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Excess Returns
The Wall Street Labels That Trap You: Chris Mayer & Robert Hagstrom on How Language Misleads Markets
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- [00:03]
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- [00:33]
Robert Hagstrom
You're about to make a trade. Which u do you listen to? Is it get optioning those options or let's do a little research? Learn more@finra.org TradeSmart we are excited to.
- [00:48]
Podcast Outro
Announce the launch of a new podcast, the 100 Year Thinkers. In a world where most investors think in quarters, this new show offers insights from investors who think in decades. Hosted by Matt Ziegler and Boagumil Baranuski and featuring Chris Mayer and Robert Hagstrom, this monthly roundtable will tackle many of the issues that all of us face as investors, but look at them through the lens of investors who operate over very long timeframes. We have included this episode in the Excess Returns feed, but if you want to keep receiving new episodes, you can subscribe to the 100 Year Thinkers on all major podcast platforms or our YouTube channel using the links in this episode. Description thank you for listening. We hope you enjoy the new show.
- [01:18]
Robert Hagstrom
Value investing is all about buying something for less than it's worth. It has nothing to do with price. Earnings ratios has nothing to do with price to book. Just because a stock is a high PE stock with a high price to book does not mean that it's not a value stock. Nor is a low PE stock with a low price to book value necessarily a great value investment if you can't sell it for more than what it's worth.
- [01:38]
Chris Mayer
Growth is a component of value and so they're just looking for good opportunities that meet their other criteria. And so that's the way I think any investor should think. It's really those designations are things that have or packaged together by Wall street because they have something to sell.
- [01:55]
Robert Hagstrom
Reversion to the mean is such fifth grade mathematics. I can't believe that people continue to believe that reversion to the main is a way to generate excess returns. It just. It's. That's just bonkers to me.
- [02:10]
Bogomil Baranowski
You're watching Excess Returns. I'm Matt Zigler. Bogomil Baranowski is my co host. Our esteemed, eloquent and Most excellent guests, Robert Hagstrom, the Warren Buffett Way and CIO at Equity Compass. Welcome to the show, Robert.
- [02:24]
Robert Hagstrom
Hey, guys, how are you? Matt Bogumill.
- [02:27]
Bogomil Baranowski
And of course we've got Chris Mayer, Mr. Hundred Bagger himself, co founder of Woodlock House, Family Capital Live and in the flush with a brand new book, Chris, Doth My Ears Deceive Me? Did you just write a new book?
- [02:40]
Chris Mayer
I did, I did. Just came out. It's called the Unspeakable Level, Korshipski's Razor and Other Ways of Revealing. Available at the Institute of General Semantics. It's the complete trilogy. I've written two other books on general semantics, so this is the third one.
- [02:57]
Robert Hagstrom
Congratulations.
- [02:59]
Podcast Producer/Interviewer
Congratulations. Thank you.
- [03:00]
Chris Mayer
Anyway, I'll be on with you guys again and look forward to discussion, as always.
- [03:03]
Bogomil Baranowski
And a new philosophy book, right, because I know we're.
- [03:06]
Chris Mayer
That's right. It's not about investing. So don't go into that thinking you're getting 100 baggers, part two. It's not.
- [03:11]
Robert Hagstrom
Not.
- [03:12]
Podcast Producer/Interviewer
It's better. It's better.
- [03:14]
Bogomil Baranowski
Well, I don't. I don't know if you know, but, you know, other people like to sneak philosophy stuff into their investing books.
- [03:22]
Chris Mayer
Yes, I wrote a book like that, too. I think we're going to talk about that one too.
- [03:25]
Bogomil Baranowski
But yeah, I think we're going to bring it up.
- [03:26]
Chris Mayer
We smuggle. We smuggle these things in somehow.
- [03:29]
Bogomil Baranowski
Well, I'm all about smuggling. Today we're talking interdisciplinary frameworks in investing. Basically, how philosophy, how language, how mental model. Mental models, if I can talk, transform the world of investing. Here's the opening question. Robert, you've written that stock picking is a subdivision of the art of worldly wisdom. What in the hell do you mean by that?
- [03:51]
Robert Hagstrom
Well, let's give credit where credit's due. That's actually Charlie Munger. Charlie Munger said that in 1994. I don't know. Chris will probably remember. I don't know if you guys will, but Henry Emerson used to write something called the Outstanding Investor Digest.
- [04:07]
Chris Mayer
Great publication.
- [04:08]
Robert Hagstrom
Yeah, it was terrific. And Henry was so nice and generous and he was the guy that was in the audience at the Berkshire meetings, actually. I guess he knew how to. What is that kind of writing that you can do that's, you know, so fast and stuff like that?
- [04:22]
Bogomil Baranowski
Shorthand?
- [04:22]
Chris Mayer
Yeah, like shorthand.
- [04:24]
Robert Hagstrom
So he would. He would pin all the. He'd pin all the Berkshire meetings. So we had subscriptions to that. And in the early 90s and, and, and one of them came out. I think it was the spring of 94, Charlie had done a lecture at Professor Babcock's class at USC and the graduate program, MBA program. And it was on the art of achieving worldly wisdom. And, and he basically said, you know, investing really is more of a subdivision of this meta, you know, achievement, if you will. You know, if, if you're going about trying to achieve worldly wisdom, the benefits will flow through down to stock picking. So let's give credit where credit's due. It's nothing I came up with. I read it in oid way back then and, and then from there, you know, it began to sprout wings and people began to talk about it.
- [05:20]
Podcast Producer/Interviewer
I love the concept, and we'll come back to it. But, Chris, you argue that most of what we think about Wall street rests on nothing more than abstractions. Can you unpack that idea for us?
- [05:32]
Chris Mayer
Yeah, I mean, even the phrase Wall street itself is an abstraction. It refers to a place. But when people use it, they're not really referring to Wall street, they're just referring to the world of money. I suppose. But yeah, I mean, I think finance is one of these worlds where we're just embedded in these abstractions. So much so that it's easy to forget way people on Wall street talk about small caps or large caps, whether it's a value stock or a growth stock or even things like GDP or talking about interest rates. These are all very big abstractions. And Robert talks about worldly wisdom. I mean, for me, one of the things I discovered is Alfred Krasybski's general semantics. And yeah, this is a big topic with him about kind of unpacking what those abstractions are and getting you to focus, again, not so much on the term itself, but really what you mean, what it refers to and trying to bring those abstractions more to ground level. So that's been an important interdisciplinary, say, idea or philosophy that I've used.
- [06:43]
Bogomil Baranowski
Stick with that thread just for a second longer. Chris, how does general semantics help with investing? How do you actually use it in concept?
- [06:52]
Chris Mayer
Yeah, I mean, part of it is actually to penetrate those. Those abstractions. So, I mean, it's. It's sometimes hard to come up with, with specific one. One big example that comes to mind is really, and this is before I knew necessarily about general semantics, but I was, you know, doing it at that time, which is the general financial crisis. And the way people would talk about or fall for the label aaa, you know, AAA meant safe, and the bond markets and ratings agencies would give different securities to AAA rating and it seems absurd now, but back then that was a stamp that would be good enough to get you in a bank portfolio. I mean, I work for a bank that had one of these AAA securities in there and wind up taking big losses on it. And it's always ironic to me because I worked in the corporate lending department. We would never just settle for a label like that. You know, we always had to underwrite all the companies and like, just to extremes, like getting field audits and all these things. And. But the Treasury Department could buy a bond if Moody said it was aaa. And so. And, and of course, you know, just because something stamped with AAA doesn't mean it was all. There was all kinds of things under there that weren't safe. So that's one idea. But I mean, it permeates so many things because more like the way you think, so general semantics will say, will teach you that anytime anybody presents you with an either or option, you know, your little alarm bell should go off. There's never just an either or. There's always something else, or even the language I'm using now, the English minus absolutes. So never say never. Always, anytime you hear those little alarm bells should go off. It teaches you things about cause and effect. It's not so simple as, you know, one thing causes something else you think about. One event has multiple causes. So there's a lot to it, to kind of, you know, that it affects your worldview and how you tackle these problems.
- [08:54]
Podcast Producer/Interviewer
So many thoughts, and we'll come back to it. But, Robert, I'm curious about the lattice work of mental models that you talk about. Munger's idea. How come it resonated with you? What does it mean to you, the lattice work, the beautiful word that describes it?
