[00:03:24] Intro: You are listening to the Richer, Wiser, Happier Podcast where your host, William Green, interviews the world’s greatest investors and explores how to win in markets and life.

[00:03:44] William Green: I’d like to start with Joel Greenblatt, who, as you may know, having read the chapter about him in my book,Richer, Wiser, Happier is one of the most remarkable and successful investors of our generation. Back in 1985, when Joel was only 27 years old. He founded a tiny hedge fund called Gotham Capital, which was bankrolled largely by a famous Wall Street tycoon that the junk bond king and multi-billionaire Michael Milken, who was his first major investor, and Joel proceeded to hit the ball out of the park to an astonishing degree.

[00:04:19] William Green: His investment returns to just the stuff of legends over the next 20 years. He averaged 40% a year, which is really unheard of at [00:04:30] that rate. To put this in some context, you turn a million dollars into 836 million dollars, which is astounding. But as Joel explains in this clip, he got off to a pretty terrible start.

[00:04:43] William Green: And what’s interesting is that this happened when he was investing in what he regarded as pretty much a risk-free investment. He was specializing in those days in a lot of special situations like spinoffs and mergers and the like, and, and so he found some virtually risk free bet that turned out to be anything but.

[00:05:05] William Green: In any case, here’s Joel speaking to me on this podcast in 2022 and I’ll comment on it afterwards and I hope you find it as instructive as I do.

[00:05:16] Joel Greenblatt: Well, the interesting thing UR Brace Jovanovich, which was a publisher but also owned amusement parks in Florida, believe it or not, went to buy a very small company called Florida Cypress Gardens, which I remembered as a kid going to, and they had water skiing, Santa clauses during Christmastime and, you know, all kinds of water shows and beautiful gardens, and was a very unique, interesting, and very memorable place to visit when you’re five or six years.

[00:05:40] Joel Greenblatt: And when I saw they were getting taken over, and this was literally in the first month, I went into business for myself. And you know, I was pretty nervous. I was 27 and I had gotten money from a very famous guy and I wanted to do a good job. And I saw this opportunity where Florida Soccer gardens was being taken over and there was a nice spread in that deal where I could make a lot of money if it [00:06:00] went through.

[00:06:00] Joel Greenblatt: And I thought the deal made a lot of sense. At the time, and so I was able to have a big smile on my face and buy Florida Cypress Gardens as one of the first investments I made when I went out on my own and a few weeks before the deal was supposed to close. Unfortunately, Florida Cypress Gardens fell into what’s called a sinkhole, meaning the main pavilions of Florida Cypress Gardens literally fell into a hole that appeared out of nowhere, and apparently that happens a lot in Florida.

[00:06:23] Joel Greenblatt: I wasn’t that familiar with it, and thank God I wasn’t that Florida Cypress Gardens, when it. But the Wall Street Journal wrote a real humorous story about it, and I was like, why is this funny? You know, I’m about to lose my business. I had taken a pretty decent sized bet in this deal, you know, so it just tells you things can happen that you don’t anticipate that it’s not really your fault.

[00:06:42] Joel Greenblatt: I had never even heard of a sinkhole before I read about this happening. So it’s like a risk that I, when you’re doing a merger deal, you’re not really saying risk of sinkhole is in your checklist of things to look for, and so stuff happens. Less kind words for that. It’s a good lesson to learn, especially out of the box.

[00:07:00] Joel Greenblatt: I was sweating pretty good. They ended up recutting the deal at a lower price and I lost money, but not that terrible and so I got a Howard Marx is my favorite line from Howard Marx is always, experience is what you got when you didn’t get what you wanted. I always loved that line and that’s what I got in Florida.

[00:07:14] Joel Greenblatt: Cyprus Garden, some good experience.

[00:07:17] William Green: It’s a good reminder of just the sheer uncertainty of this business, which I think you’ve talked about, how you’ve seen that again with Covid. The idea that suddenly you could actually find that all businesses, all these businesses that you thought were pretty [00:07:30] steady compounding machines, would close entirely for a year.

[00:07:33] William Green: Nobody could go shop there, for example.

[00:07:36] Joel Greenblatt: Yeah, I mean I have five kids, a couple of which I’ve taught investing or tried to teach investing too. And you know, I was trying to teach investing in early 2020 when, when Covid appeared. I tried to explain, you know, I’ve been doing this a long time. I’ve never seen this, never anticipated anything like this.

[00:07:52] Joel Greenblatt: You know, I’ve never seen where they just closed down the world. And you know, besides the terrible human cost, I’d never seen anything like this. And I just tried to explain to them that I’m not going to be much help here. I’ve never seen this before, but it is a good lesson to learn that you have to be at least diversified enough and aware enough that really bad things can happen and you have to live to play.

[00:08:14] Joel Greenblatt: Another day was probably the best lesson to learn that you can put all your eggs in one basket and you can come back from big mistakes as well. You know, I’ve made big mistakes with big positions as well, and then bad things just happen. Part of what you, I always thought you get paid for in this business is kind of your stomach.

[00:08:33] Joel Greenblatt: That what I enjoyed about getting into the business was if you think well, and if you try to figure things out, it’s not really a count how many hours you showed up thinking that it’s the quality of your thought, and in this case it doesn’t matter how well you thought other things still can happen and understanding.

[00:08:51] Joel Greenblatt: Understanding that bad things can happen and preparing to survive to play another day is important. And so I think that was one of the best lessons. Of [00:09:00] course, the market came back fairly quickly, so it wasn’t, you know, as painful as it it could have been. But we didn’t know that at the time. I mean, I remember watching Warren Buffett.

[00:09:10] Joel Greenblatt: At his annual meeting, right in the thick of things, maybe at the end of March, 2020, I think it was maybe April one or I, I don’t remember. Not, not far after Covid started and he didn’t look like this was nothing. And it was a little frightening to see because it was really staring at the unknown. And if you’re looking at the unknown, one of the benefits of working for a long time in this business is a lot of it is gaining experience, seeing a lot of things, contextualizing things.

[00:09:38] Joel Greenblatt: Comparing things to what’s happened in the past and what might happen, and this was fairly unique.

[00:09:44] William Green: I love this story of the pavilion of this company falling into a sinkhole in Florida, because it’s just such an unforgettable metaphor, I think about the uncertainty of life. It’s a reminder that more or less anything can happen.

[00:10:00] William Green: As Joel says, these things aren’t necessarily your fault and you don’t anticipate them. And it really reminds me of a story that Peter Lynch told me once many years ago. I was interviewing him as a journalist one 20 years ago, and Lynch as, as most of you will know, was this legendary investor Fidelity ran the Magellan Fund with just blistering success over about 13 years or so.

[00:10:24] William Green: And then retired. And I, I was talking to Lynch about his early experiences as a money [00:10:30] manager and what he’d learned from Ned Johnson, who is his boss and mentor at Fidelity, who is the, the patriarch of Fidelity, this fund that now runs trillions and trillions of dollars. and Lynch told me that early in his career he made this investment in a, some kind of fashion retailer.

[00:10:47] William Green: And he said they’d had this amazing year and their, it was, I think their best year of revenues ever. And then the movie Bonnie and Clyde came out and Faye Dunaway this, this actress starring in Bonnie. And Clyde was wearing these incredibly beautiful retro dresses that I think had very long hemlines, if I remember.

[00:11:09] William Green: And this changed women’s fashion so dramatically and so suddenly that in the same year that this company had record revenues, they also went bankrupt and he lost his entire investment. And Lynch said to me that he was kind of worried about this, and he was breaking the news to Ned Johnson. And Ned Johnson just burst out laughing and said, no, no.

[00:11:33] William Green: Sometimes things just come out of left field and there’s nothing you can do about it. It’s just part of the game and I think it’s just such a valuable thing to remember that this is, we live in a world of tremendous uncertainty where a movie can change women’s fashion totally unexpectedly, where a pavilion can fall into a sink hole where somebody eating some wild animal in a, in a wet market [00:12:00] in Wuhan, China.

