Sahil Bloom (03:48):
And what he realized when he went through that exercise was that actually all of the materials together were much cheaper than going out and buying a rocket. And so, he decided to build it himself. And as a result, they’ve been able to produce rockets at a fraction of the cost, test, iterate, learn, and now build a company that has a chance at taking on that fundamental issue of sending a rocket to Mars. And so, this is a mental model to be clear that is not for everyday use, and every single problem you come around. It is a very time consuming mental model because it requires you really drilling down and asking a million questions about things. I mean, to leverage this in your own life in investments you’re going to make, or in business situations, you really need to just go down a rabbit hole of questions.

Sahil Bloom (04:34):
Why do I believe this to be true? How do I know if it’s true? How can I support that belief? What alternative viewpoints might exist? Basically, you just need to turn yourself into a… I think of it as the curious child’s mental model where you’re just asking why? Why, why, why, constantly until you drill down to, okay, what is the foundation of this and build up from there. So it’s really not one for me problem. If you’re not looking for an imaginative novel solution, it’s probably one that will just take you too much time. Sometimes you need the quick, unimaginative solution in certain situations, and that’s fine. And there are mental models for that. But it’s really critical if you’re looking for an imaginative solution. If you’re looking to drive truly nonlinear asymmetric outcomes, this is one that I think is just foundational for people.

Trey Lockerbie (05:27):
Yeah, I think it gets to this idea of being an independent thinker. And one example that comes to mind from what you just said, it’s reminded me of Warren Buffett’s take on gold and how he said, if you are a Martian coming to earth for the first time seeing these people dig up this rock and then transporting it across the ocean, and then burying it again, deep in the ground, and all the while ascribing some value to it that’s totally arbitrary. You’d just be sitting there scratching your head.

Sahil Bloom (05:54):
Yeah, I think it’s a great and an interesting example that you use there because I’m a huge Warren Buffett fan, but I would counter that by saying I could look at money and say the same thing. If I came down from Martian planet and said, “Wait, you have this piece of paper that you’ve decided has value, but there’s an institution that can just create as much of it as they want, whenever they want, without asking any questions. And you’re fine with that? And it doesn’t change the value of it in your mind.” So I’m not looking to go create the bull case for gold or Bitcoin or whatever store of value is the one of your choosing. But I do think you can take that lens and question almost anything about our monetary and investing system, and go down a rabbit hole on it. And sometimes it’s a productive exercise.

Sahil Bloom (06:38):
It’s interesting to have those discussions, and go through those thought experiments with people because what you end up finding, I’ve found, at least when you start to ground things in first principles, you realize that a lot of the assumptions you’ve made about certain things you believe are just fundamentally not true. Are just really not grounded in something that you’ve really thought about. It’s grounded in, I was told by somebody at some point in my life that it’s true, so I believe it’s true. And really, you haven’t done the work. You haven’t learned the foundational principle that leads you to that conclusion. And so, for an investor, it’s a good gut check. It’s a good way to really test how deeply do I understand this or really know it? And do I really have an edge as I think about this problem?

Trey Lockerbie (07:20):
Okay. So, the next mental model I want to break down is second-order effects, and you’ve written about how billionaire Howard Marks has pointed out that first level thinking is “simplistic and superficial and everyone can do it.” But not many people think through second or even tertiary order effects. Can you walk us through an example of how to use second-order thinking when it comes to investments?

Sahil Bloom (07:43):
Yeah, and I’m a huge Howard Marks fan. I think this originally came up in a maybe 2015 memo that he wrote, and if you don’t read Howard Marks quarterly memos, you should drop everything and just go spend the entire weekend reading these things because they are just absolutely incredible. He’s an unbelievable writer. So, I think of second-order thinking as like the and then what game. Basically, life is so complex. There are infinite variables out there. It’s so easy to just look at the first order effects of any action, and then just take it at face value. That is the tendency of most people. You just think action reaction, and it’s like playing chess, and only thinking about what the next move your counterparty is going to make. That’s a very challenging way to win at chess.

Sahil Bloom (08:32):
As you all know, if anyone watched the Queen’s gambit this year, the best chess players in the world are thinking five, 10 plus moves ahead. Second-order thinking requires that. You need to think on a different plane. You need to think on a higher level in order to generate truly kind of edge level insights that allow you to achieve those asymmetric outcomes that all investors are looking for. If you’re looking for market level returns, which I would caveat this by saying that for most people achieving what the market achieves should be your goal, and is a great long term outcome and a great way to compound wealth long term. But for investors that are trying to achieve at a higher level, institutional investors whose job it is to outperform the market or benchmarks, you need to be able to think in terms of second-order effects.

Sahil Bloom (09:16):
I think a great example to talk about this is COVID, and the initial outbreak of COVID in March. The seeds of it really started to come up in January. We started seeing things happening in China. Supply chains were being disrupted with the closures of factories over there. It was starting to be reported on, and so if you think about this in first and second-order effects and how the two different planes of thinking might have worked, first-order effects, you would learn about that information that’s coming in as an investor and say, “This is likely to come to the US. The R0 data on the transmission of the disease looks quite bad. It seems like likely that is going to arrive in the US and disrupt our business ecosystem.” Maybe not the full lockdown, but disrupt. And so I should sell. I should sell some of the assets I have, hedge my exposure in some way, buy puts, whatever it might be. That’s kind of first-order effects. And I think if you had done that, you would have avoided exposure to what was a massive downturn a month and a half later.

