We Study Billionaires - The Investor’s Podcast Network - TIP 012 : Psychology and Stock Investing (Investing Podcast)

Starting point is 00:00:00 This is episode 12 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. Welcome everybody to episode 12 of the Investors podcast.

Starting point is 00:00:31 This is Preston Pish, and I'm accompanied by my co-ho. host Stig Broderson, and today we have a very exciting guest that's going to be talking to us about the psychology of stock investing. Today's guest is Ravi Mehta, and he's the author of the book, The Emotionally Intelligent Investor. His book talks about how self-awareness, empathy, and intuition drive performance in your investments, and I'm sure that that's something that everybody wants to learn more about. If you're interested in learning more about Ravi's incredible book, which Stig and I have both

Starting point is 00:01:02 thread. We're going to have that link in the show notes, and you can also pull that up in our book club page that we have. So a little bit about Robbie. So he graduated summa cum laude from the Wharton School of Business, which everyone knows is the best business school in the entire world. And he's worked on numerous multi-billion dollar hedge funds through his career to include Karsh Capital Management and also the Soros Fund Management. So to put it lightly, we're really thrilled to have him on the show today because he brings a wealth of information and has had the opportunity to learn from some of the best and greatest investors of all time. So, Robbie, is there anything else you wanted to add or highlight that maybe that I missed?

Starting point is 00:01:41 Well, the only other thing is I started my own investment firm about a year and a half ago. It's called Nichama Capital, nowhere near the multi-billion dollar funds that I worked for before. But it's been a very exciting time. Well, that's a great point because what we can do is we'll also add a link to your funds page. So if people were interested in maybe even investing in your fund, they can pull that up. right through the show notes. So we'll have that available as well. Thanks for having. Yeah, absolutely. Excited to have you. So Stig, why don't you go ahead and ask the first question

Starting point is 00:02:11 here for Ravi? Okay, Ravi. And also thank you so much for coming on the show. Okay, so, Ravi, I know that you have worked with George Soros. What would you say is his two greatest strength as an investor? Yeah, first let me preface this by saying that when I was at Soros, I was in my mid-20s and I was a relatively junior person there. So I didn't have a ton of interaction with him directly. But I obviously worked with people that did have a lot of interaction with him. It was also a time when he was focusing more on his philanthropy.

Starting point is 00:02:46 But I would say two greatest strengths were that one, he would always bet big when he had conviction. So he was very good about sizing up his highest conviction ideas at the right time. And the other great thing about him was that I think he was very self-aware and was very good at listening to his intuition. I heard a lot of stories about how, for example, he would change his mind on specific investments when he had back pain. And people often experience actually physical symptoms when they're anxiety present. And investors can have anxiety when their investments, they don't really have a lot of conviction in the investments. Or maybe they realize something fundamentally has changed, but they didn't get out of the investment. And so he was very good at recognizing that his back pain was linked to those times when he should be changing his decision.

Starting point is 00:03:35 I think that's fascinating because I know personally there's many times when you can't put some type of quantitative numbers to maybe your decision or your thought process and you're really basing it on qualitative feel. And it's amazing how often that has steered me personally in the right direction. and I'm sure, Ravi, you have the exact same experience, and I know Stig has the same experiences where you necessarily can't say that, oh, well, the value of something I calculated that this is driving me down the path. It's just totally off of feel. And you're saying that that was one of Soros' greatest strengths that you kind of saw. That's pretty amazing.

Starting point is 00:04:10 Yeah. Yeah. So, you know, not only did he size his highest conviction ideas at the right time, but he would also get out of a lot of losing positions early. Those are the two greatest strengths. Yeah, that's fascinating. Hey, so in the book, I love this discussion that you had provided on support levels and resistance levels. And I think that it's something that a lot of people might not necessarily understand. Is that something that you could describe to our audience in a little bit more detail so they understand what that's all about? Sure.

