You Will Make Mistakes. Forgive Yourself. Move On. Start Rebuilding.

On September 2, 2010, in Charlie Munger, Philosophy, by Joshua Kennon

“His son died, his marriage ended, he lost a lot of money,” said Charles, Jr.  “He just walks away from that (emotionally).  Dad says to himself, that doesn’t work.  Don’t revisit it.  There are some things my dad could deal with better if he faced them more.  My dad, if he had a bad experience in a town, in a restaurant, he would not go back.  I’d try again.” – Page 45, Damn Right!  Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe

You will have failure in your life.  It is inevitable.  By the time he was in his 30’s, Charlie Munger had watched his eight year old son die of cancer, he had lost most of his money, and suffered a divorce at a time when there was a significant social stigma attached to it.

Today, not only does he boast a net worth of nearly $2 billion, more importantly, he has eight successful, independent grown children, countless grandchildren and great-grandchildren, and has had an immeasurable influence far beyond his own direct circle of friends that will certainly help build the civilization.  Heaven knows we are far more rational as a result of the system Munger introduced to us through his role in the Berkshire Hathaway shareholder meetings.  From the time we first grasped the concept, we have been collecting and categorizing mental models for use in our life and businesses.

Success isn’t the result of genius, but the by product of specific behavior. Never forget that.  If you do what is necessary to be successful, the fruits will begin to manifest in your own life.  The ride will be bumpy and there will be vicissitudes, but you can end up where you want.

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The First $100,000 Is Hardest

On September 2, 2010, in Charlie Munger, Investing, Making Money, Saving Money, by Joshua Kennon

“Munger has said that accumulating the first $100,000 from a standing start, with no seed money, is the most difficult part of building wealth.  Making the first million was the next big hurdle.  To do that a person must consistently underspend his income.  Getting wealthy, he explains, is like rolling a snowball.  It helps to start on the top of a long hill – start early and try to roll that snowball for a very long time.  It helps to live a long life.” – Page 242, Damn Right!  Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe

Years ago, when I first came across this quote from Charlie Munger, I liked it so much I wrote a special at About.com, a division of The New York Times called How to Amass the First $100,000.  I was cleaning off my desk and came across the book; of course, I couldn’t help but sit down and start reading through it, again.

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The Secret World of Brooks Brothers

On September 1, 2010, in Fashion, My Life, Saving Money, by Joshua Kennon

Brooks Brothers at ChristmasBefore I “arrived” as they say, I had no idea how different clothes shopping was for men once they became successful.  Honestly, I never thought much about it but the assumption was that in terms of logistics, it would be just like shopping at Wal-Mart only with better surroundings, better service, higher quality and higher price tags.  You know, you walk into a Neiman Marcus or a Saks, look around at the merchandise, and then pay for it at a register if you were satisfied.

I was totally, completely wrong.

I’m not even talking about the best-of-the-best such as Kiton and Brioni, which are the fare of James Bond and billionaires overlooking New York from their skyscraper headquarters.  I’m talking about upscale retailers for business owners, attorneys, accountants, bankers and professors, who make the world go round.  The places that become affordable once your household income crosses into the six-figures per year, (which is a dentist in a small town married to a real estate agent or, likewise, a school teacher married to a police officer) and that are just taken for granted in most families.

I See Why Charlie Munger Is Crazy About Brooks Brothers

Brooks Brothers Select Fabric

You can create almost anything you desire, have it fit exactly how you want, and pay very close to what you would for things bought off the rack. Here are some of the fabrics a Brooks Brothers customer could use to create a new special-order sport coat.

Take Brooks Brothers as an example.  The company has been dressing American Presidents since the mid-1800’s.  Berkshire Hathaway billionaire Charlie Munger is “crazy about Brooks Brothers” according to his daughter, Molly.  He would reportedly give his eight children gift certificates to the legendary clothing store long before he ranked among history’s greatest investors.

