Motley Fool Hidden Gems Investing - The Power of Optionality

Episode Date: May 7, 2023

The pessimist believes that setbacks become one’s identity. The optimist believes something else.  Kevin Kelly is the founding executive editor of “Wired” magazine and the author of “Excellent Advice for Living: Wisdom I Wish I’d Known Earlier.” Motley Fool co-founder and Chief Rule Breaker David Gardner caught up with Kelly to discuss:  - The power of compounding in your finances and personal relationships.  - ChatGPT and the origins of hacking.  - Why investors should be unafraid of losing.  Today’s conversation comes from a recent episode of David’s weekly podcast, Rule Breaker Investing. To hear the entire show, click here: https://www.fool.com/podcasts/rule-breaker-investing/2023-05-03-excellent-advice-for-living-with  Company discussed: AMZN Host: David Gardner Guest: Kevin Kelly Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Volvo is leaving the chaos of rush hour outside. Start by settling into your saddle-stitched Nappa leather seats. Notice the open space around you. Uncluttered, elegant, intentional, warm ambient light, and natural wood details to ground you. This is Volvo's Scandinavian sanctuary for every journey. Learn more at volvocars.ca. Optional features mentioned. Imagine things getting worse is easy. It's cheap. It's very cheap to imagine how things go wrong.

Because that is the probable destination. That's entropy. Entropy is most things are going to fail. Most things are going to break. It's easy to imagine them breaking. It's much harder to imagine how things work well. And we have this problem right now with AI. It's far easier to imagine all the ways that it doesn't work

work, then harder to imagine how it works. I'm Mary Long, and that's Kevin Kelly, founding editor of Wired Magazine and author of the new book, Excellent Advice for Living. Motley Fool co-founder David Gardner caught up with Kelly to discuss a key financial concept that applies to all aspects of life, the imagination required of optimists, and how Amazon One through optionality. This is an excerpt from a full interview, which you can listen to on the Rule Breaker Investing Podcast. We'll put a link at the show notes for you. I asked you ahead of time if you would consent to me randomizing different pages of your book and then just picking my favorite quote off that page and doing the interview that way. And you

said you would allow us to go where our whims here in this case my dice take us and so that's where we're going to start kevin i've lined up about eight quotes here and this was randomly chosen in fact the order we'll be talking through these was itself randomly chosen i guess a less lazy interviewer would have actually sculpted everything but i'm this is how i roll and i think you're really good with that too so let's start with the first quote for each of these i'm just going to spot you up and there might be a story or an anecdote that you have in mind or simply additional thoughts you have for each and i kind of love that the first one i randomized was from page 85 and this is what you write on page 85 all the greatest prizes in life in wealth

relationships or knowledge come from the magic of compounding interest by amplifying small steady gains all you need for abundance is to keep adding one percent more than you subtract on a regular basis now i literally randomized that first but that couldn't be a better motley fool setup i don't think i was like i'm sure you're sure that you weren't cheating there because that seems also familiar to me um yes it's true and my point is that it's not only true for money for those little magic coins but that it's actually true for relationships it's actually true for skills it's true for civilization as a whole if we as a civilized society can create one percent more than we destroy then we can make civilization that way in fact that's all

civilization is i mean there's just plenty of destruction and problems but we create a few percent more than we um destroy and that compounded over time gives us our society today so so it is absolutely true for finance but it's also true for other things like relationships if you can be you know if you can love a few percent more than than you than you are um you know uh when you're being nasty or mean you can actually compound that over time and accumulate um something good and and so there is this magic force as einstein says this marvelous force in the universe But it does apply even beyond the little stacks of bills. And, of course, we do spend a fair amount of time at The Motley Fool thinking about the compounding effect of money and interest, as you say.

And certainly that is in some ways an easy read because it's numbers. It's numerical. You can actually play it out forward in a spreadsheet. You can quantify it, enumerate it. Whereas when you start saying, well, relationships, that takes us off into a right brain qualitative assessment. And I really appreciate that in your mind, and I think mine too, I find this persuasive, everything's compounding. Everything is compounded up to this moment for better and for ill that you and I could share in this discussion. So everything is compounding.

