Stig Brodersen  6:03  

Yeah and it was really interesting, Preston. They were talking about the compounding effect because that’s really something that’s important here because these kids go back, perhaps, to the local club, and then they get elected to the A-team next time. And then they’ll have, as Preston was saying, better coaches, better teammates. So it’s really a compounding effect. 

It just keeps going on. And these guys, they’re getting better and better actually, regardless of their birthday. But it is the birthday that initially sets the standard for them to be able to have all these privileges.

Preston Pysh  6:40  

You know, it’s funny, I talked to my sister offline about this. And she says, Yeah, Preston. It’s crazy. The people up here, they literally time their kids’ births, so that they can have one of those advantageous birthdays if they have a boy for hockey. 

Stig Brodersen  6:55  

Really?

Preston Pysh  6:56  

Yes, absolutely. That’s what she said. So for like the hardcore hockey parents up there that are trying to get their kids to be great hockey players, they actually time their births up there. Now, what was really interesting at this point is, Gladwell took that example, the hockey players and how they had this advantage, and he applied it to academia. And he gave this example, he showed through statistics, with test scores, standardized test scores that kids that are earlier in their age group…here in America, you typically start school around like the August timeframe. 

And as far as the birthday goes, it’s typically the cutoff for the birthdays around, maybe call it, October. Or maybe a month earlier, September. And so he said, that these kids that were earlier and had more development early on, so a September, October, November baby versus [a baby] born at the end of the school year, call it May or June or something like that. Those kids that were [born] earlier had higher test scores. And I think the percent was 10%. 14%? Stig, do you remember what the number was? 

Stig Brodersen  8:03  

No. But it was quite significant.

Preston Pysh  8:04  

Yeah, it was significant. And so he showed that early on. That was the percent that they scored better on their tests. But then he continued it to high school and into college, and the number persisted. And so, I found that absolutely fascinating. And it’s just really interesting that something that is just as basic as your birthdate could have an impact on you becoming an outlier and maybe whatever it is you’re doing. So go ahead, Stig. 

Stig Brodersen  8:32  

Yeah. I just have a funny story here. I read this book, like January, so I just had the expense of my students and I think I gave away like six or seven days. And the first student I met just after reading the section, I just asked him, So Thomas, when’s your birthday? He was like, well, January 13. I mean, it’s completely unscientific. But it was just a good story.

Preston Pysh  8:59  

That’s one day after my birthday. Alright. So okay, we’re going to go to the next section here. So that was the first thing that he talked about in the book. So then he goes into the next point. I really like this. Probably, the most out of the entire book–the point that he was making here. And he’s talking about hard work. And what he talks about is this idea of this 10,000-hour rule. And just for anybody who’s trying to wonder, how long would it take for me to do something for 10,000 hours? 

And so he says that if you do something for 20 hours a week for 10 years, that’s 10,000 hours. So for people that are working a 40-hour a week job, whatever that task might be, if you do that for five years, you’ve pretty much hit your 10,000-hour mark. 

And he says that whenever you hit…I think he got this from a guy named Anders Ericsson, who’s Swedish. And he did some extensive research on this 10,000-hour rule. But in the book, he talks about how once you hit this 10,000-hour mark, you basically become an expert in whatever it is that you’re doing. 

So whenever I first started flying… I don’t know if people out there know but I used to be a pilot, a military pilot. And whenever I went through flight school, it took a long time to get a lot of flight hours. It takes a very long time. My total flight time is probably a little over 1100 hours. That’s all the more flight time I have. So I’m definitely not an expert. I’m about 10% of this 10,000-hour rule. 

But I remember distinctly, my flight instructor, when I was first trying to learn how to fly, he had 20,000 hours in a helicopter. And it was just amazing how much experience this guy has. When you figure out how much time that is, that’s almost like the guy took off and he flew for two years straight. So he was a phenomenal pilot. I got into some one emergency situation we had where he handled it like a pro and turned her and swept the helicopter around. We came flying down and just skidded across this runway with sparks flying off the skids at the bottom. It was amazing. But because he was so experienced, he was able to control the helicopter in just an amazing way because he broke the 10,000-hour rule by double. 

