Alright, so let’s go ahead and kick this off chapter one. The name of this chapter is called “The mindsets” and what she’s really talking about, and you’re gonna hear us say this a few times on the show because it’s mentioned a few times in the book. She talks about the difference between a growth mindset and a fixed mindset. So really, if you’re going to describe a growth mindset, this is a person who doesn’t care if they fail at something, it doesn’t even faze them. That’s the growth mindset, the person is open to trying new things. They want to learn, they’re more interested in learning than they are of the potential to fail and to be perceived as a failure in the eyes of people that are around them. 

The fixed mindset relies more on natural talent, the person who says, “I’m just the greatest at whatever I’m really good at this.” That person is going to have a much harder time accepting defeat or accepting failure. So a lot of times they might not even try something new, because they’re kind of scared that the person that might be viewing them as they’re trying something new, would have an opinion that maybe they’re not so great at it. And so, they’re not inclined to try new things. So that fixed mindset is very prohibitive in the growth of this person and how they can eventually succeed and become a lot better at something. 

So those two mindsets are really what she’s talking about through the entire book. There’s not like there’s anything else, there’s not something that really is new. She talks about the growth versus fixed mindset. But then she provides a ton of different examples to basically illustrate how important this is to understand this key critical mindset that a person can have.

Stig Brodersen  4:27  

If you just continue with the second chapter, which is called “Inside the mindsets,” she’s talking about how success is perceived differently from a fixed and growth mindset. So if you have a fixed mindset, success is showing that you’re not making any mistakes. Whereas if you have a growth mindset, success is that you’ll learn something new. So as you can see, it’s a very different way of perceiving the world. I also think it’s a good point in terms of how do you work with adversity and that’s something that we covered multiple times on the podcast.

If you think that it’s important not to make any mistakes, it’s really, really hard to cope with adversity. Whereas if you think it’s important to learn something new, you’ll probably be more successful because no matter what you do in life, you will be making mistakes. And the way she talked about that, and one of the examples she gave in terms of the students was that, so to provide context to story, she is a professor at Stanford, and she’s teaching psychology. So she had a test. And after the test, she asked all the students if they wanted to know the right answers from the students that had all the answers correct, or if they wanted to be told the mistakes that other students made, that were making more mistakes than they were. 

She said, it was very, very clear that the students that had a fixed mindset, they just want to see all the people making more mistakes than them. Whereas people with a growth mindset, they wanted to learn so they wanted to learn what’s the right answer from the students that perform better than them. Exposing yourself, basically saying to everyone, “I’ve made a lot of mistakes. I want you to learn from you,” that’s a big hurdle to overcome. So I really liked this example that she brought up with students.

Preston Pysh  6:05  

I find it interesting that you brought up the word ego, because the whole time I was reading through the book, and she’s talking about growth versus a fixed mindset, I kept thinking that when you’re talking about a fixed mindset, it’s so closely tied to a person that has more of an ego, because they can’t put themselves in that precarious situation. They don’t ever want to be the person who is viewed as not being sufficiently smart enough, or physically strong enough, or whatever the case might be. And so they don’t ever put themselves out there in order to try new things. It has a whole bunch of other compounding impacts, especially when you start talking about ego from an adult, not from a child, but from an adult standpoint. 

You know, when you start talking about an egotistical boss, they have such an ability to prevent proper communication flow within an organization because the only thing that they hear from their subordinates or even from their peers is actually exactly what they want to hear because that’s all people feel like they can tell them, because they’ve got this fixed mindset, this is what it is. They’re not open to the possibility that there’s multiple ways that something could be perceived. And so for me, I guess, when I look at a fixed mindset, I almost always correlated that a strong ego is almost always tied to it. That’s not something that she really talked about a lot in the book, which I was kind of surprised by because, for me, that’s how I was reading it the whole time I was going through the book.

