2. Elementary worldly wisdom, with the windows open

Part 6 of 19 in The Patient Owner: Charlie Munger’s Ideas, as Rakesh Jhunjhunwala Might Have Taught Them to an Indian Investor← Part 5Part 7 →

This chapter discusses the importance of using multiple mental models in investing, drawing from Charlie Munger's ideas. It highlights the risks of relying on single perspectives and the value of understanding diverse factors in decision-making.

Aniruddha. Munger’s famous talk said that eighty or ninety models from the big disciplines carry most of the freight, and a handful carry the heaviest freight. A doctor hears that and nods. We are not allowed to practise from one textbook either. Why did the market version of this idea take so long to reach Dalal Street?

Rakesh. Because Dalal Street pays for a view, and a view is cheaper if it comes from one model. Earnings will grow. The multiple will expand. GDP will rise. The government is friendly. Any one of those sentences can be true and still be a stupid reason to buy a share. Charlie’s point was that reality does not respect your department. A jewellery retailer is a psychology problem, a working-capital problem, a trust problem, a gold-price problem and a distribution problem at the same time. If you analyse it only as a P/E, you are a man with a hammer.

Aniruddha. In medicine the hammer is the scan. The patient has a story. The scan has a picture. The picture is not the patient. I have watched intelligent people buy a stock the way a frightened family buys a scan: to end the discomfort of not knowing.

Rakesh. Doubt-avoidance. He had a name for it. Under stress, the mind wants a decision more than it wants a correct decision. A falling screen is stress. A friend’s wedding where everyone owns the same new listing is stress. A founder who is charming is a different stress. The cure is not more courage. The cure is more models, so that the decision has somewhere to sit besides your mood.

The handful that carry the freight in India

He was not interested in a catalogue of one hundred models. He was interested in the ones that had actually saved him money.

Compounding. A business that can reinvest its own cash at a high rate for a long time is a different animal from a business that must hand the cash back because it has nowhere honest to put it. India has both. The first looks boring in year three and absurd in year fifteen. The second looks generous in year three and hollow in year fifteen.

Critical mass, borrowed from physics and visible in retail. A store network, a paints dealer, a diagnostic lab, a jewellery brand — below a certain density they are a cost. Above it they are a habit. Most pitch decks draw the curve and forget to ask whether the city in front of them is above the line or below it.

Feedback loops. A trusted brand gets better locations, which makes it more trusted. A distrusted lender must pay more for deposits, which makes the book worse, which makes the deposits leave. Same structure, opposite sign. If you cannot say which loop you own, you do not own a thesis.

Base rates. Before you fall in love with a company’s story, ask how often that kind of story has ended in a durable profit in India. New airlines. New banks. New ‘super-apps’. Retail chains that need a new city every quarter to keep the same-store number from telling the truth. The base rate is a wet blanket. Wear it.

Second-order effects. The first order of a rural road is a road. The second order is a paint company, a two-wheeler, a clinic, and a girl who stays in school. The first order of easy money is a rising price. The second order is a promoter who pledges the shares to buy a cricket team. Always price the second order.

Aniruddha. You are describing a ward round. History, examination, base rate, what else this could be, what we do if we are wrong. The Indian education system trains the opposite muscle. It trains recall. Munger hated recall without a lattice. So do I, which is why I have spent years arguing that a student with a good tutor and a bad textbook will beat a student with a famous coaching class and no questions.

Rakesh. Then you already know the investor’s version. A man who has memorised ratios and cannot tell you how the cash is collected is a coaching-class investor. He will score well in the interview and die in the market. Worldly wisdom is not a bigger syllabus. It is the habit of hanging one fact on another until the picture either holds or falls over.

What is too popular may not be profitable. — Rakesh Jhunjhunwala, public interviews

Aniruddha. Popularity is a model too. Social proof. In a coaching class it produces the same answer from four hundred students. In a market it produces the same stock in four hundred portfolios, bought for the reason that it is in four hundred portfolios.

Rakesh. And the exit is a single door. Charlie would have called the combination a lollapalooza: several biases pulling the same way, each one respectable alone, disastrous together. India specialises in this. A nationalist story, a television story, a WhatsApp story and a liquidity story can all be pointing at the same share. None of them is a cash flow.

Evening question. Take a business you like. Name four models that have to be true at once — one from psychology, one from cash, one from competition, one from regulation. If you only have one, you have a tip.