Ep 29: What I Learned Losing a Million Dollars, with Author Brendan Moynihan

Brendan Moynihan is a Managing Director at Marketfield Asset Management ($20 billion of assets under management). Mr. Moynihan is also the Senior Advisor to the Editor-in-Chief of Bloomberg News, and an adjunct professor at Vanderbilt University, where he teaches both international finance and investment analysis. Previous to all of these posts, he spent more than 20 years on Wall Street as a trader and risk manager. He is the author of Next Time will Be Different: Why Economists Can't Predict Financial Panics and Crises (Infrared Press, 2013), the author of Financial Origami: How the Wall Street Model Broke (Bloomberg Press, 2011), and the co-author of What I Learned Losing A Million Dollars (Columbia University Press, 2013), which is about the losses and lessons of investor Jim Paul. He is currently writing a book on the "science" of risk management.

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

• 0:00Tim Ferriss?

  Welcome to another edition of The Tim Ferriss Show, ladies and gentlemen. I would like to start this very special episode with two things. First, a quote, and that is, quote, "Be who you are and say what you feel, because those who mind don't matter and those who matter don't mind," end quote, from none other than Dr. Seuss. Love that quote. Second, just a little bit of trivia, since the co-author of What I Learned Losing a Million Dollars is our guest today. I thought I would look at the number 1 million, the denomination 1 million. It's a big deal in the US and a lot of Western culture, but perhaps you didn't know that the number 10,000 is a very big deal in, for instance, Japan.

• 0:44Tim Ferriss?

  And when they say "banzai, banzai," when they throw their arms up in the air, that is ban, or like ichibang, ban, 10,000 years, zai, banzai, 10,000 years, 10,000 years. So, there you have it, a quote and a random piece of trivia that you can play with. This episode, we have Brendan Moynihan with us. Brendan Moynihan is a Managing Director at Marketfield Asset Management, which has $20 billion or so of assets under management. He's also the Senior Advisor to the Editor-in-Chief of Bloomberg News. He's an adjunct professor at Vanderbilt University, where he teaches both international finance and investment analysis, and previous to all of that, he spent more than 20 years

• 1:28Tim Ferriss?

  on Wall Street as a trader and risk manager. He's written a whole slew of books, mostly on finance and investing, but the one that I want to highlight today is What I Learned Losing a Million Dollars. And as you'll hear in the interview, this is one of the few books in existence that has been praised by Nassim Taleb, who is author of The Black Swan, or is author of The Black Swan, among others, and it was labeled by him as one of the rare non-charlatan books in finance. What does that mean? Well, I chased down this book when it wasn't in print and read it and had a huge impact on me, so much so that it is one of the few books in the Tim Ferriss Book Club. It is the ...newest book in the Tim Ferriss Book Club.

• 2:12Tim Ferriss?

  And there are a million and one ways to make money. And as a result, there are a million and one ways to publish books about varying methods of success, making money, and so on. As it turns out, it's perhaps a much smarter approach to look at the few ways in which people consistently lose money, consistently make big trading mistakes, investment mistakes, business mistakes that cost them money. So if you can identify the principal ways that people lose money, and in this case, the other co-author, Jim Paul, had a really dramatic story of losing more than a million dollars, that you can then define rules for yourself that allow you to be a better investor,

• 2:56Tim Ferriss?

  a better business person, and in general, succeed better in life. Pretty fascinating stuff. So Brendan is our guest today. I hope you enjoy it. As always, this podcast is supported by you guys. If you like these podcasts, both the short in-between episodes, the longer interviews, please take a look at the Tim Ferriss Book Club. Just go to fourhourworkweek.com, all spelled out, fourhourworkweek.com/books. You will find about a half dozen books that have had a huge impact on my life, including this book, What I Learned Losing a Million Dollars. And if you click on those, it'll take you through to Amazon, and that keeps this podcast going, because it does take a lot of time and some capital to put together.

• 3:38Tim Ferriss?

  So without further ado, I introduce you to Brendan Moynihan. Enjoy.

• 3:44Speaker 01

  At this altitude, I can run flat out for a half mile before my hands start shaking. Can I ask you a personal question?

• 3:50Speaker 02

  Now would be an appropriate time.

• 3:54Speaker 03

  I'm a cybernetic organism, living tissue over metal endoskeleton.

• 4:04Tim Ferriss?

  Welcome everyone to another episode of The Tim Ferriss Show and I'm very excited to have Brendan Moynihan with us today. Brendan, how are you?

• 4:13Speaker 04

  I'm doing well, and yourself?

• 4:15Tim Ferriss?

  Doing extremely well and I am thrilled to be chatting with you because of course, I was introduced to your work first through What I Learned: Losing a Million Dollars. And I remember being introduced to it by Enen Taleb or Nassim Taleb, who wrote, of course, Anti-Fragile, then before that, The Black Swan, and then Fooled by Randomness. And one of the lines that stuck out in his most recent book about What I Learned: Losing a Million Dollars was that it was one of the rare, non-Charlottanic, if that's the correct pronunciation, books in finance. And I was hoping, before we jump into all sorts of other questions that I'd like to ask, why do you think he said that? Why do you think he used that particular adjective?

• 4:58Speaker 04

  I don't know. I had never met him when he put the title of my book in The Black Swan. And at that time, he said it was the best non-Charlottanic finance book he'd ever read. And it was actually that mention that caused a little bit of a stir with email for me to reprint the book. So I reprinted the book based on what happened in The Black Swan. And then, a few years later, he was at an interview with a dozen or so journalists at Bloomberg News, and I happened to be a consultant there at the time, and they invited me to sit in on a lunch. And he recognized my name when I was introduced, just because he had put it in his book. So I never really queried him about, I mean, I was thankful that he did it, because he's not known for handing out compliments, so I was just happy

• 5:40Speaker 04

  to have had it. I was happy to have had it, and I wasn't going to jinx it. But we had a very interesting discussion while we were in that room, and it turns out that he's read a lot of the same things that I've read. And so it was sort of a dialogue between him and me while the reporters were kind of taking notes, which is very interesting. So I don't know why he did that, but I think that it's because it was an opposite tact in that there's so many books out there on how I made a million dollars in the stock market last year before breakfast. And in the million dollar book that I wrote, I even go back to try to find out, how old is this? And there's a book from like 1881, I think, by James Briskin called The Beef Banana: How to Get Rich on the Plains. You know, I mean, it wasn't the stock market. I guess it was a live stock market. But people have been forever, like, I'm going to tell you my secrets of how I got rich. I don't understand that. So I titled this book, What I Learned: Losing a Million Dollars, with my co-author.

• 6:25Speaker 04

  Again, Jim lost the money, not me. I want to be clear about that. But why would somebody reveal their secrets to making it? Why don't we examine what goes wrong? And then if somebody's willing to bear their soul about that and share the mistakes, then as a parable, it might have more resonance with people about what not to do rather than what to do. And I think there's a, I'll get into it later, but I think there's a real premise for why it's essential to know the downside rather than all the different ways to make it on the upside.

• 6:50Tim Ferriss?

  Well, I think that we should, of course, explore that. And I think that it's funny when you pointed out the getting rich on the planes with the beef bonanza. Because I can imagine for every given market, there's probably an equivalent book. I'd imagine if you go back to Venice or if you go to the...

• 7:05Speaker 04

  There's probably one for the tulip mania.

• 7:07Tim Ferriss?

  Right, the tulip mania. I was just going to bring up the tulip mania. There's probably some type of handbook that people were selling at the time. And what does that indicate as a problem or deficiency with those guides? What makes them charlatans in some cases? Not in all cases, but in some cases. What do you think the problems are inherent in such a book?

