We Study Billionaires - The Investor’s Podcast Network - TIP 041 : The 7 Biggest Mistakes Investors Make (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 41 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. Hey, everybody, how are you doing out there?

Starting point is 00:00:30 This is Preston Pish, and I'm your host for the Investors Podcast. and as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. So this episode's going to be a little bit different than ones that we do in the past. And as everyone knows, we like to study billionaires and, like, hon in on what their critical variables are. But this episode's going to be just slightly different because I ran into one of my good friends, Brian Rutherford. And he also went to West Point back in 2004s whenever he graduated. So he was a year behind me whenever I went to West Point. And so I had the opportunity to link up with him down in Washington, D.C.

Starting point is 00:01:05 And we conducted an interview together. And I really wanted to interview Brian because Brian just recently went to MIT, and he got his master's from MIT. And then he's now an instructor at West Point. In the start of the interview that I had with Brian, I called him a professor, and he kind of alludes to the fact that he's not a professor. He's actually an instructor. So as we cut to the tape where him and I are talking,

Starting point is 00:01:29 you'll hear him briefly say that. That's where that's coming from because I edited out some of the stuff that was discussed before that. So what we're going to do is we're going to cut to the tape. Unfortunately, Stig, who's with me right now, was not part of the interview because we did this not through Skype. And that's the means that we typically do our interviews through is through Skype. But we actually did this in a hotel room where Brian and I were just sitting down and when we recorded the conversation. And what I asked Brian to do was I said, Brian, I want you to come up with the seven biggest mistakes. that you think investors make.

Starting point is 00:02:02 And because he has a room of cadets that he's constantly teaching every single day up at West Point, he sees a lot of different things kind of throwing his way, just like kind of Stig sees in his classroom as well. But so what Brian did is he came up with this list of the seven biggest mistakes. And that's what our conversation is about that you're going to listen to as we go through what Brian thinks are the biggest mistakes that investors make. And so I really hope that you guys like this interview and we're going to cut to the tape right now. Hey, thanks a lot, Preston. Thanks for the opportunity to do this. One thing I do want to clear up, I'm not a professor, so any professors out there, I'm an instructor of economics. I have an MBA and not a PhD, so I wouldn't want anybody to think that I'm taking a title that was not earned. I appreciate all of that, but I do just have a master's degree, but I really enjoyed my time at Sloan, where I focused on entrepreneurship and also accounting. So with that,

Starting point is 00:02:58 I think I'll get started with my first, let's do it. My first mistake that I think that new investors make. And one other thing to clear up. So cadets at West Point, their junior year, they have access to a loan. And it's what we like to call it is the life starter loan. And right now, last year it was $36,000.

Starting point is 00:03:17 They get about a half a percent interest. And it comes from USAA. You might have heard of that bank. They have commercials on TV all the time now. And I believe it's kind of like marketing spend for them. that they get this low interest loan and they require you to have your direct deposit pay go there. So they know they have a customer for the five years that you're required to be in the military, and you pay off that loan over five years.

Starting point is 00:03:41 So anyway, so cadets... And I know from my own personal experience, so like when we were at the Military Academy over a decade ago, we also got this loan. And as a cadet, I remember my loan was $25,000. Mine too. And when I was a junior, it was just like one, one. morning you woke up and you opened your you know you logged into your account and boom there was $25,000 sitting there in your account now this is a loan you have to pay it back it's not like it's

Starting point is 00:04:08 free money but I remember as a cadet I saw $25,000 sitting in my account and I was like wow and it was just like you never thought about the fact that you were going to have to be making a payment on that for the next five years to try to pay it down because I mean you're a young kid I was 22 years old or 21 years old, I'd never like dealt with anything like that in my entire life. So it's an interesting vantage point as he's talking about what these students are doing with this money that they got, that they didn't necessarily have to work for or work off yet. They have no idea really the work involved in receiving that kind of sum of money. And the cadets right now, you said it was, what, $36,000?

Starting point is 00:04:49 $36,000. And it's a great lead in for my discussion about assets and liabilities because they now have this asset of $36,000 when they wake up one morning and it's now in their bank account, but then I tell them that's also a liability. They actually have not increased their wealth at all. They have an asset that exactly equals their liability. And so we have a discussion about paying it off and what that means later in life. And what it means when they commission and when they get out into the Army is that about a third of their disposable income every month is going to go to pay that thing back. So they need to make smart decisions with the money. And, and, you know,

Starting point is 00:05:26 Which all of them do. Yeah, right, of course. You know, I have, so as part of our, you know, we teach them about personal finance and investing. And one of the assignments is, hey, tell me what you're going to do with your loan. And I have people who are brutally honest that say that they're going, once they graduate, they're going to go to Las Vegas and they're going to blow $5,000 in a week or two. And then you have people who tell you they're going to invest it all. And the truth is probably somewhere in between. So I get a lot of questions because I have these, you know, young men and women.

Starting point is 00:05:56 who are 19, 20, 21 years old, they get access to this kind of money and they really want to do the right thing. I think, I believe by and large, they all want to do the right thing, but they don't know what to do. You know, they know what their parents did, generally speaking, and they assume that that is right,

Starting point is 00:06:15 but some of them, you know, just have all sorts of questions about what to do. And you get a lot of them, just because of their type A personality, that want to turn it into $100,000 by next year. There are plenty of old wives tales about the person who took their $36,000, and within three months they have turned it into $100,000, and they are living large at West Point.

