John Zolidis on Making Better Decisions and Recognizing Flawed Mental Models

Living a life in full is a conversation you always wanted to have with that person who gave an amazing TED Talk or the author of one of your favorite books, or that inspirational Olympian you always wanted to know more about. It's graduate level conversations with those making a difference in the world and in the lives of others. This show brings you new ideas and approaches so that you can live a life in full. I'm your host, Dr. Chris Stout and I hope you enjoy this episode. This episode is brought to you by the nonprofit I founded, the center for Global Initiatives. The center is an all volunteer organization so there are no salaries and thus all tax deductible donations can go to the work. While our key country partners in Tanzania, our work is global and generally focused in the areas of education and healthcare. We also help others to get their nonprofits started or augment others project based initiatives. It's our goal to open source humanitarian intervention and to help make it easier for others to do more good in the world. We are proud to have been ranked a great nonprofit every year since 2011 and to have achieved a Platinum level rating by Guidestar Links. In this episode's show, notes will take you to published articles on our outcomes, a number of helpful tools and downloadable resources which are all free always. Please Visit us at CenterForGlobalInitiatives.org and be sure to watch our video at Patreon.com DrChrisStout to learn more. Thanks. Welcome to another episode of Living a Life in Full. I'm your host Dr. Chris Stout. Investment research created by large banks, mid sized banks and even small boutiques is frequently muddled by conflicts of interests and its value diminished by over distribution. Analysts often feel pressure to have positive ratings, to support bankers or to generate corporate access. And the time horizon of most research is typically very short, causing analysts to miss long term winners due to near term consider. But the biggest issue is that most analysts have no proprietary information or process. Additionally, what are the mental models that can best serve not only making investment decisions, but also the various other choices we make in our lives? John Zalitis has a lot to say about all that. As to the investment aspects, via Quo Vitas Capital, where he is president and founder, he provides a research service that while designed for the buy side, is organized to solve for the sell side's issues. If you're not exactly sure what that means, we'll unpack all that and more in this conversation. John's work has appeared in the Wall Street Journal, Forbes, Fortune, the New York Post, MarketWatch, dot com, TheStreet.com and others. He was named in the Wall Street Journal's Best on the street list and is a part of the value Investing conferences in Vail, Cyprus, Cloisters, London and Dubai. Before John started his career in finance, he attended Kenyon College and later Oxford University where he studied philosophy and German. John currently lives and works from New York and Paris. Please note, before John and I get started in this episode, we are not providing any investment instruction or recommendations. Please consult your financial advisor for investment advice that's appropriate for your personal financial situation, risk tolerance and objectives. Now, John, welcome to the show.

Thanks so much for having me.

Good to have you. So I think we have Guy Spier to thank for introducing us. How did you guys first connect?

It's a long and circuitous story, okay. But it starts with Vitaly Knedlickson, I hope I'm pronouncing his name right, who works and lives out of Denver. And Vitaly had been for many years writing articles talking about value investing. And I believe at some point my interest was piqued in something he was doing. And I sent him a piece of research that I had published for my professional investor clients suggesting that this particular company, which was Finish Line, a footwear retailer, was very interesting from a value investing perspective. Vitaly bought the stock, made money, and said that this was the first time he'd ever listened to a sell side analyst. He subsequently invited me to his conference, Value X Fail, which I attended for the first time in 2016. And this conference was in turn inspired by Guy Spire. And ultimately through that particular introduction, I eventually received an invitation to attend Guy's conference, which I think I did for the first time in 2018. And then I believe after that, Guy did a podcast with me. Actually, that's actually a pretty funny story. So he had invited some YouTube experts to his conference, in addition to investors and other assorted professionals and individuals. And the YouTube investor was talking about why, or the YouTube producer was talking about why YouTube was such a successful platform, why it was so much more interesting than some of the other social media platforms. And the main reason is that the content on YouTube never dies. So when you look at something posted on Facebook or Instagram or LinkedIn, these things, or Twitter, if you will, these things get buried quite quickly. The posts get buried, they go stale, they get lost, they're never seen again. But something that's on YouTube because of the searching related nature of, continues to be relevant and continue to show up and can actually kind of get resurrected at some point in the future. So when I was talking to Guy about my business and I was looking to find and touch more people and get more individuals involved and have more people read my newsletter, he suggested doing a YouTube video. Initially, I was concerned about the compliance related elements of that because with all things within the finance industry, the first thought is, how is this going to get me into trouble?

Sure.

But eventually what he said, he provided this, I think, actually really great piece of advice. He said, john, have the courage to suck. That's what he said.

So it sounds like it.

Okay, fine, so let me go on and I will just put on a video. And actually he said, well, look, before you do that yourself, why don't we do a video? And so he called me on his show, he has his own podcast and he said, look, I'm just going to pull a presentation off your website. I know you have compliance related concerns. So let's just pull this presentation from four years ago. Here's a presentation from four years ago. It's about Starbucks in China and Starbucks growth in China. And let's just walk through the presentation. So he walked through the presentation, asked questions, we looked at some of the charts, we talked about why Starbucks was interesting, we talked about why China was interesting. And then he put it up on his channel and he was able to get I don't know how many thousands of views relatively quickly. And, and the point was, this demonstrates the power of the platform. Now we've seen a way we can do this. It doesn't matter. It doesn't have to be incredibly well rehearsed. It just has to be interesting content. And we're going to leverage the power of this platform. We're going to make the platform work for us rather than the other way around. And I think that series of events eventually led you to me through one of Guy's tweets or other emissions.

Wow. Wow. Yeah. Guy is kind of the Kevin Bacon of the financial world because he's also connected me up with a number of other folks and I think we were at Berkshire Hathaway together a few years ago. Just sort of coincidentally my daughter was there with me and I saw him at the airport and stuff. He's really quite, and he's quite generous with things. I have plagiarized one of his phrases quite frequently with, with, I guess, attributions. I don't know if that's exactly, you know, plagiarism, but that he likes to learn in. And I think he really, you know, does kind of put that, you know, into to play with, with what he did with you on YouTube and with what he does with others on his podcast and stuff. So that's, that's great. Well, and I have. You and I were talking off mic before we started. You know, this is kind of a magazine style show. Every episode's, you know, kind of a variation on, you know, different kinds of folks and interests and things like that. And I guess, you know, for, for me, with the area that you're in, I've had guests on early financial independence, medical startup, invest, equity, tech investing, general startups, and even financial journalists. One of the authors that worked with Guy for his book on kind of his bio, value investing. So having you on the show is just, you know, really terrific. I want to go back maybe into your origin story. I know that when you were younger, you wanted to be a professor and you really had zero interest in business and you were going to get a PhD in Philosophy of language and philosophy of mind. You'd gotten accepted into graduate school. What was the pivot? What, what changed that? We aren't discussing philosophy of mine and we're discussing value investing.