Sahil Bloom (10:19):
Second-order thinking takes it a step further. It says, “Okay, this is likely to have an outbreak in the US, what is going to come from that? What companies might actually benefit from that? Are there work-from-home companies? Are there home fitness companies? Are there technology companies, e-commerce, sales? Are there areas of the economy that now are going to be favored because of the impact of the virus? So, the virus, and the impact is kind of the first-order effect. But there were a whole slew of second, and third-order effects that came after that, and it’s hard. It’s hard to do because it requires you making assumptions, trying to play out an unbelievably complex dynamic and complex world. But if you had done that, your outcomes would have been enormous.

Sahil Bloom (11:04):
If you had been able to get out in front of some of those changes, and play out in your mind a bunch of scenarios, and expose yourself to those scenarios as an investor, there are massive asymmetric opportunities that existed. I mean, you look at the multiples of money that you might have been able to achieve by investing in Zoom during the downturn in March because you had gotten out in front of it or Peloton, any of these. I’m not going to go to Tesla because I still don’t understand that one. But on a lot of these, second-order thinking would have really allowed you to capture some of those opportunities. So, that’s kind of the genesis of this one.

Trey Lockerbie (11:36):
Yeah. And another example that’s kind of recent is Netflix who just came out and said, “Look, we’ve hit scale. We’re going to be producing free cash flows now, and we’re going to be self funding from here on out. And as an investor, it’s interesting because we’re prone to this recency bias. And we’re thinking, “Okay, here’s a company that just loses free cash flow year over year without really addressing at what point that really turns itself around.”

Sahil Bloom (12:01):
Yeah, and Netflix is a great example. And that’s obviously pretty recent, they just had that earnings report and the letter that went out incredible results, and things like the home builders is a fascinating… I would call that like a third, maybe fourth order effect, technically, probably, because part of that has been driven by this whole Fed reaction, which we can talk about later, and the free money that’s being pumped out into the economy, but people fleeing the cities. I mean, that was a massive second-order effect, and it’s driven all of these other investment opportunities across the GDP that you wouldn’t have thought of if you were just in a first order mindset around everything. So it’s really interesting to play out. But again, as with first principles, it’s very time consuming, and it requires a lot of thought. So it’s not for everyone. It’s not for every situation. But it does drive asymmetric outcomes when you do a good job with it.

Trey Lockerbie (12:53):
All right. A lot of our listeners are going to be familiar with this next one, which is the circle of competence. This is an idea that Warren Buffett has made famous by coining the phrase. But that said, Warren’s own circle of competence has been expanding. Now that he’s invested in Apple, and Amazon, and even airlines in the last couple of years when he was disparaging them for decades. What exactly is the circle of competence rule, and when can it be broken?

Sahil Bloom (13:21):
This is a great one. And it’s so foundational, you mentioned the audience is likely familiar with it. It’s obviously been talked about in so many of the Berkshire letters over the years. Howard Marks talks about it frequently. He’s obviously a student of the Buffett value investing ecosystem. The key to me with circle of competence is that it is dynamic not static. People think of a circle of competence, and you think, okay, here’s my circle. And now my whole life, that’s my circle. I don’t think of it that way. I really would impress upon people that your circle should grow, it should shrink, it should morph into different areas as you learn, and as you grow. The whole point is you need to be a continuous learner, and go down the rabbit hole on things that you’re excited about. You should strive to expand your circle of competence over time. It shouldn’t just be, “Oh, what I know at age 22, or what I know at age 30, is what I’m going to know my whole life.”

Sahil Bloom (14:19):
I would argue that for Buffett or for Howard Marks in his most recent memo that he just released, he talks about it with growth stocks and how he’s been a value investor his whole life and that dichotomy between value and growth has always been almost like a religion. You had to pick a side and that was the place where you existed for your entire career. And the reality is, life is dynamic. The world is dynamic, situations change. You need to be constantly learning and trying to grow your circle of competence over time. I think that’s point number one is the circle of competence should be dynamic, you should be striving to build it.

Sahil Bloom (14:55):
The other point is you need to be absolutely ruthless in identifying the boundaries of it throughout. So you can be striving to grow your circle of competence. But if you haven’t spent the time and really put in the energy and effort for it to have effectively grown, you need to be cognizant of that fact and not start reaching because you think you know everything that’s outside of it. Warren Buffett, there’s no way he would have bought into Apple or some of these tech stocks without having really done the work to feel like he understood it and could understand the future of those businesses. He’s ruthless about those things. Charlie Munger, similarly, ruthless about identifying their boundaries. It’s like the whole idea of you can derive a ton of success by just avoiding stupidity, rather than trying to be smart. And I take that to heart.

Sahil Bloom (15:44):
I mean, and I think about it beyond investing, I think it applies to business, I think it applies to life, and relationships. It’s such a powerful concept when you internalize it. And it all goes to this whole idea of just know what you know and know what you don’t know. And on things you know, tackle those. I mean, go after those double down, etc. On the things you don’t know, either avoid them like the plague or outsource them. And there’s nothing wrong with outsourcing them.

