{"version":1,"type":"rich","provider_name":"Libsyn","provider_url":"https:\/\/www.libsyn.com","height":90,"width":600,"title":"Episode 37: The Business & Life Secrets of Warren Buffett\u2019s Partner \u2013 Charlie Munger Part 2","description":" 9 \u201cSecrets and Rules For More Success and A Better Richer Life\u201d Charlie Munger Part 1: https:\/\/youtu.be\/b3gcUGvU53s If you want to get your own copy of Poor Charlie\u2019s Almanack: Expended Third Edition here\u2019s the link. http:\/\/amzn.to\/2iIgtvX 1) Understand \u201cCognitive Bias\u201d and What Default Human Practices\/Tendencies to Avoid Three Tendencies To Avoid While Making Life and Business Decisions: 1) Bias from envy and jealousy, related from Buffett \u2013 \u201cIt\u2019s not greed that drives the world\u2026it\u2019s envy.\u201d 2) Avoid accepting delusional beliefs (sounds simple but\u2026), and 3) Making closed minded judgments about people\u2026remain open to learning from people who you at first dislike.  Here\u2019s a link to a brief video reminder: https:\/\/www.cnbc.com\/video\/2017\/06\/28\/3-psychological-habits-buffetts-partner-charlie-munger-warns-can-hurt-your-career.html   https:\/\/youtu.be\/sJgHvuTeryM   2) Practice Frugality and Simplicity "One of the great defenses \u2014 if you're worried about inflation \u2014 is not to have a lot of silly needs in your life." According to CNBC: \u201cDespite their success, Munger and Buffett are notably frugal.\u201d Buffett goes to breakfast every day but often spends less that $4.00. Both Charlie and Warren have lived in modest homes and driven older-model cars most of their lives.  It was a habit they built to ensure that they had money to invest.   3) Read Daily and Choose Your Reading Wisely "In my whole life, I have known no wise people who didn't read all the time \u2014 none, zero." The richest man in the world, Bill Gates,  reads 50 books a year, or Buffett, who spends as much as 80 percent of his day reading. Munger's been an avid reader since he was a kid and he notes that "By age eight both Thomas Jefferson and Benjamin Franklin had permanent places on the bookshelf above his bed." Dave Frees\u2019 Tool To Do This Better Developing the ability to read with discipline and more effectively \u2013 set aside time to do it\u2026everyday. Set aside time to think strategically about what you want to read. Reading rules:  Read the cover, intro, table of contents.  Then, and as you read, do a note card(s) with the essential ideas, copy and quotes you might later use and also a separate note card with action items\/resources.  Once you\u2019re done the book do a mind map on a card. Keep both in the front of the book but take the action item and resources card out and buy\/acquire the resources and diary the action items.   4) Develop the Right Habits and Use The Compounding Effect Of Knowledge and Wisdom "Spend each day trying to be a little better, smarter, and wiser than you were when you woke up."   The wealthiest, most successful people tend to push themselves beyond their comfort zones and prior achievements.  They are constantly looking for ways to improve and Munger is no exception. Again, according to CNBC: "In Charlie's own life, when he was practicing law, he implemented a self-education regime for one hour a day to learn such things as real estate development and stock investing\u2026He has often said that he is a much better investor at 90 than he was at 50, a fact he attributes to the compounding effect of knowledge." 5) Rules For Business Owners & Career Advice: "Three rules for a career: 1) Don't sell anything you wouldn't buy yourself, 2) Don't work for (or hire) anyone you don't respect and admire, 3) Work only with people you enjoy." Dave\u2019s Take on This: whenever you\u2019re brainstorming new products and services, or the re-vamp of an existing one, make sure to repeatedly ask the question \u201cWould I buy this for myself or another person?  If so Why?  And, \u201chow could it be even better, simpler, and even easier to get the desired result?\u201d And when it comes to hiring and working for clients\/customers\/patients, it\u2019s not enough to know that you enjoy and respect them.  Try to understand what it is about people who you have, for years, enjoyed and respected, and why you feel that way.  This makes judgments about others in the future easier. 6) Be A Renaissance Man or Woman And Learn Across Disciplines \u201cIf you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.\u201d \u201cI paid no attention to the territorial boundaries of academic disciplines and I just grabbed all the big ideas that I could.\u201d Munger   https:\/\/itunes.apple.com\/us\/podcast\/the-pat-flynn-show\/id1253261458?mt=2 Generalism 7) Be Aware of Your Limits and Expand Them But Excel Within Them Don\u2019t Get Ahead of Them \u201cIt is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.\u201d \u201cI think Warren and I know the edge of our competency better than other people do.