Peter Thiel  1:57

A tremendous amount have been written in the last number of years about Facebook and the crazy Facebook history. I wanted to talk about one anecdote from the development of the company that I think was quite important and that it’s worth reflecting on a little bit more in this question of how to build great businesses.

Was it just they stumbled on this thing and it happened to grow? I think there was certainly some serendipity and luck around it. Though I also think there was a tremendous amount of foresight that I got to see firsthand in the company.

We’re already in the summer of 2004 and there were ideas about how they wanted to build things out and how they envisioned this completely transformative social network that would be built over many years. Aspects of it varied and changed over time but in many ways, the outline of something much bigger was already envisioned near the very beginning of the company when I started to become involved in the summer of 2004.

When you have a company that gets started, they often have a PowerPoint presentation, they will have a slide where they describe what the business is going to do and you have one type of company routes. Well, we can do many different things. We can do A, B, C, D or E, and you have a company where it’s, “We are going to do A.”

The company that says A through E is always worse than the one that just says A, even though mathematically, the opposite should be true. Mathematically, you’d say A through E has to be better than just A.

However, when you have A through E, it means that you’ve not really thought through any of these things very well. Probably they’re all kind of bad and they have not been thought through well, whereas if you have a specific idea, it’s a plan you can work against, coordinate against, measure yourself against and try to improve.

I used to play chess scholastically in junior high school and high school in the US. One of the intermediate level chess things is you usually learn how to move the pieces and combinations and how to get to checkmate. Things like that.

One of the intermediate level things you learn in chess is that it’s always good to have some kind of plan even if it’s a bad plan. It’s something you can measure yourself against versus having no plan at all. What are you trying to do then? Something where you create options for many different plans is an anti plan. It’s a way in effect to avoid thinking about things.

The education question that alluded to in the opening comments that we’ve come to think about… I’m very much in favor of education. I think it’s important. I think learning is important. However, I think it’s also very important to ask why you’re learning. What is it for?

One of the strange paradoxes in the United States and many other countries is education has become increasingly a status-driven credential, where you simply get it in order to get other things. It is the purest version of the indefinite future. You can think of things like going to business school is maybe the most indefinite version of education where why do you go to business school in order to become a businessman?

What sort of business? It doesn’t matter. If you had a specific idea that would actually be seen as a bad thing because that would be like you were too narrow, too focused. We then just create all these people who have these very general backgrounds and you end up with this paradox where what do you do at the end of your high school years? You don’t know.

You go to college. What would you do at the end of your college years? You don’t know. You go to graduate school. What do you do at the end of your grad school years? You don’t know.

Then you get some sort of job, not a job you want to do the rest of your life, or that you think is important, but one that will be good for your resume and will help you in a somewhat poorly defined way in the future.

I was teaching in class at Stanford this last quarter and I spent one day meeting with about 30 students, 20 minutes each, giving them career advice. It was in the law school context. I think this was very representative of the thinking in many of these places.

About two thirds of them plan to work at major wall firms. Not a single one was planning to become a partner and really excited about it. It was just this was what you did to build your resume and then it would sort of be this mechanical process where you did not think about the future. It would just sort of gradually unfold.

I think this is the question about education that’s gone wrong is that it’s become paradoxically a way to avoid thinking about your future. You learn certain broadly applicable things and then you just adjust as things go on.

I think this idea of having too many plans, too many options has often become a way to avoid thinking very carefully about a specific plan or specific option, or what you will do with that.

Preston Pysh  6:16

The thing that I’ve noticed about Peter Thiel is he’s always inverting. He’s going back to the Charlie Munger quote of “If you can’t figure something out, invert and see what you get then.”

It’s kind of neat to hear his perspective because I think if you asked 100 people what they would expect to hear out of Peter Thiel, as to the first comment, as far as having a business plan and kind of having three or four or five different strategies in order to meet your end state, I think most people would say, “Yeah, that sounds like a good idea.”

