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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well, hello everyone.
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It's time for another episode of Infinite Loops, and I got to tell you, I may be, in fact, the luckiest podcaster in the history of podcasting because I always get to talk to people who are smarter and far more interesting than I am today.
1:54
I have the anonymous 10-K Diver on as a guest, and let me just step back and tell you why this guy just amazes me.
2:10
So, first off he does some of the best threads I've read on issues that are sometimes really difficult for people to contemplate.
2:19
We're going to get into probabilistic thinking.
2:24
That's one of my hobby horses a little bit later, but what he does is he explains them and has wonderful graphs and tables that make them actually fun to read.
2:30
If you've ever read a 10-K, you're very brave to name yourself that because 10-Ks are usually not very fun.
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But more importantly, the way I look at it is he is a great example of what I think the talent and skill set people are going to need going forward to absolutely crush it.
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By way of example, he's anonymous right now, but he has on the strength of his work alone 200,000 followers on Twitter.
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People don't really care too much about who you are.
3:10
They want to care about what you can help them with or what you can teach them, and my guest today has incredible chops in teaching very difficult concepts in a fun and accessible way.
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I had a guest on yesterday and he's very into financial education, and I just thought, when I was getting ready for you, I was like, "Wow, I got to hook these guys up."
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So, I'm going to introduce you to him in DMs on Twitter after this.
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And finally, this is a thing that isn't new.
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So, when OSAM began its OSAM research partner program, the very first person that we hired is an anonymous person on Twitter, goes by the handle Jesse Livermore.
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My son, Patrick, was the CEO when we started this, I was chair, and so we would always talk about these things, and both of us had read Jesse and his website completely.
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And I'm like, "This fucking guy could be like the top dog at Goldman Sachs."
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And it turns out by the way that Jesse has gotten unsolicited job offers just off the power of his work.
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So, we're not afraid of it.
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We hope that we're going to get into some of what some of your goals are.
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And then finally, your threads are just amazing in that they're not just about 10-K reading or that, like capital allocation, return ratios, how much do you really need to retire, and what I love about you is that I'll be reading you and I'll be going, "Oh man, he's not going to do this, is he?
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He's not going to say the 4%.
4:47
He's not going to do that."
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And then, bam, you come right out there like, "Yeah, no, that doesn't work," which is what I love about it.
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And so, very long introduction, but welcome.
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10-K Diver: Thank you so much, Jim.
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That was a fantastic introduction and very, very warm introduction.
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Thank you so much for it.
5:07
Jim O'Shaughnessy: Oh, it is my pleasure.
5:07
You are such a high output, a high signal.
5:09
This is a debate I often have with colleagues and friends and everything else.
5:16
I continue to contend that if you curate Twitter correctly, you can get some of the highest information, the best information with very little noise, but you have to, you have to curate aggressively. 10-K Diver: Absolutely.
5:33
Jim O'Shaughnessy: Do you curate aggressively?
5:34
10-K Diver: Well, so let's break down what exactly curating aggressively is.
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So, I know a lot of people who follow thousands of others on Twitter, and I don't follow thousands of others because my feed is kind of very precious to me, and that is one way I curate people by being very selective in who I choose to follow and things like that.
5:56
So, in that way I curate aggressively, but I don't really block people or mute them or do things like that too much.
6:09
The reason I don't like to mute people is, well, a lot of the time when someone says something that you don't like, we have to wrestle with our own emotions, and we have to ask ourselves, "Okay, am I muting or blocking this person simply because I want to live in my own echo chamber where I don't agree with what they're saying?"
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But they might have something valid.
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If I don't like what they say, okay, I will read it, and then I mean, I will just ignore it or something like that, but I'm not going to say, "I never want see this person in my feet again," or anything like that.
6:46
Jim O'Shaughnessy: So, I'm not going guess your age, which I could do, but that's a wonderful insight that makes me think you've probably read a little Daoism and some of the other things that also attract me in that, generally speaking, the best way to find out what your own faults are, according to Tony De Mello at least, are to look at what annoys you in other people.
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And one of the things that you can also find that if somebody calls you something that you are pretty certain does not apply to you, your post doesn't even go up. You don't get offended.
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You just see, well, that's absolutely wrong.
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Where the hot button goes and people get angry and hot and start to shout is when somebody says something to them that they themselves worry they are like that.
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And so, that's a great tell.
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If you have to ever have to interview anyone, if you're ever in management, that's a good place to go.
7:38
So, let me ask you, I mean, again, the quality of your work is just outstanding.
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In my opinion, you could put the whole thing together in a book, sell it, you'd sell lots and lots of copies.
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What motivates you to put out such high quality work, especially being anonymous, and if you could also tell me, is this kind of like a mission?
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Do you have a long-term plan?
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10-K Diver: I don't have much of a long-term plan.
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So, when I first started this account, I knew a little bit about finance and investing, but I am one of those sort of rare people who comes to investing from a completely non-finance background.
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I'm a computer scientist by training.
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And when I first got started with investing, this was way back in 2011, I did not understand the first thing.
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So, if you ask me, okay, Apple is a stock that's trading at $150, and Amazon is trading at $3,000.
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Does that mean Amazon is 20 times as valuable as Apple?
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I would've probably said yeah, sure, that sounds about right. Oh boy.
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So, I didn't know anything about investing or stock or anything like that, but I like to think I was a reasonably intelligent person back then.
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So, if someone had just explained it to me in a simple way without all the jargon, I would've cottoned on reasonably quickly, but of course, I did not cotton on quickly.
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It took me an enormous amount of time to understand very simple things like operating leverage or return on capital, or just these fundamental concepts took me an enormous amount of time to understand simply because everything I was reading and the books I read about investing, they were aimed for somebody who's already kind of familiar with the jargon and things like that.
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So, my main motivation behind starting this Twitter account is to try and help people understand fundamental concepts in a simple way, in an easier way than what I had to go through.
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That is basically my kind of only motivation behind this, and I have a lot of fun getting into the nitty-gritties of things and trying to work out things on my own from first principles and things like that, and I think a flavor of that sort of shows up in my threads as well.
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So, I have a lot of fun writing them.
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I'm not doing some service or doing this just because I want to help people.
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Putting my own thoughts and writing very often clarifies my own thinking, and I get a lot of fun out of it, and I get to meet all kinds of interesting people, just like you and so on.
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It's just been very, very satisfying to me to not just see the account grow, but also to be able to use the strength of this account to interact with a whole bunch of my heroes, like Professor Sanjay Bakshi and Professor Michael Mauboussin, and these people, I would've never had the chance to interact with them where it not for my Twitter account. So, yeah.
10:44
Jim O'Shaughnessy: Yeah, that is great.
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Michael is a good friend of mine and he's a wonderful guy. 10-K Diver: Absolutely.
10:48
Jim O'Shaughnessy: You're lucky with that one.
10:48
I just want to pull out. Gang, what did you hear?
10:48
You heard he came to the process eager to learn, and saw that the first thing he sees is the jargon.
11:03
I always say the priesthood doesn't want the laity to know what they're talking about.
11:07
And so they come up with these complicated- 10-K Diver: That is exactly right.
11:09
Jim O'Shaughnessy: They come up with these very complicated jargony terms that we tried to literally strip from all of our material trying to help investors.
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It's hard because you forget that you're using jargon sometimes.
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For example, bips, bips meaning basis points.
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I've been doing this a long time.