Starting point is 00:06:41 Nobody knows if that's actually true. I bet that there's somebody around who has day-traded, taken on a bunch of risks, and it's worked out for them. In the short term. In the short term. Right, but as a matter of rule, you know, that is probably not the case. So I guess I'll start here with my top seven mistakes. Which are these in prioritized order?

Starting point is 00:07:03 These are not in prioritized order. As I was thinking about this, I think about the questions that I get from young people who are generally fairly intelligent. You know, they're well-reasoned folks that have just come into a little bit of cash. And so they're thinking about what to do with it. All right. So the first one, and this is where. I start when I'm asking about how I think about investing, the first thing they do is they look at a chart, either it's day, week, month, year, and they think that is some sort of arbiter of future

Starting point is 00:07:34 performance, right? It's just like going to the casino and looking at their roulette board and saying, okay, it's been black five times in a row, so I'm going to bet on red next time. Like that has any bearing on what's going to happen next. It's the same. It's the same. It's the same thing in the stock market. You look at a stock and you look at where it is and you look backwards, you know, maybe you want to look back three months because you're smarter than everybody else and you know that, you know, what happened a year ago doesn't matter, but maybe three months really matters. And they'll look at a chart and say they'll make some sort of estimation of cheap or expensive or I should be buying or I should not be buying. And I say that is fools gold.

Starting point is 00:08:20 That is, when you look at, and you can't go look at a stock without seeing a chart. There's no site that gives you information about a stock that doesn't also offer a chart. And I think that would be the biggest mistake, or one of the mistakes that I see is people relying on the charts. People seeing some... Pricing charts. Yeah, pricing charts. Exactly. They just simply charts price over the course of either day, week, month, year, whatever.

Starting point is 00:08:50 it is. They're not even looking at the profit. They're not looking at... They don't even know what the business does. You know, and that's one of my other top seven is not understanding the underlying business. I start a class in my accounting class by talking about different fast food restaurants, right? And so I ask, what's the difference? How does, I ask, how does McDonald's make their money? What is McDonald's? They're like, you know, the typical answer is, oh, well, they sell hamburgers and, you know, they've gotten, their strategy now is to get into more healthy things. They're doing salads, and maybe now they want to get into coffee because they realize that Starbucks is making a lot of money. And now I think the newest thing was, you know, we're going to serve breakfast all day because there are some people that prefer to have breakfast all day.

Starting point is 00:09:37 So they tell me, they tell me a story about how they make all of their money by how many hamburgers they sell. And I say, you know, you're right and you're wrong. right McDonald's is actually if you look at their balance sheet they are a real estate company you know they

Starting point is 00:09:54 Ray Crock even said that in some book I read absolutely they are a real estate company they own the ground that every McDonald's is on they own the ground and then the proprietor of that

Starting point is 00:10:04 franchise probably owns the building right and they probably they probably sell they probably buy their hamburgers from McDonald's corporate and a whole list of other things

Starting point is 00:10:16 things that they must do. But first and foremost, they are a real estate company, probably the largest real estate company in the country. When you look at it from a simplistic standpoint, and you're going to go buy a real small business on Main Street. And let's say that you were getting ready to buy it. And I said, okay, well, how does this small business make money? And you give me the wrong answer. You don't even know what it is. My impression of your ability to actually do well in that venture of buying that small business is you have no idea what you're getting yourself into. That's exactly right. Yes. And so when you see these students or anybody out there and they're getting ready to buy ownership of just one share and that one share might only be $30. And they can't

Starting point is 00:10:58 even tell you what the major operational earnings that they're bringing in that's really bringing in the breadwinner for the company. And they don't even know what that is. That's an issue, folks. Like you can't invest in stocks over the long term and do it successfully if you, can't answer some of those basic questions. Knowing the underlying business is really important. So the first decision is, I see it's gone from 50 to 30, and therefore it's a good value right now. Well, what else, what has caused it to go from 50 to 30?

Starting point is 00:11:33 Has Wall Street lost faith in it? Has something gone wrong with their, are they now reporting a loss? Why is that loss? Is it a one-time restructuring, or is it a core business reason that they have, swung from a profit. It's funny you say that because

Starting point is 00:11:49 say a business comes out and they say, well, this is a $1 billion loss for the company. So my immediate question is, okay, so what does that loss turn into per share? The $1 billion for a really big company might turn into one penny per share. But yet you might see the stock price go down by $3. So it might be a total overreaction,

Starting point is 00:12:09 and it typically is a total overreaction to the news, but what was it per share? And it's funny that you brought this up is your first point because the one on my list, the very first thing I wrote was not understanding that one share is the same as owning the entire business. And so I think there's really go very close hand in hand, and that if you own one share of the business, that's the same thing as owning every single share of the business. And you've got to treat it that way and you've got to understand what does the business do? How does it make its money? Yeah, exactly right. So my first

Starting point is 00:12:40 one again is looking at a chart and trying to make a determination of cheap versus expensive. And that ties to my second one is, is understanding what is cheap versus expensive. I said, so I always bring up Apple. Everybody understands Apple, most of my cadets have an iPad in class. And we talk about is Apple cheap at, I think today it closed at around $126. So is Apple cheap at $1.26? Well, two years ago, it was at about $700. So I guess it's cheap, right? Yeah. This is the rationale that I get. It's cheap. and therefore I should maybe be buying it because I really like Apple products. Okay. Well, why did it go from 700 to 100?

