hello and welcome i'm shane parish and this is the knowledge project podcast exploring the ideas methods and mental models that help you learn from the best of [music] what other people have already figured out learn more and stay up to date at FS da blog slash podcasts on the show today
is Howard Marks the co-chairman and co-founder of oaktree capital management he's authored two books the most important thing on common [music] sense for the thoughtful investor and mastering the market cycle getting the odds on your side the most famous semester [music] ever a Warren Buffett set up Howard when
I see memos from Howard Marks in my mail there the first thing I open and read I always learned something and you're gonna learn something too [music] in this conversation well it's wide-ranging covering how to think better how to position yourself to get the odds on your side a little bit of investing in market cycles but
there's so much more to this it's [music] time to listen and learn before we get started here's a quick word from our sponsor Farnum Street is sponsored by metal lab for a decade metal lab has helped some of the world's top companies and entrepreneurs build products that millions of people use every day you
probably didn't realize it at the time but odds are you've used an app that they've helped design or build apps like slack coinbase facebook Messenger oculus Lonely Planet and so many more metal lab wants to bring the unique design philosophy to your project let them take your brainstorm and turn it into the
next billion-dollar app from ideas sketched on the back of a napkin to a final ship product check them out at meta lab co that's metal ab co and when you get in touch tell them shane sent you Howard I'm so happy to get the chance to speak with you I've read your memos for years and this is this is exciting great thank you very much
change pleasure to be here can you take me back to the financial crisis a little bit and explain or at least illuminate for me how it is that we had this series of events unfold and you were you're able to have this aha moment and take advantage of what happened crises are complicated and it's hard to
give a linear description of their formation but in in general as we'll discuss later about the book cycles are all about excesses in their create correction and so the financial crisis grew out of excesses which were then corrected painfully and the excesses were basically you know a willing suspension of disbelief
an excess of credulous 'no stand you know there was too much faith in mortgages and mortgage-backed securities and they were invested too heavily and to riskily by essential financial institutions which then became precarious and you know you had Bear Stearns and Merrill Lynch in Wachovia Bank and what Washington Mutual all
disappear or require rescues and it culminated in the bankruptcy of Lehman Brothers on September 15 2008 and now you know I said in one of my memos that in the real world things fluctuate by between pretty good and not so hot but in there in the investment world investors go from you know perfect
[clears throat] to no chance of survival in their psychology and so after the Lehman bankruptcy you know people were talking about the end of the world the end of the financial world the meltdown of the financial cycle and the truth is that it appeared to be if you ever saw the Jane fund the movie
China Syndrome it looked like a vicious circle that would absolutely go non-stop and you know go through the center of the earth to Beijing and so the question was do we do we invest or not first does the financial system meltdown now this is something that could not be analyzed or proved or
disproved or anything it was not subject to intellectualization and wasn't knowable no that's right and so I took the stance that it's hard to predict the meltdown of the financial system that if it if you think it's gonna melt down it's impossible to know what to do that anything you might do to
prepare for the meltdown the financial system would be a disaster under any other circumstances and most of the time the financial world doesn't end that was the extent of my analysis and so I said well we can't plan on the end of the enterprise number two do we invest or not if we invest and the financial world
melts down it doesn't matter what we did but if we don't invest and it doesn't melt down then we abdicated our responsibility we were hired by our clients to invest if there's a crisis that does not culminate in the meltdown as an analyst and that was the best of all possible environments to invest and
we didn't invest as they loose a full stop in other words we had no choice we had to invest and so we started to invest and sometimes we thought we were going too fast and sometimes we thought we were going too slow but for the last 15 weeks of '08 we invested in an average of 650 million a week for a total of 10 billion and the financial
world did not meltdown isn't Wall Street full of people with the same sort of logic who identified an opportunity but what was the difference because one of the things that I'm so impressed with is not only did you recognize it but you actually took action on it so a lot of people seem to interpret
to understand what was happening but they were they had an inability to act where did that come from our emotions conspire at every turn to make us do the wrong thing maybe it comes from the fight-or-flight mentality which is so deeply ingrained in us but as the economy does well and companies report
good earnings and the media reports turn positive and the stock prices rise and people become more enthusiastic it becomes very hard not to buy in other words emotion causes people to buy more the higher prices go now in most walks of life people buy more when the prices go down during sales and Wall Street
they buy more when the prices rise and then but say eventually things reach the top which is not maintained now the economy turns down and the companies were reporting decreasing earnings or maybe losses and the media put out scare stories and and the prices cascade down now people get depressed and when they
approach the bottom they say I just don't want to lose any more get me out I'm terrified I don't know what to do and feel so terrible about all the things I've owned and so stupid and so in other words emotion tends to get people to sell at the bottom just as they bought at the top and this applies
to professional managers well it only applies to people who have feelings you know I quoted in the book Richard Fineman the physicist who said that physics would be much harder if electrons had feelings markets by the way there's no such thing as a market there's only a bunch of people who trade talk to me about that well what why do
we conceptualize it as a market then because you know if you think of them of a market most people flash to a photo of the New York Stock Exchange a building just as if most people well in my day if you talked about a stock people would think about a stock certificate but the building is not the market and the stock
certificate is not ownership of a company it's these things are only signifiers but a market consists of a group of people who implement their views or in value by transacting and so it's all there is as people and people have feelings and so the emotions tend to get people to buy buy buy at the top
until the last potential buyer has bought and spent all his money which at which point the the top is reached and the second derivative goes negative and sell sell sell at the bottom until the last person who's gonna panic out does so and so number one it's very difficult to take these contrarian actions in the
face of sentiment and I don't know I'm sure we're not the only person who did it I don't know well who else did it most people don't report their transactions and most investors don't write the memos like I do so I don't know who was thinking what at the time I think we were exceptional yeah I mean
there's thousands of people who sort of manage money and very few I think have been able to act on that in the moment and that's really interesting to me for a couple of reasons right one you use over he sort of overcame your evolutionary emotional programming but to it I'm curious about how you test for
that beforehand how do you test how people will respond in a crisis before you actually have a crisis we had lived through some lesser crises you know my partner Bruce kasha and I who Bruce runs our distressed debt funds which is where most of this activity is centered you know we lived through a severe market downturn in 1991 and
another one in a 102 so we had rehearsed I had at the time of the financial crisis I'd been working 40 [clears throat] years already I've seen some of these things and so you hopefully we learn from experience you know hopefully at some point our intellect aided by dispassionate observation of our experience can
overcome our emotion that's number one number two maybe Bruce and I are more unemotional than most number three our very activity of investing in distressed debt is inherently contrarian you know people say well how can you invest in companies that are bankrupt or destined to become so so you know and at that
point we'd been doing that for twenty years and if we succumbed to the normal view of distressed companies we wouldn't be able to conduct that activity and finally I think we are unusually supportive of each other and you know we've been doing we've been part for 31 years neither of us has ever said to the other one boy
that worked out badly you did a stupid thing you know this is not an activity where you can bat a thousand and hopefully it's better than baseball where the greatest that three thirty or forty percent hopefully we can do sixty or seventy percent but we can't pad a hundred percent and if you have a
