We Study Billionaires - The Investor’s Podcast Network - RWH021: Investing Amid Uncertainty w/ Joel Greenblatt, Bill Miller, Howard Marks, & François Rochon

Starting point is 00:00:00 You're listening to TIP. Hi folks, it's lovely to be here with you again. Today's episode of the podcast is a little different from my usual episodes. As you know, I typically like to do long, in-depth interviews with great investors. But today, I want to look back at several of the most important interviews I've done over the last year so that I can highlight a handful of lessons that I think are particularly valuable. Why do this? I don't know about you, but I tend to find a few.

Starting point is 00:00:30 feel overwhelmed by the amount of information I consume these days from books and newspapers and magazines, podcasts, TV, blogs, social media. I personally subscribe to the New York Times and the Wall Street Journal and the Financial Times and Bloomberg News and Barron's and the New Yorker and the economist. And I'm also an obsessive reader of books and listener to podcasts. So I'm just bombarded with information. And at a certain point, I find that there's just too much noise and it's easy to lose sight of what actually matters. So today I want to stop and take stock. I want to look back and focus on a few really key insights that have stood out from my conversations with lots of great investors over the last year of this podcast. In particular, I'm going to focus

Starting point is 00:01:22 on insights from four great investors, Howard Marks, Bill Miller, Francois Rochon, and Joe Greenblatt. I want to talk about why I think these insights matter, why they're so important that I personally need to internalize them and never forget them. And obviously, I hope you'll find them equally helpful in your own investing and life. The overarching topic that we're going to explore together is this. How can you and I invest in a successful and truly resilient way in such an uncertain, risky and unpredictable world. For me, this question of how to deal with uncertainty and make good decisions when the future is unknowable is one of the great questions not only in investing but in life.

Starting point is 00:02:12 And it feels particularly timely right now at a time when so many of us have been rattled by economic and political turmoil and geopolitical turmoil with the war in Ukraine and the energy crisis and climate change, extreme weather events, and also obviously lots of market volatility over the last year. We're also going to talk about the related question of how to handle the emotional intensity of investing, because really, as you and I both know, that so much of the game of investing is about managing our emotions, whether it's fear and greed or jealousy or anxiety. And we'll also talk about why it's actually rational to be optimistic about the future,

Starting point is 00:03:00 despite all of these storms and stresses along the way. So over the next hour or so, I'm going to play you six clips from conversations that I've had over the last year with these four legendary investors. and along the way I'm going to add some comments of my own and we'll try to explain what it is that I find so valuable about the lessons they're sharing with 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. I'd like to start with Joel Greenblatt, who, as you may know, having read the chapter about him in my book,

Starting point is 00:03:54 richer, wiser, happier is one of the most remarkable and successful investors of our generation. Back in 1985, when Joel was only 27 years old, he founded a tiny hedge fund called Gotham Capital, which was bankrupt largely by a famous Wall Street tycoon, the junk bond king and multi-billionaire Michael Milken, who was his first major investor. And Joel proceeded to hit the ball out of the park to an astonishing degree. his investment returns at just the stuff of legend over the next 20 years. He averaged 40% a year, which is really unheard of. At that rate, to put this in some context, you turn a million dollars into $836 million,

Starting point is 00:04:39 which is astounding. But as Joel explains in this clip, he got off to a pretty terrible start. And what's interesting is that this happened when he was investing in what he regarded as pretty much a risk-free investment. He was specializing in those days in a lot of special situations like spinoffs and mergers and the like. And so he found some virtually risk-free bet that turned out to be anything but. In any case, here's Joel speaking to me on this podcast in 2022. And I'll comment on it afterwards. I hope you find it as instructive as I do. Well, the interesting thing, Hartcourt Brace Giovanovich, which was a publisher,

Starting point is 00:05:24 but also owned amusement parks in Florida, believe it or not, went to buy a very small company called Florida Cypress Gardens, which I remembered as a kid going to, and they had water skiing Santa Claus's during Christmas time and, you know, all kinds of water shows and beautiful gardens. And it was a very unique, interesting, and very memorable place to visit when you're five or six years old. And when I saw they were getting taken over, and this was literally in the first month, I went into business for myself. And, you know, I was pretty nervous. I was 27 and I had gotten money from a very famous guy and I wanted to do a good job. And I saw this opportunity where Florida Cypress Gardens was being taken over and there was a nice spread in that deal where I could make a lot of

Starting point is 00:06:03 money if it went through. And I thought the deal made a lot of sense at the time. And so I was able to have a big smile on my face and buy Florida Cypress Gardens as one of the first investments I made when I went out on my home. And a few weeks before the deal was supposed to close, unfortunately, Florida Cypress Gardens fell into what's called a sinkhole, meaning the main pavilions of Florida Cypress Gardens literally fell into a hole that appeared out of nowhere. And apparently that happens a lot in Florida. I wasn't that familiar with it. Thank God, I wasn't that Florida Cypress Gardens wouldn't happen. But the Wall Street Journal wrote a really humorous story about it. And I was like, why is this funny? You know, I'm about to lose my business. I had taken a pretty decent size bet in this

Starting point is 00:06:41 deal. You know, so it just tells you things can happen that you don't anticipate that it's not really your fault. I had never even heard of a sinkhole before I read about this happening. So it's like a risk that I, when you're doing an merger deal, you're not really saying risk of sinkhole is in your checklist of things to look for. And so stuff happens. That's kind words for that. It's a good lesson to learn, especially out of the box. I was sweating pretty good. They ended up recutting the deal at a lower price and I lost money, but not that terrible. And so I got a Howard Marks is my favorite line from Howard Marks is always, experiences what you got when you didn't get what you wanted. I always love that line and that's what I got in Florida Cypress Gardens

Starting point is 00:07:20 some good experience. Yeah, it's a good reminder of just the sheer uncertainty of this business, which I think you've talked about how you've seen that again with COVID, the idea that suddenly you could actually find that all businesses, all these businesses that you thought were pretty steady compounding machines would close entirely for a year. Nobody could go shop there, for example. Yeah, I mean, I have five kids, a couple of which I've taught investing or try to teach investing too. And, you know, I was trying to teach investing early 2020 when when COVID appeared. I tried to explain, you know, I've been doing this a long time. I've never seen this, never anticipated anything like this. You know, I've never seen where they just closed down

Starting point is 00:07:59 the world. And, you know, besides the terrible human cost, I'd never seen anything like this. And I just tried to explain to them that I'm not going to be much help here. I've never seen this before. But it is a good lesson to learn that you have to be at least diversified enough. and aware enough that really bad things can happen. And you have to live to play another day. It was probably the best lesson to learn that you can't put all your eggs in one basket. And you can come back from big mistakes as well. You know, I've made big mistakes with big positions as well.

Starting point is 00:08:31 And then bad things just happen. Part of what you, I always thought you get paid for in this business is kind of your stomach. That what I enjoyed about getting into the business was if you think well and if you try to figure things out, It's not really a count how many hours you showed up thinking that. It's the quality of your thought. And in this case, it doesn't matter how well you thought, other things still can happen and understanding that. Understanding that bad things can happen and preparing to survive to play another day is

Starting point is 00:09:01 important. And so I think that was one of the best lessons. Of course, the market came back fairly quickly. So it wasn't as painful as it could have been. But we didn't know that at the time. I mean, I remember watching Warren Buffett at his annual meeting right in the thick of things, maybe at the end of March 2020. I think it was maybe April 1 or I don't remember, not far after COVID started.