What we do is parents compounds. I love that you described earlier your approach to parenting where it sounds like you really didn't offer much guidance. You just tried to do it through action and that itself. Sometimes it compounds in ways we don't appreciate or know for better or for ill. I also have adult children who sometimes say, you know, Dad, you said this when I was this age. I was like, I did? I have no recollection. Again, for better or worse.

You were actually listening? so everything is compounding but certainly from a motley fool standpoint i just love that i hit this one first and this won't be the only one because kevin there are other aspects of thinking about finances and life which is not the focus of this interview but it's clearly part of your focus in life and part of your knowledge base and and your interest presumably you've been a saver through your life i hope you you own some stock or you own some shares of the things that you created well absolutely i mean another piece of advice i'm sure i don't know if you get to but was you know again it was very practical it was like um you know actually i don't even know if it was

in the book but it was something i have a i have a granddaughter now and i was saying to the granddaughter it was kind of a funny joke but i was saying forget crypto kid he'll he'll invest index stocks you know and mutual funds so um um but yeah it i have been and you know i've been a buy and hold guy and um through through everything thick and thin and i remember i remember back in the 80s i guess it was it must have been in the 80s uh there was a curmudgeon-y guy at hallworth catalog and there was like the first time in my recollection where the stocks were going down it was kind of like a i'm not sure what the event was um maybe it was black monday 1987 who knows that stock yeah maybe it was maybe it was 87 and he was saying oh you know sell sell

sell whatever it was i was saying no buy buy buy this is like this is if i had cash i'd be buying right now but um i have been and we have been very fortunate in that way um to you know again And index funds is primarily what I do. I don't have time to do the kind of research that you need to be good at this. So I'm a lazy investor, and I've been served well by hanging in. Yeah, it worked. Compounding works. And certainly, I prefer investing directly in individual stocks, as I'm sure you know.

We love here at The Fool. But right there with our first book, The Motley Fool Investment Guide, we started by saying everybody could or should just index and for most people that's what makes the most sense and and at that time anyway there was so much marketing of managed mutual funds that index funds looked even better because they were just so much cheaper and the way to really compound was to not be paying so much in fees excellent advice for living page 54 and i quote over the long term the future is decided by optimists to be an optimist you don't have to ignore the multitude of problems we create you just have to imagine how much our ability to

solve problems improves yes i have become deliberately more optimistic as i get older I think the kind of optimism I'm talking about is a choice and less of a kind of a sunny disposition. It's more of a choice where it's an act of imagination primarily to imagine things working out good and well, things improving over time. Because to imagine things getting worse is easy. It's cheap. it's very cheap to imagine how things go wrong because that is the probable destination that's the that's entropy entropy is most things are going to fail most things are going to break it's easy to imagine them breaking it's much harder to imagine how things work well and we

have this problem right now with ai it's far easier to imagine all the ways that it doesn't work and harder to imagine how it works but if we can if we can then um we're rewarded by it becoming more likely that it will happen okay and so more likely that the good version will happen and um so so overall it isn't that we are ignoring the problems it's just that we're imagining and seeing how, in fact, our ability to get better and how future generations can improve things so that we are actually more successful at solving problems. We will, no doubt, make new problems beyond what we have right now.

And the only reason why we don't despair is because we will also continue to make solutions and the ability to solve those problems even faster and that's that one percent difference that that difference may only be one percent by the way i'm remember what i'm saying is that there may only be a one percent difference in our ability to solve the problem versus having the problems but that one percent is all we need that's the that's my protopian vision that's yes and i was gonna rock that because i remember you and i talked about that and certainly you wrote about it in The Inevitable. We're not living in a utopia. I think we can all agree on that. We're pretty sure we're not living in a dystopia. I think things would be a lot, a lot worse. But

