We Study Billionaires - The Investor’s Podcast Network - TIP181: Snap Judgements - a Review of Blink by Malcolm Gladwell (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. So one of the most common characteristics that every investor can empathize with is the feeling and emotions that occur while being a participant in the financial markets. For instance, when the market goes down by 2% in a single day, how well do you manage your emotions? As we previously learned from studying Daniel Kahneman's famous book, Thinking Fast and Slow, people tend to make better decisions when they slow things down and use their rational mind to draw conclusions.

Starting point is 00:00:26 With that said, today's conversation is going to go into more detail. about our quick snap judgments. To learn more about this part of the mind, we read a book by the New York Times bestselling author Malcolm Gladwell, and the name of the book is Blink. This was a fascinating read about what happens in the mind when an individual uses their immediate cognitive thinking to get accurate and sometimes not so accurate results in the way that they interpret the world around them. So I really think you're going to enjoy this discussion about this landmark book.

Starting point is 00:00:54 So without further delay, let's go ahead and get to it. You are listening to The Investors Podcast. where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right. How's everyone doing out there? So Stig and I are here with you covering the book Blink. The subtitle for this book is The Power of Thinking Without Thinking. Malcolm Gladwell is effectively saying that the purpose of this book is to figure out what's going on in the mind in the first two seconds, that somebody is engaged with something new.

Starting point is 00:01:41 If they're asked a question, if they meet a new person, if they have a new experience, the first two seconds, when a person's making that snap judgment, he's trying to understand what's cognitively happening during those first two seconds. So this was a really interesting book. This was quite different than a lot of other things that we've read. I guess you could say that Daniel Kahneman's thinking fast and slow

Starting point is 00:02:04 covers some of this with the fast thinking, but definitely not as interesting of a read. This was way more interesting of a read, and the stories in this were way better than Connman's thinking fast and slow. That was much more academic in the way that it read. I'm curious, Stig,

Starting point is 00:02:22 did you like this read? What were some of your initial thoughts before we start plowing through the stories? I definitely like the book, and I like how he's really looking at, you know, you talk about the blink of an eye, like really snap. I think he called just the snap decision.

Starting point is 00:02:37 about anything or something and how we can use it to our advantage or disadvantage and how we are probably, before reading the book at least, not really considering and not being conscious about how we're using that two seconds, two advantage instead of the opposite. I think that's what I walked away from this book probably more than anything, is just being aware of the fact that I have these snap judgments that happen. And the reliability of those judgments is sometimes really accurate and then sometimes really bad. And I don't necessarily know that I can identify when ones or the other after reading this. Anyway, let's go ahead and start off our discussion through the book. I really liked how this

Starting point is 00:03:19 book started. I think that he had such a strong opening with the story that he told. And what it is is, he starts off by telling this story about the Paul Getty Museum, which is out in California. And this story happened back in 1983. And there's a Kulo statue. This is like, like one of those Roman Greek statues, like the statue of David kind of thing. Now, I'm sure if anybody out there is into sculpting and things like that, you're probably rolling your eyes at my description of all this stuff because I am not the smartest person when it comes to this kind of stuff. But what they brought into the museum was a Kulos statue, and the person who brought it to the museum was wanting to sell it for around $10 million. And so the museum, before they would make the

Starting point is 00:04:04 purchase of the statue, they wanted to do a bunch of research, you know, confirm that it was authentic, that it was real. And so that was like a major process for the museum to undergo. And they had to spend a lot of money bringing in experts to look at it, to do tests on the actual stone, to make sure that it was of the age that the statue was, you know, supposedly from. And so they did all these tests and they went through all this. I think it lasted about a year. And, What they found was all the tests came back that everything was a-okay and that it was what the person who was selling it said that it was. But they had some strange encounters with experts that came to the museum to see the statue.

Starting point is 00:04:50 And in one instance, they brought in some renowned expert in this field of study. And whenever the museum pulled the cloth off of the statue and presented it to him, he immediately was kind of like, there's no way that's real. He just looked at the curator of the museum and he said, how much did you guys pay for this? And the curator says, well, we haven't purchased it yet. And he says, how much are they wanting $10 million? And the expert was just like, good luck with that.

