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drink a1.com Tim last time drink a1.com check it out at this altitude I can run flat out for a half mile before my hands start shaking can I ask you a personal question now in the broken time I'm a cybernetic organism living dissue over metal endoskeleton hello boys and girls ladies and germs this is Tim Ferris welcome to another episode of the Tim Ferris show where it is my job to sit down with worldclass
performers from every field imaginable to tease out the habits routines favorite books and so on that you can apply and test in your own lives this episode is a two for one and that's because the podcast recently hit its 10th year anniversary which is insane to think about and passed 1 billion downloads to celebrate I've curated some of the best of the best some of my favorites from more than 700 episodes over the last decade I could not be more
excited to give you these super combo episodes and internally we've been calling these the super combo episodes because my goal is to encourage you to yes enjoy the household names the super famous folks but to also introduce you to lesser known people I consider Stars these are people who have transformed my life and I feel like they can do the same for many of you perhaps they got lost in a busy news cycle perhaps you
missed an episode just trust me on this one we went to Great pains to put these pairings together and for the bios of all guests you can find that in more at tim. blog combo and now without further Ado please enjoy and thank you for listening first up Dr brne Brown a research professor at the University of Houston and author of six number one New York Times bestsellers including atlas of the heart dare to lead and the gifts
of imperfection you can find brne at brenebrown.com I think you can have self-love and self-acceptance and want to be better in ways here are the things I want to unwind MH I don't think you can truly change for the better in a lasting meaningful way unless it is driven by self-acceptance I agree with that so I think being the [ __ ] out of yourself for performance which you know I work with a lot of sports people now like it works
and if all you have to do is pay someone for one season or all you do is one game or one whatever you're okay but lasting meaningful change has to be driven by self-acceptance yeah the other thing that is just so shocking to me about complacency and self acceptance is as I think back and I would really have to go into the data but just sit here I don't think I have ever come across a single person not a single person that I can
think of who was complacent driven by self acceptance I don't know that that is not an oxymoron I got to tell you that like self-aware complacency doesn't work for me as a construct self-aware no or self- accepted complacency yeah I don't know that I believe that yeah I I mean I'll I'll push I'll push a little bit I would say I knew you were going to CU the look on your face yeah I would say and I
think that I'm I'm struggling for the right terminology but I think we all know people who are alcoholics have various issues tot and they are in denial of having problems yes let me stop you there yeah and say that is neither self-awareness nor self-acceptance definitely not self-awareness but not self-acceptance either well I would and maybe there's a better word but I would just say that there are people who are delusional to
the extent that they either believe they don't have a problem that they have or they have a problem and refuse to accept it as a problem we can go a lot of directions with this but I would say that I think we can agree there are complacent people right there are complacent people and among those complacent people I think there are those who hate themselves there are those who sort of love themselves and
are narcissistic and I know a number of these and then there's a lot in between and I think that you there are complacent in some respects complacent narcissists who almost by definition being a narcissist love themselves so is that self-acceptance maybe yes maybe no I would say that it is but it's a disabling self acceptance whereas to your point about lasting behavioral change I think that at least psychologically if you are divorcing
parts of yourself if you hate parts of yourself aspects of yourself that have been informed by your history and I'm borrowing this phrase from somewhere else but like what you resist persists and that you are going to carry that unproductive and in some ways self-defeating tension within you even if someone is forcing you to change your behavior or incentivizing you to change your external behavior and so even if
technically you're changing a behavior if you carry self-loathing even partial self-loathing with you hating an aspect of yourself or certain emotion within yourself I view that as a loss agree yeah so know this is this is getting out there a bit but this is the type of stuff that you sometimes I worry that I lose that I've lost my audience can I can make a confession yeah because for a long time I was thinking about writing a
blog post about this but for a very long time if you look at all the books that I've written it's like book on entrepreneurship book on physical performance book on cognitive performance and learning for our Chef etc etc it's mostly developmental it's about improving performance in one or more areas and now what I've spent more and more time on like we're spending time on it right now is the inner game
for sure and the importance of developing a keen level of self-awareness so that you can examine the contents of your this is going to get super woooo for a second or it's going to the contents of your Consciousness wherever you go carrying your mind with you and so to develop a familiarity with that I think is the Crux skill that underlies everything else and you and I both know plenty of achievers who are miserable who are sure
High performing wellknown people who are utterly miserable and to me the question of why is that how can that be the case is the question that I'm extremely interested in these days but I worry that having buil an audience who is largely not entirely kind of go go go rah rah rah winwin win there's nothing wrong with that but people who are trying to develop skills and competitive advantages and so on that I may lose a large part portion of
those people in shifting into talking about more of these things we'll see where it goes but that's something that has occurred to me and I think I'm willing to make that trade I think I'm willing to take that if that's a cost of of doing business I don't know so a couple things one the go go go audience that you've built this may scare them but I mean as someone who works with leite athletes and professional folks and CEOs and those
things what I can tell you is this is the hardest challenge you've issued and it's not about the conceptual complexity of what we're talking about it's about unlocking performance is one thing unlocking people yeah way harder way scarier and unlocking ourselves and creating self-awareness to me you would be remiss not to go here mhm because I don't know I think something you said when you were talking about we all know a lot of
narcissists and they love themselves but that's actually not true do you know that narcissism is the most shame based of all the personality disorders narcissism is not about self-love at all it's about grandiosity driven by high performance and self-hatred you know I Define it as the shame fear of being ordinary and so you have to me you have this audience that and I'm one of them I mean like and I'm probably an outlier I
guess and you're it's like me being a rush fan like there's always outliers the audience is like 40 40 to 50% female but I appre yeah yeah it is it's it's shifted a lot in the last handful of years yeah but I think when I get invited in by a Fortune 50 CEO and here or she says look we need help we need help with a team they're not asking me to help with time productivity right they're not helping me to set up a scrum
or agile process for software development they're saying we're at each other's throats we hate each other it's a shame based finger pointing like it's all about self-awareness and changing those behaviors and to me the hard thing about this area and your work is a lot of what I've learned from you that has changed my life has been not only Effectiveness based but efficiency based MH and so where you can lose people with
this conversation is this is not an efficient process yeah right do you know what I mean there's no I don't think there's a 4our self-awareness it's like have no plans to write that one yeah but I mean but like but people would love it if you could if you could unlock that fast but to me this is the Capstone conversation for you yeah do you know what I mean like I do because what's it all in for yeah you know like I'm fit I'm
winning I'm smart I'm successful and I'm on my third marriage and I don't speak to any of my children yeah like which you see a lot or I mean I see all the time all the time yeah right because I'm going to tell you not to dismiss the importance of that work that's easier yeah yeah it is easier it is easier you know because the thing about these conversations that you and I end up having every time we sit down this is a
second time but both times we've sat down is what differentiates us as a social species is the need to be seen and known and loved and the need to see and know and love others and No One Rides For Free like we all come into this adulthood with hard stuff and what I would say is true about complacency and 95% of what I see that people call pathology is it's armor yeah it's behaviors and ways of thinking that I've
developed to protect myself from being hurt I have a question of for you about that so my question related to armor is I'll get to through a segue which is a quote that I want to say Tera Brock the well-known meditation teacher also writer radical acceptance is a fantastic book shared with me which I'm going to paraphrase and it's along the lines of you know a great Sage once said there's only one real question that matters and
that is what are you unwilling to feel I've thought about that a lot and not to say I have any concise answers to that but I think it's an anecdote really worth meditating on I've thought about it what do you say to the People You Meet who are on the third marriage their kids don't talk to them and there are certain things that they have convinced themselves subconsciously or otherwise maybe through an abusive
upbringing or trauma whatever it might be that it is unsafe to feel certain things and you come in they've asked for help but they do not want to open Pandora's box right they do not want someone to drag them into the deep Waters of emotions that they've kept under lock and key for so long how do you help someone like that what do you suggest to them because it does get messy right it's going to get get messy
before it gets clean right at least in my experience it's like you oh you're going to do spring cleaning guess what you got to take all the things are up on the shelves all the things in the drawers all the things that are hanging on coat hangers and you're going to put them in the middle of the room and it's going to be a mess it's going to be a [ __ ] mess yeah and you're going to be pissed that you did it halfway through
but you can't really get P go without that type of Step so for someone who's listening to this and says you know what I buy it like I get it and yet what do I do because I've had on this armor for so long so I would say a couple of things I mean the first thing I always feel like is really important to say is that I'm a researcher and so I'm not a therapist that would be differentiate me and Esther like I don't see clients if I go