Well, you're absolutely right. I had zero interest in business. I grew up in a small town in Wisconsin. I didn't see my parents, friends going off to work in business in the morning. I'm not saying that I came from some kind of disadvantaged background, but there just wasn't a there, there wasn't exposure to that world where I grew up. And certainly nobody was going off to get internships through their connected parents or relatives or what have you in Wisconsin. So I kind of thought I was interested at a young age of philosophy without getting into all that. I had moved to New York City to do a PhD in philosophy, specializing, as you mentioned, in philosophy of language and philosophy of mind, which sometimes called philosophy of psychology. And I had started there. And I think there were three considerations that led me to pivot, as you put it. The first one is that it takes a really long time to get a PhD. It could take.

Yeah. And it's not cheap either.

I mean, six to eight years. Yeah. New York City is not really the most ideal place to be a graduate student. Right. Are investment bankers and they were going off to expensive clubs. And meanwhile, you're hoping to get cheap coffee and you're trying to study an apartment with thin walls where all of the noise is coming through. It just. That's not so great either.

Yeah.

In addition to that, however, one challenge with philosophy as a discipline. And when I Say philosophy. I'm talking about the analytic school of philosophy, which is to be distinguished from the continental school. The continental school being the kind done in France and Germany, that being the continent. The analytics school is done in the UK and in the US and the analytics school is very rigorous from a thinking perspective. And your tool is language. So if you spend eight hours in a day thinking very deeply about the relationship between words and the structure of your sentences, once you finish doing that, you can't really turn it off. So when you start to speak to, you know, regular people who are not really that concerned with the exact reference or utilization of the words that they're putting into sentences, you find yourself mentally dissecting their ordinary speech in a way that leads you to be, you know, really annoying. So I think that's something you want to avoid. So, one, it takes a really long time. Two, I think it does some, you know, unattractive things to the way that you think about the world and interact with others. And then three, and this was the last piece, the most important one, I think that really drove me away from it is the inability to choose where you're going to live. So when you graduate from with a PhD in philosophy, you're kind of at the mercy of which jobs are available that year. There may not be that many jobs available, and they may be in places that you don't really want to live. And so I was kind of focused on my own lifestyle from the perspective that I wanted to live in an interesting place. And I didn't like that I wouldn't necessarily be able to choose where I might live. So those are the three things that were happening situationally. When I moved to New York, I started working as a temp, getting office work, which was something that I could do while pursuing my PhD. And I had several jobs in the World Trade center, answering the phone and doing various things. So when I decided that I wanted to put press pause on the philosophy graduate school, I networked internally in the World Trade center and I found a job working in the corporate library at Dean Winter Reynolds, which was later acquired by Morgan Stanley or merged with Morgan Stanley. And my job was to aid research analysts to do something which was called researching defunct securities that people would send into us, which is an interesting topic. And then lastly, fixing their computer systems, because at this time, basically any college kid could fix computer systems of major corporations. And, you know, people are very excited to when you could do that sort of thing. So I was doing that. And so, wow, decides to try to move from that not even entry level job into something more permanent within that structure because there was the opportunity.

And give us a timeline for this. This is obviously before the World Trade center was struck. When was this? Mid-90s or when were you there?

So I moved to New York City in 1996 and I worked in the world. I ended up working the World Trade Center for about three years, I think from till 99, like 96 to 99, I was in there.

Gotcha. So for these defunct companies that you're talking about were these ones that just went bankrupt and you were doing kind of a postmortem on them or what was that?

So I was not doing any kind of post mortem. The department was amusingly called statistics, even though as far as I could tell, we weren't doing anything of any statistical nature whatsoever. So what would happen is that someone would find a stock certificate in their attic or they would inherit it from their aunt. And it would be 100 shares of the Pennsylvania East West Railroad Company from 1932. And they would say, I wonder if this has any value.

Wow.

And so what they would do is they would go to their Dean Witter retail broker and they say, look, I have the stock certificate. Is this worth anything? And that guy would say, or gal would say, I have absolutely no idea. But there's a department called statistics and I will fax it in. They would fax us the stock certificate.

Wow.

And we would then take the stock and then we would have to look it up. So we'd have to figure out, we would research it, what happened to the company, company. And so what that involved was very sophisticated analysis. We would refer to a series of almanacs and we would look it up and wow. We would find out that the Pennsylvania East West Railroad Company of 1931 had been acquired in 1932 by the North Dakota Trading and Import Company for $17 a share. And then we would see what happened to the North Dakota Trading and Import Co. Business, which typically was merged with another business at some other time later, which would then go for a 10, 10 for one reverse split, eventually filing for bankruptcy in 1939, shares being worthless.

Wow.

So we would write down all of this history, declaring what had happened to the shares and all the stock splits, etc. Mergers, acquisitions. And then we would type up, I was asked to type up what we call a wire, which was some kind of archaic internal communication system. And I think they chose me to do it because I could type. And I would send this back to the broker who would then inform their client that the stock certificate that they found in their aunt's attic was in fact, worthless.

Wow.

And I think. But I think the funny thing is that the interesting thing here is actually to ask why did these stock certificates never get thrown away? And I believe the answer is it was a feature of loss aversion. If you didn't throw it away, there was some chance that maybe it could be resurrected or maybe it would have some residual value someday. But just a lot of these things lying around and people, it's just like, why do people hold on to stocks that have gone down a ton, that they just don't want to admit that they're worthless by selling them? And it's a similar thing, except with physical certificates.

Right, right. Yeah, that's a. It's a very interesting parallel. The whole, you know, this. It's going to come back or, you know, and even it's an interesting thing, the, the abstraction of looking at, you know, like a number on your phone or on your desktop versus the, you know, the physicality of a paper certificate that, you know, just has to be worth something because it's tangible and I can hold on to, you know, Aunt Gertrude, you know, held onto it and thought, you know, it was the best thing in the world. Wow, that's great. You're kind of like a forensic analysis analyst, you know, back then. So I don't know if maybe this is the roots, but I know today that I think I know. So correct me if this is wrong, that your process is really rooted in a proprietary approach that you've developed based on all these great skill sets of forensic analysis of dead certificates. But you have a really impressive track record and I believe you conduct single stock research for professional money manager clients that would be mutual funds or pension funds or hedge funds. And you also do it for invest. Pardon me, individual investors, where you do investment management services with primarily equity and common stock portfolios. So then you're obviously a registered investment advisor for me. Very few people know that. For about two years in the late 90s, I was a registered investment advisor myself. I ran a website called Smart wealth and just kind of worked as a, kind of a Mr. Magoo momentum trader. So I'm curious, how did you make the transition? We haven't talked really about Buckingham Research, but how did you make the transition from Buckingham Research to being a founder of Quo Vitas Capital?

Okay, great question. Thank you. So I had worked for. We. Fast forward from the original statistics job. I found a job as an equity analyst, worked for Two years for a gentleman called Peter Sidoti researching microcap companies, which was a really great experience. Then I transitioned over to Buckingham Research. I believe I was a equity analyst there for maybe 15 years before spending some time working on their internal hedge fund. We had about $900 million and of that there were two funds while I was there. And one of them was a sector specific fund focused on retail apparel, footwear companies that didn't last too long. I tried to reinvent myself as a restaurant analyst at back at Buckingham Research. But at that point I felt that the writing was on the wall for the business. And so the question was, how do I control my own destiny here? So what should I do? How do I monetize my skill set? And I felt that there was a need for real research, but that few were doing research in a way that was oriented to what the clients, that is professional investors, buy side analysts, investors and portfolio managers really needed and wanted to. And then secondly, over the years, at various times, people had asked me if, if I could manage the money for them. And in the previous structure as a broker dealer and an equity analyst at broker dealer, that was not allowed. So I felt that I could set up my business as a registered investment advisor, which would provide me with regulatory oversight and allow me to manage money for individuals, but also to create research in a way that evaded a lot of the industry structures and problems that you alluded to in your introduction. And I could sell it directly to my clients. So that's kind of the shorter answer of what I was thinking and why I decided to go it on my own.