what you have said for many years now, and you just alluded to it again, is we're living in what you call a protopia, which by my layman's definition is basically things are getting infinitesimally better each day, like maybe less than 1%, but every day. And, you know, maybe some days they get a little bit worse that day but invisibly so and so we have a hard time global average because there's obviously parts of the world absolutely are going backwards but as a global average on average there's an infinitesimal amount with local you know disruptions and local setbacks that's right just as just as you might have your own any body would of an illness that was one of the one of them uh there was a doctor that i worked with an author

who who um he said you know if you do a really honest appraisal of your body every day each every day you're going to find some little injury some little cut some little boil something there's there's not there's not a single day when your body is perfect and that is just sort of the the cost of living so to speak and it's the same thing with our global uh civilization that there are going to be always illnesses and and cuts and injuries but that we overcome them over time and and that by the way is another bit of advice i believe that optimism can be learned and we we know from studies that this is true and one of the differences we're one of the main skills if i we have to say it's actually a skill. Optimism is a skill. One of the skills of optimism

is that you understand that setbacks are temporary. Setbacks are temporary. They're not your identity. The pessimist believes that setbacks is their identity, that that's inevitable, that they're fated to it. We can't escape it. But an optimist views setback as temporary, something that can be overcome. That's a great definition. And you've already said optimism is a choice. That's what you said initially. Optimism is a skill. It can be learned. It reminds me of a friend of mine who's a world-class executive coach, Heath DeKert. Heath often with his clients will say, hey, what's the best you can see for yourself? You know, this summer or coming out of your book tour or the rest of your life. And that

knee-jerk question forces people to articulate in their minds what might be the best and guess what you're much more likely to get near there if you've thought about it than just locking your way into the best so i hear a very similar thought there's one other friend of mine i want to mention madison perry who when chat gpt started to make its big pop culture splash starting late last year Madison, who tweets out sometimes on Twitter, said something to the effect of, what does it say about us? And this is my question for you. This is not merely rhetorical.

Kevin, I'll ask you directly. What does it say about us humans that so many people are just trying to break ChatGPT and mess with it and make it say stupid stuff or show its shortcomings? And I don't think he's necessarily being cynical. This is a positive inquiry. What does that say about humans? actually i'm not bothered by that because that to me is much more in tradition of what um the origins of the word hacking came from this is what the hackers were doing love it

back in the old days mit they were hacking the system they were trying to jailbreak it they were trying to see where what would work and not work as a means of exploring it was it was and that's what a lot of the people who are hacking the chat gpt are doing trying to you know jailbreak it is is is they're kind of probing the limits of it which i think is a very natural kind of fun thing to do i don't think it's that malicious where they actually are trying to you know that they were some guy who's asking chat gpt about how to eliminate humans on earth you know and i mean it was it was what it wasn't a serious intention to try and do that it was more kind of seeing what would it say. And so I think at this level that we're talking about right now,

it's a form of hacking. It's an exploration. It's testing the limits. It's like, you know, quality control in some senses that the consumers are doing the quality control of like, where does this break? Which is what, you know, software people do all the time. There are people who are hired and that's their job is to see if they can break it. And that's sort of what was happening here. Number six comes from page 132. Number six in our interview, this is the six that Kevin and I are doing of his stuff. We tend to overestimate what we can do in a day and underestimate what we can achieve in a decade. Miraculous things can be accomplished if you give it 10 years a long game will compound small gains that will be able to overcome even big mistakes

and i'll put an end quote right there but i want to add first of all this is a second one that speaks again to compounding and small things growing and you know i'm a sucker for these themes but what i like about this one is you're also pointing out one of the things i've tried to point out about stock market investing and my own experience, both acting on my own advice and what I've provided to others. And that is losers are overrated. We make fearful, too fearful losing in life. The most you can ever lose. And I've done this only once or twice is a hundred percent, unless you're doing some crazy, silly thing, but the most you can make is infinite. And if you do the math, losing is so overrated and not worthy of the fear people accord it.

So to quote you again, a long game will compound small gains that will be able to overcome even, and I would even say in quotes, big. But you mean seriously mistakes or losses. Exactly. Yeah. Again, there's a direct obvious financial vector in this. But this also, Sam's advice, applies to other things. And so you could – again, if you are – for instance, one of the values of doing art, say, on a regular basis is that you can make some bombs. You can make stuff that's no good.