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And so, I will just naturally say bips, and it happens to be the one I train myself on because if I hear myself saying bips, I know, oh, I'm back and deep in the jargon.
11:39
But the other thing that I really enjoy about you and your account is your reasoning from first principles.
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You take a beginner's mind to the problem.
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I just wish that there was some way I could wave a wand and get people to understand that they're going to understand things so much better if that's what they do, and it just seems to me, and I want your opinion, are these...
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I had Professor Plomin on who's a geneticist and he's a behavioral geneticist.
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So, I asked him, is this genetic, the people who learn this way and whatnot because I came for the finance threads, but the ones I really love are on things like existential risk, and the mortality argument that you made.
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Those things are great because, A, very few people are thinking about them, B, they just align so well with step by step, how do I think this out properly.
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I love the probability errors that people are so...
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Their intuition leads them down so many wrong paths when they're trying to do probabilities that your stuff is very clear, but you are obviously a polymath.
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10-K Diver: Well, if you say so.
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Jim O'Shaughnessy: I do say so.
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You may put that on your resume.
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Jim O'Shaughnessy says that I am a polymath.
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10-K Diver: Yeah, that should be good enough for most people.
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Jim O'Shaughnessy: But tell me, in all seriousness, your interests are very broad, physics, computer science, risk, risk metrics.
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I love your piece on the volatility tax.
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I've had that conversation with people who were so high up in the various banks and investment houses that I could not get them to understand that no- 10-K Diver: It is a very difficult concept to get across.
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Jim O'Shaughnessy: So, why don't we jump to that?
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Why don't we talk a little bit about the volatility tax and if you would, for our listeners, define what it is?
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And I'm not going to ask you to go through the whole thread, but what I am going to ask you is was it something that just jumped out at you that was like, "Oh boy, I really need to explain this because I bet nobody really gets this."
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By the way, I can confirm, a 30-year Wall Streeter, nobody gets it.
14:02
10-K Diver: Well, so it is a pretty difficult topic to get across, and if you look at the comments to the thread, the comments to that particular thread, it is clear that there are still people after reading the thread who have misconceptions about it.
14:19
And so, the volatility tax, I think, okay, the first reason a lot of people don't get it is because it's not really a tax in the traditional sense of the tax.
14:25
When you call something a tax, people's minds immediately jump to something that the government charges you on your profits or something like that. Right?
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Jim O'Shaughnessy: Right.
14:36
10-K Diver: And this is not any tax that is levied by the government or anything like that.
14:37
So, basically, if you have a stock say, and the stock can double in some years and halve in other years.
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So, what happens is you have a stock, there's no way to predict what the stock will do in advance in any particular year, but there's a 50% chance that the stock will double and there's a 50% chance that the stock will get cut in half.
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So, the stock is at $100 today.
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It could be at 200 one year from now, or it might be at 50.
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If you sort of take the expectation of this, most people like to deal with expected values.
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So, a stock that is at $100 today, it might be at $200, or it might be at $50.
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So, the expectation of that is 200 plus 50 divided by two, which is $125.
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So, the stock is expected to be at $125 a year from now, but it's at 100 right now.
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So, that's a 25% return sort of, quote unquote.
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And this is what's called an arithmetic return.
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The problem happens when we try to sort of compound this over a period of time.
15:44
So, we just buy the stock which is at $100 right now, and then let it ride for a long time, a large number of years.
15:55
Now, if the statistics of the stock remain the same, that is, it either doubles or halves in any given year, and those years are all independent of each other and so on, what happens is that you don't get anywhere close to the 25% return in expectation. And why is that?
16:15
Because if you think about it, a doubling and a halving sort of cancel each other out.
16:15
So, if a stock doubles and then halves, that just leaves you exactly where you started.
16:26
So, if you have volatility in the stock, which is basically the stock, this is a very volatile stock, it doubles and halves and so on, right, over a long period of time, the number of doublings and the number of halvings are going to be roughly approximately equal to each other because we said that they each have a 50% chance.
16:42
They're both equally likely.
16:47
So, the number of doublings and the number of halvings are going to be roughly similar to each other, and all those doublings and halvings are just going to cancel each other out.
16:55
The most likely return that you will get over a long period of time is exactly 0% because you start with 100, and then let's say the stock, over the next 20 years, there are 10 doublings and 10 halvings in some order, that's just go to leave you back with your $100.
17:09
So, we had this arithmetic return which is at 25%, but we now say that over a long period of time, the most likely return that we're going to get is 0%, and this most likely return also has a fancy name.
17:23
It's called the geometric average.
17:23
So, that's the arithmetic expectation and the geometric expectation, and the two can be very different when you have a volatile stock or a volatile asset.
17:39
The idea is that for people who want to sort of leave their money in this stock and then try to compound with it over a long period of time, when successive backs are compounded, it's really the geometric return that matters far more than the arithmetic return.
17:51
And the geometric return unfortunately is 0%, whereas the arithmetic return is 25%.
17:57
So, that difference between the arithmetic and the geometric expectations, that is basically what is called the volatility tax.
18:09
And people don't understand this very well because it's a probabilistic concept, and there are all these arithmetic and geometric things and expectations, and there are a lot of concepts that go into this particular sort of super concept.
18:19
A lot of people don't understand it.
18:24
And I think the second reason a lot of people don't really understand it is because people like to call themselves disciples of Warren Buffett and Charlie Munger.
18:28
And so, Buffett and Munger are famous for making statements like you shouldn't care about the volatility in the stock in the day to day price movements.
18:40
We don't really look at that. We can't predict that.
18:40
What we are interested in is buying and holding stocks for the long-term.
18:44
Our favorite holding period is forever, and so on.
18:49
So, inevitably, a certain fraction of Buffett's and Munger's followers, they see all these statements made by Buffett and Munger, which are perfectly true by the way, but they misinterpret them.
19:02
So, they don't think about them.
19:02
When Warren Buffett has one statement in one of his letters, if you go and carefully dissect it, there will be so much behind that statement, and not enough people take the time and trouble to understand that they just get some high-level takeaways, which frequently are not exactly what Buffett and Munger were saying.
19:26
But if you make statements like this, in the long run, volatility doesn't matter, volatility, it only matters for short-term traders, if you make statements like this and a certain faction of people believe them, then when you say, "Hey, are you worried about the volatility tax?"
19:40
"No, no, I'm a fundamentalist driven investor.
19:40
I don't care about volatility and things like that."
19:44
So, people, unfortunately, they give themselves a label that they are fundamental investors, and so they shouldn't worry about these things, and that sort of makes them put blinders on, and so they are not able to see the math.
19:54
I mean, the math doesn't lie.
20:01
It's the same for everybody, whether you're a fundamental investor or not.
20:05
So, that might be one reason.
20:05
Jim O'Shaughnessy: Just so much to unpack there.
20:08
I think this is another reason that I was really looking forward to this interview because we really, really think alike.
20:13
When you're talking about Buffett, I was reading recently a statement that he made that I think very few Buffett acolytes will pay attention to, which was, "You know when I was giving the best financial advice in my life?
20:29
When I was 22 years old and nobody, but nobody would listen to me."
20:35
He goes, "Now, I can basically put any damn thing out and everyone thinks it's the gospel truth."
20:41
And so that's the halo effect which leads me into I'm shocked that somebody as sharp as Charlie Munger doesn't take into account the psychology and behavioral aspects of investors on a day where their stock is down volatility like 30% and the reptile brain takes over and they sell. Right?