partner or an organization which second-guesses your mistakes then you become mistake averse and we don't do that so and we in this case we we work together and supported each other and we have a lot of respect for each other and that permits it and I think that that sets the tone for the organization because it is not a
blame a finger-pointing organization I think all these things help can we get on this for a second so like you have this thing where you're necessarily valuable you're not going about a thousand or a hundred percent and so they're there's times when you're going to be wrong how do you distinguish
between being wrong and it just being a function of probabilities or being lucky and riot and how do you learn from those in a culture that and I like the fact that you don't sort of assign blame but how do you learn from that how do you surface that I think for many of the things we're we're discussing today I
can't give you a recipe oh of course you know I mean I think that we have an above-average ability to detect risk and make investments that have upside potential what would the risks under control I think we had this ability you described to to understand the difference between bad decisions and bad
outcomes and this hesitation to point figures when we get a bad outcome and I think that all of these things start with the mindset and rather than have the recipe or a roadmap I think we have a mindset to do these things you know the one of the reasons we're so good at controlling risk is that we put risk control first we have a
motto if we avoid the losers the winners take care of themselves and that was fine when we invested in in high-yield bonds where high-yield bond if you buy it at par the work the best you're going to get is interest plus par back but there are lots of worse outcomes so we've concluded that if we secure
against the worse outcomes we'll get our interest than our money back so those securities have no upside aspiration then we moved into areas like to stress that real estate infrastructure and power investments and private equity and so so forth where we do have aspirations where we're trying to make a lot of
money and you know we have a record and distressed debt of I think sixteen or seventeen percent a year for 30 years without using any leverage clearly we have high aspirations securing against losses is not enough you actually have to find some winners but we have retained our motto clearly if we
avoid the losers winners take care of themselves is not enough in an aspirational strategy like the stress debt we have retained that because it signifies front the mind consciousness of risk control well look I started Wharton 55 years ago last month and the first thing I remember learning there is
that you can't tell the quality of a decision from the outcome and that pervades my thinking and I think it's very important and then I played backgammon with my good friend Bruce Newberg out in Los Angeles and you know you need some crazy number to win and you get it that doesn't mean you're a good player means you were lucky and he
always says that improbable things happen all the time and probable things fail to happen all the time because the world is in uncertain place you know if the things that were probable happened all the time there were in theory there would be no risk so we understand that we're gonna make decisions that aren't
going to work and that the people we work with are kind of make decisions that aren't going to work especially in the short run they may work in the long run but in the short run a goodness that didn't work can look an awful lot like a bad decision but we have a mentality which recognizes that doesn't criticize
people every time something goes wrong and you know we we try to hire people who are not terribly emotional egotistical don't have a lot of hubris or testosterone and I think we try to have a mellow organization which is you know very helpful in all these regards how do you test for that when you're
hiring just talking we don't know we don't run psychological tests or anything but you know the first step towards solving a personnel or managerial problem is acknowledging it so if you put a high priority on hiring the kind of person I have described you have a better chance of doing so and we do I want to talk a little bit about
cycles which is what the the book is about what are sort of examples of the most important cycles and maybe we can do a deep dive on the the economic cycle and your including the role of governments and central banks and well it's funny you should say that because literally in the car coming here this
morning I was reading an article about timely article about the Fed the need for Fed independence and you know the Paul Volcker's great example of Fed independence and some examples of feds that were not independent then failed Volcker was the the 80s was the bulwark just for people listening can we give
context to well in the in the 70s we had runaway inflation in America not like you know some African nation that had a thousand percent a year but we had 16 percent a year I think it was at the peak and makes it very hard to live and securities collapse and people have trouble keeping up with the cost of of
living and you know commodity prices get out of hand and so forth and then of course short term rates go up which makes it hard to finance business and so forth and everybody you know so the main point about inflation is I think it's very mysterious it's hard to say what starts it it's hard to say what stops it
deflation they have in some countries like Japan it's hard to know what starts or stops that but obviously has a great impact on the economic cycle and if you think about the economy u.s. economy grows let's say for rounding purposes on average 2% a year why doesn't growth 2% every year why is it why sometimes three and
sometimes one and sometimes four and sometimes negative and I think that you know and unfortunately the book is already printed and as you keep thinking about things and talking about them your your thoughts come into better focus so I would summarize it as saying that cycles happen because people not
electrons but people commit excesses to the upside usually out of enthusiasm which then have to be corrected and those corrections overshoot to the downside and that's the investor psychology yes exactly but it's it's it's the way the world works I mean you take you take a company we're in a
recession we're coming out of the recession and the management sits around the table says we're going to be in a recovery there's going to be an increase in demand for our product we want to get our share of the demand of the increase in demand so we're gonna build another factory hire a thousand workers and
build inventories and all the companies in the industry do the same thing at the same time they all build factories work for us in inventories that makes that [clears throat] an above-average year in the economy you know but then it turns out that collectively they built much more factories in and workforce in
inventories than they need to take advantage of the gain in demand in the recovery and so they falter and the next year they don't build those things and that makes that a below average year the I mean I'm over simple successes sowing the seeds of its exact structure and and that's another description of cyclical
behavior you know it's interesting to look at the US economy we're in the tenth year of a recovery there's never been a recovery of more than ten years so somebody who was an absolutist you know would say well then that means that in let's say October it's in nine months the economy will stop going up but of
course there are no rules and twain said history does not repeat and that's one of the ways in which it doesn't repeat these limitations are not hard and fast this has also been the slowest recovery since World War two and that's a good thing because that slow recovery you see one of the things is that your listeners
should note is that in the financial or investment world where cycle psychology is so important and there are no absolute laws of nature at work everything has two sides a good side every development has a positive side and a negative side so the the negative side of a slow recovery is that it's
been slow the positive side is that it hasn't been marked by excesses and if it has been marked by excess then that means we don't have to have a correction to the downside which is called the recession anytime soon so my guess is that this recovery will set a record for the longest recovery in history because
of the slowness and the absence of excesses now in December the government passed a tax bill which is highly stimulative because it cut the rates on corporations not from 35 to 25 as most people had thought generous but to 21 yeah and I would say that was over stimulative that that tax bill will cut
government revenues and most people think that that will lead to an increase in the deficit and in the national debt and that was I I would say it was over still motive and my reaction at the time was it still is that doctors do not give adrenaline to healthy patients they give it to people who are having heart
attacks and we had a healthy economy that tax bill stimulated it I would say over stimulated it unnecessarily that will lead to excesses which will then have to be corrected one of the ways we correct excesses in the in the economy preferably and hopefully less painfully is through interest rate increases so because
interest rate cuts are stem motive increases are restrictive and that will tend to diminish the growth in the economy and hopefully prevent typer inflation from taking hold so it's this kabuki dance to try to get that balance right and given that the tax bill was over still motive it will probably need higher interest rates than
