How do we fool ourselves in the stock market? And what does neuroscience have to do with investment? And what does any of this have to do with Isaac Newton or the Dutch East India Company which ran for two hundred years, or Kodak or the way that zebras like to herd or instincts or emotions and almost two hundred different cognitive biases. Welcome to Innercosmos with me David Eagleman. I'm a neuroscientist and an author at Stanford and in these episodes we dive deeply into our three pound universe to uncover some of the most surprising aspects of our lives. Today's episode asks what do brains have to do with the stock market? So there's this old joke about a man who's looking for enlightenment, and he goes on a journey to find the wise man, and he hipes snowy mountains and fords rivers, and after many months of toil, he summits a peak and he finds the wise man sitting there cross legged at the top. And the man drops to his knees and he says, Oh, wise one, what profound words of wisdom can you share? With me, and the wise man looks at him and says, by low sell Hi. Now, whether you think that that's the world's funniest joke, it doesn't matter, because the fascinating part is that the joke is stuck around for generations.

How do we fool ourselves in the stock market? And what does neuroscience have to do with investment? And what does any of this have to do with Isaac Newton or the Dutch East India Company which ran for two hundred years, or Kodak or the way that zebras like to herd or instincts or emotions and almost two hundred different cognitive biases. Welcome to Innercosmos with me David Eagleman. I'm a neuroscientist and an author at Stanford and in these episodes we dive deeply into our three pound universe to uncover some of the most surprising aspects of our lives. Today's episode asks what do brains have to do with the stock market? So there's this old joke about a man who's looking for enlightenment, and he goes on a journey to find the wise man, and he hipes snowy mountains and fords rivers, and after many months of toil, he summits a peak and he finds the wise man sitting there cross legged at the top. And the man drops to his knees and he says, Oh, wise one, what profound words of wisdom can you share? With me, and the wise man looks at him and says, by low sell Hi. Now, whether you think that that's the world's funniest joke, it doesn't matter, because the fascinating part is that the joke is stuck around for generations.

And this is because the.

And this is because the.

Advice is so simple, and yet most people in the stock market find it incredibly difficult for their brains to stay on track to follow that advice. Instead, they buy a stock once it's shot way up and everyone's talking about it, and when the stock starts crashing they do a panic cell. But of course that kind of bad decision making is just the very start of it. We humans do all kinds of bad decision making in the stock market, or more generally, when we're thinking about how to invest our savings. Why, well, it's because we're not like mister Spock and star Trek, who knows how to make optimal logical decisions. Instead, we are yoked with psychologies that have long evolutionary histories, and as a result, they have all sorts of flaws in their reasoning, which we generally summarize as cognitive biases, which are these patterns that you see where we deviate from rationality in our decision making, we do things that are often irrational.

Advice is so simple, and yet most people in the stock market find it incredibly difficult for their brains to stay on track to follow that advice. Instead, they buy a stock once it's shot way up and everyone's talking about it, and when the stock starts crashing they do a panic cell. But of course that kind of bad decision making is just the very start of it. We humans do all kinds of bad decision making in the stock market, or more generally, when we're thinking about how to invest our savings. Why, well, it's because we're not like mister Spock and star Trek, who knows how to make optimal logical decisions. Instead, we are yoked with psychologies that have long evolutionary histories, and as a result, they have all sorts of flaws in their reasoning, which we generally summarize as cognitive biases, which are these patterns that you see where we deviate from rationality in our decision making, we do things that are often irrational.

Why do we do this?

Why do we do this?

Well, the world is extremely complicated, but your brain is always trying to get a grasp on it and have some control over what you can do. And so with time, like millions of years or sometimes tens of millions of years, you develop these mental shortcuts that work much of the time, but they're not actually strictly logical. Now, in my book Incognito, I wrote about how much of your brain's activity is running under the hood, and my analogy was that the conscious mind, which is the part of you that flickers to life when you wake up in the morning, that's like a broom closet in the mansion of the brain. Most of what you think and do and act and believe you have no access to. As a result, even though we typically feel like we are excellent stewards of our decision making, there are all kinds of irrationalities that humans display. Now. Not being like mister Spock is typically not the end of the world, and obviously for our species, for all its flaws, we continue to get by. But these cognitive biases do show up in a much bigger way when we look at how people deal with economics.

Well, the world is extremely complicated, but your brain is always trying to get a grasp on it and have some control over what you can do. And so with time, like millions of years or sometimes tens of millions of years, you develop these mental shortcuts that work much of the time, but they're not actually strictly logical. Now, in my book Incognito, I wrote about how much of your brain's activity is running under the hood, and my analogy was that the conscious mind, which is the part of you that flickers to life when you wake up in the morning, that's like a broom closet in the mansion of the brain. Most of what you think and do and act and believe you have no access to. As a result, even though we typically feel like we are excellent stewards of our decision making, there are all kinds of irrationalities that humans display. Now. Not being like mister Spock is typically not the end of the world, and obviously for our species, for all its flaws, we continue to get by. But these cognitive biases do show up in a much bigger way when we look at how people deal with economics.

Now.

Now.

Traditionally, economics has been studied in the context of an ideal decision maker, often called homoeconomicus and homoeconomicists is perfectly rational and not influenced by shiny objects or by what his friends are doing. But a new field began to blossom a few decades ago, and we now call that behavioral economics or neuroeconomics, and the idea is to understand how people actually make decisions and what sorts of mistakes they actually make. And I spoke about this in episode eight, which was about how your brain decides what it's actually going to buy, like which car and which restaurant you're going to go to, and which ice cream flavor you're going to choose. But today I want to hit a different facet of this top which is you come home from work with your paycheck and you decide I'm going to do the smart thing and invest this money, which is an important idea, but people often lose tons of money in the stock market. I've seen this happen with friends of mine, and there's been a proliferation of phone apps that let you do trading in a way that's like an addictive online gambling game and they lose tons of money. But not everyone loses money in the stock market. In fact, academics study this and generate whole fields that wind Nobel prizes about how to allocate assets. So where's the disconnect. Well, it has to do with the brain and our psychology and with these cognitive biases. So I called up my friend Mark Mattson. Mark is an entrepreneur and deeply studies the science of investing. He's been in the financial industry his whole life, and more than anyone I know, he's seen exactly the way that humans be behave and the difference in the way they would behave if they were.

Traditionally, economics has been studied in the context of an ideal decision maker, often called homoeconomicus and homoeconomicists is perfectly rational and not influenced by shiny objects or by what his friends are doing. But a new field began to blossom a few decades ago, and we now call that behavioral economics or neuroeconomics, and the idea is to understand how people actually make decisions and what sorts of mistakes they actually make. And I spoke about this in episode eight, which was about how your brain decides what it's actually going to buy, like which car and which restaurant you're going to go to, and which ice cream flavor you're going to choose. But today I want to hit a different facet of this top which is you come home from work with your paycheck and you decide I'm going to do the smart thing and invest this money, which is an important idea, but people often lose tons of money in the stock market. I've seen this happen with friends of mine, and there's been a proliferation of phone apps that let you do trading in a way that's like an addictive online gambling game and they lose tons of money. But not everyone loses money in the stock market. In fact, academics study this and generate whole fields that wind Nobel prizes about how to allocate assets. So where's the disconnect. Well, it has to do with the brain and our psychology and with these cognitive biases. So I called up my friend Mark Mattson. Mark is an entrepreneur and deeply studies the science of investing. He's been in the financial industry his whole life, and more than anyone I know, he's seen exactly the way that humans be behave and the difference in the way they would behave if they were.

