One of Charlie Mungers better known quips was: ‘All I want is to know where I am going to die, so I’ll never go there’. He avoided that place assiduously, but last week, after 99 years, Charlie went there.
Perhaps by mistake, perhaps because even he recognised it was time, a very long innings behind him. However, he leaves a mountain of wisdom accumulated over that extended period, most of it as ‘wingman’ to Warren Buffett. While it was a partnership with Buffett as Chairman and Charlie as Vice chairman, Buffett credited Charlie as being the brains behind the strategic insights and wisdom that made Berkshire Hathaway such a profit powerhouse.
So, what can a local SME, struggling for visibility, relevance, and cash in an increasingly homogeneous and competitive market where size really does matter, learn from him?
Simplicity. We humans tend to complicate things. It is not usually deliberate, rather it is a function of our limited perspectives, reliance on others, uncertainty, risk management, and a host of other drivers we all feel. Charlie advocated simplicity. Break a problem or situation down into its component parts, and deal with them one at a time. Others might call it managing by first principles. Einstein noted that things should be ‘made as simple as possible, no simpler.’
Over the weekend I was reading through the updated Australian building codes trying to understand the complexities of the recent changes. One of my clients must ensure the products he sells into the building trade not only comply, but he needs to explain to his builder customers the application of the codes to his products. The codes are so complex, differing across state jurisdictions, that builders who are bound by them often knowingly ignore them, relying on their suppliers. The codes are simply too complex for a small builder to ensure currency is maintained, amongst the other tasks necessary to keep their businesses nose above water.
Simplifying decision making processes by ensuring that the boundaries of authority, responsibility and accountability are clearly delineated through the business, is a goal to which we should all aspire.
Focus. Competing priorities means nothing gets optimised, and often many tasks do not get completed. Focussing attention on the things that really matter and giving them undivided attention for as long as the problem or opportunity warrants is a key lesson from Charlie.
Focussing also frees up our most valuable resource: time. By deliberately ignoring distractions, and leaving the lesser issues to others, or ignoring them completely, frees time to concentrate on the most important things, those that in the long term will deliver the greatest return.
No SME client I have ever worked with has been able to clear their desk sufficiently to devote the time and energy they should to the long term strategic foundations and health of their business. They simply wear too many hats, and often have difficulty delegating, assuming there is someone to whom they can delegate. The smaller the business, the harder it is, as those to whom delegation can be made, and the cash to pay for it, are in short supply.
The discipline required, both personal and in the business culture nurtured is enormously challenging.
Think and act for the long term. When you think and act short term you inevitably find yourself whipping around like the end of a bullwhip. Logistics managers understand the ‘Bullwhip effect’ better than most, as they see it every day in their supply chains. However, it is just as potent in the management of every other facet of a business. Seeing and responding primarily to the short-term fluctuations usually just compromises your ability to adjust strategically to the long term drivers of success.
Circle of competence. Many consultants have made a business out of advising clients to ‘stick to their knitting.’ It has been so prevalent it has become a management cliché. A circle of competence as Charlie saw it is a wider concept. While you are sticking to what you know, you are also seeing opportunities to leverage what you know in other domains.
This idea also applies to those stakeholders with whom you engage. By ensuring there is overlap in the circle of competence each brings to the table, you widen your own. This is at its core a strategy for successful collaboration.
Incentives. Understanding the power and application of incentives to shape behaviour enables individuals and groups to optimise the outcomes for which they are responsible.
For years we have seen research report after research report articulating the reality that after the basic needs of life, food, shelter, and companionship are satisfied, individuals start to respond to a range of other incentives. Some will sacrifice money for free time, others seek public acknowledgement of effort, security of what they have becomes more important than risking it for some possible future benefit. The list of drivers of individual behaviour goes on, and it is never just about money.
A friend who runs a successful bookkeeping business has recently gone to a four day working week. Several of her staff were against it, and subsequently left. The significant majority were happy to do their hours in four days, with Friday off. Productivity has jumped, as there is several hours each day when the phones are not ringing, causing distractions, so tasks are completed quicker, and with less processing errors. Contrary to the expectations of some, clients have also embraced the change, and remaining staff love having Fridays free to get on with their lives.
Understand probabilities. Success requires that we have a picture of what we believe the future will dish up, and we are able to respond today to put ourselves in a position to leverage those future events in our favour better than competitors. Given the only thing we know for sure about the future is that we will not be completely right about it, we need to understand probabilities. The better you can articulate the odds of some future state, the better able you will be to respond positively to it. Charlie was a great believer in what he called ‘Mental Models’. Being a voracious reader, he was able to see situations through a range of perspectives, and equate them to previous known outcomes, thereby giving him the opportunity to shorten the odds of an outcome he felt sufficiently confident to predict, and invest in to leverage.
Understanding your odds offers the opportunity to give yourself an appropriate margin for error for the investment you are contemplating. This applies equally to how you will spend your time today, to a major strategic choice.
Continuous learning. Charlie never stopped learning, until last week. Much of the time freed up by his focus and personal discipline was spent reading and interacting with those he considered smarter than him in some domain, and satisfying his voracious curiosity. Every situation he saw was considered as a learning opportunity, particularly those that did not go as predicted. They enabled him to add to his wardrobe of mental models with another model through which he could see a situation to understand better the odds, and shape them in his favour.
Every owner of an SME I have ever dealt with understands the implications of the phrase: ‘work on your business not in it.’ Few achieve what they would see as the optimum mix, and it is always the ‘on their business’ that suffers. They are depriving themselves of the opportunity to learn by looking around, compiling mental models, seeing opportunities in other domains, and leading their employees and stakeholders.
Rationality over emotion. Successfully doing all of the above allowed Charlie to make rational decisions, avoiding the attraction of the emotions. He has been the living embodiment of what Daniel Kahneman would call ‘System 2’ thinking. He takes his time, removes the pull of emotion, seeks out the facts, and makes rational choices for the long term.
None of the foregoing practises are stand alone triggers for success. Each influences the others in a range of ways, offering compounding benefits. In taking the long term view of his investment choices, Charlie allowed that most powerful force in the universe, (according to Einstein), compounding, to deliver for him. An investment of $100 and subsequent reinvestment of dividends in Berkshire Hathaway in 1978 when Charlie teamed up with Warren Buffet would be worth almost $400,000 today. This is an almost 20% annual compounding of value of the investment. It is 25 times the value today had that same $100 been invested in a S&P index fund. This is the effect of patience, long term thinking, and powerful mental models that increase the odds of success relative to other investment choices. Every owner and manager of an SME I have ever seen could benefit from the wit and wisdom of Charlie Munger.
Vale Charlie. If I was having one of those imaginary dinner parties where the most interesting people from history were around the table, you would be there.
Header photo: Charlie 5 days before his passing, holding forth in an interview with CNBC
