{"id":7977,"date":"2013-04-05T17:09:52","date_gmt":"2013-04-05T11:39:52","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/?p=7977"},"modified":"2024-03-11T17:24:24","modified_gmt":"2024-03-11T11:54:24","slug":"stock-investing-using-charlie-mungers-lollapalooza-effect","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/stock-investing-using-charlie-mungers-lollapalooza-effect\/","title":{"rendered":"Charlie &#038; the Lollapalooza Effect"},"content":{"rendered":"<p><strong>Acknowledging what you don&#8217;t know is the dawning of wisdom- Charles T. Munger<\/strong><\/p>\n<p style=\"text-align: justify;\">True indeed! I came to know much more about the super investor, Charles Thomas Munger, aka Charlie Munger, Vice-Chairman of Berkshire Hathaway over a discussion, which happened impromptu over a lunch meet with my fellow and senior analysts.<\/p>\n<p style=\"text-align: justify;\">In <span style=\"text-decoration: underline;\"><span style=\"color: #0000ff; text-decoration: underline;\"><a title=\"The Buffett Menu\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/basics-of-investing\/warren-buffett-secrets-and-style-of-investing-in-stocks\/\" target=\"_blank\" rel=\"noopener\"><span style=\"color: #0000ff; text-decoration: underline;\">The Buffett Menu<\/span><\/a><\/span><\/span>, we told you about the essential ingredients of the specials in Warren Buffett\u2019s investment menu, basically his investment style.<\/p>\n<p style=\"text-align: justify;\">Now, it\u2019s time to introduce you to the <em>lollapalooza effect<\/em>! As intriguing as it may sound, the concept behind \u2018the lollapalooza effect\u2019 holds much importance for the intelligent investor. A concept propounded by Charlie himself.<\/p>\n<p style=\"text-align: justify;\">Let me jog my memory, and reiterate the discussion for you.<\/p>\n<h3 style=\"text-align: justify;\"><span style=\"color: #000000;\">About Charles Thomas Munger\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">All of us knew about Charlie Munger being a very successful investor, even before joining Warren Buffett in Berkshire Hathaway as the Vice-Chairman.<\/p>\n<ul style=\"text-align: justify;\">\n<li><span style=\"text-align: justify;\">He ran an investment partnership of his own from 1962 to 1975 where he generated CAGR of 19.8% during the period (vs. a 5.0% annual return for the Dow).\u00a0<\/span><\/li>\n<li><span style=\"text-align: justify;\">He was the Chairman of Wesco Financial Corporation from 1984 through 2011, &amp;<\/span><\/li>\n<li><span style=\"text-align: justify;\">He had also demonstrated his investing genius while managing the portfolio of \u2018The Daily Journal\u2019 Company, and growing it at a CAGR of 33.3% in 10 years.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\">What we also wanted to know more about was his investing style\u2026.<\/p>\n<h3 style=\"text-align: justify;\"><span style=\"color: #000000;\">Charlie\u2019s Investing Style\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">Quite in parallel to <span style=\"text-decoration: underline;\"><span style=\"color: #0000ff; text-decoration: underline;\"><a title=\"Warren Buffett's investing style\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/basics-of-investing\/warren-buffett-secrets-and-style-of-investing-in-stocks\/\" target=\"_blank\" rel=\"noopener\"><span style=\"color: #0000ff; text-decoration: underline;\">Warren Buffett\u2019s investing style<\/span><\/a><\/span><\/span>, Charlie is also focussed on investing in undervalued businesses with an <span style=\"color: #000000;\">economic moat<\/span>. Hence, the basic criteria for shortlisting a great business are the same.<\/p>\n<p style=\"text-align: justify;\"><em>He too believes in analysing value apart from price, leaving an appropriate margin of safety, ensuring proper compensation for the risk, and being wary of inflation and interest rate exposures.<\/em><\/p>\n<p style=\"text-align: justify;\">However, while Warren Buffett also follows some of these, Charlie particularly emphasises on using <span style=\"color: #000000;\"><strong>\u2018P-R-I-D-E\u2019<\/strong>:<\/span><\/p>\n<p style=\"text-align: justify;\"><img decoding=\"async\" loading=\"lazy\" class=\"aligncenter wp-image-7999 size-full\" title=\"Charlie's PRIDE concept\" src=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/Charlies-PRIDE.png\" alt=\"Preparation - Re-valuating - Incentives - Down-to-earth - Ethical business\" width=\"551\" height=\"229\" srcset=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/Charlies-PRIDE.png 551w, https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/Charlies-PRIDE-300x124.png 300w\" sizes=\"(max-width: 551px) 100vw, 551px\" \/><\/p>\n<h3 style=\"text-align: justify;\"><span style=\"color: #000000;\">Importance of developing mental models\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">A very interesting distillation of Munger&#8217;s approach can be found in &#8220;Poor Charlie&#8217;s Almanack&#8221;. It introduces the concept of \u2018Elementary Worldly Wisdom\u2019 in relation to business &amp; finance. It talks about developing a set of mental models as a framework to help solve critical business problems like being good at <span style=\"color: #000000;\"><strong>stock-picking<\/strong>.