Doing so optimally.

Doing so optimally.

And he's just written a new book called The American Dream. And the part I want to zoom in on today is the part about how we make decisions in the stock market. So here's my conversation with Mark Mattson. Okay, So Mark, one thing I talk about a lot on this podcast is this idea of the internal model, which has been building up since the.

And he's just written a new book called The American Dream. And the part I want to zoom in on today is the part about how we make decisions in the stock market. So here's my conversation with Mark Mattson. Okay, So Mark, one thing I talk about a lot on this podcast is this idea of the internal model, which has been building up since the.

Day you were born.

Day you were born.

Your brain is locked in silence and darkness and trying to model the world and understand what's out there. Now you use a term that I believe was introduced by the scholar Kenneth Burke originally that I love, which is this idea of a screen or many screens tell us about that.

Your brain is locked in silence and darkness and trying to model the world and understand what's out there. Now you use a term that I believe was introduced by the scholar Kenneth Burke originally that I love, which is this idea of a screen or many screens tell us about that.

Yeah, so most people think that they have an objective view of the world, and their view is the quote unquote right view. What he was talking about was you don't really see the world. What you actually see is what the screens that you have allow you to see. And the screens are created linguistically from out of language. So some of these screens are created on purpose. So if you're a doctor, you spend many, many years creating all the linguistic screens around, you know, being a doctor. But we have those screens developing all the time, and most of them aren't on purpose.

Yeah, so most people think that they have an objective view of the world, and their view is the quote unquote right view. What he was talking about was you don't really see the world. What you actually see is what the screens that you have allow you to see. And the screens are created linguistically from out of language. So some of these screens are created on purpose. So if you're a doctor, you spend many, many years creating all the linguistic screens around, you know, being a doctor. But we have those screens developing all the time, and most of them aren't on purpose.

They're kind of on accident.

They're kind of on accident.

The experiences we had in life, teachers, we had in life, and we are unaware that we actually have a screen, which then limits us. A lot of people talk about mindsets, but I think mindset seems like something that you can easily change. Well, I'll just change my mindset. The screen doesn't seem like a screen that you can change. It actually seems like the truth, and that locks us into the same behaviors.

The experiences we had in life, teachers, we had in life, and we are unaware that we actually have a screen, which then limits us. A lot of people talk about mindsets, but I think mindset seems like something that you can easily change. Well, I'll just change my mindset. The screen doesn't seem like a screen that you can change. It actually seems like the truth, and that locks us into the same behaviors.

Over and over and over again.

Over and over and over again.

You mean, because we believe whatever our screens are telling us.

You mean, because we believe whatever our screens are telling us.

We think that is the world out there. I know that to be true. Yeah, well, something will happen. We'll make up a story about it, a screen about it. In the book, I talk about money demons or negative beliefs around money and our relationship to money, and once they're formed, they take control. It's kind of like the movie Aliens where the alien slams onto somebody's face and that's all they can really deal with is the alien. It takes over, It has complete control, and we don't even realize it's happening.

We think that is the world out there. I know that to be true. Yeah, well, something will happen. We'll make up a story about it, a screen about it. In the book, I talk about money demons or negative beliefs around money and our relationship to money, and once they're formed, they take control. It's kind of like the movie Aliens where the alien slams onto somebody's face and that's all they can really deal with is the alien. It takes over, It has complete control, and we don't even realize it's happening.

So give us some examples these money demons.

So give us some examples these money demons.

So one money demon kind of like the underlying demon of all is I don't have enough. I don't have enough to have a successful life. I don't have enough to create my business the way I want to. I don't have enough to live powerfully. I don't have enough to feel fulfilled. So this this kind of a scarcity beliefs system them a scarcity screen that money, and it's just a screen. Money is hard to make, hard to invest, and hard to keep, so it's a screen of suffering and struggling. Another's related screen would be a victimhood screen, in that I'm a victim and I can't really create what I really want to create with my life because I'm locked in from some kind of victim mentality, as opposed to an American dream screen, which would be through hard work, individualism, creativity, focusing on creating value for others. And I first became aware of this, you know, with a story with my grandfather and my father, and they had two In fact, the screens that they had were so extreme it was like they weren't even living the same world, like it was two different dimensions, and it made it very hard for them to communicate and have a relationship throughout life.

So one money demon kind of like the underlying demon of all is I don't have enough. I don't have enough to have a successful life. I don't have enough to create my business the way I want to. I don't have enough to live powerfully. I don't have enough to feel fulfilled. So this this kind of a scarcity beliefs system them a scarcity screen that money, and it's just a screen. Money is hard to make, hard to invest, and hard to keep, so it's a screen of suffering and struggling. Another's related screen would be a victimhood screen, in that I'm a victim and I can't really create what I really want to create with my life because I'm locked in from some kind of victim mentality, as opposed to an American dream screen, which would be through hard work, individualism, creativity, focusing on creating value for others. And I first became aware of this, you know, with a story with my grandfather and my father, and they had two In fact, the screens that they had were so extreme it was like they weren't even living the same world, like it was two different dimensions, and it made it very hard for them to communicate and have a relationship throughout life.

Let's double click on that. What were those screens for your grandfather and your father?

Let's double click on that. What were those screens for your grandfather and your father?

Well, so, my grandfather grew up in the coal mines and the chemical factories in West Virginia, and he had a screen that actually that money was evil and anybody that had money actually stole it and took advantage of other people, so much so that when he was actually offered a raise and to be a foreman at Union Carbide, where he worked, he refused to take it because he said, I don't want to be the man, and I don't want to take advantage of other people. He didn't see an opportunity to create wealth for his family, to be a foreman and actually create value for the people under him. And my dad on the other hand, and he was driven by a question that was why am I doomed to live in West Virginia and why am I doomed to suffer here? And my dad had a different question which created a different screen. His question was how can I escape this abject poverty and create wealth and prosperity for myself and other people? And he saw money as a way of creating values for others, and hate believed in capitalism, and my grandfather didn't. And those who my grandfather died alone of inmphysema from the chemical factory that he worked in. People will actually die to keep their screens.