And so, it is really an interesting point that he throws out this number. And then he gives examples of different people that have hit this 10,000-hour mark. So one of the examples he throws out there, the first one was the Beatles. He talks about how the Beatles moved to Germany early on from 1960 to 1964. And they played over 1200 times. They played 1200 gigs between that timeframe. 

And so he says they hit the 10,000-hour mark before they went back to the UK and became the enormous success that they’ve become. And so, just for people to kind of understand that’s four nights a week for five years straight, playing a band gig. And for anyone that plays in a band, they know that that’s a pretty intense amount of playing. So Stig, I’m gonna let you go ahead and take the next one pertaining to this 10,000-hour rule.

Stig Brodersen  12:03  

Yeah, and that was Bill Gates. I was really psyched when Gladwell introduced Bill Gates because I thought, well then now, I’m going to hear the story of Microsoft. I only love fractions of the story of Microsoft. But what’s actually interesting was that Gladwell ended his story almost before it began. Because he was talking about the very early years of Bill Gates. He was saying that the whole reason that Microsoft was ever able to occur, was that Bill Gates had some huge advantages that very few other people had at that time. So he had access to programming. 

And I don’t know if you can compare this to like the access to flying an aircraft, for instance. But very few people at that time had access to computers, because they were very, very expensive. Preston, I’ll probably imagine that it’s pretty expensive to have access to an aircraft, and you can just fly whenever you want.

Preston Pysh  13:01  

Oh, yeah. Very. Thousands of dollars an hour.

Stig Brodersen  13:05  

Yeah. But Bill Gates, he was very fortunate. And I think last, he introduces 9 or 10 different reasons why Bill Gates was so lucky. When he was born, that was extremely important. He was born at an age where he had the chance before. He went to college before he started business where he could put in a lot of hours to learn how to program. I mean, that was one thing he was born when there actually were computers. And he wasn’t that all that he had a wife and kids and a job when computers came out. Preston, I see you have something.

Preston Pysh  13:44  

Yeah, so the thing that was really interesting about the Bill Gates piece is this was at a transitory time in computing where you used to have to use punch cards. So if you wrote a computer program, you have to make these punch cards. I’m of a younger generation so I didn’t have to deal with punch cards ever, whenever I was learning how to program. But whenever you had to use punch cards, my understanding is that you build the deck and then you’d have to wait to have access to some type of computer that could then run the program and tell you whether it had bugs or it worked. 

And so that time in between making sure that your punch cards were complete to gaining that access to the computer, there was an enormous amount of delay that you had to wait around for that to happen. But Bill Gates at the age of 13, he was one of the only kids on the planet that had access to a computer that wasn’t based on punch cards. He actually could run a program on the actual operating system of the computer. And he was able to troubleshoot his programs, that if something was wrong, he could just go back, amend the code, and then run it again virtually on the computer. 

He wasn’t dealing with these punch cards. And he was doing this at an age that no one else had this kind of access through his school computer. He was able to garner up this 10,000 hours at a young age, which I think is very instrumental as well, because if you’re doing something at that young age, you’re just going to have such a greater understanding of it, self discovery, and some other stuff that we’ll talk about later in the book. But he was able to accumulate this 10,000 hours really fast and at a very young age, and it just put him on a completely different path than anybody else out there.

Stig Brodersen  15:23  

Yeah, and there are many reasons why Bill Gates was so fortunate. He actually said that to Gladwell when he was writing this book, that he was probably 1 in 50 kids on the planet that had these opportunities. So Bill Gates knows that he was, you know, somewhat lucky. And the other thing as well, for instance, at the University of Washington, he lived very close–he actually lived in walking distance. 

And so while the rest of the country didn’t have the option to to learn how to program, he actually could have put in, as Preston was saying, like endless hours. And that meant that he had put in 10,000 hours before you saw the whole boom with computers. So, when everyone else was learning how to program, Bill Gates was already starting Microsoft. And he had 10,000 hours, perhaps, one of 50 kids in the world that had the privilege at that time. 

So, another thing that I wanted to point out was that, Gladwell, he’s not saying that Bill Gates was just lucky. He’s saying, I do acknowledge that Bill Gates is this a fantastic person, he is extremely hardworking. And he acknowledged that, for instance, Bill was extremely hardworking, very talented, but he could not have had the same success if he hadn’t been, say, lucky or had the opportunities that very few other people had.