• 7:23Speaker 04

  Yeah, well, Taleb put the label on there. So I don't necessarily want to, you know, speak to what his viewer perspective was on that. But from what I understand, it's that people are holding themselves out as experts with some sort of specialized knowledge or insight that as a high priest class, only they can impart to other people. And there were people who made livelihoods throughout history by being hucksters or tricksters or charlatans. And I think that from my understanding of reading Taleb's work, that he thinks that there's a, you know, a large cottage industry in the financial services industry that does that. They forecast what the market's going to do or what the economy's going to do.

• 8:06Speaker 04

  They tell people what they should do with their money, what they reveal inside secrets. And I think that he said, you know, if you try to do those or you try to follow those, you might get lucky for a while, but you have to understand that was luck. It was not some special... Secret formula that you had or got from this person to bring you to that state.

• 8:22Tim Ferriss?

  Right.

• 8:23Speaker 04

  But yeah, no, I think you're right. It happens in every industry.

• 8:27Tim Ferriss?

  And I think, you know, I've, I've found investing fascinating for so long. When I say investing, it was generally for most people listening to this, that would mean publicly traded equities, for instance, stocks. And I remember the very first stock I ever bought, I don't know if I've ever publicly talked about this. This is my story, of course, not yours, but and I want to talk about your background in a second, but the very first stock I bought was Pixar. And I was 15, 15 or 16 years old. And it was

• 8:58Speaker 04

  Probably the early 90s.

• 8:59Tim Ferriss?

  Yeah, it was 95, perhaps 96, I want to say somewhere in that range roughly. And I was thoroughly convinced the stock would do well and it ended up doing well, but I didn't have the emotional control to hold it. So I sold way too early. And what's funny about it is I then went and tried to develop very sophisticated approaches while going to undergrad at Princeton and beyond, very sophisticated approaches to investing. And I've come full circle to where what made me believe in Pixar is what in some cases enables me to pick startups that I believe in. And it's just funny how I tried to copy these models that seem to me very sophisticated. And there are some sophisticated models, of

• 9:44Tim Ferriss?

  course, but there's such a survivorship bias in finance where you have 100 people perhaps who roll the dice. And there are people who don't just roll the dice, but the 100 people who roll the dice and you have the few who survive are the people you hear about, which is also true of, say, startup icons who end up on the covers of magazines after risking it all. And it's a skewed data set. It's a really skewed data set, but I don't want to digress too far.

• 10:08Speaker 04

  And you could say the same thing about the S and P 500, which everybody believes is a stock index we've had for, you know, since 1928, but it's not true. You know, it was created in 1957 on March 4th. And before that, it was a 90 stock index. And you know, 10 years ago, 40% of the stocks that are in it now, we're not even in it. If you go back 20 years, like 80% of the stocks that are in it now, weren't in it. So I mean, even the the gauge by which people are measuring, one, how the market performs, and then how managers perform against that is like, you know, an elastic measuring tool. It's a rubber band. It's not a fixed set.

• 10:43Tim Ferriss?

  Right, exactly. And I think that what's also very common, and then I want to come back and give some background on you for people who may not be familiar with your your background and credentials, but it's very common in the financial markets or any type of investing. I see this a lot in startups where someone will, just as a haphazard scattershot approach, invest in, say, 100 companies. And they happen to hit the Google of that decade. And then they paint the bullseye after the arrow has hit. And they and they attribute that to skill as opposed to luck. And then what's so ironic about that in Silicon Valley at least, is that they then

• 11:24Tim Ferriss?

  get a reputation, assuming they can use PR and messaging well enough, for being a good investor, and they start to see better deals, which then becomes this self-perpetuating cycle until the hubris leads to something like massive overspending for a period of four or five years, and then they crater. But they create another fund, and then it's back to square one, which I think also happens quite a bit in hedge funds. But for those people who aren't familiar with your background, perhaps you could just tell us a little bit about your history and what led you up to what I learned losing a million dollars, but also up to the current day?

• 11:59Speaker 04

  Well, it's not an elaborate background. I was raised in Alabama, and I had the good fortune to, one day in my senior year, have Jim Rogers, who had started one of our own fund. He's from Demopolis, Alabama. I was from Birmingham. He came and spoke to our senior class, I think out of His fealty toward the state and coming to visit. And I was at the University of Alabama, so he came and spoke. And after class, I went up and called him and said, okay, you know, you're a poor boy from Alabama and got to New York. How do I do it? So he said, well, I'm in town tonight if you want to go to dinner. So I went and had dinner with Jim Rogers when I was still a senior in college. I mean, I was already sort of determined that this is the industry I was going to get into, but I thought I got to take advantage of this guy being on the premises to talk to him. So, you know, I learned a little bit from

• 12:42Speaker 04

  him and struck up a bit of a dialogue. And way back then, when there were wood burning computers and there was no world wide web, I wrote to him and he wrote to me, or I called him, he called me. And that kind of got me started. I interned when I was in college at a regional investment bank. And then I went to work with him for the first year after school. That was in Nashville, but I wanted to get to Chicago or New York. And I decided on Chicago for the futures market. So I went to Chicago. I spent four years there. I learned from a pretty smart guy there who'd been around for a long time. And kind of continued my real world education rather than going to graduate school. And I got married, had my first son, and wound up working for a guy named Jim Paul for the last year that I was in Chicago. And I had gotten recruited back to Nashville. And it

• 13:25Speaker 04

  was at that lunch with Jim on my last day of working for him. I was in the futures research department at Dean Litter. And the last day of my employ with him, he took me to lunch and he told me the story about, or part of the story about how he'd lost the money. And, you know, he said, somebody said I should write a book about it. And I said, well, you know what? I can do it. I can take your flowery story and marry it with my dry theory. And that was May 31, 1990. So that was sowing the seeds to do the book.

• 13:49Tim Ferriss?

  Now, you have, you have an incredible, just as a side note, memory for dates. Has that always been the case? And it's, and I think you may have mentioned this before, but do you just have a particularly acute memory for facts and figures and things of that type?

• 14:04Speaker 04

  Yeah, I'm not so good with names, but for some reason, the ten digits aren't as much of a challenge in their combinations. So I don't know. I mean, there's some dates I can remember certain things or certain things striking as important. And so I remember them. Other things that go in one ear and out the other.

• 14:21Tim Ferriss?

  You had that meeting with Jim and proposed that you could make this book a reality. And how did the book then get written? What did that look like?

• 14:30Speaker 04

  Because it was a lunch, so it was an hour, right? I mean, he just told me kind of the highlights and said, you know, somebody said I should write a book. I said, well, I can do that. I said, if you will tell the story to someone who hasn't heard it before, so that you will be animated and, you know, full of inflection and just tape record it, send me the tapes and then I will transcribe it and I will match it in with my theory. And I told him what my theory was and I'd worked for him, so he was a little bit familiar with what my approach was. So that was May 31st and then the beginning of November, he calls me and says, you know, I can't do it. I'm, I can't, I tried, I can't talk to anybody, so I'm gonna mail you a plane ticket and you're gonna fly up here and stay with me for a weekend and I'm gonna tell you the story. I'm like, all right, great.

• 15:12Speaker 04

  So, so the weekend before Thanksgiving in 1990, on a Friday, I flew up to Chicago. He picked me up at the airport, we went to the house, got there, I don't know, five, six o'clock or something. And his wife said, she goes, gentlemen, I lived this once, I'm not going to live through it again. I'm going to my sister's, I will see you on Sunday. And she left. So, so then Jim like turns on a Kentucky basketball game or something. And I don't really follow sports, so I was kind of like, okay, I'm gonna burn two hours here, like, you know, doing nothing. I don't really care about this, but, so Jim watches the basketball game and I'm like, okay, great. You know, I'm like, okay, I'm ready to get started. And he goes, no, let's watch a movie. So he puts in this movie called Pretty Woman. Well, I don't really watch movies, so I'm like, I'd never seen this thing. I didn't know what it was all about.

