(upbeat music) - Hey everybody, this is Phil Town. - And this is Danielle Town. - And welcome to podcast. If invested, tested podcast. Welcome, welcome to-- - Hot test to welcome. - That one. - That one. (laughing) Welcome to listening. - Oh my God. - You clicked maybe by accident. Welcome. - And here you are. - Podcasting, investing. We're trying to be really good investors. And if you've just gotten here, you know, there's a lot of back story we're not gonna go into. But we are definitely-- - So you just got here, scroll away back to episode one, and we'll see you in like two years. - Yeah. You know, the actual podcasts that most people do is like, each one is its own thing. This one not, this is an ongoing rolling education series. It's a serial, it's-- - It's old fashioned serial. - Days of our investing lives, apparently. And we get all over different areas of investing. And the last one we got over was Daniel Day Lewis running in a breach cloth through the woods of Appalachia, America in the 1750s in last of the Mohicans, probably taking his shirt off at some point. And we consider this an investing podcast. This is-- - Yes. - This is how far a field we can go. - The point is, you can call anything investing practice and it's not wrong and that's amazing. So the reason-- - That's really true. - We'll get back to the discussion that we're having right at the end there. But the reason I even like was curious about these ideas is-- and a little short that I did for the podcast recently, I was saying to people like, chat with your friends at the pool or at the beach or at the Fourth of July party and talk about stuff they're into because your friends are probably into different things than you are and they know things. And when you have, it's kind of weird to question somebody about something they know about unless you have a reason. And so if you say, I've been getting into this like, investing thing, I'm sort of curious about what you know about cheese. Can you tell me about the cheese company that you work for? - The cheese. - I mean, this is a great way to find out one, more about your friend and two, about the cheese and then go and, you know, buy the cheese company. - I mean, you guys, it's so interesting to do this. Honestly, this is the most fun business and job in the whole world because you can find out about stuff. - Yeah, that's your job. - And you can be like my best friend who I've known for 15 years who I'd never thought to ask about cheese because that sounds so boring, actually knows a ton about cheese and now like it turned into this huge thing. Or it didn't and you move on after five minutes, either way, nobody lost in that situation. (laughing) - Well, I was just thinking as you're speaking about Bill Ackman, who is really, in my view, one of the great investors and runs a massive hedge fund, I think he has 10 billion that he's investing very successfully, very Warren Buffett, rule one kind of investor. And he was, he's an avid fly fisherman and he was out fly fishing years ago with a guy named Oliver White as his guide. And he did a number of trips with White and really liked him. And Oliver has this sort of breadth of experience as a fly fisherman, right? We're studying what he does and he's really good at it. And Ackman offered him a job. And Oliver White went to work for him and lasted a year or two where he discovered that a great deal of what Ackman expected from him as an analyst is to just read, read stuff all the time, read anything, read whatever you want to read, but just keep reading and reading and reading and reading. And ultimately White left because sitting in a cubicle and reading in New York wasn't his idea of a good life. So he left, went back to guiding. - Yeah, that's a big change from being on the river every day, for sure. - Yeah, I think Ackman put up some of the money for him to buy a lodge and a guiding service and he went out and did it and is running that now. - Sweet. Point being that you are all potentially great investors, every single one of you. And if you put the time in and avoid what we were talking about last week, which is confirmation bias, which can just eat you alive, and which we may be speaking about more here, I guess. Are we gonna chat about that confirmation bias? - Yeah, I-- - If you can avoid that, you could be really good at this. - Well, I wanna talk about what we were talking about last time, which I'm not sure I would call confirmation bias, but we can talk about that. So what you were saying last time was that there, it was some, there was an amateur mathematician on Joe Rogan's podcast recently, and then there was, there was somebody else who is like a professor, you think, of mathematics? - Yeah, I'm sure he's working, yeah, for you. - As defined by having a .edu email address, if I remember correctly. - Yeah, that's right. - So we can just move on from those credentials. - And so this is Eric Weinstein and Terrence Howard to discuss, and I think Terrence Howard is an actor to top it off. - Oh, the actor? - I think he's an actor. - There is an actor named Terrence Howard, yeah. - Yeah, then it's probably him, but he's brilliant. He's brilliant in a street like his own self-educated brilliance who has put together geometric puzzles that really pop the eyeballs of one of the top mathematicians in the world and got him willing to sit down. And at the end of the day, what Eric Weinstein did, he said the day of peer review is over. Now you have such poor, he said basically back in the 70s, somebody started creating some publisher, started creating all these magazines to do peer review and just spread them out. So one after the other created a peer review magazine for everything he could think