Preston Pysh  16:47  

And that’s really the premise of the book, folks. So, if you look at the fact that the opportunity was presented, which was Bill Gates having this computer, then Bill Gates actually having the initiative and the drive to put the 10,000 hours into the computer and to learn, his initiative, his desire, and his drive was what truly separated and made him the outlier. Then I mean, you’re not even talking about his drive when he started Microsoft and going toe-to-toe with all the different competitors, and blah, blah, blah, blah, blah. 

But the fact of the matter, it was a great story to kind of outline that point. So, let’s go ahead and talk about the next one, which I really like too because this was kind of fun to see somebody debunk this, finally. And what we’re talking about is the IQ test. 

So, when you look at somebody like Einstein, he has an IQ on record of around 150, somewhere around that point. And so, what Gladwell does in the book is he talks about this gentleman named Chris Langan, and Chris Langan’s IQ is 195. 

And so, when you see somebody with such an enormous IQ, you would think, well, that person just has to be successful. They have to be way out in front of everybody else in a performance, in a success standpoint, because they’re so smart. But what’s really neat is Gladwell goes back to the study, I think this study happened, what? Back in the 1920s, or 30s Stig, do you remember within *inaudible* was?

Stig Brodersen  18:13  

Yes, seems about right.

Preston Pysh  18:14  

But there was a study done in the US where this psychologist found a collection of kids across the US at a young age that had very high IQ. And what he did is he tracked these kids to see how many of them are going to become ultra successful in the United States. And what he found after they became adults, and he tracked them for… I mean, this is over decades that this study took place. He found that there was no major outlying factor for these kids that had super high IQs. And so, it made Gladwell really kind of start digging into this and studying this more. 

And so, what he did is he talked about how there’s a barrier, and once you get past this barrier, let’s call it an IQ of 120, you have to have an IQ of somewhere around that point where once you get over it, it’s like a hurdle. Once you get over it, you’re in the clear. 

And then there’s other factors that apply after that IQ hurdle is reached. And so, one of the factors that he talks about, I really like this, was he talks about a test that he had that was called creative intelligence. 

And so, what he talks about is the school that he went to. They got somebody that had a really high IQ score versus somebody that had a high enough, if you will, IQ score, and gave both of these guys this creative intelligence test. 

The creative intelligence test is called the brick and blanket test. And what they do is, they tell the kids, Hey, here’s a sheet of paper and here’s a pencil. What I want you to do is, I want you to write as many uses that you can think of for a brick and a blanket. And so, they gave it to the kid with a really ultra high IQ, and then they gave it to the kid who had a high enough IQ. 

And what they found or the differences that these kids were writing for the uses of a brick and a blanket were just tremendously different. So the kid with a really high IQ, he had very logical uses for each of those items. So like the brick, he said, “You could build a building with a brick. You could make a floor with a brick. You could pave a street with a brick, and so on and so forth.” 

But then, the kid who had a high enough IQ, he had things down there like you could throw a brick through a store window and vandalize the store. And he just came up with these ridiculous ideas for the brick. But he also had some normal ones in there like you could build a building. 

And so, what they’re saying is that, this creative test identifies other areas of creativity within the person. And he talks about some of the most successful people in the world don’t necessarily have the highest IQ, but they’re very balanced in their intelligence.

So, they have Creative Intelligence. They have Critical Thinking Intelligence. They have this intelligence where they can solve these random problems that you see on an IQ test. The IQ test is just a sliver of the overall person and the balance of the person’s skill sets. 

And so, Gladwell talks about it in the book. He goes to different Ivy League schools because people that do well on the SATs are typically the ones that go to the best Ivy League schools. He basically shows that when you look at the overall CEOs in America and the people that are ultra successful from using that as a measurement of success, he sees that the schools are really spread across. There’s really no Ivy League advantage when you look at it from a numbers standpoint. 

And the reason he throws this out there is because he ties it back to this IQ test. You don’t have to necessarily score ultra high in your SAT test in order to become an ultra successful person because it’s based on more factors than knowing some analogy on the test. I totally agree with this. And just really, it was nice to see somebody back all this up and facts and with statistics. 

All right, so really, that kind of completes the first half of the book, which was about Opportunity, where he talks about these different factors like the 10,000-hour rule, the IQ test, and just having an advantage with your birthdate, and things like that. And then, he starts talking about Legacy. What I really took away from this part, the second part of the book, which honestly, I didn’t really care for the second part as much as I liked the first part of the book. 