21:07
So, that kind of shocks me.
21:07
I know why he said what he said, but I'm a quant. Right? 10-K Diver: Right.
21:13
Jim O'Shaughnessy: We do value. We do momentum.
21:14
We do combination of value in momentum.
21:14
We are driven by empirical aggregate results and base rates over a variety of market conditions and then only directionally. Right?
21:28
So, but you said it would go up 15. 54%. No. No.
21:28
I said that the tendency of this particular strategy is to have this many winning rolling 10-year periods, et cetera.
21:42
But I also when you were talking about the volatility tax, I like your distinction that people have the label, the label thinkers, word thinkers, they miss so much because the labels there, the blinders go on.
21:55
So, Ben Bernank said very simply, plainly, inflation is a tax.
21:55
You would think that people who were getting worked up about things like that would be screaming that from the rooftops.
22:08
But I think so many people are blinded by their blinders where nope, the government isn't officially doing...
22:15
Well, they actually are by printing so much money.
22:15
But anyway, so I love the idea that you eschew labels too because they're very handy, but they're also really, really dangerous, and they can make you completely misunderstand concepts just because you're thinking about that word differently.
22:33
One of my lines has always been we are deterministic thinkers living in a probabilistic world.
22:38
Hilarity and tragedy often ensue. 10-K Diver: Absolutely. I love that quote.
22:47
We are deterministic thinkers living in a probabilistic world. That's exactly right.
22:51
So, when you say that has- Jim O'Shaughnessy: So, I [crosstalk]- 10-K Diver: Sorry, go ahead. Go ahead.
22:52
Jim O'Shaughnessy: Oh yeah. No, no, no.
22:52
I do have a follow-up question on the volatility.
22:55
I'm sure you're familiar with Mandelbrot's The Misbehavior of Markets.
22:58
10-K Diver: Yes, the fractal based way of thinking about [crosstalk].
23:01
Jim O'Shaughnessy: He makes a pretty convincing case in there using daily cotton prices to say that to make the very non-efficient market theory observation that markets have memories.
23:11
What do you think about that?
23:16
10-K Diver: So, I don't know if I know enough about that to have a strong opinion of it one way or the other, but well, in most engineered systems, having a completely memoryless system would be an unnatural thing.
23:33
If you design a circuit or something like that, for example, and look at just the present state of the circuit, the present state of your computer or whatever, you look at all the voltages and currents and all the bits that are store in various places and so on.
23:43
They depend in a strong way on what happened in the past.
23:50
So, most systems around us, the past states of the system, they play a role in influencing what the current state is, and the next state is some combination of the current state and the past state and some input that the system gets over a period of time and things like that.
24:14
This is a standard dynamical system way of thinking about the universe.
24:21
If markets somehow were a system that were completely memoryless, that would be very, very remarkable.
24:28
I don't think markets can be completely memoryless.
24:28
I think there will have to be some amount of memory in...
24:35
I mean, what is a price?
24:35
The price of something is just there is a buyer and a seller and they're negotiating with each other, and then wherever they end up in, wherever they do the deal, that is what we call the market price.
24:47
The buyer comes in with a certain set of past experiences and they're going to pay so much, and the seller comes in with a certain set of past experiences and so on, and they all have memories and they make decisions based on these memories and so on.
25:03
So, if the aggregate of all these one on one interactions, if the aggregate behavior of the market is to be completely memoryless, that would be very, very surprising indeed. Jim O'Shaughnessy: Yeah.
25:16
10-K Diver: So, I don't fully understand the math of fractals and so on.
25:16
It's something that I've wanted to read about for a long time.
25:21
It's on my list of topics that I have to learn more about and Mandelbrot is obviously a very smart guy.
25:27
He knows much more about fractals and all these math concepts than I do, but it seems reasonable to me to expect that the market is going to have some amount of memory.
25:38
Jim O'Shaughnessy: Yes, I agree, and it's long been one of my, I guess, Indiana Jones and the whatever.
25:42
Mine would be the solution for markets being complex, adaptive systems with feedback loops that when the opinions driving them are heterogeneous, markets clear because you're buying Apple and I'm selling Apple and both of our reasons are correct and we agreed on a price.
26:03
The reasons are very different.
26:03
I might be funding my grandson's education, and you might be saving for marriage or whatever, but when feedback loops get very quickly priced into the system, they can sometimes cause information cascades where opinions basically become homogeneous, and we all think the same thing.
26:23
I think that those are what drives bubbles and crashes, and I think that they are very linked to the way humans evolved.
26:29
And so, maybe I'll put you on the team because you would figure it out.
26:38
I'm too lazy as you probably know if you follow my Twitter account.
26:42
What I'm really good at is finding really super smart people like you and saying, "Hey, what about this?"
26:47
So, let's move on to another one that you did, and that I just wondered do you...
26:55
So, you did one on the whole 4%, how much money do you need to retire. 10-K Diver: Right.
27:02
Jim O'Shaughnessy: I'm not going to bury the lead.
27:02
You conclude at the end that this rule of 4%, well, yeah, I could see why people would like it now, but when you use Shiller's data to bring it back to the 1870s, it fails, what, 13 times or something like that.
27:16
10-K Diver: Something like that, yes.
27:19
Jim O'Shaughnessy: And so, that's another thing that I'm a huge believer in is as much history data as possible because ultimately they say, "Well, why does that matter?"
27:27
Well, it matters because markets are priced by human beings.
27:33
I look around and I don't see any evolved version of homo sapien, and I hope that happens, but it hasn't happened for millennia, and so since the markets are the end result of human activity that looking over very long periods of data, you see things like in 1900, there were 200 car manufacturers in the United States.
27:56
When you now things like that, you're a little less rah-rah or FOMO-y about some new app that's coming out. 10-K Diver: Absolutely.
28:10
Jim O'Shaughnessy: Just if you wouldn't mind briefly just describing what you went through, which again, listeners, if you really want a class A insert MBA from some Ivy, just read these trends.
28:20
He does an excellent job on these, but just give us a bit on the 4%.
28:28
And there's a movement that honestly, I'll just say, I don't know too much about, but I have friends who are registered...
28:34
Well, lots of registered advisors, but also fee-only financial planners. I'll ask them about it.
28:40
I can tell what side they're on by the way they react.
28:40
This thing is called FIRE which is an acronym for what?
28:47
10-K Diver: It stands for, I believe, financially independent and retired early.
28:55
Jim O'Shaughnessy: Ah, okay.
28:55
And they have sort of this Rosetta Stone of 4% withdrawal. Right? 10-K Diver: Right.
29:02
So, FIRE, there are lots of people who sort of identify with the FIRE idea, but one of the sort of tenets that many of these people believe is this 4% rule.
29:06
Of course, there are some people in the FIRE community who say that 4% is too aggressive.
29:13
There are others who claim that 4% is too conservative.
29:19
So, I don't want to group everybody in the FIRE community as they all go by the 4% rule or something like that, but a large percentage of them, or at least a large percentage of the more vocal people among them seem to set a lot of store by the 4% rule.
29:38
And just quickly, the 4% rule basically says that your withdrawals in retirement should not exceed 4% of your portfolio.
29:45
So, for every $1 that you have in annual expenses, your portfolio should be worth at least $25 for every $1.
29:52
So, so that is the 4% rule because $1 is 4% of $25.