<\/span><\/p>\n<p style=\"text-align: justify;\">According to him, isolated facts get you nowhere. They need to come together on a framework of theory, to become usable. In the words of Emile Auguste Chartier:<em> \u2018Nothing is more dangerous than an idea, when it\u2019s the only one you have\u2019<\/em>.<\/p>\n<p style=\"text-align: justify;\">However, there are certain rules that apply here:<\/p>\n<p style=\"text-align: justify;\">Rule # 1: Have multiple models &#8211; because if you have just one or two, you\u2019ll tend to force reality to fit into it. (To a man with a hammer, everything looks like a nail!)<\/p>\n<p style=\"text-align: justify;\">Rule # 2: Have models across a fair array of disciplines \u2013 the most reliable models come from mathematics, biology and psychology.<\/p>\n<h3 style=\"text-align: justify;\"><span style=\"color: #000000;\">The Lollapalooza Effect\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">His speech on the \u2018Psychology of Human Misjudgement\u2019 is a treasure trove for behavioural finance enthusiasts. It identifies the following as drivers of human behaviour:<\/p>\n<ul>\n<li><span style=\"color: #000000;\"><strong>biases<\/strong><\/span> and<span style=\"color: #000000;\"><strong> incentive-effects<\/strong><\/span> , &amp;<\/li>\n<li><span style=\"text-align: justify;\"><span style=\"color: #000000;\"><strong>social proof<\/strong><\/span> i.e. the tendency to do what everybody else is doing.\u00a0<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><span style=\"text-align: justify;\">In the speech, <span style=\"color: #000000;\"><strong>Charlie Munger highlights 24 standard causes that lead to human misjudgement<\/strong>.<\/span> Out of the many concepts he touches upon in his speech,<em> \u2018the lollapalooza effect\u2019<\/em> deserves a special mention. Munger himself considers it as one of the most important concepts.<\/span><\/p>\n<p style=\"text-align: justify;\">The lollapalooza effect is what happens when you have more than one bias\/incentive acting at the same time. It means the confluence of several themes heading in the same direction to produce a given result which can either be positive or negative. And, as it becomes hugely powerful, it also becomes a major driver of human misjudgement.<\/p>\n<p style=\"text-align: justify;\">The most relevant example of the lollapalooza effect is the<span style=\"color: #000000;\"> <strong>mortgage market<\/strong>:<\/span><\/p>\n<p style=\"text-align: center;\"><a class=\"gridlove-popup-img\" href=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/The-Lollapalooza-Effect1.png\"><img decoding=\"async\" loading=\"lazy\" class=\"size-full wp-image-8002 aligncenter\" title=\"The-Lollapalooza-Effect\" src=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/The-Lollapalooza-Effect1.png\" alt=\"Mortgage example of the Lollapalooza Effect\" width=\"372\" height=\"308\" srcset=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/The-Lollapalooza-Effect1.png 372w, https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2013\/04\/The-Lollapalooza-Effect1-300x248.png 300w\" sizes=\"(max-width: 372px) 100vw, 372px\" \/><\/a><\/p>\n<p style=\"text-align: justify;\"><span style=\"color: #000000;\"><strong>Tupperware parties<\/strong> and <strong>open outcry auctions<\/strong><\/span> also demonstrate the same effect. Both are designed to manipulate people into certain behaviour. In the Tupperware party, the host\/hostess gave the party, so the tendency is to reciprocate; other person\u2019s decision to buy satisfies the desire to get social proof. In the open-outcry you&#8217;ve got social proof, the other guy is bidding, you get reciprocation tendency, you get deprival super-reaction syndrome, the thing is going away&#8230;hence, the desire to get it even more.<\/p>\n<h3 style=\"text-align: justify;\"><span style=\"color: #000000;\">Munger vs. Buffett\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">Though both, Charlie Munger &amp; Warren Buffett hold parallel views on value-investing; there have been instances, where Charlie managed to convince Warren to take an alternative view!<\/p>\n<ul>\n<li>His approach towards <span style=\"color: #000000;\">blue-chip holdings.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\">Adhering to his stance <strong>\u2018Income first, capital gains later\u2019<\/strong>, Munger takes an alternate approach when it comes to blue-chip holdings. For him, stocks that generate strong business performance on a consistent basis are worth holding indefinitely, as opposed to just an undervalued one. It was Charlie who introduced Warren to the notion that some businesses are so fantastic at increasing intrinsic value with consistency that they are worth holding on to even during periods when the stock price seems to get a little ahead of the business fundamentals. In short, <span style=\"color: #000000;\"><em><strong>excellent businesses do a fantastic job of raising intrinsic value each year<\/strong>.