\u201d Munger Think strategically and globally as you take on a project, about the following:   What are the upsides? Financially as well as in terms of happiness and team\/work satisfaction\/motivation What are the risks? Financially and to all of the above. What are our known and existing resources and strengths that are used here? Where\/How are we weak here? Do others within the organization agree? How have customer\u2019s clients and patients rated us in these skill areas in past transactions?     8) Build On Simplicity \u2013 Informed Simplicity   \u201cTake a simple idea, and take it seriously.\u201d Munger   Ultimately, we build best when we build on simplicity and we are dedicated to simplifying.  Don\u2019t start with ideas that are too complex. Find one that solves a basic need or problem is a new OR proven way that\u2019s not previously or currently being applied to this market\/problem\/niche.  Build from there but continuously seek to \u201cre-simplify.\u201d   9) Build A \u201cLattice\u201d of Mental Models To Be Truly Effective In Every Aspect of Life   \u201cWhat are the models? Well, the first rule is that you've got to have multiple models because if you just have one or two that you're using, the nature of human psychology is such that you'll torture reality so that it fits your models, or at least you'll think it does. \u2026 And the models have to come from multiple disciplines because all the wisdom of the world is not to be found in one little academic department. That's why poetry professors, by and large, are so unwise in a worldly sense. They don't have enough models in their heads. So you've got to have models across a fair array of disciplines. You may say, \u201cMy God, this is already getting way too tough.\u201d But, fortunately, it isn't that tough because 80 or 90 important models will carry about 90% of the freight in making you a worldly wise person. And, of those, only a mere handful really carry very heavy freight.\u201d  Munger Here\u2019s an amazing resource on Munger and models: https:\/\/www.farnamstreetblog.com\/mental-models\/ The categories from which we derive useful mental models\/frameworks of thinking and more accurately understanding the world:   Mathematics and Statistics Biology Human Nature and Judgment Military and Covert Warfare Improved Thinking & Psychology Systems Thinking Physics of the Observable World and Quantum Mechanics Micro Economics   And when we align our lives and practices with not only our principles and values but also with the \u201claws of nature\u201d and a better way of thinking (a matrix of mental models) then things start to get really good.   There are hundreds of models under each category above, but let me suggest a few that you learn and consider in the future as you: 1) develop products and services, 2) solve problems for yourself, team and clients, 3) launch new marketing and sales  efforts and campaigns, 4) improve your profitability, systems, and the value of your practice as well as, 5) taking actions to radically improve your relationships and personal life.   Mathematics and Statistics:   Compounding and the time value of money \u2013 Once we understand the power of compounding of money, we can begin to understand the time value of money AND that compounding might apply to other things as well.  For example, if we understand the time value of money we may stop giving away value by allowing clients to pay us over long periods of time.   Can\u2019t be done?  Yes it can but you need to think more deeply.     Can you alter who you attract?  Can you offer multiple payments but with interest or at a higher price?   Likewise, when we understand compounding in one way (of money) we can start to think about building skills earlier and reaping the reward of getting better and better sooner.   For example, I learned a set of skills as a negotiator and interrogator that I have used since my twenties. Had I learned them later I\u2019d have left millions of dollars on the table over the years.  And, I\u2019m better than ever now and can use these skills is more imaginative ways, across multiple disciplines to make even more and to limit downside risk.   Pareto\u2019s Principle  - Otherwise known as the 80\/20 rule.   Once we learn that 20 percent of most societies seem to amass 80% of the wealth (across cultures, religions, nations, and throughout time) we begin to realize that we use 20% of our homes 80% of the time and that 80% of the time we are wearing the same 20% of our shoes and clothes.   This leads us to understand that 20% of our marketing and advertising gets us most of the results (but not always the 20% of the clients that yield\/pay us 80% of our profits or the 20% who make 80% of the best referral.  That 20% of our team accomplishes 80% of the tasks. When we do we can look at hiring, training, client selection, lines of business and service, and our advertising and marketing in a totally different (and more effective and profitable) way.   The laws of small and large numbers - One of the fundamental underlying assumptions of probability is that as more instances of an event occur, the actual results will converge on the expected ones.   For example, if we know that the average man is 5 feet 10 inches tall, we\u2019re far more likely to get an average of 5\u203210\u2033 by selecting 1,000 men at random than 5 men at random.   