Stig Brodersen 10:38
I have a few things for the first section as well. One thing that I really liked was when Tony Robbins said that money is like religion and politics. Everyone seems to have a strong opinion. That was something that really resonated with me because it’s really hard to discuss money with people because everybody, probably including myself, thinks I have the truth. That makes it hard to discuss and perhaps that’s also one of the reasons why so many have problems with money.

It’s hard because there doesn’t seem to be one truth when it comes to money, just as well as religion and politics. But still Tony Robbins says out some basic rules that everybody should follow.

For instance, the first rule was that you should pay yourself first. For anyone who is studying how to get wealthy, this probably doesn’t come as a newsflash to them. Basically, what he is saying, a very objective rule that no one can argue with, is that the path to become financially independent is to pay yourself first. That means that if you make $100, then you would set aside $10 at the beginning of every month, before we do anything else. He highlights a few basic rules that everyone should follow.

Preston Pysh 12:03
I will piggyback on your first point there with everyone’s opinion. A lot of the time our opinions aren’t based on much information at all. I’m currently reading and Stig is also currently reading a book called “Influence.”

I’m thoroughly enjoying this book. One of the things that they talk about in that book is how people oversimplify things in order to adapt to their environment, because all day long, you’re just constantly sensing all these different inputs and all these different variables. The mind over time adapts these principles that it will oversimplify things, and then you as a person, just make these hardline opinions and stances on maybe just a couple variables.

It talks about how dangerous that is as a person. When you look around and you see people, maybe you’re talking about oil at work, because that’s a hot topic right now. It’s amazing how fast everyone simplifies things and says, “Oh, well, it’s because of this,” and then their opinions are done. It’s over right then right then and there.

Something really kind of important to talk about or to think about which Stig just highlighted is don’t be so quick to jump the gun on what is or what is not. You have to collect a lot of variables and you’ve got to thoroughly understand something before you just dive in and say, “This is what it is.”

So kind of a tangent there, but you just kind of triggered something that I was recently reading. I found it very interesting. Okay, let’s go to the second section here.

In the second section of the book, he talks about shattering financial myths, and he comes up with quite a few. I think there’s like seven or eight but we’re just going to talk about a few of them here.

The first one that he talks about is that 96% of actively managed mutual funds do not meet the market over a sustained period of time. This is something that we talked about in one of our previous episodes, but if you think that you’re going to read this book, and you’re going to have the idea that owning a mutual fund is a good idea, that is not going to happen.

The one thing that you’ll definitely walk away from after reading this book is that mutual funds have a devastating impact on your investing future compared to index funds or something else that has lower fees. That was really one of the first points or myths debunking mutual funds.

The second thing that he talks about is that fees are a small price to pay. What he means by this is that he says that if you think that you’re just paying a 2% fee that doesn’t have that much of an impact, you’d be dead wrong. And so, he lays out these different fees and he shows how the difference in your overall growth rate would be.

Let me just explain some of these. He says the average mutual fund has a 3.17% fee associated with it. Right out of the gate, your average mutual fund is a 3% fee. So just remember that as I go through this next section. He says three funds all starting at $1,000.

Okay, so we got three different funds. One is at a 1% fee. The next is a 2% fee and the third is a 3% fee. They’re all starting out with 1000 bucks. He says, “After 30 years at an 8% growth rate, here’s what you would have with each one of those funds. So the first one at 1%, you’d have you’d turn your $1,000 into $7,600. The second one that had a 2% fee, you’d have $5,700. Then the third one with 3% fees, you’d have $4,300. So going from a 1% fee to a 3% fee, you’ve almost taken your growth over a 30 year period and cut it in half.”

That’s a thing that I think a lot of people do not understand when it comes to mutual funds. This was something that I give them huge kudos for in the book for outlining how devastating just a 2% increase in fees can have on your investment future. That’s something to really key takeaway from the book.

Stig Brodersen 16:11
Yeah, just just to piggyback on that, Preston. Robbins said it best when he said that you shouldn’t play any game if you don’t know the rules. I think that most people can resonate with that. They wouldn’t play football, if they didn’t know how to play football.

It seems like when it comes to investing, it’s just everybody’s game. Then they will just enter a game where the odds are basically against them.

