We Study Billionaires - The Investor’s Podcast Network - TIP131: Smarter, Faster, Better by Charles Duhigg (Business Podcast)

Starting point is 00:00:00 We study billionaires in this is episode 131 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 Stig Broderson. Hey, hey, hey, how's everybody doing out there?

Starting point is 00:00:30 My name 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 Seoul, South Korea. And today we have a book for you. And I really like this book a lot. I'm curious to hear Stig's thoughts on it, though. The name of the book is smarter, faster, better. And this is by Charles Duhigg. This book came out about a year ago.

Starting point is 00:00:53 I want to say March of 2016 is when this book came out. I am a huge Charles Duhigg fan. He wrote the book, Power of Habit, which Stig and I do. We'll have a link to that in the show notes if you guys want to check out our review of his other book, Power of Habit. But this book was very good. And this book is all about productivity. So if you're the type of person who's working on something and you just don't know how you can muster more willpower, strength. What's the words I'm looking for here?

Starting point is 00:01:23 Stig. A reason to get up in the morning. There you go. A reason to get up and work on what it is that you're trying to go after. I think this book is going to give you a lot of good tips and a lot of good information on how to identify why maybe you're not motivator or maybe why you are motivated to do certain things. So I was listening to an interview between Charles Duhigg, the author of this book, and Ray Dallio. And Ray Dahlio said, you know, I bought every single person at Bridgewater a copy of your book. And I was kind of like, wow, I understand that because I think Charles Duhig's a fantastic author.

Starting point is 00:02:00 That's one of the billionaires that we can say has endorsed Charles Duhigg as a writer. And that's why we're reading his newest book here, smarter, faster, better. All right. So what we're going to do is we're going to go chapter by chapter. There's only eight chapters here. So we're just going to kind of hit the highlights from each one of them. So the first chapter is called motivation. And this was a very interesting discussion.

Starting point is 00:02:20 And he provides some fantastic examples. I'm going to throw it over to stick to kick this off. The way that Charles Duhigg explains motivation is that he explains it as if it were skill. It's not something you're born with. Some people might have a better starting hand than other, but basically this is a skill that you can hone, you can train. And the way to think about motivation is that the more control you have of a situation, the more motivated you typically also are. So this works from an employee perspective, but also works from leadership perspective. So for For instance, if you're a leader, it's very important that you give your staff autonomy.

Starting point is 00:02:59 And you basically lay out different options to your staff instead of giving the commands. Even though you think one option might be better, if you can't summon the support from the staff, it probably won't turn out good for you anyway. So one of the things that I wanted to highlight from this first chapter that I personally really agree with and like that he brought up is this idea of internal locus of control and external locus of control. So I'm going to tell a story about my time at West Point. So one of the first things that I learned whenever I went to West Point was you don't

Starting point is 00:03:35 blame anybody else for anything. In fact, you take the blame for everything no matter what. And I know for a person listening to that, they might think that that's really extreme and they might not necessarily understand how a person could just automatically take the blame for anything. But that's one of the things that the first year, which is difficult, is you just start taking responsibility for everything. You know, you walk out and maybe your friend did something wrong and you had nothing to do with it and you'd have an upperclassman say, well, why in the world did that happen? And you know darn well that it was your buddy that just messed up and got you in trouble.

Starting point is 00:04:13 But the response that you would say is, sir, there's no excuse. And if they dug deeper and they wanted to know, no, there's a reason why. did this happen, then my next probably response would be, sir, I failed to do whatever that response would be. And, you know, I didn't have an appreciation for what I was being taught at the time. But now when I look back at that experience, what I was really learning is exactly what Charles Duhigg is talking about in this first chapter about internal locus of control. And what that is, is when you charge yourself with being responsible for anything and

Starting point is 00:04:48 everything around you, you start to view the world through a different lens. You start to analyze things more. You start to say, okay, well, if I would have done this thing differently, actually, I might have been able to completely avoid this altogether. And I know that that might be very hard for some people to make that transition. But I think that even if some of that wears off on your personality, where you start taking more ownership for what goes wrong, that's going to have a profound impact on your progress and your ability to control your circumstances in the future because now you're going to instead of blaming, I mean, you see this all across America. And I'm sure you see it all around the world.

Starting point is 00:05:28 I'm not just saying America, but you see these parents when they go to a sports game. And Johnny doesn't do well. When Johnny comes off the field, they don't say, hey, if you would work harder or whatever. No, they're blaming the ref. They're saying, oh, well, you know, if so-and-so would have passed you the ball better, you would have made the shot. or if the ref didn't mess up on the call, you would have won. I think a lot of people do this beyond sports.