29:59
So, if you need, I don't know, 100k a year to live on or something like that, you just multiply that 100k by 25, and that gives you two and half million dollars, and that two and half million dollars is how big your portfolio has to be if you want to retire today and still get that 100k per year and survive without a job or something like that. So, that is the 4% rule.
30:26
Jim O'Shaughnessy: Yeah, and what I thought was interesting was most people stopped there.
30:29
One of the things that really bugs me, and one of the things that I think that social media actually, Twitter in particular, can solve is that a lot of these popularly written either books or self-help guides or whatever present things in that kind of very simple format.
30:50
Well, gee, that makes sense. Four times 25, 2. 5 million.
30:55
I've got something to shoot for.
30:55
I'll take 4%, and everything will be jake. Well, no it won't.
31:01
And so, when you have access to someone like you, you go, "Wait a second."
31:08
And then you add the data from Professor Shiller who's a great guy, and lo and behold, you find that it doesn't work lots of times, and Murphy, there's the old Murphy's law, right, if it can go wrong, it will go wrong, and I always say, Murphy was an optimist.
31:28
I always say that things go wrong at precisely the worst time for them to go wrong.
31:35
That's why I bring so much psychology into this, and I've long said that markets change second by second.
31:41
Human nature hasn't changed millennia by millennia.
31:41
Arbitraging human nature is the last sustainable edge in markets.
31:47
But part of that arbitraging, I think, is getting familiar with what you write about because people who have the real goods, so to speak, and I've seen this in my career, they're going to feel far more confident about sticking with the strategy that they've worked out that works for them, and all of my listeners know, my strategy might not be right for you.
32:16
my strategy might not be right for you. What you need to do is read as much as you can, read everything 10-K Diver has written, and then read some more, and read some more, and develop something that you can really sink your teeth into and defend, and all of a sudden,
32:35
that becomes a process, and that process becomes a lot easier because you habituated and then the first time that you see a bear market and you actually get greedy, you know that you have done very, very well because if you can keep your head while all of those around you are losing theirs, I mean, that's the attitude of doing well. I want to move on a little bit to mental models.
32:54
I want to move on a little bit to mental models.
33:01
I hate the term because everybody's using it now, and I thought I was so cool back in 1980-whatever when I was writing my first piece and I was talking about mental models, and I just thought...
33:14
My wife keeps me very humble, and she goes, "Oh, just stop."
33:18
She was reading the thing, and she goes, "You're here peacocking around."
33:18
She's a summa cum laude in journalism, and so she edited all my books too, and the first thing of mine that she edited was a piece I wrote for Barrons in 1992, and I was crushed.
33:28
I was so mad at her, and she was just like, "Passive voice.
33:36
You've written this like one of those academics.
33:40
You're trying to put a bunch of wiggle words in." I was just like, "What?" But it's true.
33:47
So, I got all- 10-K Diver: Wiggle words can save your life Jim O'Shaughnessy: Absolutely.
33:53
But okay, we're going to use it.
33:53
It's become a term of art, and more importantly, everyone knows what we're talking about when we're talking about mental models.
34:01
I kind of look at your stuff as building the scaffolding that put those mental models together.
34:08
So, what I want to know is do you have like a series of models that you really rely on when making decisions either in investing or other aspects of your life, and with that question, what five skills did you develop to make those models more and more are effective?
34:26
10-K Diver: That is a wonderful question.
34:29
So, when I make decisions, I don't think I go through a checklist of mental models or anything like that.
34:36
The way I use mental models is, well, I try to read a lot and to learn a lot of things about the fundamentals of different kinds of fields, for example, the basics of probability and base rates and things like that.
34:50
So, base rates are such a key mental model.
34:57
Jim O'Shaughnessy: They're the cornerstone of what we do at OSAM. 10-K Diver: Absolutely.
35:00
If you claim that some company is going to...
35:01
Well, extraordinary claims require extraordinary evidence, basically.
35:05
That is the idea behind base rates.
35:05
If you think a particular company is going to grow at 20% for the next 50 years or something like that, well, how many companies have done that in the past?
35:14
Jim O'Shaughnessy: Right.
35:14
10-K Diver: And if your model assumes this, shouldn't there be some justification for assuming this?
35:18
So, that is essentially what the base rate concept is.
35:24
So, coming back to the larger question of mental models.
35:24
So, I have a large number of mental models like this.
35:30
Many of them are drawn from probability because I really love probability.
35:36
As a subject, it is just fascinating to me how...
35:36
I've been studying probability for years now, and one thing I have learned is that if you give me a probability problem or some kind of puzzle, I am going to sit down and work through the numbers before opening my mouth because my intuition is just so...
35:55
It can lead me so far astray.
35:55
Jim O'Shaughnessy: All of us. 10-K Diver: Exactly.
35:59
Jim O'Shaughnessy: Listeners, please hear both of us.
36:00
Our intuitions, mine, 10-K Diver's, they lead us astray. Now, continue please. 10-K Diver: Exactly.
36:08
So, I believe there was this witty, aphorism that says something like conditional probability is subtle, and all probability is conditional.
36:13
So, all probability is subtle.
36:21
If I'm taking a decision.
36:21
Very frequently, I don't know the future, and when I'm making a decision, I like to think through, okay, what are all the possible outcomes that can happen, what are the number of ways this thing can go right, and what are the number of ways this thing can go wrong, and am I comfortable with those odds, what do I have riding on this bet that if something were to go wrong, can I still survive that and live up to the next day.
36:45
This is such a natural way to think about making any kind of decision really in investing or in life, what can go right, what can go wrong, and what are the consequences if something goes right, what are the consequences if something goes wrong, and can you survive those consequences.
36:56
That's basically what probability is.
37:01
It just gives you a systematic way to think about these things, and since I love probability, I use probability a lot in my decision-making, and I try to sneak in a lot of probability in my threads as well, and little puzzles I post on Twitter and so on.
37:18
So, this set of mental models, Markov chains and permutations and combinations and so on, I rely on them a lot to think through and make decisions.
37:24
So, at this point, I think once you've sort of internalized a mental model or a set of mental models, you sort of naturally apply them without even thinking that, okay, for this particular question, I am going to apply this particular mental model and then think about it this way. It just comes naturally.
37:48
It's not like you are going through your roster of mental models and picking out a few that you're going to use for a particular decision or something like that.
37:53
So, to some extent, it just sort of becomes a part of you and you start using it habitually, and I think that is why I'm not able to clearly articulate what my decision process is, but I rely on a large number of mental models to make my decisions, and in each case, there may be a slightly different set of mental models and so on.
38:16
Jim O'Shaughnessy: That is how I think all of us actually do things.
38:19
I was very lucky to grow up with a grandfather who had been very successful in the oil business, and I was the youngest grandson, and my grandmother died before I was even born.
38:32
But as a consequence of that, I grew up in St.
38:32
Paul, Minnesota where he lived.
38:38
So, he came over to our house twice a week for dinner and taught me a ton of stuff, and one of the things that he taught me that I still do to this very day is what he called premeditating, and what premeditating is, is what you've just described.
38:50
It's essentially a Monte Carlo simulation that you do on paper.
38:56
He always said, "You have to write this down," because he believed, and I believe as well, that if you don't know what you're talking about and when you try to write about it, you're going to learn very quickly that you have no idea what you're talking about. 10-K Diver: Absolutely.
39:14
Jim O'Shaughnessy: But the premeditation was okay, I'm thinking that my goal is X, right, whatever X happens to be.
