TIP684: Current Market Conditions & Poor Charlie's Almanack w/ Stig Brodersen & Clay Finck
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Stig Brodersen : On today's episode, I'm joined by my co-host Stig Brodersen to discuss current market conditions, how hard money fits into our portfolios during an uncertain macro environment, and the one book that Stig rereads every year, Poor Charlie's Almanac. With Charlie Munger having passed away just over a year ago, I thought it would be a good chance to revisit this amazing book and uncover some of the lessons that Stig has learned from reading it more than a dozen times over the years.

At the end of the episode, I'll also share more on the free and paid events TIP will be hosting in Omaha during the Berkshire weekend, where Warren Buffett hosts the Woodstock for Capitalism. With that, I bring you today's episode on the current market conditions and poor Charlie's Almanac.

Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your hosts, Stig Brodersen and Playthink. Playthink

All right. Welcome to the Investors Podcast. I'm your host, Clay Fink. And today, I'm happy to be joined by my co-host, Stig Brodersen. Stig, thanks so much for joining me here as a co-host today. Thank you so much for inviting me, Clay. It's always great to be a guest on one of your episodes.

So today I originally wanted to discuss Poor Charlie's Almanac, but I thought it'd also be interesting to discuss current market conditions because when I think back to when I was a listener of TIP, those were some of my favorite episodes to get yours and Preston's take on current markets. We have the election season finally out of the way and we're back into a market that sort of resembles 2021 in many ways. So Stig and I will be giving a quick overview of the markets and the economy to get us started here.

And I promise I'll try and not bombard the audience and the listeners with too many numbers here. So please bear with me. So the S&P 500 and the NASDAQ, they're both sitting near record highs. And then Bitcoin, as of the time of recording, soared to $96,000, really took off post-election, and also is around a record high. And just

The secular bull run of asset prices just seems to only surge higher and higher after the temporary decline we had in 2022 in the stock market and assets overall. So if we zoom out and look at interest rates, in early 2022, the federal funds rate was effectively 0%. And then the Fed decided they wanted to combat inflation, raise rates. They took rates to over 5%, 5.25%.

That was in the fall of 2023. And here in 2024, they've done two rate cuts, bringing the target rate to 4.5%. And inflation overall seems to largely be under control. It probably depends on who you ask, at least relative to 2022. So the CPI metric currently is coming in around 2.6%.

The Shaler PE ratio, that's around 38. And probably to many people's surprise, that's actually the level we saw back in 2021 when markets were quite frothy. So the market overall is quite bullish and optimistic. And Stig, I think back to early 2023, we were at the tail end of that bear market and we were talking about Alphabet and how cheap we thought it was at that time. And we both added to the stock. And today it's proving to be pretty difficult to find

similar opportunities, at least in the larger cap companies. Much of big tech is up over 100% from their lows around that time period. And a lot of that's just simply come from multiple expansion, which we can't expect to continue for too much longer. And ironically, when I actually look at some big tech names, some of them still seem to be somewhat reasonable values, not screaming bargains, but still

not crazy high valuations, I would say. And then, of course, many people are also talking a lot about Buffett and Berkshire having a record amount of cash. So as of the end of Q3, they held a record $325 billion in cash. And it's probably more useful to look at this as a percentage of the assets they own. So when we look at that metric, it's around 25% of Berkshire's assets is sitting in cash. And it hasn't been that high since

June of 2005, which is nearly 20 years. So lots of interesting things there to ponder on.

Stig Brodersen : Yeah. So I'll be the first one to say that the S&P 500 doesn't look cheap. I mean, trading above 6,000 at the time of recording, but there are certainly pockets of the market that looks fairly valued. Say, energy, for example, there's some smaller value stock that looks quite reasonable too. Some might even call it cheap, but I don't know if I should say cheap, but everything is equal. Everything is a function of opportunity costs. Stig Brodersen : The big tech companies, to your point,

they get a lot of attention. And I like to compare it to tourist attractions. I know it's going to sound a bit odd and it's almost going to sound derogatory, but that's not my intention. So if you visit Barcelona, for example, you probably want to visit La Sagrada Familia. And you're certainly not alone if you do that, because all tourists get the same idea. And there's a reason why they get the same idea, because it's a fabulous place to visit.

Now, similarly, the big tech companies are also somewhat richly valued. But then again, just like there's a lot of familiar, there's a reason for that because they're amazing. They get some of the widest moats the world has ever seen and they're priced like that for a reason. So I don't know if it's a bubble. Sometimes whenever we see the biggest market cap companies, we like to think that they're in a bubble, but by definition, some companies have to be the biggest market cap companies

So to your point, I have a position in Alphabet. I don't think it looks expensive. If anything, it looks reasonable. I don't think it looks cheap, but probably somewhat reasonable. And then you can say that I own Apple through my holdings in Berkshire Hathaway, even though Berkshire Hathaway is rapidly selling out of Apple these days. Stig Brodersen : So the big tech companies are probably not a hunting ground if you're looking to build a new position. But if you're already invested and you're sitting on some capital gains, well, perhaps you want to hold on.

One thing that I don't really like is whenever I see mainstream media make these projections for companies like Nvidia, and I think we've been accustomed for some time for them to focus on forward PE and not trailing PE. But for a company like Nvidia, I see a lot of forward two-year PEs, which for a company that's growing close to 100% year-over-year, I don't really know if I'd like that way of

Of course, you can say, if you don't want to do it for a two-year forward P, if you don't do it for companies like Nvidia, what kind of companies we do it for, but then I would counter and say, don't do it for any companies. Stig Brodersen : So I guess that's just the whole rhetoric that makes me a bit uneasy. Who knows? Perhaps it's just because I missed the stock that I have such a sour mood here. But I once read Peter Lynch's book. It was one of his books. It wasn't the Alvin Wall Street, it was the other one. I think it was called Beating the Street.

And keep in mind that these were books written decades ago. And so he talked about that if you're not holding GE, you are effectively shorting it because it took up so much of the S&P 500. Stig Brodersen : I understand where it's coming from, but I don't think it's a good way of looking at your portfolio. For example, saying, "Hey, if I don't own big tech companies, I'm shorting big tech companies." I think you set yourself up for trouble if you think like that. And I think many of the problems that we're struggling with in this world probably comes from

us thinking that we need to have an opinion on everything. Just like Buffett's notion that it's better to have a punch card with 20 punches, and then you can only make 20 investments in your life perhaps. We should have a punch card every time we have an opinion on something. And I do see the irony that I have an opinion on people not should have an opinion, which is so ironic in itself. But anyways, I think that it might be too much around the fringes to have an opinion on big tech valuations right now. Again, that's an opinion.

there's so many other pockets you can look in the market that might make more sense. Robert Leonard : Yeah. I think I've read a stat that the top seven companies comprise of something like 31% of the S&P 500 today. I think investors for quite some time could sort of ignore this concentration, but it just becomes more and more concentrated. So it becomes more and more important to think about and consider. And 100% of your net worth is in the S&P 500. I think you should consider whether something should be rebalanced to some degree. Robert Leonard :

because your portfolio largely depends on the performance of those stocks, at least for the next, say, five years or so. And you mentioned multiples with regards to Nvidia. When I think of a company like Nvidia and a Tesla, something that's really trying to revolutionize industries, I think that multiples might as well be useless. Robert Leonard :

People would just quote multiples for Tesla for so many years, but then their growth ended up just making those look ridiculous. And I think NVIDIA is the same thing where people looked at a multiple of 100 or 200 and they just blew expectations out of the water and just made those multiples look cheap in hindsight. So I'm certainly no expert on any of those two names, but multiples can certainly be tricky with some of these growthy companies. And you make a good point about just...

You don't have to have an opinion on everything. So many people who aren't necessarily value investors, they'll ask me,

what I think the market's going to do over the next year. And I can have an opinion on what I think the market's going to do, but it's similar to asking me what card's going to be coming on the river at the poker table. I can think I can know, but I really have no idea. But history tells us that it really pays to have a long-term bullish bias. And I think our natural instincts can tell us that

we should wait to invest or wait until the coast is clear and prices are cheap, but rarely is that the right path to go. And had you taken that viewpoint in 2020, you would have missed the opportunity to buy the S&P 500 at half of what it's at today and missed out on massive gains. I think part of what really makes investing so fascinating to me, besides just the simple prospect of making money, is that we just never know what the future is going to hold. So while I've been an investor

We've largely just been in a secular bull market when looking at the big picture, and it's really paid to be an optimist. So since 2010, for example, the S&P 500's average annual return with dividends has been around 14%, while the long-term average is typically around 8% to 10%. And these types of returns likely just aren't sustainable for the next 10, 20 years, and it's not sustainable just largely because of these larger cycles at play. So

some decades might be really good, whereas the next decade might just be the total opposite where it might be flat. So for example, during the 1990s, the S&P 500 compounded at 18% per year. And I think it had nine straight years of going up. Not a single down year, nine years straight. But during the 2000s, it actually had a negative return from start to finish, even with dividends reinvested. So that's data I pulled from dollars and data. Robert Leonard

And when I see the S&P 500 up 24% in 2023, another 27% year to date in 2024, I would say now's the time probably to act more with caution in entering some of your positions. I'm also reminded of one of my favorite frameworks that I learned from John Huber here on the show. So he shared that there's really three sources for returns for any stock. It could be Google, Alphabet,

could be the S&P 500, it could be Nvidia, Tesla, any stock. The three sources of returns are earnings growth, the change in your PE multiple, and capital returns, which is essentially just buybacks and dividends. So in the past two years, a lot of those returns have just simply come from the PE multiple expanding, which is largely just a change in market sentiment. So when sentiment is largely positive, you don't want to bet on that multiple just continuing to expand even more in the short term. So

It just isn't a sustainable way to generate returns over the long run.