Starting point is 00:05:23 I feel bad for the person that's going to buy that for $10 million because that's not real. And he had seen it for just a couple seconds. and he hadn't even walked around and looked at it, but that was his opinion. And so this really spooked the museum, and the museum was kind of like, what in the world? Why would this guy say this? And he's not giving us anything really quantifiable as to why or anything that is wrong with this statue. So the museum takes the statue on a tour. They actually take it back over to Europe, which is where it originally had come from.

Starting point is 00:05:54 And they brought in a ton of experts out of Italy and had them all come look at it. And the general consensus amongst all the experts was there's no way that thing's real. And what was really interesting was the stone on it was of like the color and like the wear that it probably should have had based off of the test samples that they had done and all this other research on the background. They were looking at the documents and like bank documents from 70, 80 years ago and to confirm all this stuff. but after that tour that they took the statue on and this other round of experts had looked at it and kind of just shook their heads, the museum dug much deeper than what they had done and what they ended up finding out was it was in fact the fake. And the story for me was just really fascinating.

Starting point is 00:06:42 In the book, it does such a better job of going into the details and describing all the story. He really unveils this a lot better than what I just described via audio. but it was a fascinating entry to the book of like, how are these people able to look at something in two seconds and determine whether something's real or not when everyone else is instilling from the Daniel Kahneman thinking slow and they're going through very methodically and proving that the thing is real,

Starting point is 00:07:11 but how are these humans being able to look at it in two seconds and make that determination? And that's at the very end of that opening, he says that's what this whole book is about, is how are they able to make that determination? And it was a very fascinating story to open up. And Malcolm Gladwell tells a few stories about what he would call thin slicing, basically how little knowledge go a long way.

Starting point is 00:07:33 And he's saying that one of the most extreme versions of things slicing you can observe like on a daily basis is whenever you are evaluating the teaching qualities of professors. So basically what they did in this test was that they had the students look at three sets the videos. The first one was just 15 seconds long. And then they have the students evaluate the performance of this professor on how good he was teaching. And the interesting thing was that there was no audio here at all. It was just this guy who had never seen before and just looked at him for 15 seconds. Now, whenever they compared that to the other group who actually had that

Starting point is 00:08:11 teacher, they were exact same ratings. So they said, hmm, okay, if people can do this in 15 seconds, just normal college students, well, can we do that for 10 seconds? And they tried to put 10 seconds and was exactly the same result. And then they even did it in two seconds. And just two seconds, they could evaluate the teaching performance again without audio, just really with a blink of an eye. And that's so powerful. So it's not just as we saw in the first example where it's an expert who's been studying

Starting point is 00:08:42 Greek statues for three decades. it's random college students who has the same capabilities of evaluating whether or not a teacher is good at teaching. You know, one of the stories in the book that I liked the most about thin slicing was the story of doctors that were being sued for malpractice. And it was interesting the way that he said this. He said that if they could peer in on a phone conversation between a doctor and a customer or a patient for just a couple minutes, they had like such a high probability. I forget what the percent was, but it was a very high probability of accurately predicting

Starting point is 00:09:22 whether that person would be a doctor that has a higher probability of malpractice lawsuits or not. And what's so fascinating about this is for a person looking at this from the outside in, they would say, well, you know, how many surgeries does the person do a year? What type of surgeries do they do? Have they had poor performance in the past? with some of their surgeries.

Starting point is 00:09:45 Like, that's where most people would go. But they found that they were actually able to predict malpractice with doctors at a significantly higher rate by listening to a phone call for just five minutes between the doctor. Gladwell talks about the reason people want to sue a doctor is not just because they performed something wrong with the surgery, but because people had an issue with the doctor. And they felt like the doctor was condescending to them or that the doctor didn't treat

Starting point is 00:10:14 them right. That's the person who has a malpractice. And what was interesting, he talks about how some doctors, you know, have a ton of surgeries that don't go well, but they're never sued. And the reason why, according to Malcolm Gladwell, is because the doctor is nice and actually likes and takes care of their patients. But the doctors that are mean and the ones that kind of treat their patients like they're inferior or beneath the doctor are the ones that get sued. And so, they were able to listen to just a short conversation between the patient and the doctor on the phone. And if the doctor was talking down to the patient or talking to them like they're a lower being than him, the probability of that doctor being sued for malpractice was significantly higher.