[00:12:01] William Green: Can lead to this catastrophic pandemic that changes all of our lives and transforms the way we work, transforms the way many of our kids have been educated over the last couple of years. It costs millions of lives, turns the economy upside down. I mean, it’s just astonishing. It’s an incredible reminder of just how little we know about the future.

[00:12:23] William Green: And it, it reminds me again, there’s a, there’s a wonderful quote from the Athenian playwright Euros. So I think he wrote about 2,500 years ago, who said something along the lines of, how can you consider yourself a great man when the first accident that comes along can wipe you out completely? And Montia, the great French philosopher actually wrote those words on a beam in the library of his shadow in.

[00:12:49] William Green: And I think it’s a good thing to remember. I used to have this discussion often with my friend, Guy Spier, who runs the Aquamarine Fund and whom I helped write his autobiography, The Educational Value Investor. And we would talk about this great story from Damon Runyon, a wonderful writer who he, he wrote the story, The Idyll of Miss Sarah Brown, which became the musical Guys and Dolls. Runyon tells this fabulous story in it where Sky Masterson the star of the hero, the protagonist of this story is a high rolling gambler, and his father sends him out into the world with one piece of invaluable advice, really against the perils of overconfidence.

[00:13:29] William Green: And his [00:13:30] father says, look, one of these days, son, somebody is going to come to you and they’re going to open a totally pristine new pack of card. And they’re going to say to you, I’m going to bet you that the Jack of Spades can leap out of this, this pack of cards and squirt you in in the ear with cider. And he says, son, do not take that bet.

[00:13:52] William Green: For sure as we are standing here, you’re going to end up with an ear full of cider. And so Guy Spier and I used to joke about this, this idea that you have to beware of ending up with an ear full of cider. So in some ways this is kind of unsettling, right? You, you start with this recognition that we live in a very uncertain world where almost anything can happen, but we need to recognize reality as it is, right?

[00:14:16] William Green: This is one of the great lessons from Howard Marks that you need to accommodate yourself to reality as it is not as you wish it to be. . And so we start by recognizing that we live in a world where, as Joel Greenblatt says, you’re staring at the unknown, right? This is a world where there’s the potential for natural disasters, cyber attacks, wars, as we’ve seen in Ukraine, pandemics, conmen, like like Madoff.

[00:14:41] William Green: I have have been watching a terrific series about him on on Netflix. I encourage you to watch, and so one of the first lessons that I think we really want to intern. Is this one from Joel, which is you have to live to play another day, and that’s just vitally important. I think [00:15:00] this emphasis on survival and avoiding ruin, avoiding disaster is just a fundamental idea both in investing and life.

[00:15:09] William Green: You’ve got to position yourself so that if you are wrong, you’re still going to. Or if you’re unlucky, you’re still going to survive. And I, I think this is really what Ben Graham’s idea of the margin of safety was all about. It’s about how to protect yourself in an incredibly uncertain world, from bad luck, mis analysis, mistakes your blind spots.

[00:15:33] William Green: It’s a very mature and worldly wise view of our own limit. I’m reminded also of something that Jeffrey Gundlach, who’s often called the Bond King, once said to me, which is, he said, look, I I’m wrong about a third of the time. And he said, the key is to make sure that your mistakes are non-fatal. So what do you do?

[00:15:56] William Green: You’re not powerless. Once you actually recognize the fact that you need to focus on avoiding ruin and making sure that your mistakes are non-fatal, because the most obvious thing is you need to diversify. And this is just a recurring theme. It’s so obvious that I’m almost embarrassed to say it. And yet we fall into this trap again and again.

[00:16:16] William Green: And it’s funny, a a friend of mine who’s a well-known mutual fund manager sent me an email the other day pointing out that a fourth century rabbi named Iza Kaba Aha, I think I’m pronouncing his name right, but probably not [00:16:30] recommended putting a third of your wealth in property and a third in merchandise, and a third in cash.

[00:16:36] William Green: So this is 1600 years ago. This is not a new and the first episode of the podcast that I did, which is before the Richer, Wiser, Happier Podcast existed, and I, I did a guest episode on, We Study Billionaires, which I think came out on January 1st, 2022. If you want to look for, it was with Ray Dalio and Dalio again talked about the power of diversification.

[00:16:59] William Green: He talked about his all weather portfolio where he finds a bunch of different assets that aren’t highly correlated. So for example, he talked about investing in stocks, but also. Inflation index bonds and gold and the like. So this is just a really fundamental idea, right? We live in an uncertain, unpredictable world where the future is unknowable.

[00:17:21] William Green: So you have to diversify. But I would say there are some other really key ways in which we need to diversify. One of which is I’m slightly fearful and paranoid about what would happen if there were a problem with an institution. Was holding my money. And I just, I, I don’t want to have too much money in one fund, in one brokerage firm, in one bank you know, call me paranoid, but who knows what can happen in terms of cyber attacks and the like, or financial malfeasance.

[00:17:50] William Green: And I just, I just don’t want to take that risk. I would rather just spread my money, spread my bets, and I, I think the same goes. For asset classes. You don’t want [00:18:00] all your money in one asset class. In one country, there’s a well-known bias, home bias, home country bias where people, people think, oh yeah, I’m in America.

[00:18:09] William Green: I should have all my money in America. . I just, I think you should remind yourself of what happened if you lived in a place like Cuba or my in-laws who had to flee from Vienna during World War II or or my ancestors who had to flee from Ukraine and Russia and Poland in the first part of the 20th century.

[00:18:29] William Green: And so this idea of diversifying not just among asset classes, but countries and currencies, I think is just a wise precaution in a world where anything can happen. And another really important idea, I think comes from Howard Marks, who when I interviewed him for my book, just said, look, the real question is how much do you push the limits?

[00:18:50] William Green: You just want not to overreach because given that we are facing an unpredictable and unknowable future, part of preparing for that unknowable future rather than trying to predict it, which as we all know, I think it’s impossible, even though we fall for the bullishness of people who pretend that they can predict the future for the economy and for the market, we have to admit to ourselves, I think if we’re honest, that we can’t.

[00:19:15] William Green: So if we want to prepare for it, what do we do? We have to say, well, I’m not going to overreach, so I’m going to set aside some cash. I’m going to diversify. I’m going to live within my means. I’m not going to take on so much leverage that I’m a forced [00:19:30] seller at the worst possible moment. And so these very simple precautions actually grow out of a mature recognition.

[00:19:40] William Green: That the future is unknowable, unpredictable, and that we live in a world where a pavilion can fall into a sinkhole when we didn’t even know what a sinkhole was. And but then there’s a caveat here, which is, I remember Howard Marks’ saying to me once that at a certain point, risk avoidance becomes return avoidance.

[00:20:01] William Green: And so you don’t want to become so paranoid about the future and all the things that could go wrong. That you fail to take advantage of opportunity. And there’s a quote in my book, I think, where I, in a chapter called The Resilient Investor, where I, I think it’s niche I quote who says that at a certain point, if you stare into the void too long, you become the void.

[00:20:23] William Green: And I think we want to avoid that. We want to be wary of what can happen and position ourselves to survive our own mistakes and our own misfortune. and our own ability to be blindsided or biased, but at the same time, as we’ll talk about more later in this episode, we want to be very positive about the future.

[00:20:44] William Green: We don’t want to become so pessimistic that we curl up in fetal position and don’t invest. Because really what all of the greatest investors are doing is taking advantage of these, these uncertainties, taking advantage of the times when other people [00:21:00] are fearful. And so I think it’s not about avoiding risk, it’s about taking intelligent risk.