The opposite of this model is the law of small numbers, which states that small samples can and should be looked at with great skepticism.   Can you think how this might apply to thinking about a sales letter, Facebook advertising, reviewing resumes?   Biology: Adaptation Species tend to adapt to their surroundings and changes in their surrounding.. But, the adaptations made in an individual organism\u2019s  lifetime are not passed down genetically. Rather, whole Populations of species adapt through the process of evolution by natural selection, as the most-fit offspring of the species survive in the new and changed environment and are then able to reproduce at an above-average rate. Can this help us in business?   Well, think about testing and marketing.  The landscape recently changed dramatically for trusts and estate lawyers.  For most of their clients, the old motivations to do planning\u2026the federal estate tax\u2026is now gone.  So what to do?  What will get them to act in this new, and tax friendlier environment? Before we create or offer a new product or service in a full launch and expensive rollout (where we dedicate enormous resources that cannot easily be recovered) it might be useful to offer a few variations based on our theory of what\u2019s best in a new legal environment.  One or two of our tests may substantially outperform the others (as they did).  Then and only then do we put our resources behind a broader release of the real survivors.  The Red Queen Effect (The Arms Race of Genetic and current Adaptation) As the above blog observes, \u201cThe evolution-by-natural-selection model leads to something of an arms race among species competing for limited resources.\u201d  Thus, when one species acquires an advantageous adaptation, a competing species must also adapt in some equal or better way or it will fail as a species. Essentially, this model tells us that staying in the same place, can mean falling behind or dying out. This evolutionary arms race is called the Red Queen Effect for the character in Alice in Wonderland who said, \u201cNow, here, you see, it takes all the running you can do, to keep in the same place.\u201d So, this gets us thinking about the need for constant reinvention or at least about being aware of changes in the environment and in our competition. It also suggests both an advantage in being innovative and able to cloak or hide the innovation from our competitors for as long as possible. It means we have to develop ways of working smarter NOT just harder. Finally, if we bring different models to bear there is also a model from warfare that tells us that splitting our forces diminishes their power and makes error more likely.  So do we do ourselves harm by splitting our energies and resources and developing new services and products when our existing ones are still going strong? Now we know we\u2019re getting somewhere because our models have conflicting things to tell us and we have to think about it even more. Complicated? Yes. Extremely powerful?  You Bet. Human Nature and Judgment: Trust Fundamentally, most societies and social\/business structures operate on the basis of trust. A trusting system is one that tends to work most efficiently and as a result,  the rewards of trust are extremely high. When prospects learn to trust you and your business, cost of acquisition is lowered.   This means that the skills of truly building and maintaining trust are a highly valuable.  But how people test for trust and what they require to maintain it seems complicated and dependent on contest.  To learn more see my article on trust here: Trust Part I https:\/\/www.successtechnologies.com\/2016\/12\/why-trust-is-essential\/ Trust Part II https:\/\/www.successtechnologies.com\/2017\/02\/why-trust-is-essential-part-two-of-four-tests-clients-use-and-how-to-establish-trust-in-business-relationships\/ Trust Part III https:\/\/www.successtechnologies.com\/2017\/02\/why-trust-is-essential-part-3-of-4-building-trust-as-a-leader-and-using-that-power-for-good-not-evil\/ Trust Part IV and Resources https:\/\/www.successtechnologies.com\/2017\/03\/why-trust-is-essential-part-4-of-4-building-trust-bonus-materials\/ Tendency to Distort Due to Liking\/Loving or Disliking\/Hating Here are links to two more excellent articles on two more mental models worth adding to your way of thinking about and looking at problems and creating solutions. Basically, we tend, based on past association, stereotyping (another human mental model that must be understood), our own ideology, or by direct experience, to distort our thinking and judgments in favor of people or things that they like and against people or things they dislike. This tendency leads to overrating the things we like and underrating or broadly categorizing things we dislike, often missing crucial nuances in the process. Application in business and in life:  Build a practice of asking ourselves the question, \u201cAm I making this decision\/Judgment based on objective facts\/observations OR might my basis for the decision be based on a tendency to like or dislike a person or institution involved? Another thought to drive better business practices and more effective behavior in life: \u201cAnd what will a man naturally come to like and love, apart from his parent, spouse and child? Well, he will like and love being liked and loved.