The Four Filters Invention of Buffett and Munger by Bud Labitan, MD, MBA available at amazon.com

The Four Filters Invention of Buffett and Munger Why is this a major advance in Behavioral Finance ?

The genius of Buffett and Munger's four filters process was to capture all the important stakeholders for business success. ( in a multi-variable equation or formula ) A.Products B.Enduring Customers C.Managers D.Margin-of-Safety

Understand the Business And Products

Seek Sustainable Competitive Advantages

Seek Able Trustworthy Managers

Bargain Price is a Margin of Safety

The Evidence: Warren Buffett has written about the Four Filters in several ways. This behavioral sequence is always similar: “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.” Buffett has also phrased the Four Filter process in this slightly different way: “When buying companies or common stocks, we look for understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.”

The History: Where did these checklist influences came from? Phil Carret and Philip Fisher both developed and used quality checklists. You can also find Charlie Munger’s list of human behavioral tendencies in my book.

Probability and Effectiveness: Here is Warren Buffett’s Ted Williams analogy: “I put heavy weight on certainty. Use probability in your favor and avoid risk. It’s not risky to buy securities at a fraction of what they are worth. Don’t gamble. You’re dealing with a lot of silly people in the marketplace; it’s like a great big casino, and everyone else is boozing. Watch for unusual circumstances. Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. * What defines an excellent company?

The Variations of Use: We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. Warren Buffett puts it this way: “Seek whatever information will further your understanding of a company's business.”

Framing: Framing can influence our choices. Tversky and Kahneman described "Prospect Theory" in 1979 using framed questions. They found that contrary to expected utility theory, people placed different weights on gains and losses. Tversky and Kahneman found that individuals are much more distressed by prospective losses than they are happy by equivalent gains. In 1992, Takemura showed that the effects of framing are likely to be lower when subjects are warned in advance that they will be required to justify their choices, and when more time is allowed for arriving at their choices. Luckily, Buffett and Munger seem to have arrived at the practical use of these optimal framing ideas earlier than most. Buffett and Munger make good use of “justification,” “elaboration,” “elimination,” and “time.”

The genius of Buffett and Munger's four filters process was to capture all the important stakeholders for business success. ( in a multi-variable equation or formula ) A.Products ========== Understand The Business B.Enduring Customers == Sustainable Comp. Adv. C.Managers ========== Able & Trustworthy D.Margin-of-Safety ===== Below “Intrinsic Value”

Questions ? & Thank You.

The Four Filters Invention of Buffett and Munger by Bud Labitan, MD, MBA available at amazon.com