- [09:08]
Robert Hagstrom
Well, that was the metaphor, right, that Charlie used in the lecture was you're building a lattice work of mental models, and you can think about lattice work, fences, fences or lattice works. And you kind of. And my imagery was, you've got a big wall up there and you've got lattice work, and each one of the nodes up there is a different discipline. And that's kind of how I thought about it. I was a liberal arts major in college, and so it definitely resonated with me because, you know, we had to. We had to go through the sciences, both the hard sciences and the soft sciences and history and philosophy. And, you know, we. You did the full tour of what. What would Charlie say is, you know, a path towards achieving worldly wisdom. So I was. Mentally, I was okay with this. The Big challenge, though, was when I fell, you know, asked backwards into this investment business because it was not, it was not a goal of mine. Very briefly, I, I wanted to go to Washington D.C. i had written in college, I'd written at Villanova and had interviewed politicians. And my, my dream job was to go to Washington D.C. and you know, be the next Woodward Bernstein. You know, that, that was my goal. And I spent a few months down there and, and realized this is really a disgusting place. I'd never seen, I'd never seen such a, a pile how of garbage that, that I said, I just got to get out of here. I can't make sense of this and you know, how, how this thing works and stuff like that. And put my tail between the legs and came back and wanted to get a job writing for newspapers in, in the Philadelphia area and went back to a suburban Wayne Times that I'd written for in college and said I'd love to have a job. And they said, we can't pay you, but if you sell advertising for us, you know, we'll let you write a column and maybe give you a little bit of a paycheck. And so I just went up and down, you know, Lancaster Avenue outside of Philadelphia, knocking on doors. And one day I came up to something called Leg Mason, Wood Walker, Members of the New York Stock Exchange. I'd never heard of it. I didn't know what it was. I thought it was an accounting firm, a law firm. And I walked in and said, you know, this is who I am, selling advertising. Can I talk to people? The manager, they took me back. I gave him the spiel and I said, would you like to buy a quarter page ad? And he said, no. Would you like to be a stock broker? And I said, this is 1984. The bull market had just started. And they were looking for bodies. You know, they were looking for people to, to dial and prospect. And, and so, you know, I, I, I, I was not, I was not crafted to be an investment professional. I, I was coming at it somewhat differently. But fortunately, in my, my training program, we, our last day, we read a copy of the Berkshire Hathaway Annual report, which I had never heard of, written by a guy named Warren Buffett, which I had never heard of. But it resonated with me, you know, as Chris said, a lot of its abstractions, the way that, that Warren talks about stocks as businesses, people, products and services. All of a sudden the light bulb went off. You know, the proverbial light bulb goes off. I go, okay, now I Get it. You know, I understand what we're doing. The value line investment surveys, which was nothing more than row after row of numbers, didn't make sense to me. But, but Warren taught me about investing. And then of course that legit led you to Charlie Munger. So that, that's kind of how, you know, the background worked. And then, you know, I don't know how far you want to go into it, but, but I became friends with Bill Miller. I was a broker, he was director of research. And Bill was already what I would call a lattice work, a mental models type guy because he had done liberal arts and undergraduate and worked on his PhD in Philosophy at Hopkins. So he was already of that mindset. And so his friendship in the early 80s, you know, was very helpful as well.
- [12:49]
Chris Mayer
I will say Warren Buffett would, would have made a great general semanticist. And in fact, I, I wrote an article that was published in Etc Institute's journal. It was all, it was on Buffett and Grzytski and comparing the two. Because Buffett. Yeah. When you read Buffett's letters, I mean, it's often making those references to language and the way people use language. And he's getting behind it, you know, like Robert said, he's, he's looking at businesses as stocks as businesses. He's thinking about people and he's, he's always bringing things down to, you know, the real practical ground level. So, yeah, it's an interesting connection there.
- [13:23]
Robert Hagstrom
Yeah. And Chris would know this too, is that he just dismisses all the language of Wall Street. You know, he says, I don't know what beta is and tracking error, information ratio and all that stuff. He goes, I don't even know what that means.
- [13:35]
Chris Mayer
Right.
- [13:35]
Robert Hagstrom
But it's not important to me. It's not essential for me to make money to understand these terms. But there was, as Chris points out, there was Wall street just doing nothing but talking in these abstractions and trying to make senses out of them, which is the way a lot of people communicate on Wall Street. And Warren was just playing a different game.
- [13:54]
Bogomil Baranowski
Chris, why?
- [13:55]
Chris Mayer
It's not a popular idea either. I mean, when I wrote, you know, one of the reasons I wrote my book. How do you know? Is because that there was one book, 1958, where it was about general semantics, applying it to Wall Street. But after that it was a big wasteland in a vacuum. So it's not a topic that's pursued by a lot of people because it's just easier to fall into those abstractions and use the easy language. And lingua that everybody else is using. And it takes a Warren Buffett and someone to come along and say, you know what, that's a lot of blow.
- [14:27]
Robert Hagstrom
Well, Chris, I mean that's. Those were the professors, those were the teachers, you know, you know, they, if you wanted to be an investor, you wanted to go into the finance business and you got your MBA at school, this was the language that they talked about. So you had to develop that language with them. But I think what Chris, you know, smartly has pointed out in his writings and Warren would say is, I don't get that language. That language doesn't make any sense to me and it probably causes more problems than it actually provides benefits. So, you know, Chris is definitely, definitely onto something, you know, that's front and center how Warren thinks about things.
- [15:02]
Podcast Producer/Interviewer
Can I add something real quick? I'm still blown away that after three years, 200 conversations on talking Billions. Chris, your episode about general semantics in the top three most shared and listened episodes and we recorded this two years ago. So yeah, think about it by that too.
- [15:18]
Chris Mayer
That's crazy.
- [15:19]
Podcast Producer/Interviewer
An amazing appetite.
- [15:21]
Robert Hagstrom
Yeah.
- [15:22]
Podcast Producer/Interviewer
Appetite for this kind of content.
- [15:24]
Bogomil Baranowski
Chris, I'm curious for you. Where did like Robert had this whole world of experiences and then he stumbles into the Leg Mason office selling ads, ends up with a job, ends up meeting Bill Miller who's drawing on all these resources. How did you expand the, how did you end up wanting to draw from all these, like put general semantics in investing and even come up with the idea that you should be doing this other stuff?
- [15:48]
Chris Mayer
Yeah, I mean it's a great question. And I don't know, it's like, it's like Robert said, I mean, it just seems like a lot of this just happens by accident. You know, I've always liked to sort of just read and explore things that were not in the mainstream, so to, you know, so to say. And so that just leads you reading different kinds of books. And I think I know the first time I heard about general semantics and Kurzybski was actually reading Robert Anton Wilson, which is, I don't know if you know anything about him, but he's, you know, written some pretty far out books like Cosmic Trigger and things like that. And he said that he, he learned more from Krasinski than any other writer. So that alone was enough intrigued me. And I remember I found a speech he gave at the Institute of General Semantics about Alfred Kuzybski. So that's kind of drew me in. And, and so I don't know, Robert, I mean, some of this is you just have it or you don't have it. Some people are just drawn to, you know, off the mainstream ideas and other people are not. It's hard to explain.
