Most of you have probably read some book by Robert Ciladini, whose books on psychology are often recommended by Charlie Munger. His latest book is great because 50 different models of human psychology and persuasion are broken out into an easy to understand manner. If you’re too lazy to read the book though, check out where you’ll find a good summary.
Today’s WSJ though had a on how these “Most Popular” lists create positive feedback loops and influence our perception. There is a great bit with Cialdini in the article:
Other recent studies have quantified the popularity of popularity in other settings. Signs telling guests at a hotel in the Phoenix area that towel reuse was the No. 1 choice among their peers increased the rate of this practice by 34%, compared with other signs with messages stressing the impact on the environment. Arizona State University psychology Prof. Robert Cialdini and colleagues found that rates went even higher when the signs specified that most prior guests in the same room reused towels.
“To the extent you can convince that, not just a lot of people are doing this, but a lot of people like [them] are doing this,” you’ll get greater buy-in, Prof. Cialdini says.
Another group of researchers demonstrated this with restaurant diners in Beijing. Table cards at Mei Zhou Dong Po, a Szechuan restaurant chain, touting the five most popular items boosted ordering of these items by 13% to 20%, according to a forthcoming paper by a team from Peking University and Duke University. “Part of it is reassurance that something is good and worth buying,” says Bill Paul, a restaurant-menu designer.
Calling these items popular is crucial, the researchers found, because other table cards that highlighted five sample items but made no claim on their popularity had little effect on sales. And the diners liked following the pack: “Diners who were exposed to the popularity information treatment are more satisfied,” says co-author Hanming Fang, a Duke economist.
That’s just an excerpt, be sure to check out the rest of the article. There are some other good examples of popularity being used to persuade us.
Felix Salmon over at Reuters discussing Michael Lewis’ review of The Snowball, Alice Shroeder’s biography on Warren Buffett. I highly enjoyed that book and thought Lewis wrote a pretty fair review. Salmon though had a few points in his post that I wanted to discuss.
First, Salmon says:
Would Buffett really have gained from going private? I doubt it, somehow: having sought-after equity with which to pay for acquisitions was extremely valuable to Berkshire Hathaway.
I’m not really sure if this is really a benefit for Berkshire not being private. Berkshire’s strength as an acquirer has more to do with the cash that’s generated from its operations, turnover in investments, and the company’s insurance float. These would still exist if the company was private. As for selling stock to fund acquisitions, I think that this has really only been done once, with Dexter Shoes and it was a decision that Buffett has gravely regretted ever since. See the where the Dexter investment is discussed:
Finally, I made an even worse mistake when I said “yes” to Dexter, a shoe business I bought in 1993 for $433 million in Berkshire stock (25,203 shares of A). What I had assessed as durable competitive advantage vanished within a few years. But that’s just the beginning: By using Berkshire stock, I compounded this error hugely. That move made the cost to Berkshire shareholders not $400 million, but rather $3.5 billion. In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion– to buy a worthless business.
To date, Dexter is the worst deal that I’ve made. But I’ll make more mistakes in the future – you can bet on that. A line from Bobby Bare’s country song explains what too often happens with acquisitions: “I’ve never gone to bed with an ugly woman, but I’ve sure woke up with a few.”
Salmon goes on to say:
Finally, as Lewis says, “as rich as Buffett became, he never stopped measuring himself by how much money he had”. When Berkshire Hathaway was trading at a significant multiple of book value — as it nearly always was — Buffett could judge how much money he had just by taking the number of shares he owned in Berkshire Hathaway and multiplying them by the share price.
If Berkshire went private, however, Buffett could do that no longer: he would have to measure his own wealth on book value alone. Which, while surely a large number, wouldn’t be quite as large as the market value of his stake in Berkshire Hathaway.
But in his review:
He tells Schroeder that he pretty much measures his whole life by Berkshire Hathaway’s book value, and the reader can’t help wondering if that is ultimately how he measures other people, too.
I’ve bolded “book value” for added emphasis but I think you get the idea. For someone like Warren Buffett, who over the course of decades has made billions by mastering the art of valuation and navigating through market bubbles, the idea that he would care about Berkshire’s overinflated value seems a bit far fetched. He knows when Berkshire is a bargain and what it is not. See the :
Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do any, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange (“NYSE”). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the “third market” or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B.
Please be clear about one point: We will never make purchases with the intention of stemming a decline in Berkshire’s price. Rather we will make them if and when we believe that they represent an attractive use of the Company’s money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock’s intrinsic value.
