We Study Billionaires - The Investor’s Podcast Network - RWH020: The Disciplined Growth Investor w/ Fred Martin

Episode Date: January 8, 2023

IN THIS EPISODE, YOU’LL LEARN: 00:00 - Intro 10:14 - What Fred Martin discovered about mitigating risk as a Navy officer in the Vietnam War. 14:22 - How he handles the pain & discomfort of difficult periods in the stock market. 31:52 - Why he thinks Tesla’s stock is overvalued & what he thinks it’s really worth. 35:20 - Why it’s critical for investors to be skeptics who never let down their guard. 43:56 - What insights he drew from studying Benjamin Graham & writing a book about him. 51:44 - How Fred applies a consistent three-step process to every business he analyzes. 54:34 - How to win as an investor by waiting for intrinsic value & the stock price to “true up.” 01:02:25 - Why he regards a legendary free soloist climber as the world’s greatest risk manager. 01:11:43 - How flying planes has helped Fred to refine his understanding of the margin of safety. 01:16:02 - Why he’s given three younger colleagues the authority to veto his stock picks. 01:24:26 - Why he “seals the exits” before buying a stock, assuming that he’ll own it forever. 01:34:29 - Why fund managers should sacrifice their own interests for the sake of their clients.  01:37:56 - What advice he’d give to people who are looking to hire an investment adviser. 01:42:09 - Why he believes that relationships & purpose are the two most important things in life. 01:45:48 - What he’s done to build good health, so that he’s still going strong at age 76. 01:47:24 - How his religious faith has made him a better investor & a better steward of assets. 01:50:10 - What he’s learned about how to endure sorrow & tragedy. Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES Join the exclusive TIP Mastermind Community to engage in meaningful stock investing discussions with Stig, Clay, and the other community members. Fred Martin’s investment firm, Disciplined Growth Investors. Fred Martin’s mutual fund, the Disciplined Growth Investors Fund.  Benjamin Graham and the Power of Growth Stocks, co-authored by Fred Martin The Psychology of Money: An Investment Manager’s Guide to Beating the Market by Jim Ware Free Solo, an Oscar-winning documentary about legendary climber Alex Honnold. William Green’s book, “Richer, Wiser, Happier” – read the reviews of this book. William Green’s Twitter. NEW TO THE SHOW? Check out our We Study Billionaires Starter Packs. Browse through all our episodes (complete with transcripts) here. Try our tool for picking stock winners and managing our portfolios: TIP Finance Tool. Enjoy exclusive perks from our favorite Apps and Services. Stay up-to-date on financial markets and investing strategies through our daily newsletter, We Study Markets. Learn how to better start, manage, and grow your business with the best business podcasts.  SPONSORS Support our free podcast by supporting our sponsors: Bluehost Fintool PrizePicks Vanta Onramp SimpleMining Fundrise TurboTax Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm Learn more about your ad choices. Visit megaphone.fm/adchoices Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

You're listening to TIP. Hi there. In my book, Richer Wiser Happier, I wrote a chapter titled Don't Be a Fool, which is all about Charlie Munger's strategy of consciously and systematically reducing what he calls standard stupidities and foolish thinking and idiotic behavior. Charlie, who recently celebrated his 99th birthday, once said that all you have to do to get ahead in life is to be non-idiotic and live a long time. I don't know if that's entirely true, but I think there's great wisdom in this idea

that one of the keys to long-term success is simply the ability to avoid making too many dumb mistakes, especially mistakes that have the potential for catastrophic consequences. This subject of avoiding costly or calamitous mistakes is a central theme in today's episode of the podcast. My guest is Fred Martin, a great investor whom I also wrote about in that same chapter of my book. Fred is the lead portfolio manager at an investment firm called Disciplined Growth Investors. Since he founded the company in 1997, he's beaten the market by a mile while focusing on two

relatively racy sectors, small and mid-sized growth stocks. For me, what's striking about Fred is not just his long history of superiors, investment returns, it's that he also has a remarkable gift for managing risk. He's 76 years old and has now been investing successfully for half a century. During that time, he's encountered countless minefields, including financial crises, periods of soaring inflation, recessions, wars, stock market bubbles and some pretty brutal bare markets. Yet he's survived and prospered through it all. How come? Well, I think the main reason is that he's an extremely disciplined investor with a fierce focus on simply mitigating risk.

For example, he has a strict rule that he'll never invest more than 3% of his portfolio in a stock at the time of purchase because he doesn't want to expose himself to the risk of being overly concentrated. He also refuses to overpay for any stock, regardless of how enticing its growth prospects, look. He invests in rapidly growing companies, but he approaches them with the skeptical, cautious mindset of a hardened value investor. He makes sure that the stock is cheap enough to give him a big margin of safety. It's not a coincidence that Fred co-authored a book about Ben Graham, the father of value investing, who wrote that the secret of sound investing could be distilled in just three

words, margin of safety. What fascinates me is that Fred applies this fundamental concept of the margin of safety in every area of life, not only when he's buying stocks, but when he's skiing or driving or flying his Gulfstream jet. As you'll hear, his relentless focus on managing risk and avoiding disaster dates back to his early experiences as a young Navy officer on a destroyer during the Vietnam War. Another reason why I'm particularly excited to have Fred on the podcast is that he rarely gives interviews because he tends to keep a very low profile. Most of the time, he just quietly goes about his business of managing separate accounts for institutions and wealthy families. To set up a separate account with him, his clients have to entrust him with a minimum of $15 million.

So this is a guy who operates in a pretty exclusive. and rarefied realm. In any case, I'm just delighted that we have this opportunity to learn from Fred, and I hope you enjoy our conversation. Thanks a lot for joining us. You're listening to The Richer, Wiser, Happier Podcast, where your host, William Green, interviews the world's greatest investors and explores how to win in markets and life. Hi, folks, I'm really thrilled to be joined today by Fred Martin, a superb investor who's built a fabulous record over half a century, and Fred is joining us from his office in downtown Minneapolis. It's great to see you, Fred. Thank you so much for joining us. Thank you, William. Good to be here.

When I interviewed you for my book back in 2017, we talked at some length about your father, who was a stockbroker for about 60 years, but you also mentioned that your mother was an incredible human being and was really the brains of the family. And then last night, I was looking at my notes from our interviews back then. And I realized I totally and utterly failed to ask you about her. And she sounds extraordinary. And I know she had a big impact on who you would become. So I wanted to remedy that failure of mine and ask you, what made her so extraordinary? And how did she influence who you are today? Well, I have five brothers. And they're all wonderful people, which is rare. It's all good husbands, good fathers, good people. And it was our mother. And so let me just

give you the dichotomy that was a part of her life. So she grew up effectively as an only child, a pampered daughter of a rich banker in Northern Michigan. And she graduated in college, I think, in 1939. You can imagine how many women graduate from college in 1939. She then had three years of postgraduate music education University of Chicago. So she was a concert level pianist, concert level soprano, a sculptress, a painter. She painted oil portrait of every one of her sons. I still have my painting of me. And not a very large woman. When she got married to my dad, she was going to have a child for the experience. And she had one and something clicked. And so she had a boy. And then she started to have more kids. And then she had up to three.

I'm the third oldest. Then she wanted a daughter. So then she went to number four was a boy. She was going to name her daughter Joy because her mother was named Joy. The fifth was named Jay, another boy. The sixth was named John, another boy. On the seventh try, she had a little girl. Unbeknownst to her at the time, she had a, I think it was ovarian cancer. And her little girl was born prematurely and died 36 hours after she was born. And six months after that, received a death sentence from three doctors that said,

get your affairs in order because that was pre-chemo was radiation therapy only. And her response, which was absolutely true, she looked at the freedom. She says, I can't go now because I have three little boys at home. So she lived 25 more years before she got cancer the second time and died at age 67. So with that kind of history, you can imagine she's an idol to all of us in the family. The other amazing part to her was that if you had met her after cancer, she's one of these people that never said a negative word about somebody. She was either effusive in their praise or didn't say anything. But this amazing force, you would have, you would never know when she had cancer, you would never know about her background. You never know about her accomplishments.

She was one of these people that just, you know, walked softly and carried a giant stick in all of my brothers and I idolize her to this day. And my dad did too. And how do you think growing up with such an extraordinary woman behind you, supporting you, shaped who you are and made possible the extraordinary success that you've had in your career? Well, there's a yin and yangton. There's a good and a bad to it. The good part was that she had an undeniable self-confidence and which got passed on to me and some of my other brothers. So I start something with the idea is how good am I going to be at this? I don't start with the idea that it's not going to work.

So just a really high self-concept. The negative part was that I remember this vividly that my, in those days, you didn't have any special schooling. I was one of six boys, very active household. I was the second most creative member of the family. My brother, Yarned me, is actually almost dysfunctionally creative and amazingly creative guy. It wasn't until my mid-30s because I was working for then Mitchell Hutchins and the head guy from New York came out to see me. I was maybe late 30s. And he said, you know, you're one of the two original thinkers I have in the firm.

I looked at him, I said, I don't know what you're talking about. So it took me years to marry up the self-image. And I think my mother could have helped narrow that up, you know, a person that we all had different ways of receiving the world. And it was a struggle for me when I was younger to try to fit the world into what I thought it should be. Okay. So there was a high self-concept. She just, she could do anything. She knew it.

So whenever I start something, I figure, well, see how good I'm going to be at it. So just an absolute sense of not so much arrogance as self-confidence. Wow, that's a powerful gift. And I remember you once saying that being the middle of six boys forces you in some way to fight for what you believe in, to stand your ground. Can you talk a bit about that? I thought that was a really interesting insight. So I like until about 14, I mean, I have really high energy, but I'm average among my brothers of energy. They're, you know, the brother older than me, who's 79,

still rides his bike 6,000 miles a year, his bicycle, okay? The oldest one is a killer. He's got MS for 45 years, and he's just a tiger. And so I've said my life until I was about 14 was trying to keep him getting killed by my two older brothers and exerting total physical dominance in the three younger ones. I mean, it's just like, you know, it's chaos. And so the big thing is you get a strong sense of survival, you know, because it was, it wasn't that super healthy environment?

We had really good parents, but it wasn't super healthy. But boy, you sure learned how to survive. Trust me. That's interesting. So, well, survival will be a big theme of our conversation. Yes. I mean, you've been an immensely successful investor for 50 years now. And so a big part of what I wanted to talk about is actually how you survive over all of these years.

So to wind forward a little bit, you ended up doing your undergraduate degree at Dartmouth and then graduated from the Tuck School of Business at Dartmouth. And then you left, I think, in 1969, and it was the middle of the Vietnam War, so you joined the Navy and ended up serving from 1969 to 73. And you were kind of, I remember you was saying to me once that you were an incredibly effective naval officer and you were cleared for command at sea at 22, I think, which I think means you were one of the youngest people in U.S. naval history to be actually cleared for command to be given clearance to be in charge of these big ships. Can you talk about that experience of being in the Vietnam War for four years and what you learned by having so much responsibility thrust on you at such a young age? You know, it's a funny sort of starting point to that is that so I was going school in England, right? And I was in RTC. And so for some reason, and I cannot explain why. I had my heart set on being on a destroyer in Pearl Harbor, Hawaii.

I mean, I bought a chart of the Hawaiian Islands. I circled Pearl Harbor and bread, but it was really stupid because what I didn't understand was that was the front line for sending ships to Vietnam. So my reward for that was I had three deployments. I was only in for four years. So I had three, seven-month deployments to Vietnam. So I was, you know, home for six, gone for seven, home for six. I mean, you can run the math. So I got three tours in.

So I had a tremendous amount of sea time. I recall coming out of, you know, there was a big anti-war movement in the colleges. I remember starting, and for the first year in the service, I wasn't committed at all. I just remember that vividly. It was kind of half in. And then I, somewhere along with mine, said, well, you got three more years. Let's put the afterburns on. And then I got really serious about it.