- [16:49]
Robert Hagstrom
Well, first of all, I tip my hat to you that you, you basically came across a concept and your, your intellectual curiosity motivated you to, to go down the rabbit hole. There's not a lot of people that, that, that do this right. You know, you come across something you don't understand, typically you just move on to doing something that you do understand. You know, I, I, I, I was clearly a intellectual cripple until Bill Miller. And Bill would come on the Tuesday squawk box. Remember the old days, we had squawk box on our desk. And Tuesday morning was, you know, the research meeting. And Bill was managing, just started managing the Leg Mason Value Trust with Ernie Keaney, but he was director of research and he and Ernie had started the Value Trust with Chip Mason. And, but then Bill being, you know, he did his, he did his doctorate in philosophy, absent the dissertation. I used to beat him up saying, you should do that dissertation. Get to call you Dr. Miller, you know, he said, it's just a waste of time. I can't make any Money writing a PhD dissertation. But Bill, at the end of every meeting or every research meeting, he'd bring up some book, you know, and it would be really obscure. I mean, it would be like, you know, a philosophy book or a science book, just something off the reservation. And, and, and I was curious enough, I guess, I was pledging, you know, I wanted to be successful. I wanted to be, you know, do well. And so I, I would, I would write down the book and I'd go to the local bookstore because that was before Barnes and Noble and Borders and certainly Amazon. And I'd say, can you order this book? And the guy would look at me like I had three heads. He goes, what are you doing with this? This makes no sense. I said, yeah, I don't know either. But, you know, this guy's pretty smart and he's reading it, and I would read it, understand maybe a half of it. And I'd call Bill or, you know, in those days, and I said, bill, you know, I'm reading this book. Can you help me? And blah, blah. And he was just intellectually generous enough to say, sure. You know, think about this, think about that. So, you know, I had almost a tutor, you know, before he became a superstar in the 90s. You know, I had this guy that was generous and he was a teacher, you know, he was a graduate, you know, a grad graduate professor, you know, take, you know, he did some teaching at the undergraduate level. So I guess it was in his DNA. But unlike Chris, who basically curiosity grabbed him and he motivated himself, I had someone take me by the hand and walk me through, you know, the library and books and actually would tell me what was going on. And you cannot, I cannot overestimate how incredibly valuable that was to my investment success. Without Bill Miller, you know, I don't think I'd be half of where I am now. I say this, people say, robert, you did your dissertation on Buffett, writing the Warren Buffett way, and you did your practicals with Bill Miller, where you actually went in from the theoretic to the practical, because if you don't beat the market, shame on you. And that's exactly right. I mean, I was fortunate enough to do the dissertation on Buffett, but make no mistake, doing the practice, working with Bill Miller for 14 years when he hired me after the Warren Buffett Way, 14 years, being at his side was a benefit. You cannot even begin to imagine how important that was. So I, I, Chris and I got to the same place in many ways, but he did it by himself. I had, I had a lot of help along the way.
- [20:15]
Podcast Producer/Interviewer
So tying it all together. Bill Miller, Warren Buffett, they've owned stocks that some people call value stocks. Some of them call, are called growth stocks. Maybe there's another label. Going back to labels, Chris, you wrote that value investing is a term that really has little meaning, and you actually warn against the value versus growth categories that so many people use. Can you talk about that? Should we drop those labels altogether?
- [20:38]
Chris Mayer
Yeah, as an investor, I don't see why they should influence you at all. And again, Buffett has talked about this before that he even says himself, they're not, you know, looking at just value stocks. I mean, growth is a component of value. And so they're just looking for, you know, good opportunities that meet their other criteria. And so that's the way I think any investor should think. It's really those designations are things that have, were packed together by Wall street because they have something to sell. You know, a certain mutual fund, they're, oh, you got to have exposure to this and that. And if you're a professional running a certain kind of fund that has to be in a certain kind of stock, maybe you have to pay attention to it, but as an individual investor, never. I mean, why does it matter if what other people call, you know, if other people call it a value stock or a, a growth stock. Also, the same stock can be called to both. You know, both have both labels. And you see this in ETFs, you know, you can see value DFs, and they have both name, same names in there. So I mean, it's not, it's not so simple to call what, whatever one is the other. And at different times, one, one can seem more like the other. But yeah, I mean, I don't see they have much relevance at all to what you're doing.
- [21:50]
Robert Hagstrom
And here's the thing, Chris, I'd love to hear your thoughts on this, which is if you go back to 1992 in the Berkshire Hathaway annual report, Warren laid it out. He basically said, look, value investing is all about buying something for less than it's worth. It has nothing to do with price earnings ratios, has nothing to do with price to book. I know we carve up the world that way. He goes, but investing has not. He goes, just because a stock is a high PE stock with a high price to book does not mean that it's not a value stock, nor is a low PE stock with a high, you know, a low price to book value necessarily a great value investment if you can't sell it for more than what it's worth, what you think it's worth. But, but then, you know, Chris, you know, I feel like, you know, Don Quixote swinging at the windmills after 30 years, I didn't give up. I mean, you try to explain it to people that there's, there's no difference between. Value is just trying to figure out what something's worth, whether it's slow growing, rapidly growing, high price to book, low price. You know, you're just trying to figure out what things are worth. And they, and they, you know, it's, it's like the Godfather. They pull you right back in trying to get out of this mess and they're pulling you right back into this nonsense. And today it's, it's still the same thing. Value stocks are low pe, low volume, you know, low downside risk. Price, risk growth is something else. And Warren said, you know, that's just stupid. But, you know, he wrote that, you know, 30 some odd years ago and we're still mentally not doing it correctly.
- [23:17]
Chris Mayer
Yeah, and it comes up all the time, even on the annual meetings. And I remember someone who asked, asked him once whether there was a limit to the price earnings ratio he would pay.
- [23:26]
Robert Hagstrom
Yeah.
- [23:27]
Chris Mayer
He said, no, you know, there isn't a limit. He goes, you know, some Things like when they bought GEICO is losing money, so they had no. No pe, you know.
- [23:34]
Robert Hagstrom
Yeah.
- [23:34]
Chris Mayer
And he made that point again, that something can have a very high pe, but for whatever reason, you know, it's gonna do a lot better. And so, yeah, I mean, there's this book I'm reading now, Buffett and Munger Unscripted.
- [23:47]
Robert Hagstrom
Yeah, it's good.
- [23:48]
Chris Mayer
Edited by Alex Morris. A great idea, right? Just goes through all these annual meetings in the past and then organizes in relevant excerpts. And just reading that, you get a sense for what Robert's talking about. I mean, he's been at this for decades saying the same thing, you know, saying it four or five different ways. But the.
- [24:07]
Robert Hagstrom
You know, it's funny because when I was writing the Warren Buffet way and then did the portfolio book, people said, quit writing about Buffett and giving all the secrets away. I said, I'm not giving the secrets away. They're right there in the annual reports, and they're in the annual meeting. And by the way, it doesn't seem to matter because no matter how many people read the annual report, how many people go to the annual meeting, how much the press covers it, we still fall back into that mental trap that value is low price to book or low price earnings and growth is speculative and high pe, and it's not value. And I'm like, it doesn't matter. People are. It's very coonsy. And, you know, if you got, go back to Thomas Coons theories of, you know, paradigms and collision, you get these paradigms going and people just latch onto them and they're not changing. You know, the people who believe that pe, low PE is value and high PE is not value, that's how they believe the world is. And they're not going to change. They're just not going to change.
- [24:58]
Chris Mayer
Kudos for bringing in Kuhn.
- [25:02]
Podcast Producer/Interviewer
But I think it's better for us, you know, let them stay confused. And the few of us that pay attention anyways, it's, it's not a, it's.
- [25:13]
Bogomil Baranowski
Not a bad thing. And I'm still going to be stuck on, you know, Robert, if you're Don Quixote, does that make Chris Sancho Panza.
- [25:21]
Chris Mayer
Like the other way around?
- [25:24]
Bogomil Baranowski
Just wanted to clarify, Chris. I'm thinking about you while you're going back and forth on this and this idea of language and meaning. You've said words don't have meaning, people give them meanings. And, and can you almost extrapolate that another step further? Like Wall street gave words meanings, Buffett Flipped that on its head. Now you guys are talking about it. A second layer does that just keep going down? Is that turtles all the way down forever, meaning upon meeting. Upon meeting?
- [25:53]
Chris Mayer
Pretty much. I mean, one of the little snidbits, tidbits. I remember as, you know, if you look at, like, the top 500 most used words in the English language, for those 500 words, there's 14,000 definitions. So we have.
- [26:07]
Robert Hagstrom
We have.
- [26:07]
Chris Mayer
We have these words doing a lot of, you know, carrying a lot of freight. And so, yeah, I mean, it sort of reminds me all the time when I think about that, that it is useful to clarify terms with people. You know, what do you mean when you say X and then you can have a better conversation rather than just assuming that people know what you're talking about?