39:17
What he would have me do is write all of the things that you can see getting you to X and the results, then write all of the things getting you not X and the results, and what made itself very apparent to me as I did this more and more and more...
39:39
I mean, I have one around here.
39:39
I'll put one of the graphs up on Twitter afterwards so you can see it.
39:44
What it taught me was one of the things that we just, our Human OS seems to rebel at is it doesn't like considering all of the bad things that can happen if we get something that we say we want, and when you do this exercise, you can't help it.
40:10
This has saved me many, many times from making a decision that seemed like an easy decision, and then when you did the premeditation, you're like, "Oh, I don't like that at all."
40:24
Do you do things like that? 10-K Diver: I think so.
40:25
So, be careful what you wish for, right?
40:25
If you really work hard towards something, and then when you...
40:31
Well, first of all, you have to be in a state where how are you going to feel if you get what you're working so hard for.
40:35
Jim O'Shaughnessy: Right.
40:39
10-K Diver: That is a very difficult question to answer.
40:39
So, lots of people, they have been sort of fueled by one particular project or initiative their whole lives, and then when they finally achieved their objective, they have completely changed as a person from when they started to when they finally achieved their objective.
40:57
What they thought they would feel and what they actually feel are two completely different things, and it's very hard to tell.
41:02
If I'm working towards financial independence or something like that, let's say, trying to figure out how much money I need so that I can call myself financially independent, and I have some figure in mind and I go and achieve that figure.
41:17
Okay, once I achieve that, how exactly am I going to feel the next day?
41:17
Is it just going to be business as usual, or suddenly, I feel like a big load has fallen off my chest or whatever?
41:27
I don't really know right now how I'm going to feel at that point.
41:31
So, what you say, premeditating it and trying to think through the various possible ways that we could get there, and everything is going to involve a certain amount of sacrifice.
41:38
So, what are you going to give up in order to get to your goal?
41:43
In some parts that you follow towards your goal, you may not have to give up very much, but in other parts, you may have to give up a lot more.
41:53
And so, when you get to the goal, how much you have given up along the way tends to factor into how satisfied you are when you finally get there. Right? Jim O'Shaughnessy: Yeah.
42:05
10-K Diver: So, it is kind of a hard problem, but I think premeditation definitely can help a lot with that, just systematically thinking through various possibilities and figuring out what you're willing to give up, what you're not willing to give up, how well you understand yourself.
42:19
So, in investing and in all walks of life really, know thyself is such a powerful thing.
42:25
Jim O'Shaughnessy: Fantastic advice. Right? 10-K Diver: I think so.
42:30
Jim O'Shaughnessy: So, the real Jesse Livermore who our colleague, as an OSAM research partner uses his name, the real Jesse Livermore killed himself in the Sherry-Netherland men's room in the 1940s because he had made and lost fortunes like four times and he was broke.
42:48
He ostensibly is the actual author of the book, Reminiscences of a Stock Operator, or at least the inspiration for it which is, by the way, if you've not read that book, I highly recommend that book.
42:59
10-K Diver: It is on my list. I have not read it yet.
43:01
Jim O'Shaughnessy: Oh okay.
43:01
Good, good, because when you get to certain passages, if you just close your eyes and hear or repeat what you've just read, you just saw that on Twitter.
43:08
Somebody just wrote that on Twitter because it just shows you the ubiquity of our Human OS, and we all like to think that we're special and different, and by and large, we're not.
43:20
Now, yeah, sure, there are a lot of people who are...
43:25
I mean, there is a standard deviate, there's the bell curve, and there are the standard deviations of return.
43:27
We all get that, but more often than not in things of the heart and things of what do you want to want, what do you want to achieve, people have pretty similar aspirations, and I personally think that fear and concern about what other people will think of us, answer, they don't think about us.
43:43
So, that was something that it took me a little while to learn, but now that you learn it, it is very freeing, but the thing that the tech is not- 10-K Diver: Very liberating, and that's also another application of base rates. Right?
43:54
You think you're very special and unique, but what fraction of people would you say are very special and unique?
44:05
How likely is it that you are in that fraction?
44:05
Jim O'Shaughnessy: When somebody's going on and on about how brilliant they are or how they don't fall for that, there's this GIF that I put up that is a screensaver, and it says, "You are the only exception."
44:19
10-K Diver: I want to ask you a question.
44:25
I want to flip the rules here.
44:27
Jim O'Shaughnessy: Okay, sure.
44:28
10-K Diver: I am very, very curious about your GIF game on Twitter.
44:31
Do you have this giant library of GIFs?
44:31
How are you able to find one that is so appropriate so quickly and post it?
44:41
Sometimes you post GIFs within 30 seconds on Twitter, and it's exactly the right GIF.
44:49
It would've taken me 10 minutes to find that GIF. How do you do this?
44:57
Is some proprietary or some strategy that you're not going to tell anyone?
45:01
Jim O'Shaughnessy: I've got to probably have to come clean with you here.
45:03
It's all artificial intelligence.
45:03
I have nothing to do with it.
45:03
My god, I'm a 61-year-old white guy.
45:08
I can't find GIFs like that. No, all joking aside.
45:08
Yes, I do have access to a super large GIF library, and if you want to know the real secret, the real secret is this, I've got 30 years of cultural history that you don't have.
45:22
Mercifully, I was gifted with a very good memory.
45:32
And so, I have those 30 years that someone your age simply, unless you were just like a mad...
45:40
Now, my friend, Jeremiah Lowin, he's the only person in his thirties that I know of, including my son who has watched every Marx Brothers movie that ever was made, he is an anomaly.
45:53
But for the most part, my edge is just I got 30 years on you guys.
45:53
That goes without saying. The Gene Wilder GIF. Right?
45:59
So, that's from Young Frankenstein.
45:59
Mel Brooks made it like 40 years ago.
46:05
And so, I remember, luckily, movies and things I've read.
46:05
That's the other thing, I memorized a hundred poems when I was young, and so that trained my brain to make it easier for me to...
46:18
If I read something, I pretty much retain it.
46:18
So, it's just that ability to, A, I got a 30-year head start, that's unfair, and B, I am voraciously curious.
46:27
So, I also love current culture. I think it's fantastic. 10-K Diver: Absolutely.
46:37
Jim O'Shaughnessy: So, I find myself now bringing up very contemporary things with people in my age group, and they just look at me like, "Are you fucking batshit crazy?
46:44
What are you talking about?"
46:44
So, I just think, my personal thinking on this is we are visual creatures.
46:50
You probably have this figured out, but I might be or maybe not, I might be running some tests on Twitter maybe, and one of the things that I have concluded that was a thesis going in is that people for the most part are much more visual than they are auditory or kinesthetic.
47:16
And so, you test things like that out, and then you listen to the way people write things.
47:23
So, one of the things that I was very lucky to learn at a very young age is I can't assume that you know what I mean when I say something, and that sounds weird, but it's true.
47:36
We talked earlier about label thinkers, and so many people are label thinkers that they...
47:42
I did a piece for Twitter called The Thinker and the Prover, and it gets into this for people who want to change their story, if you will.
47:53
Derren Brown has a great book called Happy in which he says, "You know, guys, you are the author of your life story.
47:59
Not only are you the author, you're the editor too."
47:59
One of the things that I'm always looking for is I just, I was made by nature to be voraciously curious, and there's no cure for it, and I can tell you're exactly the same way.
48:13
What you do is you see something and you're like, "Huh, I wonder about that."