[00:21:07] William Green: It’s about taking considered risk. And there’s one other lesson that I think is really important from this clip of Joel Greenblatt talking about this early mistake in his career, which is that he said, you can come back from big mistakes. And again, it might sound like a trivial and obvious point, but I think this idea of how we deal with our mistakes is really important.

[00:21:28] William Green: And I remember once asking Joel about this question of how he deals with mistakes. And he said to me, look, I learned the lesson. I studied him a mistake. I try to learn the lesson, I try to internalize. But then I let go of it. I don’t become paralyzed by it. I move forward. And I thought about this a lot because I think I tend to have this this habit of messing up and then kind of flatuating myself and feeling like, ah, I can’t believe I did this incredibly stupid thing.

[00:21:55] William Green: And it, it kind of haunts me and I. I’ve tried actually to wean myself away from that habit. I know that Charlie Munger talks about the importance of rubbing your nose in your mistakes. And I, I think it’s important not to bury your mistakes. You want to study them, you want to admit them, you want to talk about them, but you don’t want to overdo it.

[00:22:16] William Green: Become paralyzed by it. You learn the lesson and then you move forward. And I, I often think about this line from this great Buddhist meditation teacher called Sharon Salz. Who would say All is not lost, and she would say, let [00:22:30] go and begin again with self-compassion. And this has become a kind of mantra for me.

[00:22:34] William Green: I it’s, it’s helpful when you’re meditating and you lose your breath and, and you see your mind goes elsewhere and you start to think, wait, where was, I’m a terrible meditator? And, and then, then you’re like, no, no, that’s fine. Because really the rep here is to notice that your mind wandered and to come back to the breath and begin again.

[00:22:52] William Green: But this also is such a beautiful microcosm of life, right? We, we mess up, we trip up, we make mistakes. As investors, we make mistakes. As parents, we make mistakes in every area of our life because we’re human. And the ability to learn the lesson, to say to ourselves all is not lost, and to let go and begin again with self-compassion seems to me actually a really important aspect of resillience.

[00:23:15] William Green: So again, just to sum up, I guess the key really is to focus on what you can control, right? There’s so much we can’t control. We can’t control necessarily what’s going to happen. We, we, we don’t know. We don’t know whether we are sitting on top of a sinkhole or not. But we can diversify. We can live within our means.

[00:23:33] William Green: We can set aside a cushion, we can decide not to overreach, and we can also learn the rules of the game of investing so that we actually know what we are doing. That’s a pretty helpful a pretty helpful idea as well, which I think we’ll probably come back to. Another really important theme that I discussed with Joe Greenblatt is the question of how to deal with the emotional intensity of investing, especially in tumultuous times like we’ve been through over the last year, or so.

[00:23:58] William Green: Here’s the question I [00:24:00] asked him, followed by his answer. Have you ever figured out ways to handle your emotions and to become more emotionally resilient? Because I think of someone like Howard Marks right, who we talked about before. Howard I think is, he says that he’s a worrier, but I think also he’s not super emotional.

[00:24:16] William Green: I always felt like when I was with him, it felt like being in the presence of a most superior machine, you know, with with about 50 more IQ points than I had. And when I think of someone like Charlie Munger who said to me at the bottom tick, March 2009, when he was buying Wells Fargo, he didn’t feel any, any emotion, any fear, and I was wondering if you were wired that way, yourself, not to be too anxious, kind of focused on odds or if there were things that you had to do to get your emotions under control during these very rocky periods.

[00:24:45] Joel Greenblatt: Yeah, so I think what you’re alluding to is to be a really good investor and have a strong enough stomach. Do you have to have a screw loose someplace to be able to handle it? And I think the answer is yes. You have to have a little bit of a screw loose to be able to take those risks. On the other hand, I do feel the kick in the stomach when I lose a lot of money, but I usually adjust to it in two or three days.

[00:25:06] Joel Greenblatt: Try to get my wit a me to take advantage of the opportunity. So I. I’m human, at least in that part where the kick in the stomach, but you kind of get used to it. So I think different parts of your career are different. When you’re young, you figure you have time to make it back. When you’re older, you maybe have the experience to know that it will come back.

[00:25:25] Joel Greenblatt: And I’ve seen this before and I’ve seen it not only once, but many times. And so [00:25:30] what do you do here? I’m not saying you can completely. The emotions that are involved in, and those emotions are very strong, but I do think, at least for me, Being able to adjust and count your blessings fairly quickly and say, okay, can I live with where I am now?

[00:25:48] Joel Greenblatt: Yes, let’s move forward and try to do it the right way. One of the best experiences I had was when I had a summer job and a friend of mine was working for actually the head of risk arbitrage at Drexel, and the guy running that department was about 72 at the time, which I thought was ancient. Now I think he was a youngster.

[00:26:06] Joel Greenblatt: I forgot why I had an opportunity to talk to him, but either we were taking a walk someplace or whatever, and I was saying, you know, I was so upset that I lost money in this thing and how unfair it was. And this thing came out of the blue and this gentleman turned to me and he says, well, have you ever made money where you know you were kind of lucky and you know, it turned out better than than you expected?

[00:26:27] Joel Greenblatt: And I said, yeah, that happens a lot. He said, Does it happen more than when the bad things happen? I said, yeah. And he said, well, stop complaining. And you know, it’s a good way to contextualize, you know, if you didn’t take risk, you couldn’t make extra money, you can put your money in the bank and only take inflation risk or whatever that might be.

[00:26:44] Joel Greenblatt: But at least you know what you have. But one of the reasons you’re able to make money is that the stock market gets very emotional, sometimes creates these opportunities, but it also comes along with pain. If it didn’t. Everyone would do it and you wouldn’t have this opportunity. And of course I’m saying something now, not in the heat of the moment.

[00:27:03] Joel Greenblatt: That sounds very logical and, but eventually you get there. Eventually when bad things happen in a few days, if you can get your sea legs back and start thinking, okay, where are my opportunities? What can I do? Can I trade around in my portfolio? Is there a new opportunity that came up that’s maybe better than what I have?

[00:27:21] Joel Greenblatt: And that’s been the case. So I think good investors may be still get kicked in the stomach, but then come back soon enough to take advantage of the opportunities that come. I think big, big picture, you have to have a little bit of a screw list to take the pain, especially with a very concentrated portfolio that a number of people I know pursue.

[00:27:39] Joel Greenblatt: I did it for a number of reasons. I don’t, when I’m looking for really what I would call unfair bets, I don’t have 50 or a hundred unfair bets at a time to take. So by necessity I have to, when I was running a very concentrated portfolio, take six or eight of them and just have a very fine, I think you have to have a very high hurdle.

[00:27:57] Joel Greenblatt: Meaning, well, to get into the portfolio, it has to be really great. And if you own six or eight great things, or at least great bets, that’s more comforting if you actually know what you own. If you don’t know what you own, if you don’t know how to value a business, you are just going to react to the emotions because you don’t actually understand what you own.

[00:28:14] Joel Greenblatt: But if you actually understand what you own and the premise that you bought those things with is still. That’s actually the only way I think you can deal with the emotion because you realize it’s what you own is still good.

[00:28:28] William Green: There are a number of things that I found really [00:28:30] striking in this answer from Joel, the first of which is that it’s interesting to me that even he feels the kick in the stomach, that this is not a painless process for even someone I think is temperamentally well suited to this.

[00:28:45] William Green: As Joel is, I do remember when I asked Howard Marks whether he found it difficult to invest during, you know, the financial crisis around early 2009 or late 2008. When he was investing incredibly aggressively in toxic bonds, he said, no, I don’t remember it being difficult at all. And I said to him at the time, do you were you always this unemotional?

[00:29:09] William Green: And he said, yeah. And I said, have you had trouble with your relationships as a result? because I knew that he’d been married a couple of times. And he said, yeah, it was difficult in my first marriage. He said, I, I’ve become better about it. But yeah, I was always pretty un.emotional So I do think that the greatest investors tend to have a temperamental advantage.