Stig Brodersen  7:31  

I’m really happy you brought this up because I have a story about ego and the story about having a fixed mindset, especially in terms of defining what successes. So this is a gentleman and he was kicked out of a band, the band that he really, really liked, and he was so frustrated. He said to himself that he would be a very, very successful musician. And he pressed himself that he would receive countless prizes and praises touring the world and breaking a lot of sales records. 

Now, the interesting thing is this just after he was kicked out of the band, he actually did sign a really good contract for the record company. And he went out to sell more than 25 million copies of his albums. Now, when he was looking back at his career in his late 40s, he said that he felt like he was a failure. And you might be thinking, “How can that person like that consider himself a failure?” 

The problem was that the gentleman’s name was David Mustaine, and he founded Megadeth, and the band he was kicked out of that was Metallica, and they sold 180 million albums. So he said, “How can I consider myself success when Metallica sold 180 million albums?” And to me, it was such a touching story, because I just found it so sad. I just heard that story and I heard at the same time, I was reading this book and I was thinking what a very sad example of a fixed mindset.

Preston Pysh  8:49  

So kind of piggybacking on what I was saying earlier, and that was a really interesting story that you had there, Stig, I’d never heard that. Talking about ego is more of the fixed mindset. When you talk about the growth mindset for me, that’s humility. That’s a person who’s just really humble and can take criticism is not so insecure with the way that they view themselves that if they fall down, they start walking, and it’s not a big deal. But some people get really concerned of how that was viewed by everyone around them. 

So there’s a quote here that I want to read that I absolutely love. And this comes from Warren Buffett, he says, “It is the person who thinks their IQ is something like 40 points higher than it actually is who creates the most havoc in life.” And boy, you could not say that more eloquently than what Mr. Buffett has laid out there. 

One of the things that him and Charlie Munger talk about a lot is they talk about temperament. They always say, “Oh, well, we were just born with the right temperament to do what we do.” And what I think that they’re really getting out when they talk about temperament is they’re actually talking about humility. They’re talking about if our IQ is 150 or 140, or whatever their IQ is, I don’t know what would be, but they don’t think it’s 150. They think it’s 130. They think that it’s lower than what it actually is. And they treat themselves with that humility in mind. That, “Yeah, I might have an IQ, but there’s a lot of things I can mess up.” 

That mindset, that line of thinking is a growth mindset for me. And the author doesn’t talk about that in the book, she just keeps referring to it as growth and fixed through every single chapter in the book, which I kind of found a little frustrating. But for me, it’s more ego and humility, in the way that you view yourself because when you’re of that mindset, when you’re a person with humility in mind, you’re open to somebody else in the room being smarter than you. You’re open to all these other ideas and that there’s challenges out there for you, not that you’re at the pinnacle of life and that there’s nowhere else you can go.

Stig Brodersen  10:58  

Basically I think it’s a question about do you use others’ successes to motivate you? r do you try to take that person down one way or the other? Are you really trying to come up with excuses why you haven’t performed as well as that person or really speaking badly about that other person’s skill? I think that’s probably really what it boils down to. 

In the continuation of this, if we go down to chapter three, this is titled “The truth about ability and accomplishment.” And she’s again talking about students and she’s saying that how do people react when you tell them, they’re talented, for instance? Some people when they were told they’re talented, they basically stopped doing anything, because again, they don’t want to make any mistakes. And to circle back to what we talked about before, they’re trying to take down all the talents, for instance, athletes. They’re trying to take them down one way or the other, instead of pulling themselves up. 

So what she’s talking about is that if you have the chance to influence, you might be a professor you can influence students, you might be as a parent, you can influence your child, make sure to give them a growth mindset. She actually says it’s dangerous to tell people how talented they are. Instead, you should be telling them how good it is that they’re making mistakes and that they learn new things.

