We Study Billionaires - The Investor’s Podcast Network - TIP 047 : The Black Swan (Investing Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 47 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. All right, how's everybody doing out there?

Starting point is 00:00:29 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. And today we're going to sound a lot better than we usually do because we have a special guest with you. And his name is Hari Ramachandra. Everybody knows Hari from our mastermind group. Hari's always that smart guy that we bring on the show to cover our weaknesses of not

Starting point is 00:00:50 knowing what we're actually talking about at times. And Hari comes from bitsbusiness.com. And the book that we're going to be talking about this week is a really, really popular book. and this was one of Hari's favorite books. And so it was a very easy decision to bring him on the show to talk about some of the thoughts that he had on it along with Stig and I as we read this book. And the name of the book is The Black Swan. And the subtitle was The Impact of the Highly Probable. And this was written by Nassim Teleb.

Starting point is 00:01:17 This book has really been one of those books that a lot of different billionaires are talking about. Specifically, Jeff Bezos was a huge proponent of this book. Bezos made this a mandatory reading for some period of time at Amazon for a lot of the executive. there. Howard Marks endorses this book very heavily. You have Monish Pabry, Guy Speer. I know that they're fans of the book. And I'm sure there's plenty more out there that really have, this book has had a huge impact on the way that they see markets. They see the world and the way that it operates. And so that's what we're going to be talking about today. And it's really exciting, Kari, you know, obviously some of my joking comments there, but we really do mean that you add so much value to the podcast when you come on. So it's awesome to have you with us today. Hey, Preston, thanks for having me. As you mentioned, this is one of my favorite books, and I'm glad to be here talking about this book with you guys. Always fun, buddy. So let's go ahead and jump into this one, and let's just go ahead and start talking about the overall theme of the book.

Starting point is 00:02:16 And this is what I took away, and I want you guys to shoot some holes. Maybe I didn't understand it nearly as well as you guys. But the main theme that I took away from this is that the distribution, when you talk about statistics, And for anybody who doesn't know Nassim Taleb and kind of what he's great at, he's great at statistics. And what he's talking about here in the book is that distributions are not normal. And I think that whenever people think about statistics, especially in an academic sense, they think about the distribution and the bell curve. And they think that when you model different systems, whether it's the stock market and the different points on that or whatever the model might be, everyone thinks of things in a normal distribution. And I think Nassim Taleb would probably take on the approach that it's never a normal distribution and it's slightly skewed and that because of that you get these extreme results that can sometimes happen.

Starting point is 00:03:09 And he uses the metaphor of the black swan. Everyone thinks that all swans are white and then you see the black swan and then that one event can have such a catastrophic impact to the direction of the future and the way that things emerge. and so that's really kind of the takeaway that I had. And I'm real curious to hear with Stig and Hari have to say about that idea or maybe you guys want to add to some other themes that you really kind of captured from the book. So I'm going to first throw it over to Stig and then we'll go to Harry. So I'll just think I'll just continue on what Preston said about the normal distribution because somewhat might be saying out there and saying, what is this normal distribution? What are we talking about? We're talking about statistics.

Starting point is 00:03:48 And normal distribution, that's basically just that we can more or less rely on the past. We can rely on the past in the sense that we have some occurrences that happens very, very often, and then we have something that happens very rarely. And I think when you talk about black swans, it's something that can happen not often, but it's definitely something that is not very, very rare, and it's something that has a huge, huge impact when it does happen. So it's not like normal dispute. You can't just plot it in the probability of that, not at all when you're talking about black

Starting point is 00:04:22 swans. And the way that he is explaining that, he's doing that very neatly with an example. So the way he explains this is he's telling a story about a turkey which is being fed for thousand days. Now for that turkey, the very next day is very predictable. But, well, I guess we all know what happens to a turkey around Thanksgiving, right? So he's saying, well, black swans, they're kind of relative. It might be more relevant to look at the butcher and talk about what is very coming for him and what he can expect the next day. So he's having all these very, very neat examples of you can't really rely on the past.

Starting point is 00:05:01 And he's saying best, the past, irrelevant, and the worst, it can be catastrophic. So I guess that was kind of like my main takeaway from that. I'll know about you, Harry. I know that you have read this book multiple times. So I'm really curious to hear what you're saying. I agree with both you and Preston. For me, the main message of this book is that we humans are prone to be overconfident. And as we were discussing before the show, ironically, the tone of the author in the book sounds a bit overconfident.

