We Study Billionaires - The Investor’s Podcast Network - TIP569: An Investor's Guide to Clear Thinking w/ Chris Mayer

Starting point is 00:00:00 You're listening to TIP. Back by popular demand, we bring back Chris Mayer. Chris is the portfolio manager of Woodlock House Family Capital and the author of the very popular investing book 100 Baggers. But today, we're going to be chatting about his lesser-known book, How Do You Know? A Guide to Clear Thinking about Wall Street, investing, and life. How Do You Know is a much different book than 100 Baggers, and it really got me thinking and changed the way I think about the investment landscape.

Starting point is 00:00:28 constantly, we are being bombarded with these broad terms like value investing, growth investing, the economy, GDP, the list goes on and on. Chris makes the compelling case during this episode that we can do away with all of these broad terms altogether. During this chat, we also touch on what Chris's goal is as a long-term investor in public equities, general semantics and how it relates to investing, why we shouldn't always take labels and names at face value, what companies Chris owns that are in what many would call, at unattractive industries, what Saznov's law is, how Chris developed the ability to not take

Starting point is 00:01:04 himself too seriously, his top book recommendations, and much more. If you enjoy this chat, I highly recommend you pick up this book as well, which we will have linked in the show notes. With that, we bring you today's episode with Chris Mayer. 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. Welcome to the Investors Podcast. I'm your host today, Clay Fink.

Starting point is 00:01:45 Today is a great day because we bring back Chris Mayer to the show. Chris, welcome back. Thank you, Clay. Good to be back with you. Looking forward to it. Well, since I was such a huge fan of a hundred baggers, which many people in the audience are aware of, I picked up one of your other books titled,

Starting point is 00:02:02 how do you know a guide to clear thinking about Wall Street, investing, and life? After I read this book, I've realized that you really, really love to read and you fully embrace what Charlie Munger calls being a learning machine. So I'm curious, has being an avid reader always been a part of who you are, or how do that start for you? Yeah, I think so. I think I've always been somebody who's always had their nose in a book. And even when I was little, I can remember I used to love reading like fantasy and science fiction and as a preteen reading The Hobbit and Lord the Rings and all that. And then my reading just sort of shifted all around. But yeah, I think I've always been a reader. I've always enjoyed reading and learning and having books around.

Starting point is 00:02:49 And I think about the way you invest. You know, you select, say, 10 or so businesses. And I think it's really easy to kind of become complacent and think that, you know, you got your set it and forget it type portfolio. But you know, you're still a learning machine. You're always reading and learning. And I think you sort of live in a way that Buffett and Munger sort of live where they're always thinking about things. They're always thinking about their businesses. So can you talk more about that role that being a continuous learner has played for you? Yeah, I think that's important because when you think about it, it looks like you're not doing anything because the portfolio isn't changing. You're not in there doing by ourselves. But that's just one activity. You know,

Starting point is 00:03:29 If you think about doing things as also including reading transcripts and keeping up on the companies that you own and not only them, but they're competitors and peers. And then there's ongoing work that I enjoy doing where I talk to people used to work there, or former executives or people used to run divisions or locations depending on the business. And so that's ongoing and you always learn new things. And businesses change all the time. I mean, some of these businesses now I've owned for years and it's just the environment's changed, different things happen. So there's always seemed like there's stuff to learn. I tell people,

Starting point is 00:04:03 if I wanted to, I could just do this job 24-7. But you kind of got to discipline yourself a little and realize there's a point of diminishing returns you get to with a name and then you kind of leave it aside for a while, work on something else, and you kind of come back to it. So I'm always doing something. It's just not buying and trading, buying and selling. Before we dive into the book here, I had one more point related to our previous conversation. During that chat, I mentioned that the goal for most investors is to beat the market, meaning they're trying to outperform some sort of benchmark like the S&P 500. And I think that's the goal of many fund managers because those who invest with them,

Starting point is 00:04:43 they know that their clients can go out and just buy an index and not have to deal with, you know, managers and paying fees and such. And during that chat, you pointed out that it probably shouldn't be the goal for most investors, or at least it isn't your goal. And that really stuck with me from that chat. You stated that trying to beat the market is like approaching life with the goal of trying to be happy. So with that in mind, I'd like to ask you, just throw it over to you to what is your goal

Starting point is 00:05:11 as an investor if it's not beating the market? Yeah. I mean, I think being the market is more like the outcome of a very good process. So, yeah, I mean, it's like kind of putting a cart before the horse if you're saying you want to beat the market. I mean, first thing you want to do is develop a good process that leads. to high returns. And a problem also is if you make being the market your goal, then you know, you're not going to beat the market all the time. Even the greatest investors will trail a third

Starting point is 00:05:37 of the time or more. And it might make you make decisions that might get you ahead of the market in the short term, but it would be detrimental to the long term returns of your portfolio. So I want to ultimately, I hope that I will beat the market by a wide margin when I look back 10 years and see the results. But that again is sort of a, that's the end. product of a lot of other things that have to go first. So, and that for me entails finding an approach that meshes with my skill set, my temperament, and all the work that I've done. So that's my goal. And my soul and my goal, then it really becomes more of a discipline of sticking to what I've found, sticking to that process and not straying because it's also easy to,

Starting point is 00:06:18 you know, any, any style that you have is going to, again, it's going to trail the market at some point. And if you're not committed to that process, then it's easy to sort of switch and think that you can do better by, you know, altering your style. And most of the times that's a mistake. It reminds me, I believe you wrote that most great investors, like you think of Buffett, Munger, they're going to be trailing the market one third of the time. So during those years where they're trailing the market, they might think they're doing something wrong when in reality, their process might be just fine, but they just need to stick with it and focus on that long term like you're mentioning. Yeah, I'm not very goal-oriented myself when it comes to that

