How to THINK Like Top Investors | Expert Advice in 23 Minutes

What's up, Believe Nation? It's Evan. My one word is believe, and I believe in you. And I want to see the great thing that you have inside you explode out into the world and see some amazing things coming from you. And so to help you on your journey, I'm starting a new series. It's a test. I believe that success leaves clues, and so in this new Success Clues series, we're gonna look at how the world's most successful investors think. And as always, guys, as you're watching, if you hear something that really resonates with you, please leave it down in the comments below and put quotes around it so other people can be inspired. And when you write it down, it's much more likely likely to stick with yourself as well. Enjoy.

The most important thing is to decide— is to be able to define which ones you can come to an intelligent decision on and which ones are beyond your capacity to evaluate. You don't have to be right about thousands and thousands and thousands of companies. You only have to be right about a couple. I met Bill Gates on July 5th, 1991. We were out in Seattle, and Bill said, "You've gotta have a computer." And I said, "Why?" And he said, "Well," he said, "you can do your income tax on it." I said, "I don't have any income. Berkshire doesn't pay a dividend." He said, "Well, you can keep track of your portfolio." And I said, "I only have one stock." I said, I mean, And he says, "It's gonna change everything." And I said, "Well, will it change whether people chew gum?" And he said, "Well, probably not." And I said, "Well, will it change what kind of gum they chew?" "Not." And I said, "Well, then I'll stick to chewing gum and you stick to computers." I don't have to understand all kinds of business. There's all kinds of business I don't understand, but there's thousands of opportunities there. I did understand the Bank of America, and I'm able to do that. I'm able to understand some given percentage, but Ted Williams wrote a book called The Science of Hitting, and in The Science of Hitting, he's got a diagram, shows him at the plate, and he's got the strike zone divided into 77 squares, each the size of a baseball, and he says, if I only swing it pitches in my sweet zone, which he shows there, and he has what his batting average would be, which is.400. If he had to swing at low outside pitches but still in the strike zone, his average would be.230. He said the most important thing in hitting is waiting for the right pitch. Now he was at a disadvantage because if the count was 0-2 or 1-2 or so on, even if that ball was down where he was only gonna bat.230, he had to swing at it. In investing, there's no called strikes. People can throw Microsoft at me and, you know, you name it, any stock, General Motors, and I don't have to swing. And nobody's gonna call me out on called strikes. I only get a strike called if I swing at a pitch and miss. So I can wait there and look at thousands of companies day after day, and only when I see something I understand and when I like the price at which it's selling, then if I swing, if I hit it, fine, if I miss it, it's a strike. But it's an enormously advantageous game, and it's a terrible mistake to think you have to have an opinion on everything. You only have to have an opinion on a few things. In fact, I've told students if when they got out of school they got a punch card with 20 punches on it, and that's all the investment decisions they got to make in their entire life, they would get very rich because they would think very hard about each one. And you don't need 20 right decisions to get very rich. You know, 4 or 5 will probably do it over time. So I don't worry too much about the things I don't understand. If you understand some of these businesses that are coming along and can spot things on, if you can spot on Amazon, for example, I mean, it's a tremendous accomplishment what Jeff Bezos has done, and I tip my hat to him. He's a wonderful businessman, he's a good guy too, but could I have anticipated that he would be the success and 10 others wouldn't be? I'm not good enough to do that, but fortunately I don't have to. I don't have to form an opinion on Amazon, and I did form an opinion on the Bank of America, and I formed an opinion on Coca-Cola. I mean, Coca-Cola's been around since 1886. There's 1.8 billion, 1.8 billion 8-ounce servings of Coca-Cola products sold every day. Now if you take one penny, and get 1 penny extra, that's $18 million a day, and 18 million times 365 is 7 billion 3 less 730 billion, or $6,570 million. So annually, $6,570 million from 1 penny. You think Coca-Cola's worth a penny more than Joe's Cola? I think so. And I've got about 127 years of history that would indicate it. So those are the kind of decisions I like to make. And you may have an entirely different field of expertise than I would have, and probably much more up to date in terms of the kind of businesses that we're seeing evolve. And you can get very rich if you just understand a few of them and understand their future.

When you started, how did you learn to invest and how did your investment strategy change over time?

Well, I learned from my mistakes. In other words, my instinct is, you know, you go there and you place a bet. I've had winners and I've had losers. And what I did every time I made a mistake, they became painful mistakes, but with time I realized that reflecting on those mistakes would give me gems. What I would do is I'd say, why did I make that mistake? And I would learn from that mistake, and I'd write down a rule. So what was helpful for me is I put that rule— principles, these principles— I wrote these principles down. Those principles that I wrote down, I then put into algorithms, in other words, equations. And what I learned by being able to do that is by— if I took my decision criteria, those principles, and then I tested them back through time, I gained a perspective that was fantastic.

The markets have been going through these wild gyrations, don't seem to have a clear sense of what direction is up. How do you interpret that as somebody who has spent a lot of time playing the markets?