No, and I should probably also preface a few different things. So we talk a lot about the market and we always have to ask, what do you mean whenever you talk about the market? And very often we do talk about the S&P 500. And I should also say, I've never invested in the S&P 500. I think if you do that, you'll probably do well as part of a broader strategy. My reluctance to invest in the S&P 500 to the point before isn't really because it won't do well. It probably will do well enough if you hold it over a long period of time. It's just more like

Stig Brodersen : On this show, we really like talking about individual stock picks. And I was speaking with someone the other day in the value investing community, and he said to me that if he was, and I think he's probably in his 30s, and he said to me, if he was in his 80s and still haven't been beating the market, he still would think that the good times were there to come. Stig Brodersen : And I kind of like that sentiment. I don't know if that's how you should invest, but I think that there is something wonderful about that approach to life and being around optimistic people who just love stock investing.

And so I think if you really find investing boring, yes, by all means, S&P 500, but there is something to be said about picking individual stocks. Anyways, to your point, Clay, no, the returns from the S&P 500 probably isn't going to come from multiple expansion, but from earnings growth. And then you can say that with the current multiples we see right now, it would take some time to work off that multiple. And also to a point before, whenever you talk about multiples on say something like Tesla,

and all of a sudden I'm saying, "Well, perhaps you should still look at multiples." There is a difference whenever you're talking about individual stocks and then whenever you're talking about collection of 500 stocks, because on average, well, there are some things that are on average, even if it's market weighted. Stig Brodersen : And I really like how you grouped it into decades. You have one decade with 18% and then another decade with negative return. So I think we should be careful to guard ourselves against survivorship bias. You referred to this historical return of 8% to 10%. And

I think it's completely illogical if you're an American to have home bias,

And you're looking at those returns and you're seeing is the greatest economy the world has ever seen. And it's the century of the US and say, "Hey, this is going to continue." And so whenever I look at the S&P 500 now, I'm like, "Are we going to see another 8% to 10%?" It seems ambitious to me. And that's not because I don't think the US is not going to do well. I think the US is going to do very well, but it is very difficult to continue with those type of returns. Stig Brodersen :

Why that happened to the greatest economy the world has ever seen. A lot of great economies went belly up and there were high inflation, there were a ton of stuff happening. So you can be susceptible to some kind of survivorship bias. And then I also want to say that whenever you're seeing those returns, let's call it 10%, there might just on a CPI basis be 7% real returns. Stig Brodersen : And so whenever we're talking about, let's say we're going to be sitting here in, I don't know, 10 years from now,

I'm pretty sure the S&P 500 would be trading more than 6,000. And certainly if you look at more 20 years, it's going to be trading more than 6,000. But then the question is, how much can you then buy for the same dollar? It's a lot easier for a stock market to show a 10% return if there is 10% inflation than if there is a 0% inflation.

Stig Brodersen : Some of that inflation is baked into the stock price because it runs through all the way through the income statement. So whenever we talk about, oh, the S&P 500 is at an all-time high, it will continue as long as we have inflation in the economy, which I will expect that we're going to have forever for the latter. Better words, I'd say that we are going to see a new all-time highs, even if we didn't see any productivity gain in theory, because it would just all run through inflation. Stig Brodersen : We can then go into a different discussion about

We talked about CPI, so that's sort of like the official inflation data. Perhaps you want to look at money supply growth or something else, and then the math looks very, very different. But I think whenever you're looking at nominal numbers, I also think it's important to think about how is your portfolio going to go? How is that going to perform in real numbers as in purchasing power? Stig Brodersen :

Yeah. I love how you mentioned you can't just write home an 8% to 10% return if you're an investor in the US because the reality is that things change eventually. And if someone told me the S&P 500 is going to earn a 10% return over the next decade, I'm like, okay, we must have some level of inflation in that. If it's 5% inflation, you're getting a 5% real return. Certainly something to think about. And very quickly, we're getting into

into macroeconomics here. And Peter Lynch said that if you spend 13 minutes studying macro, you've wasted 10 minutes. And despite this sound advice from Lynch, I'm going to talk a little bit about macro because I really just can't help myself. And someone recently mentioned how Buffett's a person who says to ignore macro, but they have believed that he doesn't do what he says to a large degree. So I mentioned earlier, he has record cash right now. So you could maybe call that a sort of a macro forecast on where he sees value.

But again, Buffett would also say it's just opportunity costs where he's looking for the best opportunities. And many people would argue holding so much cash probably isn't the best route to go. Maybe that's my own bias at play here. When I look at the macro, I think one of the elephants in the room that a lot of value investors don't talk about or just ignore is just the US federal debt situation and where that sort of sits. So I wanted to paint a few numbers here. The US has...

over $35 trillion in federal debt. Debt to GDP is 123%. We have a $1.8 trillion deficit, and the current interest expense is over $1.2 trillion, which exceeds the spending on the US military. The US is just at a point where it's currently borrowing money just to pay the interest on their existing debt, which honestly just worries me. What the future holds in terms of us as investors, us as a country, and how

I just saw this statistic here on Xer Twitter here on December 4th. The total US debt spiked by $84 billion in just one day, and it's up over $1 trillion in the past 105 days. And when I look at some macro analysts we've had here on TIP, like Len Alden, Luke Grohman, the consensus to me seems to be that currency devaluation is just inevitable, and the

that's just to keep debt levels at a somewhat sustainable level going forward. So essentially, the government's just going to need to continue printing money in order to fund deficits and try and keep debt levels at a sustainable level. And to me and you, we're thinking, how can we guard ourselves against potential inflation going forward? And you and Preston, you started the podcast in 2014. And when you started it, you were just

full Buffett fanatics, just stock investors following the likes of Buffett and Munger, but you've transitioned to invest also in other asset classes as well. And thankfully, I've followed along in that journey with you. So you and I, we both own gold and Bitcoin in our portfolios, for example. And when I look at the returns of these assets year to date, while the S&P 500 is up 27% year to date, gold's up 28% and Bitcoin's up 116%.

I say this fully knowing that Bitcoin is highly controversial with so many people, especially in the value investing community. And I try not to be too dogmatic about it on the positive or the negative side. And gold in itself can be a little bit controversial as well, to be honest. Robert Leonard :

Stig Brodersen : Yeah, that's definitely true. And thanks for teeing it up, Clay, because to your point, we started the podcast back in 2014 and very much were influenced by Buffett and sort of read that as the gospel. And you can even go back in the back catalog and see the first three episodes we had, that was just about how Buffett invest. And I think that we are still very much influenced by Buffett here on the podcast, who I should mention in 1997 made a major silver play. He made short of a hundred million on that, and that was buying physical silver, I should

I should say. So talk about not wanting to make money on owning hard money. So there is something to be said about that, but generally approach the idea of hard money the same way Buffett talks about investing in utilities. He says that it's not how to become rich, but how to stay rich. And I think if you want to become rich, generally you need to understand micro quite well. And if you want to stay rich, you need to understand macro well. There's only so many ways you can lose your wealth if you have a lot of money.

Concentration is one, leverage is another, and then you also have hyperinflation. And most people don't think about hyperinflation because they never experienced it, so it makes complete sense why you wouldn't consider it. But whenever you reach your number, I don't know, let's say it's $10 million, $100 million, I don't know what your number would be, but you have to focus a lot on your downside and hot money falls into that category for some investors, certainly not for all value investors. Stig Brodersen :

and owning hard money might take a little longer to double your portfolio value, but it also gives you some downside protection. And then some people would then say, "Bitcoin doesn't even fall in the hard money bucket." And then that's sort of like a different discussion. So you might point to that many people refuse to look at macro and have gotten rich by not looking at macro. And that will be true. I would then counter and say that

How much of a short-term bias do you have? And what do you define as a short-term? So let's say you're looking at a shorter time period, and I'm going to be a bit cheeky and say 50 years. Perhaps 50 years is a short period of time in a peaceful, prosperous time, depending on which country you're looking at, what your experiences have been, and what will the future hold? So before we talk too much macro and probably too late, I think that's where I tend to differ a lot from a

A lot of investors would say that 10 years of long-term investing in 20 years. I guess if you think about in the light of financial history, like 50 years is a blink of an eye and very high inflation and wars, emergencies happen, pandemics happen. And it's always been the case in recorded history. This whole discussion about Bitcoin makes me a little uneasy. It's almost like talking about politics.

you'll quickly stop talking about substance and then emotions run hot and they can get quite ugly. Preston and I covered Bitcoin on episode 30, and this was published back on April 5, 2015. Now, Preston and I later took positions, and I said at the time that I wouldn't sell any of my coins until they reached half a million dollars per coin, which obviously at the time made me look like a fool, especially in the circle of value investors. Luckily, we had no listeners in 2015, so no one heard it.

