Stig Brodersen  2:58  

The very first one I have is the mental accounting. Basically, the concept of mental accounting means that we are streaming money differently depending on where we got it from. So if I found money on the street, or probably be more callous, that it was something that I would inherit… 

You can document that if people inherit money, they would typically be used more for donations. You can also see that they would typically invest more in bonds and stocks. So it’s actually very interesting that even though $1 might be $1, it’s definitely not in the light of mental accounting.

Mental accounting is something that we also talked about before in the past here on the show, because it’s something that’s very relevant for stock investors. So in this example, where you bought a stock at say, $10, you are more likely to sell that at *inaudible* $15. Then, if it went down to $5, regardless of intrinsic value, because your mental accounting says that you bought it for $10. That’s really what you remember, even though the stock doesn’t care. 

So what he’s talking about when he’s saying mental accounting is how to use that to your advantage in your daily life. It’s about how living a good life is interpreting facts constructively. He comes up with this example with a parking ticket. 

The way that I guess all of us look at parking tickets [is that] it’s something that we don’t like and something that frustrates us. It’s definitely something we’d like to be without. So what he has done in terms of his mental accounting is that he has set aside a fixed amount of money every year for donations. So regardless of whatever that is, he will give it away by the end of the year. 

Then, if you have expenses like parking tickets, he will take from that pool. So he’s already written it off like this mental accounting always says that you’re actually not paying this money. It’s not something that you will touch anyway. 

You can actually use this mental accounting trick many different ways. A way that he’s using mental accounting is to cut back his expenses is that he’s always adding his income tax to that price, which is about 50%. So he’s saying if something costs $20 at a restaurant, I always say to myself it’s $30, because that’s how much money I would need to make to pay for that meal. 

I just have one more example. This is actually very relevant to the episode we just did with the power of moments where when you go on vacation, you always remember the high point and the end of the vacation. He knows that too, when he says that too. 

So basically, what he’s doing is he always pre-pays as much as he can before going on vacation, because he knows that his brain will trick him into saying, “Well, it’s probably the better vacation because at the very end, he won’t pay anything.” 

Preston Pysh  5:53  

I like that. I don’t really have anything else to add to that. You hit pretty much everything that was covered in the book. 

So let me go on to my point. This kind of came near the end of the book, and the title of the chapter was “Read less, but twice.” This one really surprised me because I’d never thought about reading this way.

The way he starts us off is he says, if you had a punch card, and I think he stole this idea from Warren Buffett, because Warren Buffett talks about having a punch card when he invests. But he says, “If you had a punch card that you could only punch 50 times, which books would you pick? And how would you pick them [if] you could only pick 50 books?”

I really liked this idea, because we read a lot on the show, obviously. I think a lot of people out there who listen to the show are hardcore readers as well. What he’s getting at is make sure that you optimize what it is that you’re reading and just don’t waste your time. 

He talked about his own library. He had like 3000 books in his library and he said that he probably had only read about one third of them. Of the one third that he’s actually read, he couldn’t really say that he remembers too much from a lot of the different books. 

So this made me think about my library at the house and how much I’ve retained from the various books. I felt the exact same way that he felt where the one example that kind of came to mind when I was thinking about this was the book that Stig and I read on Starbucks, Howard Schultz’s book. I couldn’t really remember. 

I’m curious. I’ll ask Stig this. How much do you really remember from that book, Stig? I mean, we did an entire podcast about this book, but it really wasn’t for me. It really wasn’t a great book, but I’m curious. How much of that do you really remember?

Stig Brodersen  7:36  

I remember him talking a lot about melted cheese.

Preston Pysh  7:40  

I had the exact same thought that’s like the only thing I really remember from the book. He went through a lot of things, and he talked about how much he was revamping things, and how the focus was on the coffee. However, in general, I really didn’t take away too much more from that book other than those themes that I just blurted out. 

So his point here about “reading less, but twice,” and being more thorough and focusing on the books that are really good. I completely agree with that, when I look back at some of the books that we’ve read and how much I’ve actually retained. 

To give you an example, he said, “If I read a book one time, I’ll retain 3%.” This was his own estimate. He says, “I retained 3% of what I read. If I read the book twice, I’ll retain 30% of what was read.” His estimate is that he’s understanding 10 times more by reading the book a second time. So what his technique is, is he picks up a book, he kind of skimmed through it for about five minutes. He said, “I don’t give any book more than five minutes.” 

If it doesn’t seem like something that he would want to punch his card for of the 50 books, then he puts it down and he doesn’t read it. But if it is something that he feels like is going to be completely worth his time, not only is he going to read it, but he’s going to read it twice or maybe even three times.I found this really an interesting way to look at reading because it’s very different than anything that I’ve ever done. 

Now, he had four points that he talks about with this. He said, “If the book leaves no trace on the mind, then it was a total waste of your time.” So that goes back to his point. 