You could be in a kind of a streak where you just – nothing is very good. But if you do it every day, you're compounding your skills and that will overcome even the most horrific kind of mistake that you might make or failure. And so this idea of doing things on a regular basis and small things on a regular basis is part of what the advice is about. And that could apply to exercise. That could apply to – so like if you're doing exercise every day and then you get hurt, it's much easier to overcome that because you have built in this sort of compounding ability to kind of return to the gym or whatever it is. Yeah, fit, being fit, being stronger. Yes. Yeah.

Well, really appreciate that. Have you ever read or maybe met James Clear or his book Atomic Habits? i am of course very aware of the book and a big fan of it i have not actually met um james um but i i applaud his his his basic thesis and ideas about making things as easy as possible um as habitual as possible and and i think um that has been an influence on my own habit making and and of course there's good habits and bad habits too but you know going back to the investment thing yes that's very much true and i think it's also really that advice is really good for entrepreneurs and people who are who are trying to do something new and difficult and

that is is the same thing that that if you are can construct your advanced construct your progress in a way that it's incrementally compounding where you do things and you're not kind of waiting for a big payoff you're not you're not hoping for the the the thing to come in all at once kind of like yeah rich fast but you're kind of getting rich slowly who wants to get rich slowly well everybody should be because that's really the only way you're going to get there and so and so if you do this in a kind of company then again when when you have the disaster strikes when when when the lights you know or go out whatever it is when it's when you had your near-death experience which you will have if you're an entrepreneur then you can overcome it

much easier because you have built in this compounding slow gains you've been gaining all along so you go back uh 10 feet but you've been incrementally gaining a foot each day resilience obviously the word grit in recent years has been used to describe this and uh and it the reason it's popular is because it's important and it counts yeah well uh two more two more number seven page 202 this one you won't even find fast enough because it's so short i'll be done before you get there kevin but go with the option that opens up yet more options yes so this is actually maybe a kind of a more of a theme of the book in general there's a couple themes in the book one of is about the generous nature of the universe

And the second one is this idea of opening up options, which is part of what optimism is about. But the idea is that, in my view, when I think about technology, which we're kind of taught here and there about, again, I think most of the problems that we have today in our lives and in the world have been created by technologies of the past. and most of the technologies of tomorrow will be caused by our technologies that we're making today and but but and the most critics of technology would probably agree with that but where i diverge from the critics is i believe that the solutions to those problems is not less technology but better more and better technology and those new and better technologies themselves are not immune because they will produce new and better problems and so you so you might wonder well what's gained by all this running around where problems technology

making new problems solving new problems making new problems and there's there's one fundamental thing which is that we get options out of we get choices we get possibilities that's the difference between living in a city and living in a beautiful village in the Himalayas where they eat organic food and stuff is that you take the one-way bus into the grimy, gritty city and you have choices about what you can do. You don't have to be a farmer. You don't have to be a farmer's wife.

And so that's what technology gives us and that's what civilization is giving us is increased choices. And so what we want in our individual lives and society-wise is that when we make choices, we want to favor those choices that will unleash more options. We don't want to close down options. We always want to make choices where we're increasing our options over time. Each time we make a choice, we are going to close off options. So there's inherently a closing off of options, but we want to be opening up more than we close off. And that is – so when I look at decisions that I have to make, I'm evaluating it on what does the optionscape look like?

What – does going this way, does it increase my choices and possibilities even though it might close off others? Or is it going in a direction where I'm restricting the number of options that I have? And so I think that thinking in terms of the optionscape is a skill that we're going to increasingly come to rely on as we have more and more choices and possibilities before us. You know, I think about – I love your point about the problems of today are better problems in some ways. They're also more complex problems, and therefore we need better technology to solve them. some of the undeniable human progress the yes things really were worse back then and yes things really are better today and only we can't see a day-to-day in a protopia but when we look a century backward we see that many of the top causes of death of our fellow humans a century ago