[00:29:27] William Green: There’s a, there’s a difference in their wiring sometimes I suspect. But then it’s interesting to me that you hear Joe Greenblatt about saying that even he feels that the kick in the stomach, and I think that gives you a sense of the emotional intensity of this game. This is. One of the things that also Joel points out that I think is really important is this idea that because it’s painful, because it’s emotional, that’s actually why we can make money, right? We can. This is something that goes back to Ben Graham [00:30:00] with his concept of Mr. Market. The market is basically bipolar, and so it’s driven by these intense emotions. And so you as the investor can decide, well, I don’t actually have to take the deal that I’m being offered because nothing is cheap enough for me to buy.

[00:30:16] William Green: And so part of the advantage that people like Joel or Howard Marks or Charlie Munger or Warren Buffett have is that they’re able to stand aside in a fairly dispassionate and watch the craziness of this game, the bipolar mood swings of the market. And most of the time just not do anything and then just wait for a few mispriced bets, a few opportunities that are very appealing, and then they strike with with what Munger calls gumption.

[00:30:44] William Green: So it’s a mixture of these, these long periods of inactivity. Followed by some periods of extreme aggressive activity that that’s a very common pattern among the greatest investors. I’m also reminded of something that, that Joel said to me when I was interviewing him for my book. He said, look on this subject of opportunities coming out of pain, he said, people are crazy and emotional.

[00:31:10] William Green: They buy and sell things in an emotional way, not in a logical. And that’s the only reason why we have any opportunity. So if you have a way to value businesses that’s disciplined and make sense, you should be able to take advantage of other people’s emotions, right? So there’s this central idea that you’re trying to take advantage of other people’s emotions.

[00:31:29] William Green: You’re not [00:31:30] just trying to control your own emotions. But this raises this really important question that Joel mentions, which is, do you actually have a disciplined way, a disciplined, logical way to value businesses? One of the things that Joel explained to me that I think had a, a profound effect on me is, is he said, look, if you don’t know how to value a business, you really have no right to play this game.

[00:31:55] William Green: You, you should own an index fund, or you should invest with an active fund manager who does know what they’re doing. And so this is a really central idea, right? You have to actually ask yourself if you’re qualified to win this. And you need to understand the rules. And so one of the things that Joel impressed upon me is he said, look, the whole game, basically stocks are ownership shares of businesses, and you’re valuing them and then you are trying to buy them for much less than they’re worth.

[00:32:22] William Green: And that’s it. That’s the essence of investing as he sees it. And so he said, if you don’t know what you are looking. It’s like running through a dynamite factory with a burning match. And he said, you may live, but you’re still an idiot. And I think that’s something that we’ve seen in this recent period where people were getting extremely carried away by high tech stocks that they thought you could own forever or by cryptocurrencies that they didn’t understand, that were driven to some degree by the Greater Fool theory, the idea that someone stupider was going to come along and buy it from you.

[00:32:59] William Green: It was just price [00:33:00] momentum. I’m not trying to be insulting because I made plenty of dumb mistakes myself. But I, I think this fundamental understanding from Joe is an important one to internalize this idea that we, we have to know what we own. We have to value it in an unemotional way, and that if we don’t know how to do that, then we’re at a tremendous disadvantage because we’re just carried.

[00:33:24] William Green: By the mood swings of the crowd. And this is something that comes up again and again in the interviews that I’ve done with great investors. If you listen to one of the most recent episodes that I did with Fred Martin, who’s remarkable, he talks about this fundamental process where you value a business and you, you, you buy it a discount to what it’s worth.

[00:33:45] William Green: And then as he puts it, there’s a truing. Between the intrinsic value and the stock price, and as he puts it, you have no idea how long it’s going to take. It, it, it’s pretty random. And you know, so one of the keys to being a successful investor is to have the patience to wait for that gap to close. Joel Greenblatt said to me once he thinks typically it only takes two or three years, sometimes it can take longer the market as we know from John Maynard Keynes can remain irrational for longer than you can remain solvent if you’re really unlucky. So again, it’s understanding the fundamental underlying process. This, the rules of the game, buying stuff at a discount, knowing how to value it in a sensible, disciplined. And then waiting for that gap to close.[00:34:30] [00:34:30] William Green: In another episode of this podcast, I spoke with Bill Miller about this issue of the emotional challenge of investing. I wanted to get a better sense of how he personally deals with the pain and pressure, but also of how regular investors can deal with it. As you probably know, bill is a Legendarily smart investor and billionaire who famously beat the s and p 500 for 15 years.

[00:34:56] William Green: He also has an incredibly high tolerance for risk. And when he interviewed him for the podcast last year, tech stocks and Bitcoin were getting absolutely hammered. And Bill was in the midst of taking a beating because he had enormous personal investments in Amazon, which he’d owned for more than 20 years, and Bitcoin, which he’d started buying at around $200 per coin.

[00:35:22] William Green: Bill is it takes on a level of risk that most of us couldn’t handle, but I, at the time he had told me that he was the largest single individual shareholder in Amazon, whose name wasn’t Bezos. So he could also afford to take a loss. Anyway, here’s my question and Bill’s answer.

[00:35:41] William Green: I remember Charlie Munger saying to me at one point when I was asking him what it felt like in 2009 to buy something like Wells Fargo in March, 2009.

[00:35:49] William Green: Whether it was emotional, whether he felt fear and worry, and he was like, in this monosyllabic way, Nope, nope, . No, I said, so you’re not really fighting those emotions because you don’t feel ’em. So is that [00:36:00] similar with you that you don’t really feel those emotions like fear and anxiety and worry during these times?

[00:36:07] Bill Miller: No, I would say that those, the anxiety for me comes when, you know, I can always tell when the market is close to a bottom when I get margin calls, because I read despite what, you know, Buffett and Munger talk about with respect to borrowed money. I mean, my view is that, that if you can borrow money at negative real interest rates, To buy productive assets that you should do that.

[00:36:26] Bill Miller: But you know, I’ve gotten margin calls here and that’s painful cause you have to sell stuff that you do not want to sell and just to do that. But then, you know, once the things are sold and you, and you also have to pay tax then, so I don’t like to pay tax anymore than the next person does. So I, you know, my cost basis on, you know, Amazon is effectively zero.

[00:36:42] Bill Miller: My cost basis on Bitcoin is effectively zero. So selling those things to meet margining calls, because they’re also highly liquid, is going to be very painful next spring. You know, because they gotta pay tax on.

[00:36:52] William Green: So for a regular investor who feels these emotions much more intensely, do you have advice for them on what to do?

[00:36:59] William Green: Because one of the recurring problems obviously, that you and countless other really exceptional money managers have had over the years is that people bail at exactly the dumbest point, at exactly the moment when they should be buying your funds because they get clobbered, they lose heart despair and bail out, and then they buy again when they’re doing really.

[00:37:18] William Green: And just looking back on the last 40 years and having seen all of these mistakes that shareholders make, what would you advise people, not just your shareholders, but regular people to do when they’re feeling kind of barraged by these [00:37:30] emotions as they open up their portfolio and in the morning and they look and they go, oh my god, really?

[00:37:35] Bill Miller: Well, I mean, I, my advice to them is, is what JP Morgan said when somebody said to him, he, he can’t, he can’t sleep for all the money he’s losing in the market and, and what should he do? And JP Morgan said, sell down to the sleeping point mean. I think that’s the, that’s the answer. You know, it’s funny you mentioned that because yesterday, I’m not going to mention the person’s name for obvious reasons, but yesterday, a well known money manager, one of the best in the world, redeemed our.

[00:37:58] Bill Miller: So millions and millions and millions of dollars, and they’re like, really . So I don’t think he went out to buy a, you know, a mega yacht or anything. I mean, I, I’m guessing he just was, you know, worried about how much money he’s losing.