Starting point is 00:13:24 Was there a massive decline in value? Oh, no, there was a stock split. And so we get into a discussion about what is stock splitting? Does stock splitting or reverse split, does that create any value? Well, you all are smart? Absolutely not. It does not create any value. Okay, then why does Apple do it?

Starting point is 00:13:43 Well, I think the word on the street, a lot of people believe that Apple split their stock to maybe be included in the Dow one day, and that most stocks in the Dow are at $100, roughly $100 or less, right? And a $700 share was never going to be included in the Dow. I think we would all agree that Apple is integral to, it is a representative company of our economy, and the Dow is supposed to be 30 representative companies that make up our economy. So I think a lot of people believed that maybe to be included in the Dow 30 that they would have to have a lower share price. And Apple sees itself as kind of the everyman company.

Starting point is 00:14:25 Every man should be able to maybe buy a share. Everybody should be able to. And you get more people that can do that at 100 than that. That's exactly right. Because there's psychology in the market, right? There's psychology that 700 is expensive and 100 is less expensive. But really, those have nothing to do with cheap or cheap. expensive. It's all about earnings per share. It's price, not value. That's exactly right. But if you

Starting point is 00:14:48 don't have an understanding about that, you might be buying at $126, whereas that might or might not be a good value. And $700 might have been a great value. Because the seven for one stock split they did, that would make shares $100 to share. 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 got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over

Starting point is 00:15:35 the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful main stage talks, hands-on workshops on freedom tech and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end.

Starting point is 00:16:19 And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com, with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately.

Starting point is 00:16:50 How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move. With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence.

Starting point is 00:17:24 And now with the Netsuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead. If your revenues are at least in the seven figures, get their free business guide, Dymistifying AI at netsuite.com slash study. The guide is free to you at net suite.com slash study. NetSuite.com slash study.

Starting point is 00:17:56 When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelming and lonely. That's why having the right tools matters. For millions of businesses, that tool is Shopify. Shopify is the commerce platform behind millions of businesses around the world and 10% of all e-commerce in the U.S. from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not joking. a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use

Starting point is 00:18:37 templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today at Shopify.com, slash WSB. Go to Shopify.com slash WSB. That's Shopify.

Starting point is 00:19:07 dot com slash WSB. All right. Back to the show. So that's a really important point. So the market's offering you a price of $126. So you can buy it for $126. But what is it worth? What is that one share of equity in the business worth?

Starting point is 00:19:30 And that's where you have to go and you have to do discount. cash flow models or whatever, that's where you really have to do some legwork to figure out, discount cash flow, how much are they going to earn into the future? What's the profit of the business? And if I discount that back to the present day value, what's it actually worth? And then you have to relatively compare that to other things that you can buy on the market. That sounds like a really jumbled up mess of confusion for a lot of people that might not be into this stuff, you know. But it's not.

Starting point is 00:19:58 It's, you know, understanding, this is one of my other big seven is not understanding, and not, you know, I will have a cadet who will come in and tell me that they invested in, that they did really well last year, they invested in two or three stocks, let's just say they invested in three stocks, and they earned 20%. Great, they're really happy about that. I did it wonderful, and I'll say, great, what did the broader market do? What did the S&P 500 do? What did the Wilshire, you know, 3,500 do?

Starting point is 00:20:27 Russell, together. Yeah, we got to compare it to something. Oh, if does S&P also did 20%, then I will. look at them and say you lost. You lost to the market because you took on extra risk. Exactly. I invested in three stocks and only was rewarded with 20%, where I could have invested in 500 stocks. Reduced your risk. Reducing my risk and also earned 20%. So I say that they lost relative to the market. And that concept blows their mind. They believe that they have now, they have picked three winners and they are, they are a really good.

Starting point is 00:21:03 stock picker. And that's one of my other top seven is that what's really dangerous is to earn money in the short run. I got that same one. To earn money on one or two stocks in the short run and then overestimate your ability take more idiosyncratic risk, right, and not understand why you're taking that risk and you will fail at one point. You will put more money into one or two things that will lose 50% in value when the whole stock market maybe only goes down. It has a normal correction of maybe 10% and they've lost half their money. And they realize that maybe this isn't good. But the problem is when good things happen, and this is basic psychology, when good things

Starting point is 00:21:45 happen, they attribute it to themselves. When bad things happen, they attribute it to things outside of their control. They say, oh, the market, that specific company, something bad happened. And it's surely not my fault because remember back, you know, when I first started doing this, I picked a couple of winners when the whole market was going up. Which is a compounding problem because when they get back and did the situation again, it was, I didn't lose money last time. That wasn't my fault.

Starting point is 00:22:11 But whenever I did make money, that was my awesome picking ability. Absolutely. Yeah. Absolutely. So we've talked about a few of the top sevens. We've said, looking at a chart, you know, the most dangerous thing that can happen is making a little money early or a lot of money early and attributing it to yourself and not market forces, right? Making a determination about cheap versus expensive based on the stock price alone.

Starting point is 00:22:37 I have so many people who want to invest in stocks under like that the $10 range. They think that they are, that they can buy. Yeah, they pay me stocks. Oh, I can buy 5,000 shares. And all it needs to go up is, you know, two or three cents and I've made a lot of money. And I say, they will just as easily go down two or three cents. sense and because those are generally very thinly traded shares, they don't know even what thinly traded means, liquidity, right?

Starting point is 00:23:04 That they could be locked in and not be able to offload those things. So again, this is an opportunity for me to bring up different aspects of investing to people who don't know. And they're all trying to do the right thing. They all want to, you know, they're acting in kind of their self-interest. Well, they're motivated. They're motivated. They want to read and they want to consume.