Starting point is 00:05:52 They do it in their personal life. They're quick to blame others instead of just saying, what could I have done differently? What could I have controlled, which is the key word here, what could I have controlled in order to create better circumstances for myself? And at the end of the day, it really doesn't matter if it's your fault or not, because you typically can't do anything about other people's actions anyway. I mean, if it is a bad ref, you know, tough luck, that's just the way it is.

Starting point is 00:06:20 So that's also why he transitioned into this discussion about complimenting, for instance, your kids or hard work. Give them the feeling that they can control the outcome through hard work. I've had experiences where, you know, you're sitting in a board meeting, you're sitting in some type of group discussion, and somebody says, well, why did you do this wrong? And they're basically coming at you. And I've been amazed at, and this comes from my time at West Point where this was drilled into my head, where you just say, you know what, there's no excuse. I failed. Like that's my response. You know, it's like, you know what?

Starting point is 00:06:58 I just did a poor job at doing X, Y, and Z. I basically lay out why I wasn't able to maybe do something appropriately. And then it's always, okay, and so this is what I did all wrong. And basically moving forward, this is what I think I can. can do in order to fix that or to remedy that. And you know what kind of response you typically get back from somebody who asked you that hard question or who was poking you? They have nothing. In fact, they're like, okay, uh, sounds good, do that. You know, there's no, there's no more back and forth. You just, you cut off the entire conversation. And I guess whenever I'm in a professional

Starting point is 00:07:32 setting with some people, I see this time and time again where people just try to develop some type of excuse for something. And usually the person asking doesn't want to hear the excuse. They might want to hear maybe some of the reasons that led to it. But at the end of the day, they're like, just own up to it. You're wrong. You know, if you're wrong, you're wrong. Just admit that.

Starting point is 00:07:53 And it's amazing how fast the conversation, the direction of everything, the productivity will go in a completely different direction because you own up to it. You're like, hey, this was a failure. I could have done this better. These are the three things that I'm going to do in order to fix that. And the conversation is done. It is just done. So in the second chapter, we're going to talk about teams.

Starting point is 00:08:15 And specifically, we're going to talk about how do you form the best teams. And Charles Duhigg starts out by telling a story about this female going to Yale and the terrible experiences he had with her study group. And the way she explained it was that there was way too much competition and everyone tried to be a leader. Then the chapter goes on and it talks about how Google tried to form the very best teams. And they were looking into what is it really? What does the empirical evidence tell us about how to form good teams? Should there be heavy rivalry among the team members, for instance, as in the exam before? Actually, some evidence shows that that could be a good idea.

Starting point is 00:08:57 All I said, it should be different personalities. And again, other papers said, if they had similar hobbies, the rest would take care of itself. Now, what Google concluded based on those findings was basically that they couldn't conclude anything. Too many things was just pointing in opposite directions. So they needed to figure out what is really that creates the best teams. Now, Preston, we actually don't coordinate our notes before we start. So I actually had a section about West Point I wanted to talk to you about after this introduction. So I just want to say for people out there, it's completely coincidental.

Starting point is 00:09:30 It's something we rarely talk about and we actually already mentioned it twice. we're doing it thrice. So whenever I heard this story about this female going to Yale and everyone trying to be the leader in her group, so you are basically taught in leadership and you are surrounded by hundreds of other cadets that also, I assume, I might be wrong, but I also assume that they wanted to excel in leadership. How do you fit into a role? And I think everyone has tried this like in a team and a study group and the workplace where

Starting point is 00:10:00 more people wants to be the leader. What is the process and how did you experience that as a cadet but also as you advanced in ranks? That's an interesting question because I didn't really think of it in terms of everyone at West Point wanted to fill a leadership role whenever we'd be doing group projects or anything. Where I noticed it more is whenever I went to Johns Hopkins to do my master's because not everyone came from that background of hardcore leadership. and that was new for me. I wasn't used to a lot of people not being comfortable with wanting to be in a leadership role. So I think people might have the impression that there was a lot of people trying to take on a leadership role at West Point for every project. But I would tell you that that wasn't the case.

Starting point is 00:10:49 And I think that the reason it wasn't the case is because there were so many other opportunities to lead something else while you were there, whether it was a sports team or people might not realize this. but the whole school is broken down into a military formation. So like when I went to school there, I was assigned a company that I basically lived with of 120 people. And then that company was broken down into four platoons. And so then I was assigned to a platoon. Then I was assigned to a squad.