Sahil Bloom (16:12):
I think Buffett, these other folks, Howard Marks talks about his son does the growth investing in their family for their family money because his son really understands it. It’s part of his circle of competence, Howard Marks might not. So, you outsource to people that do understand those things, and that are going to know it better than you. The same way I know a lot about investing, but I don’t know about building a roof. So I’m not going to get up on my roof and try to patch my roof or fix it. I would hire someone that is an expert at that that’s within their circle of competence to go do it. The same exact thing applies to investing.

Trey Lockerbie (16:46):
Okay, the next model is perhaps lesser known, which is Occam’s razor. So let’s walk through the concept and provide some real world examples around that.

Sahil Bloom (16:56):
Occam’s razor, this is almost the other side of the coin from first principles, from second-order thinking in the sense that those are all about complexity, Occam’s razor is all about simplicity. Occam’s razor is simple is beautiful. The simplest explanation is often the best one. That’s kind of the easiest way I can say it. But basically, if you’re trying to answer something, and you’re weighing a handful of different hypotheses about it, find the one that requires the fewest necessary assumptions to be proven or disproven. And that is usually what you should go after. Basically, the simplest path to proving or disproving a thesis. And it really just enables you to the razor cut through the noise on an issue and just boil it down to the critical path towards an outcome.

Sahil Bloom (17:49):
The best investors are able to boil down investment decisions to the fewest possible variables. I think of famous investors, when you listen to them talk, they have this unbelievable ability to aggregate all of this information about a company and just say the one or two things that actually matter. And you sit there and it’s like this unbelievably enlightening moment, this is what they’re doing. They’re able to boil something complicated down to the simplest possible variable for them to look at. Gavin Baker is someone I’m a huge fan of, a tradies management in Boston. And he talks about this a lot in a number of interviews that I’ve heard with him, he talked about it as it related to electric vehicles, as an example. All that matters is the battery efficiency.

Sahil Bloom (18:33):
And so, you just focus on that. You don’t need to get caught up in all of the other metrics because battery efficiency is what matters for driving these businesses forward and for their success as a business model. And so you focus on that. That’s really what this is all about. Don’t add unnecessary assumptions, variables, and noise, when really only one thing matters. So identify that one thing, and then ruthlessly focus on it as a means to just bring simplicity into an extremely complex world, extremely complex companies, etc.

Trey Lockerbie (19:05):
This reminds me of a quote that says any idiot can build a bridge, but it takes an engineer to build a bridge that barely stands. And I talk about this in my own company a lot at Better Booch where people are sometimes prone to over engineering a problem or a solution and sometimes the simplest answer is the best answer.

Sahil Bloom (19:24):
Yeah, I totally agree. And I think it’s a nice pairing alongside first principles and second-order thinking because it reminds you that you shouldn’t overdo it with those things when they’re not necessary. You find that there are thinkers, investors, business people in the world that do overcomplicate things unnecessarily. And so, Occam’s razor is a good reminder, I think, for really focusing on what’s important, and drilling down in that way to get you to an answer that really matters.

Trey Lockerbie (19:54):
All right. Let’s talk about compounding, which is our next mental model. Our listeners are almost certainly familiar with this Einstein quote that compounding is the eighth wonder of the world. But no matter how familiar you are, the human brain is really programmed to think in a much more linear fashion, and not so much exponentially. So what tools or examples do we have to override this natural tendency that will help unlock the power of compounding for us as investors?

Sahil Bloom (20:22):
Yeah, this is a tough question. And by the way, as it relates to that quote, I always find this funny. I tweeted out a thread about compounding, and I opened it with that quote because it’s probably the most famous quote on compounding. And as soon as I did it, I got a sea of responses basically disputing whether Einstein ever said that. So for the record, I’m not sure whether he ever said it. I like to continue to attribute it to him because I think it’s a great quote, and I’m going to continue to maintain that he did. But he may not have.

Sahil Bloom (20:51):
But on compounding, I mean, humans are notoriously bad at thinking in terms of exponential growth, power laws. I would argue it’s the reason that we’ve consistently underestimated the case growth of the Coronavirus this year. Why a lot of investors were totally caught flat footed around the impact and on the potential for the government to try to lockdown the country. Our minds just have trouble comprehending it.

Sahil Bloom (21:14):
Jeff Booth, an author and thinker who I really have enjoyed wrote a book called The Price of Tomorrow, where he talks about deflationary impacts of technology. And in that book, he had an amazing example. I thought it was really incredible of taking a piece of paper and folding it over on itself 50 times. You go and ask people, how thick is that piece of paper after you folded it 50 times? Most people say two inches, three inches, maybe you get someone say a foot thick? And the answer to the question is that the piece of paper would extend from the Earth to the Sun, by the 50th fold over itself. And it is just unbelievable to see in real time in a little simple experiment like that how dramatically we underestimate the impact of power laws and compounding in that way.

Sahil Bloom (22:04):
And so for me, I think the lesson and the takeaway is, you really need to be aware of that natural human bias that prevents you from understanding exponential growth and compounding. You need to run the math on things. I constantly advise people to just look at, if you just compound your portfolio at 8% per year, and you’re reinvesting dividends in the long term, look at the math on what it becomes from where it is today until you’re retiring. Just look at it. And I think a lot of the robo advisors that are coming out now that are encouraging young people to invest in a passive way are doing a good job of that because they’re showing you visually how powerful that compounding is. And also how impactful it is, if you disrupt the compounding. I mean that the whole idea of I think it was Charlie Munger that said, “The first rule of compounding is to never disrupt it, never interrupt it.” And it’s such a good quote.

