[00:02:46] Intro: You are listening to the Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

[00:03:06] Clay Finck: All right, so like I said at the top, during this episode, I’m going to be covering my lessons and takeaways from reading the first few chapters of The Joys of Compounding. I think this episode will resonate with a lot of the listeners, not just those that are interested in value investing, but because many of the principles that apply to value investing also apply to our daily lives.

[00:03:26] Clay Finck: Right inside the cover of the book, it says, value investing is not just a system for success in the market. It is also an intellectual toolkit for achieving a deeper understanding of the world. Gautam builds a holistic approach to value investing and philosophy from his wide-ranging reading, combining practical approaches, self-cultivation and business wisdom.

[00:03:50] Clay Finck: What you’ll find throughout his books is that he pulls these quotes and these ideas from all these various investors and thinkers, and he weaves them together masterfully in a way that just makes it so easy to read. The first quote he lists in his book is one by Charlie Munger. The best thing a human being can do is to help another human being know more.

[00:04:12] Clay Finck: I’m still relatively young and early on in my own career but helping other people has been one of the most fulfilling things I’ve done, whether that be giving people feedback on how to think about investing in their own finances or what my thoughts are on a particular investment. Obviously, I can’t give investment advice, but I have people asking me for my opinion a lot of the time.

[00:04:34] Clay Finck: I found that helping other people is really, truly fulfilling and I just get so much fulfillment from that myself. Guy Spier wrote the foreword to this book, and if you enjoy the content covered in this episode, it’s pretty likely you’ll also enjoy my other episode covering Guy Spier’s book back on episode 519 on the We Study Billionaires podcast. Guy says that Gautam’s book is another step in the valley investing tribes unfolding knowledge about the world we inhabit. You’ll not only learn from the classic value investors like Graham Buffett and Munger, but also the more recent students like Mohnish Pabrai, Tom Russo, Mike Mauboussin, Peter Bevelin, and authors such as Shane Parrish and Nassim Taleb. Guy rounds it out by saying that this book offers a fresh opportunity to learn and relearn those key lessons that will make us better investors and better human beings.

[00:05:29] Clay Finck: Chapter one of the book is titled; The Best Investment You Can Make is in Yourself. Then here’s another Charlie Mugger quote. I constantly see people rise in life who are not the smartest, sometimes, not even the most diligent, but they are learning machines. They go to bed every night a little wiser than when they got up in the morning and boy does that help, particularly when you have a long road ahead of you.

[00:05:54] Clay Finck: Munger believes that lifelong learning is paramount to long-term success because we likely won’t go far in life solely based on what we already know. Berkshire Hathaway had to weather through those decades that looked much different than the previous decade. And Munger says that without Buffett being a continuous learning machine, Berkshire’s achievements would’ve been absolutely impossible.

[00:06:18] Clay Finck: Gautam points out that most people go through life not really getting any smarter. But wisdom can be acquired for those who truly want to obtain it. In fact, there’s a simple formula for doing so. It’s simple but not easy, and it involves a lot of hard work, patience, discipline, and focus. And that’s to read a lot. If it were me, I’d also throw in things like audiobooks and podcasts as well.

[00:06:44] Clay Finck: But maybe I’m a bit biased. Warren Buffett today is worth over 100 billion dollars and he spends his typical day sitting, reading, and thinking for the whole day. He says that he spends up to 80% of his day reading. Like our money compounds, the knowledge acquired from reading also compounds and adds up over time.

[00:07:07] Clay Finck: Gautam says that self-improvement is the ultimate form of investing in oneself. It requires devoting time, money, attention, and hard effort now for a payoff later. Sometimes in the far distant future, a lot of people are unwilling to make this trade off because they crave instant gratification and desire instant results.

[00:07:29] Clay Finck: These short-term costs when applied the right way along an axis of time, offer an exponential payoff when applied over a long life. Compound interest, Albert Einstein repeatedly said, is the most powerful force in the universe. Gautam also points out that people who engage in mentally stimulating activities like reading, experience slower memory decline than those who don’t, and that reading is also linked with higher emotional intelligence, reduced stress, a wider vocabulary and improved comprehension.

[00:08:03] Clay Finck: Then he pulls in two quotes from those who are very popular in the self-improvement space. Jim Rohn is quoted as saying that formal education will make you a living and self-education will make you a fortune. And then Zig Ziglar says, rich people have small TVs and big libraries, poor people have small libraries and big TVs.

[00:08:25] Clay Finck: Reading is so powerful because you’re able to take in the accumulated knowledge and information in a span of hours that took somebody else thousands of hours and oftentimes decades of work to put that book into your hands. Gautam writes, the most talented people in any given field are self-educated.

[00:08:45] Clay Finck: The best way to learn something is to try to do it, but the next best way to learn something is to learn it from someone who has already done it. This is the importance of reading and vicarious learning. In an October 2013 interview, Buffett and Munger discussed how they were able to leap ahead of their peers and competitors.

