Bud Labitan

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

I think these academic papers help to explain why Buffett and Munger's Four Filters Process outperform the conventional "framing effects" on decision making.

Takemura,K. 1992 Effect of decision time on framing of decision: A case of risky choice behavior. Psychologia, 35,180-185. (In English)

Takemura,K. 1993 The effect of decision frame and decision justification on risky choice. Japanese Psychological Research, 35, 36-40.(In English)

Takemura,K. 1994 Influence of elaboration on the framing of decision. Journal of Psychology, 128, 33-39. (In English)

Takemura,K. 1994 An theoretical explanation of the framing effect: Contingent focus model of decision making under risk. Japanese Psychological Review, 37, 270-291.(In Japanese with English abstract)

Book Review: The Four Filters Invention of Warren Buffett and Charlie Munger (Two Friends Transformed Behavioral Finance)

The Four Filters: U + SCA + ATM + MOS

Jake,

Thanks for a balanced and critical review. The Buffett and Munger innovation was in how they "framed" their investing decision before making it. The liberal use of quotes (which Mr. Buffett approved) was intentional... so that the reader would feel that he was listening to Buffett and not the author Labitan.

I tried to hide my own biases; but a little leaked out in the SOAP process described in chapter 3. The intent there was to show the reader that we can form a general impression of managers using both feelings and facts... using both subjective and objective data.

Here is an old audio clip of Mr. Buffett mentioning the 4 decision filters: [frips.com]

I think the key to appreciating the filters as I do, is to imagine what each of the 4 clusters really represent. 1. Develop an understanding of the economics of the business and its products. 2. SCA is really about Customers. 3. ATM, Able and Trustworthy Managers and 4. Ben Graham's Margin of Safety by buying below Intrinsic Value.

If we give credit to Ben Graham for filter four; then the real advance of the Buffett+Munger collaboration is in "U+SCA+ATM."

Here is an audio that hints at their "growth" in learning towards finding the "wonderful business." [frips.com]

Before we find the "wonderful business," look at the wonderful runner. Imagine a marathon runner and additive factors this way... endurance + strength + determination + experience will probably beat the runner with only endurance + determination.

I hope this explanation helps your readers appreciate the Buffett and Munger innovation of combining 3 qualitative steps with 1 quantitative step... in order to have a higher probability of a better outcome.

Bud

Book Recommendations by Gates, Buffett and Munger

These men are not going to recommend books about themselves. However, I wish to point out that my book attempts to carefully explain the genius of Buffett and Munger's contribution to Behavioral Finance.

In my view, Buffett and Munger advanced the area of "decision framing" and outlined a sensible approach to valuation by including all the important stakeholders in a four "decision cluster" process.

"The Four Filters Invention of Warren Buffett and Charlie Munger" paperback is available from Amazon.com and the audio cd version is available from Lulu.com here: www.lulu.com/content/5...

Here is a short audio clip for your readers to review. And, pay special attention to the last minute of the audio. It is a bit scratchy, but careful listeners will appreciate its historical significance.
frips.com/4m.mp3

Bud Labitan
frips.com

The "Four Filters" of Warren Buffett and Charlie Munger

"The Four Filters of Warren Buffett and Charlie Munger" is now available on the Amazon Kindle Reader here: www.amazon.com/dp/B001...

The Paperback is available here: www.amazon.com/dp/0615...

And, the 70 minute abridged audiobook cd is available here: www.lulu.com/content/5...


Enjoy !

The "Four Filters" of Warren Buffett and Charlie Munger

Friends,

My book is now on audio cd here: www.lulu.com/content/5...
Runtime=70 minutes. Read by the author.

This is the abridged version of the book: "The Four Filters Invention of Warren Buffett and Charlie Munger".
This book examines each of the basic steps Buffett and Munger use in "framing and making" an investment decision. It is a focused look into an amazing invention within "Behavioral Finance."

I hope you like it!

Bud Labitan
frips.com
www.lulu.com/content/5...