we otherwise would have which will increase the possibility of lapsing into recession what's the the government's role in the economic cycle the most direct is the actions of the Fed and of course that's in in in theory that is independent of government but the the feds central banks which is what the Fed
is have for more than a hundred years basically been charged with controlling inflation that is the number one job keep the economy on an even keel so that it grows but not overheats causing inflation that has to be reined in in the more recent years maybe 30 40 years ago the Fed was given another responsibility which is to support
employment now this is problematic because employment growth comes from economic growth that's good too much economic growth you get rising inflation that's bad so they they have two goals which are in opposition and of course that requires particularly a droid management which is by definition not so easy and so
well you know sometimes the Fed is too positive and you might get inflation or you might get you know I think I think that in in in some ways the Fed contributed to the global financial crisis by being too accommodating and you know I think that Greenspan was so accommodating of the need the economy to
grow that and kind of a kind of a cheerleader that he permitted the perception of something called the Greenspan put which is anytime the economy looks like it might have a problem the Fed will squirt in some extra liquidity and cut rates maybe and that'll prevent the problem so ie there will never be a problem there will never
be a slowdown we don't have to worry about negative scenarios in make in doing our planning it'll it'll always be okay and that's dangerous because if if you ask you planning for tough times then your planning will be overly biased to the upside and when the tough times come you're by definition not ready
outside of the Fed does the government play a wealth sort of redistribution role and how does that affect the economic cycle I mean we talked about the tax cuts yeah well of course what people have to understand maybe more than anything else is that governments don't make anything all they do is
redistribute all they do you know we have these millions of people working in Washington and all these senators in Congress all they really do is they collect money and they spend it they don't make it they don't have businesses which add value to our society and so they make spending decisions and and and
collecting decisions these are policies taxation how much from the rich how much from the poor how much from interest and dividends and how much from salaries and these I've seen in fluctuations in these things over the years but this is policy and then you know there are people who
say that we have too much inequality and it should be fixed and there are people who say that the way to fix it is to get the rich to pay their share now I kind of bridle at that because it seems like a religious or philosophical statement it's not an economic statement there is no such thing as a fair share and and
the only question is who determines the fair share and my feeling is that the fair share is by definition when people say we're trying to get the to pay their fair share what they mean is we're trying to get them to pay more than they pay now but how do you define a fair share right now right now the people we
might call the rich or certainly the people at the in the upper part of the income distribution pay almost all the taxes so you know this question of fair share is is problematic and then how do you distribute it you know do you have welfare do you have guaranteed universal income do you have federally employed
guaranteed jobs etc these are all redistribution questions and and no he's a no easy answers and B this is the main grist for politics are the differences of opinion on this subject one of the very most important I want to come back to get your opinion on universal basic income in a second but before we sort of move
on out of the economic cycle and the role of the government and the Fed and investor psychology when I think about that intuitively I think about it as a nation state but we also operate in this global economy where tax rates on businesses make it more competitive for one country over another where interest
rates make investment in one country a more more prone than another how do you think about that not only from the individual like United States point of view but then in the global sort of world that we live in first of all let me say oaktree is not what we call a macro investor we do not invest in broad
themes of economic growth and movements and currencies and interest rates that we we are a micro investor we invest in individual companies and situations and properties and so forth so I don't do this for a living but I am out in the world than I do tend to have opinions on these things back in May of 2016 I wrote
a memo entitled economic reality and basically what I said you know our presidential campaign was going on at the time in campaigns people always say things which do not comport with economic reality you know in real life if we have ten dollars we can have - $10 hamburgers in politics during campaigns people say I'll you
I'll give you - $10 hamburgers and it won't cost you anything and you don't have to choose between having two hamburgers and and putting money in the bank or what have you and so yes economic realities to find the playing field and the rules so for example a nation cannot or shouldn't set its tax
rates without reference to the tax rates in the rest of the world one of the reasons we had to reduce our corporate tax rate is that our corporate tax rate was high relative to rest the world which meant which gave businesses and an incentive to establish themselves elsewhere or move elsewhere to escape
u.s. taxation and they can do that and in economic reality I talked about the fact that there was an article in the paper that the highest tack the biggest tax payer in New Jersey moved away I haven't known and people can move if they want to so you know down in down in Venezuela they were running out of toilet paper was becoming
too expensive so they they controlled the price of toilet paper and so the price of toilet paper couldn't go up guess what you can't make people produce toilet paper and they said if we can't raise our price to reflect the cost of making notes in a balloon you're going to cut production and now it's even
harder to get so ever so this is economic reality and if we say well we're going to balance the budget by taxing the rich raise tax rate rates on the rich they move away we saw this in France you know I think was Hollande put a seventy five percent tax rate on the wealthiest Frenchman they move away this
is economic reality in action and presumably the the rich are also the I mean the most it's easy for them to move away - that right yeah that's right that's right if you yeah I mean look in the new tax bill they changed the tax deductibility of state and local taxes and mortgage interest and as to the state and local taxes there are
seven states in America that have no state and local tax estate taxes so you have a lot of incentive to move from New York in California and New Jersey and Connecticut and Illinois to Florida to Texas in Nevada and as you say the working man may not be able to do that but the person who lives off his
investment portfolio could do that in a heartbeat yeah and since I moved to count to New York five and a half years ago I run into a lot of people I say how do you likely be new oh I don't live in New York I live in Florida right I only come to New York a hundred and eighty-one days a year because that's
the maximum permissible and government can't undo by Fiat in the long run the things that economic reality requires it's very interesting I think but the same thing is playing out with countries not just people and that's impacting where companies locate it's impacting where tax dollars go it's how do you
think about that I really and that even if you come up with a global agreement the cost of defection is a huge advantage and probably very little sort of like disadvantage if you're caught well and when you say if you're caught nations will cheat right you know every doesn't resent it every time we have commercial
treaties you get a little cheating around the edges and and the cheaters get away with it for a while and you know this is this will this will always be the case how do you how would you do things differently if you were sort of in charge of not only the sort of like US government and the economic cycle but
broadly like how would you conceptualize how the world would best be maximized how do we unleash that potential across the globe well that raises a real interesting question Shane and you used the term maximize and the greatest contributor to global economic maximization is globalization you know I mean let's
say you have two countries mine and yours and we're really good at raising sheep and you're really good at turning leather into shoes and so we braised the sheep and when they're ready we send the hides to you and you make the leather into shoes and we and this system produces a hundred pairs of shoes a year
and then some politician a Rexha wall no more trade in sheep leather or shoes now I have to I'm good at raising sheep but I have to try to learn how to make shoes friend and you are good at making shoes but you have to learn how to raise sheep to get the leather yeah and so in this new world I can only produce 40 pairs of
shoes and you can only produce 40 pairs of shoes because we're not doing what we're good at we have to do what we're bad at also and in this new system there's only 80 pairs of shoes in the old system which was humming there were a hundred and and that's called the benefits of specialization and
