#4 Jason Zweig: Elevate Your Financial IQ

WSJ columnist Jason Zweig and I tackle important topics like how to be a smarter investor, filtering out noise, why philosophy and history matters, and his new book, The Devil’s Financial Dictionary. Go Premium: Members get early access, ad-free episodes, hand-edited transcripts, searchable transcripts, member-only episodes, and more. Sign up at: https://fs.blog/membership/ Every Sunday our newsletter shares timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ Follow Shane on Twitter at: https://twitter.com/ShaneAParrish Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:09Shane Parrish?

  Welcome to The Knowledge Project. I'm your host Shane Parrish. I'm the author of the Farnham Street Blog, a website with over 65,000 readers that's dedicated to mastering the best of what other people have already figured out. In The Knowledge Project, I interview people from around the world so we can learn from them, expand our minds, and challenge our thinking.

• 0:30Shane Parrish?

  In this episode, recorded live in New York, I have Jason Zweig. Jason writes the Intelligent Investor column for The Wall Street Journal. He's also written books like Your Money and Your Brain, The Little Book of Safe Money, and taken part in revised editions of The Intelligent Investor. He's got a new book coming out called The Devil's Financial Dictionary that we'll talk about. Jason is an extraordinary person who offers historical perspectives on today's seemingly important financial news. In this episode, we talk about a host of things, including what his day looks like, why he adds a philosophical and historical view to his columns, the relentless flow of news, his new book, The Devil's Financial Dictionary, and what the average investor should do. So without further ado, I hope you'll enjoy the conversation with Jason.

• 1:14Shane Parrish?

  If you do enjoy it, please let me know. I'm @FarnhamStreet, F-A-R-N-A-M, Street, S-T-R-E-E-T, on Twitter. And thank you for listening.

• 1:31Shane Parrish?

  All right, I'm here with Jason Zweig from The Wall Street Journal, and he's one of the most requested guests that I get for The Knowledge Project, so I'm happy to have you here, Jason.

• 1:42Speaker 01

  Great to be with you, Shane.

• 1:43Shane Parrish?

  So I guess one question I have is, what does your day look like? What's your typical day?

• 1:49Speaker 01

  My typical day is kind of a mess. You know, I've been doing this for a long time. My column has run for seven years in The Wall Street Journal, every Saturday, except when I'm on vacation or in the hospital, which hasn't happened. And it's not always so easy to feed the beast. You know, I can't take a week off because I don't think I have anything useful to say. I have to find something. And as I think you'll remember, I once defined my job as saying the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my

• 2:32Speaker 01

  readers will know I'm repeating myself. And it's a lot harder than it sounds, it's more challenging than it sounds, it's usually more fun than it sounds. So, you know, a typical day for me is I, when I can, I like to start very early. I like to get to the office before seven, maybe read for a few minutes, then go to the gym, which clears my head. And I, you know, probably spend a little too much time online and on Twitter, but mainly I'm trying to figure out how to triangulate between what's going on in the financial markets and the news flow and my readers' lives and the questions that

• 3:15Speaker 01

  are on their minds, and kind of find new and interesting ways to say the same old things. So I'll spend a fair amount of time reading journals in evolutionary biology or cognitive psychology, maybe reading blog posts by people who ostensibly don't have anything to do with investing or the financial markets, trying to get a spark of a creative idea that will give me a different kind of entry point into what's going on. How did you get started writing? Well, I always wanted to be a writer. I was a very bookish kid. My parents, my

• 4:00Speaker 01

  mom is still alive, my dad and my mom both were very literate people. They had varied careers. My dad was a farmer and a military officer and a political science professor and a newspaper publisher. And then later in their lives, my parents became art and antique dealers. And our house was full of books, including first editions of Mark Twain and Nathaniel Hawthorne and Keynes, actually, among, among many, many other great authors. And so I was always bookish. From the time I was 13, I wanted to write.

• 4:41Speaker 01

  But I wasn't interested in journalism until after I got out of college and my great American novel was not selling, nor was it even writing itself. And out of despair, I did take a very junior level, entry level job in journalism that had nothing to do with business, and found that it was satisfying and that there were surprisingly few other people who could write reasonably well. So I got better at it and I worked hard at it. And then I got into business journalism at Forbes magazine. Was that a conscious choice, you moved to business?

• 5:22Speaker 01

  No, it was all serendipity, like almost everything in my career. If you take the luck away, there's no plan. And in fact, if you take the luck away, there's probably nothing left. I think luck is, luck is just a massively powerful force in the lives of individuals and societies and markets. And I benefited hugely from it. I've been fortunate that I've had good luck, not a lot of bad luck, although I'm sure that time will come too. But in any case, I, my first job in journalism was working at an Africa magazine. And I did that for a couple of years, even though I knew nothing about Africa when I

• 6:07Speaker 01

  started. And when I finished, I bumped into a friend of mine on the street who said Time Magazine is looking for some very junior people. And I said, well, they don't come any more junior than me. And Time Magazine ended up hiring me to be a fact checker in the business section. And then I got laid off from that after a year and a half, and Forbes Magazine hired me. And after about six weeks, I realized I liked it. And that's how I became a business journalist.

• 6:39Shane Parrish?

  That's amazing. There's a lot going on in journalism these days. What, how do you see it playing out with reporting and free versus online versus delivery? What's changing from your perspective?

• 6:53Speaker 01

  Well, I think the biggest challenge that journalism and the information businesses face over the coming decade is actually the same one that the information-consuming public faces, which is how to sort out the wheat from the chaff. How to deliver high-quality, accurate, reliable information in a way that the audience can tell it's reliable. You know, 10 or 20 years ago, if you didn't read something in the Wall Street Journal or the New York Times or a handful of other newspapers or magazines, you, maybe your good local newspaper or TV channel, if you live in the right city.