The second point that he has… This is obviously not for crime novels, because once you read a crime novel, you know who the suspect is, it’s totally worthless when you’re dealing with fiction, this is really only for nonfiction. He said that [was] his expectation, and I know he used the example with a 50 book punch card. 

But he said that his objective for the next 10 years is that he’s going to read 100 books, which means he’s only reading 10 books a year. That’s it. So like, less than one book per month, which isn’t a lot, but he’s going to read those books two or three times. 

What he’s really getting at here is his immersion. He wants to immerse himself in the book so that it really becomes a part of him and not something that he’s just kind of quickly going through and then forgetting everything that was talked about.

One other final point that I think is really important, especially if you’re a young listener and you haven’t read a lot of books or you’re under the age of 30 or 40 years old, he talks about the “secretary problem.” 

Let’s say that you were going to hire a secretary and you knew that you were going to have 100 people come for the interview. How do you know when to just stop, because the time that you spend interviewing 100 is different than if you interviewed 30 people, and you just made a selection? You’re wasting your time by interviewing another 70 people. 

So what is the best point to cut off the interview and just make a selection if you had 100? There’s a mathematical solution to this, and the answer is 37. So if you’re going to interview 10, then you should interview about three or four people to then make your selection because you’ve seen enough that you now understand what the population looks like to make an informed decision. 

There’s a whole lot more written about this. There’s a really good book called “Algorithms to Live By” by Brian Christian and Tom Griffiths that gets into this extensively on this idea of the secretary problem, but to just make it short here and apply to what we’re talking about, what he recommends is you should read as much as possible up until the age of 30 to 35 years old… Something like that, depending on how early you started, obviously. 

However, assuming you’ve been reading your whole life, you should stop reading a barrage of books by about 30 or 35 years old. At that point, you should become very focused and read only things that you think are going to be highly influential and read them twice or three times. I found that to be a really profound thought and something that I really valued in this book, because it was something I’d never heard. So that was my point. 

I’m curious. Was that one of your points, Stig?

Stig Brodersen  11:39  

No, it was actually not. It was shortlisted, but it didn’t make the cut. 

I really liked his point about why you should reread the book like exponential learning. You will also make it one of your principles. It’s so easy to read a book and say, “Oh, that’s a great book. It was a good book…. but he did talk a lot about melted cheese or whatever you got out of it.” 

But if you can find principles that you can adapt and absorb into your daily life, I mean, isn’t that really one of the reasons why you read in the first place, especially books like what we’re reading here on the show? You want to get smarter.

Preston Pysh  12:19  

All right, well, let’s hear your next one, Stig.

Stig Brodersen  12:22  

So my next one is the negative side of the good life. He says the best way to look at this would be to look at something like tennis. What he says is that whenever you’re playing tennis with an amateur, it’s all about avoiding mistakes, because amateurs tend to aim too long or too high or too short. So that is the way to win. 

Now, if you’re playing into the pros, you have to take on a bit more risk and you have to hit winners. If you don’t hit winners against the pros, you’re probably going to lose eventually. He says that, looking at the good life, it’s actually very similar because it’s not so much about what it guarantees, but more what prevents it from happening. 

So he has this list about what would make you unhappy. You have poverty, drug addiction, loneliness, a long commute, being like a victim, a lot of great points. It’s actually very interesting that he reached this conclusion that if you *inaudible* all these things that will make you miserable, the upside can take care of itself.

I can’t help but relate this again to stock investing, to Benjamin Graham, to Warren Buffett, when they’re they’re talking about if you only care about the margin of safety, but all the risk you can incur. The upside really tends to take care of itself. 

I never really thought about that in terms of how I’m living my life. I always thought about what can I do to make me happy, and I guess not as much trying to mitigate what makes me unhappy and get the indirect effect. So that was definitely a life hack that I think most of us can take away from this chapter.

Preston Pysh  14:06  

Okay, so the next one that I had was chapter 25. It was called “Hedonism and eudaimonia.” This is all about how meaning can compensate for enjoyment. I love this chapter. This is something I’d never thought about. I kind of felt kind of strange reading this and thinking to myself, “Wow, how have I never thought about this?” 

Let me just give the people that are listening here this scenario. He starts off this chapter and he said, “Ask yourself how enjoyable, and the key word is enjoyable, are the following activities for you?” You got to put them on a scale from zero to 10. Zero being not enjoyable at all, and 10 being extremely enjoyable. These are some of the things on his list. He says eating chocolate, fighting for your country in a war, spending time on your hobby, raising children, funding hospitals in Africa, preventing global warming, watching the World Cup. He gives a bunch of examples like this. I’ll just pause and you think about, you know, if something’s really enjoyable, make it a 10. If it’s not enjoyable at all, make it a zero, and think about what your results are.

Okay, so now you’ve kind of thought through that. Now, here’s another question. How meaningful are the same activities when you think about them?