in and I'm working with CEOs and this question comes up all the time what I would say to people is Pandora's Box is closed right now but are you under the impression that you're living outside of the box or in the box like yeah I like that you don't want to open Pandora's Box that's strange to me cuz you're living inside Pandora's Box and what I feel like you've asked me to come here to open it up we're not going to do this
process without walking through some deep [ __ ] there's going to be deep Swift water and if the water is super deep and Swift you need to go through that with a therapist and get that settled before we work in the organizational way but what I would say to people what I always say is the same for me and I'm sure the same for you that we all grew up and experienced to very varying degrees trauma disappointment hell you know hard
stuff we armored up and at some point that armor no longer serves us and so what I think I would say to that person is how is not talking about this serving you like I've been server for 23 years so someone in AA would be like how's that [ __ ] working for you MH I probably would put a softer spin on it than that over black coffee and a cigarette but you know but I would say that it's not serving anymore mhm and now the weight
of the armor is too heavy and it's not protecting you it's keeping you from being seen and known by others MH and so this is I mean just tell you quintessentially this is the developmental milestone of midlife from late 30s to through probably your 60s this is the question you know this is when the universe comes down and puts your hands on your shoulders and pulls you close and Whispers In Your Ear I'm
not [ __ ] around you're halfway to dead the armor is keeping you from growing into the gifts I've given you that is not without penalty time is up so this is what you see happen to people in midlife and it's not a crisis it's a slow brutal unraveling and this is where everything that we thought protected us keeps us from being the partners the parents the professionals the people that we want to be and I've only seen
this is a fork in the road I've only seen two responses to this visit from the universe there was my response which I I was like screw you bring it you think you can best me and then it was just one nightmare situation after another until you know you're not going to win that fight right I think if you say you know what I'm not going to do it then you've got to double down these are the people that walk through the world
double down on their own [ __ ] in denial you know cheek squeezed as they walk and cause so much pain in the world to themselves as well I mean yes because it is so much easier to offload pain than to feel pain yeah and so you really have a choice in midlife the first step of it the whole process is what armor I'm not saying just pull off all the armor and streak through Austin because I think you can replace the armor with something
I think it's curiosity is what you replace you just become very curious about yourself about the world why did I react that way when Tim asked me that question I wanted to like hit him over the head with a topo chica bottle you know what was going on there do you know what I mean like what is my obsession about this you just become very curious is curiosity is really the superpower for the second half of our Lives because
it keeps us learning it keeps us asking questions and it increases our self-awareness but when you see and I think it's really hard because because you know I'll walk into a situation and they'll be the person who invited me is usually the CEO and then you'll have like the cross armed pissed off clinch cheet like Fu looking person usually in operations or technology you know and then they're like What's the business
case for you being here yeah right like because here's our stock price here's what's going on here's our valuation like what do you need and then you know the CEO usually say [ __ ] hate each other and this can only last for so long you know the end of every great band right like this is going to come to an end and it's going to be terrible and so I don't know I think you can't pull it all off at once for all of us there's
trauma yeah and people are like no there's not trauma for all of us there's trauma for you know people who had have been abused physically sexually you emotionally there's trauma for people of color and people who have been on the margins there's trauma for all of us it's just different levels of trauma yeah you know I mean to escape childhood with nothing is I haven't met that person yet no I haven't either right so the trauma stuff
literally the trauma message in our body is you take this armor off we die so you protect us at all cost and leave this on a lot of that work has to be done with a therapist the other two hacks that I think have saved our marriage besides just showing up and kind of using some of these things like what's working what was hard is the 8020 so everyone says marriage should be 50-50 it's the biggest crck of [ __ ] I've ever heard it's never
50/50 yeah ever and so what we do is we quantify where we are so if Steve comes home and he'll be like I got 20 just in terms of energy Just Energy investment kindness patience out of 20 and I'll be like I'll cover you I got you brother I'll pull the 80 sometimes we come home which we have done a lot my mom has been sick and I'll say I've got 10 and Steve like two days ago said I'm riding a solid 25 so we know that we have to sit down at
the table anytime we have less than a 100 combined and figure out a plan of kindness toward each other oh I love that yeah because the thing is marriage is not something that's 50/50 a partnership works when you can carry their 20 or they can carry your 20 and that when you both just have 20 you have a plan where you don't hurt each other yeah cu the your Red Bear right yeah and and and so so what we'll say is I'm like
I've got 10 and he'll be like I got maybe 25 we're like put all the groceries that are supposed to be great and healthy in the freezer we're ordering out get the housekeeper here an extra day and we're canceling anything with people that we really actually don't like so how can we create some buffer in the system no we do that so like and then you know then we'll like a day or two later I'm like he'll be like
I'm I'm riding to 60 I'm like oh my God work is kicking my ass I'm still at a 20 he like I got you but we're a spare 20 so you you know let's ask Charlie if he wants to skip water po practice today and let's all turn in at 8:00 huge the other thing I would say too that now I'm thinking about that is we made a determination very early there's kid focused families parent focused families and family focused families we're a
family focused family so that means that if you want to do water polo Eagle Scouts tennis and ski shooting then that comes to the family and the family agrees what will keep the family healthy like I've got a book launch I've got this Steve's got patients he's taking on another you know he's a pediatrician he's doing this so what works for our family right now is you can do two extracurriculars and I'm going to have a
two-e tour not a four-week tour but we put the family as the system that we serve it's not the kids at the parents cost or the parents at the kids cost it's the family and it is remarkable how do you weigh if you do it all the voting system so to speak right so if you all come to the table does everyone have equal vote in the decision-making process with respect no no this a dictatorship yeah like yeah we don't even [ __ ] around
that it's like when my kids like if I say like oh [ __ ] my kids are like oh you can't say that I'm like I can say anything I want you can't say that and when you're old enough you can do whatever you want when you get your cursing license yeah yeah but right now I I can totally do that watch me so we have very we talk to our kids about everything we're super open and Steve and I both have veto power and we rarely
use it I bet I pulled out my veto card once in The Last 5 Years veto meaning kid says I want to do X and you say can't do X or Steve or Steve yeah I'm like I I have to veto that I cannot do that and then we really respect the veto because we don't overuse it so our thing with our kids this is my theory on parenting my theory on parenting is the best we can do is a loving course from liance to commitment that your kids need to do
what you're asking them to do out of compliance so don't run into the street don't do this you're not allowed to watch that kind of TV you're not allowed to play that kind of video game you need to comply otherwise there's some natural consequences at some point I've got a 14-year-old now he's at other people's house doing video right and so if all I teach him is compliance and don't give him the why about why you can't do that
if I don't say yes every time I can and explain the NOS then when he's there and I can tell you that like we got a call from a parent maybe a month ago and said the boys were having a sleepover they wanted to watch I know some R-rated violent thing and Charlie said can we watch something else my parents are not cool with us he didn't have to do that yeah but he's moved to a commitment to our family values because we say yes
every time we can we don't do any of that stuff that my parents did because I said no just a quick thanks to one of our sponsors and we'll be right back to the show this episode is brought to you by LinkedIn ads as a business-to business marketer your needs are unique the B2B buying Cycles are long and your customers face incredibly complex decisions isn't it time you had a marketing platform that was built
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linkedin.com TFS terms and conditions apply and now Edward o Thorp legendary blackjack player hedge fund manager and mathematics professor and author of beat the dealer and a man for all markets from Las Vegas to Wall Street how I beat the dealer and the market find him on Twitter at Edward o Thorp Ed it is so nice to see you and thank you for making the time pleasure to be here jim I've enjoyed many of your
podcasts it's lovely to finally connect and perhaps we'll get to the small world that connected us at some point but I thought we could begin with a little bit of background for people who may not have the entire context and then we can fill in the gaps so perhaps you could speak to a little bit of your growing up and your formal education if you wouldn't mind I was uh born in Chicago during the reign of Herbert
Hoover president number 31 so I've seen 16 presidents I moved out to California with my parents during World War II and basically grew up in uh California went through junior high school and high school out here and then uh went to UC Berkeley and UCLA and I got a Bachelor's degree and a master's degree in physics and then in the middle of my PhD for physics I realized I needed more math so I started taking it and then I saw I
could graduate more rapidly in mathematics so I got my PhD in math instead and then I went on to teach at UCLA MIT New Mexico State University and finally University of California revine now how did gambling or interest in those types of applications of physics or mathematics enter the picture for you well I'm a curious person and you could say that it happened purely by chance when I was teaching at UCLA I got
interested in beating Blackjack somebody told me about an article that would let me play almost even so one Christmas occas my wife and I went out actually Christmas Vacation of 1958 just after I got my PhD we went out to Las Vegas and I never gambled because I knew it was a a loser for most people and uh the odds were against you but I bet $10 and I played for about 40 minutes and I had an interesting experience the first 20