Then he comes out and says that what he’s found in his investments is that one path is the best way to go. It just kind of flips everything on its head.

Do I agree with everything that he said? I definitely agree with his comments on education. I will say that I think that his comments on the venture capital stuff is more based on confidence.

My personal opinion, I think that when a person says this is what we are going to do, it demonstrates a confidence level in the person, the venture capital person that they are going to achieve this and that they really don’t have a shadow of a doubt that they’re going to achieve it, as opposed to a person who would go in and say, “Well, we might do this, we might do that or we might do this over here.”

That person doesn’t have any idea as to what the market forces are driving them to. I think that maybe that’s a little bit more of what he’s getting at than saying that you should only have one path, or I think you should have ideas on how you can still shape things in order to achieve your goal.

Stig Brodersen 7:42

It was interesting what you said about Peter Thiel’s reflection there about what business is. I think you can look at this in different ways and he specifically mentions Facebook and how they had this dead set plan of how they should change the way we interact together with this huge social network.

It’s also important to make this distinction between the very biggest tech companies and then entrepreneurship in general, if you are a Silicon Valley company, if you are living off the networking effects on something like Facebook, and that’s how you’re going to grow. It has to be big. Either it’s big or it’s nothing. That’s the Silicon Valley way of thinking.

It also has a lot to do with the way that money is plowed into these companies, either it’s going to be a massive success within those seven years that a venture capital fund would typically run for before it’s closed down or it will go bankrupt. That’s okay, too, in a way, as long as we have those big winners.

If you want to increase that volatility, so you will get those outliers like Facebook, then yes having one plan and that’s the vision, we’re not going to change anything. That is the one plan and if that’s not going to work, it’s just going to fail anyway.

I think that mindset probably works in the valley. I think all entrepreneurs think it’s a horrible way of conducting business. The way most entrepreneurs think is that they like the lifestyle. They are probably also passionate about a project or product service. They would like to make a decent living out of having their own business. If that’s the way you approach business, why not have business plan A to E? I just think it’s very important to make that distinction.

Preston Pysh  9:25

I think it’s important for people to realize his comments are coming from a venture capital investment point of view. If you go in there and you’re listening to a pitch from a company to do another series round of investing, you got to understand what you’re listening to.

You’re listening to a company who A.) doesn’t have enough earning power to take care of themselves. They’re going to go bankrupt if they don’t get this round of funding. So then the question quickly becomes, “Okay, so what in the world are you going to do with all this money I’m about to give you?”

If there’s not a really clear path that says, “I’m going to take your million dollar investment and I’m going to do X, Y and Z.”

That’s where these guys are looking, they’re looking for something that is very direct, like this is exactly what we’re going to do and this is how we’re going to achieve this.Then after that happens, this is the next thing that’s going to happen.

When people talk in those terms to a venture capitalist, the venture capitalist gets very excited because they see it as a very high probability event. Whereas if he’s going in there, and he’s listening to a pitch and the company saying, “Well, we might do this and we’ll bend some of the money here. We’ll probably keep some of this in reserve.”

I mean, they’re just kind of talking all over the place. That’s where I think his comment is more directed towards

Stig Brodersen   10:38

Just a quick comment to that, Preston,because I was just reading Reid Hoffman’s Blitzscaling book. As some of you might know, PayPal was founded by Peter Thiel and he then merged with Elon Musk into this PayPal company. Reid Hoffman was then the COO.

He made this decision that they should give everyone $10 that they can just send away for free to a friend as long as they had a PayPal account. Obviously this is not a profitable strategy, but the intention behind PayPal was that everyone should use it should be a common payment standard.

This was just a way of marketing yourself really, really fast and this was the only plan that they had. This is the thing that needs to be done. If it doesn’t work, then it’s not okay and we’ll go bankrupt. That’s it. We’ll start another company.

However, if we succeed, then PayPal will be massively successful. Just to give some piece of context to when you hear someone like Peter Thiel talk about having only one plan. That is where it comes from.