[00:38:10] William Green: I think this idea of investing down to our sleeping point is really important and obviously it’s different for each of us, right? But it’s very important to be self-aware, to know what your own tolerance for pain and volatility and loss actually is. And I remember interviewing Howard Marks for my book, and he said to me, we need to recognize our, both our financial and our psychological fragility.

[00:38:39] William Green: And he said to me, you better be scared. Scared in the sense of acknowledging the possibility of bad things happening and being realistic about your own ability to withstand bad outcomes. And what Howard said to me at the time is, you’ve gotta be really careful about these macho claims that you won’t mind if the stock market plunges.[00:39:00] [00:39:00] William Green: And he said, look, what normally happens when the market goes down by a third is that people panic and they sell, and then they turn this downward fluctuation into a permanent loss, which is the very worst thing that you can do. So his point to me is you gotta be honest with yourself about how much risk you can actually handle.

[00:39:18] William Green: Because if you take on too much, it’s going to overwhelm your emotional resilience as he put it, and then you’re going to end up doing the wrong thing. So, as I say, it’s, this is obviously different for each of us. It’s very personal, how, how much pain and suffering and volatility and risk we can handle and volatility and, and risk are, are not exactly the same thing, right?

[00:39:42] William Green: So for someone like Bill Miller, he can take extreme amounts of volatility. Partly it’s temperamental. Partly it’s, it just suits his personality, right? He’s a, he’s a very aggressive, hyper-rational investor, and in fact, when I was fact checking my book with him and, and was asking him about his personal portfolio at the time, I think, if I remember rightly, he had 83% of his personal portfolio in Amazon at the time.

[00:40:09] William Green: And his second biggest position was Bitcoin. So this was a supremely aggressive portfolio, but that was his own money and he wasn’t that worried about it, and he could withstand the pain. Likewise, you think about someone like Joel Greenblatt, who in his earlier incarnation as a hedge fund manager, in those those years where he was [00:40:30] tremendously successful at Gotham Capital, he had an incredibly concentrated portfolio with maybe 80% of his assets under management in six to eight stocks.

[00:40:41] William Green: And so he once told me, He could easily find himself down 20 or 30% on paper in a matter of days, and it might happen every couple of years. But I think he could handle it temperamentally partly just because as he said before, he understood what it was he owned, so he knew how cheap it was.

[00:40:42] William Green: But I think you have to find a level of concentration and diversification that allows you to sleep. And so for someone like François Rochon, he told me in the podcast where I interviewed him, that he feels 25 stocks is about right for him. That’s concentrated enough that, that it allows him to outperform the market, but diversified enough that he’ll survive his mistake.

[00:41:06] William Green: Fred Martin, who I interviewed recently, who’s obsessed with survival and has an incredible ability to endure over the last 50 years as a successful investor. Fred told me he feels most comfortable with 45 to 50 stocks and that that’s diversified enough for him to still have beaten the market by a mile over decades.

[00:41:27] William Green: So for me, I think about this a great deal. I’m a little bit of a of a scaredy cat. And so I’ve kind of contrarian and I like to invest when other people are scared. I’m, I’m kind of okay then, but I’m also really aware of the risk of ruin, the risk of disaster. And I don’t want to I don’t want to take excessive risk.

[00:42:48] William Green: And so I, find, I often think about something that Sir John Templeton told me 20 something years ago when I visited him in the Baha. And he said that a regular investor should own a minimum of five funds that are exposed to different areas of the financial markets. And I find myself thinking about that a lot.

[00:43:06] William Green: Every time I get a little bit carried away, and I think I’d like to make some really aggressive bet, I try to remind myself of what Templeton said about just being humble enough to be aware of your own vulnerability. And so I’m not in any way trying to argue that I’m a great investor, but the way I’ve sliced this for myself is that I’ve owned two index funds forever.

[00:43:29] William Green: Basically a, a Vanguard International Fund and a and a whole market US fund. And then I own a couple of pretty concentrated hedge funds, one of which is really pretty concentrated, has most of its money in six or eight stocks and I, and one that’s a little bit more diversified, but still pretty content.

[00:43:47] William Green: And then one really pretty diversified mutual fund. That’s an international fund. And then I own Berkshire Hathaway, which I also regard as almost like a fund. And it, it adds some ballast to the portfolio. And I’m, I’m not saying any of these things that stock picks or fund picks or recommendations.

[00:44:02] William Green: I’m just trying to give you a sense of how, how I’ve thought through this issue for. And then I own a couple of other stocks that are not big positions and, and that are more a matter of playing, although I’m not sure that’s sensible and but anyway, that idea of investing down to your sleeping point of thinking about how much pain you can cope with, thinking about your own fallibility and diversifying enough so that you’ll survive your mistakes is really.

[00:44:34] William Green: The next clip I’d like to play you is from an interview that I had with Howard Marks that was published back in March of 2022. As you probably know, Howard is one of the best-known investors of our time. He oversees something like 163 billion in assets as co-chairman of Oaktree Capital Management. Here’s the question that I asked him, followed by his answer.

[00:44:59] William Green: You also have a temperamental advantage that I’ve seen with people like Bill Miller, Charlie Munger, Joel Tillinghast, lots of the great investors that you’re just less emotional than most of us. Yes, it’s easier for you to stand back and look at the odds dispassionately.

[00:45:13] Howard Marks: Emotion is the greatest enemy of superior investing. If you take a look at most people in what they call the herd or the consensus, as the economy does well, as the company’s profits grow, as it reports higher earnings, as the stock rises, most people become more and more and more excited about it, more optimistic, more trusting.

[00:45:33] Howard Marks: And more inclined to buy. So the higher the price, the more buying they do, then eventually things stop going so well, the economy turns down, the corporations profits contract. Three earnings announcements are negative. The price of the stock declines. People get pessimistic and depressed, and more likely to sell.

[00:45:51] Howard Marks: So the higher the price, the more likely they are to buy. The lower the price, the more likely they are to sell. This is the opposite of what we should be doing. We should be scaling out as the price rises perhaps when it gets unreasonable. And we should be getting in with both feet when it falls. So clearly most human emotion is a raid against doing the right thing.

[00:46:11] Howard Marks: And you know, there are a lot of other examples, not just that, but there’s a reason why Buffett said the less prudence with which others conduct them. The greater the prudence with which we must conduct our own affairs. When other people are unafraid, we should be terrified because that means they’ll pay prices that are too high.

[00:47:28] Howard Marks: When other people are terrified, we should turn aggressive because their terror makes things available to us cheaply. And you’re right, I mean, the great investors I know are unemotional about their investing and they. Counter to these trends.

[00:47:44] William Green: I don’t think this actually requires a great deal of commentary.

[00:47:47] William Green: For me, it’s, it’s such a beautiful summary of why it’s so important to think for ourselves and not get carried away by the emotions of the crowd. One thing I would add is just a recollection of going to interview such John Templeton back in 1998, I think it was when he was, I think about to turn 87 years.

[00:48:08] William Green: And I asked Templeton to sum up some of the principles of investing that had served him so well over an enormous period of time. And he said to me, look, one of the most important things as an investor is not to chase fads. And so we talked a bit about how to defend against the madness of crowds. And one of the things that Templeton would always argue is that really the best way for any investor to avoid falling into these popular delusions and the madness of crowds.

[00:49:40] William Green: To quote from a famous book that he wrote a Forward. Is to focus not on the outlook of a stock, but on its value. You just want to be anchored by fundamental analysis of what the stock is actually worth. And he said this is the great safeguard against Crowd madness. One of the other things that was really striking about Templeton is that he was so contrarian that he would actually study markets that.