• 7:37Speaker 01

  If you didn't get it from those handful of sources, you didn't trust it. And you knew why you didn't trust it, because it hadn't been filtered through a skeptical, professional person delivering and checking the news, the significance of it, the validity of it. And the real challenge in the internet-based world of information is it's almost impossible to tell from looking at most material how reliable it is. And I'm hoping that we're moving toward a period in which both the organizations that deliver the news and the consumers of it will be able to tell from looking at it whether

• 8:19Speaker 01

  it's reliable, because there's so much garbage and misleading, tendentious, wrong, untrustworthy material being disseminated now. And it's very hard for a consumer to tell the difference. So I'm hoping we'll develop markers. That will enable readers to be able to tell whether the information is trustworthy.

• 8:42Shane Parrish?

  I don't know if you've ever heard of it, but Ryan Holiday wrote a book called Trust Me, I'm Lying. And it was all about manipulating that cycle of media and the pressure to get things out, to actually get PR for, you know, the people that he was representing.

• 8:57Speaker 01

  Yeah, it's, I mean, it's an incredibly toxic mix because through Twitter and Facebook and all of social media and the internet, people now are more rapidly informed than at any time in human history. And the human brain is an instant reaction mechanism. And as soon as you see salient information, your brain has already processed it. I mean, a lot of experiments have shown, a lot, a lot of this process occurs in a tenth of a second, a third of the time it takes you to blink your eye. And if we don't have systematic mechanisms that enable people to discriminate good information

• 9:41Speaker 01

  from bad and reliable information from bogus or faulty reporting, or simply propaganda that is masquerading as reporting, society will really suffer. And Charlie Munger told me last year, when I was at the Daily Journal meeting in Los Angeles, that he really fears for the future of the republic, as he puts it. That newspapers like the Wall Street Journal and the New York Times no longer have the, I guess I would say, intellectual oligopoly that they once did over the credibility of information. When anyone can throw up a blog post and throw millions of people into a tizzy about anything,

• 10:26Speaker 01

  it's going to be turbulent times for society until we get that sorted out.

• 10:30Shane Parrish?

  Do you have any advice for me as a reader of blogs and newspapers? And how, how to go about filtering that and how to go about thinking of it? Is it just bringing a skeptical attitude towards what you're reading? Or is it more than that?

• 10:44Speaker 01

  Well, I think, I think if, if you're not a skeptical reader, you're, you're not reading. I think that's the first point to make. The second is, I think as a consumer of information, you can steer the media toward...

• 10:59Speaker 01

  A better world for communication. And what I've tried to do in the past couple of years, although I don't always succeed, is whenever I write my column, I try to tell people not only what I know and what I've learned, but I try to tell them how I've learned it. And I do that through links. And it's very disconcerting for me now to read news articles in mainstream, from mainstream news organizations, or blog posts from just about anybody, where the wrong things are linked, or the right things are not linked. I really want material judgments that are at least purporting to be objective.

• 11:41Shane Parrish?

  Right.

• 11:41Speaker 01

  To be sourced. And if someone is telling me, "I believe X," or "I have concluded Y," then I want to see, "How do you know X and why do you believe Y?" And if the person is not telling you that, then you probably should move on, because you have no way of independently or readily verifying what the person is telling you.

• 12:03Shane Parrish?

  One thing I love about your column, when you were talking there, that I love, you go back and you tease out these humanities that have happened over a long period of time. You bring that to play on whatever today's topical news is. And that, not only do you often link to the original sources, but that perspective of time becomes a big, I want to say, context for what I'm reading.

• 12:31Speaker 01

  Yeah, you know, it's really, I think, one of the challenges for somebody like me, who writes for individual investors and tries to provide advice, is it's extraordinarily difficult for people to maintain a long-term perspective in a world that I think we would generously be describing as short-term oriented.

• 12:54Speaker 01

  And the best way to do that is with, you know, enabling people to make more points of contact with, you know, the wisdom of past ages. And Benjamin Graham has this extraordinary remark in one of the interviews he gave late in his life, where somebody asks him, "Why are you always quoting Greek and Roman philosophers?" And he's, he, I'm really paraphrasing, but he said something along these lines. He said, "Well, not just Greek and Roman philosophers." He said, "I also quote Spinoza a lot." And he said, "I guess it's because I'm trying to write not from the perspective of our

• 13:39Speaker 01

  time or past times, but from the perspective of eternity." And when you first read it, it's kind of shocking because it sounds arrogant, but when you know the writings of Benjamin Graham, who for anyone in our audience who isn't familiar with him was Warren Buffett's teacher and arguably the greatest investment advisor of the past century. Graham was not being arrogant. He was being humble. And he was saying, "The people who came before us know more than we do." And just as Sir Isaac Newton said, "If we see farther, it's because we stand on the shoulders of giants," it's worth remembering that when he said that, he was actually picking

• 14:22Speaker 01

  it up from Saint Bernard of Clairvaux, who presumably stole it from somebody else.

• 14:27Shane Parrish?

  So when you go home, are you, you said you read biology journals earlier. Are you situating yourself in that, are you going back and reading another era? I know you're a big fan of Montaigne. Who else are you, you reading for that type of perspective that you bring to bear?

• 14:46Speaker 01

  Well, when I'm not in the office, I, I do have a rule, which I try never to break.

• 14:54Speaker 01

  I'm pretty resolute about it. I will not read anything related to investing or the financial markets or business, for that matter, when I'm not in the office. And I, every once in a while, I break it, but it has to be a pretty, it has to be an exception that really proves the rule. I mainly read, I mainly read fiction, historical biography, philosophy. I try to read anything that's beautifully written and has stood the test of time. I don't read a lot of contemporary fiction, although I do read some that comes to me highly recommended.

