We Study Billionaires - The Investor’s Podcast Network - TIP534: The Joys of Compounding by Gautam Baid

Starting point is 00:00:00 You're listening to TIP. Hey, everyone, welcome to the Investors podcast. I'm your host, Clay Fink. I am just so excited to bring you today's episode reviewing Gottem Bade's book, The Joys of Compounding. I recently had a friend in the value investing space recommend Goddum's book and that it's just a must read. And when I picked it up, I was honestly blown away

Starting point is 00:00:25 by how much quality information was in it. Since the book was so good, I decided to cover it over a series of episodes so I don't leave out any of the good content in it. This series of episodes covering the joys of compounding is likely going to be five or six episodes over the coming weeks. Godham confirmed that he was good with me reviewing the book, so to support him, I'd encourage you to go out and purchase the book for yourselves. I promise you won't regret it. It's called The Joys of Compounding. I think after you listen to this episode, you'll be more than happy to go and buy the book. For those of you who don't know Gottem Bade, he is the managing partner and fund manager of Stellar Wealth Partners India Fund.

Starting point is 00:01:05 The fund is a Delaware-based investment partnership, which is available to accredited investors in the U.S. The fund is modeled after the Buffett Partnership fee structure, and it invests in listed Indian equities with a long-term, fundamental, and value-oriented approach. Goddham's book is a masterclass on what those in the value investing space represent and live for. Today's episode covers the first six chapters of his book, which includes why we should commit to lifelong learning, how understanding first principles can help us better understand the world around us, how mental models can help us make more rational and effective decisions, what Warren Buffett and Bill Gates consider their most critical factors to their success, Why the best investors are those with a behavioral edge, why the world's most successful people

Starting point is 00:01:57 choose the right role models to learn from, why successful investing requires extreme humility and so much more. I personally believe that you will gain many life and investing lessons from tuning into these episodes covering the joys of compounding, and I want to thank Adam for being just so generous and letting me chat about it. Some of these lessons may be new to you, and some may be a nice reminder to help you connect the dots between, you know, different pieces of your own life. As I was reading the book, there were so many parts that just made me stop and think. This book is packed full of great content and it's very well written as well. I think you'll come to learn that as I read some of the parts from the book.

Starting point is 00:02:36 Without further delay, I hope you enjoy part one covering Godham Bates' book, The Joys of Compounding. You are listening to The Investors Podcast, where we study the financial markets and read the that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, so like I said at the top, during this episode, I'm going to be covering my lessons and takeaways from reading the first few chapters of The Joys of Compounding. I think this episode will resonate with a lot of the listeners, not just those that are interested in value investing, but because many of the principles that apply to value

Starting point is 00:03:23 investing also applied to our daily lives. Right inside the cover of the book, it says, value investing is not just a system for success in the market. It is also an intellectual toolkit for achieving a deeper understanding of the world. Goddum builds a holistic approach to value investing and philosophy from his wide-ranging reading, combining practical approaches, self-cultivation, and business wisdom. What you'll find throughout his books is that he pulls these quotes and these ideas from all these various investors and thinkers, and he weaves them together masterfully in a way that just makes it so easy to read. The first quote he lists in his book is one by Charlie Munger. The best thing a human being can do is to help another human being no more.

Starting point is 00:04:12 I'm still relatively young and early on in my own career, but helping other people has been one of the most fulfilling things I've done, whether that be giving people feedback on how to think about investing in their own finances or what my thoughts are on a particular investment. Obviously, I can't give investment advice, but I have people asking me for my opinion a lot of the time. I found that helping other people is really truly fulfilling, and I just get so much fulfillment from that myself. Guy Speer wrote the forward to this book, and if you enjoy the content covered in this episode, it's pretty likely you'll also enjoy my other episode covering Guy Spears book back on episode 519 on the We Study Billioners podcast. Guy says that Goddum's book is another step in the

Starting point is 00:04:59 value investing tribe's unfolding knowledge about the world we inhabit. You'll not only learn from the classic value investors like Graham, Buffett, and Munger, but also the more recent students like Monish Pabri, Tom Russo, Mike Mobison, Peter Bevelin, and authors such as Shane Parish and Nassim Taleb. Guy rounds it out by saying that this book offers a fresh opportunity to learn and relearn those key lessons that will make us better investors and better human beings. Chapter 1 of the book is titled, The Best Investment You Can Make is in Yourself. Then here's another Charlie Munger quote. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed

Starting point is 00:05:46 every night a little wiser than when they got up in the morning. And boy, does that help, particularly when you have a long road ahead of you. Munger believes that lifelong learning is paramount to long-term success because we likely won't go far in life solely based on what we already know. Berkshire Hathaway had to weather through those decades that looked much different than the previous decade. And Munger says that without Buffett being a continuous learning machine, Berkshire's achievements would have been absolutely impossible. Goddum points out that most people go through life not really getting any smarter, but wisdom can be acquired for those who truly want to obtain it.