And then I started really becoming effective. So what I remember about was, first of all, the idea where you go in as a kid, come on as a man. I came out as a very, very serious man. We fired big guns and fired bullets a long way. You know, I had all kinds of intensive middle management. My last job, I reported directly to the captain. I had 65 people working for me. I've never worked that hard since, ever.

It was grueling duty when you're, you know, in a war zone. You're standing eight hours watch a day, plus your regular job. So the other memory is I got out, looked for a job, and I didn't get a single question about my Navy career. It's kind of interesting. because that's all I knew, you know. But there were a lot of clues in there about my self-concept, my effectiveness. Play the tape way forward.

I have this idea, you know, unverified, but we learned stuff in our lifetime and you put it in the closet and 20 years later it comes out and you have this stuff that's there. Knowledge is rarely wasted. It just resides there. So my management skills as a money manager are way above most money managers who tend to be loaners and you know and i got lucky because i had that middle manager experience in early age and a lot of the functional parts of it i use today and structuring the firm so he was just like an amazing proving ground the other part was i got these high ratings and yes i was clear command really early

i never wanted to stay in i'd go see the captain say you're doing a great job for me what are you going to do when to get out i was going to manage money i was the unofficial financial officer to the investment officer to the ship i remember looking at mutual file and reviewing it for people. And, you know, I was already thinking about investing. And you were getting the Wall Street Journal delivered to you on the ship, right, in batches. In batches. Well, it was third-rate posted, so you'd get, you know, 13 in one dump, you know.

I mean, we'd get mail delivered by helicopter typically. You know, they'd come and drop a big bag of stuff. So, yeah, I didn't, it's hard to read when you get 13 in a row because you're losing the pacing of it. But I was still very interested in investing even through the whole time in the, in the Navy. The other thing that seems extremely relevant about your career in the Navy is that you started, I think, in June 1969, right after this disaster that I wrote about in my book when I was writing about you in the chapter about Charlie Munger as well, the USS Evans had this catastrophe, which I think made you ultra sensitive to risk and the dangers of human error.

Can you talk about what happened to the USS Evans, which was another destroyer? So you were on a 437-foot destroyer, as I remember. Right. About same size, yeah. Yeah, and as a young lieutenant, you would be in charge at night and have 240 people's lives basically in your hands when the captain was asleep because you became the de facto captain. And you've basically just seen this disaster with the USSR 7. So if you could give us a little bit of color on what happened in the impact that it had on you,

that would be great. You know, I can brought that into, which reminds me of sort of a book I read years ago by a wonderful I was named Jim Ware about the psychology of money is worth reading. It's quite good. But I didn't realize at the time, but I was already very tuned to risk. There's pluses and minuses to that, by the way. So I grew up in a very active family of six boys, right? Well, if I saw something was risky and exceeded my risk tolerance, a daredevil can block that out and overpowered. I could never block it out enough. So we went to Chicago one time at an amusement park. The owner was a friend of my dad's and he would put us on the rides.

And their fastest roller coaster was there. And I'm the only one that didn't ride it. And of course, you get called chicken and my brothers are making fun of me. I eventually wrote it later in the day only after they tested it. And I was satisfied that it was going to be okay. I've done that snow skiing. I've done a lot of snow skiing. Typically, I go to an area.

I'll scout all the runs, ski them the next day. That's just, you know, or if I'm in a pack of people and they're doing runs that I don't necessarily want to do the runs, I'll just split off and ski myself. What it is is the book, Psychology of Money, and Jim Moore is a great thinker, by the way, talked about right-left brain balance, that is the ability to assess risk and opportunity simultaneously. And as you grow, and he claims Buffett has that, can look at both sides of it. And I think I probably have that. It's just it's a gift that you're born with. And I can never look at something and shut out the wrist part of it totally. I can never do that. I can't, okay,

it's always there and I can't shut it out. Well, that's good in a way. I could still go after the return, go after the opportunity, but I can never shut it out. So the Evans just crystallize my mind, you know, so I'm starting to think, how do we avoid that? And one of the simple, just so that people know what happened, basically at 3 a.m. one night, the captains asleep in a couple of these lieutenants who are young, very untrained guys are in charge, and they turn the wrong way, and the ship is cut into, and 74 people died, and they were court-martialed. And I remember you saying to me, Fred, you had kind of seared into your mind the image of the ship. What did it look like?

It looked like you had took a welder, and he cut off the front half of the ship. I mean, it literally looked like the ship just stopped, just almost where the bridge was. the front half was gone. It literally was right straight up and down. And it's seared in my mind. So what you do is you start thinking, okay, I'll give me an example. When you're on a bridge, the radios are blaring. You've got six or seven people on there. You've got the radio, the injure room calling you on something. You've got all these distractions. You have to cut through all that. So I always had the habit of walking out on the bridge wing. If we're turning right, I'd walk out on the starboard wing and I'd take a peek to see what's out.

If we're going left, before we threw the hill over, I'd go out and take a peek. That was 15 seconds, but I want to make sure there was nothing out there. So it's really like a simple rule, like very similar to saying when you're going to change lane in your car, that you're just going to look because you can't really trust your mirrors in case there's something in your blind spot. Yeah, you got it. And you said to me also once that basically the Navy was obsessed with the idea of process. of following process, honoring process. How did that twin obsession with safety and survival and honoring process affect the way that you've approached everything to do with risk in your life?

I have to confess to you that many decisions I made over my lifetimes were implicit decisions, not explicit. I didn't sit around and say, you got to think about processes, but I walked out of seeing safety in the Navy was paramount. You know, if you read the history of World War II, One of the reasons that we won is the Japanese thought their pilots were expendable, and we would do everything we could to save a pilot. It turns out they're really expensive to train, and you only have a certain pool. And so the Navy was obsessed with safety, which I thought was great. The process part had to do with this.

You're on a bridge, so you've got multiple people. You've got a guy behind the wheel driving, and he takes orders from the conning officer. You always want to make sure everybody knows who the conning officer is. The captain's on the bridge. Anytime he wants, he can say, this is the captain. I have the con. That means the only person that can tell that guy what to do is the captain. The ex-o could also do the same thing, the executive officer.

So just think about that kind of clarity of thinking, that clarity of process. So, you know, to carry it forward to managing money within my company, we have every stock, there's one person responsible for following the stock, and it's assigned. knows who it is. Every client we have, there's one portfolio manager that's responsible for shepherding that relationship. We don't move it around much. There's also one portfolio system that's responsible for, you know, developing the relationship. So you see that kind of line clarity throughout. Okay. So I think that's sort of management 101. The idea of process, though, came more slowly. I just, I wish I could give you a, like a moment when I realized that it was the right thing to do.

It might have been when I started DGI, because I was part of a star system, I thought, I think a group effort can be superior to one. If you have a group effort, you have to have a process. So that might have been the trigger on that. But I don't know whether the Navy itself was so, you know, fired up on process, was very fired up on clarity, clarity of communications, clarity of mission and all those kind of things. We'll come back to this issue of process and how you laid out your process when you started disciplined growth investors, because I think it's a central aspect of your success. But to go back to you leaving the Navy, and as you said, you came out deadly serious, came out in 1973, and you started your investment career as an analyst, having not had much luck

with your interviews. You started as an analyst for the trust department of the Northwestern National Bank Trust, which is, I think, a Minneapolis bank that was later acquired by Wells Fargo. And you said to me before that it was one of the greatest gifts that you started your career in 1974. So you got to see the crazy euphoria of the early 70s and then everything totally going to hell in 1974. And can you talk about that, about what a formative experience it was to go through the boom and bust of 73 and 74? Let me preface that just a little bit by saying that because my dad was a stockbroker and I got fast, I was a saver and I got fascinated with the markets. I think I bought my first stock when I was 10 or 11, okay?

So I had spent 15 years trying to figure this out without really, I was reading books. I was very interested at Tuck School, but Tuck School didn't really focus on investment management or analyzing companies. So, you know, maybe the table was set. So I started Northwestern Bank and I'm a young guy. I opened a learning and I looked like price earnings ratios were pretty high. So I go to to director research and I said, Stu, it looks to me like the market is pretty expensive and he patted me on the shoulder and said, don't worry about a young man, you'll learn soon enough. And I watched, I had this weird mind for data points and I watched the Xerox. Our analyst next to me was following

Xerox and it was a $140 stock and it was going to make $2.35. I remember that. So that was about 60 times earnings. They were rent. They were. They were. with lease copiers on a three-year lease, double-declining balance depreciation. So the sales were slowing, but earnings were still going up because depreciation was running off. And the stock, I think, went from 140 to something like nine. And then there was a mortgage insurance company called MGIC. And the star analyst was covering it, not me. And it was 100 going to make $2.

So it's 50 times earnings. It dropped to 50. And he pulled the string and all the PMS jumped in and the bottomed at six. So I'm watching this, okay? And then from that point on, I started making a lot of money in stocks. I never stopped. And I think it was, I saw the dichotomy between the company real value and the price of the stock. And it was compressed in a two-year time frame from, you know, the end of 73 to the bottom of the market in 74.

I remember you also telling me an extraordinary story where you had been following. I think it was Corning Glass. And you went to, you went to your ball. who I remember you saying was an incredibly smart guy and a really good investor. And he said, look, I don't really see any earnings here. I don't see any value. And he said, don't worry about it. It's a faith stock.

Well, he was the head of the trust department. He was a brilliant guy. I loved it. He was a fabulous guy. He said, don't worry about the face stock. All of their earnings were from their unconsolidated sons. You know, and it was an expensive multiple. It was like, so, you know, I just watched.

But I thought, wow, okay. So, Fred, when you saw a period, like that, having lived through it viscerally and seen the nuttiness of it, how did that prepare you for the experience of say 99, 2000, or then 2007, or then the period with the fangs before COVID? Because you wrote something in March 2020, for example, where you said, this is one of your insights on your website. It says 40 years after the nifty 50 and 20 years after the rise and fall of Cisco, the stock market is once again in the grip of the great company lousy stock syndrome. The list of extremely overpriced stocks includes many small companies, but also includes the

five largest companies in the US by market cap, Microsoft, Apple, Google, Amazon, and Facebook. And you were predicting at that time, if you compute the likely return for these five stocks that were about 20% of the S&P's entire value, you were expecting them to make about minus 3% a year at exactly the time when everyone was very bullish. Can you talk about how that early experience in a way prepared you for later periods of euphoria when people would become obsessed with great companies without realizing that a great company can be a lousy investment? There have been really three times in my lifetime where you just hit really extreme overvaluation.

And so that's not a large statistical sample to learn from. So I would tell you that I have, I think quantitatively I learned a lot from it. I'll explain that in a minute. Emotionally, I don't know. You know, it's just, it's miserable, okay, because the backside is always really miserable like we're going through right now. So what it prepared me for, it did something. And I mentioned you, we're working on a magnum opus on risk because I think the whole,

Graham always said, man is the risk and the return will take care of itself. And so one of the, you know, not all risks are the same. So overvaluation is a risk you can't diversify. If you have 25, a stock, 25 stock portfolio that's overvalued all the stocks or 50 stocks, you're going to lose money. I don't care. Eventually, they're going to sell back to what they shouldn't sell for. So you can't diversify that away. It's also easy to quantify. It is actually easy to quantify. You can tell when something's like way overpriced, it's just really hard to deal with it for a variety of reasons. I didn't have the happened in in 73 because I wasn't a portfolio manager but I just observed and I took advantage at the backside of it by finding stocks that were really cheap and making a lot of money with them. So that was okay. 99, 2000 was the worst period of my career for a variety of reasons. I just started DGI in 97. I was getting fired all over the place.