minutes I had a little card telling me what to do and people thought I was a fool who knew nothing about the game and they were right that I knew nothing about the game but the card made me a much smarter than the other players I made some remarkable plays that attracted their attention and then they all hovered around they wanted to see how I was making these plays in one of them I got a seven card 21 which is very
rare and in most places paid a bonus they didn't pay bonus in this particular place but they thought I was trying for that and I somehow managed to produce it so I realized they didn't know much about the game really and I went back and read carefully the statistics article and realized that I could see from my math background how to actually devise the system to beat the game then I said about to do it and about that
time I moved from UCLA MIT and I had access to the big computers at MIT this was back in uh 1959 they had an IBM 704 which was a refrigerator size machine that served 30 New England universities so I taught myself how to program and I worked my way through with my ideas I saw that I had a winning system and it was just a matter of finishing all the calculations so I went ahead and did that I wanted to
get this system published because I thought that from my experience in mathematics and what i' seen happen elsewhere other people would claim they did it and grab the credit that annoyed me because it already happened to be mathematics a couple of times so I went shopping for somebody who could get me quick publication and turned out that on the MIT campus there was a man who I knew nothing about named Claude Shannon who
was an Institute professor and he was a member of the National Academy of Sciences so he could get me if he approved of what I wrote a quick publication in the proceedings of the National Academy it would only take couple of months to get it out so I looked him up one day and the secretary at mit's math department said there's no point in going to see him he doesn't see people he's very very private and if you
do get to see him you're only going to have 5 minutes so I finally managed to see him at lunch for 5 minutes after we talked he said well looks like you've got all the main ideas here yes I'll put this through but we have to change the title the title was a winning strategy for blackjack and he changed it to something like a favorable strategy for 21 which sounded better he didn't want to make too bold a statement for the National Academy and
make it look like this was a just a gambling paper so anyhow the paper got sent in and it caused a sensation because I had submitted an abstract to it to the uh American mathematical society meeting in Washington DC where I was going to present by the way they initially rejected the abstract saying that this is just another fool with a system that doesn't work because we know you can't beat gambling Gam but on the abstract committee was a
person I knew well from UCLA a number theorist named John Selfridge became quite well known in number Theory and he said well if Thorp says it's true it probably is so you should accept this abstract so I went there and I presented and I thought there'd be about 50 mathematicians in the audience but instead there were 300 people it was jammed and a lot of the people were very oddl looking they had pinky rings on and
sunglasses and tropical shirts in the middle of winter so after I finish they lunged for my little handout I brought 50 handouts thinking that's all I need there and I basically tossed the handouts out and left as quickly as I could then it was picked up by a fellow named Tom Wolf who became a famous American novelist he was a a young reporter then he wrote a piece for AP which went across the country and so it got massive press
that led to me writing a book and telling everybody how to do it after a couple of years between the time I wrote the book though and when I told people how to do it by publishing I went out and played blackjack myself and proved the system worked I figured that there's no point in writing a book unless I knew it really worked I knew it worked in theory but what if you actually tried to do it and you know a lot of things they
seem to work in theory but when you get down and actually uh put something to the test you find out there are all kinds of things you didn't think of turned out in this case it worked very well we made uh in one weekend with a test $1,000 which is about that with a zero on the end in today's money this is in about 20 hours of serious play so I had a lunch money at M for a very long time thereafter Ed let me just jump in for a
moment so a couple of questions I could have a thousand follow-up questions but I'll just I'll limit it to a handful the first was for that 11,000 which would be say 110,000 in today's dollars 20 hours of serious play do you recall roughly what the the bank roll was yeah it was $10,000 oh that was the starting okay got it we started and we added 11,000 I see I see got it on top of that and my prediction before we went was that
that's what would happened so it panned out all right two other questions rewinding a bit to your ear story when you were first sitting at that blackjack table if I heard you correctly you said you had a little card if I heard you correctly could you describe what that was on the card yeah it was a a set of rules for hitting and standing doubling down and pear splitting and it was the the best way to play with a higher degree of
approximation it was the best way to play against a full deck or what was left of a randomly Shuffle deck if you didn't know anything more about the cards that have been used up and my contribution after I understood this was to figure out what would happen when some of the cards are missing from the deck because the cards that are used up are not a representative sample of the cards in the deck they can vary quite radically
for example you might use all the aces early and that would be bad for the player or you might use none of them up until late in the game and that would be quite good for the player and with Claude Shannon the person who doesn't meet anyone you said you were able to get 5 minutes at lunch why were you able to get time with Claud or why do you think he was willing to spend time with you it turns out that he was willing to
spend five minutes I think probably just to get rid of me but after we talked he kept asking me questions and it became 15 minutes and then he approved the paper that I wanted to submit and then he said what else are you working on so I said well there's another project which actually I started before blackjack and which got me interested in gambling and that's a way of beating roulette and Claud Shannon it turns out
was probably the king of Gadget teers he built many ingenious machines over the course of his life he built robots that would run mazes machines that would play chess he just loved all that sort of thing and he had a house full of gadgets and Equipment hundreds of thousands of dollars worth in valued money back in 19 5859 so when he hear about roulette and I explained to him what my ideas were there he got very excited so we
continued to talk and this five minute meeting became half an hour and then an hour and then we adjourned to the cafeteria at MIT to grab a bite and we went on for another couple of hours and we decided that we would join together and make an allout effort to build a machine that would allow us to predict the out come of a roulette game and the house and casinos have had to I was going to say adapt but really
counteract your strategies and tools by changing the rules so could you say more about what what you then devised in the case of roulette what we did was we built a small computer that would had about 11 transistors in it 11 or 12 I don't remember which cuz we had two versions and I forget whether we ended up with the 11 or 12 transistor version the computer's now at the MIT Museum in Cambridge it's been on exhibit in
various parts of the world at one time or another in any case over about 9 or 10 month period we worked in Shannon's basement almost full-time and we built this wearable computer turned out to be the first wearable computer according to the MIT media lab and one person would wear the computer and enter push button information about the position and velocity of the ball and the rotating wheel in the center and then the
computer would instantly there's a trick there I do mean instantly it would instantly tell you where to bet and so the other person would sit at the roulette table apparently connected with the Observer who was busy putting in the rouette information and that person would hear a series of musical tones and when the musical tone stopped the last tone in the octave would tell them what section of the wheel to bet on WE
divided the wheel into eight sections with a little bit of overlap and so uh the person who bet which happened to be me was able to quickly put down money on five neighboring numbers on the wheel and it had a massive edge of 44% so the piles of Dimes we started out with with our experiment dime chips became huge piles of Dimes right quickly so the computer worked wonderfully well yeah I want to take a step back just for for people who are
listening and say that there are many reasons that I wanted to have this conversation with you and it is not specifically related to gambling in the sense that what most there there are many things that interest me about your life and your thinking and my hope is that for people listening they get a window into at least two things one would be your methods of thinking frames works for thinking how you think about
thinking and then also your personal approach to health and fitness because as people may have picked up with some of the references could you tell everyone listening what your age is as we speak today I'm 89 and for those people who can't see video you look like you're in your 60s and I am just beyond excited to to hop right into that so we're going to jump around quite a bit we won't do this exactly chronologically but could you
perhaps describe your approach to health and fitness and you could tackle that starting wherever you like is it just that you you were given the right parents and out of the box have tremendous genetics is there more to it how would you begin to unpack this I kind of wandered into health and fitness by accident initially just like I wandered into Blackjack and roulette I'm curious and always looking for things to
understand I like the idea of self-improvement too so I was walking behind the student Co-op one night when I was about 20 and I heard a bunch of clanking and I looked down in the basement and there were some fairly Burly guys down there pumping iron and I walked in I said you know this is this is a waste of time this is ridiculous so one of them said to me I'll bet you a milkshake that if you work out with us
for a year just one hour an evening three evenings a week you'll double your strength in a set of exercis that they uh describe so I said I don't believe it let's try it so I went down and the four exercises were the squat with a barbell on a rack the military overhead press the bench press and uh deadlift it wasn't deadlift it was something else I forget the four four one at the moment but I'll think of it yeah clean and jerk
maybe who knows or bent row it was something along those lines but a compound exercise like like the others yeah so there was a fourth exercise so anyhow what happened was I was a uh I wouldn't say 98 Pound weakling but maybe 150b weakling and at the end of a year I could military press 185 which uh was at least double what I started with I could bench press 375 I could do 15 at uh 325 and I could yeah I could squat with 375 I could do
