We Study Billionaires - The Investor’s Podcast Network - TIP 098 : The Power of Habit by Charles Duhigg (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 98 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcasts. 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, how's everybody 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 Broterson out in Denmark. Today, we've got a book for you. And this was one that I thoroughly enjoyed. And to be quite honest with you, Stig, I'm a little embarrassed that I haven't read this book until now. I know I've seen it in my Amazon queue as far as, you know, recommended books.

Starting point is 00:00:52 And I've seen this one so many times popping up as something that I should read and just haven't gotten around to it. And so the name of the book is the power of habit. why we do what we do in life and business. And this is written by Charles Duhigg. So Stig, I'm assuming this book was valuable for yourself. Did you really enjoy this one? Yeah. So that's your habit. Whenever you think a book is good, you assume I have the same opinion. But yeah, you're definitely to write press. And I thoroughly enjoy the book as well. So what you're thinking about, okay, so who endorsed this or what, you know, made you read this one? So going back to one of

Starting point is 00:01:31 my favorite books, Think and Grow Rich, which was a book that kind of grew out of Andrew Carnegie, who was one of the wealthiest people of all time. Andrew Carnegie solicited this book. And if you've never heard our episode on Think and Grow Rich, definitely go back and find that and listen to that episode. This book is tremendously useful. If you're trying to succeed at something, it doesn't necessarily have to relate to financial wealth. It could be anything in your life that you're trying to achieve. that book is very valuable. Well, one of the things that it talks about and think and grow rich is focusing on whatever it is that you're trying to create. The focus is really important. And more importantly, developing habits around that focus and around achieving that goal. So

Starting point is 00:02:19 whatever those habits are is what's going to really lead you to that success over time by continually trying to achieve it. And so this book is all about your habits, understanding how they work, understanding what maybe your habits are that you don't even necessarily realize you have. And how can you basically reform those habits to be ones that are more conducive to helping you achieve what it is that you want to achieve? And so you truly couldn't find a better book about habits and how profound they are in your life than this book. So I want to start off with a quote. And this quote comes from Gandhi. And I think a lot of people have heard this before, but I just want to start off because the habit portion of this is just so important. So Gandhi says,

Starting point is 00:03:05 your beliefs lead to your thoughts. Your thoughts lead to your words. Your words lead to your actions, which then lead to your habits, which lead to your values and ultimately your destiny. And so that to me is extremely profound because what he's really getting at is, So you start off with just some ideas and they lead to your thoughts and all that. And then it really develops into these habits and these habit loops. And then after you start developing these habits, they almost become somewhat uncontrollable at that point because they then become your values and your destiny. I feel like this is one of the last stops where you can really take an objective look at yourself and say, is that a habit that I want to have in my life? And if it isn't, this is where you have to step in.

Starting point is 00:03:53 And this might not be the right word to say, but you can reprogram your life by knowing what that habit is and then knowing how to adjust it. And this book really gives you that the power to do that and the tools to do that. And more importantly, how to recognize it. Let's go ahead and dive into the first chapter. So when he opens up the book, he really grabs your attention with how profound this idea is. The author starts off the first chapter with a gentleman that this was a real short-term memory problem type thing in this gentleman's life. And when they would be, he talked about how if this gentleman was sitting in his living room and he said, well, you know, where are you going to go and have lunch? The gentleman could not tell you, well, the kitchen is behind my right shoulder or the kitchen's over there and I'll go in there to have breakfast or lunch or whatever.

Starting point is 00:04:47 because his short-term memory was so bad that he couldn't remember anything like that. He couldn't remember where his bedroom was or anything if you asked him right now. But what they found was that this gentleman, when it comes 12 o'clock, and he's sitting there watching TV, and when it comes 12 o'clock, he would stand up, he'd walk into the kitchen, he'd open up the refrigerator, and he'd get out, you know, whatever is lunch meat sandwich, and he'd sit down and he'd make himself a sandwich. and they couldn't understand how did he know to do that. If he can't remember where the kitchen's at or where anything's at for that matter, and they discuss a lot more habits that this gentleman had where he would get up,

Starting point is 00:05:29 he'd walk down the street, he'd go to a certain spot, he'd do his thing that was part of his routine and he'd come back. But when he'd come back and you'd ask him where that's at, he'd have no idea how to be able to explain it to you. And so what it gets at is your mind is when you, you go through your life, you're constantly programming your mind to do certain things and certain habits. So I'm sure everyone's had this experience where they've been listening to something on the radio or, you know, maybe they're having a conversation on the phone and they're driving.

Starting point is 00:06:00 They don't remember even driving the route. They might have been driving for a half hour and they don't even remember making the turns, making any type of conscious decision of I was turning left, I was turning right, I was merging into this lane. They don't even remember it. they don't even remember how they got there. They're just there. And so what he's getting at is that you as a person are constantly doing similar things each day. And when you do that, you're developing a habit and you're basically programming things into your subconscious mind to take over and do these things. And you don't even realize it.