Well, so, my grandfather grew up in the coal mines and the chemical factories in West Virginia, and he had a screen that actually that money was evil and anybody that had money actually stole it and took advantage of other people, so much so that when he was actually offered a raise and to be a foreman at Union Carbide, where he worked, he refused to take it because he said, I don't want to be the man, and I don't want to take advantage of other people. He didn't see an opportunity to create wealth for his family, to be a foreman and actually create value for the people under him. And my dad on the other hand, and he was driven by a question that was why am I doomed to live in West Virginia and why am I doomed to suffer here? And my dad had a different question which created a different screen. His question was how can I escape this abject poverty and create wealth and prosperity for myself and other people? And he saw money as a way of creating values for others, and hate believed in capitalism, and my grandfather didn't. And those who my grandfather died alone of inmphysema from the chemical factory that he worked in. People will actually die to keep their screens.

Now you believe that the investing industry is broken, tell us about that.

Now you believe that the investing industry is broken, tell us about that.

Well, the investing industry is seriously broken because it's based on a very destructive screen. And that screen is something we call investor prediction syndrome. People believe and have been fed the idea that you need a forecast, either an economic forecast or a political forecast, and then based on that forecast, you can foresee the future and then pick all the best stocks and get in and out of the market at the right time, and or pick the best managers. But all the academic research is conclusive that all the noble and predictable information about the future is already in the price. Therefore, only unknowable, unpredictable events will change prices going forward. And so people are gambling and speculating with their money and they don't even realize that they're doing it. And that screen is so embedded in the financial industry that it goes unacknowledged. You turn on the TV and they're asking, well, what's going to happen with the election, and what's going to happen with inflation? And what should I invest in based on this forecast? And it doesn't it begs even common sense. I mean, obviously no one can predict the future, and if they did, they wouldn't tell you on TV.

Well, the investing industry is seriously broken because it's based on a very destructive screen. And that screen is something we call investor prediction syndrome. People believe and have been fed the idea that you need a forecast, either an economic forecast or a political forecast, and then based on that forecast, you can foresee the future and then pick all the best stocks and get in and out of the market at the right time, and or pick the best managers. But all the academic research is conclusive that all the noble and predictable information about the future is already in the price. Therefore, only unknowable, unpredictable events will change prices going forward. And so people are gambling and speculating with their money and they don't even realize that they're doing it. And that screen is so embedded in the financial industry that it goes unacknowledged. You turn on the TV and they're asking, well, what's going to happen with the election, and what's going to happen with inflation? And what should I invest in based on this forecast? And it doesn't it begs even common sense. I mean, obviously no one can predict the future, and if they did, they wouldn't tell you on TV.

So it's crazy, right.

So it's crazy, right.

And one of the things that really struck me in your book was you looked at a number of these predictions where people said in magazines or on blogs or articles or whatever about you know, hey, these are the stocks to pick for this year, these are the killer stocks. They're going to make you a bunch of money. And you went through you analyze what actually became of those as compared to let's say the S and P five hundred, and what did you find there?

And one of the things that really struck me in your book was you looked at a number of these predictions where people said in magazines or on blogs or articles or whatever about you know, hey, these are the stocks to pick for this year, these are the killer stocks. They're going to make you a bunch of money. And you went through you analyze what actually became of those as compared to let's say the S and P five hundred, and what did you find there?

Well, it's the average investor historically averages trying to do asset allocation investor money it earns about two and a half three percent and the SMP, for example of clocks in around ten percent. So on average, people are throwing away three to six percent of their return trying to pick the best stocks and trying to get in and out of the market. And if you find someone that got lucky enough to beat the market, statistics show that that was just luck and not skill. So it's it's extremely destructive for people that are trying to plan for their future and their have their American dream. And it's and it's driven by all kinds of biases, mistakes and thinking and logic. And for example, one of one of the biases that people have is hindsight bias. And they maybe they picked twenty or thirty stocks and two or three of them do really well, in hindsight, they'll remember only the ones that did really well, and they'll forget about the ten or twenty that they picked that didn't.

Well, it's the average investor historically averages trying to do asset allocation investor money it earns about two and a half three percent and the SMP, for example of clocks in around ten percent. So on average, people are throwing away three to six percent of their return trying to pick the best stocks and trying to get in and out of the market. And if you find someone that got lucky enough to beat the market, statistics show that that was just luck and not skill. So it's it's extremely destructive for people that are trying to plan for their future and their have their American dream. And it's and it's driven by all kinds of biases, mistakes and thinking and logic. And for example, one of one of the biases that people have is hindsight bias. And they maybe they picked twenty or thirty stocks and two or three of them do really well, in hindsight, they'll remember only the ones that did really well, and they'll forget about the ten or twenty that they picked that didn't.

Do well, and they'll think, I'm pretty good at this, and they'll.

Do well, and they'll think, I'm pretty good at this, and they'll.

Go, wow, I'm great at picking stocks.

Go, wow, I'm great at picking stocks.

But they never really calculated their total return and it gives them which leads into another bias, which is over confidence bias.

But they never really calculated their total return and it gives them which leads into another bias, which is over confidence bias.

They feel way.

They feel way.

More confident in their abilities than they actually are. And we do a little we do a little game in class where we'll have people stand up. You know, what de style do you fall in for your driving abilities? You know, are you in the bottom.

More confident in their abilities than they actually are. And we do a little we do a little game in class where we'll have people stand up. You know, what de style do you fall in for your driving abilities? You know, are you in the bottom.

Ten percent the top ten percent?

Ten percent the top ten percent?

And if you ask them, ninety five percent of the people think they're above average in their driving skills, So about forty five percent are seriously delusional. But we make the same thing with investing our investing ability.

And if you ask them, ninety five percent of the people think they're above average in their driving skills, So about forty five percent are seriously delusional. But we make the same thing with investing our investing ability.

Yeah, and in fact, there are many many cognitive biases, and psychologists and neuroscience have gone through and named and identified us so many of these almost two hundred probably, but you point out several besides hindsight and over confidence, what are others that affect the way that people invest their money?

Yeah, and in fact, there are many many cognitive biases, and psychologists and neuroscience have gone through and named and identified us so many of these almost two hundred probably, but you point out several besides hindsight and over confidence, what are others that affect the way that people invest their money?

One of the worst most destructive is hurting.

One of the worst most destructive is hurting.

Bias, as in h er D.

Bias, as in h er D.

Yeah, yeah, hurting, So, you know, great for Zebra, really bad for investors. And the psychology behind is that if everybody's doing it, it must be right and it must be safe.

Yeah, yeah, hurting, So, you know, great for Zebra, really bad for investors. And the psychology behind is that if everybody's doing it, it must be right and it must be safe.

And that's how bubbles happen.

And that's how bubbles happen.

If you look from like ninety five to two thousand, s and P five stocks made twenty two percent for five years in a row. Tech stocks made forty five.

If you look from like ninety five to two thousand, s and P five stocks made twenty two percent for five years in a row. Tech stocks made forty five.

Years in a row.

Years in a row.

So everybody loaded up on tech stocks, loaded up on you know, based on this hurting bias if their friends are doing it. It's it's almost kind of immature, remember like high school, you know, where peer pressure. Everybody's doing it, it must be the right thing to do. And then people are left, you know, stunned when they lose textlocks lost seventy five percent of all their value. These these are these are not inconsequential results from these biases.