sets forget what the other one was wish I could remember it in any case I was astounded that all this uh came to pass so made me pay attention to uh strength at least and some time went by and I a little swimming because I got interested in scuba diving and then uh one day in my 30s I was jogging along the beach with my uh brother-in-law and he said let's go for a little jog I went about a quarter mile and I was gasping I was 35 then I
remember I said this is awful I'm in terrible shape I have to do something about this so they had a book on aerobics by somebody named Ken Cooper who has a had a lab down in Texas and started in large part the aerobics Revolution that uh swept the country so I started keeping track of his points he gave you points for various degrees of aerobic effort I think if you did a mile in between 12 and 15 minutes you got one
point and you did between 10 and a half and 12 you got two points and so forth so I started trying to run a mile a day and I did that well I ran a mile every Saturday to start with and then one Saturday I decided to try a little further so I ran two and then three and then I said I'll I'll try a 10-m Race So I got under a 10-m race which was kind of foolish but I finished and I did I did reasonably well so then I said I'll try a marathon so
then I got into Marathon running and I really liked that I did that for about 20 years until I uh hurt my back weightlifting all my bad events have been from pushing myself athletically so hurting my back was probably the worst SLE thing her needed a disc so I had stop had to stop heavy pounding and heavy running but 20 years of Road running well more than that maybe 25 years and marathoning gave me I think a
very good base for going forward and so now I do things like I'll walk about three miles three or four times a week and I spent about two days in the gym doing stretching and uh strength exercising core strengthening and so on a lot of emphasis on core because of my back which it's just fine now I was just going to ask how your approach seems like it has evolved and changed over time say after 50 years of age or in the
last say 40 years or so are there any particular changes that you made in addition to the core strengthening to support the back that you think have contributed to your longevity I've evolved I try to listen to my body so I do what I enjoy and the rule I started to follow was is better than none and more up to a point is better than less so there's there's no excuse I mean if you tell yourself gee I'm not going to
do this because I can't do the whole program that's a big mistake just start doing it and I find that if you start doing it and you get used to it you find more and more things that you kind of like that you could build on and then you just keep getting better at it I was probably in my best shape at around 55 to 65 because of all this that is inspiring I am just about to turn 45 and even amongst my just just say age cohort
it's very common for me to see people giving up even in their 40s and blaming it on age but with you sitting in front of me describing your trajectory and sort of adaptive habits I feel like those those excuses don't hold a whole lot of weight one thing that's pretty neat is uh race walking I did that for a while and that's something that is lower impact than running but you can get the same kind of aerobic workout so that's
something I'd direct people towards what does your strength training look like now or over the last few decades well it's as I get older it declines I get weaker and it gets a little harder to do things and I feel a little tireder I can't do as many uh reps or sets of things so so I have a mix of things that I do now I will do squats usually now just body weight and I try to I'll do dumbbell squats or
lunges with a lot of emphasis on one leg and then shift and do a lot a lot of uh weight on the other leg do pull-ups I think the best I've done recently which is not very much is h four underhand pull-ups and two overhand pull-ups 10 years ago I could do a dozen of each well I do a lot of back exercises regularly on the mat and that's very helpful for keeping my back in shape and keeping my core in pretty good condition
so we may come back to this but let's segue and go back in time yet again and look at investing how did Finance or investing enter the scene for you well the way I got into finance and investing was that I made money at blackjack and from book royalties this first time in my life I had any spare money before that as an academic my wife and I were living from months to months with no Surplus and then kids were coming and
that made it even tougher so once I had some money from uh both gambling and book royalties I wanted to figure out what to do with it and so investing made good sense to me I would put some Capital aside and let it grow I uh started out by making a lot of foolish beginner mistakes which cost me and then I decided to sit down and refigure this thing out and so I began to study investing in my spare time so I spent the summer of
1964 which was uh I guess the third year I was at New Mexico State just reading All Summer in a big bookstore in uh Beverly Hills martal reading all the investment books and newspapers they had and then I started again in the summer of 6 five reading whatever I could find and I happen to get a little book on U warrants common stock purchase warrants which were the Forerunner to what people call call options now and when I saw
that a light came on and I realized that I could mathematici this and I could figure out how to Value these things and if I did that I'd probably be ahead of the crowd who didn't know how to do these things and so I'd probably have an edge by chance I came to use IR vine when it opened in the fall of 1965 and I was telling one of the Deans there about this idea that I had and that I was working on he said oh we have someone
else who does that and turned out to be Sheen kassu and so the two of us hooked up and Sheen kassu had actually been doing it in practice and he'd already made an elementary model for trying to judge warrants so we decided to write a book together and work out more of the details in theory and so that became the book beat the market and that launched both of us into separate businesses and so I began to do what are call warrant
Hedges and basically you buy a cheap warrant and you short common stock against it that's one way or you buy an overpriced warrant and you short it I said buy you short an overpriced warrant and you buy the common stock against it to hedge the risk because they tend to move together in the case of the overpriced warrant as it collapses toward zero or toward its conversion value you capture an excess return and
what I found was that you could make a steady 25% a year with practically no risk doing this so I was doing it for myself and then word spread around UCI campus and people wanted to sign up so I signed up the dean of The Graduate Division and I also signed up the secretary to the chancellor and uh some people in the math depart department and so forth so I was managing a whole collection of uh little accounts for
people and they were making 25% a year and they kept telling everybody about it the dean of the gradate division happened to be an investor also with a fer named Warren Buffett and Warren Buffett was uh at that point shutting
down his partnership because everything was overpriced back in 1968 prices were crazy and the dean of The Graduate division wanted to know where to move his money to so he introduced me to Warren Buffett to kind of check me out
to see if I might be a good place to put it and so Warren and I got along fine and apparently I passed the test because the dean gave me his money to invest and so I got to know Warren Buffett and I was sorry to see that he was going out of business because I thought as I told my wife then this is going to be the richest man in the world we'll come back to the that a little later I think you'll find the followup to that quite
interesting so anyhow I got the idea of forming a hedge fund from a Warren Buffett who was just close down his hedge fund so I went into business managing accounts and then merged the accounts into the hedge fund and started this hedge fund or private limited partnership that ran for about 20 years and used ideas that I kept generating mathematical Finance ideas to keep staying ahead of other investors and
making excess returns and in 20 years we only had three down months out of all those months and those down months were less than 1% so it basically just printed money every month and it made just under 20% annualized during that time I'm very risk averse as you you'll find as we continue to talk and so this thing ran with extremely low risk but yet had very high return so that was my entree into investing that's one hell of an
entree 20 to 25% annually let's touch on a few points here so there were two other people who I believe read beat the market or were influenced by it fiser black and Myon scholes could you just perhaps fill in the dots with that because Nasim Talib refers to the black schols model with a different name could you perhaps just fill in the gaps there for people who are listening I actually figured out what this model was
back in the middle of 1967 and I decided that I would just use it for myself and then later I kept it quiet for my own investors the idea was to basically make a lot of money out of it for everybody and it was fun to me just to develop it and apply it to various things now Fisher black and Myon scholes read beat the market which was sort of the launching pad for me into uh finding this model and it was also a
launching pad for them they saw how to improve the idea is and beat the market and they made a mathematical Finance model that value warrants and options very accurately so it was based on a set of assumptions that are fairly narrow but pretty good and I thought that I was the only one who had this model so when the Chicago Board options exchange opened in 1973 I thought I'd have the feeli to myself but unfortunately Fisher
black and my scholes published the idea and they did a better job of the model than I did because they had very tight mathematics behind their derivation I had to make a couple of assumptions to get to the same point but there were reasonable assumptions which turned out to stand up in practice and in theory later on so in any case they published the uh model and I thought oh I have this hedge fund I've been running for a
few years it's been doing well we're going to make a lot of money in options but now black and sholls have told everybody what the secret is but people didn't catch on right away so when the Chicago Board options exchange opened for business in April 1973 the only people on the floor were my Traders it was like uh having machine guns against bows and arrows for people who don't know scholes went on to win
the Nobel Prize for economics in 1997 yes and a black would have been there too if he hadn't died of cancer before that Robert Merton was at MIT where they've been doing a lot of good theoretical work on the development of warrants and options and so he wrote some beautiful papers about this theory about the same time that black and scholles were doing their work so the prize was awarded jointly to Merton and scholes and I will say this
about the prize the people who publish are the ones who get the prizes the people do not publish it doesn't matter what they figure it out or when they figured it out they don't get the prizes since they don't deserve to because if you don't publish you haven't really proven to the world that you really did this on the one hand and you haven't really changed the world in the same way that people who publish do so I think