globalization is is in is in opposition especially to to negating the benefits of specialization and so you know the administration in this country says we run a big 800 billion dollar deficit trade deficit which I know whatever the number is and that shows that a we're they're winning and we're losing and B they must be cheating
they're taking advantage of us and we're gonna stop that and this is a total ignoring of economic reality when you go to the barber shop you get a haircut you pay the guy 20 bucks you run a trade deficit with him he's taking in 20 bucks from you you're not taking in anything from him so in in in those
terms he's killing you trade wise but you're not unhappy he gets the money you get the haircut so when we run a trade deficit with China most people weren't unhappy why it's over let's say that let's say the number is 800 billion I don't remember if we run an 800 billion dollar trade deficit with China what
does it mean it means we bought 800 million billion more of Chinese goods than they bought of American goods that's what a trade deficit is why do we have a trade deficit because we would rather buy their goods which are some combination of better and cheaper and they're not very motivated to buy our
goods because number one we don't manufacture that much and what we manufacture by their standards isn't better and cheaper so we get cheap goods and if we say we're going to stop the trade deficit what it means is we're not gonna have accesses to the cheap goods no I saw the president on TV the other
day and he said you just don't understand we've taken billions we've collected billions from the Chinese in tariffs well not economic reality Chinese don't pay tariffs tariffs are paid by consumers of goods we have collected billions in tariffs from US consumers of Chinese goods paying higher price those paying higher prices I don't
know if they're happy you know everything in Walmart just went up is that good or bad now presumably there there would be two reasons for the imposition of these tariffs maybe three one is I would say some matches Moe another is that China's treaty cheating in some ways on trade and we we want to
punish them until they stop and everybody tells me there's some truth in that and then the third thing is that we want to protect US jobs and clearly could be a combination of all three and we we've lost I think they the estimate is that we've lost three million jobs to China over the last let's say 15 years
so let's say we the tariffs reverse that process we get those 3 million jobs back that's a good thing and to do so we impose tariffs which require a hundred million Americans to pay higher prices for the things they buy every day that's a bad thing is it just a is that good for America or bad and those are the
kind of decisions that Washington makes in their in their judgment it's really interesting to hear you say that because that's not the type of conversation we hear around that we hear the these sound bites the bullet points right or the clouds are good okay so may 2016 economic reality August 2016 I wrote a
memo called political reality I said political reality is totally different from economic reality the politician says I can get you everything you want without any sacrifice it's not gonna cost you anything vote for me and you can have you can have it all you don't have to choose economics if you think
about it is really the science of choices and clearly it's not true but people can say anything on the stump they want and you can't sue a politician for for making a promise that he didn't come through with and they do but we have to make choices how is the reasonable sort of person too many choices in a world with a they have
to elect officials but the tone and the quality of that conversation is just I don't know to me it seems absurd on a lot of levels well the tone and quality is ridiculous I mean it has lapsed into just vilification of the other side tribal ization of opinions a great article this week by David Brooks in the New York Times on
the differences in thinking between the extreme left and the extreme right you know and the different you know the difference of opinions on things like you know the import of the level of racism in this country and and and that kind of thing they just think totally differently and as a consequence they
can't communicate at all and part of the reason is that I have a position which is different from yours and I tell you the good things about my position and you tell me the good things about your position I never admit to the bad things about my position or vice versa and we don't have a respectful
honest discussion we just try to fight for our side part of it is you know what percent of let's say Americans understand economics I mean it's economics is really convoluted and what percentage of people all right now we have tariffs been they've been tariffs in the headlines for the last six nine
months how many people understand what a tariff is how many people understand that the Chinese don't pay the tariffs Americans pay the tariffs and I'm pretty soon when the events surrounding my new book die down I'm gonna write my next memo and I'm Bobby gonna touch on tariffs and all the things that nobody
understands about tariffs and there are so many and you know you put a tariff on imports of steel and aluminum to protect American manufacturers of steel aluminum but that means that American manufacturers of motorcycles are added who use foreign steel are at a disadvantage relative to American
manufacturers of motorcycles who use domestic steel you want to disadvantage some American country companies relative to others and they're at a disadvantage relative to foreign motorcycle manufacturers do you want a disadvantage of American companies relative to Fargo's it's it's not easy and why because the tariff is an attempt to
regulate the economy by rule in contravention of economic reality you have somebody who can produce steel cheaper than you you put a tariff on to fix that but it has all these ramifications all of which or shall we say unnatural what would your what would do you think personally is a better option Oh
so let me there's one thing I have to interject it I left out so globalization leads to global maximization and world product is maximized by globalization it's a winning strategy however at the individual level there are winners and losers right because you know in my example all the people who used to make
shoes in America were forced out of business because they didn't do it well and all the people who used the raised sheep and in Canada are forced out of business because they didn't do it well and you know then you get into the question of whether the American advantage in raising sheep is the result
of government subsidies etc and then you pass a rule against subsidies and etc so you know I have to confess Shane I've never thought I had the answers on these things but I think that I could help participate in an honest and open discussion of the issues I think that's where it starts right yes and and and hopefully
in thoughtful honest objective not highly partisan people could come to a decision which maximizes the welfare for the most people but still of course there will be losers and then the question one of the differences between the two political parties in this country is is what do you do for the
losers you know we don't want anybody to lose right I mean that's part of the issue well we don't know some don't want anybody to lose you know I had a stepmother who thought everybody should get a vacation in Las Vegas in a color TV or I would rather say we don't want anybody to any of the losers and of course it's hard to
use that word but losers in this process to suffer right you have to have winners and losers and I used to say to my stepmother well why don't we pass a law which says that when people go to the casino in Vegas they can't lose there can be people who win and people who break even but nobody can lose well I
want to go to that kissing right me too but it would only it would only be open for an hour and then they'd figure out that they should close it and so you again you're trying to contravene you have to have losers and winners in the free enterprise system if you don't want winners and losers switch to the
socialist system or communist system in which they in which there were only losers I I think personally I mean for me I think of it as people should have equal opportunity but outcome should not necessarily be equal and part of that is work ethic part of it is luck there's a whole bunch of factors that go into that
but ideally I mean I would love to live in a world where everybody had equal sort of opportunities of flourish well of course you can't produce that because we are born in with advantages of birth you know where we're born of which schools we go to yeah and in and you know I wrote a memo in January of
2014 which happens to be the memo that got the most response and it was called getting lucky and it was on the importance of luck the role of luck and you know I talked in there about a dozen ways in which I feel I've been lucky I think I've been the luckiest person on the planet and I think was to that that
people were responding but you know I get into arguments with people and a lot of people say oh you know well what in current what started the our the article is it as I read a piece quoted some Silicon Valley guy who says success is never accidental you make your own luck and I I don't agree I think luck is a
real thing and it's unimportant and it's inherently unfair but that's life and so I get into the arguments of people and I yeah and I say to him okay how about your IQ what did you do to deserve develop or nurture your IQ you were born with the brain that works better than others yeah that's luck yeah and it's
