The Smattering Podcast 59: Fighting Chimps and Picking Stocks

The Smattering Podcast 59: Fighting Chimps and Picking Stocks

Note: Transcripts are lightly edited.

[00:00:02] Jason Hall: hey everybody. Welcome back to the smattering where we ask the hard questions about investing. I'm Jason Hall and joined by the voice of people, Jeff Santoro. Jeff. Hey, buddy.

Jeff Santoro: Hey, how are you?

Jason Hall: I'm good. I'm good. It's a, it's a busy week. We've got a lot going on. You know, we launched the newsletter, pretty excited about that.

We did pretty good. We've actually written two separate things for it, right? We wrote the introduction and then we actually did something related to our conversation with Travis Hoium, last week's guest. Of course, I hope more people keep, keep signing up for that, right? That sweet ad revenue,

[00:00:40] Jeff Santoro: Yes they should absolutely sign up for the newsletter.The link is in the show notes and all of our social media. Yeah, we, we have a newsletter now. It's gonna go out on Sunday mornings. It will include whatever the hell we feel like talking about. Sometimes it'll be follow-up thoughts on that week's podcast. Sometimes it'll be random thoughts.

We kind of wanna leave it open-ended to be whatever we want it to be, ala what this podcast is. And in addition to the Sunday newsletter you'll also get a transcript of the show that comes out the same time the show does each Saturday, so you'll get two emails a week from us. But that's it.

We don't we don't anticipate spamming you any more than just those two a week unless we really, really have something important to say. So please sign up for that. And then just a quick reminder again for our listeners who could be, who would be so kind as to give us a rating on the podcast apps, maybe even a review on Apple Podcasts, that, that will help more people find the show.

One of the last podcast reviews, we got the person referenced finding us like, discovering the podcast. So that's the reason we ask for the reviews and the ratings is that puts it in people's feeds when they search for things like investing podcasts. , maybe we come up and, and we grow the show that way.

So check out the newsletter, give us some reviews, give us some ratings, and we really appreciate it.

[00:02:00] Jason Hall: Jeff, I have, I have an observation. When you put out the, the call out for people to review the podcasts, you always ask for people to do it out of the generosity of their, of their hearts and their kindness.

And we have some greedy people too. We do. And that's okay. I mean, this is a podcast about investing and, and finance. So a little greed there. And I wanna talk to the greedy people for a second.

[00:02:25] Jeff Santoro: Go ahead. I'll, I'll talk to the kind people. You can talk to the greedy people. Yeah.

[00:02:29] Jason Hall: So we do this podcast for free.

The newsletter's gonna be free. That's our promise. Continue to do those things for free. We both have regular jobs that provide us income. We have visions to be able to continue to grow the podcast, make it better, do more, expand it, help it, you know, do more for, for our listeners and our readers. That takes money, right?

We want the, the incentive -- part of the incentive for us is the more money we can earn from this, the more time, of our own time that we can put into it. So speaking to the greedy people out there. Keep that in mind if you want more of this kind of stuff. Just give us a five star review. That's all you have to do.

That's all you have to do. Cuz we'll grow, we'll be more popular, more ad revenue will flow in. I'm, I'm talk - by the way, I'm talking to Jen Roberts right now. This is for Jen.

[00:03:15] Jeff Santoro: This is specifically for Jen?

[00:03:16] Jason Hall: Specifically for Jen. She'll get it. All right. Hey, what are we doing today? What's our show about?

[00:03:22] Jeff Santoro: So the, the title's kind of bizarre, but the basic idea we had been talking about, I think with the original idea we had was along the lines of are you lucky or good?

And we were talking about, it's hard in the moment to know if you are making the right decisions or making the wrong decisions, and, and you, your only indicator is portfolio go up, portfolio go down. But that could be because you're a skilled or non-skilled investor, but it also could be because of things outside of your control.

And then that got us talking about the facts, which I think you're gonna share in a moment that most individual investors underperform the market or even sometimes the actively managed fund that they're in. So we wanted to have a conversation about all those things, how to know if you're doing well at investing, how to know if you're lucky or unlucky what lessons you need to learn over time.

How do you know when you're learning those lessons? So that's the theme of this episode.

[00:04:27] Jason Hall: So the title for this episode, you've already seen it, folks. Jeff's dancing around it, but the title is Fighting Chimps and Picking Stocks. And you may be wondering, what in the hell does that mean really?

