The Mental Model of AutoCatalysis (aka “Evergreen” or “Self-Breeding”) in Business

This article on AutoCatalysis continues my quest to list out the Top 100 Mental Models Needed to Succeed in Business.

I first heard of AutoCatalysis being used as a business tool from reading Charlie Munger.

AutoCatalysis originates in chemistry , a subject I did poorly in in high school, so I’ll give this definition from The Focus Investing Series Part 3: The Munger Network of Mental Models:

“In the autocatalysis process, properties, events or products serve as their own catalysts and are “self-breeding.” For example the self-stimulated increase in the demand for air conditioning, hence the self-stimulated increase in the demand for air conditioners.”

Munger gives one example in air-conditioning: …

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How I Created My Own Circle Of Competence

The Circle of Competence was one of the most important exercises I did before founding our current company Ongig.

I started a new business after sitting with my "circle of competence" on my wall for a few months

The Circle of Competence is simple: you write down the things that you are competent about and draw a circle around it. And then, as Buffett explains, remember that the more you go outside your circle of competence, …

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“Alienate the Non-Prospect” to Truly Dominate Your Market

In sales & marketing we take it for granted that we should always follow the A.I.D.A approach to a conversion funnel: you “Attract” and “Interest” prospects, then generate enough “Desire” (by showing benefits & pushing their emotional buttons) for them to finally take “Action” (i.e. pay you money).

But is attracting potential customers always a good idea?

Apple is ok alienating 80%+ of computer prospects (represented by PC/Windows guy on the left) in order to attract hipper prospects like the Mac Guy (on right).

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The Top 100 Mental Models Needed To Succeed In Business

I’m fascinated by these models and decided to keep a listing of ones I run across (some are related to Munger and others are ones I hear about outside of Munger but which I believe Munger might appreciate).

Warren Buffett's Right-Hand Man Charlie Munger

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Are These 7 Items Pointing To A Coming Economic Armageddon?

I’m an optimist by nature but — hopefully you see that through the rest of my articles here — but I’m also practical.

And there’s a weird amount of $hit going on in the U.S. and abroad these days that’s got me preparing for a possible economic meltdown.

And I’m not talking about the staggering U.S. federal deficit — that’s got serious longer-term consequences. I’m talking about a handful of other scary items that worry me more in the short-term. …

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The 20 Best Business Books Of All Time

My brother-in-law Rich recently asked me for my favorite business book. I had a tough time answering because a slew of book titles raced through my mind.

Well, make room on your bookshelf because I dove in and came up with 20 top business books below:

The Best Business Books Of All Time

1) Poor Charlie’s Almanack

If I had to pick just one business book for folks to read, it would be this illustrated tome by Charlie Munger — Warren Buffett’s long-time right-hand man — with its folksy and entertaining tales of business and life (see Charlie Munger Quotes for a taste).

There’s plenty of Buffett tips in here too so you get two-for-one! …

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What You Ought To Know About Buffett & Munger’s Four Filters Invention

You guys know I love Charlie Munger and Warren Buffett… I consider them American hereos.

I read an interesting book called The Four Filters Invention of Warren Buffett and Charlie Munger (by Bud Labitan) the other day — if you like business, investing or Buffett or Munger, you should buy this book.

I thought I’d briefly summarize their “Four Filters” below — I paraphrase Bud Labitan’s book at times and add in a dose of quotes I’ve collected (see my past postings on Charlie Munger Quotes or Warren Buffett Quotes) as well as some quotes and insights from other folks.

The Four Filters Invention

1) Understandable First-Class Businesses

• Use The “Scuttlebutt Approach” — Go out and talk to a company’s customers, suppliers and competitors to find out how the industry really works (Philip Fisher wrote about this in Common Stocks and Uncommon Profits (thanks for correcting me, Santosh!)
• Treat Any Investment As If You Owned Only That The Rest of Your Life
• “To understand a business, figure out what results it is achieving, why it is getting those results, and what could happen to change what is causing those results.” — Charlie Munger
• Keep it Simple — Charlie Munger is fond of saying: “We just throw some decisions into the ‘too hard’ file and go onto the others.”
• Read as much as you can about businesses — Buffett and Munger recommend reading annual reports and The New York Times Century of Business by Floyd Norris and Christine Bockelmann)
• “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” — Charlie Munger

Circle of Competence

Buffet advises investors to focus on their “circle of competence” (that which they know the most about).

“Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management and limited exposure to hard times.” — Warren Buffett

2) Enduring Competitive Advantages (Favorable long-term economics) (aka “A Protective Moat Around Their Economic Castles”)

Michael Porter suggests that there are two major types of competitive advantages:

1. A Cost Advantage

2. A Differentiation Advantage

“Something Special in People’s Minds”

Buffett and Munger have simplified this to “something special in people’s minds.”

“American Express has financial integrity; there’s worldwide acceptance of its name. It holds two-thirds of the market while charging more for its product…you have something special in people’s minds.” — Buffett at Berkshire’s 2000 Annual Meeting

“A Moat Around Their Economic Castles.”

“We look for moats around the castle. We think in terms of moats and the impossibility of crossing it — we want it widened every year. If it’s too narrow, we leave it alone.” Buffett at Berkshire’s 2000 Annual Meeting

The strong consumer brands of CocaCola and Gilette (later bought by Proctor and Gamble) were examples that Buffett gave in his 1993 Letter to Shareholders: “The might of their brand names, the attributes of their products and the strength of their distribution systems give them an enormous competitive advantage…”

Here’s another classic Buffett quote on the topic: “I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years time. Take Wrigley’s chewing gum. I don’t the think the Internet is going to change how people chew gum.”

3) First-Class Management

• Only Work With Good People — “You can’t make a good deal with a bad person” — The Tao of Warren Buffett
• They Should Be Able & Trustworthy — “Ability will get you to the top, but takes character to keep you there.” — Abraham Lincoln
• Good Question To Answer: Does Management Have “Skin in the Game — A CEO should have at least one year’s salary worth of his own money in stock in the company they are running, according to Pick Stocks Like Warren Buffett by J.K.Lasser.
• Management Should Have Their Own “Checklist” — “No wise pilot, no matter how great his talent and experience, fails to use his checklist.” — Munger

4) A Bargain Price

“We look for a horse with a one in two chance of winning and which pays you three to one. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing. Charlie Munger from Poor Charlie’s Almanack.

Margin of Safety — Benjamin Graham called this “margin of safety” — that is, the difference between the intrinsic value of a business versus what the asking price is.

How do you calculate intrinsic value?

Well, I recommend digging into Ben Graham’s Intelligent Investor book for the real details…but if you want a neat little formula than check out this Warren Buffett Intrinsic Value Calculator.

Patience For A Sensible Price Tag — Munger & Buffett refer to waiting for the “fat pitch.” Be very patient, but be very aggressive when it’s time.

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Warren Buffett Quotes

I’ve been into motivational business quotes lately and I was reading the Tao of Warren Buffett (which I highly recommend!) and it reminded of the great quotes Mr. Buffett has shared.

Here are some of my favorite Buffett quotes:

How to define friendship …

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