[00:50:08] William Green: The most out of favor. So one of his favorite ways to find a good investment was simply to look at whatever asset class had performed the most terribly over the previous five years. And then he would say, well these problems temporary or permanent. And so I remember around the time that I’d first interviewed him, he made a huge investment in South Korea during the Asian financial crisis when South Korea had got just absolutely clo.

[00:50:35] William Green: And so he would go around the world and he would ask himself literally, where is the outlook worst? And so he would focus on these pockets of total gloom and doom, looking for enticing bargains because the pessimism of the crowd would be just an incredible gift. It would enable him to buy assets on the cheap.

[00:50:57] William Green: And so this is just really a powerful reminder of one of the lessons that runs through. the careers of Howard Marks, John Templeton, Buffett, Munger. And the way that John Templeton summed it up to me was he said to buy when others are despondently selling and to sell when others are enthusiastically buying is the most difficult, but it pays the greatest rewards.

[00:51:23] William Green: And I think that gets at, at the crux of the matter. Yeah, it’s really, really difficult. Emotionally, it’s incredibly hard, at least for most of us, but it pays the greatest. But at the very least, I think this, the fact that the greatest investors tend to be these great contrarians gives us a clue that even if we can’t buy at what Templeton would eloquently describe as the point of maximum pessimism, at least we shouldn’t sell.

[00:52:49] William Green: At least we shouldn’t panic. and so this has been hugely helpful to me over the years. There are, there are times, like during the Covid crisis, the early days of the Covid crisis, when I bought something like Berkshire Hathaway a few times because. I felt like, okay, this isn’t the end of the world. It’s probably going to be okay, and it’s incredibly cheap, but often I can’t actually bring myself to buy anything.

[00:53:10] William Green: It’s sort of too painful. Or maybe I don’t have enough cash set aside, but at least I don’t sell. And so during a time, like 2008, 2009, during the financial crisis, I didn’t sell. and during this, this latest downturn, I didn’t sell. And, and just knowing from the greatest investors that at times of real pain, you don’t want to panic and sell.

[00:53:33] William Green: You don’t want to be the person who looks back and says, I’ve followed the crowd. I just got. I just got overwhelmed by my own emotion and I saw it the worst possible time. So this I think is one of the, one of the most helpful lessons we can learn from studying the the great contrarians like Buffett, Munger, and Howard Marks.

[00:51:40] William Green: I also want to highlight another part of my conversation with Howard Marks that had a particularly powerful impact on. In this clip, he talks about cryptocurrencies and the debates he’d been having with his son, Andrew, about Bitcoin. Like his father. Andrew is also a money manager, albeit one who’s much more open to high-tech stocks and cryptocurrencies and, and the like.

[00:54:15] William Green: In any case, here’s what Howard had to say about it.

[00:54:19] Howard Marks: Well, our discussions that is the discussions I had with Andrew, really, one of the main focuses was cryptocurrency, because in 2017, which was the year that cryptocurrency came to most people’s attention, Bitcoin had been created seven or eight years before that.

[00:54:34] Howard Marks: But that’s the year that it, Bitcoin went from a thousand to 20,000, and that’s the year that people started talking about it. And I came out very. I said, there’s not there, there, there’s no substance to, it doesn’t produce cash flow. It can’t be valued intrinsically, which means that it, you can invest it in it intelligently.

[00:55:50] Howard Marks: And you know, one of Andrew’s greatest goals was to point out to me that that had been an example of knee-jerk skepticism. I’ve made a lot of money. Conveying against the new, new thing in the past, whether it was portfolio insurance in 1987, or e-commerce startups with no business in 1999. And here we were.

[00:56:11] Howard Marks: This is another new thing. And so, you know, I’ve been habitual. It’s been successful and that’s a, that combination produces habits. So I came out against Bitcoin and I probably did it when it was about 6,000, then it went to 20,000, then it went back to 6,000, and it stayed there through 18 and. And into 20.

[00:56:28] Howard Marks: And by April of 20 it was, I think, still 6,000. But what Andrew said to me is dead in the most loving possible way. You don’t know what you’re talking about. You don’t know anything about cryptocurrency. You don’t know the supply demand case. You don’t know the technology, you don’t know the uses, and you can’t come out as a knee-jerk skeptic about things you don’t know.

[00:56:50] Howard Marks: And in order to make superior investment decisions in any field, you have to know more than most other people. You certainly are not in the category of the people with superior knowledge. All I had was 50 years of investment experience, generalized, but I didn’t know anything about crypto that anybody else didn’t know.

[00:57:08] Howard Marks: So he was right about that and I So it’s-

[00:57:11] William Green: a reminder of the importance of humility basically? Yes. Yes. And, and of being a continuous learning machine and saying, there are things

[00:57:17] Howard Marks: I don’t know about. You know, usually I write about four memos a year now, and in 2020 with the pandemic I wrote, I think 13. I wrote a lot in March, April, when it was needed.

[00:57:27] Howard Marks: But in the summer when things were quieting down a bit, I wrote two memos that I really liked that didn’t get much response. Uncertainty and uncertainty too. The importance of intellectual humility. What is intellectual humility? It means the other guy could be right and accepting that, and I think that’s very important for all of us.

[00:57:45] Howard Marks: And confidence. I run for wrote a memo and conf, I’ve written a memo on everything, but confidence is a very important thing because you need some of it or else you can never hold your positions, especially when they go against you, but you shouldn’t have. So much confidence that you ride them all the way down against the evidence or that you are guilty of hubris and you fly too close to the sun.

[00:58:07] Howard Marks: You have to balance it. But I think that it’s very important to not think you know everything to not think the other guy’s always wrong. So I think that you’re right. One of the most important things is to know what you don’t know. Dirty Harry said A man has to know his limitations. And so I don’t have a strong opinion on crypto because I don’t think I know.

[00:58:25] Howard Marks: I’m trying to learn.

[00:58:27] William Green: For me, what’s really valuable here is not actually the debate about Bitcoin. Personally, I’m totally agnostic about cryptocurrencies. I, I have no idea whether they’re going to go up from here or down from here. And , I’m not really sure anyone else knows either. What’s really instructive though, is Howard’s mindset.

[00:58:45] William Green: Just think about the humility here, the willingness to acknowledge that he doesn’t know enough to make a call about the future of Bitcoin and his weariness of his own biases. The fact that that he’s been successful in conveying against all of these, these fads and bubbles in the past made him just assume that this was another of them and have this kind of knee jerk skeptic.

[00:59:12] William Green: And that’s not to say that his knee-jerk skepticism was wrong. It might turn out to be right, but I think what’s so helpful here is Howard’s openness to learning from his own son. His sense that his son understands things that maybe he doesn’t understand. And this leads him to this really beautiful assertion that you have to accept that the other guy could be right and not think that you know everything.

[00:59:37] William Green: And this is something that’s always fascinated me about investing, is that you could have two utterly brilliant people who disagree with each other totally about the same thing. And so here, for example, you have, you have Bill Miller, who’s absolutely bullish about Bitcoin, who feels like it’s going to be an amazing investment, and has talked very eloquently.

[00:59:57] William Green: If you, if you check back in the episode that I did with him on the podcast, we talked in some detail about why he loves Bitcoin. and then you have people like Buffett Munger saying that it’s rat poison. And that’s just really interesting to me. The fact that Buffett Munger think it’s rat poison doesn’t lead Miller to think that he’s wrong.

[01:00:16] William Green: He just says, look, they don’t have any domain expertise. And let me study it dispassionately and look at the evidence for myself. And here again, you have Howard Marks saying, look, I don’t have a strong opinion about crypto because I don’t think that I know. and then that final line, which I think is wonderful where he says, but I’m trying to learn, and that’s a reminder of a really important thing that, that Munger said about Buffett, which is that he’s a continuous learning machine.

[01:00:44] William Green: And I think that’s one of the, one of the great strengths of Buffett is that he managed to learn new tricks, right? He, he, after saying that he would never invest in tech, he invested in Apple, which turned out to be the, the most profitable investment of his life. He made international investments, he invested in railroads, he kept learning.

