Tag Archives: Mental Models

Thinking Mental Models; What Do Investors Want in a Gold Stock?

Check out: http://thinkmentalmodels.com/

then click on various categories to view other mental models.  You don’t necessarily need to pay $2.99 per PDF, but you can learn more about the particular lesson/mental model.  Become an expert.

How has Nike maintained a moat over the years selling fashion/sporting goods? NKE_VL and NKE_35 Year?

What Do Investors Want in a Gold Stock?

Mark Twain once wrote “A gold mine is a hole in the ground with a liar on top.”


Note that none other than Klarmen of Baupost has an interest in Allied Neveda Gold (ANV).



Worth a read if you ever want to “speculate” in gold mining shares.

What do Investors Want in a Gold Mining Stock

Gold is in a bubble:

pbergn says:

Gold is in a bubble: It is traded vastly as a commodity–subject to the supply/demand rule… At about $1,500 the World demand for gold has flattened. This was a signal that the gold price is moving into the bubble territory… The prices are also driven higher by paper gold, such as ETF’s… The true appreciation percentage can be discerned from gold mining company stock valuations, which are indicative of the actual demand increases and monetary inflation expressed in the US dollars… Those Libertarians or so-called Free-Marketeers who delude themselves with the idea that gold is money are woefully wrong– gold is not money, since one has to exchange it into one of the hard currencies to be able to exchange it for goods and services (try paying a drycleaner or your local grocer with a hunk of gold and see what happens)… The idea that gold will be the only currency left after all fiat ones finally explode in hyperinflation supernova is neither original nor true. The Say’s law on neutrality of money suggests that a currency is as good as many products and services there are in the market that it can be exchanged with. The money is neutral–that is it has no intrinsic value… However in case of gold and other precious metals, they do have intrinsic value as a commodity used in jewelry, electronics and medical industries… Of course, the lion’s share of demand for gold originates as demand for jewelry, especially from the traditional cultures valuing the noble metal as very special, such as in India… However, the demand for gold as a commodity or as a jewelry is inelastic upwards. That means that the demand curve is bell shaped and is bounded from above… At a certain price point, the demand for new gold will proportionally decrease, being compensated by recycling and dilution of content of the items made from it… IMHO, the fair price for an oz of gold today expressed in US dollars is around $1,400 – $1,500 as suggested by flattening demand for the new mined metal as a commodity at that price point.


Rethinking a Business Major

from Farnam Street

Melissa Korn reporting in the Wall Street Journal:

“The biggest complaint,” writes Korn is that “undergraduate degrees focus too much on the nuts and bolts of finance and accounting and don’t develop enough critical thinking and problem-solving skills through long essays, in-class debates and other hallmarks of liberal-arts courses. Companies say they need flexible thinkers with innovative ideas and a broad knowledge base derived from exposure to multiple disciplines.”

That gap in my own knowledge was one of the reasons I started Farnam Street.

Robert Hagstrom, author of Investing: The Last Liberal Art, adds: comments

At first, you might think the “art of achieving worldly wisdom” is an elective you can do without. After all, there is simply not enough time to read all that is required before the next day’s opening bell, and besides, what passes for reading today is more about adding information and less about gaining knowledge. But don’t despair. In the words of Charlie Munger, “we don’t have to raise everyone’s skill in celestial mechanics to that of Laplace and also ask everyone to achieve a similar level in all other knowledge.” Remember, as he explains, “it turns out that the truly big ideas in each discipline, learned only in essence, carry most of the freight.”  Furthermore, attaining broad multidisciplinary skills does not require us to lengthen the already-expensive commitment to college education. We all know individuals who achieved a massive multidisciplinary synthesis of knowledge without having to sign up for another four-year college degree.

According to Munger, the key to true learning and lasting success is learning to think based on a “latticework” of mental models. Building the latticework can be difficult, but once done, it can be applied to a wide range of problems.  “Worldly wisdom is mostly very, very simple,” Munger told the Harvard audience. “There are a relatively small number of disciplines and a relatively small number of truly big  ideas. And it’s a lot of fun to figure out. Even better, the fun never stops. Furthermore, there’s a lot of money in it, as I can testify from my own personal experience.”

Original Article: http://feedproxy.google.com/~r/68131/~3/lZyZWLHicRM/

Sign up for a Mental Models Course from Munger 🙂http://open.salon.com/blog/simoleonsense/2012/02/02/attention


Mental Models, The Franchise of Legos (plastic blocks)


But why should we learn about the world and its history, why bother trying to live in harmony with others? What is the point of all this effort? And does it have to make sense? These questions, and some others of a similar nature, bring us to the third dimension of philosophy, which touches upon the ultimate question of salvation or wisdom. If philosophy is the ‘love’ (philo) of ‘wisdom’ (sophia), it is at this point that it must make way for wisdom, which surpasses all philosophical understanding. To be a sage, by definition, is neither to aspire to wisdom or seek the condition of being a sage, but simply to live wisely, contentedly and as freely as possible, having finally overcome the fears sparked in use by our own finiteness. –Luc Ferry in A Brief History of Thought

Mental Models: http://www.farnamstreetblog.com/mental-models/

Why Legos Are So Expensive — And So Popular? Hint—it is a FRANCHISE!   (I hope readers who have children that play with Legos can add their input–Why did you shell out those big bucks for plastic blocks?)