Starting point is 00:11:02 And so this is a great example of thin slicing of a critical element that leads to malpractice suits, which, believe it or not, was a higher than the doctor's poor performance in the, you know, I mean, I'm sure there's a lot of situations where this scenario is not true, but in a macro perspective, it's actually a much better predictor. And I found that just fascinating. And that's what he's really getting at. And he talks about this idea of looking at what it is you're trying to understand from an angle or from the side. He says, this is a great example of being able to not look head on to why this person is being sued because the surgery was performed wrong, but actually looking at a more critical element from a side vantage point, which is, how does the doctor treat the patient?

Starting point is 00:11:49 How does the doctor make the patient feel? And that he found that that was a much more important characteristic to identify such malpractice. So another example that Gladwell goes into, this was really a neat story as well. So this is a story about a gentleman named John Gottman. He works at the University of Washington, and he's a psychologist there. And he has become an expert on understanding whether a couple is going to continue to stay married or not. And the way that he has conducted this research, this is quite fascinating, is he set up a room with two seats that face each other. And then there's a table in between. And then there's sensors on the seats. And then there's cameras behind the people. So basically you got a camera giving a direct face shot of the one person

Starting point is 00:12:40 and then another face shot of the other person as the two people would be interacting, the couple would be interacting on the chairs. And so he's got sensors to see how they're moving. And then he has the sensors to see how their facial reactions are. And then he's obviously recording the sound. And so he's using all these censorial inputs. And then he's trying to capture a couple having a conversation, preferably an argument for about an hour. And then what he has found that is by watching and looking at his sensor inputs for one hour with a couple arguing, he can predict with 95% accuracy if they'll get a divorce within 15 years. When you think about this, the fact that he's watching an hour conversation and he can

Starting point is 00:13:25 predict something like that with such accuracy, for me is a little scary. And when you hear the story that he talks about in the book, it's really quite fascinating the level of detail that he goes into to detect the way people are interacting and the way that their face changes whenever they're having a conversation. So like one of the conversations that he talks about in the book is he brought in this couple and he said, what don't you guys agree on? And then they said, well, we don't agree on the dog. Like the man doesn't like the dog. The wife loves the dog. So he says, okay, no problem. Just talk about the dog. And I'm going to sort of, you know, capture the information that you guys are talking about, the conversation you guys are talking about.

Starting point is 00:14:05 And so after they're done, he's showing this tape to Malcolm Gladwell and he's showing him where the concerns are down to like every little moment in that conversation, down to like, you see what happened here during these three seconds, how his face reacted to the way that she said this. And that right there where he's raising his eyebrow is very bad. And so what he does is he takes each one of those, let's just say he breaks it down into buckets of one second, he's flavoring whether that one second is a positive reaction or a negative reaction. And then what he's doing is he's summing up each one of those one second buckets. And he's looking at that for the entire duration of the 15 minute or one hour conversation. And then it's basically providing a score based off of those one second buckets that he collected. Let's take a quick break and hear from today's sponsors. All right.

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Starting point is 00:19:09 Back to the show. So just to give you an idea of like the details that he used, he had 27 different emotions on a chart that he used. And he had a number to eat one of them. And so it was not only facial expressions, even though there were quite a a few good ones, like rolling with your eyes, for instance. If anyone is in doubt, that's not a good thing to do to your wife if you're having an argument. So he has 27 different emotions. The face is actually the body language that is easiest to manipulate. And people actually do that

Starting point is 00:19:44 to each other because we are told at least look happy or at least pretend that you, whatever that is. So they also had cameras below the table. One of the most honest parts of your body, that's actually your feet, because your feet tells you what you're thinking. Your feet tells you your mental state. So there was also a different, an important tell. And at the end of a one-hour call, he had as many as 900 numbers on each person in terms of going through whether or not there would be a high risk of them getting a divorce. And just to continue on Preston's point on, what what should you really pay attention to. He had something called the four horsemen.