If you walk into a Brooks Brothers store, you would be making a mistake to just browse through the dress shirts, sport coats, and suits.  Why?  The company is a true haberdasher, just like in the older days (unless you are in your 80’s, you probably don’t realize that almost all clothes used to be custom made for you, not picked up based upon pre-manufactured sizes!)

The Brooks Brothers staff keeps huge books of fabric at a large, dark desk.  Perhaps you want a sports coat?  You go through the books and choose from more than 250 fabrics, which you can feel and see.  You select your fabric, you take measurements so the garment fits your body comfortably based upon your preferences, you choose how many pockets you want, where they go and the style, the buttons, and even the lining.  Do you want a pink cashmere sport coat with white silk lining and mother of pearl buttons?  They can do that.  How about a dark green water-resistant, lightweight wool sport coat to wear on the golf course in the morning when it is still a bit chilly?  They can do that, too. (more…)

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How to Solve the Trade Deficit – Part IV

On August 31, 2010, in Economics, by Joshua Kennon

This is part of my special on How to Solve the Trade Deficit. You can read Part I, Part II, or Part III if you missed them.

The Increased Competition for Jobs Is Domestic, As Well

You mention that standards of living have fallen, despite gains in things like iPods with 25,000 songs and the ability to connect instantly through the Internet.  The thing is: In many respects, it isn’t true – standards of living haven’t fallen – unless you fit one specific demographic, which we’ll talk about in a minute.

I pointed out a few months ago:

  • Research that showed Americans alive today have more free time that any group of humans that have ever lived in history (you can read about it here).  What do they do with that free time?  Watch television.  No, literally, the research showed that people used all of those extra hours to sit on the couch in front of the TV.
  • Teen pregnancy and abortion rates are collapsing, which is promising for future poverty rates because having a child before the age of 25 is more likely to result in lifetime poverty.
  • We live longer than any civilization in history.
  • We have better pain management than any humans who have ever lived.
  • We can cure more diseases than any humans who have ever lived.
  • We can travel anywhere on the planet in under 20 hours.
  • We consider full-home air conditioning and heat a basic human right when, only 90 years ago, the richest men on the planet suffered the heat just like the poorest worker.
I Want My Country Back

What "I Want My Country Back" really means for many people, whether they realize it or not, is they want to go back to a time when a man could get married, have kids, and support a family on a single salary by working at the local factory. What they don't realize is for that to be possible, it required limited choice for consumers, and keeping blacks, women, Jews, gays, and the elderly out of the workforce. What they really want is the system that allowed them to have a job simply because they were ENTITLED to one by virtue of being a white man. Those days are over and they are never coming back ... frankly, I think it's good for civilization. I love meritocracy as long as there is equality of opportunity.

Plus, you must consider that 50 years ago, blacks, Jews, gays, women, and anyone over 55 weren’t viable competitors in the work force because they were either paid a fraction of their white, male protestant counterparts, fired, or not even considered for positions.  Unless you happened to fit into that one lucky genetic “lottery ticket” you were screwed.

Now, we are increasingly a meritocracy.  In today’s workforce, you are far more likely to have your ideas compete with a much wider range of people.  This is good for the civilization.

To put it bluntly: When you say things are getting worse from a standard of living perspective than they were several decades ago, the unspoken fact is that this is only true if you are a straight, white, male, protestant, high school graduate who wants to make a living without years of specialized training. (more…)

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Serenity Now!

On August 25, 2010, in My Life, by Joshua Kennon

This post deals with my side speculation fund, not my investments.  You shouldn’t have a speculation fund unless you have short-term emergency reserves, little or no debt, fully funded retirement accounts and the lifestyle you want. In fact, for a vast majority of people, I think it would be completely inappropriate unless you love the financial markets and they provide you deep satisfaction.*

Woke up this morning to find that one of my speculative accounts was down $50,000 and due to the trading strategy, it has only four months remaining before it becomes a permanent loss.  So, in sixteen weeks I’ll have either made a nice chunk of change or I’ll have lost that amount.  All of that beautiful gambling money … gone.  Let’s just say I’m not terribly optimistic it will work out in my favor but you never know.