<\/em><\/span><\/p>\n<ul>\n<li>Warren Buffett investing in the <span style=\"color: #000000;\"><em>Chinese electric car maker BYD<\/em>.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\">This serves as an exception to the rule that Berkshire avoids technology companies, being companies, whose businesses he didn\u2019t understand quite well. However, Munger convinced Buffett to invest in BYD, by its numbers. What BYD had already done was ridiculously difficult to do, and they had done it anyway making it a very remarkable company, and Warren could see that from the numbers. Moreover, Charlie believed that the founder, chairman and CEO of the company Wang ChuanFu had the right character worth investing in, &#8220;<em>a combination of Thomas Edison and Jack Welch &#8211; something like Edison in solving technical problems, and something like Welch in getting done what he needs to do<\/em>&#8220;.<\/p>\n<h3><span style=\"color: #000000;\">The return on my investment\u2026<\/span><\/h3>\n<p style=\"text-align: justify;\">Though I was aware of Charlie Munger\u2019s investment style with respect to stock selection, my time investment that day at the discussion gave me return in the form of new insights into his beliefs and concepts: the importance of putting facts together and developing a framework of mental models while solving critical business problems, the role played by the incentive effect and social proof in human misjudgment, and of course, the lollapalooza effect.<\/p>\n<p>If you liked what you read and would like to put it in to practice <a href=\"https:\/\/www.moneyworks4me.com\/registration\/\">Register at MoneyWorks4me.com<\/a>. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.<\/p>\n<hr \/>\n<p><a href=\"https:\/\/www.moneyworks4me.com\/\"><img decoding=\"async\" style=\"float: left; height: 100px; padding-right: 16px; margin-left: 40px;\" src=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/05\/mw4me-logo.png\" alt=\"\" title=\"\"> <\/a> <a class=\"hide-mobile\" href=\"https:\/\/t.me\/mw4me\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" style=\"float: left; height: 100px; padding-right: 16px;\" src=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/05\/investments-shastra-blog.png\" alt=\"\" title=\"\"> <\/a><\/p>\n<div class=\"hide-mobile\" style=\"height: 100px; padding-top: 15px;\"><strong style=\"font-size: 15px; color: #32aadf;\">Join our Telegram Channel:<\/strong><br \/>\n<a style=\"text-decoration: underline; font-size: 14px;\" href=\"https:\/\/t.me\/fundamentalstockinvesting\">Stock Investing<\/a><br \/>\n<a style=\"text-decoration: underline; font-size: 14px;\" href=\"https:\/\/t.me\/mutualfundinvesting\">Mutual Fund Investing<\/a><\/div>\n<div class=\"hide-desktop\" style=\"float: left; width: 100%; text-align: center; padding-bottom: 15px;\"><a href=\"https:\/\/t.me\/mw4me\" target=\"_blank\" rel=\"noopener\"><img decoding=\"async\" style=\"height: 100px;\" src=\"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-content\/uploads\/2018\/05\/investments-shastra-blog.png\" alt=\"\" title=\"\"><\/a><br \/>\n<strong style=\"font-size: 15px; color: #32aadf;\">Join our Telegram Channel:<\/strong><br \/>\n<a style=\"text-decoration: underline; font-size: 14px;\" href=\"https:\/\/t.me\/fundamentalstockinvesting\">Stock Investing<\/a><br \/>\n<a style=\"text-decoration: underline; font-size: 14px;\" href=\"https:\/\/t.me\/mutualfundinvesting\">Mutual Fund Investing<\/a><\/div>\n<div style=\"text-align: center;\">\n<p><span style=\"color: #0070c0;\"><b>Need help on Investing? 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Munger True indeed! I came to know much more about the super investor, Charles Thomas Munger, aka Charlie Munger, Vice-Chairman of Berkshire Hathaway over a discussion, which happened impromptu over a lunch meet with my fellow and senior analysts. In The Buffett Menu, [&hellip;]<\/p>\n","protected":false},"author":15,"featured_media":20478,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"no","_lmt_disable":"no","footnotes":""},"categories":[1156,1151],"tags":[893,888,892,887,290,891,890,889,90],"modified_by":"MoneyWorks4me","_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/7977"}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=7977"}],"version-history":[{"count":1,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/7977\/revisions"}],"predecessor-version":[{"id":20479,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/7977\/revisions\/20479"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media\/20478"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=7977"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=7977"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=7977"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}