totally it's not merit we convince ourselves that you know we did something to foster that or improve it well I don't I mean there I was I was just born lucky yeah you know and Buffett talked me to the ovarian lottery I think that's a great concept yeah well really misunderstand they really do and let's
say we get over the hurdle of agreeing that there is such a thing as luck and then we we say that some people get it and some people don't and that's inherently unfair I think the next step is some people might say I mean it's conceivable to imagine somebody saying you know I'm kind of down because I
realized that my success came from Locke and that depresses me but me I think my success comes from luck and I'm in ecstatic evaporation because I I feel I've always been lucky and why shouldn't I keep you being lucky now it's great to go through life with a positive attitude and I think that my good fortune in the
past contributes to my positive attitude with regard to the future now that is probably illogical because look lucky events in theory may be independent but I think that I will continue to benefit from my from my good luck and you know the philosopher Cicero said something beautiful he said the thankful heart is
not only the greatest of all the virtues but it is the parent of all the other virtues hmm and I think but what that means is that people who are lucky should thank their luck acknowledge it and revel in it I think it will also make them want to share the fruits of their luck right with with others that's
a great segue into so we talked about sort of unequal outcomes but equal opportunity and when people don't have equal outcomes one of the things that's come up is sort of universal basic income how do you think about that on the one hand we don't want anybody starve and we feel terrible about children who grow up in
the unlucky circumstances and don't have exposure to a good education and good nutrition and and things that help them stay out of trouble and and develop a positive self-image and you know so that tends to drive on shall we say [clears throat] the left which is more concerned about the unequal outcomes and
wants to fix them and I do not want to see the unfortunate among us suffer live in extreme poverty and we've been doing quite well as a world in terms of fighting extreme poverty do you view that nationally or globally when you when you say that comment yeah this well I think globally you know I read I
was reading the book fact fulness and it says that if you ask people how what percentage of the world's population lives in extreme poverty most people would say a much higher number than is true yeah so and I think that the number has been coming down and and the other thing is that I think that people who
live in what we describe as poverty poverty today it might be even better than most people lived 200 years ago terms of quality of life but the problem is that we get a lot more from our work than just our income and because we feel like we're part of something well we don't think we get self-satisfaction and we understand that
we are able to do things we understand that we are producing our own subsistence and we have colleagues you know we have a team effort we work together with others on things and we accomplish them and and you know there's so many benefits to work now the truth is that the work I do and the work that people who do manual
labor is not too much the same they may not love their work the way I love mine one of John Kenneth Galbraith last books was he had an essay maybe I would call it a rant on the subject that you you know it's ridiculous that we use the same word to describe what a CEO does and what a road
worker does you know we say work but clearly they're not it's not very much in common but the truth is we get great benefits from work and universal basic income will not give those benefits it'll only feed the physical needs and you know so number one there was a big debate under Clinton about
welfare and we reduced welfare because we thought it gave bad incentives and got people into bad habits and I think that's probably right and universal basic income probably would do so I think that the universal basic income idea would go some way to keeping people from starving to death which of course is important and
children from being malnourished and male clothed but it's not going to solve the problems of society and I don't know what is because I think that motivation and the elimination of jobs is one of the biggest problems we face in the long run and may a exacerbate the need for universal basic income or
or some progressive candidates now say God you know guaranteed jobs from the government talk to me about that that sort of changed with the we'll call it technology and automation and AI and machine learning how is that similar to other sort of I want to use the term like revolutions but and how is it dissimilar in your
mind yeah I I was I was invited down to Tulane University they had a speaker's program and I think I was the first speaker at the business school after the school was repaired following the terrible earthquake hurricane they had down there and my hosts took me to dinner in Basin Street and one
of the things they told me about was that New Orleans and the environments were thriving metropolis economically thriving metropolis in the days of agriculture and of course millions of people had jobs in agriculture and then agriculture became automated those people lost their jobs in agriculture and moved to the
Upper Midwest to make cars and appliances and then they that was they thrived and people who worked in those industries who really maybe maybe only had a strong back as their main asset did very well they had unions at strong unions that unions got great great packages for them and they did very well
but then of course we globalized and the manufacturing of cars and appliances moved overseas and since then the unions have been in decline on the private sector side and now what do you do if your only asset is a strong back you know I think President Obama on the on the stump said well we'll give more laptops but not
everybody can work a laptop enough to make a living and number two in the Information Age by definition we need fewer people to produce GDP than we did in the days of physical labor so it's a big problem now I was talking about the fact that China law it took three million jobs from us I believe um accurate in saying that from 79
roughly to today our manufacturing output in this country has doubled and we don't think ourselves as being great manufacturers but I think that the that we sell in measured in dollar terms which is course the only way you can measure it we sell twice as much today as we did 40 years ago and 40 years ago
I think we had about 19 million people working in manufacturing today we have 12 so we have twice the outcome output with 1/3 less workers which means that the output per worker has tripled if the output per worker hadn't tripled we'd have three times as many workers right making the same amount of goods rather
than twelve we'd have 36 million employed in manufacturing and so I wrote in I think this was an economic reality I wrote if you want to solve the problem all you have to do is ban gay in productivity but of course that would be silly and that would not be economic reality because somebody else would
implement those gains in productivity and eat our lunch but the point is that we have probably lost 24 million jobs to increasing productivity over the last 40 years compared to 3 million that went to China and it shows you the scope of the problem and the location of the problem the problem is not China and you know
knocking on the door is self-driving cars and right I think driving yeah as a single largest job category in the Inc that's right and and and self-driving cars are gonna be a big issue they're gonna by the way not only will they put I mean this is a utopian world that may be decades away but not only will they
put all the taxi drivers bus drivers truck drivers limo drivers out of business but think about the body shops because computer car self-driven cars won't have any accidents and the paint shops and the steel because they'll require less so tonight and the insurance companies because you know you won't
need insurance adjustor since there won't be any accidents to inspect and then take it take it further down you know people won't want cars they'll do with cars what they do today with bicycles in New York you'll have a supply of cars you'll pick one up drive it for a few hours and drop it off in
somebody else's paper so you know the average car take a guess at the average car in America and I can't even it's hard to think about all of America but how many hours a day is it used yeah - yeah well that means that means if we could increase the utilization of cars by having them drive themselves you know
you you punch into your number where you need a car it comes to you picks you up and takes you where you want to go that we would only need 1/12 the number of cars so think of all the people who lose their jobs in the auto industry and because the order when the street contracts that in the steel industry and
and so forth so you know where do those people get jobs it's hard to imagine and yet we've faced this before how that's that's what say to me we faced this before and that's why I went through the recitation about people moving from agriculture to to apply as if cars and so the optimist says we faced it before
and this is and and and jobs don't go away they just move around I don't have a good enough imagination to picture that world you're not optimistic on this I'm not optimistic I'm four and I try to be an optimist but I try not to be a stupid optimist and what do they do if they don't drive cars do insurance