• 15:57Speaker 04

  So I sit there for like another, you know, I don't know how long that was, two hours, another two hours of my life I was never gonna get back. So we get to the end of the thing and I turn, Jim is 50 years old at this time. I turn and look and the guy is sobbing. He has seen the movie before, okay? And he's sobbing at the final scene of this thing where the guy shows up.

• 16:15Tim Ferriss?

  Richard Gere.

• 16:16Speaker 04

  Like, it's supposedly like he's riding a horse and carrying flowers and coming to get this girl or something. I'm almost like, you gotta be kidding me. So, anyway, I'm like, okay, can we get started in the morning? So we got started in the morning. I had the tape recorder, had all the tapes, had extra batteries, ready to go. This is a little dictaphone, you know, it's like the size of a, you know, business card, a little bit larger or whatever. And Jim goes to the pantry and pours himself a screwdriver. It's eight o'clock in the morning. I'm like, well, I know Jim had sort of mentioned, like, when we went to lunch that day, he was like, oh, I think I'll have a drink. And I'm like, okay, it's lunchtime and you're going back to work. So, you know, Jim had a screwdriver then, and then Jim continued to drink screwdrivers and just talked into the tape recorder. Well, I asked a few questions here and there, but he basically was just doing a brain dump, and I was just gonna transcribe it all later. So I don't know, maybe three in the afternoon, I kinda give in and say, okay, well, I'll

• 17:01Speaker 04

  have a beer. So I go to the drinker and have a beer, and I don't know, after about like an hour and a half of drinking beer, and he's drinking, I don't know what by then, I'm feeling a little like woozy, and I'm like, you know what, you've been at this for eight hours, you probably need a little rest, you know, you've been talking and drinking for eight hours, and I probably need to put my hat down, this is, this is not, you know, uh, drinking beer in the middle of the afternoon, it's not something I really do. So, so I went, there was a guest room, so I go to the guest room, about half hour later, he comes in, hanging on the door, and goes, Brendan, Brendan, we're in big trouble, we're supposed to meet Pat for dinner in thirty minutes, and we gotta leave right now if we're gonna make it. No, no, no, no, you may be in big trouble, but I'm not in big trouble. I'm

• 17:43Speaker 04

  not going anywhere until this room stops spinning, and it's not gonna be anytime, you know, soon. So you go have dinner with Pat if you want, but I'm not leaving. So that was, that was it for the night. I mean, we got eight hours that day, and then we did probably another nine hours the next day. I wound up with seventeen hours worth of tape that I took back with me, all little microcassettes. And then I spent Thanksgiving Day, when I wasn't at the turkey dinner, in the office, which was closed, using the secretary's headphones and dictaphone machine where you put the tapes in, and then you use foot pedals and you fast forward and rewind, and I started transcribing this thing.

• 18:25Speaker 04

  And then I started spending weekends transcribing it. And I'd never typed, you know, before in my life, so I basically used the Columbus method, you know, hunt, seek and land, to type this thing out.

• 18:34Tim Ferriss?

  My god, that sounds like a really long process.

• 18:37Speaker 04

  It was, and, you know, it was on a Univac system. Again, there were wood burning computers, there were no, there were no desktop computers at this place. We're talking about, you know, nineteen ninety. I'm sure they existed somewhere, but they didn't exist at this place.

• 18:49Tim Ferriss?

  Right.

• 18:49Speaker 04

  So, um, then, you know, I took my stuff and started tapping it out on the weekends, and then I started doing nights where I'd work all day, go home, have dinner, put the kids to bed. Go back down to the office, work on the computer, adding to it. And it took the better, I mean, between the research and the writing and the back and forth and figuring out how it was going to organize it, it took me the better part of three years, four years to really kind of get it all into, into shape. You know, I don't know if you'll be bored with the details of, I mean, that was, that was the writing side of it, the, the production side was a little interesting as well, so, because we did it differently.

• 19:21Tim Ferriss?

  Well, let's talk about it, yeah. Tell me about it. As a side note, maybe you can answer this at the same time. That is a major undertaking, of course, taking three, four years to do that. I'd be curious also just to hear, and you don't have to do it right now, but perhaps somewhere in your answer, what was the drive to do it? Why did you want to do this book?

• 19:38Speaker 04

  Well, I think I've learned since then, because I've written several since, that just sometimes it's like something gets into your head and you gotta get it out.

• 19:45Tim Ferriss?

  Yeah.

• 19:46Speaker 04

  I mean, I don't know if it's, you know, I'm not an artist by any stretch. My mom was, I did a bit when I was younger, but I guess you get something in your head and, you know, artists have to kind of get it out. So each of the subsequent books that I did kind of follow the same pattern, where it's like, I had this observation, I have something to say about it, I gotta figure out the best way to say it, and then I want to create a physical product out of it and then, you know, try to sell it. I mean, it's like, you know, we were trying to make a fortune off of Jim's misfortune and, you know, we didn't necessarily, but it's not a bad business card, you know, we, we, we handed out and, you know, it works, so.

• 20:16Tim Ferriss?

  Mm-hmm.

• 20:16Speaker 04

  But in the course of doing the book, I found out that, you know, the author really doesn't get that much money unless you're like, you know, a really big hitter and you get an advance and it's a great book and blah, blah, blah. I mean, there are a lot of middlemen in between, from publisher to the bookstore to whatever, who get, I mean, to the person who gets paid to, you know, do the indexing on the book, you know.

• 20:34Tim Ferriss?

  Sure.

• 20:34Speaker 04

  They were getting as much as I was or something. I'm like, really? I mean, I wrote the book. So, so I decided that we're gonna self-publish it. I wrote a letter with a five-page synopsis of the book and a full copy of the manuscript and a self-addressed stamped envelope and sent it out to about thirty people of name in the industry, including Warren Buffett, who wrote back and said, "Sorry, Mr. Moynihan, too many requests, too little time, Warren Buffett." But I got his autograph, nothing else. So we collected quite a few people. Ned Davis runs Ned Davis Research out of Florida. And Ned put his name on the back cover. Bob Prechter, you know, from the futures industry did. Leo Malamed, Chairman Emeritus of the Chicago Mercantile Exchange. Ken Fisher, out in your neck

• 21:19Speaker 04

  of the woods, put a blurb on the back cover of the book. So we wound up with a pretty good list of, you know, eight or 10 people of some name who were willing to read the book and, you know, put a blurb on it. And then we just got really lucky. I sent out maybe 20 or 30 made up press releases. I didn't even know what a press release was, but I had created one or, you know, looked at one and just made the same thing. So I sent them off to some of the news organizations and Mark Holbert at Forbes Magazine picked up on it. And the day we self-published the book, October 5th, 1994, it made a byline on the cover of Forbes Magazine above Jack Welch's head that says, "Biggest mistakes investors make. Are you guilty?" And bang, we were done. We broke even in three months and then we just had books to give away and we sold to German rights and, you know, then we were just kind

• 22:04Speaker 04

  of off to the races.

• 22:05Tim Ferriss?

  Germany's huge. Germany's a big market. And were you selling it at that point? I'm just trying to put a finger on the date.

• 22:11Speaker 04

  1-800-something book. I mean,

• 22:13Tim Ferriss?

  Oh, CEO read or one of your?

• 22:15Speaker 04

  I had P O Box 198038, Nashville, Tennessee. People were sending in checks. I'd go down there every day, get the checks, go home, box up books, mail them out. I mean, it was, it was, it was insane, you know? And then Jim would give speeches in the futures industry and, you know, he'd take a box of books and he'd like sell them one by one. And, I mean, it was, it was not our job. We were just, you know, we were just, but we got all the money. You know what I mean? It's like, we weren't taking, it wasn't like there was a cut, but it was, it was a hobby. You know, I don't play golf or tennis, so it's like, this is what I do with my time.

• 22:45Tim Ferriss?