Starting point is 00:06:27 In fact, there's a simple formula for doing so. It's simple, but not easy, and it involves a lot of hard work, patience, discipline, and focus. And that's to read a lot. If it were me, I'd also throw in things like audiobooks and podcasts, as well, but maybe I'm a bit biased. Warren Buffett today is worth over $100 billion, and he spends his typical day sitting, reading, and thinking for the whole day. He says that he spends up to 80% of his day reading.

Starting point is 00:07:00 Like our money compounds, the knowledge acquired from reading also compounds and adds up over time. Godham says that self-improvement is the ultimate form of investing in oneself. It requires devoting time, money, attention, and hard effort now for a payoff later, sometimes in the far distant future. A lot of people are unwilling to make this trade-off because they crave instant gratification and desire instant results. These short-term costs, when applied the right way, along an axes of time, offer an exponential payoff when applied over a long life.

Starting point is 00:07:38 Compound interest, Albert Einstein repeatedly said, is the most powerful force in the universe. Gottem also points out that people who engage in mentally stimulating activities like reading experience slower memory decline than those who don't, and that reading is also linked with higher emotional intelligence, reduce stress, a wider vocabulary, and improved comprehension. Then he pulls in two quotes from those who are very popular in the self-improvement space Jim Rohn is quoted as saying that formal education will make you a living and self-education will make you a fortune. And then Zig Ziglar says, rich people have small TVs in big libraries,

Starting point is 00:08:22 poor people have small libraries in big TVs. Reading is so powerful because you're able to take in the accumulated knowledge and information in a span of hours that took somebody else thousands of hours and oftentimes decades of work to put that book into your hands. Goddum writes, The most talented people in any given field are self-educated. The best way to learn something is to try to do it, but the next best way to learn something is to learn it from someone who has already done it. This is the importance of reading and vicarious learning. In an October 2013 interview, Buffett and Munger discussed how they were able to leap ahead of their peers and competitors. Munger said, we've learned how to outsmart people who are clearly smarter

Starting point is 00:09:09 than we are. The other big secret is that we're good at lifelong learning. Warren is better in his 70s and 80s in many ways than he was when he was younger. If you keep learning all the time, you have a wonderful advantage. Self-improvement in investing in oneself is the best investment one can make, so it's critical that you spend a portion of each day working on yourself. Just one good idea from a book can lead to millions or even billions of dollars when you apply this concept of lifelong learning consistently. In Chapter 2, Goddum continues to expand on this message by becoming a learning machine. Well, the body is limited in ways that the mind is not. In fact, by the time most people are 40 years old, their bodies begin to deteriorate, but the amount of growth

Starting point is 00:09:59 in development that the mind can sustain has no limit. Reading keeps our minds alive and growing, end quote. I can't help but think about the traditional education system and some of the things I was forced to read growing up. I can't speak for everyone, but I personally didn't really enjoy reading growing up, and I think some of the reasons for that was because the majority of people in my environment weren't readers. And the things that school pushes us to read, I really didn't find it interesting at all.

Starting point is 00:10:29 But nowadays, when I pick up a book to read before bed, a lot of times I find it difficult to put it down because I just enjoy it so much. Goddum's book, The Joys of Compounding, is one of those books for me. Whether it's reading or going for a workout or whatever else, oftentimes the hardest part is to simply start doing it. If you commit to reading just 10 pages per day and you really commit to it, that means you're committing to starting the act of reading. By the time you get to the 10 pages, the act of reading, the act of reading, you get to the 10 pages,

Starting point is 00:10:58 the act of reading just feels effortless, so you'll want to read 20 or 30 pages. And when you come across a book you don't like, just simply put it down and try and find a better book. Unless you're reading a book to learn a specific skill or for another specific reason, you should let your mind go wherever your curiosity leads you. Nassim Teleb is quoted as saying, Curiosity is anti-fragile, like an addiction. It's magnified by attempts to satisfy it. Godham follows up by writing, paradoxically, as you read more books, your pile of unread books

Starting point is 00:11:34 will get larger, not smaller. That's because your curiosity will grow with every great read. This is the path of the lifelong learner. The place where many people can trip up with regards to this is not valuing their time. Rich people have a lot of money, but it's wealthy people who have control of their time. Time is the scariest resource because we can't get any more of it. Once your time is spent, it's gone and you can't get it back. So we need to be cognizant of how we spend our time

Starting point is 00:12:06 and ensure we aren't spending too much time doing things we don't truly value and spending enough time investing in ourselves. How many people spend too much time on tasks that don't add value long term? Such as watching television or watching Netflix, scrolling social media or YouTube or other time-sucking things that really pull at our attention. That's not to say that there's not room for these things in our lives, but we should be mindful that similar to how we allocate our money into investments and in our portfolios, we also want to be allocators of our time.

