry is. Char­lie’s father had died. He went back to Oma­ha to deal with his father’s estate. And you remem­ber, I men­tioned the doc­tor, fam­i­ly friend ear­li­er on the sons of, I think the doc­tor had passed away, but the sons of the doc­tor held a din­ner par­ty. Wel­come Char­lie back. And they also invit­ed War­ren as a guest.

Now that the father. The doc­tor had been an investor in one of [00:40:00] War­ren’s invest­ment part­ner­ships. And appar­ent­ly he said he invest­ed in War­ren because War­ren remind­ed him of Char­lie. Now. War­ren had heard that sto­ry. Did­n’t know Char­lie, but fig­ured he must be a good guy. Char­lie had heard about this invest­ment with this War­ren buf­fet guy and fig­ured he must be a good guy too.

War­ren was 29 and Char­lie was 35 when they met. Appar­ent­ly that night. They dis­cussed a busi­ness finance and his­to­ry, and pret­ty much fell in love. Here’s a quote from War­ren. He says, well, when I first met Char­lie in 1959, when the Davis fam­i­ly got me togeth­er with him, Dr. Davis pre­vi­ous­ly had often mis­tak­en me for Char­lie and I want­ed to find out whether that was a com­pli­ment. Or an insult. So when Char­lie came home to Oma­ha in 1959, the Davis’s arranged for us to go to din­ner.

In fact, I think we had a small lit­tle pri­vate room with a few Davis’s in atten­dance. Some­time dur­ing the evening, when Char­lie start­ed rolling on the floor, laugh­ing at his own jokes. I knew, I admit a kin­dred spir­it.

[00:41:00] War­ren gets asked in the book, what are the secrets of his suc­cess? Char­lie’s suc­cess.

War­ren says, well, one time, some attrac­tive woman sat next to Char­lie and asked him what he owed his suc­cess to. And unfor­tu­nate­ly she insist­ed on a one-word answer. He had a speech pre­pared that would have gone on for sev­er­al hours, but when forced to boil it down to one word, he said that he was ratio­nal. You know, he comes equipped for ratio­nal­i­ty and he applies it in busi­ness.

He does­n’t always apply it else­where, but he applies it in busi­ness. And that’s made him a huge busi­ness suc­cess. What oth­er char­ac­ter traits do you think have con­tributed to his suc­cess? War­ren says, I think actu­al­ly it real­ly does come out of Ben Franklin that he admired so much. I mean, there is hon­esty and integri­ty and always doing more than his share and not com­plain­ing about what the oth­er per­son does. We’ve been asso­ci­at­ed for 40 years and he’s nev­er sec­ond guessed any­thing I’ve done.

We’ve nev­er had an argu­ment. We’ve dis­agreed on things, but he’s a per­fect part­ner. What would you say are his most [00:42:00] unusu­al char­ac­ter­is­tics? War­ren? I would say every­thing about Char­lie is unusu­al. I’ve been look­ing for the usu­al now for 40 years and I’ve yet to find it. Char­lie march­es to his own music and it’s music like vir­tu­al­ly no one else is lis­ten­ing to.

So I would say that to try and type­cast Char­lie, in terms of any oth­er human that I can think of, no one would fit. He’s got his own mold.

So, uh, a lot to like about that. In the book, there’s also a Q and a with Susie buf­fet. Uh, War­ren’s wife at the time. They say, tell us about War­ren and Char­lie first meet­ing one anoth­er. She says the first night they met Neil Davis had got­ten them togeth­er at this restau­rant. And I’m watch­ing these two peo­ple and I thought, did Neil bring them togeth­er?

Because he want­ed to see what hap­pened when these egos clashed. Because you have these two strong ver­bose, bril­liant guys. It was amaz­ing to me to see War­ren get qui­eter and let Char­lie take the lead. I’d nev­er seen that before. War­ren always took that role and I’d nev­er seen any­body take that away [00:43:00] from him.

And he relin­quished it to Char­lie that night. It was unique. I’ll nev­er for­get that evening. That was unusu­al. Well, War­ren is usu­al­ly so much quick­er. He’s just so much faster and smarter than every­body. I mean, it can’t be helped. And he was Char­lie tak­ing off. You see, it was real­ly fas­ci­nat­ing to me.