Starting point is 00:11:16 And so whenever I would be struggling with a test or whatever, I could go to my squad leader who might be an expert at physics and say, hey, I'm struggling in physics. Can you help me out? And so you could get that help and assistance. So there was all these little opportunities because the school puts you into all these different leadership roles and they change that up every single semester. So I think a lot of people when they get in a group project or whatever, there's so many opportunities to lead at that point that I don't think a lot of people were saying, hey, I've got to be the leader on this project. It didn't really happen maybe as much as what some outsiders might think.

Starting point is 00:11:51 Would you say it's also a question about the roles were so formalized because we're also going to talk about roles later. in this episode. Whereas, for instance, in a study group, like, no one is typically appointed the leader of the group. So that's why you have this struggle for power, if you like. Do you think that is probably why it works so good at West Point? Yeah, I think maybe that might be the case because there were so many other opportunities to lead something.

Starting point is 00:12:15 I don't think a lot of people were wanting to do any more than they had to because they were already strapped for time and involved in so many different things. So, yeah, I'd agree with that. If we continue the podcast and talk about what Google found, and they had two very important findings in terms of figure now, why is it that a group really works, why is it that a team really works out? And what the found was that empathy is very, very important. If they are able at reading each other's body language, it's very, very important for the performance of the team. It's also important to mention that you don't necessarily need to be friends.

Starting point is 00:12:52 There's this notion about if everyone's good friends, you will achieve great things. That was something in Google found. That was definitely not the case. It was not necessarily a bad thing, but it didn't have any important factor. Rather, everyone should feel that they were listened to. So one thing that had a lot of emphasis on was always to ask every person in the room, what is your opinion? Or if someone has really not said anything for a long time, then directly ask, what is your opinion?

Starting point is 00:13:19 You haven't spoken in a while. afterwards you would repeat what the other person was saying and as a leader actually make a big deal out of sending a little checkmark next to that person's name. So I love where this is going because it goes back to what you had originally said, Stig, which is this is all about control. Okay, when everyone's participating on the team, everyone feels like they are in control and that they're contributing. And that is so important because whenever you have, let's say you have one person that's just totally dominate. everything and you're part of this team and any feedback that you provide is immediately written off by maybe this one person, this leader who's running the team. That person now doesn't feel like they have any control or input into the group and so then they immediately start to

Starting point is 00:14:06 shut down. And so what I find amazing about what Do Higg is outlining in the book is he first talks about it from an individual perspective of why an individual might be productive. But then the fundamental thesis that it's all about control applies to the group. group dynamic as well when you take a step back and you look at that from, I mean, you could even scope this out to maybe even a national level where when a country doesn't feel like it has any kind of control, maybe it's less productive. It's an interesting idea. I mean, I don't know how much you could really apply to that, but it's an idea that's

Starting point is 00:14:39 worth exploring. And I think that understanding that fundamental thesis is so important to really wrap your head around this episode. Whenever I think about the control dynamic, I often think about teenagers. when you see a teenager who has a very controlling parent, that teenager isn't productive. They want to sleep till 12 o'clock. They don't want to go do anything. They just want to lay around because they don't feel like they can impact or control anything in their life.

Starting point is 00:15:06 And that might be one of the reasons why you see teenagers that are very productive versus aren't productive at all. But we'll keep going here. 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 shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering its 18th year, bringing together activists, technologists, journalists, investors, and builders from all over the world.

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Starting point is 00:19:08 Sign up for your $1 per month, today at Shopify.com slash WSB. Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. So the next chapter is chapter three. This is called Focus.

Starting point is 00:19:30 I didn't like this chapter. And the reason I didn't like this chapter is because for me, it was a little repetitive to some of the other things that I've read in other books. In fact, I can't even remember Stig. Which book did we read that it was talking about? about the airplanes and the focus of the pilots. We read the Malcolm Gladwell's. Yeah, that's right.