[00:09:05] Clay Finck: Munger said, we’ve learned how to outsmart people who are clearly smarter than we are. The other big secret is that we’re good at lifelong learning. Warren is better in his seventies and eighties in many ways than he was when he was younger. If you keep learning all the time, you have a wonderful advantage.

[00:09:23] Clay Finck: Self-improvement in investing in oneself is the best investment one can make, so it’s critical that you spend a portion of each day working on yourself. Just one good idea from a book can lead to millions or even billions of dollars when you apply this concept of lifelong learning, consistently. In chapter two, Gautam continues to expand on this message by becoming a learning machine.

[00:09:48] Clay Finck: Quote, the body is limited in ways that the mind is not. In fact, by the time most people are 40 years old, their bodies begin to deteriorate. But the amount of growth in development that the mind can’t sustain has no limit. Reading keeps our minds alive and growing, end quote. I can’t help but think about the traditional education system and some of the things I was forced to read growing up.

[00:10:12] Clay Finck: I can’t speak for everyone, but I personally didn’t really enjoy reading growing up, and I think some of the reasons for that was because the majority of people in my environment weren’t readers and the things that school pushes us to read, I really didn’t find it interesting at all. But nowadays, when I pick up a book to read before bed, a lot of times I find it difficult to put it down because I just enjoy it so much.

[00:10:36] Clay Finck: Gautam’s book, The Joys of Compounding is one of those books for me. Whether it’s reading or going for a workout or whatever else, oftentimes the hardest part is to simply start doing it. If you commit to reading just 10 pages per day and you really commit to it, that means you’re committing to starting the act of reading.

[00:10:56] Clay Finck: By the time you get to the 10 pages, the act of reading just feels effortless. So, you’ll want to read 20 or 30 pages, and when you come across a book you don’t like, just simply put it down and try and find a better book. Unless you’re reading a book to learn a specific skill or for another specific reason, you should let your mind go wherever your curiosity leads you.

[00:11:18] Clay Finck: Taleb is quoted as saying curiosity is anti-fragile, like an addiction. It’s magnified by attempts to satisfy it. Gautam whom follows up by writing, paradoxically, as you read more books, your pile of unread books will get larger, not smaller. That’s because your curiosity will grow with every great read. This is the path of the lifelong learner, the place where many people can trip up with regards to this is not valuing their time.

[00:11:48] Clay Finck: Rich people have a lot of money, but it’s wealthy people who have control of their time. Time is the scarcest resource because we can’t get any more of it. Once your time is spent, it’s gone, and you can’t get it back. So, we need to be cognizant of how we spend our time and ensure we aren’t spending too much time doing things we don’t truly value, and spending enough time investing in ourselves.

[00:12:14] Clay Finck: How many people spend too much time on tasks that don’t add value long term, such as watching television or watching Netflix strolling social media, or YouTube or other time sucking things that really pull at our attention. That’s not to say that there’s not room for these things in our lives, but we should be mindful that similar to how we allocate our money into investments and in our portfolios, we also wanna be allocators of our time.

[00:12:40] Clay Finck: Time spent doing one thing is time not spent doing something else that adds more value to our lives. We’re allocators of our time just like we’re allocators of our money. Committing to even 10 pages per day of reading this will likely lead to at least one book per month or 12 books per year. And this puts you far ahead of many of your peers who don’t see the value in this daily habit of reading.

[00:13:06] Clay Finck: We also need to be mindful of what type of information we’re consuming. We live in an age that is full of information being spread every day, and it’s vying for our attention. Information is not scarce. It’s our attention and our time that is scarce, and the media’s job is to catch your attention because their business model incentivizes that.

[00:13:28] Clay Finck: As a general rule of thumb, the news media that brings us the day-to-day events, as well as most of what is shared on social media, it isn’t really important. A lot of it is used to try and entertain us and to tell us the public mood and sentiment. Nassim Taleb writes, minimal exposure to the media should be a guiding principle for someone involved in decision making under uncertainty, including all participants in financial markets.

[00:13:55] Clay Finck: Gautam follows up by saying that his key argument is that what is reported in the media is noise rather than information. But most people do not realize that the media is paid to get our attention. The key lesson is that in the pursuit of wisdom, we must read much more of what has endured over time, such as history or biographies than what is ephemeral, such as daily news and social media trends.

[00:14:22] Clay Finck: Apply the Lindy effect to the books you read and use it to your advantage. Books that have stood through the test of time and are still widely read today are likely to be well worth your time relative to many of the new releases. And Gautam encourages readers to go through multiple non-fiction books at a time and pick up those non-fiction books that you’re most interested in. Continuing those that you find value in and dropping those that don’t.

[00:14:49] Clay Finck: Reading and learning compounds in stockpiles over time, allowing you to build an inner repository to use when interacting with the world. This is what Munger refers to as the lattice work of mental models. Gautam states that mental models are an explanation of how things work, what variables matter in a given situation, and how they interact with one another.