Starting point is 00:06:36 And so that's really kind of how this book starts off is talking about this gentleman and how he's able to go through his life. even though he has no idea what he's doing, he's able to function like a normal person almost because of the fact that he has these habits built into his daily life and this exists in his brain even though he doesn't even know where they're at. His body can go into like autopilot and do these things. I think it's really profound how it talks about that your life has really happens. So you have to convince your brain what is a good habit and what is a bad habit for me. And he's saying that the whole idea is really the habit is a good thing. Clearly not bad happens, but the whole essence of having habits, that's a good thing.

Starting point is 00:07:20 And I'm really thinking about Daniel Kahneman's thinking fast and slow when I read this book because it habits relieves the brains from stress. And brain is really just programmed to doing whatever is easiest. And if you have learned how to drive a car, if you have learned how to walk, you shouldn't be thinking about how to do that. You should be thinking about other things. And that's why it's so beneficial in the first place to have habits. But what he's also talking about is how you should be aware of the things that are not good for you. And he has a lot of different great examples later in the book. But in the very first chapter, he talks about how McDonald's has actually been

Starting point is 00:08:02 able to use the power of habit. And he's talking about how a McDonald's is decorated. He's talking about what kind of food they're serving, how fast the food triggers rewards in your brain, and how the whole experience of walking into McDonald's should be as easy for the brain to do as possible, because that way they have a chance of you of coming again. Just the awareness in the very first chapter of how you're really controlled by your habits, that's really the takeaway from the first chapter. because later in the book he will go into more example of how you can change your habits, but also how you can be exploited by other people if they're aware of how the brain works

Starting point is 00:08:47 in terms of humoring the habit of how your brain works. So Stig, I really like that you pointed this out. So the brain doesn't know the difference between good habits and bad habits. And I think a lot of people, they get so used to their life and they're going through it and they're doing these things daily that they don't necessarily say, well, that's a good habit versus a bad habit. They just do it. They just do it because it's so ingrained into their mind that it almost becomes an unconscious

Starting point is 00:09:14 kind of thing. Like, say, you drink soda or something like that. And maybe you want to cut back on it because it's forcing you to have weight issues or whatever. I don't know. But you're doing this and you're doing this habit and you don't even realize that it's something that has been pushed so far into your unconscious mind that you're just naturally going through the steps.

Starting point is 00:09:33 And so I think the recognition that I got from reading this book was, well, if there's good habits and bad habits, I need to identify the good ones versus the bad ones. And I need to cultivate the good ones and remove the bad ones and effectively reprogram my life. So if I go about this in a methodical manner, let me just pull out a piece of paper and let's just start listing these things out. Like, what are some of the good ones? And I'd list them out. And then what was some of the bad ones? And I'd list those out. And they say, okay, now that I know what the bad ones are, let me prioritize them so that I can focus on the really bad ones first.

Starting point is 00:10:09 And let's try to remove those. Let me try to systematically go through this. So before we go any further down that path, I want to talk about the really kind of the three main things that he talks about in the book for identifying this. So there's three things. And I think this is really important for people to remember. number one is the cue. Number two is the habit itself and number three is the reward. So those are the three things that encompass this loop, if you will.

Starting point is 00:10:40 It's almost like a programming loop. Let me just talk about one of mine. So one of the habits that I wanted to remove in the worst way was I'm on my phone all the time. It's ridiculous. Like any point in the day, like I'm pulling up my cell phone and I'm like checking email. I'm just searching the internet. I'm looking at stock tickers or just just mindlessness, you know, like it's just ridiculous. So, and it didn't even occur to me.

Starting point is 00:11:09 Like, I knew this was kind of an issue, you know, like I knew it was almost like an addiction. And there's articles out there on this that it's like an addiction. So I didn't know how big of an issue was until I implemented one of the things that I read from the book, which was if you want to change the habit, all you have to do is you have to recognize the cue, first of all. If you recognize the cue, then it's very easy for you to basically reprogram the habit. So for me, really, the cue is pretty obvious.

Starting point is 00:11:38 I was pulling out my phone when I was bored. When I was just sitting there and I literally had nothing to do or like, let's say there was people around me, they were having a conversation and it didn't interest me in the least bit. I was bored. And so I would pull out my phone. He talks about how in the book, sometimes it's a time queue like at 1230 every day. that could be your cue. It could be a certain person that you run into is a cue.

Starting point is 00:12:03 It could be something that you see. That's for you to determine. And that can kind of be tricky at times. And sometimes it might take you weeks to really figure out what the cue is. But for me, with the cell phone thing, this was like such an obvious cue. I was just bored. So what you do is when you know the cue and you can feel and you can sense that cue, you have to replace it with a habit.

