Highlights from my recent interview with Intelligent Money

I recently did an extended interview with Intelligent Money, which created a "Profile Showcase" that includes a transcript and four video clips.

Today, I'll share some brief excerpts from each of the topics we covered (I'm sure longtime readers will be familiar with many of these!)...

Essentials

• Worldly Wisdom (you can see the video right here):

"When Charlie Munger talked about worldly wisdom, he talked about having a toolkit to build your mental toolkit. One of his favorite sayings was that you do not want to be the 'one-legged man in the ass-kicking contest.' Another was, 'To a man with a hammer, the world looks like a nail.' His point was that people tend to see things in very narrow ways. Instead, he said you want what he called a latticework."

• Trading is Hazardous (the video is here):

"Every study ever done on individual investor accounts shows the same result. Researchers found that the more trading you do, the lower your returns. In one study, I do not recall if it was Fidelity or Vanguard, researchers looked at millions of accounts, all anonymous, and the pattern was clear.

"There was a straight-line correlation: the more trading, the lower the returns. The accounts with the highest returns actually belonged to dead people. These were dormant accounts with no trades at all."

• Investor Mindset:

"I would argue that being a successful long-term investor is 50% building skills – being smart, hardworking, understanding industries and businesses, getting yourself a good job, an apprenticeship, learning everything. All of that is 50%. The other 50% is controlling emotions and the psychology of investing...

"Human beings are hardwired to want to get rich quick. Of course, the key to getting rich and building wealth is to do it slowly. The surest way to get poor quickly is to try to get rich quickly. This is how people get sucked into bubbles and all the madness of crowds, looking at others making money."

• Federer, Tennis, and Investing (here's the video):

"At the 2024 Dartmouth University Commencement speech, Roger Federer talked about how even at his absolute peak, over the course of his best year, he won only 58% of his points. That is not much more than half the time. He said he had to be able to put failures, missed shots, disappointments, or an opponent simply hitting a better shot behind him.

"Even when you are successful, you are going to fail about 42% of the time, since the opponent wins those points. Having the mental resilience to deal with setbacks, and understanding that in any competitive field there is no way to win all the time, is critical. We all know tennis players who let one bad call or one bad shot cause a complete meltdown, and they end up losing to someone they should not have lost to."

• Mind of a Goldfish (the video is here):

"You need resilience, what I call the mind of a goldfish. You lose money or something goes against you, but you cannot let it upset you to the point that it changes your thinking and snowballs into worse outcomes. Yet it happens all the time. Just watch a tennis player lose one point, have a meltdown, and then lose the match. The same thing happens in investing."

• Become a Learning Machine:

"The other thing I didn't figure out as a young person is by the time I graduated from Harvard and Harvard Business School with high honors and all, I thought, OK, now it's time to monetize this sort of hard work, but these degrees and whatever. And what I realized is I didn't know anything at the time. I just had a good foundation to then become a lifelong learner..."

Buffett Classics

• Secrets to Success:

"Warren Buffett always talks about the three characteristics he looks for: smarts, hard work, and integrity. He says that if integrity is missing, you do not want the other two. Other than my parents, Buffett and [Charlie] Munger have been the biggest influence on me, and that was one of the earliest lessons I learned from them."

• The Legacy:

"I initially discovered [Buffett and Munger] and spent a lot of time studying and reading everything about them and everything they'd written because I developed an interest in investing. They're two of the most successful investors of all time. And so it was sort of self-serving, I wanted to make a lot of money and be a successful investor...

"[Buffett and Munger] are such great teachers, not just about investing, but about life and worldly wisdom."

• Arrogance and Humility Equation:

"Pretty much everybody in the investing business has the arrogance part down pat. What they're missing is the humility part, and that's rare.

"There are very few people who have the confidence bordering on arrogance to get into the investing business and think they're smarter than everybody else, but also have the humility to say, 'You know what? I don't know anything about cryptos or cocoa beans, or whatever the hot thing is.'"

The Playbook

• Getting Started:

"The vast, vast, vast majority of people should simply own index funds. Keep fees low. Actively managed funds, almost all of them underperform over an extended period of time. So stick to low-fee index funds."