So everybody loaded up on tech stocks, loaded up on you know, based on this hurting bias if their friends are doing it. It's it's almost kind of immature, remember like high school, you know, where peer pressure. Everybody's doing it, it must be the right thing to do. And then people are left, you know, stunned when they lose textlocks lost seventy five percent of all their value. These these are these are not inconsequential results from these biases.

They can be severe.

They can be severe.

Yeah, And one of the things that you mentioned that really struck me was this issue that no company is too big to fail.

Yeah, And one of the things that you mentioned that really struck me was this issue that no company is too big to fail.

Yeah.

Yeah.

So another bias that people have is familiarity bias. We mistakenly think that the things that we're familiar with are safe and our good investments. So every when I go around and do different speaking engagements, every town seems like it has its own, you know, familiar familiarity bias. In Cincinnati, where I used to live, it was Procter and Gamble.

So another bias that people have is familiarity bias. We mistakenly think that the things that we're familiar with are safe and our good investments. So every when I go around and do different speaking engagements, every town seems like it has its own, you know, familiar familiarity bias. In Cincinnati, where I used to live, it was Procter and Gamble.

That was their home.

That was their home.

And I had, you know, an investor some years ago. They were only six months from retirement and there I said, you know, you really should just put this in cash, wait till you retire and diversify it, because you have it all in one once thought, And the answer was, oh no, it's I worked there for thirty five years.

And I had, you know, an investor some years ago. They were only six months from retirement and there I said, you know, you really should just put this in cash, wait till you retire and diversify it, because you have it all in one once thought, And the answer was, oh no, it's I worked there for thirty five years.

I know the CEO.

I know the CEO.

We're internationally diversified, and they knew the academics, which says diverse, five diversified, diversify. And six months later they had lost. They had a five million dollar portfolio. They lost two and a half million dollars. And just because they were familiar. I met a man recently in one of our classes with well tens of millions in Boeing, and he said, no, I'm not going to diversify.

We're internationally diversified, and they knew the academics, which says diverse, five diversified, diversify. And six months later they had lost. They had a five million dollar portfolio. They lost two and a half million dollars. And just because they were familiar. I met a man recently in one of our classes with well tens of millions in Boeing, and he said, no, I'm not going to diversify.

I know Boeing. I worked there for thirty years. I have all my money there, you know.

I know Boeing. I worked there for thirty years. I have all my money there, you know.

And Boeing literally made an airplane that wrecked itself on the autopilot came on, and then they had doors flying off of their airplanes.

And Boeing literally made an airplane that wrecked itself on the autopilot came on, and then they had doors flying off of their airplanes.

And then they had violations.

And then they had violations.

They had twenty billion dollars of contracts canceled. So what I what I tried to coach investors is no matter how safe you think that company is, no company is safe. No company by itself is impregnable, and.

They had twenty billion dollars of contracts canceled. So what I what I tried to coach investors is no matter how safe you think that company is, no company is safe. No company by itself is impregnable, and.

And any of them can go bankrupt.

And any of them can go bankrupt.

I know it sounds ludicrous to think Apple could go bankrupt, but eventually somebody will take Apple out.

I know it sounds ludicrous to think Apple could go bankrupt, but eventually somebody will take Apple out.

Yeah. What was the Dutch East India Company?

Yeah. What was the Dutch East India Company?

Yeah, so it was the Dutch East India Company.

Yeah, so it was the Dutch East India Company.

They had they paid an eighteen percent, dived in for two hundred years, and they had their own army.

They had they paid an eighteen percent, dived in for two hundred years, and they had their own army.

They had their own warships, they had their own navy. Uh.

They had their own warships, they had their own navy. Uh.

And then in the seventeen hundreds they just went belly up and everybody lost all their money.

And then in the seventeen hundreds they just went belly up and everybody lost all their money.

Uh.

Uh.

It was bigger than Apple, bigger than Google, bigger than Tesla.

It was bigger than Apple, bigger than Google, bigger than Tesla.

Uh Uh it was. It was, for its.

Uh Uh it was. It was, for its.

Time and for all age, the the largest company that ever existed.

Time and for all age, the the largest company that ever existed.

Right, And people felt at the time there's no possibility they were worth than modern dollars over a trillion, right, something like seven.

Right, And people felt at the time there's no possibility they were worth than modern dollars over a trillion, right, something like seven.

Yeah, I mean just an incredible amount of value. Uh. And then they got they got killed.

Yeah, I mean just an incredible amount of value. Uh. And then they got they got killed.

Right, so if they can go out of business, Apple could go out of business Google, any of these right when I when I grew.

Right, so if they can go out of business, Apple could go out of business Google, any of these right when I when I grew.

Up, the big one was, uh was Kodak and they had they had remember the drive up you know Kodak, you know thing where you get your pictures developed.

Up, the big one was, uh was Kodak and they had they had remember the drive up you know Kodak, you know thing where you get your pictures developed.

And in one day and they even theyd they even invented the digital camera and the CEO said, no, we're not going to do that U because we're a paper and chemical company. They had ninety five percent of all the photo development, they had eighty five percent of all the cameras sold, and they went.

And in one day and they even theyd they even invented the digital camera and the CEO said, no, we're not going to do that U because we're a paper and chemical company. They had ninety five percent of all the photo development, they had eighty five percent of all the cameras sold, and they went.

And they went bankrupt.

And they went bankrupt.

Same thing with Blockbuster Netflix Netflix for forty million dollars. Tried to get Blockbuster to buy them out, and Blockbuster said, no, we're not going to buy you out. You know we have we have fifteen hundred brick and mortar buildings and that's our business model.

Same thing with Blockbuster Netflix Netflix for forty million dollars. Tried to get Blockbuster to buy them out, and Blockbuster said, no, we're not going to buy you out. You know we have we have fifteen hundred brick and mortar buildings and that's our business model.

And of course they went under. Who got it? Okay?

And of course they went under. Who got it? Okay?

So foreign investor the idea that hey, everybody's investing in this company and it's safe, I should put my money in the Dutch East India company or whatever that can't that's not a good strategy. And in fact, by the way, even very smart people can go wrong here. So Isaac Newton, what did he invest in?

So foreign investor the idea that hey, everybody's investing in this company and it's safe, I should put my money in the Dutch East India company or whatever that can't that's not a good strategy. And in fact, by the way, even very smart people can go wrong here. So Isaac Newton, what did he invest in?

So he he invested in the south Sea bubble, So you got Newton massive IQ obviously created discovered gravity, calculated the celestial movements through the dynamic laws of motion. But he got sucked in because all of his buddies were in it. Everybody was investing in the south Sea company. And he lost the equivalent of three million dollars in today's dollars. And it's not just the money, it's the emotional toll that it takes on people. And he too, his dying day regretted and had remorse and sadness over the fact that he had squandered so much of his wealth.