January 16, 2013

A lot of people wonder how Lego, selling a now un-patented product, can command both massive market share and sell at twice the price of the nearest competitor: Megablocks.

pm-gr-legomega-616Mega blocks are much cheaper than Legos yet Legos dominates in sales.

Rhett Allain, in his WIRED article addressing why lego sets are so expensive, unsatisfyingly concludes “Honestly, I don’t know much about plastic manufacturing – but the LEGO blocks appear to be created from harder plastic. Maybe this would lead them to maintain their size over a long period of time.”

While lego offers a superior product, that doesn’t wholly account for why they sell so well.

Chana Joffe-Walt offers a much better explanation in her NPR Planet Money article: (click on link to hear the radio show on Legos)

Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

Lego isn’t just selling a product, they are selling a story. Still, I doubt that alone fully explains the difference.

I think Warren Buffett offers the best explanation. Talking about the brand power of See’s Candies, he comments:

What we did know was that they had share of mind in California. There was something special. Every person in Ca. has something in mind about See’s Candy and overwhelmingly it was favorable. They had taken a box on Valentine’s Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See’s Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on Dec. 26th, the day after Christmas, because we sell a lot on Christmas. In fact, we will make $60 million this year. We will make $2 per pound on 30 million pounds. Same business, same formulas, same everything–$60 million bucks and it still doesn’t take any capital.

… It is a good business. Think about it a little. Most people do not buy boxed chocolate to consume themselves, they buy them as gifts—somebody’s birthday or more likely it is a holiday. Valentine’s Day is the single biggest day of the year. Christmas is the biggest season by far. Women buy for Christmas and they plan ahead and buy over a two or three-week period. Men buy on Valentine’s Day. They are driving home; we run ads on the Radio. Guilt, guilt, guilt—guys are veering off the highway right and left. They won’t dare go home without a box of Chocolates by the time we get through with them on our radio ads. So that Valentine’s Day is the biggest day.

Can you imagine going home on Valentine’s Day—our See’s Candy is now $11 a pound thanks to my brilliance. And let’s say there is candy available at $6 a pound. Do you really want to walk in on Valentine’s Day and hand—she has all these positive images of See’s Candy over the years—and say, “Honey, this year I took the low bid.” And hand her a box of candy. It just isn’t going to work. So in a sense, there is untapped pricing power—it is not price dependent.

The reason Lego is awesome and Megablocks is not has as much to do with what’s in the consumers’ mind as the product on the shelf. It’s the experience you have with Lego that makes it so amazing.

Remember the first time you played with Lego? You want to pass that experience off to someone else. No one wants to show up to a kid’s birthday party and announce to everyone they took the ‘low bid’ on a relatively cheap children’s toy.

Lego is a safe bet and we want to reduce uncertainty.

Read more posts on Farnam Street on:
Association biasLegoWarren Buffett

I went to Toys R Us recently to buy my son a Lego set for Hanukkah. Did you know a small box of Legos costs $60? Sixty bucks for 102 plastic blocks!

In fact, I learned, Lego sets can sell for thousands of dollars. And despite these prices, Lego has about 70 percent of the construction-toy market. Why? Why doesn’t some competitor sell plastic blocks for less? Lego’s patents expired a while ago. How hard could it be to make a cheap knockoff?

Luke, a 9-year-old Lego expert, set me straight.

“They pay attention to so much detail,” he said. “I never saw a Lego piece … that couldn’t go together with another one.”

Lego goes to great lengths to make its pieces really, really well, says David Robertson, who is working on a book about Lego.

Inside every Lego brick, there are three numbers, which identify exactly which mold the brick came from and what position it was in in that mold. That way, if there’s a bad brick somewhere, the company can go back and fix the mold.

For decades this is what kept Lego ahead. It’s actually pretty hard to make millions of plastic blocks that all fit together.

But over the past several years, a competitor has emerged: Mega Bloks. Plastic blocks that look just like Legos, snap onto Legos and are often half the price.

So Lego has tried other ways to stay ahead.

The company tried to argue in court that no other company had the legal right to make stacking blocks that look like Legos.

“That didn’t fly,” Robertson says. “Every single country that Lego tried to make that argument in decided against Lego.”

But Lego did find a successful way to do something Mega Bloks could not copy: It bought the exclusive rights to Star Wars. If you want to build a Death Star out of plastic blocks, Lego is now your only option.

The Star Wars blocks were wildly successful. So Lego kept going — it licensed Indiana Jones, Winnie the Pooh, Toy Story and Harry Potter.

Sales of these products have been huge for Lego. More important, the experience has taught the company that what kids wanted to do with the blocks was tell stories. Lego makes or licenses the stories they want to tell.

And kids know the difference.

“If you were talking to a friend you wouldn’t say, ‘Oh my God, I just got a big set of Mega Bloks,’ ” Luke says. “When you say Legos they would probably be like, ‘Awesome can we go to your house and play?’ ”

Lego made almost $3.5 billion in revenue last year. Mega made a tenth of that.

