Munger: Principles are better than knowledge, and common sense is better than theory.
The Translation Bureau is a subordinate translation team, focusing on science and technology, business, workplace, life and other fields, focusing on introducing new foreign technologies, new perspectives, and new trends.
Editor’s note: Charlie Munger is one of the smartest people in history and one of the richest people. But all this is inferior to his wisdom. Buffett once said: “If it weren’t for his help, I’m still crawling slowly in the process of evolution from ape to man.” Charlie Munger can always point to the core of the problem, in the book “Poor Charlie” Here, he talked about a case of analyzing Coca-Cola, which was amazing. Let us understand together how the big money-making guys think about problems. This article is translated from Medium, author Niklas Göke, the original title is “Charlie Munger’s “How to Start Coca Cola in 1884″ Thought Experiment”, I hope to inspire you.
Not long ago, Apple’s market value exceeded $2 trillion, making it the world’s most valuable company. Apple’s current market value is equivalent to the market value of the entire German stock market. Suppose you divide the money into the hands of individuals, you can create 2,000 billionaires, or 2 million millionaires.
Millions, billions, trillions, what’s the difference? It is difficult for humans to deal with these numbers. Let’s quantify this: if it takes 1 million seconds to complete a project, then you need to spend 12 days working around the clock, or 8 hours a day for one month; if it takes 1 billion seconds to complete a project, then you need It takes 32 years to complete without sleeping, eating, and rest; and if it takes one trillion years to complete a project, you will have to work without sleep for 32,000 years. If we go back in time to 32,000 years ago, we will find the first cave paintings known to mankind. From this perspective, Apple has surpassed human history.
However, the most fascinating part of Apple’s journey toward $2 trillion may not come from Apple at all. In 1996, long before the rapid rise of the technology giant, there was one person thinking about how to achieve this almost impossible goal, and that was Coca-Cola.
This man is Charlie Munger, he is a billionaire investor and a legendary partner of Warren Buffett. In a speech, he explained how to start Coca-Cola in 1884,And succeeded. In Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger, Janet Low provides This transcript of Munger’s speech.
With just a few ideas, Munger can turn a $2 million investment into $2 trillion in 150 years. The significance of thinking experiments is to form our own and unique understanding of the world, not to introduce ideas and opinions from others, but to guide us to the most basic thinking-a worldview built from scratch. This in turn will give us a more accurate understanding of how the world works. Following Munger’s thinking experiment, we will learn about business, growth, psychology, and life.
5 useful concepts in business and life
Charlie first introduced five viewpoints that led him to think. These five viewpoints are very useful in solving various problems in business and life.
1. Simplify the questions by answering the big, “no brainer” questions first.
2. Use mathematics to sort out the chaos of daily life. Charlie said: “If you lack the mathematical ability, then most people will feel powerless in their lives as if they are forced to participate in a kicking competition with only one leg.”
3. Think about the problem in turn. Charlie said: “Many problems cannot be solved positively.”
4. You only need basic academic wisdom to solve most problems, but you must think in an interdisciplinary way. You have to look at everything from multiple angles and have your own ideas, because even experts have a lot of bias. Charlie quoted an old proverb: “For a man with a hammer, every problem looks like a nail.”
5. The real big effect usually appears under the combined action of several factors. It is impossible to get an exponential result with only one or two multipliers, we need the superposition of several effects.
With these ideas, let’s take a look at the following question: In Atlanta in 1884, rich man George Glotz was willing to invest $2 million in a new enterprise producing non-alcoholic beverages, but he only Accounted for half of the shares, these shares will always be owned by Groz Charity Fund. If someone can makeConvincingly stated that his corporate plan will make the Groz Fund’s assets reach one trillion US dollars in 150 years. That is to say, after a large amount of profit is distributed every year as shareholder dividends, the Groz Fund will reach 2034 by 2034. Will still have a trillion dollars in assets, then this person will get the other half of the equity. So how can this brand reach a value of $2 trillion in 150 years?
The math behind a $2 trillion company
Charlie proposed the first The big idea is that we will never be able to sell “some “Ordinary drinks” to achieve 2 trillion US dollars. We need a strong brand that is protected by law. Secondly, this beverage must be sold all over the world, so it must suit everyone’s taste.
Next, Charlie decomposes mathematically: According to population data, he assumes that the world population will reach 8 billion by 2034, and everyone’s purchasing power will greatly exceed those of consumers in 1884. Everyone still needs Approximately 64 ounces of water. Assuming that the launched Coca-Cola and other similar beverages on the market together account for 25% of the world’s water intake, and Coca-Cola can account for half of the market, then we can sell nearly 3 trillion bottles of beverages in 2034. Assuming that the net profit for each bottle of beverage sold is four cents, then we can earn 29200*0.04 = 116.8 billion U.S. dollars each year, which is a huge profit of nearly 117 billion U.S. dollars, calculated at a price-earnings ratio of approximately 17 times, which is 2 Trillions of dollars in market value.