[00:15:12] Clay Finck: Mental models are how we make sense of the world. Munger acquires much of this by studying biographies and learning from who he calls the imminent dead that have the right ideas. You’ll wanna figure out where you’re going and learn from those who have been there before. Knowledge comes from experience, but it doesn’t have to be from your own experience.

[00:15:36] Clay Finck: Gautam links this stockpiling of knowledge to The Matthew Effect. The Matthew Effect, which refers to a pattern in which those who begin with advantages accumulate more advantages over time, and those who begin with disadvantages become more disadvantaged over time. So, when Warren Buffett and I read the same article, Buffett is very likely going to garner many more insights from that article because he has read way more than I have.

[00:16:06] Clay Finck: He has so much more accumulated knowledge and is much better at garnering the most valuable information and insights from that article. If you can think back to when you were younger, you might remember how difficult it was to extract information from what you were reading and then learn from that information.

[00:16:25] Clay Finck: But if you’ve read a number of books over your life, you’ll find that extracting and absorbing information is much, much easier. As you read increasingly more, your capacity to read and absorb more knowledge increases rapidly. It compounds. Also, as you read more, you’re able to connect and contrast your accumulated knowledge with that of which you’re reading and gradually continue to connect the dots on a particular subject.

[00:16:53] Clay Finck: Then he transitions to talk about principles stating that, five words that separate the good from the great is flawless execution of the fundamentals, boiling things down to their most fundamental truths, that is to first principles, and then reasoning up from these enables us to look at the world from the perspective of physics.

[00:17:16] Clay Finck: This type of reasoning removes complexity from the decision-making process so that we can focus on the most important aspects that pertain to the decision at. Reasoning from first principles removes the impurity of assumptions and conventions. Instead, what remains is the essential information. First principles are the origins or the main concepts that cannot be reduced to anything else.

[00:17:43] Clay Finck: These are the fundamental assumptions that we know are true, end quote. Jeff Bezos is brilliant at thinking at first principles. Rather than focusing on what will change in the future, he’s more focused on what he knew wouldn’t change. Bezos knew that customers would always prefer low prices, fast delivery, and a wide product selection.

[00:18:06] Clay Finck: So that’s where he put his focus in creating Amazon. Focusing on first principles led Bezos to become one of the richest people in the world. So, in order to learn a new subject, first identify the fundamental principles and learn those fundamental first principles in a clear and deep manner. In order to do this, Gautam suggests the Feynman Technique, which is a four-step process to learning anything well and for improving retention.

[00:18:36] Clay Finck: The four steps are, first you pick and study a topic. Second, you take out a blank sheet of paper and write at the top of that paper the subject you wanna learn. Write out what you know about the subject as if you were teaching it to someone who is unfamiliar with the topic. In other words, explain it as if you were trying to teach a 10-year-old who can only understand basic concepts.

[00:18:59] Clay Finck: Third is you refine your understanding of the concept because you have to explain it in very simple terms. If you struggle in some aspects of this, then you can clearly see where the gaps are in your thinking and understanding that subject. Doing this exercise is really valuable feedback because you’ve discovered the edge of your mental capabilities.

[00:19:20] Clay Finck: The fourth step is now that you know where your understanding is lacking, you can now go back and reread and relearn the subject and fill in those gaps. Gautam then lists several fundamental truths that are derived from thinking in first principles as it relates to value investing. He says, understand and practice the following if you want to become a good investor.

[00:19:43] Clay Finck: He lists 12 of these principles that I’ll be reading here for you. First, look at stocks as part ownership of a business. Second, look at Mr. Market or the volatile stock price fluctuations as your friend rather than your enemy. Third, remember the three most important words in investing, margin of safety. Fourth, evaluate any news item or event only in terms of its impact on future interest rates in the intrinsic value of a business.

[00:20:15] Clay Finck: The intrinsic value is the discounted value of the cash that can be taken out during its remaining life adjusted for the uncertainty around receiving those cash flows. Fifth, think in terms of opportunity costs when evaluating new ideas and keep a very high hurdle rate for incoming investments. Be unreasonable when you look at a business and get a strong desire from within saying, I wish I owned this business.

[00:20:41] Clay Finck: This is the kind of business in which you should be investing in. A great investment idea doesn’t need hours to analyze. More often than not, it is love at first sight. As a side note, this is how I felt about Mark Leonard and Constellation Software when I first analyzed their business. Maybe this is the love at first sight aspect that blinded me to something I might be missing.

[00:21:03] Clay Finck: But this is just what I saw when looking at this company. And maybe I’m overestimating their runway for growth and the quality of the business, but for me it was love at first sight. And this is the same thing François Rochon said about Mark Leonard and his interview with William Green. So that’s just an interesting concept that comes to mind.