Barron's: Financials Weigh on Berkshire Hathaway

Intrinsic Value is more important than Market Value. And, in time, this high-quality portfolio will blossom again. Notice that Burlington Northern shows a
5-year average return on equity = 14.4 , If the growth assumptions used in
estimating the Intrinsic Value are accurate and sustainable, this may or may
not indicate a price-to-value ratio of 0.53 percent. The margin of safety may be around 55 dollars or 47 percent.... Just my opinion.

Value Investors: Stay Strong, and Follow Warren Buffett

Ever wonder about the investing and probability sensibilities of Buffett and Munger? My new book is really about “decision framing.” “The Four Filters Invention of Warren Buffett and Charlie Munger” ( www.amazon.com/dp/0615... ) examines each of the basic steps they perform in “framing and making” an investment decision. This book is a focused look into this amazing invention within “Behavioral Finance” that has been underappreciated by both the business and academic communities. The genius of Buffett and Munger’s four filters process was to “capture all the important stakeholders” in a “multi-variable” equation or formula. Imagine…Products, Enduring Customers, Managers, and Margin-of-Safety… all in one mixed “qual + quant” formula. In rolling two die for double-sixes, the gambler's odds are 1/36 and the house odds are 35/36 or 97%. When Buffett and Munger make a bet, they do so with house odds.
www.youtube.com/v/isB6...

Hiring a New Money Manager (in Omaha)

I would want a young manager who studied the best ideas of Buffett and Munger. You might enjoy "The Four Filters Invention of Warren Buffett and Charlie Munger." amazon.com/dp/06152412... It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process.

Buffett and Cramer Agree: It's Time to Buy Stocks

Buffett has said: "We like to price, rather than time our investments." And yes, I agree with you on BRK. You may also enjoy reading "The Four Filters Invention of Warren Buffett and Charlie Munger." It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process.
www.amazon.com/dp/0615...
I am not familiar with the other two companies. How is their record on free cash flow growth? What is the competitive situation there?
From the book I mentioned above, folks can get a better idea of how Buffett and Munger "frame" their investing decisions.

Buffett Buys GE, Goldman: Should You Follow?

Some folks wonder if these new investments are out of character. I say no. They both fit into the Buffett and Munger philosophical framework and sense of probabilities. Here is a new example of the "four filter clusters" I found in Warren Buffett's latest talk with Charlie Rose on 10/01/08. Think of the "Four Filter" clusters when you read the excerpt further below, and I will show you how they line up with slightly different words.

1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"

Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.

Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --

Charlie Rose: Prices make sense.

Warren Buffett: Prices make a lot more sense now, yeah.

Voices Of Calm In the Maelstrom

Your mention of "voices of calm and hope" grabbed my attention. Someone said that the mark of leadership is to define reality and provide hope. And, you are correct to point out that the market prices of potential investments are approaching or going below "intrinsic value." Readers here may also enjoy "The Four Filters Invention of Warren Buffett and Charlie Munger" book. It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process. www.amazon.com/dp/0615...

It would be interesting to hear what Charlie Munger thinks of this tumultuous period in the markets. Here is a new example of the "four filter clusters" I found in Warren Buffett's latest talk with Charlie Rose on 10/01/08.

Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.

Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --

Charlie Rose: Prices make sense.

Warren Buffett: Prices make a lot more sense now, yeah.

How do the concepts line up? With slightly different words, like this:
1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"

So, you and Buffett are in agreement: You want to be greedy when others are fearful. You want to be fearful when others are greedy.
Where are the other voices of calm, hope, and sensible valuation?
Hopefully, one of the candidates will step up to the plate tonight in the second Presidential debate.

The "Four Filters" of Warren Buffett and Charlie Munger

Link to amazon site for the book:
"The Four Filters Invention of Warren Buffett and Charlie Munger"

www.amazon.com/gp/prod...

.

The "Four Filters" of Warren Buffett and Charlie Munger

Paperback Book Announcement: "The Four Filters Invention of Warren Buffett and Charlie Munger. Two Friends Transformed Behavioral Finance."

www.lulu.com/content/3...

ISBN 978-0-6152-4129-6

Paperback book $32.95 Printed: 148 pages, 6" x 9", perfect binding,
cream interior paper (60# weight), black and white interior ink,
white exterior paper (100# weight), full-color exterior ink.