Starting point is 00:12:40 Time spent doing one thing is time not spent doing something else that adds more value to our lives. We're allocators of our time, just like we're allocators of our money. committing to even 10 pages per day of reading, this will likely lead to at least one book per month or 12 books per year. And this puts you far ahead of many of your peers who don't see the value in this daily habit of reading. We also need to be mindful of what type of information we're consuming. We live in an age that is full of information being spread every day and it's vying for our attention. Information is not scarce. It's our attention and our attention. time that is scarce. And the media's job is to catch your attention because their business model

Starting point is 00:13:26 incentivizes that. As a general rule of thumb, the news media that brings us the day-to-day events, as well as most of what is shared on social media, it isn't really important. A lot of it is used to try and entertain us and to tell us the public mood and sentiment. Nassim Teleb writes, minimal exposure to the media should be a guiding principle for someone involved in decision-making under uncertainty, including all participants in financial markets. Godham follows up by saying that his key argument is that what is reported in the media is noise rather than information, but most people do not realize that the media is paid to get our attention. The key lesson is that in the pursuit of wisdom, we must read much more of what has endured over time, such as history

Starting point is 00:14:16 or biographies, than what is ephemeral, such as daily news and social media trends. Apply the lendi effect to the books you read and use it to your advantage. Books that have stood through the test of time and are still widely read today are likely to be well worth your time relative to many of the new releases. And Gottem encourages readers to go through multiple nonfiction books at a time and pick up those nonfiction books that you're most interested in. continuing those that you find value in and dropping those that don't. Reading and learning compounds and stockpiles over time, allowing you to build an

Starting point is 00:14:54 inter-repository to use when interacting with the world. This is what Munger refers to as the lattice work of mental models. Goddum states that mental models are an explanation of how things work, what variables matter in a given situation, and how they interact with one another. Mental models are how we make sense of the world. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

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Starting point is 00:19:24 All right. Back to the show. Munger acquires much of this by studying biographies and learning from who he calls the imminent dead that have the right ideas. You'll want to figure out where you're going and learn from those who have been there before. Knowledge comes from experience, but it doesn't have to be from your own experience. Godham links this stockpiling of knowledge to the Matthew effect. The Matthew effect, which refers to a pattern in which those who begin with advantages, accumulate more advantages over time, and those who begin with disadvantages become more disadvantaged over time.

Starting point is 00:20:05 So when Warren Buffett and I read the same article, Buffett is very likely going to garner many more insights from that article, because he has read way more than I have. And he has so much more accumulated knowledge and is much better at garnering the most valuable information and insights from that article. If you can think back to when you were younger, You might remember how difficult it was to extract information from what you were reading and then learn from that information. But if you've read a number of books over your life, you'll find that extracting and absorbing information is much, much easier.

Starting point is 00:20:44 As you read increasingly more, your capacity to read and absorb more knowledge increases rapidly. It compounds. Also, as you read more, you're able to connect and contrast your accumulated knowledge. with that of which you're reading and gradually continue to connect the dots on a particular subject. Then he transitions to talk about principles stating that five words that separate the good from the great is flawless execution of the fundamentals. Boiling things down to their most fundamental truths, that is, to first principles,

Starting point is 00:21:20 and then reasoning up from these enables us to look at the world from the perspective of physics. This type of reasoning removes complexity from the decision-making process so that we can focus on the most important aspects that pertain to the decision at hand. Reasoning from first principles removes the impurity of assumptions and conventions. Instead, what remains is the essential information. First principles are the origins or the main concepts that cannot be reduced to anything else. These are the fundamental assumptions that we know. know are true, end quote.

Starting point is 00:21:59 Jeff Bezos is brilliant at thinking at first principles. Rather than focusing on what will change in the future, he's more focused on what he knew wouldn't change. Bezos knew that customers would always prefer low prices, fast delivery, and a wide product selection. So that's where he put his focus in creating Amazon. Focusing on first principles led Bezos to become one of the richest people in the world.

Starting point is 00:22:26 So in order to learn a new subject, first, identify the fundamental principles and learn those fundamental first principles in a clear and deep manner. In order to do this, Goddum suggests the feignment technique, which is a four-step process to learning anything well and for improving retention. The four steps are first you pick and study a topic. Second, you take out a blank sheet of paper and right at the top of that paper the subject, the subject. do you want to learn? Write out what you know about the subject as if you were teaching it to someone who is unfamiliar with the topic. In other words, explain it as if you were trying to teach a 10-year-old who can only understand basic concepts. Third is you refine your understanding of the concept because you have to explain it in very simple terms. If you struggle in some aspects of this,

Starting point is 00:23:18 then you can clearly see where the gaps are in your thinking and understanding that subject. Doing this exercise is really valuable feedback because you've discovered the edge of your mental capabilities. The fourth step is now that you know where your understanding is lacking, you can now go back and reread and relearn the subject and fill in those gaps. Goddum then lists several fundamental truths that are derived from thinking and first principles as it relates to value investing. He says, understand and practice the following if you want to become a good investor. He lists 12 of these principles that I will be reading here for you. First, look at stocks as part ownership of a business. Second, look at Mr. Market or the volatile stock price fluctuations as your friend rather

Starting point is 00:24:08 than your enemy. Third, remember the three most important words in investing, margin of safety. Fourth, evaluate any news item or event only in terms of its impact on future interest rates and the intrinsic value of a business. The intrinsic value is the discounted value of the cash that can be taken out during its remaining life, adjusted for the uncertainty around receiving those cash flows. Fifth, think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments.