So did you fund that? Like, was your stake to do this as a, as starting up by virtue of those individuals that wanted to use you as a, as an advisor or how did you, how did you get your stake to get the show on the road?

Well, the great news is you don't need a lot of money to set up a registered investment advisor. I mean, it's a few small fees. You have to pass some regulatory exams. There's no capital requirements. It's not like setting up a broker, dealer or hedge fund that you have a big structure and the research needed a compliance background. I needed some access to a Bloomberg or I use FactSet. So there wasn't really a lot of capital required other than just to fund myself while I was trying to build up a sufficient amount of clients to generate an acceptable amount of revenue.

Got it. So I started off too in the introduction where we talked about used terms like buy side and sell Side and at Buckingham, I've read that you saw flaws in the sell side research. Can you talk about what's the difference between buy side and sell side for those that don't know? And what were the flaws that you saw on the sell side at Buckingham?

So sell side research is typically created by investment banks and it is sold to professional investors who are managing money for others. The buy side are the analysts and portfolio managers that work at hedge funds, mutual funds, pension funds that get research from outside sources that they incorporate into their process of making decisions of buying and selling stocks or increasing or decreasing their market exposure, or shifting from one sector allocation to another sector allocation based on what they think might be happening in the future. So the sell side piece are creating this research, the buy side are consuming it. Those what's behind the two different names? When I talk about what was problematic from a sell side perspective, it was definitely not specific to Buckingham. There is, there are a number of industry issues in my mind that inhibit research from creating a lot of value. And I want to definitely add that there are some many very good and talented cell site analysts out there, some of whom create really great research and that I still read occasionally. But the vast majority of the research is hamstrung by a number of different factors. So the first one is regulatory related. So there's something called what is a research report? And there are certain things that must be included in a research report and there are certain kinds of language you can use and certain kinds of language you cannot use. And so what happens is that right away, before an analyst goes to create anything, they're already hammered into a format which is preconditioned and created by regulatory agencies, not with the interest of the client in mind. Secondly, there are things like the distribution of your research which needs to go to a broad group of clients if there are any specific changes that you make. So if you change your estimates, your price target or your rating, you must distribute it simultaneously to all clients. And this has the perverse effect of causing analysts to not change their estimates. Because if you do change your estimate, you must publish a note. Nobody wants to publish a note saying that their estimate went up by 5 cents because interest rates change or something like that, so estimates tend to get stale. Third, so I said Buckingham, for example, we had roughly 2,000 people clients on our distribution list. So let's say you are a sell set analyst and you do some really exciting, unique research and you come up with some insights that nobody else has ever seen before. And this is really great. You want to show it to your clients so it gets published. It goes to 2,000 clients. Well, say only 10% of those clients really would care anyway. So 200. And only half of them actually read it. Well, still, that's 100 professional investors reading your research. And in that scenario, the special insight that you have created after many hours or weeks of laborious work has now been consumed and can literally be like instantly reflected in the stock price.

Wow.

So you basically discounted. Whatever. Whatever value created is like evaporates almost immediately by the. By the way you distribute it to your clients.

Wow.

And then, you know, the other issues that you mentioned, I think are bigger, which is you need to keep these very positive relationships with the management teams, because you need the management teams for various things. You need them to come to your conferences. You need them to answer the phone call. When you phone. When you call them, you want to be included on the conference call. So there's a. It's a very big prohibition, a very, very big penalty for saying anything that's not favorable.

Wow. Wow.

So you're kind of forced into a very bland language where you're, you know, you have to be very cautious about what, say you also could upset one of your clients. An important client may be upset if you think that their favorite position is a sell, and then they'll cut you off.

Wow.

And then the salesperson won't pay you. So there is this conflict of interest swirling around everything that you're doing, which inhibits you from really stating what your opinion might be about the company. So you're constantly kind of backtracking and thinking about how you might offend some party in the value chain, which is going to negatively affect your compensation.

Wow.

So that is a big issue. And then lastly, the thing that I mentioned and that you read was the lack of proprietary processor information. So I think the vast majority of sell side reports are simply earnings previews or reviews saying, hey, this is what we expect the quarter to be. And then the quarter comes out and then they just rehab what was in the quarter. Meanwhile, all the clients have already read that they have zero interest in hearing an analyst repeat what was in the press release.

Wow.

And they don't really have an edge kind of forecasting the business. They don't have any special information. Some do, but for the most part, it's very difficult to get those kind of edges and then have them on a repeated basis sustainably over time, and then to kind of distribute it in a way that doesn't affect the embedded expectations in the stock price. So I think with that I'm kind of giving you a window into all of the challenges that surround the production, the distribution and the monetization of research that makes it really hard for it to have value.

It must be so frustrating as being that analyst, feeling like you've got to just. I could see doing all this research and sometimes this happens in medical and psychological studies too, what they call the, the file drawer effect, which is that you do a study or something and you don't get the outcome that you thought. So you think it's not going to be able to be published in a scientific journal and help you out with your getting tenure or something. So you just put it in the file drawer and never try and never sees the light of day. I would imagine that with all these competing interests that there's quite that influencing an analyst saying, well, maybe I shouldn't say this or maybe I shouldn't be as full throated about it as would be accurate. That, oh, that just seems like such a darned if you do, darned if you don't kind of situation.

Could say that. But on the other hand, I would say a lot of equity analysts get paid quite well so they, you know, they can live with it. Look, it's a demanding job. You need to be in the office at 7am, you could be there till 7 8pm, you're traveling quite frequently, it's competitive and there's a lot of demands. You have to produce a lot of product. But generally speaking, it is a fairly highly compensated position.

Gotcha. So shifting from that, just before we get into some of your rating systems and talking a little bit more about value investing, just one other question about Quo Vitas from the operations side. Are you subscription based or how do you get compensated? How does it work for you so that things are, you know, tidy and following within regulatory guidelines and things like that?

Sure. So I have two lines of business as you pointed out. So one is the registered investment advisor where I'm managing money for individuals. And in that I just charge a flat fee and that's basically similar to what all advisors charge. So it's around 1%, a little bit or a little bit less. And the other business, the research business, is on a subscription basis and I set it up that way because I want to be freed to spend as much of my time as possible researching interesting things that can help my clients make money rather than calling them to put on trades which would be not in their best interest. Yeah, so that, that's why I set it up with it as a subscription basis.

That's great. I like that. I know with Guy. Speaking of him with his firm, Aquamarine Capital, he's deep in the Munger Buffett camp vis a vis value investing. And value investing is really kind of your niche too. Is that correct?