[00:21:22] Clay Finck: Six is think probabilistically rather than deterministically, because the future is never certain, and it is really a set of branching probability streams. At the same time, avoid the risk of ruin. When making decisions by focusing on consequences rather than just raw probabilities in isolation, some risks are simply not worth taking, whatever the potential upside might be.

[00:21:48] Clay Finck: Seventh, never underestimate the power of incentives in any given situation. Eighth, when making decisions involve both the left and right side of your brain. Left for logic analysis in math, right for intuition, creativity, and emotions. Nine, engage in visual thinking, which helps us better understand complex information, organize our thoughts, and improve our ability to think and communicate.

[00:22:18] Clay Finck: Ten, invert always invert. You can avoid a lot of pain by visualizing your life after you have lost a lot of money trading or speculating or using derivatives or leverage. If the visuals unnerve you, don’t do anything that could get you remotely close to reaching such a situation. Eleven, vicariously learn from others throughout life.

[00:22:42] Clay Finck: Embrace everlasting humility to succeed in this endeavor. And finally, number twelve, embrace the power of long-term compounding. All the great things in life come from compound interest. It’s a great list here. He presents to readers, many of which I wish I had learned much earlier on in my own journey, and some of which I had to learn the hard way.

[00:23:04] Clay Finck: And then the book transitions to cover obtaining worldly wisdom through a lattice work of mental models. So, the chapter might as well be dedicated to Charlie Munger. Gautam opens up the chapter with a Leonardo da Vinci quote. Study the art of science, develop your senses, especially learn how to see. Realize that everything connects to everything else.

[00:23:28] Clay Finck: In Tren Griffin’s book, he lays out Munger’s paths to worldly wisdom. Munger has adopted an approach to business in life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines, psychology, history, mathematics, physics, philosophy, biology, and so on, a person can use the combined output of the synthesis to produce something that is much more valued than the sum of the parts. Robert Hagstrom expanded on this in his book. Each discipline entwines with and in the process strengthens every other. From each discipline, the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding.

[00:24:17] Clay Finck: Those who cultivate this broad view are well on their way to achieving worldly wisdom. Munger was once asked whether people should become specialists or generalists, and he actually suggested that people focus on becoming specialists, as today’s specialists tend to be highly valued by society in terms of their career prospects, but he still encourages spending 10 to 20% of your time on the broader ideas of the world.

[00:24:44] Clay Finck: Gautam Riley points out that developing this sort of wisdom requires a ton of thinking and connecting the dots within your own. He pulls an excerpt from an essay by Bill Deresiewicz. Thinking means concentrating on one thing long enough to develop an idea about it, not learning other people’s ideas or memorizing a body of information.

[00:25:06] Clay Finck: However, those may sometimes be useful, developing your own ideas. In short thinking for yourself. You simply cannot do that in bursts of 20 seconds at a time, constantly being interrupted by Facebook messages or Twitter or any other distractions. I find for myself that my first thought is never my best thought.

[00:25:27] Clay Finck: My first thought is always someone else’s. It’s always what I’ve already heard about the subject, always the unconventional wisdom. It’s only by concentrating, sticking to the question, being patient, letting all the parts of my mind come to play that I arrive at the original idea. By giving my brain a chance to make associations, draw connections, and take me by surprise.

[00:25:52] Clay Finck: You do your best thinking by slowing down and concentrating. Now, Munger has often credited his success to having a long attention span and his ability to stay focused for a long period of time and thinking is actually really hard work. Henry Ford once stated, thinking is the hardest work there is, which is probably why so few people engage in it.

[00:26:18] Clay Finck: Gautam writes, the best ideas come to you in solitude. Introverts tend to be creative because by spending more time alone, they are more susceptible to inspiration. Introverts are also less susceptible to groupthink, and thus it is easier for them to go against the consensus. He also pulled in some practical habits that can allow us to improve our thinking, which were sourced from the book, The Five Elements of Effective Thinking.

[00:26:47] Clay Finck: First, understand deeply. Be brutally honest with yourself on whether you understand the core concepts deeply, and you’re not just memorizing. Second, make mistakes. You’re not going to grasp something on your first attempt. I’m sure many are in the same camp as me and made some very bad investments early on in their journey.

[00:27:08] Clay Finck: Learn from them. When Thomas Edison was asked about how he failed about his countless failed attempts at making a light bulb, he replied, I have not failed. I’ve just found 10,000 ways that won’t work. Third is raise questions. Don’t be afraid to look silly because questions help deepen your understanding.

[00:27:26] Clay Finck: Fourth, follow the flow of ideas. Many ideas stem from other ideas, so learn from others and work to improve upon existing ideas. Fifth, change. Learn the habit of understanding things at a deeper level. See pretty much everything in everyone as an opportunity to learn, be a work in progress, gradually bringing in more and more new information every day, and embracing new ideas and change in your life.

[00:27:56] Clay Finck: To round out the chapter, there are two quotes Gautam listen here. Munger explained why he spends so much time reading, especially reading biographies. I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up yourself.