• 15:37Speaker 01

  But, you know, what's the best book I read over the past year? I would say, hands down, Victor Hugo's Les Misérables, which I had never read, and a friend of mine taunted me and said, you know, "What's the best book you've never read?" And I named it, and he said, "Well, you have to." And it took me months, because I read it on my phone in the gym.

• 16:00Shane Parrish?

  Oh.

• 16:01Speaker 01

  And it was 6,000 pages long, and I loved every second.

• 16:05Shane Parrish?

  Are you reading mostly on Kindle or physical, or do you mix them?

• 16:09Speaker 01

  Except when I'm in the gym, I always, or in the gym or on, maybe sometimes on my commute, I always read physical books. It's part of my upbringing. I love the tangibility of the paper page.

• 16:26Shane Parrish?

  Yeah.

• 16:27Speaker 01

  I love being able to visualize where in the book I read a particular thing. And I have a rule that I only write in paperbacks. I will never write in a hardcover book, because I, it seems like desecration. But I usually will take notes in everything I read. But if it's a hardcover, I take a piece of scrap paper and I take my notes there.

• 16:51Shane Parrish?

  Speaking of books, you have a new book coming out, which I was lucky enough to get a pre-publication copy of and love.

• 16:57Speaker 01

  Mm-hmm.

• 16:58Shane Parrish?

  It's called Devil's Financial Dictionary. Do you want to talk a little bit about how this came about? This is an amazing project and a very cynical look at the financial markets, which resonates a lot with me and I think resonates with a lot of people because there's a lack of trust in the system in which we were a part of.

• 17:19Speaker 01

  Yeah, yeah. Well, yeah, what happened Shane is about two years ago, I redesigned my personal website, which is, it's non-commercial, I don't take advertising. It's there mainly to archive my articles and I suppose as some kind of weird ego trip. And it was bothering me that as someone who ardently believes that people should not be constantly updating their portfolios or fixating on today's market news, I still needed new material on a pretty frequent basis to justify people coming there in the first place or coming there again.

• 18:03Shane Parrish?

  Mm-hmm.

• 18:04Speaker 01

  And I was sort of staring out the window one day at home on the weekend and I realized that I, in 1999, I had started a glossary of financial terms and I'd poked fun at a few things. I had an entry for portfolio manager and, I don't know, maybe I had about 10 entries, I think. And surprisingly, I found I'd kept them and they were pretty bad. And suddenly, sort of, as people say, the penny dropped, right? And I said, Ambrose Biers, The Devil's Financial Dictionary. And Ambrose Biers is one of my favorite writers.

• 18:46Speaker 01

  He was one of the greatest men of letters in American history, although he's not well, he's not nearly well enough remembered today. And he's best known for his Civil War short stories, which are great, and for The Devil's Dictionary, which is far and away the most cynical, sarcastic, satirical book ever written in America, and is probably unrivaled in English-language literature by anything except the work of Jonathan Swift. And Beers was an incredibly angry, bitter, cynical, nasty man, who really sort of hated humanity and thought that everyone was an idiot or a crook.

• 19:30Speaker 01

  And he believed in nothing other than sort of a fundamental level of decency to your fellow man. And I'm nowhere near as cynical as Beers. I actually like people. And I think people have wonderful virtues and great qualities that make life worth living. Beers, we should remember.

• 19:53Shane Parrish?

  You're one of the nicest guys I know, so I...

• 19:55Speaker 01

  Well, thank you. Maybe you need to get out more. But, I mean, Beers basically is believed to have marched into the Mexican Civil War late in his life to be shot, probably in front of a firing squad. So I'm nowhere near as cynical as Beers, and I don't have that anger toward people in the financial system. But there is no doubt that the financial markets, bankers, brokers, portfolio managers, all the people in what Jack Bogle of Vanguard has described as the helper industry, all the financial intermediaries, deserve a little bit of tweaking.

• 20:40Speaker 01

  So this book started out as a little adventure to see if I could come up with short, snappy definitions. And then it became a challenge, because I would say to myself, can I take everything I've learned about this particular thing over the past 25 years and boil it down into 150 words or less? And I found out I could do it. And then I said, what about 100 words or less? And then I found I was able to define many things in 50 words or less, and some in a single word.

• 21:20Speaker 01

  And, you know, people who've read it, and you had your own kind opinion, thank you, do seem to enjoy it. My objective is, first of all, I hope people will be entertained by it and maybe enlightened by it. Two, I hope it's funny. And three, I hope it sends people back to read the original Devil's Dictionary. Because, one of the things I've been thinking about ever since I wrote the book is that the ability to define a term that you're presented with in business or in life, in such a way as to make it cynical and funny, is sort of the ultimate measure of your own skepticism.

• 22:03Shane Parrish?

  Mm-hmm.

• 22:04Speaker 01

  And if somebody presents you with a sales pitch for something, you should be able to go back to your office or your house and say, "How can I make somebody laugh at what this person just told me?"

• 22:17Shane Parrish?

  Yeah.

• 22:18Speaker 01

  And say, "That's ridiculous." And until you can do that, you don't really understand the weaknesses in what the person is telling you, and you probably don't understand the weaknesses in your own thought process. So that's why I think an exercise like writing this book was important and useful, and I hope could make it useful for readers as well.

• 22:40Shane Parrish?

  Do you want to pick out a few of your favorite definitions and maybe read them to us?

• 22:46Speaker 01

  Sure. I think...

• 22:48Shane Parrish?

  Maybe just one or two.

• 22:50Speaker 01

  Yeah.

• 22:51Shane Parrish?

  I think that would give people a really good feel.