Preston Pysh 16:39
Yeah and that’s how he started off just to kind of highlight. He started off this whole section of shattering financial myths with the idea that Stig just said, as far as knowing the rules before you start the game.

This next myth was really kind of an interesting one. He says that all funds returns are not 100% truthful. What he meant by this is that he says that what a lot of these big banks do is they might start five mutual funds or five funds. Of those five funds that maybe go for five years, okay, they’ve been in existence for five years. One or two of those five funds will actually have decent returns or decent results.

And so, what the big bank does is they kill three or four mutual funds that did badly. They prop up the one who did well/ They produce a bunch of marketing material behind the one that did well. Then they send that out as if that was the sole result.

However, what you’re not seeing and what’s not truthful is that the big bank basically had a 20% track record, because only one of the five actually did well. They’re not even showing you the results of the other ones. It all failed.

It’s basically like this law of probability with the mutual funds. What they do is they prop it up and through marketing. They’re able to sell these funds to different people to make it look like they’ve done really well, when in fact, they’re doing really bad in the grand scheme of things.

Stig Brodersen 18:03
Another thing that they’re doing, and I think this is just really horrible is how they manipulate the returns. For instance, if you imagine the mutual fund having 100% in year one, and then they’re losing half the next year, then by simple calculation, you’ll see that they are spending the same way with this. They’re starting with a 0% return.

However, what some of these mutual funds are actually doing is that they’re saying, “Well, we got 100% in one year, and minus 50% in the second year, so that must be a 25% return on average.” That was something I was really surprised about that someone would do.

Preston Pysh 18:41
I can say the one thing I really did like about the book was all the research and the stats that he had for the performance of some of the different financial instruments. I found that very useful and very truthful. It was nice to have somebody just kind of shed some light on all this stuff because I think a lot of there’s a lot of propaganda and a lot of marketing on Wall Street to try to keep this stuff out of the purview of the general public. I think Tony did a great job highlighting all that stuff.

As we go to the next point here, the next one that we had highlighted out and we didn’t get all of them, but we highlighted a few of them. The next one he had was “I’m your broker. I’m not here to help.”

In this section, he talks about how Morningstar showed a report that 49% of mutual fund managers owned no share, not a penny in the fund that they actually managed. Then he went through all the different dollar thresholds above that.

I’m just going to highlight the top dollar threshold and only 9% owned over a million dollars in their own fund. So 10% of mutual fund owners out there are fund managers actually own their own fund above a million dollars because anything under that I mean, these most of these guys are very wealthy people so for them, to have $10,000 in their fund, I will basically write that off as them not even having money in their fund.

That’s just so they can say that they have money in their fund. When you look at those stats, and you look at the numbers, it’s actually quite scary when you see that.

The magic question that Tony says in the book, “If people who manage the fund aren’t investing in their fund they run, how in the world would I?” That’s a great question. I would totally agree with him. I don’t even know how you could possibly answer that.

There are more myths in the book, those are just the ones that we’re going to cover here in their brief overview of the book.

In the third section of the book, Tony has a section called “What’s the price of your dreams?” I really liked how he kicked off this section, because he was talking about one of his events where he was doing his motivational speaking and life coaching.

In that he asked the people, “What is it in your life? What is your goal that you want to have?” One of the one of these gentlemen in the back raised his hand. Tony called on him and the gentleman said, “I want to have a billion dollars.”

Tony just kind of smiled. He thought about it a little bit. The way that he approached his response to the guy, he says, “Okay, why do you want to have a billion dollars?”

I don’t think that gentleman was probably anticipating that kind of response, but it was a very important question to ask, because I think a lot of people say I want to be a millionaire, or I want to have $5 million. Then they have no idea why they want to have that sum of money.

And so, the point that Tony gets to is, what is the lifestyle you plan on living and at what age? Do you plan on living it and use that as your foundation and as your starting point for looking back in time of how you’re going to get there? Why do you actually need that sum of money? Are you going to own a $300,000 house and live off of $50,000, a year, from 60 to 80? Because if that’s the case, you don’t need $10-15 million.