of in order to get more money. And the industry, the educational industry bought into this and has diluted peer review to a point of stupidity where now you're being peer reviewed by people who just agree with what you say. And so what Weinstein did, he said, what I'm doing for you, Terrence, is I'm doing an expert review and these are very rare. - But that, I just wanted to qualify 'cause to me, that's a dangerous statement. Peer review is not good and we should stop doing it. That's a dangerous statement because scientific progress is based on peer review. - Well, he would argue with that. - He's gonna leave that there. - He would argue with it. - The answer to the podcast is fabulous. - So argue away but I just, that would be a very big deal and that's not to say that there aren't issues with peer review and neither are there. - Oh good 'cause Weinstein is a managing director at Peter Thiel Capital. - Oh! - Cool. - Guess what? Weinstein's in the investing world sports fans. Now that is fascinating. I didn't know that. - Okay, now let's talk about this thing that actually applies to all of us. Which is, the problem as you described it of an amateur coming up with some genuinely good ideas, maybe new ideas, maybe really making a breakthrough in the field and then layering on incorrect ideas or stuff that's been disproven or simply a bad idea out of left field that actually just is not true. Some, whatever, something like that. There's sort of this like sophomoric addition to the actual good idea. And I was saying that would be like stripped out of you in school and that's the point of school. So somebody who didn't go to school and didn't go through like for math, I mean, and didn't go through that process. Yeah, I mean that's the reason that mathematicians who did go to school tend to look down on people who didn't 'cause they know they're gonna get a lot of that stuff. That doesn't mean they can't have good ideas and it's the same in any field. And so, and what you were saying was that he was like defending himself a lot and you called that confirmation bias. So I relate so much as an investor, as somebody trying to learn something new, as somebody who did not go to school for investing at all and especially not long-term value investing. I feel like exactly like him most of the time where I know I have good ideas, but am I layering dumb ideas on top of them? Am I putting other things in there that just aren't true? And if I had somebody checking my work over and over, it would become really obvious. I think it's very likely. I would almost say it's impossible not to do that stuff when you're learning something. And I'm not sure it's exactly confirmation bias because you're doing it, I'll speak for myself. I'm doing it the best I can and I'm criticizing my work the best I can. But, so I don't feel like I'm confirmed with it. - Well, I think you have to, you have to take two, there's two sides, there's almost like two steps to avoid confirmation bias. One, I think is to recognize it as a constant threat for any intellectual exercise. - Yeah, but I'm talking about not, I'm not talking about me walking in, here's my report on company X, it's great. That's confirmation bias or that's the beginning of it anyway. If you start to challenge it and I go, "No, no, no, it's really good because of these reasons." I'm talking about I'm doing the work and I'm aware that there's things I don't know that I might be blipping in there and I don't have a way to discover those things. I don't have a way to not make those mistakes. - First off, I wanna offer a different definition of confirmation bias than what you used to offer. - Okay, go ahead, yeah. - So you were saying confirmation bias is, and I'm not sure you actually meant this literally, but that you have confirmation bias, if you think your report on company X is really good, really great, and you turn it in, then that is automatically confirmation bias and it isn't at all. - Yeah, you're right, that's a terrible definition. Yeah, it's really not. - Okay, good. So confirmation bias is the inability to see the inversions in my language and you just simply can't see them, you turn them into positives every single time. - So in my imagination, you turn in that paper and then the person says, here are 15 things wrong with it and I think that what you're saying is completely stupid because I know what is true. That's confirmation bias, that's a fact. - And you're wrong. I mean confirmation bias implies that you're wrong, right? So in other words, you're having an argument with your spouse and they're not hearing a word you're saying because they're quite sure you're wrong. - Well, that's unhelpful. - Right, they're just sure you're wrong and they're just not hearing a word you're saying and they're not going to hear it because all they wanna do is tell you how wrong you are. - I have a top tip for that situation that I've been using lately. - Oh, what? - Somebody told me, when you have two against each other, you say to yourselves, no, we are a team against the problem. - Ooh. - Yeah. - Really good. - And if you say that in an argument. - We're a team against the problem. You're gonna get a really annoyed look, but it breaks it up for a minute. - Oh my God, that's a good one. All right, I might try it. Not that Melissa and I ever, ever get in that situation, but confirmation bias has another side to it. And that is that you, in order to avoid it, you have to know it exists, number one, and be humble, like be the opposite of hubris, be someone who is intellectually curious and completely willing to be wrong and accept that. So you have to have that in your head. But the other side of this coin of confirmation bias is that you