And this is one of the things that got me when Jeff and I were talking about the idea for the show is, I remember our colleague at the Motley Fool and our pal, Bill Mann recently tweeted out something that he's tweeted out before, that there is this statistically significant percentage of American men that for some reason, believe they could actually beat a chimpanzee in a fight, right? And it's, it's absolutely insane to believe this because they're 50% stronger than the average person, even though they're, you know, five feet tall and weigh 130, 140 pounds, they could rip your arms out of the sockets and beat you to death with your own arms. But there's a bunch of people that think that they, that think that they, they could, they could take one of these, these animals down.

And then that got me thinking, Jeff. Most people, the vast majority of people think that they're an above average driver. The basic math says that that is not true. Right?

One of my favorite investing books. Gonna give it a plug for it. Again, Luann Lofton's, wonderful Warren Buffet Invests Like a Girl (and Why You Should, Too). One of the things that it talks about is how, especially men, I'm talking to the men here again in aggregate, it's not always exactly the case, tend to be way overconfident in their ability to do something like pick stocks or invest.

We tend to be way overconfident on the golf course. We tend to be way overconfident on the basketball court. So it got me thinking about all of those things in, in regards to investors and that whole lucky or good thing, Jeff, that you were talking about.

[00:06:25] Jeff Santoro: I love how I come at it from lucky or good, and you have all these strange sort of like paths that your mind takes you to, but I think that's why I like doing the podcast with you.

[00:06:37] Jason Hall: I'm a weird guy. What can I say? So I wanna share some, go ahead.

[00:06:41] Jeff Santoro: No, I was just gonna say, I know you have some data you wanna share to kick off the conversation, so why don't you go ahead and do that.

[00:06:45] Jason Hall: Yeah. So there's there's a firm called DALBAR that does investment research. And they, they have some really good data. And I think it's, lemme say this first. I think it's always important to like, understand incentives. I tweeted about that today. It's like they largely support, provide data and, and information for the financial services industry, right?

So it's a little bit self-serving what, what they do, but I think it's really, really useful. The, it's a report they release every year. It's the QAIB, the quantitative analysis of investor behavior. They keep it behind a paywall and they sell it to advisors, right? They sell it to people in the industry that then they can use it.

To work with their clients, right? To try to educate them and help them build those toolboxes that we talk about, talk about a lot. And what's really stunning about it, and I'm gonna share something, there's a couple of, of firms, I'm sure they have, they have permission from from DALBAR to, to release like some of the little pieces of data.

But Index Fund Advisors did a writeup that talks about looking at 30 years. So this is from the beginning of 93, through the end of 2022. So this is includes the last full year of data that DALBAR had. And during that period of time, the S&P 500 generated just about 9.7% in annualized returns. It's a really good period, right? About the average for the market, maybe a little above the average for the market over the long term. Now. The average equity fund investor, before I even tell you the number, before I even tell you the number, let's talk about equity funds. So let's talk about large, large cap US stock funds.

That's the biggest category. Okay, so these are the stocks, these are the, the funds. This includes like index funds that like they index to the S&P, but it also includes the actively managed funds out there that they benchmarked to the S&P 500. In other words, they say, this is, this is our goal is to do S&P 500 plus level of return.

So their, their goal would be that same 9.65% over that 30 years, that would've been what they were aiming to get. So by and large, most of those funds generated about 9.65% in returns, minus what they charge in fees. Right? They tend to underperform strangely enough by roughly what they charge investors to manage the fund.

That's just kind of how the math works out, right? Roughly. It's roughly about that amount. Here's the thing, so let's say they, they achieved on average, 9% in CAGR over that period. You know what? Let's, let's say they even only achieved 8.5% CAGR. Let's say they were charging a lot of fees, cuz in the, in the nineties they were high, and the fees have come down since then.

So let's say they were achieving 8%, 8.5% in CAGR, it's a lot less than the market. The average equity fund investor, average retail investor investing in these funds, 6.8%.

And I call that the chimpanzee threshold.

[00:09:57] Jeff Santoro: Trademark. Trademark.

[00:09:59] Jason Hall: Trademark. Right, right. It's people trying to time the market, jumping in, jumping out, you know, all of the fear and greed driven emotional decisions we make that pull us away from focusing on our goals.