Well, put on my manage the portfolio trader hat, and not so much a trader but manage the portfolio, it's great. Any time there is volatility and any time there is change there is opportunity. Now I say it's great because I've taken a whole different approach to investing. Than most people. I think buy and hold is a crock of shit. I think the idea that you always have to invest your cash is not far behind. And so I've always been of the attitude that unless you really have a commitment to something just keep your money in cash knowing that at some point in time there's going to be a week or two like we've had.

[Speaker:YEAGER] But how much time, you've got a lot going on in your life, how much time do you have to actively manage your portfolio through these 500-point market swings.

Well, see, that's the whole thing. I don't have to spend much time until it hits the fan, right? So I don't, I mean, I don't—

There's a lot of hitting the fan this week.

Well, that's exactly right. And that's where the opportunity is. Like, I wouldn't look at my portfolio or, you know, I get a, you know, a one-line, one-number statement every day from my bank. And, you know, that tells me if anything weird happened and I wouldn't even look at it. But then when everything starts getting crazy, I call it the World Series of investing. You know, that's when you start digging in. And it's because of the approach that I take. So, you know, back in 2006 and 2007, I was writing blogs saying, look, the stock market's for suckers. You're getting put, you know, when you sit down at the business table, you always look for the sucker. And if you don't see it, it's you. And you've got all these professional people on the other side of the trades. I mean, when I started trading stocks in the early '90s, after I sold my first company, you know, you could understand different elements of the market better than the professionals. So I can understand new technology from Wellfleet and Synoptics and all these old technology companies better than the traders. Today there's so much money in these huge hedge funds and then they have such professional research and in-depth research, there really aren't any advantages for the individual traders. And so my approach has always been, unless I know something specific, put it in cash. And so—

And so what are you investing in? What are the areas that you feel you know?

What I did, in 2008 and 2009, I put everything into MLPs and MREITs, mortgage-backed securities, ones that I thought were the better companies, and I just piled in. And I also piled into Australian bonds because I thought the economy was good next to China. It was my way of playing China.

So you make one-way bets. This isn't portfolio balancing you're talking about.

No, all that asset management, diversification, that's for idiots, right? Because you can't diversify enough to know what you're doing. What I did was I said, self, self, there's going to be a lot of volatility. So I bought, took a little bit of money and bought out-of-the-money calls on the SPY calls I bought on the Standard Poor's, the S&P 500, and then I did the same thing on the Diamonds, which is the Dow Jones. So I bought those long when the stock prices cratered and then when we had the big not today, but the big run-up before, I bought a bunch of puts knowing that even though I was paying for a lot of volatility, that I thought there would be a lot of swings in the market. And so I just—

So you're just betting on volatility?

I'm just betting on volatility.

And how long is that going to last in your view?

No idea. And that's the whole thing, right? People aren't buying intrinsic value in companies anymore. The whole Warren Buffett approach works great for Warren because he can put $3 billion into an investment and take a whole different approach than John or Sally Doe investor who can't do that.

Diversification is the only free lunch in investing, and I see this happen so many times. Here's my basic lesson that I've learned that I never vary from, and this works, trust me, it works. Never more than 5% of your portfolio in any one name, no matter how great the story is. If it's the next Nortel, if it's the next RIM, Who cares? 5% max weighting. For me, usually it's 2.5% to 3%. I never let a stock get bigger than that in my portfolio. I sell into the strength all the time. Secondly, never, ever, ever more than 20% in any one sector. So if you love gold, you just can't get past 20% of your net worth in gold or energy or any other sector, financial services. So good sectoral diversification is crucial. And finally, for me, I'm over 60% weighted in debt now versus equity. Not government debt, not Treasury bonds, but corporate debt. Remember that a BB or BBB bond is serviced before they pay the dividend on a common stock. So I like to own right up the balance sheet. So I own a lot of prefs, converts, senior debt, floating rate notes. I love that stuff because when they get upgraded, I get capital appreciation. Meanwhile, I get a check. The key to life is the check coming in. It's the cash. If you always, always, always look at the free cash flow, this will keep you safe because the only friend you're going to have when you're old and crusty is not your dog, not your kids. It's the cash in the bank that's still going to love you.

In your book, you also say when you're investing, you should have an element of fear in there.

You should make the assumption when you make an investment, there's some probability you'll lose it. It'll go to zero. And that's why you need to have, you know, a reserve, like a backup plan, some cash set aside that if everything blows up, you're okay. I find it extraordinary when people make their first, you know, liquidity event and they have some capital, that they blow it all again. That is the biggest mistake. You've got to take a nut, even if it stays in cash, or it's a very, very liquid safe securities and say, that I don't touch. It goes back to what my mother taught me: spend the interest, never the principal. I mean, look, you know, I make a lot of crazy investments. I don't touch the principal.