In the above hypothesis, the biggest question is whether it is reasonable to make a profit of four cents per bottle. Charlie said that as long as a popular drink can be invented, the answer is yes. Four factors are superimposed: in the long run, the dollar will definitely depreciate; the true purchasing power of beverage consumers will increase; spending less money can improve the consumption experience, and consumer beverage intake will rise rapidly; technological advances will reduce costs.
With the mathematical framework, we can now solve two other problems: how to create a lasting and competitive brand withAnd how can our drinks sell well like pancakes, but in large demand like water?
The magic formula of Coca-Cola is based on common sense
It is not easy to create and own a beverage market that can replace a quarter of the world’s water consumption. As Charlie said, this is a “lollapalooza effect” that requires a combination of multiple factors.
However, almost all of this comes from basic psychology, as Charlie said: Coca-Cola’s brand and name must inspire consumers to buy and drink its products. To achieve such results, strong conditioning is required. The business of Coca-Cola is to create and maintain conditioned reflex.
1. Operational conditioning
In psychology, operational conditioning refers to rewarding or punishing a certain behavior so that the subject can perform the behavior more or less.
For sales of beverages, what consumers drink should be the greatest return. At the same time, these rewards should not be easily replaced by other beverage suppliers. Charlie suggested that we can adjust four reward levers for Coca-Cola:
1. Nutritional value (calories)
2. Pleasant taste, taste and aroma
3. Stimulate the brain with sugar or caffeine
4. Summer makes people feel cool, or winter makes people feel warm
Charlie said that in order to get better results, we will combine all factors. First of all, we make the drink cool, because there are many ways to make a person warm up without drinking anything. Even if a person has a hot drink, they only need to drink a little to get warm. However, the supply of cold drinks in summer is endless.
Secondly, we will add sugar and caffeine at the same time, because the combination of coffee and tea has long been proven successful.
Third, we will optimize the taste through trial and error.
Finally, don’t let competitors steal our operational conditioning. The easiest way is to let Coca-Cola exist anytime, anywhere. If customers never need to try alternatives, they will always be loyal customers.
2. Pavlovian conditioning (classical conditioning)
Different from operational conditioning, classical conditioning refers to multiple connections between one stimulus and another unconditional stimulus with rewards or punishments, allowing the individual to learn that when the stimulus is presented alone, it can also trigger a similar unconditional response Conditional reaction.
The most famous example of classical conditioning is the saliva conditioning of Pavlov’s dog. In 1897, Ivan Pavlov first studied this. Every time he feeds the dog, he rings the bell. At first, dogs salivated when they saw food. However, as time went on, they began to use The ringtone is associated with the food, and I start to hear the ringtone Drooling from time to time, even when no food appears.
Since Pavlovian conditioned reflex works only through association, it is extremely powerful, especially when it is combined with the primitive impulse shared by all humans. Charlie made the following subtle associations with Coca-Cola:
1. An exotic name that sounds expensive.
2. A color that makes a drink look like wine instead of water.
3. Carbonic acid-so people can associate it with champagne and other expensive sparkling beverages.
4. A flavor that is different from all existing flavors, making it harder for competitors to imitate.
After the product is determined, the brand is established. If Pavlovian conditioning is about psychological connections, then when consumers hear or see the word “Coca-Cola”, what kind of psychological connection do we want them to make? Charlie says to connect with all the things that people like and appreciate.
For example, people like beautiful people, especially the opposite sex, so beautiful people drink Coca-Cola to make our drinks look more attractive. For Coca-Cola, an athlete standing on a pedestal is a good image; a happy family living in a big house is a good image; a wealthy businessman drives an expensive car, and a woman Relaxing on the beach and a group of children attending parties are all good images.
To connect these images with our brand in the minds of consumers forever, this requires a lot of advertising. Therefore, Cha ideal used 40% of the sales price for marketing and promotion. In turn, this will give us a huge advantage in media buying, which is an advantage our competitors do not have, especially when our target market is global.
Finally, use “The concept of “social identification” will further increase our Pavlovian effect. People want to be recognized by others, so the more consumers see others drinking Coca-Cola, the more they want to try it-when they try Feel more fulfilled.
Charlie said that by combining all these factors, we will begin “a kind of autocatalytic reaction in chemistry”, like a self-injected gasoline flame. Coca-Cola’s sales will not only grow rapidly, but will continue to accelerate.
The next question we have to solve is, how can we ensure the completion of the sales task?
Global availability of logistics
Charlie said there are only two good ways to sell Coca-Cola:
1. As a syrup placed in soda or sold in restaurants
2. Packed in a bottle as a separate retail product
We have to do both: As a syrup, Coca-Cola can be produced and transported in a few factories in one place, but the bottled one should be sold worldwide, and we should pay as little as possible to transport carbonated drinks.
In order to achieve the profit target, we will subcontract these bottling plants to contractors instead of suppliers or franchisees. This allows us to always set the initial price of the product, regardless of where we export it.