[00:10:13] Jeff Santoro: And you, you shared with me another statistic that we don't, I don't think have in front of us, so we'll, we'll just talk about it in generalities. But Peter Lynch, one of the greatest investors of all time, ran the Magellan Fund at Fidelity for many years and returned some really impressive amount annualized every year.

But the people in his fund did not, which is just, it's the same product of, the, if they had just got in and stayed in, they would've had the return the fund had, but they were – trading. People trade in, they cash out, they come back in. And when you do that, you, you lose. So it's the same idea with just a more specific example.

And it's not crazy to me to hear that because the very few people in my life who I've had conversations about investing with who are not people like you and I, or maybe even a lot of our listeners-

[00:11:02] Jason Hall: No, they're people like you and I, they're just not investors like you and I.

[00:11:06] Jeff Santoro: Investors like you and I. Yes, thank you. They are people like us, Jason, you're right. But they say things like very matter of factly. Like, oh no, I'm not, I'm not in the stock market right now because it's crashing. Like as if you just said, no, I don't walk into traffic, like, it's that plain, you know?

And I just, I'm always like, wait, wait, hold on. What? Yeah. And who, I mean, I, I might have said that myself if I didn't know what I know. So it's not surprising. It's the facts and it's sort of the genesis of this conversation.

[00:11:36] Jason Hall: Yeah. Let's talk about the lucky or good part, Jeff.

[00:11:41] Jeff Santoro: I, I struggle with this a lot because, , I'll be perfectly honest, in 2020, I thought I was good because I, I just started and everything went up.

[00:11:56] Jason Hall: Yeah. I, I don't, again, I don't have the exact numbers in front of me, so I'm probably vastly overstating this, but directionally, I know this is correct, from that March bottom, March 23rd, whatever the exact date was, it was like the bottom during the Covid crash for the next nine months, maybe a year, I think for, from there until the market getting back to the previous high was about six months or so something, like 70% of US stocks went up.

I mean, you couldn't swing a dead cat without hitting a winning stock. It was pretty, pretty remarkable.

[00:12:36] Jeff Santoro: Pretty remarkable, I think. But I, but here's what I, here's what I think the bottom line is. Like, I don't think you can really know if you're lucky or good, or if you're unlucky or bad until many years has passed.

And I think even then, you probably owe your success to a decent amount of good luck. And you probably owe lack of success to some degree of bad luck. And, and here's what I mean. I think right now, I, I go back and forth in how I feel about this, but I feel like my portfolio is positioned pretty well.

I'm pretty happy with it. , I'm seeing what I hoped I would see once the market recovered in the sense that when the market was going down, I was losing to it. And now that it is going up, I am beating it. Right? So that says to me that, , most of the red I see in my portfolio right now is probably due to the fact that.

I started investing as the market was in a bubble, right? So like, it's gonna take me a while to recover from that piece of it. But I think even if you look back over a 30, 40, 50 year investing career, there's probably a decent amount of, oh man, I bought that 15 years ago on whatever, borrowed conviction or a , my buddy really liked it.

And, then I just kept it cuz it was doing well and I added to it. And , you could say there's some degree of luck to that or you didn't, you didn't do six hours of research before you purchased that stock. Maybe you were just lucky you bought it at the right time, or you sold something at the right time. I think it's always gonna be a combination of, of, luck and skill.

So I think maybe the better question is like, I guess part of me is like, does it matter? I think the better question is like, have I been successful? Over the long term, do you know what I mean? There's really no way to know how much of it is luck versus skill.

[00:14:23] Jason Hall: Well, I think, it is still an important question to ask and particularly, particularly in the short term, right? And I've used this analogy before I just mentioned the basketball court and like basketball is a simple game, right? Give somebody that's never played basketball before 30 minutes and you're gonna find out if they're a good athlete or not. Right? And if they're a good athlete, they're gonna be good at basketball. Right? If they're not a good athlete, they're not going to be good at basketball.

With investing, again, I've said it before here, you don't get, the feedback that you get in the short term is entirely noise. Except for when it's not.

Okay. Let me just confuse that. And what I mean by that is it's mostly volatility, right? Right. Barring some major fundamental change in the publicly available information about a company coming out. It's mostly just noise, right? And, but, but, but you can see an opportunity and, and the opportunity that I'm gonna give is a combination of luck and good buying.