Starting point is 00:19:47 It was Malcolm Gladwell's book. Outliers. Yeah. So for me, this chapter was really very similar to the Malcolm Gladwell book that we read. If you guys remember, you guys were with us for the Malcolm Gladwell book, a quick recap, it talks about the dynamics in a cockpit when you're talking about pilots flying, how when one pilot you get into these different cultures and how some cultures are more aggressive and people feel like they can speak up versus others where they don't feel like they can speak up

Starting point is 00:20:15 and how that plays into the productivity of flying an aircraft. Instead of reading this chapter, I would really refer people to episode 75 where we read Kelly's book, The One Thing, which is really about focus. And I think he does a much better job at explaining what focus is. The way that Charles do explains this is that you need to build up your models of a certain situation before you experience it. For instance, it might be if you're a pilot and something goes wrong. And by building up those models, you are better at reacting if you're in the emergency,

Starting point is 00:20:47 but he also applies it to envision before you come to your desk. What is the first task as you do and then push through that task no matter what happens? So I definitely think the focus is very, very important. I think the way he explained this was probably a bit abstract and not really applicable for most people. All right. So the next chapter was chapter four. This is all about goal setting. We've covered this topic in a couple different directions in the past.

Starting point is 00:21:13 But the main premise that he's talking about here is you've got to set really lofty goals. And I like how he talks about sometimes where you set these lofty goals and you give yourself kind of a short time horizon to get there, to force that productivity, to force a person to really go after something. I think anybody can relate to that. When you give yourself just a small amount of time to knock something out, you have no choice but to be productive in order to hit that suspense. But I think the example uses in the book, which is a really cool example. He talks about General Electric and how they set a really eye and lofty

Starting point is 00:21:46 goal in order to improve the efficiencies of some of the engines that they were designing. It's a fantastic story. As a side note, you can't get a better writer to tell a story than Dohigg. He is very, very good at telling you his thesis or his idea of why something might work. And then he gives such a great, fantastic story on how it unfolds and how he basically teaches you through the story. And I really like that. It's fun to read his books. So in particular for GE managers, they figured out that they needed to set two type of goals. They needed to set a smart goal and a stretch goal. So just really briefly about a smart goal, that's an approvation for the goal has to be specific, measurable, attainable, realistic, and trackable. And if I just could give you an example,

Starting point is 00:22:33 and this is especially something I've struggling with as a professor, is that you would be speaking with a student, and that student would set a goal, and that goal could be, I will do better on my next report card. That's definitely not a smart goal. And just to give you an example of how you could make this into a smart goal. So it could be, for instance, in the next marking period, I will take careful notes and review them at least two days before test and quizzes

Starting point is 00:22:59 so I can ask the teacher questions that I don't understand. I would do my math homework before I do things with friends, and when I hand in, I'll ask the teacher about anything I'm not sure about. When I get anything wrong, I'll make sure to ask my teacher or my classmates for the right answer. That's the example of a smart goal. So GE implemented this, and what they figured out is that the employees loved it. They really made them feel like they're progressing all the time. It gave them the feeling of accomplishment. It's very important for us as human beings that we have closure, that now this is solid.

Starting point is 00:23:32 and then we can go on to the next thing. Now, what they also found a GE was that the smart goals in itself was not enough. It was really not the one solution they were looking for because they found that more and more of the employees and the managers, they were kind of using the smart goals as a checklist and not necessarily setting the right smart goals, but basically just wanted to accomplish as many goals as possible and not really be focusing on the quality.

Starting point is 00:23:58 So, instead, they decided to have two different types. a goal. So the first one was the smart goal, which is more operational. And then everyone needs to have a stretch goal. And the interesting thing about a stretch goal is that it's very, very hard to achieve. So that also made people think outside of the box, aside from the smart goal. One example that he uses was whenever Jack Wells, the CEO of GE said to his managers, we need to limit the amount of mistakes in our production by 70%. I don't know how. I'm not giving you in directions, but that is what you need to achieve. I know it's a stretch, but you need to figure out how do we get to that point within two years. Now, the managers at GE said it was ridiculous.

Starting point is 00:24:42 It simply couldn't be done. The manufacturing process was so complicated, having more than 10,000 components for each engine. Now, since that was what Jack Wells told them, they had to get on in and they decided to analyze all eras recorded the past 12 months. And they quickly figured out than hiring more quality insurance people wouldn't do the trick. So the solution must to make every employee an expert. Now, they actually tried that. They actually did that for nine months, and they figured out that the massive retraining of the current staff

Starting point is 00:25:13 was not sufficient. They could not reach 70%. So they decided to hire more technical staff. But they were already in high demand and very expensive. So to attract people, they had to give the engineers more autonomy but also changed the scheduling system that they've been custom of using a GE.

Starting point is 00:25:30 So this turned into a stretch goal and basically meant that to succeed on mitigating 70% of the errors, everything needed to be changed from workers, from how workers were trained, from how they were hired, and also the way the site ran. But in the end, after three years, the errors was cut down a 75%. And that really shows the strength of a stretch goal.