- [26:29]
Robert Hagstrom
Yeah, Chris is, you know, spot on. And he. Chris, I. I just implore you to do. Do more work and do more publicity. And you're doing it right here and now with your new book. But with Bill, it was all about philosophy. It's philosophy of language. It's, you know, study of semantics. And Bill was a big Wittgenstein guy. He lived with Wittgenstein, and towards the end of his life, he pivoted and got into the philosophy of language. And it's the same thing that Chris is pointing out is that. And when you gave me the notes, I went, this is perfect. Which is. Wittgenstein said, the words that you choose give something meaning. Meaning gives you the description of what you think is going on, what ultimately forms your explanation. And Bill was very big about this, so he said, all right, explanations are descriptions. Descriptions are made up of words that you have. Then give them meaning. Giving meaning by the words that you choose. But the point of it all was that failure to explain, when you make mistakes and invest, failure to explain is caused by failure to describe. If you go back and look at every one of your errors, at least my errors, I had the wrong description. What I thought was going on was not going on. It was the way that I thought it was going to turn out. So my description was wrong, therefore my explanation was wrong. But then when I go back and say, okay, well, then how did you start with the description? And this is where Chris has got it. Bullseye. I selected words. I brought meaning to the table, and my meaning was wrong. And when you start to think about it at that level, boy, there's a whole lot of excess returns to be made in the market by people misdescribing what's going on.
- [28:12]
Podcast Producer/Interviewer
I'm very curious about time horizon and evaluation frequency as we're talking about investing here. And to me, it's the question, how much time do I have to be right? And you both wrote about it from different angles. But, Chris, you wrote about this myopic loss aversion and the dangers of frequent evaluation. In investing. We have numbers that can be collected daily minute to minute. You and I spoke about it. But we really have to expand that time horizon and feedback loop so we're not judging things too quickly. Can you talk about that?
- [28:46]
Chris Mayer
Yeah, I mean, it's, it's hard to do. I think it's. I think this is one area where it's easier when you're an individual investor than a professional. Because even when you're a professional trying to put out your time horizon, you still, I mean, your investors get statements, you're, you know, they're getting in the quarterly updates or whatever. And even your own incentives are often tied to, you know, where you wound up at the end of the year. So it makes it more difficult and you're expected to, you know, have an opinion and a view on lots of different things that are happening now. So I would say, I mean, it's not, it's never easy, but I mean, one thing is we try not to look at stock prices during the day and focus more on the, you know, the businesses and the things we own. And most, most of the time, you know, nothing really important happens in any particular day or week. Even when you get quarterly results. I mean, the market makes a big deal about quarterly results, but even that, it's not really that important in the grand scheme of things. So he's constantly reinforcing that message and trying to push out your time rise. And part of it also is being careful what you allow to grab your attention. So, you know, I don't watch any of the financial TV shows or pay any attention to that, of course. And even when it comes to news, I remember I, when I was younger, I used to like, consume like the Wall Street Journal, Financial Times every day. I'd have them back when they were still delivered, and I'd sit there and flip through it. I mean, I don't do that anymore at all. I mean, the only time I might go look at the Wall Street Journal is if I'm researching and hunting for some something and stories or things that have been written. So you gotta disengage yourself a little bit from that news cycle and get outside that as much as possible. But again, you know, it's it's not easy. So I'd be interested to hear how, how Robert does that as well.
- [30:36]
Podcast Producer/Interviewer
Robert, can I, can I frame it for you and quote a certain research that you did? You shared that when you look at the largest 500 companies and 40% of them, almost 40% doubled over a rolling five year period, just to give the image for the audience, but only 3% did. So in any single year, 40% and 3.
- [30:55]
Robert Hagstrom
Yeah, we need to put that into context. I'd read an article for Bill, a commentary for Bill. This was actually after the financial crisis, but because everybody, we thought we were into a sideways market and these come up from time to time. People go, okay, you know, the market's been up 15% for the last three years. It's going to go, you know, Vanguard says it's going to be up 3% per year for the next decade or something. You know, you get these people saying sideways markets. Well, I remember, you know, we went back and looked at all sideways markets and the one that was really hair of the dog was 75 to 82 after the 73, 74 crash and interest rates going through the roof, inflation going through the roof, The Dow from 75 through 82 did not change in price. The only thing that went up, they had 5% dividend yields. Back in those days, Chris, you had 4 and 5% dividend yields in stocks. And so the Dow did nothing. I think the S and p was up 3% average annual in price plus the dividend about 8. But then I remember that Buffet killed it. Not only did Berkshire kill it, Sequoia Fund was killing it because we had done the work on it. And we began to look at some of the stocks in the portfolio and went, man, those stocks were killing it between 75 to 82. And so that basically charged me, I think, to go back and look at 75 to 82. So we just took the S&P 500 and we said, well, how many of them doubled in a year? And Bogomil, you pointed out there just wasn't that many. Like 18 to 20 stocks doubled in any one year. And then you went out three years and five years. And when you got to five years it was 30. Some odd percent of those stocks on rolling five year periods actually were doubling. And so it kind of said, okay, well that doesn't sound like a sideways market, right? If you got 38% of the portfolio going out and doubling every five years, something else is going on. So it brought up what was called the difference between the trends of the system and trends in the system. So the trend of the system was flat, didn't go anywhere, but the trends in the system were doing this. And so then you dialed back and looked at that which was outperforming and it was the oil stocks and the industrials as you imagine, because we had the oil embargo back there during the Israeli wars, Mideast wars. But the second best performing was consumer discretionary. So you went through consumer discretionary and said, okay, who's outperforming? And it was newspapers and advertisers and magazines and all that stuff which Warren owned. He owned the Washington Post affiliated, he owned Ogilvy and Mather. He owned all these businesses. They had low capital investment needs. They could price and inflation allow them to price. And he killed it. I mean stocks were going up hundreds of percent. And so it led me to believe that it's called a patience premium or what's called long horizon arbitrage. Basically that's where the excess returns were for me, for me. And my psyche was trying to figure out what can compound on a consistent basis over three, four or five years. And if Graham is right on the weighing machine, those economics drop the price. And sure enough it does. But to Chris's point, if you're looking at data, I mean my personal opinion, Chris, is my epic loss aversion is the single biggest reason why people can't make money in the market. They just can't divorce themselves away from a decline in price. Even though Graham said there's a difference between short term price, quotational loss, permanent capital loss, and the two are totally different, it's very hard, but people cannot wrap their hands around it. When something goes down in price, Chris, people freak out, they think something's wrong. And I'll stop here, but I would say you've got to figure out who's on the other side of the trade. And there's lots of reasons why stocks go up and down in price and it's not always because of valuation or intrinsic value there. There are lots of different games being played, multiple games being played all the time by different people with different money. And so if you think that price is the all knowing, well, you better. As Buffett says, if you're in the poker game for 30 minutes and you don't know who the patsy is, you're the patsy. So if you think price is always right, get out of the game or go to indexing. But I'm repeating myself. My epic loss aversion is the single biggest reason why People can't make money in the stock market.
- [35:14]
Chris Mayer
Yeah. Like Buffett often said, you know, the market is there to serve you, not instructing yourself. If you're looking at market prices for your cues, then you're, you're starting from just the whole wrong foundation. And, you know, a lot of times, you know, I love to look at companies and just put like even 5 or 10 year spreads of some metric, like could be, you know, free cash flow or whatever. You just see this ladder step. But if you look at the stock price, you'd never, you never know. I mean, it's like up and it's down and all over the place. But if you just looked at the business itself and ask yourself, would I, would I ever sell this business? Or why should. Why would I sell this business?
- [35:46]
Robert Hagstrom
Yeah.
- [35:47]
Chris Mayer
You would just incline to let it be.
- [35:48]
Robert Hagstrom
Yeah. When I was writing, doing some of the books, I would talk to Debbie Bazanik, who's still Warren's secretary to this day. I think she was 17 years old when she went to work for him, because she's still his secretary today. But I, you know, I had to have a conversation. We're doing something. I had to have a conversation. And, and I did ask her one day, I said, does Warren watch cnbc? And she goes, well, I'm not sure I would call it watching. I said, well, what, What? He goes, well, he never has the sound on. Okay, well, I like that, I like that part. I said, why is it on? He goes, it's kind of like a tape, you know, and if there's a news headliner, because he doesn't have a Bloomberg, he doesn't, you know, he, you know, you know, the computer that he got was to play bridge in the beginning, right. He goes, he doesn't. But he has it on. And he just, if there's an emergency or some big news item, he can look at it. But he goes, he never has the sound on. And I went to him and that's Chris's point. Right. Turn it off. At least turn the sound off. Yeah, like that. If you got to have it on, just turn the sound off and you can look at the tape, you know.
- [36:52]
Chris Mayer
Right. And also when you turn the sound off these things, I, I think it sort of somehow makes the absurdity of it more obvious. I don't know, someone's sitting there talking and there's no sound, just like, what are we doing here? What is going on?