Of course, over time, food chemistry will improve, and others will be able to imitate our taste, but these advancements will also help us to minimize (or Does not contain) sugar. In addition, due to our good confidentiality work and economies of scale, we will be far ahead of our competitors.
4 traps to avoid anyway
Using the concept of reverse thinking, Charlie proposes four traps that we should avoid at all costs.
1. Consumers should not feel tired after drinking a drink. They have to drink one bottle after another on a hot day, so find a taste that will not be tired.
2. We need to protect Coca-Cola’s trademark, even half of the trademark.
3. Don’t make others jealous. Charlie said: “The best way to avoid jealousy is to make our success well-deserved.” We must continue to work hard on quality, promotion and affordability, so that people will applaud our success instead of being jealous.
4. Never change our law of victory. Even if we find a better taste, it is not worth giving up our strong position in the hearts of consumers and in daily life.
This thoughtful plan will definitely impress Gloz, but how does it work compared to the actual event that happened in the end?
Coca-Cola in the real world
The real Coca-Cola Company was founded in 1892, eight years later than our fictitious investment of $2 million. By 1896, Coca-Cola’s profits were still zero.
The 128-year-old Coca-Cola made many mistakes during its growth, including losing part of its trademark-“Cola”. Now all beverages can freely use the Coke trademark.
Nevertheless, the reality version of Coca-Cola followed Charlie’s plan and reached a high of $250 billion in market value in January 2020, even after paying millions in dividends over the years. It also needs an eight-fold increase to reach $2 trillion, but there are still 14 years to go. An annual growth of 16% is a challenge, but regardless of the final result, Charlie predicts that it will not be too far away.
You might say: “It’s easy to come up with this plan afterwards.” But it’s not easy, at least I can’t do it. Obviously, this was the same before 1996, otherwise someone would have given such a speech long ago.
No matter how you evaluate Charlie’s ideas, you can learn some lessons from this thinking exercise.
Five inspirations from Charlie Munger’s experiments
Charlie Munger is one of the smartest people in history and one of the richest people. But compared with his wisdom, all these seem pale and weak. Charlie has already experienced it. He has witnessed the rise and fall of the empire, and his genius is remarkable, but there are also times when he fails. However, he never stopped learning, he not only learned from the things around him, but also from his heart: imagination provided us with the greatest lessons. “Imagination is more important than knowledge,” Einstein said, “because knowledge is limited to what we know and understand now, and imagination allows you to embrace the whole world.”
Through Charlie’s thought experiment, I got the following inspiration:
1. Principles beat knowledge. You need to have some guidelines to guide you how to think. With some principles, you can solve all problems in your own way. Instead of gathering knowledge, you can solve challenges at any time, hope it will be useful someday. Knowledge may one day be useful, but it will never surpass your ability to think independently.
2. Common sense is better than theory. In theory, consumers are complex creatures. They will weigh their decisions carefully, and many factors will affect their decisions. In fact, Johnny wanted a Coke because the girl on the billboard was sexy and he was thirsty. After all, we all live in the real world. Even the best theories are of no benefit if they cannot be applied in real life. Don’t indulge in theory, use common sense.
3. Psychology controls everything. Our brains are full of prejudices. We are driven by our own instincts, environment and our companions. No matter what you want to do in this world, whether it’s spreading an idea, making a car, or selling a drink, if you ignore the invisible hand that controls most or all of human behavior, you will never achieve yours. aims. Never underestimate psychology.
4. Although you may encounter many failures, you can eventually reach your goals. If your idea is correct, you understand psychology, and adapt to real-world situations, you can have a lot of opportunities to make mistakes and still reach the finish line. Coca-Cola made many mistakes, some of which were almost fatal, but they always managed to save them because their overall plan was reliable. Failure will always be a large part of the road, perhaps the biggest part, but it will rarely completely prevent you from achieving your goals.
5. Please always think independently. As Charlie predicted in the case, there are now 8 billion people on the planet. These are 8 billion unique perspectives, and none is better than the other. In the words of another world-class thinker, Steve Jobs: “Everything around what you call life is made up of people who are not smarter than you.” Never let others decide your opinion. Use principles and reasons to form your own opinion and independently evaluate everything you encounter. Please always think independently, no one can do this for you.
Coca-Cola, Disney, Apple-today’s giants are built on many different factors, and each has its own unique story. What they have in common is that behind their success, there is a group of people who dare to think independently.
In Charlie’s view, what is really important is: Stay on the discipline of learning, and the courage to use what you learn to help you make decisions. As long as you have these, nothing can stop you-even after 150 years.
“I often see people who succeed in life. They are not the smartest, sometimes not even the most diligent, but they are learning machines. They are smarter when they go to bed every night than when they wake up. Very helpful, especially when you still have a long way to go.”
——Charlie Munger (Charlie Munger)
Translator: Jane
Recommended reading: TryAfter dozens of strategies, I found 7 sleep habits that can improve efficiency