1. Michael Corleone:  “I have always believed helping your fellow man is profitable in every sense, personally and bottom-line.” Michael seems to be claiming that he agrees with Charlie Munger who once said: “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.”   You may, of course question, whether Michael was being sincere in making this statement to some assembled reporters. But perhaps he agrees with the sentiment of Munger here:

“Ben Franklin said: ‘I’m not moral because it’s the right thing to do – but because it’s the best policy.’ We  knew early how advantageous it would be to get a reputation for doing the right thing and it’s worked out well for us. My friend Peter Kaufman, said ‘if the rascals really knew how well honor worked they would come to it.’ People make contracts with Berkshire all the time because they trust us to behave well where we have the power and they don’t. There is an old expression on this subject, which is really an expression on moral theory: ‘How nice it is to have a tyrant’s strength and how wrong it is to use it like a tyrant.’ It’s such a simple idea, but it’s a correct idea.”

2. Michael Corleone:  “One thing I learned from my father is to try to think as the people around you think. On that basis, anything is possible.” Michael appears to  be advocating speculation in the manner of a Keynesian beauty contest which may explain his poor performance investing in public markets. Keynes explains the problem this way:

“Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole, not those faces which he himself finds prettiest, but those which he thinks likeliest to match the fancy of the other competitors, all of whom are looking at the problem from the same point of view. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

By guessing what others are guessing what others are guessing [repeat] you will not beat the market. This is speculation rather than investing.

3. Don Vito Corleone:  “Someday, and that day may never come, I’ll call upon you to do a service for me.” Reciprocity is a powerful human emotion. Professor Cialdini has made this point in his ground breaking book Influence. Compliance professionals know how to exploit this tendency. For example, when the stock broker gives away the “free” salmon dinner he or she is expecting you to reciprocate by allowing them to manage your wealth. The salesman who wants you to buy his goods in return for the football tickets is no different in his or her motivation. One weird thing about the reciprocity tendency is that you are so influenced by it that what is asked for by the compliance professional can be of far greater value that what is given to you. For example, the Hare Krishna member in the airport who gives away the flower can ask for something much more valuable and yet the people being solicited will still tend to feel the compulsion created by reciprocity. The key defensive move against reciprocity is to not accept the gift in the first place. I would rather stab myself in the thigh with a sharp fork than accept a free weekend condominium stay offered by a time share salesperson. One technique that is useful when engaging in a negotiation is to politely refuse to accept or at least immediately reciprocate when hospitality is offered. Lavish hospitality given to the employees of a business is often intended to create obligation at a personal level, which they hope will cause the employee to offer reciprocal benefits to the generous compliance professional. One problem, however, is that some studies have shown that there is also a bias toward receiving a gift: “Although the obligation to repay constitutes the essence of the reciprocity rule, it is the obligation to receive that makes the rule so easy to exploit.”

4. Clemenza:  “Leave the gun. Take the cannolis.” Professor Michael Porter believes that “The essence of strategy is choosing what not to do.” One of the hardest things for many people in business is to not do something. One common example is the restaurant with a nearly endless menu. They often serve everything poorly and unprofitably.   Allocating resources  to a sub-optimal use is a misallocation of capital. As an example, if you are a startup founder and you are buying expensive chairs for your conference room the same process should apply. Is that your best opportunity to deploy capital? Those chairs can potentially be some of the most expensive chairs ever purchased on an opportunity cost basis. If you drive an expensive sports car Buffett can calculated in his head what your opportunity cost is in buying that car versus investing.

5. Michael Corleone: “Never hate your enemies. It affects your judgment.” It is hard to overemphasize the importance of temperament to success. Most mistakes are psychological or emotional. Munger believes that he and Buffett have an advantage that is based more on temperament than IQ. If you can’t handle mistakes, Munger suggests that you buy a diversified portfolio of low cost index funds. Unfortunately, even if you do select an index-based approach you still must make some investing decisions such as asset allocation, fund selection and asset re-balancing periods. Humans tend to make so many psychological and emotional mistakes and that “compliance professionals” are able to milk that tendency to manipulate your actions. Be careful.