[00:28:15] Clay Finck: Nobody’s that smart. In the digital informational age we live in, Naval Ravikant points out that embracing lifelong learning is more available now than ever before. Quote, the internet is the best school ever created. The best peers are on the internet. The best books are on the internet. The best teachers are on the internet.

[00:28:36] Clay Finck: The tools for learning are abundant. It’s the desire to learn that’s scarce, end quote. Chapter four is titled, harnessing The Power of Passion and Focus Through Deliberate Practice. Gautam writes, according to the Japanese, everyone has an Ikigai. I’ve never heard this term. It’s a new term for me. It’s spelled I K I G A I.

[00:28:59] Clay Finck: It means of reason for living. Everyone has an Ikigai, a reason for living, and according to the residents of the Japanese village from the world’s longest living people. Finding it is the key to a happy life. Having a strong sense of Ikigai where passion, mission, vocation, and profession intersect means that each day is infused with meaning.

[00:29:26] Clay Finck: Then there are a couple of really great quotes here. Ed Latimore says that when you can use your skills to make a difference in someone’s life and get paid for it, that’s a happy life. When you’re passionate about it as well, that’s a calling. The feeling is almost divine. Naval Ravikant says, your goal in life is to find the people who need you the most to find out the business that needs you the most, to find the project and the art that needs you the most.

[00:29:55] Clay Finck: There is something out there just for you. Abraham Maslow, who is known for his hierarchy of needs. Describe the good life as one directed towards self-actualization or the higher need. Gautam writes that self-actualization occurs when you maximize your potential by doing your best. Humanistic psychologist, Albert Ellis puts it a bit differently.

[00:30:20] Clay Finck: That self-actualization involves the pursuit of excellence and enjoyment, whichever people choose to desire and emphasize. So, the enjoyment piece allows for more balance in your life. It allows for less emphasis on achieving your highest potential. It allows for prioritizing your overall wellbeing. For example, I’ve really enjoyed working out and tend to do some form of movement most of my days, to allow for some balance and ensure that I’m not just doing one thing the entire day.

[00:30:49] Clay Finck: When Bill Gates and Warren Buffett met for the very first time at a dinner, Gates’s mother asked everyone around the table what the single most important factor of their success was in their own lives. Gates and Buffett gave the same one-word answer. The word was focus. Both men agree that relentlessly focusing on one specific passion leads to achievement, and that means pushing aside other ideas and interests until a certain goal is reached.

[00:31:18] Clay Finck: Buffett says that intensity is the price of excellence. Bruce Lee says that I fear not the man who has practiced 10,000 kicks one time, but I fear the man who has practiced one kick 10,000 times. Nowadays with social media and the increased influence of the Federal Reserve on the markets, people’s focus has shifted to the headlines that don’t really make much of a difference in the long term and tune in to what inflation is, where interest rates have moved, focus has shifted away from studying great business.

[00:31:51] Clay Finck: Which is where most value investors money is to be made. Gautam writes, 50 years ago, the best investors were the ones with an informational edge. Today, the best investors are the ones with a behavioral edge. A lot of investors and money managers today are very short-term minded, as I’m sure a lot of the listeners are aware.

[00:32:13] Clay Finck: He writes, today, an investor’s edge is less about knowing more than others about a specific stock, and more about the mindset, discipline, and willingness to take a long-term view about the intrinsic value of a business. While our society today often frowns on inactivity, most of what Buffett does seems to appear to be fairly inactive.

[00:32:36] Clay Finck: He doesn’t make big investments very often. He sits around and he reads, and he reads, and he thinks just all day and doesn’t really think about the news too much and what the Fed’s doing and such. Buffett is incredibly focused on doing what is best for the long-term shareholders of Berkshire Hathaway. Buffett says, quote, many people would see this as totally unproductive, but many of my best business solutions and money problem answers have come from periods of just sitting and thinking.

[00:33:08] Clay Finck: Your outcomes in life are driven by your decisions, and your decisions are driven by your thinking, so don’t skimp on the time needed to make important decisions. Most investors make investment decisions often and they think very little. Buffett thinks often and makes investment decisions much less frequently.

[00:33:28] Clay Finck: Gautam says, one of the best hacks in the investment field is learning to be happy doing nothing and having a strong passion for lifelong learning is a durable competitive advantage for an investor. What differentiates successful investors from mediocre ones is passion. To be a truly passionate investor means you are always thinking about the future in the direction of the world.

[00:33:53] Clay Finck: It means you are always enthusiastically observing everything around you, end quote. Buffett has always said that the way to a happy life is to follow your passion and take the job that you would take if you were independently wealthy. And ironically, that quote from Buffett was one of the driving forces behind why I joined TIP myself.

[00:34:13] Clay Finck: I loved the company, I loved the people, and I loved the work they did. The reason passion is so important in your work and your life is because with passion, you’ll bring more energy than anybody else. You approach work with the mindset that you have the opportunity to go to work rather than you have to go to work.