And then what hap­pened after that is his­to­ry. I think War­ren felt that Char­lie was the smartest per­son he’d ever met. And Char­lie felt War­ren was the smartest per­son he’d ever met. And that was unique to each of them and it’s con­tin­ued to be that way. And so their respect for each oth­er’s intel­li­gence was I think the begin­ning. You know, when they see the integri­ty they have in com­mon and so forth, it’s a match made in heav­en. It’s excit­ing.

It’s like chem­istry and I could see always when they were togeth­er. I mean, it’s like com­bus­tion. It was real­ly, real­ly great. I think that War­ren was an aber­ra­tion in his fam­i­ly. Char­lie per­haps was in his, and they just hap­pened luck­i­ly to meet each oth­er.

So I [00:44:00] love that those sto­ries there, Char­lie left his legal firm after only about three years, but his name stays on the mast­head to this very day.

It’s first on the mast­head, even today, when they have hun­dreds of attor­neys. And this tells you a lot about the guy. When he left the firm, he did­n’t sell his shares. He grant­ed them. To the estate of his younger part­ner, Fred water, who had died of can­cer or left behind a wife and chil­dren. So I think that tells you a lot about Char­lie man­ga. Um, he always advised the firm.

You don’t need to take the last dol­lar and choose clients as you would choose friends. Over the years Char­lie and War­ren kept up their friend­ship. Fre­quent tele­phone calls and let­ters and so forth. Char­lie. Uh, Char­lie’s law firm was engaged by War­ren to do legal work for him. War­ren has said oth­er clients there. And some­times they would end up [00:45:00] invest­ing in the same com­pa­ny. Char­lie kept build­ing his invest­ment firm.

Dur­ing these years, between 1962 and 1973, it grew it. 28.3% keg­ger com­pared to the Dow at 6.7%. But then in 1973 and 74, it fell 31.9% and 31.5%. In back-to-back years. Kind of know how he feels, what the last cou­ple of years have felt like for us. In 1975, then rose 73.2%. So over 14 years, it grew 19.8% care­giv­er ver­sus 5% for the Dao. But after this expe­ri­ence, Char­lie like War­ren decid­ed he did­n’t want to invest funds direct­ly for oth­er investors to stress­ful in the bad years, I guess. So we liq­ui­dat­ed Wheel­er Munger is invest­ment firm. And his stake­hold­ers end­ed up get­ting stock in Berk­shire Hath­away.

[00:46:00]

So that’s how he end­ed up work­ing as War­ren’s part­ner.

They end­ed up, um, going into busi­ness togeth­er in the mid sev­en­ties. And obvi­ous­ly stayed togeth­er until Char­lie passed away last week, 2023. So what’s that 50, almost 50 years. They worked togeth­er.

Now, Char­lie, as I men­tioned before, was a big fan of Ben­jamin Franklin. Think he read Ben­jamin Franklin’s auto­bi­og­ra­phy. Ear­ly on in life and it had a big impact. On him. At the 75th anniver­sary of see’s can­dy, Char­lie said. I’m a biog­ra­phy nut myself. And I think when you’re try­ing to teach the great con­cepts that work, it helps to tie them into the lives and per­son­al­i­ties of the peo­ple who devel­op them. I think you learn eco­nom­ics bet­ter.

If you make Adam Smith, your friend. That sounds fun­ny, mak­ing friends among the emi­nent dead. But if you go through life, mak­ing friends with the emi­nent dead who had the [00:47:00] right ideas, I think it’ll work bet­ter for you in life and work bet­ter in edu­ca­tion. It’s way bet­ter than just giv­ing the basic con­cepts.

And I can relate to that. Um, peo­ple are often, uh, sur­prised with the amount of his­to­ry facts I can recall. Dates and events and those sorts of things. And I was explain­ing it’s not because I have a par­tic­u­lar­ly good mem­o­ry for that stuff. In fact, I don’t, I’ve got a ter­ri­ble mem­o­ry. But I know those dates because they’re part of a sto­ry.