The question really kind of imposes a lot. It was really neat. The scenario in the book, he talks about this guy saying he needs a billion dollars. The guy says, “Well, I want to have my own jet.” And so Tony says, “Well, you can lease jets with NetJets. I only fly this many times a year and I feel like I fly all the time. That only cost me $350,000 a year for that much flying. So you don’t need to own a $60 million jet and charter the crew.”

The guy says, “Well, I want to own my own private island.” Tony comes back and says, “Well, that’s kind of interesting. I own my own island and I’m only there two weeks out of the year or something like that. If I would rent the island for those two weeks out of the year, it would only cost you $50,000, instead of owning a multi-million dollar island.”

He just kind of goes through the thought process. He’s throwing out these ideas to this guy if you need to think differently. You need to think where do I want to be? How’s the best way that I can get it and what’s the most affordable and realistic way I can get it? I think that it was a really good discussion. It was really kind of a fun topic in the book.

Stig Brodersen 23:36
Yeah. I don’t know about you, Preston. I was really curious so I started, of course, to do the calculation for myself. Robbins was completely right. You don’t need that much money. He had this very neat equation.

When I say you don’t need that much money, of course, you need a lot of money to become financially independent. But as Preston was saying before, you probably don’t need like 5 million or definitely not $1 billion to become financially independent.

What Tony Robbins is saying you might use something like 6% as the return of something like 6% on your principal. So a very neat way of thinking that is saying, “How much money would I need a year to live the lifestyle I want to do?” and then multiply that by 16, simply because it’s 6%.

I think one of the other important points with this section was when you set such lofty goals that really aren’t tied to any realism to them, it’s exhausting. It puts you in a position where you set the goal. Then a year later you realize, “Hey, this is just totally impossible.” Then you give up altogether.

Preston Pysh 25:13
Your chance of success then greatly diminishes when you don’t put the end state in a reasonable sight picture for yourself of how you’re actually going to get there. The goal is so unrealistic that it’s just a dream. It doesn’t even make any kind of sense.

I think that it was really important to set that benchmark for yourself. I just want to highlight, Stig, the thing that I was thinking about when I was reading this, when he talked about the rental of his own private island.

I was thinking, “How can we possibly put an event together for the TIP community so that we could rent out our own island, everyone can come there, and we can have a blast?”

Stig Brodersen 25:58
You wouldn’t believe it. I thought the exact same thing.

Preston Pysh 26:00
See? That’s why you and I don’t worry about it. We’re going to have fun. And you know what the best part is? The whole community is going to enjoy it, too. We’ll put that out there. We’ll dig into it and will research for everybody.

Okay, so all joking aside, here we go into the fourth section. Then we really weren’t joking about that. We were moderately serious. So just kind of keep your ears tuned. Probably more about that later.

In section four called “Make the most important investment decision of your life,” Tony talks about the importance of asset allocation. This is obviously something that Stig and I totally agree with, as far as where are you putting your money and when are you putting your money into those specific types of assets.

I think that my personal opinion is in the book, he talks about how important this is, but as far as the execution of it, I think he kind of missed the mark on how a person can actually apply this because he doesn’t really get into how time is extraordinarily dynamic with the valuation of assets.

As time continues to march on, you are adjusting your asset allocation based on opportunity cost. That isn’t something that I really got out of the book that I saw that he explained real well. Maybe I just saw it differently than other people, but the way I see it, and the way I treat asset allocation is that I’m constantly making a comparison. I’m looking at the value of the assets that I own today and what return rate I will get based on how they’re priced in the market today. I’m comparing it to what else I could find that might have a higher return. If I can’t find something, after I pay capital gains tax, I keep it where it’s at.

However, if the market conditions change, let’s say that we went into a market collapse, and all the stock prices drop. So whenever I see that situation, my opinion is that the stocks became a lot more valuable, and that I’m going to get a higher return because they’re lower in price. Then I buy more stocks.

And so, my asset allocation is a very dynamic thing. It’s something that’s constantly changing based on relative factors. I don’t think that that’s something that he addressed real well in the book, but he did say that asset allocation is the most important thing that you can do.

Stig Brodersen 28:30
Yeah, I completely agree with you, Preston, because what I just heard was that you kept talking about the return that you want to optimize your return. This book is really to mitigate your variance. You don’t want to have volatility.