the people who don't publish don't have claims to these prizes having the tool in place turned out to be revolutionary for my life because I was able to use this tool and I had some shortcuts in using it that other people didn't have for a very long time because I developed it myself beforehand and they didn't get around to seeing it the way I saw it these shortcuts were very useful we stayed ahead of the marching Legions of
phds who came later we stayed ahead of them all the way through into the Tomic Clos partnership in uh 1988 let me hop in for a moment here to ask a few questions about your meeting or at least one with Warren Buffett why in that meeting did you come away saying you thought he would end up being the richest man in the world what did you see see or hear or observe in that meeting that led you to that I saw that
he was compounding at a high rate of return that he'd been doing it for a long time that he was very very smart and that he really knew a tremendous amount about companies so he was a good evaluator of companies and he demonstrated a very large Edge already he'd been running his Partnerships from 1956 to 1968 and had about a % before fee annual Li return rate and I was sorry that he was going out of business and that things look so
Bleak from the standpoint of stock pricing to him at that time interesting followup to that story what Warren Buffett did at that point was he decided to make a poor textile company in uh I forget where it was somewhere in New England called Brookshire hathway he decided to make that his own little private mutual fund and he bought up as many shares as he could and he didn't particularly encourage his exiting
Partners to take shares in that company because he wanted them himself they did have a choice they could take cash or they could take shares in Berkshire and not knowing what to do many of them just took cash and exited some of them took Berkshire though Berkshire I think was they would have gotten at something like $12 a share in 1964 now it's a little under $500,000 this year oops the vir story is kind of
interesting I knew how smart he was and I said the way he's compounding he's going to be my opinion the richest man in the world in a while it'll just take time I lost track of him I figured he was just working for his own account and there was no opportunity for an investor that was largely the case but then up in 1982 I happened to see an article about Berkshire Hathaway and I saw that he was running it and then I decided to take a
look and I said oh it's gone from 12 to 982 so is the opportunity gone many people who owned it had sold on the way up taking their enormous profit of a multiple of five or 10 or 15 and I said I know what he's doing I know this man I know what he's going to do I'm buying at 982 even though I missed out the move from 12 to 982 and of course buying at 982 turned out to be a good move yeah I would say so just a quick thanks to one of our
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their best Robo advisor for 2022 to start building your wealth and to get your first 5,000 managed for free for Life go to wealthfront.com Tim that's w a l t HF nt.com Tim to start building your wealth one more time go to wealthfront.com Tim to get started today let me ask you if you were teaching a let's just say what could be undergraduate or graduate seminar in investing now so you were teaching a class of
neop phyes how to invest and some are say mathematically inclined and some are not it's a very mixed group what types of tools or thinking Frameworks heuristics mental models anything would you focus on in the first handful of lectures well the first thing I would tell them is the answer is really easy for almost everybody but you're not going to believe me until you work through yourself and understand it and
I'll tell you the answer to start with and then I'll try to convince you that it's the right answer so I'll just tell you the answer to start with the answer is if you're a long-term investor you should just buy and hold equities and the best place to have bought and hold equities has been the US for the last couple of hundred years overall equities here have compounded at about 10 or 105% for 200 years the data for the first 100
years is not as good as the data for the last 100 but the data for the last 100 is quite good and very well documented how does that do against everybody else well you can prove by logical and mathematical arguments and I won't go into all the details here some of it's in my book it's also in other places you can prove that if a person simply buys the index and wholes it he will outperform most all the other players
the people who buy and hold the index will beat the whole collection of people who don't do that they do way better on average the ones who don't do that pay trading costs they have more volatility from diversification generally from lack of diversification and they often pay investment advisers and all this and they also pay taxes when they trade so the upshot is that you make 10 and a 12% if you don't pay all these people you
might make 8 or seven or 6% if you pay the crowd of people waiting to quote help you unquote so that's the simple answer for people who don't know anything about investing now you might say well yeah but I'm pretty smart I hear all these stories I listen to Kramer on TV he jumps around and makes a lot of noise and sounds good so why can't I do better well the academics have something called the efficient market theory in
which they claim that you can't do better now I've already explained that that's that's wrong you can find instances where you can do better Warren buff did much better I found with my hedge fund I could do much better but the kind of work you have to put in to do much better is substantial it doesn't seem like it at first but when you get into it there are all kinds of details and follow-ups and things to be checked
out and you end up spending a substantial amount of time and energy figuring out how to do it better and for everybody who finds out how to do it better the rest of the crowd who isn't buying the index is doing a little bit worse because you can show that the whole collection of people who don't buy the index are themselves as a group like the index because everybody as a group is like the index you subtract the index
part out and the rest is like the index too so the people who aren't buying the index but are like the index as a group are busy paying all these costs taxes investment advisors and so forth so on average that whole group does worse you're paying basically uh Casino vigorish or whatever if you're not indexing and you got to beat that in order to do better than the indexers and obviously the group can't beat that and
so it's only a small collection of people some by luck and some by skill who end up doing better so you're basically EV betting against the odds if you just step in and buy stories and invest in various mutual funds that are actively managed and so forth so that's what I would tell people now now on the other side of the coin if you really are interested in investing it's worth educating yourself and trying to do it
because you will learn a lot about investing you might actually find a way to win and you'll learn about how the world works and a lot about life too the things you learn from what seems like a narrow specialized field generalize very widely to all kinds of things if if you're the kind of person who can take a lesson in one part of life and transport it to another part of life what are some of those transferable lessons in your
mind let's take uh risk as a good example you learn about investment risk and how you want to avoid very great risks or minimize them great investment risks can take you out of the game altogether so you might have a a thing where you multiply your money by 10 times but you might also lose it all some things that are highly volatile like buying cryptocurrency are in this category where you you may have the
chance of a very large gain but also the chance of a very large loss and if you lose most of your Capital it's very hard to climb back out for instance if you lose 90% of your Capital you've got to multiply what's left by 10 in order to get back to even which means you've got to make 900% to offset that 90% loss that's not going to be easy to do it takes a long time so you want to avoid really bad outcomes so I applied that for example
to covid I thought about what to do and how to deal with it and I said you know at my age the stats from China which came over in early 2020 showed that people at 85 and up were dying at the rate of if they were male 18% of those who got it and even now the death rate is very high for those who get it if they're unvaccinated it's probably pretty close to that and if they're vaccinated it's maybe attempt
that so I consider that a risk that can take me out of the game with a fairly high probability so I'm going to avoid getting covid if I possibly can I'm going to mask up I'm going to avoid crowds I'm going to think about what the risks of various activities are that I do and decide whether it's worth it so I did a my own analysis of covid and its risks and uh tried to be very careful from that on I think it's paid off and
uh it's paid off for my family too I've passed this information on to people around me do you have any recommendations for and this might sound a little meta but how people should think about long-term think or the long term because the the recommendation for say an equity index or index ETFs was predicated on investing and holding for a long period of time what would you consider of the minimal viable long period of time if you have an
answer to that and how can people become more aware of their own weaknesses related to short-termism or short-term thinking and switch to more long-term I tend to be a long-term thinker you might say well if you're 89 how can you be a long-term thinker well I have uh children and grandchildren I also feeling pretty good and staying in good shape so I 89 may not be all that old at this point in any case I would say that
if you're looking out 15 or 20 years or more maybe you have a a dynasty trust or something like that or you have descendants and you yourself expect to live 15 or 20 years or more the best investment I think is to buy almost entirely equities and hold it you might have want to have a little cash around I think a Buffett recommends 90% index and 10% bonds or shortterm intermediate term bonds for cash that does just about as
well as 100% equities I just put it all in equities because I have enough so I don't have to worry about fluctuations up and down if you have a shorter time Horizon you may want to do things differently and it depends on how much you're going to need and how much you have I have a set of rules that are a little bit helpful here there's I'll start with the what I'll call the 4% rule suppose that you're going to retire and you want
enough to last you from your Capital throughout the rest of your life I would say a pretty good working rule put it mostly in equities and spend 4% of your Capital each year or less if you can and and that ought to last you from say the 60s till the end of your life it's not guaranteed but pretty good chance it will then I have the 2% rule which I found by studies both mathematical and by simulation of stock returns if you
only drain 2% out per year then that money will probably grow in perpetuity there's a small chance that it'll be extinguished by really bad downturns but very small there is an organization that freezes people and they ask me for advice about how to invest their endowment fund freezing me meaning cryogenically freeing yes and so I said for the endowment fund which is going to get people out of uh being frozen
sometime in the far future 50 100 200 years out for that fund you're going to want to invest longterm and let it run because that's going to get you the most money down the road and if you're going to attempt to reanimate somebody there's no specific timetable if you don't have enough money to reanimate them at a certain time you can wait a few years and let the money grow a little more so you want money to grow to as big an