Preston Pysh  12:14  

And that they’re working hard. After reading this book, I did see myself the way that I talked to my son and my daughter who are real little, it almost always was “You’re so smart. Oh, great job. You know, you’re so quick.” And after reading this book, I started with that too, “Oh, you really worked hard on that s great job.” So instead of making them feel like they’re naturally good at something, it then became an emphasis on their work habit, and how well they struggled through a problem and how they solve that became the new narrative that I tell them whenever they’re doing a good job. 

So the next couple chapters, we’re going to kind of skip through these because what they’re really doing is she’s taking this same idea, this fixed mindset versus growth mindset, and she’s applying it to different areas. So chapter four is about sports. She has a pretty cool story in here about Michael Jordan and how he didn’t make his high school basketball team. And he obviously turned out to be maybe one of the best basketball players ever, because he had a growth mindset. 

Then in chapter five, she goes through business examples of a growth mindset versus a fixed mindset where she talks about Enron and how they had  a fixed mindset. She talks a little bit about Jim Collins’ book. Then she goes to chapter six, and she talks about relationships with a growth in fixed mindset yet again, and how you can apply it to your love life. Then chapter seven, fixed mindset versus growth mindset for parents and teachers and coaches, which we just kind of briefly talked about. 

Then we’ll talk about the eighth chapter here, which is “Changing your mindset.” So now that you’re aware of this growth versus fixed mindset, how do you go about implementing this or changing this into your life so that you can start moving in a better and more positive direction? So before we do that, Stig, you have something you want to highlight from some of the stuff that I covered?

Stig Brodersen  14:02  

Yeah, I really liked chapter seven, which was about parenting because one of the things that I really liked was the example of the nine year old Elizabeth, who was on her way to her first gymnastics competition. Even though that she did a nice job, she didn’t get any ribbons in any of the disciplines, which clearly made her sad. And then she would be asking, what would you do as a parent? You can, again, use this whenever you’re influenced whether or not your parent or a teacher or leader one way or the other. I think the example she brings up here is really, really crucial. 

So she comes up with five different responses you can give her and the first thing you could tell her was that you could tell her that she was actually the best in the competition. Clearly, this would be wrong, because it’s insincere. And you both know it’s not true. I mean, kids are pretty smart. They typically know if they’re not the best person on the competition. You could also tell her that she was robbed of a ribbon, the judges were against them. That will be also be wrong, you shouldn’t teach your child to place blame on others, the blame is basically on her. So the third thing would be you could also tell her that gymnastics is not that important. And I really like that because I can see myself in this situation, for instance, where I’m talking about the students, I’ll be like, “Well, this course might be this part of the curriculum that you have a hard time solving, that’s probably not that important.” But that’s also wrong to tell a child or student that because if you teach Elizabeth to devalue something, just because she’s not good at it right away, that’s also a very damaging thing to teach her. 

So that was the first three options and there were no good. So the fourth option was, tell her that she has the ability and surely will win the next time. I hear this all the time from parents, they will be telling the kids, you are really good, you didn’t win this time, but you will win the next. That’s actually the most dangerous thing to tell the child because you insinuate that she’s a natural talent. And you’re basically handing over the fixed mindset to them, because she basically doesn’t have to work hard. She’s just a natural talent and she will surely win the next time. Actually, what you should tell her is that she doesn’t deserve to win and whenever I heard that the first time, I thought it was pretty, you know? I don’t know, it was offensive. I was like, “This poor nine year old girl, I mean, tell her that she’s…”

Preston Pysh  16:19  

You definitely don’t have kids, Stig.

Stig Brodersen  16:24  

It seemed pretty harsh to me. But actually, what you should say as a parent is, “I know, you’re disappointing to Elizabeth, but you have not earned it yet. Many other girls have been doing this for a long time and the work a lot harder than you.” And then you should tell her if she really wants to be good at gymnastics, she needs to work really, really hard. But if she also thinks that gymnastics is just for fun and she doesn’t need to win, that’s okay too. But she shouldn’t expect to win because she’s not good enough. To me, this sounds a bit harsh, but I can see you, Preston, you have kids. You had this talk many times before.