are diseases that have been eradicated it's truly remarkable we we take for granted too often probably every day how much has been gained how much safer this world is even though we're all aware of problems with guns and other threats in our society today but wow so some of the problems of day truly are better problems in the sense that they're not as sad and tragic what we're actually having to encounter as something like smallpox. Yeah, yeah. I mean, to me, there's nothing that makes me more optimistic than reading history. During COVID, we read up and watched many, many lectures on what actually happened during the Black Death, during the plague. oh my gosh it was just horrific in so many ways where i mean it was very rapid and you know the

entire family's being wiped out except for one person i mean it was like that it was really phenomenal and of course they didn't even have the highest level of living seniors to begin with but this was just really really really plunged them to the depths and um and yeah if you read anything about how slavery was endemic for most cultures around the world it was really really um really bad so so i always like the obama challenge which is um you're going to be born somewhere in the world with no control over what rank you are what gender you are it's like what year do you want to be born in you know it's like you do not want to be born in the past you do not want to be born in the past where you're randomly going to be born somewhere in

the world and you you know most people had a really really tough and particularly the women it was um so so if you so you can see progress in that way more than just longevity just control of your time um you know uh pain all kinds of things before we go to our final quote I just want to underline one quick investment point about your go with the option that opens up yet more options. One of the words that I've used regularly over the years for my own signature style of investing is optionality. I know you know what that means. And I think a lot of people do too, but I don't think enough of the world understands the power of companies and Alphabet is a great example. And Amazon is a great example. And many, ironically, perhaps

of the best stocks of our time. The stocks that you want to have had in your portfolio are companies that exhibit extreme optionality. It does seem as they go with their option, whatever their initial business model is, it opens up more options. To your point, Kevin. So I want to make sure there's a real clear parallel in my fellow fool's minds here that what Kevin is saying about go with the option that opens up yet more options is awesome advice for entrepreneurs and for investors buying into certain stocks over certain others. So I am a huge optionality buff. I haven't heard your definition.

Could you summarize that to me in just one sentence? You hinted at it, but optionality meaning that companies that are increasing the options in which they can do business? So companies whose very nature is such that they have increasing numbers of options with their widget or platform or cultural or innovative idea. And so it was once pointed out to me by Andy Cross, our chief investment officer here at The Fool. He said, you know, David, the difference between you and Buffett, well, there are actually a lot of differences between me and Buffett that don't actually make me look very good. But he said, the difference between you is that you are looking for companies with infinite possible futures, and Buffett is looking for companies with

one definite future. You think about, say, Candies or Geico Insurance. But I've always, you know, I loved AOL back in the day, my first 100-bagger stock, because I saw it could be so much more. Or Amazon started, you remember this, Kevin? Earth's biggest bookseller. Of course you do so right so companies i was one of the first i was one of the very first customers because jeff knew the whole earth catalog and we were book reviewers so he invited stewart and me and i actually have a history of my first purchase in 1995 um um and um you know yes it was but but i have to say i did not see the optionality that jeff saw because i was imagining it as as book selling and anybody who saw beyond that had a bigger vision than i had well and if i may say

if i may say i don't even think jeff saw what jeff would see because that's part of the nature of this is that you kind of as you take more steps toward the lighthouse you still don't exactly know where it is but you know that's a little brighter than where i just stepped from and as you get closer these are the words of shirzad shamin the author of positive intelligence i've always loved this metaphor he uses as you'll never actually get to the lighthouse but you'll there's more and more light and so it really i do think that jeff bezos did not know amazon web services in 1995 no and but he did not but who was positioned who was positioned culturally and yeah with the ideas to actually take us there and get us there and where will these

entrepreneurs and these visionaries take us next and you're one of them kevin so that's why i'm glad to hang out with you i mean i i like that that term and i would suggest you know i would expand it beyond even investment and even a personal optionality and say that what we want to have as a civilization is optionality love that is we we want to increase the optionality so that we as a civilization are opening up options all the time taking choices where we increase options rather than decrease them and um that may be something to keep in mind headed into the current situation with China and Russia is to try and keep our options expanding. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy stocks based solely on what you hear. I'm Mary Long, thanks for listening, and we'll see you tomorrow. you