- [37:05]
Robert Hagstrom
Well, you remember the old days when the cable came out, they were going to put a V chip in your tv, it's called a violent chip. So anytime there was violence on TV that the television would automatically go dark, you know, and they never perfected it. Now they put the, you know, the things in the beginning, adult, you know, you know, violence, drug use, whatever the case. But I thought that would be perfect because if you had a speculative chip on cnbc, anybody who wanted to forecast the market or make a prediction about stocks, it would go flying.
- [37:36]
Podcast Producer/Interviewer
He would just watch the commercials.
- [37:39]
Robert Hagstrom
I wanted to have CNBC with a speculative chip in there so it would turn itself off every time somebody speculated about stock prices.
- [37:46]
Chris Mayer
Right.
- [37:47]
Bogomil Baranowski
Well, apart from CNBC being the ultimate fish tank in Warren Buffett's office, which is, which is a beautiful image that I'm going to carry with me, I think, for a while.
- [37:56]
Chris Mayer
Yeah, that's good.
- [37:57]
Bogomil Baranowski
It's related the, the talk, Robert, that you were saying. I feel like it's related to your work on complex adaptive systems and who wants to be where. And I'm thinking of the, I might mispronounce it the El Farrell problem. Do you want to explain what that is? Because I, I feel it's really.
- [38:13]
Robert Hagstrom
Yeah. And once again, guys, I mean, you're going to think without Bill Miller, I'd probably, you know, be a high school teacher in history or something like that. So even before I went to work for Bill, this was act. After I wrote the Warren Buffett way, and Bill invited me out to the Santa Fe Institute, which was started way back in the 1980s, a bunch of guys came over from, from Los Alamos National Laboratory to start a new independent research, you know, facility and institute, so to speak. And, and, and it got started basically by guys like Ken Arrow and Phil Anderson and, and a guy named Brian Arthur, who were, two of them were economists who said, you know, the classical equilibrium models of economics make no sense. And everybody said it's more of a biological interpretation than a physics based interpretation. So Bill, you know, took me by the hand, put me on the plane and we went out to Santa Fe. And I remember our first lecture we went to was a three day lecture, you know, three days of it. And I came out and I said, Bill, what does this have to do with me buying or selling IBM? And he goes, has nothing to do with buying or selling IBM. It is all about helping you to understand how to think differently about markets. And I went, oh. He goes, when you begin to think of them as biological animals who evolve, adapt and change versus a physics based reversion to the main animal, if you will, your thinking changes immediately. So when you study complex adaptive systems, you're getting the biological interpretation, but then that brings in not only biology, it brings in philosophy of pragmatism and other things that help give you, you know, a map, if you will, an intellectual map, how to navigate things. And it was the Santa Fe Institute, along with William James philosophy of pragmatism that helped build, wrap his hands around technology because the Santa Fe guys were all over the Internet and the coming of network economics and stuff like that, and his philosophical background, studying pragmatism at Hopkins, you know, both of them collided at the same time and he was off to the races. So complex adaptive systems is what the stock market is, it's what the economy is, it's what your immune system is, it's what the ecology is. That's what it is. And when you begin to describe and think of it in those terms, it changes you a little bit than just, you know, reversion to the mean is such fifth grade mathematics. I can't believe that people continue to believe that reversion to the mean is a way to generate excess returns. It just, it's. That's just bonkers to me. And so you get out of that mentality of reversion to the mean. It's all powerful. As Buffett says, polling does not replace thinking it was that easy. You know, you could sell what's popular and buy what's unpopular and you'd be a billionaire. Well, obviously that's not the way it works.
- [41:02]
Podcast Producer/Interviewer
So. Thinking about complexity. Yeah, sometimes we can oversimplify the world looking for the cause and effect. And Chris, you shared an example when we spoke on some occasion, how butter production in Bangladesh air quotes here explained 99 of the S P500 movements.
- [41:24]
Bogomil Baranowski
I believe.
- [41:25]
Chris Mayer
Tell me more. Yeah, I mean that was a, there was a. I forgot his name, but he, he had something like. He used to run these, you know, correlations.
- [41:36]
Bogomil Baranowski
Was it the spurious correlations blog?
- [41:38]
Chris Mayer
Yes, yes. Such a great website that would be like, you know, butter production in Bangladesh, you know, really closely fit. The S and P would do it all statistically, you know, valid way that Wall street people do it. You have regression analysis, all the data. Nobody would have any qualms with what he was doing statistically, but he would draw all these spurious correlations, you know, cheese production in the us, how many people died in strangulations or whatever it was. It's like bizarre statistics. And he'd find them where they best fit. Lines to the S and P or something else to Explain it. And of course, the point is, you know, those are. We can laugh at those. Those are obviously seem unconnected. But the point is that there's lots of things that we do like that, that seem plausible, but those are the tough ones. So, you know what's. Just because something is plausibly linked doesn't mean that they are necessarily linked. So. And what, we get in trouble with that all the time. There's lots of examples. There's some good examples I have in the book I remember particularly, like where if you've gotten the prediction exactly right, you still made no money. So one of them was like gold. You know, gold was up big in whatever year it was. And you would deduct to yourself, you know, deduce, okay, well, maybe I should own a gold miner. And if you own Newmont Mining, the stock actually went down. You know, there are other reasons. There are other factors involved. It's not such a simple cause and effect relationship as that. Or when people say interest rates go up, remember that? That was going to tank the market not too long ago. And of course, stocks continue to go up because it's not just interest rates.
- [43:04]
Robert Hagstrom
It's of.
- [43:04]
Chris Mayer
There's lots of other factors going on. So, yeah, I'm fascinated by this cause and effect because we're so. I don't know, something about us. We want to reduce it like X causes Y. And we want to hang on to those relationships, but really they're so tenuous and it's so difficult to really know, you know, what one factor is going to cause. Something happens. Lots of things going on.
- [43:25]
Robert Hagstrom
Yeah.
- [43:26]
Chris Mayer
Endlessly fascinating.
- [43:28]
Robert Hagstrom
I apologize. I was supposed to tell you about the El Faro problem. Just to make it simple, people listening to the podcast should just go to AI and look up Brian, Arthur and L. Faro L is E, L. And then the second word, faro, F, A, R, O, L. Problem. And it was basically Brian saying how you cannot predict the stock market. And it was about an Irish bar in Santa B. And most of the time, you know, there was 100 some odd people. And it get rowdy and loud and rambunctious. At the perfect time was 60 people in the bar seemed to be. You can listen to the music and enjoy it. So he goes, well, let's. Let's cut. The problem is how do you predict whether there'll be 60 or 100 people in the bar next week? And he goes through all these iterations and Chris is spot on, which is, you know, these spurious relations. Is it the weather? This? If the weather's that it's going to be 60 if the weather. That's, you know, you do all this thing and ultimately at the end of the day, you can't solve the El Faro problem. As I said, there's no mathematics yet that has been invented. There's no Pascal, no Fermat that can predict the behavior of complex adaptive systems. But as Chris points out, people are still going to try, they're still going to put effort towards it. But there is, I want to assure everybody, I'm not sure it matters, but there is no mathematics that has been yet discovered by Nobel Prize winning people at Los Alamos National Laboratory at the Santa B Institute that can predict the behavior of a complex adaptive system over the short term. Absolutely not. It's nothing but guesswork. But CNBC will throw everybody and their mother at them that will tell you, they can tell you what's going to happen to this complex adaptive system over the next month or two or three, or even next year, which is even worse. And so then the question is, why do actually people believe this? There's a question, right? If you know you can't predict the stock market, why do people then hover around people that profess to predict the stock market? Riddle me that.
- [45:28]
Bogomil Baranowski
Clearly you haven't seen the butter production numbers.
- [45:34]
Chris Mayer
I don't know. It's an age old problem. People like oracles, people always gravitated towards.
- [45:41]
Robert Hagstrom
There's a psychologist named Michael Sherman who wrote a book called why We Believe.
- [45:44]
Bogomil Baranowski
Wonderful book.
- [45:45]
Robert Hagstrom
Yeah, great book. And he basically points out just the idea that you don't know what's going to happen tomorrow, it's just so uncomfortable to you that psychologically you'll sign on to anybody that can tell you what's going to happen next week. Because not knowing what's going to happen next week is so uncomfortable, so stressful. You'll go, well, if this person says this is going to happen next week, I feel better because now I know what's going to happen next week regardless that they don't know what's going to happen next week. So it's this need to believe or at least have someone tell you what's going to happen is so important psychologically. But people that make a lot of money, long term investors really don't spend a lot of time. So once again, it's not necessary for you to know what the market will do in the next six months or a year for you to make money in the stock market. You'll be fine.