But he talks about how culture impacts people’s ability to achieve and their ability to become an outlier. And so, one of the cultures that he talks a lot about in the book is the Asian culture. So he talks about why are… and it’s kind of interesting the way he brought this up, why are Asians so good at math?

The way he approaches this problem was quite unique. He goes back and studies the culture, the Asian culture, and what he finds is that the Asian culture is typically a rice-based agriculture setting where individuals go out to work in the rice fields early on. You go back hundreds of years and most of the people worked in rice fields. And so then, he starts trying to understand, well, what does that mean? 

So when he does that, he sees that whenever you compare a rice field compared to what you find here in the United States or over in Europe where most of the agriculture is wheat, and corn, he finds that the labor involved in a rice field is 10 to 20 times more intensive labor than working in a corn or wheat field. 

And he says that this culture has been ingrained in the Asian culture–that hard work and working very long hours continuously, day after day, provides an enormous advantage over a culture where they’re not accustomed to working those kind of hard hours. 

And so, he is essentially connecting a to b by saying, because of this culture of hard work and drive to perform, that’s one of the main reasons why Asians typically tend to do a lot better in mathematics and education in general. So go ahead, Stig.

Stig Brodersen  24:19  

Yeah. I think that the key word here is really persistency because he’s talking about math not being a talent. Math is an ability that’s a skill that you can acquire. And he has a lot of great examples with this. But basically, he also studies cultures. And he is asking students in different countries, how much time do they spend on solving a math problem without getting any help. 

And it turns out that in some countries, for instance, like in Korea, Singapore, or other rice-based agricultural countries, kids are just more willing to put in the time and effort to solve these problems. That’s why, at least according to Gladwell, they have advanced math. That’s actually because they are persistent. And the reason for that is their legacy.

Preston Pysh  25:09  

So the next one that Gladwell talks about, is this idea of how culture is potentially impacted airline crashes. So I’m going to have Stig introduce this one and just kind of talk through it.

Stig Brodersen  25:20  

Yeah, I think there was this really interesting thing. We’re talking about what we call, power distance. And just really short, power distance, that is how we work with authorities. So for instance, you have a country like Denmark. I think Denmark was a top of the list or bottom of the list, if you want, because the power distance in Denmark where I’m from is really, really low. So, everybody sees himself as equal. 

So, if you have a boss, even though your boss is still your boss, you feel like you can talk to your boss and see him as an equal. Now this is very different, for instance, in South Korea. In Korea, you can actually speak up to four different forms. So you can be very polite, you can be extremely polite when you’re talking to superiors. And this actually turned out to be a huge problem when you’re sitting in the cockpit. And especially in situations where, for instance, you’re about to crash. 

So for instance in Denmark, not really to emphasize too much on that, but if you have a co-pilot in Denmark, he would just say to the captain, Dude, what’s going on? We are crashing, you’re making all these mistakes, more or less. But in South Korea it’s really, really hard because you have to be extremely polite. You cannot tell it directly to the captain. You have to give him hints that the plane is about to crash. And that was actually one of the main reasons why you saw so many crashing in South Korea. And Preston is laughing for some reason right now. It’s nice to hear what he has to say.

Preston Pysh  26:56  

Well, no. You’re exactly right. I mean, flying around with a fellow American in a helicopter, if you’re making a mistake it’s like, “Hey, man! Look up, dude. What’s going wrong? What are you doing?” Your explanation was spot on. It’s like, “Hey, look at your 12 o’clock or you’re flying in the wrong direction, or whatever.” And it’s so true. It’s real casual. 

If you’re making a mistake, even though I might outrank the person I’m flying with or vice versa, you feel comfortable just stating what’s going wrong. Whereas in another culture, it’s definitely different, especially in South Korea. I lived in South Korea for two years. 

In fact, I flew in South Korea for two years. And I’ll tell you, I was trying to learn the language and what you’re talking about, these different forms. I would be taught a certain way to say something for maybe, a younger generation. And then, when I would be around somebody who was of a much older generation, and I say that phrase, they would be just very frustrated and look at me very annoyed because I was saying it very casually or it wasn’t in a formal tense. 