have to really understand what you're talking about. You have to be deep in that field or deep in that company. - In order to what? - In order to avoid it. In order to avoid confirmation bias. - Oh, in order to avoid it. - Otherwise you get caught up, I'll give you an example. - We were looking at, we own a piece of a bank, okay. So then this article comes out very negative about the investments that this bank has been making. It's been lending money to a couple of projects around the country that are not doing well. And this is very not bank-like behavior by this bank. So article caught a lot of attention. The stop price drops. - Did you know about this or was this news to you as well? - News to us, news to us. So the stock price drops 20, 25% on this news. And which can mean something or mean absolutely nothing. It can mean, ooh, red flag be aware because a lot of smart people are getting out. Or it can mean, wow, time to buy because a lot of dumb people are getting out. So you just, you don't know. So what you have to do is you go find out. You take this criticism seriously as an owner of this business. And so you gotta go find out. And that process for us meant to go to the buildings and talk to people around those buildings, talk to the leasing agents, talk to everyone. And what we found interestingly was that indeed there was a valid criticism of this company going on here that they had put money in, they put the money up for, you're gonna appreciate this, I think. A life sciences building, a big one in downtown San Diego on the waterfront. So this is downtown San Diego on the waterfront, glass, beautiful views, what could be wrong, right? Well, they built it as a life sciences building. And all of the life sciences companies are north San Diego, 15 miles away, up the freeway, starting with the Salk Institute and the University of California San Diego in La Jolla and moving north all the way up to the Palomar airport. - Wait, so sorry, you said they just built a building, but do you mean as office space? - As life sciences office space. - Okay, okay, so it's for rental, for leases. Okay, not for the bank itself to use. It's an investment, okay, got it. - Right, they put the money up for this other developer. - And they can't lease it, totally sitting empty because it's for life sciences, it's built for that. Their leasing agency is trying to put that in there and no one wants it, why? Well, because nobody wants to drive south into the downtown San Diego area who works in the life sciences industry. They all wanna be north, live near the beach, proximity to the beach, away from the crowds, away from the traffic, up where everybody else in the industry is. And it's been like that for 40 years. - Oh, wow. - I mean, one of the first companies I invested in, when you were a little squirt, was a company that leased office space as a life sciences company, right up there. And then that company went on to lease space farther north and so on. So I've been intimately involved with the real estate of life sciences for 40 years, well, almost 40 years. And I can tell you, from that experience, I have a sense of that real estate in San Diego that whoever was in that bank, approving that loan did not have. - Well, and then to our ongoing theme here of seemingly unrelated information helping you out 40 years later. I mean, that's a cracker. - Right there, life sciences locations in San Diego. - Yeah, there you go. You just don't know, you just don't know. And so we're looking at this and just going, holy smokes, these guys were expecting to lease this out because it's so beautiful and it's on the bay and they're having a terrible time. And then the question becomes, well, did the bank make a horrible mistake or is it a mistake they're gonna get out of, okay? - Yeah. - So I mean, that's the heart part as an outsider. It's the, so what? Was it a horrible mistake? Was it a mistake that's now there's five others in the pipeline, just like it? Is it a one-off or there may be secretly geniuses because they think that they're gonna bring people down? Like, how do you figure that out? - Absolutely. And that is right to the heart of investing. That's what investing is about. It's about being a reporter for your own newspaper. - Yeah, so how do you figure that out? - You gotta lead on a story and if you're a reporter, think about how would you figure it out if you're a reporter and here's this news story. Okay, well, you just gotta talk to a lot of people, right? You gotta read about a lot of stuff. You gotta look at what the company says. You gotta look at what the other competitors are doing and what they're saying. You've gotta talk to people who may or may not wanna lease that building. You're gonna talk a lot. It's John Templeton, I think, described this kind of investing as scuttlebutt. You're looking for scuttlebutt. You're looking for just talk to me, right? - Still my favorite investing word. - Yeah, scuttlebutt. And so, but consider, if you're a reporter, how important it is to not get confirmation bias about your story. You don't want to take a point of view too early. You wanna be intellectually neutral and intellectually honest. Or you're gonna end up getting caught in some lie, essentially, and you're gonna publish this lie. You're gonna buy somebody's story that is a good salesman and you're gonna get caught up in it, which is one of the reasons, by the way. - Well, you're not, though, because then you won't get published. So basic journalistic standards are, you don't have a point of view. You find out the facts. You only put the facts in, and if you have a quote from somebody saying this thing happened, you try really hard to get a quote from somebody else saying, no, it