- [46:31]
Chris Mayer
And you all know this But I mean, we can think of all these different profits of in the stock market and different times have been celebrated for making some call and then that's the only call. You know, they just happen to get it right. Gone. I mean, anybody remember Elaine Garrizelli, I.
- [46:44]
Robert Hagstrom
Think was her name?
- [46:46]
Chris Mayer
So there's all kinds of, you know.
- [46:49]
Robert Hagstrom
Well, it's, you know, it's randomness. You know, if you get enough people forecasting, somebody's going to be right, but not because they have the science. It's just random that, you know, it was your turn to be right, although you have no idea what you're doing. You were right this time for random purposes, not because you have the science.
- [47:04]
Bogomil Baranowski
Yeah, well, Robert, and I'm thinking of you and the Bill Miller story on this, that his outperformance was a happy calendar accident. That's. Tell that story. That's, that's intellectual humility.
- [47:16]
Robert Hagstrom
You know, Bill told it on himself and he was right. I mean, we did the math and you know, he, he would out, he outperformed 15 years in a row. Okay? But if he did it November to November, he only outperformed, I think, nine out of 15 years. So. So if the calendar ended on November 30, as opposed to December 31, he would have only outperformed nine out of 15 years. And so he said, you know, I, I got lucky. You know, just the stock prices closed at December 31st. And, you know, I, that's the way that we did calendar returns, and therefore I won. But had we done them on November 30, you wouldn't even know who Bill Miller was. So.
- [47:56]
Chris Mayer
Right. You know, as Robert says, he put that in his own, in a letter, and it was one of his shareholder letters. So, I mean, he. And then the other interesting thing about that, of course, is there are a number of mutual funds that had better returns than Bill Miller over that period of time. But yeah, they didn't beat the mark on anything, anything like that, you know, so, yeah, they've called into question the whole record keeping thing that people are doing.
- [48:18]
Robert Hagstrom
Once again, you know, frequency versus magnitude, Right. You know, Bill was being celebrated because he frequently beat the market, which he did for 15 years. But magnitude is how much money you made when you beat the market. And as Chris points out, there were other people that made a lot more money than Bill, but frequency, you know, was selling a lot of newspapers back then. You were on TV. If you beat the market 15 years in a row, the guys that made more money, that didn't beat the market 15 years in a row, didn't get as much publicity.
- [48:46]
Podcast Producer/Interviewer
Pretty incredible. And people were still surprised when it happened. And he underperformed after that. But that's a separate story. I'm curious. He set it up.
- [48:56]
Robert Hagstrom
Our therapists are still working on us.
- [49:01]
Podcast Producer/Interviewer
Expectations and conviction. I'm very curious. Chris Munger has this quote that I'm sure you both remember. The first rule of a happy life is low expectations. So you go into investing with high conviction. You want to hold a handful of stocks that make sense, but then you want to maintain healthy expectations. How do you balance the two?
- [49:20]
Chris Mayer
Yes, I mean this is why often talk about, you know, you have to allow your businesses, they will perform in a range of expectations. So they're not machines that are just always going to, you know, every year is going to ladder step, you know, perfectly higher than the next. And so you have to give that room on the business side. And again, this is one of the other, this is one of those things that's just very difficult to do because sometimes it's hard to know if a business has an off year, whether that is a permanent downshift in performance or whether it's just a one off because of a variety of other things that were going on. And you can look at some great businesses where they're surprisingly, you know, where the performance from year to year is surprisingly variable. Like I, I have Copart, for example. I mean you look at that, it's had years where it's up revenues up 20, 30, 15, then it can have a year where it's up 4%. And you know, as an investor during that time stock price is going down, you think, oh, it's downshifting, you know, it's two years in a row and then next year it pops back up, you know, back to 20%. So some of these, some of these, it's just very hard to know. But so I again I give the wide expect if the business is really a great business and you've done all this work to your point Bogumill about building up your conviction, you don't want to then just let that go if you know, just because the company has an off year or so. So you have to allow for that. I think part of that is going in with those expectations and the expectations that it's really hard, deliver very high returns for a long period of time. So yeah, your expectations not, you know, if you have to start off with really high expectations, you're not really probably not going to get met to be realistic.
- [51:10]
Robert Hagstrom
I That's, I want to ask Chris a question. When do you finally throw in the towel and know you're wrong?
- [51:17]
Chris Mayer
Yeah, I mean these are, those are great. These are like the great, great questions in there. It's hard to know. It's hard to know. I think there are a couple of things where I think it's pretty reliable. Like if you lose faith in the management team, I think it's probably a good, good time to go. There are some times when it's pretty obvious that someone else has come up with a better mousetrap or you're losing competitively and that can be a pretty good time to go.
- [51:41]
Robert Hagstrom
Often. Yeah.
- [51:42]
Chris Mayer
You know, again, there's always exceptions, right? There's always businesses that figure it out and then they turn it around. So, you know, some meaningful changes in the business itself. I think like if some kind of competitive position is compromised, ethically happens, things like that. Otherwise it's very difficult and you're more, more likely, I think better to just sit because a lot of times you're selling, you're taking a tax hit and then you've got risk of what you, you know, where you're going to redeploy the capital. And if you sit down and really work out the math of that, it's, it's a challenge, which is, which is another reason to stay put. If you're forcing yourself to make a lot of decisions, you know, you have to have a pretty high bar of being correct to make those trades worth it. And you know, even the greatest investors are still, are not that right that often as a batting percentage. But you know, to Robert's point magnitude, when they're right, they're, they're often right in a big way.
- [52:36]
Robert Hagstrom
I would say I spend the majority of my time trying to figure out, I might have said this earlier and if I did, you know, if you ask Buffett, of all the mistakes that you made in your career, you know which one you know jumps out, you. And, and there's a tenant in there called favorable long term prospects, which is nothing more than the competitive advantage period. How long does this last? And Buffett said, of all the mistakes I've made, probably 90 some odd percent of them are that, which is, I thought this was going to last a lot longer in its ability to generate a return above the cost of capital and compound. I thought that was going to last much longer than it actually did. Chris is right. I mean, if you have management do something stupid, they make a bad acquisition, they're, you know, they're Honesty questions, whatever the case may be, you can set, you're, you're moving on. You know, I, I just, there's too many great companies and great managers to be with shadowy figures. It's when everybody's doing a great, you know, people are nice, they're good, smart managers. Everything's in the, in the, and the, in the business. And that's why I asked Chris earlier, you know, the business had a rough quarter or two, or maybe it's been a bad year. Well, you know, is it just another year or, you know, we've been around the punch bowl too long, it's not going to last much longer. That's where, that's where I struggle and I spend most of my time trying to figure out how long does this stuff last.
- [53:55]
Chris Mayer
I will, I will add a footnote to that is that, you know, when you think about the cost of being wrong, the cost of being wrong, of letting something, letting a great company go, and then subsequently it continues and you've let it go, the cost of that error is huge. So versus just holding on a little longer and then, okay, so then you have to, eventually you're out of it. 20 or 30% lower. That's a small mistake in the big realm of things. And I know there's a story in Colossus that came out recently about Henry Ellenbogen and how he took over the T. Rowe Prices Horizon fund. And there was. His predecessor had sold Walmart or something. And this guy ran it for 22 years. Jack Laporte, I think his name, great manager, beat the S and P by an average of 4 percentage points a year. So his returns were outstanding. But he inherited a Walmart stake that if he had just left it alone, would have been worth more than the $8 billion that Ellen Bogan inherited. Think about that. So that was all the other decisions he made to produce those great returns was offset by one mistake of just letting that, you know, if he just held Walmart that whole time. So that's what I mean. So, like, I totally appreciate what Robert's saying because I think about that myself too. Like my company is going through bad stretches and I think a lot about, well, is this the, is this the end that I'm always more inclined to just wait a little longer because the mistake there is, okay, I lose some money, but if I'm wrong and I get rid of it and it continues to become a great business, that's very costly and painful mistakes mistake to make.