Starting point is 00:06:54 specifically, you know, investors always like to ask that kind of, you know, new investors, they'll say, well, what kind of returns do you expect? What do you hope? And so, you know, sometimes I'll say, well, you know, I like the double money, double your money over five, you know, it's kind of a good pace, but it's not like it's a goal per se. I'm just trying to, the highest returns I can with skill set and knowledge that I have without doing anything crazy or risking the whole thing. So, yeah, I mean, it's kind of like, I don't know what a good analogy would be. I mean, if you were running a sports team, you want to go as far as you can, but you don't necessarily, I don't know, you don't have goals that you have to beat certain metrics along the way.

Starting point is 00:07:30 I don't know if that's a good analogy. I'm trying to think of a good analogy. All right, let's turn to your book. How do you know? A lot of investment books say a lot of the same things as you probably know, but I think yours is much different. It's a book that really made me think kudos to you for that, for, you know, creating something that, you know, I think really is just a lot different. and it's almost hard to explain, but we're going to be diving into some of the ideas here. The book talks a lot about general semantics. So let's start there. Can you define what general semantics means? Because this is a term I had never even heard of before reading the book.

Starting point is 00:08:06 And how does this relate to investing? Yeah, it's kind of tough to describe what it means exactly. I mean, it was a discipline that was created by a guy named Alfred Kraszipsky. And he wrote a book in the 30s called Science Insanity. It's a big, fat book with many foot. notes and some math and 800 pages. It's, you know, it's not an easy read and stuff. I'll admit to being stumped the first time I tried to go through it. But that's where it began. It begins with him. And what he was trying to do, or I should say one of the things that general semantics

Starting point is 00:08:35 tries to do is sort of analyze and look at how we use language and symbols and, you know, the assumptions that underline those words and symbols and how they then affect how we think about things. I think that's kind of a very broad way to think about it. You know, it's kind of an aid to critical thinking too. It's even a shorter hand way to think about it. And so, you know, how does this relate to investing? This is what my book wants to do is to relate in general semantics to investing. And there really has been very little on it. There was one other book that was written in 1958 by John McGee. And originally he called it General Semantics on Wall Street. That was the original title. And I guess it didn't sell very well because within a year they issued another edition. They called it

Starting point is 00:09:18 winning on Wall Street rather than General Semantics, which is not the best name. And I think even people who are enthusiasts of discipline today will complain, you know, general semantics is not a great name. And I wish you'd given it a better marketing handle, a better name. But it's been around for so long, it's hard to change it. So, you know, the way I think General Semantics relates to investing is you take all those analytical tools. And so Kraszipsky has this whole toolkit, which I get into in the book, and apply it to

Starting point is 00:09:44 how we use language in Wall Street. I mean, we have in investing, we have lots of terms. that we use that are very vague and abstract. And general semantics kind of helps you cut through a lot of those abstractions and get down to more concrete ideas. I know I'm speaking kind of generally now, but I'm sure we'll get into specific ideas here soon. And the main quote, I think, that applies to this book broadly is a quote from Kyrgyzipski.

Starting point is 00:10:10 The map is not the territory. So just because you attach a word to something doesn't mean it tells you anything about, you know, what it is you're describing. That's right. That's his most famous coinage. I don't think he was absolutely the originator of it, but he definitely popularized that term. The map is not the territory. And it's kind of like, you know, there's been a lot of similar ones like the menu is not the meal as another one. This idea that what we say about something, what we describe it is not the actual thing itself. And that's a very important idea that Krizibski hammered at again and again. Let's dive in and chat about some of the terms that people use to try and simplify the

Starting point is 00:10:48 investing world in maybe not the best possible way. What are some of the examples that come to mind for you? Yeah, I mean, I always think of just basic ones like think about how we talk about value stocks and growth stock. That's always one that's maybe easier to describe because, you know, what is a value stock really? I mean, well, the way we talk about it and the way investors talk about it, sort of the way the media talks about it, it's like there's an identifiable tag that you just put on a stock, this is a value stock, this is a growth stock. And those categories, of course, have very little meaning when you get down into it. You can see, you know, people call themselves value investors own stocks that are also owned by people, call those growth investors.

Starting point is 00:11:29 Stocks move around between the boat. They really don't mean much of anything when you're in the business of owning individual stocks and businesses. You could do without that terminology entirely. And I don't think you lose anything at all. And there's a lot of macro terms as well that we, you know, just throw around. Like, we'll say the economy is doing well or the economy is doing poorly, or we'll throw around things like GDP, like it has a precise meaning. And so what general semantics, I think, when you get familiar with it, what it forces you do, anytime you see any of those kind of big abstractions, it kind of makes you stop, gives a little flag and saying, well, what is, what do you really mean when you say that? What are we talking about? You know, it doesn't matter.

Starting point is 00:12:04 And those are some of the things that come to mind. I pulled a bit here related to the value investing one. You mentioned that it can include investors that are so different from each other, that you have to question the validity of the term altogether. Then a bit later, you have, if you want to get on the path to clear thinking, you have to see through this charade of value and growth. Another quote that really stuck with me is you said, there's really no such thing as a value stock or a growth stock. And it's just something that you just read it and you're just like, huh, he's really right to some degree here. And it just like turns your world upside down because people talk about value stocks and growth stocks all the time.