48:19
10-K Diver: I think if we are lucky, we are the authors of our lives, but our spouses are the editors.
48:26
Jim O'Shaughnessy: That's a good point, actually.
48:29
The other thing that I find very interesting that I think somebody like you would find interesting as well is we often look at things...
48:35
So, for example, I'm a friend of Rob Henderson.
48:42
I don't know whether you follow him on Twitter, but he's a postdoc at Cambridge in psychology, and I'm reading his memoir before it gets published.
48:47
One of the points that he makes, he had a very rough upbringing in Los Angeles and Northern California in foster care, and one of the things that he says is that we habituate things to the point where people can't even think differently am I asking question the right way.
49:13
One of the things I love about you is you do that.
49:13
And so, Rob in his book basically is saying everyone says education equals financial wherewithal equals happiness.
49:20
We're not looking at the right thing.
49:26
What Rob does is say what if we disambiguate all of this data, but instead centering it around degrees, we center on how many people came from a two-parent family household, and then let's compare all of them together.
49:40
It's like your piece that you did on the restaurants. Right?
49:45
It's a fundamental error that when you look at the average of all restaurants, I looked at it a little while ago, but if my memory serves me, you were talking about what are the chances that a restaurant that survives for three years will be surviving 10 years later, something along those lines. Right? 10-K Diver: Well, right.
50:03
So, the basic thing is if I tell you that restaurants last seven years on average.
50:10
Jim O'Shaughnessy: Right.
50:10
10-K Diver: So, a restaurant, if you take all the restaurants and figure out how long they stay in business, and then take the average, they last in business for about seven years before they have to shut down.
50:16
And then I tell you, okay, Bob has a restaurant and it's three years old. Okay?
50:21
He opened it three years ago.
50:21
So, it's three years old.
50:26
How much time do you think Bob has left on his restaurant?
50:30
Jim O'Shaughnessy: And my guess is everyone says- 10-K Diver: Most people would say four, four years.
50:34
Jim O'Shaughnessy: Four years, and that's totally wrong. Right?
50:36
10-K Diver: Yeah, exactly.
50:36
That's because most the death rate is not uniform.
50:38
Jim O'Shaughnessy: Right.
50:39
10-K Diver: Most restaurants may fail in the very first year. Jim O'Shaughnessy: Yes.
50:43
10-K Diver: So, it's the same thing with infant mortality and things like that as well.
50:48
So, it turns out that if you have an average life expectancy, so say the average human in the US has a life...
50:54
Well, maybe the US is a bad example because infant mortality is low here, but let's say in a country where infant mortality is higher.
50:58
If the average expected life of a person is say 60 years or something like that, and I give you a five-year-old and ask what is the expected future life of this person, it's not 55 years.
51:10
The average person may live for 60 years, but the average is pulled down because there is a lot of infant mortality.
51:16
So, the very fact that somebody has survived for five years gives them a much greater chance of exceeding the 60-year lifespan than most people would give them.
51:28
So, just the very fact that you've survived the first five years [crosstalk].
51:35
Jim O'Shaughnessy: Exactly, and that's the point that I think you actually do make in your piece.
51:42
And my immediate answer would be when I was looking at that piece, and now granted, I've just trained myself to think this way, but when I was looking at the piece, it was like, well, no, I would only want to see the life expectancy of restaurants that had already lived three years. 10-K Diver: Exactly.
51:59
Jim O'Shaughnessy: Right, because that negates all of that early death. Right? 10-K Diver: Right.
52:02
Jim O'Shaughnessy: The sensitivity to initial conditions is like the be-all and end-all of chaotic mathematics. 10-K Diver: Absolutely.
52:09
Jim O'Shaughnessy: And people, they just naturally don't intuitively think that way.
52:13
10-K Diver: No, they don't.
52:14
This is exactly a lot of people [inaudible] popularized this notion of Lindy, the Lindy effect.
52:20
Jim O'Shaughnessy: Right.
52:22
Well, but sorry, but you know what's funny about that of course is that Lindy's closed down, the restaurant. 10-K Diver: That's true.
52:29
Jim O'Shaughnessy: Whoops. Go ahead. Go ahead.
52:30
10-K Diver: So, the Lindy effect, it's a probabilistic statement.
52:31
It's not a deterministic statement, and the Lindy effect basically says that if an idea or a book or something like that, something that is not perishable, if something has survived for N years, then it's expected future life, so when is it going to die and what is the amount of time between now and the time it's going to die, the expected future life, that is also equal to N years.
53:01
So, if something has survived for N years, then it's expected future life is also N years.
53:09
So, the longer something has survived, the longer it is expected to last, and this doesn't apply to everything.
53:15
There are certain phenomena where death becomes more and more likely as you age.
53:20
There are some phenomena where death becomes less and less likely as you age, and some places where the likelihood remains exactly the same.
53:27
It doesn't change as you age.
53:31
So, Lindy is one specific example where death becomes less likely as you age. Jim O'Shaughnessy: Yeah.
53:38
10-K Diver: And Taleb gets an enormous amount of pushback on this idea simply because people don't understand it.
53:45
Jim O'Shaughnessy: Right.
53:46
10-K Diver: They don't understand that it's a probabilistic statement, not everything has to follow this particular law, things like that.
53:50
So, I mean, so in fact, it's pretty funny when Taleb wrote that section on Lindy in his book...
53:55
I don't remember exactly which book.
53:55
It may be Antifragile or The Black Swan. Well, one of his books. Jim O'Shaughnessy: Yeah.
54:02
10-K Diver: When he wrote that section, he actually had, okay, these are all the common objections that people make, and here's why each of these individual objections is the wrong argument.
54:14
He had a rebuttal right there.
54:14
Jim O'Shaughnessy: He prerebutted. 10-K Diver: Exactly.
54:19
Jim O'Shaughnessy: Well, but then he also makes another example that I do actually have a little problem with which is his turkey example. 10-K Diver: Right.
54:28
Jim O'Shaughnessy: And I get it.
54:28
I understand why he makes it, and that people are lulled into believing that this long expansion of life is going to go indefinitely, and they failed to take Thanksgiving into account.
54:41
The little quibble that I have with that is that only works if you're one of the turkeys. Right?
54:47
If you were the turkey and you were using that kind of reasoning, you'd think, "Future so bright, I got to wear shades, baby." Right?
54:53
But if you were an objective observer observing that system from the outside, you would definitely see that massive fall off around Thanksgiving. Right? 10-K Diver: Absolutely.
55:08
Jim O'Shaughnessy: So, I mean, even those things, it's like I applaud anyone who tries to use a fun...
55:08
Like your stuff, as I've said before but I want to reemphasize here, is fun. You do fun graphics.
55:17
You ask things in a way that is very engaging.
55:23
And so, listen, I am all in favor of teaching people to learn that way.
55:30
But then one of the things that you do run into is like this turkey thing. Right?
55:30
It's a great example as far as it goes, but it also precludes a lot of people from thinking, "Well, okay.
55:43
Yeah, that's true, but only if you're the turkey."
55:43
If you're an objective third party watching this unfolding of events, you're going to know very well about that last Thursday in November. Right? 10-K Diver: Absolutely. Absolutely.
55:56
So, I think the point that...
55:56
Well, I don't want to put words in Taleb's mouth.
56:01
So, let me say I think the point that I got out of it is when you try to apply this principle to businesses and things like that.
56:08
So, is this just a turkey?
