We Study Billionaires - The Investor’s Podcast Network - TIP225: Billionaire Peter Thiel Lessons Learned (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. On today's show, we cover a very famous Silicon Valley billionaire Peter Thiel. For people that aren't familiar with Peter, he's a graduate of Stanford University, and after he graduated from college, he started off as a judicial clerk working as a securities lawyer, and he even did some derivatives trading at Credit Suisse before starting his own capital management company. But then in 1999, he co-founded a little company called PayPal, and he was the CEO until the sale to eBay in 2002 for 1.1.1.

Starting point is 00:00:30 $1.5 billion. After the sale of PayPal, Teal started a big data analysis company called Palantir Technologies, and he also became the founder of a venture capital firm called Founders Fund. With this firm, Teal became Facebook's first outside investor when he acquired a 10% stake for $500,000 in August of 2004. Peter's personal net worth today is about $2.5 billion and he remains active in numerous tech businesses. So on today's show, we cover a few of the more interesting questions that Peter's responded to lately, and we're really looking forward to digging into some of his responses. So without further delay, here's our episode covering Peter Thiel. You are listening to The Investors Podcast, where we study the financial markets and read the

Starting point is 00:01:17 books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, welcome to The Investors podcast. I'm your host, Preston Pish, and as usual, I'm accompanied by my co-host, Stig Broderson. And like we said in the introduction, we're going to be covering everything Peter Till today. For people that don't know Peter, he was an early investor in Facebook. He was asked a question in reference to his early investment in Facebook. And he was asked, why you should have a specific strategy for your business and stick to it. And this is how he responded. A tremendous amount written in the last number of years about Facebook and the crazy Facebook history. But I wanted to talk about one anecdote from the development of the company that I

Starting point is 00:02:06 think was quite important and that it's worth reflecting on a little bit more in this question of how one builds great businesses. Was it just, did they stumble on this thing and it happened to grow? And I think there was certainly some serendipity and luck around it. But I also think there was a tremendous amount of foresight that I got to see firsthand in the company where already in the summer of 2004, there were ideas about how they wanted to build things out and how they envisioned this completely transformative social network that would be built over many years. Aspects of it varied and changed over time, but in many ways, the outline of something much bigger was already envisioned near the very beginning of the company when I started to become

Starting point is 00:02:48 involved in the summer of 2004. When you have a company that gets started, they often have a PowerPoint presentation. They will have a slide where they describe what the business is going to do. And you have one type of company where it's well, we can do many different things. We can do A or B or C or D or E. And you have a company where it's, we are going to do A. The company that says A through E is always worse than the one that just says A, even though mathematically the opposite should be true.

Starting point is 00:03:14 Mathematically, you'd say A through E has to be better than just A. But when you have A through E, it means that you've not really thought through any of these things very well, and probably they're all kind of bad, and they have not been thought through well. Whereas if you have a specific idea, it's a plan you can work against, coordinate against, measure yourself against, and try to improve. I used to play chess scholastically in junior high school, high school in the US, and sort of one of the intermediate level chess things. You initially learn how to move the pieces and combinations and how to get to checkmate and things like that. But sort of one of the intermediate level

Starting point is 00:03:47 things you learn in chess is that it's always good to have some kind of a plan. Even if it's a bad plan, it's something you can measure yourself against versus having no plan at all. So what are you trying to do? You know, something where you create options for many different plans is an anti-plan. It's a way, in effect, to avoid thinking about things. The education question that alluded to in the opening comments that we've come to think about is, I'm very much in favor of education. I think it's important. I think learning is important, but I think it's also very important to ask why you're learning, what is it for? And one of the strange paradoxes in the United States and many other countries is that education has

Starting point is 00:04:23 become increasingly a status-driven credential, where you simply get it in order to get other things and it is I think the purest version of the indefinite future and you can think of things like going to business schools maybe the most indefinite version of education where why do you go to business school in order to become a businessman what sort of business doesn't matter if you had a specific idea that would actually be seen as a bad thing because that would be like you were too narrow too focused and so we just create all these people who have these very general backgrounds and you end up with this paradox where what do you do at the end of your high school years don't know, you go to college, what do you do at the end of your college years, you don't know,