Starting point is 00:24:44 Be unreasonable. When you look at a business and get a strong desire from within saying, I wish I own this business. This is the kind of business in which you should be investing in. A great investment idea doesn't need hours to analyze. More often than not, it is love at first sight. As a side note, this is how I felt about Mark Leonard and Constellation Software when I first analyzed their business.

Starting point is 00:25:09 Maybe this is the love at first sight aspect that blinded me to something I might be missing, but this is just what I saw when looking at this company. and maybe I'm overestimating their runway for growth and the quality of the business, but for me it was love at first sight. And this is the same thing Francois Rochon said about Mark Leonard in his interview with William Green. So that's just an interesting concept that comes to mind. Sixth is to think probabilistically rather than deterministically. Because the future is never certain and it is really a set of branching probability streams.

Starting point is 00:25:44 At the same time, avoid the risk of ruin. When making decisions by focusing on consequences rather than just raw probabilities in isolation, some risks are simply not worth taking, whatever the potential upside might be. Seventh, never underestimate the power of incentives in any given situation. Eighth, when making decisions involve both the left and right side of your brain, left for logic, analysis, and math, right for intuition, creativity, and emotions. 9. Engage in visual thinking, which helps us better understand complex information, organize our thoughts, and improve our ability to think and communicate.

Starting point is 00:26:29 10. Invert. Always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating or using derivatives or leverage. If the visuals under view, don't do anything that could get you remotely close to reaching such a situation. 11. Vicariously learn from others throughout life. Embrace everlasting humility to succeed in this endeavor. And finally, number 12, embrace the power of long-term compounding.

Starting point is 00:27:02 All the great things in life come from compound interest. It's a great list here, he presents to readers, many of which I wish I had learned much earlier on in my own journey, and some of which I had to learn the hard way. and then the book transitions to cover obtaining worldly wisdom through a lattice work of mental models. So the chapter might as well be dedicated to Charlie Munger. Goddum opens up the chapter with a Leonardo da Vinci quote. Study the art of science. Develop your senses especially learn how to see.

Starting point is 00:27:35 Realize that everything connects to everything else. In Tren Griffin's book, he lays out Munger's paths to worldly wisdom. Munger has adopted an approach to business in life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines, psychology, history, mathematics, physics, philosophy, biology, and so on, a person can use the combined output of the synthesis to produce something that is much more valued than the sum of the parts. Robert Haxstrom expanded on this in his book.

Starting point is 00:28:12 Each discipline entwines with and in the process strengthens every other. From each discipline, the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom. Munger was once asked whether people should become specialists or generalists, and he actually suggested that people focus on becoming specialists, as today's specialists tend to be highly valued by society in terms of their career prospects, but he still encourages spending 10 to 20% of your time on the broader ideas of the world.

Starting point is 00:28:55 Godham rightly points out that developing this sort of wisdom requires a ton of thinking and connecting the dots within your own mind. He pulls an excerpt from an essay by Bill Durecht. Thinking means concentrating on one thing long enough to develop an idea about it. Not learning other people's ideas or memorizing a body of information. However, those may sometimes be useful. Developing your own ideas. In short, thinking for yourself.

Starting point is 00:29:24 You simply cannot do that in bursts of 20 seconds at a time, constantly being interrupted by Facebook messages or Twitter or any other distractions. I find for myself that my first thought is never my best thought. My first thought is always someone else's. It's always what I've already heard about the subject. Always the unconventional wisdom. It's only by concentrating, sticking to the question, being patient, letting all the parts of my mind come to play that I arrive at the original idea. By giving my brain a chance to make associations, draw connections, and take me by surprise.

Starting point is 00:30:03 You do your best thinking by slowing down and concentrating. Now, Munger has often credited his success to having a long attention span and his ability to stay focused for a long period of time. And thinking is actually really hard work. Henry Ford once stated, thinking is the hardest work there is, which is probably why so few people engage in it. Gottem writes, the best ideas come to you in solitude. Introverts tend to be creative because by spending more time alone,

Starting point is 00:30:37 they are more susceptible to inspiration. Introverts are also less susceptible to group think, and thus it is easier for them to go against the consensus. He also pulled in some practical habits that can allow us to improve our thinking, which were sourced from the book, the five elements of effective thinking. First, understand deeply. Be brutally honest with yourself on whether you understand the core concepts deeply

Starting point is 00:31:05 and you're not just memorizing. Second, make mistakes. You're not going to grasp something on your first attempt. I'm sure many are in the same camp as me and made some very bad investments early on in their journey. Learn from them. When Thomas Edison was asked about how he felt about his countless failed attempts at making a light bulb, he replied, I have not failed. I've just found 10,000 ways that won't work.