Starting point is 00:12:26 So this is what I did. And this is really vital. You have to write it down. You have to write it down. That is so important because if you just think about this in your head, you're never going to do anything. But when you write it down and you come up with a plan and he talks about this in the book and he gives lots of examples that involves Starbucks and the training program that they have at Starbucks.

Starting point is 00:12:48 But if you write it down and more importantly, you come up with the plan of what you're going to do in place of the old habit, You say, when this happens, I'm going to do this. And you write it down, you will do it. But when you don't write it down and just think about it, this is going to fail. So maybe one of the first things you can do is go out and get a notebook. Because when you get a notebook that's dedicated to just reprogramming your habits, I think you're going to have probably, I don't know what your success rate would be, but I would guess it would go through the roof of this actually working.

Starting point is 00:13:22 So for this example, I wrote down. And anytime I get bored and I want to pull out my phone, instead of that habit, I'm going to go over. I'm going to kiss my son on the head and my daughter on the head. And I'm going to try to play or do something with them instead. That was what I replaced the habit with. And so the reward, so then you talk about the reward. So before I replaced this habit, you know, I would check my phone. And I guess I would get some kind of reward or feeling like I.

Starting point is 00:13:55 I'm up to date or that I am current and that I'm not falling behind with the stuff that I need to be doing because I'm not responding to emails or whatever. But the reward for me was that I could, the new reward from the habit was that I could see my kids happy and like they could see me, you know, them smile, me, smile and we were just having a good time. So that's how I replaced this habit loop. So I did this. And in the first hour, I went over to my son and I was kissing a mom.

Starting point is 00:14:25 on the head. Like, he looked at you, you know, this is so funny. It's a little sad and it's funny at the same time because I felt so bad like when I thought about it because I was spending so much freaking time checking my phone. And so the first couple times I went over, I kissed my son on the head. And my wife had no idea that this is what was going on. And my son goes to me, he goes, Daddy, where are you going? And I said, well, I said, buddy, I'm not going anywhere.

Starting point is 00:14:55 because my son, he's three and a half. And I said, I'm not going anywhere. And so, you know, it was just a couple minutes later. And I get this urge of, I'm bored. I need to check my phone. Like, I'm feeling this urge. Like, it's almost like a compulsion, you know. And I do what I wrote down, you know, as soon as you have the urge to go through the new

Starting point is 00:15:20 habit. So I went over to my son again. I kissed him on the head. And I said, I love you so much, little buddy. and he looked back up at me, he goes, Dad, where are you going? And I looked at my wife and I said, why is he asking me where I'm going?

Starting point is 00:15:34 And she says, every time you do that, you go to work or you go do something or whatever. And she said to me, she had no idea that I'm like doing this whole habit thing. She goes, that's your habit. I just, I died laughing. I was like, this is insane. This is crazy.

Starting point is 00:15:55 This is absolutely crazy. That little experience, like, for me, was just so profound. Like, if I can just change something that quickly and see the impact that I guess I'm having by doing this one thing that I'm not even thinking about, it's totally unconscious. If I'm doing this, like, what else in my life am I doing unconsciously that I can reprogram or change for the better? This was such a insane experience for me. Did your wife come up with a lot of suggestions for having to say? No, I'm not telling her about this because if I tell her about this, she'll start reprogramming everything.

Starting point is 00:16:34 She'll start telling me you need to do that. No, I'm just joking. And I know that there's a ton more that I could work on, you know, like a ton more. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food. floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually

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Starting point is 00:20:36 Sign up for your $1 per month trial today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. I think it was really interesting what you said about how you had the cue of your phone. I think that's probably something everyone in the 21st century can relate to. But also how your brain reacted.

Starting point is 00:21:08 Because I think he's actually very specific about this in the book. where he talks about that the reward that you're getting is the momentarily distraction. And what's interesting is that just as if you're a smoker and you're trying to quit, your brain anticipates negatine. And it's almost for the brain as you are already smoking whenever you see a pack of cigarettes. It's the same thing for your email. Like your brain almost thinks that you're actually checking your email before you reach down in your pocket and get your phone. And that's just how ingrained the habits are.

Starting point is 00:21:42 are. But I was thinking like, was it really that simple, Preston? Should I do the same? No, I think I think the reason mine was so much simpler than others is because, you know, some of these things like you're talking about nicotine, like that is highly addictive. Like, it is really hard. Like your mind has chemicals and stuff kind of going off firing because of that reward that's associated with. My reward with my phone was like really not that great of a reward. You know, it really wasn't. It was just kind of a stupid reward. Like, when I look at it now, like, I'm kind of cleaning up my email only a couple times a day and not, you know, oh, I have no idea how many times I was doing it before. And it's actually, I've become more efficient because I've

Starting point is 00:22:25 forced it into only a couple spots during the day. And what I've noticed is like, there's really not much of a change. Like there's, there was nothing that was time sensitive at all with the stuff that I was doing on my phone. Not at all. So that's what made mine so simple and easy because the reward was kind of like, you know, a stupid reward. Now, when you get into some of these other ones like nicotine, alcohol, whatever, the reward is so much harder to replace. And I think that that's going to be hard for some people if they're trying to replace those habits. But I think the hardest part of all this is recognizing that it exists. And then I think the second hardest part, about all of it is really developing the plan and writing it down because I don't think people do that.

