We Study Billionaires - The Investor’s Podcast Network - TIP336: Mental Models Used by Billionaires w/ Sahil Bloom

Starting point is 00:00:00 You're listening to TIP. Hey, everyone. Welcome to the Investors podcast. I'm your host, Trey Lockerbie, and I'm so excited to have Sahill Bloom with me on the show today. Sahel is a VP at a private equity firm, as well as a frequent contributor to CNBC. He also holds a degree in economics, as well as a master's in public policy, both from Stanford University. Saahill is a rising star in finance who recently blew up on Twitter, going from 500 followers. or so to now well over 100,000 followers, all in about six months' time, primarily due to his thoughtful stories on business and his simple breakdown of complex topics. So we're going to discuss some of those topics on the show today, starting with mental

Starting point is 00:00:44 models. For some, this might be a useful refresher, and to others, this might provide new insights as to how to up your investment game. So please enjoy my discussion with Sahil Bloom. 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, everybody, I'm here with Sawhill Bloom, who I would say is the MVP of Twitter for the last six months. I'm really excited to have you on the show. Thanks for coming on. Yeah, it's a pleasure to be here. Thanks for having me, Trey. So, Sal Hill, one thing I'm incredibly impressed by is your ability to distill down these really

Starting point is 00:01:38 complex concepts into these really bite-sized formats, whether it's a tweet or a soundbite on CNBC. And a useful one I found recently was your threat on mental models. So I want to walk through each one, one by one, and I want to start with first principles. Billionaires like Elon Musk have been a proponent for thinking and strategizing from a first principles framework for a long time. But how do you describe this framework and what's a good example of it working in the real world? Yeah, this is a really important one, Trey. I mean, this is a foundational mental model for really for driving nonlinear outcomes as I think about it.

Starting point is 00:02:18 When you have complex problems and you're in complex systems and situations, being able to ground yourself in fundamental truths, the first principles of something is so, so important, whether you're in business, an investor, solving problems on a day-to-day basis, really in anything. So this one here, I mean, the famous Aristotle quote that it's grounded around is the first basis from which a thing is known. That's how he defines first principles. So this is really all about building up from the bare bones foundation, solving a problem from the ground up, and not getting bogged down in assumptions that you believe to be true or have been told are true. You really need to go and build from foundational truths that you know to be true.

Starting point is 00:03:03 So the whole point here is stop taking things at face value the way something has always been done. And so when you go to see, you talk about a classic real world example, Elon Musk is a great one with SpaceX. When he was going to start this business, he had this crazy problem that he was trying to solve of how to send a rocket to Mars. And maybe not a problem that all of us think about on a daily basis, but that was his problem that he had. to address. And the fundamental issue there was that the rocket that he wanted to buy was too damn expensive. It was something like $60 million to go buy a rocket. And so he just started thinking, what are the fundamental truths here? Let me ground this in first principles thinking. What are the components of the rocket? What are the materials that it's made out of? And what do they cost?

Starting point is 00:03:48 And what he realized when he went through that exercise was that actually all of the materials together were much cheaper than going out and buying a rocket. And so he decided to build it himself. And as a result, they've been able to produce rockets at a fraction of the cost, test, iterate, learn, and now build a company that has a chance at taking on that fundamental issue of sending a rocket to Mars. And so this is a mental model, you know, to be clear, that is not for everyday use and every single problem you come around. You know, it is a very time-consuming mental model because it requires you really drilling down and asking a million questions about things. I mean, to leverage this in your own life, in investments you're going to make or in business situations, you really need to just go down a rabbit hole of questions.

Starting point is 00:04:34 Why do I believe this to be true? How do I know if it's true? How can I support that belief? What alternative viewpoints might exist? Basically, you just need to turn yourself into like a, I think of it as like the curious child mental model where you're just asking why, why, why, why? Constantly until you drill down to, okay, what is the foundation of this? and build up from there.

Starting point is 00:04:58 So it's really not one for every problem. You know, if you're not looking for an imaginative novel solution, it's probably one that will just take you too much time. Sometimes you need the quick, unimaginative solution in certain situations, and that's fine. And there are mental models for that. But it's really critical if you're looking for an imaginative solution, if you're looking to drive truly nonlinear asymmetric outcomes,

Starting point is 00:05:23 this is one that I think is just foundational for people. Yeah, I think it gets to this idea of being an independent thinker. And one example that comes to mind from what you just said, it's reminding me of Warren Buffett's take on gold and how he said, if you were a Martian coming to Earth for the first time, seeing these people dig up this rock and then transporting it across the ocean and then burying it again deep in the ground and all the while ascribing some value to it that's totally arbitrary, you'd just be sitting there scratching your head. Yeah, I think it's a great and an interesting example that you use there because, you know, I'm a huge Warren Buffett fan, but I would counter that by saying, you know, I could look at money and say the same thing if I came down from a Martian planet and said, wait, you have this piece of paper that you've decided has value, but there's an institution that can just create as much of it as they want, whenever they want, without asking any questions. And you're fine with that and it doesn't change the value of it in your mind. So I'm not looking to go, you know, create the bullcase.