What he talks about is that people, when they look at it from an enjoyment standpoint versus a meaningful standpoint, the list actually changes. The numbers on the list change. What he’s getting at is really kind of like, when you’re talking about enjoyment, you’re talking about something that’s short term, like something that doesn’t require a lot of effort, but you get a lot of enjoyment out of it. Whereas, the other is something that’s more involved and requires like a sense of pride because you put a lot of hard work into it. It has meaning to it.

I like this because it made me think, “Wow, whenever I think about this show, it’s very meaningful to me, it’s a lot of hard work. I mean, sitting down and reading, recording, programming and working with the team and everything, it is a lot of hard work. But it’s very meaningful work, whether people want to believe that or not, but for us, it’s very meaningful work.” 

I wouldn’t say that it’s just enjoyable, like for me going out with my kids and going to an amusement park, that’s really enjoyable. Like I have fun when I do that. 

So he talks about this difference between something enjoyable and something meaningful. Then he talks about, “So which one is it that you should be trying to acquire in your life?” I think, intuitively, when I started reading this, I started thinking to myself the answer is you want to do meaningful work, because that’s going to be lasting and everything else. 

That wasn’t what he actually concluded in the chapter and I like that. What he concluded in the chapter is that you have to have balance between these two things. The person who goes out and is just trying to do things that are meaningful all the time, they’re going to burn themselves out. They’re not going to have any type of enjoyment in their life or sense of fun or anything like that. 

However, the person who’s just on the opposite spectrum that’s just trying to go out and have fun all the time, and they never do anything meaningful. They’re going to be incomplete as well. So he said, “You got to strike a balance between these two things and avoid the extremes. The reason why is because let’s say you enjoy watching TV. But if you watch TV for 12 or 14 hours straight, you kind of have this feeling. The marginal utility isn’t there. It decreases the further that you wander away from the fringes, so you have to keep this balance in check.”

I completely agree with this. This was a fantastic chapter. It was something that I’d never really thought about my life. I was really happy to kind of stumble upon that in this book.

Stig Brodersen  17:54  

I don’t have anything to your point, Pres. Now, I’m actually pretty surprised that we haven’t had any duplicates. Yeah, but let’s see here for the next one. 

So the next one is called the “Circle of dignity.” The circle or imaginary circle you have around you, that includes all your non-negotiable principles and preferences that need no justification. For him, it would be never post pictures of his kids on social media or it could be he would never do anything for money that he wouldn’t do for a 10th of that sum. 

Regardless or not if you agree with him, the strength from him of this “circle of dignity” really comes from, he doesn’t care. It’s okay. If you want to post all the pictures of your kids that you want on social media. It’s okay if you would like to do whatever for whatever kind of money. It’s your principles. It’s your “circle of dignity.” 

What he says is that the smallest circle of dignity is the better because if you put more things into that circle, the more that they can conflict. So regardless if you think that this is a silly example, if you think that his principles are good to live by, I think it’s a very good way of living because at the end of the day, we will offend and disappoint people no matter what you do with your non-negotiable. 

However, if you really think about it, it’s a very superfluous question because things that are invaluable, by definition, have no price. The “circle of dignity” is really just you and you have no price. 

I know this conversation might be a bit abstract, but I think it’s important that you don’t have to rethink every time you find a tempting offer because at the end of the day, it will erode your self respect and reputation, which will make you even more vulnerable for future offers. That’s probably a vicious circle for you to enter.

Preston Pysh  19:54  

I think one of the important things that he talked about in the book was you’ve got to at least have the list of what your non-negotiables are. I think for most people out there, myself included, I don’t know that I could show anyone what that list is. I think that’s a really important point. 

Maybe that’s not a bad exercise. Pull out a piece of paper and say, “What are my non-negotiables? What is it that I hold very close and dear to myself that I’m not going to negotiate on or waver on? Let me put those down in writing, and then start acting on that. So that’s something that I will never cross that line.”

Maybe it’s time you spend with your family, or whatever that is… I think it’s important for people just to recognize the importance of writing down the list, let alone going any further than that. 

So the next one that I had was the dogma trap. I really like this one, because it gets to a kind of a theme that Stig and I hopefully hit on whenever we’re talking about investing. He starts off this chapter with a really intriguing question. 

He says, “If I asked you how zipper works, what would you say [was] your [level of] understanding? On a scale from 1 to 10. 10 being you really understand how a zipper works, and 1 being you don’t understand it at all, and how would you respond?” 

You kind of probably have a number in your head of how well you understand what a zipper is. Then he said, “Now, if I was going to give you a piece of paper, and then really explain to me, how does the zipper work? 

Explain like the engineering behind it. All the mechanical pieces and everything, how much could you actually describe on how that actually works? How it clasps together, how it’s pulled apart, all that stuff?

What I think a lot of people will recognize is that they actually understand very little as to how a zipper actually works. Maybe that’s just me and maybe my lack of understanding of the engineering. I guess that most people really couldn’t give too much of an explanation other than, “Oh, it zips up my clothes, you know.” 