I think value investing has a lot of interesting and attractive properties. And I think all investing is value investing at a certain level. There are different species of value investors. Okay, so. And some of which I find difficult to execute or not particularly feasible, at least for me. Okay, so some of those. So we can go. For example, the classic is like the cigar butt investing. And so this is an analogy to that Warren Buffett created, which is, hey, sometimes you can walk down the street and you can see a cigar butt that someone has just tossed out, but it still has a few puffs in it. And if you could just pick it up and scoop up those puffs, you get them for free. And so what he's saying is like, hey, sometimes there's these like thrown out stocks that have, you know, they're a melting ice cube, but you can buy them below the value of the melt. If you will mix metaphors.

This.

I find this like a very difficult way to invest. And that is also something that I think has become more difficult because of quantitative screens. So it's easier for computers to find these cigar butts, if you will, than it may have been 40 years ago when Warren Buffett coined the term. If maybe it was even further back than that. There are other guys like, say, if we take Seth Klarman, who wrote the book Margin of Safety, he's very interested in finding businesses in very hidden pockets of the market that are not well followed or that are ignored by other investors and they're trading at a substantial discount to what he believes their intrinsic value might be. I also think this is quite difficult because, one, you need to be a generalist because these opportunities don't. They're kind of distributed broadly across all sectors. Two, you have to be extremely patient to find them. And then three, and this is the hardest part in my mind is that you need to sell those if they go up. So in the event that you find something that is significantly below its intrinsic value, if something happens, the happy occurrence happens and it goes up for some reason, then you need to sell your position because it no longer has this margin of safety built into it. And then you have to reinvest those proceeds into some other crazy, difficult to analyze, hard to locate business. That's not similar to other things that you already know. Some people are really good at that, but that is very difficult.

So you could be sitting on the sideline with cash, just waiting for that next opportunity that may or may not come in any time soon.

It's also tax inefficient because you know you're taking profit.

Sure, yeah, yeah, yeah. Wow.

If you look at Howard Marks, he talks about being very attuned to the investment cycle and making sure that he's buying at times when stocks are extra attractive. But these cycles can last, you know, 812 years. So again, very difficult to have a career or as a professional investor when you're mostly sitting on your hands. So my approach is to look for higher quality companies and to try to buy them at a discount. And I think that that's been a little bit more of the Warren Buffett together with Charlie Munger approach has been more focused on quality. Buffett likes to talk about moats positioning. And if we take for example, Apple, which I think is Buffett's largest holding, he may have bought it at a discount, but certainly there's been times in the last several years or decades since he originally bought it that Apple has not been trading at a discount. I believe I read, I saw a interview with him where he was asked about his position in Coca Cola. This was decades ago and had gone up quite a lot. And he said, well, you know, Coca Cola is a wonderful business and there are not that many wonderful businesses. And so I don't want to sell it even if I believe that it's not at a substantial discount to what intrinsic value might be on a near term basis. And so I'm a little bit more in that camp, which is trying to find really great companies, buy them at a discount, own them for really long periods, it's much more tax efficient. And then my institutional knowledge of the business increases. So as I own the same companies for years and years or years or decades, my comfort level with the businesses increases, my depth of knowledge of the business increases and I'm less likely to be shaken out in some kind of a market dislocation. And I think as an individual investor that's the biggest risk, is that you sell when things seem really scary and you find yourself chasing when stocks are going up. So if you take a really long term approach, really get to know the companies you know you own quite well and don't get too caught up in worrying about on a short term basis, whether they are overvalued or undervalued relative to near term Cash flows. I think you can avoid a lot of mistakes.

What then makes the indication for a sell? And do you just sell a portion just to be able to have that liquidity to then live off of, so to speak, or to be able to use that for something else that looks interesting to invest in or what? I totally get that philosophy of the buy and hold also. It seems like Munger and Buffett are also will sit on stuff. I remember a couple years ago, if memory serves, that they were buying anything and everybody's like going, come on, you gotta. You can't just sit there. And they said, well, sure, we can just sit here. So how does it, you know what, what. For a situation where you've got a good business, a good company, things are going well. What is the trigger to sell some of it or to change your position?

So I recently gave a talk at Columbia Business School about this, about what the sell discipline is like. When do you sell? And so I outlined a few different criteria. So the first one is when you've been wrong. If you buy something because you think it's a great business and they're going to grow earnings and management team's fantastic and you think the stock price is excellent and they've got. And it turns out you were just wrong. And usually that is telegraphed to you by the fact the stock's down a lot. But the fundamentals are not what you thought they were. You need to recognize that and sell and move on. So I mean, that is, as an investor, you're going to be wrong a lot. So you just have to know when to move on. So that's number one. Number two, I mean, you could sell in a scenario where you think a business has just become stupidly overvalued. Now that's a little bit trickier. Like, how do you define stupidly overvalued versus just sort of overvalued? I tend to stick with them even when that happens. Maybe it's an error. And a third reason is when you find something better. So you know, and that could be a better company, something that's earlier in its growth curve, something that's cheaper relative to its intrinsic value. Because starting with the assumption that everyone has a finite amount of capital to put to work, right? So ideally, you want to be managing your portfolio relative to the opportunities that you see in the market and the businesses that you find most attractive at any given moment. So those are the things that I talked about in the Columbia talk together with short selling.

That's good. Speaking of that, I Want to get into short selling with you in just a second. In particular your Dubai talk on it. But before we shift into that, just because I'm curious too, do you have some tips or techniques about ways to manage risk of you know those. Because I know like a lot of times I'll fall in love. People fall in love with companies. You know, they fall in love with the story, they fall in love with the founder, they fall in love that they had a big run up and they expect it to, you know, just keep going straight up and hockey stick forever. So what are some of the ways that you mitigate or manage risk in your investment decision making?

So risk is a tricky concept and it's also a concept that's similar to uncertainty, which I tried to talk about in Vail and I found was based on the reaction or diverse reaction that I've gotten to that talk is something I think is just not particularly well defined concept. But as far as managing risk, my approach is threefold. So first one is to really do a lot of work, so make sure you really understand the company well that you're investing in. Maybe this isn't possible for individual investors, but that's the first piece is to really understand the business well. The second piece is to take a very long term orientation and to because again, as I mentioned earlier, I think the biggest risk is to sell based on short term problems in a business or short term changes in the economy or short term changes in and what sectors people want to own and move away from your focus on the company's long term fundamental prospects, which is what you want to own it for. And the third is to make sure that you buy businesses that don't have impaired balance sheets. So own companies with strong free cash flows that aren't overly leveraged so that if there's something really goes wrong with the market, the business doesn't go to zero. And of course a really good recent example was Covid. Right. So you wanted to make sure that your business could survive a period where there was no revenues coming in for some short period of time or indeterminate period of time.

Gotcha. Good. Well then let's use that as a segue to your Dubai talk. First of all, you used the Hindenburg image in the first slide of your PowerPoint. I also have to say for folks, you need to go to YouTube, you need to look up, you know, your PowerPoints and things. They're just really, I love your sense of humor with these. And so that's a little Easter egg. People can can look up and see. I'll put some of them in the show notes too. But on the COVID slide was a picture of the the Hindenburg blowing up the blimp. And was that meant generally as a reference to being a disaster, hence, you know, short selling, or was it to Hindenburg research?