Preston Pysh  11:37

On the next question that we’re going to play, Peter was asked, “What is the importance of visionary founders that can articulate the mission of the company when it has no employees?” This is how he responded.

Peter Thiel  11:48

Many but not all cases, they’re quite good at articulating it, which is actually a fairly unusual combination. You often have classical engineers who tend to be very introverted in many cases. These are people who are technical, scientific engineering type people who happen to be rather eloquent at articulating it.

One of the things that is very important in building these things is they don’t exist on day one. You have to actually motivate people and you have to convince other people that this is a really important thing to work on. I think this is one of the one of the subtle things that’s really valuable about the sort of the breakthrough technology, doing something unique and different that’s not been done. It is so much better at motivating people.

Again, you can sort of debate how big this is, but one of my friends, Adam D’Angelo, started a company called Quora a few years ago. It’s sort of a new search engine. It’s a hard, interesting problem.

There’s a story around why this is a very important kind of a problem. Whereas if you’re starting the social networking company, it’s why should you work for this company, rather than the next one? Why are you actually making a difference in the world?

You want these things to be successful as businesses, but it’s not the only thing that motivates people. It’s really worth thinking through how these things do not motivationally work.

There are all sorts of businesses that I think are possibly quite valuable, but end up being very uninspiring and you end up with this very difficult problem of if you’re starting on finding a very hard time attracting talented people.

Conversely, if you have something where it’s at least interesting, you have at least a chance of getting sort of a critical mass of very talented people. This was very true of the genesis of the really great businesses.

I think Google is still in some ways a very inspiring example. The first 30 people at Google were unbelievably impressive and they somehow were able to maintain this for the next 300 or the first 3000 even.

I think it was in part because, especially Larry Page, he was very good at just articulating this vision of how the most important problem in the world was organizing the world’s information. There was much more information than people knew what to do with so Google was working on sort of creating this universal library. That was the most important problem to solve at the end of the 20th, beginning of the 21st century. You may or may not agree with that, but that was a good way and an important way to drive this.

Preston Pysh  14:16

It’s funny that says that because I would never imagine the pitch to an early employee at Google being what he just described. I really liked the way that he said that. Stig, I’m kind of curious to hear your thoughts on this one.

Stig Brodersen  14:27

I like listening to Peter Thiel because he always thinks so differently about all problems that I hear people talking about. I’ve never heard someone talk about how to motivate employees in a company who is going to take over the world but doesn’t exist.

To me that is absolutely amazing and one of the reasons why I always feel so inspired listening to Peter Thiel.

Whenever we talk about a critical mass or break even point we are always thinking about a small startup, a restaurant or another kind of company that’s set up. You need to have 400 guests per week to break even for that to happen. You need to have so many chefs and waiters. That’s the way you should think about this.

What Peter Thiel is talking about is the critical mass you would need to have employees before you can build your company. Looking at the world through the looking glass of Silicon Valley, this focus on having a hockey stick growth for those networking effects to stop working.

Facebook we talked about before, it has no value if you own a personal network. It doesn’t have a value if there’s 500,000 people on the network. Close to everyone has to use it and then it makes sense for you to use it too. For more people coming, it’s a stronger and better company.

However, before all of that you can’t just set that up with just one man down in your basement. You need to have so many employees. I never really thought of it like that before.

That’s also why the venture capital function is so important to have in the business world because you need someone to take those those bets that we can change the world and we can do something great, but we need to burn a lot of cash because this would not be sustainable for a long, long period of time because it needs so many engineers before it can be set up.

Preston Pysh  16:23

I just want to comment more in general about Peter Hiel here. For folks, if you are liking some of Peter’s comments, or maybe you don’t have any exposure to him, he has a book out there called “Zero to One,” Stig and I have covered it. We’ll put our comments in the show notes if you want to listen to that before you go dive into the book. Fabulous, really, really good book.