amount as possible in the far future and so the 2% rule for the endowment fund I think was a pretty good rule for spending because all the simulations showed that it would grow to to a very large amount over a period of time so that's long-term thinking the intermediate term I think of that as maybe uh five to 15 or 20 years and there something like the 4% rule that I describ might be good and for short term it's just a matter of
what your needs are and what you're going to have to uh come up with and people are in various ranges of wealth there's what you might call Poor where you don't have very much to save or put aside and you're going to be hard to retire and hard to make it then there may be middle class people who can put a moderate amount away I know somebody for example she has saved about a million and a half and she is in her
mid-50s I think she'll be fine so I've explained to her pilot all inequities and let it rip she gets scared every so often when there's a downturn she calls me and I tell her uh hold fast and then it goes back up she said I'm really glad I held fast a lot of people are what I call scared rabbits and when the market goes up they get confident they start buying and then it drops and they get really scared at
the bottom and they sell out and then it goes back up and they buy again and it drops they get really scared at the bottom and they go back out again so they seem to have the worst of it all the time yeah doesn't feel good to go through life as a scared rabbit and certainly certainly hurts your financial standing that's worth thinking for yourself comes in uh you won't hold fast to something unless you understand it
yourself there's an old saying give a person a fish and they eat for a day teach a person the fish and eat for a lifetime and it's a simple thing for thinking if you give somebody advice about a problem they might solve that one problem if you teach them how to think about problems they can solve problems for the rest of their life and so that's the way to go and also if you give them advice and they don't know
understand what the advice is or how to think about it there's a good chance they won't take their advice I'll give you an example back in 1991 I was invited to review the portfolio of McKenzie in company back in New York and
so they had a profit sharing and a uh pension plan and I came and I looked at all the things they had and the things they had were really quite good but there was one very strange investment they had it printed out one or 2% a
month every month they've been doing it for years they had a record going back into the late 60s supposedly and I said how do they do this and they said well uh we don't know exactly they tell us that they won't explain what their method is but we can show you our accounts so I looked at their accounts and I saw that this account bought stock and it put option positions on call callers they had a put
option A little below the stock price and they bought a call option a little bit above and that the two things paid for themselves it was self- financing so they didn't have apparently a whole lot of risk but I could show that in a down Market they would lose in a down month and an up month they would win but they won every month and the reason they won every month was because a mysterious trade was put on involving S&P index
options and it was always in the right direction so if they were going to lose it would be a winner and if they were going to win it would be a loser so I said this is not possible I said I want to go over and look at this place so they called the person in charge who happened to be at that time Peter maid off the brother of Bernie made off Bernie was off in Europe raising money this is 1991 mind you so when Peter made off heard I was coming
he said no I won't let him in the front door so I held my nose and I said I want to take a better look at all this so I looked at all their trades and I saw that half the trades never happened when I researched them that is there was no trades occurred on any exchange at the prices they were making them at for these options another quarter of the trades had so much volume that the volume couldn't have happened because
there wasn't that much volume on the exchanges where they traded the last quarter of the trades there which consisted of 40 there were 160 to start with the last quarter of the trades didn't happen anywhere there was no explanation so I said okay let's look at some of the trades that actually could have happened so I went to uh a vice president of Bear Sterns rest in peace and said you know we do a lot of
business together I'd like to ask you a special favor which you might or might not be able to Grant I'm going to give you 10 options trades I'd like to know who was on the other side of these trades in particular was made off and on the other side of any of them so they researched the trades and they came back and said no can't find any trace of any made offing company so I said to McKenzie this is a fraud and they said but we're making 20%
a year I said well you're making 16% a year currently in your other Investments if I'm right this 20% is not real and the roof's going to fall in someday and you might lose your jobs on the other hand if I am right and you move you've saved this problem if I'm wrong and you move you're only going from 20% to 16% so you know it makes a lot of sense to just exit so they exited in two months and we inquired of everybody we knew I threw my
network they threw their Network to find out who had Investments with made off and how much they had now we could only cover a small part of the territory because our network was not comprehensive and it turned out that about half a billion we were able to identify now that meant that there was a lot more than half a billion out there how much more we couldn't say but things were looking very bad on the other hand
how could you challenge mid off he was a pillar of the National Association of Securities I think he'd been a past president he'd been a on committees there he was the biggest third Market that is s The Exchange maker in the country so a respected person and well known to everybody and he had thousands of investors as it turned out and because he had so many investors everybody knew it had to be right
because surely those people had checked it all out now the finale of the story is that when I was doing this the person who invited me who was a hedge fund manager himself who invited me to do this from he had been an adviser to them this person believed in maid off and continued to go out and rais money for him and in 2008 when the news came out that maid off was a fraud my son called me up and said you know Dad the stuff
you've been telling me about for 17 years it finally happened it blew up so anyhow this fellow who had been running a fund of funds and included maid off in that fund of funds they it's a special type of hedge fund that invests in other hedge funds he had been doing this and had a very big fund of funds he was raising money for madeof the same week that the bad news came out and he had his own personal money and
his family's money and trust fund money with ma off but I had explained everything to him in great detail I knew him quite well at the time back in 1991 that McKenzie and Company had this analysis explained to them and decided to pull out so the whole point of this is here's a person who had all the information it was explained very clearly and he just didn't believe it and he himself was in the investment business and was very successful but he
was a reporter in times past and his family made a lot of money in the 30s he was came from a rich family in Chicago and the way he figured things out was he would poll people and he would ask people what they thought about something it would be like I asked you what's the uh best diet pill I can take you'd probably say there aren't any good ones and i' probably agree with you right he'd ask a 100 people and then they
would in fact be a poll and he'd go by the pole so just imagine that you asked 10,000 people whether they thought you could travel faster than light and all but one said yep you can do it I saw it on TV and only one guy said no you can't do it Albert Einstein so a guy like him would overwhelmingly reject Einstein and believe the the 10,000 average people who just said yeah you could do it because the poll was 99,999
to1 on one side so he doesn't think for himself he lets the crowd think for him and and that I think is a fundamental mistake that many people make they let the crowd do their thinking they don't figure it out for themselves let's talk about toolkits and bring in we don't have to focus on him necessarily but since Warren Buffett came up earlier you have then his partner Charlie Munger who is well known for mental models and I
think Buffett describes him as having the best 60-second mind he's ever met something like that what mental models do you find helpful or would you teach in that class that I mentioned earlier and you can really approach it in any way that you think is is sensible but how should people think about mental shortcuts or mental models and are there any that come to mind that you think are particularly valuable I'll tell you
about a few then I'll tell you where to get more perfect let's take take a notion that economists call by their Priestly name externalities have you heard of that term I have I have heard the term okay good most people have not as it turns out so you're you're way ahead already well so externality we'll see where we go an externality simplistically is a consequence that's of somebody's action that's generally not intended
and it's usually bad but it's sometimes good I'll give you examples of each of varying sizes here's a bad one that happened to me uh actually last week I go out to get my car and I find out that the tire is flat I look and I see a sheet metal screw in the sidewall which means that this tire is going to have to be replaced so I end up taking care of the problem where did the problem come from most likely I think
down the road from me there's been a lot of construction going on I've noticed as I go for walks that pieces of metal are often lying in the road sheet metal screws Nails other things that aren't good for tires I pick them up when I happen to walk by but I don't get them all and the workers are carelessly depositing more not very many but it only takes one to give me a flat so this is an unintended bad consequence
of the work going on there who benefits well the homeowner does because he doesn't have to police his guys to clean up carefully and sweep the streets afterwards he doesn't have to spend another $5 a day on sweeping labor to make sure that none of these things are there but it cost me $500 for a new tire unfortunately it's a Tesla plaid with a 10 and half inch wide Michelin tire so the tires are not cheap so this is an unintended bad
consequence for me that saves a very small amount for the guy who's doing the construction few doors down let's take a little bigger one when I was a chemistry student back at age 14 in 1940 six teaching myself I mean there
was wasn't a decent chemistry class around I came across a fellow named Sante arenus a great Swedish physical chemist from the latter part of the 19th century he at that time and I learned it then did a study of how gases in the
atmosphere trap heat and he explained how much the heat trapping power was of various gases including carbon dioxide he explained very clearly how much carbon dioxide would contribute to global warming as it increased so this was known way back then and I knew it as a 14-year-old and the mechanism is obvious you can sit behind a uh plate glass window when the sun is shining and feel everything heat up around you the