I kind of feel like if you were a novice chess player, you may lose because you don't know the value of the pieces on the board. But if you're a novice chess player and you are so certain about the value of the pieces of the board that you would never exchange a rook for a bishop, regardless of the positioning on the board, then you're probably also setting yourself up for trouble. Stig Brodersen : And so if you're not a nerd about chess, what do I refer to? Basically, it means that the rules, and we set up rules for ourselves,

in our investment process, but you always need to be able to make exceptions to your rules.

Stig Brodersen : Basically, what happened at the time, this would happen later in 2015, but emotions certainly started to run hot in the value investing community. Then at some point in time, I don't remember when, it must have been later than 2015 because no one talked about Bitcoin at the time, but Buffett and Munger went out and talked about Bitcoin being rat poison and then entire value investing community more or less went with that, perhaps for good reason, perhaps not. You were sort of like persona non grata if you said that you invested in that.

Stig Brodersen : So anyways, what Preston and I then did was we had a call and we talked about it. We talked about the investment side. We talked about the business side. We talked about that it probably would be better if he set up his own show talking about Bitcoin and I continue with value investing on another format, which is what we do now. And not because it's very secretive. I publish my portfolio annually and everyone can Google it, find it if they want to. And it's been documented. There also been other times where I talked a bit more about my view on Bitcoin, but

But I kind of prefer not to talk too much about it, which is a bit ironic because I know I just spent a few minutes talking about it. But you sort of like in the outline, put me a bit on the spot, which I also kind of like. So I think that's perfectly fine. Then the other thing is that a podcast where you say, hey, I'm just going to wait for this hundred bagger to take off and not do anything for a decade or more, it just wouldn't be a great podcast. I think it goes out multiple times a week. But anyways, if

if you used to think that, or if you do think that investing is all about discounted cash flows, and if something doesn't have discounted cash flows, then it's a bad investment. I don't know. I guess I just look at it from a different standpoint. I more look at it as I want my portfolio to be anti-fragile, defined as I want to reach my financial goals as many times as thousands out of a thousand times, if that's possible. And I see hard money having a role in all of those that

scenarios. So it's more a question of where can I find the highest return with the lowest amount of risk? Stig Brodersen : So even if you look away from financial history, I think I've just changed my framework a bit where I'm looking more to see what kind of expected return can I get and how do I minimize for risk at the same time? And I've just become a bit more pragmatic about it. So I guess, yeah, hot money falls into that bucket. And to my point before, even for the very best investor, Buffett, history has ever seen,

He made his ton of money in silver investments back in 1997, which we sometimes tend to forget. So perhaps you're just taking a page from his playbook and then adding your own color to it. Let's take a quick break and hear from today's sponsors.

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All right, back to the show. Robert Leonard : Yeah. So it sounds to me like the main reason you want to own hard money, you defining that as gold and Bitcoin, is that you want to protect yourself from high levels of inflation or some sort of currency reset where the currency is revalued against some sort of hard money or commodity. Preston has just got me thinking so much about this topic in particular. So when I look at the past, say 10 years or so, I think it's

No doubt to me that we've seen significant asset price inflation that's largely been a result of money printing. So if we just look at home prices, for example, home prices are rising faster than average wages. So many people are starting to ask themselves how they're ever going to buy a home. So for some people who just might not have positioned themselves well financially, they're sort of just forced to either just continue renting or

or go and have just a lower standard of living, whether it be a smaller home or buying an older home than those people in the past. And it's sort of this interesting dichotomy where the US is such a prosperous country. Of course, I'm talking about the US as a US citizen here, and I know we have a lot of listeners in other countries. But just speaking sort of from personal experience, we have this very prosperous country, but I

Asset holders are continuing to get wealthier and wealthier, and a lot of other people who aren't asset holders are just largely being left behind in some ways. I think back to Q1 2020 in the Mastermind discussion. It was with you, Preston, and Toby Carlisle. Preston pitched Bitcoin in a discussion that was largely focused around stocks for many years. And Bitcoin at the time was trading around $9,000. I was curious,

how home prices have developed since then. So if you look at average home prices from that time to November 2024, so March 2020 through November 2024, average home prices in the US went from 269,000 to 404,000. So that's a 50% increase in nearly five years.

Wages over that time went up less than half of that amount. And one thing that Preston did that just sort of opened my eyes was instead of using your unit of account as US dollars, try using your unit of account as Bitcoin. So one thing he would do is always reference Apple. So Apple's revenues over time in terms of Bitcoin would go down, their income over time would go down because of this emerging store value assets is what I would maybe call it.

It's just seeing a lot of adoption and is appreciating over time much faster than most asset prices. So had you denominated home prices in Bitcoin over that March 2020 to November 2024 time period, the value of a home in the US went from 30 Bitcoin to 4.25 Bitcoin, which is an 85% decrease. Now, this isn't my way of saying that

Bitcoin has to be a major part of a portfolio or anything. It's not 100% of my portfolio, and I certainly don't advocate for that. It's an extremely volatile ride, and there's certainly no free lunches when it comes to investing. But I just think it's so interesting that over time, the value of most assets have fallen pretty drastically against what I would call an emerging store of value asset. And whatever you want to call it, the prices of most things have fallen against that. So

I think I'm going to continue to have that as a portion of my portfolio and sort of help counter against continued devaluation of the dollar. And I mentioned the debt situation earlier where more and more debt is being issued. And I think it also just helps sort of illustrate the power of an asymmetric bet where the most that you can lose is what you put in. But if it ends up being a good bet, then you can significantly make multiples of what you put in over long time periods.

Tying back to the point on protecting against just inflation, one thing that comes to mind for me is that many value investors would argue that the Buffett line where you can just simply buy good businesses to protect against inflation because they can just take up their prices, they have pricing power, and can pass on the inflation to consumers. So how do you think about that, using just businesses in general to protect against inflation? Robert Leonard

Yeah, it's such a great question because I used to think that everything Buffett said was right. And who am I to say that he's wrong? So please take it for what it is. It's difficult with quotes because you don't really, it might just be taken out of context. Perhaps he was saying a bunch of things afterwards. I've heard the quote, but I don't know what he was saying before, what he was saying after, and what he was referring to. So who knows? So I come at this from a few different angles.

So for example, I don't own gold because of the risk of inflation. I own it because of the risk of hyperinflation, which is a very different thing. But you can just look at it as high inflation. There are some technical differences to what hyperinflation is. Stig Brodersen : And so to your point, for example, about gold being up 27% this year, that is how you would see it as an American in America using US dollars. For a lot of our listeners who are not based there, who are using other currencies, gold is up significantly more than that. So what

I think that's just one element to that. And so briefly about Bitcoin, because as you can tell, I keep on talking about it, I don't want to talk about it anyway. So I ask for your forgiveness. Bitcoin was a bit of a different thesis. I'll see if I can respond to your question just from this angle here. So we might feel like geniuses from having invested, but we also have to zoom out. At a level around like 95, 96,000, whatever it's trading at the time of recording, I think there are still a lot of upside.

But obviously, it's lower than it was when we started covering. But it's also trading at those levels because it's a symptom of the asset being de-risked. Not that it's being de-risked fully by any means, but let's say compared to when we started talking about in 2015. At the time, the idea of a Bitcoin ETF and that country having its legal tender just seemed laughable, and here we are. Stig Brodersen :

Stig Brodersen : Talking about Bitcoin on our show is a bit like an asymmetric bet, right? Unlimited downside for ticking people off and no upside because those people who have that conviction probably already listened to the other show that we have about it. But back to your point about businesses and inflation, I think that generally, yes, great businesses are a good protector of inflation risk, but I also think it has some flaws that doesn't cover the most extreme risks.

So for example, during the Second World War, many European stocks became worthless because of hyperinflation. And for others that wasn't susceptible to that, they still became worthless because the factories that these companies owned, they were bombed. So there was just no value there. And of course, in today's digital world, the risk has changed. It's a lot harder to bomb Google's search algorithm than a factory. I think I made my point with that.