There was a money manager in Akron, Ohio named O'Sflager, Roke Associates, which was the Kathy Woods of this cycle. And I had a whole bunch of clients in Akron and they were firing me and reinvesting it in this guy. And of course he took them down 80 or 90 percent. I had beautiful portfolios for him. Yeah. And he had an enormous bet on Cisco, for example. So he owned these incredible companies that were like the, they were like the fangs or they were like the nifty 50. They were great businesses. But I remember you saying to me, he just immolated his shareholders because they, you know, would have been fine maybe for them to have 10% of their portfolio in a racy thing, but they were giving him all that money.

He said, I want all your money, which I thought was, it's just my opinion. But there's a hubris there that's pretty extreme. So that was kind of the first time I saw actually managing a business and managing portfolios, the blowback. I had clients sticking stocks in their portfolios. Two or three clients didn't fire me, but they stayed mad at me. at least a decade or longer. One guy fired me, his wife stayed with me, and now he's a fan again, 20 years later, okay? And another guy did, was just mad at me. Part of it was they were

embarrassed that they stuck stocks in there, they got killed, you know, because stocks they took, I would let people put one or two in. That was about yet, but it was miserable. I hated it. And just to clarify, this is because most of your business is managing separate accounts. And so a typical separate account with you might, the starting point, I think the minimum is 15 million. I remember you once saying to me that the average account is 30 million. So these are people who are supposedly pretty sophisticated on the whole, but they were still getting caught up in the euphoria. And we're looking at you making 12, 13, 14 percent. And we're like, what the hell are you doing?

Actually, just to go way back because we've got customers for a long time, a lot of the people that were arrested, we started with a funny story. I think they started with a couple, two or three hundred thousand. They had 45 million now, okay? They fired me in 99. So they started with 200,000. They probably had 10 million at the time or something like that. They fired me. And they're wonderful people.

And I called them up. I said, I'm tearing this letter up. I don't accept this. We have too good a working relationship. You can't fire me. And they said, we'll talk about it. They talked about overnight. And they said, we changed our mind.

We're staying with you. And they're still customers. So it wasn't that I had at that time. we raised our minimums after we had more money to run. But we used to have a million dollar minimum. And one of the things that's been meant the most to me is I've taken a lot of people that were hardworking people and made them a ton of money. And so that was the people that were turning.

I went down to see some doctors in northern Iowa. And I lost my temper, which I rarely do at a client. And they were criticizing me, telling me like you're saying, at the time we were doing 17%, but everybody knew 25% a year was in the bag, and they started criticizing me, and they said, you don't really know how to buy gross stocks. And I lost my temper.

And I said, look, I have a thick skin. I can take a lot of heat, but you at least have to be accurate in how you're criticizing me because you don't know what you're talking about. The lead doctor in the group, watch this. Three years later, follow me out,

after I came down three years later, out to the car and thank me and said, you saved us, and I can't thank you enough. And so they didn't fire us, but I was just taking a beating. So this time, and I'm going to put 07 aside for a second because that was, I think the basis of 07 was the craziness in the financial system. I think the financial system, it wasn't so much overvaluation.

It's just that the system was this close to collapsing. The one that sticks in my mind is 20 and 21. And I have to say, I think we did the best job I've ever done in the face of that, okay, because the reality is that, you know, we go into this and we have some stocks that are too expensive and they have huge unrealized gains and we have a lot of taxable clients. So what do you do? And we sold outright a bunch of them and trimmed a lot of them and de-risk the valuation of the portfolio.

So we enter this year and with good investment value above our hurdle rate, if you will, okay? And the down market just elevated our return, but we don't have an over-priced point. portfolio or not, so we're not worried about that. There's still overpriced stocks around, and they'll eventually sell whatever value they should sell at. So I think we did better this time, but it's still miserable. I mean, I'm watching the markets, and we're down, we're down, we're down, I think, 18 or 19 percent from the peak of November of last year. It's not too bad, but I'm looking at the carnage everywhere. I don't know if you're seeing Tesla today, it's getting just destroyed in the market. So we're not, we don't have the waterfall declines that others are experiencing.

We've had a couple of bad stocks, but you always do. But it's still miserable. I hate it. Yeah, but you had warned specifically, you said Tesla was dangerously overvalued when you wrote about this in March 2020. So, I mean, the quote that I took from what you wrote at the time that I think is a very helpful thing for us to bear in mind when these infrequent periods happen. You said, the disciplined investor must honor the financial laws of gravity and reduce or sell those companies with extreme overvaluations. The disciplined investor must ignore the discomfort and anxiety that comes from lagging relative performance, an inevitable outcome from avoiding or selling the stocks that are driving the market. And so I think that kind of, that gets at a really essential truth,

right? That this is painful. There's a lot of anxiety. There's a lot of discomfort. But having discipline, in a way, it gets back to your idea from your period in Vietnam, that it's the discipline and the process saves your life. It absolutely does. But I think you're on really a key point, which is it's still very uncomfortable. You're still going to experience. So, you know, we get mixed complaints from clients, you know, they would complain about their got a call not too long ago from the client.

Oh, you know, I paid huge gains an hour down this year, right? So, and I got them calm down. So they blame us a little bit. And I have to sort of say to them, you've got to put your big boy dance on because I don't make the tax loss. So it's uncomfortable. and you kind of have in the idea that the backside, this isn't going to be pretty. If Tesla goes through, I think it hit 411 at the peak or 407, it's 124 today or something like that.

And our guess is, it's a guess it may be worth 80, just a rough guess, 70, something like that. So it's getting close, but it's not where it was. Don't worry about it. It's a faith stock. That's right. It's a face stock. And by the way, at $80 a share, it's still one of the great six. stories in American history. I mean, it would still be worth $250 billion plus as a startup,

which I think is remarkable, but it's not at its peak. It was the market value of Tesla was greater than the market value of all the other auto companies in the world combined. And so it was, in my point in saying, it was, valuation is one of the easiest thing to compute. You can be pretty accurate. It's also one of the hardest things to cope with because you have the chasing on the way up. You know, we spent countless meetings explaining to clients why we weren't going up as fast as the Russell mid-growth index and showing the overvaluation of the index and all that stuff. And then you get to the backside and now we have a different set of concerns as, you know,

how high is the Fed going to raise rates? What's next year going to be like, you know? And we get carried down, whether we like it or not with the general, you know, not as bad, but we get carried down. I don't want you to any way, shape, or form. I'm not looking for sympathy. This is part of the business. This is what it's about.

And you have to suffer and you have to be uncomfortable, in my opinion, if you're going to be really good at it. You have to keep questioning yourself thinking, you know, is this time, is it different this time? Are we, the laws of financial gravity inverted this time? Is it different? You know, I just think that the idea that you can never, I call it keeping your sense of balance when you're investing. If you always say price is what you pay, values what you get,

you're on balance if your portfolio is well priced. You have to understand that you're almost always going to be at some state of discomfort. That's just life. Yeah. Okay. Yeah. You know, if you want to be comfortable, you shouldn't be an investment manager. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists,

investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having

dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it.

If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CR. into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions

with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, Netsuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide demystifying AI at Netsuite.com slash study. The guide is free to you at Netsuite.com slash study. NetSuite.com slash study.

When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming. and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds

of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right.

Back to the show. You had another very formative thing happened to you, I guess, where, well, first of all, I think in 1973, the brokerage firm that your father worked for went bankrupt. And I think you said to me that your mother basically lost her inheritance and he lost half a million dollars, which was a huge amount of money in those days. And so this was very personal you seeing the price to pay for folly, exuberance, lack of carefulness. Because I remember you were incredibly candid when I interviewed you for my book in saying, look, my father was just a wonderful man, but a terrible investor. And I was wondering how watching this personal disaster unfold also informed your focus on survival, on avoiding catastrophe as an investor?

I got out of the Navy and my wife and I were up on my dad's boat. He had a boat in Michigan, Lake Michigan. When the call came, say, in the firm and gone under. So I was like, I mean, we're right there, you know, and he was a tough guy and he was an optimist, so he weathered it. But it was like, wow. And my mom, to her credit, you know, forgave him for it. But it was, you know, it was a blow.

my takeaway was you've got to do your homework you have to be a skeptic you got to check stuff out if it doesn't make sense don't do it yeah i'm fascinated right now with and i don't need any of these people at sequoia but they invested in in FTX and FTX didn't have audited financial statements at least for the balance sheet that just fascinates me how could you invest in something without audited financial statements and i know if you remember fannie Mae from you know when it went under and a wait but I think from 99 or 2000 to 05, it didn't have an audit financial statement. And yet, professional investors were buying the stock. And it just seems to me that you have to be a skeptic and you can't let your guard down ever.

And you can't buy something because a funny story by this client, he's still a client. And he would always, he got a retirement old in Florida. And the worst thing is just go out play golf with retired CEOs because I always have some hot story that they don't think about. but they think it's going to go up a lot. And he was always telling me about the smart money, and I finally had enough. And I said to him, you know, if you look at our track record,

we're the smart money. And he never brought it up again. But how much taking tips from people, you know, where you hear all the smart guys are buying this or, you know, all these people are in it. Or I think part of what happened with like FTX, he got in the deal flow, you know.

And so if you're Sequoia, you got to buy the deal because you got other deals coming. I just, I don't think it's irrational. think that you're going to sweat every investment in your portfolio. You're never going to let your guard down on any investment. I don't care how big it is. You're going to, because you can't, you just have to be pretty anal about it. It's a point of view, but I think you've got to check everything out. You've got to keep asking questions. When you once said to me, Fred, the golden

rule of risk management is to know what you own. Unlike all great truths, it sounds like a total platitude. But if you think about how much trouble people would have avoided by really looking under the hood of FTX, if that was possible, or Fannie Mae, or many of these companies, or just saying, I can't look under the hood. I don't know. It's not possible. But that simple rule, and this has been a big revelation for me is just increasingly to think, well, I know a fair amount about the psychology of great investors and their lives and how they think. But I really am not very well equipped to understand the finances of companies. I'm not very interested in it. And even though I worked at Forbes and wrote for Fortune and stuff like that, I just don't really want to sit around

reading 10Ks and stuff like that. It just doesn't interest me. And just that recognition that I'm not equipped to analyze and value businesses has been kind of painful and very liberating at the same time. First of all, one of the things I really, really enjoyed about your book was your own personal sort of reaction to the people you were interviewing. I thought it was fantastic. Oh, thanks. And I mean that, I think it's really a great book. I mentioned to you that I had such a mixed feeling.

You were, you really got us. And I like to be a little bit under the radar, which was, you know, a little bit disconcerting. But that short section on me, you got it so accurately that I wanted to find out what you wrote about everybody else. the book. I really was really, I'll read it again one of these, probably the next year. So read it again because I think it's quite valuable. I had an insight I was going to. What I was going to say is one of the great lessons for me of writing about people like you or Charlie Munger, who I wrote about in the same chapter, was to realize I'm not you. I'm not well equipped for this game. And so I think

you're, I mean, you, part of your advantage, right, is that very early in your career also, it wasn't just your wiring. You, you started for your CFA. I think you got it in the design in 1978. So you were studying Ben Graham's book, Security Analysis. And so you were kind of learning the rules of the game and internalizing them very early. So I wanted to get a sense of how you came out of studying Ben Graham after the irrational exuberance of 73 and then the crash of 74. Then you're studying Graham around 77, 78. You must have come out with this sense of clarity about how the game works about what the rules of the game are, what the laws of gravity, financial gravity are. Can you give us a sense of what you came to believe about the fundamental rules of investing,

having studied Graham in this deep way? Yep, but hold that. I just want to make to compliment you on. I like any sentence that begins with those words. Well, no, but I, what I didn't tell you, so my time at Tuck School was pretty useful. I only remember two things sort of about. One is that one time they had a guy, a money manager, come from Boston, from some Boston firm to give a night talk.