My guess is that Buffett may get a kick out of seeing his net worth appreciate to an overinflated value, but that’s about it. Seeing as he has a good grasp on what Berkshire is worth at any given time, he probably knows that those overinflated valuations are often only temporary. After the Dexter investment, I would argue that Buffett is highly unlikely to use stock for any future acquisitions; limiting the usefulness of Berkshire stock when it is overvalued.
I personally think that staying public had some major intangible benefits for Buffett.
By creating such a level of transparency between Buffett and the outside world, Berkshire Hathaway was really able to be the masterpiece that he had hoped to create. Berkshire is really like that work of art that goes on tour to the major museums of the world for everyone to see. We’re all given access to the company’s financial statements and letters. That kind of transparency facilitates a greater degree of understanding about Berkshire Hathaway helps create the “cult” of followers that Buffett and Charlie Munger often joke about. With that kind of buzz, entrepreneurs are able to hear about how Berkshire is run and reach out to Buffett in hopes of selling their businesses.
Buffett is able to find great businesses that are often led by great people. He rarely has to enter into a turnaround situation, so Berkshire Hathaway has become this conglomerate of companies that all tend to have strong competitive advantages in their own respective industries. I think it is extremely rare to find a situation like this in the world of private equity. Those guys don’t seem to get as great of deals as Buffett, so they have to resort to taking out massive amounts of leverage to amplify their returns to make them more worthwhile. In addition, they’re often forced to perform open heart surgery on their portfolio companies by slashing departments and parachuting in new executives. It’s extremely difficult and I think that’s why we’re seeing a number of these recent PE acquisitions file for bankruptcy.
Being public really helps in communicating the values that Buffett prizes to the rest of the world and makes it easier for ordinary people to check out. Business owners often don’t have to work through intermediaries like investment bankers and instead can go straight to Buffett. It cuts through the gross inefficiencies of the acquisition process and forges a stronger relationship between the entrepreneur and the owner.
I know it’s not the only reason for Berkshire’s success, but it is definitely part of the equation.
Harry Markopolos, a hedge fund expert, sent a detailed memo to the Securities and Exchange Commission (SEC) articulating why Madoff must have been a fraud. The SEC did nothing with it. We don’t know the reason why, but I’m willing to suggest that the lawyers who received Markopolos’s warning simply didn’t understand the finance or math that Markopolos relied on.
Lawyers who only know a mass of legal doctrine and very little about the disciplines that are intertwined with that doctrine are a menace to the wider civilization.
Why didn’t the SEC understand the warning that was clearly placed at its door?
The SEC is pretty good at going after some little scumbag whom everybody regards as a scumbag. But once a person becomes respectable and has a high position in life, there’s a great reticence to act. And Madoff was such a person.
Why aren’t our regulators capable of addressing many of the issues that we confront in the market today?
Most of them plan to go back to living off money made in the system they are supposed to regulate. You can argue that financial regulation is so important that no one in such a position should ever be allowed to do as you partially did—serve and then leave to make money in the regulated field. Such considerations led to lifetime appointments for federal judges. And we got better judges with that system.
So government service should be a little like a monastery from which you can never escape?
What you can opt to do is retire, which is pretty much what our judges do.
What about the idea that investors should be able to fend for themselves?
We want the sophisticated investor to protect himself, but we also want a system that identifies crooks and comes down like the wrath of God on them. We need both.
As value investors, we typically read, a lot. Unfortunately, there are many places on the internet where websites are poorly designed which inhibits the readability of lengthy articles. The people at Arc90 have released a tool that I really love to use called . Basically, after customizing it to your liking, you add the tool the bookmark bar in your browser and click it whenever you’re at a website that is tough to read.
Here, let me demonstrate.
So Shai Dardashti over at Reflections on Value Investing . One of the articles featured in the post, by People’s Daily is a bit hard to read. The text is on the small side and it’s not anti-aliased. It looks like this:
(click to see full size)
Now, you could go onto the printer option, but that doesn’t help too much. And sure, you could try scaling up the size of the text. But I think Readability gives you a much better option. When you click the Readability button on your bookmark bar, the page transforms from the previous image to this:
(click to see full size)
Note: all the page’s elements are removed besides the text. The text is bigger, more readable, and the words per line are fixed so that your eyes don’t have to move all over the place.