Starting point is 00:20:26 There was the most important one. There was content, you know, speaking from a higher level. Because it's so close to discuss, it basically is the same as total rejection. And I actually found that very interesting comparing to suing your doctor from a matter of practice because it was exactly the same thing, like being condescending, speaking from a higher level. That's really what gets you into trouble. And it's the same with the marriage. One way you could easily look at something like content is if a person rose the eyes, that

Starting point is 00:20:55 would be one of the easiest science. The next one would be stonewalling. Apparently, this is more men that tend to do that than women. Stone Wong is really what we were getting at before, like not giving in, just saying, I'm right, being completely inflexible. Then we have criticism. Apparently, more women do that than men. And then being defensive, really have all these responses where you're saying, I agree

Starting point is 00:21:19 buts. And whenever you're trying to give in and then still say but at the end and then come with another sense, this typically means that you're not an agreement at all. So for me, this was really an eye-opener, I guess for anyone being married or any kind of relationship with a significant other, it's really interesting to think back on different discussions you had. And it's not only arguments, even though he said that arguments would be a good starting point for analyzing how you communicate together. It's really the pattern of how you communicate regardless if it's a very difficult argument or if it's really your everyday discussion. So 95% accuracy of the awards after just one hour. I mean, for me, it's just, it's unbelievable. He said after 15 minutes, it was 90%.

Starting point is 00:22:08 And just after three minutes, he would give a pretty accurate picture. So I don't know, for instance, where you're like, yeah, I would really like to try this or would you be. be like, I don't know if I want to know this whenever you read that. It's like one of those things. Do I really want him to tell me what he thinks with that kind of accuracy? Now, I found it really fascinating, though. And the one point that you said there that was also really important is whenever one of the individuals in the argument would just say something to deface the other person, like, well, screw you. That is a relationship that is going to have a problem, like in the future, hands down. So I don't know.

Starting point is 00:22:48 know if anyone out there listening has that kind of stuff going on, but that's what we read. In fact, I would highly encourage people to buy this book just to read this section. I think it was really fascinating to hear some of the points that he talked about. And this is right at the very beginning of the book. I think this is what in the first chapter. It was pretty interesting stuff. So the next story that I found really interesting in the book was the story about a surgeon. His name was Brendan Riley.

Starting point is 00:23:15 and he was trying to discover a better way to diagnose heart attacks in a hospital. And for anybody who works in the medical field, and I'm very illiterate when it comes to anything medical related, so I apologize for those listening if I mess any of this up. But when you think about a person who's coming to the hospital that has a chest pain and has a concern of a heart attack, this is a really risky position for the hospital, Because if they bring the person in and they run a bunch of tests and the person, in fact, did not have a heart attack, it's very costly to the hospital to go through that process. It takes up a lot of time and effort.

Starting point is 00:23:57 It maybe distracts from other patients that might need care. There's a lot of pieces here that if they don't make the right diagnosis, it's very bad for the hospital for obvious reasons. On the other hand, if the hospital sends the person home and they, in fact, do have a heart attack or they have the symptoms or a heart attack that's about to occur, that's really bad for the hospital as well. So they're kind of in this situation where they have to be very accurate with their diagnosis. And for Brendan Riley, this was a real passion for him to try to understand what is the checklist that I could develop that really kind of asked the right questions and gets really. high accuracy in a short amount of time, but doesn't overburden things. And at the end of all this, Brendan came up with a three question checklist out of all the things that you could think about

Starting point is 00:24:52 trying to understand, like, how old is the person, what's their history for heart risk, you know, like all these different things that could come out. None of those things were included in his checklist. In fact, this is his checklist. Number one, is the pain felt by the patient unstable. Number two, is there fluid in the patient's lungs? And number three, is the patient's systolic blood pressure below 100? Those were the three questions, and that was it. And he says, let's do this. For each person that comes in, they're going to do the checklist of three that Brendan Riley came up with. And then the doctors are also, the other doctors are going to do whatever method they were doing before. And then they're going to compare the results after,

Starting point is 00:25:34 I think it was one month that they tested both of the systems. And what they found after a month was that Brendan Riley's three question checklist was 70% more accurate compared to the method that other doctors used. And it was safer because it didn't involve any precursor surgery or anything like that. Which for me is just mind blowing that something so simple could have those types of results. And kind of as a sidetrack, this reminds me of this professional. or in politics, he has a seven question, I think it's seven or eight question checklist that he asked himself before each election of who's going to win the election. And it's seven questions. That's it. And his accuracy for like the last 25 or 30 years, he's only miscalled, I think,

Starting point is 00:26:22 one election. In that entire period of time, he's been wrong one time. And that's crazy. Because when you look at the probabilities of what all the pollsters and things would have been saying, so maybe there's something to this. And it's quite fascinating. And this goes back to what Malcolm Gladwell was saying that we discussed about earlier, which was this looking at the critical element of what's happening kind of from a side angle and like a split second judgment based off of these really simple questions. Stig, I'm curious how you kind of read through this example.