56:08
Is this business just doing well for the time being, and then one fine day, the hammer is going to fall, or is this business a Lindy type of business?
56:20
It's survived for so long, so it's going to survive for the next, or there's a very high likelihood that it's going to survive in the future.
56:26
So, is it a Lindy or is it a turkey?
56:30
Jim O'Shaughnessy: Yeah, I mean, that would be a great title for a book for you to write.
56:35
Is it a Lindy or a turkey?
56:35
Is it a Lindy or a turkey? I love it because honestly, if you want to know one of the secrets of being a really, really successful investor is knowing the difference between those two, and they are not terribly easy to identify, number one, and number two, and I wanted to talk to you
56:55
about this too, and I can already see that I'm going to have to have you back on because you're so engaging, my school marm, Jamie, isn't here, and so I can go longer than I normally do, but is this whole idea of narratives. So, I say that narrative follows price, not the other way around.
57:04
So, I say that narrative follows price, not the other way around. 10-K Diver: Absolutely.
57:13
Jim O'Shaughnessy: People look at me like I've just declared that Satan is now ruling the earth because so many people, they've been sold this is the narrative that they actually believe that.
57:20
I just have a really hard time with people who think that you can weave a little narrative around a...
57:27
It's like putting lipstick on a pig.
57:33
It's still a pig, and it's now pissed off because you smeared its face with makeup. Right?
57:33
What's planned for you next?
57:39
What are your next things that you're going to be tackling for your readers?
57:44
10-K Diver: Well, so we have this show that we're doing.
57:46
Jim O'Shaughnessy: Yes, you told me about this. Give me the name please.
57:48
10-K Diver: So, the name of the show is Money Concepts. Jim O'Shaughnessy: Okay.
57:51
10-K Diver: It's a social podcast in the sense that people can tune in and ask questions of me, and if I have a guest, they can ask questions of the guest and things like that. So it's pretty engaging.
58:02
Jim O'Shaughnessy: Is this on that new app? What's the name of it?
58:05
10-K Diver: Yes, it's called Callin.
58:06
Jim O'Shaughnessy: Yes, yeah.
58:07
10-K Diver: The name of the app is Callin.
58:09
Jim O'Shaughnessy: Yeah, they're pitching me about [crosstalk] on that.
58:10
10-K Diver: So, the idea is people just call in.
58:10
Jim O'Shaughnessy: Yeah, yeah.
58:12
Yeah, their team is pitching me on joining there.
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10-K Diver: Oh, if you want to give it a test drive to see how it is- Jim O'Shaughnessy: I'll just call you. 10-K Diver: ...
58:19
I can have you as a guest in the future Money Concepts episodes.
58:19
Jim O'Shaughnessy: Okay, very cool. Very cool. Okay.
58:19
So, you're doing Money Concept on Callin. 10-K Diver: Right.
58:20
Jim O'Shaughnessy: And anything in terms of your writing for your longer think pieces that you do on Twitter?
58:34
10-K Diver: Well, So, you had Tim Urban on the show. Jim O'Shaughnessy: Yeah.
58:36
10-K Diver: And Tim Urban has this wonderful TED Talk about procrastination.
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Jim O'Shaughnessy: Oh, me too, baby.
58:41
10-K Diver: So, I have a long list of topics on my phone that are great topics to write future threads on, and I know I'm going to be doing some of them this year. Oh, beautiful. You have similar.
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Jim O'Shaughnessy: For our listeners, I just showed him the long list on my phone. 10-K Diver: Right.
59:03
Some of the topics are reading financial statements and operating leverage and a large number of different concepts.
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Jim O'Shaughnessy: So, okay.
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I do have to be mindful of time here, and I can just have you back on.
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That's the other beautiful thing about just having your own podcast and not wanting to monetize it.
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I can do anything that I want to do which I love. 10-K Diver: Absolutely.
59:23
Jim O'Shaughnessy: But you did a thing on asset allocation that I thought was interesting because it actually was something that we did in depth at OSAM, and we looked at how CEOs were able to deploy capital and what we found...
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Our thesis was not what we found.
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And so, this data's a little bit old, but diluters, in other words, CEOs that were issuing shares shaved off about 4% over a 40-year period from other large cap stocks.
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We're only looking at large cap here. 10-K Diver: Okay.
59:56
Jim O'Shaughnessy: So, diluters, in other words, they're issuing shares. They lose 4%.
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That's CAGR, compound average annual return.
1:00:04
10-K Diver: Oh, 4% per year.
1:00:05
Jim O'Shaughnessy: Yeah, per year. 10-K Diver: Okay, okay.
1:00:08
Jim O'Shaughnessy: You can do that math.
1:00:09
Those that load up on debt take a 300 basis points off the average large stock return, compound average annual growth rate.
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Those who follow expansion plans minus four and a half percent. Acquisitions minus 1. 6%.
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Now, reducing debt plus 0. 02, buybacks plus 2. 5%.
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Now, I read your piece on asset allocation, and I got to the buyback thing, and I go, "Uh-oh, I think we're going to disagree on buybacks here."
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And then we didn't because we also...
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So, we have a strategy called Market Leaders Value where the final characteristic that we screen on is what we call shareholder yield which is buyback yield plus dividend yield. Right? 10-K Diver: Right.
1:00:59
Jim O'Shaughnessy: As you point out your piece, they need to be cheap.
1:01:00
The company and the CEO can have no...
1:01:05
Just very easily visible way to make more on that money, and you'd be surprised at how many mature companies find themselves in that position.
1:01:14
Well, over 40 years, they added 2.
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5% compounded average annual return over large stocks.
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My question to you is because my suspicion, we've never really done this for tiny stocks because my guess is that we probably wouldn't see the same results there.
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Are you going to do any more pieces on asset allocation?
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Because one of the things that I think that you could also be really helpful on just because you're so entertaining is even more basic stuff, and by that, I mean like how to read a balance sheet, I thought was great.
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What is your most read thread?
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10-K Diver: I believe the most read thread was the one about leverage.
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So, I had a piece about the benefits of leverage and also the pitfalls of leverage.
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So, that was the most read thread.
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It was most read for one very simple reason.
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It's because Chamath Palihapitiya, he retweeted that thread and not just retweeted it, he quote-tweeted it saying, "This is one of the best accounts on fintwit" something like that, and that's why it became the most read thread. Jim O'Shaughnessy: Yeah.
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No, I thought that was great.
1:02:27
I use leverage as an example a lot to remind people that using too much leverage is almost always fatal because of the path an asset takes to get to a certain price.
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Even if you have a list of the 10 biggest performers for the next year, if you don't know their path day to day, you will get your margin call and you will be wiped out.
1:02:51
10-K Diver: Oh, absolutely.
1:02:51
That is such a basic point in investing, and I'm so glad that you brought it up.
1:02:54
Warren Buffett, he has this piece in one of his letters where he likens leverage to driving on the road with a dagger mounted on the steering wheel.
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Jim O'Shaughnessy: That's a great metaphor.
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10-K Diver: And he says, "Yes, you're going to be a very, very careful driver.
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If you have a dagger that is constantly pointing at you from the steering wheel, you're going to drive very, very carefully, but the first pothole is going to kill you."
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Jim O'Shaughnessy: You're dead.
1:03:22
10-K Diver: So, it's this whole idea of short-term volatility being converted into long-term risk.
1:03:27
So, short-term volatility doesn't have to be a long-term risk, but if you do things like this, if you have too much leverage, and if you run the risk of getting margin called or something like that, then essentially what you've done is converted short-term volatility into long-term risk.