greenhouse effect so it's simple it's obvious it's got plenty of science behind it what do people do now well they create a negative externality by polluting people drive around in cars and dump CO2 into the atmosphere and each individual is convenienc by being able to drive around in his car but he contributes to a global problem a problem that won't come back perhaps to haunt him if he doesn't live long enough
or maybe gradual so gradual he doesn't notice it but everybody together is busy contributing this major externality to the world which leads to a second little mental model it's called The Tragedy of the common that's a pretty famous thing by a guy named Garrett Harden and the simple example is you got a village with a little green in the middle and it's got a lot of grass growing and only a few people live in the village so one guy
has sheep and he lets his sheep graze on the green and there's plenty of grass so that's not a problem few more people move in they get some sheep they turn them loose on the green pretty soon there too many sheep for the green it's all eaten up so each person acts in his own self interest but collectively what they do is against the common good so that's another little mental model or idea so the whole collection of these
things that are out there that are very valuable for thinking purposes one collection is there's a 50 item collection that came out under Inc period on the internet about from Elon Musk it's quite good there's also Charlie munger's book poor Charlie's alic yeah which has a lot of these things embedded in it one of my favorites is it has a strange name of a fundamental attribution error and I didn't like the name I said
Charlie why are you calling this fundamental attribution error well Charlie actually just picked it up from sociology and psychology that's what they call it and I thought this is a terrible name you should call it something else but as I thought about it some more I decided actually on a mad Dame after all roughly speaking what it does is it's a human tendency to make assumptions that are not fully justified
by the evidence for instance you go to lunch and the person you invited doesn't show up so you begin to speculate well maybe he just forgot he's a forgetful guy or uh maybe since we had a little quarrel two weeks ago maybe that was it maybe he just and he's going to show me or something of that sort you start making up stuff to try to explain it but you don't have the evidence for it it turns out that he had a car accident on
the way and he's busy dealing with all the fall off from the car accident and two hours later you find out what actually happened and it's too bad and he apologizes profusely but you didn't have any idea what actually happened you just started making stuff up that is something that humans do over and over and we're wired for it it's evolutionary it ties into a famous book Thinking Fast and Slow Daniel Conan yes exactly and so
he has an example there of you're in the forest and you hear a roar you don't stop to find out where the roar is coming from you run up the nearest tree because it might be a lion in fact it might be something entirely different but you don't take any chances you you react and if it's not a lion you've made fundamental attribution error you attributed to being a lion when it wasn't but it saved your life often when
it wasn't an attribution error that ties in with something else which is learning how to think if you think fast it's kind of emotionally from the gut responding Without Really reflecting you will make a lot of mistakes sometimes though it's a way of saving your life for example somebody yells fire you're at you're at the door of the theater you run out the door immediately before you find out whether there is a
fire that might or might not have been but running out the door before there's time to reflect in which case it might be too late is a good thing to do I hold it for everybody else too as I run out just want to mention a few things on the externalities piece and thinking about the say unintended secondary or tertiary effects on the collective there can also be positive externalities or externality benefit like if you were to
buy fire insurance for your house your neighbor might be a little bit safer right so it can it can go both ways that's a good example it's one that actually was a real life experience for me right here we had a fire Wildfire couple of months ago we all had to evacuate and uh I have chub and they have Wildfire insurance and so I have that and so chub actually had a water truck out here which protected not only
me but lots of other people in the neighborhood so is the next step after identifying these externalities for instance in the case of the construction site thinking about how to somehow create and enforce incentives such that someone is acting to the benefit of the collective for instance the construction site where someone's not spending $5 but it costs individuals who are affected $500 to replace a given Tire I'm sure there are
million different examples of this does that then lead to a study of incentives yes that's a good point that if somebody creates an externality that's negative a good thing to do is to tax it what we've learned is if you tax something you get less of it so let's take carbon for example if you tax carbon you'll get less of it in the air so a carbon tax is the rational logical solution to the whole pollution
problem all you have to do is make the tax big enough and people find other ways to do things than uh pollute with carbon however that leads to another thought principle which is the difference between rational solutions to social problems a rational solution is one that is generally good for almost everybody as opposed to a select few you can have rational solutions to social problems but you often can't get them implemented so you
also have to think about what can you actually accomplish politically and there's a great book about that there's a professor at Yale the Sterling professor of political science Ian Shapiro I happen to listen I listen to podcasts yours included when I go for my walks and his course was one of the ones I listened to it's absolutely great it talks about how to actually get something done politically and we've seen for example
the Biden Administration has had great difficulty getting very much of what it wants to do past and they could learn a lot from this professor who has a lot of good things to tell them he has a book called uh the wolf at the door which is fairly recent which basically explains the things that I learned in his political science course a few months ago and it tells you how to form coalitions that can win and how to pass
things that will stay in place for example Social Security stayed in place because it had a strong constituency that had created right away and that constituency was going to defend it forever after and it politically even though some politicians and occasional political parties have tried to destroy it they have not been successful because the constituency is so embedded and so strong now so anyhow he has a clear
description of how you can actually get things done and he believes I think that you can make incremental progress discouraging as though it seems these days by doing the right way of putting uh coalitions together and defending
against blocking coalitions so it's a very insightful course anybody who wants to get something done evolutionarily I would recommend uh reading this book and I might say we're in a crisis of uh democracy now in my opinion and
simplistically we have three paths there's Devolution which I think we're undergoing now there's an evolution which I hope is the way things work out in which we fix things and things get better and then there's Revolution which is extremely ugly and unpleasant and one of your uh previous interviewees Ray Delio has a book that I would I think is very well worth reading even though it's a tough slog and uh maybe i' Chang the
writing a bit but you know it's it's a real contribution to thinking about the crisis that we're going through now and it talks about the changing World Order I think that's the name of the book and the rise of China as an Empire and the decline of United States as an Empire and I think that U we have some serious thinking to do we can't just sit back on our Laurels and say we've been so great we've been uh the world superpower and
hope that it's going to last we have to do things differently I'd recommend that I also would second that recommendation Francis fukiyama has also some fantastic writing that is worth exploring and I have that Doo book within 15 ft of me here where I sit right now and speaking as someone who studied also in China myself uh at a pretty pretty fascinating time to be there I was around uh in Beijing at universi in
1996 and I've tracked things pretty closely since that it's definitely worthwhile to read up also on the history of China because that is going to and is is coming to bear as we speak on the entire three-dimensional chess of geopolitics which is fascinating and also at times terrifying certainly let me ask you if I may what other investors aside from Warren Buffett impress you and they could be people who are no
longer actively investing they could be current but are there any other investors who come to mind who have particularly impressed you outside of Buffett and the reason I ask for people who are wondering is related to what you said earlier that by studying investing by participating in investing you get to stress test and look at how other people stress test thinking and cognitive biases and so on is there any anyone who
comes to mind for you outside of outside of Buffett there are people in the hedge fund world who have done remarkable jobs at various times but they're not accessible to most people for example let's take uh Jim Simon of renaissance renaissance Partners is basically a private operation at this point but it's been extraordinarily successful uses phds and computers and math and codebreaking and so forth and it has from around
1989 or 90 on been spectacular in its performance probably the best risk adjusted record in the world from that time forward and for people who want to read more about Jim Simons there's a book called the man who solved to the market which is a good read although you're you're probably not going to be able to as you mentioned emulate the sort of Quant approach that that he is taking for a million and one reasons but
absolutely fascinating story any other names who come to mind I'm trying to think of who I would give money to to invest I don't have anybody now that I'd get money to to invest there are a few good hedge funds around but they take too much for the general partner and leave too little for The Limited partner and they also generate income that is highly taxed if you're a taxable investor so they're only good for nonprofits at this
point or tax exempt investors what about past investors say in decades past who you would have given money to willingly does does anyone come to mind well I I did give money to Ken Griffin's Citadel mhm for from the time it started I think I was investor number one after wow Frank Meer who was the uh other General partner with Ken Griffin Frank Meer was a longtime friend of mine from the past so that's how I learned
about it I actually had keng Griffin out to the house when he was about 18 or 19 and just starting up with Frank and talked to them about how my hedge fund princ Newport worked and we discussed at some length the idea of profit centers and subsidiary businesses and I handed them boxes of prospectuses that were hard to get on all kinds of convertible Securities these things would come out when the Securities were issued and then