Starting point is 00:23:11 And it was amazing. As soon as I wrote it down and I thought, okay, well, what can I replace this habit with? If I didn't try to write it down, I would have never taken that next step of trying to figure out what am I going to replace the habit with. I would have just thought about it and like, oh, yeah, I'm sure that stuff works. But as soon as I literally had a pen in my hand and a paper on the table and I had to come up with the replacement habit, and I mean, I just came up with that really fast. My family is so important to me. So it was like, okay, well, let's, boom. Let's try that one out. Let's see what, let's just see what happens. Yeah, I think it's really interesting to realize how much it means to replace the queue or something

Starting point is 00:23:51 else. Because I was changing a habit here, I want to say, like six weeks ago or something like that. So in episode 92 or something, we had Jesse Isler on. And Jesse Isler, he was, he's famous for founding McKee, Jett, which is later sold to Warren Buffett. But actually, one of the most interesting things we talked about was how changing his diet, actually eating fruit until noon, was really, really one of the cornerstone habits of the lives he's hanging today, even though you might be looking at him. He has an amazing financial success, but it was actually really what really sparked all of this. And he kept talking about this book, Fitful Life.

Starting point is 00:24:31 And so I got out and bought the book and it had like Jesse, I want to say I'm not like a food scientist to anyone, but I was really captured by the whole idea of changing my diet like that. And so I actually challenged myself to do that for one day first and later for a week. So only eat fruit until 12 o'clock. And just to return to the discussion about cues, what's really interesting is that I figured out that it was not always because I was. hungry that I ate breakfast. It was kind of a habit. It was not always because I wanted to have, say, eggs and bacon in the morning that I was actually doing that. That was also a habit. So what I did instead, what I did instead was every time I felt I should be doing what I used to do, called it eat bacon, I would go out and get a piece of fruit from a refrigerator. And what I realized was that it was actually a lot easier than I thought because the reward for me was really to grab something

Starting point is 00:25:34 to eat. It was not so much what I was eating. So I was like, hmm, is this really that simple? And then the reward for that is, as just said, you would actually feel a lot better. So in that sense, it was quite easy to keep doing that. But the whole notion of having a cue where it used to one thing and then just stop and then do something else. Even before, I read that it could be scientifically proved that that's the way to go. I just experienced it firsthand. That was really interesting. And figuring out how easy it is to change your life like that, I think that was really

Starting point is 00:26:10 an eye-open for me. Okay, so Stig kind of hit at the idea of what we're going to move into next. And this is what he talks about in the book is this idea of keystone habits. So what this is, is think of a habit that you. you might have that has kind of a compounding impact on your life in multiple areas. That's what a keystone habit is. It's such a profound habit that it has this ability to really kind of fall into other parts of your life.

Starting point is 00:26:40 And so he tells this story of a gentleman named Paul O'Neill, who was the CEO of a company called Alcoa, which does a lot of metal work and smelting and all sorts of stuff like that. And so this company before Paul O'Neill came in, had a safety record and had a lot of accidents that occurred. And the company was going through a very transformational time. They wanted to hire a new CEO. And so Paul didn't work for the company, didn't work for Alcoa at this point. And Alcoa was looking for a new CEO. And they wanted to bring in somebody new, fresh that was not part of the company. So they hire Paul. And Paul came from this background in government service and he did have some private services where he had worked in the private industry

Starting point is 00:27:26 as well. And so Paul comes in and the company had already been running through some issues. Their stock price was down. They had been having some rough quarters. And Paul comes in and he gives the quarterly speech to the company. And, you know, everyone was expecting, oh, we're going to do this and that so our net income can be higher next quarter. We're going to raise revenues. We're going to do all this stuff and give basically the ordinary pep talk that Paul comes in and he does something that, you know, really freaked out a lot of people. He starts off his speech by saying, okay, so in the back of the room, there are two exits. And if there's an emergency that occurs while I'm talking, proceed through those exits and make sure you exit the building to the right or whatever. You know,

Starting point is 00:28:13 It just basically gives the safety briefing before he even starts talking. Then he proceeds to go. So our number one issue at Alcoa is we have a very poor safety standard. We are going to become the most safe organization in the whole United States. Alcoa is going to be the leader in safety. That is our number one priority. We are not going to focus on anything other than safety. And so what the author talks about in the book, and this happened, this was in the 80s, Stig or late 70s that this event took place.