They’re part of a time­line because of the way that I do his­to­ry pod­casts. I tell her usu­al­ly a lin­ear sto­ry. And I go into detail with that sto­ry. And I kind of remem­ber the beats of the sto­ry. It’s like when you watch a film, right? You, you know, there’s what hap­pens in the first act and the sec­ond act and the third act. And you, you can remem­ber details when they’re part of a sto­ry, our brains. Have evolved over hun­dreds of thou­sands of years. To be very good at nar­ra­tives, our brains [00:48:00] work. Uh, with nar­ra­tives as a, as a fun­da­men­tal con­cept. It’s how we under­stand our­selves.

We care at cre­ate a nar­ra­tive about our­self. About the peo­ple around us about our lives. And about the lives of our tribes and our nations and our reli­gions, et cetera, et cetera. So our brains are real­ly designed to han­dle nar­ra­tives and I’ve dis­cov­ered with myself over the. Last cou­ple of decades as I’ve been doing his­to­ry pod­casts, that if I want to learn any­thing. I need to fig­ure out the nar­ra­tive when we start­ed QA V the rea­son I built my own spread­sheet in the begin­ning was because I had to have the nar­ra­tive of why these things were impor­tant.

I knew I could­n’t just remem­ber the facts. And that’s why when Tony came up with the. Cafe anal­o­gy ear­ly on in the show. It real­ly helped me a lot too, because it was a, it was a nar­ra­tive. It was a sto­ry that I could remem­ber, and I could remem­ber why the things. In the sto­ry we’re impor­tant to the sto­ry.

As part of his phi­los­o­phy [00:49:00] of liv­ing. Sim­ply Char­lie, like War­ren always lived in a mod­ern house. He lived in the same house in Cal­i­for­nia. I believe. For. I don’t know. 90 years. Maybe. No 70 years, prob­a­bly up until he died. Instead of a real­ly fan­cy house Char­lie’s quot­ed as stat­ing that in prac­ti­cal­ly every case. They make the per­son less hap­pi­er, not less hap­py, not hap­pi­er.

A fan­cy house that is. I think this is a quote from Wikipedia mon­ger appre­ci­at­ed the util­i­ty of a basic house with few advan­tages to liv­ing in an Austin Taisha. home. Mon­ger appre­ci­at­ed mod­esty stat­ing don’t have a lot of envy and don’t over­spend your income. And mon­ger’s last 2023 inter­view with CNBC. He cre­at­ed his suc­cess and longevi­ty to a long-held sense of cau­tion and an abil­i­ty to avoid all of the stan­dard ways of fil­ing. I’ve got some quotes about that [00:50:00] a lit­tle bit lat­er on. Uh, you’ve heard Tony talk on the show before about lat­tices lat­tice work and Char­lie’s mul­ti­ple men­tal mod­els. Here.

These are some quotes from the, uh, poor Char­lie’s Almanack book. From Char­lie. Uh, I think this is from the speech­es at the end of the book. What does ele­men­tary world­ly wis­dom? Well, the first rule is that you can’t real­ly know any­thing. If you just remem­ber iso­lat­ed facts and try and bang them back. If the facts don’t hang togeth­er on a lat­tice work of the­o­ry. You don’t have them in a usable form.

You’ve got to have mod­els in your head. You’ve got to array your expe­ri­ence, both vic­ar­i­ous and direct on this lat­tice work of mod­els. You may have noticed stu­dents who just try to remem­ber and pound back what does remem­bered? Well, they fail in school and fail in life. You’ve got to hang expe­ri­ence on a lat­tice work of mod­els in your head. And then he goes on and he talks about some of the mod­els that you [00:51:00] need. One of the first ones he talks about is prob­a­bil­i­ty the­o­ry. He says by and large, as it works out, peo­ple can’t nat­u­ral­ly and auto­mat­i­cal­ly do this.