1:03:47
Jim O'Shaughnessy: Indeed.
1:03:48
10-K Diver: And in that fashion, avoid doing that as far as possible.
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Jim O'Shaughnessy: Yeah, I could not agree more, and it's one of those things that just seems...
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I mean, all you need is arithmetic here.
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You don't even have to get above arithmetic to be able to figure this one out. 10-K Diver: Exactly.
1:04:02
Jim O'Shaughnessy: It's just amazing to me that people can't figure it out.
1:04:02
Well, before my final question, what's next for you?
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You have 200,000 followers on Twitter.
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I've got to assume you're getting job offers from people who you've never, ever spoken to, et cetera.
1:04:16
What do you want to be in...
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You admitted you're a computer scientist.
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So, you let that cat out of the bag, not me.
1:04:20
10-K Diver: Oh, well, that cat has been out the bag for a while.
1:04:25
Jim O'Shaughnessy: Oh, okay, okay.
1:04:25
So, are your aspirations to work in finance?
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Are your aspirations to be an author?
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What do you want to be doing in 10 years?
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10-K Diver: I love to just write and educate and delve into concepts at a deep level.
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I'm really delighted that I have this audience who seems to like what I'm doing.
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And so, I have this engaged audience, and it's a lot more fun to be a writer when you have that audience than if you don't have an audience.
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So, it's just a lot of fun.
1:04:56
So, to be honest with you, I don't have any long-term plans or anything like that.
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So, I started this account in 2020 in the middle of the pandemic, and I had absolutely no idea that it would become this popular so quickly.
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So, I'm still trying to figure things out, but I just want to have fun.
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I really like my job as a computer scientist.
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I think about so many things, and I come into contact with so many interesting concepts and things like that.
1:05:23
I think even if I had all the money in the world or something like that and I could quit my job, I don't think I'd do it because I just enjoy it so much.
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So, it's not like I want to get into finance or manage other people's money or anything like that.
1:05:38
I just want to continue having fun at this point.
1:05:38
I just want to continue having fun at this point. Jim O'Shaughnessy: So, listeners, you just heard a Daoist sage tell you how to live your life, meaning that you could have all the money in the world, and you're still doing what you like,
1:05:52
you're doing the right thing, and curiosity, and the ability to meet a lot of different, interesting people, see a lot of different, interesting things, whereas my friend, Tren Griffin, would say, let's just do it for the stories, man, because at the end, that's what we all got. All right. This has been absolutely phenomenal. I will definitely All right.
1:06:08
This has been absolutely phenomenal.
1:06:08
I will definitely have you back on because I didn't even get to half the stuff that I wanted to ask you about.
1:06:18
10-K Diver: I'd love to be back on.
1:06:18
Sorry, I have a tendency to ramble.
1:06:20
Jim O'Shaughnessy: No, not at all.
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You're saying that to me?
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But so the question that we ask everyone at the end is we're going to make you the emperor of the world for a day.
1:06:30
You can't kill anyone and you can't lock anybody into a re-education camp, but what you can do, have you seen the movie Inception? 10-K Diver: Yes, I have. Jim O'Shaughnessy: Okay.
1:06:43
What you can do is you're going to have- 10-K Diver: I don't think I understood it though.
1:06:45
Jim O'Shaughnessy: Well, okay, I'll explain what you can now do.
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You're going to have a magic microphone, and you're going to say two things, two ideas that every human being on the planet is going to wake up the next morning thinking that they thought of that idea and that they're going to now start being that way.
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What two things you got for me?
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10-K Diver: So, the first thing is something that we already touched upon.
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I'm still not a hundred percent clear on the rules here.
1:07:08
So, just as an example, if I want to make everybody spell Buffett with two Ts instead of one T, is that going to be possible?
1:07:19
Jim O'Shaughnessy: Sure, it is possible. 10-K Diver: All right. All right.
1:07:23
Jim O'Shaughnessy: I love it.
1:07:25
He's going to get this fantastic thing, and he's going to use it in a prank Buffett. I love it. 10-K Diver: No, no, no.
1:07:31
That was just an example, just to test the boundaries of what's possible. That doesn't count.
1:07:36
Jim O'Shaughnessy: All right.
1:07:38
We'll give you that as a [inaudible]. 10-K Diver: All right.
1:07:41
So, the first thing is I would like to make people dig into fundamentals a little more.
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So, if you come across something on Twitter or something like that, I mean, now there's a lot of misinformation on Twitter with these wars and all that.
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Just dig a little bit into primary sources.
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Just find out where this information is coming from.
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Same thing with financial information.
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If you have read something put out by an analyst or something, don't just stick their word. Go read the 10-K.
1:08:06
Just dig into the fundamentals of something. Go for primary sources.
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Think from first principles.
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I mean, if you want to find a company's return on capital or something like that, just go look at its earnings.
1:08:17
Think about its business.
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Look at how much capital it needs, and then take the ratio and see what you get.
1:08:21
Don't just go and rely on some number that is reported by Yahoo Finance or something like that.
1:08:26
Think from first principles. Right?
1:08:31
Jim O'Shaughnessy: Right. I love that one. Yeah.
1:08:32
10-K Diver: So, if I can make more people think from the ground up from first principles, that would be something that I will do.
1:08:38
Jim O'Shaughnessy: Perfect.
1:08:40
10-K Diver: And the second thing is if I could wave a magic wand, more people would be thinking probabilistically and not get deterministically.
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So, if someone says there's a 75% chance of rain tomorrow or something like that, and it doesn't rain, most people would come back and say, "Hey, you told me it's going to rain. It's not."
1:08:58
No, I didn't tell you that it's going to rain.
1:08:58
I said there's a 75% chance of rain.
1:09:02
That means there's a 25% chance of no rain. Right?
1:09:02
So, just basic notions of probability that, as you like to say, we are deterministic thinkers in a probabilistic world, and if I could somehow encourage more people to think probabilistically rather than deterministically, just work through various possible outcomes, what are the odds of each, just think in that way, I would definitely, that's probably something that I would do.
1:09:32
Jim O'Shaughnessy: I love both of them, and you would also have a much happier life in my opinion.
1:09:35
Well, tell us how we can find you on Twitter and elsewhere.
1:09:35
You've already told us about the new Callin show.
1:09:41
And we can find you on Twitter at what's your handle?
1:09:47
10-K Diver: So, the handle is 10-K Diver, no hashes or underscores or anything. Just 10-K D-I-V-E-R.
1:09:50
Jim O'Shaughnessy: Perfect.
1:09:54
And they can find you on Money Concepts. Is that a weekly?
1:09:58
10-K Diver: So, we try to do an episode every Sunday. Jim O'Shaughnessy: Okay.
1:10:00
10-K Diver: So, this particular Sunday, I'm very excited because we're having Professor Aswath Damodaran on the show.
1:10:06
Jim O'Shaughnessy: Oh, wow. Congratulations. That's great.
1:10:08
10-K Diver: Yeah, he's one of my heroes.
1:10:08
So, we are very excited to have him on.
1:10:10
Jim O'Shaughnessy: Excellent.
1:10:12
Well, listen, thank you so much for coming on an Infinite Loops.
1:10:12
We will have you back on, and this has been fantastic. 10-K Diver: Absolutely. It was lovely. Thank you so much, Jim.
1:10:19
Jim O'Shaughnessy: Cheers. Bye-bye.