Starting point is 00:28:49 Yeah, something like that. So, you know, there's stock analysts there in the meeting listening to this new CEO who has no track record at all comes in. And the company's in shambles. And the only thing he's talking about is safety. He talks about in the book how, you know, everyone's just like sell this company. This guy's, you know, cuckoo. he is going to destroy this place. But what they didn't realize was that the thing that Paul O'Neill really understood was the power of habits and this idea of keystone habits.

Starting point is 00:29:24 And so Paul saw the critical variable of all this is if they could fix the safety and create a company that was centered around the safest habits of pouring these metals and working in what would, you know, determine a, a dangerous industry, if you can basically bulletproof that so that no one can get hurt, what you're actually doing is you're creating a more efficient process around the company that you have. And so what they found was in the long run, and it wasn't evident at first, and you had a lot of people thinking that this guy was going down the wrong path. But ultimately, you know, five, ten years later, what happened was is the company became extremely effective.

Starting point is 00:30:09 And they were able to produce bigger numbers. They were able to do it at a lower cost. They were able to do it safely where nobody was getting hurt anymore. And so by focusing on that keystone habit, it had a compounding impact across the entire organization. And so in the book, one of the things that they say is a keystone habit through research is that people who work out and people that keep their body physically fit, that tends to be a keystone habit in a person's life. And, you know, they provide other examples,

Starting point is 00:30:41 but I found that discussion really insightful and something that made me think, okay, so what are some of the keystone habits in my life? And to be honest with you, I haven't even really been able to figure it out yet. But it's something that really has me thinking because that's something I want to cultivate. That's something that I want to work on. Oh, I really love, Preston, you brought this up about exercise, because one of the things he says in the book is that, no one thing it's fun to begin exercising. He's saying that most of the people that start exercise and do exercise today is because they had some sort of problem in some part of time in their life.

Starting point is 00:31:17 It really takes a lot to start exercise because it's so annoying for us as human beings. And the first thing I thought was like, laughable, like, oh, that can be true. But I actually remember when I started practicing like eight years ago, it was because I was in a bad place personally. So for me, it was like, hmm, that probably makes sense. And what he's saying is that whenever you exercise, or the reason why you can continue doing that is there's a lot of chemicals released in your brain, you feel good about yourself.

Starting point is 00:31:49 But that actually happens after some time. It doesn't happen the first few times. The first few times is just pain, and it's really hard to get over that hump. So he's actually saying if you want to exercise or if you want to achieve really anything, remember to provide yourself with that reward. And he said that perhaps one of the best things he would suggest

Starting point is 00:32:08 is to give yourself like a one-hour TV reward and let your cue be coming back from work. Because I just know it so well from me at least beforehand than whenever I was coming home from work, what would I do? I would just sit in my couch and I would just never get up. So he was saying, yes, I totally get why you think it's a pain to exercise and I completely get that you don't want to get started.

Starting point is 00:32:32 But if you just have that as cute, go out immediately and then reward yourself. And I can tell you, whatever you're watching that hour, it's going to be a lot more fun instead of sitting in that couch and doing whatever. Hey, so one of the things that I wanted to talk about that I really liked in this book was this description and this discussion of Michael Phelps. So this was really profound for me because it really reinforced the idea, of people that are peak performers and that can just do things

Starting point is 00:33:04 without even really thinking about it like Olympic athletes or anything like that. So the story of Michael Phelps, he talks about how Michael had such a rhythm and his habits were so strong that it was almost like he wasn't even consciously thinking about his swimming and what he was doing.

Starting point is 00:33:24 He was so trained to do what he did that it was completely pushed into his subconscious, and he was just in a routine at this point. So he talks about, so it's three hours before his butterfly, you know, race. He was at the cafe, and he had the same meal that he had every single day for the last four years at that exact time before this race.

Starting point is 00:33:46 He would finish that at two hours and 50 minutes before the start of the race. At that point in time, he would walk this many feet over to whatever. Then he would, and it was talking about literally by the minute to like 15 minutes before the start of the race, he takes his headphones on. He puts on the same mixtape track that he had listened to for four years straight, the exact same songs. You know, one minute prior, he steps up. He does his arm flaps the exact same way that he's, and it talks about this rhythm and this habit that he was in to do the race. And so the thing that was really interesting was he was saying that when a person, is in this habit loop and the first thing, let's say he's listening to the music and then the

Starting point is 00:34:33 music ends of his mixed tape track and it's two minutes long. That in his mind is a win. He just won at that habit. And so when you stack all these habits up, you know, for that first three hours before he even dives into the pool, he has done all these things, call it 15 things in a row and each one of them are done with a win at the end of it because it had gone exactly as planned, exactly how he had done it in the past, four years straight in a row. And so for him, he's just on that path. He's on that habit loop of now I'm going to jump in the pool and I'm going to swim this certain time that I have done for the last four years. And he talks about on this particular race that he was referencing,