adjusting fix cars buy build cars or make steel what do they do so what's different about this one that the causes need to be the less optimistic see it's the march of technology and is it the share volume yes number of people displaced it's the well it's the volume of people displaced and the fact that
their jobs will not be done by other people they'll be done by machines and who were doing the matter at equivalent or better level than they were and much faster and we're gonna variability yeah you know there's a there's a joke Shane that about the factory of the future you know about that one it'll have one man
and one dog the dogs job will to keep the man from touching the machinery and the man's job will defeat a feed the dog sounds like the Amazon ghost or I was in in Seattle yeah last week right you just literally there's there's one person standing at the front explaining how you download the app and swipe in and then
you just go in and grab stuff and walk out right and so there's one they used to be ten people working in the bookstore yeah what are the other nine doing are there new jobs - you see when when the when people stopped working in agriculture there were the new industries of autos and
appliances will there be new labor intensive industries to give jobs to the nine people who lost them in the bookstore what do you think that'll do for wages of blue-collar sort of jobs well you're seeing it already in in this in this rising income inequality it the people who have capital or technical education skills
are doing very well and the people who don't have those things are doing very badly don't you think that'll just continue the people who can develop the personalist bookstore or the robot will be in great demand and people who can create artificial intelligence will be in great demand and very valuable and
they'll all live in a small community just south of San Francisco and the people who can't do any of that stuff and get this place from their jobs will be will do very poorly and this is dystopian and I hate myself for thinking that way but I'm not optimistic about a solution and by the way let's
be generous and say that there's a possibility that government could could solve this or help not this government this government by a meet by which I mean the current state of affairs in Washington I'm not talking about a person or a political party this government can solve any problems because they can't agree on anything I
think if there were a solution to this problem it would be a big solution that would be a national solution and revolutionary and would require bipartisan support for something pretty radical hard to believe and that seems to be getting increasingly difficult not only here but around the globe from I mean
what I'm exposed to you're sure the tribal ization of views exacerbated by the polarization of the media but this is part of a natural cycle like we become more extreme and then we come back together or am I am I just trying to be optimistic ahead huh oh I'd like to hope so I'd like to hope so I'd like to hope
that that it eventually you have experiences which are so bad that you say you know we can't run that way anymore but the thing you probably have to get pretty bad for it to happen you know my my greatest interest at the present time in the political world is in bipartisanship and I'm supporting an
organization which exists no labels to support bipartisanship and we're hopeful but most people say it's quixotic I want to go back to the days where you know both sides of the aisle used to go to social engage with each other and talk and try to find reasonable solutions that instead of avoid each other and meet each Oh
polarize everything I want to come back a little bit just to investing one thing we didn't talk about that I really want to get your thoughts on is what is risk like how do you define risk not only in investing but risk in general well risk in general what is it it's the probability of bad outcomes you know in
academic investment theory they say it's volatility the volatility of prices the volatility of returns now I believe and that was a view basically developed in the new theory of investing and I would say basically at the University of Chicago in the early 60s and I was very 44 about my luck one of the things I was
lucky about is I went to Chicago in 67 and I was among the first classes taught the new therian anytime here at the front of the line it's an advantage and that put me at the front of the line but in the new theory they there are all these processes in equations which concern risk and return and how you
optimize risk return relative to risk and you have a formula you need to plug something in for risk and they plug the in volatility now I don't think volatility is risk I think but I think risk is the probability of bad outcomes but why did they use volatility because it exists you can say how volatile was this asset or asset
class in the past and we'll extrapolate to the future and if if you don't use volatility there's no other number available because there is no number that you can observe historically for the probability of that outcomes at various points of time but I think that risk is the probability of bad outcomes
now my thinking fortunately is always evolving and I wrote my last memo on risk in 2015 it was called risk revisited again and I talked about risk as being the probability of loss and for most investors loss is the bad outcome they're concerned with but the truth is we really should talk if we if if it's a
probability bad outcomes there are really at least two risks that we should think about what is the probability of loss and the other is the probability of gains that you miss out on now given the way people are wired we care more about losses than we do about gains for God and more an investor who works for
somebody else is more likely to get fired for losing money than for missing out on opportunities rent but the point is I go through this only to say that they're both bad outcomes and we should think of risk in terms of both does that imply we know the range of outcomes that are possible well you know what about
uncertainty so in this memo which anybody who's interested in risk I strongly recommend they read it by the way all the memos that I've been talking about all the memos I've written in the last twenty nine years are available at WWE capital comm under the heading of insights hopefully there's some insight
there and and they're all free and anybody can go on and subscrive them and download them and and sign up for a service that will notify you the next time one comes out you can download that but and and I hope people will will include a link on the page thank you very much that's great but there was a great economic philosopher investment
philosopher is how I described him named Peter Bernstein he died about 10 years ago and I quote him extensively the reason that risk revisited was revisited again and thus the title risk revisited again is because I found a memo from Bernstein from oh seven on my desk in 2015 my desk is it can be messy and I
incorporated a lot of what he wrote and he said risk exists because the future is a range of possibilities there was a professor at the London Business School Elroy demson who said risk means more things can happen than will which is a brilliant summation but risk exists because the future is uncertain there's
a range of possibilities mm-hmm Bernstein says sometimes we don't even know what's in the range in answer to your question and sometimes we think we do sometimes we're right about that sometimes we're wrong but I think clearly the upshot is that in order to manage risk you have to have a view of
what the probability distribution of future events looks like what's most likely what's least likely and what's in between and you can only make your decisions on the basis of that probability distribution now the first key is that you have to do it right if you're if you start from the wrong probability distribution you're
unlikely to find success but number two it's essential and this returns to it even you and I discussed an hour ago it's essential to bear in mind that even if you know the probability distribution exactly right you still don't know what's going to happen right the difference between probability and
outcome as Bruce Newberg says and on the roulette table I could've really seen it well I use the example of I use the example of a craps table and ooh Bruce and I play backgammon all the time backgammon is is is run by dice so you throw two dice and there are 36 possible outcomes each die has six sides six
times 6 36 and we know a hundred percent certainty what's possible you're gonna get one of those outcomes we're gonna get one of those outcomes and we know that of the 36 outcomes six of them are seven six one one six five two two five four three three four so there are six combinations that give
seven it is the most likely outcome right there are five combinations that give six and five that give eight and from there on the probabilities recede so we know which numbers are most likely somewhat likely unlikely we still don't know what's going to happen right it's only what the tendency would be on a
given role and probably if you do enough experiments in the long run that's what you'll get if you roll a thousand dice a thousand times 6:36 the the outcomes will be seven yeah but in one roll and you have no idea and that's the difference between probability and outcome and that's where the uncertainty