[00:34:33] Clay Finck: To quote Gautam again, instead of merely trying to live a long life, we should endeavor to infuse meaning into our lives. Too often life appears short to us because we all seem to have so much to do. But the reality is that life is long if you know how to use it well, when you find your North Star, that is the single most important thing that sets your life’s course.

[00:34:58] Clay Finck: You learn where you’re headed, and that is such a good feeling, and it is fine for your North Star to change over time. But whatever it is right now, let it guide you. Your North Star is highly meaningful and vital in a personal context. So, aiming toward this beacon of light will bring you great happiness to you every day. Pursue your passion because you won’t get this time back ever again, end quote.

[00:35:23] Clay Finck: In 2004, Steve Jobs was diagnosed with pancreatic cancer and was informed that he only had a few weeks to live. This is what Jobs said in his 2005 Stanford Commencement speech. Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make big choices in life because almost everything, all external expectations, all pride, all fear of embarrassment or failure, these things just fall away in the face of death, leaving only what is truly important.

[00:35:58] Clay Finck: Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart. Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma, which is living with the results of other people’s thinking.

[00:36:18] Clay Finck: Don’t let the noise of others’ opinions drown out your inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary, end quote. All this discussion around passion also reminds me of Jeff Bezos’s regret minimization framework.

[00:36:40] Clay Finck: He zooms forward to imagine his 80-year-old self and ask himself if he would regret making such decisions. This is how he left his high paying corporate job on Wall Street to starting Amazon. His parents told him to start it part-time and keep his high paying job, but he knew that the only way he would succeed is if he went all in.

[00:37:02] Clay Finck: Gautam writes, every big decision we make in life usually involved some sort of trade off. At times, we have to accept small regrets in order to avoid larger ones. Many people spend so much time worrying about the risks of taking action that they completely overlooks the risk of failing to act. Sure, if you don’t take any risk, there’s no failure associated with it, but regrets will haunt you for the rest of your life.

[00:37:29] Clay Finck: Failure hurts but passes quickly. Conversely, regret hurts forever. Chapter four is rounded out by discussing deliberate practice being the key to achieving excellence. Deliberate practice is a highly structured activity or process done with the specific goal of improving one’s performance. Deliberate practice is often a repeatable task.

[00:37:51] Clay Finck: For writers, it means writing a lot. For musicians, it means practicing a lot. Deliberate practice also tends to be hard. It takes a lot of focus and a lot of mental effort, and it isn’t really all that fun. Gautam rounds out the chapter with the Will Durant quote, we are what we’ve repeatedly do. Excellence then is not an act, but a habit.

[00:38:13] Clay Finck: So that completes section one of his book, which covered investing in oneself, becoming a learning machine, obtaining worldly wisdom in harnessing the power of passion and deliberate practice. This brings us to section two, covering building a strong character. Chapter five touches on the importance of choosing the right role models, teachers and associates in life.

[00:38:36] Clay Finck: And I’m really glad he included this chapter because it really hits close to home for me. Two mentors I’ve had over the years through this podcast was Preston Pysh and Stig Brodersen. I’ve learned so much from them over the years, and there was a stint where I would tune into every one of Preston’s podcasts, especially the ones where he would appear on other shows, because I just learned so much from him, not just on the investing side, but also his perspective on life.

[00:39:03] Clay Finck: Now today, I can also add William Green to that list as someone who I see as a mentor through his really insightful podcast, and he just does great work for TIP. Warren Buffett says I was lucky to have the right heroes. Tell me who your heroes are, and I’ll tell you how you’ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice can make your own, and that if practiced will become habit forming.

[00:39:32] Clay Finck: Gautam writes, role models act as our motivational coach and as a source of daily inspiration in our lives. The very instant, when we come across our role model, we usually know it. The feeling we experience at that moment cannot be described in mere words. It can only be experienced. It is one of profound inspiration, motivation in finding one’s purpose in life.

[00:39:59] Clay Finck: Now role models can be someone who achieves something you want to achieve. They’ve struggled with similar problems that you’re experiencing. They have a life story that’s inspirational. Or maybe it’s the people that just have so much discipline that they’re able to help you learn how to be more disciplined to help achieve your own goals.

[00:40:17] Clay Finck: Two people that come to mind on the discipline side are David Goggins and Jocko Willink. For many of us, me included, our parents are our role models. Gautam encourages readers to always give time to your parents and be appreciative of them in everything they’ve done for us. There is this classic saying that you are the average of the five people you spend the most time with.

[00:40:40] Clay Finck: If you spend most of your time with people who are better than you, then you can’t help but improve. Buffett’s success is largely driven by the people he chose to surround himself with. He created an all-star team of business leaders, including Ajit Jain, Greg Abel, Rose Blumkin, among others. Part of Buffett and Munger’s Brilliance was to let managers of high caliber and integrity run their businesses and just not get in their way.