Starting point is 00:05:03 you go to graduate school, what do you do at the end of your grad school years, you don't know, but you get some sort of job, not a job you want to do for the rest of your life, or that you think is important, but one that will be good for your resume and will help you in some somewhat poorly defined way in the future. I was teaching a class at Stanford this last quarter, and I spent one day meeting with about 30 students, 20 minutes each, giving them career advice. It was in the law school context, but I think this is a lot of, very representative of the thinking in many of these places. About two-thirds of them

Starting point is 00:05:32 planning to work at major law firms, not a single one planning to become a partner, not a single one really excited about it. It was just, this was what you did to build your resume, and then it would sort of be this mechanical process where you did not think about the future, and it would just sort of gradually unfold. And I think this is the question about education that's gone wrong, is that it's become paradoxically a way to avoid thinking about your future. You learn certain broadly applicable things and then you just adjust as things go on. And so I think this idea of having too many plans, too many options has often become a way to avoid thinking very carefully about a specific plan or a specific option or what you will do

Starting point is 00:06:14 with that. So, you know, the thing that I've noticed about Peter Thiel is he's always inverting. He's going back to the Charlie Munger quote, you know, if you can't figure something out, invert and see what you get then. It's kind of neat to hear his perspective because I think if you asked 100 people what they would expect to hear out of Peter Thiel as to the first comment as far as having a business plan and kind of having three or four or five different strategies in order to meet your end state, I think most people would say, yeah, that sounds like a good idea. And then he comes out and says that what he's found in his investments is that one path is the best way to go. It just kind of flips everything on its head. So do I agree with everything

Starting point is 00:06:53 that he said, I definitely agree with his comments on education. I will say that. I think that his comments on the venture capital stuff is more based on confidence. My personal opinion, I think that when a person says this is what we are going to do, it demonstrates a confidence level in the person, the venture capital person that they are going to achieve this and that they really don't have a shadow of a doubt that they're going to achieve it, opposed to a person who would go in and say, well, we might do this, we might do that, or we might do this over here. That person doesn't have any idea as to what the market forces are driving them to. And I think that maybe that's a little bit more of what he's getting at than saying that you should only have one path forward. I think you should

Starting point is 00:07:39 have ideas on how you can still shape things in order to achieve your goal. It was interesting what you said about Peter Thiel's reflection there about the businesses. I think you can look at these different ways, and he specifically mentions Facebook and how they had this dead set plan of how they should change the way we interact together with this huge social network. I think it's also important to make this distinction between the very biggest tech companies and then entrepreneurship in general. If you are a Silicon Valley company, you are living off the networking effects on something like Facebook, and that's how you're going to grow. it has to be big. Either it's big or it's nothing. That's the Silicon Valley way you're thinking. It also

Starting point is 00:08:24 has a lot to do with the way that money is plowed into these companies. Either it's going to be a massive success within those seven years that a venture capital fund would typically run for before it's closed down, or the attorney is that it will go bankrupt. And that's okay too in a way as long as we have those big winners. If you want to increase that volatility, so you will get those outliers like Facebook, then yes, you're having one plan, and that's the vision, we're not going to change anything. That is the one plan. And if that's not going to work, it's just going to fail anyway. I think that mindset probably works in the valley. I think for all other entrepreneurs, I think it's a horrible way of conducting business. The way most entrepreneurs think is that

Starting point is 00:09:06 they like the lifestyle. They are probably also passionate about a project or a product, a service. They would like to make a living, a decent living out of having their own business. And I think if that's the way you approach business, why not have business plan A to E? I just think it's very important to make that distinction. I think it's important for people to realize his comments are coming from a venture capital investment point of view. So if you go in there and you're listening to a pitch from a company to do another series round of investing, you've got to understand what you're listening to. So you're listening to a company who A, doesn't have enough earnings power to take care of themselves.

Starting point is 00:09:45 Like, they're going to go bankrupt if they don't get this round of funding. So then the question quickly becomes, okay, so what in the world are you going to do with all this money I'm about to give you? And if there's not a really clear path that says, I'm going to take your million dollar investment and I'm going to do X, Y, and Z, that's where these guys are looking. They're looking for something that is very direct. Like, this is exactly what we're going to do and this is how we're going to achieve this. And then after that happens, this is the next thing that's going to happen. And when people talk in those terms to a venture capitalist, the venture capitalist gets very excited because they see it as a very high probability event. Whereas if he's going in there and he's listening to a pitch and the company saying, well, you know, we might do this and we'll bend some of the money here and we'll probably keep some of this in reserve.