Starting point is 00:12:42 Yeah, and value investors and growth investors. And absolutely, I mean, that's the key is they be able to see through those labels. I mean, we do it too when we talk about companies and we'll say, well, this company is an auto manufacturer. And then you just start thinking about it in a certain way like Ferrari. You know, technically it's an auto manufacturer, but it behaves more or looks more like a luxury goods company. You know, those are kind of some examples that people get stuck in certain buckets.

Starting point is 00:13:08 that instead of looking through at the underlying economics and that will change what you think. Another term, I think, is really interesting that people love to use is durable, competitive advantage. Does a company have a durable competitive advantage? It's really profound to think about how it's not really in either or thing. It's dynamic is ever changing. And what is strong today might not be strong in the future. So it's something that continuously needs to be sort of studied, thought about, and that's how it sort of applies to your sort of philosophy of continuously learning and continually questioning, you know, what is reality. Absolutely. And you mentioned something in there that's also a big point with Kraszipski,

Starting point is 00:13:51 you know, the either or. So that's always a distinction anytime you come across something and it's presented as an either or, that alone is another little flag because there's almost always a third alternative where there's always always a case where there's gradations in between. And so in your example with durable competitive advantage is one of those. I mean, it's not that you have it or you don't have it. It's a matter of degree, right? It's just kind of understanding what allows a company to earn high returns, let's say. And usually there's something that has, it's special that it does.

Starting point is 00:14:20 And then your job as investors just kind of figure out what that is and how long it might last and stay on top of it. So it's not about putting on a label on and saying, well, this company has wide moat. What does that mean? It's not that you just have it and don't have it, like we're talking about. Let's take a quick break and hear from today's sponsors. All right, I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:19:06 be so fixated on these big terms and why GDP itself is just a flawed metrics that is really difficult to attach meaning to when you're looking at these numbers? Yeah. Not. That's That's it. I mean, it's a very big, vague term. I mean, there's a lot of different critiques of GDP, and I know I've included some in the book. I mean, I remember one that comes to mind, you know, as Rory Sutherland points out, that, you know, Wikipedia is a great free resource for everybody. I think he said it's like putting a library in everyone's house, but of course, doesn't get counted in GDP at all. There's lots of things that are like that, where if you don't spend money on it, it's not counted, even though it clearly has value. I know Bill Bonner, who is my partner, always likes to point out the example of saying,

Starting point is 00:19:47 well, you know, if you mow your own lawn and your neighbor mows his own lawn, there's no contribution to GDP, but if he pays you 20 bucks to mow his lawn and you pay him 20 bucks to mow your lawn, suddenly, you know, it's 40 bucks added to GDP. And so it measures things like spending. So, you know, we spend money on health care because we're sick as GDP goes up, but that's not necessarily a good outcome we want. I mean, he goes on and on and on with GDP. It's a very, very large abstraction that kind of tries to track spending in an economy. But when you really get down into the particulars of it, it doesn't really make a lot of sense. And again, it's one of those things I think you could do without as an investor. If you never looked at GDP or knew what GDP was, I don't think

Starting point is 00:20:28 it would hurt your results at all. You really opened my eyes, Chris, to why we should be skeptical of labels and names. And as you've mentioned, when people don't understand something, they like to slap a label on it and think that they understand it without really looking and digging into what it actually is that you're talking about. And you mentioned one ETF in your book that had $132 million in assets under management. And it was called the Power Shares, Dynamic, Leisure, and Entertainment ETF. So investors were presumably getting exposure to the leisure and entertainment industry. But this fund held companies like McDonald's and a bunch of the airlines companies. And Funnily enough, the ETF didn't even hold the obvious players like Disney.

Starting point is 00:21:18 And it's a big wake-up call that we really need to look at what it is we're actually talking about and not just take a label like the Leisure and Entertainment ETF, just take that and assume that that's what it actually is. Yeah. There are lots examples of that in ETF world. I remember there was also a home builder stock or home builder ETF that I talked about in the book. And one of these ETS had something like only a third of it. assets and Home Builders. So you're getting a whole bunch of other stuff other than that. And the power of labels, I mean, it can have really big consequences. You know, I used to work in the banking in the

Starting point is 00:21:53 90s and early 2000s. And back then, we still very much, people very much trust the S&P ratings and AAA for securities. And so I know that bank treasury would buy and sell bonds just because they had AAA rating, wouldn't do any more work on it than that. We used to joke because I was in commercial lending and do a lot more work, you know, on individual company, through field audits, and all this other stuff, but the Treasury Department could buy and sell tens of millions of bonds just because it had AAA rating or not. And all that came undone with the big general financial crisis. And you saw that that was a case where people were just trusting the label and not looking at what was in it. So this can definitely have real serious consequences overlooking these labels.