Starting point is 00:26:57 Yeah, I think there are so many built-in problems to this story. And it's really not my way of saying that the healthcare system in the U.S. is broken or anything like that, even though that Preston is smirking now. I'll say it is. But just for instance, to begin with what you talk about, you know, my practice, as it turns out, only 10% of the people who came to Cook County Hospital had a heart attack or had a true heart disease. But of course, you don't want to send someone home, like if there was something.

Starting point is 00:27:32 wrong, you don't want to be sued or anything like that. So you just admit a lot of people, which basically means that if you meet everyone, no one will get the right treatment. And I think what really stood out for me was how more tests didn't help at all. Problem one, more people died. Problem two, it was more expensive. Problem three was that the doctor felt more comfortable, having more information. And that also meant that they had a really hard time changing their mind because now they had all these tests and they felt so certain in their decision to do plan A instead of plan B

Starting point is 00:28:11 that it was a huge advantage to the patients if they were not diagnosed correctly, which again would lead to problem one and two, like die and they need additional treatment, which would be more expensive. But it really also goes back to being human, I guess, in the sense that think about if you're a doctor, think about you spend so much money and so much time studying and getting experience. And I don't know if you feel like you master your craft, but I think like if I was a doctor and I spent so much time and money coming to that place, why would I feel comfortable using three simple questions that, you know, I guess more or less

Starting point is 00:28:54 everyone out front of the street can do. Why would I not trust my own decision and follow my own guidelines and make my subjective doctor decision? I mean, otherwise, I would just feel like I'm a robot in a system one way or the other, following this simple decision tree. So, this is not my way of having a rant or any bad experiences with doctors. I think it's also more more an ego thing, more just being human being, like, why would you use a system like that? And I can't help to relate this slightly to stock investing in the sense that simple being better. I'm thinking, you know, using something as simple as these three questions, you know, it kind of relates to quantum investing for me, like something very, very simple that everyone can

Starting point is 00:29:41 basically do if they understand what's behind it compared to, you know, an individual investor, you know, a doctor coming up with an individual assessment, you know, reading through all these data, watching all there is, all the documentaries were not about this company. And you feel this is the best pick ever because I have so much knowledge. But that stands to reason that symbol is typically better. And if you have a formula that proven and the works, why would you go through all the hoops of the other thing, just pinning yourself into a corner? And I know this may be lame that I'm talking about how to tag event transition into a discussion about stock investing, but it's more how do we make decision and how do we avoid the human bias in the decision

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Starting point is 00:33:52 Yeah. And this is exactly how I thought of it whenever I was going through this too, was whenever I come back to investing, how can I develop a checklist or something that makes things easier but is also all-encompassing that other things are nested underneath of those really profound questions or those points that I'm trying to understand. And so when I look at this as an outsider that has zero medical knowledge whatsoever, and I see that they're just three questions, it seems really too simple to just ask those three questions.

Starting point is 00:34:20 But I guarantee you, there are so many nested thoughts and ideas that are underneath of each of those three questions that it's way beyond what it looks like. on the surface. And whenever I think of a great checklist for investing, I think that that's also something that a person needs to think about in the way that they're developing their approach. Preston, if you ask someone like Toby, he would say that he just need one question. He just say, what's the lowest multiple on this exact formula? Then I'll just buy them. And I won't do an individual assessment because whenever we test that, people can't do that. It's just too hard. So it's just easy just to trust that one multiple.

Starting point is 00:35:03 That's it. That outperforms. I think that really makes you humble regardless if you're a great investor or a great doctor. It might be similar than you think sometimes. Well, and I think you go to Warren Buffett and people say, you know, how long does it take you to figure out what the value of a company is? And he says, I can figure out what I think the intrinsic value is in a minute. I forget what the exact quote is, but it's like a couple minutes, right? It's not very long at all.