Sahil Bloom (22:54):
And when you’re able to show that visually how impactful it is, if you take a dividend, or you remove some money from it, it’s really unbelievable and eye opening. And so, I think for me, is continuing to just hone in on the numbers and the math and make yourself aware of how impactful compounding is not just with your investments, but also with knowledge, with learning, with growth, how much you know today versus what you knew a year ago just off of what you’ve been reading, and how you’ve been building up information. Because investments in yourself, investments in your knowledge compound just as much as any financial investment, if not more. It’s really the best investment you can ever make is in your knowledge and in your learning, in my opinion.

Sahil Bloom (23:34):
The other one is simple. It’s the rule of 72, the time to double an investment. In simple terms, divide 72 by the rate of annual return, and you get the number of years to double the investment. I always find that to just be a quick and easy, quick and dirty way to figure out in your mind like, okay, wow, this is pretty powerful if I can just do that. So, for alternative investment managers targeting a 20% IRR, or for someone just trying to meet the market at an 8% you can just do the quick math on these things and get a sense for what that compounding really looks like.

Trey Lockerbie (24:08):
So this last one I wanted to add in here, it’s a little bit different, but you just posted this great thread on it. And it was a reminder of the myriad of biases that plague us as human beings. And this one in particular can be especially dangerous, but what I’m talking about is the Dunning Kruger effect. So tell us about what that is, how we can be mindful of it, and how it can prey on unsuspecting investors.

Sahil Bloom (24:32):
This is one of my favorite threads I’ve ever written. It really did, it took off. I saw Mark Cuban retweeted it. Colin Cowherd retweeted it this morning, which I got a real thrill out of, but this whole idea of everyone is a genius in a bull market. I’ve seen a bunch of people on CNBC saying it and it’s really true. The Dunning Kruger effect is the idea that people with low ability systematically overestimate their ability at a given task. So the first rule of the Dunning Kruger club is that you don’t know you’re a member of the Dunning Kruger club. And right now we’re in an environment where this is so important to understand. And it ties into the circle of competence, but it’s really just understanding the boundaries of your competency. Don’t let external reinforcement or external signals change your view on what your core competency is.

Sahil Bloom (25:23):
Right now we’re in an environment where a lot of investors, day traders, retail investors feel like investing gurus, feel like geniuses. If you were long SPAX the entire year and that was all you invested in. Or if you’re long, a bunch of speculative growth stocks, you might have been up 100% last year. And so, don’t conflate what you learned about your portfolio growth with the fact that you’re an investment guru is the idea unless you’ve really spent the time, the hundreds of hours creating the edge, doing the fundamental research, learning about the companies, diving in. If you’ve done that, and you’re driving outsized returns, and you feel like it was within your circle of competence, that’s a different story, and I would argue then that that’s within what you know. And so, you’ve done well operating within what you know. Otherwise, you just got lucky. And there’s nothing wrong with that. There’s nothing wrong with getting lucky. And there’s nothing wrong with acknowledging that you got lucky.

Sahil Bloom (26:20):
I have plenty of investments this year, that I just think I got lucky on. And I knew when I made the investment, that it was kind of just a flyer. There’s room for that in your portfolio from time to time. But you need to be able to acknowledge what you know, and acknowledge more importantly what you do not know. And we’re in an environment now where external affirmation from the market and this Fed induce euphoria that we have right now is really driving a lot of people to mint themselves as new investment gurus and market geniuses. And it’s really concerning in what happens on the back end of it if we do have a downturn or if there is an environment where stocks don’t only go up.

Trey Lockerbie (27:01):
Let’s talk about that Fed induced euphoria you mentioned because one of your breakout threads that really got you on the map and got a lot of attention was this allegory you posted or tweeted about, with the story you invented about Mr. Federico. So talk to us about who Mr. Federico is, and how he highlights the Fed’s involvement in today’s markets.

Sahil Bloom (27:24):
So this was my first thread, the first thing I really posted on Twitter, it was back in May, middle of May. The market was surging. The economy was not good. The economy was kind of in the tank at the time. And I kept having friends and family reaching out to me asking what’s going on? How can this be happening? Why is the market soaring while the economy seems so bad? I mean, we were locked down, people aren’t able to go out, what’s going on? And I kept trying to figure out, what is a way to explain to people why this is happening, and the role of the Fed in that. And I was out on a walk and I came back to my house, and I was trying to figure it out.

Sahil Bloom (27:59):
I just had this idea that I became obsessed with of an allegory, a parable to try to explain it. And so I sat down on the floor in my garage, and I wrote this story, and ended up posting it for 500 followers at the time, and it got picked up by a few people. And it sort of spiraled and blew up, and that launched the beginning of my Twitter career as it were. But the whole story, I used this fictional character, Mr. Federico, a really bad play on words of the Fed. But he goes to a market and Renaissance Italy. And the whole reason I use the market is because I think of it as the simplest way of thinking about how a market works is you go into a olden day market and there are buyers and sellers. And the whole price of goods is determined by the interaction between those buyers and sellers. That’s how a market should work.