• 22:52Speaker 01

  I'm especially fond of this one. And by the way, when I read these, first I will give the word, then I'll give the part of speech, and then I'll read the definition. So, this one is the word "bonusus," noun. "A mythical creature described by the ancient Romans and often included in medieval bestiaries, the bonusus closely resembles a bull, but with its horns curled back toward its tail. Because the horns are only for show, as the Roman naturalist Pliny wrote, the bonusus has no way to deter predators and will run away as soon as it is threatened. When it becomes panic-stricken, the bonusus spews immense quantities of flaming-hot manure in its wake.

• 23:37Speaker 01

  As the next stock market crash will show, the typical investor who believes himself to be a bull will turn out to be a bonusus. Do not stand too close behind him." That's awesome. So that's one. And then just another one from the bees would be bull market. Noun. A period of rising prices that leads many investors to believe that their IQ has risen at least as much as the market value of their portfolios. After the inevitable falling prices, they will learn that both increases were temporary. See bear market. So, and then I think I'm gonna read one more Shane. It's long, but it's fast. We got lots of time. Yep.

• 24:22Speaker 01

  Which is Hindenburg Omen. Noun. An indicator in technical analysis that has predicted approximately 548 of the past three market crashes. It is calculated by establishing whether the daily number of new 52-week highs is no more than twice the daily number of new 52-week lows, then determining that the daily number of new 52-week highs and the daily number of 52-week lows is each at least 2.5% or 2.8% or 2.2% depending on whom you ask of the total number of stocks that either go up and down if and only if, one, stocks overall are higher than they were 10 weeks ago,

• 25:07Speaker 01

  and, two, the exponential moving average of the daily ordinal difference of advances minus declines over the past 19 trading days is less than the exponential moving average of the daily ordinal difference of advances minus declines over the past 39 trading days. If you were able to read that in one breath, you are qualified to become either a pearl diver or one of those people who read the disclaimers in automobile commercials on the radio. For some peculiar reason, the Hindenburg Omen is named after a gas-filled blimp that exploded and burned in 1937.

• 25:46Shane Parrish?

  It's a great book. I encourage everybody to check it out.

• 25:49Speaker 01

  Thank you.

• 25:50Shane Parrish?

  In a world like that, what is the... I mean, there's such an element of a kernel of truth to all of that as well. So what's the average investor to do? It's like you can't trust the people on TV. Everybody has an incentive, not everybody, but a lot of people have an incentive that go... If it's hidden, it goes against you. And even if it's overt, sometimes it goes against you and you're not necessarily aligned. What's the average Joe at home to do in a world like this?

• 26:22Speaker 01

  Well, I think you have to recognize a couple of things. One is that it's very difficult to separate good advice from bad. And ultimately, you do have to take your own counsel, but you want to make sure that whatever you do is evidence-based. You know, there's... You talked with Michael Mobison about this. There's a huge tendency in American culture to trust intuition, probably more than we should. And so many investors will go with their gut without asking whether their gut knows what it's talking about. So while you should be skeptical of professional advice you're hearing or receiving, maybe

• 27:05Speaker 01

  sometimes for a fee, you also should be skeptical of yourself. And the default position for any investor should always be to do nothing, because it doesn't cost anything to do nothing.

• 27:18Shane Parrish?

  Right.

• 27:18Speaker 01

  You're not incurring excess fees when you do nothing. You're not incurring tax bills when you do nothing. And if you've already made a sensible plan, almost certainly the best thing for you is to stick with it. You want to evaluate from time to time whether it makes sense. But any recommendation to take action has to be compelling enough to overcome the inherent intrinsic advantage of just sitting there.

• 27:49Shane Parrish?

  How should people think about risk in a world like that, where I might not have all the information and I might not have the base rates or the context or the...

• 27:59Speaker 01

  I kind of like the definition of risk in the Devil's Financial Dictionary. I'll read it to you. Here it comes. Risk, noun, the chance that you don't know what you are doing when you think you do. The prerequisite for losing more money in a shorter period of time than you could ever have imagined possible. Risk can be formally defined as the odds of an adverse or undesirable outcome. When the forecast is for an 80% chance of sunshine, for example, then the risk of rain is 20%. Or as the extent to which extreme outcomes differ from the average. It has been philosophically defined by finance professor Elroy Dimson of London Business School this way.

• 28:41Speaker 01

  Risk means more things can happen than will happen. In the end, risk is the gap between what investors think they know and what they end up learning about their investments, about the financial markets, and about themselves. So, I mean, I think the best way to define risk is exactly that. It's the difference between what I think I know and what in hindsight will have turned out to be true.

• 29:08Shane Parrish?

  I love that.

• 29:09Speaker 01

  And the best way to minimize that risk is not to be overconfident about the state of your own knowledge. And yes, base rates can be hard to surface, but you have to start with that as your premise. As Danny Kahneman has said many times, and again, Michael Mobison referred to this when he was on with you. The single most important question to ask about almost anything is what is the base rate? So, as an investor, you're thinking about an IPO. Instead of letting somebody tell you it's the next Google,

• 29:44Shane Parrish?

  Yeah.

• 29:45Speaker 01

  you have to ask yourself, what's the average experience of people who bought IPOs? The answer is it's rotten.

• 29:52Shane Parrish?

  Pretty dismal.

• 29:53Speaker 01

  It's terrible. So, if you're going to buy the next Google, that'd be great, but in fact, what you're buying is the next IPO.

• 30:01Shane Parrish?

  Right.

• 30:02Speaker 01

  And it might be Google, but it might turn out to be similar to the 99% of all IPOs that basically didn't do very much for people or hurt them.

• 30:11Shane Parrish?

  And that gives you almost a signal that you should, what is different about this one? And why would you think that? What gives you the confidence?

• 30:18Speaker 01

  Yeah, well, really, the other thing that every investor should ask is, actually, there's two other questions that are helpful. One is, what do I know that the other people on the other side of the trade Are unlikely to know.

• 30:33Shane Parrish?