Starting point is 00:10:32 And I mean, they're just kind of talking all over the place. That's where I think his comment is more directed toward. Just a quick comment to that, Preston, because I was just reading Reed Hoffman's Blitzscaling book as, as some, Some of you might know PayPal was founded by Peter Thiel, and he then merged with Elon Musk into this PayPal company. And Reid Hoffman was then the CEO-O. And they made this decision that they should give everyone $10 that they can just send away for free to a friend as long as they were having a PayPal account.

Starting point is 00:11:02 And obviously, this is not a profitable strategy. But the intention, the goal behind PayPal was that everyone should use it should be a common payment standard. So this was just a way of marketing yourself really, really fast. And this was the only plan that they had. This is the thing that needs to be done. And if it doesn't work, then it's not okay. But then, okay, we'll go bankrupt.

Starting point is 00:11:24 That's it. We'll start another company. But then if we succeed, then PayPal will be massively successful. Just to give some peace and context to whenever you hear someone like Peter Thiel talk about having only one plan, that is where it comes from. 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

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Starting point is 00:15:46 Back to the show. So on the next question that we're going to play, Peter was asked, what is the importance of visionary founders that can articulate the mission of the company when it has no employees? And this is how he responded. Many, not all cases, they are quite good at articulating it, which is actually a fairly unusual combination. So you often have classical engineer tends to be very introverted. In many cases, these are people who are technical, scientific engineering type people who happen to be rather eloquent at articulating it.

Starting point is 00:16:17 Because one of the things that is very important in building these things is, you know, they don't exist on day one. And so you have to actually motivate people and you have to convince other people that this is a really important thing to work on. I think this is one of the subtle things that's really valuable about the sort of the breakthrough technology, doing something unique. different that's not been done is it is so much better at motivating people. And again, you can sort of debate how big this is, but one of my friends, Adam D'Angelo, started this company called Quora a few years ago, which is sort of a new search engine. And it's a hard, interesting problem, and there's a story around why this is a very important kind of a problem. Whereas if you're starting the

Starting point is 00:17:01 nth social networking company, it's why should you work for this company rather and the next one, why are you actually making a difference in the world? You want these things to be successful as businesses, but it's not the only thing that motivates people. And it's really worth thinking through how these things do not motivationally work. So there are all sorts of businesses that I think are possibly quite valuable, but end up being very uninspiring, and you end up with this very difficult problem of,

Starting point is 00:17:28 if you're starting them, finding a very hard time attracting talented people. And conversely, if you have something where it's at least interesting, interesting, you have at least have a chance of getting sort of a critical mass of a very talented people. This was very true of the genesis of the really great businesses. I think Google is still in some ways a very inspiring example, but the first 30 people at Google were unbelievably impressive. And then they somehow were able to maintain this for the next 300, you know, to some extent, for the first 3,000 even. And I think it was in part because, especially Larry Page, it was very good at just articulating this vision of how, you know, the most important problem in the world was organizing the world's information. There was much more

Starting point is 00:18:11 information than people knew what to do with. And so Google was working on sort of creating this universal library that was the most important problem to solve at the end of the 20th, beginning. of the 21st centuries. You may or may not agree with that, but that was a good way, an important way to drive this. You know, it's funny he says that because I would never imagine the pitch to an early employee at Google being what he just described. I really like the way that he said that. Stig, I'm kind of curious to hear your thoughts on this one. I really like listening to Peter Thiel because he always thinks so differently about all problems that I hear people talk about. I've never heard someone talk about how to motivate employees

Starting point is 00:18:50 in a company who is going to take all the world but doesn't exist. Our kind of thinking is behind that. To me, that is absolutely amazing. And one of the reasons why I always feel so inspired listening to Peter Thiel. Whenever we talk about a critical mass or a break-even point, we're always thinking about, you know, a small startup. We're always talking about, you know, a restaurant or another kind of company that's set up. You need to have 400 guests per week to break even.