It was not a reference to Hindenburg research.

Okay.

I have not ever read their research. I know they have a good reputation, but I have no comment on those guys.

Just curious about that. Okay, so let's discuss short selling and value investing. Some value investors believe that you really shouldn't be a short seller. And there's kind of a dogma about asymmetric risk and rewards and shorting. But I don't think that's your philosophy. Is that right? And if so, tell us why.

So, no, I do think that short selling can be interesting. It's not for everybody. It's different from long investing. And so in the Dubai talk, I wanted to first contrast one difference between how a value investor who's looking at ideas they want to own or be long would not have the same process as someone who's looking for stocks that they expect to go down. And the contrast that I called out is that when you're buying a stock that you think is trading below its intrinsic value or that you think is going to be worth more in the future, you don't necessarily care why the market is providing you with the opportunity. It's not that important. What's more important is your analysis of the company's assets, its cash flow, its competitive position, its management team relative to the price you're able to buy the stock. When you're a short seller, you actually need to try to disprove something about the reason that people own a stock. So you have to. You have to find something that's going to be different from what the street believes. So it adds this incremental piece of the analysis. So you don't just analyze the company and the stock price. You need to analyze what the market perceives about the business and then have a view as to why that's wrong. Because when the market realizes that it's wrong, that's when the stock price is going to be dislocated, theoretically go down, and then you will be able to buy the stock back at a profit.

Gotcha. So what are some of the ways that folks can get into trouble with trying to do that?

Well, I think the first thing that gets people into trouble, short selling, is that they try to short based on price or valuation alone. And that is usually a definite way to get into a world of pain. So, you know, you can't, you need to, you need to have a view like what is going to cause the stock to be reset at a lower price. If you, if you just say, hey, this thing is, you know, crazily overvalued. There's no, no reason for it to trade at this. The problem is that stock prices can become detached from fundamentals and they can become detached and that can stay that way for a long period of time and they can continue. And if a stock is irrationally priced at $100 a share, then there's in principle no reason why I can't trade at $200 a share. So I think starting with the frame that something is incorrectly priced in the market and that is your main approach is gonna lead you to be, you know, possibly covering at a higher price and losing money.

Gotcha. You know, you mentioned like the aspect of COVID and the pandemic and how that affected at certainly a macro level. Scott Patterson has a new book out called Chaos Kings. I don't know if you're familiar with the subtitle is How Wall Street Traders Make Billions in the New Age of Crisis. And in that book he talks about Nassim, Nicholas Taleb and famous for the Black Swan and Anti Fragile and Mark Spitznagel I guess was a student of his at some point in time. And they have, or Spitznagel has a Black Swan protection fund with his company Universa and they have an audited 15 year annual return of over 100% which seems crazy, but mostly if not exclusively by betting on calamities. Do you have any thoughts or opinions about that kind of an approach vis a vis shorting or the unforeseen kinds of events that then they seem to feel are inevitable?

I think that Nicholas Talib Tassim's book Fooled by Randomness is one of the most exciting books I've ever read as far as finance goes. And I really like the ideas that he has in those books about how our brains are programmed to find patterns in noise and then to try to describe a narrative and meaning to that when there really exists none. And you know, the second point or among the other points he has is that people discount these very rare events so you can buy insurance against those events at a much lower price than you should be able to and therefore profit when these calamities or very unusual events occur. So I mean, I think in principle that makes a ton of sense. I think Practically very difficult to execute. I haven't audited their performance track record. I mean, it sounds amazingly too good. Unbelievable.

I know, I know.

So I mean, the thing is it's going to be very lumpy, right. A strategy like that, because calamities don't happen that frequently.

Yeah.

So you're going to have many years where, or periods where you don't, you just lose a little bit because your, your strategy isn't paying off and you have a carrying cost of running the business. And then whenever the calamity occurs, you make, you know, I don't know, some massive quantity, whereas everybody else with the opposite strategy is getting crushed. It's not something that individual investors can put into practice.

Yeah, it reminds me of like how VCs, if you look at like when you talked about the bumpiness, you know, if the VCs have enough unicorns that go to a billion, it certainly makes their whole track record for all the, you know, the, the losers and stinkers that went bankrupt to become invisible. So one other question about that then. I want to get into your mental models. Like this also makes me think of like activist investors. You know, we see the kinds of things that are occurring with, with Hindenburg and kind of what they're doing and what they've been been doing. We see hedge fund managers like Bill Ackman or legendary short sellers and activist investor like Jim Chanos. Is that all within the, the crucible of short sellers or is it being public about these kinds of things and sort of their. I don't know if it's even paradoxically, but they're causally, you know, causing the shorts that they're calling to actually happen. Or do you have philosophies around that vis a vis ethics or practicalities?

Yes. There are kind of two different ways to talk about this. So one is there are people like Muddy Waters who do a lot of work. They put their position out there and then they go public with their thesis and their data. And I imagine profit from getting the market to come around to their view. And if, as I said previously, you need a reason to believe that the market is going to view the stock differently and you could theoretically be that catalyst. Right. There's a lot of risk to that strategy though. For example, if you're wrong, and unlike a long, and this is the second half of the answer to your question, when you're a short seller, it actually works against you to bring more people to your point of view. So if in a sense, I mean that if you get the short if the stock gets crowded from a short selling perspective, you actually decrease the amount that you will make because the others will also try to cover the stock at the same time, creating buying pressure. And it also amplifies a negative reaction if you're wrong. So the more people that are short, if you're wrong, the higher this, the more the stock's gonna go up against you. So there's kind of two, those are the two schools of thought. One is like you, you put all your information out there, you can make the stock move all by yourself, and that's your strategy. A second is to really be quiet. And it's really only when there's a surprise that stock prices move dramatically. So if I take just one step back, I would say that when I approach investing for my professional clients, I start my first filter are earnings revisions. And I say that the most reliable predictor of stock price performance are changes in expectations for cash flow and earnings. So if you can find a business where people think that it's going to earn a dollar, but you think it's going to earn 250, it's highly likely the stock's going to go up when the earnings get reset to this higher expectation and vice versa, if they're supposed to earn a dollar, but they're going to break even, it's probably going to go down quite considerably. So I spend nearly all of my time trying to find cases where analyst estimates, street company guidance and street expectations are wrong. And I can have some conviction about which direction I think the earnings revisions are going to go.

Gotcha. That's great. So let's shift into. Because I mean, this kind of, the meta aspect of all of this conversation is your decision making and how you look at data and how you weigh it and whatnot. And I know that you were, you and I were talking off mic before we got started with the valuex conferences. So I want to discuss your take on mental models and decision making. But before, for people that aren't familiar with valuex, can you share what that is, what that's about, where they happen?