Starting point is 00:04:41 You know, there are two types of investors. They're the kinds that believe in technical analysis. And they mainly believe in it because they've seen it work. A lot of them don't actually know why it works. And then the second camp is the camp that just kind of equates technical analysis with, you know, picking stocks on a Ouija board or something or, you know, like black magic. And because they just don't understand why it would possibly work. I was, to be frank, I was in that second camp for a long time until I started, you know, seeing how technical analysis was actually was a helpful predictor of stock movements. And then I tried to basically try to understand why.

Starting point is 00:05:17 And it's really rooted in behavioral finance. So you talked about support and resistant levels. Those are the two of the most important things in technical analysis. And they're both linked to being a good finance. So, for example, the stock is at $100 for a long period of time. And then it goes down to $97. There's a lot of, you know, there's a lot of people that bought the stock around $100. And there's a bias that a lot of people have that they don't want to realize a loss.

Starting point is 00:05:42 And so there's a lot of people that are waiting for the stock to go back to $100 before they're going to sell. And so that's create a resistance level at $100. So I think there's a practical example right now that you're seeing in the market with IBM. And I hate to use like current event because a lot of our listeners are listening to this in the future. But IBM, when Buffett bought IBM, I want to say he got in at like the 165-ish range, something like that, maybe 167 or something like that. And so you saw a ton of people from the market start flooding the market at that price point in the $160 range. And so obviously is the supply and demand changed on the. the picket, it went up. You saw it up over $200. And then recently they had this past earnings call

Starting point is 00:06:25 where they basically had a lot of things that came off their balance sheet onto their income statement. And you saw no earnings basically reported for this last quarter. And you saw the thing plummet. And you saw the thing plummet right back down to that $165 price point. And it was funny because that just happened recently within this month and reading your book. And I saw what you were talking about with these support levels and resistance levels, it reminded me exactly of that scenario that you were talking about in the book. Yeah, I mean, and also support level is also linked to behavioral finance. So, for example, when if a stock is at, let's say, $50 for a long period of time, and you know a lot of people bought the stock around $50, then it goes to $55. All those people

Starting point is 00:07:09 that bought it at $50 made money. And a lot of them might have sold at $55 or reduced their position at $55. But they've associated a positive output. outcome by buying it at 50. And so that's called association bias. And so even if something changes fundamentally with the stock, they have a bias to want to buy back or add to their position that they might have trimmed back at 50. Ravi, I can help to think, and I might be completely off here, but some of the audience might think that speaking about technical analysis, that is a short-sighted, where if you look

Starting point is 00:07:42 at more fundamental, more classic value investing techniques, that is more long-term thinking. Would you think that would be presumptuous to see it that way? No, because technical analysis can be used by long-term investors as well. So some of the things I'm talking about, right, probably people in IBM who are going to hold their stock for multiple years because they just don't want to realize the loss. And so that resistance level is that can stay around for a long time. So, Ravi, I like to tell people that I think that my two greatest assets are my time and my income. and my intuition.

Starting point is 00:08:18 In your book, you give intuition a lot of focus, and you even talked about it already with the Soros comment. Can you give the audience the best advice for honing your intuition? How do you know when it's something? Like with Soros, you said it was his back, and how can other people hone this skill,

Starting point is 00:08:34 this intuition that you talk about in the book? So intuition is just pattern recognition. That's the first thing to kind of just understand what intuition is. For example, I used to play a lot of chess and chess players heavily rely on the intuition. They can't possibly think about every possible move that's available to them, right? So they look at how the pieces laid on the board,

Starting point is 00:08:58 and they recognize certain patterns just from their experience of what's successful and what's not. And so they rely on their gut instinct to kind of evaluate a specific type of move. And then they spend most of their time just safeguarding, making sure that that move is safe. And I think the best investors do something. similar. You know, Warren Buffett doesn't look at every possible investment that's out there. He tends to gravitate because of the experiences knows what he's good at. He gravitates towards certain investment ideas and then he spends majority of time making sure those investment ideas