Starting point is 00:09:26 And he didn't look like this was nothing. And it was a little frightening to see because it was really staring at the unknown. And if you're looking at the unknown, one of the benefits of working for a long time in this business is a lot of it is gaining, is gaining experience, seeing a lot of things, contextualizing things, comparing things to what's happened in the past and what might happen. And this was fairly unique. I love this story of the pavilion of this company falling into a sinkhole in Florida, because it's just such an unforgettable metaphor, I think, about the uncertainty of life.

Starting point is 00:10:01 It's a reminder that more or less anything can happen. As Joel says, these things aren't necessarily your fault, and you don't anticipate them. And it really reminds me of a story that Peter Lynch told me once many years ago. I was interviewing him as a journalist, one, 20 years ago. And Lynch, as most you will know, was this legendary investor fidelity ran the Magellan fund with just blistering success over about 13 years or so and then retired. And I was talking to Lynch about his early experiences as a money manager and what he'd learned

Starting point is 00:10:36 from Ned Johnson, who is his boss and mentor at Fidelity, who is the patriarch of Fidelity, this firm that now runs trillions and trillions of dollars. And Lynch told me that early in his career, he made this investment in some kind of fashion retailer. And he said they'd had this amazing year, and it was, I think, their best year of revenues ever. And then the movie Bonnie and Clyde came out.

Starting point is 00:11:04 And Faye Dunaway, this actress starring in Bonnie and Clyde was wearing these incredibly beautiful retro dresses that I think had very long hemlines if I remember correctly. And this changed women's passion so dramatically and so suddenly that in the same year that this company had record revenues, they also went bankrupt and he lost his entire investment. And Lynch said to me that he was kind of worried about this and he was breaking the news to Johnson. And Ned Johnson just burst out laughing and said, no, no, sometimes things just come out of left field and there's nothing you can do about it. It's just part of the game. And I think it's just

Starting point is 00:11:46 such a valuable thing to remember that this is, we live in a world of tremendous uncertainty where a movie can change women's fashion, totally unexpectedly, where a pavilion can fall into a sinkhole, where somebody eating some wild animal in a wet market in Wuhan, China, can lead to this catastrophic pandemic that changes all of our lives and transforms the way we work, transforms the way many of our kids have been educated over the last couple of years, it costs millions of lives, turns the economy upside down. I mean, it's just astonishing.

Starting point is 00:12:24 It's an incredible reminder of just how little we know about the future. And it reminds me, again, there's a wonderful quote from the Athenian playwright Euripides that I think he wrote about 2,500 years ago, who said something along the lines of, how can you consider yourself a great man when the first accident that comes along can wipe you out completely? And Montania, the great French philosopher, actually wrote those words on a beam in the library of his chateau in France. And I think it's a good thing. And I think it's a good thing to remember. I used to have this discussion often with my friend Guy Spear who runs the Aquamarine Fund and whom I helped write his autobiography, the educational value investor.

Starting point is 00:13:09 And we would talk about this great story from Damon Runyon, a wonderful writer who he wrote the story, the idyll of Miss Sarah Brown, which became the musical Guys and Dolls. And Runyon tells this fabulous story in it where Sky Masterson, the star of the hero, the hero, the protagonist of this story is a high rolling gambler. And his father sends him out into the world with one piece of invaluable advice, really against the perils of overconfidence. And his father says, look, one of these days, son, somebody is going to come to you and they're going to open a totally pristine new pack of cards.

Starting point is 00:13:51 And they're going to say to you, I'm going to bet you that the jack of spades can leap out of this pack of cards and squirt you in in the ear with cider and he says son do not take that bed for sure as we're standing here you're going to end up with an earful of cider and so geysphere and i used to joke about this this idea that you have to beware of ending up with an earful of cider and so in some ways this is kind of unsettling right you you start with this recognition that we live in a very uncertain world where almost anything can happen but we need need to recognize reality as it is, right? This is one of the great lessons from Howard Marks, that you need to accommodate yourself to reality as it is, not as you wish it to be. And so we start

Starting point is 00:14:36 by recognizing that we live in a world where, as Joe Greenblatt says, you're staring at the unknown, right? This is a world where there's the potential for natural disasters, cyber attacks, wars, as we've seen in Ukraine, pandemics, conmen, like Madoff. I've been watching a terrific series about him on Netflix, I encourage you to watch. And so one of the first lessons that I think we really want to internalize is this one from Joel, which is you have to live to play another day. And that's just vitally important. I think this emphasis on survival, an avoiding ruin, avoiding disaster is just a fundamental idea, both an investing and life. You've got to position yourself so that if you're wrong, you're still going to survive, or if you're unlucky,

Starting point is 00:15:28 you're still going to survive. And I think this is really what Ben Graham's idea of the margin of safety was all about. It's about how to protect yourself in an incredibly uncertain world from bad luck, misanalysis, mistakes, your blind spots. It's a very mature and worldly wise view of our own limitations. And I'm reminded also of some of. I'm reminded also of something that Jeffrey Gundlack, who's often called the Bond King, once said to me, which is, he said, look, I'm wrong about a third of the time. And he said, the key is to make sure that your mistakes are non-fatal. So what do you do? You're not powerless once you actually recognize the fact that you need to focus on avoiding ruin and making sure that your mistakes are

Starting point is 00:16:16 non-fatal. Because the most obvious thing is you need to diversify. And this is just a recurrent. theme. It's so obvious, I'm almost embarrassed to say it, and yet we fall into this trap again and again. And it's funny, a friend of mine who's a well-known mutual fund manager sent me an email the other day, pointing out that a fourth century rabbi named Isaac Bahaha, I think I'm pronouncing his name right, but probably not, recommended putting a third of your wealth in property and a third in merchandise and a third in cash. So this is 1600 years ago. It's, this is, this is is not a new idea. And the first episode of the podcast that I did, which is before the Richard Wise Happier Podcast existed. And I did a guest episode on We Study Billionaires, which I think came out

Starting point is 00:17:04 on January 1st, 2022, if you want to look for it, was with Ray Dalio. And Dalio, again, talked about the power of diversification. He talked about his all-weather portfolio, where he finds a bunch of different assets that aren't highly correlated. So, for example, he talked about investing in stocks, but also in inflation index bonds and gold and the like. So this is just a really fundamental idea, right? We live in an uncertain, unpredictable world where the future is unknowable. So you have to diversify. But I would say there are some other really key ways in which we need to diversify, one of which is I'm slightly fearful and paranoid about what would happen if there were a problem with an institution that was holding my money.

Starting point is 00:17:49 And I just, I don't want to have too much money in one fund, in one brokerage firm, in one bank. I, you know, call me paranoid. But who knows what can happen in terms of cyber attacks and the like or financial malfeasance? And I just, I just don't want to take that risk. I would rather just spread my money, spread my bets. And I think the same goes for asset classes. You don't want all your money in one asset class. in one country.

Starting point is 00:18:18 There's a well-known bias, home bias, home-country bias, where people think, oh, yeah, I'm in America. I should have all my money in America. I just, I think you should remind yourself of what happened if you lived in a place like Cuba or my in-laws who had to flee from Vienna during World War II or my ancestors who had to flee from Ukraine and Russia or in Poland in the first part of the 20th century. And so this idea of diversifying not just among asset classes, but countries and currencies, I think it's just a wise precaution in a world where anything can happen.