I think to some investors and in some situations, it is a good idea to limit your volatility. I think that perhaps Robbins is really not looking at this the right way.

Now, I’m definitely thinking about how to optimize returns. I’m not thinking about how to mitigate my variance volatility, and especially not in the short run. That was just something that took away from the book.

Preston Pysh 29:11
Yeah, at the end of the day, I could care less about the variance. It may be a hardline stance, but the thing that isn’t changing is my percent of equity that I own, and that’s what I care about. I don’t care whether the stock went from $40 to $30.

I care in the sense that I might buy some more of it, or that I might relook at maybe why it had gone down. But I still own the same percent of equity that I had before after a crash or a boom cycle or whatever.

The thing that I’m looking at isn’t necessarily the concern over the market that has priced my equity differently. I’m looking at how I can capitalize on this opportunity of the market pricing my equity at a different price point. A

I think that is how people have to look at it if you still owned whatever percent of a company that didn’t change. The only thing that changed was the representation of how other people view the value of it and if they’re wrong, and you have to know and understand accounting to do that on an individual stock basis.

However, if you know that they’re wrong and you understand what the real value of the company is going forward, it should not concern you in the least bit. I guess I always look at it from, if somebody came along and looked at my personal company that I own, and they said, “Well, I think it’s worth this.” Then the next day, they say, “It’s worth half.” I’m going to laugh at them and that’s because I know the value of my own company.

I suppose I look at stocks in the exact same light, even though I’m not personally managing a particular stock, call it Berkshire Hathaway. Warren Buffett is. If somebody comes along and says that it’s worth half as much the next day, I’m looking at that in the same ownership light, that no it’s not. It’s worth this. So if you’re going to sell it for that, I’m willing to buy more.

That gets into our whole value based philosophy, but just something I want to throw out there about asset allocation is it’s very important to ensure you are buying bonds at the right time, because if you’re not, you’re going to get smoked.

Stig Brodersen 31:24
Yeah and Robbins also talks a bit about rebalancing your portfolio. I think we’re on the same side here, because I don’t believe that you should always have 20% equity or always have like 40% bonds. I think it really just depends on the circumstances.

I think that if you’re looking for this magic formula, about your asset allocation, and always aim to rebalance according to their phone, I think you’re really heading for trouble. I think you’re not looking at what is our surroundings, what’s the most optimal thing to do, and you forget to think for yourself, and just stare at a form. I think that’s probably the wrong approach to take.

Preston Pysh 32:01
It’s funny you should mention magic formulas, because we’re going into section five where things even get more interesting. He says “upside without the downside” for section five. You could not have had more propaganda in this book leading up to this section. I’m just going to throw that out there. I was not happy with the way that the book progressed in the way that it just blew the reader’s attention up as section five is coming.

What is in section five is that Tony had an interview with Ray Dalio, who is an American businessman and founder of the investment firm Bridgewater Associates. Just to kind of give you a little bit of a background on Ray Dalio. He appeared in the annual Time 100 most influential people in the world. He’s worth $15.2 billion I think. So he’s the 69th richest person in the world.

Tony Robbins had an interview with Ray Dalio who runs this fund in the finance sector. Ray Dalio is pretty much regarded as one of the best money managers out there. So Tony gets this interview with them and Tony, basically, with sounds to me in the book through a little coercion, said to Ray, “Help out the average person. What is the allocation that Americans got to have to protect their downside?”

He gets Ray Dalio to say what the asset allocation of his All Weather Fund was. So here it goes. I’m going to tell you what it is. It was 30% in stocks, 40% in long term US bonds, 15% in intermediate bonds, 7.5% in commodities, and 7.5% in gold.

I don’t even know where to start with this. I was a little frustrated when I read this. I’m not going to lie. I don’t even know what to say. I was just a little frustrated with this. I think that the other thing too that Tony might have taken out of context here is I don’t know if Ray was saying that that’s where he was currently sitting or if this is where you should constantly keep these percentages in the portfolio, but I don’t even know what to say so go ahead.