There’s also another book out there that covers Peter Thiel and it’s called “Conspiracy.” Fascinating book gets into how Peter Thiel thinks, how strategic he is. It talks about the whole Gawker Hulk Hogan thing and how Peter Thiel was involved in the litigation on some of this stuff in the funding behind the litigation. Really a fascinating read.

I would highly encourage people to read that book. It was a very, very good book. One of the things that came out of the book that I found fascinating was the author talks about how Peter Thiel thinks.

One of the things that he talks about is you could ask Peter a question and Peter would think a long time before responding. Then he would say something like, “Well, you know, this type of person would answer that question by saying ABCDEFG.” Then he would say, “But this type of person would probably see that problem differently and they would disagree with that first response. They would probably respond by saying this and then he would give all the reasons why.”

What the author is getting at is Peter feels that there’s a solution or there’s an answer that has an array of different ways to view it and because he looks at things from such a complex and unemotional vantage point, he’s able to really kind of thoroughly understand how things work better than most people.

I found that little bit of that discussion out of this book conspiracy to be really kind of enlightening and it helped me challenge the way that I think about things in that it doesn’t have to be so absolute.

It’s actually something that maybe you should take a step back and say, “Well, let me think about what the person who would disagree with my personal point of view would say and how would they respond and what would be their reasoning for their response, because they have a reason.”

I think when a person goes through that exercise, they’re going to find themselves being probably more thoughtful and more understanding of the people around them. In the book, they said that he got this approach out of his training because he went to law school.

This is one of the things that they make you do in law schools that you have to argue, maybe the side of the case that you don’t want to argue. It forces you to kind of learn how to think this way.

Peter has continued to approach all problems in his life that way. I just find that really fascinating. I also find both of those books really worth people’s time if you want to dig into them.

Stig Brodersen  19:12

I’m reading this book right now by Rolf Dobelli. The name is “The Art of Thinking Clearly,” and he goes back to having mental models of the world and how you’re looking at something like the Second World War.

If you have a background in the military, you might be thinking in terms of military solutions. If you have a background in politics, you think what could they have done differently in terms of the political system? If you’re an economist, you’re thinking why couldn’t we have supported the economy better, and then we wouldn’t have everything bad happening in Europe at the time?

So it’s really about challenging yourself all the time and thinking inadvertently like what Peter Thiel is doing. I think that’s also why whenever you listen to him, he can reflect on a just a different level than almost any other person you could think of because he has so much empathy and so much knowledge that he can go into the different shoes of so many different people and come up with a balanced picture of the situation.

Preston Pysh  20:07

He approaches it from the position that he could be wrong. I think that that’s one of the hallmark mistakes I think a lot of people make. When they get into a discussion, and it’s like, “Well, what do you think about this?” by providing their response to what they think. It’s almost like they have to dig a trench around them and they have to get in there. Then they have to fight and defend that position.

I don’t think Peter Thiel approaches it from that vantage point and more from this is a discussion where I can learn something. He then starts off by saying, “Well, I guess I would think that this would be the point of view that I have, but somebody else would probably argue against that. This is how that argument would go.”

He’s trying to understand what the truth is by understanding all vantage points. I think that that’s just a way different approach than what I think most people approach it from.

I think a lot of the reasons why people do not approach it that way is probably because some deep rooted fear or insecurity about being viewed as being wrong and not being viewed as intelligent might be driving a lot of the reasons why people don’t approach things that way. When you take a step back and you look at and you say, “Well, if these people think I’m an idiot, because I’m arguing with myself, or because I’m just throwing out all these different ideas,” I think that you just have to have a lot of calm and balance in knowing who you are and being comfortable with maybe being viewed differently to speak that way or to think that way.

I highly admire that about him.

This next one is an interesting question, because it’s something that’s extracted out of his book “Zero to One” where Peter talks about a question that he likes to ask all new job recruits that come into his company.