If you under­stand ele­men­tary psy­chol­o­gy. The rea­son they card is real­ly quite sim­ple. The basic neur­al net­work of the brain is there through broad genet­ic and cul­tur­al evo­lu­tion. And it’s not for Matt Pas­cal. He’s talk­ing about the guys that came up with prob­a­bil­i­ty the­o­ry. It uses a very crude short­cut type of approx­i­ma­tion.

It’s got ele­ments of for mat Pas­cal in it. How­ev­er, it’s not very good. So you have to learn in a very usable way. There’s very ele­men­tary math and use it rou­tine­ly in life. Just the way. If you want to become a golfer, you can’t use the nat­ur­al swing. The broad evo­lu­tion gave you. You have to learn to have a cer­tain grip and swing in a dif­fer­ent way to real­ize your full poten­tial as a golfer. If you don’t get this ele­men­tary prob­a­bil­i­ty into your reper­toire. Then you go through a long life, like a one legged man in an ass [00:52:00] kick­ing con­test. You’re giv­ing a huge advan­tage to every­body else.

Oth­er mod­els.

He men­tions are account­ing. The five W’s. He talks about a rule at the Braun com­pa­ny when their com­mu­ni­ca­tions, where you had to use the five W’s who, what, where, when, why, and how. And you had to tell who you had to tell him you com­mu­ni­ca­tions, who was going to do what, where, when and why? And if you wrote a let­ter or direc­tive, In the Braun com­pa­ny, telling some­body to do some­thing and you did­n’t tell him why. You could get fired.

In fact, you would get fired if you did it twice.

He also talks about hav­ing a back­up sys­tem, under­stand­ing how to do a cost ben­e­fit analy­sis, the psy­chol­o­gy of mis­judg­ment. Micro­eco­nom­ics. Which he says involve con­cepts, like social proof phe­nom­e­non. The ben­e­fits of scale, the effi­cien­cy that comes from scale, et cetera. And he talks about what he calls to track analy­sis. First, what are the fac­tors that [00:53:00] real­ly gov­ern the inter­ests involved ratio­nal­ly con­sid­ered? And sec­ond, what are the sub­con­scious influ­ences?

Where the brain at a sub­con­scious lev­el? Is auto­mat­i­cal­ly doing these things, which by and larg­er use­ful, but which often mis­func­tion. So it was part of his process of analy­sis in life. To fig­ure out what are the. Fac­tors that real­ly gov­erned the inter­ests evolved in this busi­ness or what­ev­er the prin­ci­pal was. And what are the sub­con­scious influ­ences that would prob­a­bly make him­self or oth­er peo­ple. Get it wrong.

Here’s anoth­er quote from him in the book.

And the most impor­tant thing to keep in mind is the idea that espe­cial­ly big forces. Often often come out of these 100 mod­els. He said, there’s about a hun­dred mod­els that you need to know, and that you need to fig­ure out how they all work togeth­er. We’re sev­er­al mod­els. Com­bine you get the Lol­la­palooza effect.

This is when two, three or four forces are all [00:54:00] oper­at­ing in the same direc­tion. And fre­quent­ly you don’t get sim­ple addi­tion. It’s often like a crit­i­cal mass in physics where you get a nuclear explo­sion. If you get to a cer­tain point of mass. And you don’t get any­thing worth see­ing if you don’t reach the mass. Some­times in the F the forces just add like ordi­nary quan­ti­ties.

And some­times they com­bine on a break point or crit­i­cal mass basis, more com­mon­ly the forces com­ing out of these 100 mod­els of con­flict­ing to some extent. And you get huge mis­er­able trade-offs. But if you can’t think in terms of trade-offs. And rec­og­nize trade-offs in what you’re deal­ing with. You’re a horse has. Tuit, you clear­ly are a dan­ger to the rest of the peo­ple.

When seri­ous think­ing is being done, you have to rec­og­nize how these things com­bine and you have to real­ize the truth. Of biol­o­gists, Julian Hux­ley’s idea. That life has just one damn relat­ed­ness after anoth­er. So you must have men­tal mod­els and you must see the relat­ed­ness and the effects from the relat­ed­ness. [00:55:00]

Dur­ing a talk at Har­vard in 1995 called the psy­chol­o­gy of human mis­judg­ment. He talks about Tup­per­ware par­ties and open out­cry auc­tions as exam­ples of where peo­ple make bad deci­sions. He said three, four or five of these things, mod­els work togeth­er and it turns human brains into mush. Mean­ing that nor­mal peo­ple will be high­ly like­ly to suc­cumb to mul­ti­ple irra­tional ten­den­cies. All act­ing in the same direc­tion.