And I was just enthralled. It was one of the few things I remembered about touch school. The other thing was that we had to take a statistics course, and I had a freakishly high aptitude for statistics. And I remember going to the final exam. And my grade, my score going into the final was 20% higher than the next guy in the class. So having a facility for numbers, okay, is a huge gift, right? Because, you know, and having a high math aptitude.

And this is really strange. I remember why I grew up in a small time in the end, I'd be walking home and cars would go by and I watched the license plates and I would jigger the numbers around to add them up and subtract add them together so I can get to zero. I mean, who does that? So you're perceptive and saying, and the truth is when you start off as a money match, you don't really know if you're going to be good at it, right? you're just a young guy and you're trying hard.

And for you to realize that mostly you don't have the interest in it. So I just, I gave an example. I have spent until the last month no time on cryptos. I went to my young guys and so what is it? It's a currency. Well, that's not an investment. Let's not worry about it. I'm fascinated now.

I'm reading everything I can about FTX because I'm fascinated with the autopsy. I'm fascinated with learning from this as to what happened. What can we learn from it? And so this is just an area of interest for me. And for you, it wouldn't be an area of interest. What is an area of interest for you is being able to very perceptively pull out from money managers, the good ones, what it is that they do. And I mean, it's a gift.

And so I think you're following your gift, you know, but if you try to come into money management and you're not understanding that there's a big difference between an audited financial statement and an unaudited statement. And that's like, for me, it's like a neon sign, you know. Yeah, whereas I think I would hear the audited statement and my eyes would start to glaze over. Whereas I look at some obscure book on, you know, Tibetan Buddhism or something. And I'm like, oh, cool, there could be something there that relates to this, that relates to this. Yeah, no, that's your strength.

Yeah, I think you have to somehow be doing what it is that you're naturally obsessed with and good at. Yeah. But you also, I mean, you got lucky in a. sense that you studied in the right church, right? So you studied Graham and you got that there were these fundamental laws of investing. And it seems like in some way, I mean, I think we should spell out what some of those laws of investing are for our listeners, because in a way, they're the backbone of what you've done for 50 years. And the first one I would say is you once said the discount to intrinsic value is the best predictor of future returns. So can you talk a little bit about just the

focus on intrinsic value as opposed to market price, which is just, it's such a fundamental idea. It is. It is. Let me preface that by sort of responding to what reading Ben Graham did for me was say there is a path. You can systematically invest in the markets without knowing all the pieces of it. And Buffett comes along and takes his stuff. He was the one that took Ben's stuff and put it into practice.

and articulated it beyond that in a way that makes perfect sense to people who are serious about long-term success. So what they did for me is say, you can do this. There is a path. Yeah, it's not just random. There are these rules of the game. It's not random. There are rules of the game.

And so the number one rule is prices what you pay and values what you get. Well, okay, so let's unpack that. Okay. The hard part of that is what's a company worth? And that sounds like, Fred, that's like investing 101. But let's unpack that a little bit more. If you say to yourself, we are going to be focused and we're going to do one more twist because we're buying growth companies.

We're going to push out a future value. We're going to make a forecast. We're going to make our decision. Look at the stock price today, but we're going to see what it's worth out seven years. We're going to go past an economic cycle. Okay, so we're going to do a little bit of forecasting. We can talk about that. But we're going to build this intrinsic value thing in our heads.

We think in seven years that come, forget the stock, the company is worth X, okay? That's what we're going to do. One of the things that I've learned that that's opened us up to do because, you know, you always want to keep back checking yourself, right? Keep challenging yourself. And so we're a value investor ultimately. We're buying growth companies, but we pay a lot of attention to value. A lot of the value investors have imploded the last 15 years, and here's our guess.

They thought the best measure of a cheap stock is the price. ratio. One of my guys, Rob, is it brilliant guy, we started thinking about is the P ratio the only way to think about the value of a franchise? How about free cash flow? How about the fact that America is a much more asset-light economy now? And so they don't have to put as much back in a building, so free cash flow is higher, yada, yada, yada. Margins are better, yada, yada, yada. How about companies like armholdings that sell only the royalties to the designs for the smartphones, right? I mean, so we expanded our notion of value out. We had two companies that shifted from shrink wrap software subscription model into it and

auto desk. We held the earnings collapsed because you push the revenues out. Expenses are still there. So for a year or two, the earnings go way down. And then, but the lifetime value of subscription is higher than shrink rep software. Okay. So I thought we did a great job of saying we're never going to violate the principle, but we will be open to thinking about it.

and broadening our understanding as opposed to debating the principle. And I can't tell you because all this stuff takes emotional and mental bandwidth, analytical bandwidth. If we're debating, you know, prices what you pay and values what you get, but this time is different or whatever. The idea of the price of it is relatively easy. Look at the market value of the company, you know, figure out what the total value of the company is in seven years.

And if it has a high enough expected return, it's a can to buy. I mean, that's the easy. part. The hard part is this whole notion of value. And I believe that you can get better at how you figure out value. We use a probability weighted expected return now, that we probabilistically figure out what they're worth. We're not trying to be an accurate forecast. We want an achievable forecast. There's a big difference between those two. And so there's a lot of things you can do. You can get better at this. And I think we are getting more and more skilled at making forecasts, which means that we're getting better at the expect to return.

And to get back again, Fred, to this idea of adherence to process, one of the reasons why you survived and outperformed, I think, over so many years, is that you very consciously have this consistent investment approach that's built around three steps. And so when you founded your firm, Discipline Growth Investors back in, I think, 97, you wrote this down. And I wondered if you could just take us through those three steps, because in a way, in a way, it's a very practical application of these kind of financial laws of gravity.

It'll help us explain how you take advantage of those laws of financial gravity. So the first stage is what? So the first stage is understanding what you own. You know, again, let's parse this out. Let's not have our hands look at a company and already start thinking about building a forecast because you're going to skip the other steps. So what's executive compensation like? what is, you know, how do they make money?

What kind of business do they have? Okay. What are their margins? How good are they? You know, all those kind of things. And if you can't figure out how they make money, leave it for somebody else. I mean, there's a basic humility in saying, I mean, this saved us with Enron. We looked when Enron hit 10 bucks a share on its way to zero.

Because it looked like an interesting business. We looked at it. The financial statement was so complicated. We just threw our hands up so we can't understand this one. We'll let somebody else have it. So the idea is this isn't a forecasting effort that comes next. This is an understanding effort. Can we figure out how they do business?

Okay. So step one, you're analyzing the company, researching the business very thoroughly, seeing how it operates, trying to figure out what the competitive venture is. So you're starting with the facts. Step two is much more about building a really detailed financial model. Can you talk to us about that, what you're doing there? Yeah, sure. And that's where we spend the group time on the model. And we've gotten, you know, it's not proprietary, but it's close because we have a model that we can, it's interactive. So we'll say, well, what if you've got them growing in 9%? What if they grow 11 or what if their margins do this or that? We can play with all kinds of different assumptions there, right? And it's a very granular model. We build it up typically product line by product line. And we do a lot of visualization like, you know, how big is their addressable market? What's the competitive landscape? all those kind of things.

So we're trying to look at this thing. And I would say in our process, we spend in the group meetings, we spend 90% of time with that. We're trying to get as clearer pictures we can as a cheap picture or what it's going to look like in seven years. And people have said, you guys look like a private equity firm. And I said, yeah, but we charge a lot lower fees. But that's how, by the way, we lose a lot of companies to private equity firms,

because they're looking at probably the same data we're looking at. Okay, so stage two is constructing this detail financial model where basically you are estimating what the earnings are likely to be in seven years time. And then stage three, this is where you're calculating your expected return, right? So can you explain what you're doing and why you have these specific hurdles for small caps and midcaps, which are the two areas you focus on? Yeah, we use so the last step is you simply look at the, you look at the prices, the market value the company and you figure out the future market value, you say, okay, working assumption,

not unfair is that over time the stock market, say, a weighing machine, short term, it's a voting machine. So intrinsic value and stock price tend to true up over time, okay, maybe not perfectly, but tend to true up that way. So the last step is to say, okay, the stocks here, we think, you know, it's going to be worth something in the future. In the mids, and this is a key point that I like to make. we need a 12% higher annual compound return to buy a midcap company, 12% or higher.

We need 15 or higher for smallest because it's riskier. That's why we put that in there. Now, why 12? There's nothing magic about that except here's a working assumption. If we do 12% for you, you're probably going to keep us. If we do sex, you're probably going to fire us. We've priced our fees off that, by the way. If we do 15 and smalls, we're going to be a superstar.

And in fact, over our history through, I think last month, we were, I think about 12 on our midst, almost dead, you know, 27 years, which is kind of amazing when you think about publishing that. It leaves us vulnerable. If the market's going to do 15 for three to five years, we're probably going to, you know, get some heat from customers, step it up if we're doing 12. But what it does do is very simple. It's very straightforward. We've used the same hurdle rate since we started. no debate about it. So it's just a judgment call. But this is important for a couple of reasons. One of which is it's this repeatable process, right? This consistent adherence to a process where you're saying,

I'm not going to take valuation risk by overpaying for these stocks because then the expected return just doesn't justify the amount of risk that we're taking. That's correct. Yeah. I mean, just think about the clarity you have. It's all against the hurdle rate, right? So we had stocks in 21 that had a negative expected return over the next seven years, well, those were, you know, largely sold. So it gives you clarity. And it also in 08, where we showed a 25% plus expected return, we said, hey, you got to own them. So you build time series in there. So just to play it where it is today, we entered the sell-off. At the end of last year, we had about a 14% expect return our mids. With the down market, we're pushing 20, which is not as high as 08,

but really high. We're all in because it's just too good a return. So it gives you that clarity we're not debating like, oh, interest rates are up. Should we raise the hurdle 8 to 15 because rates are up? I don't think so. Every time you introduce some other variable into a model, you have a whole debate and everybody gets confused, we think 12 is a good number. There's something else that you mentioned, Fred, in passing there, about the truing up process. And I think it's really important to sort of dwell on this for a moment because it's one of those really profoundly fundamental insights into investing. And you once said, I'll quote you, you said there are two sources of return for a stock. One is the growth in intrinsic value.

The other is the truing up between where the stock is and where the company value is. And the timing on the truing up, the second part of the return, is completely random. That has some really profound implications, right? So this gets back to the idea of the market being a weighing machine in the long run. But can you also talk about the importance of patience, given the fact that you have no idea when that truing up is going to happen? I'm working on a piece right now where you am on navigating bare markets because, you know, I've been through nine of these two giant ones and a bunch of doozies like this one. And you always get laid in it whenever we are on where we are on this one, you wonder, is it ever going to, you know, when does value kick in? And Ben Graham says that's one of the mysteries. In 1955, I think,

he was testifying to Congress. And they said, what turns bear markets? And he said, that's one of the mysteries of our business, you know, eventually value takes over and it turns. But there's never a green light that comes on and says, okay, kitties, it's time to come in the pool. I mean, there's no free lunch on this stuff. And I think one of the hardest parts about what we do is the fact that we do not, have control over when the intrinsic value and the stock price begin to true up. Because you can go for several years and have that happen. And it is just, so what you try to do is, one of the great things I learned from Buffett is he's a teacher.

He's always teaching. He's just incredible at how he can take complex things and make them simple, right? So we spend a lot of time teaching our customers, educating, educating, exactly what you're saying. Look, we don't know when it trues up. It's going to take patience. If you do it enough times, they start to have confidence because they've seen this happen over and over and over again. You know, and so we have a high credibility motion with our clients.