Starting point is 00:23:24 and this is the first time for many of them. And it's great. And I really appreciate the opportunity to be able to stand up there. As somebody who did this himself, I was doing this back in 2003 and 2004. You know, I thought, you know, I got my loan at the, at the dawn of the, really about a seven-year bull market, right? I got it in 2003, so I guess maybe not quite seven years. But I invested in, you know, individual securities. I was making good money.

Starting point is 00:23:54 And then again, not attributing it to market forces, I was attributing it to myself. And sure enough, you know, when the market went down in 2008, I went down with it. So it's almost like looking in a mirror yourself. It absolutely is. A decade older. I looked at all of my instructors as they were out of touch and they didn't know. And now I'm that instructor who is clearly again out of touch if I don't know. But that's okay.

Starting point is 00:24:21 You know, some of these lessons, I want them to learn. If they're, you know, $30,000 now, I would appreciate that you learn lessons now versus, you know, 20, 30 years from now when they're talking about millions of, potentially. Or they inherited a lot of money. Exactly. So learn these lessons now. And so try it out. So the losses aren't too steep. Okay.

Starting point is 00:24:46 So the next one that I'd like to talk about is really is opportunity cost, right? And this is, so we asked cadets at the very, very end of the semester, what is the thing, what is the biggest lesson that you've learned? And a lot of them talk about personal finance, and they talk about just the idea of opportunity cost. If I'm investing in one thing, that I'm not investing in another thing, right? And we see this in a number of ways. I have some cadets who understand, and they believe, I believe, because their parents probably did this, that they've invested in treasury bills, CDs, things that are very safe, you know, and that is, that's very common, right?

Starting point is 00:25:23 That people invest, they're very risk-averse, and so they invest in things that are very safe. But if you're investing in something that provides you one or two percent, then you're not investing in something else, right? And so that starts to blow their mind, that there is something else out there. Oh, no, no, I'm really happy with one or two percent. I said, are you happy with one or two percent

Starting point is 00:25:45 because you don't know that there's something else out there or you're happy intrinsically with one or two percent? And then I talk about, you know, it leads into a conversation about inflation, right? That if you're only earning one or two percent, you're going to be lucky to keep up with inflation. Yeah, you're losing your buying power. You know, and so again, we have discussions about the power of money. Would you rather have a dollar today or a dollar a year from now? And that seems pretty simple.

Starting point is 00:26:09 But then when you relate that back to investing in CDs or T bills or bonds, you know, when they're at 19, 20, 20, 21 years old, they sometimes don't make that logical leap, right? And I try to help them see that. You know what? If you're 20 years old and you have money to invest and you know that this money is for when you retire, say you're 60, 65 years old,

Starting point is 00:26:33 you probably shouldn't be in CDs with that money right now. Yeah. You know, that doesn't make sense. And it comes with an opportunity cost. So, and they, over time, we talk about opportunity costs in many different realms. And so I think they come to have an appreciation. I think a lot of people don't realize that investing in general, it's all relative games. So if you take the United States population as a whole, you've got a few people investing at 1%,

Starting point is 00:27:01 you've got other people out there making 20% returns like Warren Buffett made through his whole career. It's all relative to the other person. So there's only a certain amount of cash flow. And if you're one of these people that are protecting your principal, but you're at the bottom end of the returns, you're a guy that's going to be at the bottom of the barrel. I mean, it's just really that simple. You're exactly right. And understanding the counterparty to what you're doing,

Starting point is 00:27:30 this is my other mistake that people make. They don't understand when they're buying something, they're making a bet. They think that if I'm buying, clearly you believe that some security is going to go up in value. Well, somebody's selling you that security. Oh, I love this conversation. And clearly, they believe it's going to go down.

Starting point is 00:27:47 Yeah. So cadets, they love to believe that they know something that other people don't, right? That they are a little bit smarter. And maybe this is a function of the institution a little bit. They get inundated, told many times that they are the best and brightest, and they are, you know, everybody's a valedictorian from high school, and everybody's amazing. And they are. Generally, they're a great group of young men and women, and it's great to be there and teach them. but I remind them that just 50 miles south of where West Point sits on the Hudson, just 50 miles south is New York City, where there are lots of people whose whole livelihood depend on them making a bet about things going up or down.

Starting point is 00:28:29 And I ask them, who do you think has more information? Do you think it's you cadet who's trying to speculate or trade a little bit in between your classes or somebody whose entire livelihood is based on, you know, on a stock going up or down who is there 18 hours a day they have a team of analysts you know I'm talking about a portfolio manager or somebody who's working down on Wall Street and and they have access to tons of information they have access to you know the CFO CEO of these companies they are on investor calls they are on earnings report calls they are

Starting point is 00:29:06 thirty five years of experience absolutely yeah I said who do you think has more information you know and they almost all that somebody who does this 24 hours a day, they have more information. I said, okay, well, when you're buying a stock, somebody's selling it to you. And who do you think is selling it to you? You know, it could be somebody else, just like you, small investor, you know, playing around with a few thousand dollars, or it could be a big seller, right, who has potentially, and I know that we want to believe that all stock market information, all company information, as public, well, it may be public, but that doesn't mean you as small investor has actually read