Preston Pysh  16:58  

Well, no, I think that what you’re bringing up is a really important point because you see this mistake made so much in America. It’s crazy. But I think that the key thing is, you obviously console your child, like, you know, “It’s gonna be okay. You’ll get through this. You did really good, you work really hard.” But then I think the key thing is, “Hey, if you want to win next year, we’ve got to work even harder. If you’re going to win, and I’m going to be there with you. I’m going to help you get there. I’ll help you every step of the way. But we just got to work harder next year.” 

And if that’s the message, that I think, hitting the intent here is that there’s growth to be made. To tell the kid that they don’t deserve it, you kind of do say that but just in a more indirect manner. 

Okay, so in the last chapter, she’s talking about this changing your mindset. So now you’re aware of this growth or fixed mindset, but then how do you go about changing and to be honest with you, I didn’t really particularly like the recommendation. The recommendation was, “You can do this. It’s not easy. You have to to work at it being aware of it is half the battle. And then you just have to, you know, work hard to change your mindset. So you’re more growth inclined.” 

I don’t necessarily think that that’s the best advice. And maybe I miss some of the point there in the last chapter, but I think it comes down more to how do you teach a person to have more humility? How do you take somebody who has an ego and show them that they have an ego? Or how do you if you’re looking at it from your own vantage point without having any outside actor help coach you in this? How do you recognize those traits and behaviors? 

I don’t know that you can necessarily do that, especially for a person who’s a lot older. Let’s say you’re 60 years old, somebody coming up to you and saying, “Hey, man, you have a big ego you’re not open to change and things like that.” I think that’s really hard to do. 

Now where I think her book is very valuable. If you’re listening to this, and you’re like, well, maybe I do have an ego maybe I don’t have any ego maybe I am very have a lot of humility. I would tell you read this book and listen to the examples where she’s telling you this person has a growth mindset, this person has a fixed mindset and see if you find some of your own behaviors in here. 

With that said, I think some people will cling to the things that they think that they’re naturally good at and ignore the things that you’re bad at. But I think the book can maybe help some people as they’re reading through this to identify, you know, that is I do have a fixed mindset. 

You know, in the Gates notes, when Bill Gates was writing his review of the book, which, by the way, we’ll put into the show notes of this episode, if you want to read Bill Gates’s comments about this book. He talks about a couple things that he had a fixed mindset on and thinks that he had a growth mindset. And he said that his biggest critique and his biggest issue with this book, from Bill Gates’s perspective, was that she made it almost as if it was binary, as if you have a growth mindset or you have a fixed mindset, and there’s no in between. 

What he says is most people are somewhere in between, like both of these two behaviors depending on what it is that you’re talking about. So I think that’s a fantastic highlight that he had. I think that’s something that maybe could be incorporated into future volumes of the book, there’s been 1.8 million copies of this book sold. So this is a highly read book, sign up on our email list. So you can get our executive summary where we outline every single chapter and we kind of hit the highlights of this book. 

Alright guys, hang tight, because we’re going to take one minute to tell you about today’s sponsor.

Stig Brodersen  20:22  

This podcast episode is brought to you by FreshBooks. It is 2017 and every small business owners *inaudible the anxiety of tax season. To help you out, I’m hosting a webinar this month, together with FreshBooks, I’ll show you the top accounting tips to get prepared for a less painful tax time this year, and we’ll teach you how to send an invoice in just under 30 seconds. Everyone who signs up during the webinar is eligible for two months free trial with FreshBooks. Afterwards, you will have a chance to hang out online with me and ask questions about accounting, billionaires, investing and whatever is on your mind. We hope you sign up for the webinar this month at theinvestorspodcast.com/freshbooks. 