And so, little things like that. I mean, it is a very formal country in the way they approach their elders. And so, that has advantages and disadvantages depending on how it’s approached and how it’s actually utilized. 

For pilots flying in a commercial airline, as they’re going on an approach with an instrument landing and the clouds are really low, they gave this example in the book, when you have people in the back that can’t just say, “Hey, we’re going to crash if you don’t pull out of this and do a go-around.” That’s an issue. 

And he talks about how the retraining has occurred and how they’ve brought this up to their culture and how they’ve had to adapt and realize that people in the back and their co-pilots and assistants need to be in a position where they feel comfortable, and that they can address these problems so that they don’t kill hundreds of people on board an aircraft. Go ahead, Stig.

Stig Brodersen  28:48  

Yeah. And actually because today, Korean Airlines is a great company. They don’t have any crashes or they hardly have any crashes. But one thing that was extremely important for them to do [was] to avoid the language, [which is] now English. It’s not Korean anymore. I mean, even though you can speak polite English, we don’t have four different forms, luckily. 

Otherwise, I mean, they won’t learn the language, I guess. But the pilots now in between have to speak to each other in English. And that’s really different from when you have to be extremely polite and only give hints to the captain what’s about to happen. So that was just something that I found really interesting. 

And actually what Gladwell was doing was that he was looking back at plane crashes, and he had been listening to the recordings of these plane crashes. And you can actually see, for instance, in the Korean culture and the Colombian culture where they have this wide power distance that just before a crash, probably contra to what would happen if they had crashes in Preston’s aircraft or in the American military, but they were talking about, I think Gladwell said, hurt feelings. Like, why did you talk to me like that? Is he now mad at me? Because when push comes to shove, people just tend to fall back on the cultural legacy.

Preston Pysh  30:15  

Yeah, it’s happening and people aren’t even thinking about it. That’s the thing, especially in a cockpit setting. And I think even with them practicing, and I think it’s still difficult, growing up in that kind of culture and being able to quickly adapt to that. And just so people know, the aviation community is all English. So if you make a radio call, if you’re flying in South Korea, and you make a radio call, it’s all in English. 

Everything’s in English across the entire world whenever you’re flying. Just as an FYI. So, I think we’re going to skip the last point here. We’re just going to conclude this and just talk about the ‘So what?’. And that’s the big point. So we’re talking about all these really kind of neat and interesting ideas that we pulled out of this book. But, so what? okay, and that’s the part we need to answer for you. 

So I think the first thing when you talk about ‘so what?’ is that if you want to be an outlier, you want to become an outlier in whatever field that you’re doing, it takes hard work. I think that the first thing I took away is this 10,000 hour rule. And I think what we’ll do in the show notes is we’ll provide a link to some of the studies that we saw from Anders Ericsson. We’ll put that in the show notes. 

So if you want to read more about this 10,000-hour rule, you can. But it all comes down to hard work and putting in the hours and staying dedicated and persistent to whatever it is that you’re trying to accomplish. That’s first and foremost. That’s the ‘so what?’ I got up. The second thing is, it talks about how I guess, what are the advantages and disadvantages that I have, and the opportunities that I have at my feet today. 

So if you’re a person, and you’re trying to play hockey, and you were born in December, that’s probably one of your disadvantages. If you were born in January, that could be your advantage. And for each person, it’s different. 

But I would tell you, there are advantages in your life right now that you can capture. You just got to figure out what they are. Because no one’s going to come along and tell you what they are. You’ve got to know inherently what are those advantages. When I look at Stig and I’s podcast and our YouTube channel and different things like that, I think we have an advantage because we got into this stuff at a critical point, when it started to become popular. 

When you look 20 years from now, it’s going to be very hard for a young kid to start a YouTube channel and talk about investing and compete with somebody that’s had 20 years worth of views. I think that’s an advantage we have. And I’m just throwing that out there to not boast about it. I’m throwing it out there to talk about how I would take away the principles in this book for my own life. 

Ask yourself that hard question: What are the things that are right at your feet today that are big opportunities for you? And how can you capitalize on them? And then how can you funnel your hard work into that opportunity?