Peter extracted this question from a book that he had read, and the name of the book is “Things Hidden Since the Foundation of the World.” In this book, Peter learned that there are all sorts of secrets throughout the world that have just not even been discovered yet. That there are people out there that know the secrets, but they just haven’t been able to really kind of action them.

One of his questions that he asked people when they come in is what is it that you know that nobody else in the world knows. He usually gets a blank stare from people but this is interesting, because he was asked this question by somebody in the audience of this talk that he was doing. This was his response.

Peter Thiel  22:28

I think that’s sort of a conventional view is that there are not that many answers left to this question. What’s true that nobody agrees with none… We believe that all these truths have already been discovered in the past.

Maybe there’s still some things but they’re just about impossible to figure out. So there are conventions that we understand and there are mysteries that nobody can figure out.

I, by contrast, think there’s still a lot of things left on an intermediate level. There are a lot of things that I call secrets, which are truths that are hard but possible to discover. I think there is always a secret at the core of it. Every great business, there’s some sort of research program that some area that people are really, really focused on. They think about it really hard and it sort of advances their thinking to the point where they get an understanding about something that other people do not yet have.

At PayPal, we’re very interested in crypto currencies and encryption technology in currencies. Could they be intersected? Could you build a new digital currency? This was a question that animated us tremendously.

We didn’t quite succeed in building one at PayPal, even though we had t-shirts that said that we’re going to be the new world currency. We didn’t quite succeed in that goal. But that’s sort of an in depth substantive focus, actually did help us think really hard about how do you architect a new payment system? How do you do certain things differently? It was a key part of inspiring us.

I think there are sort of many secrets left and this is something we generally do not understand. It’s not obvious where one should look. If you were living in the 17th or 18th century, you could look at a map and there were empty spaces left on the map. You could come and explore and go and discover those places. There’s sort of a natural geographical sense in which there were secrets left. The 19th century, there were still places in the periodic table of elements that were empty. You could sort of do some basic chemistry and find some secrets.

There’s sort of a sense that maybe basic chemistry and geography sort of fields that are closed. However, I think most fields are not like that. I think most fields are still ones where there’s tremendous amount of innovation possible.

Certainly, this is true in the computer field, where we’ve seen massive innovation in recent decades in the world of bits, computers, internet, mobile internet, that whole ensemble. I think we’ve seen less innovation in the world of atoms, transportation, energy, clean energy, biomedical, biotech, space, travel, all the kinds of things people thought about in the 50s and 60s.

I think it’s not because there’s some law of nature that it’s hard to innovate or impossible to innovate in these areas as well. There’s sort of this cultural change where you haven’t tried as much.

There’s a lot of this that has a self-fulfilling character. If you think that you can’t find a secret, then you’re not going to try, you will not look and you will not be a person who ever finds one.

Failure, pessimism can have a self-fulfilling character, as conversely, if you think there’s a lot to be discovered, progress can accelerate and more more things can happen.  Second, a sort of contrarian truth that I believe to be true is that there actually are many secrets left to be discovered.

Stig Brodersen  25:30

Another amazing clip here with Peter Thiel. I’m just amazed by how he’s thinking about things. In this day and age, you would think that innovation has just taken to new heights with everything that’s been going on. He’s like, “Not so many things. We can just look at atoms. Atoms haven’t really been as innovative as we used to think.”

I would like to talk about this clip and PayPal that he also mentions in this clip. How Peter Thiel, in many ways, felt that he failed with PayPal. To me this is very interesting that he actually originally set out to find a secret, as he would call it, behind banking that this could be done differently. Not even just having your own online payment system but also inventing your own cryptocurrency, your own money that everyone could use and then mitigate the fees and all the problems you had with banks.

I think today perhaps also because of Peter Thiel, that idea sounds less normal, and you have all these ICOs out there. It doesn’t seem like a big deal to have those thoughts but back in the days, very few people, if any, were really thinking about this and really considering this. To me, that’s an example of a secret that just hasn’t been discovered yet.