Redfin. At one point, Redfin was under a tremendous amount of short pressure. The business was in trouble. They had just chosen to exit the flipping - house, flipping business, the iBuying business that everybody else had basically exited already. They chose to exit it. And this idea that they were gonna be insolvent kind of started floating around because their debt and, and they were owning, they owned a bunch of houses, they paid too much, like it was all gonna blow up.

And I did deep research into it. I'm like, you know what? That's, that's all bullshit. That's. Are they gonna struggle? Yeah. Their business is, they're a brokerage, right? Their business is selling existing homes and there's zero inventory out there. It's gonna be tough for a few years, but this is not a zero.

And I bought, and within a reasonably short amount of time, the stock doubled, tripled. I haven't sold, I've still held because I think it still plays well. So I believe that I was good because, understood the industry, understood the business, understood the balance sheet, understood all of the potential outcomes.

I was lucky that it happened so quickly, you know what I mean?

[00:16:33] Jeff Santoro: Yeah. That's a good way to think about it.

[00:16:34] Jason Hall: Yeah. So that, I think, I think the key thing there, and this is why I wanted to push back a little bit on this, Jeff. I think sometimes if you say, well, there's no way to tell if I'm lucky or good, that's just an easy out to not have to not hold any, not hold yourself accountable for your choices.

And, and I think people should really avoid that because like, here's my bad luck example. I wanna give this one, I've given it before too I'm drawing a blank on the name of the company, but it was a company that made sapphire that was used for like smartphone screens and that kind of stuff.Super tough material, really durable.

They had signed a big deal with Apple to be like Apple's key producer of this. The deal got really ugly. Apple was refusing inventory that wasn't perfect. They were losing money. They could, they didn't see any way to get out of those terms.

So they filed for bankruptcy. Like a company went from, everything was good to two months later they filed for bankruptcy.

And that was just bad luck, right? There was just almost no way to reasonably predict that as an outcome. And then you learn from that, right? That was just bad luck.

[00:17:42] Jeff Santoro: Well, I think, all right, so. I agree that you, I agree in the way you pushed back at what I said, but I think what I was thinking about it was more like this.

Let's say you bought, I don't know, I'm not, let's say you bought Redfin, right? You and you look back on your Redfin purchase 20 or 30 years later and it's been a massive winner for you.

Jason Hall: Yeah, that's getting lucky.

Jeff Santoro: Well, yes, and this is what I'm gonna say. Like I think you're right. Like if you look back on the way you bought it, which was how you did, where you did all this research and you looked at everything and you said, I don't agree with what's going on, and you put a decent chunk of money down and then you left it for 20 years and now it's worth 10x what it was, right?

think you can, you can account that to skill, but I do think that there's some degree of, I bought Redfin the same day you did, but because of this other reason or because of some other sort of thing I saw that maybe turns out to be not true, but because the other part of the business that I didn't see was awesome, I lucked out in the end anyway.

Like I think that's like I, here's a good example that might work for some people. There's probably a ton of people who buy Amazon because they know it from e-commerce and they buy Apple because they have an iPhone and they buy Microsoft cuz they use Word not realizing. Amazon also has AWS, which is a huge driver for its comp, for its business.

Or that, yeah, Apple's ecosystem has pulled 2 billion users into its subscription services and now that's, you know, 20% of revenue. I don't know if it is, I'm picking a random number. Same thing with Microsoft. They buy it because they know the Windows operating system, but they're not even realizing that they have a huge cloud business as well. And now they have this big stake in AI. So I think you can still be lucky with a long-term winner because, absolutely you, you bought it and held it and the thesis changed and you didn't notice or pay attention or care, or it was a winner, so you just were like, well, it's winning. I'm not gonna mess with it.

So that's what I meant about like it, it sometimes can be hard to tell, like, I have winners in my portfolio right now. Granted short timeframe, maybe two or three years that I can attribute to luck. I bought 'em at the right time. I didn't really know what I was doing yet. And I have some that I can say pat myself on the back a little bit cause I think I did a little more research and there was some skill base. So I think I was saying more of that.

[00:20:07] Jason Hall: I've got another one I wanna talk about that I think is a good example because it will build a little bit on what you were talking about with am Amazon, because I think somebody that bought Amazon in say 2004 because they identified a beaten down tech stock that really had built a lead in e-commerce and still had a lot of potential, right?