  And what did, what did Jim look like? I'm trying to identify when you're, when he's sitting there having those screwdrivers, what, what is he wearing? What does he look like?

• 22:52Speaker 04

  Jim was 6'1", 6'2", probably 170, 175 pounds, lean, angular, may have been blonde, started to go a little bit gray, fair complexion and a gravel voice from yelling in the lumber pit for 10, 15 years or something. I mean, his voice sounded like gravel in the bottom of an empty coffee can is what it sounded like.

• 23:18Tim Ferriss?

  Yeah, I felt like you did a good impersonation, at least based on my reading of the stories. That's the voice that I'm now gonna have in my head when I reread it.

• 23:28Tim Ferriss?

  What were some of the lessons that he learned or that you heard from him, stories and so on, that you weren't able to include in the book? Are there any other favorite Jim stories that just didn't make it into the narrative?

• 23:41Speaker 04

  The stories were interesting. My view is that, you know, what I presented as the three mistakes that investors and traders make was an overarching perspective from what goes on between your ears that can screw up anybody's specific methodology for how they go about trying to make money. So I didn't think that, I mean, I thought I captured it and then, you know, I buttressed it. When I looked up the word psychology in the dictionary and I found out there's a three-part definition that matches exactly the three parts that I just went through. So I'm like, okay, the light bulb went on over my head and I just, I went full bore to get that all worked in. I don't know that Jim really revealed anything to me that wasn't in there. I'll recount one thing that he said to me after I got on the manuscript and he read it. He goes, "Okay, I know how you got all this story about me and all this, but how do you know about all this law stuff?" And I'm like, "It goes on in your head."

• 24:24Speaker 04

  And I thought, Jim, I told him, I said, "You're so vain. You think that like you're the only person who's lost money, okay? I mean, you know, I've lost money, okay? If I lost $15,000 on a trade or over a series of trades or whatever, it's not the same as much as you lost, but you know what? It's the same thing. I mean, you're not the only person who's done this." "Okay, okay, I get it, I understand." So I'm like, so I don't know that Jim was ever able to incorporate what I was saying into his approaches, because every once in a while, over the course of the three and a half years I was writing the book, he'd call and he'd say, "God, I did it again. I was up, I was up, but then I lost $20,000." I'm like, "Okay, well, Jim, I have a book for you to read. It's in manuscript form right now, but I'll be happy to send it to you that might help you with that problem, because you're obviously not getting it, you know?

• 25:10Speaker 04

  So I don't know that Jim ever really incorporated it into his psyche, and he may have been unable to, I don't know. But he had some hilarious stories and, you know, some of them were accounted in the book. Some could not be recounted, you know..."

• 25:22Tim Ferriss?

  Right, and for family programming, right.

• 25:25Speaker 04

  Well, yeah, and, you know, because the names have to be changed to protect the innocent and all the rest. So, no, I think one of the funniest stories that, you know, I've ever heard came out of his mouth and it was after he lost the money. So he's on the Board of Governors at the Mercantile Exchange, okay? He's like in the executive committee. There are like six people making the decisions to the exchange. And he drops one point six million out of the one point two million that he has in seventy five days.

• 25:49Tim Ferriss?

  Mm hmm.

• 25:50Speaker 04

  So they come in, liquidate the position, throw him off the board and clear out his office.

• 25:54Tim Ferriss?

  Mm hmm.

• 25:55Speaker 04

  So he's like, oops. So he goes downstairs to the same restaurant that he took me to have lunch in all those years later. And he's like, you know, what am I gonna do? And he says, well, you know, the only way to make good on this is I've got about a million dollars worth of life insurance and the only way to do that is for me to have a few drinks down here at the bar. Everybody knows I drink too much anyway. Then I'll take the Porsche, get out on the interstate out here and heading home, I'll crank it up to about a hundred and I'll aim the car at one of those concrete posts that holds up overhead bridges.

• 26:24Tim Ferriss?

  Oh, my God.

• 26:25Speaker 04

  So he goes downstairs and he has his drinks and he gets in the car and he gets out on the interstate and looks in the rearview mirror and sees the light flashing. So he pulls over and the cop comes up to the window and says, license and registration, Mr. Paul? Does he have any idea how fast you were going? Eighty-five, ninety-five. He goes, try eighteen miles an hour. Get out of the car. So he was stuck in first gear. He was a road hazard, which is why I got pulled over because he's in a, he's in a car that looks like it's going fast when it's sitting still and he's driving at eighteen miles an hour in first gear. So he said it probably saved his life and for what it's worth, it, you know, I got

• 27:08Speaker 04

  a book out of it as well, but that quickly passed from his perspective. He's like, okay, I got saved by a guardian angel or something. I'm never gonna do that again. And then he went about trying to, you know, piece his life back together after, after that, but that was one of the funniest things I've heard from him.

• 27:24Tim Ferriss?

  And let me, let me add another fifteen thousand dollars of transmission damage to the amount of money I need to recoup.

• 27:30Speaker 04

  Yeah, yeah.

• 27:32Tim Ferriss?

  On the three points that you mentioned, perhaps you could just give a brief mention of those three points and in general, I'd be curious to hear what you think makes a good investor.

• 27:44Speaker 04

  Okay. Well, the three points, and again, I kind of backed into it because I had, I had the three things that I was doing wrong. I mean, I sort of. I thought I had it kind of sorted out. And then I wrote the book and then I realized, okay, this is really about a light treatise on the psychology of mistakes that we made. And I thought, what does psychology really mean if I see if I can work this into the book? So if you look up at the dictionary, it says, what are the mental processes, behavioral characteristics and emotions of an individual or a group? So basically, the mental processes are that people internalize what should be an external loss. Like, if you lose your keys, you don't go through the five stages of internal loss, which is denial, anger, bargaining, depression, right? You lost your keys, it's no big deal.

• 28:28Tim Ferriss?

  Right, right.

• 28:29Speaker 04

  When you lose money, people tend to internalize that and they tend to equate self-worth with net worth.

• 28:35Tim Ferriss?

  Right.

• 28:36Speaker 04

  And then they start going through this mental process. So being able to identify and capture that lets you know, okay, this is one of the mistakes that you could be making. You have now internalized something that should be external. Don't be doing this, this is a bad thing, okay? I'm trying to abbreviate all this.

• 28:48Tim Ferriss?

  Of course, yeah, of course.

• 28:49Speaker 04

  See, the other one is the behavioral characteristics of, again, the individual or group. And I think that people mistake the venue in which they participate in an activity with the type of activity they're engaged in. In other words, I think there are five types of market participants. I think there are investors, speculators, traders, bettors, people who bet, and gamblers. And depending on which one of those five you are is a function of how you're behaving in the environment. So there are people who can professionally gamble in Las Vegas and they have a system to do whatever. So they're not really gambling, they've got some sort of system and methodology. And I don't really, I don't do that kind of stuff, but I've read enough about it to where there are people who do this.

• 29:31Speaker 04

  And oh, by the way, Edward Thorp, an academic, wrote a book called Beat the Dealer, made so much money that the Las Vegas Resorts and Hotel Association changed the rules of the game. So he went out and wrote a book called Beat the Dealer and sold five million copies. And I'm like, what is, what is up with this? This is like, you know, the beef bonanza again, right? I mean, they changed the rules so that you can't use this system, but five million people bought his book? I'm like raising my hand, I've got a book over here, I mean, I'll just sell a million, I don't need five million, just come buy a million of it.

• 30:00Tim Ferriss?

  Just to touch on those labels that you mentioned, because I've found one of the many eye-opening aspects of the book, because I think you got into at least a handful of those in the book, but how would you, in brief, distinguish those various classes, those five classes of market participants?

• 30:16Speaker 04

  So, investing, according to Adam Smith, is parting with capital with the expectation of return in the form of interest, rent, or dividends. Each of those three things are paid on a periodic basis, right, quarterly, monthly, semi-annually, whatever.