Starting point is 00:31:31 Third is raise questions. Don't be afraid to look silly because questions help deepen your understanding. Fourth, follow the flow of ideas. Many ideas stem from other ideas. So learn from others and work to improve upon existing ideas. Fifth, change. Learn the habit of understanding things at a deeper level. See pretty much everything and everyone as an opportunity to learn.

Starting point is 00:31:57 Be a work in progress. Gradually bringing in more and more new information every day and embracing new ideas and change in your life. To round out the chapter, there are two quotes got him listened here. Munger explained why he spent so much time reading, especially reading biographies. I believe in the discipline of mastering the best that other people have figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart.

Starting point is 00:32:28 In the digital informational age we live in, Nivalvrava Khan points out that embracing lifelong learning is more available now than ever before. Quote, the internet is the best school ever created. The best peers are on the internet. The best books are on the internet. The best teachers are on the internet. The tools for learning are abundant.

Starting point is 00:32:49 It's the desire to learn that's scarce. End quote. Chapter 4 is titled Harnessing the Power of Passion and Focus Through Deliberate Practice. Goddum writes, According to the Japanese, everyone has an ikigai. I've never heard this term.

Starting point is 00:33:06 It's a new term for me. It's spelled I-K-I-G-A-I. It means of reason for living. Everyone has an ikigai, of reason for living. And according to the residents of the Japanese village from the world's longest living people, finding it is the key to a happy life. Having a strong sense of ikigai,

Starting point is 00:33:28 where passion, mission, vocation, and profession intersect means that each day is infused with meaning. Then there are a couple of really great quotes here. Ed Latimore says that when you can use your skills to make a difference in someone's life and get paid for it, that's a happy life. When you're passionate about it as well, that's a calling. The feeling is almost divine. Naval Vravacant says,

Starting point is 00:33:56 your goal in life is to find the people who need you the most. To find out the business that needs you the most, to find the project and the art that needs you the most, there is something out there just for you. Abraham Maslow, who is known for his hierarchy of needs, described the good life as one directed towards self-actualization or the higher need. Goddum writes that self-actualization occurs when you maximize your potential by doing your best. Humanistic psychologist Albert Ellis puts it a bit different. differently. That self-actualization involves the pursuit of excellence and enjoyment,

Starting point is 00:34:36 whichever people choose to desire and emphasize. So the enjoyment piece allows for more balance in your life and allows for less emphasis on achieving your highest potential. It allows for prioritizing your overall well-being. For example, I really enjoy working out and tend to do some form of movement most of my days to allow for some balance and ensure that I'm not just doing one thing the entire day. When Bill Gates and Warren Buffett met for the very first time at a dinner, Gates's mother asked everyone around the table what the single most important factor of their success was in their own lives.

Starting point is 00:35:12 And Gates and Buffett gave the same one-word answer. The word was focus. Both men agree that relentlessly focusing on one specific passion leads to achievement, and that means pushing aside other ideas and interests until a certain. goal is reached. Buffett says that intensity is the price of excellence. And Bruce Lee says that, I fear not the man who has practiced 10,000 kicks one time, but I fear the man who has practiced one kick 10,000 times. Nowadays with social media and the increased influence of the Federal Reserve on the markets, people's focus has shifted to the headlines that don't really make

Starting point is 00:35:53 much of a difference in the long term. And tune in to what inflation is, where interest rates, have moved, focus has shifted away from studying great businesses, which is where most Valley investors' money is to be made. Goddham writes, 50 years ago, the best investors were the ones with an informational edge. Today, the best investors are the ones with a behavioral edge. A lot of investors and money managers today are very short-term minded, as I'm sure a lot of the listeners are aware. He writes, today an investor's edge is less about knowing more than others about a specific stock and more about the mindset, discipline, and willingness to take a long-term view about the intrinsic value of a business.