It’s like the neg­a­tive ver­sion of the Lol­la­palooza effect. And the Tup­per­ware par­ty exam­ple, you have rec­i­p­ro­ca­tion con­sis­ten­cy and com­mit­ment ten­den­cy and social proof. For exam­ple, the host­ess. Gave the par­ty and the ten­den­cy is to rec­i­p­ro­cate. You say you like cer­tain prod­ucts dur­ing the par­ty. So pur­chas­ing would be con­sis­tent with views.

You’ve com­mit­ted to oth­er peo­ple [00:56:00] buy­ing, which is the social proof. So all of these things add up and you feel com­pelled to buy some­thing. You. Prob­a­bly don’t real­ly need or want.

In the open out­cry auc­tion sce­nario, there’s social proof of oth­ers bid­ding. Rec­i­p­ro­ca­tion ten­den­cy com­mit­ment to buy­ing the item and depri­va­tion super reac­tion syn­drome. IEA sense of loss. He says that’s an indi­vid­ual sense of loss for what he or she believes should be, or is his or hers. These bias­es often occur at either con­scious or sub­con­scious lev­el and both in micro­eco­nom­ic and macro­eco­nom­ic scale. So you, you. We’ll get your­self worked up and you think you deserve to own this house, and then you can’t stand to see some­body out­bid you.

And so you go crazy with your bid­ding.

And one of the things that Char­lie often did, um, was to invert. You’ve heard Tur­ney talk about this a lot on the show. [00:57:00] And he often talked about what to avoid. So what to not do focus on that, start on that, and then you can work out what you should do. Um, this is where he, obvi­ous­ly, he said, as I said ear­li­er on, all I want to know is what I’m going to die, where I’m going to die.

So I’ll nev­er go there. He talked about the. Chess board and think­ing about. The more pro­duc­tive regions of his, uh, strat­e­gy. Think­ing about elim­i­nat­ing. Unnec­es­sary parts of the board that he did­n’t need to go to and fuck­ing. Focus­ing on the parts of the chess board. That he did want to. Occu­pies, we would call it in chess. I don’t know how many of you are chess play­ers, but you tend to think of the bor­ders, the strate­gic posi­tions that you real­ly want to occu­py.

You want to focus your ener­gy on and you can ignore every­thing else. And. He [00:58:00] real­ly tried to reduce every­thing down to the most basic unemo­tion­al fun­da­men­tals. Again. Which is like, yeah. Well QAV is right. We try and reduce. The val­ue propo­si­tion of enough, of an invest­ment in a stock down to some­thing that’s a com­plete­ly unemo­tion­al deci­sion.

We’re look­ing at the fun­da­men­tals. Ana­lyz­ing them as, uh, ratio­nal­ly and log­i­cal­ly as we can. And let­ting the sys­tem spit out the deci­sion, what we should do.

Um, but he said you also have to avoid what he called physics envy. The com­mon human crav­ing to reduce enor­mous­ly com­plex sys­tems such as those in eco­nom­ics to one size fits all New­ton­ian for­mu­las. Instead he hon­ored Albert Ein­stein’s admo­ni­tion. A sci­en­tif­ic the­o­ry should be as sim­ple as pos­si­ble, but no sim­pler. Uh, he also said what I’m against is being very con­fi­dent and feel­ing that, you know, for sure that your par­tic­u­lar action will do more [00:59:00] good than harm.

You’re deal­ing with high­ly com­plex sys­tems where in every­thing is inter­act­ing with every­thing else.