Starting point is 00:05:37 But his message is very clear. And this tendency to be overconfident makes us take on risks that can be very very. very harmful and also makes us think we can predict and control our future, whereas the world today is a complex system. And as you might have read in the book, he makes it very clear that in a complex system, it's not only difficult to predict future events, but it's almost impossible. And that is the problem of induction. According to Nassim in the book, the problem of induction is how can you know the properties of the infinite unknown based on the properties of the finite unknown,

Starting point is 00:06:34 which goes back to what you and Princeton were talking about, which is using a Gaussian or a bell curve to predict a complex, the future events that can happen. So I got a few points of what you're talking about here, Harry. So first I want to highlight that if you're reading this book, the tone and the style of this book is going to drive you mad. I had a hard time getting through it, to be quite honest with you. I got very frustrated with Teleb's writing style.

Starting point is 00:07:06 And the irony of the fact that you're talking about being overconfident, and then you're reading his writing style, it was pretty much the ultimate irony, I think, that you could ever read in a book. But the content is superb. The content is amazing in this book. And that was the only reason that I kept going is because the points that he is laying out are very profound. And I think one of the reasons Jeff Bezos has really kind of treated this book with so much respect is because he is hitting on the exact same point that Hari's talking about. He's talking about oversimplification. And this is something else that we learned in the book, Influence, which was

Starting point is 00:07:42 billionaire Charlie Munger's favorite book is that people come up with shortcuts. And I think that that's just the inherent human nature is to come up with shortcuts in order to live your life in a manner that's more predictable and more, I guess, you can be more fruitful whenever you live in these predictable patterns. And how you do that is you come up with these shortcuts. You take a few variables. You come up with a, hey, this is going to be the outcome because this is what happened the last three times that this happened to me.

Starting point is 00:08:10 and you develop that shortcut of the mind. And that's what Taleb is talking about in the book that's so dangerous is you have people that are doing this modeling based on a few variables and they think that the future outcome is going to be more predictable than they actually think because they don't actually understand all the other outside influences that they have no comprehension for. And that's where the mistake occurs. And that's what he's really getting at. And when you talk about statistics, okay, and going back to this bell curve, so when you

Starting point is 00:08:37 look at the bell curve, all the data. points are almost all in the middle. And then they slowly go out and there's very few data points out on the very ends of the potential outcomes or the potential data that's collected. What Teleb's talking about is that almost all data points of whatever system you're collecting on are actually skewed to the left or to the right. And when you do that, let's say that all the data points are pushed to the left side of the bell curve. Okay. So your mean is pushed out to the left, your data points have a long tail out to the right. And what he's saying is when that long tail is pushed out to the opposite side of wherever that might be, the potential for

Starting point is 00:09:17 that extreme data point on the far outside limit is extended much further than most people think or could understand. And that's the Black Swan. That data point that's way out there on the long tail is the thing that has some type of catastrophic change to the fundamental nature of how things work. So, Harri, I saw you had something. Yeah, Preston, you brought up a very good point. In fact, Talib points out to some of the fallacies or biases that we humans face while making decisions about the future and also how we react to events in the present context. In fact, he lists some of the fallacies that we should avoid to protect ourselves from a black swan. They are the error of confirmation, also known as confirmation bias, which is in the book

Starting point is 00:10:15 influence, as you mentioned, the narrative fallacy, the problem of silent evidence or survivorship bias, and tunneling, which is basically focusing on a specific and ignoring what's happening around you. So these are all some of the biases that we all have inherently, and we can't really escape them. And that's his point. And when we are overconfident, we underestimate the influence of the environment and also our own biology on us.

Starting point is 00:10:50 So one of the things that I think is a really important discussion to talk about is understanding the potential for extreme circumstances. And the way that he really describes this in the book, he talks about mediocre stand versus extremist stand. So one of the, I think one of the best ways for people to really understand us is he provides this example of talking about you've got to understand the range of your data points or the potential range of your data points. So he talks about a distribution of people's height. He would say, if we took all the different data points of how tall a person could be based on historical evidence, your range is fair. finite. Okay, it's not a very big range. Let's say that on the small scale, you could have somebody that maybe is like three or four foot tall. And I don't know what the extreme numbers are here.

Starting point is 00:11:39 So you've got to excuse my inability to talk about this too intelligently. But let's just say that it's three or four feet. And then on the tall end, maybe your range is eight feet or something like that, really tall. Okay. So when you look at that range and let's say you had 100 people in in a room and you were going to guess what the tallest person versus the shortest person might be. Your ability to predict that is probably a little bit better than if it was a more extreme circumstance, which I'm going to talk about next. So let's just say we think that the tallest somebody could be in the room would be maybe 6 foot 6 and then the shortest would be maybe 4.5 feet or something like that.