Starting point is 00:18:56 And another really important idea, I think, comes from Howard Marks, who when I interviewed him for my book, just said, look, the real question is, how much do you push the limits? You just want not to overreach, because given that we're facing an unpredictable and unknowable future. Part of preparing for that unknowable future rather than trying to predict it, which, as we all know, I think, is impossible, even though we fall for the bullishness of people who pretend that they can predict the future for the economy and for the market. We have to admit to ourselves, I think, if we're honest, that we can't predict it. So if we want to prepare for it, what do we do? We have to say, well, I'm not going to overreach, so I'm going to set aside some

Starting point is 00:19:36 cash. I'm going to diversify. I'm going to live within my means. I'm not going to take on so much leverage that I'm a forced seller at the worst possible moment. And so these very simple precautions actually grow out of a mature recognition that the future is unknowable, unpredictable, and that we live in a world where a pavilion can fall into a sinkhole when we didn't even know what a sinkhole was. But then there's a caveat here, which is, I remember Howard Mark saying to me, once that at a certain point, risk avoidance becomes return avoidance. And so you don't want to become so paranoid about the future and all the things that could go wrong that you fail to

Starting point is 00:20:24 take advantage of opportunity. And there's a quote in my book, I think, where in a chapter called The Resilient Investor, where I think it's Nietzsche, I quote, who says that at a certain point, if you stare into the void too long, you become the void. And I think we want to avoid that. We want to be wary of what can happen and position ourselves to survive our own mistakes and our own misfortune and our own ability to be blindsided or biased. But at the same time, as we'll talk about more later in this episode, we want to be very positive about the future. We don't want to become so pessimistic that we curl up in fetal position and don't invest. Because really, what all of the greatest investors are doing

Starting point is 00:21:10 is taking advantage of these uncertainties, taking advantage of the times when other people are fearful. And so I think it's not about avoiding risk. It's about taking intelligent risk. It's about taking considered risk. And

Starting point is 00:21:26 there's one other lesson that I think is really important from this clip of Joel Greenback talking about this early mistake in his career, which is that he said, you can come back from big mistakes. And again, it might sound like a trivial and obvious point, but I think this idea of how we deal with our mistakes is really important. And I remember once asking Joel about this question of how he deals with mistakes.

Starting point is 00:21:50 And he said to me, look, I learned the lesson. I studied the mistake. I try to learn the lesson. I try to internalize it. But then I let go of it. I don't become paralyzed by it. I move forward. And I thought about this a lot because I think I tend to have this habit of, of me.

Starting point is 00:22:08 messing up and then kind of flagellating myself and feeling like, I can't believe I did this incredibly stupid thing. And it kind of haunts me. And I've tried actually to wean myself away from that habit. I know that Charlie Munger talks about the importance of rubbing your nose in your mistakes. And I think it's important not to bury your mistakes. You want to study them. You want to admit them. You want to talk about them. But you don't want to overdo it and become paralyzed by it. You learn the lesson and then you move forward. And I often think about this line from this great Buddhist meditation teacher called Sharon Salzberg who would say, all is not lost. And she would say, let go and begin again with self-compassion. And this has become a kind of mantra for me.

Starting point is 00:22:54 It's helpful when you're meditating and you lose your breath and you see your mind goes elsewhere and you start to think, wait, where was I? I'm a terrible meditator. And then you're like, no, no, that's fine. because really the rep here is to notice that your mind wandered and to come back to the breath and begin again. But this also is such a beautiful microcosm of life, right? We mess up, we trip up, we make mistakes as investors, we make mistakes as parents, we make mistakes in every area of our life because we're human. And the ability to learn the lesson, to say to ourselves, all is not lost, and to let go and begin again with self-compassion seems to me actually a really important aspect

Starting point is 00:23:34 of resilience. So again, just to sum up, I guess the key really is to focus on what you can control, right? There's so much we can't control. We can't control necessarily what's going to happen. We don't know whether we're sitting on top of a sinkhole or not, but we can diversify, we can live within our means, we can set aside a cushion, we can decide not to overreach, and we can also learn the rules of the game of investing so that we actually know what we're doing. That's a pretty helpful, a pretty helpful idea as well, which I think we'll probably come back to. 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.

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Starting point is 00:28:22 how to deal with the emotional intensity of investing, especially in tumultuous times like we've been through over the last year or so, here's the question I asked him, followed by his answer. Have you ever figured out ways to handle your emotions and to become more emotionally resilient? Because I think of someone like Howard Marks, right, who we talked about before, Howard, I think is he says that he's a warrior, but I think also he's not super emotional. I always felt like when I was with him, it felt like being in the presence of a most superior machine, you know, with about 50 more IQ points than I had. And when I think of someone

Starting point is 00:28:56 like Charlie Munger who said to me at the bottom tick in March 2009 when he was buying Wells Fargo, he didn't feel any, any emotion, any fear. And I was wondering if you were wired that way yourself not to be too anxious, kind of focused on odds, or if there were things that you had to do to get your emotions under control during these very rocky periods. Yeah, so I think what you're alluding to is to be a really good investor and have a strong enough stomach, do you have to have a screw loose someplace to be able to handle it? And I think the answer is yes. You have to have a little bit of a screw loose to be able to take those risks. On the other hand, I do feel the kick in the stomach when I lose a lot of money, but I usually adjust to it in two or three

Starting point is 00:29:37 days, try to get my wits about me to take advantage of the opportunity. So I think I'm human, at least in that part, where the kick in the stomach, but you kind of get used to it. So I think different parts of your career are different. When you're young, you figure you have have time to make it back when you're older, you maybe have the experience to know that it will come back. And I've seen this before and I've seen it not only once, but many times. And so, what do you do here? I'm not saying you can completely defeat the emotions that are involved in and those emotions are very strong. But I do think, at least for me, being able to adjust and count your blessings fairly quickly and say, okay, can I live with where I am now? Yes,

Starting point is 00:30:19 let's move forward and try to do it the right way. One of the best experiences I had was when I had a summer job and a friend of mine was working for actually the head of risk arbitrage at Dressel. And the guy running that department was about 72 at the time, which I thought was ancient now. I think he was a youngster. But I forgot why I had an opportunity to talk to him, but either we were taking a walk someplace or whatever. And I was saying, you know, I was so upset that I lost money in this thing and how unfair it was and this thing came out of the blue. And this gentleman turned to me and he says, well, have you ever made money where, you know, you were kind of lucky? And, you know, it turned out better than you expected. And I said, yeah, that happens a lot.

Starting point is 00:31:01 He said, well, does it happen more than when the bad things happen? I said, yeah. And he said, we'll stop complaining. And, you know, it's a good way to contextualize. You know, if you didn't take risk, you couldn't make extra money. You can put your money in the bank and only take inflation risk or whatever that might be, but at least you know what you have. But one of the reasons you're able to make money is that the stock market gets very emotional sometimes, creates these opportunities, but it also comes along with pain. If it didn't, everyone would do it and you wouldn't have this opportunity. And of course, I'm saying something now not in the heat of the moment that sounds very logical. But eventually you get there. Eventually, when bad things happen in a few days,

Starting point is 00:31:42 if you can get your sea legs back and start thinking, okay, where are my opportunities? What can I do? Can I trade around in my portfolio? Is there a new opportunity that came up that's maybe better than what I have? And that's been the case. So I think good investors maybe still get kicked in the stomach, but then come back soon enough to take advantage of the opportunities that come there. I think big, big picture, you have to have a little bit of a screw list to take the pain, especially with a very concentrated portfolio that a number of people I know pursue. I did it for a number reasons. When I'm looking for really what I would call unfair bets, I don't have 50 or 100 unfair bets at a time to take. So by necessity, when I was running a very concentrated portfolio,

Starting point is 00:32:23 take six or eight of them and just have a very fine. I think you have to have a very high hurdle, meaning, well, to get into the portfolio, it has to be really great. And if you own six or eight great things, or at least great bets, that's more comforting if you actually know what you own. If you don't know what you own, if you don't know how to value a business, you're just going to react to the emotions because you don't actually understand what you own. But if you actually understand what you own and the premise that you bought those things with is still intact, that's actually the only way I think you can deal with the emotion because you realize it's what you own is still good. There are a number of things that I found really striking in this answer from Joe. the first of which is that it's interesting to me that even he feels the kick in the stomach, that this is not a painless process for even someone I think as temperamentally well suited to this game as Joe Liz.