Starting point is 00:09:31 have downside protection and good risk of work characteristics. One of the things that you broke out in the book, Ravi, was that you don't necessarily have to have a lot of experience. I think for a lot of the people that are listening, they don't have the experience that you have or like 10 years of experience. So maybe to transition into your discussion into that point. So, you know, it's pattern recognition, but you don't necessarily have to have 20 years of experience. And you talk about that in the book. And I think it was a great point. 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,

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Starting point is 00:14:06 All right. Back to the show. Yeah, so I think there's certain things that people are good at, right, or good at recognizing. People already have, even if they're not professional investors, a lot of them have intuition of what's going to be successful, what kind of businesses are going to be successful and what aren't. And the key is, the most important thing is to invest in what you understand. I think too many people want to getting out of their circle of competency. They want to, you know, investing in biotech stocks or something they have no idea about.

Starting point is 00:14:35 And you don't need to have a view on everything. out there, right? You just need to invest in areas you know well and patterns that you recognize are successful. It's kind of like whenever I go out with my wife and I go across and I see maybe a business that I really like, I tell her, I think that this business is going to be wildly successful when you're not really basing it on much. You're just kind of basing it on gut. And a perfect example would be Chipotle. Like you go in there and the food's fantastic. It's a really simple model. You just know that that business as it continues to expand is going to be successful. So is that kind of more of what you're kind of referring to as far as your intuition and pattern analysis of sticking the things that you understand and your competency?

Starting point is 00:15:16 Exactly. Great. So let's continue to speak about emotions because there's a really strong part in your book or actually several strong points in your book where you're talking about us as investors being influenced by our emotions. And I think I can definitely testify to that and no pressing can do as well. But do you have like the secret to how we can apply this to our advantage and definitely not to our disadvantage, as for instance we saw under the financial crisis? Yeah, the first step is self-awareness. Everybody has these different behavioral biases that impact our investment decisions. The best way to understand what biases you have is like going over where you've maybe lost money or understanding your prior mistakes and seeing if they have a pattern.

Starting point is 00:16:05 For example, some people tend to take extra risk after had some good returns in their portfolio. Other people take extra risks after they have losses in their portfolio. The only way to really understand which camp you're in is by going over your past mistakes. One of the things I like most about investing is that the vehicle for self-analysis. And, you know, I'm constantly learning things about myself and then incorporating what I learned about myself into my investment process. For example, I wrote in my book that I have this bias towards selling my winners too early. This link to my fear of regret. I would rather lock in a game, even a small one,

Starting point is 00:16:42 than feel regretful for having a potential loss. Fear of regret can also lead me to have too many positions. I would rather have at least a small position than regret missing out on a specific stock going up. And so understanding that about myself has changed my investment process. So I have specific rules for when I can sell stock, and I can't sell stock just because it's up. And then the other rule, right, to avoid having too many positions and for diversifying is I have a limit to how many positions I can have in my portfolio.

Starting point is 00:17:14 And I also try to make sure that my top 10 positions are a minimum percentage of my phone. Okay. Another thing I actually do like to return to is loss. You said that sometimes you're behaving irrational when you are locking in gains. But how is it that we as people act to loss? in general. And because you have this great example of it, a common and Tversky in your book. So please just very quickly elaborate on, you know, how do investors react to losses?

Starting point is 00:17:46 Different investors react differently. Most people tend to, you know, losses make people unhappy. And there's a lot of research out there that when people are unhappy, they tend to take less risk. But then actually some other people, when they have losses, they actually increase. increase their risk profile. They add to their losing positions, even if something fundamentally might have changed for the stock. So it depends on the person. I don't think there's a specific rule you can apply. This is why self-awareness is really important. So that's a great point, Ravi. In chapter five, you talk about why it's important to match your

Starting point is 00:18:24 personality to your investment style. So if you think you're just going to go out and be like Warren Buffett, that might not even be possible because of the way that your personality and the way that you're wired might not match the same wiring that maybe Buffett has. And you might be really, it might be very difficult for you to make the same decisions and the same thought process because you're just emotionally involved in a completely different way than the way Buffett would be involved. So I just found that that was really fascinating. And is that something that you could, you know, just talk to our audience a little bit more about as far as matching your personality with your investing style? Yeah. So, you know, for example, Buffett is a very conscientious.