His point on this [is] what he calls [as] the “knowledge illusion.” Most people think that they understand things at a much more granular level than they actually do. So then the next thing he steps to is so think about how profound and complicated a problem is when you ask something like this: how much immigration is good for a country in the long term? 

When you think about the complexity of that question, it is extremely profound. It has so many different variables, so many different variables that we think we understand, but we actually know nothing about. What he’s really getting at here is sometimes you just shouldn’t have an opinion, and that you should maybe throttle back how quickly you’ll provide an opinion. 

It wasn’t in this chapter, but in another spot in the book, he talks about this idea where your mind is constantly pumping out an opinion about everything and anything. Basically, turning that down, turning the knob down on how you should be basically providing an opinion on things. Sometimes it’s very liberating just to say, “I just don’t know. I don’t have an opinion on that.”

How many people do you go up to and say, “Hey, what’s your opinion on X, Y, and Z?” And the person actually responds back and says, “You know, I just don’t have an opinion on that.” Like, that is so rare. That is so insanely rare that you just don’t ever see it. 

What he talked about in that chapter, which wasn’t even the chapter I’m referring to here, he said, that’s a form of intelligence when a person says that. When a person just spouts out anything that’s a lower form of intelligence. So I completely agree with that. 

Now, where he goes with the rest of this chapter, as he starts talking about ideology, he starts talking about don’t fall into the trap of just following any kind of ideology. 

He says,  “This is how you can tell if you’re falling into the trap of an ideology. Ideologies explain everything. They’re irrefutable and they’re obscure. That’s the three prong test of whether you’re falling into an ideology or not.”

He says, “Be especially wary when speaking in public about an ideology,” which is something Stig and I do every week, because you will likely be prone to beat it deeper and deeper into your mind. I can tell you that is a true statement. 

So what he says is imagine you’re on a talk show anytime that you’re spouting something off. When you’re on this talk show that you’re publicly proclaiming something that you need to be wary of the way that you come across whether it’s a really strong opinion. Anytime you have a strong opinion, you need to be very careful. 

What he’s saying here is, if you can’t argue the opposite side of the opinion, as well as your own opinion, then you really haven’t earned your opinion yet. He’s obviously pulling that from Charlie Munger. I’m assuming because I think Charlie is the one who has come out and said that. So that was my third point. I really liked his discussion on this. It was quite fascinating.

Stig Brodersen  24:57  

It was very, very profound and very, very liberating that you can just say, ” I don’t know.” It really creates this bond of trust with that person, even though you might think it probably shouldn’t, because you just said you didn’t know anything. 

I mean, think about how much you if you were a respected politician running for whatever kind of office, journalists would ask him or her a tough question. Then, that person will be, “I don’t know. I need to go back and study this more. I’m really sorry. I will send you an email with my response. I’m just not knowledgeable enough.” 

I mean, I would probably work for a politician like that. I’ve never seen it so far, but hopefully one day will happen. So my fourth point is, “If you run your own race, you can’t lose.” It has the tag line “General knowledge is only useful as a hobby.” 

I really like this point, partly because I don’t necessarily agree with it, but also because I still find it very, very profound. The way he starts out this chapter is he’s talking about how back in the Stone Age hunters and gatherers, more or less did the same. 

There were definitely tasks that men did and tasks that women did for anatomical reasons. But aside from that, they were more or less all generalists, because they had to be partly because often people died and you really needed someone who could step in. 

The way that they live, you have to be a generalist. That was the most efficient way of living. He says that it’s very different today. We basically know more and more about less and less. The reason is that the winner basically takes all in a globalized and driven world. 

We have so many choices today, so we shouldn’t be intimidated by a sudden global competition because it also means that you can specialize in more fields. As long as you can win in your own field, you’re on track to win another one’s race. This is actually a very good thing for most people.

The way to think about this is something like the Kentucky Derby or any other kind of sports. I mean, the winning horse is not twice as fast as number two, but he might be making 5 acts [with] the prize money and sponsorships afterwards. That specialization is just so important.

Same with entertainers and the way that he conveys that into useful advice for the reader is that if you’re applying for a job, or if you’re trying to polish up your resume, don’t see how many different credentials you can take. See what is necessary and then do that very, very well.

Preston Pysh  27:37  

I had a point that kind of piggybacks off of what you’re saying there. [It’s] do the thing that you’re really good at. I don’t remember where this was in the book, but he made the quote. He said, “If you’re going to give to a charity, give money. Don’t give anything else other than your money.”

When I read this, I said, “That sounds like really bad advice.” Then, he goes a little further. And he says, and I know this is more from a utility standpoint that he’s saying this. I think that there’s a lot to be said of giving to a charity with your time. There’s a lot of other values to be had, but he’s looking at it purely from a utility standpoint.