comes in the risk and in economics we make decisions based on what's called the expected value which is you enumerate the possibilities you assign probabilities you figure out which course of action has the highest probability weighting weighted value but some may be the action which has the high expected value includes some
possible outcomes which are unsurvivable you know probably the the the activity which could produce the highest expected level of elation for me might be Clift I think I don't like the bad outcomes so I'm not going to engage in cliff diving and similarly the highest returning investment activity might be venture
capital investing and somewhere in the probability distribution for any venture capital fund investment is the possibility that all the investments turn out to be valueless so if I'm a conservative investor I'm not going to do that and so we can't just invest on the basis of the probability
distribution and the expected value we also have to take our own tolerances and and predilections into account like expected value is sort of like a model or a lens into making better decisions one of the other ones that you've talked about it's sort of second-order thinking can you explain a little bit about that
and then what would be really interesting is to go into other sort of mental models you commonly use to conceptualize problems and think about them well what I call second level thinking says this the goal in investing investing is a funny activity it's really incredibly easy to be average and an average is
usually not too bad and if you're willing to settle for average you can do it with very little risk and very little very choosy very little risk of being below average and very little cost you buy what's called an index fund if you say I will be you know that the S&P 500 stock index it represents average stock
market performance I'll be happy with the return of the S&P 500 you invest in an index fund which invests in all the stocks in the S&P 500 in a certain weighting the cost is very low because there's nobody making any decisions and you're not investing time either right but no same time cost and you're
absolutely guaranteed against falling short at the expense of not being able to exceed so it's really easy to be average those of us who work in the investment business clearly we shouldn't be well paid for producing average results or and certainly not below average results but there should be there can be generous rewards for
being above average that's our goal that's my goal to be above average now next paragraph if you think the same as everybody else you'll take the same actions as everybody else if you take the same actions as everybody else you'll have the same performance of everybody else so and that by definition
cannot result in above average results so you can't think the same as everybody else you have to diverge from the thinking of the herd at some point in time and if you do and you're right then you will probably do things which are different from what the herd does and you'll be have above-average performance there's
problems with that however which is that there's a as a concept developed at the University of Chicago 1964 called the efficient market hypothesis which says that the market does the as a good job I'm gonna I'm gonna take off some of the absoluteness of the hypothesis that the market that is the consensus of all
investors does a good job of incorporating the availability is available information at a point in time which is to say that most of the time the consensus opinion is close to the truth and can't be improved upon now that creates a problem visa vie the desire for second level thinking because to be an out
performer you have to think different from the crowd but most of the time the crowd is about as close to being right as you can get right most of the time shall we say idiosyncratic thinking is not right right ergo the problem so should be a an above-average investor number one you have to think different from the
crowd but number two you have to be right so second level thinking is thinking which is different and better and by definition if you think about it very few people can do it my mother used to say it's the exception that proves the rule and exceptional people think different from the crowd and better than the crowd but by
definition they're exceptional you know this isn't Lake woebegone a fictional Lake woebegone where all the children are above average and but you know I'm hemming and and my last book was called the most important thing and the firt and it has 21 chapters and each one says the most important thing
is and then it's a different thing because in investing there is no one important thing or one clearly most important thing and there are 21 things all of which are essential and they're like bricks in the wall you can remove one in my opinion and I've devoted the first chapter to this concept of second
level thinking and the way you make you know most [clears throat] people have no idea how to be a successful investor I mean intellectually they don't understand no conception of the process the way you become a superior investor is you look at things you see things other people don't see most people make mistakes concerning a
given company they get too excited and priced too high they get too depressed and and and toss away its stock at a price which is too low you have to see the mistakes that others are making understand what they're doing understand why it's wrong hold a different point of view and be turn be proof right that's a
difficult recipe but that's what you have to do to be a second-level thinker so it in the in the chapter I give some examples the first level thing then this is the this is the simplest and the clearest the first level thinker says this is a great company we should buy the stock the second level thinker says it's
it's a great company but it's not as great as everybody thinks the the opinions which are incorporated in the price are too optimistic and when it turns out that the two out the mysticum when the truth comes out those hopes are going to be dashed the price is going to fall so we should sell the stock now
clearly the first level thinker is simplistic good company buy the stock the second level thinking requires a more convoluted discussion many more words more time a lot of the concepts of second level thinking are by definition counterintuitive which by definition elude most people that's the definition of
counterintuitive so it's not easy but it is a necessary condition for for being superior but you can sort of train yourself to think in that way well can you or can't you some people are naturally born contrarian some people don't get contrarian thinking and one of the things I say a shame is that
everything that's important in investing is counterintuitive right and everything that's obvious is wrong so you know you go up to a hundred people on the street and you say here's a company that is a tech company and the stock everybody's buying it and the stock has tripled in the last month and we should buy it some
large percentage of the people will say yeah that makes perfect sense some small percentage will say no it prot if it's tripled in the last month it's probably some kind of a boom which means that it has been become unjustified ly popular and if everybody's buying it we should sell it that's contrarian thinking right
that's second-level thinking and I think that that a lot of people look I've thought about this a long time I I've made my money in asset classes that when I got there were unpopular like high-yield bonds in 1978 and I thought to myself if you went up to a bunch of people in this in the straight world the
straight investing world and you said you should buy this because nobody else is most of them will say what are you crazy if they're not buying it by definition it has no merit and and we can't do that and anyway we don't want to do something which is different from what everybody else is doing because if
it turns out to be a mistake we'll look stupid how important is that ability to look stupid in terms of a performance it's essential it is one of the most essential ingredients and again I wrote a memo back in well in O six I think it was I wrote one called dare to be great and I said in order to be great you have
to dare to be great and then in 14 I hated it there to be great - and I said everybody dares to be great the question is not the day to be right the question is do you dare to be different because clearly but you have to diverge from the from the pact is required if you're going to be a superior in
anything and number two do you dare to be wrong number three - there to be look wrong do you dare to look wrong because even things which are gonna be right in the long run maybe look wrong in the short run so you have to be willing to live with all those three things different wrong and looking wrong in
order to be able to take the risk required and and neat and engage in the idiosyncratic behavior required for six I want to come back to something you said about thinking the same as everybody else how does that change the information that you consume and how do you how do you go about the opportunity
cost I mean you have a lot of things on your desk there's a lot of books to read how do you think of it that at some point in the process and it's it's probably a different point for everybody you have to think about again this kind of this idea of counterintuitive I think what most people think who think about
investing is that if good things happen you'll make money not necessarily so it all depends on expectations if the expectations are too high then you could have a favorable out a favorable event and it could disappoint people you know so people think last year the company made $1 per share next year they think they're going to make $2