Starting point is 00:33:19 I do remember when I asked Howard Marks whether he found it difficult to invest during the financial crisis around early 2009, at late 2008, when he was investing incredibly aggressively in toxic bonds. He said, no, I don't remember it being difficult at all. And I said to him at the time, do you, were you always this unemotional? And he said, yeah. And I said, have you had trouble with your relationships as a result? Because I knew that he'd been married a couple of times. And he said, yeah, it was difficult in my first marriage. He said, I've become better about it. But yeah, I was always pretty unemotional. So I do think that the greatest investors tend to have a temperamental advantage. There's a there's a difference in their wiring sometimes, I suspect. But then it's interesting to me that you hear Joe Greenbott saying

Starting point is 00:34:09 that even he feels the kick in the stomach. And I think that gives you a sense of the emotional intensity of this game. This is tough. And one of the things that also Joe points out that I think is really important is this idea that because it's painful, because it's emotional, that's actually why we can make money, right? We can, this is something that goes back to Ben Graham with his concept of Mr. Market, that the market is basically bipolar. And so it's driven by these intense emotions. And so you as the investor can decide, well, I don't actually have to take the deal that I'm being offered because nothing is cheap enough for me to buy. And so part of the advantage that people like Joel or Howard Marks or Charlie Munger or Warren Buffett have is

Starting point is 00:34:57 that they're able to stand aside in a fairly dispassionate way and watch the craziness of this game, the bipolar mood swings of the market, and most of the time just not do anything, and then just wait for a few mispriced bets, a few opportunities that are very appealing, and then they strike with what Munga calls gumption. So it's a mixture of these long periods of inactivity, followed by some periods of extreme aggressive activity. That's a very common pattern among the greatest investors. I'm also reminded of something that Joel said to me when I was interviewing him for my book. He said, look, on this subject of opportunities coming out of pain, he said, people are crazy

Starting point is 00:35:44 and emotional. They buy and sell things in an emotional way, not in a logical way. And that's the only reason why we have any opportunity. So if you have a way to value businesses that's disciplined and makes sense, you should be able to take advantage of other people's emotions. So there's this central idea that you're trying to take advantage of other people's emotions. You're not just trying to control your own emotions. But this raises this really important question that Joel mentions, which is, do you actually have a disciplined way, a disciplined logical way to value businesses? And one of the things that Joel explained to me that I think had a profound effect on me is he said, look, if you don't know how to value a business, you really have no right to play this game.

Starting point is 00:36:31 You should own an index fund or you should invest with an active fund manager who does know what they're doing. And so this is a really central idea, right? You have to actually ask yourself if you're qualified to win this game. And you need to understand the rules. And so one of the things that Joel impressed upon me is he said, look, the whole game, basically stocks are ownership shares of businesses and you're valuing them. And then you're trying to buy them for much less than their worth. And that's it. That's the essence of investing as he sees it. And so he said, if you don't know what you're looking for, it's like running through a dynamite factory with a burning match. And he said, you may live, but you're still an idiot. And I think that's something that we've seen. seen in this recent period where people were getting extremely carried away by high-tech stocks that they thought you could own forever or by cryptocurrencies that they didn't understand that were driven to some degree by the greater fool theory, the idea that someone stupider

Starting point is 00:37:32 was going to come along and buy it from you. It was just price momentum. And I'm not trying to be insulting because I made plenty of dumb mistakes myself, but I think this fundamental understanding from Joe is an important one to internalize, this idea that we have to know what we own, we have to value it in an unemotional way, and that if we don't know how to do that, then we're at a tremendous disadvantage because we're just carried away by the mood swings of the crowd. And this is something that comes up again and again in the interviews that I've done with great investors. If you listen to one of the most recent episodes that I did with Fred Martin, who's remarkable, he talks about this fundamental process where you value a business

Starting point is 00:38:18 and you buy it a discount to what it's worth. And then, as he puts it, there's a truing up between the intrinsic value and the stock price. And as he puts it, you have no idea how long it's going to take. It's pretty random. And, you know, so one of the keys to being a successful investor is to have the patience to wait for that gap to close. Joe Greenblatt said to me once, typically it only takes two or three years. Sometimes it can take longer the market, as we know from John Maynard Keynes, can remain irrational for longer than you can remain solvent if you're really unlucky. So again, it's understanding the fundamental underlying process, the rules of the game, buying stuff at a discount, knowing how to value it in a sensible, disciplined way, and then waiting

Starting point is 00:39:03 for that gap to close. In another episode of this podcast, I spoke with Bill Miller about this issue of the emotional challenge of investing. I wanted to get a better sense of how he personally deals with the pain and pressure, but also of how regular investors can deal with it. As you probably know, Bill is a legendarily smart investor and billionaire who famously beat the S&P 500 for 15 years running. He also has an incredibly high tolerance for risk. And when he interviewed him for the podcast last year,

Starting point is 00:39:39 tech stocks and Bitcoin were getting absolutely hammered. And Bill was in the midst of taking a beating because he had enormous personal investments in Amazon, which he owned for more than 20 years, and Bitcoin, which he started buying at around $200 per coin. Bill is, it takes on a level of risk that most of us couldn't handle. But at the time, he had told me that he was the largest single individual. shareholder in Amazon whose name wasn't Bezos, so he could also afford to take a loss. Anyway, here's my question and Bill's answer.

Starting point is 00:40:20 I remember Charlie Munger saying to me at one point when I was asking him what it felt like in 2009 to buy something like Wells Fargo in March 2009, whether it was emotional, whether he felt fear and worry. And he was like in this monosyllabic way. No, no. And I said, so you're not really fighting those emotions because you don't feel them. So is that similar with you that you don't really? really feel those emotions like fear and anxiety and worry during these times?