He said the most you can give to a charity is through your money, because think about it. If you’re really good at carpentry, you need to be building things. In that case, if you’re doing Habitat for Humanity, maybe giving your time would be the best thing you could get. 

For most people, they’re not a carpenter, maybe they’re a computer programmer, or they’re this or that. If they focus on that thing that they’re really good at, and they make money. Giving that money to the charity is going to provide the most utility to the charity than anything else because if you continue to work at your job, you’re able to produce more and whatnot. It kind of gets to Stig’s point: focus on the things that you’re really good at and just knock them out of the ballpark.

Stig Brodersen  28:54  

So I guess where I might disagree with this is that I think general knowledge is really helpful for you, not only to grow as a human being, but I actually think general knowledge can also help you specialize. 

I think you’re just talking about merging two different fields. Someone like Kahneman who we’ve talked about multiple times in the show. Well, he comes from background psychology. I think the reason why it’s been so useful not just for people in psychology, but also in finance is because he took the best from both of those worlds.

We used to talk about reading Ray Dalio’s book “Principles,” and there’s a very interesting chapter where he talks about how nature can really explain a lot of things, investing, interacting with people, and how just looking outside the window can really help you understand the world. 

It’s a very indirect way of having success, not just financial success, but also personal success. If you understand the world, and I think general knowledge is what you need. So I think that’s probably where I disagree with him, but I can definitely see that it might just be me twisting it, because his advice about how to specialize and doing what you do best is definitely valid.

Preston Pysh  30:11  

Okay, so the fourth point that I have is called the “focusing illusion.” We talked about this a little bit when we had Robert Cialdini on the show, and this idea was brought up by Daniel Kahneman. 

To just kind of paraphrase Daniel Kahneman, he says nothing is more important than what you’re thinking about right now. So let me provide an example of what he’s talking about and why this is a profound idea.

If I was to ask you whether you wanted to live in Miami, or live in Buffalo, how would you respond to that? Or what would you enjoy living more in one of those two locations? Most people will immediately come back and say, “Well, I would be much happier if I lived in Miami.” 

What people almost immediately are doing is they’re comparing the weather when they’re making that decision. They’re focusing on one aspect of the question, which is the weather. They know that if they’re down in Miami, it’s more hot, and they don’t have to go through the winter. Where[as] if they’re up in Buffalo, they will. 

What he talks about here is the focusing illusion is providing this perception that you’re going to live a happier life in a different location. This could be applied to anything. This is just one example. What he says when you think about what’s actually happening, when you go down to Miami, you have a job, you live in a certain area, Miami, which might be good or bad. You have a long commute that might be really short, or it might be really long. You have all these factors that are also at play. 

What you might find is that you’d be exponentially happier in Buffalo than you would be in Miami, depending on all those other circumstances. Maybe you’re not making any money down in Miami and you’re working paycheck to paycheck and you don’t have any excess money to go out and in yourself. Like there’s all these other factors that people just lose sight of, because maybe they’re so fixated and so focused on that one thing.  

I guess what he’s trying to get at here is a person needs to take a step back, and they need to understand this bias, this focusing bias, this focusing illusion that exists in almost any single person, because the more that you think about that one thing that just keeps driving your thought process, the more that you’re ignoring all those other things that are out there that might actually create a lot of value or a lot of happiness for you. They’re nowhere in sight because you’re so focused on the one thing, which might be a guy who moved to Miami [just because he says,] “I don’t like this weather.  I’ve got to move to Miami.” 

So the recommendation that he provides is get out a piece of paper, write down all the different factors that are a play with a decision to broaden your scope and broaden your perspective so that you don’t get sucked into this illusion. I found that to be very profound. I see this all the time.

My daughter is little, she’s three years old. I see this focusing illusion at play all the time. Even my son, they get this idea in their head, I want this toy. Until they get that toy or they get that thing, they just cannot get it out of their head. They’re totally fixated on it, and it drives their entire emotions. It drives everything, because they can’t take a step back and say, “Oh, well, there’s five other toys sitting over here. I guess I could go play with one of those or whatever it might be.”

You also see this in adults. You see this in kids, you see it in everybody. I think it’s a much more profound idea than people really realize. It’s funny when we were talking with Robert Cialdini, he brought up the story where Daniel Kahneman was asked, “What’s the most important thing that you think is out there that a lot of people don’t understand?” 

And Daniel Kahneman actually said, “the focusing illusion,” even though this wasn’t what he had won his Nobel Prize for. This was a completely different idea. [It’s] something that didn’t even make him that famous that he brought up as the most important thing.

Stig Brodersen  34:04  

What I really thought about when I read through this chapter about the focusing illusion was really the feeling of gratitude and how we are simply not grateful enough. 

Let’s give an example. So a few weeks ago, I had a cold. I remember complaining a lot about having a cold, like the timing was bad. I was very busy with the company and tons of other things. So I had no time to be sick. I don’t know when you ever have time to get sick, but that was kind of like the narrative for me. 

