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RS Weekly Update - Munger Knows Lollapalooza

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September 14, 2011 – Comments (0)

Dear Fools,

Picking up where we left off last week, here is tendency #25 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack. This concludes the series. I hope you’ve gotten as much out of it as I have.

Tendency #25 – Lollapalooza Tendency

Munger’s simple description here is “The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome.” So when we have multiple factors, biases or tendencies working together toward the same end, those results tend to be huge.

The flight of the airplane is a good example of the lollapalooza effect. Many things have to come together for an airplane to take flight. It’s not just the propeller or jet engine turning. Remember Bernoulli’s principle? The design of the plane along with many other factors needs to come together for a plane to take flight. No doubt the Wright brothers witnessed the power of lollapalooza effects that fateful day at Kitty Hawk.

What’s an example of a lollapalooza effect in the investing world? The many forces that worked together to drag our financial system into the greatest crisis since the Great Depression maybe? Big banks became oblivious to the junk they held on their balance sheets and by the time they realized that what they had wasn’t worth what they thought it was it was too late. They were forced to take dramatic write-downs on their balance sheets, cut dividends and raise more capital from investors all in the hope that they could stay afloat. Consequently many banks are no longer with us. And while many actually passed the federally mandated stress tests to determine what they could withstand in the event of another economic crisis (I think they had a little help there), now banks with $50 billion in total assets or more like Bank of America, Wells Fargo and Citigroup to name a few are being required to develop “living wills” in order to show how they could be liquidated in a timely fashion so as not to present a greater risk to our country’s (and to an extent the world’s) financial system.

Google is another good example. As search began to take hold in our Internet age, it was the founders of Google who came up with a superior algorithm designed to yield large quantities of quality information and fast. But it didn’t stop there. This search technology led the company to later go public which enabled them to expand their offerings and develop new products and technologies. Today Google has a hand seemingly in almost everything we do and there’s no sign it’s slowing down either. From advertising to productivity tools and enterprise products Google continues to innovate and grow more relevant each and every day.

As investors it’s a good idea to keep an eye out for companies that have a hold on something special. Heck it’s also worth paying attention when something just doesn’t seem right either. I remember my days as a mortgage loan officer back in 2001-2002 and thinking that giving this money away was just too easy; something just didn’t add up. I guess I was on to something there.

Foolish best,

Jason (TMFJMo)


Masimo

Check out my latest addition to the portfolio; it’s sure to get the blood pumping: http://bit.ly/ra07Jh

Munger’s Tendencies

This is why Munger thinks hate creates opportunity: http://bit.ly/pUTWxZ

Portfolio Returns

Well it was another ass-kicker of a week, but the Motley portfolio is still hanging in there. As of market close 9/8/2011 the Motley portfolio's returns stood at 4.04% versus Mr. Market's 1.09% for a spread of 2.95% which is a little better than the 2.8% from a week ago.

We'll just keep on keepin' on.

Straight from the Onion

The headline just made me laugh: http://onion.com/rcZTV9

As an added bonus, this one really does seem like it would be straight out of the Onion, but it’s apparently the real deal. Guess he really was hungry: http://cbsloc.al/pPeXwl

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