Saturday Serendipity
Quote, Mental Model, Twitter Thread.
Quote
"Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future."
— Warren Buffett
Mental Model
Incentives:
“Never, ever, think about something else when you should be thinking about the power of incentives.”
— Charlie Munger
I don’t know why I have not written about incentives yet. Incentives are the most important thing to understand. As Munger says you show me the incentives and I will show you the outcome. An Incentive is basically something that motivates a person to perform a particular action. Incentives affect us in our daily lives. Every person has the incentive to perform their task for example a cab driver drives a cab to earn some money on an hourly basis. It is our job to understand whether those incentives are aligned with our best interest or it is not. Incentives are very hard to think about because sometimes even if we think the incentives are actually of help to both parties it will turn out that it is not the case. In Delhi some time ago there was a rise in the population of cobras so the state made a rule stating that every dead cobra people will get money. Now, it seems like a good idea but after this rule came out the cobra population actually increased. People had started breeding cobras to kill. This requires second-order thinking.
In Investing
Incentives are really important from an investing perspective as we get to understand what different professionals’ incentives are. Brokers have the incentive to sell more as they get a higher commission with the number of sales they make. There are some companies which don’t give their employees the right incentives. As investing professionals also there are many incentives that are not helping you make rational choices. You get a commission before you deliver the returns which make it a little unfair on the person putting the money in. Although Buffett and Munger have solved this problem of incentives for portfolio managers. It is important to understand when analyzing companies the CEO with shareholding (skin in the game) will do better than the person who only gets a salary regardless of how the company works.
Incentives are a huge topic if you want to find out about it more read here
Twitter Thread
That’s it for this week!