- [55:28]
Robert Hagstrom
No, I, I, I, I, I'm on Chris's side with this, which is if, if I'm beginning to get the instinct that something's wrong, I'll try to hang in there a little bit longer. You know, the first instinct is, well, maybe I'm wrong, right? Maybe Chris says maybe everything's going to be fine. So when, when somebody hits my radar that I go, I'm, I'm suspicious, I'm nervous or something like that, I will purposely try to lock myself into hanging in there a little bit longer to see how this works out. Now that's not for an over bet. I mean, if I've got a 10 to 15% bet. Yeah, you know, we might right size that bet again. You know, maybe if I'm suspicious, maybe it's not a 15% bet. Maybe it's more like a 5% bet and we can right size the bet. But to Chris's point, we try to hang in there with the position longer than what the first inkling is that there's a problem here.
- [56:18]
Bogomil Baranowski
Okay, so say someone. Robert, you go first on this. Say somebody has only done the business school thing. They've only read the books, they've only talked to the professors, they've only watched cnbc. How would somebody start this interdisciplinary approach? And I'm going to caveat this, the reason I have your book is because as a non finance person who bumbled his way into this business slightly less gloriously than you did with a sales sheet in your hand selling ads, but not dissimilar. It was just somebody going all that other crap. You know, you can actually start applying it here, just not in the way that anybody else is probably gonna understand. What's the first step?
- [57:00]
Robert Hagstrom
Yeah, we get that question quite a lot as you can imagine. College kids first. The college kids are like so swamped. Like I have no time to read another book, so you know, I gotta pass the exam. So, you know.
- [57:09]
Chris Mayer
Right.
- [57:10]
Robert Hagstrom
There's an old saying, you know, liberal arts education's for the middle age because it's not actually until you're middle aged that you can get around to figuring it out and you understand how valuable it is. Bill said there's an intellectual promiscuity to achieving the art of worldly wisdom. You got to cast the net wide and you got to go and read things. If I were today, I'd go to Charlie's Almanac. Poor Charlie's Almanac has 23 books in the back that he says is a recommended reading list. And if you go through it, I think a third are biographies, a third are science, ecology, you know, biology and stuff like that. And a third is philosophy and stuff like that. I mean, that'll get you. I mean, there's 20 books that can get you. If you read Charlie's recommended list, there's some books there that can get you going. But the idea is to cast the net wide. Read fiction. Bill reads a lot of fiction, Russian literature and, you know, Brothers Kazmara and all this stuff. And I keep going about Bill, what the hell is going on here? What is it about a story that makes you think you know what's going. But, I mean, he's off. You know, he goes way far afield. So you've just got to allocate some time each week, each month, you know, an hour here, whatever. Just reading something that isn't finance, isn't the Wall Street Journal, like Chris said, isn't another finance textbook. Just read stuff and it will happen. It'll occur that a bulb will go on, a light bulb will go on, and you go, ah, I've seen that before. Ah, this makes sense. But you gotta. You gotta get through it. You gotta. You've gotta go through the drudgery of. I don't want to say drudgery. You've gotta go through the time of reading things that are not connected. I wish I could tell people that if you read 10 more finance books, it's not going to improve your investment performance. You read 10 more philosophy, history, biography books, it probably will increase. Improve your investment performance.
- [59:05]
Chris Mayer
Well, Robert won't say, but, you know, I'd recommend his book Latticework. Investing is a way to just kind of get into that way of thinking and. And maybe one subject will grab your curiosity while you'll go deeper, because that's how you start, really. You start with adding one, and then maybe you'd add another, and then you add another, and then, you know, I'll be shameless enough to say my book. How do you know is a good entree into that sort of thing? Well, it's an easy read, and I don't get anything for it anyway. It's published by the Institute. I've already. I donate all my royalties go to them. So it's not like a financial motivation thing, but just to get the ideas out there, you know. Both those, I think, are just sort of, yeah, easy, fun reads to kind of get you in that mode of thinking outside of finance and the usual things that people expect you to read. Read Buffett's letters, read, you know, Graham read. Read all this stuff. This. There's other things. Other Aspects and of knowledge that are very applicable. Yeah.
- [60:00]
Bogomil Baranowski
Chris, people want to check out the new book in particular, along with the rest of your writing. Where should we send them today?
- [60:06]
Chris Mayer
Yeah, I mean, you can check out the Institute of General Semantics there. They have my books there, the ones on general semantics. How do you know you can get there? Yeah. And then if you search Woodlock House, you get to my website and I have a blog there, you can read all blog posts and things. So those are two ways to find me.
- [60:24]
Bogomil Baranowski
What about you, Robert? Same thing. Where should people find me?
- [60:27]
Robert Hagstrom
You know, we're, we're all mainstream. Amazon, you know, it's. It's always Amazon. Wiley Wiley is the shepherd of many of the buffet books that Lattice work came out of Columbia Business School. So, you know, Amazon is probably my best, you know, best turf.
- [60:43]
Bogomil Baranowski
Well, fantastic, Robert. Chris Bogamil, I want to thank you all for joining me. Like, comment, subscribe, all the things, you know, where to find the buttons below. This is Excess Returns. This is our special show, the Hundred Year Thinkers. We're doing this monthly. Guys, thanks for coming out and doing this with us today.
- [61:00]
Podcast Producer/Interviewer
Thank you so much.
- [61:01]
Chris Mayer
Good to be with you guys.
- [61:05]
Bogomil Baranowski
These two guys, you just wind them up and let them go. I think that's our takeaway with doing these episodes with them. Right.
- [61:12]
Podcast Producer/Interviewer
You know, I still have chills because I feel like he might have been the best of this series, but also one of the best episodes that I ever recorded. And it just brought together so many of the topics that I love bringing up. And I mentioned that Chris and I spoke about General Semantics and his books before, and these episodes are among the most shared and listened on talking billions among 200 or so episodes, which blows me away. And actually Chris didn't mention it, but when I brought it up to him that I want to record an episode beyond the Hundred Beggars, which we recorded earlier, he said, well, that other book was not a big, you know, commercial success. I said, it doesn't matter. The topic belongs here. And I think first of all, we had a lot of fun recording, but a lot of people were introduced to ideas that they haven't heard before.
- [62:08]
Bogomil Baranowski
It's a special thing and I'm very intrigued. So I think we have to do a General Semantics episode.
- [62:14]
Podcast Producer/Interviewer
Yes.
- [62:15]
Robert Hagstrom
With.
- [62:17]
Bogomil Baranowski
And I. So I did an episode for Just Press Record where I paired Chris with Onlore Lecomf.
- [62:24]
Podcast Producer/Interviewer
It's amazing.
- [62:25]
Bogomil Baranowski
It was like an education and research.
- [62:27]
Podcast Producer/Interviewer
She was on my show, too.
- [62:28]
Bogomil Baranowski
Brilliant book. Tiny Experiments.
- [62:30]
Podcast Producer/Interviewer
Yes.
- [62:30]
Bogomil Baranowski
About how you. Basically, it's like a Portfolio life theory with tinkering with all these little things to see what catches. And my God, has she been successful first as a student who was just, don't learn from me. Learn alongside me, and then built this whole community up around learning. And now it's turned into this. This wonderful monstrosity that is NEST Labs. But one of my favorite parts about that episode was she had never encountered general semantics before.
- [62:55]
Podcast Producer/Interviewer
Incredible.
- [62:56]
Bogomil Baranowski
And so it was. It almost turned into this impromptu, like, Chris revealing stuff, and then her taking her, you know, neuropsychology background and starting to map stuff over and watching them weave these ideas together. I think we might be able to pull that out of Robert Hackstrom, too.
- [63:13]
Podcast Producer/Interviewer
You know, there are those fields that we interact with and we might have experience with it. You know, physics, for example. Right. We all know that the apple drops. We experience it, we see it. But then you need a teacher that sits down with you and explains what is exactly happening. And I think those moments are the moments that we have with Robert and Chris where we might have seen it, we might have observed it. Even the things we talked about today, the cause and effect, the feedback loop and the time horizon and all those anecdotes that came up. By the way, I wish we talked about that bar more.
- [63:48]
Bogomil Baranowski
I know it's a great metaphor.
- [63:49]
Podcast Producer/Interviewer
We'll come back to it. But anyways, I think what they do for us and for this audience is that they explain to us what we've been observing and what we know to be true. It's just now, and I told that Chris a thousand times, you give me a language. As much as he's explaining, your labels are only that good. He does give us a framework, a language to explain something that we've been observing. And it really changes the level of awareness. And you can take it places once you have a way to explain it to yourself and then explain it to somebody else.
