📈🧠 In 1995, Charlie Munger, the renowned investor and Vice Chairman of Berkshire Hathaway, delivered a legendary lecture at Harvard not about investment strategies, but about the mental flaws that affect business decisions.
In this blog/podcast/video, we unravel Munger’s insightful guidance on avoiding cognitive biases and mental errors that can skew decision-making. Munger’s principles go beyond investing; they offer a blueprint for making smarter decisions in business and life.
🔍 What you’ll learn:
Overreaction to Loss: Understand why focusing too much on avoiding loss can lead to missing significant opportunities.
Inconsistency-Avoidance: How clinging to beliefs can blind you to vital information.
Availability-Misweighing: The dangers of oversimplifying complex situations.
Twaddle Tendency: Recognizing when information is fabricated or exaggerated.
Social-Proof Bias: The risk of following the crowd blindly.
Overoptimism Tendency: Managing unrealistic expectations and assessing risks accurately.
Reward and Punishment Superresponse: The underestimated influence of incentives in decision-making.
Pain-Avoiding Psychological Denial: The tendency to distort reality to protect the ego.
Influence-from-Association: Avoiding negative bias based on association.
Lollapalooza Tendency: Identifying when multiple mental flaws combine to create extreme outcomes.
Munger’s wisdom is a key to unlocking exceptional decision-making skills, as evidenced by his success with Berkshire Hathaway.
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Join us as we delve into each of these principles, providing real-world examples and actionable insights. Share your thoughts and experiences in the comments below! #CharlieMunger #InvestmentPrinciples #CognitiveBiases #BusinessWisdom #BerkshireHathaway”
So, back in 1995, Harvard University invited Charlie Munger to give a lecture to its students. Now, one might assume that Munger, being the Vice Chairman of Berkshire Hathaway and a highly respected figure in investing, would impart valuable insights on how to excel in the world of finance. But interestingly enough, Munger had a different approach. He focused on something far more important than investing advice – he delved into the realm of mental flaws that affect every single business decision we make.
See, our brains are fascinating organs that constantly take shortcuts when it comes to decision-making. It’s just the way we’re wired. But here’s the kicker – these shortcuts often lead us astray, tricking us into believing that our flawed thinking is actually accurate. So, what Munger recognized was that avoiding these mental flaws was the key to his success in building Berkshire Hathaway.
In Munger’s most famous lecture, he emphasized the significance of being able to see and, importantly, avoid these mental flaws. He believed that it was more critical than any specific investing advice he could give. So, what were these mental flaws that Munger warned his Harvard students about? Let’s dive into the ten most critical ones.
The first flaw is the overreaction to loss. We have a tendency to overemphasize loss rather than focusing on potential gains. Munger advised his students not to miss out on a big opportunity just because they wanted to avoid a small loss.
The second flaw is inconsistency-avoidance. When we hold a belief, we tend to identify with it strongly. As a result, any information that clashes with our beliefs appears twisted or distorted. Munger urged his students to see information for what it truly is, without letting their preexisting beliefs cloud their judgment.
Next up is availability-misweighing. Munger pointed out that the simplest answers to complex situations often become viral and widely accepted. However, just because others provide a single explanation for why something happens, it doesn’t mean that the whole picture has been revealed. Munger encouraged his students to assume that they could be missing important information whenever they are presented with only one response.
The fourth mental flaw is what Munger called the “twaddle tendency.” People have a knack for making things up as they go along, especially when they want to appear more intelligent than they actually are. Munger advised his students to be skeptical and assume that some percentage of any given explanation is simply fabricated.
Then there’s the social-proof bias. As humans, we often tend to follow the crowd and assume that popular ideas must be true. But Munger cautioned against this tendency, reminding his students that popularity doesn’t equate to accuracy. It’s important to think critically and not blindly follow the masses.
Moving on to the sixth flaw, Munger highlighted the overoptimism tendency. We humans have a tendency to be overly optimistic, which can cloud our judgment and make it difficult for us to accurately assess risks. Munger advised his students to seek a third-party perspective to evaluate the downside risks of their decisions.
The seventh mental flaw is what Munger termed the “reward and punishment superresponse.” Essentially, we underestimate the impact that incentives have on driving behavior. Before working with others, it’s crucial to understand their incentives and motivations.
Next up is the pain-avoiding psychological denial. When faced with an uncomfortable truth, we often skew our perception of reality to avoid the pain that accompanies it. While this may protect our ego in the short term, it ultimately hampers our decision-making process. Munger encouraged his students to confront uncomfortable truths head-on and base decisions on accurate information.
Influence-from-association is another mental flaw Munger highlighted. Essentially, when we associate an idea with something negative, we automatically assume that the idea itself is bad. Munger advised his students to look for valuable lessons even in ideas that others tend to avoid due to negative associations.
Lastly, there’s the lollapalooza tendency. When multiple mental flaws come into play together, they can amplify each other and lead to extreme outcomes. Munger urged his students to be vigilant for situations where multiple flaws might be at work, as they can significantly impact the logic behind decisions.