So I think value the value investing conferences are kind of a story that needs to be told. I don't think it's kind of a well known thing. So, you know, my background, even though I was working for a boutique investment research firm, was really within the New York City Wall street complex. And within that, the biggest sums of money in the hedge fund world are chasing a lot of fairly large liquid public companies and they're running strategies that require them to Stay very close to short term changes in performance of the business and the stock. Okay, so wait, it says something called market neutral. So when you're market neutral, you need to be long and short approximately the same amount of shares. And what, what these pools of capital are doing are trying to eke out 1% point of alpha per month. That would be the ideal situation. And so just 1% spread between their long and short performance while they're maintaining really no specific exposure to the overall market. And so to do this, these analysts and portfolio managers are extremely focused on short term earnings revision trends in the quarters. And they're looking for cases where companies are going to beat or miss by small margins and they can capture these small movements while not taking a lot of market exposure risk. And so they're just always focused on this news flow, the latest data, the near term outlook, what management said at the last conference they were presenting at, etc. Etc. When you go to the value investing world, it's like an entirely different universe of thinking and approach. So generally speaking, the attendees at these conferences are not corporate. They're not coming from JP Morgan or Morgan Stanley or Goldman Sachs. They tend to be individuals. It's very entrepreneurial. It tends to be people running family offices, small funds, individuals managing their own pools of capital. And there is a very strong lifestyle element associated with the conferences. So the people who attend them are also interested in why they are investors as a profession and how they can live a balanced life, which is, you know, not something that you hear frequently in the New York City complex.

Right.

Of short term trading.

Right.

So but I think it might, it's worth it kind of just to talk about the format of these conferences a little bit. So they, so they, they're a user generated content, which is to say that everyone who comes to the conference typically presents to the group. And so you have a peer, you have like a feeling that you're kind of all in it together and you're presenting to your peers. So it's not a format where there's a number of high profile people presenting to an audience. It's a much more collaborative spirit. And then in addition to the presentations around investment ideas or investment philosophy or process, from an investment standpoint, there's usually activities where the participants are encouraged to have conversations, do interesting things. So in Closer Switzerland, you go skiing, you do snowshoeing. In Val, Colorado we go to something called Camp Hale, which is an old military camp where they've got a whole bunch of fun activities. We go up the mountain Go hiking. This is in the summer in Cyprus. We do a boat cruise. We visit some ancient ruins and there's a lot of eating and drinking and socializing in addition to some actual work where we talk about investment ideas.

Nice.

So this kind of network helps you to meet people. You meet other people who are experts in different areas and then you widen your network as an investor so that you can utilize the value and the expertise of all these different people when you come across new ideas.

That sounds great. How long are they? A week, A weekend?

Most of them are two to three days. I think that's about enough.

And how many folks attend these generally? I'm sure it varies, but on average

they're each a little different. So the tallies is 40 people only. Sophocles Sophocleis, who runs the Cyprus Value Investor Conference, I think we're going to have around 60 there in September. The Dubai conference I think also had around 40 to 50. And Guy Spires event in Cloasters has mushroomed a little bit recently. So I think it's maybe closer to 80 or 90.

Gotcha. So then with these. I remember way back when the teds first started with Richard Saul Wurman, he wanted them kind of confidential, like, you know, people if you wanted to be at it, you needed to get invited to it. You needed to kind of, you know, know you could share with others what you talked about or whatever. But it wasn't as public as they are now with a Ted.com and people can watch TED talks and all these kinds of things. You are very good about publicly sharing some of the things that you've given in talks. Is that a general value or general ethos of the Value X conferences that people then, if they choose to, can go out and share it? Or is it just kind of up to the individual that participates and puts something together or what's, what's the, the norm for that for these kinds of conferences in terms of public sharing?

So there's some, there's some important principles behind the conferences. So one of them is non solicitation. So you're not intended to go there to sell to each other. You're there to, you're going there to share and provide value to the others. The second one, Guy Spires was Gestalt. So you know, it's a positive reinforcing type event and then the privacy is actually a big component of it. So usually what's shared at the conference, the presentations are not allowed to be spoken about or at least we ask people not to speak about them outside the context of the conference. That said, some presentations do get shared and usually you can find, for example, on Vitale's website, some presentations from past conferences with the permission of the attendees. So it is a little bit more buttoned up. They are for the most part are invitation only or you have to be approved to attend. But it's not. But I wouldn't say that it's a kind of a snobby, exclusive group. That's not the idea. It's more of an inclusive group with the objective of kind of elevating the overall community by bringing diverse people together from different places.

That's great. I think that kind of additive nature of it and collaborative nature of it really can be helpful in terms of growth and creativity and whatnot. So let's then take that as our segue into mental models. Can you maybe to kick things off with a 101, how do you distinguish mental models from heuristics? Or what are the differences in terms of what you see?

Sure. So I like to talk, I like to do process oriented presentations. I don't mind also talking about individual companies. But more recently I've gotten interested in speaking about how to find good short selling opportunities, when to sell. And then I decided that I want to talk about mental models and in particular destructive mental models. So things that cause us to make error and then thus how to avoid them. Okay, so when, I mean when I say mental model, this is not a term that, that I coined. It is a simplification. And from an investment standpoint, it's a simplification of a process that helps you to more quickly absorb and understand a large amount of information. A heuristic. Since you called that out, one of my favorite things to talk about is a mental shortcut. So a heuristic that I think helps to describe this is the availability heuristic. So the availability heuristic is, is if we ask you, for example, how many times, how likely is it for a pedestrian to be hit crossing the street in New York City? So you think, well, gee, I just think in my head, like, well, how many times have I read about that in the paper? Like how available is the, how hard is it for me to come up with an example? And if I think, if it's relatively easy, if I can think of many examples, I think the probability is quite high. And if I can't think of any examples, I think probably is quite low. And while, and this is a shortcut versus doing the actual work, right, of getting the data and Synthesizing it and then calculating how many crossings per day there are in Manhattan relative to the number of hits that you, you know, then you can get an actual probability number. So the heuristic gets you there more quickly. But it has the disadvantage of in this case, perhaps being completely wrong. In the case of a mental model, it usually is trying to have some efficacious ability behind it. And so it does help you to, for example, like I don't invest in companies with bad balance sheets. Might be a mental model very simplistically.

So what are these destructive mental models? What causes investors models to work for a while and then stop working? Is it environmental or. I think you talked about different factors of those. Can you maybe step us through those?

So I went through a couple of them. I'm going to start with the first one, which is to make me a little quiz. Okay. So everyone should kind of try to answer these questions for themselves. So how many days does it take for the moon to circle the earth? Chris, what do you think? 30, 27, 27 days. Okay. How many days for Mars to circle the sun? 687. How about these?

That's what I was going to say. I was going to say that.

225 days. And how many days does it take the earth to circle the sun? 365. Okay, so here's the, here, what's the, here's the point of the quiz. What do these figures have in common.

With each other or just they're

none of them. What they have in common is that none of them represent the ideal period to evaluate investment returns.

Okay. Zero correlation with. Got it. Got it.

That 365 days is not correlated to the economic cycle and it's not correlated to the business cycle. So why do we look at one year performance returns? Why do you think about your portfolio in terms of a year to date performance? It's because of industry incentives. You know, there's salespeople need to sell funds months.

Wow.

They need to have a increment of time that they can measure the performance so that they can put that in their sales literature that Wall street banks pay on an annual book bonus basis. So people orient their thinking to one year increment. But none of this has to do with like why you would buy a stock or sell a stock, in my opinion, why you should be buying stock. So that's kind of the first point is that there's this industry incentive structure and it gets you to think in a one year increment and that's a source of investment error because it causes you to do things that you wouldn't do if you were to really to think about the right period for owning a stock.