[01:01:03] William Green: He kept changing, he kept developing. And so I think this whole discussion of Bitcoin, it’s not really about Bitcoin at all. It’s really about having the mindset that protects you against your own hubris and your own overconfidence. It. It’s saying however smart you are, however much you. You need to accept the fact that the other guy might be right.

[01:01:24] William Green: And then at the same time, there’s this really important caveat which Howard makes, which is you also have to have some firm convictions. You also do have to, you do have to make a firm bet sometimes. And so like most things in investing, it’s, it’s not easy, it’s kind of contradictory, right? As the saying goes, you need to have strong opinions lightly held.

[01:01:44] William Green: And I just, I find it incredibly helpful to look at the mindset of someone like Howard, and it makes me. , I should tread a little bit more lightly in life. I’m probably wrong about most things, and so. I should at least be aware of my own biases as much as I can at trying to look for my own blind spots and, and also open to other people’s views.

[01:02:06] William Green: And I, I think that’s such a helpful attitude, not just in investing, but in politics or so many other areas of life. I just don’t want to be dogmatic. I want to accept the fact that I might well be wrong, and that at the very least I should have respect for the other person’s. Finally, I want to play you a slightly longer excerpt from one of my favorite episodes of the last year.

[01:02:29] William Green: This is from my conversation with François Russia, a great investor based in Montreal. He’s beaten the market by a mile over the last 30 years, but he’s not just a superb stock picker. He’s also an exceptionally logical, rational, and reasonable thinker about business and life. What I love about this clip is that Franco makes a wonderfully rational, compelling case for why we should be optimistic about the future despite all of the challenges we face in the world today.

[01:03:01] William Green: Here’s our discussion about why you and I should expect great improvements and advances for the human race, for corporate earnings, and for the stock market. One thing,

[01:03:12] William Green: François before I let you go, the, the, I wanted to ask you about that. I, I feel like you’ve figured something out that’s really important that a lot of people haven’t figured out, which is you write a lot in your letters over the years about the importance of unwavering optimism.

[01:03:27] William Green: And I think it’s really, it’s a really interesting insight. You know, here we are in this very difficult period where we’re getting hit with inflation and there’s, you know, the market has been kind of melting down and you know, there are fears of recession and there’s war in Ukraine and the like. And it seems to me that one of your secret weapons is one that Sir John Hamilton also had, which is that you’re an unwavering optimist.

[01:03:49] William Green: And I, I wonder if you could talk about why you are and why you have this kind of confidence in what you call the world of free enterprise.

[01:03:57] François Rochon: Yes, you’re right. I think nothing was ever built on pessimism. I think you never make wise decision with fear. I think optimism is an important ingredient to success.

[01:04:10] François Rochon: Not the only ingredient, but one important ingredient. I would say if you study human history and you go back many, many years in the past, I think the only conclusion is that you cannot be not amazed of how much we’ve improved over the last centuries. I mean, just in terms of technology, it’s incredible the changes that we’ve made.

[01:04:36] François Rochon: And you have to understand what is the fountain head of those improvements. And it’s the human mind. It’s just inventing things, creating things, finding ways of doing things better. Always very. and not in a linear fashion. Of course there there’s some tough periods and some better periods, but over a long period of time, the improvement has been quite steady and quite impressive.

[01:04:50] François Rochon: I mean, the standard of living has probably doubled every 25 years in the last century, which is incredible. And so people worry about climate change and their right to, to be. And they worry that we won’t have any more oil and we’ll have to find alternate energy. And I think they’re right too.

[01:05:31] François Rochon: Not necessarily that, we’ll, we won’t have any oil left, but I think we do have to find better sources of energy. But what will bring those changes, those improvements, either for energy or fixing climate change? Will come from ideas and the human mind. And if you think about it, the all the great progresses of the last century came from idea.

[01:05:59] François Rochon: Nothing really has changed our environment and nature and the human nature, but we find ways to always improve things because we have this strive as human beings of never being. We will always want to improve our situation, and I think this strive is very powerful and gives me the feeling that things will always improve.

[01:06:29] François Rochon: There’ll be, you know, there’ll be tough periods, there’ll be, you know, crisis and catastrophies. I accept that and I’ve been accepting that for 30 years. And, you know, I’ve seen the recessions, I’ve seen terrorist attacks. I’ve seen you know, a lot of crisis in many countries. But in the end, I think the human race always advances forward.

[01:06:49] François Rochon: And the, the right approach is to be optimistic that we’ll find solutions to all of our problem. Just, we have to put our minds to it. But I’m confident that the survival gene, this is probably the most the strongest gene we have. We want to survive, we want to move forward, is a, is a very, very great fuel for human investment.

[01:07:12] François Rochon: And pretty optimistic it’s going to continue. I would say that in the next I don’t know if going to be around 50 years, but I’m pretty sure if, if I’m around our standard of living will have increased by hundred percent, then we’ll live even better than we’re living today. And I’m pretty confident that we’ll find solutions to all our big problems like climate changes and inflation.

[01:07:35] William Green: I think part of what I like François, is that your optimism isn’t a naive temperamental impulse that just infuses everything. It’s built very much on a kind of data-driven knowledge of the past. And so remember, for example, reading in one of your letters, you, you talked about a Tale of Two Sitters by Charles Dickens, and you said that since its publication in the 1850.

[01:07:57] William Green: The percentage of people living in extreme poverty in the world has fallen from 87% to less than 10% today. And you mentioned that the average standard of living has increased by a factor of more than 25 times since the book was published in 1859. So you look at that and you think, this isn’t naive.

[01:08:14] William Green: This has happened. This is our history. And think of all the terrible things that we’ve been through in that last 160 years since that book came out. And likewise, there’s an extraordinary table that I think you originally drew up during the 2008, 2009 financial crisis and then published again or updated in March, 2020 at, at the initial height of the Covid Pandemic, where you listed 14, I think, major corrections over the last, I think, 60 or so years, followed by these massive rebounds.

[01:08:45] William Green: And it was very striking to me. Again, it’s a data-driven reason for optimism. You, you listed, for example, in I think 1973 to 74, the market fell something like 48% and then was followed by 106% gain over the next five years or so, and this process seems to have happened again and again. Can you talk about that sense of just that the sun also rises, right?

[01:09:09] William Green: That, you know, here we are going through a difficult period and yet when you look back historically again and again, the sun also rises.

[01:09:18] François Rochon: Yes. It’s the lesson that if you study human history, That’s the lesson. And Abraham Lincoln said hundred and 50 years ago, so this too shall pass away.

[01:09:29] François Rochon: And Ben Graham said that this phrases summarized the whole human history things pass, crisis passed. And in the end, the human race continues to always improve things and move forward. And I would say same thing with companies. Like we talked at the beginning of the interview, companies grow their earnings six, 7% yearly and give a 2 percent dividend on average, so that’s an eight or 9% return for stock.

[01:09:58] François Rochon: So of course when they go down 30, 40, 50%, there’s every reason to believe that within five or six or seven years, they’ll make new records just because earnings continue to. Increasing earnings at 7% annually, double the whole earning in the, in the US every 10 years. So it makes sense that every 10 years, the s p 500 or industrial average doubles in value because earnings have double over the last 10 years.

[01:10:30] François Rochon: And w recession, of course, and earnings will go without recess. But they’re rebound. And eventually they’ll make new records. So I think that’s very reassuring to understand that because you know that there’ll be tough times, but if you are patient you’ll be rewarded.

[01:10:46] William Green: It’s beautiful because it means you have to understand these fundamental forces that are at play here, like the power of intrinsic value, growing the power of productivity, increasing the power of human ingenuity to solve.

[01:11:00] William Green: but once you kind of understand that you don’t really need to be that naive to be optimistic I suspect.