Now, here’s the thing – most people are not fully aware of just how much these mental flaws skew their decision-making processes. But Munger, with his exceptional ability to recognize and confront these flaws, was able to build Berkshire Hathaway into a powerhouse. So, the key takeaway here is to protect against these mental flaws in your own decision-making. By doing so, you can elevate yourself to the level of a top-notch decision-maker, just like Munger.
And with that, we’ve covered the ten critical mental flaws that Charlie Munger warned his Harvard students about. These flaws have the potential to significantly impact our decision-making, so it’s essential to be aware of them and actively work to counteract their influence.
Remember, decision-making is a multifaceted process, and understanding the common pitfalls can help us make better choices in both our personal and professional lives. So, take Munger’s wisdom to heart, and may your decision-making skills soar to new heights!
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In this episode, we explored the importance of avoiding mental pitfalls in business decisions and recommended “AI Unraveled” as a comprehensive guide to AI investing. Thank you for joining us on the “Djamgatech Education” podcast, where we strive to ignite curiosity, foster lifelong learning, and keep you at the forefront of educational trends – so stay curious, stay informed, and stay tuned with Djamgatech Education!
Declining sales for mobile chips - Apple recently announced the decline for iPhones was 10% this quarter. The only reason their stock pumped up was due to their share buy back announced. ARM will not have this luxury and decreasing demand will hurt them Previous guidance was made under the assumption of 3 rate cuts this year. We are down to maybe 1? This had hurt SMCI as well as AMD two chip manufacturers who build chips using ARM's archecture... suffice to say guidance will be poor hurting their stock price against Wall Streets insane expectations for chip manufacturers I have NVDA calls (expiring May 24th) , one of ARM's biggest customers, thus by proxy my calls are gonna tank after close. Honestly debating on buying ARM puts (expiring this Friday) to hedge but IV crush is gonna be a bitch with this one Edit: I bought calls expiring this Friday so it’s gonna crash. GG friends Edit 2: I told yall their revenue guidance would miss smh 🤦 submitted by /u/rayrayrex [link] [comments]
Hey guys, Airbnb is reporting earnings today and I wanted to know everyone's thoughts on it. So far they're looking to hit $1.8 billion in revenue, marking a solid 20% year-over-year growth. Guys, that's insane. That’s not just good; it's their best first quarter ever. We're looking at a net income of $117 million compared to a net loss of $19 million last year. The turnaround story here is all about scaling revenue while keeping a tight leash on expenses and raking in some decent interest income. This rocketed their net income margin from a shitty -1% to a pretty decent +6%. So here I'm gonna outline my bullish thesis on Airbnb and try to justify buying calls for earnings. I want to know if it's a good idea. Cash Flow and Share Buybacks Free Cash Flow (FCF) hitting a massive $1.6 billion, thanks to increased bookings and margin expansions. What does Airbnb do with all that cash? Buybacks. They’ve bought back $2 billion worth of shares and just announced a new buyback program up to $2.5 billion. This rewards shareholders and boosts EPS. Bookings and Travel Trends Travel isn't just rebounding; it's evolving. Airbnb’s total Nights and Experiences booked jumped by 19%. 36% spike in cross-border bookings. Long-term stays (28 nights or more) are also doing well, making up 18% of all bookings. This isn't just a rebound; how and why people travel is changing. Supply Growth On the supply side, Airbnb boosted its listings by 18% year-over-year. That's growth across the board... North America, Latin America, urban, non-urban, etc. More supply means more options for consumers and more revenue potential for Airbnb. The Analyst's Angle From what I've read all analysts are keen on Airbnb's performance, noting the resilience in travel demand and robust financial health. Looking at pre-earnings forecasts there are strong expectations based on prevailing travel trends and economic conditions. My thoughts Airbnb is doing pretty damn well in our post-pandemic world. They're capitalizing on new travel behaviors, like increased interest in international destinations and longer stays, which could be a long-term trend rather than a short-lived reaction. So guys, what’s the play here? Airbnb seems to be on a solid path with strategic stock buybacks, strong quarterly performances, and robust growth prospects in the travel sector. You can grab shares if you're looking for a growth stock with some stability and bullish market sentiment. I'm going to grab calls tho. IV on calls actually doesn't make it seem like it's worth doing. If you expect a 5% bump AH, calls won't be profitable due to the premiums right now. 5/10 160c is $5.80/share. But I'll go ahead and grab the 165c just to see, it's a little cheaper at $3.75/share. submitted by /u/GrowYourConscious [link] [comments]