Starting point is 00:35:22 here, some water, whenever he dove into the pool, some water got into his goggles. Well, that was something that he had trained for. That was something that he had pushed into his habit loop, that whenever that happens, I have to go into counting the number of strokes from one side of the pool to the other so that I know exactly when I'm going to hit the wall

Starting point is 00:35:41 since I can't see. And so this was something that, you know, even though he's at the Olympics, He has done this so many times, and he has done this habit so many times. It's something, he's not even, he's not thinking about, oh, my God, I'm not going to do the, I'm not going to win. I'm not going to do whatever. And it's just completely out of his mind. He is in, he's in total robotic programmed response mode because of the habits that he's forced into his life.

Starting point is 00:36:07 And so then at the end of the race, he looks up, pulls the waterfield goggles off of his face. And right next to his name, it says, World. record. And he had literally beat the world record on that race, even though his goggles were filled with water, because for him, it was just another day in the pool of something he had been doing over and over and over again. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. Vanta automates your compliance process and brings compliance, risk, and

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Starting point is 00:39:50 Back to the show. President, I think he was even closing his eyes for the majority of the race because it didn't matter. Like, he knew exactly what to do. So why would he open his eyes? And there was some point of time where he said, yeah, now I had like, need like, 20 flaps. It was not like, yeah, I'm probably halfway. No, it was 20. And then it was 19 and then 18. I mean, he just knew that. There was another story and the thing was about the Buccaneers. So again, it's about sports and it's about how actually removing the human decision will give you better results. And I think they can play close to the Super Bowl and eventually winning a Super Bowl. But they had a few years where they really didn't make it. And what they actually realized,

Starting point is 00:40:34 after they were looking at the sports tapes and going through the tactics, it was that when it really mattered, the players had a tendency to think, I probably know better than my habits. And that was actually in the situation where things went wrong. And I can't help myself, guys, I need to relate this to stock investing because the first thing I thought whenever I heard this was, isn't that the whole essence of quantum investing? Isn't that the whole idea of always buying, say, stocks with the lowest PE and always buying

Starting point is 00:41:06 with the lowest price to book or whatever your system is? But then when if there's a financial crisis, you are overriding your own rules, which is actually where you really need to stick with your rules. And that's really where things go wrong. I'm not saying you shouldn't be thinking about how you invest or shouldn't be thinking about what you're doing in sports. I just think it's really interesting that it's actually when you're really struggling with something is called in financial.

Starting point is 00:41:31 in market, or in sports, that you need to stick most to the system because that's actually where you need to do what you're really good at and not come up with a new solution. I just found it very applicable for both situations. You know, when you look at Warren Buffett and you wonder why he's had so much success, you know, you might be able to attribute it to the fact that he does. He sticks to the same exact strategy, the same methodology, no matter what the circumstances are. And I think when you do that from an investing standpoint, which where you went to stick with this, is if you are consistent and you continue to make the decisions in almost like a habit loop,

Starting point is 00:42:08 regardless of what circumstances are being served, you're then able to identify if you are making a bad decision inside of that habit loop. But if you're just smushy and you're kind of changing like a meandering river here, it's hard for you to identify where maybe you're making the wrong decision because it's constantly changing. You have to fix the system in place before you can identify where the failures are occurring. And so I think that's really important. And that, you know, all these guys that are super successful, they have a checklist. They use an investing checklist.

Starting point is 00:42:43 I can't stress that enough. Guys, we are just hitting at the tip of the iceberg with this book. I mean, there are stories and examples after examples. There's fantastic advice on how you can do this. If you have some bad habits, this is a book you've got to read. I can't tell you that strongly enough. So if you want to read this for free, go to our show notes. There will be a link for audibles.

Starting point is 00:43:08 You can click on audibles. You can listen to this entire book for free if you use our link and your first book for audibles is free. It's all through Amazon. So that's the nice thing about audibles is every book in the Amazon inventory is through audibles. And that's why we use that service ourselves. The other thing, if you want to get our executive summary of this book,

Starting point is 00:43:26 sign up on our email list. We don't send out any spam or. garbage. It's just the executive summaries and different market advice that we have. And we usually send that out two times a month. To be honest with you, sometimes we send it out less than two times a month. So if you're worried about us spamming your email, that's not going to happen. In fact, we get lots of emails from people saying, you're not sending enough emails, but that's how we roll. We don't like to bother people. So we send you something. It's because it's something important or something that's useful for yourself.