didn't. And here's why. You try to have, if it's a sort of bifurcated type of issue with two sides, you try to have both sides. And an editor will usually require that before it gets published. Okay, then this is where we depart as investors from being good reporters. If that's what a good reporter is, somebody on, for example, on CNBC, let's talk about company A. - I'm talking about print, writing an article. - I know, but you can see this on CNBC all the time. They always put up this guy on that side and then this other guy on the other side. It's just standard. But think about this, CNBC doesn't have to take a point of view. They're just providing entertainment. You have to have a point of view. You're going to end up with one of three points of view. Either you understand this and it's a bad investment or you understand it and it's a good one. Or you don't understand it and it's too hard. Those are the three places you're going to end up. - Yeah. - And so you can't just go, well, I'm going to get somebody on their side of this infinitely. You keep trying to get somebody on their side of it until the evidence becomes overwhelming. - Yeah, yeah, because sometimes you can't find somebody and that's also a piece of evidence. What comes to mind, like straight on this example number one is the reporter from the Wall Street Journal who went into Theranos' history. Remember Theranos? - Oh, yeah. - Theranos is the supposedly biotech company that was like a Stanford dropout, let it. Elizabeth Holmes, I'm sure you've seen her blonde face on the news and she essentially thought that she could fake it till she made it the way software companies tend to do. But because she was playing with people's health, you can't do that because people can die and so did. So she had this blood testing machine that didn't work. And so it was covered up, like it was covered up. - It was buried very deep, yep. - Like Weinstein level covered up with like, commandos coming to your house at night, terrifying type of stuff, like they were doing that. And this reporter just kept going. And if he were an investor, he would have done, I don't think there's anything different in that process. Your outcome is you salar, you buy, your outcome is you write a book and you expose them. It's still the same process. - Right. - And his book, which I wanna look up the name 'cause it's so good, I can't recommend it enough. I listened to it on audiobook. - What's it called? - Blood, blood, something. - Blood something, yeah. - I listened to it when I was even really sick and could hardly like process stuff. And it was just, it was so engaging that I was able to stick with it. - Bad blood. - Bad blood. - Bad blood. - John, something, right? - Hang on, John, carry you. - Yeah. - John, carry you. Great book, wow. - I cannot recommend that enough from an investing perspective of the layers that he went through in the corporate structure to find out what was happening and then to, just as you just said, to the competitors, to the suppliers who all had different stories. And that's the investigation. - This is such a good subject because it's mind boggling that people who had a direct involvement with this company, like some executive at Walgreens, for example, decided to build super labs within Walgreens and rolled out like a hundred of them without having, without knowing for sure that he's got a good technology. The technology didn't exist. - Yeah, she faked it. - And they won't do these things out. - She faked it with that, if you get that deal. - And I gotta tell you, it's an amazing thing, how the beauty of being an investor versus a reporter is so cool because as an investor, you don't have to write the story. (laughing) All you have to do-- - You don't have to do that horrible part at the end where you have to put it all together. - Where you have to keep digging until you get the story right, you don't have to do that. All you have to do is get going until it's too hard. And when it becomes too hard, or when it's, you're obviously over your head, you're obviously drifting into an area where you're not in your circle of competence. This is where hubris starts. This is where confirmation bias goes because you think you know. And so if you can keep your head screwed on rationally and dig into a company like Theranos, I think you'd very rapidly discover you've got all this anecdotal stuff over here saying something's wrong. And you've got all of this quote evidence from the company saying it's not. And you would just have to be intellectually honest and say, there's no way I can know. I can't go into the machine. I don't have enough information. And the reason that that's such an important thing to realize as an investor is that you're capable of making investments in the things that you don't understand, and you need to be sure you don't get caught up in some salesman's story. I have a good friend of mine that put seven figures into this guy's water treatment thing. And when I looked at it, I saw, he asked me to take a look at it. When I looked at it, I saw that I couldn't see. It was a black box. - When you said, do you mean data that they gave you? - Data and the way the machine works and how it does it and everything. - Okay. - Black box. Black box. You put in, you're in on one side and now it comes sparkling fresh water on the other side. You got this black box that's doing magical things. And this guy has got the Saudi Arabian guys involved. You got these guys involved. He's got these guys involved. And I've been around the block enough to recognize the limits of my own knowledge and realize if I can't get a professional to look in this box for me, then this is too hard and I don't want any part of