Gotcha. Wow.

And then. And the second one has to do with the pattern seeking nature of the brain, which you could also call the, the lizard brain. And I call number two, the wise man problem. And 2023 is a good example of this. So ironically, the more experience you have and the more data that you've seen historically, the less likely you are to look for what's new and unique and different about these circumstances. In 2023, many economists, actually the majority of economists forecast recession. Now this is an interesting point by itself because actually this has never happened before. It's never happened that economists as a group have forecasted a recession in advance. They have always waited for the recession to actually start.

I'll be darned. Wow. Wow.

Why are they so convinced that there's a recession that's going to come? Well, you have an inverted yield curve and interest rates are going up and we're at full employment and whatever their reasonings might be, but as thus, Lee, I don't know what's going to happen the rest of the year, but so far they've been completely wrong. We have not had a recession. My point is that the reference to the prior experience is causing you to discount what's different about this time.

Interesting. It also calls into question the wisdom of the crowd, you know, of the wise men, experts, you know, kind of problems. So that's. I didn't realize that, that it was actually a phenomenon. That's good. Okay, good, good. Continue.

The third one I called analysis by analogy, or you could say false analog. And this is more of something that happens, I think, for equity analysts. But when you see a new company for the first time, the first reaction that I have and that I think most analysts would have is how is this business similar to some other company that I already know? So you're trying to take a mental model of how does a restaurant business work or how does a retail business, or how is a gold importing business or whatever it might be, and you're trying to fit this new business into the form of the one that you're already familiar with. Now, the reason you're doing that is you're trying to save time. You don't want to spend hours pouring through the filings and meeting with the management team and visiting the operations, et cetera. And you want to race to the conclusion about whether this is a business that you'd be interested in owning or not owning. And I argue this is an error because you're biased to not see the things that make the business interesting, unique or different. And those are probably much more relevant facts to find from an investment standpoint rather than how is this similar to things that I already know?

Gotcha. Okay.

And then on the other side, there is your brain trying to make a narrative in noise. So stock prices go up or down. And I'm sure most people who, if their investors have experiences, so you buy a stock and it starts going down, of course. So you think, what did I get wrong about this business? What didn't I know? What does the stock know that I don't know? What is it telling me? And in fact, sometimes stock prices just move around on absolutely nothing or certainly no reason that's related to the long term fundamentals of the business. Yet your brain is actually just programmed to try to find an explanation for why the stock's moving in the direction it is, which then causes you to behave in ways which are counterproductive.

You know, I've heard that in context of like people being interviewed on Bloomberg or CNBC or something like that, an analyst or an expert or whoever that, you know, the interviewer will say, well, why did you know XYZ stock, you know, go up or down today? And they'll say, well, this is why, blah, blah, blah. And sometimes you could probably prima facie make an argument to say, you know, the, the CEO went to jail or something and that probably is causal, you know, but you know, I heard someone else just kind of say they have no idea. You know, it's just totally, you know, spec you really kind of, unless there is some kind of, you know, really red flag event that, you know, stuff just goes kind of up and down naturally, organically for whatever reason that more people buying or selling that day. So that's, I really appreciate that that's so true.

And then this is the, I, this one I had the most trouble with or I've had the most diverse set of responses to was around uncertainty. And this may harken back to my philosophy roots on some level. So my contention is that the amount of uncertainty in the future is constant. So it's never more uncertain or less uncertain. And as an investor, you're always dealing with the future. You're never investing, you're not investing for today, you're investing for things that you think are going to happen five years, 10 years, I don't know, two years, but you're Always at risk of things happening in the future that are different from what you think might, might be going on.

Okay.

And what I believe happens is that people conflate uncertainty in the present with uncertainty in the future and that that causes them to make investment errors. So let me try to flesh that a little bit more.

Okay.

So when Russia invades Ukraine and oil prices go up and there's a pandemic, we believe things are uncertain. We don't know what's going to happen. But you never knew that these things were going to happen in advance. And you still don't know what's going to happen in the future. But what you do know is that stock prices change. So if you are an investor, the perceived near term uncertainty actually correlates with better times too, to buy stocks. Whereas if you think that you can't see what's happening in the future and so you don't want to buy, I think that's a source of error. Simultaneously, if you think you have really good visibility, you're also fooling yourself. You have no more visibility into the future. Now at the end of the conclusion of the Russia, Ukraine hostilities or oil prices, prices or interest rates that you won't have any more visibility under those circumstances than you do under today's circumstances.

Yeah, it's.

So it's, that's my idea. I don't know if articulating it very well.

Yeah, I mean, what it makes me think of. So let me see if a message is received. It makes me think of just sort of like gambling. I mean the, the uncertainty of thinking, well, okay, the roulette wheel, it's going to land on red this time because last time it was black or it's going to land on red this time because the last five times that landed on red or a coin toss or a dice throw or anything along those lines, maybe even harkens back to your point about trying to look for patterns where there really aren't patterns. So I think that's really a good point. That it's almost a. I don't know if cliche is the right word, but it certainly seems to be like a dictum that when things are in a panic or things are uncertain that markets do go down and that then becomes a buying opportunity. Good companies are on sale for a discount. Is that kind of the spirit or the philosophy of what you think about that with the conflating uncertainty?

If I add the idea that you shouldn't be trying to assess how you feel about future uncertainty during these periods? Because when you're an investor, you should always be accepting that there's uncertainty. So your action is predicated on not knowing what's going to happen in the future. Nevertheless, you still need to make some kind of capital allocation decision. Even you do nothing, it's still a decision. So my advice is to, or my approach is to focus on things that I think are knowable or more knowable, like is this a good company? You know, is Nike going to be a strong brand in the future? Is Home Depot still going to be around and providing drills and nails and lumber for home improvement improvement projects five years from now? And when you focus on the things that you can know, you want to, you discount these unknowables. Whereas if you focus on large picture stressing type activities, you're less likely to make good decisions because you don't really know what's going to happen one way or another. So that's kind of the point, or are trying to make the point. And it was interesting because in Vail, this message did not get across very well. But in other cases, the reaction I've gotten from professional investors and others, it's like, John, the points you're saying is obvious. So I'm still not sure that I've done a great job either way. But I do think it's interesting in that we have to deal with uncertainty. That's part of the job. As an investor, how do you approach a perception that things are more or less uncertain? And how do you change your, or should you change your investment approach based on these kind of feelings? My contention is that you shouldn't, you should have an approach that doesn't change because you're fooling yourself.

So do you think the folks at Vail just didn't want to believe it? Could that be part of it?

I'm not sure I explained myself that well. I think so. One response I got was, well, you know, right now the range of possible outcomes for an event like Russia invading Ukraine is much bigger than the range of possible outcomes for the future before we had this event. So therefore I have to change my allocation to equities to account for this wider range of possibilities. And I'm not sure that I agree with that because I would say before the invasion that was still possible, right?

Yeah, yeah, that's what I would say. Yeah, that's.