Starting point is 00:36:38 While our society today often frowns on inactivity, most of what Buffett does seems to appear to be fairly inactive. He doesn't make big investments very often. He sits around and he reads, and he reads and he thinks just all day and doesn't really think about the news too much and what the fact. it's doing and such. Buffett is incredibly focused on doing what is best for the long-term shareholders of Berkshire Hathaway. Buffett says, quote, many people would see this as totally unproductive, but many of my best business solutions and money problem answers have come from periods of just

Starting point is 00:37:17 sitting and thinking. Your outcomes in life are driven by your decisions and your decisions are driven by your thinking. So don't skimp on the time needed to make important decisions. Most investors make investment decisions often, and they think very little. Buffett thinks often and makes investment decisions much less frequently. Goddum says, one of the best hacks in the investment field is learning to be happy doing nothing, and having a strong passion for lifelong learning is a durable competitive advantage for an investor. What differentiates successful investors from mediocre ones is passion. To be a truly passionate investor means you are always thinking about the future in the direction

Starting point is 00:38:03 of the world. It means you are always enthusiastically observing everything around you, end quote. Buffett has always said that the way to a happy life is to follow your passion and take the job that you would take if you were independently wealthy. and ironically, that quote from Buffett was one of the driving forces behind why I joined TIP myself. I loved the company, I loved the people, and I loved the work they did. The reason passion is so important in your work and your life is because with passion, you'll bring more energy than anybody else. You approach work with the mindset that you have

Starting point is 00:38:40 the opportunity to go to work, rather than you have to go to work. To quote Gottem again, instead of merely trying to live a long life, we should endeavor to infuse meaning into our lives. Too often, life appears short to us because we all seem to have so much to do. But the reality is that life is long if you know how to use it well. When you find your North Star, that is the single most important thing that sets your life's course. You learn where you're headed. And that is such a good feeling. And it is fine for your North Star to change over time.

Starting point is 00:39:15 But whatever it is right now, let it guide you. Your North Star is highly meaningful and vital in a personal context. So aiming toward this beacon of light will bring you great happiness to you every day. Pursue your passion because you won't get this time back ever again, end quote. 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.

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Starting point is 00:42:50 at fundrise.com slash income. This is a paid advertisement. All right, back to the show. In 2004, Steve Jobs was diagnosed with pancreatic cancer and was informed that he only had a few weeks to live. This is what Jobs said in his 2005 Stanford commencement speech. Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make big choices in life. Because almost everything, all external expectations, all pride, all fear of embarrassment or failure, these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to fall.

Starting point is 00:43:42 your heart. Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma, which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary, end quote. All this discussion around passion also reminds me of Jeff Bezos. his regret minimization framework. He zooms forward to imagine his 80-year-old self and asks himself if he would regret making such decisions.

Starting point is 00:44:22 This is how he left his high-paying corporate job on Wall Street to starting Amazon. His parents told him to start it part-time and keep his high-paying job, but he knew that the only way he would succeed is if he went all in. Goddum writes, Every big decision we make in life usually involved some sort of trade-off. At times, we have to accept small regrets in order to avoid larger ones. Many people spend so much time worrying about the risks of taking action that they completely overlook the risk of failing to act.

Starting point is 00:44:55 Sure, if you don't take any risk, there's no failure associated with it, but regrets will haunt you for the rest of your life. Failure hurts, but passes quickly. Conversely, regret hurts forever. Chapter 4 is rounded out by discussing deliberate practice being the key. to achieving excellence. Deliberate practice is a highly structured activity or process done with the specific goal of improving one's performance. Deliberate practice is often a repeatable task. For writers, it means writing a lot. For musicians, it means practicing a lot. Deliberate practice also tends to be

Starting point is 00:45:32 hard. It takes a lot of focus and a lot of mental effort and it isn't really all that fun. Godham rounds out the chapter with a Will Durant quote, We are what we repeatedly do. Excellence then is not an act, but a habit. So that completes Section 1 of his book, which covered investing in oneself, becoming a learning machine, obtaining worldly wisdom,

Starting point is 00:45:55 and harnessing the power of passion and deliberate practice. This brings us to Section 2, covering building a strong character. Chapter 5 touches on the importance of choosing the right role models, teachers, in life, and I'm really glad he included this chapter because it really hits close to home for me. Two mentors I've had over the years through this podcast was Preston Pish and Stig Bruterson.

Starting point is 00:46:22 I've learned so much from them over the years, and there was a stint where I would tune into every one of Preston's podcasts, especially the ones where he would appear on other shows because I just learned so much from him, not just on the investing side, but also his perspective on life. Now today I can also add William Green to that list as someone who I see as a mentor through his really insightful podcast and he just does great work for TIP. Warren Buffett says, I was lucky to have the right heroes. Tell me who your heroes are and I'll tell you how you'll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own and that if practiced will become habit forming.