I had a cold for like three or four days, [and] whatnot, but when I think about me today, I have not thought one second about how grateful I am that I’m not sick. The only days during the year when I think about that is when I’m sick. I guess that’s probably the same thing for most people. 

So that was not necessarily what this false illusion was about but I kind of like to bring that example to the table as a related topic. It’s also my segue really to my fifth and final point, which is “the less you expect, the happier you’ll be.” This is not the same thing as not setting goals. One of the things that we learned in the book is also that it’s important to set goals. If you achieve goals, you become a happier person. 

This is very different actually. This is, in many ways, also the same as not falling into the focus fallacy. The way he frames this is he is comparing the utility, the happiness of a silver medalist compared to a bronze medalist. 

You might be thinking, “If you come in like, it’s *inaudible*. You would be happier, but you won’t, because [a] silver medalist can pass himself to gold.” It was this benchmark, typically, whereas if you get a bronze, you’re thinking, “Well, you know, I’m up here on the podium, at least I get a medal. There are so many other pupils in the field who didn’t get one and gold was pretty far away.” So, it will make you happier.

Expectations in many ways are good, and they’re helpful in your [day-to-day] life. You would expect the sun to sudden rise like it always does. You will not need to spend your time and focus and energy on that, but it can also work against you. 

We’re recording this [on] one of the first days here in 2018. New Year’s Eve is typically the most disappointing day over the year because that is the time where people have the highest expectations. It’s still not the worst night per se, but it’s where people have the high expectations and when ever they’ve realized what they’re going to do. It’s typically not as good, but they hope…

Similar narratives about birthday holidays for the families. A lot of other things, but especially New Year’s Eve should be the top day here. Basically, his advice is that we should draw a clear distinction between desires, necessities, and expectations. You shouldn’t make your wants your necessities. It’s very dangerous to say, “I have to be the CEO or I have to have kids.” Basically, you don’t. 

The way he provokes the reader is by saying, “Aside from breathing, eating, sleeping and drinking, you don’t really have to do anything. Instead, it’s a lot healthier in terms of sending invitations to say, “My goal is to become the CEO. My goal is to have kids,” because these necessities will basically make you unhappy. As he stated, it will make you act like an idiot around other people. 

The way that he wants you to test this is…he’s saying how important this is for the quality of life. He says, “Consider your lifespan and start to rank the zero being you consider this a disaster, and 10 being this is your life’s dream.” 

And then, you should probably deduct this to whatever kind of desire you have to avoid the focus fallacy, and it takes 10 seconds. He even says that he does this on a daily basis in terms of putting things into perspective, if there’s something that you just like to have. 

I think this was very profound in many ways, because it’s not a question about not being ambitious, it’s not a question about not pursuing your goals. It’s more a question of how do I limit my downside? How do I make sure that if I reach my goal, if this and this would happen, I’ll just be happy? And if it doesn’t, I’ll still have a good life?

Preston Pysh  38:30  

Alright, so the last one that I had was called inner success. You actually hear Warren Buffett talk about this one a lot, which is the difference of your outer scorecard and your inner scorecard. This was the last chapter in his book. I really liked this idea. 

He starts off by talking about Warren Buffett specifically saying that Buffett had won the ovarian lottery and what he means by that is that Buffet was born at a certain point in time in the United States. He was blessed with a strong mathematical mind into a family that gave him opportunities that he could leverage in, etc, etc. 

What he’s really getting at is Buffett was lucky that he had all of these things that were completely outside of his control lined up that afforded him the opportunities that he was able to take on. When you look across the world, and all these other people that aren’t given those same luxuries at birth, they don’t have the same luck that Buffett had to start off. 

So comparing yourself to a guy like Buffett, if you’re trying to compare them based on net worth, which is only one tiny little metric that you could compare him to. But if you’re using that as your outside scorecard to compare yourself to him, you’re going to continue to be disappointed in yourself. That’s what he’s really getting at with this is don’t compare yourself on the outside. Rather, compare yourself on the inside with yourself, [if you’re] getting better each day. 

So he brings up this example with John Wooden, who’s one of the most successful basketball coaches in American history. Wooden has a quote, he said, “Success is peace of mind, which is a direct result of self satisfaction and knowing you made the effort to do your best to become the best that you are capable of becoming.” 

Success, in this sense, isn’t winning titles or collecting medals. Instead, it’s an attitude. He goes on to say, “Make each day your masterpiece.”

So what this really is what is it that’s important to you on the inside? Not what are people around you seeing on the outside? What is important to you that you become a great parent; that you’re there for your family; those kinds of things that are most important? And then, what are you doing each day to get better at those things that you truly value from the inside? Then, you got to keep trending in that direction. 

Something that I like that he talks about in the book, he says, there’s no way that anyone ‘s going to read this and immediately say, “Oh, you know what? I’m just going to focus on my inner scorecard, and [I’m] going to completely ignore [my] outside scorecard.”