Starting point is 00:06:23 for gold or Bitcoin or whatever store of value is the one of your choosing. But I do think you can take that lens and question almost anything about our monetary and investing system and go down a rabbit hole on it. And sometimes it's a productive exercise. And it's interesting to have those discussions and go through those thought experiments with people because what you end up finding, I've found at least, when you start to ground things in first principles, you realize that a lot of the assumptions you've made about certain things you believe are just fundamentally not true, you know, are just really not grounded

Starting point is 00:06:57 in something that you've really thought about. It's grounded in. I was told by somebody at some point in my life that it's true, so I believe it's true. Really, you haven't done the work. You haven't learned the foundational principle that leads you to that conclusion. And so for an investor, it's a good gut check. It's a good way to really test how deeply do I understand this or really know it? And do I really have an edge as I think about this problem. Okay, so the next mental model I want to break down is second order effects. And you've written about how billionaire Howard Marks has pointed out that first level thinking is, quote unquote, simplistic and superficial and everyone can do it.

Starting point is 00:07:33 But not many people think through second or even tertiary order effects. Can you walk us through an example of how to use second order thinking when it comes to investments? Yeah, and I'm a huge Howard Marks fan. I think this originally came up in a maybe 2015 memo that he wrote. And if you don't read Howard Mark's quarterly memos, you should drop everything and just go spend the entire weekend reading these things because they are just absolutely incredible. He's an unbelievable writer. So I think of second order thinking as like the and then what game. Basically, life is so complex.

Starting point is 00:08:08 There are infinite variables out there. It's so easy to just look at the first order effects of any action and then just take it at face value. That is the tendency of most people. You just think action reaction. And it's like playing chess and only thinking about what the next move your counterparty is going to make. That's a very challenging way to win at chess. As you all know, if anyone watched the Queen's Gambit this year, like the best chess players in the world are thinking five, ten plus moves ahead. Second order thinking requires that. You need to think on a different plane. You need to think on a

Starting point is 00:08:44 higher level in order to generate truly kind of edge level insights that allow you to achieve those asymmetric outcomes that all investors are looking for. If you're looking for market level returns, which I would caveat this by saying that for most people, achieving what the market achieves should be your goal and is a great long-term outcome and a great way to compound wealth long term. But for investors that are trying to achieve at a higher level, institutional investors whose job it is to outperform the market or benchmarks, you need to be able to think in terms of second order effects. I think a great example to talk about this is COVID and the initial outbreak of COVID in March. The seeds of it really started to come up in January. We started seeing

Starting point is 00:09:28 things happening in China. Supply chains were sort of being disrupted with the closures of factories over there, it was starting to be reported on. And so if you think about this in first and second order effects and how the two different planes of thinking might have worked, first order effects, you would learn about that information that's coming in as an investor and say, this is likely to come to the U.S. The R-NOT data on the transmission of the disease looks quite bad. It seems likely that it is going to arrive in the U.S. and disrupt our business ecosystem. Maybe not the full lockdowns, but disrupt. And so I should say, sell. I should sell some of the assets I have, hedge my exposure in some way, buy puts, whatever

Starting point is 00:10:10 it might be. That's kind of first order effects. And I think if you had done that, you would have avoided exposure to what was a massive downturn a month and a half later. Second order thinking takes it a step further. It says, okay, this is likely to have an outbreak in the U.S. What is going to come from that? What companies might actually benefit from that? Are there work from home companies? are there home fitness companies? Are there technology companies, e-commerce sales? Are there areas of the economy that now are going to be favored because of the impact of the virus?

Starting point is 00:10:43 So the virus and the impact is kind of the first order effect, but there were a whole slew of second, third, end-order effects that came after that. And it's hard, right? It's hard to do because it requires you making assumptions trying to play out an unbelievably complex dynamic and complex world. But if you had done that, your outcomes would have been enormous. If you had been able to get out in front of some of those changes and play out in your mind a bunch of scenarios and expose yourself to those scenarios as an investor,

Starting point is 00:11:13 there are massive asymmetric opportunities that existed. I mean, you look at the multiples of money that you might have been able to achieve by investing in Zoom during the downturn in March because you had gotten out in front of it or Peloton, any of these. I'm not going to go to Tesla because I still don't understand that one. But on a lot of these, second order thinking would have really allowed you to capture some of those opportunities. So that's kind of the genesis of this one. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:15:55 self-funding from here on now. And as an investor, it's interesting because we're prone to this recency bias and we're thinking, okay, here's a company that just loses free cash flow year over year without really addressing at what point that really turns itself around. Yeah, Netflix is a great example, and that's obviously pretty recent. They just had that earnings report and the letter that went out, incredible results. And things like the home builders is a fascinating, you know, I would call that like a third, maybe fourth order effect technically probably because part of that has been driven by this

Starting point is 00:16:30 whole Fed reaction, which we can talk about later and the free money that's being pumped out into the economy. But people fleeing the cities. I mean, that was a massive second order effect. And it's driven all of these other investment opportunities across the GDP that you wouldn't have thought of if you were just in a first order mindset around everything. So it's really interesting to play out. But again, as with first principles, it's very time-consuming and it requires a lot of thought. So it's not for everyone. It's not for every situation, but it does drive asymmetric outcomes when you do a good job with it. All right. A lot of our listeners are going to be familiar with this next one, which is

Starting point is 00:17:07 the circle of competence. This is an idea that Warren Buffett has made famous by kind of coining the phrase. But that said, Warren's own circle of competence has been expanding. Now that he's invested in Apple and Amazon and even airlines in the last couple of years when he was disparaging them for decades, what exactly is the circle of competence rule and when can it be broken? This is a great one. And it's so foundational. You mentioned the audience is likely familiar with it. It's obviously been talked about in so many of the Berkshire letters over the years. Howard Marks talks about it frequently. He's obviously a student of the Buffett value investing ecosystem. The key to me with Circle of Competence is that it is dynamic, not static. People think