I hope I don’t sound like a commercial, I haven’t been asked by these guys to blog about their tool, it’s just something I’ve found that I thought I would share. I feel that it helps me improve my concentration when reading lengthy articles because the page has less distractions. What I’ve also noticed is that on some of the SEC documents you find online, it’s great for reading through footnotes or anything without tabular data. Hopefully some of you find this as useful as I have.
Yesterday, Liz Claman at Fox Business had a really great interview/roundtable with Warren Buffett, Charlie Munger, and Bill Gates. It was awesome to see and hear Munger, since out of the three, he’s much less exposed in the media. They cover a wide range of topics, so it was nice to see the different perspectives.
If you missed the interview, they’ll be re-airing it this weekend. Saturday at 9PM EST and Sunday at 10PM EST.
Rather than embed the videos and slow the blog’s loading time, I’ve provided direct links to each one of them.
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I don’t know if anyone’s ever asked Bill Gates about Google, but it was nice to get his thoughts on the company’s competitive advantages — or in this case it’s wide, shark filled moat. As he said in the interview, Microsoft is not deterred by the moat or the sharks and will continue to charge ahead.
Munger’s views on harnessing solar power were pretty optimistic. I like that Buffett and Munger were quick to point out that it isn’t a space they would invest in. Simply because it’s too difficult to pick winners. I remember reading about John D. Rockfeller’s Standard Oil, and how before it, the refinery space was fragmented and situated atop shaky financial foundations. Many, many, many refineries failed. That’s how I view the solar / renewable space right now. There’s still more experimenting that has to be done in terms of getting the actual business right.
I wonder why Berkshire didn’t just sell Moody’s. It seems like both Buffett and Munger believed that Moody’s actions were incorrect. In the past, when this has happened, the security was simply sold. But it cold be that the position in Moody’s was too big to unwind, or more likely — Buffett believes that the ratings agencies will have to continue their existence. It may be impractical to do away with the ratings agencies all together, so the demand for their services will continue to persist.
One of the things I always like to hear from Buffett and Munger are their book recommendations. The topic didn’t appear to come up during the annual meeting, but yesterday Claman asked them the question.
Unfortunately I haven’t read any of these, but I know that Bill Gates and his father were on Charlie Rose a few days ago talking about the book. Malcolm Gladwell always pens a good article for the New Yorker, but sometimes his concepts seem a bit fluffy. I’ve never read any of his books, but I think I may take a look at Outliers because of Munger’s recommendation.
In addition though, there are a few others twittering the event:
of the New York Times
of FWallstreet
of Fox Business
They all vary in what they’re saying and the amount of detail. is probably the fastest, while the Omaha World Herald is the most detailed. Also, unless you have a Twitter client you’ll have to manually refresh their pages. Or alternatively you could check back in a few hours when everything is finished.
I would also say that within a few days of the event, detailed transcripts are usually released from the various bloggers that frequent the meeting. So don’t worry too much about missing anything right now.
It looks like the people at Bloomberg intend on splitting the interview into snippets and spreading them across the afternoon broadcast. I’ll update this post as I see more from it. But I just caught this:
Bloomberg: What do you think about the recent AAA ratings change by Fitch and Moody’s? Charlie Munger: We would naturally prefer the rating that we formerly had. Berkshire is of marvelous credit. If you asked my if I agreed with the ratings change I would say.
Bloomberg: What kind of reform for CDS market? Charlie Munger: I’ll give you an answer that will surprise you. If I were the governor of the world I would eliminate it entirely. 100%. That’s the best solution. It isn’t as though the economic world didn’t function quite well without it. And it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.
You’ve got to love the fact that Munger doesn’t mince any words. Also, be sure to check out which many of you have probably already read.
I’ve been looking for websites that will be live blogging the event. Here’s a couple below, I’ll add more as I find them:
– coverage begins tomorrow at 8:30 AM CDT
I wonder if anyone will be twittering from the event. Seems like a good medium to use for this sort of thing.
Update: Looks like is twittering the event. Fox News says they’re the only network that will have live coverage from the event tomorrow (haven’t verified this)
My name is Tariq Ali, I run Street Capitalist. I recently graduated from the University of Texas at Austin. There, I stumbled onto value investing via the school library. I read everything I could and now I'm here, writing out my thoughts and investment ideas.
I have a lot of heroes when it comes to investing, it seems like every investor has some kind of niche. Some, whose books and writings have had the biggest impact on me are: , ,, , and .
Have any questions? Want to stay in touch?
Feel free to e-mail me at TariqTX@gmail.com
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