Starting point is 00:12:16 That would be the range that I would probably guess in order to have an 80% chance of guessing correctly of every single person in the room. Now, when he talks about the range of net worth, okay, the range of net worth could be drastically larger because you're talking about, you know, some people don't make any money in a year and then you could go clear up to somebody like Bill Gates who has a net worth of, call it $80 billion. So our distribution is so lopsided when you think about if we plotted, let's say we took the world's population and we plotted those on a bellerick.

Starting point is 00:12:52 curve. That would be skewed and so lopsided as to the the high end versus the low end of that distribution. It's very lopsided. It's not a normal distribution that you'd be thinking about. So that would be the extreme, the extremist stand of as you would be sitting and guessing what the probability and those outcomes could be. You could be off by a landslide. If one person in the room had a net worth of call it $500 million and you guessed it that the upper limit was only, you know, a couple million because there's so many more people out there with that distribution that could hit that range. So I think what he's really getting at in the book is if you are a stock investor or you're a person that is living in this realm of really

Starting point is 00:13:37 understanding what probabilities could potentially occur, you have to have a firm understanding of what is the potential range of the distribution before you start making some calculated risk-first reward decisions without having a firm understanding of what the possibilities could be with respect to the range. And I think it's really important that you mentioned that, Preston, because he really doesn't say that this is the solution because inherently you can't predict a black swan and the impact will be severe. So what do you do?

Starting point is 00:14:12 It's not like Nassim is saying, okay, you should just do this and then you're prepared. Basically, he's saying you should just be prepared for the worst because the word. is not very likely to happen, but it can happen and the impact again can be severe. And so if, for instance, we're talking about stock investing, my takeaway would be to diversify yourself. I mean, that would just be the simple consequence of what he's saying when he's saying that you should be prepared. But that's really an overall concept, I guess most people would say.

Starting point is 00:14:44 I totally agree. I think it's having a respect for the risks that are actually there, not living in this world where you only consider a couple variables, but you understand the potential for anything to happen. And let me just throw on an example. So we were talking about Amazon and, okay, and Jeff Bezos. So everyone values Amazon so highly. And I guarantee you, if something would happen to Jeff Bezos, God forbid anything like that would happen to somebody because of a comment. But let's say something would happen to Jeff Bezos. You would see, and let's say somebody had a significant amount of their savings in Amazon because they think that Amazon is a great company and Bezos is.

Starting point is 00:15:22 changing the world. But if something would happen to him, the value of that company would just plummet on the markets. It would go wild. Okay. And that's a, that's a one variable circumstance that could absolutely happen, but people don't think of it in that context if they put a very large substantial portion of their net worth into that company. Same thing could be said about Berkshire, Aathaway. Okay. That is a very real potential that I don't think people think about when they take half of their net worth and they put it in a company. One of the, one of the reasons why we are overconfident is that we confuse situations from

Starting point is 00:16:06 mediocre, mediocristan with extremistan as Thalib talks about in the book. In fact, in one of the chapters, he has a table that helps us understand how to decipher or how to distinguish a situation. and identify whether it is a situation from Mediocrystan or whether it's a situation from an extremist. And the problem with many of the financial models is they try to apply the tools that are applicable to Mediocrystan to an extremistan situation like the stock market. And the modern portfolio theory, which he viciously goes after in the book, is one such example. Just to get into the technicals of a bell curve, why he hates the bell curve, is that in a bell curve, the average and the median are both assumed to be same.

Starting point is 00:17:05 What it means is there is no dispersion, there is no diversity in the events within a sample. and this makes it really, really hard for us to handle situation from extreme stun. Because in a bell curve, there is a dramatic increase in the speed of decline in the odds as you move away from the average of the center. To illustrate that, when you're looking at a bell curve, 68% of all the samples are supposed to lie within the first standard deviation or they call it sigma. And 95% within the second standard deviation are to sigma and 99.7 within 3 sigma. And in one of the chapters, in fact, he goes through an example where he illustrates very clearly how this is totally wrong. And I highly encourage whoever is reading the book to pay attention to that chapter on Belker. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:22:36 Everyone does the math behind the normal distribution. And I think he would make the argument that the normal distribution is that 1% type environment that actually exists in reality. What he's saying is that almost everything is non-distribution, the magnitude of how skewed of the non-distribution that it is, is really kind of the, you. the crux of what environment you're operating in. And when he brings that up, to me, I'm like, that makes sense. That makes perfect sense to me.

Starting point is 00:23:09 And he's exactly right. And it is amazing that how much emphasis is spent in the education community on the understanding of the normal distribution. And it's almost like, oh, well, if you got non-standard data, you know, let's not talk about that. Or let's, let's push that over there because that's a really hard calculation. It's not something that we can put any definitive statistical evidence behind. So we're just going to try to maybe change the way we collect the data or whatever so that we get normal distribution.