• 30:30Tim Ferriss?

  Right.

• 30:31Speaker 04

  You intend to be parted with that capital for an extended period of time. Traders are market makers, in my mind, they buy the bid and sell at the offer, it's all they do, they go home flat, and they are very short timeframe oriented, very different from the investor. Speculators, buy and sell, go long or go short, not waiting for that dividend, interest, or rent, they are in for the short term, looking for the price differential, the price change, so their timeframe is again different from the longer timeframe of the investor. Bettors are interested in being right, you and I can have, there's not really a very politically correct, you know, term for this, or updated term for this, but there's a thing called a gentleman's bet, right?

• 31:06Tim Ferriss?

  Right.

• 31:07Speaker 04

  There's no money involved, this is bragging rights.

• 31:09Tim Ferriss?

  Like trading places.

• 31:10Speaker 04

  I think this happened, you bet, they even bet a dollar, but they took the dollar off the table, it'd be purely a gentleman's bet, right?

• 31:16Tim Ferriss?

  Right, right, right.

• 31:17Speaker 04

  To where, you get bragging rights, I was right, you were wrong, you know, and your chest puffs up, and you get to make fun of the guy, and you know, whatever, right?

• 31:23Tim Ferriss?

  Right.

• 31:24Speaker 04

  Or pinky bets, right, you know, you have a pinky bet, there's no money change, right?

• 31:27Tim Ferriss?

  Right.

• 31:27Speaker 04

  They confuse the profit motive with the profit motive, P R O P H E T, P R O F I T, right?

• 31:33Tim Ferriss?

  Right.

• 31:34Speaker 04

  They want to be right, it's not about the money.

• 31:36Tim Ferriss?

  Right.

• 31:36Speaker 04

  And then gamblers, that is a disease, there is something wrong there, it is a betting gone amuck, money is just a ticket to enter, they're there for the adrenaline rush, and I don't pretend to be an authority on, you know, what that is, but it's the other end of the spectrum, but it is one of the categories. But you can gamble in the securities markets.

• 31:55Tim Ferriss?

  Sure.

• 31:56Speaker 04

  Commodities markets and the currency markets, whatever. You don't have to be in a gambler casino to be gambling. If you exhibit the behaviors, and I go through what the behaviors are so people can start to recognize and acknowledge what they're up against. And then the last piece is, you know, what are the emotions of a group or individual? And again, I'm not talking about being a psychologist or being trained in any of that, but I don't have to be trained in that to know that if your emotions have become involved, what you've done is you have personalized something. You have now made this a matter of pride or embarrassment or shame or something. Emotions are neither good nor bad. They simply are. They just exist. We experience them. It doesn't matter. Making decisions based on emotions is bad and can be problematic.

• 32:38Tim Ferriss?

  Mm-hmm.

• 32:39Speaker 04

  So in my research and reading, I just found this book from 1905 called The Crowd by a Frenchman, Gustave Le Bon. And he talks about the crowd being the single entity that best exhibits emotional decision-making. So I thought, well, if I can go through this and make this part of the construct to explain to people, if you're exhibiting these kinds of decisions or these kinds of processes, which is when a crowd forms, a psychological crowd forms and what they do.

• 33:09Tim Ferriss?

  Right.

• 33:09Speaker 04

  Then you'll be catching yourself and identifying that misbehavior and trying not to be making emotional decisions. So that's the, I mean, that's the sort of Reader Digest version of what are the three things and then sort of like the beginning bullet points that fall down underneath each one.

• 33:23Tim Ferriss?

  And the crowd sounds a lot like Mr. Market that Warren Buffett talks about, who comes into the office.

• 33:29Speaker 04

  Yeah, and Jim Gray too, exactly, exactly.

• 33:31Tim Ferriss?

  And what have you found among readers or people in general? Of course, you've had a lot of exposure to market participants, both when you've actively traded, but since the book came out. What have you found has been effective for people or distinguished people who have been able to develop and actually act on the information in the book? Because like you pointed out, I mean, I'm endlessly fascinated by this, even with my own books, whether it's business or sports or the four R body, whatever it might be. There are some people who put the words into practice and there are others who fail to. And I'd love for you to comment on. How or why the readers who are successful in doing that are successful? If you have any thoughts?

• 34:16Speaker 04

  I have spoken to a number of people, a lot of people have contacted me over the years. It's been a long stretch. But I think what I've found is, because what I try to do is just say, okay, here are the problems, but then, all right, now what to do about it?

• 34:25Tim Ferriss?

  Right.

• 34:26Speaker 04

  And what I lay out in the back half of the book, or the back two chapters of the book, is, one, having a plan that is developed when you are not in the market, you cannot have a position on when you develop this thing.

• 34:35Tim Ferriss?

  Right.

• 34:36Speaker 04

  And whatever your methodology is, you know, I mean, there's many ways to make money if there are participants, there are relatively few ways to lose it, I think I've just identified them, form the checklist, put that on the top half of a sheet of paper, and on the bottom half of the sheet of paper, write out, because you have to have it objectified and down in black and white, write down the if-then statements or scenarios under which you will pull the trigger to get in a position or get out of a position.

• 35:01Tim Ferriss?

  Right.

• 35:02Speaker 04

  So that it is now out of your hands. Now, can you violate that? Can you take the piece of paper and throw it away, or tear it up, or whatever? Absolutely. But until somebody goes, I think, and puts down a checklist, and has something to look at and say, am I doing one of these three things, or the little bullet points that fall under each one of those three? Am I succumbing to this, you know, and with the pencil start saying, okay, you know? And then, are you following the bullet points that you've now put at the bottom, which are the if-then scenarios under which you're going to act and pull the trigger on a position in the market? So, I think the ones that have, you know, sort of gotten what I was saying, they have written it down. The top half of the sheet of paper is basically, you know, you print it out, right? I mean, and then the bottom half, your plan might not change from one day to the next,

• 35:45Speaker 04

  but some people print it out every day, some people just print out the bottom half and say, okay, I'm changing the plan to do this, I'll check the checklist, am I falling into these traps, am I doing any of this stuff? And again, it's the propensity for humans to delude themselves and, you know, kind of cheat on that exists, and there's really not a lot, you know, I can do about that. But in terms of translating 65,000 words into a single sheet of paper that you can then try to... Instill it is the way that I found people use it. And I did the same thing. I mean, that's I have a stack of legal pads and I physically write the stuff out every day because then it's not being tapped out on the computer. I literally have to write it out in, you know, capital letters with a pen. So I know I'm doing what I'm supposed to be doing.

• 36:23Tim Ferriss?

  And I do exactly the same thing, typically on a post-it or an index card, something that's very physically limited in terms of real estate so that I can't have an unending, say, app full of to-do items. I feel like checklists are so undervalued, particularly when people feel that the decisions are simple enough to hold in their working memory. Because the first thing, of course, that happens, like you said, you can't really formulate a plan when you have a position. And if you have an emotional response to a position, that working memory is going to be rendered useless.

• 36:59Speaker 04

  Right. There's a reason my telephone numbers are seven digits long, right? I mean, there is a capacity that the brain cannot take in. And this is actually going to be one of the sections of the book that I'm, I've already written it, but I'm, the book that I'm working on right now, which is basically the concept formation. So if you in your mind's eye, if I put up three vertical lines just on a piece of paper, one inch long, you can just glance at that and tell me there are three. You don't need to count them, right? Now, a five-year-old would have to count them because the five-year-old has not yet figured out how to grasp that much content at a glance and spit out what the answer is. But if I put 15 of those lines up there, right next to each other, you would have to count them. Now, I could do a little shortcut and I could do four of

• 37:44Speaker 04

  the lines vertical and then one diagonal through it, right? And you're old enough to know that means five. And I could put three of those and you'd say, bang, 15. Or I could put the number one five and put in the digits one and five next to each other is condensing a lot of perceptual data into a smaller mental unit that you can grasp immediately. That's what your post-it note is doing with the list, in my mind. And that's what my one pager is doing in my mind, is that the bullet points are taking this, you know, mass of data that I have, you know, formed in my head, what am I going to do, what am I not going to do? And I'm boiling it down so that I can, at a glance, more readily apprehend it and put it to work.