But Mega Bloks may yet gain on Lego.

Mega now owns the rights to Thomas the Tank Engine, Hello Kitty, and the video game Halo. And, on shelves for the first time ever this week: Mega Bloks Barbies.

PS: I will post shortly on a Reader’s Question: What besides an Index would you recommend for a person who seeks safety and return on his/her capital?


M. Pabria Video Lecture at Ivey School Feb. 2012

Mohnish Pabria of Pabrai Funds discusses mental models and competitive analysis.  Don’t blindly follow or worship investing “gurus” but try to use what makes sense to YOU. Even investors like Pabrai have trouble understanding competitive advantage as shown by his investments in Exide (Xide), Pinnacle Airlines, Sub-prime credit during 2008, etc. We ALL make mistakes so we should learn from everyone around us.

Pabrai says, “I am a shameless cloner.” Copy good ideas.



A Course on Mental Models–Helping Us All to Decide and Think Better

Perfect solutions of our difficulties are not to be looked for in an imperfect world.–Winston Churchill

Model Thinking

If you haven’t signed up, then here is another chance. I signed up; I need all the help possible.

Hi Everyone,

Good News!!! The course ‘Model Thinking’ will go live very shortly. When it does go live, we’ll be asking you to officially register and agree to some standard terms and conditions. In the interim, you can now go to the site, at http://www.coursera.org/modelthinking/lecture/preview and watch the first two sets of lectures. The first set of lectures covers the benefits of modeling and provides a framework for the course. The second set covers Thomas Schelling’s seminar model of segregation as well as a model of standing ovations that I developed with John Miller of Carnegie Mellon University.

The full site with quizzes, discussion forums, and all the other bells and whistles will be operational very shortly. I thank you all for your patience. Enjoy the first few lectures!!

As we say in Ann Arbor… Go Blue!!!


Interesting Free Investing Newsletters and Links

Just in case you missed these:

Ask for a free quarterly newsletter by emailing: Hewitt.Heiserman@EarningsPower.com,

Ask to be on his email list: kessler@robotti.com,

and his weekly emailings:sfriedman@gmail.com  There will be overlap, but you will find interesting articles, videos and value investors. Read ruthlessly, however, I don’t bother to read about Fairholme’s investment in BAC or AIG, because those companies are out of my circle of competence. Only read what benefits YOU.

Recommended blogs:

big picture blog: http://www.ritholtz.com/blog/


Question from a Reader–The Best Way to Improve Your Skill as An Investor

Question from a reader

There seem to be two courses of action in trying to apply the lessons learned via your website to improve your skill as an investor. The first is to do an in-depth study of a single company, its industry and its competitors. The second option is to read as many 10-Ks as possible and do quick and dirty valuation similar to those found in, say, Greenblatt Class #5.

Which option do you see as more valuable? Am I missing a third way?

Great question and I will elaborate more as this blog develops.

Mario Gabelli advises students to pick one industry and study that thoroughly then after 3 to 4 months move on to another industry. Buffett started by pawing his way through Moody’s manuals and Value-Line to find cheap asset stocks like cigar butts. Munger influenced Buffett with Sees Candy to look at high quality businesses.

After you have read the obligatory required materials like Buffett’s shareholder letters, his Buffett Partnership letters, Margin of Safety, The Intelligent Investor, the Greenblatt books and lecture notes, you need to build from there. My interest and suggestion would be to find 6 to 8 compounding machines which can be bought at a discount.  If you can find a few high return on capital companies that are able to redeploy that capital for several years at high rates, you will have outstanding returns. These companies are rare that is why you must be patient to find them and to hold them.  But you must know what to look for.  You should become an expert in how companies develop and maintain competitive advantages. This will help you in searching for great investments and give you confidence to hold them for a while.

For example, if you understand regional (geographic) economies of scale you could focus on service companies like waste hauling and disposal or rock aggregates or health care providers and notice if they dominate their particular regions. Do you see high returns on capital? Study these companies and wait for them to go on sale.  Rather than wait for blow-ups and disasters to study companies, find the best emerging companies you can find, study them regardless of price then wait for your opportunity.

Take a look at the last case study on charlie479.  He epitomizes what I am talking about.  Read broadly and deeply about businesses—10-Ks but books and autobiographies too.  As you learn more about competitive advantages you will see connections in other businesses. You will see companies losing their advantages but look for companies that are successfully entering against incumbents. Look at niche companies that can dominate smaller markets.   Read, read and read.

Next week I will post the best company analysis in the world done by Charlie Munger.  If you can learn how he views business problems then you will grasp what is most important in business analysis.

You can buy cheap assets in special situations where management restructures the debt or assets and you get a nice bump up in price, then you must redeploy your capital like a merchant into another asset play.   This can be profitable and relatively low risk but the big money is made sitting on fantastic businesses that are compounding at high rates.  I would focus there. Few investors study competitive advantages–I mean become an expert at spotting and understanding great companies.

Fire away with more questions.