Sahil Bloom (28:50):
What I wanted to illustrate with the story is Mr. Federico, the Fed, comes into the market and basically announces that he will buy anything in the entire market at any price. And then he walks out. And what impact does that have on the buyers and sellers? And what happens is, people know that there’s a buyer of last resort at any price. The person has just said it they will buy at any price. And so, they start buying furiously because they know that no matter what, they have someone they can offload it to at a good price. And what happens is prices skyrocket. Effectively, there are only buyers because they know they can offload it at a good price.

Sahil Bloom (29:31):
And that was what I was trying to illustrate was Mr. Federico actually didn’t have to buy anything. He just had to say and state the intention that he is a buyer of last resort at any price in order to create that impact. And my impression at the time was that that was what was happening. Was that you had an environment where the Fed and the United States had come out and effectively said, with the bond market, they’d already done it, that they were going to buy bonds, credit ETFs. And there was an implied assumption that they would do the same for equity ETFs to the extent there were another downturn. And so, as a result, there’s no need for there to be a downturn because you know that as soon as there is you have a buyer, and you don’t need to worry about it.

Sahil Bloom (30:14):
And what we’ve seen since May, obviously, is nothing short of an astounding rally that has continued throughout the year. I would argue that there are some metrics around the economic recovery that are more optimistic than they were then. But the point still holds that you have an environment where you have a very powerful figure that creates the money in the system, and can create as much as they want in order to buy as much as they want. And that fundamentally disrupts what a market is at its foundational core.

Trey Lockerbie (30:45):
Well, this kind of ties into the Cantillon effect, which is another term that’s been trending really up on Google searches over the last year. Explain to our audience what the Cantillon effect is, and maybe provide a real world example of it.

Sahil Bloom (30:59):
Yeah, the Cantillon effect is another one of my more popular threads that I’ve written. It resonates with a lot of people, and it’s a really bipartisan idea, frankly, in that people hate inequality in general. It’s such a topic that drives sentiment around it. And so when you talk about people moving it up on Google Trends or tweeting about it, I think it makes a lot of sense because we all have an adverse reaction to inequality. So the Cantillon effect is the idea that the flow path of money matters. The first person to have the money benefits more than the people who receive it later, really, because they can spend more before the prices rise. That’s the fundamental concept.

Sahil Bloom (31:38):
In our current economy it’s all around where is this new money entering the system? People talk about the money printer? Well, where is the new money entering the system? It’s through quantitative easing. It’s through the actions in the market, the actions stabilizing the markets. And who does that benefit? Well, it benefits people first, who own those assets. And so you get this wealth effect where who owns these assets, it’s wealthy people. Mostly, it’s people that are exposed to markets, exposed to bond markets, have a lot of assets to benefit from the price inflation that’s going on in those markets. And so, what you have is an impact where the people that were already well off are now even more well off. You have a surging market.

Sahil Bloom (32:23):
I mean, the S&P was up a lot last year in a year when the economy was way down. But the people who weren’t exposed to the market who are already on the lower rungs of society are stuck there. And so, the whole idea and why it’s resonated with people so much is I think it’s provided fodder for the argument around more stimulus to the people, less stimulus to the markets. That’s been like a common refrain that you’ve heard. We need more direct checks to people to support the families, the small business owners, the people who are really struggling, and less pumping up the market so that millionaires, billionaires have their wealth expanding by such dramatic levels.

Sahil Bloom (33:01):
There were all these stats around billionaire wealth, and how much it grew last year, while millions and millions of people are unemployed and suffering not just in the US, but around the world. And that concept just creates an acid like reaction for most people, me included. It’s just a crazy, crazy thing. And it all comes back to this idea of the Cantillon effect. The idea that the Fed whether you think it’s accidental or intentional does propagate inequality with some of these actions. They constantly have been out there talking about in the early days of the recovery how their actions were not creating inequality. And I would just say that it’s simply untrue.

Sahil Bloom (33:38):
I don’t think that it was nefarious. I don’t think that they are going out trying to create inequality. But the simple mechanics of how it works are very logical. When you’re putting money into the markets, and it’s driving up the price of assets, who owns those assets? Rich people. And so rich people are benefiting, while people that were not as well off are not getting that same benefit. And so you have a sharpening of the divide of the gap. And it leads to and historically has led to if you go back and trace through history, a very common cycle of populist rise of nationalism, of different anti-establishment sentiment. And so, it’s really scary to just think and play out in your head the impacts that all of these things have outside of the economic sphere. It has socio-political impacts that are very real, and that we really need to be cognizant of as we look forward to the next 10 years in America and in the world.

Trey Lockerbie (34:32):
So, a hot topic as of late is whether or not all of this stimulus will eventually lead to inflation, or even deflation, or maybe even stagflation. So maybe highlight each one of those for our audience, and which one you think is most likely

Sahil Bloom (34:49):
Yeah. I think it’s a really interesting question. And I’ve somewhat changed tune on it over time. I mean, my initial reaction, again, this is like a first-order effects, second-order effects thing. My initial reaction was in the early part of the crisis, oh my, God, there’s all this money entering the system, money printing. Inflation is going to be rampant. It’s going to go nuts. And when you think about it a few levels deeper, and I’ve talked to really smart folks like Brent Johnson, or Luke Gromen, or Lyn Alden, and you listen to these things they’re talking about, there’s a lot of layers to it.