Starting point is 00:17:55 of a circle of competence and you think, okay, here's my circle and now my whole life, that's my circle. I don't think of it that way. I really would impress upon people that your circle should grow, It should shrink. It should morph into different areas as you learn and as you grow. The whole point is you need to be a continuous learner and go down the rabbit hole on things that you're excited about. You should strive to expand your circle of competence over time. It shouldn't just be, oh, what I know at age 22 or what I know at age 30 is what I'm going to know my whole life. I would argue that for Buffett or for Howard Marks in his most recent memo that he just released. He talks about it with growth stocks and how, you know, he's been a

Starting point is 00:18:37 value investor his whole life. And that dichotomy between value and growth has always been almost like a religion. You had to pick a side. And that was the place where you existed for your entire career. And the reality is life is dynamic. The world is dynamic. Situations change. You need to be constantly learning and trying to grow your circle of competence over time. I think that's point number one is the Circle of competence should be dynamic. You should be striving to build it. The other point is you need to be absolutely ruthless in identifying the boundaries of it throughout. So you can be striving to grow your circle of competence. But if you haven't spent the time and really put in the energy and effort for it to have effectively grown, you need to be cognizant of that fact and not start reaching because

Starting point is 00:19:24 you think you know everything that's outside of it. Warren Buffett, there's no way he would have bought into Apple or some of these tech stocks without having really done the work to feel like he understood it and could understand the future of those businesses. He's ruthless about those things. Charlie Munger, similarly, ruthless about identifying their boundaries. It's like the whole idea of you can derive a ton of success by just avoiding stupidity rather than trying to be smart. And I take that to heart. I mean, I think about it beyond investing. I think it applies to business. I think it applies to life and relationships. It's such a powerful concept when you internalize it.

Starting point is 00:20:05 And it all goes to this whole idea of just know what you know and know what you don't know. And on the things you know, tackle those. I mean, go after those, double down, etc. On the things you don't know, either avoid them like the plague or outsource them. And there's nothing wrong with outsourcing them. I think, you know, Buffett, these other folks, Howard Marks, talks about his son, does the growth investing in their family for their family money because his son really understands it. It's part of his circle of competence. Howard Marks might not. So you outsource to people that do

Starting point is 00:20:37 understand those things and that are going to know it better than you. The same way, you know, I know a lot about investing, but I don't know about building a roof. So I'm not going to get up on my roof and try to, you know, patch my roof or fix it. I would hire someone that is an expert at that that that's within their circle of competence to go do it. The same exact thing applies to investing. Okay, the next model is perhaps lesser known, which is Occam's Razor. So let's walk through the concept and provide some real-world examples around that. Occam's Razor, this is almost the other side of the coin from first principles, from second-order thinking, in the sense that those are all about complexity.

Starting point is 00:21:17 Occam's Razor is all about simplicity. Occam's Razor is simple as beautiful. The simplest explanation is often the best one. That's kind of the easiest way I can say it. But basically, if you're trying to answer something and you're weighing a handful of different hypotheses about it, find the one that requires the fewest necessary assumptions to be proven or disproven. And that is usually what you should go after.

Starting point is 00:21:44 Basically, the simplest path to proving or disproving a thesis. And it really just enables you to the razor cut through the noise on an issue. and just boil it down to the critical path towards an outcome. The best investors are able to boil down investment decisions to the fewest possible variables. I think of famous investors. When you listen to them talk, they have this unbelievable ability to aggregate all of this information about a company and just say the one or two things that actually matter.

Starting point is 00:22:18 And you sit there and it's like this unbelievably enlightening moment. This is what they're doing. They're able to boil something complicated down to the simplest possible variable for them to look at. Gavin Baker is someone I'm a huge fan of Atreides Management in Boston. And he talks about this a lot in a number of interviews that I've heard with him. He talked about it, as it related to electric vehicles, as an example, all that matters is the battery efficiency. And so you just focus on that. You don't need to get caught up in all of the other metrics because battery efficiency is what matters for driving these businesses forward.

Starting point is 00:22:52 and further success as a business model. And so you focus on that. That's really what this is all about. Don't add unnecessary assumptions, variables, and noise when really only one thing matters. So identify that one thing and then ruthlessly focus on it as a means to just bring simplicity into an extremely complex world, extremely complex companies, etc. This reminds me of a quote that says, any idiot can build a bridge, but it takes an engineer to build a bridge that barely stands.

Starting point is 00:23:23 And I talk about this in my own company a lot at Betterbooch, where people are sometimes prone to over-engineering a problem or a solution. And sometimes the simplest answer is the best answer. Yeah, I totally agree. And I think it's a nice pairing alongside first principles and second-order thinking because it reminds you that you shouldn't overdo it with those things when unnecessary. You find that there are thinkers, investors, business people, world that do overcomplicate things unnecessarily.

Starting point is 00:23:55 And so Akram's Razor is a good reminder, I think, for really focusing on what's important and drilling down in that way to get you to an answer that really matters. All right. Let's talk about compounding, which is our next mental model. Our listeners are almost certainly familiar with this Einstein quote, that compounding is the eighth wonder of the world. But no matter how familiar you are, the human brain is really programmed to think in a much more linear fashion and not so much exponentially, right? So what tools or examples do we have

Starting point is 00:24:25 to override this natural tendency that will help unlock the power of compounding for us as investors? Yeah, this is a tough question. And by the way, as it relates to that quote, I always find this funny. I tweeted out a thread about compounding and I opened it with that quote because it's probably the most famous quote on compounding. And as soon as I did it, I got like a sea of responses, basically disputing whether Einstein ever said that. So for the record, I'm not sure whether he ever said it. I like to continue to attribute it to him because I think it's a great quote and I'm going to continue to maintain that he did, but he may not have. But on compounding, I mean, humans are notoriously bad at thinking in terms of exponential growth, power laws.