Starting point is 00:29:44 it and knows it and has assimilated that into the price. So just understand that whenever somebody's selling you something, that they have the exact opposite view of you. Exactly. And they don't have a clear understanding of where they are in the market. In fact, some of them, some of the people who trade believe that they are buying stock from the company, that the company is selling them shares, and then when they decide to sell, that they're selling it back to the company. I said, that's not exactly how they work. That leads into a discussion about IPOs, and that's when the company gets money the first and only time

Starting point is 00:30:18 unless they're buying back shares. But again, that level of understanding is kind of what I'm dealing with. And that's perfectly legitimate. I probably thought that at one point. Somebody had to explain about what's going on when you're buying and selling in secondary markets and that sort of thing. I like to always think,

Starting point is 00:30:38 right before I push the buy or the sell button on any type of security to think to myself, am I the smart person or am I the dumb person on this deal? And if I can't, you know, say with a whole lot of confidence and back up quantifiably, all the reasons why I think I'm the smart person on the deal, it's a little harder to push that button to execute the order. And I think that if a lot of people had a little bit more respect for maybe the person on the other side of the deal, is their vantage point? How can I understand their vantage point a little bit better? And I think if you don't do that, due diligence and really try to shoot holes through your

Starting point is 00:31:19 own opinions, you're going to probably have a hard time being successful in the market. And in the Jack Swagger book, who profiles the very best investors of all time, one of the things that I found really interesting was he talked about how some of the guys that were a really good traders specifically. They could change their opinion on a dime where they would be really bullish on one thing and then literally the next minute they would turn into an absolute bear. And he attributed this to their ability to really look at things objectively and say, hey, I had this opinion and these were all the reasons why, but then whenever I thought about the other person's perspective, maybe the person who was selling when you were buying,

Starting point is 00:31:59 whenever they assessed all the reasons why they were doing it, they were easily able to say, you know what, not only was I wrong, but now I'm going to take the exact opposite position, and I'm actually going to go in the opposite direction. So I think if you're the type of person, it's a very idealistic type person where you come up with three reasons why you think something is right or wrong, and you really hold tight to that and you're not open to other people's perspectives, you're probably going to have a hard time being successful, a successful trader, let alone investor. You're exactly right. And to illustrate this, and I know, and I know, know, you know, part of the theme is talking about billionaires.

Starting point is 00:32:36 And I'll tell you who's the billionaire that takes up a lot of the bandwidth in the classroom. That we talk about is Elon Musk and Tesla, right? Well, first of all, we talk about how Elon Musk is not only linked to Tesla, that he has two other very large and successful business, SpaceX and Solar City. But he, you know, people want to, you know, my cadets really, they want to know about Tesla, Tesla stock, Tesla cars are really interested about should I buy, should I sell. And I think this illustrates this point that Preston is talking about is you see wild swings in the price because people are changing their mind all the time about Tesla.

Starting point is 00:33:17 I remember a couple of years ago, Elon came out and said at $160 that he thought his own stock was a little overpriced, right? So this is 2012 or maybe he has an economics background. Let's just agree that Elon knows more about what's going on in Tesla than what we investor do. And when Elon says, hey, 160 is a little bit high, we should all have been running for the doors, right? When an insider says that, then, you know, and he knows his cash flow better than you and I, we should have probably gotten out. You know, but that didn't happen, right? You shall go up to $250 and then back down and up and down.

Starting point is 00:33:57 And why? Why is that? You know, there's not a long track record for Tesla. Tesla makes right now one car. I know they've announced the battery for the home, and that's an exciting potential market. But right now there's probably more risk and more questions than there are answers, the gigafactory that's being built in Reno.

Starting point is 00:34:16 That is their limiting factor for being able to produce cars. How many lithium batteries can we produce? I don't think anybody knows the answer. If you read their 10-K, they talk about putting $5 billion, to this project and Panasonic's going to show up with some money and they're going to get some tax breaks from Nevada and this is all going to coalesce together

Starting point is 00:34:36 and it's going to be perfect. Nobody's ever built a lithium ion battery gigafactory, right? Where it knows what the market is for it? And oh by the way, they're buying a huge percentage of the world supply of lithium. I mean, do they must believe that that's going to do something to the price

Starting point is 00:34:53 in the long term. So I think there's more questions than answers and if you look at the mass market model I think what is it the model X not the model X is the SUV but the other one that's supposed to be the mass market thirty five thousand dollar car this is all predicated on the factory being up and running full operating capacity at a certain time to be able to produce batteries at a certain price so that they can sell this mass market car at thirty five thousand dollars we are all

Starting point is 00:35:20 at two hundred two hundred and fifty whatever the stock prices today we are pricing that in as as being successful yeah and I think there's a lot of risk there And, you know, this isn't to rub on Elon. I think he's an incredible person. And really, if I was to invest in a person, he would be near the top of the list. However, there are still market forces and still... You're still going to produce it. You're absolutely, there's still some execution risk that, lots of execution risk that he has to get through.

Starting point is 00:35:49 And so, so ultimately, I try to showcase this for cadets, that there's a lot of risk in this price. And if you're a speculator, you're, if you're a speculator, you're, if you're, investing in Tesla today, I would say unless you're going to invest and let it go and not look at it for 10 years, which is darn near impossible to do it, then you're a speculator. You are speculating that he's going to be able to do some of these things and that will turn into profits. But understand that that is not, that's not like getting a dividend and taking, you know, four or five percent, you know, as a, as a, as a, as a, as a good return, you're speculating that he's going to be able to do all this stuff. And it's a, it's an interesting discussion. because you're bringing up the terms, speculation and investing, and the contrast between those. And so Benjamin Graham, who people know Ben Graham, was basically the guy who taught Warren Buffett everything he knows, and he was his professor at Columbia.