But, you know, at least one or two or three always get restive. You know, when is it going to happen? When is it going to happen? And I think it's the reason, it's one of the reasons why I'm willing to tell people exactly how to do it, knowing how hard it is. Because you don't have any control over it. You can control the quality of your work. You can control what you want to pay for something,

but you can't control when intrinsic value and stock price begin to grow up in either direction. And I think knowing these fundamental laws of financial gravity is a pretty good start. But as you say, the execution is excruciatingly difficult because all the fear, all of the uncertainty, all of the institutional pressures from clients who can leave you and fire you, your own emotions.

I mean, there are so many things. that come to play here. But the fact that you know these laws of gravity is a really helpful start. And your average holding period for stocks is the best part of 11 years. So you're also, you're allowing time for this force of gravity to play out. I try to, every way I can, I try to teach clients like, I'm getting called. What do you think about the market next year? I say, I have no idea. I just can't. I can't imply that. that I know what's going to happen next year. I might have an opinion, but I got about a 50-50 chance of being right.

But I just try to, everything I do and everybody here keeps trying to say, we don't know what's going to happen over the next six or 12 months. We don't know. We don't know. We know we have great stuff. So is the key for it to focus on what is knowable, which is the intrinsic value in what you think it's going to be in seven years, which is sort of not super-knowable, but somewhat.

But it's no, but it's absolutely knowable to avoid valuation risk. It is absolutely knowable that, you know, I would say to you that just, you know, having said P ratios are not super leading ads, but they're not unimportant, okay? Or price of sales. You know, you can do back to the envelope. You know, we're not experts in Tesla, but we did back of the envelope calculations. It's an auto company, gave them margins and all that stuff. You know, looked at the auto business. And you can do rough analysis and you can kind of figure out what it's worth.

So you can know how well-priced your portfolio is. You can know that. But there are lots of things you cannot know. And I think what you have to do on stuff you don't know is live your life carefully enough. So if you're wrong on that, you can survive. That's a very profoundly important point. It is.

And you wrote to me the other day, I think we may have uncovered the greatest risk manager of all time, the climber in the documentary Free Solo. and I wonder if you could talk a bit about this guy Alex Honnold, who is a master of, I don't know how many of our listeners have watched the movie. There's a great documentary called Free Solo that's about this guy, Alex Honnold, who decides to climb, I think it's El Capitan, so this 3,000 or so foot sheer granite cliff. I mean, it gave me a heart attack just watching the thing.

Can you talk about what you can learn from someone like Honnold about dealing with uncertainty, dealing with risk, mitigating risk in a really intelligent, thoughtful way, since we don't know what can happen or what will happen. We can guess what can happen, but we don't know what will happen. Did you watch the documentary? Yeah, and then yesterday I watched something about the filming of the documentary, which is terrifying in its own right. And, you know, one of the things that the cameraman said while making the film is that they had to record part of it with remote cameras because he said he didn't want them to see him die. because they were friends of his. So during the most dangerous bit,

they actually had to set up remote cameras. Oh, my God. Okay. So it's a funny, so Rob is working on, he's spiriting the piece on risk. This has been in our hands for years, right? This idea of trying to get better, and I really believe if you really want to learn something,

well, teach it, you know, and so the teacher always learns the most. And so he writes to sing on free solo. This is Rob Nikoski, who's your right-man chief investment officer. He starts with free solo, and I freak out about it because I'm going, You know, wait, wait, we're not talking about falling off cliffs here. And as I started thinking about it more and more, and about a month ago, I called Rob up and I said,

I think I'm not looking at this right. This guy was one of the greatest risk managers of all time. And we need to look at it. I need to look at it differently and say, my goodness, he took this thing with a binary outcome. And he made it. And there were a thousand old threads to make that. And so this has to do, this is really deep stuff. But what this has to do with is risk and risk mitigation, okay?

And what's in your control and what's not in your control? And so what he did is he systematically, he climbed it many times. He was a very spurny's climber. He was physically fit. And he practiced those moves with a rope over and over again, right? Now, he also is part of the thing. One of the things that struck me is so profound in the whole thing is, I don't know if you remember in the movie, he was going to climb and he got part of the way up and said, this isn't right.

And he went back down again. I don't know if you remember that. And I remember. I'd forgotten that, yeah. I thought, oh, my goodness, gracious. This guy, he's got the wrist mirror going in his head. He's not ready. It's not right.

And he knows that this isn't the right day. And just thank of the humiliation he must have felt in the sense of deflation. Because you don't just show up when he's having a climate. You build to it. You're all fired up. You start up there. And you have probably up and goes, oh, not right. It's interesting also, Fred.

I saw an extraordinary video of him last night where he was teaching a famous Scandinavian climber to free climb. And he said to the guy, when you get stuck, just be patient and take the time to figure it out. He said, you get in trouble when you're in a hurry. So when you can't figure out how to get out of it, just pause, be patient and give yourself time to figure it out. And he's talked about not letting your emotions spiral out of control when you were

stuck. And so there's a kind of an incredible ability to get his ego under control. That's astounding. It's just in a, you should, by the way, you should try to get him on your podcast. That would be great. Yeah, he's a fascinating guy. Well, I just, just because if you, look, he had a binary outcome, but he also had the ability to practice over and over again.

Every, he climbed it, climbed it, climbed it, right? Anyway, I mean, he stacked a lot of things in his favor. It doesn't guarantee that he didn't fall, but boy, he sure did a lot of risk mitigation. He also, there is another idea that we're also, we're debating, and that is, and Buffett said this many times. So it is possible to get the market return. You can buy an end of an S&P 500 index, but anybody can do it. When you try to get an excess return, the field gets really narrow, and it becomes all about process and implementation and the ability to take intelligent risk if you're going to do superior. results because if you try to do superior, you may end up with inferior results.

So this kid had the potential to rise to the top of this, but he had to really do risk mitigation to make it. And it's true investing. As you move up the food chain, as your performance gets better, you better really manage the risk because it'll kill you. And so I'm still turning my head over on his comment about be patient. And it's true investing. You know, we have a, I went to fly school years ago, and one of the buzzwords was when the one of the things you train for in flight school is you train crews, which is kind of interesting.

But you also, you train when stuff goes wrong, a red light on the cockpit starts blinking, you know. First thing you do is look at it, right? And it's not fun, right? Something's going wrong. But there's a saying, wind the clock. Just let it blink. Just wind the clock. Okay.

Because you don't want to overreact. It rarely is it life-threatening. The first part, you can make it life-threatening. One of the extreme examples, and has happened in the past, is you're lifting off in a two-engine plane, right? And just as the plane hits a certain speed, you rotate, you lift off, your engine quits. So fly the plane, wind the clock, fly it to a safe altitude and deal with it. Even if you have an engine fire, deal with it when you get to altitude. Okay?

Why would you do that? Because you don't want the guy in the right seat to reach over and pull the, wrong lever and cut the power off to the good engine. I mean, just, that's happened. So excitement in the cockpit, I call it fast hands. I don't like to fly with guys with fast hands because they'll push the wrong button. That's a bad idea of flying. So I love his advice. When you get in the jam, slow down. Think about it. You're safe where you are right now. And it's true investing. Think about it. Think about it. You don't ever have to be in a rush to lose money. You really don't.

And, you know, it's, if you know, Buffs always talks about waiting for the fat pitch to come over the plate. Just, you know, just wait. There'll be other ones coming. Just slow down. It's a really good way to think about it. Just slow down. Honnold also used a very interesting phrase where he said he did enough preparation so he could step outside his fear. So that was very, this was in another video of his. And he had trained for, I think, two years weighing weather to attempt this climb that ends up doing in something like three hours, 57 minutes. So, I mean, it's very profound, I think.

Josh Waitskin often talks about thematic interconnectedness, right, where you see something in one field that applies in another field. And there's something about his, Honnold's ability to control his emotion that's very applicable. I don't have you talked about that capacity for you in terms of looking at balance sheets. as a right left brain balance, I don't have the capacity to put that risk out of my mind enough. It would impede my ability to execute because I would be thinking about falling. I wouldn't even, first of all, I wouldn't even try to do that because that risk profile

is beyond, he had to be able to literally dissect every risk on the way up, you know, different handholds, everything else. All the experience he's had, like you're saying, massive preparation. It is, but it's one of the greatest, it's one of the greatest athletic feats of all time, but it's also one of the, maybe the greatest risk management exercise of all time. It's just, and so we started, I started by ejecting to have it in there because I thought, we don't want to have people thinking about falling off the cliff. But then I made a 180 and we're going to, we're using the theme of from him, and I'm going to take your quote, I give it to Rob, because we're going to try to get that in there because I think that that is, you know, there's an idea on decisions. And I've said this to many people. So let's say there's three kinds of decisions.

A decisions, B decisions, and C decision. A are great decisions, make them. C are bad decisions, avoid them. Where people spend way too much time as on B decisions. They try to make them before they either turn into an A or a C. So if it's a B decision, don't do anything with it. It's just a B decision. Don't waste time on it.

See what happens. It'll either migrate to C or migrate to A. That's just so that idea of patience, I think, is, you know, Certainly investing, patience, but patience on decisions. Sure. I think it's a great idea. Yeah, I think I talk about this in writing about Ed Thorpe in the introduction to my book where he talks about part of rationality being suspending judgment. And then my friend Jillian Zoe Siegel, who wrote about Buffett in her book,

getting there. I remember her quoting Warren saying, you can always tell people to go to hell tomorrow. I think he used slightly cruder words than that. But, you know, again, it's the ability to just wait, not to be pushed into action prematurely. Just wait. Just wait. There's real value in that. Can we talk a bit about flying?

Because you obviously are very experienced pilot. And in the acknowledgments of your book, you talk about how Jim Dobesh, who's been the chief pilot for your firm since I think, 2003 and who's a, obviously a very interesting guy, I think, former paratrooper and Ranger and stuff. he's got game. He does. You said in addition to his superb flying skills, he showed me how to apply the margin of safety to flying. And I wondered if we could talk a little bit about how this fundamental idea of the margin of safety, which you obviously applies in climbing solo on a mountain without ropes or anything. Also applies in investing, also applies in flying. How has it helped to you in flying this idea of the margin of safety? Oh, my goodness.

So let me just again. When you ask these questions, I always try to flash back just for a second. So let me go back to Ben Graham for a second. So, you know, Graham had a searing experience in the early 30s because he lost a lot of money. And that's how he really recovered and began to teach and became a much better investor.

And he always said margin of safety was the discount to intrinsic value. and I thought that's true, but I never, I thought margin of safety was broader than that. My definition of margin of safety is it's things you do to keep adverse events from becoming catastrophic. So ever stuff's going to happen. The question is, is it catastrophic or not? And so when you take that approach, you can start to think about in flying, there's adverse stuff that happens. Equipment breaks.

You have weather. You have unexpected traffic. You have this. You have that. So how do you handle these adverse events? without having a becoming catastrophic. Well, then it gets interesting. So there's a million ways to build margins of safety.

The first thing is you have to acknowledge how important it is. And, you know, I asserted in my book that the pilot community has a much better feel for margin of safety, the investment community because it's much more deadly if you keep violating it, okay? But the first step is to recognize it's really important. Second is to implement processes and steps that enable you. to maintain a sufficient margin of safety. And Jim and I've flown together for 25 years, and, you know, we still, every flight try

to build a margin of safety. And it can be, you know, we went to Denver and back a week ago, and terrible weather forecast both directions, and we have our alternate plans, you know, and so that's how you start to build it. We have plenty of gas. We build a margin of safety, and it's a whole bunch of different steps. And, but you have to constantly think about margin of safety. You got to always be building that.

You once told me that you had an agreement with Jim that basically both of you could veto a trip. With no argument, with no argument, no talking back. I'm not comfortable with this. We're going to turn around. Why is that so important? Because it keeps you from talking each other into killing yourselves. Like, I'll do it if you'll do it. Remember, he's an ex-airborne ranger.