Starting point is 00:25:09 I would argue it's the reason that we've consistently underestimated the case growth of the coronavirus this year, you know, why a lot of investors were totally caught flat-footed around the impact and on the potential for the government to try to lock down the country. Our minds just have trouble comprehending it. Jeff Booth, an author and thinker who I really have enjoyed, wrote a book called The Price of Tomorrow where he talks about deflationary impacts of technology. And in that book, he had an amazing example. I thought it was really incredible of taking a piece of paper and folding it over on itself

Starting point is 00:25:43 50 times. You go and ask people, how thick is that piece of paper after you've found? folded it 50 times. Most people say two inches, three inches, maybe you get someone say a foot thick. And the answer to the question is that the piece of paper would extend from the earth to the sun by the 50th fold over itself. And it is just unbelievable to see in real time in a little simple experiment like that how dramatically we underestimate the impact of power laws and compounding in that way. And so for me, I think the lesson and the takeaway is you really need to be a of that natural human bias that prevents you from understanding exponential growth and compounding,

Starting point is 00:26:25 you need to run the math on things. I constantly advise people to just look at if you just compound your portfolio at 8% per year and you're reinvesting dividends in long term, look at the math on what it becomes from where it is today until you're retiring. Just look at it. And I think like a lot of the robo advisors that are coming out now that are encouraging young people to invest in a passive way are doing a good job of that. that because they're showing you visually how powerful that compounding is and also how impactful it is if you disrupt the compounding. I mean, the whole idea of, I think it was Charlie Munger that said the first rule of compounding is to never disrupt it, never interrupt it. And it's such a good

Starting point is 00:27:04 quote. And when you're able to show that visually, how impactful it is if you take a dividend or you remove some money from it, it's really unbelievable in eye opening. And so I think for me, it's continuing to just hone in on the numbers and the math and make yourself aware of how impactful compounding is, not just with your investments, but also with knowledge, with learning, with growth, how much you know today versus what you knew a year ago just off of what you've been reading and how you've been building up information. Because investments in yourself, investments in your knowledge compound just as much as any financial investment, if not more. It's really the best investment you can ever make is in your knowledge and in your learning, in my opinion.

Starting point is 00:27:45 The other one is like simple. It's the rule of 72. The time to double an investment in simple terms divide 72 by the rate of annual return and you get the number of years to double the investment. I always find that to just be a quick and easy, quick and dirty way to figure out in your mind, like, okay, wow, this is pretty powerful if I can just do that. So for alternative investment managers targeting a 20% IRA or for someone just trying to meet the market. And an 8%, you can just do the quick math on these things and get a sense for what that compounding really looks like. So this last one I wanted to add in here, it's a little bit different, but you just posted

Starting point is 00:28:22 this great thread on it. And it was a reminder of the myriad of biases that plague us as human beings. And this one in particular can be especially dangerous. What I'm talking about is the Dunning Kruger effect. So tell us about what that is, how we can be mindful of it, and how it can prey on unsuspecting investors. This is one of my favorite threads I've ever written. It really did.

Starting point is 00:28:45 It took off. I saw Mark Cuban retweeted it. Colin Cowherd retweeted it this morning, which I got a real thrill out of. But this whole idea of everyone is a genius in a bull market. I've seen a bunch of people on CNBC saying it. And it's really true. The Dunning Kruger effect is the idea that people with low ability systematically overestimate their ability at a given task.

Starting point is 00:29:08 So the first rule of the Dunning Kruger Club is that you don't know you're a member of the Dunning Kruger Club. And right now we're in an environment where this is so important to understand. And it ties into the circle of competence, but it's really just understanding the boundaries of your competency. Don't let external reinforcement or external signals change your view on what your core competency is. Right now, we're in an environment where a lot of investors, day traders, retail,

Starting point is 00:29:38 investors feel like investing gurus, feel like geniuses. If you were long SPACs the entire year and that was all you invested in, or if you were long a bunch of speculative growth stocks, you might have been up 100% last year. And so don't conflate what you learned about your portfolio growth with the fact that you're an investment guru is the idea, unless you've really spent the time, the hundreds of hours, creating the edge, doing the fundamental research, learning about the companies, diving in. If you've done that and you're driving outsized returns and you feel like it was within your circle of competence, that's a different story. And I would argue then that that's within what you know. And so you've done well operating

Starting point is 00:30:23 within what you know. Otherwise, you just got lucky. And there's nothing wrong with that. There's nothing wrong with getting lucky. And there's nothing wrong with acknowledging that you got lucky. I have plenty of investments this year that I just think I got lucky on. And I knew when I made the investment that it was kind of just a flyer. There's room for that in your portfolio from time to time. But you need to be able to acknowledge what you know and acknowledge, more importantly, what you do not know. And we're in an environment now where external affirmation from the market and this Fed-induced

Starting point is 00:30:53 euphoria that we have right now is really driving a lot of people to mint themselves as new investment gurus and market geniuses. And it's really concerning in what happens on the back end of it if we do have a downturn or if there is an environment where stocks don't only go up. 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.