6. Sonny Corleone: “Whatcha go to college? To get stupid? You’re really stupid!” Charlie Munger makes the point that high IQ does not mean you have high rationality quotient (RQ).  Temperament is far more important than IQ. Warren Buffett has said about Charlie Munger: “He lives a very rational life. I’ve never heard him say a word that expressed envy of anyone. He doesn’t waste time on senseless emotions.”  Warren Buffett suggests that some of this aspect of human nature may be innate: “A lot of people don’t have that. I don’t know why it is. I’ve been asked a lot of times whether that was something that you’re born with or something you learn. I’m not sure I know the answer. Temperament’s important.” High IQ can be problematic. What you want is to have a high IQ but think it is less than it actually is. That gap between actual and perceived IQ creates valuable humility and protects against mistakes caused by hubris. It is the person who thinks their IQ is something like 40 points higher than it actually is who creates the most havoc in life.

7. Michael Corleone: “Well, when Johnny was first starting out, he was signed to a personal services contract with this big-band leader. And as his career got better and better, he wanted to get out of it. But the band leader wouldn’t let him.” Johnny Fontaine was locked up in this services contract to lower his transfer pricing power. Wholesale transfer pricing =  the bargaining power of A that supplies a unique product or service XYZ to which may enable A to take the profits of company B by increasing the wholesale price of that product or service. The term “wholesale transfer pricing power” is similar to, but not the same as, a “hold up problem.” The best lens to look at the wholesale transfer pricing power/supplier hold up set of issues is Michael Porter’s “Five Forces” analysis, specifically “bargaining power of suppliers.”  To solve this problem Don Vito Corleone famously said: “I’m going to make him an offer he can’t refuse.”

8. Hyman Roth:  “The best deal you’re ever going to make is the one you can walk away from.” This is a statement about the importance of having what Roger Fisher Calls a BATNA (best alternative to a negotiated agreement) in his book Getting to Yes. Negotiating leverage is determined by what is essentially an opportunity cost process. If you have only one supplier of an essential component at any point in your value chain (like the music streaming business does), then may God have mercy on your business. Hopefully God will have mercy because suppliers (for example, music owners) will not.  At one in the Godfather the bodyguard Mosca made another point related to BATNA when he said: “Tell me what to do. Then I will tell you my price.” Never agree to buy and then negotiate price. Do the reverse.
   

9. Michael Corleone: “All my people are businessmen; their loyalty is based on that.” The best CEOs are “master delegators, running highly decentralized organizations and pushing operating decisions down to the lowest most local levels in their organizations.” They push down decision-making on everything but capital allocation and choosing and compensating senior executives. They “delegate to the point of anarchy” using incentive to get the behavior they desire. There are many examples of this in the Godfather. Tessio at one point said to Tom: “Tell Mike it was only business. I always liked him.” Michael Corleone famously said: “It’s not personal, Sonny. It’s strictly business.” Sonny forgot the lesson and was ambushed as a result. This is the famous exchange the preceded the ambush:
   

Tom Hagen: “Your father would want to hear this. This is business, not personal.”

Sonny: “They shot my father? It’s business, your ass.”

Tom Hagen: “Even the shooting of your father was business, not personal, Sonny!”

Sonny: “Well then, business will have to suffer, all right?”

10. Sollozzo: “I don’t like violence, Tom. I’m a businessman. Blood is a big expense.” Keeping costs low is a fundamentally important business skill and is consistent with lean startup principles.  As Chamath Palihapitiya has said:

“It’s fine to fail. But if you fail because you didn’t have the courage to move to Oakland and instead you burned 30 percent of your cash on Kind bars and exposed brick walls in the office, you’re a fucking moron….The company builders are just cheap, they’re just grimy, and just, shitty office space, and they’ve got to keep it under 8 or 9% of their total burn, and they find people who really really believe in the thing they’re making, and they decide to just live in Oakland and pay for Lyft, and it’s still cheaper. They do all kinds of creative things that deserve capital so they can build. So it forces us to ask those questions, ‘How are you really company building?’ And that’s how we get the truth on who’s going to stand the test of time.” “We’re trying to coach our C.E.O.s that the window dressing is both expensive from a cash perspective and tremendously expensive from a culture perspective. It distracts the team from building what they need to build. Don’t waste money on things that get away from your mission, which confuse employees about why they’re actually there. Meaning, the quality of the office and the quality of the food are all part and parcel of a lack of discipline, which speaks to the fact that the mission isn’t compelling enough.”