Starting point is 00:19:02 He has relatively low emotional sensitivity. He can continue to make very rational decisions, even if he has a lot of losses in his portfolio. He also has his motivation for investing revolves around understanding businesses and understanding competitive advantage. So this personality traits, Lennon be more of a longer-term investor that tries to understand the fundamentals of companies. Soros is actually very different. He is more emotionally sensitive.

Starting point is 00:19:28 He's a little bit more impulsive. And the motivation for investing revolves around his philosophy. He tries to prove out his philosophical and hypotheses with his investing. And so those kind of trades tend to make him a better trader than a longer-term investor. Myself, I'm more towards the Buffett than Soros, but I don't think I have the as low emotional sensitivity maybe the Buffett that has. So, you know, I'm not the kind of person that can take a ton of risk and have all my money in a couple of stocks. I have modest concentration. So, Ravi, I think a lot of people might be polarized.

Starting point is 00:20:02 I know I was for sure when I started investing. So what I mean by polarized is that either they are very quantitative, so they're really based on numbers. All that might be very qualitative when they're accessing stock investing for the first time. What is your take on that? How do we actually blend that? Well, first of all, I think we have to have a blend because we're not. increasingly competing against computer algorithms in the market, and the computer algorithms

Starting point is 00:20:33 are obviously much better at just quantitative analysis. And so, while quantitative analysis is always important, investors need to increasingly rely on things that the computers can't do well. And there are a lot of qualitative things that still can't do very well. So, for example, computers cannot evaluate how good management is. You just cannot, at least at this point, empathize with other market participants and maybe take advantage of their behavioral bias. You know, it's funny because whenever I was looking at all these computer algorithms that are calculating and making these trades and you hear about these billionaires with this momentum trading and stuff. And I mean, I think it scares a lot of people because they're like, wow, there's no way I can beat a computer.

Starting point is 00:21:13 There's just no way I can do it. And I obviously have the exact opposite opinion because at the same time I read articles about how, I guess there was an article about Ann How, And on days that her, that articles on Anne Hathaway were published, Berkshire Hathaway was traded at a higher level because these algorithms were picking up these articles on Ann Hathaway. And it was actually manipulating the trading on these stocks. So I think for a lot of people, it is scary because they automatically think, oh, there's no way I can beat a computer. There's no way I can beat software that's calculating this stuff. But at the same time, I think a lot of the analytical software that's doing this stuff is doing it on a short-term basis and it's it's trading based off of statistics that it's calculating for today or tomorrow or maybe a week from now and not necessarily something that you would plan on owning for 10 years, which is, you know, obviously the approach that Stig and I and Ravi, you know, endorse if you're going to own a business, you've got to treat it like a business. So I just wanted to throw that out there because I find that a lot of people out there get scared when they start

Starting point is 00:22:19 hearing about these computers and things. And it goes back to Robbie's point of just qualitative analysis is just as important as your quantitative analysis. And you have to balance those two. It has to be a hybrid approach. And you have to be able to call file whenever you see movement because maybe there's an Ann Hathaway article out there. So let's go to the next question. This is one that I was really excited to ask you. What is the most important investment advice that you can provide the audience from your time at Karsh Capital Manor? management, maybe from like a personal experience or something like that. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:26:14 All right. Back to the show. Yeah, I think, you know, I learned a lot of things when I was at Karsh. But the biggest thing was just kind of constantly review my mistakes. Most people, when they have a loss, they just kind of take the loss and move on. But Michael Karsh, he really instilled in me in an attitude of constantly reviewing and understanding what caused the loss. And so that constant reflection is really what made me who I am today. I guess, you know, one specific example is relatively early in my career there.