Starting point is 00:25:55 All right, so the next chapter was chapter 5. This was titled Managing Others. And this was a very interesting discussion as to what kind of culture creates the best productivity within an organization. And so he cites a study that was conducted, I think, out of Stanford. And the Stanford professors did something like 15 years of research on what kind of company culture worked the best. What they found was that of all the different companies that they were modeling or assessing, there was what they called the star model where there was five different ways that culture usually developed inside of a company. There was the engineering culture.

Starting point is 00:26:36 There was the autocratic, the bureaucratic, the commitment model. And what they uncovered from this research was that often the companies that ignored the commitment model, which wasn't really any of the five, those companies typically had some of the, the best results. And the reason why that these companies had the best results by ignoring this commitment model was because any person within the company had the control, and again, that's the key word, had the control and ability to induce change into the organization. So let's take the example that he talks about in the book. There's a small auto factory out in California and down to the very lowest level person that's working at the company, they had the ability to,

Starting point is 00:27:28 first of all, stop the assembly line, had the ability to implement changes at their organic level, and that person had a lot of control that was decentralized away from the higher headquarters. Now, those companies also had the framework in order to have, I guess, that bureaucratic model that I think most people are accustomed to with large organizations that they might work for. That was still in place. But I think that the power and authority was pushed down as much as possible to the lowest level. And those are the companies that had the most productive workforce. And I think it all goes back to the word control. And I also think it has to do with pride. It really has to do with do you feel that you are creating a quality product? And if you don't have

Starting point is 00:28:17 control, it's really, really hard to make that product your own. And specifically, he was talking about in the book how the old management told them that you can never ever stop the assembly line because it cost $15,000 a minute to stop the line. The way that the workers perceived that was that they were working for someone else. It was their line. It was them making money. And actually what happened was they actually sabotaged the production, which was a crazy story simply because they had these classes with the management all the time. Now, what happened whenever they got this new system in place was that they took another different pride in their job because now it was their product. The management makes sure that they wouldn't fire employees.

Starting point is 00:29:02 So for instance, whenever the financial crisis hit, the management took a big pay cut and the workers that were about to be laid off. Instead, they were retrained to other tasks, lower level task, though, but tasks that needed to be solved within the company. So they actually went through great financial crisis without laying off anyone. And this is really the strength of the commitment model, is that management and workers, they are together through thick and thin. So real quick, to piggyback off that comment, in order to distribute that authority down to the lowest level, you've got to have trust in the people that are around you. And I immediately think of the book from Stephen Covey, the speed of trust was the name.

Starting point is 00:29:42 of the book. What a fantastic read where he talks about when you extend trust to other people, you will get it back in return because it's reciprocal. It works through the law of reciprocity. And I think a lot of people might not necessarily understand how true and how that is at work every single day when you're interacting with anybody. That law is absolutely in play. So that I think goes hand in hand with what Stig was talking about. All right, so chapter six, decision making. I'm going to throw this over to Stig to kick this one off. So the way that Charles Duhigg explains decision making is that he's saying that most people are predicting the future or trying to predict the future.

Starting point is 00:30:24 Actually, all the choices that we're making in our lives, that is an estimate of what the future will bring. If you are having kids, it's typically because you have thought, will my life become better by having the kids than not having cats? or if you're getting married, you would more or less be thinking, what will happen to my life if I married my significant other compared to if I didn't. And the way he explains this is that it's actually a very bad way of estimating what's going to happen in the future. Because he's really talking about how we come up with these binary decisions, saying if I'm going to have kids, my life will be good.

Starting point is 00:31:01 Or if I'm going to get married, my life will be bad. And that's the wrong way of looking at it. He introduces a concept called probabilistic thinking, where he encourages everyone to say, okay, so what is it that I think will happen now? And he said, okay, if I will have kids, you know, there's 20% of this happening. There might be a good scenario, a bad scenario.

Starting point is 00:31:21 Now, there might also be another option, and there might be another 20% probability of this happening. And what he's basically doing with this is that he is outlining and clarifying the consequences of our choices. He's not saying this is what will happen, which we as humans are very inclined to do. He's outlining the options so we can figure out how do I increase my chance of the positive thing to happen? Or is this a too risky of a bet if you want? So I should stay out of it in the first place if I can't mitigate any of the bad consequences. Basically, his point is that

Starting point is 00:31:55 even though that you imply probabilistic thinking, it's not the same as you can always be right. it's simply a question of shifting the arts in your favor before making a big transition in your life. Okay, so the next chapter was chapter seven, and this was called innovation. And I think that this is something that is kind of obvious, the point that was being made in this chapter, which is that when you're creating something new, the stress and the setbacks are part of the process. I think everybody kind of knows that.