Preston Pysh  26:48

What I find fascinating is it just shows you these guys understood the power of encryption back then. They understood that encryption would be the gateway to allow a digital currency to exist, but they just couldn’t figure out the breakthrough, which was really blockchain technology or some type of technology that enabled the encryption to allow a unit that can’t be copied or pasted on a network so that if you create 1000 units, only 1000 units could be exchanged. That’s what the blockchain technology stuff kind of really was the breakthrough on is that you can do that.

It seems to me like these guys understood that encryption would have enabled that. They just couldn’t crack the code on how they would implement that or make that real perfect example with him understanding that there’s these secrets out there that they can uncover. It sounds like they were on to something, but they just didn’t get there on it.

I think the most important thing that he said in all of that was there at the end, he talks about your perspective and your attitude. If you think that there are things out there to be discovered, then your probability of actually finding them are probably way higher.

However, if you have this negative mindset, if you have a pessimistic view on it, you’re probably not going to find anything. I just find that across all the things that Stig and I study all these books like that is just such a common theme, is just your perspective and your attitude.

I’ve been on a big kick of reading about the brain and things like that. What’s fascinating is how your brain pushes things into its subconscious. You learn something and then when you go to bed at night, you’re dreaming and all this stuff is getting pushed back into your subconscious.

The way the brain is kind of functioning is what you continue to tell your brain is what it is then pushing into the subconscious. If you’re walking around all the time with this negative attitude of “Oh, this sucks. We can’t do this.”

What’s actually happening is you’re flavoring or coloring, the way that your brain functions inherently, because your subconscious is driving so much of your daily activities.

Now if you do the exact job opposite and you’re always thinking of things in a positive way. You’re saying, “I can discover something new, I can do this.”

You keep pushing all of those thoughts and those ideas back into your subconscious. You do this for years on end. That will have a tremendous and profound impact on who you become. It’s not something that you even realize is happening. It’s all happening at the subconscious level.

He says that at the end and I think that that is just a real nugget, that he just kind of slipped in there as if it was nothing. Though the more that you think about what it is that he’s talking about, and how insanely difficult it is to identify something that no one else in this world has identified or that very few have identified, you have got to approach it with that kind of mindset or you’re just dead on arrival.

Stig Brodersen  29:42

One example of this going back to this crypto discussion, perhaps as some of the listeners know, Peter Thiel was one of the first major figures that invested in Bitcoin. He did that in the early days.

I’ve read an interview with him that was very recent that he still felt that there was probably an 80% chance that Bitcoin would be worthless. When he did weigh that outcome with the probability of it being right or if that was, I would say his secret there was about to be revealed, as you could probably say, based on this question… It was just such a good bet that there was no reason why he shouldn’t do it.

That tells you so much about how he thinks about things that he’s thinking as a contrarian investor, knowing that he’s most likely wrong, because very often the herd is right, to some extent. But if you can pick the places where it’s not and if you have a good model or multiple models to figure out where the herd is wrong, that’s really when you can make money as an investor and grow as a human being.

Preston Pysh  30:41

Next question, this is the last one we’re gonna play. Peter Thiel was asked, “Do you worry about artificial intelligence and what it’ll do to us and our ability to earn a living?” This was how he responded.

Peter Thiel  30:51

I’m of the view that strong AI is still quite a long ways off. If we ever were to get artificial intelligence, if we were ever to build computers that are as smart as human beings in every way, this would be a momentous event. This would be as significant as extraterrestrials landing on this on this planet.

If aliens landed, the first question would not be about the economy and what does it mean for your job? The first question would be political, are they friendly? Are they unfriendly?

I think to even frame it as a question about jobs is to understate the importance or seismic nature AI would represent. I think, short of strong AI, however, I think people are way too worried about computers in this economic sense. You live in a financial capitalistic age, I used to have argued elsewhere that I think we do not live in a scientific or technological age.

Most people in the US and Western Europe really don’t like science. They don’t like technology. They’re biased against it in all sorts of ways. It’s true of people. It’s true of the politicians. It’s true of governments. It’s true of the culture.