Starting point is 00:26:49 I would not necessarily think as much about an industry versus a specific company. When an overall industry is improving, the best companies tend to have higher valuations. So I would tend to stay away from them. The worst companies, I would stay away from them just because they're the worst companies. And so I would tend to gravitate towards companies in the middle. They were relatively cheaper. But when in the overall industry is improving, what actually happens is the best companies outperform, because they're the best company. And then the worst companies outperform

Starting point is 00:27:19 because they go from maybe losing money to making money or something like that. And the companies in the middle actually underperform. One of the things he taught me was kind of think about the whole industry and to gravitate more towards the best and maybe the worst company as well. You know, it's interesting that you say that looking back and looking at your mistakes was the most important thing that you learned because Stig and I were just reading a book by Guy Speer is called The Education of a Value Investor. And that was one of his biggest points in the book was,

Starting point is 00:27:52 don't just move on to the next thing and just keep picking. You've got to look at what were my biggest mistakes. Why did they go wrong? Go back and assess all the variables that led to what you missed. What was the critical variable that I missed that led to the demise of this pick? And I find that theme spread through people like Monish Pabri and Guy, yourself, I know Warren Buffett, Charlie Munger, all these guys, they're very introspective, always looking at how could I improve on what I've done in my past so that I can perform

Starting point is 00:28:24 better in the future. So I really like that point. And what's really interesting is that Monish Pobri and Guy Speer had like a checklist that they run through with all the mistakes that have made previously. And what they actually chose to do was to look at other great investors like Warren Buffett and the mistakes that he admittedly have done as well, then added that to their list to make sure that they don't make the same mistake as Buffett himself. And I think that's a really, really strong, say, competitive advantage to have to other investors because it's not fun to look at mistakes. It's not fun to look at what you have done wrong.

Starting point is 00:28:59 It's much more fun to look at what you have done good. Right. I also operate with a checklist. And so, for example, when I was talking before about when I sell the stock, I'm sell it for a few different reasons. The other things, I'm very into journal writing, and so actually every night I try to think about maybe some mistakes I've made either that day or the past, and I try to learn from mistakes.

Starting point is 00:29:24 I think it's very important to give your losses some voice and let those scars kind of be ingrained in you so that you don't make those mistakes. Yeah, there's two ways of looking at it. You can look at it as, hey, I made a mistake and I don't want anybody to see that, or you can treat that mistake as one of your biggest gifts in that I'm never going to make this mistake again because I learned this lesson and I'm going to annotate it in a checklist or however else, you know, somebody might incorporate that. And so I look at my biggest blunders as my biggest gifts. And I think that that's very important for a person. If they really want to be successful in investing,

Starting point is 00:29:59 they've got to treat it that way. They can't treat it as, you know, something they've got to hide or act like it didn't happen. They need to wear that on their sleeve as a battle scar, I guess. Yeah, and it's like, you know, thousands of dollars worth of education, right? Oh, let me tell you, there's lots and lots of dollars that have paid for my education, yes. Okay. Raleigh, a question that we'd like to ask to our guest, and especially an author like you, is which books have influenced you the most? And perhaps you can also come with a book recommendation to our audience. Sure.

Starting point is 00:30:35 Well, you know, I think all the Jack Schwagger books, the Market Wizard books are great. On technical analysis, there's a book that I still think is probably the best book on technical analysis from Stan Weinstein. I think it came out of the 80s. Stan Weinstein's secrets of profiting in bullet bear markets. On intuition, the most influential work is been done by Professor Gary Klein. Specifically, I really like the power of intuition. On self and social awareness, I really like emotional and emotional intelligence. Intelligence 2.0 by Paphis Bradbury.