Stig Brodersen  32:53  

Yeah, I think that’s a great point. And I’m really happy to set the whole thing about 10,000 hours because we’re not stopped listening to the book. You know, the one thing that struck my mind was that, sometimes the world is just unfair. But that should never be an excuse. And I would just hate if you read this book and you’re saying, “Well, I’m born in December. I’m probably not going to be successful. That’s probably why I don’t get good grades. That’s probably why I don’t get picked for the A-team in hockey or soccer, whatever it is.”

But that’s not the reason why. I mean, the reason is probably that you don’t work hard enough. And I know it seems hard for me to say so. But it comes down to you. And yes, it is true that you can have great opportunities if you could come from a wealthy family. There’s a lot of things there. But at least in my opinion, it comes down to putting in the time and effort than anyone else would do. And so, I think that is the most important thing to take away from this book.

Preston Pysh  33:58  

As you look at those opportunities and disadvantages, be careful what you look for because you’re going to find it. So if you’re looking for disadvantages, you’re going to find disadvantages. If you’re looking for all the advantages you have, you’re going to find the advantages. So look. Be careful what you choose to look for because you are going to find it. So that’s the last thing I guess I’ll say. Okay, so this is the point in the show where we’re going to transition into one of the questions from our audience. And this week, it comes from Michael Brown. So here’s this question.

Mike Brown  34:22  

Hey Preston and Stig. This is Mike Brown from California. I love your show from my 45-minute drive to school. What I was wondering is, what would you guys recommend for a college student who doesn’t have any income coming in but has money saved? Also, would you recommend investing a small amount of money because time is on our side, for the young generation? So thank you and I love you guys and the show. 

Preston Pysh  34:50  

All right, Mike. One of the pitfalls that I think a lot of college students get into is they start listening to shows like this and they hear about the proactive way to make money, which is investing and to earn more. But the part of the equation that a lot of students forget is that if they can just minimize their debt and try to control that as much as possible, that’s a form of investing, in my opinion, because you’re preventing yourself from having these huge debts and liabilities that you have to pay off later on. So I would tell you to actually focus more on your spending and cutting that back as much as possible. I mean, you got to keep it within means. You got to be realistic. Don’t go crazy. 

But I think if you focus on that first until you do have a stream of revenue that you can invest, that’s probably going to be the smarter thing that you can do. So I would focus more on, “Hey, are there any scholarships I can apply for? How can I get assisted funding for my college?” Those kinds of things I think are probably the smartest decisions that college students can make. 

And the other important thing that you can do is compound your knowledge–continue to study what to do whenever the opportunity does present itself that you will have income to invest. But I think investing a couple hundred dollars here and there, that’s probably going to be more of a distraction from the stuff that you really need to be focusing on.

Stig Brodersen  36:15  

So, Michael, I really like this question. And I get this question a lot, I have to say. And really love this question because that really means that my students are thinking about what they are doing with their life. I would say, when I’m asked as you are, should I invest even though I don’t have any income coming in, but I have a little capital, I would say that you should. And this is not to contradict with what Preston is saying that sometimes investing can be a distraction. But I think that investing is really, I mean, if you put in your own money, it’s a really good way of learning. So you learn a lot when you invest with your own money.

So, let me just give you an example. Say that you have $500. Now, that might not seem like a whole lot of money to a lot of people, but if that is the capital that you have, then it’s a lot of money. So that means that when you start picking stocks, you will have to be really, really sure that you’re picking the right stocks. So the whole process you’re going into in terms of understanding stocks, understanding how to do the whole research, it really doesn’t matter whether or not that’s $500 or $10,000, because the process is the same. 

And the thing that Preston said about compounding knowledge, and I think that that’s probably the most important thing. And if you all [are] like some of my students, you might be saying, “Well, I’m already studying 8 hours a day. Why should I put in more time in accumulating my knowledge? Isn’t it enough that I study 8 hours a day?”

Perhaps, I’ve been studying business and I’m getting smarter, so why should I study even more? Now, this might just be my personal rant or perhaps, it’s just me who can’t read the labor from inside the box. But I think that the problem with the education system, and especially for college is it has 2 flaws. First of all, it’s focused on exams. And when something is focused on exams, it’s actually not always focused on business. 

The other thing is that it’s focused on you being an employee. So you have business courses where you learn to go to exams, and you have business courses where you learn to be an employee. If you truly are an investor, you need to learn how to be in the driver’s seat. You need to think as an owner. And I think that is knowledge that’s really hard to get. 