Yeah. We all like to get the highest possible return in our portfolio, but really what I'm looking for is to run my portfolio a thousand times and then make sure to take care of my family and loved ones thousands out of those thousand times. So that's one thing. And then another thing, this is just a personal thing. I get taxed pretty heavily on public equities. Whereas for example, for private equity in certain structures, I don't get taxed at all. And so

I think the general thesis of holding great businesses as a protection of inflation makes sense, but perhaps it more makes sense if you know exactly why that person is having that thesis. How is he taxed? Where is he residing? What's the time period he's looking at? And so on and so forth. So I don't necessarily think it's true a thousand out of a thousand times. Stig Brodersen :

Robert Leonard : Yeah. I mean, taxes is certainly an important consideration for many investors, and I would say especially for you. So there's been talks of unrealized capital gains tax here in America, and I'm like, "I just can't imagine having to deal with something like that." But to my understanding, you actually do have to deal with unrealized capital gains. Is that correct?

Stig Brodersen : Yes. Without going into Danish tax law, depending on how it's being held, there are different rules. There are some unrealized tax involved, which just changes how you invest, which is why it's so hard to say, "This is the way you should have your portfolio." It depends on your goals and how you're being taxed and a ton of other factors. Trey Lockerbie : Yeah. And just to take that a step further, there's unrealized capital gains on public equities, but not on something like gold or Bitcoin.

That's correct. For example, you can also make the argument that, no, sorry to be really nerdy about this, but if you own more than 10% of a private company or sell, you don't pay any tax at all because there is incentive to raise money for private businesses and create employment. So everything is equal. What I should probably be doing with my time should be to start a bunch of businesses from a tax perspective. And that sort of goes back to one of the things we talked about before. I just find it to be so much fun picking individual stocks. But it's also one of the reasons why I only have five stocks, because if you

if you have to fight all of those hurdles, those stocks really have to be good stocks. Otherwise, it doesn't make any sense to invest your money into them. Trey Lockerbie : Yeah. Well, I'm going to try and seamlessly transition to talk about poor Charlie's Almanac here. So we talk a lot about Buffett on the show here, of course, but I'm not sure if we give Charlie Munger as much credit as he deserves. So investors like Monish Pabrai has referred to Munger as a quantum leap above Warren in terms of intelligence.

Robert Leonard : You had mentioned to me that you read Poor Charlie's Almanac every year. So at this point, you've probably read it many, many times and more than probably most Charlie Munger fans. And it reminds me of a point that our friend and former colleague, Robert Leonard, told me. He had onboarded me here at TIP in 2021, and I asked him sort of what stands out to him about working with you. And he mentioned that he just learned so much from you. And he mentioned that one thing about you is you're really good at reading, taking

taking away a lot of the key concepts from a book and then applying those into your own life. And I think we live in a world where a lot of people feel this sense of pride by having a full bookshelf or having read X number of books, but they might not apply really much of anything of what they read. It would be like reading every book on Warren Buffett and telling everyone you read every book on Warren Buffett, but never actually going out and buying a stock in your brokerage account. So

I'm certainly excited to learn more about what you've learned about this wonderful book and how it's impacted your life. What books do you reread every year and why is Poor Charlie's Almanac one of them?

That's actually the only book I reread. I had other books on my list. The reason why was that I read a book, I actually don't remember the name of the book, but it talked about how you should spend the first third of your life reading as many different books as possible, and then you should spend the rest of your life rereading the best books. And I thought, "Oh, that seems smart." So I created a list of books I wanted to read every year, but only one actually made the cut in reality, and that was Paul Charles' Almanac. And so I don't

So I don't necessarily know why that's the one that made the cut. And I didn't think about it like that before you asked me the question. So I tried pondering a bit on that here before we started recording. I think that there are different reasons for that. One of them is probably that I don't go to Omaha anymore. So it's almost like a way for me to be in Omaha while still being at home, especially now that it's available in audio book format, it's even easier to read.

Charlie famously talked about how you should make yourself friends with the imminent death. And now, sadly, Charlie would fall into that category. And having read so much about him and what every Berkshire meeting you can find online more than once, I feel like you can draw that wisdom as if he was still here. And I think he's just such a powerful role model to have in your life. So I tried to become friends with him without having met him and tried to seek his guidance. And

I also think it's worth underlining that Charlie doesn't bat a thousand, which he's also not embarrassed to talk about in his book. And so I have a process where I learn to what my heroes in life tell me, what they advise me to do, and then I decide. Mongo would probably tell me not to buy Bitcoin just for once, so I don't always pay attention. But Charlie, like so many other successful people, has found that what works for them at times, they tend to think that also works for others.

And I think that there are certain principles that transcend time and culture. For example, Charlie talks about how being ultra-reliable is important, and I do think that's true. But I also think it's worth noting that Charlie, what really made him successful is that he's wired in a certain way. He was born and raised in the States at a certain time, and you can point to many other factors that was very specific to him, and you're sort of like,

You shape your environment and then your environment shape you. And I don't think anyone should try to be Charlie, partly because you're not. But even if you're wired like him and you're born today, your environment would just shape you in a different way and you wouldn't get the same benefits. You'll get different benefits from being Charlie today. Paul Teller's Almanac is such a wonderful read. And I think one of the reasons why is because it introduces you to so many of the greats in world history.

and then you can make yourself friends with them. Other imminent death. That was how I learned about the American physicist, Richard Feynman. His whole saying about don't be fooled and the easiest person to fool is yourself. And I wouldn't have become introduced to Feynman without Paul Charles Almanac. And I think that's a very good mental model that I constantly use whenever, for example, I find a new stock that seemingly is a screaming buy. I was thinking about this recently last night on

on the mastermind community we just talked about in our P. And not to dive too much into that, and I was going through the investor presentation yesterday and their latest 10Q, and I was like, oh my God, this is so amazing. And then I was like, am I just fooling myself? And so I think Kyle has a position. I think we need to make disclaimers and all that, but I don't know. I just think it's one example of stopping yourself, which I certainly didn't do a good job of before I started investing more, I started Paul Charles Almanac more. It just seemed...

wonderful. Like, oh my God, a single digit stock and paying off debt, and there's so much free cash flow and high insider ownership. How can this go wrong? And there's so many ways it can go wrong. Anyways, I used to think whenever I was in grad school that markets were efficient. And then I found Warren Buffett, child monger. And then I thought the markets were always inefficient, which is also the wrong way to be looking at it. Because very often when something looks like a streaming buy, it's because you missed something really important.

And you have to strike a balance, of course, because you have to assume that the mispricing is there for a reason. And very often you'll find that it's the case, but you also can't make that paralyze you. So you also need to have the character to be able to load up if you truly find something that is a screaming buy, which luckily happens from time to time. Stig Brodersen : Another powerful model I also learned from Paul Charles Elmanach is from the German physicist Max Planck.

And he tried to immerse himself in economics, and he couldn't do that because he found that the system was too complex, and it was too different from hard science. And so if you want to be good at economics and investing, you also have to be okay with knowing that you can be approximately right, and that's so much better than being exactly wrong, which is John Maynard Keynes' quote that really illustrates Planck's point here.

And then Max Planck has this wonderful quote where he says that progress advances one funeral at a time. That's another important investing framework, and we're talking about this multidisciplinary framework. So let me paint some color around that. So the idea that Max Planck had was he originally thought that if you could prove that you're right, you could then convince the smartest scientists in the world that you're right.

And then he was like, you actually can't. Even if you prove it, the old guard are still not going to agree with you because they have their truth. And that is the truth. And there is no way to debate it, even hard scientists. So he basically said that progress advances one funeral at a time. And it sounds sad whenever you put it like that. I find it to be true though. And I generally think that's the best way to run your life and your portfolio. So let's say whenever it comes to politics, you can think you have the best

arguments in the world, but it doesn't really matter. The other party won't listen, just like you won't listen to them because they have a different politics than you. On that note, that's one of the reasons why we don't want to talk politics on our podcast, because you can argue that politics is important for investment decisions and they are, but as soon as you talk politics, everything becomes so polarized. And in this world, we just don't want to throw ourselves into that discussion. But how do we lean into this framework as investors?

where progress only advances one funeral at a time. So think about it like this. I have the best political argument. No one can refute it. And of course, people can. It doesn't matter if you're right or wrong. The other person would still disagree, and perhaps you're wrong. And this belief doesn't even have to be deep-seated. It's really a question of the path of least resistance and that strategy not panning out the way you hope. Think about how many restaurants you've seen that started out with a strategy, a

along the lines of, our food is so amazing that we'll get a ton of customers from word of mouth. And of course, you sadly see that that restaurant is going out of business because the world just isn't that kind. So you would have to find companies where the product and services are so good that you don't have to convince people to use it. It will be their default mode with the path of least resistance. And so think about how that leans into the mode around big tech companies today.