But what he says is, you should try to trend in that direction. It’s not that you’re making a complete flip, and you got to kind of have both in your life. What he’s saying is, if you can trend in the direction where you slowly start to focus more on your inner scorecard than your outer scorecard, you’re going to be much happier. You’re going to be much more successful in your own right. That’s what he’s really trying to get out with the entire book. That’s why saying 52 surprising shortcuts to happiness, wealth, and success.

Stig Brodersen  41:36  

Great point, Preston, and I also think a very nice way to round up the book. Did you have anything else here? No? Okay. Let’s go into the next segment.

Preston Pysh  41:45  

All right. So this is the point in the show where we take a question from the audience. This question comes from Tim Davidson.

Tim Davidson  41:51  

Hi, my name is Tim, and I’m from Australia. I live in Thailand with my wife, who’s a dentist and we listen to your podcasts all the time. We have learned so much from both of you. Keep up the good work, guys. 

You know before the Bitcoin protocol, there really hasn’t been any major technological innovation in money. Bitcoin is essentially just a piece of software. It’s a technological innovation because it’s uncorrelated as a potential asset with anything else, in my opinion. Thus, it doesn’t matter what the Fed reserve is doing doesn’t matter what’s going on politically. 

Bitcoin’s price is set by the people in a free and open market but what happens if shares crash globally, like they did in 2000? What do you think will happen to the price of Bitcoin and 1000 other alt coins? Does the average [man] invest in Bitcoin [and] inadvertently think of Bitcoins as a share or equity in a company because a lot of people do own stocks? 

So my question is, in the event of a correctional crash on global share markets, will the average investor for *inaudible* also sell their cryptos? Finally, I just wanted to say the road might not be straight up, and Bitcoin might not be the one at the end of the shakeout over the next five to 10 years. 

However, I believe there will be a cryptocurrency that will become mainstream and learning about it now and maybe investing in some old coins could be the best trade of one’s lifetime. With all this in mind, are the two asset classes discussed above, uncorrelated in the mindset of the average investor, or are they directly connected? Thanks very much.

Preston Pysh  43:18  

So, Tim, that’s a cool question. Thailand is a beautiful country. I’ve been there one time, and it was really neat. So I just wanted to throw that out there. 

I like this question. I think it’s an important discussion to talk about what happens during a large credit and tracking event first, and then maybe we can talk about some of the hypotheticals of what could happen with Bitcoin. So when we talk about a credit event, what’s happening is all the credit in the system is drying up, and then it’s contracting down to its monetary baseline. 

Let me explain this for anyone who doesn’t understand what I mean by that. You first have to understand how a fiat currency works. So, fiat currency has what’s considered a monetary baseline component and then it has a credit component. The credit is made up of the fractional reserve banking that happens. 

If you don’t understand what fractional reserve banking is, I’d tell you to Google that. Learn a little bit about how when a central bank puts more monetary baseline into the system, how the banks can then expand that, and basically create credit around that.

Once that credit expansion reaches a limitation, and it starts to basically get supersaturated as the way I like to call that it starts to contract and it has a tendency to accelerate as that contraction occurs. What it’s doing is it’s accelerating back down to its monetary baseline. 

So just for simplicity, let’s say that $20 is the monetary baseline and then another $80 is credit making up a total for the entire economy of $100. Once that gets to the hundred dollar limit, and it gets supersaturated at 100, then it starts to contract back down. It goes to 80, it goes to 60, but that $20 component of the monetary baseline does not dry up. Only the credit part of that dries up. 

When you think through this example, if you’re valuing everything commodities, you’re valuing stocks, you’re valuing bonds with this money that’s in the system, the hundred dollars. As that contracts, the value of everything else is going to go down right with it. 

So the price of gold, if you go back, and you look at gold during the credit contraction of 2008, and this is really from kind of like the summer period, up until maybe Christmas of 2008. You actually saw the price of gold go down. I want to say by 20 or 30% during that period of time. The reason you saw the value of gold go down is because all that fiat credit was drying up. Since gold is somewhat fixed in the amount of quantity that exists in the world, if you’re using these dollars to value that… And those dollars are contracting and disappearing, you’re going to see the value of gold go down right with it. 

So with all of that said, and let me just add to that, as soon as that credit event tracks, and we saw this go full contraction back in the last credit cycle… I would say, what would you say, Stig, February to March? Somewhere in 2009 is when you probably saw credit… I think that’s about when the timing was…is that right?

Stig Brodersen  46:26  

Yeah, it sounds about right. I think gold even from year end was like 24%. 

Preston Pysh  46:32  

Yeah, and so you saw gold even front run that a little bit. Gold hit its complete contraction, I want to say around Christmas of 2008. Then, it started going up. In general, you’ll see everything contract, even commodities that have a fixed supply of those commodities. They’ll contract up until that point where the central banks then do their expansion again and they start in the last cycle. 