Starting point is 00:23:38 I know that because whenever I got a black belt in Lean 6 Sigma. And I mean, it's all about statistics. And it was amazing to me as you do different projects and you look at how you can optimize an organization and you're collecting all this data, how everyone wants to get to normal data. But when you're actually looking at the reality behind things, you've really got to move. away from that and you've got to have an appreciation for the Black Swan. And I really like the content of the book. I can't say that enough. If you haven't read this book and you're in financial markets or you're in something that's data heavy, I can see why this book has gotten so much traction despite the atrocious tone in the book.

Starting point is 00:24:17 And one really, really great example that Nasemi is bringing to the table is this investment fund called Amaranth. And apparently this fund lost seven. billion of the investors money. That was basically all the money. And supposedly the fund has been saying that they have employed 12 risk managers. So that was their way of saying to the customers or to the investors, well, you shouldn't be worried because we hired as many as 12 managers to make sure that you won't lose your money.

Starting point is 00:24:46 And what he is saying is that if the model you're using is not right, it doesn't matter if you employ 100 managers. And so I also think that what Teleb is saying is that the problem is in here. in the system. Like I can just say for my part, you can't graduate from my education if you don't know how to use a non-distribution. That is a part of the standard curriculum. So you can't give this business degree if you don't apply and use the non-distribution. And now we're talking about why it can't be used. So you're part of the problem, Stig. I mean, there you go. You have it. Yeah. Well, I would probably rather say it's my wife's fault because he's teasing statistics.

Starting point is 00:25:24 I'm only doing economics to finance. Oh, my. I hope so if he's listening. Hey, so here's the, here, this was in the book and I loved this point. This was really fun. He talks about this fat Tony character. So let me just throw this out to the audience. I want to describe it from the vantage point of whenever I was reading the book. So, uh, Taleb says, you know, if you had a coin toss and you know the chances of a of a coin landing on heads or tails is 50%. Let me tell you that there's this coin and I flipped it 99 times. and of the 99 times it landed on heads. So what's the probability during the next flip that it's going to land on heads again?

Starting point is 00:26:05 And so anybody who understands the gambling fallacy, the gambler's fallacy, they know that the mathematical or the educated answer is 50%. And I know whenever I was reading the book, I immediately thought, oh, it's 50% because that's what you're taught in school. That's what you immediately think when you have any type of like statistics background. You understand that the chance is 50%. So Teleb talks about this character and was basically a description of street smarts versus book smarts. So the book smart person is going to say, oh, it's 50%. But the street smart person who he described as fat Tony, fat Tony says, oh, it's 100% that it's going to be heads. And he, you know, the question is, well, why?

Starting point is 00:26:52 Why do you think that it's 100% that it's going to be heads? Because there's absolutely something that's going on that the probability of it landing on heads 99 times. It's a trick coin. And I think it's a fantastic discussion. I think it's a fantastic discussion of stepping away from, okay, we know this is the book answer. But there's also another answer out there. And that's what really happens in reality. And I think that that's his way of comparing, hey, the person who talks about normal distributions talking about the book answer.

Starting point is 00:27:22 The person who's talking about what happens in reality is talking about non-standard distribution of probable outcomes. And he's thinking about things from, hey, what's going to happen in practicality? And I think the truth of what's actually happening here is in the middle. And I think that a person has to have a respect for the book answer and they have to understand the fundamentals of how this even works in the first place. But at the same time, you have to understand how does it apply in real life and how can I really kind of learn from both scenarios? And I think that that's really important and a great discussion. and a great highlight of the two different mindsets and how you need to be thinking about this stuff.

Starting point is 00:27:57 Preston, I loved the story too. That was really insightful. In fact, in day-to-day life, we have seen such people at our work or when we are interacting with people in society. There are people who are book smarts and there are people who are street smart. And for the audience,

Starting point is 00:28:20 I want to also let them know that Telib is not just an author. He was actually a trader before he became an author. He also has an MBA from Wharton and then a PhD too in mathematics. So he's kind of an ultimate combination of both the words. And he understands that all these models, financial models that are used by many investing firms, break down at certain points when human irrationalities are in the picture. And that's the point he is trying to make in this book. I'm glad you highlighted that because I think it's a really important part of the discussion

Starting point is 00:29:08 is the fact that he's just not an academic that has studied this. He actually worked on Wall Street. I think he was a commodities trader. Is that right? Yeah, he was a commodities trader. and he doesn't come out and directly say this in the book, but he definitely implies the fact that he was shorting the market in 1987 whenever it crashed during that really deep crash in 1987, which I thought was pretty cool if he's being completely forthright with his positions during that time. And I think it tells you, I think it shows you how contrarian he really is with some of his ideas. And it's kind of a really neat discussion.