Starting point is 00:40:45 No, I would say that the anxiety for me comes when, you know, I can always tell when the market is close to a bottom when I get margin calls because I right despite what, you know, Buffett and Munger talk about with respect to borrowing money. I mean, my view is that if you can borrow money at negative real interest rates to buy productive assets, that you should do that. But, you know, I've gotten margin calls here and that's painful because you have to sell stuff that you do not want to sell and just to do that. But then, you know, once the things are sold and you, and you also have to pay tax then, so I don't like to pay tax anymore than the next person does. So I, you know, my cost basis on, you know, Amazon is effectively zero. My cost basis on Bitcoin

Starting point is 00:41:21 is effectively zero. So selling those things to meet margin calls because they're also highly liquid is going to be very painful next spring, you know, because they got to pay tax on that. So for a regular investor who feels these emotions much more intensely, do you have advice for them on what to do? Because one of the recurring problems, obviously, that you and countless other really exceptional money managers have had over the years is that people bail at exactly the dumbest point, at exactly the moment when they should be buying your funds because they're getting clobbered. They lose heart, despair, and bail out, and then they buy again when they're doing really well. And just looking back on the last 40 years and having seen all of these mistakes that

Starting point is 00:42:00 shareholders make, what would you advise people, not just your shareholders, but regular people to do when they're feeling kind of barraged by these emotions as they open up their portfolio in the morning and they look and they go, oh, my God, really? Well, I mean, my advice to them is what J.P. Morgan said when somebody said to me, he can't, he can't sleep for all the money he's losing in the market. And what should he do? And J.P. Morgan said, sell down to the sleeping point. I mean, I think that's the answer. You know, it's funny you mentioned that because yesterday, I'm not going to mention the person's name for obvious reasons, but yesterday, a well-known money manager, one of the best in the world,

Starting point is 00:42:35 redeemed our fund. So millions and millions and millions of dollars. And they're like, really? So I don't think you were not to buy a, you know, a mega yacht or anything. I mean, I'm guessing it just was, you know, worried about how much money he's losing. I think this idea of investing down to our sleeping point is really important. And obviously, it's different for each of us, right? But it's very important to be self-aware, to know what your own tolerance for pain and volatility and loss actually is. And I remember interviewing Howard Marks for my book. And he said to me, we need to recognize both our financial and our psychological fragility. And he said to me, you better be scared, scared in the sense of acknowledging the possibility of bad things happening and being

Starting point is 00:43:25 realistic about your own ability to withstand bad outcomes. And what Howard said to me at the time is you've got to be really careful about these macho claims that you won't mind if the stock market plunges. And he said, look, what normally happens when the market goes down by a third is that people panic and they sell and then they turn this downward fluctuation into a permanent loss, which is the very worst thing that you can do. So his point to me is you've got to be honest with yourself about how much risk you can actually handle. because if you take on too much, it's going to overwhelm your emotional resilience, as he put it, and then you're going to end up doing the wrong thing. So, as I say, this is obviously different for each of us. It's very personal, how much pain and suffering and volatility and risk we can handle.

Starting point is 00:44:16 And volatility and risk are not exactly the same thing, right? So for someone like Bill Miller, he can take extreme amounts of volatility, partly it's temperamental. partly it's it just suits his personality right he's a he's a very aggressive hyper rational investor and in fact when I was fact checking my book with him and was asking him about his personal portfolio at the time I think if I remember rightly he had 83% of his personal portfolio in Amazon at the time and his second biggest position was Bitcoin so this was a supremely aggressive portfolio but that was his own money and he wasn't that work about it and he could withstand the pain. Likewise, you think about someone like Joel Greenblatt,

Starting point is 00:45:02 who in his earlier incarnation as a hedge fund manager in those years where he was tremendously successful at Gotham Capital, he had an incredibly concentrated portfolio with maybe 80% of his assets under management in six to eight stocks. And so he once told me that he could easily find himself down 20 or 30% on paper in a matter of days. And it might happen. every couple of years. But I think he could handle it temperamentally, partly just because, as he said before, he understood what it was he earned. So he knew how cheap it was. But I think you have to find a level of concentration and diversification that allows you to sleep. And so for someone like Francois Rochon, he told me in the podcast where I interviewed him that he feels 25 stocks is about

Starting point is 00:45:51 right for him, that that's concentrated enough that it allows him to outperform the market. But diversified enough that he'll survive his mistakes. Fred Martin, who I interviewed recently, who's obsessed with survival and has an incredible ability to endure over the last 50 years as a successful investor. Fred told me he feels most comfortable with 45 to 50 stocks and that that's diversified enough for him to still have beaten the market by a mile over decades. So for me, I think about this a great deal. I, I'm a little bit of a scaredy cat. And so I've kind of contrarian.

Starting point is 00:46:33 I like to invest when other people are scared. I'm kind of okay then. But I'm also really aware of the risk of ruin, the risk of disaster. And I don't want to take excessive risk. And so I find I often think about something that Sir John Templeton told me 20 something years ago when I visited him in the Bahamas. and he said that a regular investor should own a minimum of five funds that are exposed to different areas of the financial markets. And I find myself thinking about that a lot. Every time I get a little bit carried away, and I think I'd like to make some really aggressive bet, I try to remind myself

Starting point is 00:47:12 of what Templeton said about just being humble enough to be aware of your own vulnerability. And so I'm not in any way trying to argue that I'm a great investor, but the way I'm a great investor, but the way I've sliced this for myself is that I've owned two index funds forever, basically, a Vanguard International Fund and a whole market U.S. fund. And then I own a couple of pretty concentrated hedge funds, one of which is really pretty concentrated, has most of its money in six or eight stocks, and one that's a little bit more diversified, but still pretty concentrated. And then one really pretty diversified mutual fund that's an international fund.

Starting point is 00:47:50 and then I own Berkshire Hathaway, which I also regard as almost like a fund, and it adds some ballast to the portfolio. And I'm not saying any of these things as stock picks or fund picks or recommendations. I'm just trying to give you a sense of how I've thought through this issue for myself. And then I own a couple of other stocks that are not big positions and that are more a matter of playing, although I'm not sure that's sensible. But anyway, that idea, that idea of investing down to your sleeping point of thinking about how much pain you can cope with, thinking about your own fallibility

Starting point is 00:48:28 and diversifying enough so that you'll survive your mistakes is really key. The next step I'd like to play you is from an interview that I had with Howard Marks that was published back in March of 2022. As you probably know, Howard is one of the best known investors of our time.

Starting point is 00:48:48 He oversees something like a hundred, $163 billion in assets as co-chairman of Vogue Tree Capital Management. Here's the question that I asked him, followed by his answer. You also have a temperamental advantage that I've seen with people like Bill Miller, Charlie Munger, Joel Tillinghouse, lots of the great investors, that you're just less emotional than most of us. It's easier for you to stand back and look at the odds dispassionately. Emotion is the greatest enemy of superior investing.

Starting point is 00:49:19 If you take a look at most people in what they call the herd or the consensus, as the economy does well, as the company's profits grow, as it reports higher earnings, as the stock rises, most people become more and more and more excited about it, more optimistic, more trusting, and more inclined to buy. So the higher the price, the more buying they do. Then eventually things stop going so well. The economy turns down. The corporations' profits contract. The earnings announcements are negative.

Starting point is 00:49:47 the price of the stock declines, people get pessimistic and depressed and more likely to sell. So, the higher the price, the more likely they are to buy. The lower the price, the more likely they are to sell. This is the opposite of what we should be doing. We should be scaling out as the price rises, perhaps when it gets unreasonable. And we should be getting in with both feet when it falls. So clearly, most human emotion is arrayed against doing the right thing. And, you know, there are a lot of other examples, not just that, but there's a reason why Buffett said, the less prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own affairs. When other people are unafraid, we should be terrified because that means they'll pay

Starting point is 00:50:29 prices that are too high. When other people are terrified, we should turn aggressive because their terror makes things available to us cheaply. And you're right. I mean, the great investors I know are unemotional about their investing and they go counter to these trends. I don't think this actually requires a great deal of commentary for me. It's such a beautiful summary of why it's so important to think for ourselves and not get carried away by the emotions of the crowd. One thing I would add is just a recollection of going to interview Sir John Templeton back in 1998, I think it was, when he was, I think, about to turn 87 years old. And I asked Templeton to sum up some of the principles of investing. that had served him so well over an enormous period of time. And he said to me, look, one of the most important things as an investor is not to chase fads. And so we talked a bit about how to defend against the madness of crowds. And one of the things that Templeton would always argue is that really the best way for any investor

Starting point is 00:51:37 to avoid falling into these popular delusions and the madness of crowds, to quote from a famous book that he wrote a forward to, is to focus not on the outlook of a stock, but on its value. You just want to be anchored by fundamental analysis of what the stock is actually worth. And he said this is the great safeguard against crowd madness. One of the other things that was really striking about Templeton is that he was so contrarian that he would actually study markets that were the most out of favor. So one of his favorite ways to find a good investment was simply to look at whatever asset class had performed the most terribly over the previous five years.