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Starting point is 00:34:33 Back to the show. Let's talk about that Fed-induced euphoria you mentioned because one of your breakout threads that really got you on the map and got a lot of attention was this allegory you posted or tweeted about with the story you invented about Mr. Federico. So talk to us about who Mr. Federico is and how he highlights the Fed's involvement in today's markets. So this was my first thread. It was the first thing I really posted on Twitter. It was back in May. Middle of May, the market was surging. The economy was not good. The economy was kind of in the tank at the time. And I kept having friends and family reaching out to me asking,

Starting point is 00:35:14 what's going on? How can this be happening? Why is the market soaring while the economy seems so bad? I mean, we were locked down. People aren't able to go out. What's going on? And I kept trying to figure out, like, what is a way to explain to people why this is happening and the role of the Fed in that? And I was out on a walk and I came back to my house and I was trying to figure it out. And I just had this idea that I became obsessed with of an allegory, a parable, to try to explain it. And so I sat down on the floor in my garage and I wrote this story and ended up posting it for 500 followers at the time. And it got picked up by a few people and it sort of spiraled and blew up. and that kind of launched the beginning of my Twitter career, as it were.

Starting point is 00:35:54 But the whole story, I used this fictional character, Mr. Federigo, a really bad play on words of the Fed. But he goes to a market in Renaissance Italy. And the whole reason I used a market is because I think of it as the simplest way of thinking about how a market works is you go into a olden day market and there are buyers and sellers. and the whole price of goods is determined by the interaction between those buyers and sellers. That's how a market should work. And what I wanted to illustrate with the story is Mr. Federico, the Fed, comes into the market

Starting point is 00:36:30 and it basically announces that he will buy anything in the entire market at any price. And then he walks out. And what impact does that have on the buyers and sellers? And what happens is people know that there's a buyer of last resort at any price. The person has just said it. They will buy at any price. And so they start buying furiously because they know that no matter what, they have someone they can offload it to at a good price.

Starting point is 00:36:56 And what happens is prices skyrocket. Effectively, there are only buyers because they know they can offload it at a good price. And that was what I was trying to illustrate was Mr. Federico actually didn't have to buy anything. He just had to say and state the intention that he is a buyer of last resort. at any price in order to create that impact. And my impression at the time was that that was what was happening, was that you had an environment where the Fed and the United States had come out and effectively said with the bond market, they'd already done it, that they were going to buy bond credit ETFs.

Starting point is 00:37:33 And there was an implied assumption that they would do the same for equity ETFs to the extent there were another downturn. And so as a result, there's no need for there to be a downturn because you know that as soon as there is, you have a buyer and you don't need to worry about it. And what we've seen since May, obviously, is nothing short of an astounding rally that has continued throughout the year. I would argue that there are some metrics around the economic recovery that are more optimistic than they were then. But the point still holds that you have an environment where you have a very powerful figure that creates the money in the system and can create as much as they want in order to buy as much

Starting point is 00:38:12 as they want. And that fundamentally disrupts what a market is at its foundational core. Well, this kind of ties into the cantalon effect, which is another term that's been trending really up on Google searches over the last year. Explain to our audience what the cantalon effect is and maybe provide a real world example of it. Yeah, the canton effect is another one of my more popular threads that I've written. It resonates with a lot of people and it's a really bipartisan an idea, frankly, in that people hate inequality in general. It's such a topic that drives sentiment around it. And so when you talk about people moving it up on Google trends or tweeting about it,

Starting point is 00:38:53 I think it makes a lot of sense because we all have a diverse reaction to inequality. So the cantalon effect is the idea that the flow path of money matters. The first person to have the money benefits more than the people who receive it later, really because they can spend more before the prices rise. That's the fundamental concept. In our current economy, it's all around where is this new money entering the system? People talk about the money printer. Well, where is the new money entering the system?

Starting point is 00:39:21 It's through quantitative easing. It's through actions in the market, the action stabilizing the markets. And who does that benefit? Well, it benefits people first who own those assets. And so you get this wealth effect where who owns these assets? It's wealthy people. Mostly, it's people that are exposed to markets, exposed to bond markets, have a lot of assets to benefit from the price inflation that's going on in those markets.

Starting point is 00:39:48 And so what you have is an impact where the people that were already well off are now even more well off. You have a surging market. I mean, the S&P was up what last year in a year when the economy was way down? But the people who weren't exposed to the markets who were already on the lower rungs of society are stuck there. And so the whole idea and why it's resuscary. with people so much as I think it's provided fodder for the argument around more stimulus

Starting point is 00:40:14 to the people, less stimulus to the markets. That's been like a common refrain that you've heard. We need more direct checks to people to support the families, the small business owners, the people who are really struggling and less pumping up the market so that millionaires, billionaires have their wealth expanding by such dramatic levels. There were all these stats around billionaire wealth and how much it grew last year, while millions and millions of people are unemployed and suffering, not just in the U.S., but around the world. And that concept just creates an acid-like reaction for most people, me included. It's just a crazy, crazy thing. And it all comes back to this idea of the cantalon effect. The idea that the Fed, you know, whether you think it's

Starting point is 00:40:58 accidental or intentional, does propagate inequality with some of these actions. They constantly have been out there talking about in the early days of the recovery, how their actions were not creating inequality. And I would just say that it's simply untrue. I don't think that it was nefarious. I don't think that they are going out trying to create inequality. But the simple mechanics of how it works are very logical. When you're putting money into the markets and it's driving up the price of assets, who owns those assets? Rich people. And so rich people are benefiting while people that were not as well off are not getting that same benefit. And so you have a sharpening of the divide of the gap. And it leads to, and historically has led to, if you go back and trace

Starting point is 00:41:40 through history, a very common cycle of populist rise, of nationalism, of different anti-establishment sentiment. And so it's really scary to just think and play out in your head. The impacts that all of these things have outside of the economic spirit has sociopolitical impacts that are very real and that we really need to be cognizant of as we look forward to the next 10 years in America and in the world. So a hot topic as of late is whether or not all of this stimulus will eventually lead to inflation or even deflation or maybe even stagflation. So maybe highlight each one of those for our audience and which one you think is most likely.