Starting point is 00:32:29 With that said, I think he told a really cool story to, represent that idea. It wasn't anything groundbreaking. So I guess for me, the chapter was as far as value add to the book, yeah, not so much, but had a really cool story where it talked about Disney and their development of the movie Frozen and how they went through all these re-edits of this movie. Because when they first put it out there, it had all these different mistakes. They talk about how, I don't know if anyone's seen Frozen, but as a parent with young kids, I've seen it a few times. In the movie, the snowman character is really funny. And he talks about how the snowman character was really annoying and not funny at all in the original versions.

Starting point is 00:33:12 And he talks about all these kind of errors and mistakes that they had whenever they were doing this. But as we discovered in the book, Creativity, Inc. It's all about Pixar and how they go about this creative process, which is where I would definitely tell you to go if you're wanting to learn more about innovation and this process of being creative and developing things that are creative. That's the book to go to. But what Do Higg talks about here is how they worked through that process. They worked through the setbacks. And then at the very last moment, they had this person that they hired to help with a song. And then that person came in and it just really kind of spun the movie in a whole different direction

Starting point is 00:33:48 and gave it the clarity that it needed in the end to be this massive blockbuster. The story is really cool to listen to. Regardless of the learning that's kind of taking place as to the point that he's making there, I think the story is really worth listening to. I thoroughly enjoyed the recap on all the inside pieces of that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up,

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Starting point is 00:37:21 prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. One of the things he put a lot of emphasis on was the term spinning. And apparently spinning is something that happens in creative teams when they stop being creative, when they're too stuck in their role to come up with a solution to, for instance, how do we do the ending of Frozen. And to spark creativity, you need intermediate disturbance. Basically, you need to distort the team to make it dynamic. And the reason why he does that was actually a founding from nature. And he uses the analogy about a reef.

Starting point is 00:38:02 If you don't interfere, one species will become dominant. But if you interfere all the time, only very few of the resilient species will survive all the hardship. What you need to do is to create intermediate disturbance because that's when the most species bloom. At Catmole, the CEO of Pixar was very aware of this. So that was also why he, when the team got stuck and frozen, distorted the team to spark the creativity, basically. Yeah, and he only changed up in the management architecture of the movie. He only changed one person's position because he felt like that slight change was enough to kind of jar the movie

Starting point is 00:38:40 in the creative process that takes place by just changing up that leadership architecture just a touch, which was, it was interesting. Okay, so then the last chapter that we had was chapter eight, and this was all about absorbing data. In this chapter, he's talking about, and this is really applicable to today, where you have access to just unbound amounts of information, and how do you cope with this information overload? So, Stig's going to cover some of the highlights from this chapter. So the first thing I thought about whenever I was reading this was whenever I'm teaching a class.

Starting point is 00:39:15 And very often, for instance, in an accounting class, you will need to have the students understand a concept. So, for instance, that concept might be the networking capital. What I quickly figured out whenever I started out cheating was that if I ask my students, what is networking capital? What they will do is that Google networking capital, and then they will copy paste that into the response. So it would be a very, very correct answer,

Starting point is 00:39:40 but the whole process of turning information into knowledge, that will be completely lost. So the way that Dool explains this is that you need to interact with your information one way or the other. You need to engage with it. Otherwise, it can't be turned into knowledge. And what uses information if you can't absorb it?

Starting point is 00:39:59 So, for instance, one thing you might do is you might ask the student. So you know what networking capital is. But could you please explain to the rest of the class or just to yourself, what happens if you take out the inventory in that equation? What's the influence of the operations of the company? Now, that question is very, very difficult to find on Google.

Starting point is 00:40:20 You really need to understand what you're talking about. And that's really the key concept for you as a leader, for you as an employee, to make sure that the team understands where we were going. You need to turn all that information that you acquired into knowledge. You need to constantly engage with it. All right, guys. So that's the summary of Smarter, Faster, Better, by Charles Duhigg.

Starting point is 00:40:42 If you guys want to get our executive summary, it's about five pages long where we type up our notes from each chapter. Go to our website. You can drop down on the subscribe link, click on the one for emails. And we don't send out any spam. We send out our executive summaries about once a month, twice a month, something like that. And you get them completely for free. There's no cost or anything.