Starting point is 00:31:08 And then, you know, just obviously all in the same telebooks and Howard Marks' most important things are very helpful. So, Ravi, awesome having you on the show. Thank you so much for coming on here. For anybody that's interested in reading Ravi's book, The Emotional Intelligent Investor, it's just a fantastic read. Stig and I thoroughly enjoyed it. And if you're wondering how psychology and your emotions impact your decision-making in the

Starting point is 00:31:35 stock market. You'll definitely want to pick up this book. Next week, we have Guy Speer coming on the show. If you have any questions that you want us to give to Guy, make sure that you go to Asktheinvestors.com and type that up or record it for us and we'll play it on the air. So our question this week comes from Benoit DeFriene and he asks us, if I have $50,000 to put aside, what do you think about the strategy of taking half of that money and dropping it into a couple different ETFs and then taking the other half of the money and putting it into individual stock picks. So, Stig, what do you think about that question? The first thing, and, you know, President, I really hate disclaimers, but it really depends

Starting point is 00:32:14 on what the person is, who the person is, because if the goal is really to spend little as possible time energy on this, he might as well put 100% into his ETF. And if his goal is really to be proficient, being like not necessarily the next one buffet, but spend a lot of time in picking stocks, then the right strategy might be to put 100% into value stocks. But I got to say that if you want to pursue a strategy with the ETF, one thing I would definitely be looking at that is low fees, so that's the first thing. And the second thing is look at what is the underlying asset. So make sure that you have some really solid underlying assets.

Starting point is 00:33:00 And what I mean by solid is I would probably pick great American stock, something like S&P 500, for instance. And I would probably not go into more exotic type of investment like emerging markets. So if you want to pursue ETF, that's probably the two short takeaways I want to give you. So I guess my advice really comes to what Ravi was talking about in this episode. is you've got to really understand yourself, first of all. And you have to be honest with yourself. If you feel like you are really good at accounting and you really understand how to assess an

Starting point is 00:33:37 individual stock pick, well, then your entire portfolio could be individual stock picks because you know how to assess the risk and what could go wrong in owning whatever particular stock you pick. But if you're the type of person who doesn't have that firm grasp on all the things that could go wrong and let me tell you, there's a lot of things that can go wrong in individual stock picks, you probably need to have a larger portion of your portfolio in indexes, if not the entire portfolio in indexes. I also think that what we discussed with Ravalli about emotion is really important, because

Starting point is 00:34:08 if you tend to get very affected by market swings, then you might go into ETFs. I know that the market still have like wild swings, but at least, I should say, you lose money with the rest of the population. Yeah. Yeah, I totally agree with that stig. I think that if you're the type of person that you already know you're emotionally charged and if you see your account go down by 20% tomorrow and you're going to be really kind of wigging out, you probably need to be more into indexes because you're going to have this psychology, this mindset that everybody else lost all that money.

Starting point is 00:34:41 So it's not something that I personally did wrong. It's just the way that the market's moving. Whereas if you invest in an individual stock pick, you're going to be questioning your own ability in order to pick and select the right asset. So I think that knowing yourself, knowing how you're emotionally going to react to things is vital to making that decision. Okay, so Benoit, fantastic question. I think there's a lot of people out there that are wondering that exact same thing. So we're going to send you a free signed copy of the Warren Buffett Accounting book, and we really appreciate you typing up that question for us. So that's all we got for today.

Starting point is 00:35:17 Like I said earlier, we're having Guy Speer on the show next week. He is a, heavy hitter in the value investing community. So if you don't know who he is, I recommend you look him up on Wikipedia. Also go to Asktheinvestors.com and record your question for Guy, and he can answer it next week on the show. So make sure that you go there and do that. So thank you so much for joining us this week, and we look forward to seeing you next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to

Starting point is 00:35:55 www. www. asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 012 : Psychology and Stock Investing (Investing Podcast)

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