[00:41:07] Clay Finck: Working with the right people teaches you things that you just can’t learn in a textbook. Then there’s a bit written about the importance of trust. Gautam explains that trust lies at the heart of any relationship. We experience an echoing anxious feeling when trust is not present. When trust is present, we experience an open, connected feeling.

[00:41:28] Clay Finck: We build trust by being honest in our communications, by being authentic and sincere in both words and actions. By being transparent and admitting mistakes and sharing what we learn, by being reliable and fair in our dealings with others. Over time, as you build your network, put in your best efforts and constantly add value to others in your relationships, and to build a seamless web of deserve trust.

[00:41:55] Clay Finck: This reminds me of last week’s episode where I discussed Mark Leonard in Constellation Software. Mark Leonard is just one of those people that you know you can trust. Historically, he has continued to under promise and overdeliver year after year after year. You know that he’s going to do what’s right for shareholders and never take a penny more than he believes that he should.

[00:42:16] Clay Finck: Trust is earned when one’s actions meet their words. To round out chapter five, Gautam quotes Laurence Endersen. Our ability to choose is one of life’s great gift. We are the product of our choices. Good choices come from good character and a few good choices make all the difference. Chapter six discusses humility as it’s titled, Humility is The Gateway to Attaining Wisdom.

[00:42:43] Clay Finck: Socrates said that the only true wisdom is in knowing you know nothing. Gautam follows us up. If only if we approach learning with an open mind, can we truly educate ourselves. The wiser we become, the more we realize how little we know. A lesser well-known equation from Albert Einstein rings true, ego equals one divided by knowledge.

[00:43:06] Clay Finck: The more knowledge, the less ego, the less knowledge, the more ego or the deeper one dives into any field, the more humble one generally becomes also known as The Dunning–Kruger effect. By demonstrating intellectual humility and acknowledging what we don’t know, we place ourselves into a beneficial position to learn more.

[00:43:29] Clay Finck: Thus, the donning of wisdom, end quote. Especially when it comes to investing, things are always more complex and complicated than we might initially think. So always question what you think you know and consider the possibility that your current assumptions might be wrong. This is how you grow is by admitting to mistakes and learning from them.

[00:43:49] Clay Finck: We can’t ever be fully sure of something. So be skeptical about anything that’s a quote unquote sure bet. Or be skeptical of absolute terms such as never or always. Charlie Munger stated, people couldn’t believe that I suddenly made myself a subordinate partner to Warren Buffett. But there are people that it’s okay to be a subordinate partner to.

[00:44:12] Clay Finck: I didn’t have the kind of ego that prevented that. There are always people who will be better at something than you are. You have to learn to be a follower before you become a leader. People should learn to play all roles. Now, Charlie upgraded his life by associating with people he regarded as better than him.

[00:44:29] Clay Finck: He had to set his ego aside and have the humility to not be at the top of the ladder. Gautam explains, truly humble people do not experience any uneasy feelings when someone younger, but more successful or knowledgeable than them shares advice. If you’re truly happy and satisfied with the life you’re leading, you’ll be happy to see other people succeed.

[00:44:51] Clay Finck: Don’t make this life all about you. Be happy when other people are doing well and encourage their success. When you support others, it shows that you’re not threatened by them because you are confident in your own abilities. He then shares a story of Frank Wells, who was the president of Walt Disney from 1984 until his death in 1994.

[00:45:12] Clay Finck: After his death, it was discovered that in Wells’s wallet, he kept a note that stated, humility is the essence of life. And later it was discovered that he had carried that note in his wallet for 30 years. Humility is the essence of life. We also need to be aware of our natural biases. Odds are that how you view the world is largely shaped by your own personal experiences.

[00:45:37] Clay Finck: This reminds me of what Morgan Housel talks about in his book, The Psychology of Money. People who live through the hardship of the Great Depression can’t imagine storing all of their wealth in the stock market. While a lot of investors over the past decade can’t imagine not having most of their wealth in the stock market.

[00:45:55] Clay Finck: Gautam says, people tend to believe in what they have personally seen far more than what they have read or has happened to others. We are all biased by our personal history. If you experience an outlier event, then you’ll likely overestimate the chances of that type of event happening again in the future. If you can get a good idea of someone’s personal experiences, then you can have a better understanding of someone’s position and how they might view the world.

[00:46:22] Clay Finck: One point that William Green mentions again and again on this podcast is that investors must remain humble because the future is uncertain and what has worked in the past might not work in the future. Things are constantly changing, and we can never be absolutely certain about what the future holds.

[00:46:41] Clay Finck: When investors have a big win or feel like they can do no wrong, it’s natural to become overconfident and double down on our bets, thinking that we can’t lose. Speaking from personal experience, if you ever feel like the money is too easy and you just simply can’t lose, that is the time to de-risk and take chips off the table.