Starting point is 00:43:57 Let's go ahead and do a question from the audience. Okay, and so this question comes from Anna. Hi, Staken Preston. This is Anna. I'm a Kiwi living in California. Thank you very much for all the amazing interviews and knowledge you share through the Investors Podcast and Buffettbooks.com. I'm going through the lessons on Buffettbooks.com

Starting point is 00:44:18 and enjoy reading about Nancy's ice cream stand as a way to understand investing terms. One question I keep asking myself is, as I learn about value investing, what does Warren Buffett think of value investing versus buying index funds? I learned about his $1 million bet with hedge fund managers recently. What does it say that Warren Buffett won by buying index funds? Should I continue learning about value investing or should I just go out and buy some ETFs? Thanks again for all of your hard work. That is an awesome question.

Starting point is 00:44:51 And I love that. So here's my opinion. And I could be completely wrong because I'm basically theorizing on what Warren Buffett thinks. But from the stuff that I've studied, the meetings that I've attended and all that kind of stuff, I think that Warren Buffett really likes index funds a lot. And I think that whenever he looks at how things changed through his lifetime, when he started off investing, there was no such thing as an index fund. But now he's seeing that it's a very good financial instrument because it distributes your risk across, you know, call it the S&P 500 index. You're distributing your risk across 500 of the best companies in the whole United States versus just owning one company. So things have changed since he started off investing. Now,

Starting point is 00:45:40 one of the main reasons Warren Buffett invests in individual companies is because he's got an enormous amount of capital and he's able to kind of dig in there and really kind of make a good assessment because he has different access, he has all this kind of stuff. And so I think that Warren Buffett would buy an index if it was valued better than an individual pick that he could find. And I think that goes for other people too if they want to invest in individual stock picks. The thing that I think Warren Buffett has found through the years is that most people, and when I say most, it's probably like at the 99% level, have no idea how to assess the value of a company appropriately and assume an account for the risks that are associated with most companies. And so that's why I think he has really kind of shifted in the last, he's really seen it happen in the last 10 to 20 years where he's really kind of starting to push people really the last 10 years towards. ETFs and indexes. And so that's where he made this bet.

Starting point is 00:46:49 And I think, what is he in year seven of the bet? I took a picture of it at the last meeting. So I'll fire that off to Stig and we'll get that added into the show notes. So you can see the count. But what he did is he was at the top five managers that people selected top five money managers or hedge fund managers were pulled together and their returns were average, the top five. that people could select this whenever he made this bet. But his bet was that he'll pick an S&P 500 index and it'll outperform the top five hedge fund

Starting point is 00:47:21 managers over a 10-year period. I would tell you, unless you have a lot of experience investing in individual stocks, I really think that maybe an index is probably the best route. And I think that it's important for people to understand how to value an index, which is you take the inverse of the P.E. to get a percent. So if the PE right now, and I like to use the Schiller PE in the States, let's just call it a 25. You take one divided by 25. That gives you a 4% yield.

Starting point is 00:47:49 That's what you can expect when you own the S&P 500 annually over the next 10 years would be about a 4% yield. That's where it's priced today. You might be right with top five heads funds, but I'm also thinking it's not just five guys picking great investments. These heads funds, they're extremely diversified. You might be thinking, well, that's fair enough. The S&P 500, that's diversified. Do you have heads funds? On the other hand, they're also diversified.

Starting point is 00:48:17 Yeah, but as these huge heads funds, as they select a lot of different assets, in a lot of different asset classes, it really comes down to how the hedge funds is structured, if they're more or less buying the market. And I think that's something I see with a lot of the heads funds. It seems like they're following a given strategy. And I can't talk specifically about those five funds. But are they really just buying the market one way or the other just with a much more expensive structure?

Starting point is 00:48:49 And I think if you look at the better one Buffett has made, it really comes down a lot of it to the cost structure and not so much to the performance. And I think for the index that Buffett chose, I think it was like 17 basis points or 21 basis points, which is not even the cheapest. you can get for an ETF. But I think you took Vanguard because he put a lot of faith in them. But what's actually interesting, and I can see Preston here in a bit, he has some data on the bat. So go ahead. Oh, okay.

Starting point is 00:49:24 Sorry to change your line. I thought there, stick. So here's the numbers. So I snapped this at the Berkshire meeting in May, and he started this in 2008. And the cumulative yield for both of these is the following. So the hedge fund managers at this point are up 21.9% since 2008. And the S&P 500 index since that period of time is 65.7% up. And the way that these numbers are averaged is like in 2008, the S&P 500 was down 37%.