So he he invested in the south Sea bubble, So you got Newton massive IQ obviously created discovered gravity, calculated the celestial movements through the dynamic laws of motion. But he got sucked in because all of his buddies were in it. Everybody was investing in the south Sea company. And he lost the equivalent of three million dollars in today's dollars. And it's not just the money, it's the emotional toll that it takes on people. And he too, his dying day regretted and had remorse and sadness over the fact that he had squandered so much of his wealth.

And I call this attribution error.

And I call this attribution error.

We think that because we're really good in one thing, that skill must transfer to another thing, and especially in investing, people think, well, I'm a brain surgeon or I'm a neuroscientist or whatever, so you know, I'm going to automatically be good at this other thing.

We think that because we're really good in one thing, that skill must transfer to another thing, and especially in investing, people think, well, I'm a brain surgeon or I'm a neuroscientist or whatever, so you know, I'm going to automatically be good at this other thing.

But I give him the example. No one would if you had.

But I give him the example. No one would if you had.

You know, those movies where the pilots of the plane get some kind of stomach problem or whatever, and they get this, you know, incapacitated, and they ask for someone to come and fly the plane, and then a passenger lands the plane. I looked up to statistics. That has never happened, not one single time. And if you ask pilots what are the odds of that happening, they are zero. There is no chance of a person that's not trained to land it. But if you ask men could they do it? Fifty percent of all men say they could land that plane. Yeah, overconfidence and attribution error.

You know, those movies where the pilots of the plane get some kind of stomach problem or whatever, and they get this, you know, incapacitated, and they ask for someone to come and fly the plane, and then a passenger lands the plane. I looked up to statistics. That has never happened, not one single time. And if you ask pilots what are the odds of that happening, they are zero. There is no chance of a person that's not trained to land it. But if you ask men could they do it? Fifty percent of all men say they could land that plane. Yeah, overconfidence and attribution error.

And what about the necessary lie bias?

And what about the necessary lie bias?

Oh my gosh, this one has massive application, not only to investing. So it's the thing that you do, uh, before you do something that's imprudent. It's a lie that you tell yourself to allow you to do it even though you know you shouldn't. So it's like okay, for an alcoholic, well just won't one won't hurt, you know, one drink won't hurt. Or for a gambler and they're in Vegas, well they're down twenty thousand dollars, but I'll stop when I get I get I get even, or you know, fitness area. You know, I'll you know, I really want to lose thirty pounds, but that piece of looks really good.

Oh my gosh, this one has massive application, not only to investing. So it's the thing that you do, uh, before you do something that's imprudent. It's a lie that you tell yourself to allow you to do it even though you know you shouldn't. So it's like okay, for an alcoholic, well just won't one won't hurt, you know, one drink won't hurt. Or for a gambler and they're in Vegas, well they're down twenty thousand dollars, but I'll stop when I get I get I get even, or you know, fitness area. You know, I'll you know, I really want to lose thirty pounds, but that piece of looks really good.

I'll start my diet tomorrow.

I'll start my diet tomorrow.

So it allows a person to take an imprudent behavior and justify it with a lie.

So it allows a person to take an imprudent behavior and justify it with a lie.

And get away with it. Oh boy.

And get away with it. Oh boy.

And so we're yoked with all these biases. They steer our behavior. Even though we tend to think we're like mister Spock and Star Trek, we're not at all. And every bias comes with a story, right.

And so we're yoked with all these biases. They steer our behavior. Even though we tend to think we're like mister Spock and Star Trek, we're not at all. And every bias comes with a story, right.

Yeah, it all, It all comes with the story, you know.

Yeah, it all, It all comes with the story, you know.

It's it's it's interesting to watch people.

It's it's it's interesting to watch people.

One of the stories people have and it is the perception that they're in control of their thinking. And this is one of the exercises in the workshop. I write about on the book that we really don't have as much control as we think we do. And I got a lot of this from your book, you know, but for investors, they really feel like they have control.

One of the stories people have and it is the perception that they're in control of their thinking. And this is one of the exercises in the workshop. I write about on the book that we really don't have as much control as we think we do. And I got a lot of this from your book, you know, but for investors, they really feel like they have control.

And we do a couple exercises.

And we do a couple exercises.

One is, you know, for thirty seconds, close your eyes and don't think of anything, no self talk, no you know, And if people are honest, at the end of the thirty seconds, almost everybody has to raise their hand that you know, their internal internal voice came back. So I said, well, if you can't control even you can't even stop it. You're definitely not in control of that inner voice. And then it also shows up. It doesn't show up like a cheerleader when you wake up in the morning, I'm going to take on the.

One is, you know, for thirty seconds, close your eyes and don't think of anything, no self talk, no you know, And if people are honest, at the end of the thirty seconds, almost everybody has to raise their hand that you know, their internal internal voice came back. So I said, well, if you can't control even you can't even stop it. You're definitely not in control of that inner voice. And then it also shows up. It doesn't show up like a cheerleader when you wake up in the morning, I'm going to take on the.

Day and I'm going to create unbelievable things.

Day and I'm going to create unbelievable things.

It's more like e or oh no, another day, and I should work out, but it's raining.

It's more like e or oh no, another day, and I should work out, but it's raining.

I think we'll have a donut.

I think we'll have a donut.

So and then we talk to ourselves, and that's a bizarre thing in itself.

So and then we talk to ourselves, and that's a bizarre thing in itself.

We debate ourselves and talk to ourselves.

We debate ourselves and talk to ourselves.

Who's the person doing the talking and who's the person doing the listening. And so people they feel like they have all this control over their behavior and actions and investing, and the reality is they just don't.

Who's the person doing the talking and who's the person doing the listening. And so people they feel like they have all this control over their behavior and actions and investing, and the reality is they just don't.

Okay.

Okay.

So we talked about some biases, but even really basic stuff like how an investor understands what is meant by their average return? What's an example of the way that that gets manipulated.

So we talked about some biases, but even really basic stuff like how an investor understands what is meant by their average return? What's an example of the way that that gets manipulated.

First of all, most investors have no idea what they've actually earned or didn't earn over the last thirty years. The best way to cowlate a rate of return is time weighted and dollar weighted compound return.

First of all, most investors have no idea what they've actually earned or didn't earn over the last thirty years. The best way to cowlate a rate of return is time weighted and dollar weighted compound return.

And I don't expect anyone to understand any of that, but what I will say is that it's very easy.

And I don't expect anyone to understand any of that, but what I will say is that it's very easy.

To misunderstand your rate of return. So let's say you have an investment, because most people calculate their average rate of return.

To misunderstand your rate of return. So let's say you have an investment, because most people calculate their average rate of return.

So let's say you start with.

So let's say you start with.

One hundred thousand, and you get one hundred percent in one year, and it goes up to two hundred thousand, and then the next year you lose fifty percent and it goes back down to one hundred thousand. Well, the average rate of return is twenty five percent because you've got one hundred minus fifty, which leaves you fifty divided by two, which is twenty five percent.

One hundred thousand, and you get one hundred percent in one year, and it goes up to two hundred thousand, and then the next year you lose fifty percent and it goes back down to one hundred thousand. Well, the average rate of return is twenty five percent because you've got one hundred minus fifty, which leaves you fifty divided by two, which is twenty five percent.

