Hello investors , my name is Sagar and in this video , we will talk about my favourite book , Poor Charlie´s Almanack , which is based on Charlie Munger
he is the vice Chairman of Berkshire Hathaway and the right hand of Warren Buffett
in this book  , you find out about his investing methods and he also talks about his past . So I will keep mixing both of them in this video
Munger was born in 1924 . He actually met Buffett when they were young as he worked in his grandfathers shop , grocery store
They used to get 2 $ for 12 hour shifts and they didn´t even have lunch breaks
at that time , the economy was doing ok and he had a comfortable childhhood
Unfortunately , in 1930´s , Omaha witnessed the Great depression
and this is when Charlie Munger noticed the importance of having cash aside
at that time , one of his uncles has a bank with more than 35 000 $ of bad loans given to farmers
as farmers weren´t earning well , they didn´t have the ability to repay back the money
as he didn´t have any money , he wasn´t able to open the bank and continue lending
and this is when Charlie´s grandfather came to the rescue and gave him 35 000 $ so he could continue his business
even though the Judge had to give up nearly 50 % of his assets to save his business
as Charlie loved studying , he chose mathematics in his University
but he soon realised that he like physics even more because he liked to approach problems from different angles
and he still uses his knowledge from physics in daily life and also applies this to stock market
Unfortunately , he had to leave his studies to serve for the nation as the war was going on
he never had to fight and he was actually studying weather forecasting
during this time , Charlie developed an important skill , card playing .
He learned when the odds are in your favour , you should back it heavily and fold early , if not .
and he uses the same principle for investing
as the war ended , Charlie realised that he still didn´t have a degree and that´s when he decided to follow his father´s footsteps and joined Harvard Law
He had zero problems and graduated magna cum laude . Instead of joining his father , he though it would be better to try in a larger city he moved to California.
his initial salary was 250 $ and he wasn´t happy with it
because he was facing some serious issues like his divorce , where he lost his belongings
and his son had cancer , which didn´t have any treatment at that moment , plus he had to pay all the expenses from his pocket
but he always kept smiling . He actually used to have an awful yellow car and his daughter asked him about it
and he answered that it was to set the level of expectations low when he met any girl
as he kept earning more , he started investing that money
Initially , he used to invest in real estate
One of clients , Otis asked him for some advice as he didn´t know what to do with his properties
Charlie Munger was confident that if he tore them down and re-zoned it , it would do very well
Otis suggested Charlie Munger to join him and they became partners
so they invested 100 000 $ and they ended up making 500 000 $
In their initial project , they had several floors but they realised that the first floor would always sell out first
this is when they decided to focus on one flow houses
plus Charlie noticed that if you add one or two trees in these houses , you can actually charge double
after a couple of years , his real estate investments were worth over 1.4 million $
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Unfortunately , his father passed away after some time and this is when Charlie returned to Omaha and this is when he met Warren Buffett
Warren had already heard about  Charlie from one his clients
that same client gave him 100 000 $ without even listening his proposition
when asked , the client simply said that he reminded him of Charlie Munger
when Charlie met Warren for the first time , he had an instant connection with him
interestingly , when they were talking for the first time , Charlei was using one hand to drink and the other hand to stop anyone from talking
as he just wanted to talk with Warren the whole day
and Warren suggested Charlie to run his own fund as he knew a lot about businesses
at that time , Charlie had his second marriage and the family was getting bigger
and he wanted to make more money . His goal was to stay just below the wealth-level required to be names to the Forbes list
because he didn´t want his wealth to be public and you might have seen that even in Berkshire meetings , he´s not so public
but his investments did so well that he ended up in Forbes cover
as he wanted to make more money , he decided to start his own fund
In the first 11 years , the index returned 6 % annualy and is fund gave 20 % returns after expenses
So what did he do differently ? It´s important to note that after 11 years , the market crashed for 2 years
so his fund went down 30 % for two consecutive years but he recovered it eventually and this is when he realised that he doesn´t want to manage funds
but for the time he managed , the returns even with the crash included were amazing
At that time , he was always taking with Warren and they always had some investments that were common between them
One such example is Blue Chip stamps
Many times , when you spend a big amount  , the shopkeeper always gives you some points or stickers
and you can exchange these stockers for a reward like toaster
and this is exactly what Blue Chip Stamps did . So if you had a shop , you can buy the stamps from Blue Chip
and in return , you would pay Blue Chip Stamps
so if someone , actually came with their points to buy a toaster
Blue Chip stamps would give them the product because the shop owner already pays in advance when he gets the stamps
so basically the shop owner would pay for stamps and the products in advance
but as you may know , many people don´t care about these stamps and they either throw it or keep and forget it
and even if the customer comes back , it takes him some time  to collect all the stamps
so all the money the shop owner paid to Blue Chip is considered as float as they always have this money for some time
I´m sure you heard about float when you listen Warren Buffett
In 1970 , Blue Chip stamps had sales of 120 million $ and float of 100 million $
so Blue Chip used to invest all the float money and make good returns on it
but after some time , the business just kept deteriorating because people didn´t want stamps anymore
Sales went from 120 million $ to 200 000 $
but this float money was very important for Blue Chip because after some time , Charlie , Warren and one partner controlled 75 % of this company
and they used this money to acquire other businesses like See´s candies
so the famous See´s candies investment actually came from Blue Chip stamps float
This is only one example but let´s understand how Charlie Munger was able to achieve those returns
Charlie divides his stock analysis into two parts : Internal and external .