Starting point is 00:19:18 For that to happen, you need to have, you know, so, so many. chefs and so and so many waiters. You know, that's the way we usually think about this. What Peel is talking about is the critical mass you would need to have of employees before you can build your company. We're looking at the world through really the looking glass of Silicon Valley. This focus on having hockey stick growth for those networking effects to start working. Facebook, we talked about before. It has no value if you own a person on the network. It doesn't have a value if there is 500,000 people at the network. You know, everyone or close to everyone has to use it.

Starting point is 00:19:55 And then it makes sense for you to use it too. And for more people coming, it's a stronger and better company. But before all of that, you can't just set that up, just one man down in your basement. You need to have so and so many employees. I never really thought about it like that before. That's also why the venture capital function is so important to have in the business world because you need someone to take those bats that we can change the world. We can do something great.

Starting point is 00:20:24 But we need to burn a lot of cash because this would not be sustainable for a long, long period of time because it needs so many engineers before it could be set up. So I just want to comment more in general about Peter Thiel here. For folks, if you are liking some of Peter's comments or maybe you don't have any exposure to him, he has a book out there called Zero to One. Stig and I have covered it. We'll put our comments in the show notes if you want to listen to that before you go dive into the book. Fabulous.

Starting point is 00:20:51 Really, really good book. There's also another book out there that covers Peter Thiel, and it's called Conspiracy. Fascinating book gets into how Peter Thiel thinks, how strategic he is. And it talks about the whole Gawker, Hulk Hogan thing and how Peter Thiel was involved in the litigation on some of this stuff and the funding behind the litigation. really a fascinating read. I would highly encourage people to read that book. It was a very, very good book. One of the things that came out of the book that I found fascinating was the author talks about how Peter Thiel thinks. One of the things that he talks about is you could ask Peter a question and Peter would think a long time before responding. And then he would say something like, well, you know, this type of person would answer that question by saying ABC, D, EFG.

Starting point is 00:21:43 And then he'd say, but this type of person would probably see that problem differently. And they would disagree with that first response. And they would probably respond by saying this. And then he would give all the reasons why. And what the author is getting at is Peter feels that there's a solution or there's an answer that has an array of different ways to view it. And because he looks at things from such a complex and unemotional vantage point, he's able to really kind of thoroughly understand how things work better than most people.

Starting point is 00:22:19 And I found that little bit of that discussion out of this book, Conspiracy, to be really kind of enlightening. And it helped me challenge the way that I think about things in that it doesn't have to be so absolute. It's actually something that maybe you should take a step back and say, well, let me, let me think about what the person who would disagree with my personal point of view would say. And how would they respond and what would be their reasoning for their response? Because they have a reason. They're not just saying it to say it. They have a reason. I think when a person goes through that exercise, they're going to find themselves being probably more thoughtful and more understanding of the people around them. In the book, they said that he got this approach out of his training because he went to law school. And this is one of the things that they make you do in law school is that you have to argue maybe the side of the case that you don't want to argue. And it forces you to kind of learn how to think this way. But Peter has continued to approach all

Starting point is 00:23:15 problems in his life that way. So I just, I find that really fascinating. I also find both of those books really worth people's time if you want to dig into them. I'm reading this book right now of Ralph DeBelli. The name is how to think clearly. And he goes back to this about having mental models of the world. And how if you're looking at something like, you know, the Second World War, If you have a background in the military, you might be thinking in terms of military solutions. If you have a background in politics, you think what could they have done differently in terms of the political system? If you're an economist, you'd be thinking, why couldn't we have supported the economy better?

Starting point is 00:23:50 And then we wouldn't have everything bad happening in Europe at the time. So it's really about challenging yourself all the time and thinking inadvertently like Peter Thiel is doing. And I think that's also why whenever you listen to him, he can reflect on just a different level than almost any other person you could think of because he has so much empathy and so much knowledge that he can go into the different shoes of so many different people and come up with a balanced picture of the situation. He approaches it from the position that he could be wrong. I think that that's one of the hallmark mistakes that I think a lot of people make is when they get into a discussion and

Starting point is 00:24:26 it's like, well, what do you think about this? By providing their response to what they think, It's almost like they have to dig a trench around them and they have to get in there and then they have to fight and defend that position. where I don't think Peter Till approaches it from that vantage point. I think Peter Till approaches it more from this is a discussion where I can learn something. So he starts off by saying, well, you know, I guess I would think that this would be the point of view that I have. But somebody else would probably argue against that and this is how that argument would go. And he's trying to understand what the truth is by understanding all vantage points. And I think that that's just a way different approach than what I think most people approach are from. And I think a lot of the reasons why people do not approach it. way is probably because some deep-rooted fear or insecurity about being viewed as being wrong and not being viewed as intelligent might be driving a lot of the reasons why people don't approach things that way. And I think when you take a step back and you look at it and you say, well, if these people