Starting point is 00:35:27 Yeah. He's doing something very similar. And it's definitely not to put doctors or investors on display because as a patient, wouldn't you rather have your doctors, you know, taking you through six tests? And that would probably give you a sense of security and safety that, oh, now they know everything there is to know about me, so now they will make the right decision. Just like you would like your money manager to scan the market now second for second, so you're exactly sure you would get the very best stock for you, even though that might not be

Starting point is 00:35:57 really what you need. there's just also many similarities between those two. I think it's Einstein with the quote, make things as simple as possible but not any simpler. Yeah. You look at this and for this example, it works. But for other times, people might be trying to simplify things too much

Starting point is 00:36:16 and they're missing just a ton of important details that need to be incorporated. But it was an interesting story. It was an interesting point that was laid out in the book and it definitely makes you challenge some of the way that you view things. and maybe over-complicating things. So up to this point in our discussion, at least,

Starting point is 00:36:34 Glow Well is basically talking about all the pros of how a person can look at something in a very short amount of time from this outsider's kind of angle, not looking at it head on, and being able to make a determination on something that's very accurate and gives them very good insight.

Starting point is 00:36:53 The second part of the book is just the opposite. How do we come up with these snap decisions that sometimes work against us. So one of my favorite stories, not just in this book, but in general, that's the story about New Coke. To me, it's just such a fascinating story of how can so many people be wrong? And if you're listening to this and you're thinking, how is that related to blink and making snap decision?

Starting point is 00:37:20 It's because the way that this was tested, whether or not people like Pepsi, like it was, or Coke was that they were doing blind testing and they were doing like a few sips of a Coke. So back whenever they tried this, this was in the early 80s. They realized that 57% of people preferred Pepsi compared to Coca Cola in the blind test. And clearly this frustrated Coca-Cola great deal. So they were trying to come up with a new formula for a new Coke to make it taste better. And what they realized was that they needed to make it sweeter. So they decided to make Coca-Cola sweeter on a test basis. And this was a very, very thorough test. They actually asked more than 100,000 people to go into a lab of some sort. They might be stopping people in malls or

Starting point is 00:38:15 whatnot, and then take them into a room and doing blind test, and then Chris them whether or not they liked the Pepsi or the new improved Coca-Cola. And, you know, they're doing blinders. And And finally, in September of 1984, it came up with this final version of what they called New Coke. And across the board, more than 100,000 people were asked. 7% more now preferred New Coke compared to Pepsi. The CEO even called it the surest move Coca-Cola ever had done in history. And that's when you know it's going to fail. So people who remember this or guess in my situation, people have been told this.

Starting point is 00:38:54 story, you know, talks about how people just went crazy and not in the good way, going crazy because of the new Coke and everyone was just so displeased. People more or less feel betrayed that the Coca-Cola company was taking away their favorite drink. And now people are starting to look back and saying, how could they just be so wrong? How could people prefer the new Coke, the taste of New Coke, but not actually when they started to manufacture this and start to market it. And there were quite a few reasons for this. One of the most important ones was the sip test problem, which is a problem both for soft drinks and also for the music business. So this is the thing. Whenever you get just a sip of Pepsi, it's better because it's sweeter than

Starting point is 00:39:46 Coca-Cola. But you don't drink one sip of a Pepsi. Or you don't drink one sip of a Pepsi. Or you don't drink one sip of Coca-Cola, you drink an entire bottle. That's the first part. The second part is you need to account for the environment. So it's not as whenever you're drinking whatever you are, it's not like you're sitting in a lap. That's not how you enjoy your drink. You're doing that with your friends, you're doing that in your front of the TV. It's a different experience. It feels different. It feels different when you drink a bottle of Coca-Cola in your own home. So whenever you ask people for polls, you need to put them in the right situation. So a lot of music has done really good in SIP test laps. But that's not necessarily the musicians who do well. You need to put

Starting point is 00:40:34 people into the concert to give them the experience of the music, to give them the experience of the Coke, if you might add, before you can really do a poll on what works and what does not work. I'm curious to hear your take on this. Well, and I think where it fits into what Malcolm Gladwell was talking about was when the two seconds is a bad decision point for a person. And in this case, you know, Coke didn't even believe that, you know, when Pepsi started airing these commercials that in a blind taste test, everyone prefers Pepsi. So Coke went out and started testing it themselves. And they found out that everyone prefers Pepsi over Coke in a blind taste test.