Starting point is 00:47:06 Goddham writes, role models act as our motivational coach and as a source of daily inspiration in our lives. The very instant when we come across our role model, we usually know it. The feeling we experience at that moment cannot be described in mere words. It can only be experienced. It is one of profound inspiration, motivation, and finding one's purpose in life. Now, role models can be someone who achieve something you want. want to achieve, they've struggled with similar problems that you're experiencing, they have a life story that's inspirational, or maybe it's the people that just have so much discipline that

Starting point is 00:47:46 they're able to help you learn how to be more disciplined to help achieve your own goals. Two people that come to mind on the discipline side are David Goggins and Jocko Willink. For many of us, me included, our parents are our role models. Goddum encourages readers to always give time to your parents and be appreciative of them and everything. thing they've done for us. There is this classic saying that you are the average of the five people you spend the most time with. If you spend most of your time with people who are better than you, then you can't help but improve. Buffett's success is largely driven by the people he chose to surround himself with. He created an all-star team of business leaders, including Ajit Jane,

Starting point is 00:48:29 Greg Abel, Rose Blumpkin, among others. Part of Buffett and Munger's brilliance was to let managers of high caliber and integrity, run their businesses, and just not get in their way. Working with the right people teaches you things that you just can't learn in a textbook. Then there's a bit written about the importance of trust. Godham explains that trust lies at the heart of any relationship. We experience an echoing, anxious feeling when trust is not present. When trust is present, we experience an open, connected feeling. We build trust by being honest in our communications. being authentic and sincere in both words and actions, by being transparent and admitting mistakes in sharing what we learn, by being reliable and fair in our dealings with others.

Starting point is 00:49:18 Over time, as you build your network, put in your best efforts, and constantly add value to others in your relationships, and to build a seamless web of deserved trust. This reminds me of last week's episode where I discussed Mark Leonard in Constellation Software. Mark Leonard is just one of those people that you know you can trust. Historically, he has continued to under promise and over-deliver year after year after year. You know that he's going to do what's right for shareholders and never take a penny more than he believes that he should. Trust is earned when one's actions meet their words. To round out chapter five, Goddum quotes Lawrence Anderson. Our ability to choose is one of life's great gifts. We are the product of our choices.

Starting point is 00:50:05 Good choices come from good character, and a few good choices make all the difference. Chapter 6 discusses humility as it's titled, Humility is the gateway to attaining wisdom. Socrates said that the only true wisdom is in knowing you know nothing. Goddum follows us up. If only if we approach learning with an open mind, can we truly educate ourselves? The wiser we become, the more we realize how little we know. A lesser well-known equation from Albert Einstein rings true.

Starting point is 00:50:37 Ego equals one divided by knowledge. The more knowledge, the less ego. The less knowledge, the more ego. Or the deeper one dives into any field, the more humble one generally becomes, also known as the Dunning-Kroger effect. By demonstrating intellectual humility and acknowledging what we don't know, we place ourselves into a beneficial position to learn more, thus the dawning of wisdom, end quote. Especially when it comes to investing, things are always more complex and complicated than we might initially think.

Starting point is 00:51:12 So, always question what you think you know and consider the possibility that your current assumptions might be wrong. This is how you grow is by admitting to mistakes in learning from them. We can't ever be fully sure of something, so be skeptical about anything. that's a quote-unquote sure bet, or be skeptical of absolute terms such as never or always. Charlie Munger stated, People couldn't believe that I suddenly made myself a subordinate partner to Warren Buffett, but there are people that it's okay to be a subordinate partner to. I didn't have the kind of ego that prevented that.

Starting point is 00:51:48 There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader. People should learn to play all roles. Now, Charlie upgraded his life by associating with people he regarded as better than him. He had to set his ego aside and have the humility to not be at the top of the ladder. Godham explains, Truly humble people do not experience any uneasy feelings when someone younger, but more successful or knowledgeable than them shares advice.

Starting point is 00:52:19 If you're truly happy and satisfied with the life you're leading, you'll be happy to see other people succeed. Don't make this life all about you. be happy when other people are doing well and encourage their success. When you support others, it shows that you're not threatened by them because you are confident in your own abilities. He then shares a story of Frank Wells, who was the president of Walt Disney from 1984 until his death in 1994.

Starting point is 00:52:46 After his death, it was discovered that in Wells' wallet, he kept a note that stated, humility is the essence of life. And later, it was discovered that he had carried that note in his wallet for for 30 years. Humility is the essence of life. We also need to be aware of our natural biases. Odds are that how you view the world is largely shaped by your own personal experiences. This reminds me of what Morgan Howell talks about in his book, The Psychology of Money. People who lived through the hardship of the Great Depression can't imagine storing all of their wealth in the stock market. While a lot of investors over the past decade can't imagine not having

Starting point is 00:53:26 most of their wealth in the stock market. Goddham says, people tend to believe in what they have personally seen far more than what they have read or has happened to others. We are all biased by our personal history. If you experience an outlier event, then you'll likely overestimate the chances of that type of event happening again in the future. If you can get a good idea of someone's personal experiences, then you can have a better understanding of someone's position and how they might view the world. One point that William Green mentions again and again on his podcast is that investors must remain humble because the future is uncertain,