Was struggling but was moving in the right direction. That was good. That same investor that has held that stock through today was also good and also lucky. Because AWS and because now they've got a, you know, a logistics business that's the size of FedEx and they're the front door for, I don't know, 10,000 other companies that are trying to sell, you know, goods on the internet.

Like however you wanna cut it up. You know, again, it's both, right?

You, you can be good by buying it and then you can be lucky because it does all this other stuff, but you don't invest enough like intellectual capacity into seeing that future. And then you just sell and you miss all that.

Jeff Santoro: Right. Right.

Jason Hall: So, and so you miss, you miss that opportunity. For me. So for me, for me, the one that I wanna talk about is it's MercadoLibre, because when I first bought the stock in, I don't know, 2012 or so, somewhere around there, I didn't, I, I knew almost nothing about the business besides David Gardner was a very, very good investor and he picked it in Rule Breakers.

And so I bought some that was the service that he ran. He doesn't run it anymore. Tim Byers and some other really smart people are running it, but it's the Motley Fool service. It was the second service that I joined at the Motley Fool before I started writing for the Motley Fool. So I was lucky. I was just lucky because I followed that recommendation.

But then built my understanding of the business and have gotten to the point now where it's one of my super high conviction companies and I've added a ton of money to it because now I know about it and I can see a vision of an Amazon-esque company in Latin America that, oh, by the way, also is the biggest payments business in Latin America.

Right? So being able to see that bigger picture, I think that's, that's a really, really important.

[00:22:16] Jeff Santoro: I completely agree with that example, and that's a really good summary for a lot of the stocks I own. I bought them because I was a subscriber to a service. They recommended it. I held it. Because I did my research and learned about it and I added to it because of my skill.

So that's what I was getting at. It's sort of a combination of both. But here's where I think I agree with you, where this is a super important thing that for everyone to consider is you wanna at least go through the mental exercise and have the conversation with yourself or with another person about whether or not your successes were lucky or good and whether or not your failures were unlucky or bad, right?

Because that's being honest with yourself about how much your success was. Luck versus skill and vice- you know, on the other end too, is a mental exercise I think is worth having, because if you just chalk up all of your successes to skill and you beat yourself up over all of your failures and, and chalk all of them up to lack of skill, you're probably going to either be overconfident, like the, the guys who think they can beat up a chimp, or you're probably gonna just be so discouraged you're gonna bail and stop investing.

So I think it's a worthwhile mental exercise conversation to have. And I think everyone just needs to be honest with themselves about to what degree it's one or the other.

[00:23:37] Jason Hall: I think it's about humility. Humility for me, Jeff, because my, my observation, and again, I'm gonna apply a caricature here, is people crow about their smart investments and it's, and they, and then they give excuses about the ones that go bad.

I was really good here. I was right over here, but something else happened. And they learn zero lessons whatsoever. And if you can't find humility to really try to find some objectivity, to really learn lessons about what's, what is successful, what works for you and what doesn't. And when you can really try to figure out where you just got lucky and be happy with that luck and don't misplace that luck for skill that leads you to, to mistakes.

You know, it's amazing to have a huge winner that generates massive returns and then you thought you were good and you were just lucky and then you go lose that much money trying to replicate it in a really, really dumb way.

[00:24:34] Jeff Santoro: Yeah. And that's the next logical sort of step in this conversation or, or mental exercise, which is, have you learned any lessons through - from analyzing whether you were lucky or good?

And also how hard it is sometimes to know in the moment what lesson you're learning or trying to learn or should learn. Because, just in just looking over the past couple months for myself, I mean, we, I was the reason we did an episode called I don't know How to Invest anymore. And I feel-

Jason Hall: Everybody, everybody knows that, Jeff.

Jeff Santoro: Yeah, I know. Thank you for pointing for reiterating it after I threw myself under my own bus.

And that was only a month ago. A month and a half ago, right? Not, not that long ago. And I already, right now feel completely different than I did then.

And, and part of that's probably cuz my portfolio is better than it was back then. And it just goes to show you, like, even for people who spend a lot of time in their lives talking about this stuff, it's hard to completely separate yourself from the emotional side of the investing. And I, there's stocks right now in my portfolio that are doing well that.