But your real rate of return is zero.

But your real rate of return is zero.

And investors try to calculate their average rate of return, but it's widely inaccurate and so so that just leads to the overconfidence bias and all the other biases as well. But in addition to the biases, investors also have to deal with their instincts.

And investors try to calculate their average rate of return, but it's widely inaccurate and so so that just leads to the overconfidence bias and all the other biases as well. But in addition to the biases, investors also have to deal with their instincts.

And instincts are for in life.

And instincts are for in life.

A lot of times they give you great signals like if I'm out in the water and someone y'all's shark and my instinct is to go in, that's, you know, probably not a bad instinct. But they're driven by pleasure and pain. So some things are pleasurable, Like maybe I like chocolate covered peanuts, and if I have a small, little handful, fine, But if I eat all who half whole half pound bag of peanuts, bad news, chocolate covered peanuts, I'm gonna get fat on a cholesterol gonna you know, die eventually.

A lot of times they give you great signals like if I'm out in the water and someone y'all's shark and my instinct is to go in, that's, you know, probably not a bad instinct. But they're driven by pleasure and pain. So some things are pleasurable, Like maybe I like chocolate covered peanuts, and if I have a small, little handful, fine, But if I eat all who half whole half pound bag of peanuts, bad news, chocolate covered peanuts, I'm gonna get fat on a cholesterol gonna you know, die eventually.

Same thing with pain.

Same thing with pain.

Some you know, a lot of people will say exercise is painful, and maybe for some people it is, but it could also save your life.

Some you know, a lot of people will say exercise is painful, and maybe for some people it is, but it could also save your life.

Well, investing instincts are all always wrong.

Well, investing instincts are all always wrong.

When you lose some thirty percent in your equities, that's pain, and people want to leave, they want to run, they sell it, they go to whatever is high, and they're always doing the exact opposite of what they should do. They're chasing high returns, they're panicking when things go down, and so the instincts are deadly for investors and they run in the background and they don't even realize it's happening.

When you lose some thirty percent in your equities, that's pain, and people want to leave, they want to run, they sell it, they go to whatever is high, and they're always doing the exact opposite of what they should do. They're chasing high returns, they're panicking when things go down, and so the instincts are deadly for investors and they run in the background and they don't even realize it's happening.

So what did you learn from the academics about investing.

So what did you learn from the academics about investing.

The first thing I learned from the academics, and the only reason I was willing to accept what they had to say, was that I had done the speculating and gambling. I actually was part of the problem. I was with a broker dealer. They were telling me try to pick the best stocks. They were telling me they could time the market and get in and out. They were telling me they had these great managers that could beat the market. And I was investing my money that way, my family's money, my client's money, and it wasn't working. And I went to the broker dealer and I said, hey, this is broken. This is people are getting hurt. And the president of the broker dealer said, so what, just sell them something else.

The first thing I learned from the academics, and the only reason I was willing to accept what they had to say, was that I had done the speculating and gambling. I actually was part of the problem. I was with a broker dealer. They were telling me try to pick the best stocks. They were telling me they could time the market and get in and out. They were telling me they had these great managers that could beat the market. And I was investing my money that way, my family's money, my client's money, and it wasn't working. And I went to the broker dealer and I said, hey, this is broken. This is people are getting hurt. And the president of the broker dealer said, so what, just sell them something else.

What's your problem?

What's your problem?

So I heard a debate between Donald Jackman of five Star Money Management in Rex Singfeld, who had studied under Eugene Fama at the University of Chicago, who's now a Nobel Prize winner, and they taught me about.

So I heard a debate between Donald Jackman of five Star Money Management in Rex Singfeld, who had studied under Eugene Fama at the University of Chicago, who's now a Nobel Prize winner, and they taught me about.

Efficient market theory.

Efficient market theory.

An efficient market theory means that the returns don't come from great managers. The returns come from asset classes or categories based on the cost of capital, which means a company that is more risk long term should have a higher return because they have a higher cost of raising capital to fund their company. And so if you look historically, things like large stocks historically around ten percent, small stocks historically twelve percent, small value stocks fourteen percent. So the return comes from the market, not the manager. So the first job is to eliminate gambling and then focus on the academics to develop a portfolio with the highest expector return in the lowest amount of volatility. And David, I've I've been teaching financial advisors about this for thirty four years.

An efficient market theory means that the returns don't come from great managers. The returns come from asset classes or categories based on the cost of capital, which means a company that is more risk long term should have a higher return because they have a higher cost of raising capital to fund their company. And so if you look historically, things like large stocks historically around ten percent, small stocks historically twelve percent, small value stocks fourteen percent. So the return comes from the market, not the manager. So the first job is to eliminate gambling and then focus on the academics to develop a portfolio with the highest expector return in the lowest amount of volatility. And David, I've I've been teaching financial advisors about this for thirty four years.

And they still don't get it.

And they still don't get it.

And it's really it's a sad thing, and it's tragic because a lot of people say they do it, but then their own biases, the advisors biases, and their instincts and their emotions take over and it destroys the process.

And it's really it's a sad thing, and it's tragic because a lot of people say they do it, but then their own biases, the advisors biases, and their instincts and their emotions take over and it destroys the process.

Ough, So what are the lessons that come out of you look at all this stuff, the Nobel laureates and economic and the things they discover, the lessons they learn. How do you summarize all that?

Ough, So what are the lessons that come out of you look at all this stuff, the Nobel laureates and economic and the things they discover, the lessons they learn. How do you summarize all that?

The first thing is.

The first thing is.

Most people, the way they relate to their money, especially their portfolios, is through speculating and gambling, and they don't really mind because they don't really have a purpose for their money that they've acknowledged and they focus on. So in the lack of focusing on a purpose, the default position is just.

Most people, the way they relate to their money, especially their portfolios, is through speculating and gambling, and they don't really mind because they don't really have a purpose for their money that they've acknowledged and they focus on. So in the lack of focusing on a purpose, the default position is just.

Getting more money.

Getting more money.

Now, the problem with just getting more money is that just getting more money can't make you happy. As a matter of fact, as a practitioner working with thousands of people, actually getting more money can have the opposite effect. It creates more doubt, more fear, more responsibility, jealousy within the family, more stress and anxiety about how you're going to invest it or what you're gonna do with it. So money does not make you happy, and you can think about people like Howard Hughes and Elvis Presley and Marilyn Monroe. Obviously, money, power and fame doesn't equal happiness. And the reason it doesn't is because you might get that temporary thrill from that new car or that piece of jewelry or that new house, but it's temporary in nature and is not lasting. But that's what keeps people gambling with their money because they figure if they can take their million and turn it into two million, they'll all of a sudden be happy.