Starting point is 00:36:44 Ben Graham wrote the book, The Intelligent Investor and Security Analysis, which Warren Buffett says are the two books that have influenced him more than anything else. And Ben Graham starts off the Intelligent Investor. In the very first chapter, he talks about this idea of speculative, versus investing. And he defines the difference between speculation and investing

Starting point is 00:37:04 as if you are an investor, you A, protect your principle first, and B, you take a reasonable return. And he kind of quantity, he doesn't really necessarily define what reasonable is, but I think a lot of people would define that as about a 10% return is kind of what you should really classify as reasonable.

Starting point is 00:37:26 Anything above that that you're expecting a 50% return and there's a huge amount of risk on your principal, that immediately falls into this category of speculation, which is not investing. And I think that that's where Graham really sets himself apart and Buffett and all these other billionaires that are really successful. They focus on what is probable? What is my probability of success? And is it given me a decent return relative to other opportunity costs out there?

Starting point is 00:37:55 And if the answer is that it's given me a good return, and it's protecting my principal and there's a high probability of success. That's something I want to go after. Buffett has this quote. He says, I want to step over a three foot or two foot bars or something like that. I'm probably messing up the quote. All this whine. But he says, I'd rather step over a two foot bar than to try to jump over a 10 foot bar.

Starting point is 00:38:16 And that's what he's getting at with that quote is, I want to protect my principal. I will go after a decent return. I am not chasing high returns with low probabilities of success because that's how you lose a lot of your principle. Yeah, yeah, exactly. Speculating versus investing, I think cadets generally don't understand what they're doing, right, when they're clicking the buy button and I'm going to buy a block a stock.

Starting point is 00:38:38 Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings completely, clients, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a SOC to or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

Starting point is 00:39:08 Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with VANTA. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform I'd won in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try?

Starting point is 00:39:45 The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments. The S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4x, crypto, and beyond. With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for.

Starting point is 00:40:17 See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit plus500.com to learn more. Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify.

Starting point is 00:40:47 Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings account. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise Income Fund, which has more than $600 million invested in a 7.97% distribution rate. With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years.

Starting point is 00:41:24 Visit fundrise.com slash WSB to invest in the Fundrise Income Fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right.

Starting point is 00:42:00 Back to the show. And this is really getting to the essence of a thing we called patience. You know, if you are patient and you are trying to accumulate a lot of wealth over a lifetime, it's a lot easier for that person to invest than it is for them to speculate. You know, these people that are speculating, these really anxious cadetions, I mean, I was one of these guys, you know, over a decade ago. So it's kind of fun to talk about it because I remember being in that state of mind where you want to do big things really early. You just want to jump out of the gate and get after it.

Starting point is 00:42:38 And that's where these guys are at. They don't possess the patience. And I think for anybody that's going to be a large success in the market, you've got to have some patience. I mean, I'm just going to look through my list really fast and see if there's any really big ones that I have that, you know, we didn't necessarily cover on your list. So the one that we talk, and we talk about this a lot on the show, is really protecting your downside.

Starting point is 00:43:02 And it really goes to what we were just talking about is protect your principle. These guys who are the number one investors in the world across the board, you know, had managed billions of dollars or they have their own net worth of a billion or more. They always mention,

Starting point is 00:43:17 protect your downside. You've got to protect your downside. So, like, we look in the current market right now. So a lot of people are chasing measly returns in my opinion. That's my opinion. I could be completely wrong. But my opinion is, is that, you know, based on how the market is currently priced, it's at about a 4% return, I think.

Starting point is 00:43:36 And the date is 9 June when we're recording this, in 2015, just so people know. So at 9 June, 2015, the market, in my opinion, is priced at about a 4% return. When you look at fixed income, so you look at a 10-year treasury, I think it's what? 2.5%, 2.7%, somewhere around in there. So those are the returns that people are chasing with their money. I don't really think that those are very good returns. I think that you're potentially setting yourself up for a liquidity trap, and I know we were talking a little bit about that before we started recording,

Starting point is 00:44:07 but it's very important for you to think, am I in a position where the risk that I'm assuming in going after a 4% return is worth that potential liquidity trap, the way that I'm defining it? Is it worth that? Is the downside risk of the market taking a huge correction worth that 4% gain? Yeah. I'm of the opinion that a lot of my money is not worth that. Yeah. But that's my personal opinion. I completely agree, Preston. I mean, so to illustrate this, had a good story about cadet coming in to talk about the company lumber liquidators.

Starting point is 00:44:43 They sell flooring to millions of homes in the United States. And there was a story about three months ago on 60 minutes about how a lot of, of their flooring was not meeting the code that was being even stamped on the floor. So there's made in China and they had very high levels of formaldehyde and other carcinogens. Ethics concerns. Yeah, ethical concern, absolutely. So the Wednesday before the Sunday 60 Minutes episode, the CEO came out and said, hey, there's going to be a story run on Lumber Liquidators this Sunday, and it put us in a negative flight.

Starting point is 00:45:18 That day, that Wednesday, Lumber Liquidator's stock went down by about 25%. So I think it was a high about 70, so 25% run up on that day, on that Wednesday. The story happens on Sunday, comes out. It was maybe a little bit worse than what people thought. So Monday, it takes another 25 to 30% loss. And I am teaching class on Tuesday. So cadets come in, and they've read the news, and maybe they even watch the story. And they said, hey, sir, again, looking at the chart first, saying,

Starting point is 00:45:51 hey this stock is down almost 50%. I should maybe be in this sort of thing and this gets to Preston's point about understanding your downside risk. I said, okay, what is the downside? What is the risk here? Why would you make an investment today? What is your premise?