Starting point is 00:29:42 And that's something else that I really liked about the book is you see a lot of his examples from work. working in financial markets come out in the book. So if you're thinking that it's a purely academic type read, it really is. And he gives a lot of experiences from his time of working on Wall Street. And a lot of financial information is kind of discussed throughout the book as examples, which we obviously really liked here at our show. And Preston, in fact, he also talks about the problem of making decisions under uncertainty. And his main squabble with academicsians or professors is that they never have to make their decisions under uncertainty.

Starting point is 00:30:24 In fact, in one of the chapters, he talks about these professors and philosophers and economists who get their paycheck every Friday. And part of it is invested in their 401 case. And they blindly trust the markets. they don't think. Whereas as a trader, they have to constantly make decisions that can make or break their careers and under uncertainty. And that's where he kind of, you know, has really distilled his thoughts into in this book. Yeah, he was doing that as he was like basically bashing academia over the head with the idea

Starting point is 00:31:08 like, hey, these guys not only teach that everything's normally. distributed, but then they go and they invest in that manner as well, thinking that everything's normally distributed when it's not. And I totally agree with his point. It's just the way he goes about saying it is very brutal, I guess, to that community. Stig, are you with us? Oh, yeah. I'm just trying not to feel too hurt. And wondering how he ever got a PhD without implying the knowledge distribution. Seriously, how did he ever get through that gate? Go ahead, Horry. Stig, I want to get your take on his attack on academics and professors

Starting point is 00:31:50 because I know you and some of other academicians who are also quite practical and are also doers, as he says, not just thinkers. So what is your perspective on his opinion about academics? Yes, Stig, what's it like being a black swan? Well, I definitely agree with Nasim. I hope I'm not as brutal as he is when he's talking about academics. But when I was graduating and through my graduate studies, I was told that the efficient market hypothesis was true. I remember I found it was quite weird because that was back in 2009 and everything used to be like double in price.

Starting point is 00:32:34 and how could that be efficient? And then six months after, it was half and there was also efficient. I really wasn't sure how to grasp that. But that is what we were told. And then I actually got a job as a commodities trader, exactly the same as Taleb. And you were just seeing, you know, the minute you stay on the commodities training floor,

Starting point is 00:32:51 that nothing is efficient at all. The only thing you can be sure of is that someone will, you know, yell something nasty during the next five seconds. I guess, I guess that's it. But he's definitely right. And when he's talking about academics, it's just because we in academia, if I can say we about that, is that we like to put things into an equation. Like, we need to put this into an exam. And how can you put anything into an exam in finance economics?

Starting point is 00:33:20 If you can, put it into a formula. And I think that's also one of his main things here. He's not only trying to prove his own point. He's also trying to, you know, having like a class with the whole academic community. I think the thing that's amazing is, I mean, Stig didn't mention this, but I mean, he's talking about when he was at Harvard. I mean, this is Harvard University that is teaching these models. And I think that that's just amazing. I mean, you talk about one of the best business school in the entire world is teaching these models.

Starting point is 00:33:50 I know when we had Guy Spear on the show, he went to Oxford, you know, and he's talking about these models being at the forefront of what they're teaching at these high-end Ivy League schools. and it just goes flying in the face of, you talk to anybody on Wall Street, what they think. And, I mean, they're going to laugh at you if you say efficient market hypothesis. I mean, you're going to get laughed out of the room. Prista, that's a good point. In fact, that reminds me a comment by Charlie Munger. He said, investing is so simple.

Starting point is 00:34:21 It's just three points. And you're done within a day or two. So what are the university is going to do for the rest of the semester? So they have to justify the fee there. they're charging the students. Yeah, you want to talk about a bubble, start talking about college tuition. That's a whole different conversation, but watch that thing pop. But yeah, no, it's some great points.

Starting point is 00:34:45 Really fun conversation. Did you guys have anything else you wanted to highlight that you thought was really a good discussion point in the book? I don't want to drone on because I think his point was really fairly concise and then he gives a lot of examples. Phenomenal book. Just be prepared for the tone. I'm telling you right now, there's time. I wanted to throw the thing across the room, but in general, the content is phenomenal. It is very good. It's well worth your time. I think that you will definitely get a lot out of it. And I think

Starting point is 00:35:11 that you're going to look at things a little bit differently. I think you're going to take the approach where you're going to really think twice about simplifying anything. And I think that you're going to have a greater appreciation for what the potential outcomes could potentially be, especially on that long-tail piece of the distribution of whenever you think about all these possible outcomes and probabilities. So Harri, Stig, did you guys have anything else you wanted to add? 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

