Message Font: Serif | Sans-Serif
 
UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev | Next
Author: TMFJMo Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1388  
Subject: RS Weekly Update - Munger, Incentives and SBUX Date: 2/18/2011 1:03 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 6
Dear Fools,

If you know Berkshire Hathaway then you probably know the name Charlie Munger, Buffett’s right-hand man and Vice Chairman of Berkshire. Mr. Munger has a book called Poor Charlie’s Almanack, a collection of speeches and musings from Charlie himself; life lessons and perspective from a man who’s done a lot of living.

Toward the end of the book Mr. Munger offers his take on the psychology of human misjudgment. He breaks this down into 25 tendencies, the errors that come from these tendencies and antidotes to remedy them. For my benefit (and hopefully yours), I am going to revisit each one on a weekly basis.

Tendency #1 – Reward and Punishment Superresponse Tendency

Incentives play a very important role in our lives. From when we are raised as children to our work lives as adults, incentives in one form or another dictate how we behave. And the power of incentives is so great that if not properly addressed, they can and will produce less-than-desirable behavior. Munger uses the example of the Xerox salesman who pushes the inferior of two products on his customers. Because of a poorly arranged incentive structure, the salesman has good (albeit selfish) reason to push the inferior product as he benefits from better compensation. Of course the customers end up losing because they buy an inferior product. Ultimately, if not corrected, Xerox loses as people flee to other suppliers with better products.

The most important takeaway from this lesson as quoted from the book is: “Never, ever, think about something else when you should be thinking about the power of incentives.” Another one I like that we probably all say at some point is, “Be careful what you ask for, you might just get it.”

We can relate this to investing in a number of ways. But the one that continues to come back to me is to keep in mind incentives when we are assessing management. When management’s compensation (read: incentive) structure is flawed, less-than-desirable behavior will more often than not be the result.

Foolishly,

Jason (TMFJMo)

Jason owns shares of Berkshire Hathaway

Starbucks

I’ve added some caffeine to the mix with the most recent recommendation. Check out the buy article for Starbucks here: http://bit.ly/hPfgTH

Sticking with the subject of coffee, Green Mountain rules the single-cup market for now, but they’d better look out. If there’s one company on the face of the earth that can take stick it to ‘em, it’s Starbucks: http://yhoo.it/gr4jDu

Watch List Ideas

Here are two dividend ideas that may warrant further research: http://bit.ly/fQFbmv

Straight from the Onion

I gotta believe he at least knows how to throw a Frisbee: http://onion.com/e0T9Ft
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (1) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Macro Economics

The Future, or What's Left of It
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement