But anyway, so after he was done a PayPal which was 2002. He then started LinkedIn. So it was just like, number one hit after number one hit in Silicon Valley, from the time he stopped working at Apple and he just started making serious moves. And as you plow through his bio even more, you can see that he was a first round investor in Facebook. I mean, you’d think, you know, Stig if he’s investing in Facebook, considering he already wrote the code for it like seven years ago, I guess he would have seen that one as being a winner.
Stig Brodersen 5:23
Yeah, that’s true. He’s really impressive. And Pres, I’m really happy that you talked about the PayPal mafia thing. We covered it a few times, but it’s really impressive. Like these guys, Elon Musk being one of them, Peter Thiel, and other. And also the two guys from YouTube, Yelp as well. I don’t know how they were actually doing as well. He actually did touch briefly upon that in the book in terms of making alliances and all that, but it’s quite astonishing that you’ll see all the key people from the PayPal days that they have all been so successful since. I think is quite remarkable.
Preston Pysh 5:55
Yeah. I mean, this guy’s brilliant. He’s absolutely brilliant. You can see from just where he went for his undergrad and his master’s. I mean, he’s just a super smart guy. So some of the other companies just real fast before we dive into the book here, so not just Facebook, not just PayPal. He’s the founder of LinkedIn. He also had investments in Airbnb. He had investments in coupons.com. He had an investment in care.com, which is the babysitter website. This is the tip of the iceberg. I could keep reading all these companies that he was an investor in early on, like round one investor, it’s totally crazy.
So anyway, let’s dive into the book. So that’s who we’re talking about. These are his thoughts that he wrote in this book. There’s a co author on this. His name is Ben Casnocha, a the two of them wrote this book together. So we’ll just go chapter by chapter because there’s really not a lot of chapters and this was a pretty easy read. Stig, what were your overall thoughts before we go chapter by chapter?
Stig Brodersen 6:54
Well, I definitely think that this is the book I should have read 10 years ago. I think it has a lot of great insights about building relationships and especially college students. That’s definitely a book you should pick up. Clearly, when you’re setting up your own business, you will learn to build relationships with business associates one way or the other. But I think that starting out with a book like this, it will save you a lot of hardship in terms of approaching people the right way. I thoroughly enjoyed the book. And like you said, Preston, it’s a really easy read, a lot of anecdotes about great stories. Very conversational.
Preston Pysh 7:30
Yeah and I think you can, I know… I listened to the audible version of this, and I really liked it. And just a note, if you’re listening to this, and you want a free book, for the first one you download, go to our website. We have links in the website that you can download your first audio book on Audible for free, and this could be the book, if you want to listen to this one.
So the first chapter is titled “All humans are entrepreneurs.” He starts off this chapter with a really kind of simple premise where, and I really like the way he lays this out because he says that 30 years ago, 40 years ago, the way that America worked in particular, you could go work for a company and work your way up the ladder, and really kind of have enormous success for yourself and really kind of live in that house that you wanted. All that kind of stuff, like basically the American dream. You could go work for one company and rise up through it. And it worked.
He’s saying that today it’s not like that anymore. He said, “You can have a great education. You can go work for a great company, and really kind of struggle to really produce this American dream.” And I think he really attributed to just the fact that the world is insanely competitive at this point. I mean, you could get into this whole big long argument as to what’s causing that, Stig and I would probably argue that it has to do with long term interest rates cycle, but we aren’t going to go down that path. He’s laughing because he agrees with me. We’re not going to go down that path as to why that’s happening.
But he lays out that case and read doesn’t lay out why that’s happening either. All he’s saying is, the world is becoming a lot more competitive and if you’re relying on that model that 1960s to 80s kind of model as to how you’re going to rise to the top, it’s probably not going to work out nearly as well for you. I think his argument here is that you have to get better at creating a competitive advantage for yourself. So I want to throw it over to Stig and his thoughts on this.
Stig Brodersen 9:29
Whenever I heard the title of the first chapter, “All humans are entrepreneurs,” I was thinking, I guess, like most people, so does that mean that we all need to start up own company? I mean, clearly, it has been really, if not easy for Reid Hoffman, he has been very successful. So I would kind of lile, “Hmmm… hat’s a that’s a weird start.”
But actually, he’s very accurate on what he means about being an entrepreneur because it’s not about necessarily starting your own company. It’s just as much about your approach to your own work life. It might be starting up your own company, but for most people it’s being an employee. And he’s having this notion that today 20 years of experience is 20 times one year of experience. Like that’s the premise he is looking everything from. I really like that. It’s like, “You’re not 20 times as good.” And as Preston said before, this is not about you working 20 years in the same company or even longer, getting a gold watch and then retire. The world is definitely changing.
And he’s saying that the good thing about the entrepreneurial mindset is that they’re really good at working with uncertainties and the need to constantly adapt. That’s something as an employee today, you also need to do, and he’s talking about this through a term he calls “permanent beta.” Basically, what this means is that everything is always a work in process. You’re never done with anything you can’t look at your job is just done. And it says that it’s the same thing with your job. It’s the same thing for your career and you must simply accept being out there in the world that you are flawed, and you’re always going to *inaudible. And that’s the entrepreneurial mindset that he encouraged everyone to have.
Preston Pysh 11:10
I like that point because at the heart of it, he’s talking about self improvement. He’s saying that the entrepreneurial mindset is one that’s always trying to self improve. It’s always basically saying, “What I have right now is not good enough, and that I need to get better at whatever it is that I’m doing.” He’s saying that if you have that mindset, then you are treating whether you’re working for a big name company, you’re working for a small business, you own your own business, it doesn’t matter. If you take this entrepreneurial mindset of constantly trying to self improve, that’s going to be a huge building block for you as you try to achieve whatever it is that you’re trying to go after.
Stig Brodersen 11:53
He had this very nice way for stock investors to look at how the world is changing because he said that in 1920’s the company’s staying in the S&P 500 for 65 years, that was something that even back then sounds like a long time. That was really surprising. But what he’s saying now is that today, it’s 10 years. For me as a stock investor, I can use that information. I was like, does that mean that one should be thinking more into ETF investing because it’s simply too difficult to predict the performance of companies these days?
Preston Pysh 12:27
Alright, so going on to the second chapter, this one was called “Develop a competitive advantage.” So as you might think, what he’s saying here is that there’s so many opportunities, there’s millions of people that are equally skilled for what it is that you’re doing. So how in the world are you going to set yourself apart from the other person?
The way he lays this out, he says, “First off, you need to determine your assets, whether they’re soft skills, like your network, your knowledge that you have, or maybe it’s hard assets, like your cash or your investment. You need to determine what those assets are.”
I think for most people, it’s going to be a soft skill asset. It’s going to be what you know and what you learned in college, your practical knowledge in the jobs that you’ve had, that’s where most people have their assets. The next thing that you need to do after you understand what that is, is you need to figure out how you can grow that asset base into the future.
Then thirdly, it’s essential to face the reality and identify what your customers are willing to pay for. Your customers, for a lot of people, that’s your boss, that’s who you’re working for, that’s your customer. You’re providing a service to them and if you can’t figure out a way to expand that, your ability to basically rise up and maybe achieve whatever it is that you’re wanting to achieve is not going to happen.
So I guess it’s a really simple way to look at things from a business entrepreneur mindset. But then you’re applying it to your ordinary job if that’s what it is, or maybe you’re applying it to the business that you own. It’s however you want to look at it, but it’s really kind of viewed through the same lens.
Stig Brodersen 14:02
I really liked the way that he was putting it up in three simple steps. After he did that he used the example of a basketball player. So he said that for basketball player, well, his assets, soft assets, in this case, that was his capabilities of playing basketball. Now, so the second part of the aspirational values, well, his value needs to be aligned before it’s sustainable for him. So in his situation, and the niche that he needs to put himself in is where he has a competitive advantage. So that might not be the NBA, there might be a small league because he needs to be someone who is remarkable.
And then the third one is the modern realities. So who’s actually willing to hire you? Which kind of leagye you’re playing? What kind of club can you play in? He said that that was the way to look at those three steps and we must all do that because we can’t always be the best at *what would sell and who wants to be best at. But still, it needs to be aligned with what we believe in. So we need to find that niche first. That’s really the key word and go from there.
I think that was a really interesting way of looking at your own capabilities, especially if you just graduated and you’re thinking, “Well, I’m probably not really the best anything because I haven’t really acquired the skills.” But he debunks that and saying you do have them, you just need to develop them, and then find the niche where you can be the best. And he said that, you can usually do that within 6 to 12 months.
Preston Pysh 15:27
Alright, so going into the third chapter, it is titled “Plan to adapt.” I like this chapter because it kind of goes against the grain on a lot of other books that we’ve read that really talked to this idea of coming up with this one goal and this one thing that you are dead set on achieving. He doesn’t say that you shouldn’t do that. But I think what he’s saying is you should be more adaptable and open to other courses as you’re going towards whatever that goal is.
So let me just give an example. So let’s say you have this huge goal of becoming the number one chess player in the world, whatever might be. And as you’re going down this path and you’re working towards it, you might be presented with opportunities that might actually be more appetizing to you in the long run. So like, let’s say, for example, you’re trying to be the best chess player in the world. But then for whatever reason, in addition to the environment around you, offers you this new opportunity that maybe you could start your own chess academy and teach other people how to be world class chess players.
For some people, that might sound like an absolute terrible thing. Maybe somebody who’s trying to achieve at a very high level that sounds horrible because it will take them off their course. But for another person, if they’d be presented with this opportunity, that might actually be something that they actually might want more. I think that’s what Reid’s getting out in the book. He’s saying you should have these huge goals and these huge aspirations. Absolutely. But don’t get so rigid in your thinking that when these other opportunities come up in your life, you’re so focused on that one thing that you don’t even wait a second to consider the opportunities and the other things that could come into your life and maybe even be more beneficial or can make you happier.
I really like that, because I think that it is some great advice. I think that it offers up this idea of, yes, have a course of action. But have an array of other things that you’re open to, and then you can consider it. If something comes up, it’s so easy just to say no. But if you’re open to those things, I think your opportunity for success in the long run and your happiness in the long run is that much greater.
Stig Brodersen 17:45
It was definitely a chapter that was with a lot of great advice, especially if you were just about to graduate. It was quite clear to me I guess that it was almost like he was talking to himself when he was younger, and all the mistakes that he felt that he did in terms of going to the business world, even though he’s been quite successful. That was still how I read it.
He talked about this paradox of very often companies will ask you if you have experience, otherwise you can’t get the job. And you won’t be like, “Well, I don’t have any experience, but you need to give me experience before I have experience.”
Well, I guess that everyone who has been applying for jobs probably knows this paradox. So he addresses that and he said that the way to fix this, if you can afford it, of course, is to look at internships. I think everyone has probably heard about that. But he had a very interesting thing to this about internships because he said that a lot of people when they look at internships that look at internships in terms of they’re almost doing the company a favor, one way or the other, because hey, they are working for free. That was not how he said that one should look at it because the cost of paying someone a salary, that’s only one type of cost for the company. That’s not really how it is.
So he was saying that whenever you are applying for a job, or even if it’s an internship, think about how are you making the lives of the employees in the business better, and not so much about the cost. That’s not really what’s relevant, because very often these people, and the way that they’re making decisions are, can they solve this problem for me? That’s actually the main thing. And I think that was a really interesting discussion, because, as you said, it’s never a company that’s hiring people. It’s always people hiring other people. So I think that was one of my key takeaways from this chapter.
Preston Pysh 19:39
So whenever I look at the way Reid behaved through his life with respect to this plan to adapt, I look at this first company that he started, this SocialNet.com. And like we said at the beginning of the episode, this was seven to eight years before Facebook even happened. So he clearly knew this was something that was is going to be big. But you know what he hung it up after three years was it? Two or three years, he hung that up and he went to PayPal. And you can see, he had this goal. He knew that this thing was going to be big. He saw it.
But even though he was getting resistance, and he was getting friction whenever he was trying to start this, and this is all relative to where he went next, because he was obviously probably something that was pretty successful in its own right. But he got offered another opportunity to go work at PayPal and have this huge role in something that was absolutely revolutionary on a global scale. He sees that. He adapted to his environment that he was being offered. Then again, you know, PayPal is huge. They’re selling it to eBay and everything else. And I mean, it’s massive.
Then he has another opportunity with LinkedIn. And you look at how the correlation between LinkedIn and this SocialNet basically paved the way for him to stand up this LinkedIn website. And I see that he exercised that in his own life. I think it’s such a great demonstration for people that he’s just not saying it but he’s demonstrating it for people to see how he implemented this into his own life. He had this big, big huge goal of creating these platforms. But he did it in a kind of jump from one ship to the next and he kept going where the growth was.
Take advantage of those opportunities and be very open minded because it looks like that’s what he did in his own life, and it paid off immensely for him.
Okay, so the fourth chapter is called “It takes a network.” And I wasn’t surprised to hear this chapter in the book.
Stig Brodersen 21:38
It’s from the LinkedIn founder.
Preston Pysh 21:43
So as you might expect, he’s a big proponent of using your network and networking in general. I kind of liked how he talked about this in his book because he gets into the discussion of how je still communicates with Peter Thiel. He still talks to Elon Musk. He values these guys and he bounces ideas off of them, and he keeps them close to him. They might be working in completely different directions. but at the end of the day, he uses these guys as a sounding board and he’s there for them. The relationship is reciprocal.
So when they have ideas, say Elon Musk has an idea, he’ll come to Reid and he’ll bounce these ideas off of Reid. And so it’s not a profit motivated mindset where, “Hey, do you want to sell me some of that equity?” It’s not anything like that. It’s more… I’m sure some of that takes place. But I think it’s more of an intellectual mindshare and a mastermind that he’s talking about. And it was really neat to hear this billionaire talk about his mastermind and how much he values it. I really enjoyed hearing some of that.
Stig Brodersen 22:53
I like the way that he talks about this. He uses this great metaphor that relationship building is like philosophy. You’re told that you have to, but it’s really no fun. I like that. I definitely like that because I’m an introvert. I think for a lot of extrovert people, it’s a lot easier for them and a lot more natural for them to build networks. But if you’re not, it’s really hard because whenever you’re hearing, “h, you need to build a network,” you’rre thinking about, oh my god, I need to hand out 50 business cards and give everyone my elevator pitch. But that’s not how he talks about it at all.
The weird thing is that I don’t know too much about Reid Hoffman himself, but I kind of feel like he might be an introvert himself, and which is also why he’s building all those relationships online and perhaps not in person.
But to move on with some of the key points from this chapter is that he’s talking about the difference between a strong tie and a weak tie. He’s talking about that most people go to their strong ties first. So that would be someone like your spouse or your best friend. He’s using the number e8 to 10 people in your inner circle. But then he brings up this very interesting statistic. When it comes to finding a spouse, or actually finding a job, 70% of them is through weak ties. And you might be thinking, “Wow, that doesn’t make any sense. LWhy don’t I get this from my strong ties?”
He’s saying, “Well, it’s actually because the people closest to you, they are have this problem looking at you because they are almost putting you in the box. That’s how they know you. So they keep talking about you and to you like you’re that predefined person. So they’re not thinking about your development and they’re thinking about what else you can do because they have this really predefined notion about who you are.”
Another thing is that the people very close to you, they’re very often exposed to the same thing as you are. And using weak ties, perhaps they have another mindset, but they’re simply exposed to other things and other opportunities compared to your strong ties. So I kind of feel that was really interesting discussion and relates really in terms of where’s my next business opportunity, perhaps.
Preston Pysh 25:04
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Alright, so moving on to chapter five, we’re going to talk about pursue breakout opportunities. This is kind of a neat chapter because I think it’s easy to talk about this, but harder to put into application.
So he says that opportunities come suddenly and while some of us are clueless about it, others seize them and make the most of it. This wasn’t in the book, but I want to talk about a personal experience in my own life. So I know whenever I’ve had setbacks in my life, the approach that I’ve usually taken is I just feel bad for myself. I often focus on the setback. It’s just like, that’s all I think about is how terrible the situation is. I’d like to say that I’m introspective, and I look inside as to why that might have happened and never blame anything on my exterior circumstances. But that’s obviously not true because a lot of the times I get into this blame mode, and I think that it’s because of my outside circumstances that cause whatever.
And only recently, I can honestly say that within the last year or two, anytime I’ve had a setback, I’m starting to take, and I’m still not I haven’t mastered this by any shape of the imagination. But what I’m trying to start to do is anytime I have that setback, I immediately say, “Okay, so what is it that I’m supposed to take advantage of right now, at this moment, because I’m having this setback for a reason? I just have to figure out what the enormous opportunity is that’s being served and that’s tethered to this setback.”
AI know that’s so easy to say that but really, really difficult to implement, because it might not feel like there’s any hope or any type of opportunity tied to this setback, and that’s obviously not always the case. But I feel that it actually might be the case more often than people realize. So what I’m trying to do is writing it down. So what I’ll do is I’ll grab a piece of paper, and I’ll write the setback and write it out. And then I try to force myself to write three opportunities that now present themselves because of the setback. Sometimes I don’t write anything down. But I try, I try. And I think that that’s the point that I want people to take away from this. So I’m gonna throw it over to Stig, because he’s gonna take it from here.
Stig Brodersen 28:31
I think Reid Hoffman had two very interesting observations in this chapter. The first one that was about human resources. Now, his take was that human resources don’t have any positive power, if you want to call it like that. The reason? He’s saying that is that they have the power to say no, and not always to say yes. So if you’re using the traditional channels in terms of applying for a job, you will meet a lot of people that would just say no, because that is where they have authority. So that’s why you if you really want a job, and a job with great opportunities, you need to connect with someone that can say yes. And they’re typically not in the human resource department.
The other thing he talks about was both as an employee and as a business owner, it’s important to make a decision. He’s saying that today the way business work is that we have so many options. We have so many options and it’s really hard for us as human beings to say no, and really to go down one path. So he’s talking about in terms of weighing risk. It might be perceived in the human mind as being risky and not to be open to a lot of different things. But it’s actually really important for you, again, as an employee or as a business owner, to commit to that opportunity you have, and you need to do that and you need to follow through before you pivot into another thing. Those two observations I thought was really profound from Hoffman.
Preston Pysh 29:56
So I like this part where he basically says so I’m telling you to pursue breakout opportunities. But you ask, “How do I do that?” And what he says is you have to start off by developing habits that increase your chances of finding more opportunities. So, a person might say, “Well, what does that mean?” And I think what it really comes down to, at least for me, is are you a person that does it yourself? Or are you the type of person that needs to be spoon fed information on how to do things? I think that’s the critical habit that you need to develop. If you don’t have that “go get it done yourself” kind of attitude. I think that’s what it really comes down to.
The people that teach themselves anything in this world are the ones who create these habits of opportunities that fall into their lap. So I would challenge people to think about that really long and hard, if you’re trying to find things that have opportunities come into your life.
So let’s go on to the next chapter chapter six, “Take intelligent risks.” So Reid Hoffman is of the opinion that people have a tendency to overestimate risks, and that they overaccount for them. And that a lot of the times, and this is another important one, is that just because you don’t know what the risk is, doesn’t mean that it’s actually a risk. You need to dig into it more and maybe understand why or why not it’s a risk.
I really liked all this. I think that this is good stuff. I think that when it comes to stock market investing, sometimes people fall into that latter category where they don’t even know something’s a risk. And they don’t take the time to account for it, and that’s where they can potentially get themselves in a lot of trouble.
But I think that when you’re talking about things that are more job-centric, and hey, I want to start my own business and or I want to go off and do this other thing. People are scared of things that they just don’t know and so they don’t go any deeper than that.
I think what Reed Hoffman saying here in his book is he’s saying, “Go deeper than that.” He’s saying, if you don’t know what it is, and you’re scared, do the research, work hard to understand things. So you now do know what the risk is and you might find out that the risk is nothing, and that you should go for it. That’s what he’s really getting at in this chapter and I really like that because I think it It helps to chase the fear out of whatever it is that you want to go do or whatever you want to go accomplish.
Stig Brodersen 32:44
Yeah, I really love your point about that we are overestimating risk. And when it comes to risk, it makes a lot of sense. And the way that Hoffman explains this is that traditionally, if we made a wrong decision, and he was talking like thousands of years ago, you would just die. If you made a mistake back then, you might be eaten by an animal. That’s actually the the metaphor he’s using.
He’s saying it makes a lot of sense to consider risk all the time. But he’s saying that anywhere in life, there is a risk to any of your decision. He’s taking an airline example, whenever you’re flying, well, there’s a risk and there’s a reward. You think, if you do crunch the numbers, if you do have that knowledge, by digging deeper as Preston said before, you usually see that the worst thing that can happen is usually not that bad.
For instance, when it comes to the job market, well, if you get the wrong job, you know what, you can quit. And a lot of people are saying, “Well, it doesn’t look good for a resume.” Hoffman doesn’t agree with that at all. I mean, clearly, it’s not good if you have 10 different jobs in five years, but everything is definitely better than staying in a job that you don’t like. He’s also talking about, again, the title of the chapter is “Take intelligent risks,” and he’s actually using Warren Buffett, as an example here. He’s saying that he is taking intelligent risks when he is investing, where everyone is running for the hills in the stock market. That’s an intelligent risk. That doesn’t mean that he can’t be wrong. But it’s an intelligent risk because he’s weighing the risk and the reward. And that’s basically the gist of this chapter. We need to rethink what risk is and if we do crunch the numbers, things are usually not that risky.