I'm all of a sudden like, Hmm, this one's doing well, maybe I should be buying more of it. And just like three months ago I was like, I might sell this. It's, it's a lost cause. It's, it's not going anywhere.

So it's so hard to know in the moment, , like when a, when a stock's down and the business is struggling, is this short term, is this an issue? Is my thesis broken? Is this just a short term challenge?

And if it is, maybe I should buy more because then I'll, you know, reap the benefit down the road when they get their act back together. So, I don't know how you think about that. Like how do you know it's easy to look back? Like those stories you just told about being unlucky with that iPhone screen supplier and being lucky, lucky with other things.

It's easy to look back 10, 15 years later, and realize where those stories are. But how do you do it in the moment? That's what I struggle with.

[00:26:30] Jason Hall: Yeah. I'm glad you brought that up because I think if there's, like, if there's one overarching lesson I've learned to, the idea of trying to find lessons and trying to learn is that it's almost impossible to do it in the moment.

You, there's just, you know, money is emotion. Stocks are, you know, our financial future and we have so much invested to it, especially if we're picking our own stocks. It's just, it's how humans are wired. It's really, it's a challenge to do, and what I've found, for me, that is the most helpful thing to do is to let time pass.

Now, it's one thing when you're faced with a, a situation where you need to make a decision. Fortunately, with our stock portfolios, At, at least if you're using the proper tools, you should never be in a situation where you're forced to make a decision, right? If you, if you've done something dumb and you're using margin, , and you've had a margin call because stocks have fallen, that's your own fault, right? You've put yourself in that position and you have to make those decisions.

If you're a hundred percent stocks and you're living off of your investments for income, again, you've put yourself in a, in a position where you're, that's where your fragility lays, right? So I think that's an important thing is to, is to remember, and we've, we talked, we've talked about this a bunch lately, is like, you don't have to do anything, right? You don't have to.

And often the best thing to do is when you, like, you feel forced to, to make a decision, is to stop, step back and let some time go by so your emotions become less a part of whatever decision you're gonna make, and you can start to find some objectivity. And try to understand what you can take away from it that can inform whatever your next decision is gonna be.

That's the big one to me, is it takes, you just have to give yourself time.

[00:28:20] Jeff Santoro: Yeah. And it's, I agree with that. I think that's probably the only thing you can do in the moment when you're not so sure. And I mean, I wrote it, that's one of the things I wrote about in the newsletter is, the, I find myself having the biggest itch to do something when I'm like home on a day off and I have some free time and I'm on the computer and I'm checking out my portfolio.

And then I'm like, whereas like if I have a really busy week at work, I don't even think about my portfolio. And, and then the, the, the thought I had about selling something three days ago is just gone because I now got busy. So it's that time thing is huge.

So let me, I want to ask this. I wanna go in a slightly different direction.

Everyone says confirmation bias is bad. Everyone's like, don't make decisions based on what everyone else is doing. If you see everything on Twitter talking about this one thing, you should probably avoid it cuz you know it, that means everyone else is talking about it and the stock price is either too high or too low, because of that, all those things.

But I do think about when you're trying to make a decision about something, or maybe even struggling with the luck versus skill thing, do you think confirmation bias can ever be a good thing if the people you are seeking the opinion of you have a really high regard for?

So, so for example, because you and I chat all the time to plan the podcast, and because you and I are lucky to have other, colleagues through the Motley Fool and other investing friends that we have out in the world, it's not hard for either of us to hop on our text thread and say, Hey, I'm thinking of buying this or selling that, what do you think?

And I don't know, I'm, I'd be lying if I said I, the opinions of the people I trust in this world didn't matter to my decision making process. And sometimes I do wonder, like if I'm really kind of going back and forth about something, or if my gut's telling me sell or my gut's telling me buy, and every single person I talk to agrees with me, is that bad or is that actually sometimes a good thing?

[00:30:21] Jason Hall: This is, I'm trying to think of the best way to, to put what I'm gonna, say.

So here's the, let me say this first. The idea that confirmation bias in and of itself is entirely a bad thing. I don't think that's true. It's something that as a, a species we have, right? So obviously it has served some purpose. And our ability to thrive, right? As, as a species. So I think that's really important to start with.