It reminded me of when Charlie Munger, after he had become very, very rich, saw Berkshire Hathaway lose $250 million or so in no time on an airline investment Warren Buffett had made and Charlie described the feeling of watching all of that beautiful money just disappear right in front of your eyes… Even though it won’t do any damage to a healthy business in the long-run, it isn’t pleasant.

(Don’t cry for me … I’m a big boy and I can take it.  Molly informs me that anecdotes like this will make my biography believable.  Otherwise, it will have just been an obnoxious direct upward ascent that will demotivate, rather than inspire people.  I told her the rare loss is fine but I’d prefer to make the mistakes up through creative editing so I can keep the money and still inspire, LOL!)

Anyway, I was talking to my dad about it because he has his own side accounts and I joked that today, anyone who talks to me in the office is likely to hear:

Serenity Now

* Many of you know that I run a bit of my private capital like Benjamin Graham, who said you should have separate accounts for your speculations that are not part of your “investments” proper, using them solely for pure entertainment with the full knowledge they could pay off big or be wiped out entirely. Graham pointed out, as has Buffett, that this is neither illegal nor immoral as long as you accept the fact it is not investing.

For example, the extremely risky gamble I took on BP options I told you about a few weeks ago are not even remotely appropriate for anyone else and I knew they might go to zero but they are a tiny portion of our overall net worth.  Even though I occasionally dabble in this sort of thing, like Buffett with his copper futures back in the 1960’s and 1970’s, I favor sweeping any gains into the permanent investment and always playing with the same amount of gambling money so the risk doesn’t grow beyond a set amount each year.

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Mental Model: Social Loafing

On August 20, 2010, in Psychology, by Joshua Kennon

Charlie Munger Mental Models

Charlie Munger recommends that you view the world through so-called "mental models" to help improve the quality of your life and the effectiveness of your endeavors, whether you are helping a charity or managing a business. My personal definition of a mental model is, "a basic psychological, mathematical or scientific truth that if understood can be harnessed for great good or evil." Today's mental model is social loafing.

If you were starting a project or business, common sense would tell you that you could produce 5x as much output if there were five people working on your goals than if there were just one person.  If you are running a counseling program, ten counselors should be able to do 10x the work as a single counselor, right?  If you are starting a candle company, twenty employees should be able to produce 4x the work as five employees, right?  If you are a mom cleaning out a garage, you should get more done with your three kids helping you, right?

Wrong.  This is one of the rare areas where common sense miserably fails because it is coming up against a powerful psychological force that is hardwired into humans after thousands of years of biological adaptation.

It turns out, that as you add people to a group, although group effort in an absolute sense increases, individual effort falls off a cliff due to a psychological phenomenon known as social loafing.  This means that a group is almost always, by default, operating at far below its maximum capacity, whether you are baking bread, manufacturing widgets or building houses for the poor.  Much organizational behavior can be understood when viewed through the lens of this particular mental model.

The good news is that there is also a solution to social loafing but it requires you to put in very specific systems in place to combat its powerful, subtle influence.

By learning to fight social loafing, you have a chance at drastically improving productivity and results for any project you manage.  This has significant ramifications for anyone who is starting a business, running a company, helping a charity, working with a church, building homes for the poor, trading commodities, running a training program or undertaking any activity that requires the cooperation of people.

The Two Keys to Social Loafing

Psychologists have proven that humans are wired for social loafing in virtually all activities.  The first, and most famous, test involved a tug-of-war contest where they were able to isolate and measure the effort of individual “tuggers” pulling a rope by themselves and then, later, with a group.  It turns out that when people were added to help tug on a rope, individual effort fell by 18% to 66%, a massive loss of productivity.  Furthermore, all of the original “tuggers” believed they were pulling just as hard with the team as they had been on their own. (more…)

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