I was speaking to my best friend recently. He is an entrepreneur who has been struggling in his business. I asked him how last week was in terms of sales? He said that last week they did good numbers. I asked him what changed? He shrugged and said "I told my staff that I may not be able to pay their salaries if the numbers don't pick up!"
I immediately opened Poor Charlie's Almanack and read him the very first psychological tendency called Reward and Punishment Superresponse to share a few real life case studies on the power of incentives. These wise words were spoken by none other than Charlie Munger.
If you would persuade, appeal to interest and not to reason.
"One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.
Layer this rule with "rewarding behavior that works" and making sure that your "reward is prompt and not delayed." If you reward bad behavior then you will get more of what you do not want so be mindful of what you are rewarding.
Even if you get the incentives right, keep in mind that "man tends to game all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Anti-gaming features, therefore, constitute a huge and necessary part of almost all system design." So antidotes like the cash register, a sound accounting system and cameras are needed to ensure that you get the behavior that you want.
When it comes to you and your kids, Granny's rule is the rule to follow. Granny’s rule states that "children eat their carrots before they get dessert. The business version requires that executives force themselves daily to first do their unpleasant and necessary tasks before rewarding themselves by proceeding to their pleasant tasks. Given reward superpower, this practice is wise and sound."
"Punishments, of course, also strongly influence behavior and cognition, although not so flexibly and wonderfully as rewards. For instance, illegal price fixing was fairly common in America when it was customarily punished by modest fines. Then, after a few prominent business executives were removed from their eminent positions and sent to federal prisons, price-fixing behavior was greatly reduced.”
Here is another example of punishment to sway the behavior you don’t want: "George Washington hanged farm-boy deserters 40 feet high as an example to others who might contemplate desertion."
*These stories and ideas are from the book Poor Charlie’s Almanack
IF YOU WANT TO MAKE A LOT OF MONEY SIGN UP FOR SIT-ON-YOUR-ASS INVESTING
Since I was reading Poor Charlie's Almanack, of course I copied some of what Charlie said because he says it so much better than I ever could. He said:
"If you want to make a lot of money, sign up for “sit-on-your-ass-investing.” Invest in such a way that you won’t have to make another decision. We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit-on-your-ass. That’s a good thing. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra 1, 2, or 3 percentage points per annum.
That is how I invest. And that is how you should invest too.
Investing is a full time job. I realized early that I am not smart enough to analyze the complexities of equity investing to win disproportionately. So I only had two options - either I buy myself an index fund or I find myself a Warren Buffett to give my savings to. I ended up finding myself a Buffett in Saurabh, and a Berkshire in Marcellus.
It took me a long time to come to this decision. Over a period of two years I read books and newsletters, listened to videos and podcasts and talked to and met Saurabh, Nitesh, Tej, Rakshit and Ashvin. I started to like and admire the Marcellus team. They are a bunch of disciplined, hard working and down to earth individuals who feel responsible for growing people's hard-earned savings. So they only invest in companies which are able to pass through their frameworks of clean accounting, free cash flow generation and monopolistic advantages.
What does this all brouhaha mean in terms of numbers? Here is how I think about it.
50,00,000 - 50 lacs is the minimum you need to invest as per regulations for their PMS. Now you can also invest as little as 2 lacs for their advisory service which I suggest you do if you haven't been able to put aside the 50 lacs.
18% - CAGR is the minimum I expect to make. It is approximately 10% over the FD rates. Given the monopolistic nature of the dominant businesses we invest in, this is being conservatively optimistic.
10 years - Over this time horizon, Mr. Market usually aligns with business fundamentals of ROCE.
5x - If you invested 50 lacs, it will become 2.5 crores. If you invested 2 lacs, it will become 10 lacs.
25x Compounding Magic - Now let's imagine you leave it in for 20 years. The numbers then look ridiculous. Your 50 lacs will become 12.5 crores. Your 2 lacs will become 50 lacs.
The question is do you have the ability to SIT-ON-YOUR-ASS while Marcellus does its job? Not everyone can run this marathon. But the ones who can, will win the race.
P.S. If you want to invest with Marcellus, I would be happy to connect you with the team. If you go through me, they pay me a percentage. If you don't go through me then you save a percent. Either way, I'd be happy to connect you.
Harsh Batra
LinkedIn & Instagram
I build businesses (EthosData, Happy Ratio), help investors 5x in 10 years with 1 strategy (Marcellus), and email what I learn every Sunday (Subscribe Here).
Good One