Now, the problem with just getting more money is that just getting more money can't make you happy. As a matter of fact, as a practitioner working with thousands of people, actually getting more money can have the opposite effect. It creates more doubt, more fear, more responsibility, jealousy within the family, more stress and anxiety about how you're going to invest it or what you're gonna do with it. So money does not make you happy, and you can think about people like Howard Hughes and Elvis Presley and Marilyn Monroe. Obviously, money, power and fame doesn't equal happiness. And the reason it doesn't is because you might get that temporary thrill from that new car or that piece of jewelry or that new house, but it's temporary in nature and is not lasting. But that's what keeps people gambling with their money because they figure if they can take their million and turn it into two million, they'll all of a sudden be happy.

Well, it's not true.

Well, it's not true.

And I discovered that when I was twenty seven working with investors. So I spend my whole life trying to help people build their money, and then the net result.

And I discovered that when I was twenty seven working with investors. So I spend my whole life trying to help people build their money, and then the net result.

Is no happiness. It's like, wow, this is darable.

Is no happiness. It's like, wow, this is darable.

So one of the things we do is we help people break through the no talk rule, because people have terrible shame and guild about money also, and they often learn the no talk rule about it from their parents, and so breaking through.

So one of the things we do is we help people break through the no talk rule, because people have terrible shame and guild about money also, and they often learn the no talk rule about it from their parents, and so breaking through.

That no talk deals the no talk rule is yeah, so the no talk.

That no talk deals the no talk rule is yeah, so the no talk.

Rule is that.

Rule is that.

And usually in families there's there's a no talk rule about the no talk rule.

And usually in families there's there's a no talk rule about the no talk rule.

Uh So, so.

Uh So, so.

You know, the next door neighbor gets a new car and Johnny says to Mom, well, I wonder how much that car cost. I'm gonna go ask them, And they're like, don't you do that. Don't you dare ask somebody what their car costs? You know, that's that's impolite, that's rude. We don't talk about stuff like that. And and so normally if you look at look at things that people won't talk about, it's usually because they feel shame and guilt around it. And so then there's this this this the stigma about talking about money, and it's very destructive. And people are taught that if you're going to invest, you do it alone, either isolated by yourself on a computer, or maybe just with one other advisor. It's never ever thought of, maybe we should do this as a community, have a class in training and workshop and people could talk about their life and their money and their experience, which I found is actually the most the most powerful way so the in the without a lack of purpose, then people are are thrown to investing, picking timing, and then today you have all these toxic investments like bitcoin that people get sucked into gambling with and they it in a lot of areas of life. You can make a single mistake if you've lost forty pounds and you go have a piece of cheesecake at dinner. Okay, fine, you're probably not going to have a heart attack that night. That's not how investing works. You can make one mistake on anyone given day and you can wipe out forty five years of hard work and investing. And that's what makes all these biases so critical. And if the instincts and the biases weren't enough then you also have to deal with emotion. So you have this cocktail of emotions, instincts, and biases whip sawing you all over the place as an investor with no academic understanding of how markets really work, and you.

You know, the next door neighbor gets a new car and Johnny says to Mom, well, I wonder how much that car cost. I'm gonna go ask them, And they're like, don't you do that. Don't you dare ask somebody what their car costs? You know, that's that's impolite, that's rude. We don't talk about stuff like that. And and so normally if you look at look at things that people won't talk about, it's usually because they feel shame and guilt around it. And so then there's this this this the stigma about talking about money, and it's very destructive. And people are taught that if you're going to invest, you do it alone, either isolated by yourself on a computer, or maybe just with one other advisor. It's never ever thought of, maybe we should do this as a community, have a class in training and workshop and people could talk about their life and their money and their experience, which I found is actually the most the most powerful way so the in the without a lack of purpose, then people are are thrown to investing, picking timing, and then today you have all these toxic investments like bitcoin that people get sucked into gambling with and they it in a lot of areas of life. You can make a single mistake if you've lost forty pounds and you go have a piece of cheesecake at dinner. Okay, fine, you're probably not going to have a heart attack that night. That's not how investing works. You can make one mistake on anyone given day and you can wipe out forty five years of hard work and investing. And that's what makes all these biases so critical. And if the instincts and the biases weren't enough then you also have to deal with emotion. So you have this cocktail of emotions, instincts, and biases whip sawing you all over the place as an investor with no academic understanding of how markets really work, and you.

Can see how it can be so dangerous for people.

Can see how it can be so dangerous for people.

Excellent, by the way, I think, I want to step back on one point though, What were the five discoveries that you were able to summarize that of.

Excellent, by the way, I think, I want to step back on one point though, What were the five discoveries that you were able to summarize that of.

All this, Yeah, so.

All this, Yeah, so.

Discovery number one. Stock picking in all of its forms is destructive behavior. Now, when I coach the coach people on this stuff, they have a massive amount of cognitive dissonance because they've been doing it for twenty or thirty years, so when they first hear it's jarring. So stock picking in all of its forms is destructive behavior. Market timing trying to get in and out of the market at the best timing. That's destructive behavior. It actually increases risk invariance in a portfolio. Track record investing trying to find the manager that beat the market in the past with the hopes that they'll continue to do it in the future. Destructive behavior for most experienced investors that have been around for a while. I have done one or more of these behaviors in the past, and left to my own devices, will repeat them without a disciplined discipline coach to help me through it. And then finally the Koudo gra I always tell people, if you can get this one, you automatically get the other ones. It is abjectly absurd to speculate and gamble with my money, especially once I've created a purpose that's greater than money itself. And those are the five discoveries from the academic research that I've been able to work with these researchers over the last thirty four years.

Discovery number one. Stock picking in all of its forms is destructive behavior. Now, when I coach the coach people on this stuff, they have a massive amount of cognitive dissonance because they've been doing it for twenty or thirty years, so when they first hear it's jarring. So stock picking in all of its forms is destructive behavior. Market timing trying to get in and out of the market at the best timing. That's destructive behavior. It actually increases risk invariance in a portfolio. Track record investing trying to find the manager that beat the market in the past with the hopes that they'll continue to do it in the future. Destructive behavior for most experienced investors that have been around for a while. I have done one or more of these behaviors in the past, and left to my own devices, will repeat them without a disciplined discipline coach to help me through it. And then finally the Koudo gra I always tell people, if you can get this one, you automatically get the other ones. It is abjectly absurd to speculate and gamble with my money, especially once I've created a purpose that's greater than money itself. And those are the five discoveries from the academic research that I've been able to work with these researchers over the last thirty four years.

You talked about this thing where you ask people to pick three stocks that they want to invest in, So tell us about that.

You talked about this thing where you ask people to pick three stocks that they want to invest in, So tell us about that.

So in the class, I was trying to think of away, because you go through these biases, and we have exercises and we take people through the biases and the emotions and the instincts and the whole thing, say familiarity bias, size bias, hindsight bias, hurting bias. And I was trying to think, how can I have an example of this working. So I have people write down three stocks, write down three stocks, and then I and then I have them stand up and I read off the five biggest stocks Amazon, Tesla, Meta, Facebook.