It was all this quantitative easing, they started pumping more dollars into the system. They started buying bonds off the market at any price, and they started fueling the system with more fiat into it, which expanded the monetary baseline. Then the credit came after that. 

I fully expect to see something like that play out again, whenever the next credit event happens. I don’t necessarily expect a credit event happening here Christmas time of 2017, but you never know whenever these things could hit and what might trigger it. I mean, you could have some type of global event call it a war, something that could maybe cause a credit event to start trickling down and kind of compounding on itself. You don’t know when that’s going to happen. 

So when all that happens, and you look at Bitcoin specifically, which is I know where your question was at. Bitcoin, in my personal opinion, will be treated as a fixed supply just like gold. That’s my opinion. Other people might have an argument against that, but my opinion is that it’ll be just like gold.  

My expectation for that first part of that credit event or that credit contraction, whenever it happens is that the value of Bitcoin will go down. Just like any other stock or bond or anything. Now, once that kind of bottoms out, and in the past the bottoming has happened pretty quickly, because central banks have had interest rates to play with… 

They dropped interest rates, they were able to expand the credit supply very quickly, like within six months, nine months… Then you saw a very abrupt rebound in things like gold and commodities that had a fixed supply or a fixed supply to demand ratio there. 

I would expect to see the kind of a similar thing play out in Bitcoin this time around. Where that might be different is if somehow maybe Bitcoin as part of the reason for the meltdown, which I think that might be way far off reason. However, I mean, it’s definitely in the realm of possible. That could maybe make my whole underlying assumption of all this stuff false. 

So, at the end of the day, I have no idea but I hope some of those ideas and kind of that thought process of how credit events kind of work help you think through what solution you think might occur. I’m curious to hear what Stig thinks of all this.

Stig Brodersen  49:05  

What we know, at least based on history is that if a crash should occur, you will have the contraction that Preston talked about before and then you will just see the Fed start pumping out a bunch of liquidity. One thing that you will see is likely that the lower the federal funds rate, which is basically a rate that’s maintained by the Federal Reserve. 

That is the cash that flows in and out, you can look at it in terms of deposits between the banks. If that rate is high, they will have more incentive to hold on to that cash. But if it’s low, they will have more incentive to push it out into the market to get the production going. 

So I’m pretty sure you will see something like that. The Fed has also recently hiked rates, probably because they would like to have some ammunition if we see a crash. The other thing, at least what we saw last time was the start of quantitative easing. That started up almost out of the gates, buying up $600 billion in mortgage backed securities and agency *inaudible*. Who knows if you might see something similar to that?

However, when it comes to Bitcoin, I think this is very exciting because I just talked about how you will pull out liquidity. Preston talked about a fixed monetary baseline? I’m not sure that is what investors will think, if this should occur. I think that investors would say, “I find gold to be safe.” 

I’m not sure they will make the analysis because it has a fixed monetary baseline. That’s usually not how people talk to each other but it would seem like, “Oh, so if the state is pumping out of funds one way or the other and gold cannot… like how that goes inflation…” 

I think it’s all about safety at that point in time more than anything else. So the question is really, will people perceive Bitcoin to be safe whenever that happens? I think that is really going to be the big question mark because we never seen anything like that for Bitcoin. 

Just think about it when it came out in 2008, I think. It was very small. You couldn’t really use that for anything. I think that the potential upside is huge. But again, the downside, we don’t know about that.

Preston Pysh  51:14  

One other thing that I want to piggyback on what you were saying there is we have seen it in Cyprus, and we have seen it in a couple other locations where they have had basically a meltdown in the fiat of the domestic currency. Bitcoin has done extraordinarily well in those locations, for obvious reasons. 

Though I’m not necessarily saying that’s what’s happening in the next credit event. I think it could, but I think it’s something that people need to be aware of. Stig lightly hit on this as well as like, what does the Fed do if they don’t have much interest rate to play with and the market starts to contract in a major way? 

Well, you know, I’m of the opinion, they’re gonna definitely go to quantitative easing, and they’re going to go in a massive way. That’s going to be interesting to see how that all plays out and whether that’s going to be enough to stimulate the economy as fast as it did during the last credit event. However, they’ve replaced a lot of credit with dollars and I think they’re going to do that again. So we’ll see what happens. 

Those are some of our thoughts. We definitely do not know what the heck’s going to happen. As far as I’m concerned, it’s 50-50. As far as it [is] going up or going down, I have no idea. I think those are some of the important things to consider when you’re thinking through what might happen. 

All right. So Tim, thank you so much for submitting your question for submitting your question. We’re going to give you free access to our intrinsic value course which is a paid course on our TIP Academy website. 

We just really thank you for doing that. If anyone else listening to this wants to get your question played on the show, go to asktheinvestors.com. Just click on a little button there and you can record your question. If we play it on the show, you get a free course.

Stig Brodersen  52:44  

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

Outro  52:51  

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