[00:47:01] Clay Finck: Housel writes, the more successful you are at something, the more convinced you are that you’re doing it right. The less open you are to change, the more likely you are on tripping in a world that changes all the time, there are a million ways to get rich, but there’s only one way to stay rich. Humility, often to the point of paranoia.

[00:47:21] Clay Finck: The irony is that few things, squash humility, like getting rich in the first place. It’s why the Dow Jones Companies changes so much over time and why the Forbes list of billionaires has a 60% turnover per decade. Humility doesn’t mean taking fewer risks. Sequoia takes as big a risk today as it did 30 years ago but has taken risks in new industries with new approaches in new partners.

[00:47:47] Clay Finck: They’re cognizant that what worked yesterday isn’t what will work tomorrow. Since the future is uncertain, it’s important to think more probabilistically as well. Rather than asking if you will be right or wrong, ask yourself what is the probability, if I’m right or wrong, what’s the probability of different outcomes?

[00:48:05] Clay Finck: When investors start thinking and certainties is when they really start to get themselves in trouble. Think about how people assumed that housing only went up around 2005 or 2006, or the sentiment among new investors and stocks thinking that stocks could only go up in 2021. Buffett helps combat uncertainty in the markets by investing only within his circle of competence in areas he knows really, really well.

[00:48:30] Clay Finck: Buffett says that we don’t have to swing at every pitch. He says The trick in investing is just to sit there and watch pitch after pitch go by, and wait for the one right in your sweet spot. And if the people are yelling, swing you, bum, you ignore them. You don’t need to evaluate and know every company well.

[00:48:47] Clay Finck: In Buffett’s case, he only knows a select number of businesses really well. Nearly 40% of Buffett’s US stock portfolio is in Apple. Over 75% of his portfolio is only allocated to five companies. It requires humility to recognize your limitations in the edge of your circle of competence and only invest in businesses that you can truly understand.

[00:49:10] Clay Finck: Buffett minimizes his risk by only investing in businesses that he is certain will continue to have a durable competitive advantage and continue to produce stable free cash flows. Contrary to popular belief, Buffett once said that 99% of stock ideas that come to him are outside of his circle of competence, and he isn’t able to accurately assess what the future will look like for those companies.

[00:49:34] Clay Finck: Gautam writes, just think about that for a minute. In Buffett, we have arguably the greatest investor who has ever lived admitting that he does not understand 99% of the businesses he comes across. The next time you feel you know it, reflect deeply on that fact. A genuine and honest adherence to one circle of competence is a deeply humbling experience.

[00:49:59] Clay Finck: The basic idea behind the circle of competence is so simple. It is embarrassing to say out loud when you are unsure and doubtful about what you want to do, do not do it. If you can’t find businesses within your circle of competence, do not hardly step outside that circle because of the fear of missing out, which is often the case in bull markets.

[00:50:20] Clay Finck: Instead, spend time studying industries and companies outside your circle before crossing the boundaries. The biggest advantage of developing one’s circle of competence over time is that different industries and types of companies are in favor at different stages of the market cycle. Having an expanded opportunity set at one’s disposal to choose from can prove to be highly profitable at such times.

[00:50:44] Clay Finck: He explains how in order to expand your circle of competence, you need to read a lot. The person that turns over the most rocks will find the best opportunities. Early on in Buffett’s career, he would analyze every single company he possibly could, and he’d have these quick checks to automatically disqualify companies.

[00:51:02] Clay Finck: So, he didn’t waste any time on companies he deemed to be bad investments. Gautam explains my personal investment opportunity set has significantly expanded over the years with time and experience in the markets. Initially it was restricted only to secular growth stocks at reasonable to expensive valuations.

[00:51:22] Clay Finck: But now it covers multiple areas of the investment universe, including commodities, cyclicals, deep value, and spinoffs, as well as loss making companies that are turning around. Instead of being restricted by my personal biased views to a small opportunity set, as was the case during my early years, I am now able to invest in a variety of industries and situations where I find mispricing of value and a highly favorable risk return trade-off.

[00:51:50] Clay Finck: No single strategy works all the time in an every kind of market. That’s why it’s essential to build up one’s investing arsenal to be able to hunt for value from within different areas. Then to round out the chapter, he says, the takeaway from Buffett and Munger is clear. If you want to improve your odds of success in business, life and investing, then clearly define the parameter of your circle of competence and operate only inside of it.

[00:52:18] Clay Finck: Over time, work to expand that circle, but never fool yourself about its current boundaries. As Feynman says, the first principle is that you must not fool yourself. You are the easiest person to fool.

[00:52:33] Clay Finck: All right, that wraps up today’s episode. Again, I’m going to be covering Gautam’s book over multiple episodes, so if you enjoy today’s episode, be sure to check out my episode next week as well.

[00:52:44] Clay Finck: If you click follow and the bell icon on the podcast app you’re on, you’ll get notified of all of our future episodes so you don’t miss any of them. With that, thank you so much for tuning in, and I hope to see you again next week.

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