Starting point is 00:42:22 Yeah, I think it's a really interesting question. And I've somewhat changed tune on it over time. I mean, my initial reaction, again, this is like a first order effect, second order effects thing. My initial reaction was in the early part of the crisis, oh my God, there's all this money entering the system, money printing. Inflation is going to be rampant. It's going to go nuts. And when you think about it a few levels deeper and I've talked to really smart folks like Brent Johnson or Luke Groman or Lynn Alden and you listen to these things they're talking about, there's a lot of layers to it. And so I've kind of changed tune on it in the sense that I think

Starting point is 00:42:56 our present dynamic remains deflationary, where the Fed is really trying to plug a hole in the ship. I mean, you have this shock to the economy, and they're putting money out there to try to keep the ship afloat. The risk, and what I think the future holds, is an environment of inflation or stagflation, where they don't know when to turn off the faucet. And especially now that we have, you know, an all blue environment from a political standpoint, and there's going to be a ton of bias towards deficit spending in the future, I think that creates an environment where your bigger concern is going to be inflation and even worse, stagflation, particularly when you have the Fed coming out and saying that they're going to allow inflation to, quote, unquote,

Starting point is 00:43:43 run hot for a period of time before they take action. That was a dramatic policy step for them that really cannot be overstated that really sets the tone for the next five, ten years. They've already said they have no prospects of raising rates. So we're in an environment of effectively zero interest rates for the foreseeable future. And they're willing to let inflation tick up before they actually take actions. And so what I would be most concerned about, what I'm looking at potentially happening, is that environment of inflation or stagflation in the next few years. And you hope it's not a 1970s situation where it becomes that bad. But that is, I think, the bigger concern. concern now as we look at into the future.

Starting point is 00:44:27 You know, it is, and it's curious when you see the M1 and M2 charts going parabolic with the money supply and the velocity chart going, you know, completely inverted further and further down. And that's basically the money that's exchanging hands for goods and services, which would ultimately drive inflation. And we just haven't seen that turn around yet. But, you know, it's interesting that I saw some data that shows that a lot of consumers have more money than ever, either stockpiled away through the stimulus and COVID.

Starting point is 00:44:55 They're just not out there spending money because there's really nothing to do. So when the floodgates open back up and people are back out in the world putting their money to work again, will that ultimately drive inflation? Yeah, I think that's possible. I mean, we might have a real roaring 20s dynamic on the back end of this. I mean, I know personally, I am so ready to go out and travel and eat at restaurants and go to the movies. I mean, once the vaccine is out there, I am inclined to agree with my friend Gavin Baker on this

Starting point is 00:45:28 that we are at the start of a roaring 20s period as it relates to some of these categories in spending. And I think Omnichannel Retail is a really interesting place to look and play. I think the hospitality sector, which has been totally beaten down as an interesting, you know, interesting potential angle as well. But I would also hope that, you know, the people that were in these services jobs that have gotten hammered this year and who are in need a ton of support, are able to go back to those jobs on the back end of this. It's one of the things that I constantly think about that I

Starting point is 00:45:57 remain really concerned about is just that you have this residual level of unemployment after all of this. That will be hard to fight and hard to support that group of people that have been so heavily impacted here. So shifting gears a little bit, I want to talk about education because I know you and I share this passion for distilling down finance for people who aren't in the industry, but I think we both agree that financial literacy in general is really not where it needs to be, especially in the U.S. So talk to us a little bit about what our government needs to do to create a better future for financial literacy. We need a national financial literacy mandate in schools, full stop. I don't think there's

Starting point is 00:46:40 any way around it. I'm baffled that it still doesn't exist. Every single student coming out of high school should have a basic level of financial literacy. I didn't get it. I learned about isosceles triangles. I learned about the Ming Dynasty. I learned about mitochondria, but I didn't learn about budgeting. I didn't learn about taxes. I didn't learn about ETFs. I didn't learn about compounding and wealth creation. And those things are so foundational to your ability to take care of your family and friends, to create a life that you want and to live in the way that you want. And so it baffles me that we do not have a basic level of financial literacy taught in schools today. And I think that is the number one priority. It's something that I'm working on with a few

Starting point is 00:47:27 organizations now. And hopefully there's going to be change around that because it's so impactful. And again, to the inequality point, it's extremely impactful for minorities, for less fortunate populations, because it impacts your whole life. Again, to the point on compounding, if you don't learn these things early, if you're not investing early, if you're not building wealth, saving properly, staying out of debt, it leads to a compounding impact to the negative over the course of your life. And you really need to get out in front of that. So I think it's so, so important that we just teach kids at a young age and provide some funding to schools around it. We need to provide information, and it's what I try to do. Provide it in a way that is interesting and engaging for young people.