Then depending on how old you are, you would have some investors out there, they would say, I cannot convince my parents or my grandparents to use Alphabet's, Apple's products. You don't need to. Progress advances one funeral at a time. And I'm such a hypocrite. I'm going to talk about Bitcoin now. I think you can overlay the same mental model on Bitcoin. It played the Max Planck framework. And then we had, this is a long time ago, we had a gentleman called Thierry Misterand, and he talked about

To me, that was not what he said on the podcast, but the way I heard it between the lines was progress advantages one funeral at a time. And he talked about how younger millennials and Gen Zs who don't have any money, and certainly at the time didn't have any money, were looking at this new asset class. And then I was speaking with a lot of people about Bitcoin, and they told me they would never use it, their parents would never use it, people with money would never use it.

And then I thought progress events at one funeral at a time would sound so morbid whenever I put it in that context. I'm going to come across as a bit of a jerk whenever I say that, but in the value investing community, it's perfectly fine to make a killing, no pun intended, to make a killing buying funeral homes at a P of three, but it's a no-no if you invest in Bitcoin. And then of course, when you think about it, the demand supplies is still ironclad in both scenarios. Stig Brodersen : So I think you have to consider what is it that you're optimizing for?

And as you can tell, I'm not optimizing popularity in the value investing community at all. But if we go back, take one step back here again, Buffett and Munger has previously said that there were really 15 decisions that really make their track record, or roughly one significant idea every five years. So I think whenever you hear something like that, it really makes you humble.

And so there was another wonderful quote in Paul Charles' Almanac where he talks about, "Take a very simple idea and take it very serious." That idea of you don't really get too many good ideas too often. And so I actually tried setting up a spreadsheet here the other day inspired by this and thinking about, okay, let's say what is the best idea I had per year? So I try it. I don't remember that well. My memory is not that good. So I only tried doing it for the past 10 years. So I looked at my portfolio and I looked for the past 10 years.

what is my best idea? And most years I didn't have any good idea. Last year, I kind of felt I might have had a good idea, even though my idea was a deal that was cloned. This year, I took two new positions, the jury's still out. So I guess you can say for good reason that I probably haven't had any good ideas for two years. And I kind of feel like that approach, at least to me, was very sobering. Knowing that great ideas or at least great execution of great ideas don't come across very often,

knowing that even Buffett and Munger say that they only execute it well on a good idea every five years, and then try to look at your own portfolio life and see what it boils down to. Man, it's just a reminder to me of how biased we can all be, how emotional we can all be,

how binary we can think. Either Bitcoin's the greatest thing to ever exist, or Bitcoin is the worst thing to ever exist. It seems like so many people are in one of those two camps, but the world is rarely so black and white. Robert Leonard :

I think it's a reminder to me also is people tend to just not change their mind and you shouldn't try to change their mind. So there's a family member I told them about Bitcoin in 2020 around when Preston was launching his show and it was $10,000 a coin. And they thought I was totally crazy, of course, like any normal person would. And I think our natural inclination is once the price rises,

then they're going to understand that I'm right. Of course, the price is 96,000 and they think I'm probably even crazier than back then. People just generally tend to not change their mind. And I'm not trying to say that the Bitcoin people are right or the non-Bitcoin people aren't right or whatnot. It's sort of beside the point and also ties into what you're discussing on politics. And I love that we don't discuss politics largely on the show here. Your point on the complexities of investing in economics and money

Munger's points in the book really hit home for me as well. So when I started investing, I came at it from a very math and numbers-based perspective. So I'd look at Apple and I'd see Apple stock go from a PE of 25 to a PE of 30, and I would think that the stock got away from me. And over the long run, you realize whether you pay 25 or pay 30, it really doesn't matter all that much in the long run.

And it sort of makes me wonder whether someone like Buffett pays almost too much attention to price, but who am I to question Buffett? You mentioned Munger was influenced by his environment and life experiences shaped his viewpoints. It reminds me of Munger's obsession with Costco.

I sort of feel that Buffett was a bit scarred investing in retail, and he likely felt that Costco was usually too expensive for Berkshire to ever own it, and Munger was just obsessed with all these qualitative aspects of it.

And Munger was just looking at the company through a different lens, and he had a different life experience. He had all these different viewpoints to look at a business like that. And it also ties into your point on the path of least resistance. This business offered so, so much value to customers that it was just inevitable that it would just continue to grow and just blossom. So the end of Poor Charlie's Almanac

It has a section on the psychology of human misjudgment. It highlights 25 psychological biases that we can all unknowingly fall prey to. So for example, the fourth one he lists is the doubt avoidance tendency, and it explains how our brains are programmed to quickly remove doubt and quickly come to a solution. So I found that I can easily fall prey to this bias. If you'll allow me to use an example here, we've

put a really strong focus on trying to interview investors who have a track record of beating the market. Oftentimes, I'll look at these investors' portfolios because I'm interested in finding new stocks and I can't help but find that a number of these investors I've chatted with have Constellation Software as a top position. For the most part, I see most of them aren't too keen to sell it or trim it even though it's as expensive as it's ever been. So

I'm an investor myself. I manage my own portfolio and I look at someone like Mark Leonard. I read his letters online. I see all these extremely smart people have it as a top position and my mind thinks, this is just a no brainer. How could this ever go wrong? And full disclaimer, I do own shares in Constellation Software, but I read about this bias in Munger's book and I quickly realized that I can get excited about a stock like Constellation quite quickly, even if the valuation is as high as it's ever been.

And I think that many of us can likely fall in love with new good ideas quickly and overlook the red flags because we have recency bias and we see things that have just gone so well in recent years. And then plus when you're in a bull market and stocks seem to only go up, it kind of can bring in some FOMO and really makes you want to get into it and creates this Lollapalooza effect of issues that we can run into. Robert Leonard

How about you just talk about the psychology of misjudgment, which biases you seem to fall prey for and how you guard against these?

I could probably say all of them. It's a bit of a cop-out if I say all of 25, but I kind of feel all 25. I think one of the toughest biases to get rid of is the bias of resulting. I actually want to talk a bit about that before we talk about some of the other biases in the book. So I really like what you said there before, Clay, about wanting to interview guests that beat the market. Clay Gould :

We want to make sure to have guests on that provide the most reliable advice, analysis to our listeners. And it's really difficult to separate signal and noise. And one of the ways we do that is by asking about the track record. We set up a new system. I'm not saying we've been very successful. We used to get roughly, or I just know in my inbox, we used to get around 2000 requests annually. Now we're down to 1200. I don't know. It's probably not a great system, but I've set up a new system with the help of our friend Guy.

because I kept on complaining to him about my inbox and he was very kind and helped me setting up a system for inbound traffic. So one of the things that I ask people about now is whenever they send us a guest pitch, I sent them to a page and then they had to click off that they've been beating the S&P 500 for at least a decade and then provide proof. Stig Brodersen :

And we've had that system up for close to a year and it hasn't happened once. People still email us though. No one has made proof of that. So the way we get our guests is that we study who has already tracked records and actually react to them. And ironically, most people who are beating the market are really, really hard to get on the podcast, whereas a lot of people who want to be on the podcast are not beating the market, which is probably why they want to get the promotion and be on the podcast. But anyways,

I think that resulting is very tricky for better and for worse. And whenever I talk about resulting, this is a word I learned from Andrew Duke. I'm sure Charlie Munger would also be aware of it, but it's where you look at what is the result of a decision, and then you determine whether it's a good or bad decision, and you don't really focus on the process. Focusing on the process is difficult. And focusing on the process is difficult because going back to your point, Clay, about path of least resistance,

the brain is 3% of your body mass and it consumes 25% of your energy. So you don't really want to think too much about it. It's very difficult whenever we, for example, get a new guest on to be like, "Is this a good investor?" All investors would say that they have a good process. All investors would say that they take below average risk, whether that means that they invest in Apple or don't invest in Apple. They would all say they're better average drivers and they take lower risk. That's just the way it is. And so

It's easy for me to say, and this is my not so humble brag, but I'm going to say something afterwards just to counter that. Two years ago, I invested in Spotify. I went on the show, so it's all on the public record, and I said, "This is the time to invest in Spotify." And lo and behold, it's up 530% in short of two years now. Obviously, I invested very little because it would be too easy to make money if I invest big. Stig Brodersen : And then more or less at the same time, I also went on the record and said, "You should invest in Alibaba." There was

There's this genius, his name is Charlie Munger and he's invested in Alibaba. So let's invest a lot more in Alibaba than in Spotify. And then I just lost my shirt, right? Because it was just so brutal. Don't miss Alibaba, or at least, and then you can say, well, the Spotify investment was the right decision and the Alibaba investment was the wrong decision. Perhaps that's true, but it was the same brain that made 530% in two years that also lost his shirt on Alibaba.