Sahil Bloom (35:19):
And so, I’ve kind of changed tune on it in the sense that I think our present dynamic remains deflationary where the Fed is really trying to plug a hole in the ship. I mean, you have this shock to the economy, and they’re putting money out there to try to keep the ship afloat. The risk, and what I think the future holds is an environment of inflation, or stagflation, where they don’t know when to turn off the faucet. And especially now that we have an all blue environment from a political standpoint, and there’s going to be a ton of bias towards deficit spending in the future. I think that creates an environment where your bigger concern is going to be inflation, and even worse, stagflation.

Sahil Bloom (36:04):
Particularly, when you have the Fed coming out and saying that they’re going to allow inflation to “run hot” for a period of time before they take action. That was a dramatic policy step for them that really cannot be overstated, that really sets the tone for the next five, 10 years. They’ve already said they have no prospects of raising rates. So, we’re in an environment of effectively zero interest rates for the foreseeable future. And they’re willing to let inflation tick up before they actually take actions. And so, what I would be most concerned about, and what I’m looking at potentially happening is that environment of inflation or stagflation in the next few years, and you hope it’s not a 1970s situation where it becomes that bad. But that is, I think, the bigger concern now, as we look out into the future.

Trey Lockerbie (36:54):
It is and it’s curious when you see the M1 and M2 charts going parabolic with money supply, and the velocity chart going completely inverted further and further down. And that’s basically the money that’s exchanging hands for goods and services, which would ultimately drive inflation. And we just haven’t seen that turnaround yet. But it’s interesting that I saw some data that shows that a lot of consumers have more money than ever either stockpiled away through the stimulus in COVID. They’re just not out there spending money because there’s really nothing to do. So when the floodgates open back up, and people are back out in the world putting their money to work again, will that ultimately drive inflation?

Sahil Bloom (37:36):
Yeah, I think that’s possible. I mean, we might have a real roaring ’20s dynamic on the back end of this. I mean, I know personally, I am so ready to go out and travel and eat at restaurants and go to the movies. I mean, once the vaccine is out there, I am inclined to agree with my friend Gavin Baker on this that we are at the start of a roaring ’20s period as it relates to some of these categories and spending. And I think omnichannel, retail is a really interesting place to look and play. I think the hospitality sector, which has been totally beaten down is an interesting potential angle as well.

Sahil Bloom (38:11):
But I would also hope that the people that were in these services, jobs that have gotten hammered this year, and who are in need a ton of support, are able to go back to those jobs on the backend of this. It’s one of the things that I constantly think about that I remain really concerned about is just that you have this residual level of unemployment after all of this that will be hard to fight and hard to support that group of people that have been so heavily impacted here.

Trey Lockerbie (38:37):
So shifting gears a little bit, I want to talk about education, because I know you and I share this passion for distilling down finance for people who aren’t in the industry. But I think we both agree that financial literacy in general is really not where it needs to be, especially in the US. So talk to us a little bit about what our government needs to do to create a better future for financial literacy.

Sahil Bloom (39:00):
We need a national financial literacy mandate in schools, full stop. I don’t think there’s any way around it. I’m baffled that it still doesn’t exist. Every single student coming out of high school should have a basic level of financial literacy. I didn’t get it. I learned about isosceles triangles. I learned about the Ming Dynasty. I learned about mitochondria, but I didn’t learn about budgeting. I didn’t learn about taxes. I didn’t learn about ETFs. I didn’t learn about compounding and wealth creation. And those things are so foundational to your ability to take care of your family and friends, to create a life that you want, and to live in the way that you want.

Sahil Bloom (39:43):
And so, it baffles me that we do not have basic level of financial literacy taught in schools. And I think that is the number one priority. It’s something that I’m working on with a few organizations now. And hopefully, there’s going to be change around that because it’s so impactful. And again, to the inequality point, it’s extremely impactful for minorities, for less fortunate populations, because it impacts your whole life. Again, to the point on compounding, if you don’t learn these things early, if you’re not investing early, if you’re not building wealth, saving properly, staying out of debt, it leads to a compounding impact to the negative over the course of your life. And you really need to get out in front of that.

Sahil Bloom (40:24):
So I think it’s so important that we just teach kids at a young age and provide some funding to schools around it. We need to provide information, and it’s what I try to do, provide it in a way that is interesting and engaging for young people. You can’t provide the same textbook driven solutions around finance because it’s boring, and kids don’t want to learn that way. And that’s not how the information will stick with them. You need to make it sticky. Get it to them in a way that is engaging. Maybe it’s in the context of figure out what’s a business that you’re interested in? I don’t know. A kid might say, I don’t know. Well, what do you like doing? I like playing video games. Okay, let’s talk about Epic Games.

Sahil Bloom (41:03):
Epic Games is an unbelievably cool business that you can learn about. You can learn about the different investors that have invested in that business. You can learn about and read about Tim Sweeney, the CEO, and his ideas for the future of that business. So you can take things that kids are interested in, and then couch it into an educational topic, and really drive education and learning in an engaging way for kids. That creates business knowledge, it creates investing knowledge, it creates wealth creation knowledge, and really stokes it around a passion of theirs, which I just find the best way to get anything across. You need to learn in the context of something you are interested in and passionate about.