  Mm hmm.

• 30:34Speaker 01

  And two, why do, why do I think I know more than they do? And if you can't come up with really strong answers to those questions, you should stay out. And, you know, the last time individual investors could have a powerful valid answer to those questions was during the 2008, 2009 crisis, when institutional investors were completely sidelined.

• 31:01Shane Parrish?

  Yeah.

• 31:01Speaker 01

  Because they could not summon the liquidity in the midst of massive redemptions from their clients to step up and buy.

• 31:09Shane Parrish?

  Right.

• 31:10Speaker 01

  And frankly, the smart money went to the sidelines while the supposedly dumb money of individual investors, to a large extent, stepped up and not across the board, but many of them did buy. And there, what you could know is that the person from the other side of the table, on the other side of the table from you, was not in a position to buy.

• 31:31Shane Parrish?

  Right.

• 31:32Speaker 01

  And you were.

• 31:33Shane Parrish?

  So buying is almost like an, would you consider it an act of hubris? Where you're saying, I know something you don't and I'm right and you're wrong, unless there's some sort of mechanism like forced selling?

• 31:42Speaker 01

  Yeah, I think it is an, I think it is an act of hubris, but so is buying and selling are both acts of hubris for, for investors. Trading is an act of hubris. And the less you trade, the fewer opportunities for error you generate over time. It's also, I think it's very important for people to remember another thing that Benjamin Graham said, and he wrote this in the summer of 1932, at the absolute rock bottom of the US stock market, in an essay he wrote, a guest article he wrote for Forbes magazine. And Graham said, those, those with enterprise lack the money and those with money lack

• 32:26Speaker 01

  the enterprise to buy stocks when stocks are cheap.

• 32:29Shane Parrish?

  Mm hmm.

• 32:30Speaker 01

  And by enterprise, he meant something a lot like courage.

• 32:35Speaker 01

  And I've rephrased that for a modern audience as the people who survive in a bear market are, who thrive in a bear market are the people who buy when no one else wants to. But that requires two critical ingredients. You have to have cash.

• 32:52Shane Parrish?

  Yep.

• 32:53Speaker 01

  And you have to have courage.

• 32:54Shane Parrish?

  Hmm.

• 32:54Speaker 01

  If you have cash and no courage, or courage and no cash, you can't buy. And if you can't buy at the bottom, you can't add to the market return. You're not, you can't outperform unless you have both cash and courage.

• 33:09Shane Parrish?

  That kind of goes to Buffett's point about temperament being more important than IQ and your ability to act. It'd be interesting to go back and look at who were the money managers that acted with courage during that period versus who are the ones that kind of pulled back and used that as a kind of barometer to see how you could expect them to behave in the future.

• 33:30Speaker 01

  I completely agree, Shane. I think, I think the single most important attribute for an investor to succeed is temperament, character.

• 33:40Shane Parrish?

  Yeah.

• 33:40Speaker 01

  You know, in the first edition of The Intelligent Investor in 1949, Graham was very specific. He said that when he chose the title Intelligent Investor, he had a particular kind of person in mind, not someone with a higher than above average, or much higher than above average IQ, although certainly you should be smarter than average. Not a person with an advanced degree or necessarily even a business degree. But what you do need is you need character. You need independence, skepticism, good judgment, and courage. And also the ability to sense what the crowd is doing and either to ignore it if the crowd

• 34:23Speaker 01

  is moving against you, or to take it as a signal for what you shouldn't be doing. And I think the best investors are not unemotional.

• 34:33Shane Parrish?

  Right.

• 34:34Speaker 01

  I think they're inversely emotional. And you know very well the wonderful story that Carol Loomis told in 1988 about Charlie Munger, when he's sitting next to this woman at a dinner party in Los Angeles. And she suddenly realizes she's sitting next to Charlie Munger, the billionaire partner of Warren Buffett, and she's just desperate to ask him a question that will enlighten her on how to be a better investor. So she says to him, "Oh, Mr. Munger, what's the secret to your success as an investor?" And she sort of sits back, waiting for this long exposition. And Charlie sort of grumbles, "I'm rational," and goes back to eating his salad.

• 35:17Speaker 01

  And I think it's brilliant, it's funny, it's Charlie Munger all the way, but it's incomplete. Because what the great investors are, is they have a higher form of rationality, which is they take emotion and they turn it inside out. This is what Buffett talks about when he uses that famous line about being greedy when other people are fearful, and fearful when they're greedy. But it's harder than it sounds. And in the last speech, I believe he gave in his lifetime, Benjamin Graham had a wonderful throwaway line. And he was talking about, I think it was either his daughter-in-law or his niece, and mentioning how she described him.

• 36:01Speaker 01

  And he said, "I really like this line she uses about me. She says, 'I'm humane, but I'm not very human.'" And a lot of the best investors have that sort of touch of something on the autistic spectrum. It's a little bit of detachment from other people's emotions that enables them to stand back and look and observe what other people are feeling and say, "That's funny. Why does feeling that way make sense?" And that enables them to invert the prevailing emotional forces in the market and turn it to their advantage.

• 36:44Speaker 01

  And people who knew Graham well, and he died when I was still in high school, so I never met him, but people who knew him well, and Buffett talks about this all the time, say that he was very kind to people. But it was really hard to get to know him.

• 36:59Shane Parrish?

  Right.

• 36:59Speaker 01

  And so when he said, when he repeated that line about being humane, but not very human, it tells you that that really was one of the keys to his investing success, is he was able to observe what other people were feeling and almost like Spock in Star Trek, kind of observe it as an oddity.

• 37:21Shane Parrish?

  But that's not something we can, we can learn in a sense, right? Or even if we can learn it, it sounds very hard to do that. So is it better, do you think, for people to just take what Buffett recommended and do index funds? Or do you think that it's better to put effort into trying to learn to be like that and possibly detach yourself from being human a little bit to make a more rational decision? Like, how do you go about fostering more rational decisions?