Starting point is 00:52:21 And then he would say, well, are these problems temporary or permanent? And so I remember around the time that I'd first interviewed him, he made a huge investment in South Korea during the Asian financial crisis when South Korea had got just absolutely clobbered. And so he would go around the world and he would ask himself literally, Where is the outlook worst? And so he would focus on these pockets of total gloom and doom looking for enticing bargains because the pessimism of the crowd would be just an incredible gift. It would enable him to buy assets on the cheap.

Starting point is 00:53:01 And so this is just really a powerful reminder of one of the lessons that runs through the careers of Howard Marks, John Templeton, Buffett, Munger. And the way that John Templeton summed it up to me was he said, to buy when others are despondently selling and to sell when others are enthusiastically buying is the most difficult, but it pays the greatest rewards. And I think that gets at the crux of the matter. Yeah, it's really, really difficult.

Starting point is 00:53:32 Emotionally, it's incredibly hard, at least for most of us, but it pays the greatest rewards. But at the very least, I think, the fact that the greatest investor, tend to be these great contrarians, gives us a clue that even if we can't buy at what Templeton would eloquently describe as the point of maximum pessimism, at least we shouldn't sell, at least we shouldn't panic. And so this has been hugely helpful to me over the years. There are times like during the COVID crisis, the early days of the COVID crisis, when I bought something like Perkshathaway a few times because I felt like, okay, this isn't the end of the

Starting point is 00:54:09 well, it's probably going to be okay and it's incredibly cheap. But often, I can't actually bring myself to buy anything. It's sort of too painful. Or maybe I don't have enough cash set aside, but at least I don't sell. And so during a time like 2008, 2009, during the financial crisis, I didn't sell. And during this latest downturn, I didn't sell. And just knowing from the greatest investors that at times of real pain, you don't want to panic and sell. You don't want to be the person who looks back and says, I've followed the crowd. I just got, I just got overwhelmed by my own emotion and I sold at the worst possible time. So this, I think, is one of the, one of the most helpful lessons we can learn from studying the great contrarians like Buffett, Munga, and Howard

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Starting point is 00:58:40 high-tech stocks and cryptocurrencies and the like. In any case, here's what Howard had to say about it. Well, our discussions, that is the discussions I had with Andrew, really one of the main focuses was cryptocurrency, because in 2017, which was the year that cryptocurrency came to most people's attention. Bitcoin had been created seven or eight years before that. But that, That's the year that Bitcoin went from 1,000 to 20,000. And that's the year that people started talking about it. And I came out very negative. I said, there's no there there.

Starting point is 00:59:13 There's no substance to it. It doesn't produce cash flow. It can't be valued intrinsically, which means that you can't invest it in intelligently. And one of Andrew's greatest goals was to point out to me that that had been an example of knee-jerk skepticism. I've made a lot of money invading against the new new thing in the past, whether it was portfolio insurance in 1987 or e-commerce startups with no business in 1999. And here we were, this is another new thing. And so, you know, I've been habitual. It's been successful. That's

Starting point is 00:59:44 that combination produces habits. So I came out against Bitcoin. And I probably did it when it was about $6,000. Then it went to $20,000. Then it went back to $6,000. And it stayed there through 18 and 19 and into 20. And by April of 20, it was, I think, still $6,000. But what Andrew said to me, is that in the most loving possible way. You don't know what you're talking about. You don't know anything about cryptocurrency. You don't know the supply demand case. You don't know the technology. You don't know the uses. And you can't come out as a knee-jerk skeptic about things you don't know about. And in order to make superior investment decisions in any field, you have to know more than most other people. You certainly are not in the category of the people with superior knowledge. All I had was

Starting point is 01:00:31 50 years of investment experience generalized, but I didn't know anything about crypto that anybody else didn't know. So he was right about that. So it's a reminder of the importance of humility, basically, and of being a continuous learning machine and saying there are things I don't know about. You know, usually I write about four memos a year now. And in 2020, with the pandemic, I wrote, I think 13, wrote a lot in March, April when it was needed. But in the summer, when things were quieting down a bit, I wrote two memos that I really like that didn't get much response. Uncertainty and uncertainty to. The importance of intellectual humility.

Starting point is 01:01:08 What is intellectual humility? It means the other guy could be right and accepting that. And I think that's very important for all of us. And confidence, I've run for a memo, I've written a memo on everything. But confidence is a very important thing because you need some of it or else you can never hold your positions, especially when they go against you. But you shouldn't have so much confidence that you ride them all the way down against the evidence or that you are guilty of fubris and you fly too close to the sun. You have to balance it.

Starting point is 01:01:37 But I think that it's very important to not think you know everything and to not think the other guy's always wrong. So I think that you're right. One of the most important things is to know what you don't know. Dirty Harry said a man has to know his limitations. So I don't have a strong opinion on crypto because I don't think I know enough, but I'm trying to learn. For me, what's really valuable here is not actually the debate about Bitcoin. Personally, I'm totally agnostic about cryptocurrencies. I have no idea whether they're going to go up from here or down from here. I'm not really sure anyone else knows either.

Starting point is 01:02:12 What's really instructive, though, is Howard's mindset. Just think about the humility here, the willingness to acknowledge that he doesn't know enough to make a call about the future of Bitcoin. and his wariness of his own biases, the fact that he's been successful in invaying against all of these fads and bubbles in the past, made him just assume that this was another of them and have this kind of knee-jerk skepticism. And that's not to say that his knee-jerk skepticism was wrong. It might turn out to be right.

Starting point is 01:02:48 But I think what's so helpful here is Howard's openness to learning from his own son, his sense that his son understands things that maybe he doesn't understand. And this leads him to this really beautiful assertion that you have to accept that the other guy could be right and not think that you know everything. And this is something that's always fascinated me about investing, is that you could have two utterly brilliant people who disagree with each other totally about the same thing. And so here, for example, you have Bill Miller who's absolutely bullish about Bitcoin, who feels like it's going to be an amazing investment

Starting point is 01:03:25 and has talked very eloquently. If you check back in the episode that I did with him on the podcast, we talked in some detail about why he loves Bitcoin. And then you have people like Buffett Amonger saying that it's rat poison. And that's just really interesting to me. The fact that Buffett Amonger think it's rat poison doesn't lead Miller to think that he's wrong. He just says, look, they don't have any domain expertise

Starting point is 01:03:50 and let me study it dispassionately and look at the evidence for myself. And here again, you have Howard Marks saying, look, I don't have a strong opinion about crypto because I don't think that I know enough. And then that final line, which I think is wonderful, where he says, but I'm trying to learn. And that's a reminder of a really important thing that that Munger said about Buffett, which is that he's a continuous learning machine. And I think that's one of the great strengths of Buffett is that,

Starting point is 01:04:20 He managed to learn new tricks, right? He, after saying that he would never invest in tech, he invested in Apple, which turned out to be the most profitable investment of his lifetime. He made international investments. He invested in railroads. He kept learning. He kept changing. He kept developing. And so I think this whole discussion of Bitcoin, it's not really about Bitcoin at all.