In college, to be honest, I think that’s the book that you’re reading on your own. That is the mentor that you are seeking. That is the knowledge that you acquire for yourself. So some Michael, I’m really, really sorry. I just went out of this tangent here, but it’s really a question I’m very passionate about, and I get a lot and really enjoy. Preston, I see you have some things.

Preston Pysh  39:04  

Stig, that is a fantastic point. And I think that, Mohnish Pabrai has a quote talking about, ‘I’m a better investor because I’m a business owner and I’m a better business owner because I’m an investor.’ And it’s exactly what you’re talking about. You got to think like an owner to be a fantastic investor. 

One of the things that I want to highlight about the difference of my opinion with Stig…I totally agree with what Stig is saying, that you should get involved in the market, even if you have a couple hundred dollars with the respect that you do it with not using up a lot of your time. 

Okay, you do it until you have some experience in it. But my concern is, I think a lot of people that might have a couple hundred dollars, they would invest tens of hundreds of hours in the stock market early on, when they could have been using that time to apply for a scholarship that would have put $1,000 or $5,000 in their pocket. 

I totally agree with Stig. You should be doing a little bit of it, but you need to be mindful of the time that you’re putting into things that are going to put dollars into your pocket. So, you spend 2 hours applying for a scholarship. You make $5,000. I think that’s a better investment of your time. Just my personal opinion.

Stig Brodersen  40:16  

Yeah. And Michael, I wouldn’t worry at all about accumulating capital because when you accumulate your knowledge, accumulated capital is really just a byproduct of that. And I think that that’s something a lot of college students, perhaps, that’s a part they’re missing. Because they’re thinking, I want to be wealthy, I want to be the next Warren Buffett, so I need to earn a lot of money. No. I think, say, that you look the other way around, you need to be really smart. And when you are smart it’s really easy to make a lot of money.

Preston Pysh  40:48  

Yeah, that is so true. You know, that people think that they have to have something tangible in their hand. But if you can accumulate and amass knowledge, and you can organize that knowledge in a manner that is useful to you. That’s the important part. The dollars, it’s almost like they have to start materializing out of that intangible form into a tangible form for you. I know that sounds kind of weird but the importance of compounding your knowledge and making it applicable and applying it is the key point. 

So, there’s one other thing that I want to talk about and it doesn’t have to do with this question. It has to do with something that we talk about a lot on the forum, this deleveraging situation. So I’m getting a lot of questions right now. A lot of questions with people saying, Hey, I know the markets overvalued, I’m concerned. What do I do with my money? Do I sell some of the stocks that I currently have? Because you and Stig are always saying to not sell, to continue to hold if you’ve got a good business. And that is true. 

Now, let me talk about when it might be a good time to sell. You’ve got to make the decision for yourself whether you’re comfortable or not comfortable, I think that’s first and foremost. Are you comfortable in the current situation? Can you sleep well at night? If you can’t, then you probably shouldn’t be in the market. Okay, that’s first and foremost. If you want to get out of a particular stock that you’re in, I think one of the most important factors is, how much capital gains have I amassed in that particular pick? 

And when you look at Warren Buffett, so for the last year, Warren Buffett’s been doing nothing but amassing cash. He hasn’t really been buying anything. He’s just been taking all his cash flow and it’s been sitting in cash on his balance sheet. And he’s doing that because he thinks that the market is overvalued. When you look at his balance sheet, he’s basically taken his $18 billion of cash flow for the last year, and it’s gone straight onto his balance sheet. And the reason he’s doing that is because, like Stig and I have said on our forum and other places, we think that the markets are becoming overvalued. What he’s not doing is he’s not selling a lot of the picks that he had previously had. Now, here’s the difference between maybe you and Warren Buffett why he’s continuing to hold. His capital gains are enormous. Okay, when you look at Coca Cola, he bought Coca Cola back in the 1980s. When was it, Stig? Maybe like 86 or something like that?

Stig Brodersen  43:05  

It was a long time ago.

Preston Pysh  43:07  

It was a while ago. It was decades ago. His capital gains on that, from the initial purchase price that he had, I think are over 10 times what he paid. Okay. So if he takes that money out right now because we’re in a market bubble and he’d sell that stock, he would take an enormous hit, call it 40% right off the top of the value that Coca-Cola sitting on his, what would it be? It’s Equity Line because it’s unrealized gains, he would take an enormous hit on that and it would almost be the same hit that he would take if the market crash, call it 50%. That’s why he’s not selling Coca-Cola. People need to understand that. 