Starting point is 00:22:33 And I think about how a lot of times people will attach a label to something. And when I relate this to investing, someone might think they're a, growth investor. They want higher growth. And when they see that a stock is like a value stock, then they'll just like not even look at it and not even understand what it is. And I think about how some of your holdings are in what some people might call unattractive industries. Well, I just think about how you, you know, you dug underneath the surface. And just because it might be in what people call an unattractive industry, it still can be a very attractive long-term business. Absolutely. And this has happened to me multiple times. I mean, I know like I have

Starting point is 00:23:12 Old Dominion freight lines in the portfolio. It's a trucking company. And for most people trucking and you look at it, it's unattractive industry. Why would you want to be involved in that? There's lots of competition. But then you get in the Old Dominion and you see that, you know, its return on invested capital is huge and it's got this deep competitive advantage over everyone else. And it's been taking market share, double its market share over the last decade. And then you see that, you know, in terms of results, it would be silly to just say, you know, I don't own trucking companies because the economic to that are not something you expect to see. It's a real outlier even within its own industry. And I've had that before too. I never had too much success

Starting point is 00:23:48 with retail, retail, retail stocks and retail. But I own Dino Pulska, which is Polish grocery store. And again, that's getting beyond just its category and looking at the underlying economics, which are phenomenal for that business. And it made me want to look further. And so ultimately, it's been a very successful investment so far. So again, you know, real world consequences for taking these labels at face value and if your willingness to dig behind them can lead to some real insights. It seems really obvious. You know, sometimes when I talk about general semantics of people, they'll be like, yeah, well, it just seems so obvious. But it's not the way people behave. They behave exactly as we're talking about. They're taking the label at face value and they're allowing it to do

Starting point is 00:24:27 their thinking for them. They're not looking beyond it, not looking behind it. And it's lots of examples. We've talked already about a bunch. You also caution against confusing correlation with causation. Don't fight the Fed is a phrase that gets thrown around a lot. And you write, whenever you see an if X, then Y statement, then you should distrust it. And when I think about what drives stock market returns, I tend to think about sustainable growth in free cash flows will ultimately drive long-term shareholder returns. And this book really makes me question a lot of my assumptions. So I want to just turn that question to you and have you talk about what you believe drives long-term stock returns. I'll answer that. But first, I'll go back a little bit.

Starting point is 00:25:15 And, you know, on the if then, the problem is that in finance people do this all the time is they want to just change one variable. So they'll say, you know, okay, well, if interest rates go up, then stops are going to go down because, oh, you know, raises everyone discounted rate and the cash flows, we're discounting cash flows now at this higher rate. And, NASA values will fall. The problem is, of course, in real world, you can never just change one variable. There's like all these other things that change at the same time. The underlying cash flows change, expectations change, all kinds of things change. And so you can have a result that then is then surprising. So here we've had a period of time where the Fed has increased rates at a

Starting point is 00:25:52 faster clip than ever has in the market's ripping. And there's lots of examples in the past where if you had known ahead of time what some outcome was going to be, you would still be wrong on the investment side. So one of my favorites in the book is I think I got this from Michael O'Higgins, who pointed out, he had an example where even if you knew price of gold more than doubled over some period of time, and you thought to yourself, well, that's pretty good. Logically, I'm going to buy the largest gold miner, you know, Neumont. And then if you roll forward, Newman's stock actually fell 5% during that time. Again, because it wasn't just one variable to change. Newman has costs. That went up a lot. There's other factors in the business,

Starting point is 00:26:26 expectations involved. So you had dramatically different outcome than you would have thought, based on the initial conclusion. So that's why you have to distrust any if then, if X happens, then why, and when it comes to markets, because there are so many other things going involved so when it comes to what drive long-term returns, I think it helps just to get down the really basic stuff. So a business, you think of it as a pile of capital and what rate can it increase that capital over the next 10 years? That's the fundamentals that drive returns. So it's some kind of return on invested capital plus growth rate over time. That really drives returns. What return you may get is also a function of price that you pay. So in those three things, you have

Starting point is 00:27:10 everything. And mathematically, you know, it can't work out any other way. One of those three things has to lead to returns. Now, being able to forecast or figure out, you know, what return on invested capital is going to be over the next year and what's the growth rate going to be and what kind of valuation going to be. That's probably impossible to know. We're all making best guesses and what we can based on our research and digging into why certain businesses are able to generate such returns. And that's what we do.

Starting point is 00:27:38 You're a big believer in Saznoff's law. Saznoff wrote that the price of a stock varies inversely with the thickness of its research file. And the fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most. In short, I sort of see this as the best ideas, they really stand out to you and they don't require extraordinary levels of research to build that conviction. And I think this points to what you mentioned there. You want to find the essential elements of what's going to lead to this business's success

Starting point is 00:28:15 and then understand the factors that play into that. And you filter out about everything else. In a way, it's drastically simplifying the extremely complex world around us, which is really liberating to do as an investor. So I love for you to talk more about Sazanov's law. Well, that's beautifully put there, Clay. That's good. I mean, that's exactly it. You hit it. You hit it right on the nose. I mean, I spent a lot of time trying to figure out what kind of the essential things to know about a business. That's usually less than a handful of things. We're really key, you know, the really important things. And the rest of it are details that are not that important in the long term, although they might be important in the short term,

Starting point is 00:28:56 they might have big impacts in particular quarters or whatever, but long term, they don't matter much. So I spent a lot of time on that. When it comes to Sassnav, I was always, you know, he wrote a book called Humble on Wall Street, and I think it came out in the 70s. So the thickness of the research file is something that doesn't hold up as well over time, but we get the metaphor. And he was big on a couple of things I learned from him. One was he really emphasized the skin in the game aspect. But also, I like the Saznav's law, because that jives with my experience as well. You know, when you're really laboring over an idea and you have to rely on like detailed spreadsheets and assumptions to justify, it's probably not a good

Starting point is 00:29:32 idea. The ones that are really great are the ones that just jump out at you and you're just really excited and it seems obvious. I mean, that again, it jives with my own experience. Some of the best investments I've made have had very short. I write little internal memos to myself and some of them have been very, very short and they've been great, you know, and the ones that I have to spend a lot of time on, sometimes those don't do as well. You really understand the qualitative aspects, you know, the qualitative aspects of the business of the management and you're not having to fiddle around with a complex model just to make the numbers turn out to what you want them to be.