• 37:49Speaker 01

  Yeah, wow, what a profound question. Can people learn that? I think, I think you can put policies and procedures into place as you try to manage your investing life and maybe your personal life that can help you with some of that. You know, you think about, think about people with addiction problems. You know, I don't want to oversimplify because I have a friend who died, one of my best friends died of alcoholism, but if you're an alcoholic, you would be crazy to walk past the tavern.

• 38:25Shane Parrish?

  Right.

• 38:26Speaker 01

  And say, "I will demonstrate the willpower not to walk in." You can't do that.

• 38:32Shane Parrish?

  Yeah.

• 38:32Speaker 01

  And you know you can't. So you walk on the other street and that's the kind of governor that people need to put on their behavior. If you know that you have self-control problems, you have to structure your life so that the things that tempt you into bad behavior don't get surfaced in your stimuli. And that's very easy for investors to do. If you, if you know you have a tendency toward hyperreactivity to...

• 39:01Speaker 01

  You know, red arrows pointing downward on stock market displays, then turn that website off, unfollow that person on Twitter, follow people who take a longer-term perspective and aren't rattled by this kind of thing, improve your mental hygiene. You can't turn yourself into someone who's unemotional, but you can turn down the amplitude of your own emotions if you change what your exposures are. I like that a lot.

• 39:30Shane Parrish?

  So, switching gears a little bit here, if you were put in charge and could enact laws, what would you change about the financial market? How would you run it differently than what's being run today?

• 39:44Speaker 01

  Wow, that's the king for a day question.

• 39:49Shane Parrish?

  Well, let's say king for 10 years, we'll take a little bit longer-term perspective, but, I mean, I guess I'm just wondering about the imagination that we have about what would we do and what should people even be thinking about? Like, should it be, you know, capital gains for stocks that you own under 30 days are taxed at 90%? Is it, how would you go about fostering a financial system that encourages, longer-term thinking encourages less manipulation and less management insulation? I mean, these are my perspectives, I'd love to hear yours.

• 40:24Speaker 01

  Well, I don't think I would, I don't think there's a lot that I would change in regulation. I don't think the government is particularly good at imposing rules and structures that will help the situation. A lot of the measures that have come out of the Nudge movement that was pioneered by Dick Thaler at the University of Chicago, and of course has Danny Kahneman and Amos Tversky's work behind it, among many others, those have been effective in a couple areas, particularly in retirement savings, where, you know, people, you know, where we've structured

• 41:03Speaker 01

  the defaults and we've enabled people to automatically escalate the amount they save every year, and by harnessing people's inertia, instead of letting it hurt them...

• 41:18Speaker 01

  Which was the product of government action. I think that has helped a lot. But it's hard to think of a lot more that can be done by government fiat. What I think we need is a much stronger sense of loyalty and trust in the markets between the people who provide advice and other financial services and the people who consume them. And it's very rarely talked about, but I think one of the most powerful psychological paradigms of the past, I don't know, 50 years is something called belief in a just world theory. If you know about it, Shane, you're one of the few people who do. And I see you sort of shaking your head, so I'm gonna assume you know a little about it,

• 42:03Speaker 01

  but you haven't heard a lot. So, belief in a just world is a theory that was put forward by a psychologist named Melvin Lerner in the late 1960s. And what he argued was that when you strip people of the illusion that the world is just, you change their outlook on just about everything. Right. And there's a simple way to think about it. I mean, we all, part of being human is to live under all kinds of positive illusions. There are lies we tell ourselves that are good for us. They get us out of bed in the morning. Yeah. We tell ourselves we're better at just about everything than we really are.

• 42:46Speaker 01

  We tell ourselves we process information more effectively than we really do. And along with that overconfidence, another positive illusion is a belief that the world is just. Nobody really, seriously believes that good things always happen to good people and bad things always happen to bad people. But we go through life as if they do most of the time. And if we're suddenly presented with a set of circumstances under which bad things reliably happen to good people and good things predictably happen to bad people, it's very distressing. And if you think about...

• 43:29Speaker 01

  The contrast between the dot com crash of 2000 to 2002 and the financial crisis of 2008, 2009, it just couldn't be more striking. In the late 1990s, millions of American investors did stuff that was reckless and stupid. Yeah. And they knew it. And they were told by the wisest financial minds that what they were doing was reckless and stupid. Their uncles told them. Jack Bogle told them. Warren Buffett told them. Every respected financial commentator said, "You can't day trade stocks in your pajamas when you know nothing about them." Yeah. And end up buying a tropical island. And people, people actually knew that it couldn't be.

• 44:14Speaker 01

  But what they all told themselves was, "Everyone's getting rich. I'll get rich. And when it doesn't work anymore, I'll stop and I'll get out before it's too late." And in fact, many of them lost 95% of their money and... They were like Cinderella at the ball, right? I'll get over for it. Exactly. Yep. And then it was nothing but mice, right? So people knew that it was their fault. Right. It's like, it's not that the system was broken, it's that what they did was reckless and stupid. I did something stupid and there was a consequence to it and I can kind of accept it. Exactly. I got what I deserved. Right. Which is different than the... And in 2008, 2009, many, many investors, not just in America but around the world, had learned to invest the right way.

• 44:59Speaker 01

  They diversified. They were patient. They kept their costs low. They didn't trade. They listened to the wisest people in the financial markets and they still, pardon my French, they got their asses kicked. Yeah. I mean, we should all remember that between October 2007 and March 2009, the US equity market went down 57%. Five, seven. Yeah. You had a hundred dollars at the beginning and you had forty-three dollars at the end, when you did the right thing. Yeah. So suddenly, people said, "I trusted you."