The easy way to see this is you just look at all the Hollywood movies that basically show technology that doesn’t work and that kills people. You can choose whether it’s Matrix, Terminator or Avatar. I watched the Gravity movie the other day. You’d never want to go to Mars and into outer space. You will be much happier being back on an island, somewhere on this world.

That reflects the sensibility of most people that the future is something to be feared and that we should try to prevent. That’s why I think people who are involved in the scientific or technological world are the counterculture in our society today. It’s sort of a very unusual perspective to think that the future somebody would hope for.

A roundabout answer, this idea that today’s computers are replacing people, is just another one of these technological angst narratives we have. I think it’s not true. I think computers and people are fundamentally different. They’re good at really different things. They’re fundamentally complementary, not substitutes.

The much bigger challenge for the middle class in the developed world comes from globalization, because people in India and people in China are actually not that different from us. They can substitute for labor. That’s where the substitution is taking place. I don’t think we should stop globalization but it has some problematic aspects. I think technology has far fewer.

Preston Pysh  33:15

That’s a pretty interesting perspective. I don’t know that I agree with him completely on the technological piece there but I do agree with him on the globalization thing. At the end, I think that he’s exactly right, that a lot of the jobs that are being performed here in the United States can absolutely be performed elsewhere. I’m not saying as an American that I necessarily like that outflow of capital from our country but I agree with him on that point of view that that is something that is very real and a threat to the way that the US is going to continue to progress.

I think that when you talk about the technological impacts, I immediately think about driverless technology and what impact that’s going to have to the transportation of the in here in the United States. I think that that’s going to be a fairly devastating event in the next 10 to 20 years, as far as that displacement of drivers from Uber to all the truck drivers. I think that that’s going to have a major disruption. Maybe I’m too negative. I guess I see it a little bit differently than him.

Now, I’ll caveat that he is much more attuned to what in the world is happening in Silicon Valley than I am, that’s for sure. You probably want to default more to his comment than my own.

Stig Brodersen  34:30

I would like to talk about fear and his comment about fear. how we are afraid of the new technology that’s coming. I’m currently reading this book “Thinking Clearly.” The author talks about how we are programmed as human beings to fear change and to fear what is unknown.

The reason for this is that we used to live among animals and other things that could kill us. Being afraid was a matter of life and death. People who were cautious, also survived. They passed on those fear genes to us.

Now that we live in a prosperous and safe society, at least a lot more than we have in the past, we are still wired to be afraid.

One way to look at this is imagine looking at a picture with 10 angry faces and one that is smiling. You almost don’t see the smiling face. Then if you look at a picture with 10 smiling faces and one who’s very angry, you notice that person right away.

The intention of what Peter Thiel is saying and also the takeaway from the book is we shouldn’t be afraid. We should rather embrace the changes and embrace innovation, even though that is unknown.

It really makes me think of the episode we did some time ago with Jack Ma where he talks about his father’s generation, they work 16 hours a day and they were very busy. His generation, they work eight hours per day and still they are busy. Then his children’s generation where it’s going to be three hours per day because of artificial intelligence, and they’re also going to say that they’re very busy.

However, if we think about the quality of our life because of those technological changes, they’re for the greater good. They are, across the board, good for mankind. I guess that was my takeaway here from this clip. We shouldn’t fear the future because machines and that people are fundamentally different.

Preston Pysh  36:28

All right, so this is the point in the show where we play a question from the audience. This question comes from Santos.

Santosh  36:34

Hi, Preston and Stig. Today I have a question about the Treasury Yield Curve. Warren Buffett has mentioned several times that understanding interest rates is critical for investing. I believe the Treasury Yield Curve is one of the important factors in understanding the interest rates in general.

I’ve heard from you both that flattening or inversion of the yield curve has historically been a signal of bad times to come for the stock market. I wanted to understand why having interest rates for short term compared to long term is bad for stock markets, and how much importance should we be giving to the yield curve as value investors? Thanks for all the great work.