Preston Pysh 34:20
Okay, so the last chapter chapter seven, and the title of this chapter is “Wo you know, is what you know.” one of the things that he starts off with this one is he says, “Bill Gates once said that the best way to stand out in a crowd is to equip yourself with information. The way we use the information can be the deciding factor between success and failure.”
And I really like that quote, because we’re taught in schools to memorize things and take tests. And we see this all the time. People that come out of college, they have straight A’s because they memorized everything that they needed to know for the test. But when it gets into the real application, they might be 100% clueless on how to take that information and apply it to a dynamic and changing world around you.
This is something that Hoffman lays out in his book and I think that it comes down to this simple analogy, you can read as many books as you want. You can read every Michael Phelps book that’s ever written about swimming. But until you actually get in the water, and try to do it yourself, you’re gonna have no clue how to swim, until you actually start to learn and try to apply the things that you read, or that you learned about in theory.
I think that when you combine those two things, that jumping in the pool and actually attempting the stuff that you’re studying, and you combine it with the theory, that’s when you get the amazing results.
The other thing that he’s talking about in this chapter really gets it what the title of it is, which is “Who you know is what you know.” And what he’s really getting at is you are surrounded by people. So most people have a LinkedIn account. If you go into your LinkedIn account, I want people just imagine this. If you look at all those connections, and you could imagine the amount of information, and more importantly, the experience of all those people, if you could just harness all that into a super brain into your own mind, just think of what you would be capable of doing.
I think what he’s getting at in this chapter is, you need to think, as if that exists for you. The only thing that’s the difficult part is knowing who knows what, and how to access them, so that they can help you achieve what you want. You can also have a win-win relationship where you can help them in return in order to keep that connection alive and operating. That’s what he’s really getting at here. And so you need to think about how profound that is and how you can use utilize that to accomplish what it is that you’re really after in life.
Stig Brodersen 37:04
One of the great ways to explain the power of network, especially now in the age of Google, where you’re told you can google everything and get answers for everything. Well, he’s saying that, well, Google comes out short compared to a friend that can tell you about a job opportunity that is not open. That is how he kicks off this chapter. And he’s saying, “So how do you utilize your network in terms of gaining that knowledge?” And he’s talking about how you need to learn how to converse is, it is actually skill in itself to obtain information from other people, not in the sense that you’re exploiting people. Definitely not in the sense that you’re interrogating people, but actually having a pleasant conversation with another human being where you can learn from each other.
He’s talking about the importance of *priming the respondent. So one of the things that he’s saying is that you need to tell him which kind of answer you might be looking for. If I would be calling up Preston, and he wouldn’t know it was me. And I would say, “How should I invest?” That would be pretty open questions and a really hard question for Preston to respond. But the more concise I am, without clearly giving Preston a yes or no question because that would probably be an even worse way of having a discussion, the better it is so.
So he’s basically saying you need to think about what you’re asking, and how you can use “why.” Again, the importance of why they were talking about whatever times on the podcast, how can you utilize “why” questions and how can you prime that response in terms of the kind of answer you would like.
He’s also saying that it’s natural for people to be afraid to ask too much into something. So for instance, you might be talking about a job at Microsoft, that was one example. And then the other person might say, “Yeah, but working for Microsoft right now, it’s quite risky.” Now, here’s the problem because if you’re thinking so this is Stig’s definition of risk, so that means XYZ, he’s saying, nationally, you would say, “Hmm, so what do you mean about it is risky working in Microsoft?” So again, it’s the whole thing about digging deeper and being sure what the other person is saying.
Preston Pysh 39:16
Alright guys, so that completes our review of the book, “The Start-up of You” by Reid Hoffman. We really like this, we thought it was very good. I would recommend that a person that is an introvert should read this book, it’d be a good area for them to expand and to think about. If you’re an extrovert already, and you’re pretty good at network and all that stuff, probably a pass. But for me, I think that this would be a great book for an introvert to read.
Alright, guys, so if you want to get our free executive summary of this book, we type up an executive summary for every single book that we read. It’s about five pages long, go to our website, and if you go under the subscribe link, there’ll be a spot where you can sign up for our email list. We don’t send out any spam, this email list is just for you. And we want to help add value for you that you can read through these books at a much faster pace to determine whether you want to actually buy the book or not. So go onto our website and sign up for that email list so you can get all of our executive summaries for free.