• 45:36Speaker 01

  And that belief was shattered. And so people today are very skeptical, as they should be. And anything we can do to try to restore that trust and that sense that good things happen to good people, and if you're a good investor, you'll get a good outcome if you're patient, that's really important. And that's a very long way of saying that what I would like to see is I'd like to see more loyalty structures. I'd like to see financial advisors saying to their clients, if you don't ask me to trade more than I think is good for you, I will, you know, put more fruit in your Christmas

• 46:20Speaker 01

  basket at the end of the year. And I'll also sign a contract with you that stipulates how I'm going to serve your best long-term interest.

• 46:32Shane Parrish?

  Right.

• 46:32Speaker 01

  With a lack of short-term activity. I think there's a lot that the people who provide advice can do to make the people who receive advice feel more comfortable about their trustworthiness.

• 46:45Shane Parrish?

  I think that's a really interesting approach. It's not the one that intuitively came to mind when I thought of this question, but what do you think about what's going on in the private markets right now? So you have like Uber, which is purported to have a $50 billion valuation and losing, you know, $500 million a year. And it seems like the venture capitalists of the world are taking these companies further and further before becoming public. How do you think this all plays out? I mean, this is unparalleled in history, right? Where you have several, that I know of, you have several billion-dollar companies that are now private, that don't have a ton of equity, that don't have, you know, it's all air, so to speak, and maybe it's justified and maybe it's not, but they will become

• 47:30Shane Parrish?

  public at some point. And then how does that play out when, you know, a $50 billion, $60 billion, $80 billion company becomes public and only floats, you know, one billion of that, which everybody wants, so that, you know, that'll further drive up the market valuation?

• 47:45Speaker 01

  Yeah, I mean, I think to some extent, just as the credit bubble was transferred from the private sector to the government sector. To some extent, the, let's call it, technology or the sharing economy bubble has been transferred from the public markets to the private markets. It's this huge shifting of risk. In some ways, I think it's probably healthy because now, instead of the entire public being exposed to the risk of catastrophic decline, it's just a relatively small pool of venture capitalists and, of course, their larger pool of institutional clients, including,

• 48:29Speaker 01

  perhaps, your pension fund. So, in that respect, it's healthy. But I think what's unhealthy is, in some ways, a smaller social circle of people all doing the same thing can be maybe more of a toxic breeding ground for excess enthusiasm than even a public market can because they're all talking to each other. They're all talking to each other all day long. They golf together, they play basketball together, they sail together, they commute together, and it's a self-reinforcing cycle that, I think, can get very dangerous and probably already has.

• 49:09Speaker 01

  The other aspect of it that's complicated is that it's very hard for outsiders to have a transparent view of what really is going on or to know to what extent these companies are overvalued. But it certainly feels bubbly. Well, they set their own valuations, in a way, right? Yeah, they set their own valuations, and there's also a disturbing wrinkle in that the valuations, sort of, as a new round of capital comes in, that ramps up the valuation without accounting for dilution, the same way you would in a public company. Right.

• 49:50Speaker 01

  And I think that's very poorly understood by the general public, and the venture capital community, in my opinion, has been a little aggressive in promoting that. But... You know, it's all a reminder, I think, of some disturbing signs that this is filtering through to the real economy. You know, last week, and we're talking in late August, The Wall Street Journal had an article about the million-dollar parking spot. And I think you have to be, you have to be sort of, I don't know whether the right term is ethically dumb or ethically dead not to be bothered by this.

• 50:30Shane Parrish?

  Right.

• 50:30Speaker 01

  I mean, if there are people who have so much money that they're willing to pay a million dollars

• 50:36Shane Parrish?

  For a parking spot.

• 50:37Speaker 01

  For a parking spot, something has gone wrong.

• 50:40Shane Parrish?

  Hmm.

• 50:41Speaker 01

  It's not wholesome for a society to have, and I'm not going to use the term inequality, but to have people to whom money is that dispensable. Money should be more valuable to people than that. If you need to pay a million dollars to park your car, something's wrong with you. You're living in the wrong place, you're not thinking about the virtues of walking around the corner to where a parking spot would cost you $500 a month, and something is dangerously wrong in your mindset. And it says something disturbing about society as a whole, that somebody would be willing to take a million dollars and light it on fire in that way.

• 51:25Shane Parrish?

  I agree with you. But if anybody out there has that kind of money, there's a donate button on the website to

• 51:30Speaker 01

  If you have a million dollars to burn, and the best thing you can think of to do with it is to use it to have a place to put your car, something is just disturbingly wrong with you. And one final thought on that, Shane, I think like me, you're a fan of Fred Schwedt's fabulous book that he wrote in 1940, Where Are the Customers' Yachts? And there's an unforgettable scene in that book where he describes the people commuting from Oyster Bay and the other very wealthy communities on the north shore of Long Island into Penn Station to go down and work on Wall Street in 1929. And he describes a bowl

• 52:13Speaker 01

  of nickels in that commuter car on the Long Island Railroad.

• 52:19Speaker 01

  And I wish I had the passage memorized because it's so beautiful. He explains that to the millionaires who were riding on this car, the nickels weren't money. And bear in mind, a nickel in 1929 was worth about 60 or 70 cents today. So they're almost like-

• 52:35Shane Parrish?

  At least, because that would buy a Coke, right?

• 52:37Speaker 01

  Yeah. Yeah. So it's basically like, in today's terms, think of it as a bucket of dollar bills.

• 52:43Shane Parrish?

  Right.

