Rohith Potti Rohith is based out of India and began his journey into the world of investing under Prof Bakshi at MDI. He started investing full-time in 2016 and currently manages his family money.

An Introduction to the Bridgeburner Mental Model

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I am a fan of fantasy fiction. I have tried quite a few fantasy fiction series and my favorites so far are Rowling, Robert Jordan and Raymond Feist. I recently tried a new fantasy fiction series where I came across the term 'Bridgeburners', which I thought sounded quite cool. Bridgeburners are an elite force named so because circumstances had burned the bridges of their past, of who they once were.

This term began a random chain of thought that evolved into this post. Somehow - I have no idea how - in my mind, this term got linked with a quote of Charlie Munger's:

"Just as in an ecosystem, people who narrowly specialize can get terribly good at occupying some little niche. Just as animals flourish in niches, similarly, people who specialize in the business world—and get very good because they specialize—frequently find good economics that they wouldn’t get any other way."

This intuitively / instinctively made sense to me, but then I started wondering why that was so. Why did people who narrowly specialize become extremely good at one particular thing? Buffett says the same thing, albeit in a different way:

"At dinner, Bill Gates Sr. posed the question to the table: What factor did people feel was the most important in getting to where they’d gotten in life? And I said, ‘Focus.’ And Bill said the same thing.”

Then there is that story of Buffett and his pilot Mike Flint, which Ian has covered beautifully in the article The Importance of Selective Focus.

What is it about focus that makes individuals and businesses that focus on few things get terribly good at those things, just as animals in niches?

To my mind, the answer lies in the mathematical concept that we learned in high school - compound interest. Benjamin Franklin, Albert Einstein, Charlie Munger, Warren Buffett and many more are huge fans of the concept of compound interest.

Einstein calls it the eighth wonder of the world. According to Munger, "Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”

Compound interest formula, as we learnt it is, A=P*((1+r/100)^t). Basically, in the first year, the original amount generates some interest, while in the succeeding year, the original amount and the interest together higher interest and so on. Benjamin Franklin described it thus:

"Remember that Money is of a prolific generating Nature. Money can beget Money, and its Offspring can beget more, and so on. The more there is of it, the more it produces every Turning, so that the Profits rise quicker and quicker."

Our mind works in silos - we find it difficult to apply concepts learned in one field to other fields. What intrigued me is the realization that the mathematical model of compound interest has considerable qualitative applications as well. As the formula clearly implies, to maximize the end result, one has to maximize both the rate and the tenure of compounding. Let us take a couple of examples to understand this better.

Consider two people at the same job in the same company - let us say software developer. One loves his job, while the other is neutral about it. The person, who loves coding, would put in more effort at learning more, would grasp concepts quicker and would probably stick to the profession longer – all out of his natural interest. In other terms, his rate and tenure of compounding would be much more.

Now, let us take another simplistic example relevant to this post. Consider two individuals A & B. Assume that B is naturally slightly more talented than A in most things. Let us say A focuses on just 3 things in life while B focuses only on just 10 things (which include the things A focuses on). While initially B might be better than A at all things, over a long enough period, I would believe that in the three things A focuses on, she would end up better than B.

The reason is compounding again. As Ian mentioned in his post on selective focus, Time and Attention are two of the most finite resources in the world. As A has fewer things to focus on, she is able to pay more attention and time to improving herself in those things. Thus, the rate of improvement of each thing in A is much higher, as B has to divide the finite resources of time and attention to 10 things.

Now, let us expand this concept to that of a business. A business focused on one segment or industry has more time and management bandwidth focused on that segment. When that is the case, it would tend to understand its customers better, have more efficient processes, have better insights and take care of the whole value chain better.  

Now, if this is backed by a culture of learning or a constant obsession to continually improve, then the odds of success improve dramatically. The life of any business requires multiple decisions to be taken at each point of time. A focused business run by a focused management / founder who are learning machines would take higher quality decisions at each major decision points in the business or learn faster from the errors at each stage. Such businesses, at each decision fork (whether to invest or not to invest in new capacity, or whether to increase prices or not, etcetera) increase the probability of choosing the decision fork that lead to long term favorable results. And as they are constant and eager learners, the more decision forks that they take, the higher on average their probability of taking better quality decisions. And the compounding effect of good decisions and judgement over a long period of time can be quite tremendous. While I have no proof I suspect that the compounding rate probably increases non-linearly in learning (as the new concepts you learn interact with the concepts you already know to create a varied worldview).

Bringing all the above concepts together I propose what I call the Bridgeburner mental model (as if we did not have enough of mental models). Bridgeburner is that intelligent fanatic learning machine, who burns bridges to focus on a specific segment or market or a principle with the intent of harnessing the potent mathematical force of compounding.

To explain the concept better, I have written this case study for members with illustrative examples of Rajiv Bajaj of Bajaj Auto, Ajay Piramal of Piramal Enterprises and Aamir Khan, the movie star.

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