Starting point is 00:30:06 Yeah, and that's right. I mean, you know, the models are sort of so sensitive to what assumptions you make. You could twist it and make it say whatever you wanted to say. And the qualitative things anyway are probably overrule a lot of the details in the long run. I mean, when you think about what drives returns for a business over a decade, it's going to be related to things like people and culture and those qualitative competitive advantages we talked about. So, yeah, I think that's right. I'm also curious how meeting management teams in person, maybe on a call, how that sort of plays into this, because it seems like a lot of work to,

Starting point is 00:30:40 you know, maybe fly across the world to meet a manager that you're considering investing in. And then that also introduces, you know, a number of different biases, like the liking bias and different things. Can you talk more about how meeting managers plays into your research process? Yeah, this is a great question because I do believe that, like, you know, managers and CEOs are in that position, partly because they're charismatic people. And so you go there and your charm. So I try to do all the research first. And I know I have a pretty good opinion initially. And that's not always true.

Starting point is 00:31:13 Sometimes it's happened where I've, if I haven't met, I'm not. management. I've seen them or heard them. And then that's been the attraction, something that they've said or philosophy that they've sort of put out there that I think, hey, you know, that that's a clue that something good's going on there. So I don't, I haven't met the management teams of all the companies I own, probably a little more than half. I have. And I think it's valuable to meet them. And it depends on the situation. Sometimes for a larger company where the disclosures are very good, the business is pretty simple. And management team is a lot of trans-busy. You don't get a lot of extra meaning them. And you have to be kind of brand.

Starting point is 00:31:45 about that. Like, you know, sometimes I think investors want to meet management team just so they can kind of check off that box and they can tell their investors, well, we've met the CEO, but really, what value did you get out of that meeting? You know, sometimes you do want to meet them. Find particularly with smaller companies and those companies are more accessible usually. But depending on the business, there might be things that you want to know that aren't necessarily so obvious from disclosures or some management teams are not out there as much or there's not as much coverage. So there's just not as much information and management teams can be helpful in that case. So I like to it, but it doesn't always happen that way.

Starting point is 00:32:18 Another thing I've learned from you and really admire about your approach is your appreciation for the reality that everything changes. A lot of people, I think, you know, they form an opinion on something and they can be set in their ways. And, you know, I just read your book and I become very humbled by just questioning how little I actually know and questioning what I think I know. I wanted to pull in this quote from Dawes that you brought in. it's from his writing titled using the structural differential. If we accept that we don't know all

Starting point is 00:32:49 that's going on around us, we're less likely to be close-minded about our ideas, opinions, decisions, et cetera. If we accept that we don't know all, we are more likely to develop a theoretical, experimental, and less absolutistic approach to what we believe, what we understand or know, or what we do. It reminds me how you're so willing to mention some of these individual names. You do it knowing full well, you might change your opinion on this company tomorrow. That's just for the reason that everything changes. Businesses change, industry dynamics change. And I'd love for you to talk more about this appreciation for the appreciation that everything is always changing.

Starting point is 00:33:28 Yeah. I think that's something that really general semantics studying that has really helped bring home. I mean, Kuzipski has this idea. One of his ideas is he uses dates. So for certain ideas or opinions that you have, he recommends you just kind of date it. You can either date it physically, you know, make a little subscript and date, or you can just mentally know that that was your opinion at that time. And it has a way of detaching yourself from that. So you hit it right on again when you said, you know, I'm willing to mention those names because I know in my mind I'm not attached to these opinions at all.

Starting point is 00:33:58 I mean, this is what I'm saying today is what I think right now at this moment in time. And then a year from now, it might be a different story with something. So in Kraszicki, you know, he has a number of examples like he'll say, you know, you just look at old photos. you can see how you yourself physically have changed. You can see how things have changed. I know one of the things I do is I keep a journal. And one of the interesting things about keeping a journal, I try to write in every day, even just stock market stuff, anything, is it makes it harder to lie to yourself, you know, as far as what you thought back in time. And you can see how you've changed a lot as a person, things that you liked and things that you thought you don't think anymore. So it really makes you humble. I mean, that everything changes. And so if that's your premise, you become less attached to opinions, less attached to facts. today and more willing to let them go when it's time. It's really been, I think, a very good liberating exercise. Related to this idea of everything changes, I think, you know, there's this profound mental model you sort of introduced to me that this time is always different. People try and make comparisons today to previous times in the past, and they're trying to make predictions

Starting point is 00:35:06 about what's going to happen? Is the stock market going to crash? Are we going to enter a recession? This mental model of this time is always different, is, again, very liberating. Because even some of the great investors, you know, they talk about how history tends to repeat itself, you know, maybe rhymes, but not repeat exactly. And I think about how companies are always changing, market dynamics are always changing and everything is changing again. And you talk about indexes and how they're changing. So people will look at the S&P 500 and they're not really. looking at the companies in that index. They're looking at what was the price, say, in 2003, what's the price in 2023? What's the multiples between the two? And the reality is, like,

Starting point is 00:35:46 you're comparing things that are entirely different because the index itself changes. You know, the top holdings in 2003 were much different than 2023. Yeah, I mean, that's an important thing. You know, that's, again, kind of mixes in with a lot of stuff we've talked about. The S&P index is the name, has a label and people treat it as if it's this thing that you can just compare over decades of time and that it's a valid comparison. But, you know, just look at the top 10 and the S&P now, look at it 20 years ago, look at it 20 years before that, substantially different. And the mix of companies is significantly different. I mean, I think the S&P only added financials in the 70s or something like that. So there's been a lot of big changes to the index over time.