• 52:44Speaker 01

  And he says, to these millionaires, it wasn't money. If they needed a nickel for the subway, they took a nickel. If they had an extra nickel, they threw it in the bowl. And then he says, until one day, Jehovah, a wrathful God, happened to spy the bowl of nickels in the commuter car, and in a sudden fit of annoyance, kicked it over, and with it, the entire United States financial system. And I don't believe in, you know, fate and nemesis and that sort of thing. But if you believe that there's some sort of God of financial justice,

• 53:26Speaker 01

  he, or should I say she, is not happy hearing about people who pay a million dollars for a parking spot. And I think that's the 2015 equivalent of Fred Schuede's Bowl of Nickels. And when you sort of antagonize the financial gods like that, you should not be surprised if something bad happens.

• 53:48Shane Parrish?

  On that ominous note.

• 53:51Shane Parrish?

  I'm conscious of the time here, I know you gotta get going. I always end with the same three questions. So what book has had the most impact on your life? If you could put one book.

• 54:04Speaker 01

  Well, if I had to talk about my financial, my professional-

• 54:08Shane Parrish?

  No, your life in general.

• 54:10Speaker 01

  Life in general.

• 54:11Shane Parrish?

  It doesn't have to be a financial.

• 54:12Speaker 01

  Yeah. Well, if I could only name one book, and of course, you know me, you know I want to name about 20. It would be Look Homeward Angel by Thomas Wolfe.

• 54:23Shane Parrish?

  Okay.

• 54:24Speaker 01

  Which is the book that I read. I'm gonna name two. Look Homeward Angel and Crime and Punishment. Which were the two books by Dostoevsky, of course. The two books I read when I was 13 years old that made me want to become a writer. And that made me obsessed with writing and I, my, you know, the first, from the time I was 13 until I was 25, I spent two or three hours every single day just writing to get better at it. And doing nothing but writing, regardless of what other responsibilities I had. And those were the books that made me want to become a writer.

• 54:58Shane Parrish?

  I remember reading Crime and Punishment. I actually had a hard time putting it down. The first time I read it, it was so captivating and it, usually those books of that size are intimidating to me.

• 55:07Speaker 01

  It's an unbelievable book, just sort of morally terrifying and compelling. And, and although I would probably like it less well today, Look Homeward Angel was just a, is just a phenomenal work of prose. And you can read large passages of it out loud and people will stop what they're doing and listen.

• 55:30Shane Parrish?

  I'll have to check that out. I haven't read that one. And what are you, what's currently on your nightstand? What are you reading now?

• 55:36Speaker 01

  You know, I have a funny nightstand. Other people, other people put the latest book on their nightstand. My nightstand tends to have only books I read over and over and over again.

• 55:49Shane Parrish?

  Which would those be?

• 55:51Speaker 01

  So right now on my nightstand is The Collected Essays of Montaigne. You mentioned him before. That's frankly, almost always there. A book of Schopenhauer's sort of epigrams and I think it's The Wisdom of Life by Schopenhauer.

• 56:10Shane Parrish?

  Right.

• 56:11Speaker 01

  Skeptical Essays by Bertrand Russell, who wrote some of the best, who was one of the best writers of the 20th century, as well as one of the clearest thinkers, and his hero Warren Buffett's. And Mencken Christomathie, which is the self-anthology that H.L. Mencken put together late in his life of what he felt was some of his best journalism. Mencken was one of the best journalists of the 20th century, although he had lots of personal faults, including being an appalling bigot. But I like to think we can learn from anybody with talent, and I just love the way he wrote.

• 56:53Shane Parrish?

  His writing's been recommended to me before.

• 56:56Speaker 01

  Yeah.

• 56:57Shane Parrish?

  Yeah, he seems to keep coming up.

• 56:58Speaker 01

  I mean, really sort of muscular, vivid, compelling writing. I mean, he never wrote a boring paragraph.

• 57:08Shane Parrish?

  And finally, who would you like to see interviewed, if you could nominate somebody, to come on the show and explore their brain a little bit?

• 57:17Speaker 01

  Well, in general, I think you should talk to, I'm going to give you a general recommendation and then a specific one that doesn't quite meet the description, but in general, I think you should talk to old people. I think in American society, we have an unfortunate tendency to ignore people over the age of 75 or 80, when in fact, they know so much more than younger people like us. And I think the collective wisdom of people in their 70s and 80s and 90s is massive and underappreciated. But I'm going to name somebody who isn't that old, although he's older than me and you.

• 57:59Speaker 01

  I would love to hear, I'd love to hear you talk to Paul Slovic, whose name you probably know. Paul is a psychologist at the University of Oregon, who runs a nonprofit company called Decision Research. And Paul is arguably the world's most eminent authority on the perception of risk, why people think some things are riskier than others, why people are terrified of getting in an airplane when they drove to the airport. With a cigarette in their mouth after having had two drinks.

• 58:31Shane Parrish?

  Yeah.

• 58:32Speaker 01

  Even though the probability of dying in a car crash, even if you're sober.

• 58:35Shane Parrish?

  On the way to the airport is actually greater, right?

• 58:37Speaker 01

  Yes, they're more like, I mean, they're multiple times more likely to die getting to the plane than they are in the plane, but they're going to sit there in the plane with white knuckles and Paul can explain that sort of thing better than just about anybody else.

• 58:51Shane Parrish?

  Awesome, I'll try to hook that up. Listen, Jason, it's been fascinating talking with you. I really appreciate your time today. Thank you.

• 58:57Speaker 01

  Shane, thank you so much.

• 59:03Shane Parrish?

  Hey guys, this is Shane again. Just a few more things before we wrap up. You can find show notes at farnamstreetblog.com/podcast. That's F-A-R-N-A-M-S-T-R-E-E-T-B-L-O-G.com/podcast. You can also find information there on how to get a transcript. And if you'd like to receive a weekly email from me filled with all sorts of brain food, go to farnamstreetblog.com/newsletter. This is all the good stuff I've found on the web that week that I've read and shared with close friends, books I'm reading, and so much more. Thank you for listening.