Starting point is 01:04:42 It's really about having the mindset that protects you against your own hubris and your own overconfidence. It's saying, however smart you are. however much you know, you need to accept the fact that the other guy might be right. And then at the same time, there's this really important caveat, which Howard makes, which is you also have to have some firm convictions. You also do have to, you do have to make a firm bet sometimes. And so like most things in investing, it's not easy. It's kind of contradictory, right? As the saying goes, you need to have strong opinions lightly held. And I just, I find it incredibly helpful to look at the mindset of someone like coward and it makes me think I should tread a little bit more lightly in life. I'm probably wrong

Starting point is 01:05:24 about most things. And so I should at least be aware of my own biases as much as I can, trying to look for my own blind spots and also open to other people's views. And I think that's such a helpful attitude, not just in investing, but in politics or so many other areas of life. I just don't want to be dogmatic. I want to accept the fact that I might well be. wrong and that at the very least I should have respect for the other person's view. Finally, I want to play you a slightly longer excerpt from one of my favorite episodes of the last year. This is from my conversation with Francois Rochant, a great investor based in Montreal. He's beaten the market by a mile over the last 30 years, but he's not just a superb stock picker.

Starting point is 01:06:12 He's also an exceptionally logical, rational and reasonable thinker about business and life. What I love about this clip is that Francois makes a wonderfully rational, compelling case for why we should be optimistic about the future, despite all of the challenges we face in the world today. Here's our discussion about why you and I should expect great improvements and advances for the human race, for corporate earnings, and for the stock market. One thing, Francois, before I let you go, that I wanted to ask you about, that I feel like you've figured something out that's really important that a lot of people haven't figured out,

Starting point is 01:06:53 which is you write a lot in your letters over the years about the importance of unwavering optimism. And I think it's a really interesting insight. You know, here we are in this very difficult period where we're getting hit with inflation and there's, you know, the market has been kind of melting down and, you know, there are fears of recession and there's war in Ukraine and the like. And it seems to me that one of your secret weapons is one that the suggestion. Tomt Hamilton also had, which is that you're an unwavering optimist. And I wonder if you could talk about why you are and why you have this kind of confidence in what you call the world of free

Starting point is 01:07:29 enterprise. Yes, you're right. I think nothing was ever built on pessimism. I think you never make wise decision with fears. I think optimism is an important ingredient to success, not the only are an ingredient, but one important ingredient. I would say if you study human history and you go back many, many years in the past, I think the only conclusion is that you cannot be not amazed of how much we've improved over the last centuries. I mean, just in terms of technology, it's incredible the changes that we've made. And you have to understand what is the fountain head of those improvements.

Starting point is 01:08:16 And it's the human mind. It's just inventing things, creating things, finding ways of doing things better, always, very slowly. And not in a linear fashion, of course. There are some tough periods and some better periods. But over a long period of time, the, the, improvement has been quite steady and quite impressive. I mean, the standard of living has probably doubled every 25 years in the last century, which is incredible.

Starting point is 01:08:51 And so people worry about climate change, and they're right to be worried. And they worry that we won't have any oil and we'll have to find alternate energy. And I think they're right, too. not necessarily that we won't have any oil left, but I think we do have to find better sources of energy. But what will bring those changes, those improvements, either for energy or fixing climate changes, will come from ideas and the human mind. And if you think about it, all the great progress is the last century came from idea. Nothing really has changed our environment of nature and human nature,

Starting point is 01:09:42 but we find ways to always improve things because we have this drive as human beings of never being satisfied. We always want to improve our situation. And I think this drive is very powerful and gives me the feeling that the thing will always improve. There'll be, you know, there'll be tough periods. There'll be, you know, crisis and catastrophes. I accept that.

Starting point is 01:10:15 And I've been accepting that for 30 years. And, you know, I've seen the recessions. I've seen terrorist attacks. I've seen, you know, a lot of crises in many countries. But in the end, I think the human race always advances forward. And the right approach is to be optimistic that will find solutions to all of our problems. We have to put our minds to it,

Starting point is 01:10:40 but I'm confident that the survival gene, this is probably the most, the strongest gene we have, we want to survive, we want to move forward is a very, very great fuel for human investment and

Starting point is 01:10:56 pretty optimistic is going to continue. So I would say that in the next, I don't know if it's going to be around 50 years, but I'm pretty sure if I'm around our standard of living will have increased by 300% and we'll live even better than we're living today. And I'm pretty confident that we'll find solutions to all our big problems like climate changes and inflation.

Starting point is 01:11:21 I think part of what I like, Francois, that your optimism isn't a naive temperamental impulse that just infuses everything. It's built very much on a data-driven knowledge of the past. And so remember, for example, reading in one of your letters, you talked about a tale of two sitters by Charles Dickens. And you said that since its publication in the 1850s, the percentage of people living in extreme poverty in the world has fallen from 87% to less than 10% today. And you mentioned that the average standard of living has increased by a factor of more than 25 times since the book was published in 1859. So you look at that and you think, this isn't naive. This has happened.

Starting point is 01:12:02 This is our history. and think of all the terrible things that we've been through in that last 160 years since that book came out. And likewise, there's an extraordinary table that I think you originally drew up during the 2008-2009 financial crisis and then published again updated in March 2020 at the initial height of the COVID pandemic, where you listed 14, I think, major corrections over the last, I think, 60 or so years, followed by these massive rebounds. And it was very striking to me again. It's a data-driven reason for optimism.

Starting point is 01:12:37 You listed, for example, in I think 1973 to 74, the market fell something like 48% and then was followed by 106% gain over the next five years or so. And this process seems to have happened again and again. Can you talk about that sense of just that the sun also rises, right? But here we are going through a difficult period. And yet, when you look back historically, again, and again, the sun also rises. Yes, it's the lesson that if you study human history, that's the lesson.

Starting point is 01:13:12 And Amber and Lincoln said 150 years ago, so this two shall pass away. And Ben Graham said that this phrases summarize the whole human history. Things passed, crisis passed, and in the end, the human race continues to all always improve things and the moves forward. And I would say same thing with companies. Like we talked at the beginning of the interview, companies grow their earnings six, seven percent yearly and give a 2% dividend on average.

Starting point is 01:13:47 So that's an 8 or 9% return for stock. So of course, when they go down 30, 40, 50%, there's every reason to believe that within five or six or seven years, they'll make new records just because earnings continue to increase. Increasing earnings at 7% annually double the whole earning in the U.S. every 10 years. So it makes sense that every 10 years, the S&P 500 or the Dowell's Industrial Average, doubles in value because earnings have doubled over the last 10 years. And they'll be recession, of course.

Starting point is 01:14:23 And earnings will go down in recession. But they'll rebound and eventually they'll make new records. So I think that's very reassuring to understand that because you know that there'll be tough times, but if you're patient, you'll be rewarded. It's beautiful because it means you have to understand these fundamental forces that are at play here, like the power of intrinsic value growing, the power of productivity increasing, the power of human ingenuity to solve problems. But once you kind of understand that, you don't really need to be that naive to be optimistic, I suspect. No, I don't think I'm naive, but just realistic. That's just the nature of our human society. And there are some very bad things.