• 38:25Tim Ferriss?

  Definitely. There's a very good writer, also a very good doctor, named Atul Gawande. I don't know if you've ever heard his name, but he's written for The New Yorker and wrote a book called The Checklist Manifesto. And it talked about how just incredibly profound the changes can be when a simple checklist is employed, for instance, for bacterial line infections or preventing bacterial line infections in hospitals. And of course, every doctor, every nurse feels like they don't need that type of assistance, but very simple mistakes with extreme consequences are made all the time in hospitals because people are rushed, there are extenuating circumstances, the unpredictable or the unexpected happens, and that's when the obvious becomes not so obvious, or it gets lost in the noise.

• 39:10Speaker 04

  And I would imagine that pilots-

• 39:12Tim Ferriss?

  Exactly, exactly.

• 39:13Speaker 04

  Are perfect examples of why they are maybe forced to do that. I don't know that much about it, but I mean-

• 39:18Tim Ferriss?

  No, that's a great example.

• 39:20Speaker 04

  Right?

• 39:21Tim Ferriss?

  Right. That's exactly right. And also, effectively forcing the checklist to be used, because in the case of airlines, for instance, a lot of crashes, when you review the black box tapes, are caused by a reticence on the part of the copilot, who's oftentimes lower in the hierarchy than the actual-

• 39:38Speaker 04

  Right, right.

• 39:39Tim Ferriss?

  -primary pilot, of speaking up when he notices or she notices various problems, or skipping of the checklist. And you could certainly see how that dynamic would play out if you have, let's say, a spouse who's nervous about a position, or an employer who somehow entered into the psychological dynamic. I want to come back to your current work and what you're working on, but before we get there, which investors have most impressed you or impress you, whether that's the Jim Rogers types or others? I'd just be curious to hear which investors have most impressed you over time.

• 40:14Speaker 04

  Well, again, my history is largely from the trading environment. I've traded bonds, currencies, and commodities for 25 years, and have only recently, in the last couple of years, kind of moved into the equities markets as part of my profession. And this is probably a shameless plug or whatever, but I work for the two smartest guys I've ever met in my life, so I feel very comfortable and happy there. In terms of the other investors, I do think that in my early years, I do think I learned a lot from speaking with Jim Rogers. He said to me one time, he said, "Short soybeans, and you'll learn more in one week than you will at two years at a business school."

• 40:52Tim Ferriss?

  Just by holding that position regardless of the market.

• 40:54Speaker 04

  So I did. And by the end of the week, I was dead. I did it for five days and I lost $450. But it was like the longest position I had ever held. But you know what? I learned a lot. I was probably 24 years old and I really began to, and I was on my own. I wasn't employed. I was doing my own thing. I was trying to make money doing that. And I learned more in that, you know, doing that. I did learn a lot from, again, these are going to be floor traders, a guy named Tom Baldwin in the bond pit in Chicago. I learned a lot from reading about and interviews with these people. Bruce Kovner, he was featured in Market Wizards. And so, you know, again, my bet was really more on the speculator side, right? I wasn't an investor in that capacity or looking at equities that way. So I think that my perspective and approach are probably a little bit different from what

• 41:39Speaker 04

  most people maybe in the securities industry, you know, kind of grew up and cut their teeth on.

• 41:44Tim Ferriss?

  What impresses you about a good trader? What in your mind makes a good trader? Just out of curiosity, because I've never participated in the markets that way, but I've seen, for instance, bootleg copies of The Trader, which is about Paul Tudor Jones. And it can appear very sexy. It's very exciting. I'm sure a lot of people get swept into it that way. But what makes a good trader in your mind?

• 42:07Speaker 04

  Well, I mean, I think actively being able to take a loss.

• 42:13Tim Ferriss?

  Mm-hmm.

• 42:14Speaker 04

  You might be in a position and it's against you and you have a stop further down in the market to get you out if it gets down there. But the ability to just turn and just say, you know what? It's not acting right. I'm not going to mess with this. I'm not going to hope for it to go back up to kind of back to break even. I'm just going to go ahead and get out. And be able to take that loss and just walk away from it and not relive it, not rehash it, not mull over it, not complain about it. And it's difficult because I think that what happens is, and I point this out in the book that, the Million Dollar Book that we've been talking about. And because we lose points for wrong answers on tests in school, when we lose money, we must think that we were wrong. And we really don't like to be wrong.

• 42:59Speaker 04

  No matter what it is we're talking about, none of us likes to be wrong.

• 43:02Tim Ferriss?

  Mm hmm.

• 43:03Speaker 04

  So the ability to distinguish that and differentiate that and keep that money loss as an external thing rather than internalizing and personalizing it and equating loss with wrong and saying, no, I lost some money. This is not about being right or wrong.

• 43:17Tim Ferriss?

  Mm hmm.

• 43:17Speaker 04

  Running a business is not about being right or wrong. It's about making judicious risk management decisions in a condition of uncertainty, trying to speculate, and I'm netting with a capital S, running a business, what future demand is going to be, where supply is going to come from, a very dispassionate view of the decision making process. And to some extent, a healthy disrespect for money. Money is just a way of keeping score.

• 43:45Tim Ferriss?

  Hmm.

• 43:46Speaker 04

  It to become, you know, the be all and all of that. I mean, that I've seen that get people into trouble. That's what the exact question we're asking. I've seen that get people into trouble and I think some of the best traders I've seen, like the money is not, you know, what it's about. It's not what they're they're doing. They're not flashy. They're not going out and, you know, buying crazy things and.

• 44:04Tim Ferriss?

  Well, I've heard, maybe you can confirm or deny this, but I've heard from a number of people that there are, may not be hedge fund managers specifically, but traders who are playing with huge positions, who at numerous points in their careers, when they reach a height of anxiety, when they're having panic attacks and are unable to sleep and so on, that their rule is to liquidate all of their positions and start from scratch, which would seem to sort of reinforce the keeping track perspective of of capital in this particular case. I think I may have read that in a book called More Money Than God about a number of the sort of titans of the hedge fund industry.

• 44:46Tim Ferriss?

  But that's something that I've struggled with, quite frankly, because oddly enough, in the the highly speculative startup market, where I've been very fortunate to be involved with, whether whether it's Twitter, Facebook, Uber, Evernote, a lot of these companies, it's binary. Once I make a decision.

• 45:03Speaker 04

  Yeah, you're in an illiquid situation.

• 45:05Tim Ferriss?

  Exactly. For the most part, you're in a liquid situation. So I have to do all my due diligence, my homework. Cross my fingers and place a bet and then I am not asked by Mr. Market every morning, "Do you want to buy? Do you want to sell? Do you want to buy? Do you want to sell?"

• 45:17Speaker 04

  Right, and you're an investor. And you're an investor of the longest timeframe that Adam Smith was talking about when he scripted that out because the idea of you waiting for a dividend, whether that comes from, you know, going public or whatever, is a really long time. But no, you're right. And I think that it is. I mean, you're an investor and a lot of what I've been talking about, a lot of what the book goes about in the specifics of the parable is speculators, but even investors in the liquid securities markets do have the ability to decide, "I do not want to be in the steel market anymore. I was in the steel business today. I don't want to be in there by Thursday and I'm going to get out."

• 45:47Tim Ferriss?

  Right.