Starting point is 00:25:25 think I'm an idiot because I'm arguing with myself or because I'm just throwing out all these different ideas, I think that you just have to have a lot of calm and balance and knowing who you are and being comfortable with maybe being viewed differently to speak that way to think that way. But I highly admire that about him. This next one is an interesting question, because it's something that's extracted out of his book zero to one, where Peter talks about a question that he likes to ask all new job recruits that come into his company. Peter extracted this question from a book that he had read, and the name of the book is Things Hidden Since the Foundation of the World. In this book, Peter learned that,

Starting point is 00:26:09 there are all sorts of secrets throughout the world that have just not even been discovered yet. And that there's people out there that know these secrets, but they just haven't been able to really kind of action them. One of his questions that he asked people when they come in is, what is it that you know that nobody else in the world knows? He usually gets a blank stare from people, but this is interesting because he was asked this question by somebody in the audience of this talk that he was doing. And this was his response. I think the sort of a conventional view is that there are not that many answers left to this question. What's true that nobody agrees with Yon? We believe that all these truths have already been discovered in the past. Maybe there are still some things, but they're just about impossible to figure out. So there are conventions that we understand. There are mysteries that nobody can figure out. I, by contrast, think there's still a lot of things left on an intermediate level.

Starting point is 00:27:02 There are a lot of things that I call secrets, which are truths that are hard but possible to discover. I think there is always a secret at the core of every great business. There's some sort of research program that some area that people are really, really focused on. They think about really hard, and it sort of advances their thinking to the point where they get an understanding about something that other people do not yet have. At PayPal, we were very interested in cryptocurrencies and encryption technology in currencies, and could they be intersected, could you build a new digital currency? This was a question that animated us tremendously. We didn't quite succeed in building one at PayPal, even though we had T-shirts that said

Starting point is 00:27:41 that we're going to be the new world currency. We didn't quite succeed in that goal. But that's sort of an in-depth, substantive focus actually did help us think really hard about how do you architect a new payment system, how do you do certain things differently, and it was a key part of inspiring us. I think there are sort of many secrets left,

Starting point is 00:28:00 and this is something we generally do not understand. It's not obvious where one should look. If you were living in the 17th or 18th century, you could look at a map and there were empty spaces left on the map, and you could come an explorer and go and discover those places. So there was sort of a natural geographical sense in which there were secrets left. Or in the 19th century, there were still places

Starting point is 00:28:21 in the periodic table of elements that were empty, and you could sort of do some basic chemistry and find some secrets. And there's sort of a sense that maybe basic chemistry and geography sort of fields that are closed, closed. But I think most fields are not like that. I think most fields are still ones where there's tremendous amount of innovation possible. Certainly this is true in the computer field where we've seen a massive innovation in recent decades in the world of bits, computers, internet, mobile internet, that whole ensemble. I think we've seen less innovation in the world

Starting point is 00:28:53 of atoms, transportation, energy, clean energy, biomedical, biotech, space travel. all the kinds of things people thought about in the 50s and 60s. I think it's not because there's some law of nature that it's hard to innovate or impossible to innovate in these areas. It's just that there's sort of been this cultural change where you haven't tried as much. And there's a lot of this has a self-fulfilling character. If you think that you can't find a secret, then you're not going to try and you will not look and you will not be a person who ever finds one. Failure, pessimism can have a self-fulfilling character as conversely, if you think there's a lot to be discovered, progress can accelerate and more, more things

Starting point is 00:29:31 can happen. So second sort of contrarian truth that I believe to be true is that there actually are many secrets left to be discovered. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across

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Starting point is 00:33:03 Another amazing clip here with Peter Thiel. I'm just amazed of how he's thinking about things. You know, in this day and age, and you would think that innovation has just taken to new heights with everything that's been going on. He's like, no, not so many things. You know, we can just look at Adams. Adams haven't really been as innovative as we used to think them. I would like to talk about this clip and PayPal that he also mentions in this clip, how Peter Thiel in many ways felt that he failed with PayPal. To me, this is very interesting that he actually originally set out to find a secret, as he would call it, behind banking, that this could be done differently, not even just having your own online payment system, but also inventing your own cryptocurrency,