Starting point is 01:15:07 I couldn't agree with more. I mean, for everything you read about tragedies and terrible things that happen all over the world. But there's also great, great things, great accomplishment, great things that are a civilization that have built over the years. And you have to look at that either. Also, both are important. important. And in the end, I think the overall balance is that more good I've come out of the human history than that. I love this argument that Francois makes about why it's rational and logical to be an optimist about the future of the human race and about the future of corporations

Starting point is 01:15:46 and the future of the stock market. When you follow the news day to day, it's really easy to become a pessimist and to think that the world is going to hell in a handbasket. I have to confess, as a journalist, I'm particularly prone to this type of thinking, because journalists tend to be drawn naturally to what's wrong with the world rather than what's right. Plus, for one thing, having edited magazines like the International Editions of Time magazine, I can tell you it's usually a better story and consumers are drawn to bad news. And I think also there's a tendency these days to be very critical of business and capitalism, which you see from these shows like billions and succession and the like.

Starting point is 01:16:30 So I particularly like Francois's faith in the future and his faith in free enterprise to be a driver of a better future. And I think it's really important for all of us to have this kind of confidence that things are going to get better. And particularly I think for young people who get sucked into believing that everything is falling apart. I have these discussions a lot with my children, Madeline, who's 21 and Henry who's 24. And I think it's really depressing for them. They read the news and they look at

Starting point is 01:17:03 all of these dire warnings about the environment and political mayhem and impending war with China or the current war in Ukraine. And it's really difficult for them not to get flooded by how depressing the outlook for the world seems. And it strikes me as an incredibly helpful thing to focus on the rational analysis of someone like Francois. And so I found myself really going through his argument with my daughter Madeline the other day trying to say, look, all it's not lost, things are going to be okay. You want to bank on human ingenuity to solve a lot of these problems. And that's not to be a polyana. It's not to say that these problems don't exist. But it's, it's really important for us, I think, to have some faith in the power of innovation, free enterprise,

Starting point is 01:17:54 human ingenuity to tackle some of the biggest problems in society. But maybe I'm delusional. I don't know, but I don't think so. And I suddenly don't think that Francois is delusional. This also reminds me of something very important that Warren Buffett has talked about in the past. Warren famously has come out at some really key moments when people were losing confidence in the future and has offered some really valuable data to say, look, not so fast.

Starting point is 01:18:23 focus on what's actually happened through history. So, for example, in October 2008, when the market was just crashing and the financial system was in danger of collapse, Warren wrote a piece for the New York Times in O'Ped article, explaining why he was buying American stocks and why he thought that fears regarding the long-term prosperity of the nation's many sound companies makes no sense, as he put it. And so this is what Buffett wrote. He said, over the long term, the stock market news will be good.

Starting point is 01:18:55 And then he added, in the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts, the depression, a dozen or so recessions, and financial panics, oil shocks, a flu pandemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. That's worth repeating. The Dow rose from 66 to 11,400. 197 over a century of just total mayhem, right? I mean, it's an extraordinary thing. The other thing that Buffett pointed out that I think is incredibly helpful is he said that bad news is an

Starting point is 01:19:37 investor's best friend. And he said, it lets you buy a slice of America's future at a markdown price. And that was clearly true during the Great Depression, as he explained. It was true during World War II. And it was true once again during the global financial crisis. And it was true again in those early months of COVID. And likewise, I looked back at the annual report that Buffett had published at the start of 2016, where he talked about the rise in standards of living in the US. And I think, again, it's really worth pointing this out because I think people like Buffett and Francois Rochon, they're much more data-driven. They're much more rational about looking at the evidence than most of us are. So I want to draw attention to what he said.

Starting point is 01:20:24 So this is back at the start of 2016. He wrote, it's an election year. And candidates can't stop speaking about our country's problems, which of course, only they can solve. As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong. The babies being born in America today are the luckiest crop in history. American GDP per capita is now about $56,000. As I mentioned last year, that in real terms, is a staggering six times the amount in 1930 the year I was born, a leap far beyond the wildest dreams of my parents or their contemporaries. So this again is really worth repeating. Since Buffett's birth in 1930, over the next 86 years, American GDP per capita

Starting point is 01:21:15 went up six times in real terms. And so Buffett then explains U.S. citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930. Rather, they work far more efficiently and thereby produce far more. This all-powerful trend is certain to continue. America's economic magic remains alive and well. And then what he points out, which again, I think is a lovely point that I tried to emphasize to my daughter the other day,

Starting point is 01:21:47 is that he says most of today's children are doing well. And he says, all families in my upper middle class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Senior at the time of my birth. His unparalleled fortune couldn't buy what we now take for granted, whether the field is, to name just a few, transportation, entertainment, communication, or medical services.

Starting point is 01:22:13 Rockefeller certainly had power and fame, He could not, however, live as well as my neighbors now do. So I just wanted to end on that positive note, not to be a polyana, not to be naive, but to be rational, to point out the fact that so much has improved so dramatically and that the forces that are in place that have driven that progress are, I think, pretty highly likely to continue. you. I hope that's the case. And I'm banking on the rationality of Rochant and Buffett, who I think, you know, look, Buffett specializes in catastrophe insurance, among other things. He understands risk. He knows that there are going to be tough times along the way that they're going to be difficult. There are going to be challenges. So this isn't naive. But I think understanding that the good things will come is also really important. And it helps us to keep plugging away, to keep

Starting point is 01:23:09 persevering. So anyway, I want to end on that positive note. And really, I just want to thank you for listening over the last year to the podcast. It's been an amazing learning experience for me talking to these extraordinary people on the podcast. And by focusing on the handful of episodes that I've focused on today, I don't mean to suggest that these are superior to the other episodes. It's their incredible lessons from many of the other episodes as well. I hope you found this episode helpful. It's been a bit of an experiment, and I have no idea, to be honest, if it's an entirely successful one, listening to me drone on for an hour or so, maybe torture.

Starting point is 01:23:51 But I hope that it helps to highlight some of the lessons that I've found really most valuable over the last year. And I hope it really encourages you to go back and listen again all for the first time to my conversations with these great thinkers like Joe Greenblatt, Howard Marks, Bill Miller, and Francois Rochon. I think one of the things that's most striking about all of the people on the podcast is that they're amazing teachers. They really are sharing these ideas in a very selfless way, laying out some incredibly powerful ideas about how to invest, but also how to think better and how to live more wisely. So anyway, I'll be back very soon with some more fantastic

Starting point is 01:24:31 guests, including Ray Dalio, Guy Speer, who I'm going to visit in Switzerland in a few days, and I'll interview him actually live there for the podcast, if all goes well. And then on my return to the US, I'll be interviewing Tom Gaynor and some other incredible investors. So there's a lot to look forward to this year, I hope. And in the meantime, please feel free to follow me on Twitter at William Green 72. And do let me know how you're enjoying the podcast. Thanks so much for listening. Take care. And stay well. well. 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

Starting point is 01:25:15 billionaires and the financial markets. To access our show notes, transcripts or courses, go to the investorspodcast.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.

We Study Billionaires - The Investor’s Podcast Network - RWH021: Investing Amid Uncertainty w/ Joel Greenblatt, Bill Miller, Howard Marks, & François Rochon

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