Starting point is 00:49:58 The hedge fund was down 23.9%. So then the next year it was up 20. The S&P was up 26. the hedge fund managers were up 15.9%. And so then he averages those over that period of time of what the results were annually. And that's how he got the 65.7% for the S&P 500. And the hedge fund managers were one third of that return over the last eight years. I'll assume that the numbers are highly correlated. So if Bavitt had a good year, say 2010, then the hedge fund managers would show something similar and so on. Yes, exactly. So you do see the numbers are correlated. as far as if Buffett has an up year, the hedge fund managers have an up year, or not Buffett, but the S&P 500 has an up year, then the hedge fund managers have an up year. So you're exactly

Starting point is 00:50:43 right with that. I think it's a great point because one of the key arguments you hear from hedge funds is that they are market neutral. They can short when they think the market's overvalue and whatnot. And what you just see time and time again is that it just appears to be a more expensive version of the market. And that's also what we talked to Roe Paul about. You really had to know the in and out of the heads funds before you would go and invest in it. If you think that's the right thing to do with the market is overvalued, you read in the prospect that, well, you'll probably make a profit in the market should crash because they are not as vulnerable to that. But as we saw during the last crash, that was not the case.

Starting point is 00:51:25 But Anna, really to also to answer your question, you're talking about what should you be doing and what we Warren Buffett do? Well, I think Warren Buffett, he actually made an index play in Korea a few decades ago where he was saying, I think that it's hard for me to invest in the individual Korean company, but I can just see that there was something structurally wrong in terms of price and value. So he would go in and buying, I think it was 20 or 25 different Korean companies, which turned out to be extremely profitable for him. So even someone as intelligent and as skilled as well as well as well, he's actually using an index approach when the other, at least in this example. I think Preston's right.

Starting point is 00:52:04 And I think Warren Buffett probably said something similar that for 99% of the people they might want to buy into indexes. But I also do want to say that if you're really interested in seeing if you can create a return that's higher than the market, but at the same time, are not too crazy about going into the individual company. You might want to find either an index or perhaps an ETF that follows some of the rules in terms of value investing. And I would be surprised if you do.

Starting point is 00:52:33 you do diligence, if that ETF or that index wouldn't do slightly better than the market. You shouldn't expect Warren Buffer, kind of our performance, but I would assume that it might yield a better return. I have a point that I think

Starting point is 00:52:46 is really important for people to understand. You can still beat the market and use ETFs and use indexes. And the way that you do this really kind of gets at the heart of Tony Robbins. I know we didn't like his book, but it really gets to the heart

Starting point is 00:53:01 of what Tony Robbins was talking about in this book, it comes down to what assets are you allocating your portfolio into at the certain times in the market. So like right now, Stig and I's opinion is that the market is very expensive in the United States. Other parts of the world, it's cheaper and other parts of the world, it's even more expensive. Well, Denmark, to be honest with you, is the most expensive market in the world right now. So Stig's smiling and nod in his head. You're right. It is the most expensive in the world. So like when you look at that situation, so you don't want to have have your capital allocated to Denmark companies right now. You just don't. So what you do is

Starting point is 00:53:40 you're able to beat the market by taking your capital and putting it into other asset classes at those points in time. You transition them into less riskier asset classes. So whenever the Denmark stock market has a correction, which will happen. We don't know when, but it will happen. you're not sitting in that asset class. You're totally avoiding it. So you can still beat the market, which that's when people say the market. They're talking about the stock market.

Starting point is 00:54:10 You can beat that by adjusting your asset allocation at different points in time based on the valuations. So that's why I think like you're going through the Buffett's books courses. So that's awesome. I think that that's really important because that's giving you a foundation in business. It's giving you a foundation in asset valuation for an individual company. And when you understand that, then you can apply it to an index. You can apply it to different asset classes and you can get more creative with it. But don't be confused, folks.

Starting point is 00:54:39 You can beat the market if you are adjusting your asset allocation based on different points in time, based on the valuations that you're being offered. That is so important. All right, Anna, awesome question. And because it was such a good question, Stig and I are going to be starting something a little bit new with what we're giving the people that leave responses. So, Anna, you're the first person to get two gifts for your question. The first gift is the Warren Buffett accounting book. We're going to sign that and send it off to you for free. And then the second thing we're going to give you is Stig developed an entire video course around the book, The Intelligent Investor. So you're probably well aware that that's one of Warren Buffett's books that he attributes most of

Starting point is 00:55:25 his knowledge and understanding to. What Stig did is he made a chapter by chapter video of that entire book. And so he has outlined the whole thing, made it easy to understand because the book is very difficult to understand. And we actually sell this course on our website. So you're going to get this course completely for free for sending in your question. So two gifts for you, two gifts for anybody that asks a question and gets it played on our show. You get the video series that Stig made for the Intelligent Investor and also our book. So thank you so much, Anna, and I hope you enjoy it. So before we conclude this episode, there's one thing, there's one quote, and this one is often misinterpreted, and a lot of people think that it's Warren Buffett that came up with

Starting point is 00:56:08 this quote, but it's actually Samuel Johnson that came up with this quote. And the quote is this. The chains of habit are too weak to be felt until they are too strong to be broken. All right, guys, that was all that we have for this episode. We'll see you, until the 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.com. Submit your questions or request a guest appearance to The Investors Podcast

Starting point is 00:56:39 by going to www.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 the TIP network and must have written approval before a commercial application.

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