Nvidia (NASDAQ:NVDA) shares were in focus on Tuesday as Goldman Sachs raised its earnings estimates and price target on the semiconductor giant amid "robust" AI server demand and better supply. Goldman Sachs analyst Toshiya Hari raised his price target to $1,100 from $1,000 and reiterated his Buy rating on Nvidia, raising his earnings estimates for fiscal years 2025 to 2027 on average by 8%. Despite Nvidia's near 85% gain year-to-date, positive earnings per share estimate revisions are likely coming, which should help drive the stock higher, Hari said. And with shares trading at roughly 35 times earnings (or roughly a 36% premium compared to other semiconductor stocks in Hari's coverage universe), there may be more room for upside. Nvidia is slated to report fiscal first-quarter results on May 22. A consensus of analysts expects the Jensen Huang-led company to earn $5.22 per share on $24.39B in revenue. submitted by /u/DumplingGoddessTe [link] [comments]
Trust the process, the fact that Sam hasn’t released any flashy PR yet and people are hopping on makes me believe there will be a huge move up before Thursday AH. I’ll hold my shares and play this out with stop losses. NRC denied their application 2 years ago. Since then, they have added government related officials to the team and have signed multiple deals. I think they’re closer to approval than people expect. submitted by /u/MartJJ1 [link] [comments]
The United States is projected to triple its semiconductor manufacturing capacity by 2032, following the passing of the landmark CHIPS and Science Act, according to a report by the Semiconductor Industry Association and the Boston Consulting Group. The CHIPS Act, enacted in 2022, is aimed at bolstering domestic manufacturing, and reducing reliance on other countries. It provides $52.7 billion for semiconductor research, development, manufacturing, and workforce development, which includes $39 billion in manufacturing incentives. America's projected 203% increase in fab capacity from 2022 to 2032 contrasts with the 11% increase from the previous decade. According to the report, the U.S. share of world’s chip manufacturing capacity will jump from 10% in 2022 to 14% by 2032. Without the CHIPS Act, the U.S. share would have slipped to 8% by 2032. The U.S. is expected to grow its share of the advanced logic (below 10nm) manufacturing to 28% of global capacity by 2032, up from 0% in 2022. America is expected to corner 28% of the total global capital expenditures from 2024-2032, behind only Taiwan's 31%. In the absence of the CHIPS Act, the U.S. would have only been able to capture 9% of global capex by 2032. Following the passing of the CHIPS Act, companies have announced more than 80 new projects across 25 U.S. states, totaling nearly $450 billion in private investments, the report added. The announced projects are expected to create more than 56,000 jobs in the semiconductor ecosystem and support hundreds of thousands of additional U.S. jobs throughout the U.S. economy. The U.S. is not alone in its efforts to bolster its domestic semiconductor manufacturing capacity. The European Union has its own $47 billion Chips Act. India has approved $15.2 billion in investments for semiconductor facilities. Similar programs have emerged in China, Korea, Japan, and around the world. submitted by /u/DumplingGoddessTe [link] [comments]
Canada gave us the fall of BB in the late 2000s. Time for another tech company crash from Canada? submitted by /u/RevolutionaryBed1814 [link] [comments]
I have come across several posts on WSB where a member is puzzled as to why Options premium did not increase or decreased, despite favourable movement of the underlying [a stock]. So here's a cheat sheet: Options Premium are decided by Supply & Demand. Black Scholes Model [with its limitations like European options, no friction in market place etc] may only serve as a guide to pricing an Option. In the end it is the buyer or seller that determine the Option premium for a particular strike and expiry. Greeks serve to explain the premium of the Option in its basic consitutents. Remember, Option Greeks derive their respective values from Option premium and not vice versa. Here is a brief explanation of the Greeks, Theta: bascially a function of time to expiry. Long dated options experience slow theta decay and vice versa. Theta decay for a long option is a [steady] downward sloping line for almost 80% of the life of the Option. Theta decay increases significantly, and slope plunges precipitiously in last 20% of the life of the Option. Delta: change in price of Option per unit change in price of the underlying. Delta is 0.5 for at the money Option and increase as the spot price moves deeper in the money approaches max of 1.0 Conversely, Delta drops from 0.5 to 0.01 as spot price of underlying moves out of the money. Gamma: rate of change in Delta per unit change in the price of the underlying. Gamma is max for at the money option, ~1.00 and drops if spot price of the underlying moves in the money or out of the money. Vega: change in price of Option with per unit change in volatility. This is the most dangerous Greek as it is most unintuitive and may cause either a windfall of cash, or blow up an account. Volatility or Vega is difficult to explain and almost impossible to visualize. But to simplify, I imagine Vega as the balance of supply & demand or lack of balance of supply & demand for a Option [of the same stock and expiry] at different strike price. If the supply & demand are in balance for an Option [of a certain expiry] at a specific strike price, then the Volatility [Implied Volatility] may be in neighbourhood of its historical value. If the supply & demand are in imbalance then Implied Volatility (IV) may explode or implode. This is what generates windfall of cash or account blowout. IV crush is nothing but lack of buyer for a particular Option [for a given strike price and expiry]. In IV crush Option premium dives to almost zero. submitted by /u/Option_Closeout [link] [comments]
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