Starting point is 00:36:28 And that's going to skew your numbers, you know, price earnings ratio or whatever. So, I mean, that's been very important. I love that this time it's different example, too, because, you know, I think it was Templeton who kind of made that famous where he said, this time is different as, you know, most dangerous, blah, blah. And I get the idea behind. The idea behind it is investors want to try to defend bubbles or something, and we all know that they come to an end at some point. So there's some truth to that. But then the other side is that this time is always different from every other time before. Details are always different. Different companies, different people. It's a different world than now that it was 20 years ago or 20 years before that.

Starting point is 00:37:04 And so keeping in mind that that is the case, you know, may prevent you from falling into some traps. I mean, finance people in finance do this all the time. In Twitter, how many times you'll see, oh, now they call it X, you'll see charts where someone will say, you know, have some bare market going like this and then I'll have the present and it'll be like this. Oh my God, it matches up perfectly. It has no validity whatsoever, you know, at all. Nothing to do with anything. But people love to do that. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:40:53 use an example here. They might look at the S&P 500. I'm just throwing out numbers. These aren't, you know, based on numbers I actually looked up. We'll say the multiple on the S&P was 20 in 2003, whatever it was. And today, we'll say it's higher than that. We'll say, you know, it's much higher today, the multiple today than, and people will assume that, oh, we're way above the historical means. So eventually things tend to revert to the mean. So is reversion to the mean itself a flawed concept? Yeah, I mean, I have another outlier opinion on this is that, yeah, the reversions are mean people talk about is, I mean, it's very problematic because there is no real mean. I mean, it's your imagination. It's a concept we've created, but it doesn't, there's no mean.

Starting point is 00:41:38 There's no market, no market says I have to go to this meet. And that mean, is always changing. Like, as you pointed out, I mean, you could look at the multiple now today and the SB is a lot higher than it was saying 2003. But in 2003, you know, some of the biggest companies might include ExxonMobil might have been a very large company, 2003. It might have been slower growth, more capital-intensive businesses that are part of that index versus now. So there's reasons why they might be very, very different. And it doesn't make sense to say that today's S&P has to go to some mean that's constructed based on constituents that aren't even in the index today. I think that's an overlooked thing. I mean, mean, reversion,

Starting point is 00:42:13 you have to be careful again with one of the components that you're saying have to mean revert. It might be one thing if you're looking at a company that does the same thing now, exact same thing it did now 20 years ago and the margins don't change very much and suddenly you've got a little dip. There might be some way to defend a reversion to the mean, but I'm very skeptical of those kinds of arguments. Again, I think it's another case where people are just maybe simplifying too much. They'll be like, you know, this company's trading at the lowest multiple it's ever been. I'm like, have you looked at the business and the actual, you know, where things are trending,

Starting point is 00:42:47 where the world is trending? Sure. Yeah. I mean, I know there's a prominent example. I know a lot of people were getting excited about, say, Danahare, and because it's traded at the lowest P.E. It's traded at in however many years. But, you know, do you look at the return on invested capital on Dan Hare? It's been in decline, you know.

Starting point is 00:43:02 It's not the same business that it was that people remember in their head at this great, you know, high-performing conglomerate for all those years. It's maybe it will get back there. Maybe there's a thesis that it gets back there. But a lot of times when you see a company trading in the lowest level it's ever traded at, there's a reason. And be careful about just assuming that you can buy this today and go back. to that. It will mean revert and you'll make this great return, how to get behind it and figure out why. There's another phrase I always still love. Marty Whitman used to say that, you know, what the numbers mean instead of what they are. I think that's a good idea. It's not so important what the

Starting point is 00:43:37 number is. It's kind of figuring out more what it means. Why is it there? Let's talk more about that. I pulled in a point here talking about accounting issues. Some investors, they base the value of a stock, just looking at the PE. The price side of the equation, we know it's just the market price. And relating back to the PE, people would say a high PE is an expensive stock and a low PE is a cheap stock, but it can be difficult. You know, you say you want to look at what the numbers actually mean and not what the numbers just show. And it's difficult because the earnings side of the equation, it can get murky and it can be up to interpretation of accountants. So do you have any tips for our listeners for how they can better interpret earnings or how you've sort of come around to

Starting point is 00:44:23 understanding, you know, maybe quality earnings versus not so quality. Right. I mean, sometimes when I get in for shock value, I'll say something like P.E. is not a valuation tool, you know, because it just leaves out so much. I mean, the most critical thing that leaves out is how much capital is required to produce those earnings. So if you have a company that's trading it, let's say 10 times earnings seems attractive, but how much capital is required to produce that dollar earnings. And even if a business is growing, you'll hear people say, well, as long as free cash flow per share goes up over time, that's good. Or earnings per share go up over time, that's good. But again, not necessarily because you're missing out

Starting point is 00:45:00 the key thing, which is how much capital is consumed or required to increase free cash flow earnings per share over that time. And in the market over the long term generally sorts things out by that return on invested capital and growth or some sort of return measure. Businesses that are able to generate a lot more cash with a lot less capital are going to be worth a lot more money than a company that requires a lot more capital to produce the same amount of earnings or cash flow. So I guess my advice would be, or a recommendation would be, is to always benchmark your price earnings ratio if you're going to use that on some kind of return. So again, it's not just growth, but it's also say something simple like ROE or return on capital, something