Starting point is 00:41:05 So get our notes for free. At this point in the show, what we're going to do is we're going to go ahead and take a question from the audience. and this question comes from Wendy Davies. Preston and Stig, my name is Wendy and I'm from Vancouver, Canada. I found the Investors podcast after avidly watching your free How to Invest in Stocks video series on Buffett's Books.com. I'm new to investing and I'm learning so much from every podcast and guess it's phenomenal. My question for you is this.

Starting point is 00:41:33 For a brand new investor in today's market without an existing portfolio, what would be an approach to managing a fairly significant windfall of greater than $500,000? I know investment in low-cost index funds in ETS is a recommended strategy, but is it so even when the investment is a large percent of an individual's total net worth or executed all at one time? So, Wendy, that's a fantastic question. I'm hesitant to respond with just a cookie-cutter response, though, because a lot of it has to do with you personally. And so let me expound on that.

Starting point is 00:42:07 How old are you? What do you plan on doing as far as more work? All those kind of things come into play. Do you have children? Do you have other interests? There's so many different things that come into play as to how you would respond to that. But let me give you an example. Recently, I had a friend who contacted me and he said, Preston, I need some help.

Starting point is 00:42:28 I just retired out of the military. He was a pilot that I knew. And his income was basically going to start doubling. if not tripling from where it was whenever he was in the military. And he says, I am going to have a lot of extra money to invest. What should I do? What should I do with the money? And I started asking him a few questions.

Starting point is 00:42:47 So one of the questions I said, do you own a house? Did you just buy a house? He said, yeah, I just bought a house. And he still had a lot of money to pay down on the house. And I said, well, what's the interest rate on the house? And he says, well, it's a fixed loan, 30-year loan at 3.75%. And I said, okay. And so for me, whenever I was trying to help him through this, now he has children.

Starting point is 00:43:09 And so then you had to come and you had to think about the college expenses. But basically my advice to him, after laying some of this stuff out, and it's important to note that this conversation recently took place in March of 2016. And the reason I say that that's important is because in 2016 in March, the stock market right now in the U.S., if you're going to invest in the U.S. stock market, it's priced around a 3% return. So if he takes his money, that's all this extra money that he's making and he puts it straight into the stock market, 3% return is what he could expect by putting it into an S&P 500 index. Now, when you look at the 10-year treasury, if you were going to do a bond, that's at around 2.6%.

Starting point is 00:43:51 So not much of a difference there, 2.6 to 3%. That's almost the exact same return. But he also has this house loan that's at 3.75%. So for me, whenever I, I'm thinking through where's he going to get the highest return on his money that's for the house. It's like very low risk. I mean, the only risk that he's going to have is if the house starts losing value and he needs to turn around and sell it, which in my opinion probably wasn't the case for him because I think he'd be in that area for a long period of time.

Starting point is 00:44:19 For me, the best advice for him was start paying down the house loan as much as you can because you're actually probably getting the best return that you could based on the current market conditions. As those market conditions change, let's say in. In two years from now, the stock market has a big correction and prices are a lot better. And now you can go get 6% in the stock market. Now he needs to be taking his cash flow and putting it into the stock market. So that's why answering that question is extremely hard because a lot of our listeners are from the future.

Starting point is 00:44:49 They're listening to us four years from now. They're listening to this episode. And so if I'm giving you advice to buy the stock market today, that's really bad advice for that person who's listening to this four years from now because it might be completely different. I would guess it'd actually be better, but it's different advice based on where you're at at a certain point in time and all the other conditions that are happening. So with all of that said, because this is a really long response, but I think it's important for you to hear my thought process.

Starting point is 00:45:17 That's what I really want to convey to you. This is how I would go about this. Lay out different asset classes and understand where they're priced. Know where the stock market is. and all you got to do is take the inverse of the Schiller-P-E ratio for the U.S. Figure out what that ratio is and what percent that's giving you in the stock market. Figure out what you can get in a government bond. Figure out what you can get in a corporate bond.