Starting point is 00:33:51 You own money that everyone could use and then mitigate the fees and all the problems you have with banks. And I think today, perhaps also because of Peter Thiel, that idea sounds less normal. You have all these ICOs out there and it doesn't seem like a big deal to have those thoughts. But back in the days, you know, very, very few people, if any, were really thinking about this and really considering this. To me, that's an example of a secret that just haven't been discovered yet. Yeah, what I find fascinating is it just shows you these guys understood the power of encryption back then. And they understood that encryption would be the gateway to allow a digital currency to exist. But they just couldn't figure out the breakthrough, which was really blockchain technology or some type of technology that enabled the encryption to allow a unit that can't be copied or pasted on.

Starting point is 00:34:48 a network so that if you create a thousand units, only a thousand units could be exchanged. That's what the blockchain technology stuff kind of really was the breakthrough on, is that you can do that. And it seems to me like these guys understood that encryption would have enabled that. They just couldn't crack the code on how they would implement that or make that real. Perfect example with him, understanding that there's these secrets out there that they can uncover. It sounds like they were on to something, but they just didn't get there on it. I think the most important thing that he said in all of that was there at the end, he talks

Starting point is 00:35:21 about your perspective and your attitude. If you think that there's things out there to be discovered, then your probability of actually finding them are probably way higher. But if you have this negative mindset or you have a pessimistic view on it, you're probably not going to find anything. I just find that across all the things that Stig and I study all these books, like that is just such a common theme. is just your perspective and your attitude because I've been on a big kick of reading about the brain and things like that.

Starting point is 00:35:52 And what's fascinating is how your brain pushes things into its subconscious. You learn something and then when you go to bed at night, you're dreaming and all this stuff is getting pushed back into your subconscious. And the way the brain is kind of functioning is what you continue to tell your brain is what it is then pushing into the subconscious. So if you're walking around all the time with this negative attitude, oh, this sucks or, oh, we can't do this. What's actually happening is you're flavoring or you're coloring the way that your brain functions inherently because your subconscious is driving so much of your daily activities. Now, if you do the exact opposite and you're always thinking of things in a positive way and you're saying, I can discover something new, I can do this. And you keep pushing all of those thoughts and those ideas back into your subconscious and you do this. for years on end, that will have a tremendous and profound impact on who you become. And it's not

Starting point is 00:36:49 something that you even realize is happening. It's all happening at the subconscious level. So he says that at the end. And I think that that is just a real nugget that he just kind of slipped in there as if it was nothing. But the more that you think about what it is that he's talking about and how insanely difficult it is to identify something that no one else in this world has identified or that very few have identified, you have got to approach it with that kind of mindset. You're just dead on arrival. One example of this, going back to this crypto discussion, perhaps as some of the listeners know, Peter Thiel was one of the first major figures that invested in Bitcoin. And he did that in the early days. I've read an interview with him that was very recent,

Starting point is 00:37:30 that he still felt that there was probably an 80% chance that Bitcoin would be worthless. Whenever he did wait that outcome with the probability of him being right, or if that was, I would say a secret that was about to be revealed, as he would probably say based on this question. It was just such a good bet that there was no reason why he shouldn't do it. And I think that tells you so much about how he thinks about things, that he's thinking as a contrary investor, knowing that he's most likely wrong because very often the herd is right to some extent. But if you can pick the places where it's not, and if you have a good model or multiple models to figure out where the herd is wrong, that's really when you can make money as an investor.

Starting point is 00:38:13 grow as a human being. Next question. This is the last one we're going to play. Peter Thiel was asked, do you worry about artificial intelligence and what it'll do to us and our ability to earn a living? And this is how he responded. I'm of the view that strong AI is still quite a long ways off. You know, if we ever were to get artificial intelligence, if we were ever to build computers that are as smart as human beings in every way, this would be a momentous event. This would be, you know, it would be as significant extraterrestrials landing on this planet.