I'm not exactly a wallflower. You know, oh, we can do this. okay so that that's what it prevents i'll do it if you'll do it that sort of thing your guts telling you it doesn't feel right i'll do it if you'll do it and then the eagle and so i'll do it if you'll do it so now you both have dropped them so both of us are we had a funny thing happen so both of us consider that we are solely responsible for the safety of the flight we've gone to flight school many times over the years we had one session down at wichita and it was it's a three days in a similar three days first day we were awful. And we have a really good reputation. And the cement

structure is kind of looking out of the corner of his eyes like, I thought you guys were pretty good. And we knew we stuck. So we discussed it ourselves, you know, at dinner that night. And I think Jim or I said, neither of us acted like a captain. There was no captain in the plane. For some reason, both of us decided we weren't going to be a captain today. He said, you're right. So we corrected that, you know, ace the course after that. But so I think it's a way of life when you think margin of safety, it's taking steps, it's recognizing there will be adverse things that happen, but you can take steps to make them, to prevent them from becoming catastrophic. That's the heart of margin of safety. You're going to have bad stuff happen. The question is,

does it become catastrophic? Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like RANTA, Ramp and Ryder spend 82% less time on audits with Vantta.

That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading but haven't dared try? The futures market is more active now than ever before. and plus 500 futures is the perfect place to start.

Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity. You'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on.

With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested and a 7.97% distribution rate. With traditional savings

yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8% and the average annual total return since Inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. I thought it was interesting that you also had various processes in place as an investor

that were very similar to the processes you had in place as a pilot. So you at one point, when I had asked you what the parallel was between your approach to flying and your approach to investing, you said, well, actually, I've given two of my right-hand men the ability to veto any stock pick that I make. And I thought that was so interesting, the parallel between that and your policy with Jim Dobesh of each having the ability to veto without question

what the other person has decided. Can you talk about that? that seems like such an interesting and difficult thing for a 70-something year old alpha male to give his younger colleagues who are less experienced the ability to veto his decisions. What were you thinking? I'm actually 76. And so we've expanded that to four now. So it's me plus three others that have veto power.

So I even tighten the noose more. Okay. So what I was thinking was that when you think about margin of safety, and you go out to people and you say, okay, you've been here long enough. You understand what we're trying to do. I'm going to trust that you will honor the margin of safety. And by trusting you, we're just going to expand out the number of people that can veto this. So just think of what we've done.

We have total buy-in for every decision. Each of us is responsible for the portfolio now because if stock goes in, they voted, they could have voted not to ever go in. And so I think it's a really powerful risk management tool. really, really powerful. And I hadn't thought about that, and you're helping me with this, but, but you're right, it's the same parallel to Jim and I had. And I took it when Jim and I did it and I applied it to our group.

And I think it works. It's a really interesting way of doing it. But what you're doing is you are honoring the margin of safety because you're saying, look, you know, yeah, I'm good at this, but I have my bad times. And if you guys can stop me, if you have an issue, let's discuss it. It sounds like an odd parallel, but when I got engaged, I think I was only about 23 or 24, and thank God I've been married to a lovely person, Lauren, for 30 years. But I, you know, I was pretty, I was like, what am I doing? Do I have good judgment on this? And it was too important to take reckless risk. So I remember independently calling my father, my mother, and my brother, and saying, am I missing something here?

And they were all like, no, she's absolutely lovely. Good choice, well done. And I don't know, it was a really interesting thing to do, to know even at that age that there are certain things that are so important that you actually want to not trust your own judgment. And I think I probably would have done it regardless. But to know that they all thought, no, she's great. It was immensely helpful, actually. I think that was absolutely brilliant margin of safety application. because, and I know you well enough, I don't know you super well, I know you well enough that you were reading their answers.

When you say they all thought she was lovely, you lost over the fact that you know how your dad was going to respond. You knew how you knew your mom's range of responses and you gazed those. And I think you were really smart to ask them because, you know, my wife and I, we've been married 12 years now. We're both married before and we do a divorce care ministry and we tell people, look, Boll in love with them, but then put the cunning business person side on and understand that how they were before you got married is how they're going to be after you get married. So just understand that because one of the biggest problems of marriage is people think that they love me so much they're going to change. They may still love you a lot, but they're not going to change. And as a funny postcript, my wife, who's wonderful, I took her down, went to a wedding and four of my brothers were there.

And when the weekend was done, my oldest brother called me over and he said, it's been decided. I said, what's that? He said, don't let her go. That's what my brother said. And so that was a pretty good testimony. But I thought you were, it's funny, the older I get, the more I solicit other opinions, the more respectful I am of other opinions, it's the oddest dynamic. The more I know, the more I realize that other opinions, you know, are often, you know, I told you at the outset of this call that I, I would, well, I'd learn a fair amount from this call. I'm interested. I picked up two or three or four things already from talking to you because you have some unique qualities and I can learn from that. And I'm interested in your opinion on stuff. And you just keep absorbing.

I do one other thing, Fred, that really struck me when we were talking last time about flying and the way that it relates to other areas of life is you were talking about how you need to prepare before you take off because you're coming down. either way, whether you want to or not, in the way that you want to or not. And I remember asking you how that applied in other areas of your life. And you said to me, well, look, when we're hiring, for example, he said when you were, you said when you were hiring, I think it was Nick Hanson, another of the key figures in your firm, you did, I think, 22 interviews before you hired him. Can you talk about this notion?

Because you said to me also, when you're buying a stock, you said before you buy, seal the exit. Don't think about the target price because you want to act as if you're really going to own it for 20 years. And again, this seems to relate to what Alex Honnold was doing with his free solo climbing. Yeah, he was all in. He was all in. Well, it has to do with the standard. So if you say to yourself, when we hire somebody, we like, regardless of their age, we like this to be the last place they work, then you're going to put a lot of upfront work into it because the reward could be a 50-year employee, right? And so it becomes worth it. And we've actually refined that a lot. It's a funny story we hired. It was 21 or 22 interviews with Nick. We had, we decided

to have an analyst about three years ago. So we, we had 70 qualified resumes for one spot. And so we worked it down, worked it down. They did two essay questions. I forget what they were, but they were grueling. And we, and multiple interviews worked it down to seven. And we have a very active intern program. So the seven, five were, had been interns with us. So they already knew us. And we then, it was really nasty. We had to analyze the stock we'd owned for 15 years and said, what should we do with it? And it was a difficult company to understand. And then we blind, because we had interviewed all of them, but we blinded the essay so we didn't know who wrote them. Okay. So we came out with two kids that were head and shoulders better than everybody else. The two, okay, had been two interns.

There's even funnier stories on that, but we thought about it. And one of the, people in the firm goes, these guys are really talented. They're not super expensive. We heard both of them. So we actually made a mid-course shift and added two of them. And they're both remarkable young people. One is an immigrant from Moldova, and he's pre-nationally gifted at stocks. And the other is a kid who grew up in a trailer park just east of Fargo. His father's engine, his mother's German. They both live in trailer parks. And he put his belt through college. Both of them did. And they're just these doers. And they're high-intech. integrity. And so it's true in a stock, the idea of, it's so tempting. And, you know, the beauty of the markets is that you can exit a position any time you want it at very low cost. That's the good news. The bad news is you can exit a thing any time you want so you don't have to be committed at all. You know, when you got married, you didn't get married and say, well, you know, we'll see.

I'll try this for a while. You know, our pastor at church says, when you get married, throw away the key. Say divorce is not an option. We're just not going there. So I mean, boy, that, you know, Well, that really changes the equation. And when you think about a stock, why not, at least in your head, say, we're not buying this with the idea of selling it. We're buying it and we'll do all the work because it's so tempting. So the stock runs way up and all of a sudden, you know, but it's not overpriced, but it's up a lot. You think, oh, let's, you know, you never go broke taking a profit. So I think the idea of conceptually sealing the exit, I think, is really powerful.

I remember you saying to me once that you were taking someone. out on the 20th anniversary of him being at the company. And you said, you talked about how the first time you had met him, I think, you said, if I gave you only five bullets this year, you know, to buy and sell something, what would you use them for? And I thought that was such an interesting question. It's very, very related to Buffett's idea of the 20 punch cards where you can only make 20 decisions in your entire investment career. And so this- I think, just think about Buffett, the concept of analytical bandwidth, it's not infinite. This is one of the conceits of being a human.

You think you have infinite. I'm still struck by your self-awareness to say, I don't want to read balance sheets. It doesn't mean much to me. What you're saying is I have some really great strengths. I'm going to work on those, but I don't have unlimited bandwidth. I don't have unlimited strengths. And I'm not going to try to be all things to all people. And what I said to that young guy was, I want you to conserve your decisions.

We have that right now, just to think about how you manage, how you run an investment team. So we spent three hard years. We have a beautiful looking portfolio. We generate a lot of capital gains in 20 and 21. We did some tax selling this year, so we don't have gains this year. I don't think there's much we need to do for the next seven years. That's how, what a good looking portfolio we have. What do our young analysts do?

You know, people thrive on new ideas and stuff like that. So one of the things that we're going to them and saying, you know, look, We may not be adding a lot of new names. We'll see, but what you can do is deepen our understanding of our existing holdings. And it's amazing to watch and pick up. We have a missile going on right now. It's a company that is just lit off like a candle, okay? And we're now trying to put flesh around that.

How sustainable is it? How big is their addressful market? And this, one of the young guys is digging on that. And it's just wonderful to watch. So Buffett's right. You know, you don't have an unlimited number of, I don't know how a firm that, you know, most money managers have 50 to 100 percent turnover a year, which means they're always looking for new ideas and they're, you know, it would be exhausting. I don't know. How could you, I just can't quite understand how you could do that because nobody has a kind of analytical bandwidth, you know. One of the things I wrote about in my book that I, it kind of, again, like most great truths, it sounds kind of mundane, but I just realized you want to be subtracting stuff, not. adding stuff from your life. So you're constantly thinking, what can I remove? What game should I

play? What game shouldn't I play? And so I see that a lot with the greatest investors. I think of someone like Bill Miller who's just stripped back so much of his life. So just focusing on what he is really good at and loves. What's he doing now? I studied him after 08. I was fascinated with Oh, he's had the most amazing comeback over the last decade. But I was emailing with him earlier in the week. And, you know, he's not having the best time at the moment because obviously he had an enormous bet on Bitcoin. Oh, he did. Yeah, and he'd been buying since it was $200 a coin.

And his average price was like $500. So he'd made an absolute fortune. And then he was the biggest individual shareholder of Amazon, whose name wasn't Bezos. So he had this unbelievable climb back. I'll send you an earlier episode of the podcast where I interviewed him. Oh, I'd love to. He was one of my, I mean this in a very respectful way. The 07, 08 was fascinating to me.

I mean, they're always fascinating. But if you predate that, I think it was 0405. I wrote this piece and I said, I don't understand this. I call it the gold major treasury bills, but part of the piece said, if interest rates are in half, how could the financial, the landers keep reporting the same, returns on invested capital and something's wrong here. I didn't go into, I didn't do a lot of digging. I'm not a short seller, but it just struck me. And, you know, he loaded up with dividend paying brand name financial service companies in 07, 06, and 08, they got killed. And I thought to myself,

I don't know if there was a way to figure out what they were worth. I mean, I just, I conceptually, it looked like the right thing to do, brand names, pays a dividend, worried about the markets. But I'm not sure that, you know, he really knew what he was. owned and it was, you know, really hard on him. But I always thought that he was a very similar to us, that he had a growth mentality, and he was very value conscious. And I believe that's true. I think that's, you know. Yeah. And a brilliant, a brilliant mind. He's, he's got, oh yeah, he's got, he's got one of the most thrilling minds of any. So is he, is he, does he still run money professional? Yeah, but he's, but he's coming up to retirement. He's handing over the reins shortly to, to,

Did he start his own firm? Is he still in Leibis? Yeah, yeah. No, he started his own firm. And so, and it's had an incredible decade. I mean, I think, I think his funds were, you know, top 1% over the, really? Yeah. So, no, he had an incredible rebound.