Starting point is 00:54:05 and what has worked in the past might not work in the future. Things are constantly changing and we can never be absolutely certain about what the future holds. When investors have a big win or feel like they can do no wrong, it's natural to become overconfident and double down on our bets thinking that we can't lose. Speaking from personal experience, if you ever feel like the money is too easy and you just simply can't lose, that is the time to de-risk and take chips off the table. Howzel writes, the more successful you are at something, the more convinced you are that you're doing it right, the less opening you are to change, the more likely you are on tripping in a

Starting point is 00:54:44 world that changes all the time. There are a million ways to get rich, but there's only one way to stay rich. Humility, often to the point of paranoia. The irony is that few things squash humility like getting rich in the first place. It's why the Dow Jones companies changes so much over time and why the Forbes list of billionaires has a 60% turnover per decade. Humility doesn't mean taking fewer risks. Sequoia takes as big of risk today as it did 30 years ago, but has taken risks in new industries with new approaches in new partners. They're cognizant that what worked yesterday isn't what will work tomorrow. Since the future is uncertain, it's important to think more probabilistically as well.

Starting point is 00:55:29 Rather than asking if you will be right or wrong, ask yourself, what is the probability if I'm right or wrong? What's the probability of different outcomes? When investors start thinking uncertainties is when they really start to get themselves in trouble. Think about how people assumed that housing only went up around 2005 or 2006, or the sentiment among new investors in stocks, thinking that stocks could only go up in 2021. Buffett helps combat uncertainty in the markets by investing only within his circle of competence in areas he knows really, really well.

Starting point is 00:56:03 Buffett says that we don't have to swing at every pitch. He says the trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if the people are yelling, swing you bum, you ignore them. You don't need to evaluate and know every company well. In Buffett's case, he only knows a select number of businesses really well. Nearly 40% of Buffett's U.S. stock portfolio is in Apple. Over 75% of his portfolio is only allocated to five companies.

Starting point is 00:56:35 It requires humility to recognize your limitations in the edge of your circle of competence, and only invest in businesses that you can truly understand. Buffett minimizes his risk by only investing in businesses that he is certain will continue to have a durable competitive advantage and continue to produce stable free cash flows. Contrary to popular belief, Buffett once said that 99% of stock ideas that come to him are outside of his circle of competence, and he isn't able to accurately assess what the future will look like for those companies. Goddham writes, just think about that for a minute.

Starting point is 00:57:11 In Buffett, we have arguably the greatest investor who has ever lived, admitting that he does not understand 99% of the businesses he comes across. The next time you feel you know it all, reflect deeply on that fact. A genuine and honest adherence to one circle of competence is a deeply humbling experience. The basic idea behind the circle of competence is so simple, it is embarrassing to say out loud. When you are unsure and doubtful about what you want to do, do not do it. If you can't find businesses within your circle of competence, do not hurriedly step outside that circle because of the fear of missing out, which is often the case in bull markets.

Starting point is 00:57:54 Instead, spend time studying industries and companies outside your circle before crossing the boundaries. The biggest advantage of developing one circle of competence over time is that different industries and types of companies are in favor at different stages of the market cycle. Having an expanded opportunity set at one's disposal to choose from can prove to be highly profitable at such times. He explains how in order to expand your circle of competence, you need to read a lot. The person that turns over the most rocks will find the best opportunities. Early on in Buffett's career, he would analyze every single company he possibly could,

Starting point is 00:58:32 and he'd have these quick checks to automatically disqualify companies so he didn't waste any time on companies he deemed to be bad investments. Gottem explains, My personal investment opportunity set has significantly expanded over the years, with time and experience in the markets. Initially, it was restricted only to secular growth stocks at reasonable to expensive valuations, but now it covers multiple areas of the investment universe, including commodities, cyclicals,

Starting point is 00:59:02 value and spinoffs, as well as loss-making companies that are turning around. Instead of being restricted by my personal biased views to a small opportunity set, as was the case during my early years, I am now able to invest in a variety of industries and situations where I find mispricing of value and a highly favorable risk-return trade-off. No single strategy works all the time, in every kind of market. That's why it's essential to build up one's investing arsenal to be able to hunt for value from within different areas. Then to round out the chapter, he says, the takeaway from Buffett and Munger is clear.

Starting point is 00:59:40 If you want to improve your odds of success in business, life, and investing, then clearly define the parameter of your circle of competence and operate only inside of it. Over time, work to expand that circle, but never fool yourself about its current boundaries. As Feynman says, the first principle is that you must not fool yourself. You are the easiest person to fool. All right, that wraps up today's episode. Again, I'm going to be covering Goddham's book over multiple episodes. So if you enjoy today's episode, be sure to check out my episode next week as well.

Starting point is 01:00:18 If you click follow in the bell icon on the podcast app you're on, you'll get notified of all of our future episodes so you don't miss any of them. With that, thank you so much for tuning in, and I hope to see you again next week. Thank you for listening to TIP. 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 theinvestorspodcast.com. This show is for entertainment purposes only.

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