Starting point is 00:38:45 And, you know, if aliens landed, the first question would not be about the economy and what does it mean for your job. The first question would be political. Are they friendly or are they unfriendly? I think to even frame it as a question about jobs is to understate the importance or seismic nature, AI would represent. I think short of strong AI, however, I think people are way too worried about computers in this economic sense. I think we live in a financial and a capitalistic age. I sort of argued elsewhere that I think we do not live in a scientific or technological age. And most people in the U.S., Western Europe, really don't like science. They don't like technology.

Starting point is 00:39:23 They're biased against it in all sorts of ways. It's true of people. It's true of the politicians. It's true of the governments. It's true of the culture. The easy way to see this is you just look at all the Hollywood movies that basically show technology that doesn't work that kills people. It's destructive.

Starting point is 00:39:38 that you can choose, whether it's The Matrix or Terminator or Avatar or Elysium. I watched the gravity movie the other day. You'd never want to go to Mars, even to outer space. You'd be much happier being back on some muddy island somewhere on this world. And that reflects the sensibility of most people that the future is something to be feared that we should try to prevent. And that's why I think people who are involved in the scientific or technological worlds are the counterculture in our society today.

Starting point is 00:40:06 It's sort of a very unusual perspective to think that the future is something you hope for. So roundabout answer, this idea that today's computers are replacing people is just another one of these technological onksd narratives we have. I think it's not true. I think computers and people are fundamentally different. They're good at really different things. They're fundamentally complementary, not substitutes. The much bigger challenge for the middle class in the developed world comes from globalization because people in India, people in China, are actually not that different from us. They can substitute for our labor, and that's where the substitution is taking place.

Starting point is 00:40:42 I don't think we should stop globalization, but it has some problematic aspects. I think technology has far fewer. So that's a pretty interesting perspective. I don't know that I agree with him completely on the technological piece there, but I do agree with him on the globalization thing at the end. I think that he's exactly right that a lot of the jobs that are being performed here in the United States can absolutely be performed elsewhere. I'm not saying as an American that I necessarily like that outflow of capital from our country,

Starting point is 00:41:11 but I agree with him on that point of view that that is something that is very real and a threat to the way that the U.S. is going to continue to progress. I think that when you talk about the technological impacts, I immediately think driverless technology and what impacts that's going to have to the transportation here in the United States. And I think that that's going to be a fairly devastating event in the next 10 to 20 years as far as that displacement of drivers from Uber to all the truck drivers to all that stuff. I think that that's going to have a major disruption. I guess I just, maybe I'm too negative. But I guess I see it a little bit differently than him. Now, I'll caveat that with, he is much more attuned to what in the world is happening in Silicon Valley than I am.

Starting point is 00:41:58 That's for sure. So you probably want to default more to his comment than my own. I would like to talk about fear and his comment about fear, how we are afraid of the new technology that's coming. I'm currently reading this book thinking clearly. The author talks about how we are programmed as human beings to fear change and to fear what is unknown. And the reason for this is that we used to live among animals and other things that could kill us. and being afraid was a matter of life and death, people who are cautiousness also survived and they passed on those fear genes to us.

Starting point is 00:42:39 Now that we live in a prosperous and safe society, at least a lot more than we have in the past, we still are wired to be afraid. One way to look at this is imagine looking at a picture with 10 angry faces and one that's smiling. You almost don't see the smiling face. And then if you look at a picture with 10 smiling faces and one who's very angry, you notice that person right away. And the attention of what Peter Thiel is saying and also the takeaway from the book is we shouldn't be afraid.

Starting point is 00:43:11 We should rather embrace the changes, embrace innovation, even though that is unknown. It really makes me think of the episode we did do some time ago with Jack Ma, where he talks about his father generation, They work 16 hours a day and they were very busy. His generation, they work eight hours per day and oh, we're so busy. And then his children's generation where it's going to be three hours per day because of artificial intelligence. And they're also going to say that they're very, very busy. But if we think about it, the quality of our life because of those technological changes, they're for the greater good.

Starting point is 00:43:49 They are across the board, good for mankind. I guess that was my takeaway here from this clip. We shouldn't fear the future because machines and the people are fundamentally different. All right. So this is the point in the show where we play a question from the audience. And this question comes from Santos. Hi, President, Steve. Today I had a question about the Treasury yield curve.