Stig Brodersen 34:39
Yeah, a good way to start is to discuss why gold is probably not a good investment. This is not the same as saying that gold cannot increase 20% tomorrow. I’d have no clue where the gold prices are going. But if you invest in gold, you basically hope that the guy next door comes around and offers you a higher price than what you paid for gold. That’s just not a viable investing strategy.

If you on the other hand, for instance, invest in equity, then you know that this equity is producing income. That income in the end goes back to the investor. Again, I have no clue if the stock prices will drop in half tomorrow. It is just the fundamental and underlying thing about equity is just much better than gold, for instance.

I understand why Preston said he couldn’t say this with a straight face because I can’t see why people will hold gold in general.

Preston Pysh 35:34
How can you value gold? It’s a metal and it’s not producing anything. It’s not like it’s a business that’s creating some type of product and making money. The only way you’re going to make money on gold is if it continues to track inflation, which it does, and it goes up.

So if you’re looking for some type of protection against inflation, gold’s probably a good place to put your money if you plan on holding it for the long haul. If you’re planning on doing it in the short term… But if you’re looking for something that’s going to beat inflation, then I would recommend you buy some type of business or some type of bond that’s protected by the inflation rate. That’s a much better form. To invest in 7.5% gold instead of a tip just doesn’t even make sense to me.

Stig Brodersen 36:25
I really don’t know what all the fuss was about because when I heard about this magic formula, I was thinking this is how we can get a 30% annual return. I think it was like 9.8 or something like that. It’s still a decent return, but you have more or less got a market return. So what was all the fuss about?

To answer that myself, that was really just to limit the volatility of your portfolio. That might be a nice thing but if anything, I see volatility as a great thing, because volatility allows me to buy at a good price and sell at even better prices. I’m not looking at my portfolio as the end goal is just to limit my volatility. I think that’s the wrong way of looking at investing.

Preston Pysh 37:08
I think you’re exactly right on this. I think that Tony was writing this book for a certain market. I think the market was people that were scared to death after the 2008 crash. He didn’t want people to have to go through that fear and emotional cycle once again.

What I think he’s really trying to do here is to help people to never have to experience that massive drop in their net worth ever again. And so, if I think that’s who you are, and you’re trying to just protect your downside, and not have to ever experience that, and you’re not too concerned about beating the S&P, that’s probably a decent approach for you.

However, I think if you’re just trying to get S&P 500 returns or better, this would be a very difficult way to do it by using that asset allocation that he says. Just my personal opinion.

Stig Brodersen 38:09
Yeah and also because it’s easy to say, in theory, that this is the optimal allocation. You don’t have any transaction costs. We rebalance every quarter and we have a computer doing that and looking at the return of the last 50 years. But that is not how private investors invest. I mean, it doesn’t work like that.

Preston Pysh 38:29
Yeah. I totally agree. Okay, so I think we addressed the fifth section here. Read the book for yourself. Don’t let us bias your opinion. Go in there with a clear mind and read through it because there’s a lot of stuff that we’re not talking about that are also mentioned in that section.

Let’s go here and go into section six, my favorite part of the book. This was a very good transition, to be quite honest with you. After section five, I almost stopped reading. But then I got into section six and I was very happy and actually quite excited with some of the information that was in here.

What he does is he goes through these interviews with all these high powered investors. AHe just asked some really good questions about their best investing advice and things like that. So instead of talking about each person that he interviewed, we highlighted just a few.

The first person that Tony interviewed in ection six was Carl Icahn and Carl Icahn is worth $25 billion. He’s actually had better returns as a percentage than Warren Buffett. In fact, from 2000 to today, his returns have been 1,622% when compared to the S&P 500 which was 73%. So you can actually invest in Carl Icahn’s company. The ticker for his company is IEP. He pays a very large dividend. It’s something that I’ve been kind of closely looking at lately.

I don’t own any stock in IEP. One of Carl Icahn’s points was about the corruption of the board of directors for a lot of the different companies and how he attributes 90% or more of the poor performance of a company to poor management. So that was something that really kind of made my eyebrow go up. He talks about this relationship between the CEO and the Board of Directors and how when he’s basically looking for a business that has a good competitive advantage, that has a good product or service, that has really crappy management or leadership on the board.