Sahil Bloom (41:40):
It is so hard… I’m not that old, I remember this from when I was a kid. It’s so hard to force yourself to read something that you don’t like. There are all these classic books that you’re forced to read in school. And if you don’t enjoy it, it’s really hard to absorb it and get interested in it. And then we’re creating this cookie cutter student in schools. And we really just need to disrupt the entire model and start providing education in a way that works for all kids.

Trey Lockerbie (42:05):
So I’ve had this idea for a while, and I’m really curious to hear what you think about it. Interestingly enough, billionaire Bill Ackman came out with a similar idea fairly recently, and it kind of goes like this. Basically, a child born, let’s say, in the US, received $10,000 in a trust under their name, and the 10 grand is put into something like the S&P 500 index, and they can’t access the money until they turn, let’s say, 21. If they pass away before that the money is just returned back to the government.

Trey Lockerbie (42:36):
So let’s say the S&P 500 over those 21 years yields about 8% a year. So now the citizen has $50,000, and should they choose to tap the money at 21, the government taxes it at normal income rate. So now the government makes a little ROI around 2% a year. Now the citizen has $35,000, which is enough to do something, but not enough to do nothing. They can start a business, pay down debt, down payment on a house in some areas. They could also choose to wait until they’re older to tap the funds and just let the money compound further. And what if I told you that all of this would cost the government $38 billion a year, which is only 5% of the annual military budget? Would this produce more financially literate citizens because they’d now have buy in, they’d have incentive to want to learn about this aspect of their life?

Sahil Bloom (43:29):
It’s interesting. I mean, it definitely sounds like an MMT like idea. So I would need to think about it more. I always love the idea of promoting entrepreneurship and promoting economic growth through means like these. Like deregulating entrepreneurship, I think is a fascinating way to drive ROI for governments. When you create an environment where it’s easier to start businesses, people have the funding to get something started and get something off the ground. Part of what has driven US capitalism is an environment of creative destruction. Our bankruptcy laws, frankly, allow people to start fresh and start new. And that has driven a lot of small business and capitalist growth in the United States.

Sahil Bloom (44:13):
Just as a small anecdote similar to what you’re saying, my two God children, on their first birthday, I gave them each $500 worth of Amazon and Apple stock in a little mini account. And my whole idea when they turned one, and as they get older, I’m going to start teaching them about it, and talking to them about it. I think they’ve done really well on it, by the way, because a few years since it happened, they’re probably doing quite well. But it’s an interesting way to think about creating buy-in, and whether it’s the government doing it in your example, or whether it’s family structures, grandparents relatives, if they have the means. It’s just an interesting way to create buy-in, and create a learning environment around a kid from a young age that does have really positive ROI and positive outcomes, as you say. I’m generally in favor of the government not intervening in things as much. And so, your idea maybe strikes me and my biases in one way, but I’m sure there are a lot of people who would be supportive.

Trey Lockerbie (45:09):
So, Sahil, what resource has provided the most impact for you? Where would you steer people if they’re just getting started in investing for themselves and looking into increase their financial literacy?

Sahil Bloom (45:21):
It’s a great question. For me, it’s really two things, one people and two books, essays, reading. I think, on the first one, people are so important to your growth. Exposing yourself to incredible, smart, interesting people is the number one way in my opinion to really grow and learn. Stand on the shoulders of giants, and you can see much further. I have constantly in my life tried to seek out mentors, peers, advisors, that I think are way smarter than me and know much more than me. And I’ve been blown away by people’s willingness to champion my cause to support me to help me learn and grow.

Sahil Bloom (46:03):
Twitter has been an incredible resource for that in terms of accessing smart people who are willing to answer your questions, who are willing to talk to you about things. I mean, Gavin Baker, Brent Johnson, Jeff Booth, Luke Gromen, these people that I just mentioned, Rao Paul, all of these people I didn’t know before March or April of this year. They become friends and people that I look to for advice, people that I look to for knowledge on financial topics. And by the way, they don’t all agree on these things. And so, it’s fascinating because you’re getting different perspectives, and you’re able to piece it together in your own mind and figure out your own information. But we have this incredible access to people now, via social networks, via the internet that never existed in history. And so you have to take advantage.

Sahil Bloom (46:45):
I mean, it almost feels wrong not to take advantage of that incredible access to people. I mean, I try to reply to every DM I get. As long as they’re not mean and trolling me, I try to reply to everything. And it’s a powerful resource, and people pay it forward. We all know we didn’t get here on our own, wherever here is. And so you try to pay it forward to people who are genuine and trying to make their own way. So that’s number one, people.

Sahil Bloom (47:10):
Number two is just become a continuous learner. I mentioned books, essays, articles, sub stacks, whatever it might be, just go down rabbit holes on things that you get excited about. I didn’t know anything about the video game industry, or about the streaming economy. And then I discovered Matthew Ball, and I found this unbelievable level of expertise in these essays that are just incredibly long, detailed, brilliant. And now I feel like I know probably 1/10th of 1% of what he knows. But I feel this incredible joy in learning around this information, and so much smarter about an industry that I think is going to be a huge part of our future.