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Starting point is 00:38:41 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. Back to the show. I just have one thing because it really wouldn't be a good episode if it didn't round off with a stock market observation. I remember reading this book just before we were talking with Mock and Downey, the author of All 101. And one of the thing that we also talked about here about overconfidence is that as harriset before that you overestimate what you do know and underestimate but you do know and underestimate but you don't know

Starting point is 00:39:26 and you know i'm following the oil sector and i'm definitely not an expert in oil but i think i can give my two cents about this whole oil discussion and which all stocks to invest in and how to look at all stocks but he was like but morgan was giving me so much knowledge about the oil market that I have no clue about. So that really made me think also reading this book at the same time. Like, I probably overestimated when I did know about oil and definitely underestimated all these things that I did know actually existed. Now, this is not the same as for me as saying, I'm not bull on oil anymore. I think most people probably know that that's my opinion on oil. It's definitely not a fact. It's an opinion. But I just think it's really important to know

Starting point is 00:40:14 that as stock invested, that to pick out individual stocks, you really need to know a lot about that compared to when doing index investing, for instance. So I got a story to tell, and it has nothing to do with investing. But it does have to do with Stig's point. So I've mentioned a few times on the podcast that I was a former military pilot. I was an Apache helicopter pilot, which is an attack helicopter. It has, you know, missiles and all that kind of fun stuff on it. And whenever I first started flying and I was a brand new student in flight school, one of the things that was easy for me to do was just to climb into the cockpit and just

Starting point is 00:40:54 kind of fly around because I was flying with somebody else. It was very experienced and somebody who had a lot of hours and a lot of flight time. And so it wasn't really scary to do a landing at night with a with a sensor, a small little sensor for anybody that's familiar with the Apache. There's this little eye piece that fits on one of your eyes, only one of your eyes, and it displays images at night based off of heat sensing. And that's how you've got to land and fly the aircraft. And so it's extremely, extremely difficult to do, especially as you're starting out. But it was never really that scary for me because I always had this person that was flying with me that would, you know, if I messed up, he'd kind of take the controls and assist me and help me with maybe a night landing on a really small landing zone.

Starting point is 00:41:40 or whatever it might be. Now, what was really crazy is the more that I learned and the better that I became at flying and I started becoming in charge and I was the pilot in command and the air mission commander, those landings got really scary all the sudden. And the reason why is because I was in charge now and I knew that there was no one there to bail in and save me from the mistakes that I was going to potentially make. And so what seemed to be something that was really simple and just kind of like, yeah, I can do that.

Starting point is 00:42:09 and I'd just kind of fly in and do it because I knew somebody was always behind me, he's ready to save my butt. And then whenever I was in charge, it totally flipped. And what was amazing is I got more experienced, it got scarier and it got worse. And I think that there's a lot of people in investing that can empathize with this idea of the, as the more you learn and the more that you now understand commodities, you understand macroeconomics, you understand microeconomics, you understand accounting, you understand all those different variables and how they all fit together.

Starting point is 00:42:38 I think you find that the more experience you get and the more that you understand all the variables, you start to realize, this is a little scarier and a little bit more difficult than I ever thought whenever I was a beginner and whenever I was first starting out. And so I tell that story to really kind of act as a example for maybe somebody who's entering the market and they get a little bit of experience or they maybe start understanding. Let's say you just started understanding accounting and you really feel like you understand the income statement, but you don't know all that other stuff. Like you don't know M1, M2, M3 currency, all that kind of stuff. It can be, I guess what I want you to have is that deep appreciation for what's actually happening behind the scenes and that there are so many more variables to understand. And I'm not saying that to scare you away from investing, but I guess I'm saying it for you to have an appreciation for investing and for what's really happening behind the scenes that

Starting point is 00:43:28 you might not actually understand. Kristen, that was an amazing story. Thanks for sharing that with us. And in fact, I think if somebody has to take away one thing from this book, that would be that Black Swan is a sucker's problem. And our goal should be to not be that sucker or that turkey that gets killed on the 1,000th day. And as an investor, the more we know, the less confident we should be because skepticism should be something that be inherent in the process. of investing. And through your story, you beautifully illustrated that essence. And I hope we all remember that as we move in our journey towards being a better investor.