Starting point is 00:46:07 Why would somebody be selling even more? Yeah, what is your premise for buying today? And they said, well, because it's gone down 50%. That is not a reason to buy. Because you don't know what your downside is. You know what maybe potentially the upside is because you know what it was selling at, trading at before, but now this new information comes to light.

Starting point is 00:46:26 It's assimilated in the stock price, and it's down. So I think at that point the stock was about $40, and if you run the story forward now, I think it's trading at 25 or so. It's down even further. It's because more information comes to light, and investors are understanding what the downside is, and they're not touching it. I have the opportunity to take somebody that's to Boston and talk to, the CEO of Highfields capital management, one of the largest hedge funds in the United

Starting point is 00:46:55 States, John Jacobson out of Boston, who famously shorted Enron about six months before it exploded, made a lot of money there and has since done well. And so cadets ask him about lumber liquidators. He said, we don't, we have lots of models for what's going on. We can't even model what's going on with that company right now, so we aren't going to touch it. And he is a person who likes to take a big position, whether it's a short position or whether it's a short position or whether it's a long position. But it's got to work in his models. And I'll just believe that he has lots of smart people working for him.

Starting point is 00:47:28 And if they can't model what the potential upside or downside is, that it's something that I shouldn't be touching either. So the part I like about this is it gets to the point that I really want to highlight, which is one of my big seven, and that is the appreciation for all the variables at play. And I think that a lot of people come up with a few talking points, if you will. It's almost like their elevator pitches. They're trying to sell you on why they bought whatever.

Starting point is 00:47:54 And it's so surface deep. They've got three talking points and they're like, hey, it's a great buy because A, it's a great buy because a B and it's a great buy because a C. And notice how I said it's a great buy. They never talk about the downside risks that contrast to whatever they think their upside is. And even if you did have three downsides, now you're only dealing with six variables. And when you're talking about some of these businesses,

Starting point is 00:48:19 Sometimes there's so many different variables at play, and I don't think that a lot of people have an appreciation for that complexity of what they're really dealing with. And I think that the better that you can define this, and Graham talks about this in security analysis a lot where, you know, he talks about the certified financial analyst. It is his duty, the dig into all these different variables and then weight them and figure out, hey, what are all the things that could go wrong? What are all the things that could go right?

Starting point is 00:48:51 And that's the people that you're going against. For some of these young investors that are doing individual stock picks, they might not have an appreciation for how involved. Some of those people are on the other side of the deal that are maybe selling or buying their shares. And I think that really kind of having that appreciation for all these different variables and really trying to shoot holes through. Mark Cuban has a great quote.

Starting point is 00:49:16 He says, I always try to figure out how I could kick my own ass. And I think that that's a great way to look at things. Because when you're buying stocks, if you're buying something, how could I lose? How could there be somebody that has the opposite opinion of this beat me at what I've got? I think when you look at it from that vantage point, I know Ray Dalio, you know, biggest hedge fund manager on the planet, that's how, that's why he has these boards and he sits in these rooms with all these people. And it's like, hey, here's my idea. I want everybody in here to tell me why I'm wrong.

Starting point is 00:49:47 And then he tries to quantify that and figure that out. And I think that that's one of the things you've got to do as an investor is you've got to try to beat yourself up. Why am I wrong instead of just trying to sell yourself on why you're right? And this is exactly. So to go back to the topic of this whole podcast is what are the mistakes that young investors make? And this is what they don't do, right? You look for self-affirming information and you wait that more heavily. than something that could tear down your argument for buying something.

Starting point is 00:50:18 And that's what younger people do. I mean, they want to be right. You know, they've been right probably all of their life. They've done very well. They've made it into the military academy. And now they want to make a good investment. And they look for the information that supports the decision that they probably already made. Right.

Starting point is 00:50:35 They probably click buy and then try to determine why they've actually bought it. Oh, I bought Tesla because it was really interesting. and it was down 5% today. And Elon Musk is a guy. And he's amazing. He's going to bring it back. Well, again, remember, not two years ago, he said, hey, a $160 stock price feels a little bit high to him, right?

Starting point is 00:50:58 So I think we need to take that into account. Well, hey, so that's all we got. I think that this was a fantastic interview, Brian. Thank you so much for coming on the show. This was pretty exciting to be able to link up with you down here in D.C. We did this, as you probably notice, my voice sounds a lot different. This is because we're using a little recording device in my hotel room. So I don't have access to all my recording equipment.

Starting point is 00:51:24 But I was so excited to be able to do this to just sit down and share some of these experiences because so many people are in the same situation where they're new investors. They haven't had this exposure. They haven't felt the pain of going through a 2008, 2009 crash. And, you know, when you go through something like that, you definitely look at that. you definitely look at the world through a different lens, and hopefully we're able to help people that, you know, if there is a market downturn in the next couple years,

Starting point is 00:51:51 maybe some of this information will have been useful for them to maybe mitigate some of that risk. Yeah, thanks a lot, Preston, for the opportunity to come and talk and share what I talk with other people with. And I believe some of these issues are what's on a lot of people's mind. Sometimes you don't want to speak up and say, hey, I don't really understand what I'm investing in. But the cadets certainly do, and we have a good,

Starting point is 00:52:12 interaction. So I appreciate the opportunity. So one question I got for you, and we ask every single guest that comes on our show this question, if there is one book that you could recommend to anybody in the audience, and most people recommend an investing book, but it doesn't have to be investing, something that has impacted you tremendously. What would that book? Yeah, it's my most recent read right now, and it's Robert Chialdini's influence. I think that no matter what you're doing in life, you are always trying to influence people, whether you're in sales or whether you're a marketing person or whether you're just trying to sell your idea to your boss and trying to get that raised.