But I think that its function of where it's, it's worked is that we tend to stick together with groups of people who tend to believe the same things. And that's a, that's a pretty good survival mechanism, right? The problem is that most of the, like the mental psychological stuff that we have evolved over the past quarter million years, makes us really suck it as investors, right?

Because those things are either reacting to very short, short-term stimulus, right? It's dark, there's a noise in the woods. Those of us who were very curious and decided to go explore that noise in the woods probably did not contribute to the gene pool, right? So that specific thing, died out. Right?

So the challenge is that we're really good at seeing patterns in nature. We're really good at seeing things like the change of the seasons, right? That that would start, it's like, okay, we need to go to that place. Last year when it started getting cold, where it wasn't cold, let's do that again this year. It was great, right?

The problem is that when it comes to things like the market, that pattern recognition part of our brain sees all these false trails that aren't real, right?

So I think where I come down on this is, sure, confirmation bias is part of human nature, and we have to recognize it and embrace it and realize that yes, it's gonna drive our convictions, it's gonna drive our convictions very much. But when it comes to picking a stock, when it comes to something as important as deciding whether to invest in the stock market, keep cash and invest in bonds, whatever you wanna do.

You, there can be a million reasons why you're probably right, but all it takes is one reason why you were wrong to completely unpin the argument. All it takes is one thing you missed, one thing you missed.

This is why I think it is so important that you have to challenge your convictions and you have to find people that like you and I, I think that's one of the things that we do pretty well for one another is we push back, we question, we look, we try to poke holes in the thesis that each of us may have for an idea.

Like sometimes you'll pitch a stock to me, you know, because you, you're the guy that buys stocks once a week consistently. Like that's your thing. You try to do it almost every week without fail, and you'll often, you'll send me a list of two or three stocks and I might see one on there that is like, I love that idea, and as soon as you start telling me that that's the one you wanna buy, I will point out 50 reasons why it's a stupid idea.

[00:33:46] Jeff Santoro: Yeah. No, I think you're right. I think that's, that was gonna be the way I was going to answer my own question, which is I think confirmation bias is actually okay. I think-

Jason Hall: So long as you recognize it.

Jeff Santoro: Yeah. Yes. And I think getting people, you know, and trust, getting their like sort of agreement with what you're thinking of doing is actually not necessarily a bad thing.

But I do think what needs to go along with that is either have friends who will push back at you without you asking, or you need to like, say things or seek out the opposite side to what you're thinking.

So our good friends Ryan and Brett who do the Chit Chat Money podcast, we've had them on our podcast before and we've been on theirs. I see them often on Twitter say something like, what's the bear thesis for X? Which says to me like, they like that stock and they're trying to get contrarian views, or maybe they're just prepping for a show.

But I sort of like that idea of I can't see the downside of this stock. I need someone to tell me like, what's the other side of it? Cuz sometimes you can't see it. Sometimes you are blinded from it.

[00:34:56] Jason Hall: Humans are so good at convincing themselves, they're right. Mm-hmm. Yeah. Just ask my wife. Like, as soon as I come up with an idea, she immediately gets defensive because 30 years of me coming up with really good ideas.

[00:35:10] Jeff Santoro: Yeah. I mean, look, I've, I've only known you for like three years and I can tell you that most of your ideas are terrible. So I sympathize. I sympathize.

No, but I think that's part of it. I think the confirmation bias thing is okay, as long as, like you said, you're aware of that, that is a thing. Like you should know what confirmation bias is and be aware that it's out there and that you're susceptible to it. But I also do think it's, it's worth before you make any big decision seeking out.

You know, the, the other argument that if you're, if you're bullish on a stock, seek out the bearish argument and vice versa.

[00:35:42] Jason Hall: So there was a, one of the, one of the bullet points we put on our outline that I wanna circle back to, cause I think it's useful, is how do you know what lessons to learn? I wanna talk about this a little bit more because this is really hard, you know, whether you're a brand new investor or you're a seasoned investor. And there's one thing that's come to mind to me about this that I think is really good. I wanna hear your thoughts on it. Maybe if you have anything to add to it.

It's looking at an outcome, whether the outcome was what you expected or was an unexpected negative outcome. One of the things I've started to try to do is I ask myself this question: Is there information that I now know that I could have or should have known before this happened?