And for me, that’s, you know, part of what we’re doing with QAV. We do try and reduce it down to an equa­tion that is as sim­ple as pos­si­ble. But we also under­stand that we could be wrong when we make that deci­sion. We don’t get wed­ded to that idea. Again, this is where our cell trig­gers and the com­mod­i­ty cells and those sorts of things come into play, but par­tic­u­lar­ly rule one. We can do our own analy­sis, but we also real­ize there’s a lot of stuff going on that we’re not aware of.

Micro­eco­nom­ics. Uh, sec­tor indus­try stuff that we’re not aware of. We can make bad deci­sions and that’s okay. We don’t have to make. Every deci­sion be the right deci­sion or we need is to get six out of 10 deci­sions to be right. That’s hard enough as it is. Quote from Char­lie that I real­ly like is take a sim­ple idea and take it seri­ous­ly. He says like [01:00:00] world-class bridge play­er, Richard, Zach Houser. Char­lie scores him­self, not so much on whether he won the hand, but rather on how well he played it. While poor out­comes are excus­able in the Munga buf­fet world.

Giv­en the fact that some out­comes are out­side of their con­trol, slop­py prepa­ra­tion in deci­sion-mak­ing. I nev­er excus­able because they are con­trol­lable. Again, this is why we let the check­list deter­mine our behav­ior. We make sure that all of our deci­sions are based on going through the check­list. And Char­lie actu­al­ly talks about check­lists and air­line pilots using check­lists in one of his speech­es. I think it’s speech num­ber five.

If you want to go look­ing for it. He says, how can smart peo­ple so often be wrong? They don’t do that. I’m telling you to do use a check­list, to be sure you get all the main modes and use them togeth­er in a mul­ti mod­u­lar way.

So, I don’t know if [01:01:00] Tony came up with the idea of the check­list from Char­lie, or he came up with it inde­pen­dent­ly, but you know, great minds think alike, obvi­ous­ly.

He also talks in the book. I think it was his first, the first speech in the book, which was a Har­vard grad­u­a­tion speech. When his son was grad­u­at­ing, one of his sons was grad­u­at­ing from Har­vard. And he quot­ed. Uh, speech to the John­ny Car­son had giv­en it a Har­vard grad­u­a­tion speech some years ear­li­er when his own son grad­u­at­ed. Here’s what Char­lie had to say. And he’s talk­ing about, um, how to be mis­er­able. What Car­son said was that he could­n’t tell the grad­u­at­ing class how to be hap­py, but he could tell them from per­son­al expe­ri­ence, how to guar­an­tee mis­ery. Car­son­’s pre­scrip­tion for sure.

Mis­ery includ­ed. One ingest­ing chem­i­cals in an effort to alter mood or per­cep­tion. To envy and three resent­ment. I can still recall. Car­son­’s absolute con­vic­tion is he told how [01:02:00] he had tried these things on occa­sion after occa­sion and it become mis­er­able every time. It’s easy to under­stand. Car­son­’s first pre­scrip­tion for mis­ery ingest­ing chem­i­cals.

I add my voice. The four clos­est friends of my youth were high­ly intel­li­gent, eth­i­cal, humor­ous types, favored in per­son and back­ground. To a long dead with alco­holic con­tribut­ing fac­tor. And a third is a liv­ing alco­holic. If you call that liv­ing. What Car­son did was to approach the study of how to cre­ate X by turn­ing the ques­tion back­ward.

That is by study­ing how to cre­ate Nanex. The great alge­bra bright­est Jako­by had exact­ly the same approach as Car­son and was known for his con­stant rep­e­ti­tion of one phrase, invert, always invert. It is in the nature of things. As Jako­by knew that many hard prob­lems are best solved only when they are addressed back­wards. Well, I could go on. For [01:03:00] hours quot­ing Char­lie and we, no doubt will. Sure. When Tony’s back next week, he’ll want to talk about Char­lie as well. And I might add some more snip­pets from the book, but, um, There you go, ladies and gen­tle­men, raise a toast. Uh, to Charles Munger and a life well lived and. Also just for, I guess, teach­ing us and teach­ing Tony, not only how to be a great investor, but it had a live. A great gen­er­ous life. Hap­py stock mar­ket quite a good week. And we’ll be back next week.

Ciao. [01:04:00] [01:05:00]