Sahil Bloom (47:52):
I feel the same way about semiconductors now diving down that rabbit hole with which I was encouraged to do by Gavin Baker, who I’ve mentioned a few times. A fascinating industry that is a massive part of our future. So I would just encourage people to read. Just read prolifically. And if you don’t love reading yet, find a way to love it, find things that you really do enjoy reading about. I mean, if you told me to go read Pride and Prejudice, a book that I was probably forced to read as a sophomore in high school, I don’t think you could pay me a million dollars to go read that book again. No knock on it. I’m sure it’s a classic. But tell me to go read Dune, like an interesting sci-fi book about the future and future worlds or tell me to go read the Psychology of Money by Morgan Housel. It was incredible. He’s an incredible writer, or Howard Mark’s memos.

Sahil Bloom (48:37):
I would spend an entire weekend sitting around reading and have a coffee and sit down and just enjoy that. And so, to me, it’s all about just having and fostering this environment of continuous learning. We connected on it with the circle of competence and trying to grow your circle of competence. Learn with no immediate goal in mind. Learn as its own goal just because it feels good to know new things. And then talk about it, cement that knowledge as you talk to people and the people around you, and share that knowledge with others.

Trey Lockerbie (49:08):
Well, you mention having this incredible access. And that’s really the epiphany that I had about 10 years ago when I was a touring musician, traveling on a tour bus with a lot of downtime, thinking to myself, how can I make some extra money while I’m sitting here? And it occurred to me that these markets are available to us with these wonderful companies, and we can actually own a piece of them. And it’s just an opportunity that I don’t think enough people are taking advantage of. So I really commend you with your educational efforts here, and I want to give you the opportunity to hand off to our audience where they can learn more about you and follow along with what you’re doing.

Sahil Bloom (49:44):
Thank you. I appreciate that. I can be found at @SahilBloom on Twitter. I also have a newsletter where currently I just send out my threads for people that are not Twitter inclined, but eventually I will expand into different original content there as well that can be found on Substack, Sahil Bloom on Substack.

Trey Lockerbie (50:05):
So, Sahil, thank you so much for coming on the show. I really enjoyed our conversation. I learned a lot. I think our audience will as well. And I hope we get to do this again soon.

Sahil Bloom (50:14):
Yeah, it was great chatting with you, Trey. I really appreciate you having me on. I’ve been a listener for a long time, so this was really a thrill.

Trey Lockerbie (50:20):
All right, so for the next part of our show, we’re going to be taking a question from the audience. And this question comes from 16-year-old [Carsen Benvenuto 00:50:27].

Carsen Benvenuto (50:29):
I’ve been watching the show for a while, and I’m a 16-year-old investor. I’ve probably been in the stock market for almost a year now. And I was wondering, from the perspective of someone who has a lot more experience, do you think more of my investments should be more risk than long term just because if I lose it, I have more time to try to get that money back, and I don’t have kids or family to support. So that money if I lose it, it’s not as big of a deal. So, I was basically just wondering what you think of ratio of what investments should be the more risk versus are long term? Thank you.

Trey Lockerbie (51:07):
Carsen, I absolutely love this question. And I also love that you’re starting to invest so young. So generally speaking, I would say that, yes, you can likely afford to be a bit more aggressive with your investment approach this young because you’re right, you do have a lot of time to make up for those losses. But it got me thinking about this Warren Buffett quote that says, “It’s not about timing the market, it’s about time in the market.” And to explore this concept a little bit further, I wanted to highlight an example from Joel Greenblatt’s latest book, Common Sense.

Trey Lockerbie (51:39):
So here it goes. Let’s say we have investor A who contributes $2,000 to their retirement account starting at age 26. She then continues to make $2,000 contributions every single year until she’s 65 years old. So, that’s 40 annual contributions of $2,000. And then we have investor B, who starts contributing $2,000 each year at age 19, but then stops contributing at age 26, just when the other investor is getting started. So that’s only seven annual contributions of $2,000. And let’s say both accounts get a 10% annual return at age 65, who ends up with more money? Investor A or investor B. The surprise is that it’s investor B who ultimately ends up with $930,641 compared to investor A’s $893,704. So that’s nearly a $37,000 difference.

Trey Lockerbie (52:37):
So this all ties back to a concept we talked about earlier in this episode about the power of compounding. The real key is to start early and earlier the better. So Carsen, I commend you for starting out investing so young. I wish I’d done the same thing. And since you contributed such an amazing question, we’re going to gift you with access to our TIP finance tool and to our Intrinsic Value Course. And if you’re listening along, you also want to contribute a question, just go to asktheinvestors.com. To find our Intrinsic Value Course you can go to tipintrinsicvalue.com. And an easy way to find the finance tool is just to Google TIP Finance.

Trey Lockerbie (53:15):
So that’s all we have for you this week. If you’re loving the show, or you want to just stay up to date with the best investing insights every week. Go ahead and subscribe to the feed so that these episodes populate in your app without you having to think about it either on Sunday with the We Study Billionaires show or on Wednesdays with our new Bitcoin show. And feel free to find me on Twitter @Trey T-R-E-Y Lockerbie L-O-C-K-E-R-B-I-E or email me at trey@theinvestorspodcast.com to get in touch and hear your feedback. Until then, we’ll see you again next week.

Extro (53:48):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.