Sunday Briefing: On anchoring, starting with ‘A’, free stuff, and the institutional imperative

Sunday Briefing: On anchoring, starting with ‘A’, free stuff, and the institutional imperative

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Welcome to the Sunday Briefing newsletter where I share some of the interesting lessons in life, business, and investing that I’ve come across during the week.

Latest on Junto

One article was published on Junto during the week.

Mental Model: Anchoring. Marketers use anchoring to trick you to spend more money, negotiators use anchoring to get in the stronger position, stock investors fall prey to anchoring to their own detriment.

What I’ve been reading

What I learnt from brief analysis of 2,800 Companies. There are tons of lessons to be learned from this intelligent exercise which everyone knows they should be doing but few do.

Customers Love Free Stuff … But That’s Not Your Problem.

The main reason that the “Hot IPO” is such an obvious marketing tool is that transferring billions and billions of wealth to a prospective customer group is really, really, really effective. If $60 million can build Paypal, imagine what you can do with $34 billion in a single year! And as noted early, what if you could get some other naive third party patsy to be the one that funded the whole thing?

Quote of the week

John Malone on large corporation inefficiency.

“My years at McKinsey gave me tremendous disrespect for large corporations. It seemed to me, almost certainly, there were enormous inefficiencies. And the guys who climbed the ladder to the top had become specialists in climbing ladders and really lost touch with the business.”

Which, I found, reflects Buffett’s thoughts on what he calls the ‘institutional imperative’.

“My most surprising discovery: the overwhelming importance in business of an unseen force that we might call ‘the institutional imperative.’ In business school, I was given no hint of the imperative’s existence and I did not intuitively understand it when I entered the business world. I thought then that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn’t so. Instead, rationality frequently wilts when the institutional imperative comes into play.

For example: (1) As if governed by Newton’s First Law of Motion, an institution will resist any change in its current direction; (2) Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.

Institutional dynamics, not venality or stupidity, set businesses on these courses, which are too often misguided. After making some expensive mistakes because I ignored the power of the imperative, I have tried to organize and manage Berkshire in ways that minimize its influence. Furthermore, Charlie and I have attempted to concentrate our investments in companies that appear alert to the problem.”

Source: 1989 letter

A thought

Anyone who went to school to specialize in wealth management or finance are humbled by this moment in time. Myself included.

Have a great coming week,
Oliver Sung

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