Preston Pysh  37:10

Okay, so I think it’s important for people to first start off with the idea that if you do have a flat bond yield curve, it doesn’t necessarily mean that you’re going to have a recession right then and there. I think you could go back in time and see different periods where the bond yield curve was flat and the market continued to run for a year to three years when it was in that condition.

It’s one point that you need to look at an array of many points to try to understand where you’re at in a credit cycle.

Now, think of it from a business perspective. If you’re a small business, and now the rate that you have to lend or borrow money in businesses are highly reliant on short term borrowing. So they need to go out. They need to borrow money in order to pay for a bill and then they pay that off 30 days later, or 60 days later, or whatever.

This short term lending market is very, very important to small businesses. If you’re a small business owner and all of a sudden that short term borrowing interest rate becomes higher than the interest rate on long dated debt, that starts to cause a lot of problems because for you as a business, when you look at your income statement, you got your top line. Then you got all of your expenses and then you get your bottom line. Those expenses and your interest expenses are going to start going up way higher than where they were before as all these interest rates start going higher.

This is typically an indicator that the market is pricing out years, the growth expectations far worse than what you are currently experiencing. That’s what that inversion is actually kind of showing you. It’s just something that when you go back in history. You look at what kind of precedes and then follows these inversions in the bond yield curve. They typically are kind of a canary in the coal mine that there’s going to be troubles on the horizon.

We’re seeing that today in 2018. We’re seeing the start of a flattening of the bond yield curve. I would not call it inverted at this point, because the short term yields are definitely still lower than the long term yields. Though they’re coming up aggressively and it’s starting to flatten out.

There was a brief period of time where we’re in the middle of the bond yield curve, there was an inversion, but it wasn’t a complete inversion like we’ve seen in the past. So that’s just a data point. That’s something for people to think about.

Stig Brodersen  39:32

Another thing to add to this is also at this point in time where it typically happens. You see that the debt that needs to be serviced rose faster than the income in the economy.

What you basically do whenever you have a flat or inverted yield curve is that you incentivize people to move to cash, or if not cash, then just tie your cash into instruments for a very short period of time which is as good as cash. Something happens and what really happens is that you are taking money out of the system. You are indirectly seeing a tightening of credit so you are more prone to see a bubble pop at that point in time.

I just want to add that as a piece of context to understand what’s going on in the financial markets, because you would need to sell your financial assets to service that debt.

Preston Pysh  40:23

Everything leading up to this flattening to inversion in the bond yield curve is expansion. You have credit expansion, you have people’s income levels going up as a function of all this and so more people have money. They’re able to spend and it gets into this whole Ray Dalio description of how credit cycles work.

When you’re at this point, what Stig was just describing is really that transition point where you start getting into the self reinforcing in the opposite direction where tightening is occurring and there’s less money. There are lower incomes, but yet those debt service levels and those interest levels are now exceeding the income levels which further compounds the cycle and causes it to strengthen as it continues to go down.

I look at it as a great way to kind of understand where you’re at in the credit cycle and kind of understanding when you’re kind of hitting a top. I would say that you’re starting to see that now.

Alright, Santosh, thank you so much for leaving your question there. As a token of our appreciation for leaving your question, we’re going to give you access to one of our free courses on the TIP Academy page on our website.

The course that we’re going to give you is our intrinsic value course. Our intrinsic value course teaches people how to determine the value of an individual stock. It also teaches you how to think about the market cycle and when you’re buying your stock. It also teaches you some stuff about options trading.

We’re really excited to give you this course. If anybody else out there wants to check out the course you can go to TIPintrinsicvalue.com or you can just go to our website and click on the Academy link at the top of the page. The course is right there.

If anyone else wants to leave a question on the show, go to asktheinvestors.com and if your question gets played on the show, you’ll get a free course.

Stig Brodersen  42:03

Alright guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week.

Outro 42:12

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