I don't know, I ended up 30% or whatever I did. But again, it was for a bigger amount. And so it's very, very tricky. We can talk about a good investment process, but it is essentially very, very difficult to figure out if someone is a good investor, including ourselves. And then we go back to the whole, it's a Feynman thing about, remember the easiest person to fool is yourself. Stig Brodersen : And so every time I read Paul Charles' Almanac and this

this call you a human adjustment, which is the best of all the talks. I find myself being susceptible to all 25. Still, I think some of them are more important to understand than others. It's just more a question of if all 25 are equally important, nothing is really important. One I really try to internalize is the incentive bias. I found that to be very challenging in life, investing and running my own business. I think one of the mistakes that I made early on after I stopped to learn that incentives actually matter is that

I thought that that was tied to money. And yes, money is one incentive, but there's so many other things that's not related to optimizing for money. So for example, the former GE CEO Jeff Immelt, he threw out two private jets, or he was sitting in one of them, and then there was another one just following him around in case that the first one had technical problems. I don't think that's a question of money. It speaks into this bias about self-importance.

and what that does to you to not just fly private, but have another jet next to you that'll make sure that, hey, if anything goes wrong, you can always just take the other jet. Stig Brodersen : I have a friend who used to own his own digital marketing company. It's now been sold and all this good and well, but he wanted to incentivize his team to do better. So he gave everyone a bonus if they reached certain goals.

and his team was so displeased with that decision. Whenever I heard that the first time, I was thinking that, "Oh, that was probably because you needed to give them a bonus, so they got a lower base salary, and that was probably why they were displeased." That was not the case. The bonus was truly a bonus. It was something that they're getting on top of their base salary. Stig Brodersen : We know that incentives aren't just tied to money. In which case, why was it that people were unhappy about getting a bonus? Well, this

the team wasn't measured on their output before. And so he was doing something that wasn't aligned with the company culture. And you really have to understand that, say, as a business owner, or if you're looking in as an investor and you're looking at different incentives that yes, money and incentives are tight at the hip, but you really win half the battle if you understand that money is just one of many ways to incentivize people. Stig Brodersen : One of the best talks

in Paul Charles' Almanac is really the talk is called Practical Thought about Practical Thought? If you're confused, you are not alone. I had to read that talk many times to understand what it was all about, but it was a talk where he talked about the different biases that he also talks about here in the human adjustment talk to explain the success of Coca-Cola. Stig Brodersen : So you learn the concept of Lottapalooza effect. So

The Lollapalooza effect is whenever you have multiple biases that build on each other and then they drive you in one direction to do certain actions, for example, to buy a product. Stig Brodersen : And so in Munger's talk, he was talking about you should choose the more expensive sounding name Coca-Cola instead of lots of sugar caffeinated water, or the bias towards you should carbonate water so there is a bias to associate it with champagne,

or tap into the association bias by sponsoring various events that makes you really happy, such as in sports or featuring attractive females in your ad if you're targeting a specific demographic. There are so many of those biases that can pull you in one direction. And so after reading those talks a few times, I was thinking, okay, so that makes sense for Coca-Cola. I don't know if there's any money to make in Coca-Cola right now, but at the time I was also studying MS.

And then I was thinking, okay, let me try and read those talks and then just replace Coca-Cola with MS. And then you're like, okay, I understand the business model now, which I certainly didn't do before. It's all about creating that Lollapalooza effect. And so it really feels like every time that you read Paul Childress' Almanac, you learn something new. It's like asking how many times a man can cross a river. It's not the same river, it's not the same man. And

I know it's the same book, but it feels like it's a different book every time you read it. Robert Leonard : Yeah. I mean, your point on money not driving everything. I mean, if money was everything, no one would buy a $20,000 Birkin bag from Hermes. Some people have other aspects at play. And I mean, Hermes is such a great example

all the biases and the Lollapalooza effect that can be at play. So we actually did a sort of a deep dive on Hermes with Srivizwanathan on episode 659, if anyone's interested in that. When I was in New York City for our Mastermind community events, I made sure to stop by one of the malls where there's all these luxury companies. So when someone like me that was just an outsider looking at LVMH and Hermes, like,

"Oh, these are pretty good businesses. They have these great products, they have a loyal following and whatnot." And then you go into this mall and I'm like, "Holy cow, this company has so many competitors." And I'm like, "How in the world are they able to do what they're able to do?" And it just points to, it just makes me marvel at just how good of a business a company like Hermes is. Seeing all these competitors is just really amazing and

Another misjudgment I haven't widely discussed on the show is the endowment effect. So the endowment effect effectively means that we have a tendency to overvalue things that we own relative to things that we don't own. We just instinctively believe that what we own is objectively better than what we don't own, which is quite interesting in itself. And I think we can all point to examples of things that have sentimental value and whatnot. And

Of course, when it comes to stock investing, this can be very dangerous in some cases. So a simple example of the endowment effect is you can just look at parents. They tend to over appraise their children relative to how other people view their children. So to a large extent, they can be sort of detached from reality for better or for worse. So perhaps in some cases, it can actually be beneficial to view your children in this way because

maybe more is expected of them, or they're taught to have higher standards in life or higher standards when it comes to making friends, building relationships, how they spend their time, what school they end up going to, all these sorts of things that can tie in. But to some extent, it can be very dangerous when it comes to stock investing, or it could also even be beneficial as well, because maybe it means we're more patient with our holdings. But if we have too big of an ego and we aren't letting go of a

bad stock, then it can clearly be a mistake to let the endowment effect creep in. Another reason that the endowment effect comes into play is because humans tend to be loss averse. So if we own a stock, we were quite bullish on it and it's down 20%, it can be so difficult to realize that loss and move on, even if we know that we're better off holding some other stock.

And then another interesting point with regards to this is attachment theory. So we tend to form an emotional connection to things that we own, and our minds tend to put more value on things that we own than the actual market value. So even if the stock's trading at $50, our mind instinctively probably values it maybe close to $70 because that's what we paid for it six months ago. It's almost like the things we own

become a part of our identity. It's a part of who we are. We don't want to let go of who we are. It reminds me of growing up, a lot of my family would drive Chevy vehicles. So like a Chevy pickup truck, my dad would drive to work and whatnot. And in my family, driving a Chevy vehicle was essentially a part of who we were. So today I drive a Chevy car, largely because I've just been conditioned to think it's a good brand. And I'm by no means a car enthusiast. And I know some listeners out there are going to be like, Clay is crazy for driving this

this brand and the bubble I grew up in. When I exited that, I realized how ridiculous that was. Tying this back to stock investing, I personally know that I can have a bias to hold a stock I'm bullish on, have the endowment effect come into play at times. It's just so important to recognize that we're going to come across disconfirming evidence to our beliefs and our bullish bias on the stocks we own. Of course, it can end up hurting me eventually. Robert Leonard :

To try and combat this, I jotted down a few notes. So one thing we can do is think about if we didn't own the stock today, if you'd be interested in buying it. So this might be a little bit of a counterintuitive question because if you own it, you're already positively biased in the first place. But if the situation has changed to such an extent that you wouldn't buy the stock you're currently holding, then maybe you shouldn't be continuing to hold it.

And perhaps the thesis has just been busted due to unforeseen circumstances, leading you to not want to start with a fresh position. Another way to help guard against this is to write down just your investment thesis when you purchased it. So that way, when the thesis happens to change later down the line, then that's maybe a signal that you should exit that position because, again, it ties in. If the thesis has changed, maybe you wouldn't buy it today.

And then Annie Duke's kill criteria can also be powerful. So what would lead to you selling this investment down the road? So how about you talk a little bit about the endowment effect?

Stig Brodersen : Yeah. It's interesting that you mentioned that, Clay. I once read in a book that most research on cars were done after the car was bought. And that speaks to the confirmation bias where, "Oh, it's such a great car." Like probably someone Googled, "Oh, why should I buy a Chevy?" Someone who's an enthusiast about Chevys probably typed that up. I don't know. And I don't think I have a good way of combating that. For many years,

I followed that advice of, "Imagine that you inherited the portfolio today. What would you do?" And then I heard our co-host Kyle interview Annie Duke, and Kyle said the same thing. I was like, "Oh my God, Kyle is so fantastic. He has the right approach." And Annie Duke was like, "Yeah, that doesn't work."

She said that she referred to some studies and she was like, "No, just knowing that you own it just makes it impossible for you." So if it truly is that way and you're not taxed and you don't pay any fees, actually go in and just sell it today and then see what you will do. And obviously people don't do that. But that was the thesis, which is probably true. I lost too much money because of the endowment effect.

Stig Brodersen : I can't remember how many times I thought, for example, with my investment with Alibaba, then I just need to break even and then I'm going to sell it. And of course, and I still wouldn't have been broken even if I'd done that. And I actually just ended up, I want to say it was like a 30-ish percent loss, and then I invested in Betsson instead. But anyways, this is not an endorsement or anything for Betsson. It was just like, I had a really, really hard time letting go.

Stig Brodersen : I think that one of the reasons why it finally happened was partly that I've had so many times in the past, had a hard time letting go of a stock that was just a losing stock, that I sort of learned my lesson. But as you can tell, I didn't learn my lesson because I was still holding on for too long. But the other thing was that I put myself through school playing poker. Whenever you start doing that, you also make a lot of mistakes. Stig Brodersen : One of the advantages, of course, in poker is that you have a much quicker feedback loop and you can easily tell whenever you're right and wrong.