Starting point is 00:44:20 And so, Hari, I like that because how do you become the guy that or the turkey that's not slaughtered on the thousand and first day? And I would argue, I think the best way to do that, or at least the approach that I'm taking is, and this is what I took whenever I was flying. Who is the best pilot in our unit? Who's the guy who knows, you know, who has the most hours, who has the most experience? And what is the best advice I can gain from him until I get to that point where I really feel like maybe I have become that guy? And so I think with investing, the best thing I know to do is who are the best, who are the people that have the highest net worth and how did they get that net worth? If they got it through actually investing in markets and that's

Starting point is 00:45:02 how they acquired it, that's somebody I want to track. That's somebody that I want to really listen to and fully understand what do they know, how did they know it, what did they read. But if you're the type of person that acquired a billion dollars on a whim because you invented something that was really revolutionary, but it wasn't in financial markets, that's somebody I'm not probably going to pay nearly as much attention to. So I think it's twofold. Who's done really well and does it relate to the topic or the environment that I'm trying to understand? Is that how they acquired that knowledge? That's the people that I think you want to study.

Starting point is 00:45:37 And I think if you try to go on those people's coattails and really follow them closely, don't do exactly what they're doing. You need to understand the essence of their knowledge and their understanding. That's what you need to understand. And I think that's how you become the person that avoids that slaughtering on the 1,000 and first day. I would just add one more thing about following great investors. I would look at who's done really well and for how long. But at the same time, with a bit of caution,

Starting point is 00:46:08 because one of the stories that Thalab tells in the book is of the captain of the ship who was in charge of Titanic. And he had no accidents. no incidents in his long career till Titanic. So with that, I think we all should kind of, you know, follow great investors, but at the same time, know that everybody is human. There can be mistakes. Yeah, I think that's a really good point, Harry.

Starting point is 00:46:44 And I think the key is to understand the underlying thing about this. So why has Warren Buffett been successful and stock investing? and really understanding what's the idea behind value investing. I think that's really key because you're also talking about the duration of that success. Now, I have no clue about the whole thing about Titanic. The only thing I remember in the end was that Leonardo died and I was very sad. But from what I remember, it was a new ship and it was probably the first time he was sailing with that type of ship. I mean, that might be the element that is the reason why he sang.

Starting point is 00:47:21 I don't know if it was a new route or whatever happened, but I think we just really need to understand what is the underlying event that can happen. And why don't we think that this strategy will or won't succeed? I'll tell you one thing. That Leonardo DiCaprio, he's a hell of an actor. And I see, if you don't know my personality, I'm extremely sarcastic, so I did not mean that. Okay. There's a book. It's called Only the Petrified Survive.

Starting point is 00:47:49 Is that right? I believe it's the only. the paranoid survive. There you go. That's only the paranoid survive. That's on our list of books. I think it was Michael Dell, whose net worth is in the, like, the $20 billion range that recommends that book. And I bet

Starting point is 00:48:03 you any money that that's a large theme in that book is what we're discussing right now. I have not read it. I plan on reading it, but, and if somebody out there's read it, let us know if we're on target here. But that's all we have for you guys. Let's go ahead and hop over to the

Starting point is 00:48:19 question from our audience. And the The question this week comes from Sammy Kahn, and this is what he's got. Hey, Preston and Stig, I love your podcast and all the great work you guys do. I hope you keep it up. My question comes off the heels of hearing Mark Cuban say that value investing is more applicable to people like Warren Buffett who can move billions of dollars. And I was wondering if there's any validity to the notion that value investing is for the big guy and not the small investor.

Starting point is 00:48:45 All right. I love this question. Yeah, I think Mark Cuban's wrong. I think that value investing is for any person out there who can understand what discount cash flow is in figuring out the value of something today versus the relative environment that currently exists with respect to interest rates and fixed income investments. That's my personal opinion. I think Mark Cuban is a very smart businessman. I think Mark Cuban understands business at a very deep level. I know if you watch the show Shark Tank, you can really get a glimpse of,

Starting point is 00:49:19 why he's been so successful. But let's face the facts. Mark Cuban became a billionaire because he started a website company called Broadcast.com and he sold it to Yahoo for, I want to say, $4 billion. And that's really where he made his quantum leap. He really didn't make his quantum leap in investing like Warren Buffett or Charlie Munger. He just didn't. Now, a lot of people out there might love Mark Cuban.

Starting point is 00:49:47 I'll be honest with you. I'm a pretty big fan of Mark. Cuban myself. I really like the guy. But I think he's dead wrong on this. I'm real curious to hear what Stig and Hari have to say, though. Yeah, I think I've got a side for you on this one, Preston. I think he's wrong. And if anything, I think that value investing is easier if you don't have that much money. I agree. So if you look at the S&P 500, I think that the small companies, that's probably around like $2 billion or something like that. So for someone like Warren Buffett and his net worth is like $60 billion, or something like that and Berksie Hallaway when he's doing his investments.