Starting point is 00:48:12 You can't provide the same textbook-driven solutions around finance because it's boring and kids don't want to learn that way. And that's not how the information will stick with them. You need to make it sticky, get it to them in a way that is engaging. Maybe it's in the context of figure out what's a business that you're interested in. I don't know. A kid might say, I don't know. Well, what do you like doing?

Starting point is 00:48:33 I like playing video games. Okay, let's talk about Epic Games. Epic Games is an unbelievably cool business that you can learn about. You can learn about the different investors that have invested. in that business. You can learn about and read about Tim Sweeney, the CEO and his ideas for the future of that business. So you can take things that kids are interested in and then couch it into an educational topic and really drive education and learning in an engaging way for kids that creates business knowledge, it creates investing knowledge, it creates wealth creation

Starting point is 00:49:04 knowledge, and really stokes it around a passion of theirs, which I just find be the best way to get anything across. You need to learn in the context of something you were interested in and passionate about. It is so hard. And I'm not that old. I remember this from when I was a kid. It's so hard to force yourself to read something that you don't like. There are all these classic books that you're forced to read in school. And if you don't enjoy it, it's really hard to absorb it and get interested in it. And then we're creating this cookie cutter student in schools. And we really just need to disrupt the entire model and start providing education in a way that works for all kids.

Starting point is 00:49:38 So I've had this idea for a while, and I'm really curious to hear what you think about it. Interestingly enough, billionaire Bill Ackman came out with a similar idea fairly recently, and it kind of goes like this. Basically, a child born, let's say in the U.S., receives $10,000 in a trust under their name, and the 10 grand is put into something like the S&P 500 index. And they can't access the money until they turn, let's say, 21. If they pass away before that, the money's just returned back to the government. So let's say the S&P 500 over those 21 years yields about 8% a year.

Starting point is 00:50:14 So now the citizen has $50,000. And should they choose to tap the money at 21, the government taxes it at a normal income rate? So now the government makes a little ROI around 2% a year. Now the citizen has $35,000, which is enough to do something, but not enough to do nothing. They can start a business, pay down debt, down payment on a house in some areas. They could also choose to wait until they're older to tap the funds and just let the money compound further. And what if I told you that all of this would cost the government $38 billion a year, which is only 5% of the annual military budget?

Starting point is 00:50:51 Would this produce more financially literate citizens because they'd now have buy-in? They'd have incentive to want to learn about this aspect of their life. It's interesting. I mean, it definitely sounds like a like an MMT like idea. So I would need to think about it more. I always love the idea of promoting entrepreneurship and promoting economic growth through means like this. You know, like deregulating entrepreneurship, I think is a fascinating way to drive ROI for governments. When you create an environment where it's easier to start businesses, people have the funding to get something started and get something off the ground.

Starting point is 00:51:30 part of what has driven U.S. capitalism is an environment of creative destruction. Our bankruptcy laws, frankly, allow people to start fresh and start new. And that has driven a lot of small business and capitalist growth in the United States. Just as a small anecdote, similar to what you're saying, my two godchildren on their first birthday, I gave them each $500 worth of Amazon and Apple stock in like a little mini account. And my whole idea when they turned one, and as they get older, I'm going to start teaching them about it and talking to them about it. And I think they've done really well on it, by the way, because like a few years since it happened, they're probably doing quite well. But it's an interesting way to think about creating buy-in. And whether it's the government doing it in your example or whether it's family structures, grandparents, relatives, if they have the means. It's just an interesting way to create buy-in and create a learning environment around a kid from a young age that does have really positive. positive ROI and positive outcomes, as you say. I'm generally in favor of the government not intervening in things as much. And so your idea maybe strikes me and my biases in one way,

Starting point is 00:52:39 but I'm sure there are a lot of people who would be supportive. So Sahel, what resource has provided the most impact for you? Where would you steer people if they're just getting started and investing for themselves and looking into increase their financial literacy? It's a great question. For me, it's really two things. one, people, and two books, essays, reading. I think on the first one, people are so, so important to your growth. Exposing yourself to incredible, smart, interesting people is the number one way, in my opinion,

Starting point is 00:53:15 to really grow and learn, stand on the shoulders of giants, and you can see much further. I have constantly in my life tried to seek out mentors, peers, advisors that I think are way smart. smarter than me and know much more than me. And I've been blown away by people's willingness to champion my cause, to support me, to help me learn and grow. Twitter has been an incredible resource for that in terms of accessing smart people who are willing to answer your questions, who are willing to talk to you about things. I mean, Gavin Baker, Brent Johnson, Jeff Booth, Luke Groman, these people that I just mentioned, Raoul Paul, all of these people I didn't know before March or April of this year, they've become friends and people that I look at

Starting point is 00:53:57 to for advice, people that I look to for knowledge on financial topics. And by the way, they don't all agree on these things. And so it's fascinating because you're getting different perspectives and you're able to piece it together in your own mind and figure out your own information. But we have this incredible access to people now via social networks, via the internet that never existed in history. And so you have to take advantage. I mean, it's almost, it almost feels wrong not to take advantage with that incredible access to people. I mean, I try to reply to every DM I get. As long as they're not mean and trolling me, I try to reply to everything. And it's just, it's a powerful resource and people pay it forward. We all know we didn't get here on our own,

Starting point is 00:54:36 wherever here is. And so you try to pay it forward to people who are genuine and trying to make their own way. So that's number one people. Number two is just become a continuous learner. I mentioned books, essays, articles, substacks, whatever it might be. Just go down rabbit holes on things that you get excited about. I didn't know anything about the video game industry or about the streaming economy. And then I discovered Matthew Ball. And I found this unbelievable level of expertise and these essays that are just incredibly long, detailed, brilliant. And now I feel like I know probably one-tenth of one percent of what he knows, but I feel this incredible joy in learning around this information and so much smarter about an industry that I

Starting point is 00:55:23 I think is going to be a huge part of our future. I feel the same way about semiconductors now, diving down that rabbit hole, which I was encouraged to do by Gavin Baker, who I've mentioned a few times, a fascinating industry that is a massive part of our future. So I would just encourage people to read. Just read prolifically. And if you don't love reading yet, find a way to love it. Find things that you really do enjoy reading about.