So in the class, I was trying to think of away, because you go through these biases, and we have exercises and we take people through the biases and the emotions and the instincts and the whole thing, say familiarity bias, size bias, hindsight bias, hurting bias. And I was trying to think, how can I have an example of this working. So I have people write down three stocks, write down three stocks, and then I and then I have them stand up and I read off the five biggest stocks Amazon, Tesla, Meta, Facebook.

In NA video.

In NA video.

And when I'm done reading off the list of the biggest five, ninety five percent of the people are standing.

And when I'm done reading off the list of the biggest five, ninety five percent of the people are standing.

And I said, guys, I just went over there. There are over twenty thousand stocks in the US market. You could buy.

And I said, guys, I just went over there. There are over twenty thousand stocks in the US market. You could buy.

Twenty thousand, and you guys still picked the top only five. And I tell them it's because you didn't pick the stocks. The stocks picked you through your screens and your biases. All you could see, even though I spent a day and a half.

Twenty thousand, and you guys still picked the top only five. And I tell them it's because you didn't pick the stocks. The stocks picked you through your screens and your biases. All you could see, even though I spent a day and a half.

Teaching you about this stuff, you.

Teaching you about this stuff, you.

Still picked the biggest ones you're the most familiar with that are hurting and everybody else is doing the exact same thing.

Still picked the biggest ones you're the most familiar with that are hurting and everybody else is doing the exact same thing.

Right. But now, why is that a problem?

Right. But now, why is that a problem?

Because you might say, look, you know what's the problem with hurting if I go for this big stock.

Because you might say, look, you know what's the problem with hurting if I go for this big stock.

Yeah, the problem is you're not diversified.

Yeah, the problem is you're not diversified.

And when we analyze portfolios, I call them Frankenstein portfolios. They might have an index fun here and there, then they have some active managers and then they're loaded up on those.

And when we analyze portfolios, I call them Frankenstein portfolios. They might have an index fun here and there, then they have some active managers and then they're loaded up on those.

Top five stocks.

Top five stocks.

And the problem is number Since we discussed that number one, any company can fail. I remember two thousand and eight to two thousand and nine, trillions of dollars disappeared in companies like Enron, WorldCom. Everybody had all their money in those big companies. They thought they were a bulletproof. Even GM went bankrupt in two thousand and eight. In two thousand and nine, so you know, the problem is you have massive amounts of risk without any expected additional return versus for that part of your portfolio. Maybe you're gonna put fifteen percent in large companies. You could just own the S and P five hundred and I'll own all five hundred, not you know, playing Russian roulette by picking out just five and so the damage is, you know, like like Newton and showing this. Newton thought he had it figure it out too. He was stock picking, he was market timing, he was tracked record investing. And I don't think anybody in my class is smarter than Newton.

And the problem is number Since we discussed that number one, any company can fail. I remember two thousand and eight to two thousand and nine, trillions of dollars disappeared in companies like Enron, WorldCom. Everybody had all their money in those big companies. They thought they were a bulletproof. Even GM went bankrupt in two thousand and eight. In two thousand and nine, so you know, the problem is you have massive amounts of risk without any expected additional return versus for that part of your portfolio. Maybe you're gonna put fifteen percent in large companies. You could just own the S and P five hundred and I'll own all five hundred, not you know, playing Russian roulette by picking out just five and so the damage is, you know, like like Newton and showing this. Newton thought he had it figure it out too. He was stock picking, he was market timing, he was tracked record investing. And I don't think anybody in my class is smarter than Newton.

But it's more than that, isn't it, Because the return on those big stocks is much less than the return on other stocks in the market as well. Right In other words, once you know, hey, everyone's talking about X, and you buy it, then it's then it's too late already.

But it's more than that, isn't it, Because the return on those big stocks is much less than the return on other stocks in the market as well. Right In other words, once you know, hey, everyone's talking about X, and you buy it, then it's then it's too late already.

Yeah, if you look at let's say that you loaded up on seven. They call it the Magnificent seven, and you're referring to a graph in the book. It says, well, okay, these magnificent seven in hindsight, which you can't go back in a time machine and buy now. In hindsight, they made twenty two percent higher return than the market hypothetically over the last three years. So everybody is based on recency bias. Another one we didn't talk about yet. Based on the recent performance just over the last three years, everybody extrapolates that out and says, oh, they're going to continue to beat the market the way they have over the last three years. But the graph in the book shows that on average over the next ten years, those stocks that got hot underperform the market dramatically over the next ten years. So that three year you can't go back at a time machine and buy those three years, and if you chase those returns, chances are you'll dramatically underperform the market.

Yeah, if you look at let's say that you loaded up on seven. They call it the Magnificent seven, and you're referring to a graph in the book. It says, well, okay, these magnificent seven in hindsight, which you can't go back in a time machine and buy now. In hindsight, they made twenty two percent higher return than the market hypothetically over the last three years. So everybody is based on recency bias. Another one we didn't talk about yet. Based on the recent performance just over the last three years, everybody extrapolates that out and says, oh, they're going to continue to beat the market the way they have over the last three years. But the graph in the book shows that on average over the next ten years, those stocks that got hot underperform the market dramatically over the next ten years. So that three year you can't go back at a time machine and buy those three years, and if you chase those returns, chances are you'll dramatically underperform the market.

So tell us about the importance of decision control systems.

So tell us about the importance of decision control systems.

We talk about algorithms, and you can have an algorithm of how to take all this academic information and build portfolios and that's absolutely required. And in addition to that, most people don't think of algorithms as something that control human behavior. But if you only have one piece of the pie, you can have a great engineered portfolio, just like you could have a great engineer diet, or you could have a great engineered workout program. But if you don't have the decision control system that then helps you stay committed to that process and discipline over long periods of time, it'll fail every single time. So you have to have a way to manage your own behavior because investing is so easy to destroy the behavior. Even if I gave you the perfect mix of the portfolio and you went online you bought the mix of the assets. Right next to that perfect portfolio is a button that you can click on on your cell phone to sell it and destroy it or add garbage to it like bitcoin or gold er, you know, some exotic new thing that comes out. So it is critical to have a decision control system to manage and control for human behavior. And without that, I've discovered over the last forty years the process almost always fails. So what is your decision control system? So first of all, I have to I have to my wife or mind's myths not always easy for me. I have to be humble, and I have to recognize what I can do and what I can't do, and not live in a fantasy world where I think I can predict the future. So I have to have people like Eugene Fauma and Nobel Prize winner and Harry Markowitz, people like you that remind me that I'm limited in my human behavior and that my instincts and emotions could take over unless I protect against it. So I defer to the academics, and I defer to proof, scientific proof, and then I have to stay disciplined no matter what. Two thousand and eight, two thousand and nine, the S and P drop fifty percent, and investors were begging sell, sell, sell, get me out, get me out. It would be easy to cave in for a money manager. I've seen sow many that did it, to cave into what the investor wanted at the time. But we get paid to keep people disciplined, not to cave into their instincts, emotions and biases, staying true to that. And then for the investor and the advisors, you have to create education, workshops, exercises.