So you're, you're kind of reacting after the fact to something. The example I used in Bell was Brexit, because the Brexit vote actually happened while we were there one year and Markets, like, tanked, like at the conference, but. And everyone was uncertain what to do or all losing a lot of money. And as it turned out, the range of possible outcomes to occur as a result of Brexit was not that climactic. It didn't cause the European Union to implode or the euro to dissolve or what have you, which is what people were thinking was much might occur. So that was kind of the, that was one of the response. Somebody else came, he said, well, John, I think when people say times are uncertain, what they're really just saying is times are bad, these are bad times, they're uncertain. We don't know what's going to happen. I was trying to make a little bit more sophisticated point about approach, strategy, approach from an investing standpoint. But that's. And then lastly, I got another response which was like, hey, well, you know, if you were investing in Weimar Germany, you know, you know, whatever equities you owned was a disaster. Like, they all went to zero. So are you saying that, you know, we should, we should ignore things like that? And that's not quite what I'm saying. To acknowledge what you think is likely to happen.

Right, right. Yeah. Probabilistically speaking, I guess. Well, and then does that then relate to your next one about, like, being a news junkie? I mean, does it, is there a point of, like, with uncertainty that's, you know, you talk about having to focus your time on knowables. And if you're, if, if there's certain kinds of knowables versus something that's uncertain, then. And those seem to be at odds with one another

as investors, we have a limited amount of time and there is an overwhelming amount of information and there's a huge amount of potential outcomes. So that's where the kind of intellectual challenge becomes interesting because you have to figure, what am I going to do to generate the greatest possible outcome with the limited resources that I have while managing risk of things going wrong? And I think trying to read all the news and consume all of the data that's out there is not the right approach that's going to lead to, you know, an inability to make decisions. But I think there's a feeling, there's kind of a feeling as an equity analyst, I think kind of being raised as an equity analyst, like, you need to know everything. Like that was if there's something, if the stock's down 2% because the chairman said something like, john, how did you not know that? Why weren't you listening to the presentation? So I think that's unhelpful. And then my last one was just was a little bit of a retort against another value investor idea which I called the Cabinet of curiosity. And so Seth Klarman who I mentioned earlier, said that popular securities are almost never undervalued. Whatever the herd is by definition in favor. You know, you can only find value in contrarian out of favor stocks. And while you can occasionally find value in out of favor, you know, little hidden off stocks, you can also find really terrible companies that way simultaneously. It's just not true that widely followed companies can't be cheap. If we look at Meta and Google in the last year, Meta a year and a half ago was trading at $360. It went to $90 and now it's back at $300. So to argue that Meta wasn't trading at a discount and a value at $90, I think it was trading at a low double digit P E is just wrong. It was just wrong. The facts show that it was wrong. So this is one of the most heavily followed stocks out there. And it was clearly trading at an attractive price, as was Google and some of these other names. So the market frequently can give you opportunities. You don't need to go after obscure tiny little companies that no one's heard of to find good value.

Got it. So I like all those, we'll get those put into the write ups and stuff for the show. So with all these kinds of things, what are some of the tips for investors to avoid errors? These kinds of errors?

Well, I mean it's boring, but you have to do the work. And I think that you want to buy things that you can understand. This is not a unique idea. I don't necessarily think you have to go the Peter lynch route, which is to buy only or focus on businesses that you use as a customer. But me personally, I avoid businesses, tech businesses that I find too difficult. If I can't really understand what the business does or why it has a competitive advantage, I won't invest in it. If you think about a business like Microsoft, okay, I mean pretty much everybody's using computers. And unless you're a Mac fanatic or even if you are a Mac fanatic, you're aware that Microsoft creates the operating system and the office software for virtually every computer in the world. And with a very limited amount of work, you can see that the margins that Microsoft achieves with this product are very high and that the company generates a lot of cash. And so if you believe that the business is innovative and they're reinvesting that cash in an attractive way. So like for example, to develop cloud computing or invest in generative AI. Now you have a sense that hey, this is a good company, it has a really strong position. It's really hard to imagine operating systems working on some other, some other company's platform could happen, but unlikely or certainly it's not going to happen overnight. And the business is really strong from a balance sheet and cash flow standpoint. And so as an individual investor you could probably do all of that work that's not that hard and then a little bit more work to try to figure out if the stock is attractively priced relative to history. So I think with those kind of approaches you can find businesses to own. Don't chase stocks that have moved up a lot. Don't listen to too much media. I think one thing we didn't talk about, but which I like to repeat is that the media's incentive structure is to be kind of a triggering machine. So what they want to do is amplify whatever the most recent fear is or whatever the thing that's going up the most is. And so this influence is pernicious in terms of how you want to orient yourself as an investor. So you could use the media to start as a starting point to find out about new stocks. But you need to do your own work, focus on long term own businesses you can understand. And whatever you do, don't, don't sell when everyone's in a panic.

That's good, that's very good advice. So I know we're pushing on an hour and a half. I just have a couple of other, just little, maybe light things to talk about. In generalities, are there sources that you read or books that you recommend that are helpful either for investing and, or in developing mental models or decision making that you would recommend to listeners?

So I already mentioned fooled by randomness, but I would argue the book that I find most interesting is Daniel Kahneman's Thinking Fast and Slow. Yeah, which, which I read twice. Which I almost never read any book twice. Yeah, and that's, that's not per se an investing book. Although he talks about investing a lot in it. You know, he's a psychologist and I used to study philosophy of psychology. We would distinguish philosophers from psychologists as by saying that, well, psychologists actually go out and like set up experiments and get data and philosophers just mostly sit around and think about what might happen. So he's got some really great examples within that book about how our brains are fooled and processes that are happening that influence the way that we think about things and the behavior that we make without us even knowing. And I think that if you want to understand yourself and how you invest and avoid mistakes, you need to understand your own wiring. And I think this book is really powerful in helping to create a framework for understanding some of the things that you do or don't do without even knowing it. So I would recommend that book. Let's see what else I would say. I mean those are my two favorite books that flew by Randomness and this one.

Great. Good. Yeah, I agree. Those, those are classics. So thank you for this time. John, for listeners that would like to know more about you and your work getting on your newsletter list, what are some of best ways to do so?

Well, you can sign up for my newsletter, which is free on my website. It's www.quovadascapital.com and yeah, that's, that's all you have to do.

Okay, great. I'll put that in the show notes. So John, I really, I want to thank you so much for taking the time to be on and give us a glimpse of your world and your process. It's just really been fascinating and I very much enjoyed it. Thank you so much.

Thank you so much for having me. I had a really great time.

Living a Life in Full is a production of Stout Media, a subsidiary of Gordian Knot, LLC. Assistant producer Gracie Wong Music Dan O' Brien executive producer and host Dr. Chris Stout. To learn more, stop by our website A lifeinfull for Show Notes and please recommend us to your friends and subscribe on your favorite platform. And as for the obligatory disclaimer, this podcast is for general information uses only and does not constitute the practice of psychology, medicine, nutrition or other professional health care services, including the giving of medical or psychological advice. No doctor patient relationship is formed. Lastly, and perhaps most importantly, I take conflicts of interest seriously. For all of my disclosures as well as show notes, please see livingalifeinfull.org podcast and my LinkedIn profile. Thanks. And until next time,