Starting point is 00:45:42 Do you have a house loan? What's the percent on that? Those kind of things are the questions that you guys have to ask, and then you have to make that assessment. What's going to give me the highest return for the lowest amount of risk that I'm comfortable with? I know that was long, but I'm curious to hear your thoughts. I have a very lengthy response to Preston, so I definitely won't blame you here. The one thing I really wanted to talk about in your question was basically a two-part question

Starting point is 00:46:08 was also the thing about a high percent of net worth, because that's something that we really haven't been talking too much about before. When you say that these call the $500,000, that's a huge part of your net worth, I would assume that you have the savings to live by and you also have an emergency fund and there will least quite some time until you plan to retire. Again, like Preston said, there's so much information we need to know, like age and children and which kind of different scenarios are you considering going to happen with your life. But the thing I really want to talk about more from a general perspective,

Starting point is 00:46:45 that is, is a hundred percent stock exposure a good investment? Is it risky? Do you need to diversify more into different asset classes? Because I think that's something that a lot of people have thought about, it, and at least I know I've thought a lot about it. Am I really diversified if I have 100% in stocks? Now, it's not a simple yes or no question, but I would definitely like to give it a go. If we look away from the current mind conditions, again, a lot of the listeners, whenever

Starting point is 00:47:10 you listen to this, you might be in the future and the stock market might look very, very different. So just from a general perspective, are you diversified if you have 100% stocks given that is only one asset class? And you might have seen your chart saying, if you have stocks, you will, on average, be making 8%, or if you're investing in bonds, the leverage it would be 4%. Commodities, perhaps 3%. Then you're also showing charts about how those asset classes correlates and how you will

Starting point is 00:47:39 have less risk if one asset class goes up when the other asset class goes down. And we're talking about risk quite a few times here in the podcast, and we usually don't consider volatility to be a good measure of risk. And for me, I don't think that having many asset classes, for the sake of having many asset classes, is a good investment. I don't necessarily think that you are more diversified. And I don't think as an investor that you have respect for the underlying drivers in terms of what drives returns. So please allow me to elaborate. I don't look at stocks as one asset class.

Starting point is 00:48:16 Rather, I look at it as, can I imagine a scenario where companies in aggregate are not making a profit anymore. And the answer to that is pretty simple. No, I can't. So basically, the underlying premise is that if a company makes money, it will be returned to the shareholder, in dividend, share buyback, or capital gains. So I would say that I can't imagine a scenario where companies won't be making any money. So basically what you're saying in terms of the low-cost ETF, as you're talking about,

Starting point is 00:48:46 over the long-term, yes, there will be a good investment. If I need to build up on that thesis, I can't think, about any point in time since we have human beings on this planet where we didn't have a corporation making an output. Now, it might not have been called the SEC or they might not have entry-strust laws and they might not be filing in 10K, but we always have a corporation structure one way or the other. I mean, even back when we were living in tribes, you know, we had the owner, management, worker structure and in aggregate, those societies got wealthier. So you might be also be thinking, okay, stick, so that's a good point. Okay, so up until this story, we can see that

Starting point is 00:49:25 companies are making profit, can we expect that to happen in the future? If you investigate how a company makes profit and how societies prosper, it basically come down to innovation. The more productive will become the richer we get, and that generates profit. You can think of it in terms of inventions. We become more productive after electricity was invented, the assembly line, computers for that matter. And it's basically a rule of nature. You'll always find a corporate structure. Unless we completely dissolve the structure of a corporation by telling people that they can't be working together, we can always create more output by working together in a structure

Starting point is 00:50:03 one way or the other. I know that this was a very philosophical and very lengthy approach to understanding stocks, but I think it's important to understand the underlying factors of what drives the stock market again over the long run. So just to sum up, if you're not thinking about retiring anytime soon and you're thinking about should I be 100% exposed to stocks if it disregard the current price level. I don't think that you need diversification into other asset classes. All right. So Wendy, thank you so much for submitting your question. If anybody else out there wants to get your question played on the show,

Starting point is 00:50:36 go to Asktheinvestors.com. That's Asktheinvestors.com. You can click on the little recording link there on our website and you can record your question. And if you get it played on the show, like Wendy, she's going to get either our ETF course for free or the Intelligent Investor video course for free, which is a paid course that Stig and I have on our website. She can pick either one of those for getting her question played on the show. And that was the same offer that we have for anybody else out there if you get your question played on the show. You get access to one of those courses for free. That was all that Preston and I had for this week's episode on The Investors podcast. We'll see each other again next week.

Starting point is 00:51:12 Thanks for listening to The Investors podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.com. The Investors Podcast.com. Submit your questions or request a guest appearance to The Investors Podcast by going to www.w.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only.

Starting point is 00:51:38 This material is copyrighted by the TIP Network and must have written approval before a commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP131: Smarter, Faster, Better by Charles Duhigg (Business Podcast)

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