The reason that he gets a lot of negative connotation towards his name and investing is because he comes in and he buys a majority stake or some type of controlling share of a business that has this bad management. He basically forces the CEO or the management out of it, or he creates this new dynamic within the board in order to change the stock price or the direction of the company.

You recently saw Apple, what was it maybe a year and a half ago, really taken a massive hit after Steve Jobs had died. The company was fluttering and Icahn came in and bought a very large chunk. You saw the stock price stabilize and come back up.

I think a lot of that was due to maybe the psychological factors that Carl Icahn got involved in. He had them start paying a dividend. He did all these kinds of things. Now you now see Apple’s stock price starting to come back up.

It was a very interesting interview, but the one of the highlights that I wanted to throw out there was just how he views management and the board of directors and how 90% of the time it’s their fault whenever a business isn’t doing well.

The next person that Robbins interviewed that I got a lot out of was John Bogle. So we talked a little bit about John Bogle on our ETF episode. John Bogle was the founder of Vanguard with index funds.

When we talk about how index funds are better than mutual funds, it’s all because of John Bogle. Some of the quotes that I pulled out of John Bogle’s interview. So here, I’m going to send a read through some of the quotes.

“I’m going to tell you everything you need to know about the stock market, nobody knows nothing… The manager is taking half the dividends to pay himself in reference to mutual funds… The fact is that over the long term, half the returns in the stock market have come from dividends.”

I really liked that quote and I think that that’s something that a lot of people lose sight of, wherever you go in, and you really start to really quite understand accounting, when you go in and you look at the cash flow of the business, then you you look at that free cash flow, and then you look on the on the cash flow statement, and you look at how much they’re paying out in dividends.

Typically, when you look at that comparison, the dividend typically makes up about 30-50% of the actual free cash flow. That’s what a lot of people don’t realize whenever they’re stock investing. They’ll look at the market price and then they’ll look at all well it’s paying a 2% dividend, and they just write it off as 2%.

However, when you look at the company’s capacity and ability to actually pay that dividend, it’s really kind of sucking about 30-50% of the free cash flow. That’s what Bogle is talking about in this quote. He’s talking about how fund managers are basically sucking up all the dividends and all you’re getting is the market moving the market price from the remaining free cash flow.

Stig Brodersen 43:59
I really liked his example about flipping coins. I’m not saying that I completely agree with that. It’s just something interesting to think of. He was saying that if you put like 1000 people in the room, and you’ll ask them to flip a coin. Then the winner will just continue in the flipping coin tournament. Then after 10 coin flips, you will have one winner.

In investing you will call him the most brilliant investor. In other aspects of life, you’ll just call him a lucky man. I think it was such a great quote about mutual funds and why you should not trust mutual funds because someone would just always get lucky.

Preston Pysh 44:49
The next quote that I got from John Bogle that I really liked is he says at 6.95%, you turn $1 into $30 over a 50 year period, but at 5%, you get $10 instead of $30. He says so what does that mean?

It means that you put up 100% of the cash, you assume 100% of the risk, and you get 30% of the reward. That quote for me is just amazing, because it’s really getting to the essence of what an index fund does over a mutual fund. It’s that when you’re actually consciously choosing a mutual fund over an index fund, you’re consciously making this decision to make a 30% reward when you could actually have a 100% reward for your investment.

The last one that I’m going to highlight from John Bogle, he says, in reference to shows like Squawk Box and Mad Money, “All the yelling and screaming and “buy this and sell that”, that’s a distraction to the business of investing. Take your kids out to the park, take your wife out to dinner and read a good book.” I love that quote. It is awesome.

The last person that he talked to was John Templeton whom he interviewed before the latter died. I want to say John Templeton was worth close to a billion dollars when he died.

He says that, “Bear markets start on the time of pessimism, they rise on the time of skepticism, they mature on the time of optimism, and they end on the time of euphoria.” That’s a really important quote to kind of just understand the boom bust cycle and the market psychology.

Stig Brodersen 46:58
I just think he had a great point about the biggest problem that people don’t save because he was really raging against all this, how to optimize this and not that. He’s saying we have to go back to the very beginning. Like, if you don’t know how to save, don’t focus on how to optimize and return. He’s very famous for only spending like 50% of every dollar that he made. He continued doing that from his early years until he died.