Starting point is 00:55:45 I mean, if you told me to go read Pride and Prejudice, like a book that I was probably forced to read as a sophomore in high school, I don't think you could pay me a million dollars to go read that book again. No knock on it. I'm sure it's a classic. But tell me to go read a Dune, like an interesting sci-fi book about the future and future worlds, or tell me to go read Psychology of Money by Morgan Housel. It was incredible. He's an incredible writer or Howard Mark's memos. I would spend an entire weekend sitting around reading and have a coffee and sit down and just enjoy that. And so to me, it's all about just having and fostering this environment of continuous learning. We connected on it with the circle of competence and trying to grow your

Starting point is 00:56:25 circle of competence. Learn with no immediate goal in mind. Learn as its own goal just because it feels good to know new things and then talk about it, cement that knowledge as you talk to people and the people around you and share that knowledge with others. Well, you mentioned having this incredible access and that's really the epiphany that I had about 10 years ago when I was, a touring musician, traveling on a tour bus with a lot of downtime, thinking to myself, how can I make some extra money while I'm sitting here? And it occurred to me that these markets are available to us with these wonderful companies, and we can actually own a piece of them. And it's just an opportunity that I don't think enough people are taking advantage of.

Starting point is 00:57:07 So I really commend you with your educational efforts here, and I want to give you the opportunity to hand off to our audience where they can learn more about you and follow along with what you're doing. Thank you. I appreciate that. I can be found at at Sahel Bloom on Twitter. I also have a newsletter where currently I just send out my threads for people that are not Twitter inclined, but eventually I will expand into different original content there as well. That can be found on Substack, Sao Bloom on Substack. So Sahel, thank you so much for coming on the show. I really enjoyed our conversation. I learned a lot. I think our audience will as well. And I hope we get to do this again soon. Yeah, it was great chatting with you, Trey. I really appreciate you having me on. I've been

Starting point is 00:57:50 a listener for a long time, so this was really a thrill. All right, so for the next part of our show, we're going to be taking a question from the audience, and this question comes from 16-year-old Carson Benvenuto. I've been watching the show for a while, and I'm like a 16-year-old investor. I've probably been in the stock market for almost a year now, and I was wondering from the perspective of someone who has a lot more experience, do you think more? of my investment should be more risk than long term, just because if I lose it, I have more time to try to get that money back and I don't have kids or family to support. So that money, if I lose it, it's not as big of a deal. So I was basically just wondering what you think of

Starting point is 00:58:33 ratio of like what investment should be more risk versus long term. Thank you. Carson, I absolutely love this question. And I also love that you're starting to invest so young. So generally speaking, I would say that, yes, you can likely afford to be a bit more aggressive with your investment approach this young, because you're right, you do have a lot of time to make up for those losses. But, you know, it got me thinking about this Warren Buffett quote that says, it's not about timing the market, it's about time in the market. And to explore this concept a little bit further, I wanted to highlight an example from Joel Greenblatt's latest book Common Sense. So here it goes. Let's say we have Investor A.

Starting point is 00:59:15 who contributes $2,000 to their retirement account starting at age 26. She then continues to make $2,000 contributions every single year until she's 65 years old. So that's 40 annual contributions of $2,000. And then we have investor B, who starts contributing $2,000 each year at age 19, but then stops contributing at age 26, just when the other investor is getting started. So that's only seven annual contributions of $2,000. And let's say both accounts get a 10% annual return. At age 65, who ends up with more money, investor A or investor B? The surprise is that it's investor B, who ultimately ends up with $930,641 compared to investor A's $893,704,000.

Starting point is 01:00:07 So that's nearly a $37,000 difference. So this all ties back to a concept we talked about earlier in this episode about the power of compounding. The real key is to start early, and earlier, the better. So Carson, I commend you for starting out investing so young. I wish I had done the same thing. And since you contributed such an amazing question, we're going to gift you with access to our TIP finance tool and to our intrinsic value course. And if you're listening along, you also want to contribute a question. Just go to Asktheinvestors.com to find our intrinsic value.

Starting point is 01:00:40 value course, you can go to TIP intrinsic value.com. And an easy way to find the finance tool is just to Google TIP finance. So that's all we had for you this week. If you're loving the show or you want to just stay up to date with the best investing insights every week, go ahead and subscribe to the feed so that these episodes populate in your app without you having to think about it either on Sunday with the We Study Billionaire Show or on Wednesdays with our new Bitcoin show. And feel free to find me on Twitter at Trey, T-R-E-Y. Lockerby, L-O-C-K-E-R-B-I-E, or email me at Trey at The Investorspodcast.com to get in touch and to hear your feedback. Until then, we'll see you again next week.

Starting point is 01:01:22 Thank you for listening to T-I-P. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theInvesterspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors' podcast network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP336: Mental Models Used by Billionaires w/ Sahil Bloom

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