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Munger's Analysis to Build a Trillion Dollar Business From Scratch

Munger's Analysis to Build a Trillion Dollar Business From Scratch

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Published by John Aldridge Chew

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Published by: John Aldridge Chew on Dec 20, 2011
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Munger Worldly Wisdom: Building a Trillion Dollar Business
www.csinvesting.wordpress.comteaching/studying/investing page 1
This is an
adaptation 
 
from Munger’s July 20, 1996 informal talk,
Practical Thought about Practical Thought? 
Charlie Munger,
“The title of my talk is “Practical Thought About Practical Thought?
with aquestion mark at the end.
 
Better methods of thought 
In a long career, I have assimilated various ultra-simple general notions that I find helpful insolving problems.
Five of these helpful notions I will now describe. After that, I will presentto you a problem of extreme scale.
Indeed, the problem will involve turning start-up capital of$2 million into $2 trillion, a sum large enough to represent a practical achievement. Then I willtry to solve the problem, assisted by my helpful general notions. Following that, I will suggestthat there are important educational implications in my demonstration. I will so finish becausemy objective is educational, my game today being a search for better methods of thought.
Decide big “no
brainer” questions first.
The first helpful notion is that it is usually best to simplify problems b
y deciding big “no
-
brainer”
questions first.
Numerical fluency 
The second helpful notion mimics Galileo’s conclusion that scientific reality is often revealedonly by math as if math was the language of God. Galileo’
s attitude also works well in messy,practical life. Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.
Invert, always invert 
The third helpful notion is that it is not enough to think problems through forward. You must alsothink in reverse, much like the rustic who wanted to know where he was going to die so that
he’d never go there. Indeed, many problems can’t be solved forward.
And that is why the greatalgebraist Carl Jacobi so often said,
“Invert, always invert.”
And why the Pythagoreans
1
 thought in reverse to prove that the square root of two was an irrational number.
Think in a multidisciplinary manner 
The fourth helpful notion is that the best and most practical wisdom is elementary academicwisdom. But there is one extremely important qualification: You must think in a multidisciplinarymanner. You must routinely use all the easy-to-learn concepts from the freshman course inevery basic subject. Where elementary ideas will serve, your problem solving must not belimited, as academia and many business bureaucracies are limited, by extreme balkanization
1
 
Pythagoras (582-496 BC), an Ionian (Greek) mathematicia
n and philosopher known as “the father of numbers,” is often credited
with the discovery of irrational numbers. More likely though, the credit belongs to one or more of his followers, the Pythagoreans,who produced a proof of the irrationality of the square root of two. But Pythagoras, believing that numbers were absolute, rejectedirrational numbers and is said to have sentenced their leading proponent to death by drowning for his heresy. Generally, an irrationalnumber is any real number that cannot be wri
tten as a fraction “a/b,” with “a” and “b” integers, and “b” not zero. For a number to be
irrational, its expansion in any given base (decimal, binary, etc.) never ends and never enters a periodic pattern.
 
 
Munger Worldly Wisdom: Building a Trillion Dollar Business
www.csinvesting.wordpress.comteaching/studying/investing page 2
into disciplines and sub-disciplines, with strong taboos against any venture outside assignedterritory. Instead, you must do your multi-discipl
inary thinking in accord with Ben Franklin’sprescription in Poor Richard: “If you want it done, go. If not, send.”
 
Multi-disciplinary thinking 
If, in your thinking, you rely entirely on others, often through purchase of professional advice,whenever outside a small territory of your own, you will suffer much calamity.
2
And it is not justdifficulties in complex coordination that will do you in. You will also suffer from the reality evokedby the Savian character
who said, “In the last analysis
,
every profession is a conspiracy
against the laity.”
Indeed, a Shavian character, for once, understated the horrors of something
Shaw didn’t like. It is not usually the conscious malfeasance of your narrow professional adv
iserthat does you in. Instead, your troubles come from his
subconscious bias 
. His cognition willoften be impaired, for your purposed, by financial incentives different from yours. And he willalso suffer from the psychological defect caused by the prover
b: “To a man with a hammer 
,e
very problem looks like a nail.”
 