\u201d \u2014 Charlie Munger Manipulative?  Yes.  But if you do truly love and carefor your clients, customers, friends, and relatives\u2026think about it.   Military, Covert Practices & Warfare Seeing the Front One of the most valuable military tactics is the habit of \u201cpersonally seeing the front\u201d before making decisions \u2013 not always relying on advisors, maps, and reports, all of which can be either faulty or biased. The NLP Map Is Not The Territory model illustrates the problem with not seeing the actual front, as does the incentive model. Leaders of any organization can generally benefit from seeing the front, as not only does it provide firsthand information, but it also tends to improve the quality of secondhand information. In business this can translate into periodically observing and\/or debriefing front line contacts.  Listening to phone call recordings and, for a sales manager\/director might mean actually taking calls when a new product launches to hear the questions, objections and vocabulary used.  This is turn can inform marketing and sales training. Asymmetric Warfare Think the American Revolution, ISIS, Osama Bin Laden  and the Iraqi Insurgency. The asymmetry model as applied to warfare is one side creating and playing by different rules than the other side. Generally, this model is applied by an insurgency with limited resources. Unable to out-muscle their opponents using conventional weapons and tactics that favor the conventional force, asymmetric fighters use other tactics, as with terrorism creating fear that's disproportionate to their actual destructive ability. Two-Front War Model \u2013 From Both Directions The Second World War was a good example of a two-front war for Germany. Once Russia and Germany became enemies, Germany was forced to split its troops and send them to separate fronts, weakening their impact on both fronts.  America was lured into a two front war in Europe and the Pacific which successfully (for a time) diluted it\u2019s ability to bring it\u2019s full military force to bear. In business, opening a two-front war can often be a useful tactic that will cause competition to divide it\u2019s forces.  This can be especially powerful if the second \u201cfront\u201d is launched by another competitor or type of competition. If you care currently fighting a two front war solving that dispute or avoiding the opening of a second front, An example might be an organization effectively tamping down \u201cinternal discord\u201d (think Uber) to focus on its competitors or external attacks.   Improved Thinking & Psychology:  The Map Is Not the Territory This NLP model tells us that there will always be an imperfect relationship between reality (on the ground) and the various models we use to simplify, represent, understand and to operate within the reality.  The reduction and simplification is helpful and often allows us to act, but we should not be unmindful of it or surprised when the reality differs from the model.    Thought Experiments A technique popularized by Einstein, Tesla and Edison, the thought \u201cexperiment\u201d is a way to logically carry out a test in one\u2019s own head that would be very expensive, difficult or impossible to perform in real life. With the thought experiment as a tool, we can \u201csolve problems\u201d in advance and then deploy\/implement and test our \u201csolutions\u201d in the real world. Occam\u2019s Razor Named after the friar William of Ockham, Occam\u2019s Razor is a heuristic for simplifying choice and selecting between or among competing explanations or solutions. Ockham\u2019s Razor essentially states that we should prefer or select  the simplest explanation with the fewest moving parts. Such explanations are, in general,  easier to understand, and more likely, on average, to be the correct explanation. This principle is not an ironclad  law but a useful mindset\/force multiplier.  It allows us to make more accurate choices more often. Essentially, the idea is that \u201cIf all else is equal, it\u2019s more likely that the simple solution suffices. Of course, we also keep in mind Einstein\u2019s famous idea (even if apocryphal) that \u201can idea should be made as simple as possible, but no simpler.   Systems & Systems Thinking  Feedback Loops (and Homeostasis) People (and the business structures that they create) prefer the comfort zone.  Once they have achieved a safe place to live in a comfortable way it will take quite a bit of energy or a significant threat to get them to change.  