Preston Pysh  21:08  

All right, now back to the show. So at this point in the show, we’re going to play some questions from the audience. If you want to record a question on our show, go to asktheinvestors.com and you can record your questions there. And if we get it played on the show, you get access to a free course that Stig and I have designed that are paid courses on our website. So the first question that we’re going to take is from Sudarson, and here it goes.

Sudarson  21:32  

Hey, Preston and Stig, I love your podcasts and video courses. Thank you for everything that you guys are doing. I’ve got a question which struck me when I was going through your value investing course. What would happen if every person on earth becomes a value investor? What would be the market conditions? Can you share your thoughts on that?

Preston Pysh  21:53  

I like this question because whenever I’m trying to solve a problem, I’ll often take on a mindset of what he just described where you kind of hit the left extreme and then hit the right extreme to kind of understand your boundaries of what you operate within. I don’t know what Stig is gonna say. But my personal opinion is, is that it would stop working if everybody’s doing value investing. It would stop working. 

You know, we had Wes Gay on the show. And Wes is super insane and smart. And he talked a little bit about what this question is really hinting at and he says the reason value investing works is because there’s growth investors out there, there’s momentum investors out there. If everyone was a momentum investor or a growth investor, then the value side would be lopsided. So the thing that I find really interesting here is you’re hitting at exactly what Wes hit out with his research when he wrote his book, “Quantitative Value,” where he highlights both of these two different approaches. And because so many people in the market are implementing those two types of approaches, they actually afford the other side of the opportunity to work.

Stig Brodersen  22:56  

I really like this question too, because it’s very extreme. And I kind of like, as you’re also saying, Preston, if you really understand the extreme example, very often, it’s also easier to understand the nuance, because you might be thinking, so if everyone was following a value investing approach, what would happen then? Is that even relevant because not everyone would basically do that? 

But I think it’s a very important question, because it also highlights why is it that we have a fluctuating stock market in the first place? That’s basically what it relates back to. And the reason why the stock market is priced differently is because investors have different perception of what a stock is worth. So if we assume that everyone was value investors, I think you can still make money in the market, because basically, it would still be a question of being the best at evaluating the prices. Even when Preston and I are talking about stocks, and we have very similar opinion on a lot of stocks. We still perceive it differently. So if I would be a value investor and Preston would be a value investor, we would still price the stock market differently. 

So even in the event that everybody were looking at fundamentals, I think you have a market that would work. And in some ways it worked better, in some way would work worse, even if you’re a really good value investor, you probably wouldn’t be as profitable, because you wouldn’t have the same difference to the intrinsic value. 

But I think it would be good for the financial markets, because as a value investor, you will hold on to your stocks, even if there’s a crash. So I think you’ll see a lot more stable markets, and you will see a natural tendency not to buy too much whenever the prices were too high. So you wouldn’t see the same, you know, bubbles in the market. 

So, again, you might say it’s not that realistic. But I think these more philosophical questions about the stock market, I think it’s really important to ask yourself, really to also test yourself whether or not you understand the market mechanisms. And I also want to say that the course that he refers to, that’s the course the Preston created, and you can find that for free on The Investor’s Podcast. So we will definitely make sure to link to that.

Preston Pysh  24:58  

Alright, Sudarson, we’re going to give you a free subscription to either one of our courses, the ETF course or the Intelligent Investor video course where Stig goes chapter by chapter through the book, “The Intelligent Investor,” and teaches you everything that’s in the book. But we’re going to play one more question here. And the next question comes from Matthew.

Matthew  25:16  

Hey guys, this is Matthew from St. Louis, Missouri. Thanks for putting out the podcast. It’s been a wonderful tool and helping frame my understanding of investing in the financial markets. Listening to Wes explaining how momentum investing is implemented, I could not help but think of Stanley Druckenmiller. And I wonder if you guys felt the same. It seems to me that his incredible record of never having a down here is due to his ability to be one of the first or quickest onto a particular momentum train. We’d love to hear your thoughts. That’s how you see it or if it’s something else entirely? Thanks again. 