a share earnings doubling that's exciting they did the stock up and the earnings come out at a dollar seventy five now earnings going from a dollar to a dollar seventy-five is certainly a good accomplishment but most people are disappointed in the stock falls and and so I think it's at some point look our
the people who work here spend all their time time trying to figure out what it is and they try to know what is that is to say what is this company about what will it be worth down the road what will it accomplish and so forth and they try to know those things better than others right but I think an important element
in the process is you have to stop at some time and say what do other people think why do they think it why do they diverge for me what makes me think I'm right and they're wrong you have to you have to plumb those differences you know the term you might use that I like to use sometimes is variant perception if
you think about everything the same way everybody else does you can't have an exceptional return you you if you think differently and it turns out better you have an exceptional return if you think differently and it turns out worse you have a horrible return but clearly you can't distinguish yourself if you think
the same and so you you know my son and when he was training as a young investor when he was in university and starting to think about a career and investing he would come to me and he would say well you know we should buy the stock afford because they're bringing out this new Mustang it's gonna be terrific and I
always for pedagogical purposes answered him the same way who doesn't know that see let's say Ford is going to bring out of a Mustang and it's going to be fabulous but if everybody knows it then the expectation of the success of that car is already reflected in the price of that stock and the event will not be a
profitable it'll be favorable for Ford but it will not be profitable for investors so it all comes from seeing things that others don't see another way to say that is it comes from taking advantage of the mistakes that others are making which results in thinking which is different which is right that's
the laundry list and does that change the information you consume I think it just adds a second level to the information because the information is that you that you want basic is what's going to happen our people sit around and think about what's going to happen if they're in the distressed ed area how
is the restructuring going to go if it's in a real estate area how can that building be optimized and so forth hmm but I think yeah it's just another layer of information you need and thinking you have to do which is what other people think and how am i different from them and how are they wrong and how am i
right is that one of the reasons that you read broadly across subjects I I do that mainly I mean my reading is not so purposeful okay you know I'm not reading at this point to become a better investor I'm not making that many investment around the decisions around here I'm really just trying to lead the
organization and the people and the culture and and and and relate to the clients and write and speak and that kind of thing I'm not making investment decisions and I'm just trying to get smarter you know and know more and always challenged my thinking and you know as I said about risk and I now have a
slightly different way of explaining risk than I did three years ago we're always refining and busting right and and and I hope to helped be smarter when meeting next week final questions and it I know you get a run what other parenting sort of ways did you teach your kids a bit of money that other people can use or borrow
from first of all we always talked about money not in some not like it's you know the altar of money on which we have to lay ourselves down but we talked about responsible financial decision and you know if you have if my kids had money do you want to spend it on this or that or save it and if I have money and and my
wife has money how do we think we should spend it and you should not insulate your kids from the discussion of money money is a very real thing that it's essential to develop good attitudes toward it early number one number two of course I think you have to keep money in its proper place and it should not be
the be-all end-all and if you're at the dinner table you should try to avoid saying oh that guy is a millionaire so he must be a good guy or that person is poor so they must not have any merit and you know that that's really so important I think one of the most important things to have kids who function well around
money is for them to have a feeling of finiteness and this goes back really to economic reality the memo they should understand that money is finite no matter how much money you have you can get in trouble if you spend too much of it and and but since it's finite you shouldn't waste it you should make good
decisions you know when our daughter went off to college we said here's your credit card we're going to put money in your checking account every month and when the bill comes in you pay the credit card bill and she said well I want a credit card like my friend has I what's that she says oh she doesn't get bills
you're not helping your kids if they don't get bills the and and by the way her friend may not have thought of where the money comes from the pay that credit card that's a bad that's a bad habit and you know we love our children and we love him so much and some of us grew up without and we want to give our kids we
want to give what we didn't have we want to give them what their friends have we want them to feel good you know and there's this temptation to feel that that if they have what their friends have they feel good if you don't have what their friends have they feel bad and so we give them everything we can
and some people think that a good parent gives all they can but it's bad to have the what the what the kid who has the most it's bad to let that kid set the tone for what your kids should have and it builds character to have some to say no in our family we don't do that or in our family we don't spend our money that way
or our family decided to take a trip to Paris rather than buy one of those these are these are good letting kids make responsible decisions and choices and stuff like that and insulating kids from choices is not doing them a favor what are the other sort of like moral lessons that you would start with in our family
we we respect others and we care for others and we want good for others in our family it's not about getting to the front of the line and it's not about succeeding at the expense of others we want to be part of a team effort be it in the house in the community in the country in the in the company in the
school we want to be part of a team effort which brings success to everybody and it's not about it getting ahead of the others and you know if you go out and do a great job you'll be successful and kindness and you know the Golden Rule do unto others as you would have them do unto you is is very relevant and you
know the importance of being good people and being liked and for good reasons and respected and you know when you get to be my age you Eric Erickson the psychologist wrote about the stages of man and you you think in terms of how are you thought of it's very important to you but when you get
to be my age it's too late to change how your thought of and then ultimately how do you think of yourself and you know you when I think of people who get close to the end and are unhappy with how they led their lives I think it's a terrible tragedy and then the other thing is I would buys young parents if there are if
it is a choice to be made and the two choices let's say are both non-lethal let the child make the choice you know when our daughter our daughter got into two schools for high school we wanted to go to one but we never said a word she chose the other one she went she did fine and number one maybe the child can make a good
decision and number two experience in making decisions is important and number three having your parents tell you we trust you to make that decision is really very positive for a child's development and the other thing is your kids will make mistakes hopefully not lethal ones and insulating
them from making mistakes is not doing them a favor because if they make their first mistake at five and they improve their decision-making process and they learn that mistakes don't kill you that's a good thing and if they make their first mistake at thirty five and it crushes them because they're not
prepared for that then that's a bad outcome and too close on the Soviet I'd like to read you a paragraph from the book it yeah I'm gonna I'm gonna go get it just become for now my favorite paragraph in the book it's also the next-to-last as Peter Bernstein said the future is not ours to know but it helps
to know that being wrong is inevitable and normal not some terrible tragedy not some awful failing and reasoning not even bad luck in most instances being wrong comes with the franchise of an activity whose outcome depends on an unknown future no baseball player expects to bat a thousand investors
shouldn't which means they shouldn't get down on themselves if they make a mistake as long as they Rhian their process and it was good and you shouldn't castigate your staff members for making a mistake or your children thank you had that's a great place to end this a phenomenal conversation great Thank You Shane I'm glad to have been
part of it hey [music] guys this is Shane again just a few more things before we wrap up you [music] can find show notes at Furnham Street blog comm slash podcast that's f AR n am st AR ee t BL o g calm slash podcast you can also find information there on how to get a transcript and if you'd like to
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