Lollapalooza effects 
The fifth helpful notion is that really big effects, lollapalooza effects, will often come only fromlarge combinations of factors. For instance, tuberculosis was tamed, at least for a long time,only by routine, combined use in each case of three different drugs. Another lollapaloozaeffects, like the flight of an airplane, follow a similar pattern.
My practical problem 
It is now time to present my practical problem. And here is the problem: It is 1884 in Atlanta, Ga.You are brought, along with twenty others like you, before a rich and eccentric Atlanta citizennamed Glotz. Both you and Glotz share two characteristics: First, you routinely use in problemsolving the
five helpful notions
, and, second, you know all the elementary ideas in all the basiccollege courses, as taught in 1996. However, all discoverers, and all examples demonstratingthese elementary ideas come from dates before 1884. Neither you nor GlotZ know anythingabout anything that has happened after 1884.Glotz offers to invest two million 1884 dollars, yet take only half the equity, for a Glotz CharitableFoundation, in a new corporation organized to go into the non-alcoholic beverage business andremain in that business only, forever. Glotz wants to use a name that has somehow charmedhim: Coca-Cola.
The other half of the new corporation’s equity will go to the man who most plausiblydemonstrates that his business plan will cause Glotz’s foundation to be wort
h a trillion dollars150 years later, in the money of that later time, 2034, despite paying out a large part of itsearnings each year as a dividend. This will make the whole new corporation worth $2 trillion,even after paying out many billions of dollars in dividends.
2
Danger of consultants: http://www.amazon.com/Dangerous-Company-Consulting-Powerhouses-Businesses/dp/0756756006/ref=sr_1_1?s=books&ie=UTF8&qid=1324347970&sr=1-1
 
Munger Worldly Wisdom: Building a Trillion Dollar Business
www.csinvesting.wordpress.comteaching/studying/investing page 3
You have fifteen minutes to make your pitch. What do you say to Glotz?Here is my solution, my pitch to Glotz, using only the helpful notions and what every brightcollege sophomore should know.
Focus first on big,
“ 
no-brainer 
” 
decisions first 
Well, Glotz, the big “no
-
brainer” decisions
that, to simplify our problem, should be made first areas follows: First, we are never going to create something worth $2 trillion by selling some
generic beverage. Therefore, we must make your name, “Coca
-
Cola,” into a strong, legally
protected trademark. Second, we can get to $2 trillion only by starting in Atlanta, thensucceeding in the rest of the United States, then rapidly succeeding with our new beverage allover the world. This will require developing a product having universal appeal because itharnesses powerful elemental forces. And the right place to find such powerful elemental forcesis in the subject matter of elementary academic courses.
Numerical fluency 
We will next use numerical fluency to ascertain what our target implies. We can guessreasonably that by 2034 there will be about eight billion beverage consumers in the world. Onaverage, each of these consumers will be much more prosperous in real terms than the averageconsumer of 1884. Each consumer is composed mostly of water and must ingest about sixty-four ounces of water per day. This is eight, eight-ounce servings. Thus, if our new beverage,and other imitative beverages in our market, can flavor and otherwise improve only twenty-fivepercent of ingested water worldwide, and we can occupy half of the new world market, we cansell 2.92 trillion eight ounce servings in 2034. And if we can then
net four cents per serving
,we will earn $117 billion. This will be enough, if our business is still growing at a good rate, tomake it easily worth $2 trillion.
Universal appeal 
A big question, of course, is whether four cents per serving is a reasonable profit target for2034. And the answer is yes if we can create a beverage with strong universal appeal. Onehundred and fifty years is a long time. The dollar, like the Roman drachma, will almost surelysuffer monetary depreciation. Concurrently, real purchasing power of the average beverageconsumer in the world will go way up. His proclivity to inexpensively improve his experiencewhile ingesting water will go up considerably faster. Meanwhile, as technology improves, thecost of our simple product, in units of constant purchasing power, will go down. All four factorswill work together in favor of our four-cents-per-serving profit target. Worldwide beverage-purchasing power in dollars will probably multiply by a factor of at least forty over 150 years.Thinking in reverse, this makes our profits-per-serving large, under 1884 conditions, a mere onefortieth of four cents or one tenth of a cent per serving. This is an easy-to-exceed target as westart out if our new product has universal appeal.That decided, we must next solve
the problem of invention to create universal appeal
. Thereare two intertwined challenges of large scale: First, over 150 years, we must cause a new-beverage market to assimilate about one-
fourth of the world’s water ingestion. Second, we must

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