Charlie Munger is dead; Long live his ideas!
Loving family man, legendary investor, genius thinker and learning machine
When I heard about Charlies death I felt mostly empty and a little bit of sad. Empty because Charlies spirt crossed the line between the living and the dead. Charlies thought school lost its teacher. I lost my teacher among the living. Now I have to consult him amoung the dead.
I have a large portrait of Charlie on my wall. It was taken by Michael O’Brien in Charlies house in California. It is an original (number 7 or 8). Above the picture is a note “What would Charlie do?”. This is the most important concept you should remind yourself of when tackling tough nuts. [1]
How to apply “What would Charlie do?”
When Charlie gets challenged with a tough problem, he would first dissassemble the problem into ideas, find relationships between ideas and look for self-reinforcing loops within the network of ideas. Usually very few ideas along the loop carry most weight in explaining the problem.
Lets say you want to explain why Coca Cola is a multi-billion dollar business [2]. I could easily argue, that putting sugar in water and selling it can be easily done by anyone. So why do we observe Coca Cola as by far largest cola vendor in USA with increasing market share? [3]
Disassemble into ideas
Coca Colas production & distribution. Everywhere, globally. Super markets, restaurants, fast food, kiosk, vending machines (airport, train station, sport areanas …)
Produce concentrate and ship it to outsourced local bottlers for more efficient distribution → Economies of Scale
Have great relationship to super markets, fast food & restaurants, so that the product is everywhere available → Availibility Bias
Coca Cola branding everywhere globally: Sport events & olympics, Santa Clause & Chrismas, Chrismas truck, merchandise for restaurant owners & consumers
Sponsoring of sport event and fitness; Associate Coca Cola brand with health and fitness → Product is associated with good looking sport stars & models
Early: Advertise as premium product and medicine → Luxury product
Later: Advertise on large sport events & media networks → Economies of scale
Provide merchandise for restaurants → Subsidise restaurants owners forcing them to offer Coca Cola
Coca Cola product properties: sweet, sour, salty, sparkling, cold; cocaine in the early days
Humans love sweet. But too much sweet make us feel sick. Thus add sour, to balance the taste thus eliminate the sick feeling. Add some salt to drink more. Add sparking to create a novel sensation in your mouth. Serve cold to stimulate another feeling. Coca Cola triggers 3 of our 5 taste sensors and stimulates touch (sparkling) and temperature sensors. This creates a massive sensory sensation in our brain. (Do NOT add bitter as its associate with toxicity)
This sensory sensation is remembered by the brain, causing sensory imprinting like “nobody cooks better than my mother“ (same imprinting mechanism).
Coca Cola contains sugar and salt. Sugar creates an insulin spike and rapid fall off which causes cravings for sugar in a few hours. The salt creates thirst earlier. Both properties enhance repeated consumption.
Coca Cola product appearance:
Early: Small, heavy glass bottle, promoted as headache and performance-enhancement medicine. Heavy bottle makes it feel more premium. Sensational taste, black-colored, sparking, cold drink was novel at the time. → Luxury product
Later: light alumnium cans & plastic bottles with/without design features (chrismas edition, your name on the bottle) → Efficient Logistics, Economies of Scale
Find relationships between ideas
Coca Colas business model is seperated into early game and late game. A tactic to solve this puzzle is to think backwards (invert). If you want to be a big company, which steps should I take to get there?
Late game depends heavily on economics of scale. It is mentioned in production, distribution, branding & product appearance. Thus Coca Colas should be a large company, but has to avoid burocratic overhead caused by size! Economics of scale come in different facets, reinforcing each other.
Scale of production by producing sirup in few locations
Scale of distribution by shipping sirup to local bottlers, which add water and CO2 to create the finish product and ship it to local stores & restaurants.