That is why creating and monitoring feedback loops matters so much in business as standing still is, in reality moving backwards. Without careful and regular self assessment and a review of the data we become subject to disruption by people and entities willing to lie with change and who are more aware\/adaptive. Algorithms An algorithm is generally an automated set of rules, code, or a \u201cblueprint\u201d leading a series of steps or actions moving the result step-bystep toward a desired outcome. Algorithms are best known for their use in modern computing, but are a feature of biological life as well. For example, the  DNA of any organism contains an algorithm for building a new version of that organism. Redundancy A critical model of the engineering profession is that of backup systems. A good engineer never assumes the perfect reliability of the components of the system. He or she builds in redundancy to protect the integrity of the total system. Without the application of this robustness principle, tangible and intangible systems tend to fail over time. Criticality A system becomes critical when it is about to jump discretely from one phase to another. The marginal utility of the last unit before the phase change is wildly higher than any unit before it. A frequently cited example is water turning from a liquid to a vapor when heated to a specific temperature. \u201cCritical mass\u201d refers to the mass needed to have the critical event occur, most commonly in a nuclear system. Network Effects A network tends to become more valuable as nodes are added to the network: this is known as the network effect. An easy example is contrasting the development of the electricity system and the telephone system. If only one house has electricity, its inhabitants have gained immense value, but if only one house has a telephone, its inhabitants have gained nothing of use. Only with additional telephones does the phone network gain value. This network effect is widespread in the modern world and creates immense value for organizations and customers alike. Black Swan Also popularized by Nassim Taleb, a Black Swan is a rare and highly consequential event that is invisible to a given observer ahead of time. It is a result of applied epistemology: If you have seen only white swans, you cannot categorically state that there are no black swans, but the inverse is not true: seeing one black swan is enough for you to state that there are black swans. Black Swan events are necessarily unpredictable to the observer (as Taleb likes to say, Thanksgiving is a Black Swan for the turkey, not the butcher) and thus must be dealt with by addressing the fragility-robustness-antifragility spectrum rather than through better methods of prediction.   Physics of the Observable World and Quantum Mechanics: Velocity Velocity is not equivalent to speed; the two are sometimes confused. Velocity is speed plus vector: how fast something gets somewhere. An object that moves two steps forward and then two steps back has moved at a certain speed but shows no velocity. The addition of the vector, that critical distinction, is what we should consider in practical life. Activation Energy A fire is not much more than a combination of carbon and oxygen, but the forests and coal mines of the world are not combusting at will because such a chemical reaction requires the input of a critical level of \u201cactivation energy\u201d in order to get a reaction started. Two combustible elements alone are not enough. Catalysts A catalyst either starts or maintains a chemical reaction, but isn\u2019t itself a reactant. The chemical reaction may slow or stop without the addition of catalysts which can maintain it. Social institutions and systems, of course, take on many similar traits, and we can view catalysts in a similar light as they might apply to business and life.  My dog Tucker was a catalyst to the rebirth and longevity of a much older dog Jazz.  Hiring the right leader within an organization might be a catalyst to improved performance at multiple levels. Leverage As famously stated by Archimedes, \u201cGive me a lever long enough and I shall move the world.\u201d With the right leverage, even a small amount of input or  force, can create a great output force that changes the system it is applied to. In business and life, we can use another model like the 80\/20 rule to give our existing sales and marketing budgets\/teams amazing leverage.   Micro Economics: Opportunity Costs Doing one thing means not being able to do another. We live in a world of trade-offs, and the concept of opportunity cost rules all. Most aptly summarized as \u201cthere is no such thing as a free lunch.\u201d Creative Destruction Coined by economist Joseph Schumpeter, the term \u201ccreative destruction\u201d describes the capitalistic process at work in a functioning free-market system. Motivated by personal incentives (including but not limited to financial profit), entrepreneurs will push to best one another in a never-ending game of creative one-upmanship, in the process destroying old ideas and replacing them with newer technology. Beware getting left behind. Scarcity Game theory describes situations of conflict, limited resources, and competition. Given a certain situation and a limited amount of resources and time, what decisions are competitors likely to make, and which should they make? One important note is that traditional game theory may describe humans as more rational than they really are. Game theory is theory, after all. ","author_name":"In Top Form Podcast","author_url":"http:\/\/www.intopform.tv","html":"