At this point in the show, we’re going to go ahead and play a question from our audience. Our question this week comes from Soham.
Hey, Preston and Stig. This is Soham from San Francisco Bay Area. I’m a big fan of the show. Hopefully you guys come out here soon. What are some of the most significant biases that beginning investors have? And what are some ways to address those biases to make sure that they don’t affect returns besides obviously listening to your excellent show? Thank you.
Preston Pysh 40:37
Okay, so I absolutely love this question because I think this one is really, really important for people to understand where they might be making a mistake. For new investors. I think one of the biggest bias that you can really shape or have is having a strong win up front and not really knowing why it actually materialized. So, it’s really common for a person to just lack basic stock investing knowledge. I talk to people all the time about this stuff and you’d be blown away at how many people whenever I say, “Okay, so you know what the EPS, the earnings per share, is on the company?” And they just look at me like I just started talking a different language.
Or I might say, “Well, what’s the dividend yield?” Or any one of these really, really basic, what’s the PE ratio? You know, they just have no idea what you’re talking about. But that same person who I’m having this conversation with will say, “Yeah, I made like 20% on this thing in the last six months.” And that’s a person who’s about to have a major, major upset in their investing approach. So I really think that that’s important for people to think about.
If you are just starting out and you have had some good picks. First of all, compare them to what the S&P 500 has done. So I see this one a lot. A person will say, “Oh, yeah, I did. I picked company XYZ and it went up 20% in the last six months.” But they never even think about how the S&P 500 performed during that same six months. And if the S&P 500 went up 20% or maybe even the S&P 500 went up 25% that person just lost. And they need to understand why they lost and they need to think in relative terms to the broader context of the market or other opportunities that were out there. I think when you’re doing that, and you’re really assessing your performance across a basket of other opportunities, that’s when you can really say that you’re making good sound decisions that are outperforming the market as a whole.
Stig Brodersen 42:50
So I have two biases I’d like to address. The first one is actually overconfidence too. So I’ll just do that very briefly. I’d say definitely not knowing what you don’t know, that’s a big problem. And that’s usually just how it goes whenever you start investing, or basically anything else that you haven’t done before. It might be because as Preston suggests that you might be very successful with the first pick, so you become more confident.
But in general, if you don’t know anything about it, it’s so easy to forget the risks that are associated with it, because you haven’t had experience with risk and you don’t know how to evaluate risk in investing. So definitely overconfidence. That’s one thing.
And ithe last point release me as to the next big bias and I think that’s a lack of diversification. You might have your eyes on the specific picks a Coca Cola, and because you believe in this stock, regardless of the valuation perhaps, perhaps that was why you decided to enter the stock market in the first place. All the information that you look for in terms of why you should invest in Coca Cola, if you do that, that even makes you’re more confident or actually what we call it confirmation bias. So basically like all the information out there, you kind of searching unconsciously after something that would say, “Yes, Coca Cola is a great company.”
Coca Cola is a great company and there’s a lot of information out there that would back that up. Now, there is not enough information that will probably tell you that it’s a good company giving the current valuation. But that might also be something that you won’t consider it to begin with. So you might go out and invest, say, 30% of your portfolio in the stock. And for someone who’s not familiar with sizing their portfolio, it might seem like why can’t I invest 30% in the stock?
The interesting thing is that when you’re new in investing, you usually don’t have that many stocks on your radar because it takes a lot of time to acquire the necessary knowledge to invest a lot of stocks. Aagain, say Coca Cola might be the reason why you go into stocks in the first place. So you would go ahead and say I really believe in this company. Remember all the confirmation bias too. So I might go ahead and invest 30% of my portfolio now. 30% *might make sense if you’re Warren Buffett, but it definitely doesn’t make any sense for other investors, especially if they’re new investors.
So if I need to come up with two things: definitely overconfidence and the lack of diversification if you’re a new investor.
Soham, really great question, really appreciate that. And we also really like to reward you for your questions. So we give you two courses from TIP Academy. It’s the chapter by chapter video summary of “The Intelligent Investor,” and also a new course “How to invest in ETFs.”
But guys, this was all that Preston and I had for this week’s episode of The Investor’s Podcast. We’ll see each other again next week.
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