Motley Fool Money - 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

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. 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. The 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. Mary Long, and that's Kevin Kelly, founding editor of Wired Magazine, an 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 won 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 in 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 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 1% 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, assure that you weren't cheating there because that seems also familiar to me. 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 1% 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 destroy, and that compounded over time gives us our society today. 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 you are, you know, when you're being nasty or mean, you can actually compound that over time and accumulate something good. 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 Motleyville 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 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 your interest. Presumably, you've been a saver through your life. I hope you own some stock or you own some shares of the things that you created? Well, absolutely. I mean, another piece of advice, I don't know if you get to, but was, you know, again, I was very practical. It was like, you know, actually, I don't even know if it was in the book, but it was something 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. You'll invest in index stocks, you know, and mutual funds. So, but yeah, it, I have been.

And I've been a buy and hold guy and through everything thick and thin. And I remember back in the 80s, I guess it was. It must have been in the 80s. There was a curmudgeony 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 I'm not sure what the event was. Maybe it was Black Monday, 1987. Who knows?

The stocks would tell a lot. Yeah, 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, if I had cash, I'd be buying right now. But I have been, and we have been very fortunate in that way to, you know, again, in index funds, it's 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. Yeah, it worked. Compounding works. And certainly, I prefer investing directly in individual stocks as I'm sure 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 at that time, anyway, there was so much marketing of managed mutual funds that indexed 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 active 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 entropy. The entropy is most things are going to fail. Most things are going to break. It's easy to imagine and 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 we're rewarded by becoming more likely that it will happen. Okay. And so more likely that the good version will happen. And 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 1% difference. That difference may only be 1%, by the way. Remember what I'm saying is that there may only be a 1% difference in our ability to solve the problem versus having the problems. But that 1% is all we need. That's my protopian vision. Yes. And I was going to 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 to... A global average because there's obviously parts of the world. Absolutely. Or going backwards. But as a global average, on average, there's an infinitional amount with local, you know, disruptions and local setbacks. That's right.

Just as you might have your own, any body would have an illness. That was one of the, one of them, there was a doctor that I worked with, an author who, who, he said, you know, if you do a really honest appraisal of your body every day, every day you're going to find some little injury, some little cut, some little boil, something. There's not a single day when your body is perfect. And that is just sort of the cost of living, so to speak. And it's the same thing with our global civilization, that there are going to be always illnesses and cuts and injuries, but that we overcome them over time. And that, by the way, is another bit of advice.

I believe that optimism can be learned. And we know from studies that this is true. And one of the differences, we're one of the main skills, if I would have to say, there'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 it says that, Stepbacks is their identity that's inevitable, that they're faded to it. We can't escape it. But an optimist view setback is 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 DeKurd. 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, 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 chat GPT 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

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 what would work and not work as a means of exploring. And that's what a lot of the people who are. hacking the chat chibouti or doing trying to you know jailbreak it 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 is that malicious where they actually are trying to you know that they were some guy who was asking chat chabit 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 to do that it was more kind of saying 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 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 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 in 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 and life. The most you can ever lose, and I've done this only once or twice, is 100% 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 accorded. 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, Samadvice, applies to other things. And so you could, again, if you are, this 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, you know, 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, is that. part of what the advice is about. 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, 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 James, but I applaud his basic thesis and ideas about making things as easy as possible as habitual as possible. And I think that has been an influence on my own habit making. And of course, there's good habits and bad habits too. But 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 trying to do something new and difficult. And that is the same thing that if you 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 hoping for the, the thing to come in all at once, kind of get 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 if you do this in a kind of compounding, then again, when you have the disaster strikes, when the lights, you know, or go out, whatever it is, when you had your near-death experience, which you will have, if you're 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 10 feet, but you've been incrementally gaining it for each day. Resilience, obviously the word grit in recent years has been used to describe this. And the reason it's popular is because it's important and it counts. Well, 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 kind of more of a theme of the book in general. There's a couple of 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 to hear and air 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 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 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 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 one fundamental thing, which is that we get options out of it, 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 grainy, 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. Love it. Each time we make a choice, we are going to close off options. So there is 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 into this way, does it increase my choices and possibilities, even though that might close off others? or is it going in the direction where I'm restricting the number of options that I have? And so I think that thinking in terms of the option scape 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. There are 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 it 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 take for granted too often, probably every day, how much has been gained, how much has been gained, 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, it's, 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 families being wiped out except for one person. I mean, it was like, 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 plunge them to the depths. And yeah, if you read anything about how slavery was endemic for most cultures around the world, it was really, really, really bad. So I always like the Obama challenge, which is you're going to be born somewhere in the world with no control. over what rank you are or 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 it really, really tough and particularly the women. It was, so if you, so you can see progress in that way more than just longevity, just control of your time, 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. 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 Bobfit 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, is 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. Remember this, Kevin? Earth's biggest bookseller. Of course you do. So companies that. I was one of the very first customers because Jeff knew the Whole Earth catalog and we were book reviewers. So he invited Stuart and me, and I actually have a history of my first purchase in 1995. And, you know, yes, it was, but I have to say I do not see the optionality that Jeff saw, because I was imagining it 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 Shiazad Shamin, the author of Positive Intelligence.

I've always loved this metaphor he uses. You'll never actually get to the lighthouse, but there's more and more light. And so I do think that Jeff Bezos did not know Amazon Web Services in 1995. No, no, he did not. But who was positioned, who was positioned culturally and 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 delighted to hang out with you. I mean, I like 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 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 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.