• Improved Decision-Making:

"Recognize that many of the toughest decisions are personal and emotional – who to marry, whether to take a new job, how to handle someone who has wronged you, whether to sue or settle. These decisions are emotional, and strong emotions impair judgment. So if you are stressed, sleep-deprived, or in a highly emotional state, recognize your decision-making is impaired.

"How to offset this? First, get good sleep. Second, avoid making big decisions when under stress. Third, seek outside counsel."

• One Message to Investors:

"If I had one message, it would be: think long-term. Do not try to get rich quickly. Most people watching this are young. A 25-year-old might have a 70-year investment horizon. Develop good financial habits and avoid short-term traps."

• Measuring Risk:

"Risk is not volatility. Risk is the permanent risk of permanent loss of capital... If you want to avoid permanent loss of capital, stick to businesses that generate a lot of free cash and that do not have a lot of debt. That generally will provide a floor."

• The Investment Thesis:

"Before making any investment, you should have a reason. Why are you making this investment? Be very clear about your variant perception. What do you believe that is different from the consensus view?

"The consensus view is reflected in the stock price. If you are paying that stock price, you are buying because you think the consensus is wrong and this is a better company than everyone believes."

• Variant Perception:

"A variant perception is easy to develop and very difficult to be right about. The crowd is right most of the time. A variant perception simply means you believe something out of consensus. It can be about inflation, interest rates, something [President Donald] Trump does or does not do."

• Value Traps:

"The bane of every value investor is value traps, which are stocks that never turn around – and the worst value traps decline to zero... Generally speaking, the worst value traps, the ones that go to zero have a lot of debt. So I'm constantly looking at beaten-down stocks, but the key is avoid ones with a lot of debt.

"Yes, they can be supercharged if they turn because the debt creates leverage to the upside, but it can also mean that they don't survive the trough that they're in and you've got a zero on your hands. And generally, my favorite type of value investment beaten-down stock is a very high-quality business.

"I've cited some examples before, but Facebook back in 2022, McDonald's 20-odd years ago, where very, very high-quality businesses that are generating a lot of free cash flow and something has impacted the business. Investors are concerned about something, and the key to whether it's a value trap or a great turnaround opportunity is whether the problems that have caused the stock to decline, prove to be temporary or reversible."

• Fixed Income Investing:

"My fixed income right now is a fair amount of cash. The critical thing is to make sure you are getting a market interest rate on your cash, which is a little over 4% today. If you asked me what the S&P 500 [Index] will do over the next five years, I might say 5%. You can earn about 4.3% today taking no risk owning United States Treasurys. So my fixed income is a cash sweep account at Fidelity."

• Low-Interest-Rate Environment:

"As the market has risen, trading today close to an all-time high, I have sold a few things and taken cash from maybe 5% to 20%. Generally speaking, I try to follow one of Buffett's sayings: 'Be fearful when others are greedy and greedy when others are fearful.'

"So I was putting a lot of money into the market in my personal account at the bottom of the COVID crash and again at the bottom of the 2022 tech crash. But then, as things recover, I do some trimming."

• Advice to Retirees:

"Most importantly, monitor your spending closely. I was just reading an article the other day that said when people think about how much they'll need to retire, they think that they'll only spend 60% of what they were spending. So in other words, their spending will go down by 40%. I don't know, they don't have to pay for gas driving to work or whatever.

"In reality, the actual numbers of people who have studied this is 97%. In other words, people become accustomed to a certain standard of living and that's what they spend. You've got to make sure the money lasts.

"And so the first piece of advice would not be related to investing, but related directly to what you can control. And boy, particularly today, it is so easy to let spending get out of control because everything's on your phone – 'click, click,' you've just bought something on Amazon, 'tap to pay,' you've bought that $7 latte, you've booked an expensive trip, etc."

• Advice on Advisers:

"The average person is better off with no advisors, no high fees, and simply indexing. You can break it into three buckets like I have, or keep it all in [the SPDR S&P 500 Fund (SPY)].

"If you want to pick a handful of stocks, stick to high-quality businesses, understand them, and hold them for years. A 10-stock portfolio, if you know what you are doing, might even beat the S&P 500."

Again, the full transcript is here. And here are the videos on the Worldly Wisdom, Trading is Hazardous, Federer, Tennis, and Investing, and Mind of a Goldfish topics.

Best regards,

Whitney

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