they would no longer be findable anywhere they were just like rare books so I handed them my whole collection of cartons of these things so I had a very good ride with them and I finally exited recently because the taxes take to Big a bite out of the returns that I get it's just simpler to invest in an index fund I end up better off than if I were to remain in Citadel also it's complicated you get all kinds of papers I had four feet of
paperwork when I finally uh boxed it all up at the end that is a lot of paperwork now what I I I know you had the introduction but what was it at the time about Ken Griffin and Citadel that made it pass muster for you well they were going to follow the exact plan that I was following when I shut down princ Newport so that was ah got it and I knew Frank and he was smart and capable and Ken seemed very
smart and capable and energetic so they were doing what I would be doing had I stayed in business so let's let's talk about staying in business because I had a question that I wanted to make sure I touched upon and there are a million others that I would love to talk about but could you please speak to having enough you've spoken about or at least written about how your hedge fund could have taken over your life and you could
have just ended up as a capital accumulator as your full-time full-time job plus how did you make the decision to wind it down and how do you think about having enough because it doesn't strike me as something I come across often with people who are really good at investing the way I got into the investment world I was an academic and I was curious and I found things interesting and I wasn't really in there
to get rich I was in there to deal with interesting math problems that kept coming up Blackjack roulette was a mathphysics problem investing was uh for me lots and lots of math so I enjoyed that I just do things I like and I don't worry about money as my former sister law once said do what you love and the money will follow she wrote a book with that title and uh I said 'you know that's that's right do what you love and the money may
follow and if it does that's fine if it doesn't you're still doing what you love and what's important in life I think is the journey and the people you know and you spend your time with and how you spend your time otherwise also that's how I looked at things and I started out as a child of the Great Depression so I knew what it was like to have basically no money I used to sleep four or five hours a night in high school and get up at 2: or
3: in the morning and deliver newspapers and I made $25 a month which seemed like really big money and I saved part of that for college and invested part of it in science equipment chemistry telescopes electronics and so forth Just because I like playing with those things and learning about them my goal wasn't to make money it was to have a good life and enjoy myself and have fun and it just so happened that it turned out a
lot of money too what I found though in the investment world is lots of people go in it for the money and when they do they keep going and going and going and it's a validation of them they can't stop they end up with oh five or 10 Villas a yacht a jet and let's imagine you have five houses just as take an example how much of your time you going to spend in each house you can't be on average More Than A Fifth bit by math
and you're not going to be in your house all the time anyhow you're going to be Ving traveling meeting and so on so maybe it's a sixth or seventh of the time on average now some houses are going to you're going to spend more time in in some less so you may spend a ten 10th or 15th of your time or none of your time almost in one of those houses so you end up with a whole lot of stuff to manage and take care of and you end
up hiring people to do that so you don't have to do it and then you have to manage the those people and then you have to hire people to manage the people who manage the people and so on it's like running a business it's terrible you don't get to enjoy the important part of your life which is time did you have a set point at which point you knew you're going to exit the business so to speak or was there a
particular day that prompted a particular experience that prompted you to say enough is enough I want out do you remember what the Catalyst was if there was one I wasn't having fun anymore it was turning into work and I said well I don't need to do this I have enough wealth I'm never going to spend it all why keep doing this so I decided to wind it down it was fun for a long time because there were challenging problems it was uh
challenging to try to figure out new things and to deal with all the issues that came up but when became uh bureaucratic and paperwork and a grind where I had to do things I didn't want to do that was enough it was TR time to go it was the same thing in Academia I loved Academia but there were aspects to it that became burdensome committee meetings endless reviews Grant proposals what I liked was research and teaching
and the people that I met there the students in the faculty that were smart and chall challenging and if it was only that I'd still be there but it wasn't only that and I found other things that were equally or more fulfilling so anyhow I just migrate to where where I want to be I don't have a set uh thing that I have to keep doing so let's explore that a little bit further Nasim Talib who many people will know because
of books like Fooled by Randomness the Black Swan antifragile wrote the forward to your memoir and in that he writes about your restraint not getting caught up in the the golden Fetters of large structures multiple offices morning meetings Etc and he highlights the value or the fact that you Value Independence so what does independence mean to you and how did you spend your time after winding down the investment side of things I spent my
time reading traveling in exercising enjoying my family and my friends and learning things that I could learn and then it's also entertaining to casually manage my investments I might just interject here that one of the things that makes you independent is to accumulate Capital because then the capital can grow on its own if it's a simply invested as I described before in for example an index fund and once you
have Capital then you have the chance of Independence if you have enough Capital it will support you indefinitely when you've achieved that goal there's no point in spending time doing anything you don't like doing if you can help it you know I have to do some things you don't like like gather all your tax information together every year or uh going in for routine medical appointments is there anything that you
are particularly interested in learning more about now or in the process of learning about or looking forward to learning about what I've focused on for the last year or so is reading about what's going on in American society what may happen I don't think we can predict for sure what's going to happen but we can map out scenarios we can map out possibilities we won't get them all but we can map out quite a few of them and
ask ourselves what will we do if scenario a scenario B scenario C materializes and have some sort of preparation Readiness for that and I won't go into a list of extreme scenarios except maybe a few you could have an autocratic country where a minority pretty much rules everything and dictates to everybody else you could have a turbulent country where a large part of the country maybe a majority is badly upset and just wants to bust
everything up and start over somehow so you could have the choices I described a Devolution Evolution or revolution I I don't know how it's going to play out but it's worth thinking about what might happen and whether there's anything any of us can do about it and I don't think there's much an individual can do on a grand scale unless he happens to be in a position of great importance or manages to get himself in a position of great
importance but I think there's a lot that an individual can do on a small scale and I think the best thing we can do is teach everybody to think for themselves also so they don't just take what they're told in the press for example or in the other fors of the media internet Twitter so on they don't just take that and sop it up and believe it but they question it and they ask whether in fact it might not be true
what the motives are or the people who are putting these things out and so forth when you begin to think for yourself the whole world changes and becomes much clearer in my opinion and you can manage your life a much better fundamental attribution error learning about things like that and putting your own thinking under examination Ed this has been so fun and I know that there are a million other things we could talk
about and hopefully we'll have a chance to do a round two at some point but I wanted to be respectful of your time and begin to bring this to a close is there anything else that you would like to mention or call attention to any request of my audience that you would like to make people can certainly find you online at Edwardo th.com and I'll link to that as well as your books and everything else that we've discussed in
the show notes at tim. Blog podcast uh is there anything else that uh you would like to bring up before we end this round one conversation I'll tell you one story that you probably read my book it's about Joseph heler and uh Kurt vonet please Joseph how wrote his famous book C 22 of which they made a movie way back maybe 50 years ago I'm not sure exactly when but it was uh very wellknown and famous at the time and Kurt fut is well
known too for a variety of books and Joseph heler died I'm not sure when maybe early 2000s and Kurt fut was writing in the New Yorker about him and he said Joseph hel and I were at a hedge fund mogul house I'm not sure if it was hedge fund Mogul but somebody very very rich in New York and I said to Joseph heler you know you've made a lot of money out of cash 22 this guy makes as much money in a day as you're ever going to make he's got
pen houses and Yachts and jets and Villas and models falling off his arm and so on and Joseph H looked back and said you know I have something something he'll never have Kurt fonica was puzzled he said what's that heler said I have enough and that's something that people who endlessly chase money to the end don't figure out that you can have enough and it's better than not having enough it's certainly better than never being sated
and staying on that sort of compulsive track and I am so so endlessly fascinated by by you your story your Lessons Learned and I really hope we have a chance to have another conversation because I have still so many different notes and questions that I would I would love to tackle but we'll we'll leave people wanting more and hopefully we we will make time to have that second conversation but thank you
so much for taking the time today Ed it's been uh it's been a real joy to spend this time with you well I enjoyed very much it was a pleasure to meet you and now I know that since I'm on your podcast my wife will listen to me well one can hope one can hope one can hope and to everybody listening thank you for tuning in as always and until next time try not to act like a scared rabbit and be just a little bit
Kinder than you think you need to be and as always thank you for tuning in hey guys this is this is Tim again just one more thing before you take off and that is five bullet Friday would you enjoy getting a short email from me every Friday that provides a little fun before the weekend between 1 and A2 and 2 million people subscribe to my free newsletter my super short newsletter called five Friday easy to sign up easy
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