He's, you know, he's irrepressible, Bill. He's got his, did you ever, did you ever talk to Peter Lynch? Did you ever get a chance? I interviewed him, sorry, I interviewed him more than 20 years ago. Okay. And I haven't managed to interview him since I should again. But one thing that fascinated me about Lynch all those years ago, is that I had asked him about books that had influenced him.

And he was like, nah, you shouldn't read books. He's like basically it's much more helpful to play games like poker and bridge that teach you about probabilities. And so at the time I thought, God, he's so unintellectual and uninteresting. And then I looked back at my notes a few years ago and I was like, oh, that's really interesting. It was a really interesting insight. I always thought he was one of the, I stood next to one time at a conference and he was a humble guy. I didn't talk to it all, but I thought, and I think he was loyal to a fault.

I think Fidelity gave him too much money to run, you know, and I think he just burned him out. But he was, Bill Miller was up there, Peter Lynch, there are some of these guys that just are, you know, the idea of investing of these guys that are, they're like a sports figure that can walk on there and just be so talented with some special gifts. Yeah, it's a rare breed. This issue that you just raised about taking on too much money is a very interesting one. And you, I mean, there's a very interesting thing going on with your firm, which is that you've done these things that are so not in your own interest, but are in the interests of your clients. And one of the most striking, I think, is for people who don't know the firm well, you have these two strategies. One is a small cap growth strategy. One is a mid-cap growth strategy.

and the small cap growth strategy, you basically closed to new investors when it hit about $400 million in assets about 15 years ago. And I remember you taking me through the numbers and saying, look, it would be really easy to have an extra $2 billion in assets and I'd make an extra $18 million a year. And so I was thinking, okay, so an extra $18 million a year over the last 15 years, that's pretty nice. And can you talk about this idea of the importance of being willing to sacrifice your own interest for the same? of a client, which I'm not saying just to flat of you. I'm saying it because actually I think it's vitally important for our listeners to understand this issue of the alignment of interest between them and the person who's managing their money. You know, we've had a lot of questions about ESG and, you know, what does it mean, all that stuff? And our response was a positive response,

which is the gold standard of our business is a fiduciary obligation to clients. And if ESG can help, we're interested in. In fact, gee, governance has been a key risk factor for us. But the other stuff, we've been polite and saying it doesn't really help us. But when you unpack the fiduciary obligation, I think it's a very deep obligation. It's been around for hundreds of years. And you can't simply say we put our clients into it first. You have to live it. And so you have to run your business carefully. You have to keep your expenses down. And you have to run your personal life in a way so that you can always be in a position to represent your clients. And so I live on a tiny fraction of my income.

I do have one luxury. I own a jet partly because I love to fly. But even that you bought on the cheap. I remember you bought it for something, like $5.5.5 million instead of $15 or something. Yeah, I did. I waited six years to buy it. Yeah, it was dropping a million a year.

So it's a great airplane, by the way. But I think, you know what? What I mentioned to you in the email sent is that all we've ever done is mid-cap and small cap. And so you sort of begin to understand what kind of what size you can, you know, what's the right size where you can still perform. And I got this from my dad, by the who's not a great investor, but he was a customer's man. And they loved him. And he used to tell me, you know, he worked for the brokerage.

He used to tell me he had the most secure job in America because his customers were oil. And I never forgot that. And it's the customer to pay us. And here's the tradeoff. We'd probably once a month get a thank you note. I get teased by a little bit. They're often really old, you know, 40-year customers, women that are 95, write me in Freddie and say, Freddie, because of what you've done for us, here's what I'm able to do

for my life, you know, or for my grandkids and all that stuff. That's priceless stuff. I don't know what dollar amount you can put on that. But for me, that's priceless. And so I just want you to, you know, we have 40-year customers. And, you know, I'd like to think that new people coming in and get another at least 20 good years or run out of a year. So you've got to think about people coming in, do they have the same chance for a great return as to, you know, people have been here a long time?

And look, I have a great life. You know, I do pretty much what I want to do. And I work with great people here. And we have great clients. Boy, that's not a bad place to be. And to get that, you got to give up something. And, you know, my plane would fit in the baggage compartment of some of the, you know, mega jets owned by the hedge fund guys. But you know what?

I get something they don't have. So I just think I'm not obviously, I'm intensely competitive, but I just think this was a higher reason. I just think it over, you know, and the art form is can we deliver really great results in the context of, you know, for people where we went all their money and shepherd them through the tough times? And can we, you know, there's an art form to that. And so I've had pretty good life. If I had more money and less client appreciation, I don't think my life would be as good. I remember you once saying to me that you were interested in, I think you had set up an investment conference pre-COVID, where this was back in about 2017, I think, where you were talking to me about how you wanted to empower individual investors to ask the right questions. And because I think you had seen so many of your clients and other people's clients sort of fall off the straight and narrow.

I remember you telling me you had one client or prospective client who went off and got ripped off by Madoff, for example. I mean, you know, the people who got immolated in the Olschwager funds. I mean, there were all sorts of disasters along the way. And I was wondering if you could give a piece of advice to our listeners who were thinking about hiring a money manager or investing in a fund, if you wanted to ask the right question to get a sense of whether that person has integrity and whether their interests are aligned with yours as a client, how do you do it? What should you be asking?

We started off, but by the way, I just finished. putting it into a wonderful course, which I'll send you a link to. So I mechanized it. I paid a lot of money. It's a fabulous course. I think it's online and instructor led on what I migrated to is originally I thought they're trust in our industry is really low. So if we worked on a relationship between client advisor, that would work. But the feedback I got from advisors is your questions are going to cause their fees that go down. So I'm not interested. Okay. So I switch gears and I'm going to foment a revolution. My goal is 20 million Americans become empowered to ask the right questions.

And I took 99% of what I know and simplified it and a few things like killer mistakes and how to avoid them. You know, what are three things you have to know. You have to know what compound interest is. You have to know what an investment asset is. And you have to know about margin of safety. Okay. So we're rolling that out.

And so I switch course. So there are three things that if you want to start a discussion, If you're going to go hire somebody, okay? Here's the three things that you start with, not even references like or how have you done. If you want to winnow it down, you ask them three questions. Will you figure out for me every year how I did last year? I want to know what my profits were last year. I want to what I started with, how much I put in or took out and what I ended up with.

I want to know my net profits and then I'll figure out what percent that is. Can you do that for me? Okay. Sure. Two, can you tell me how much it costs me in total to do business with you? And I don't mean just your fees. I want a total look at what it's costing me. Can you do that for me?

And I want an annual report. And I want the dollar amount and I want the percentage of my assets. So that's including the middlemen who are putting you into the fund. Everybody. Your financial advisor who might be costing you a couple of percentage points a year. Yeah. But then there's other fees. 12B1 fees for marketing, front end loads, all this stuff.

Here are the pro, I want you to tell me what it's costing me. The third thing is, can you tell me each year, report to me what my mix of assets is and the most important determinant of your annual volatility or your risk profile, quite the same, but we'll leave it at that, and your return expectations, your mix of assets between stocks and bonds? So can you give me those three things? Will you give that to me every year? And if you started with that discussion, you're going to win a while all but a few of them,

But those are the three key questions you should always know, how am I doing, what's it costing me, and how am I invested? The fourth thing might be the catch-all question, and that is, some really experienced guy told me, price is what you pay and values what you get. Can you tell me, do you agree with that? And can you tell me how you honor that in what you're going to be telling me? And just listen. but the first three will get rid of, I'll bet you won't get, you'll get, why do you want that? Nobody ever asked that, you know, that sort of stuff.

But now you've put the questions on your ground, not on their ground, because they want to talk to you about annuities or variable annuities or this product or that product or this product or this special thing, that special thing. And that's all nice, but you want to know those three things. So that's what I would tell people, those three questions. So, Fred, a few years ago, you said to me, when you get older, you realize it's all about two things. It's all just about relationships and purpose. And clearly there's a deep sense of purpose for you in managing money for people. I mean, it's not brain surgery, but on the other hand, helping people to have their, you know, to build wealth so that they have opportunities to, you know, retire, give money to charity, do more interesting things, pay for their kids college. That seems pretty, that seems pretty, admirable and important to me. Can you talk about this revelation as you get older of the all importance of purpose and relationships?

You hold are now? I'm 54. So I'm waiting for the wisdom to kick in any day now. Well, no, but you're kind of in that transition period. So, you know, when you're young, you're as a guy you're trying to prove yourself and, you know, you're probably harder knows than you want to be and you're driving hard and you're, you know, and you're not super relational because, you know, it takes a lot of time and effort and you get older and you begin, you know, you have kids and grandkids and, and you get these deep relationship with clients and friends and associates and it's just so rewarding. And they care about you and that means you like to get up in the morning and go see them and interact with them. So that's a big deal,

okay? The other one is purpose. And I have this gift. It's an eight. I know how to manage money. and I love to be able to keep doing that because I can and I've created, you know, I don't do as much as I used to because we've got great people around me, but I still get to invest, deal with customers and go out and get some new business. I mean, that's the thrill for me. That's the juice. And so, and I don't have any trouble getting them when he'd come to work. I mean, it's just, it's a hoot.

And most of my friends are retired. There's not attention there, but there's one of my close, two 70-year friends, One's retired, the other passed away last year. Long-time clients, really tragedy. But what do you do if your health is good, which is a gift? And you can really do this stuff. And you get to help other people and you get to have a lot of fun doing it. Not a fun, like giddy, but like a deep sense of satisfaction.

Man, that's priceless stuff. I mean, I feel like I'm lucky. I tell people, you say, why aren't you retired? I said, man, this is way too much fun. I love to do this. And I, so, I mean, you know, everybody has their own way of doing it. But, and I've seen, I've seen men really like my other friend who's just grabbed retirement. He's just having a hoot.

So he's all in on that. You know, it's great, you know. That's not me. I mean, I like doing this. So. I remember Sir John Templeton, Sir John Templeton saying to me something about how the world is full of useless people who have retired. And he was so, he was so venomous about it. Like, it really.

Well, yeah, I'm not sure. I don't about you. quite there, but it's for me, you know, as a funny story, we went about four or five years. We have an annual dinner for the firm and there was a planted question. Somebody said, so Fred, what are you planning on to do it to phase down? And before I could answer, my wife said, can I say something? And they said, sure, she said, he's not coming home. So I said, well, you just got your answer. But I think it's a highly individualistic, you know, my hope for you is when you're 70, you're still vigorous and you're learning and you're trying to do stuff

and you have gifts and you're trying to keep passing those gifts on and you will infect people around you. I should tell you though that if your health stays good, you know, the problem I have now is I'm still really fit. And so you don't like I play tennis, but I don't play with guys quite as old. Some of the guys are 50. So, you know, so I'm still struggling to win. It's just against younger guys now. So it's not a whole lot more satisfying, but at least you're out, you know, doing stuff. So when you think about risk mitigation in terms of your health and stuff, when you look back and you think what you got right that you can share with people like me who are younger and need to make better choices, what's worked in terms of what did you get right in terms of

keeping your health good? Some of it obviously is just genetic and good luck, but some of it was good choices, presumably. A very high proportion is genetic good luck, right? I mean, you know, my oldest brother is taking phenomenal care of himself. He's the one with MS, but he's taking phenomenal care of himself. I haven't taken that, you know, that kind of care. I've been really, really lucky. So let's not discount that. I think, but I would share this, I think, never smoked, moderate drinker, never did drugs. And I, the other thing, I watched my dad, my dad was at 6.1.8, 155, who was moving all the time. I don't know how fidgety you are, but I'm fidgety, and I'm always doing stuff. So, you know, without even trying, I have a Garmin watch. We own the stock

and I have the watch and it measures my steps every day. And I average about six miles walking a day just in normal activity because I'm doing stuff. And so I think if you stay active, that's one of the best things you can do. I do exercise regularly. I'm particularly, I don't like the, I was on a treadmill, so I have to turn the TV out and boards it. But I love playing sports. So, you know, but I have to tell you, I think 80 plus percent is genetics. I do. And 10 percent's luck and 10 percent is what you do. I think as you get older, purpose and relationships is going to lead you to better health for what it's worth. It seems like you also had a major shift in your life when you hit your 50s, right? And you became pretty devout Christian. And I was wondering

before I let you go in a couple of minutes, like how did that change everything? Because I mean, that must inform your sense of purpose and your sense of being a custodian of wealth rather than it all being about maximizing the pocketbook of, you know, you and your colleagues. Like, how did that change everything for you? Well, so the context was I hadn't been to church since I was 17. So my marriage failed, my first marriage, and then I was a central part of the failure. If you're a stand-up person, all your marriage fails, you can't, you know, you can't blame the other person. You're a central player. I liked some parts of where I was going, but I realized that I needed some sort of an overarching framework to go forward.