[01:11:07] François Rochon: No, I don’t think I’m naive. I’m just realistic. That’s just the nature of our human society and there’s some very bad things. I couldn’t agree with more. I mean, for everything you read about tragedy is a terrible thing that happen all over the world, but there’s also great, great thing.

[01:11:26] François Rochon: It’s great accomplishment. Great things that are civilization have built over the years, and you have to look at that either also. Both are important. And in the end, I think the overall balance is that more good have come out of the human ministry than that.

[01:11:43] William Green: I love this argument that François makes about why it’s rational and logical to be an optimist about the future of the human race and about the future of corporations and the future of the stock.

[01:11:56] William Green: When you follow the news day-to-day, it’s really easy to become a pessimist and to think that the world is going to hell in a hand basket. I have to confess, as a journalist, I’m particularly prone to this type of thinking because journalists tend to be drawn naturally to what’s wrong with the world rather than what’s right.

[01:12:14] William Green: Plus, for one thing, having edited magazines like the International Editions of Time Magazine, I can tell you it’s, it’s usually a better. And consumers are drawn to bad news. And I think also there’s, there’s a tendency these days to be very critical of business and capitalism, which you see from these shows like Billions and Succession and the like.

[01:12:36] William Green: So I particularly like François’s faith in the future and his faith in free enterprise to be a, a driver of a better future. And I think it’s really important for all of us to have this kind of confidence that things are going to get better. And particularly I think for young people who get sucked into believing that everything is falling apart.

[01:12:58] William Green: I have these discussions a lot with my children, Madeline, who’s 21, and Henry who’s 24. And I think it’s really depressing for them. They read the news and they look at all of these dire warnings about the environment and political mayhem and impending war with China or the current war in Ukraine, and it’s really difficult for them not to get flooded by how depressing the outlook for the world seems.

[01:13:28] William Green: And it strikes me as an incredibly helpful thing to focus on the rational analysis of someone like François. And so I found myself really going through his argument with my daughter Madeline the other day, trying to say, look, all, all, it’s not lost, things are going to be okay. You want to bank on human ingenuity to solve a lot of these problems.

[01:13:47] William Green: And that’s not to be a Pollyanna, it’s not to say that these problems don’t exist, but it’s, it’s really important for us, I think, to have some. In the power of innovation, free enterprise, human ingenuity to tackle some of the biggest problems in society. But maybe I’m delusional, I don’t know, but I don’t think so, and I, I certainly don’t think that François is delusional.

[01:14:11] William Green: This also reminds me of something very important that Warren Buffett has talked about in the past. Warren famously has has come out at some really key moments when people were losing confidence in the. And has offered some really valuable data to say, look, not so fast. Focus on what’s actually happened through history.

[01:14:31] William Green: So for example, in October, 2008 when the market was just crashing and the financial system was in danger of collapse, Warren wrote a piece for the New York Times and OP aired article. Explaining why he was buying American stocks and why he thought that fears regarding the long term prosperity of the nation’s, many sound companies makes no sense as he put it.

[01:14:55] William Green: And so this is what, what Buffett wrote. He said over the long term, the stock market news will be good. And then he added, in the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts, the depression, a dozen or so recessions and financial panic. Oil shocks, a flu pandemic, and the resignation of a disgraced president.

[01:15:18] William Green: Yet the Dow rose from 66 to 11,497. That’s worth repeating. The Dow rose from 66 to 11,497 over a century of just total mayhem, right? I mean, it’s an extraordinary thing. The the other thing that Buffett pointed out that I think is incredibly helpful, Is he said that bad news is an investor’s best friend and he said, it lets you buy a slice of America’s future at a marked down price.

[01:15:50] William Green: And that was clearly true during the Great Depression, as he explained it was true during World War II, and it was true once again during the global financial crisis. And it was true again in those early months of, of Covid. And likewise, I looked back at at the annual report that Buffett had published at the start of 2016 where he talked about the rise in standards of living in the us and I, I think, again, it’s really worth pointing this out because I think people like Buffett.

[01:15:20] William Green: Russia, they’re much more data driven. They’re much more rational about looking at the evidence than most of us are. So I want to draw attention to what he said. So this is, this is back at the start of 2016. He wrote, it’s an election year and candidates can’t stop speaking about our country’s problems, which of course only they can solve as a result of this negative drumbeat.

[01:15:42] William Green: Many Americans now believe that their children will not live as well as they themselves do. That view is dead. The babies being born in America today are the luckiest crop in history. American G D P per capita is now about $56,000 as I mentioned last year. That in real terms, is a staggering six times the amount in 1930, the year I was born.

[01:16:06] William Green: A leap far beyond the wildest dreams of my parents or their contemporaries. So this again, is really worth repeating. Since Buffett’s birth in 1930, over the next 86 years, American g d P per capita went up six times in real terms. And so Buffett then explains us citizens are not intrinsically more intelligent today, nor do they work harder than did Americans in 1930.

[01:16:33] William Green: Rather, they work far more efficiently and thereby produce far more. This all powerful trend is certain to continue America’s economic magic remains alive and well. And then what he points out, which again, I think is a lovely point that I, I, I tried to emphasize to my daughter the other day. Is that he says most of today’s children are doing well, and he says, all families in my upper middle class neighborhood regularly enjoy a living standard better than that.

[01:17:03] William Green: Achieved by John D. Rockefeller, Sr. At the time of my birth, his unparalleled fortune couldn’t buy. What we now take for granted whether the field is to name a just a few transportation, entertainment, communication, or medical service. Rockefeller certainly had power and fame. He could not, however, live as well as my neighbors now do.

[01:17:24] William Green: So I just wanted to end on that, that positive note, not to be a Pollyanna, not to be naive, but to be rational, to point out the fact that so much has improved. So dramatically, and that the forces that are in place, that have driven that progress are, I think, pretty highly likely to continue. I hope that’s the case, and I’m banking on the rationality of Rochon and Buffett, who I think I, you know, look, Buffett specializes in catastrophe insurance, among other things.

[01:17:57] William Green: He understands risk. He knows that there, there are, tough times along the way. There are going to be difficult, there are going to be challenges. So this isn’t naive, but I think understanding that the good things will come is also really important and it helps us to keep plugging away, to keep persevering.

[01:18:15] William Green: So anyway, I want to end on that positive note. And really, I just want to thank you for listening over the last year to the podcast. It’s been an amazing learning experience for me talking to these extraordinary people on the podcast, and by focusing on the handful of episodes that I’ve focused on today, I don’t mean to suggest that these are superior to the other episodes.

[01:18:38] William Green: They’re incredible lessons from many of the other episodes as well. I hope you found this episode helpful. It’s been a bit of an experiment and I have no idea, to be honest, if it’s an entirely successful one listening to me drone on for an hour or so, maybe but I hope that it helps to highlight some of the lessons that I’ve found really most valuable over the last year, and I hope it really encourages you to go back and listen again all for the first time to my conversations with these great thinkers.

[01:19:09] William Green: Joel Greenblatt, Howard Marks, Bill Miller, and François Rochon, I think one of the things that’s most striking about all of the people on the podcast is that they’re amazing teachers. They really are sharing these ideas in a very selfless way, laying out some incredibly powerful ideas about how to invest, but also how to think better and how to live more wise.

[01:19:30] William Green: So anyway, I’ll be back very soon with some more fantastic guests, including Ray Dalio, Guy Spier, who I’m going to visit in Switzerland in a few days, and I’ll interview him, actually live there for the podcast if all goes well. And then on my return to the US I’ll be interviewing Tom Gayner and some other incredible investors.

[01:19:50] William Green: So there’s a lot to look forward to this year, I hope. And in the meantime, please feel free to follow me on Twitter @WilliamGreen72. And do let me know how you’re enjoying the podcast. Thanks so much for listening. Take care and stay well.

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