Using local bottlers reducing burocracy inside Coca Cola & imporve adaption to local markets
Use light bottles to save transport costs
Scale of distribution reinforces product availibility → repeated consumption → strengthening taste imprint
Scale of advertisement by having a large revenue base to support large advertisement budget. This allows to advertise on large events like olympics and frequent ads on the national TV
If I have to become a big company, I need to get there somehow. Lets run a thought experiment. I go to Softbank, raising a couple of billions, could I recreate Coca Cola? I buy a couple of factories start producing my sirup. I then go to local bottlers to distribute my sirup. The bottler will say “I have never seen your product. Will supermarkets and restaurants buy? Will the consumer buy? They do not know your taste. I am not conviced they like your sugary sparkling stuff. Also I have an ok-ish relationship with your competitors and they will switch to another bottler if I take your sirup. You will have to buy my bottler business if you want to use us for distribution else we have no interest bottling your sirup”.
So either I have to buy the bottler (not cheap) or I have to start my own. I will have to engage with local supermarkets and restaurants to get my product onto shelves. Which will take a lot of persuation. Getting this thing with scale off the ground from 0 will be painful, blood, tears and - worst of all - burn a lot of cash.
Early game, without scale. We will treat our product like a medicine for headaches and for performance improvement. People will pay high bc all medicine is expensive but still they expect a small product because its so potent! This will give us revenues to grow early on.
Luxury product: Coca Cola mimics medicine by using a heavy glass bottle (late 1800). Use small bottle because its so potent. Unique sensory sensation in the mouth, that feels potent. Availible only in corner stores with fridge. (How did Red Bull came into stores first? Exactly, in small cans!)
Availibility and repeated consumption: Coca Cola contains salt (→ thirst) and sugar (insulin spike → sugar cravings) which causes repeated consumption pattern. This repeated consumption means good sales numbers in corner stores, super market and restaurats. The owners love it. Customers coming back repeatedly.
Sponsoring local sport events: Associate Coca Colas performance enhancement with successful sport stars. This creates market demand because others want to be successful too. And the best part, this performance enhancer tastes great! At first sponsor local events, sponsor larger events with growing revenue. Sponsoring sport events & sport stars → Associate Coca Cola with health and success → Consumer wants health and success → Coca Cola consumption causes thirst and sugar craving → More consumption
Production and distribution is local and small at first. Each bottle is small and does not require large production capacity. As transport is costly, only stores and restaurants close by will be delivered. During growth Coca Cola has to build its own bottling network at first, as distribution is very local and not developed at the time. When the possibility arises try to use 3rd party bottlers as it simplifies Coca Colas organizational structure & increases economics of scale.
When economics of scale kick in Coca Cola switches to late game model. Drop small and heavy premium packaging as economics of scale in the distribition work in Coca Colas favor. Coca Cola sponsors large events with the most successful sports stars to promote its superior properties. All this is done to preventing smaller competitors to reach economies of scale phase.
Self-reinforcing loops (Charlies Lalapalooza)
Coca Colas success is driven by 2 self-reinforcing loops: (1) economies of scale in distribution and advertisement and (2) Coca Colas taste imprint reinforced by repeated consumption. Especially the outsourcing to local bottlers keeps Coca Colas organization lean while it serves its products globally. Vice versa local bottlers carry the costs of distributing Coca Cola within their region. For Coca Cola its easy to switch bottlers, but bottlers cannot switch easily, as Coca Colas advertisement advantage creates higher margins.
The Coca Cola product created a platform that allows Coca Cola company to distribute other products (Fanta, Monster, Water brands) efficiently. Coca Cola will prosper as long as beverage brands can charge a premium and sirup is most efficient form of distribution.
Competing against Coca Colas is very difficult, as they can lower their price so low that for consumers its a bargain and still making money but the competitor burns money going out of business soon.
Charlies Legacy: Network of Mental Models
Charlie Munger was one of our greatest thinker and ledgendary investors of the past century. He gave us a framework for breaking down complex problems found in business analysis and decision making. His framework synthesizes all great ideas of all disciplines (physics, chemistry, biology, math, micro economics, computer science, …) into a process to improve our problem analysis: disassemblation of a problem into a set of relevant ideas, modeling of relations between these ideas and discovery of self-reinforcing circles which drive most of the observed (emergent) behavior.
PS: His spicy commentary will be dearly missed!
[1] Charlies portrait is in the following book https://www.pentagram.com/work/the-great-minds-of-investing
[2] Fanam Street: https://fs.blog/turning-2-million-into-2-trillion/
[3] Coca Cola market share