Starting point is 00:45:41 like that you have to factor in. And you'll find that the higher return companies are going to going to command bigger multiples. And if you're not accounting for that, you're, you have a huge blind spot as an investor. So that's one and two, keep in mind that earnings are really an accounting convention. They can be widely different from company to company depending on what accounting decisions they make or even today's economy. We have so much value and intangible assets that don't, or they get accounted for, but sometimes it's money's of water sometimes if you got to understand that. So those would be my big points of advice. And it also reminds me you talk about in your book, two companies in the same industry. Investors might look at the PE, but the accounting, how they

Starting point is 00:46:22 deal with their accounting is different. So, like, you can't compare one earnings number to the other because the way they're calculating those earnings is different. Yeah, I mean, the way, if you have a company that is more inquisitive versus another one who does a working house, you know, that affects the goodwill and messes up their earnings number a lot. I mean, also this reminds me of another The other thing I see people do a lot is they'll take whole markets and they'll say, you know, P or price to book ratio in Japan is so much lower than it is in the U.S., and therefore, it's cheaper. But as soon as you, you know, you just put up a simple thing like benchmark it against return

Starting point is 00:46:56 on equity, for example, suddenly you understand why. I mean, the return on equity for a typical American company is two X higher or more than Japanese company. I don't know what the number is today, but I know there's a big gap there. Or people do it all the time, different European markets well. UK is a lot cheaper on a P.E. basis and they're looking at some index and comparing it to an American index, not knowing that the UK index is weighted with financials or energy companies that inherently have low P's lower returns. So you always have to go back and those fundamentals

Starting point is 00:47:24 and benchmark things against that. You have a chapter towards the end of your book that talks about having a delayed reaction. People can be really quick to judge something. And it reminds me how investors, when a company releases their quarterly earnings, investors will go and check what the stock price is doing. And then they'll judge whether the company had a good or a bad quarter based on what the stock price is doing without looking underneath the surface. So you share the story that you share in the book of your experience of why we shouldn't be so quick to judge something based on our initial reaction. This definitely made an impression on me. I was pretty young at the time. But I was at a financial conference and I delivered a talk and afterwards,

Starting point is 00:48:06 you know, people come up and ask you questions. And this one guy came up to me and he was wearing overalls. It looked like a farmer. I'm telling you, this is true. Not in this happen. I couldn't believe it. You know, you're at a financial conference. People are all dressed up. And this guy really stood out. So my initial impression of him was to kind of write him off. You know, that's kind of this country bumpkin. But then as soon as I started talking to him, I realized that he was, you know, he was a very smart man. He was quite wealthy. And if I had thought about a little more, I would have maybe thought that because here, who would come to a financial conference? First off, not cheap to get there and who would have the stones to kind of come in

Starting point is 00:48:39 there like that except somebody who was supremely confident and themselves and knew what they were all about. So that was a big, big wake-up call for me. And I remember thinking I would never do that again, prejudge somebody so much based on appearance like that. And that's just one example. And there are other times where this has happened. But the delayed reaction is something was it always taught and it's probably one of the more difficult things to practice because you're naturally, your mind just jumps to conclusions and delayed reaction teaches you not to delay those conclusions as long as possible. I think again about the PE where people, you know, just want to judge if a stock is expensive or cheap just based on the PE that shows up on when looking

Starting point is 00:49:21 up the ticker. Yes, that happens. Part of it you can understand me. We're just inundated with so much stuff, right? We need to get through it. We need a filter. We need some way to sort through it and people develop shortcuts to get through them. But sometimes, yeah, your filters are not set right. But you have to set it somewhere. I mean, I know I miss a lot too. I miss a lot. Everybody does, but you have to find some way to cut it down. Yeah. And you apply your own filters in some way. For example, the owner-operator, you want companies with high level of insider ownership. but of course there's going to be great companies that don't have high levels of insider ownership too. Of course. Yeah, I've missed out a lot of that. The other big filter I use is I'm very picky on debt and leverage,

Starting point is 00:50:05 probably more extreme than most investors. And so, yeah, I have missed out on a lot of things because they have leverage. But I'm okay with that because the universe that I have is rich enough and I don't feel like I'm constrained for ideas or somehow that, you know, there aren't good winners that I've found. So you have to be okay with letting a lot of things go. Another thing that really stands out to me as I read more and more of your work is your very relaxed nature and your ability to not take yourself too seriously. I want to read a bit here from your book. You write, laugh more. Life may not be a joke, but it is often funny. If you keep in mind, the abstractions, most of the serious business of the world seems pretentuous, trivial, silly, and ridiculous. You can't help but laugh at it. I read this and I think about this. I think about

Starting point is 00:50:53 this. And I think about Buffett and Munger, and I see some similar characteristics in that they don't take themselves too seriously and they truly want to enjoy life. So I'd love for you to talk about how this maybe ties into investing because you're managing a fund, you're managing other people's money, real money at risk. Yet you're able to detach yourself in a way and not become too overwhelmed by it and not take yourself too seriously. Yeah, I would say, you know, this is learned too. I mean, this is something I've had to work at. But, I mean, it helps to doing the 100-Bagger's book, looking at long-term performance of companies.