Preston Pysh 47:30
Of all the people that he interviewed, the one that I was most impressed with was John Templeton. To kind of highlight some of his quotes here that he said that really impressed me, one is: “I don’t think an attitude of gratitude will prevent a life of fear.”

He’s talking about the idea that whenever you get scared in the market, or whatever, he says the easiest way to ever get a fearful thought out of your mind is to be grateful and to show some type of gratitude towards the situation that you’re in. I found that very profound. It’s something that I try to think about every time whenever I go through some type of experience like that.

Then the last quote that I want to highlight, it’s a good bridge into the last section of the book. John Templeton said, “Do not try to be a go-getter, try to be a go-giver.”

I know you guys probably heard the interview that we had with Guy Spier. That was one of the biggest takeaways that I had from that interview is just how giving Guy is. I’ll tell you, after we stopped that tape and talked with Guy, I can’t even describe how Guy was just trying to help us and just trying to do everything he could to just give everything to us. It was a little overwhelming to be honest with you.

It’s just kind of an amazing point in my life that I just realized how important that really is. I hope that you guys got the same thing out of the interview that we had with them.

Just John Templeton saying the same message over and over again, it just reinforces how important that is to me. And so, in the last section of the book, Tony says, “Just do it, enjoy it, and share it.”

You really see how much of an optimist Tony is in this last section because he’s just talking about how the world is going to progress. You can see how well read he is on different technologies.

If you really think that the world is going to be a horrible place for you, it’s probably going to be a horrible place, but if you think that it’s going to be somewhere that’s going to grow and prosper, it’s going to grow and prosper. I think that’s kind of the takeaway that I had from the start of the last section.

At the end of the last section, he talks about all his philanthropy and how it has impacted his life and how everything that he’s given has always come back to him in multiples. I couldn’t agree with that more.

I know I’ve had personal experiences in my life where I’ve just given to different charities and to different philanthropies. Sometimes within a day, I have seen that come straight back into my life. To be honest with you, it’s kind of a little overwhelming and just amazing to experience that firsthand.

I thoroughly enjoyed the last section of this book. It really kind of changed my whole opinion of the book. I thought that the beginning with the Ray Dalio thing was kind of frustrating for me, I got kind of frustrated through that section. But as I read the last two sections of this book, I absolutely loved it and really thoroughly enjoyed it. I had a great emotional experience as I finished the book.

Stig Brodersen 50:49
Yeah. I completely agree with you that sections six and seven were really strong. I learned so much from it. One of the things I really enjoyed about section six, and Preston, you already gave some great quotes and talked about a few of those billionaires is that all billionaires in this book, they had something that’s common and that characterizes them.

I think that the first thing that really characterized all of them was that they kept learning. I think that was really something that I took away from the book, except perhaps for Dalio and that he might be misquoted. None of them were looking for a magic formula. They kept learning and they kept improving themselves. They kept adjusting to the new environment. That probably was what made them unique.

They were satisfied with what they’re doing and they weren’t talking about retirements. Some of these people are definitely above 67 to 70 years old, but they are still going strong. They were doing that because they just love what they’re doing. They love getting smarter. They didn’t get smarter, because they wanted to get to be wealthier they can respond to because they just love getting smarter.

Preston Pysh 52:03
So I want to add something on top of what Stig just said, because this is something that we’re doing with the podcast right now as we developed a list of all these different billionaires. We’ve gone and researched all their favorite books. I think there are maybe 65 books on the list.

We’ve got this big list and we’re getting ready to publish it. We’ll link to it on The Investor’s Podcast so you can see all this, but we’re using that list of books that have influenced them. As the show continues to progress, and it continues to go into the next year, the books that Stig and I read are going to be these books that we’ve done the research on that have shaped these billionaires lives. I just want to throw that out there.

So it’s that time in the show where we will play one of our questions from the audience. This one comes from Paul Schrader.

Sender 53:36
Hey, Preston andStig. My name is Paul and I’m currently in the United States Air Force serving my time over here in Europe. Prior to not that long ago, I had no idea how to approach stocks. It’s something that I’ve always wanted to get into, particularly value investing. It wasn’t until I stumbled upon a book called Warren Buffett’s three favorite books that my eyes were opened.