So when you look at your own personal portfolio, let’s say you bought some stock last week, and you hadn’t matched any type of capital gains. And now you know that the stock market’s overvalued. Do you continue holding it? 

Well, if you’re uncomfortable I would tell you, it might not be a bad thing to sell it if you’re uncomfortable and you’re a little concerned about the direction things are going to go in the future. Because you don’t have any capital gains. You don’t have to pay any tax to sell it. You got like a $5 or $10 fee to sell out of it. So, I want to talk about that. I want to get this out there so that people understand. 

First and foremost, are you comfortable? If you are, then continue holding it. If you’re not, and you feel like you’re in a bubble situation and you might lose a lot of the value that you originally invested, look at the capital gains. We have a calculator on Buffett’s books, it’s called a sell calculator. We’ll provide the link to that in the show notes so that you can go and mathematically figure this out where you account for capital gains. What did I purchase it at? What do I think my next returns are going to be of the asset I transferred into? 

So just a little bit of discussion there to talk about this situation that we’re currently in and to give you a little bit of guidance. So I just want to put that out there. Stig, did you have anything you wanted to add?

Stig Brodersen  44:57  

No, not much. Well, now that you talk about it, Preston, I get this question a lot too. And I think perhaps the selling decision is even more tricky than when you’re buying. Just to fulfill disclosure, I’m probably not going to sell that much at the moment, and you might be listening to this in like years and years from now, but if you are listening to the to the podcast right now, I’m not like a seller in the market right now, but I am starting to accumulate cash. 

And the reason why I am is that if we see a correction in the market, cash is truly king. And if you see a crash, you might think that you can sell out your stocks and then buy the cheaper stocks, but guess what, your current stock is worth a lot less. So that’s just a way to slowly transition into a new area where the market is perhaps, overvalued.

Preston Pysh  46:02  

And people don’t realize this. A market crash is really a call on cash, it’s what it is. So like right now, you look at the current situation, for every one real dollar, there might be six or seven fake dollars. And what I mean by fake dollars is it’s credit. It’s money that was created through an agreement between, let’s call it Stig and I, say, Hey, Stig I’m going to give you $10 next week if you send me an email tonight. Okay, so we just created credit because there’s an agreement that I’m going to give him $10. That $10 is unreal, until I actually pay it. 

You got all these agreements and all this credit in the economy, and it’s far exceeding the actual number of real dollars that can actually pay these agreements. That’s the situation we’re in today. And whenever there’s a call on a lot of these agreements, what happens is, it’s kind of like this compounding occurrence where everyone starts calling their claims and they want their dollars. And so, there’s a demand for dollars. 

So whenever you’re in an environment where there’s a lot of credit in the system and you’re getting ready to transition into an environment where dollars are sought after, you want to be that guy holding the dollar, so that you have the availability to go and buy those assets whenever they’re undervalued. So, long conversation, I know we drugged this out really long. But there are some things that we want to talk about just based on the current market conditions here in February of 2015. So if you’re listening in the future, that’s when we recorded this. 

Alright guys, so that’s all we have for you this week. We really appreciate everyone coming on the show. We’ll be sending Michael a free signed copy of our book, the Warren Buffett accounting book. And make sure you sign up on our mailing list because for everybody that’s on our mailing list, we type up an executive summary of every book that we read. 

So for this Malcolm Gladwell book, we’re typing up an executive summary and we’re sending that out to everybody on our email list. So you can basically read the book in  about five pages and kind of get a lot of the main nuggets that we found very interesting in the book and that are useful for you. So great having you guys in our audience. Thank you so much for listening, and we’ll see you next week. 

One of the things that Stig and I are very strict about is not endorsing any kind of service or product that we don’t personally use ourselves. So with that said, we give our full endorsement of our sponsors content realvisiontv.com. Real Vision is a site that Stig and I personally use ourselves and it has had a profound impact on the way that we view the financial markets. One of the most important things a person can do is seek the knowledge of highly successful investors and business leaders. More importantly, understand their thought process and how they make decisions. 

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Outro  50:03  

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