Every penny not spent on achieving the objectives of the business goal is not only wasted but a potentially a contributor to a cash gap that can kill the business. The only unforgivable sin in business is to run out of cash. People who are driven to build a business (missionaries) won’t trade off things like free Kind bars if it increases the risk that they will not achieve their goals. Of course, wasting money is still stupid if a founder is more of a mercenary. As noted above, if a business spends $2,000 on an expensive office chair at seed stage, that chair becomes very expensive indeed if the business eventually has a financial exit at 100X that seed stage valuation.

11. Frankie Pentangeli: “Your father did business with Hyman Roth, he respected Hyman Roth. But he never trusted Hyman Roth!” Charlie Munger has said:

“The highest form a civilization can reach is a seamless web of deserved trust.” “The right culture, the highest and best culture, is a seamless web of deserved trust.” “Not much procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic.” “One solution fits all is not the way to go. All these cultures are different. The right culture for the Mayo Clinic is different from the right culture at a Hollywood movie studio. You can’t run all these places with a cookie-cutter solution.”

The culture of a business is more than the sum of its parts. The totality of the vision, values, norms, systems, symbols, language, assumptions, beliefs, and habits of a business is what creates the culture of a business. Munger and Buffett are huge proponents of creating a strong organizational culture: “Our final advantage is the hard-to-duplicate culture that permeates Berkshire. And in businesses, culture counts. Cultures self-propagate.” Winston Churchill once said, “You shape your houses and then they shape you.” That wisdom applies to businesses as well. Bureaucratic procedures beget more bureaucracy, and imperial corporate palaces induce imperious behavior.”

12. Hyman Roth: “Good health is the most important thing. More than success, more than money, more than power.” “I’d give four million just to be able to take a piss without it hurting.” Buffett has talked about the challenges of growing older by using this joke as a set up at annual meetings: “I’m Warren, he’s Charlie. He can hear and I can see. We work well together.” Buffett also tells this story:

“I get a little worried about Charlie. I probably shouldn’t say this, but I’m worried about Charlie’s hearing. Buffett then tells about talking to a doctor about his concern. To test the extent of any potential hearing loss Buffett yells from across the room, “Charlie, what do you think about buying General Motors at $35?” Nothing. Mr. Buffett moved closer. “Charlie, what do you think about buying General Motors at $35?” Nothing. Buffett stood right next to Munger and said directly into his ear, “Charlie, what do you think about buying General Motors at $35?” Munger turned to him and said, “For the third time, I said yes.”

Extras:

Don Vito Corleone: “Never get angry. Never make a threat. Reason with people.”

Don Vito Corleone: “Friendship is everything. Friendship is more than talent. It is more than the government. It is almost the equal of family.”

Don Altobello: “The richest man is the one with the most powerful friends.”

Licio Lucchesi: “Our ships must all sail in the same direction. Otherwise, who can say how long your stay with us will last. It’s not personal, it’s only business. You should know, Godfather”

Hyman Roth: Michael: “We’re bigger than U.S. Steel.”

Hyman Roth: “The $2 million you have in a bag in your room. I’m going in to take a nap. When I wake, if the money’s on the table, I’ll know I have a partner. If it isn’t, I’ll know I don’t”.

Don Vito Corleone: “Whatsa matter with you? I think your brain’s goin’ soft. Never tell anybody outside the family what you’re thinking again.”

Hyman Roth: “This is the business we’ve chosen; I didn’t ask who gave the order, because it had nothing to do with business!”

Archbishop Gilday:  “It seems in today’s world, the power to absolve debt is greater than the power of forgiveness.”

Michael Corleone: “I knew it was you, Fredo. You broke my heart.”

Michael Corleone: “Keep your friends close, but your enemies closer.”

Hyman Roth: “I loved baseball ever since Arnold Rothstien fixed the World Series in 1919.”

Michael Corleone : “Politics and crime – they’re the same thing.”

Hyman Roth: “This is the business we’ve chosen!”

Michael Corleone: “Friendship and money. Oil and water.”

Michael Corleone “I hoped we could come here and reason together. And, as a reasonable man, I’m willing to do whatever’s necessary to find a peaceful solution to these problems.”

• We Have Not “Reached an Innovation Plateau”
• A Half-Dozen Ways to Look at the Unit Economics of a Business

Categories: Uncategorized