Let´s start with the internal process. In this part , you are basically analysing the fundamentals of the business .
You start by looking at the numbers but this is only the starting point for Charlie
Numbers also have their own limitations and many times you can´t trust them
You start by looking at the financial statements like balance sheet and income statement
So what more than numbers ? Let me give some examples .
Charlie likes to see the main customers of a business and who are they dealing with and he likes to read about customer relations
how does the company actually make the product and they do they depend on another company for this because that is an extra risk
because if the other company decides to stop business with the company , they won´t have any end product to sell
then he looks at the scalability and this is one major issue with smallcaps as they only have one product but they can´t scale the business
and if they do manage to scale , do they have some pricing power
if you look at FMCG companies in India , they have huge pricing power as they are abel to increase their prices every year
then he looks the liabilities like debt and trade payables , which is money you owe to the suppliers
but Charlie thinks that the balance sheet doesn´t show you the exact liabilities and a nice example is stock options and their real effect
so now let´s understand the external process because it´s not related to the stock market
in the external process , he has developed various models from different subjects
subjects like mathematics , physics , biology and psychology
he then applies these models on the stock market and also in his daily life
so let´s understand this with some examples
The first one is mathematics and we use the calculations daily
the second one is physics and I mentioned that when he was in University , he liked physics because of the approach to different problems
In physics , when you don´t know the answer of a problem , it´s always better to invert
Let me explain how I used this idea of invert in my youtube channel
If you look at other stock market youtube channels , you will see that they post 3 - 4 times a week
in my case , I only post once a week but the views are pretty decent and consistent
so what am I doing different ? I simply invert everything .
Many times , when people are thinking of a new video , they think of a topic like Dmart and then make a video on it
I never do it this way . I don´t do this randomly.
I start by checking viewers interest . If you are interested in Dmart and then I make a video on it , I will get the views
So I don´t think from my perspective . I just think what viewers would like to see and this is how I get the views
so you can see we used physics principles to get more views
Let´s take another example . We studied about Darwin and evolution theory in school .
Basically , the species that keep evolving and adapting will survive and thrive
and you can apply this on the stock market and let´s take Bajaj Finance as example
in 2008  - 2009 , this was a very small company and they were barely profitable
the consumer we know today was not even there that time
but they kept improving their technology but they had competition from several banks and also Capital First
but Bajaj Finance kept adapting to their situation and this helped them grow and you can see how Darwin´s theory is seen in the stock market
and of course it was a great investment for shareholders
and this is what Charlie does . He takes ideas from other subjects and applies it to the stock market
If this wasn´t complicated enough , he has a final third filter
This is when he thinks about patience because of some important disclosures
he will look at the outstanding shares and the volumes traded
and when a company passes these three filters , then he decides to go big because he doens´t believe in diversification
Now let´s try to apply everything I mentioned in this video in a real example
The goal is to create the biggest company and we start in 1880 with Coca Cola as our name . This example is mentioned in the book .
in 150 years , we want the value of the company to be 1 trillion $ and we will use several mental models to do this .
We need to protect the name Coca Cola because if not , there will be many fakes so we will need a trademark
if we want the company to be worth 1 trillion $ , it will have to be international because we need to be big
so now we have a trademark and we need to go international
this company will make drinks. Why drinks ? Everyone in this world , drinks at least 3 - 4 glasses of water daily
but if instead of 4 glasses , they can substitute one glass with Coca Cola , then the business will be huge
as the zie will be so big , we only need to charge 3 - 4 cent per drink and we will still make a lot of money . We will keep the price low and bet on volumes
So why would someone leave water and drink Coca Cola ? They will only drink it if we offer something special
Now we will use some concepts from psychology and that´s why Charlie Mungers likes to study other subjects
usually , wine has red colour and it looks good so we will add red colour to Coca cola because if it´s like water , it will be boring
plus we will add bubbles like Champagne because champagne is a luxury item . You can see we are taking tricks from other items
We didn´t talk about the taste of the product . If we make it for India , then the product won´t be international so we have to have different taste
we will add sugar and caffeine to the drink . Why ? When you drink water , you are just drinking it because you are thirsty .
but you feel really good after drinking Coke because it has a lot of sugar
plus it has caffeine so it increases alertness . If we don´t add these things , people won´t switch from water to Coke
as I mentioned before , everyone drinks 3 - 4 glasses of water and we need to switch one glass with Coke
So how do we sell our product ? There are only two options : syrup or bottle .
We will use both so when you go McDonald´s , you see the syrup and in shops , you see bottle
So we know what the product is , how to make it and how to sell it but we are still missing advertising
as the company will get bigger ,we will face tough competition so we need to adapt according to Darwin´s theory
and that´s why we will always advertise a lot so even if someone copies us , we will still be miles ahead
and we will use psychology in advertising . We will only advertise in happy places like theatres and parks
we won´t advertise in places like hospitals because you don´t get any joy there
we will only stick to happy moments so when someone drinks Coke , they feel good as well
so you can see we created a possible  1 trillion $ company in 150 years using various mental models from many subjects
we used biology to adapt , we used physics to invert and start from what people like and then develop the product
we also used psychology and that´s why I like this book so much because it talks about mental models
so if you would like to see how I apply these mental models to pick stocks for my portfolio
and which stocks I own , you can join my portfolio service , where I share everything
plus I prepare many special reports on several companies
so if you would like to know more , I will leave the link in the description
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