There's some math in there where it's easier to tell if your process is right or wrong compared to investing. But one of the things you really learn from the poker tables are that if you try to make your money back the way you lost them, you're setting yourself up for trouble. So if you lose X, Y, Z dollars to the guy sitting to your right, and you're like, these are actually my poker chips, and I need to do whatever I can to get my poker chips back,

then you're going to make a ton of stupid decisions. So once that dude have taken your poker chips, then it's actually his poker chips. And it's really hard not to think about it like that. Stig Brodersen : So one thing that has helped me, by no means doing a good job of that, as you can tell from my experience with Alibaba, but I learned from losing many hands and tilting, as it's called in poker, whenever you can't control yourself,

I learned that think about poker like one long game. And whenever you don't think about it as one poker session or one poker week or one poker month, but as hundreds of thousands of millions of hands you're getting dealt, it becomes easier to let go of a clear loser. And so way too late, and I'm by no mean doing a good job of that, I'm implementing the same framework in my investing process where I'm thinking, this is not an investment I have in Alibaba. This is

one of many poker hands that's being dealt to me, and now I need to make another decision. So that's how I deal with it. Or perhaps, Clay, I should say, that's how I don't deal with being susceptible to the endowment effect. Let's take a quick break and hear from today's sponsors.

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This and other information can be found in the funds prospectus at fundrise.com slash flagship. This is a paid advertisement. All right, back to the show. Man, I think it's such a beautiful thing that in the stock market, you don't have to make your money back the way you lost it. As painful as it is, you can make your money in other ways when you recognize you've made a mistake.

I wanted to transition to talk about one of the more famous Munger axioms, which is to invert the problems that you're trying to solve. I revisited William Green's book, Richer, Wiser, Happier. He has a chapter on Charlie Munger, and he interviewed Charlie in person in preparing that. I'm sure you've thought of this a lot with regards to your own life, your own business, or your own investments. How do you apply this concept of inversion? Robert Leonard

I try using it in my marriage. I'm not saying I'm doing a good job of it. You should probably speak to my wife and ask her if I do a good job. But the reason why I thought about that is because recently I was asked about someone I know is getting married here very soon.

And she asked me about marriage advice. And I told her that I've been married for 14 years now, and I couldn't tell her how to have a great marriage, but I could tell her how to have a terrible marriage. And perhaps she could then invert. And so I told her she should create a life where her and her husband would not be a good version of themselves. And really, really be in situations where they can't be what they want to be.

and be outside of the comfort zone at all times and be under too much pressure for too long. And of course, that's not what you should be doing, but that's how to get a terrible marriage. I've tried. I don't think I've been successful. I've tried for the longest time to figure out how to attract the right people into my life. And I found that to be challenging. We all heard the average of the five people you surround yourself with. And I've been thinking a lot about that and thinking a lot about

how do I attract good people? And I find that to be difficult to figure out who those people should be. And perhaps it's just me, but I also inverted that problem similar to talking about a bad marriage and thinking about what kind of person is the wrong person in my life and cut them out of my life instead. Stig Brodersen : I found that to be a simpler way to go about it. And so whenever I spend time with another person, whether it's on an online meeting with most

most of our meetings are, or sometimes whenever I meet people in person, I try, and I don't know how to measure this, but either I leave with a positive energy or leave with a negative energy. And sometimes I don't leave with any energy at all. And so I think it's important that you do more with the people who leave you with a positive energy, but I think it's equally important to not continue to engage with them who leave you with a negative energy. Stig Brodersen : I find that to be very challenging

Also because to Munger's point about consistency bias, which is one of the biases he talks about in the psychology of human adjustment, it's hard whenever you say something not to be consistent with that. And I think knowing your own biases is just so valuable. It doesn't always get easier even if you know your own biases, but at least you know your own biases and can work on that.

I found that there's some things in life that are just so challenging to work through. And then I'm often surprised when I tend to keep those challenges to myself a lot of times, just like toughen up. That's the way the world is. Just get through it. And then from time to time, I'll share some of those challenges with you. And I don't know why I'm surprised, but you've gone through the same challenges that I have. It's powerful in building relationships, I think, having that sort of transparency and then

For some reason, it helps me get through those sort of challenges, like the one you mentioned of telling someone no, essentially. Surprisingly, telling people no is something that's very challenging for me to do at times. Yeah, it makes it easier to work through those challenges knowing that other people have been through them as well. And Munger's also just very blunt about cutting negative people out of your life. I mean, it's, again, another situation where you just have to learn how to tell people no. It sounds so logical, but it's just so, so emotionally hard to do.

How about inversion and how it ties into your portfolio? How do you think about that and the way you diversify and set up your portfolio?

It's a very good question. And I think it's very powerful in building your portfolio. Like most of the listeners, I don't want to lose money, but it's not enough to say, "Just don't lose money." I feel like I worked so hard to achieve my financial goals. And so, I should probably also define what I mean whenever I say financial goals. So do what I want with whoever I want for as long as I want. That's my financial goals. Stig Brodersen :

I know independence has been very important for Charlie Munger. It's never been about the money, it's been about having that independence. And to your point before about Munger saying, "Oh, just cut negative people out of your life." It's easier to say if you're a billionaire. I'm not a billionaire, but I'll imagine that if you're rich, it's probably a lot easier to have that approach. But even so, it's still tricky to do because it's hard to say no to people and especially hard to say no to people you like.

Allow me to tap into this wonderful world of China Monger, of this saying, take a very simple idea and take it very seriously. I think that in poker, we have an expression called playing with scared money. And playing with scared money is whenever you're focusing too much on not losing, which means that you don't maximize the opportunities whenever you have the odds in your favor. And so whenever that happens, you're not a good version of yourself and you let other people push you around.

And so the irony in poker, just as it is in investing in life, is that in an attempt not to lose, you are actually losing by having that strategy. Stig Brodersen :

So the way I think about that inversion and that simple idea for my own portfolio is that, I'm going to sound like a broken record here, but if I run my portfolio a thousand times and then say, okay, my goal is to do what I want with whoever I want for as long as I want. And I want to do that a thousand out of a thousand times. Of course, this quickly becomes very philosophical and you also break your feedback loop to some extent.

but I found it to be very useful. And you start thinking about that a little bit differently, at least I do.

Charlie Munger refers to the Roman poet, Cicero, which was like 100 years before Christ. And he quotes as saying, "He who doesn't know what happened before he was born will walk through life like a child." Stig Brodersen : And so if we go back to this point here about macro that we're not supposed to talk about and we keep getting back to, we had a world of a Fiat standard since 1971 and not before, world history.

So 53 years, is that short-term? Is that long-term? Depends on how you look at it. And if I run my portfolio a thousand times, if I do that a thousand times, what's going to break me in some of those scenarios is not whether my investment in Berkshire Hathaway is going to return 4% or 20% over the next decade. It's about whether or not I'll get wiped out by whatever it could be. So I've definitely taken that to heart. So here at

At the time of recording, just to give an idea of where I am with my portfolio for better or for worse, of my investable portfolio, I have 60% in public equities, 4% in hard money. And it's a bigger allocation of hard money that I would likely have, and it's not designed that way. Stig Brodersen : And the reason is threefold. I should probably also say that I'm going to link to my portfolio if anyone is interested.

But I think whenever this goes out, I don't know if... I only update it once a year. I go crazy if I look at my track record more than once a year. So whereas I have a really, really hard time not looking at stock quotes on a daily basis, I have a surprisingly easy time not looking at my track record and my overall portfolio. I think it's, I don't know, it's probably just the way that I'm wired. So I update it once a year and I make it public if anyone is interested. I think it's important going back to

understanding what your financial goals are. So for example, I have a rule that I would only add up to 10% of my best idea cost, but I also like to let my winners run. You don't want to cut your flowers from watering your weeds. So sometimes something you invest in goes well and then just takes up more in your portfolio. Stig Brodersen : And I think we also talked about taxation before, not to drone on too much about taxation, but I could easily see an argument for having more than 60% in public equities. But again, depending on how you tax, perhaps it just doesn't make as much sense to you.

