Friday, September 14, 2007

Lecture 02: Introduction to Mental Models & Mental Tricks- II

Topics covered in today's class:

  1. Surfing as a mental model, There's a tide in the affairs of men, which taken at the flood, leads on to fortune - Shakespeare, example of Sunil Mittal who rode the GSM wave and because one of India's richest men. A lot of business fortunes are made because someone happened to be in the right place at the right time - i.e. luck.
  2. Two views of the world - Bell curve world, and the Power Law world, Scalability in the Power Law World, Winner-takes-all model, importance of scale in valuation.
  3. Diseconomies of scale, bureaucracy, eventual decline of all great corporations inevitable.
  4. Mental Trick: Importance of using checklists in dealing with availability bias, first conclusion bias, and confirmation bias, the pleasure of exploiting other people's availability bias, examples.
  5. Mental Trick: Effects have effects, Peltzman effect, Carol Loomis on The Risk that Wont Go Away, Need to think like a chess grandmaster, unintended consequences, America's futile war on drugs, Price controls, Jim Roger's Law (you can control the price, or the supply but not both), examples of Licence Raj, Ration Shops, Smuggling and Arbitraging. Need to do "second step analysis" as Buffett did in shutdown of textile operations, how price changes everything (in stock market crashes), how people respond to changes in tax policies and how markets tend to assume that tax changes are permanent, how Indian companies became more profitable and not less after opening up of Indian markets to competition in 1990, How Y2k did not end Indian IT Industry, how in cyclical businesses are influenced by effects of effects, the inability of excel to capture the power of the human sprit to fight and bounce back.
  6. Mental Trick: Backward thinking, proof by contradiction, its utility in security analysis, expectations investing, how to find absurd valuations using backward thinking, the removal of need to make elaborate predictions when using backward thinking, using backward thinking in risk arbitrage and in option markets (implied volatility), the need to falsify first conclusions, negative empiricism, the asymmetry between proving something and disproving it.
  7. Mental Trick: Zooming in - the need to focus on what is going on at the detailed level e.g. segment data of Microsoft and ITC reveals something very interesting which is camouflaged when one looks at overall financial performance.
  8. Mental Trick: Zooming out - Need to step back and look at a situation, e.g. Buffett's decision to shutdown textile operations, need to think like an allocator of capital and not as someone married to a business.
  9. Mental Trick: Be creative: use mind maps, creative whack pack, innovative whack pack - examples of creativity in investment thinking e.g. changing viewpoints, asking what if, using metaphors and Aesop's fables (e.g. the rabbit runs faster than the fox because the fox is running for his dinner but the rabbit is running for his life), the need to invert, the need to check your timing (e.g. instead of asking is this attractive at this price, asking how can I make money in this deal, corporate event etc), the need to be aware of unintended consequences, the need to be very curious about things around us, the need to see the opposite viewpoint, and the need to kill your own best loved ideas, the need to be charmed by randomness...

7 comments:

Roger von Oech said...

Good list. Thanks for including my products (Creative Whack Pack and Innovative Whack Pack)!

Best wishes, Roger von Oech

Sanjay Bakshi said...

What a pleasant surprise to have you visit my blog Roger! Keep up the excellent work! All the best.

Rajendran said...

Wish I were one of your lucky students. I could only wish :) -

Thanks for CIO interview text. Excellent one !

Sanjay Bakshi said...

Thanks Rajendran.

Rohit Chauhan said...

prof bakshi
Is it possible for you to share the details of the topics you covered in your class - presentation, notes etc.
the topics are very interesting and some completely new to me such as the mental tricks - backward thinking , zooming in, mental maps etc.
would love to learn more on these topics.
if you cannot share the notes, can you suggest books to get a better understanding of these topics ?

regards
rohit

Anonymous said...

Dear Prof. Bakshi,

Am one more of your unknown but admiring students from the Net who is trying to learn from this wonderful blog.

My thoughts ditto with Rohit.

If there may be an issue regarding posting of presentation material etc, we'll appreciate book list, pointers etc (like you shared in Robert Rubin's case).

BTW 2 questions

1. I found Buffet's 3 lecture transcript at Notre Dame Univ while surfing the web. Have you seen those. Its very highly educational.

2. Was unable to get hold of Munger's 1990 Wesco letter since its not on the website (or by Google search). Any pointers?

Thanks,
Yogesh

Sanjay Bakshi said...

Thanks for your comments Rohit. I wouldn't want to post the presentations here but will be happy to send them to you, or anyone else, thru email, after my course is over - which will be February 2008. Please write to me then at sanjay@sanjaybakshi.net.

Also someone wanted a copy of the Mr. Munger's 1990 letter. Please write to me...