Starting point is 00:50:22 I think the mile cap is north of 300 billion. You know, he probably have, I don't know, between 100 or 150 companies, something like that. When he invested, he cannot even invest in the small, huge companies in the states because they would not make it, you know, any difference in his portfolio. So he has a very limited investment universe that you and I don't have. I mean, we can invest in extremely. extremely small companies and get very high returns. And just one thing I want to mention to this is that early in his career,

Starting point is 00:50:57 Warren Buffett actually had like multiple years where he made more than 50% a year. And, you know, he's been famous for saying he can still do that if he only had $1 million. But now that he has so much money, it's really, really hard to make those returns. Well, let's think about it. If we think about this in a quantifiable manner, okay, so Warren Buffett, his market caps, Berkshire Hathaway, $300 billion. So if he takes a billion dollars and he invested in, let's say, an IBM or something like that, $1 billion is going to move the market price. I'm sorry, folks, it's just a lot of money. And when you look at the volume of trade that's conducted

Starting point is 00:51:31 on a daily basis, he's going to just overwhelm that thing. And when you have an oversupply of buying and an under supply of selling, it moves the market price higher. That's just the fact. Okay. So the problem that he has is when you talk about $1 billion on a company that has a market cap of $300 billion, guess what? That's 0.3 percent. Okay? That's 0.3 percent. That's nothing. That is absolutely nothing.

Starting point is 00:51:57 And so he's dealing with these very large numbers and it's very hard for him to get in a good price without actually impacting the price that he's buying it at just because he's dealing with so much money. So that's why he has that quote. That's why he says if I only had a couple million dollars, I could do a 50 percent annual return because he understands business at an extreme level and he understands value investing at a deep level. And so I think that's why we have the exact opposite opinion of Mark Cuban. But let me say this. We're extremely biased. We are extremely biased in that opinion.

Starting point is 00:52:27 So I need to say that because we study Warren Buffett. We love the guy. We think that he's brilliant. And we've been manipulated by his thought process. So you've got to take what we're saying as a biased opinion. Hari, I want to hear what you've got to say. Kristen, I believe value investing is all about your mindset. And I can sympathize with the question because living in Silicon Valley,

Starting point is 00:52:54 you see a lot of people lucking out by either joining a startup or like their startup going IPO or being bought over by other companies. It's kind of a get rich quick expectation that kind of builds into our mindset. when we see such things happening. But coming back to our topic today, we have to remember those are black swans. Whereas value investing is a reliable way to make money and get wealthy, but it is definitely not a way to get wealthy quick.

Starting point is 00:53:32 And if we understand the difference, then we can choose which path we want to go. All right. So Sammy, we love this question. This was a really fun one to pick apart. And I really challenge people out there to just not take our advice for being right or wrong here. I think that you really need to form your own opinion. And I promise you, Mark Cuban has that opinion for a reason.

Starting point is 00:53:51 And I think, you know, if you dug into it and you tried to understand why he has that opinion, I think you'd probably add better context to our, you know, obviously biased value investing approach. So I challenge people to go do that and kind of form your own opinion. But that's kind of the way we like to answer the question. So Sammy, thank you so much for submitting that. We're going to send you a free sign copy of our book, the Warren Buffett Accounting book. And for anybody else out there, if you want to ask your question and get it played on the show like Sammy, go to Ask the Investors.com and you can record your question there. So we really want to thank Hari for coming on the show.

Starting point is 00:54:24 He has a great website. It's called bitsbusiness.com. You can go there and Hari writes a blog that is just phenomenal. So I really encourage people to go do that. And we just really appreciate everything that everyone's doing out there for you. If you're enjoying the show, go to iTunes and leave us a review because that, helps us out tremendously with getting more listeners and we just really appreciate that. I want people to really know that we truly appreciate that. And one last thing. So every single book that

Starting point is 00:54:49 we read that we do a discussion on with the podcast, we type up an executive summary of that book. So if you go to our website and you sign up on our mailing list, you will get a free executive summary that Stig and I type up for this book. So for the Black Swan, we're going to send that executive summary out to everybody on our mailing list. The summary is usually about five pages. and it summarizes the book chapter by chapter. So if you want to get that for free, go ahead and sign up on our list. We do not send marketing spam. We do not send advertisements.

Starting point is 00:55:17 We only send out these book summaries. So don't worry about that. And if you don't like it, you can always unsubscribe. So we just love interacting with our audience. And we thank you so much for listening to the show. So that's all we have. And we'll see you guys next week. Thanks for listening to The Investors Podcast.

Starting point is 00:55:33 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 by going to www. www. com. If your question is answered during the show, you will receive a free autographed copy of the

Starting point is 00:55:53 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. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP 047 : The Black Swan (Investing Podcast)

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