And I read the four Gospels. I read the story of Christ, and I read it. I mean, there were some things that happened. Like, I was talking to a counselor who I didn't even know he's a Christian. And he says, you have no spiritual basis to your life. And I said, you're right. So I started, and I got invited to a Bible study group by a friend of mine who quit. I went after 12 years.

but I read the four gospels, and if you read that, not, what happens to all of us is, I remember first time I went in this Bible study thing, I looked all around like, we were all these strange people, man, this is strange stuff. These are a bunch of holy rollers. But when I read the four gospels, and if you actually read that and you actually take the time to read what Christ actually says in there, there is, you can almost pick up a section and get three or four things that are just literally not senseless. radical concepts on how to live, how to think about things, how he answers questions,

the stoning of the woman who was a prostitute, who was, you know, is without sin cast, the first stone. I mean, this is just like ridiculous stuff. And I thought to myself, because I'm a skeptic, I thought, there's no way he wasn't like the son of God, because nobody could, you can't make this up. And who in their right mind allows himself, if he had any chance to save himself? And he had the power to do it. Why did he let himself? Why do he? Why do let himself be humiliated and killed on the hope that we would all follow. And there was no contract like saying, I'm going to do this and you're all going to do that. I was just like anyway. And of all of us worry about our legacies, you know, and he didn't have kids. He didn't have any money.

And, you know, talk about a legacy. I mean, this is like the legacy to land all legacy. So anyway, that's part of it. The other part, because I'm not stupid, I'm thinking to myself, if I do this Christian stuff, is, am I going to lose my competitive edge? I mean, you're successful a certain way. And what happened is actually maybe a little better as a investor because I got less afraid of losing money than the next guy. I got it in a right perspective. Okay.

I did something else. We talked about this idea of, you know, running the right amount of money. How about changing your paradigm with respect to assets? So how about saying that it's not how much assets you collect over your lifetime. It's what kind of steward of those assets you are. I've changed the paradigm. So it's not about how much you collect. And I'd become a much better steward.

I've given a lot of money away, but only the places that really helped a wide variety of places that, you know, help all kinds of people that need help. But they're effective, okay? And it transformed my relationships. It made me a better, I was always a natural leader and a terrible follower. And now, because I became a follower, I'm a better leader. I know that sounds goofy, but how do you lead if you're not a bad follower? follower. Somebody said to me, well, you're so successful, how do you control arrogance? And I said, well, as soon as I feel a little bit full of myself, I compare

myself to Christ and I'm right back in the dump, okay? So I don't have any problem. So my relationships got better, but I became a better investor, which I didn't know. It was one of those things. It was a, and I didn't, I would also tell you that I didn't like, no light bulbs. I didn't like, wake up one morning, like, you know, the sun is shining. I had a lot to unlearning. This was a long, I'm still at it, but it's a long journey. Why did it make you less fearful, Fred, of losing money? Why would it have that impact? Because I put it, I put in the proper perspective.

I went from not how much you collect, what kind of steward you are. It just changed. It was a paradigm ship. So, you know, am I charitable giving? I tell them when I give and hope for a bull market could give you more. So I don't give in bare markets. I've given bull markets because I'm investing for the future and I expect them to. But yeah, maybe it just, I just, I just,

I changed the paradigm. How you, we talked a lot about this today, about, you know, sort of issue framing, you know, and, you know, like margin of safety and process. So it reframe my view of the world. And, you know, I didn't even share this with you, but, you know, it's been a rough three years. We got sued by a former employee. That was tough. My middle son was killed on a bike accident last summer.

He was the most wonderful young man with two kids. I'm so sorry. expert bike racer. And then six weeks after that, one of my long-running beloved business associates was hit by a train and killed. So this all happened last summer in 21. And so one of the things that helped me with, my middle son was the most like me. So it makes it even, you know, it's just a wonderful young man as an architect, just fabulous. And so, and I thought long and hard about it. And so one of the things that I concluded was we go through life and we have roles like your husband.

Do you have kids? I assume you do. Yeah, yeah. I have two. A son and a daughter. Yeah. Thank God. Okay.

So you're a father, a brother, son, okay, husband. Those are all roles you play. An author, those are roles you play. But what is your identity? And so I have multiple roles. And my identity is I'm a child of God. And that is what drives me. So that's how I can cope with losses and not dissolve in a, you know,

and by the way, my wife has, was diagnosed. with Alzheimer's in March. Okay? So we're dealing with that. But I tell you that, not to elicit sympathy, I tell you that, that having my faith and having my identity be as a child of God helps me weather these things. I mean, it's just, the loss is incomprehensible. I, you know, each morning I read up reading a Bible has little stories of mourning and, you

know, I'm still processing my son's death. It's been over a year and I'm still trying to process it. It's a real hard one to come to grips with. Yeah, that's unthinkable. I'm so sorry. If there's something that you could share with other people who are listening, who are wrestling with their own grief or pain or suffering, what's helped you massively to deal with these sorts of things?

Like when you were saying that it's helped you to think of yourself as a child of God, what can we borrow from you that's been helpful? I think the thing that I would say is this. So the other thing I really concentrate on is if something good happens, enjoy it. You know, when a depressed person goes, well, today, things are going pretty well, but tomorrow's going to stink. A healthy person goes, hey, this was a great moment. You know, with my wife of Alzheimer's, she's a wonderful person. We don't have as many wonderful moments as we used to have, but we do have some wonderful moments.

So I take those and I try to say this is a wonderful moment. And I'm going to remember that when, you know, she can't remember something or, you know, her temper gets out of control or something. So I would say you can practice that. You can, you know, again, I'm a child of God, so that's my prime identity. But if something good happens, I'm going to, I'm going to accept it. I'm going to say this was good. This was a good moment. There'll be bad moments coming.

I get that. But this was a good moment. What you do is you recharge your batteries. You, you know, there is. There's always a risk of being a, you know, Pollyanna. But we've had throughout this process, extraordinary acts of kindness. You know, the way we've worked with our associates widow has been the whole firm rallying around her. He was a big soccer fan for the local MLS franchise.

And we had rented a big box. We had a day in celebration of him. I mean, so I think there is been a lot of miraculous things. There are miracles all the time. You just have to see them right in front of you. I have so enjoyed the process of your book, at least as it relates to me. It's been just a, it's been a joy. I mean, I was re-rewritten back and said, our paths will cross again.

I just knew they would. And they have, okay? But, yeah, I think that when people, you know, by the way, last year, my 70-year friend died, he had a, he was a fabulous guy. He had almost a version of a brain disease that closed his throat. And after a while, he couldn't eat, couldn't swallow. And finally, you know, it was so weak. They took him off food and he died.

I mean, so stuff happens. As you get older, right, stuff happens, you know? And I think you do, you have to understand, stuff happens. But the ability to relish, it sounds like, to relish, savor, appreciate, that's kind of been huge for you, it sounds like, to relish the good things. This interview is a great thing. I mean, I could either, it's a chance to have my voice heard. chance to connect with you. This is a labor of love. And so how can I be, you know, how can I,

the other issues, do you, I mean, I had the example. My dad, my mom died at 67. My dad lived until he was 91. He soldiered on. It was just a crushing loss for him. She was just, he was crazy about her, and she died at 67, you know, and he just soldiered on. So, but I think you got to just, you know, if it's a good thing that happens, treasure it, because it'll be bad stuff. And just, but soldier on. And I don't think we have the, I want to say this carefully, but I don't think we have the right to roll our tent up because bad stuff happens. I just don't, I mean, nowhere does it say, you know, you can choose to do that, but I don't

think, I don't think you need to. I've been so lucky health-wise and, you know, and quick story, you know, my, this is a miracle. My wonderful son's widow, you know, was really considering suing a wrongful death suit against the kid that got tangled with my son, they were riding bikes, and I was really against it. And she decided on her own not to do it. And that was a miracle. That's what I look at it, you know. So stuff happens, sometimes good, sometimes bad.

And you have a choice. You're going to roll your tent up, you know, or you're going to soldier on. And you soldier on. I think in the epilogue of my book at one point, I wrote something where I said there's great honor in the simple virtue of perseverance. And I didn't say it in a kind of. a facile way, I really meant it. Like the power to persevere when life sucks, when everything is going against you. There's something incredibly noble and inspiring about that simple dogged,

dogged refusal to roll up your tent. I totally agree. And you might have, that may have been a thread that you, I'm even more interested now rereading the book because I think I'll get more out of it next time. This is a fun journey. Bernie. William. Oh, thanks. I was looking back at my notes from our conversations over the last couple of days from our conversations back in 2017.

And you said to me at the end, these will be the first of many conversations. And I think both of us feel that. It's just a real pleasure learning from you and chatting with you. And I'm really grateful that you come on and share these ideas. They're very, very helpful and enlightening. And so I hope we'll keep talking. I hope so. I was mostly nervous that I would not be helpful.

enough because that's, you know, I love teaching. And you're a good interviewer. So, I'm good. Well, thank you so much. And I'm finally going to let you go. But it's been a real delight. Thank you, Fred. And I'm sorry it's been a tough year. And I'm hoping that the coming one will be much brighter and happier for you. It'll be what it is. And I will persevere. I think that's the right term. So thank you. Great. Thank you. Thanks. Yeah. All right, folks. Thanks. much for listening to this conversation with Fred Martin. I hope you can see why I admire him so much. For me, he's not just a great investor, but an extraordinary human being. If you'd like to learn more from Fred, you may want to check out his book, which is titled Benjamin Graham and The Power of Growth

Stocks. I've included the details in the show notes of this episode, along with links to various other resources that you might find helpful. You can also read more about Fred in my book, Richo, Wiser Happier, where he talks in some depth about how to succeed over the long term by avoiding disaster. As Fred once told me, we're bound to make mistakes, but the key is to make sure that those mistakes don't kill us. That's an important lesson, whether you're buying stocks or buying a plane or climbing a mountain. Speaking of which, I'd strongly encourage you to watch the documentary that Fred and I discussed about the legendary climber Alex Honnold.

It's called Free Solo, and it's both scary and absolutely spellbinding. I'll be back again soon with some fascinating investors, including Ray Dalio, Guy Speer, and Tom Gaynor. In the meantime, feel free to follow me on Twitter at William Green 72, and as always, do let me know how you're liking the podcast. I'm always really happy to hear from you. Thanks again for listening, and in the spirit of today's episode, take good care of yourself and stay safe. Thank you for listening to TIP. Make sure to subscribe to we study billionaires by the Investors Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday we study billionaires

and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors' podcast network. Written permission must be granted before syndication or rebroadcasting.