Preston Pysh  25:48  

Matt, you hit the nail on the head. In fact, that’s exactly what I thought when Wes was describing momentum investing, I guess I just don’t know how Stanley does it. I don’t know how he gauges when he’s in the middle of something that’s got more to run. That’s what I don’t understand how he’s gauging that and what he’s using is as metrics other than price. I mean, that’s what Wes is using. But that doesn’t mean that that’s how Druckenmiller is doing it. 

But I’m with you. That’s how I saw it. I’m not a momentum investor. I don’t necessarily understand it enough. I don’t feel comfortable enough just using price in order to make selections. So for me, I think that Soros, I think Stanley Druckenmiller, I think you could maybe even make the argument that Jim Rogers who also work for Soros would be a momentum guy. But you know, I’ve read some other stuff on Jim Rogers, and I think he’s a hard guy to pin down what approach he’s using because some of the things that he talks about seem very value oriented. And then other times they seem kind of momentum oriented. It’s kind of weird to pin him down. 

For people who’s not familiar with Jim Rogers, I’d say his personal net worth is somewhere in the couple hundred million range. He worked with George Soros early on had massive returns in the early years with Soros. This is before Druckenmiller started working for Soros. Jim Rogers went off on his own. He literally wrote a motorcycle around the entire planet two different times. Very interesting story. There’s a book on Jim Rogers called “Investment Biker,” just some information on him. I’m going off on a tangent. I’m gonna throw it over here to, Stig.

Stig Brodersen  27:23  

So I really like what Wes is doing. I like what Druckenmiller is doing. So I think they have some similarities and also think they have some differences. So if we talk about especially what Wes is doing, and Preston already talked about it, so he would be buying into a bundle of stocks, and he would be betting on them to continue performing really good in terms of price. He really doesn’t look at the fundamentals. 

Now if you follow an approach like that, and definitely I agree Druckenmiller also uses momentum, but you will have a lot of down years. Overall you can empirically show that you will outperform the market significantly, at least historically, but you will have some down years. 

Druckenmiller’s approach is different, it must be, at least he doesn’t really have any down years. So that’s basically what you’re talking about Matthew. I think that what he really does really well is that he have a macroeconomic driven investment style. And he has a mix of securities, both with a long and this short exposure. Basically, if you look at his portfolio throughout the years, you can see he has a very good understanding of a number of asset classes, including gold and currencies and stocks. And when he sees a mispricing, he acts on it. 

Perhaps one of the most famous example of that is back in 1992, when he was shorting the pound together with George Soros. It was a single trade, and they were betting on the inherent instability of the fixed exchange rate between the British pound and the German currency. 

So basically, I think that’s an example of where he didn’t use momentum, at least not the momentum the way that Wes defined it. But I think it’s a combination because you also see that he’s very, very often first in the trend as you’re talking about, but it’s typically your specific bet. For instance, it might be on gold. It’s not necessarily buying, say 50 different stocks and then hope in aggregate that they will continue to appreciate in price. And another thing I also want to highlight that something that Druckenmiller has been really good is that he uses leverage to trade futures and currency whenever he’s doing that. Whereas someone like Wes, that’d be more about the *inaudible performance of those stocks.

Preston Pysh  29:28  

All right, Matthew, very observant with what you saw. I can tell you that Wes’ book is very profound, probably one of the most researched and well covered books and the entire market to cover momentum investing and not growth investing, but momentum investing. We talked about that difference in the episode when we were talking with Wes, but the name of his book is “Quantitative Momentum” for anybody that’s interested in reading more about what we’re talking about here. So Matthew, we’re going to give you your pick of the ETF course or Stig’s Intelligent Investor video course. We will shoot you an email and you let us know which one you want to have. 

So, for anybody else out there if you guys want to get your question played on the show, get free access to one of our paid courses on our website, go to asktheinvestors.com and you can record your questions there.

Stig Brodersen  30:15  

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

Outro  30:22  

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