Description:
"The Four Filters Invention of Warren Buffett and Charlie Munger"
examines each of the basic steps they perform in "framing and making" an investment decision. This book is a focused look into this amazing invention within "Behavioral Finance." The genius of Buffett and Munger's parsimonious four filters process was to "capture all the important stakeholders" in a "multi-variable" equation or formula.
Imagine...Products, Enduring Customers, Managers, and Margin-of-
Safety... all in one mixed "qual + quant" formula. Other important
ideas are embedded in each chapter. The book can be used as a
supplemental textbook in a Valuation or Decision Sciences course.

Building Your Own Berkshire Hathaway

What we view as tough times may soon be viewed as "buying opportunities" for Warren Buffett and other value investors. After all, some of their best purchases were made during the stagflationary period of the 1970's.
I wrote a new book that you can review at frips.com
I think Buffett and Munger invented an amazing Behavioral Finance Formula or Process that is underappreciated by the business and academic communities. On paper as early as the 1977 BRK annual letter, their work in designing a mixed qualitative + quantitative formula may be worthy of a Nobel Prize in Economics and Behavioral Finance. So, in my new self-published book "The Four Filters Invention of Warren Buffett and Charlie Munger" ( frips.com ) I examine each of the basic steps they perform in "framing and making" an investment decision. I made this book a small and focused look into this amazing invention within "Behavioral Finance."
Buffett mentions the Four Filters this way: "Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag."

In my view, the genius of Buffett and Munger's four filters process was to "capture all the important stakeholders" in one "multi-variable" equation. Imagine...Products, Enduring Customers, Managers, and Margin-of-Safety... all the important stakeholders for business success in one mixed "qual + quant" formula. Quality bargains at 50 cents on the dollar may soon appear; Use the Four Filters!

The "Four Filters" of Warren Buffett and Charlie Munger

Secrets in the Four Filters Invention Book.

I have had some interesting comments from a few bloggers who have not read my book. So, a brief response is posted here about what makes this book unique. On the surface, “The Four Filters Invention of Warren Buffett and Charlie Munger” at [frips.com] appears to be just a reiteration of Buffett and Munger ideas. But, a keen and perceptive reader will notice that it goes deeper than that. My book strives to prove that Buffett and Munger invented a unique Behavioral Finance Formula/Process composed of three qualitative steps and one quantitative step, that is underappreciated by the business and academic communities.

Read the summary a few times, and you will be motivated and hypnotized into thinking about ways we can “frame” our important decisions. How and Why? The book was designed to motivate ( like Jim Collins' book "Good to Great" ) as well as educate us into better framing of our other life decisions. This book is a subtle peek into their sensible and optimal thinking within Behavioral Finance. Also, my book includes my own valuation of Kraft, KFT; and a discussion of how the "Four Filters" are a unique invention in terms of Behavioral Finance.

And, there is a little morality tale embedded in the examination of "Able and Trustworthy" managers. In the chapter on "Able and Trustworthy Managers," I even included a small hypothetical section about how BRK could come under attack by Fund Managers backed by sovereign funds, after Warren and Charlie are with St. Peter. So, there are some hidden gems in the new text, but it requires some keen reading. The new book, "The Four Filters Invention of Warren Buffett and Charlie Munger" is a short story about how their process works in terms of framing and Behavioral Finance. The book does not need to be a best seller. I just want it to be judged as a work describing "great decision framing" and a historical step forward, underappreciated and underrecognized in the field of Behavioral Finance.

As far as Behavioral Finance, don't expect anything fancy. The book simply explains how each of the four filter steps acts like a method of "framing" a decision from different angles. Think U for Understanding Company and Products, SCA for Sustainable Competitive Advantage, ATM for Able & Trustworthy Managers, and MOS for Margin of Safety obtained from buying below Intrinsic Value.

The "Wow" moment comes when you realize that they (Buffett and Munger) designed a multi-variable BF formula that inclueds all the main characters necessary to have a successful and enduring business; (Products, Enduring Customers, Managers, and MOS).

audio summary: www.frips.com/4fsummar...

The readers gift is in reviewing this material and finding those little "hidden gems" embedded in the text; little "Easter Eggs" to reward the keen reader.