Starting point is 00:52:48 You're always trying to sell somebody on something and understanding the keys of influence. I would absolutely recommend that book to anybody. Robert Chialdini, one of the foremost thinkers on influence. So Stig and I did an entire podcast episode on that book. It was pretty neat that you said that you like that book. By the way, that's Charlie Munger. favorite book who's the vice chairman at Berkshire Hathaway. Pretty smart guy.

Starting point is 00:53:12 Who's a billionaire. So we will have a link to our interview that we did on the top high points of influence. I'll also have a link in the show notes. If you want to download our executive summary of that book, if you don't have time to read it or you don't have time to go out and get it, we wrote an executive summary of that book. You can download that executive summary on our show notes. Also, if you sign up on our mailing list, you can get all of the executive summaries that Stig and I write for all the books that we do. But awesome recommendation. That's one of my top,

Starting point is 00:53:43 probably one of my top five favorite books of all time. So that's pretty neat to hear you say that. But thank you so much for coming on the show. It was awesome to have you here. Thanks a lot, Preston. Okay, so I hope you guys really enjoyed that interview with Brian. This is the point in the show where we're going to go ahead and answer a question from a member of our audience. And this question comes from Frank Borja. And he has a great question. So we're going to go ahead and play that right now. Hey, Preston and Stig. I know you guys are really big into accounting.

Starting point is 00:54:10 So my question is accounting related. How does a company like Tesla continue to operate with negative net income and negative free cash flow since 2007? How does it even continue to keep its doors open? Thank you so much. All right, Frank. This is a fantastic question. And I'm just surprised you haven't heard of the money tree. They just go out to their money tree.

Starting point is 00:54:36 No. obviously there is something that's a little funky going on because it doesn't make any sense. And I think for a lot of people that are starting off, they'll see that and they'll immediately say that none of this stuff makes any sense. Because a company can't keep its doors open if they have a negative flow of income a year after year. But that's not necessarily the case. And so Stig's going to answer this one because this is a hard question. So I'm going to throw it over to Stig. Yeah.

Starting point is 00:55:02 So I really like this question, Frank. And it's also something I think that a lot of people that invest in, let's call it tech stocks or new issues, they might be meeting. So it's really a great hearing that you're on the right path here. So basically, there's two ways to do this. If you want to operate a business and you can sustain that business with the net income. The first one is debt. So basically, I just pulled up some number whenever I heard the question because I found it was really interesting.

Starting point is 00:55:34 And I can see that back in 2010, Tesla had 72 million in long-term debt. Today, or by the end of 2014, they have 1.8 billion in long-term debt. So that's one of the secrets of why they can still be operating. The other thing, which is not debt, but a kind of debt, is that they're issuing more shares. So actually, when they issue shares and when they get more shareholders, that kind of just owe that money to the shareholders, which in turn, of course, will dilute the shares of the existing shareholders. And so just to give you an idea again of some of the numbers,

Starting point is 00:56:13 they're actually gotten more than $1.7 billion raised in additional equity from the capital markets since 2010. So, I mean, this is not me saying that Tesla is a bad business or anything. This is just me saying that it's definitely not a warm Buffett type of business. It's not one of those stable companies where you buy into the earnings and you would just see steadily money flowing back to you. It's definitely another type of business. So, Frank, the best way that I can tell you to help you solve problems like this in the future, because whenever I was first starting off, the thing that helped me the most was trying to always relate something back to my own personal life or my own personal experience. So I would ask myself in this situation, how could I continue to?

Starting point is 00:57:01 not make money and have enough to get by from day to day. So the easiest way to answer that question is, well, I'd have to go out and I'd have to get more loans than what I have right now, or I'd have to have people lend me more money. And then the last scenario that Stig talks about is basically diluting the equity of the business or selling more shares on the open market to raise cash. And that's really the best way I've found to really kind of solve these difficult accounting questions is how would this relate to me as an individual person or individual investor if I was in a similar circumstance. And when you do that and you go through that mental gymnastics,

Starting point is 00:57:39 you're sometimes able to solve the problem a little bit better. But Stig's answer was spot on, and hopefully that really helps everybody crack this problem. So Frank, really appreciate the question. We're going to go ahead and send you a free sign copy of the Warren Buffett accounting book. And for anybody else out there, if you want to ask a question like Frank and get it played on the air and get a free signed book by us, go to asktheinvestors.com, and you can record your question there, and hopefully it'll get played on the air for you. So that's all we have for you guys this week. We really want to thank Brian Rutherford for coming on the show and giving us a fantastic interview. I really hope that that helps people think about those difficult problems that

Starting point is 00:58:13 maybe they might be overlooking that are potential risks as they continue to invest in the market. So thank you so much, Brian, and thank you, Frank, for the question, and we'll see everybody 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. TheInvesterspodcast.com. Submit your questions or request a guest appearance to The Investors Podcast

Starting point is 00:58:39 by going to www.w.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 041 : The 7 Biggest Mistakes Investors Make (Investing Podcast)

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.