I meet investors who have a model portfolio and say, they might, I don't know, have, let's say, $100 million. And then they would be saying, "Look, I don't want to lose my money. What is the right asset allocation? How much should I put in stocks? How much should I put in bonds?" And I completely understand where that's coming from. I don't think there's anything wrong with having that approach, but it's very difficult to, that's

That's also one of the many, many reasons why we don't provide any recommendations. And there are some legal reasons that we can't give any kind of recommendations, but people come at this from so many different angles that whenever you present, this is my portfolio, does that make sense to you? It really requires such an in-depth knowledge about that person and their finances and their goals and the risk tolerance. For example, I think I have a high risk tolerance.

but most people say that they have, just like most people say that they're above average drivers. But I've put different things in place for me so I don't take too many risks. For example, I have this rule, I don't put more than 10% at cost into a specific position. I used to make a living out of playing poker. And so I know that I tend to take bigger swings and just wire it that way. So I had to guard myself against taking too big swings. I have a friend and he's sort of like,

at the opposite end of the spectrum where he says that he would not invest in less than 5% because he knows that he doesn't have a high risk tolerance and he sort of like would then start allocating, I don't know, 0.1% to that position and 0.2% to another position, nothing's going to change. So he's forcing himself to whenever he's making a bet, he has to make it bigger. So I think you can set rules up for yourself by inversion, by sort of like countering some of your own biases. And then there's of course like another element where I'm saying, "Hey, look,

I can put up to 10% at cost, but that's also because I spend less than what I make. So I still accumulate wealth. If I was 70, perhaps my threshold would not be 10%, perhaps it would be 5%. So it also very much depends on where you're coming from whenever you're doing that. Stig Brodersen : And so I was speaking with a community member the other day, and he said to me that he was a bit puzzled about why we talk so much about individual stock picks in the mastermind community.

Stig Brodersen : Which is perfectly fine. I've got that question quite a few times. And I think we all tend to have a bias towards thinking that others look at it the same way we do or have the same experiences as we do. So if you come at this and you're saying, "Look, I have $100 million. I have to figure out the trust funds. I had to figure out which of the foundations are founded, how much money to allocate to which foundation." All studies show that it doesn't make any sense to pick individual stocks.

Why should I? And why do everyone talk so much about stock investing and picking individual stocks? It doesn't really make any sense. I can easily understand where that person is coming from. No, it doesn't make any sense for you to do that, especially if the thought of reading a 10Q or 10K makes you fall asleep. But then there are other listeners to this podcast, they have a $100,000 portfolio, and they're dreaming of that hundred backer that could make them financially independent.

why wouldn't they be looking for the next 100 backers? It's crazy for them not to look. And they don't think about the next trust fund or the next which foundation to donate $10 million to. It's different. So they couldn't think of anything more exciting than reading a 10Q, even if they weren't looking for a 100 backer. So I don't even know if I answered your very question that you asked me there at the top. But as you can see, I've painted myself into a corner. So I'm going to throw it back over to you, Clay. Clay Gould :

It's largely an approach of taking many uncorrelated bets and trying to protect against your own biases, asking yourself, how can things go terribly wrong? How can this portfolio fall apart? Where are my blind spots? But yeah, there's certainly a lot to think about with regards to having many uncorrelated assets, especially when you're trying to stay wealthy rather than get wealthy. Yeah, for me personally, a lot of my investment decisions are all about

What sort of rate of return can I get? Also, of course, limiting downside as well, because losing money can really set you back in my own pursuit of financial independence. So before we drone on too longer about Port Charlie's Almanac, I wanted to mention some of the things that we're planning for Omaha during the Berkshire weekend, the first weekend of May in 2025. Also, just take the chance to just reflect a bit on 2024.

and just sort of some of the things we've been working on over the past year within our mastermind community, especially. So Kyle and I will be doing a yearly takeaways episode here soon with regards to the podcast. I think there's that saying that we overestimate what we can do in a day and underestimate what we can do in a year. So over the past year, we've onboarded more than 80 just fantastic people. We've recorded more than 60 videos, all sorts of things.

things we discussed. You recently hosted a call on portfolio management. A number of members have done stock presentations on stocks like Kelly Partners Group, MercadoLibre, NRP, TerraVest Industries, among others. And then we've had Q&As with guests like Chris Mayer, Ian Castle, Joseph Sapochnik, and John Huber, among a number of others. And

Kyle and I hosted two in-person events this year. So the first one was in Omaha in May, and then the second one in New York City in October. And you also hosted a couple of dinners in London and Copenhagen.

So meeting so many great people in the community has just really been such a blessing to me, to say the least. When we talk about bringing in high quality people into our lives, it's certainly raised the bar for me and who I want to allow into my life. And I've just been so appreciative of how so many members are so giving of their time and their knowledge and

Munger also has a saying that you aren't going to get very far in life on your own. And I definitely tend to agree in that you want to surround yourself with great people. And for me personally, that really started with joining TIP and frankly, just learning so much from you every week and from other team members for the past three years. And now in managing the Mastermind community and just meeting so many amazing people there as well, it's just been such a blessing for me looking back at 2024. I love to use that opportunity to look back when I can and

But yeah, before I give off the handoff to what we have going on in Omaha, I'd like to give you the opportunity to share anything you've picked up over the past year from the community.

Stig Brodersen : Yeah. So this has been an absolutely wonderful year. And as always, we mainly talk about stock investing. So there have been a lot of interesting stocks. And one of the things I really like is whenever we do the bull bear cash on the stock, I hope that we're going to do more of that. And I don't want to make it sound like it's because I'm bored of stock investing, because I'm certainly not. But I've been surprised to see how much I've enjoyed learning from the other community members about acquiring private businesses. Many members from our community has built their wealth through

private businesses and perhaps they had an exit, and then since turned to public equities because they didn't want to be operational anymore. Stig Brodersen : So I like to think, or perhaps it's just my vanity talking that I might have a small edge in stock investing. Perhaps I don't, as you might have listened to me throughout this episode. But I feel like I've been helping some of the community members with various stocks and their process. And I think they've helped me a lot in terms of understanding private businesses and how to acquire them and what to pay for them and how to structure financing. Stig Brodersen :

And that has just been immensely helpful for me. Another change in 2024 is that I feel like our community has just organically evolved. To some extent, I feel like parts of it has evolved from being a, I'm going to say a hundred-bagger community, and I mean that in the best possible way, but going more from a hundred-bagger community more to a portfolio-focused community. So to some extent, it has gone from

a group of investors. I think we are like 115 right now, so I can't speak for anyone. These are very broad strokes. So a group of investors who are looking for the 100 baggers, and we still have a big part of the group that's interested in that. But then we also have another group who are a little less interested in that because they already achieved their financial goals a long time ago. And as crazy as it sounds, 100 bagger wouldn't change anything for them because they already have what they need.

So they might be a bit more focused on generational wealth. We might talk about philanthropy, legacy, trust funds. Sometimes some of those calls would be recorded, sometimes it wouldn't be recorded. And it could also be more about managing multiple asset classes rather than seeking one investment that could transform the wealth and perhaps make them financially independent. So it's a different crowd and they typically are looking for other things.

I certainly think there's people in the community for everybody. Yeah, I mean, some of the most interesting members are sort of what you're referring to, like the family office or family wealth type individuals who are thinking about bigger things and just achieving returns. And those types of people spend a lot of their days just sitting, thinking, learning about certain things, and it can become lonely. And hopefully the community is just an outlet where they can connect with like-minded people who are going through similar struggles and

Yeah, just thinking about similar things. And of course, we allow those people to connect and get to know each other in New York City, Omaha, and London. So for those that are heading to Omaha, TIP is hosting a number of events. So we have one set of events that are free, and then one set is paid for our TIP Mastermind community. So my colleague, Sean O'Malley, will be organizing our free events. So we're going to have a social on Friday and Saturday evening, and I'll have a link in the show notes.

with more details. Or if you're interested in the free events, you can reach out to Sean at S-H-A-W-N at theinvestorspodcast.com. And I'll also mention the event has limited space, so it's going to be first come, first serve. I'll be hosting a couple of dinners and socials for our Mastermind community. This is our paid offering for private investors, entrepreneurs, high net worth individuals,

And we'll also be organizing a bus tour to sort of see all of what Omaha has to offer. So Nebraska Furniture Mart, see Buffett's house, et cetera. And this will be my sixth meeting that I've been to in Omaha. So we'll have a link for the Mastermind community and then our other meetups as well in the show notes for those interested. And we actually, on our website, we also have information on just how to attend the meeting, how to get credentials, everything you need to know. And as we say every year,

If you'd like to go to Omaha, I would encourage you to book your flight and hotel as soon as possible because if you wait until late April, it's likely the flight prices are going to be outrageous. If there are any flights left, the hotels are just going to be pretty insane. So yeah, I'd encourage you to get that booked as soon as possible. It's the first weekend of May. The Berkshire meeting itself is on Saturday, May 3rd. And then we have events on Friday and Saturday. And then there's a number of other events that we go to as well that I can keep you on the loop on.

Yeah. I'll have that linked in the show notes. We have a page for the Berkshire Hathaway annual meeting, and then we have our mastermind community page. That's theinvestorspodcast.com slash mastermind. Yeah. I think that's all I really wanted to cover today, Stig. Thanks so much for joining me here to discuss markets, Port Charlie's Almanac, and the community. I really appreciate it.

Yeah, you bet. Thanks for inviting me. I don't know if I was a co-host or a guest, but thanks for bringing me on. In any case, Clay, it was a lot of fun. Great. Well, I always enjoy a Stig, so thank you.

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