I cannot thank you enough for hiring me to start that journey. So two questions. First, how can options and options trading play a role in value investing?Second, are there any resources that you might recommend to further research the subject of options?Thank you both and keep up the great work.

Preston Pysh 54:18
All right, Paul, great question. This is a very popular question. A lot of people want to know more about options. To be quite honest with you, this isn’t something that Stig and myself really partake in. Stig go ahead, and I’m sure you got a response to Paul on how you treat options and the way that you look at them.

Stig Brodersen 54:38
As Preston said, that’s not something I really participate in. I think that a lot of people are probably a bit blindsided about the marketing aspects of options. Very often you hear about call options, that basically that you will get the upside but you will not get the downside. That might be an option *inaudible* S&P 500.

While it seems like a good idea that you don’t get the downside, the way that the math behind an option is really constructed is that you’re paying a premium not to take any risk. Just the way you’re thinking about it, in terms of insurance, you don’t win on insurance. You just call your losses on insurance. I think that’s probably the wrong way to look at investing. In general terms, that’s why I’m not into options trading.

Preston Pysh 55:29
Stig’s highlight of it being like insurance is probably the best way you could possibly look at this. The only reason to have insurance is whenever you can’t pay for the loss of whatever it is that you’re insuring.

So let’s say that you go down to the store, and you buy a new TV and the TV costs $700. If you can afford to replace the $700 TV, there’s no reason to put insurance on it. That’s just kind of like our general thought process and how we generally view options.

I think the important thing for people to understand when you’re thinking about options is that options are bound by time. That’s where it gets very tricky and very difficult to be successful.

With value investing, there’s no time element attached to the stock coming back to the price or the equity coming back to the price that you think it’s worth. So let’s say I’m looking at Berkshire Hathaway, and I think it’s worth 20% more than what it’s currently trading for. I’m just using that as an example.

If that’s the opinion that I have, I have until eternity to wait for that price to come back up to the price that I think that it’s worth. Whenever you get in the options contracts, they’re bound by time.

So in order for me to be successful, that might have to happen in the next month, or that might have to happen within three months. The thing that you can’t control is the market psychology and how people are going to trade stocks tomorrow. I have no idea, not one clue if the markets are going to be higher or lower on Monday.

I’ll tell you what, if somebody tells you that they do know, run away from them as fast as you possibly can. So when you understand that, and you understand that you can’t control what’s going to happen in the short term. I consider anything like three years or less the short term. That’s why option trading to us is a very difficult thing to do.

Now, I have a really quick caveat, as far as resources and researching more on options. So in “Security Analysis,” Benjamin Graham talks a lot about tangible security. If you own a bond, it might have an option to exercise it into stock at a certain price. You get into these really elaborately constructed securities, that’s where you really got to understand how options work because it might be something that you can actually attach more value to an instrument or a security, knowing that that exists.

You’re really getting into graduate level investing when you start talking about this kind of stuff. It’s something that’s very important if you’re kind of working at that level, but for the normal person that’s just going out there and maybe doesn’t have all that much accounting experience or investing experience, it’s probably something that you’ve got to be very careful with, because it’s not something that I think that people can do successfully in the long term.

When you talk to different people, when they’re telling you how great they are at options trading, that’s typically a short lived conversation. It might be something that somebody boasts about for maybe three years, and then all of a sudden, they’re not talking about it anymore. That’s just my personal opinion.

I would highly encourage you to research that more. I don’t have any good books to recommend to you. Stig, do you have anything that you would recommend other than Security Analysis, which I think is probably not where you want to start. You got to kind of really build up to that level.

Stig and I have a summary on Security Analysis, if you want to try to read that first before diving into the whole book. But anyway, that’s our opinion on options. That’s all we got for you. So we really appreciate the question. It’s a very good question, because a lot of people have the same question. We’re going to send you a free signed copy of our book, the Warren Buffett Accounting Book. I’m also going to throw in our summary of Security Analysis for you so you can go ahead and dive into that. So everyone we know this was a long episode, we really appreciate you joining in.

Outro 1:01:43
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