it. And that's what I told my friend. Said, either you get a water treatment pro from a university and pay them $1,000 a day and have them go take this box apart or you stay away from this thing because you cannot know. And of course, the guy who's developing this is all about, you know, I can't show you this because it's proprietary and it's like, you can't, I just can't, can't show you. He would show them enough to where they thought they understood it and oh, a couple more things. Maybe I'm wandering a field here, but I'm triggered by the Theranos stuff. Is that the Theranos board? - Yeah, it's so triggering. That board was full of luminaries. - Yeah, well that's-- - They had a former secretary of state on it. They had two generals on it. And it was just full of luminaries and they were all caught up in Elizabeth's home's bullshit. They just got caught up in it. And my friend got caught up in a good salesman's bullshit. It turned out it was fraudulent at the end of the day. - Oh, shoot. - Oh yeah, but I mean, it's a terrible thing but it happens all the time to varying degrees, right? So you can have companies that are not fraudulent except for just a little bit and that can, right? If you can't get in on that, you're gonna see something blow up on you. I mean, I've lost money on those things as you are well aware because there was fraud going on, there was lies going on by the top levels of the company and by the board. And if they're gonna do that to you and you're not able to get in there and check yourself personally to see and you don't understand enough about the technology to for sure know what you're looking at and you can't get an expert in there, then it's too hard and you don't wanna go outside that area of competence. So we were-- - I'm making notes for next time because we gotta wrap up, but I have five more comments. - I was gonna just circle back and say that that's why confirmation bias is this two part thing. It's like when you're outside your circle of competence, when you're into stuff that you don't really understand, this is where confirmation bias goes like a weed because we wanna think we get it. It's so part of us that we've spent 10 hours reading about this business and now, oh man, I totally get it. When chances are you don't actually get it and this is one of the things we wanna teach you guys is you have to keep the circle small, you wanna be an inch wide into businesses and a mile deep before you start expanding out into anything. - Yeah, but I don't think confirmation bias is like autumn, like I think you can read for 10 hours and have a good sense and a good idea and be useful and say to yourself, hey, I don't know everything. Like I would like to learn more. Like those two things are not necessarily automatic. Oh, now I know things, so I'm-- - I'm coming from a very specific place on this and I think that that's fair to criticize what I just said from that point of view. - But I just don't want people to like not read about stuff because they won't know enough about it after 10 hours. Like go do you learn cool stuff. - As a fund manager, where there's always that sense of do, be smart, do something wonderful and do it now. That's just an intellectual problem that fund managers have. - The push, the push, the pressure. - Push the pressure to be smarter than the next guy in the room and it leads you into these states of, particularly in this kind of a market where it's extremely hard to find a simple, easy to understand, highly predictable business that's on sale. - That doesn't have some massive problems going on. And it allows your mind to wander into areas where you're not an expert and think you can become one. And then as you're starting to become one, confirmation bias steps in, hubris kicks in and you can get yourself in trouble. How do I know that? (laughing) We can talk about that later. (laughing) - All right. - It's all nice stuff. - And then there's the torture, which I've been dealing with, which is like, I looked at BYD, which is this electric vehicles company in China. A number of years ago, super cheap, like amazing deal and went, I don't know anything about China. I don't know anything about electric vehicles, trucks and the transport system. And this is over my head. So I didn't buy it, which is like, according to the rules, correct. And now I'm seeing BYD ads on the Euro's football tournament on the edge around the pitch, because they've gotten so big that now they sponsor the freaking Euro's. - Yep. - Of the end. - Well, so the other way you can go here is just buy whatever Buffet buys. (laughing) - Buffet didn't buy that. Oh no, Buffet did buy that. That's right. - Yeah, he did. - All right, we gotta go. - I was thinking, it was more monger who famously, yeah, but you're right, Buffet did buy it. - All right, you guys, we'll talk about that some more. That was fun. Time to go play. - Time to go play. - Bye. - Yep, see you now. (upbeat music) - Hi guys, thanks for listening to "Invested." If you enjoyed this episode and you want more information or to listen to additional episodes, visit our website at www.investedpodcast.com and sign up for my virtual workshop right there. Spots are definitely limited for this event. I'm not kidding, they really are. They sell out very quickly. So everything discussed on this podcast, by the way, is either my opinion or it's Danielle's opinion. And I'm really important. It's not to be taken as investing advice because I am not your financial advisor, nor have I considered you a personal situation as your fiduciary. So remember that, you're on your own here. This podcast is for your entertainment and education only and I really hope you enjoyed it. (upbeat music) [BLANK_AUDIO]