• 45:48Speaker 04

  So it's a contrast. And I've heard anecdotally about people liquidating all the way down to zero, but really I've heard and I've experienced myself just, you know, liquidating down to the sleep level. So here's a great analogy.

• 46:00Tim Ferriss?

  Yeah.

• 46:01Speaker 04

  There's a guy who I worked with at the investment bank in Nashville, he's long since dead now, but he was around when the firm started in 1927. So he went through the crash and the depression working for that firm and was still there in the mid 1980s when I got there, May 13th, 1985. He said, "Renden, there are only two positions in the market and it's not long and short." And I kind of looked at him. He said, "It's too little and too much."

• 46:26Tim Ferriss?

  (laughing)

• 46:28Speaker 04

  So when it's working for you, when the position's going your way, you don't have enough on. And when it's going against you, you've got too much on.

• 46:35Tim Ferriss?

  (laughing)

• 46:36Speaker 04

  So, well, I liquidate down to a sleep level. Yeah, I've done that a number of times. So I've gotten completely out when I'm just like, it's not going, something's wrong. I don't understand what's happening here. The volatility is too much or whatever. And I've heard this one as well. I mean, these are little, you know, cliches that come from the street, but, you know, it's better to be a coward and live to fight another day than to die on the battlefield.

• 46:57Tim Ferriss?

  Right.

• 46:58Speaker 04

  And Jim was killing himself on the battlefield by losing that much money in that short period of time. And so, you know, but that's it. A trader will take the lump and just say, "Okay, so I lost the money, but I have to stay liquid so I can come back and, you know, try this again if I think I have any skill at doing this. I can't make this a matter of being right or wrong and risk all the capital just because there's room to risk it."

• 47:20Tim Ferriss?

  You know, one of the things I really loved about what I learned losing a million dollars, which helped me tremendously, was

• 47:27Tim Ferriss?

  Looking at my internal state, my internal rules, the beliefs, behaviors, emotions, as forensically as possible, as objectively as possible, to set rules in advance that would serve me so that I wouldn't misbehave and make sort of capricious impulse decisions that would be extremely harmful. And one of the things that sparked, in my mind at least, was trying to diagnose those various aspects of your psychology so that you could identify the type of investing that you are best suited to. And in my case, I realized that, and this happened after reading Lowenstein's The Making of an American Capitalist about Warren Buffett, where there's a story in that book that roughly, and I'm paraphrasing this, and I might have sort of exaggerated it in my own mind, but Warren Buffett used

• 48:12Tim Ferriss?

  to come home and then walk up to his office and continue reading annual reports. And at one point, his son had fallen down the stairs and was like sprawled out on the staircase with some type of injury. And he came home, kind of looked at his son oddly, stepped over him and walked up to his office, and then came down a few minutes later and asked him if he was okay. And that, to me, just seemed perfectly appropriate for him because he's so, he is the Tiger Woods of emotional detachment from his investments. And it just struck me that perhaps, just like being able to jump from the foul line and slam dunk a basketball, that there are people who have these predispositions to be able to do things like that. And I

• 48:54Tim Ferriss?

  think that you can certainly develop a lot of those skill sets. But for me, I realized that playing in a binary game, namely startups in this case, and there are exceptions, and you can sell or buy on the secondary, and there are fancy things you can do. But in very simple terms, preventing myself from looking at charts was a very, very good idea. It really opened my eyes when reading about, obviously, the parables and the stories related to Jim, and then your analysis and dissection of sort of theoretically and practically how you put that into the real world. What are your favorite other books on investing? If you had to pick, say, one to three books, if you're like, all right, if you're only going to read one book, two book, or three books on investing besides this one that I'm looking at right in front of me, what would you say?

• 49:39Speaker 04

  Yeah, that's gotta be number one on the list.

• 49:40Tim Ferriss?

  Gotta be number one. So what would the others be? And they don't necessarily have to be books that would be described as on investing.

• 49:46Speaker 04

  Right. Well, I mean, I think that I think two books kind of fashioned and got me interested in this at a very early age. The first book I read on the markets was a book called The Money Game by the pen name Adam Smith. I think his name is George Goodman. It was probably written in 1967. It just happened to be on my parents' bookcase a long time ago, and I was probably, you know, fifteen or sixteen years old when I read that. And then I went to college and kind of, you know, I was studying finance, I was sort of already in the industry and kind of getting going. And I came across another book called Once in Dal Khanda. It's about the bull market in 1960s.

• 50:28Tim Ferriss?

  Oh, absolutely. I've seen this, I've seen this book. Actually friends sent it to me as a gift.

• 50:32Speaker 04

  Just in terms of the cycles of the markets and the economy, it has a broad scope. And so, you know, some of these things have happened before in similar ways, they're not all identical, but to try to get some, some history and perspective that way. And then I've already mentioned the other one, you know, which is, is The Crouch by LeVon. I think that it's a fascinating book for, he looks at how groups of people can get caught up in these mass manias and panics. But what I observed was that those same traits can be exhibited, manifested in an individual, in a decision-making process, in an environment of uncertainty, whether you're in an office

• 51:17Speaker 04

  with people around you, or whether you're sitting, I work in an office by myself and got a home office and there's no one around, but looking at screens and being inundated with information and news or whatever, that an individual can exhibit those same traits and characteristics that make a group of people lose their individual sense of self-preservation. And for example, after your team loses a sports event, you go out with a whole bunch of people and you set the town on fire, right? And you're like, really? I mean, you would never do that on your own.

• 51:50Tim Ferriss?

  Right.

• 51:51Speaker 04

  But in the group, it happens. And so they, they take actions that are obviously contrary to their individual interests, but they do it because they are swept up in this mania or panic. And I think an individual can do that, particularly with decisions about money, particularly about in liquid markets where you're getting constant feedback. Like you said, you wake up in the morning and you're not getting a check from Mr. Market on what those prices are. Or I don't mean to check, I mean checking the price or getting a reading on what those prices are. Whereas, you know, I'm getting thousands of price changes a day by looking at screens and it's like it's easy for somebody to follow that. And I think that that book does a really good job of providing the macro view of what a micro can affect an individual.

• 52:28Tim Ferriss?

  Uh huh. And I want to be, of course, cognizant of your time, but before we wrap up, I would love to hear you elaborate on what you're currently working on, whether that's the new book or other subject matter, because I know we talked a bit before we recorded about the subject matter and I found it extremely fascinating.

• 52:49Speaker 04

  Okay. Well, I'm working on two. One I've had to indefinitely shelve just because I'm too busy with primary work and things, but I'm writing a book on grammar. I'm assuming you do not want to hear about that.

• 52:59Tim Ferriss?

  The other one, yeah.

• 53:00Speaker 04

  Right, the other one. So I'm writing a book, the working title is Fooled by Similarity: The Art of Risk or The Art of Risk Management. And it's a look at how thousands of years ago, you know, societies, whether they were tribes or clans or whatever, they looked out for each other, said if, you know, one guy's crop failed or got eaten by animals or whatever, they all would take the numerator to the denominator and divide the loss and keep that family alive so that nothing bad would happen to them, right? So it was a pretty easy pooling of risk that took place. And as time marched on, you get into around the 1600, 1660, basically you got the early stages of understanding the science and the math of probability. And this came about because of a different kind of risk. And the most risk prior to that was all seeing these downsides.

• 53:45Speaker 04

  Something bad happens, that's risk, it's going to go down, right? But when they started doing this with games of chance, you now had a man-made environment where something good could happen or something bad could happen. And so the development of probability in that was an exercise in math and it was purely predictive. It is purely predictive. I don't have to take a deck of 52 cards and go through all the different combinations and permutations to find out that there are 2,598,980 different five-card poker hands, right? The math will tell me what it is and it will tell me what the likelihood is of getting any one of those hands or going into the future. A numerator and a denominator, fine. Fast forward one hundred and forty years.