In the spring of 2000, I was way overleveraged into these two stocks. In a matter of few days, I found myself going from $12 million to the good to $4 million to the bat. So I was 25 years old. I owed $4 million. I didn't have anything to show for it. I didn't have a house or a boat or a plane or anything I could sell to pay it off. I just owed it. And I came from a middle-class background. Neither of my parents had ever made more than $100 grand in a year, and I was just stuck. And I had to make some choices then about whether I was going to quit and, you know, or try to declare bankruptcy, or whether I'd try and fight it out. And it happened just as I was graduating law school, actually. And so I said, well, I'm going to try and fight this out, and I'll take a sellout job as a corporate lawyer out at Fenwick West, and I'll try and grind this out. And so during the day, I would do corporate law stuff at a tech firm, and at night, I would do pretty much anything that somebody would pay me to do, short of giving blood or massages. —like Craigslist for this? I did go on Craigslist. I was writing contracts and business plans and renaming companies. There's a thing called Elance out there. There's now like oDesk and RentACoder and stuff, but Elance is the first of those markets, and I was the first lawyer on Elance. And so I was, I was writing terms and conditions for websites, some of which turned out to be adult websites, but they paid cash. And And so I even did a voiceover for a book once. Yeah, who knew? But I actually screamed for a few hours to make my voice super raspy. That was what they were looking for in the character. So, but I just did anything I could to try and pay off this debt. And it took me from then till basically the Google IPO, to selling another company in the Google IPO before I got back to zero of net worth. And I'll tell you No matter how early you are in your career, the richest you will ever feel is when you owe $0 to anybody. That's the very first time in your life when you've got choices. You can, you could go join the Peace Corps, you could go travel the world, you could do anything. I actually celebrated by throwing a BYOB party at my house. Like, I'm not going in the red to treat all you guys. But that, that was a real pivotal moment in my life. I'll tell you, I just, I never really considered any other option. I never considered moving back with my parents to Buffalo, New York. I never considered declaring bankruptcy. I just kind of always knew I would fight my way out of it. And I think that's something that for those of you who are founders, I'd encourage. Not everybody's a founder. It's easy to kind of sign the paperwork, but some of you just aren't founders. And there's a time when you have to admit that to yourself. That it's cool to have a startup, but you may not be a founder. You may not be the kind of unstable, mentally askew person with the slightly manic depressive side who knows in the face of insurmountable odds that you're gonna win. And I don't mean as convinced that you can sell people and convince people of that. I mean you know in your bones that you're gonna make it out. I think that's something that was a little different about me. It was like in that hole, as advisors were saying, look, just go BK, and 7 years from now you can walk away from it, I just knew I would fight my way out of it, and I didn't have to convince myself or anybody else.

You also have to dare to be great. I'll tell you one little story. One of the most successful investments we made was a small company called Cerin. We had just started to sell product. We were doing fairly well. We had half a million of revenue in 1997, and Cisco came and said, we'd like to buy this company for $300 million. Having invested $3 or $4 million for half the company, that'd be a pretty good investment. And yeah, we had one other investor. And I said no deal because I believed in what we were trying to do. April came along and somebody called me from Cisco and said, we'd like to offer $700 million. And we at that point, with subsequent investments, owned about 35-40% of the company. And I said, no deal. August came along. I won't go into the details of the story, but they offered $7 billion. We did take the deal.

If you want to make a quick buck, you can do it a lot of different ways. You can cheat somebody, you can misrepresent something, you can go manipulate the political system to get an advantage. But if you want to be successful over a long period of time, I believe you need to focus first of all on creating value for others. And that's— oh, I've had people, well, that's naive. Utopian. No, it isn't, because why will the customers want to pay you anything over a long period unless you're creating value for them? Why would your, your employees want to work for you? Or if they did, they didn't have any alternative. Why do they want to give their best efforts? Why do they want to get excited? Why would they wake up at night with ideas if you're in a community, a plant in a community? Unless you're creating value for that community. Why would the community want you there if you're polluting and hurting people and not contributing anything to the community? So long-term success starts with being dedicated to creating value for others. It's, it's not altruism. It's— my whole philosophy is, is to have a system of mutual benefit. Where both parties gain, a society based on win-win.

For all of you people out there who want to be entrepreneurs, you got to have a thick skin. You almost need some friendly psychologist training, traipsing around with you. To buck you up from all the setbacks that you have. It's always great after you're Jack Ma, but it's not so great, you know, if you file a chapter. And the difference in that, you know, Jack's a 10. He almost did go down several times. It's that scrambling ability, the ability to take that kind of abuse and rejection and believe in your basic plan, but be adaptable and just keep going.

That the business schools— and I think they're beginning to change— but particularly in the '80s, the business schools focused on if you could just turn the page, there's the formula that tells you how to do it. And the answer is there are no formulas. And, and success and failure are a combination of judgments and external events. But it starts and ends with a simple idea and your gut. But your gut has played a very key role, though, in your business and in your success. I think that I have been willing to have an opinion and then Execute accordingly.

Thank you guys so much for watching. I hope you enjoyed. I'd love to know what did you think of this video. What do you think of this new success Success Clues series. I'd love to hear your thoughts. Please let me know in the comments below if there was one piece of actionable advice that you're really going to take home. Let me know in the comments. This video focusing on investors. If there's another group or another genre or another niche that you want to learn more about, let me know in the comments and maybe we'll make it in the next edition of Success Clues if we keep this series. So let me know. Thank you guys again for watching. I believe in you. I hope you continue to believe in yourself and whatever Your one word is: much love. I'll see you soon.