Starting point is 00:41:13 And so they're like, we've got a problem on our hands. And that's why they went after this whole new Coca-Cola drink. And so what Gladwell is really getting at is that two seconds was not representative of what the truth was, which is you have to drink the whole can before you can make a determination whether you like it or not. And when you drink the whole can, too sweet necessarily isn't a good thing. So I found it to be a really interesting example that he used in the book. And it's something that I think everyone can relate to. And I know there's a lot of people out there that say, I can taste the difference. And I think for some people, they can. But it was an interesting story. liked it. All right. So that's kind of our summary for Blink. There's a lot of other stories in this book. If you liked some of the stories that we were talking about, the whole book's just littered with stories like this. I think this is well worth your time to read. I found it really to be fascinating. The one thing that I can say that, I don't even think this is a negative, I just think it's really hard to maybe change the way you make your snap judgments. And I think Gladwell even

Starting point is 00:42:13 makes this argument in the book is that maybe this isn't something that we do have control over. Maybe this is just something that your subconscious spits out whether you like it or not. And sometimes it's useful and sometimes it's not. I would argue that that's kind of his point in the book. But I think that some of his discussions are really interesting to hear. And I think that that's the real value in the book is to hear those. And then just to be kind of aware of the fact that sometimes it's really useful and sometimes it's not. All right. So this is the point in the show where we're going to play a question from the audience. And this question comes from Brian. Hey, guys, huge fan of the show.

Starting point is 00:42:48 I have a question for you about commodities. Preston, I recently reached out to you on Twitter for a recommendation on books about commodities, and you pointed me in the direction of Jim Rogers. I'll be honest, I didn't really know that much about Jim Rogers that I picked up his book, Hot Commodities. Absolutely loved it. I'm going to continue to follow Jim very closely, especially over the next couple of years. In applying the knowledge from that book, one key point in Hot Commodities is that a lot of the commodity indexes out there tend to be extremely concentrated in oil, energy, and precious metals.

Starting point is 00:43:21 And what Jim points out in the book is there's a lot of other great commodities out there and being more diversified is a good thing to do, hence his RICI indexes. So in trying to go out into the marketplace right now as a retail investor with a five-figure or small portfolio, ETFs are really my best option. So I've been looking at RJA, for example, but there's one problem I'm running into there, and that is it's an ETN. So I wanted to first get your thoughts on the safety of ETNs and do you use them?

Starting point is 00:43:53 How do you approach the risk of delisting and things like that? And secondly, what recommendations do you have for getting into broad commodities for a retail investor like myself? Love your show. Keep doing what you're doing. Thank you so much. All right, Brian.

Starting point is 00:44:08 Fantastic question. I'm going to let Stick go first. So I really like your question about ETNs because I think it's something that really having covered. We primarily talk about ETFs here on the podcast. And those two are very similar in the sense that they're both designed to track an underlying asset. And it's typically very popular because you have a lower expense ratio than active men's funds. Now, the main difference between the two is really under the hood. When you invest in an ETF, you are investing into a fund

Starting point is 00:44:40 that holds the asset extracts and then it trades that. With an ETF, It's more like a bond. Basically, you are buying an unsecured debt note that's issued by an institution. So just like a bond, an ETN can be held to maturity and it can be born and sold. But you are depending on that institution. So if the underwriter of this would typically be a bank, if they were to go bankrupt or if they get like a credit downgrade, it will affect the price and value of your ETN, which is very different than what it is within ETF.

Starting point is 00:45:16 I think one of the advantages if you do decide to invest in ETNs would be that for tax reasons, sometimes it's better. They hold the fund until it's completely sold out, which is often years later. So you will trigger long-term capital gains tax. You can't be a pain with some other funds with the short-term capital gains tax. But again, that might also be a part of the strategy of that fund that you rebalance often. And that would be the counter argument. And also, another advantage is that doesn't have any track in area because you're basically

Starting point is 00:45:48 buying this basket of whatever it is, say it would be commodities, and then it sold off at the very end. In terms of giving a suggestion or providing a recommendation of what to invest in, I think it's very difficult because I guess I would say if you're not familiar or comfortable evaluating a bond in evaluating credit, I definitely wouldn't go for an ETN. So if you feel comfortable doing that and you like the underlying asset, I think it would be good. If that's not you, I'll probably go for an ETF or another vehicle that's, I guess, to most people, easier to analyze. So, Brian, I completely agree with what Stig just said about ETNs.