• 54:28Speaker 04

  In eighteen eighties, you start getting the development of statistics, which I think got fooled by the similarity of there being a numerator and a denominator. And they started saying, well, you know, something happened in the past. There seemed to be like X number of fires in the city about every year. And so they start taking data from the past, numerator and denominator, examined outcome versus possible outcomes and said, well, you know, it's happened that many times in the past, therefore, it's a probability that will happen in the future. And that's where I think the problem breaks down.

• 54:56Tim Ferriss?

  Right.

• 54:56Speaker 04

  Is that with probability, you've got class probability. You have a uniquely defined set of population of possible outcomes and they form a class.

• 55:08Tim Ferriss?

  Mm-hmm.

• 55:09Speaker 04

  With statistics, you have cases. And the word case is French and it actually is the root for the word chance in English. So, these are all chances. And actually, that's a funny story, but just sidebar, that in finance, particularly in investment, you know, business, in the fifties, it became very scientific with Mark owitz and the paper that he wrote, The Modern Portfolio Theory and so on. In the forties, as they were trying to kind of go through this stuff, two guys were doing work on modern stochastic analysis and they couldn't figure out whether they wanted to call it a chance variable or a random variable. The word random had popped in because of random Brownian motion with Einstein in nineteen oh five. And everybody was trying to, you know, it makes finance and economics sound scientific if you start using words from the physical sciences.

• 55:52Tim Ferriss?

  Right.

• 55:53Speaker 04

  So, so they were trying to settle on, should we use chance variable or random variable? You know how they settled it?

• 55:58Tim Ferriss?

  How'd they do that?

• 55:59Speaker 04

  They flipped a coin.

• 56:01Tim Ferriss?

  That's, that's very appropriate.

• 56:02Speaker 04

  So, they wound up with, you know, random variable. My point is that in the social sciences, you have case probability, you not have class probability. I don't understand why baseball players have a single batting average. Shouldn't they have one for every pitcher that they face? Shouldn't they have a daytime one and a nighttime one? What are the odds of me getting struck by lightning? Somebody can tell me, but I would say, well, using statistics, the odds are none because so far, I've never gotten hit by lightning, therefore, there's a hundred percent chance that I will not get hit by lightning. So... There is some confusion.

• 56:31Tim Ferriss?

  It's like the turkey, it's like the turkey in the black swan.

• 56:35Speaker 04

  It gets said every day. That's right. That's right.

• 56:37Tim Ferriss?

  Before Thanksgiving, exactly.

• 56:39Speaker 04

  That's right. That's right. Unless it's the White House turkey, yeah, you know, it's because he gets pardoned. So I think that people are fooled by the similarities between, but similarity is not sameness. It is not the same thing to do statistical analysis and then try to fast forward that in the future and say probabilistically this is going to happen. So I have rings of examples, and I will load the book with that, I'll just do enough to kind of get the point across, where here's a market phenomenon that has worked 100% in the past. It's happened X number of times, and 100% of the time it has been profitable to next week, okay? But then, if you fast forward that through time, you see a breakdown and it stops working. And now there's a whole new population that it's dealing with. That is not a deck of cards. That is not a roulette wheel. Where probability,

• 57:24Speaker 04

  class probability exists, you're dealing with case probability, and these things are indeterminate. You do not have the prescribed possible universe of outcomes. And I think people, again, got a false sense of security by putting the math to it because there's a numerator and denominator like there is in probability, and they think that they actually have quote unquote "odds" in their, in their favor. As though they could repeat that thing, that experiment, 100 times in a laboratory. They can't.

• 57:50Tim Ferriss?

  Right.

• 57:50Speaker 04

  They can't. You can't replicate that social science phenomenon in a lab the way you can with the cards, the roulette wheel, or whatever, in the game's chance.

• 57:58Tim Ferriss?

  Which is also an issue in mass media, where you see journalism, or say journalists, not all, but many, who misinterpret, say, observational scientific data, and conflate it with experimental data, where you can actually isolate variables and look at cause and effect. But they take correlation and turn it into causal data. And it creates mass hysteria, which then gets put into Wikipedia because it's cited from magazine X, and it can become a huge disaster for public perception that can lead to things like dietary habits over the last several decades, which contradict, or I should say, are contradicted by a lot of the supporting data. So, yeah, this is all extremely fascinating, and I think extremely

• 58:41Tim Ferriss?

  actionable when people are able to digest it in the right format, in the right context. And like you said, I think stories and examples are extremely helpful in those cases. To shift gears, I have two more questions for you. Do you read fiction? Do you read any fiction?

• 58:56Speaker 04

  No.

• 58:57Tim Ferriss?

  You do not?

• 58:57Speaker 04

  No. The last piece of fiction I read... Was Atlas Shrugged and I finished it on October 18th, 1987.

• 59:05Tim Ferriss?

  Okay. That's a perfect job.

• 59:09Speaker 04

  The day before the stock market crashed because I came back from my honeymoon the day the stock market crashed and I got fired from my job.

• 59:15Tim Ferriss?

  Oh, wow.

• 59:16Speaker 04

  Because the guy thought it was the end of the world. So he fired us all and closed the business.

• 59:19Tim Ferriss?

  Oh, man.

• 59:20Speaker 04

  I came home and I said, honey, I'm home. And I mean, I'm really home. I didn't go anywhere. I got nowhere to go.

• 59:25Tim Ferriss?

  Why don't you read fiction? Why haven't you read fiction after that point? I'm just curious. I'm not saying you should or shouldn't.

• 59:31Speaker 04

  Yeah, I just like facts and figures, I guess. I don't know. I mean, I don't care about stories. I don't. I guess I watched Pretty Woman with Jim.

• 59:38Tim Ferriss?

  So do you do you not watch movies either?

• 59:40Speaker 04

  No, I don't have a TV. I know I went to movies with my kids when they were young, like the family and it was like a Disney.

• 59:47Tim Ferriss?

  Right.

• 59:47Speaker 04

  Like The Lion King or something, which I mean, I don't, I don't think that was intended for me.

• 59:54Tim Ferriss?

  No, that makes that makes perfect sense. Last question. If you were to rewind the clock or if you were able to give your 18 year old self or 20 year old self, one piece of advice, what would it be?

• 1:00:08Speaker 04

  I would say wait a little bit later to make most of the major life decisions. I was probably a little too young when I made a number of them. So probably just wait, just get a little bit more maturity before pulling the trigger. So my father died when I was in college. There wasn't really anybody like saying, oh, you might want to hold off on that a little bit. You might want to think about doing this. I was just basically out of my own kind of do. Right thing to do. And I was probably a little bit too young and immature for making some of the decisions I made, but.

• 1:00:36Tim Ferriss?

  What types of decisions?

• 1:00:38Speaker 04

  Oh, I think most of the major life decisions. I think in terms of, you know, moving city, how long do you stay at a job, when you get married, when you have kids, when you buy a house. I mean, I think some of those could have gone on a little bit longer and I was probably a little bit quick to pull the trigger.

• 1:00:51Tim Ferriss?

  Got it. Well, let's wrap this up here and perhaps sometime we can have a part two, but this has been great fun. So thank you very much for taking the time.

• 1:01:01Speaker 04

  Thanks for having me.

• 1:01:02Tim Ferriss?

  All right. Talk to you soon.

• 1:01:03Speaker 04

  Thanks, Ken. Bye.

• 1:01:04Tim Ferriss?

  Thanks. Bye.

• 1:01:10Speaker 05

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• 1:01:15Speaker 06

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• 1:01:19Speaker 05

  Where you'll find an award-winning blog, tons of audio and video interview stories with people like Warren Buffett and Mike Shinoda from Linkin Park, the books, plus much, much more. Follow Tim on Twitter. It's twitter.com/TFerriss.

• 1:01:31Speaker 06

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• 1:01:34Speaker 05

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