Starting point is 00:44:12 Warren Buffett has mentioned several times that understanding interest rates is critical for investing. I believe Treasury yield curve is one of the important factors in understanding the interest rates in general. I've heard from you both that flattening or inversion of yield curve has historically been a signal of bad times to come for the stock markets. I wanted to understand why having high interest rates for short term compared to long term is bad for stock markets and how much importance should we be giving to the yield curve as value investors. Thanks for all the great work. Okay, so I think it's important for people to first start off with the idea that if you do have a flat bond yield curve, it doesn't necessarily mean that you're, going to have a recession right then and there. I think you could go back in the time and see different periods where the bond yield curve was flat and the market continued to run for a year

Starting point is 00:45:03 to three years when it was in that condition. It's one point that you need to look at in an array of many points to try to understand where you're at in a credit cycle. Now, think of it from a business's perspective. If you're a small business and now the rate that you have to lend or borrow money and businesses are highly reliant on short-term borrowing. So they need to go out, they need to borrow money in order to pay for a bill and then they pay that off 30 days later or 60 days later or whatever. And so this short-term lending market is very, very important to small businesses. And so if you're a small business and all of a sudden that short-term borrowing interest rate becomes higher than the interest rate on long-dated debt, that's a small-dated

Starting point is 00:45:51 debt, that starts to cause a lot of problems because for you as a business, when you look at your income statement, and you got your top line, and then you got all of your expenses, and then you get your bottom line. Those expenses and your interest expenses are going to start going up way higher than where they were before as all these interest rates start going higher. This is typically an indicator of the market is pricing the out years, the growth expectations, far worse than what you are currently experiencing. That's what that inversion is actually kind of showing you. It's just something that when you go back in the history,

Starting point is 00:46:28 you look at what kind of precedes and then follows these inversions in the bond yield curve. They typically are kind of a canary in the coal mine that there's going to be troubles on the horizon. And so we're seeing that today in 2018. We are seeing the start of a flattening of the bond yield curve. I would not call it inverted at this point because the short term yields are. are definitely still lower than the long-term yields, but they're coming up aggressively and it's starting to flatten out. There was a brief period of time where in the middle of the bond yield curve, there was an inversion, but it wasn't a complete inversion like we've seen in the past.

Starting point is 00:47:02 So that's just a data point. That's something for people to think about. Another thing to add to this is also at this part in time where it typically happens, you see that the debt that needs to be serviced grows faster than the income in the economy. What you basically do whenever you have a flat or inadverted yield curve is that you incentivize people to move to cash. Or if not cash, then just tie your cash into instruments for a very short period of time, which is as good as cash when something happens. And what really happens is that you are taking money out of the system. You are indirectly seeing a tightening of credit. So you are more prone to see a bubble pop at that part in time.

Starting point is 00:47:46 I just want to add that as a piece of context to understand what's going on in the financial markets because you would need to sell your financial assets to service that debt. Everything leading up to this flattening to inversion in the bond yield curve is expansion. You have credit expansion. You have people's income levels going up as a function of all this. And so more people have money, they're able to spend, and it gets into this whole Ray Dalio description of how credit cycles work. When you're at this point what Stig was just describing is really that transition point where

Starting point is 00:48:20 you start getting into the self-reinforcing in the opposite direction where tightening is occurring and there's less money, there's lower incomes, but yet those debt service levels, those interest levels are now exceeding the income levels which further compounds the cycle and causes it to strengthen as it continues to go down. I look at it as a great way to kind of understand where you're at in the credit cycle and kind of understanding when you're kind of hitting at top. I would say that you're starting to see that now. All right, Santos, thank you so much for leaving your question there. As a token of our appreciation for leaving your question, we're going to give you access to one of our free courses on the TIP Academy page on our website. The course that

Starting point is 00:49:02 we're going to give you is our intrinsic value course. And our intrinsic value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle and when you're buying your stock. And it also teaches you some stuff about options trading. So we're really excited to give you this course. If anybody else out there wants to check out the course, you can go to tip intrinsic value.com. Or you can just go to our website and click on Academy link at the top of the page and courses right there. So if anyone else wants to leave a question on the show, go to Ask the Investors.com. And if your question gets played on the show, you'll get a free course. All right, guys, that was all that Preston and I had for this week's episode of The

Starting point is 00:49:40 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. Written permission must be granted before syndication or rebroadcasting.

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