- [64:24]
Bogomil Baranowski
That idea, and he said it very early on, how, you know, we talk about Wall street, but we're not even talking about Wall Street. Wall street is just the standard proxy for all these. All these details, all these abstractions.
- [64:35]
Podcast Producer/Interviewer
Yes.
- [64:36]
Bogomil Baranowski
I'm curious what your thought is to. This is from where we landed in the conversation about where does a person start? What do you think about that? How do. How would you tell somebody where to start?
- [64:48]
Podcast Producer/Interviewer
Well, I had a couple of thoughts when you asked that question, because one was, of course, start with the books, Robert's book, Lattice Work and the liberal art book, and Chris's books. I think it's an amazing place to start, but a bigger revelation that I had as I was listening to them, which is kind of a big reminder. Give yourself permission to find ideas and inspiration outside of the most immediate finance, business, accounting reading list. And I know it's a huge ask, and it was a huge ask for me when I was 20, but I had this practice that I would go to a bookstore. It was an English language bookstore in Brussels. I was an exchange student there for a year. And we studied options, pricing and sophisticated things and hypotheses. You know it. And every week on a Friday I would go to that bookstore. And it was an old school little two floor bookstore, which, by the way, somebody looked up for me and it's family owned. It was sold and moved away since anyway, somebody might be listening and they know. And I would grab different random books from the shelves. Fiction, nonfiction, history books, biographies. Outside of my school, outside of the school library, because library had the obvious options. And I think instinctively I was looking for inspiration outside, not knowing Robert, not knowing Chris's work, not knowing general semantics. And I think some of us have that little flame. You absolutely have that too. And here, this episode is yet another permission to go and chase that little flame. Because it can take you places and.
- [66:26]
Bogomil Baranowski
In many cases it's already there in you. You already have some curiosity in some other area. The question is, what's the bridge between something I'm naturally interested in and this other thing? Yeah, I'm consistently not surprised when I meet people who have connected that bridge. But I'm consistently impressed with the sheer number of bridges that exist. And I think about the, like the market wizards books. I think about some of these examples. There are just so many bridges to connect and so many that either haven't been directly connected or associated. Case in point, Chris, with General semantics and the Wall street stuff, there's a reason there's not like a million people talking about the same thing. And there's also a reason that Chris has been able to make this. Oh, this is kind of my own thing. If you're watching this and you don't know where to start or you think like I've only learned it one way, you're interested in something else. And I don't care how dumb it is. I don't care if you're catching Pokemon on your phone or your. And I'm thinking about some people with Pokemon trading card stuff that are in high finance and have pricing methodologies derived from this, or you're a musician or you're into the arts. Or maybe just love literature. Maybe you're a Dostoevsky nerd. Like forget chess and all the other more obvious ones. If you're interested in one other thing, just try to explore a bridge between two things you like. So powerful.
- [67:54]
Podcast Producer/Interviewer
Well, I'll show you how my brain works. I'm. I'm writing a piece now on my substack about tax loss harvesting. You would think the most boring topic in the world.
- [68:04]
Bogomil Baranowski
It's very exciting, very exciting.
- [68:06]
Podcast Producer/Interviewer
And I'll tell you where I took it. The idea, the wash sale rule in the US 30 days to buy it back. It's 100 years old. So historian and me is intrigued already who started in the 1920s they put it in place because before selling stocks to realize losses and they put in that rule. Not all the countries have it by the way. But anyways, for a long time we had a price tick of 1:8 for a lot of stocks. 1:16, 1:8. And the spread was so big that actually the buying and selling was very costly. So people were not using tax loss harvesting as much as they probably are today. But I was wondering 11 8th. And in the back of my mind I remembered there was a coin called the Spanish dollar which was also called the piece of eighth. And I looked up that coin and it refreshed my memory. Something that I looked up years ago. And I went all the way back to a 16th century shipwreck in Florida Keys carrying hundreds of millions of those coins from Mexico and South America and bringing it to Europe. But that ship ran into a hurricane and went down. And it took 400 years for people to find that shipwreck, uncover it. And one man actually had to was sued by the US courts and had to defend his case. Anyways. He kept a big part of the winnings. Those coins, if you melt the silver today, they would sell for 20 to $30. But they are collectible item so they probably sell for hundreds of dollars. But coins from that specific ship, because it's such a legend, they sell for thousands of dollars and apparently some of them for tens of thousands of dollars. Anyways, here I started looking at tax loss harvesting. I ended up researching a shipwreck and I was curious why they minted it this way. And I learned how that currency became one of the first international currencies. So you have global trade, you have Pirates of the Caribbean in the story, you have a shipwreck and you have a coin that to this day has purchasing power that would buy you quite a few stocks out there that trade at $20 or $30. And if you have a nice older coin, maybe you could even buy much more expensive and many more shares. Anyways, that's how my brain works. You leave me with a topic for a minute.
- [70:32]
Bogomil Baranowski
I love it and I love just the idea. I say this all the time. It's you gotta find that one thread to pull on that you wanna pull on and then go crazy. Unravel the whole sweater. Yeah, just keep pulling that thread, see where it goes. You don't even have to worry about putting it back together again on the other on the other end. If you can find that thread worth pulling. It's magic.
- [70:53]
Podcast Producer/Interviewer
This piece about tax loss harvesting, which I titled differently, opens with a story of the day of the storm in Florida in 1622. And I think this might be the only tax loss harvesting article out there that opens with the shipwreck story. So I am sure, I am sure.
- [71:13]
Bogomil Baranowski
And you know, in a future movie version of this podcast, you will also be played by Johnny Depp, I am sure.
- [71:18]
Podcast Producer/Interviewer
Why not the younger. The younger version. But yes.
- [71:22]
Bogomil Baranowski
Thanks for joining me, Bogomil. This is another great episode. I can't wait to hang out with these guys again next month.
- [71:28]
Podcast Producer/Interviewer
What an incredible pleasure to have the two of them every month and take on a new topic. And I especially loved this topic because we left finance, but we looked at finance and investing from outside with a whole different perspective. And I truly, truly value that because in the world where everybody knows everything, everybody can look up everything. I think we uncover today a true competitive edge. Pick up a novel from the 1800s and spend the weekend with it and you might see things differently than anybody else.
- [72:02]
Bogomil Baranowski
I, for one. And funny enough, I was planning to do this to cross into the new year anyway. I'm about to finish a Not regular enough, but regular enough. I think this is my third or fourth read of Moby Dick and I was like, I think the next thing I'm doing is Don Quixote again. I think we're doing Mana lamarche.
- [72:20]
Podcast Producer/Interviewer
Megan has been reading it and we've been going over pieces of it. It's a. Yeah, it's a bigger book, but to me, and I don't want to start a whole new episode here. But remember how old this book is. And what's unique about it is that it's a novel and it's a story of an average individual. Not a real hero. Kind of a broken hero in many ways. Laughable sometimes, but not a story of the kings. Not the story religious story. Not a story of you know, mythical godlike creatures but of an average individual, which today might seem obvious to us. We have shows about it, but back in the day it was very unusual to take on a story of an average fella with some incredibly unlucky path and but a lot of self belief, maybe delusion. Anyways, food for thought when you read it and think about when was this written and when people were reading it, what kind of context they were living in.
- [73:18]
Bogomil Baranowski
Anyways, it's amazing stuff. Let's go tilt it some windmills. Yes, I'm going to talk to you real soon. This is Excess Returns. That's Bogomil Baranowski talking. Billions is his show. Make sure you look up plug the substack again so people can find that post.
- [73:33]
Podcast Producer/Interviewer
Just look up my name Bogomil Baronowski on substack. Post everything there, essays, collaborations, these conversations and my podcast.
- [73:42]
Bogomil Baranowski
All right, go. Go harvest some tax losses and capture some pirate gold. I'll talk to you soon.
- [73:48]
Podcast Producer/Interviewer
Bye for now.
- [73:48]
Podcast Outro
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess Returns network@excessreturnspod.com if you have anything, feedback or questions, you can contact us@excess returnspodmail.com no information on this.
- [74:08]
Bogomil Baranowski
Podcast should be construed as investment advice.
- [74:11]
Robert Hagstrom
Securities discussed in the podcast may be.
- [74:13]
Bogomil Baranowski
Holdings of the firms of the hosts or their clients.
- [74:17]
Marketa Announcer
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