Starting point is 00:51:30 One lesson that's inescapable from doing all that is you realize that things that seem momentous at certain points in time really just sort of bleed out and are almost imperceptible over a longer period of time. So certain quarters where even where stock prices can make violent moves, 10, 15% move, you know, at the time they seem like, wow, it gets stressed out, something drops 15% or whatever. But you look back in time, even, you know, severe bare markets and you look back in time and it's a little bump in a chart. So when you

Starting point is 00:51:57 zoom out and kind of keep a bigger picture perspective, that's helped me a lot. It's really helped me a lot to do that. But I do think it's really important. I mean, I think I've enjoyed it a lot more the way I am now, just more relaxed about it, a little more detached, taking good long view, rather than just being so intense where you're, you know, so focused on the moment in the quarter or whatever it's going to happen. And so those guys, Buffett Munger, they're, you know, they're wise in a lot of ways. And this is one too. And Buffett says he tap dances of work every day and enjoys it. I mean, some of it has to be this. He can't take it that seriously. To my understanding, you spent a number of years traveling the world going to different countries.

Starting point is 00:52:37 So I'd be interested to hear sort of your, those experiences and how that impacted you and maybe how that opened you up and maybe impacted you even as an investor in just understanding, you know, how different countries are different, how cultures are different. And yeah, I'd love for you to take that in whatever direction you'd like. Yeah, I mean, I've, I did a lot of traveling all my 20s and 30s and went everywhere, all all through South America, all through Asia, and especially those places. And even some far fun places, I mean, I remember going to Myanmar when it just opened up. And that was a real eye-opening trip.

Starting point is 00:53:10 I remember, you know, they didn't take credit cards. I know, carried cash. And it was amazing. And people, I remember, I was traveling with a friend of mine, people stopping want to take pictures with us because we were one of the first, you know, Westerners that wandered in their town or whatever it was. So that was a really remarkable trip. I've been to some far out places, Mongolia. I remember doing that with Harris Kupperman. We had some good adventures there. So I think it's affecting me a number of ways. One is, yeah, I mean, I've always had this more

Starting point is 00:53:36 global focus. So that transfers over to my fund and the way I manage money. I mean, I have 11 positions now and I think only four are U.S. listed. So I'm more comfortable going other places. And I've learned a lot, too, about what doesn't work. Because a lot of that, I've tried to invest in certain countries and you realize how difficult things are. Things don't work out quite the way you think and you learn a lot more about risk of disclosures. And yeah, so I think it's been, it's been amazing just personally having those experiences, but also it's definitely informed my investing by just widening the horizon and making me much more willing, interested to explore markets outside the U.S. I'm sure many of the listeners are wondering, you know,

Starting point is 00:54:14 how in the world were you able to afford traveling the world for so many years? Were you doing the newsletter, a subscription newsletter, what were you up to? That's it. That was the thing. A subscription newsletter was wonderful to do that all that time. I used to say people pay me to just go out there and travel and meet people. And I'd come back and write about what I thought, what I found. And that was a great gig that I did for a long time. But that's how I was able to afford it. Yeah, subscriptions from my newsletter. Amazing. Well, Chris, this book, how do you know? If you enjoyed this conversation, conversation those in the audience, I'd highly encourage you to pick up the book. It's one that really

Starting point is 00:54:53 made me think. And I'm sure, Chris, you've read many books that have done the same for you. So I'm curious if you could share just one book with the audience that you've really enjoyed. It might be a recent one related to the general semantics or maybe just honestly anything. Yeah. Well, I mean, I could give two. One more recent that I just actually wrote a blog post about it, which was Rick Rubin's book, The Creative Act. Definitely really enjoyed that. A lot of good thoughts in there around creativity and awareness. So I would definitely recommend that. Not a difficult read, but one that you'll definitely linger over the pages and think about. So Ruben, if you don't know, he was an American record producer and has been involved in all

Starting point is 00:55:36 kinds of great albums and long list of artists. So he's got some great experiences there. And I think it definitely relates to investing. Investing is also creative when you think about it. I mean, we're trying to create a portfolio and connect ideas and a lot of what Rubin says about awareness is definitely applicable to investing. So I would recommend that. That was a fun read. And another one, you mentioned something more along the lines of general semantics. This is not exactly a general semantic book, but I found it to be really good kind of fellow

Starting point is 00:56:04 traveler. So there's a philosopher named Richard Rorty and probably, I would say, one of his most accessible books, not very long. It's based on a lecture he gave. It's called Philosophy as Poetry. And I would definitely recommend that. It's easy to read. And he makes some really good points in there

Starting point is 00:56:21 will make you think about how you think about philosophers or thinkers of any kind. And he talks about one of the things I like in there, he talks about the answer to a great poem is a better poem. And there's never a stopping point in what we can know or the way we can describe things. And so any kind of philosopher or any sort of thinkers really just giving us a description. And once you think of it in those ways,

Starting point is 00:56:43 It's not about trying to prove who's right or if this one's wrong or this one's better. This is one description. This is a separate description and you can learn from both. I think it'll change the way you read, I think, and the way you think about thinkers generally. I'm excited to dive into those. Chris, I don't want to take too much of your time here. I really, really enjoyed this chat and hope the audience does as well. So as always, I want to give you a chance to give a handoff to any resources you'd like to share,

Starting point is 00:57:10 especially your Twitter, your blog, and anything else. Yeah, I mean, if listeners want to follow me, I'm on Twitter. My handle is at Chris W. Mayer, M-A-E-R. And then I write an occasional blog over at Woodlockhouse. So Woodlockhouse Family Capital, you Google, it'll come right up and you'll find my blog there. I'm a subscriber. And whenever I get that email in the inbox, I be sure to drop everything and check it out. I read the piece on the creative act by Rick Rubin and really enjoyed it.

Starting point is 00:57:40 Thank you. Awesome. Thanks again, Chris. Really appreciate it. Yep, thank you, Clay. 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.

Starting point is 00:57:56 To access our show notes, transcripts or courses, go to theinvestorspodcast.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 re-brodered. Constance.

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