Starting point is 00:46:28 I don't own ETNs. I kind of try to stay away from ETNs, just basically for the same reasons that Stig just mentioned. When you think about commodities, at least what I learned from Jim Rogers' book is it really comes down. to supply and demand. In fact, I just had an interview with Bill Miller just past week. And that was one of the things I asked Bill was whenever he looks at whether he's going to buy a specific commodity or not, what's the main thing he's looking at? He said, it's supply and demand. It's all supplying demand when you're dealing with commodities. So really comes down to finding a low-cost ETF for the sector that you're specifically going after that you think that there's a

Starting point is 00:47:06 supply and demand imbalance. I also feel that commodities are a great, place to be if you feel like the dollar is going to be devaluing as far as a macro trend, which is one of my main arguments for why I think commodities in general, generally speaking, are going to do well in the coming year. Whenever you look at the different commodities out there, I think the big buckets are energy, agriculture, industrial metals, livestock, and precious metals. I think those are your big buckets. So if you're finding a call it a pro shares or an I shares, you're ETF in there. Those are probably going to give you the lowest cost, the lowest fees to be in one of those. But again, make sure you go back and you're looking at the supply and demand.

Starting point is 00:47:51 Globally is how I typically like to look at this. What's the global supply and demand and what's things looking like if that's going to continue to persist? That imbalance, if there's an oversupply and under demand and you're seeing that trend continue, then you can position yourself accordingly for that. And I'm a huge fan of the book that you just mentioned by Jim. I think that that's the best commodities book I've ever read out there, just kind of talking about the best way to invest in commodities. I think commodities is an interesting play in terms of a hedge. I mean, if you just look at the returns, you know, just by commodities itself, it's typically not super appealing compared to some of the other asset classes. But it has a negative correlation to long-term bonds close to 0.2 and negative correlation to stocks with closer to 0.27.

Starting point is 00:48:38 So for that reason alone, it might be something you're interested in if you think that those markets are overpriced. And lately, if not, you might take the reverse position. But that's one of the reasons why a lot of really good investors are holding it in the portfolio. There might be good reasons why you won't just say, oh, okay, I just don't want to be as exposed. You might have a lot of capital gains tax. You'll have to pay if you decide to own that stock. So that might be a way to manage your risk. I guess that would be my take on it, that it wouldn't be.

Starting point is 00:49:08 be like a long-term thing to hold for me, but it would be something that underwrite market conditions might be an interesting and appealing investment. I think another important part with commodities is really kind of looking at moving averages and looking at what the trend is for commodities. Stanley Drunken Miller, he often says that commodities move in about three to five-year periods of time. So like if you start getting on a bull trend, an early bull trend with a commodity, historically, those have moved in about three years. It'll continue to move in whatever that direction is. So like when you go back and you look at the last time the commodities market had a big bull run, that was the start of 2007 when interest rates were climbing and kind of, in my

Starting point is 00:49:53 opinion, a very similar dynamic to where we are today. And whenever you saw commodities really kind of melt down, you saw that kind of play out in 2014 through 2017. You saw that. You saw, saw commodities just get crushed. And so I think that you're kind of at a bottom. I think when you look at the price action of commodities, this is also where it's different than stocks, where a stock has a lot more variables to it, where you know, you're trying to figure out whether the competitive advantage of each underlying asset's going to continue to be there, whether the business is moving in the right direction, whether developing new products and the R&D is being properly allocated. Like, you're looking at all these things to determine whether the trend of a company is going

Starting point is 00:50:35 going to continue to outperform the market. That's really difficult stuff. But going maybe to the simplicity of commodities is if you look and commodities you've been punished for the last three or five years, you're probably at a point, and I know this sounds really simple, but you're probably at a point where they're probably getting ready to do really well and probably perform pretty well. Because there's only so much price action that can happen for the price of oil or the price of cattle or whatever it might be. And so I think we're at one of those points in time, I'd say the sector that I'm most excited about in 2018 is commodities, hands down. So, Brian, thank you so much for your awesome question.

Starting point is 00:51:13 Just to say thank you for the question. We want to give you a free course to our intrinsic value course on our TIP Academy page on our website. This is a paid course, but we're going to give it to you completely for free for the awesome question. And for anybody else, if you want to get your question played on our show and potentially get a free course, just go to AsktheInvesters.com, and you can record your question there.

Starting point is 00:51:33 It'll only take less than a minute for you to record. court your question. All right, guys, that was all that Preston and I had for this week's episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to Asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network.

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We Study Billionaires - The Investor’s Podcast Network - TIP181: Snap Judgements - a Review of Blink by Malcolm Gladwell (Business Podcast)

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