[00:36:34] Jeff Santoro: Yes. No, I agree with that. I think that's where you can either start to beat yourself up or stop beating yourself up, right? Like if you can look back and say, without the benefit of hindsight, there was either no way or very little way to know that. I think frauds fall into that bucket. If you own a stock and you've owned it for several years and all of a sudden it turns out they're cooking the books and you look back and you're like, there really weren't any red flags. This was just straight up fraud. I think you can sort of let yourself go for not seeing that.

[00:37:12] Jason Hall: What was the Chinese coffee company?

Jeff Santoro: Luckin.

Jason Hall: Luckin Coffee. Luckin Coffee is a great example of that.

[00:37:16] Jeff Santoro: Yep. Right. That's the one I was thinking of. Yeah. Yeah. But I also think too, like, you know, so I, I, I try to give myself grace on this.

Like if I, if I feel like I make a mistake and I look back and try to figure out what it was, and you know, I say, okay, so I guess maybe like a really sophisticated stock analyst with an MBA might have seen this as a red flag and stayed away from it. But I, as a retail investor, missed it. I think I have to give myself a little bit of a pass on that, especially if I like tried, if I did my due diligence, if I, if I read the SEC filings and the press releases and and I, and then on the flip side, if I look back and be like, man, I just, I was blinded by the fact that I love this product and couldn't see past, that's, so I'll just give an example of that.

I, we've talked before about stocks that we love, or stocks that we hate that we love, cuz that can sometimes blind you to like I've talked about that with Zoom, like I know people have Zoom fatigue and all that, but having used Teams and Cisco WebEx and Google Meet and Zoom, I love Zoom. I think it's a fantastic product that I've almost never had a problem with it working.

And I let that blind me for a really long time. That and the fact that it was not really ever gonna be, consumer facing to the level that the stock, you know, got valued up to during the pandemic. And I think, so like that's one of those things I'll look back and like, that's a lesson I, I learned, or I hope I learned I needed to learn, like not to let myself be blinded by the enjoyment I have of the product when I think about it as an investment.

[00:38:56] Jason Hall: Yeah. And I, I like what you said there about kind of giving yourself grace and there's a difference between giving yourself grace and just using something like, well, I was unlucky or whatever, just as a copout to actually like objectively trying to learn how to improve yourself as an investor. I, I think that to me that's, that's, that's really, really important because you can look at you and you, you look at these things in aggregate, right?

I think that's the key is, you know, we love that Warren Buffett quote you know, first rule of investing to not lose money. Rule number two is, see rule one or something like that, right? And it sounds really good. And it's, you know, pithy and all of those things that we enjoy to hear from Buffett. But man has Buffett written about stocks that he's lost billions of dollars on, right?

So you have to think about it in aggregate, right? I think that's the really important thing. And again, we know stocks in our toolbox. It's, it's the thing that we use to, to create long-term wealth, right? So we think about it over that longer period of time, right? And I think that's important.

And looking at that one that you got wrong, well, what did I get wrong? Why did I get it wrong? What can I take from that to apply going forward, to avoid that mistake, but also not swing the pendulum too far? Right?

So the one I've used as an example Jeff is SVB Financial, a parent company of Silicon Valley Bank, right? I was pretty damn wrong when I thought it was like a once in a decade buy back in February. I was very, very, very wrong. And I'll tell you, if you've read, spent any time on banking Twitter, or really just FinTwit broadly, starting in like early March when Silicon Valley Bank and Signature Bank were taken over by the FDIC and like all the way through into May, when we saw First Republic, you know, was, was seized by the FDIC.

Everybody in the world was talking about how it was so obvious, so obvious that these banks were gonna get in trouble because interest rates had gone up so much and rates were so low before, that's never gonna-

Nobody saw this coming, Jeff. Nobody did. Nobody saw the Fed raising interest rates, I don't know what, 5,000 basis points, 500 basis points or whatever in this short period of time. Nobody saw that coming.

Okay. So hindsight bias is a real thing. And I say all that to say this, it would've been very easy in that environment to look at the fear in the banking sector. Everybody's saying it was so obvious that this was gonna happen. And there's so many other banks in trouble and say, you know what? I'm done. I'm, I'm just, I'm gonna stay away from bank stocks.

Instead is we did another podcast episode about this. I think I learned the right lessons, right about avoiding hyper risk and, and banks, right? Because perceptions, reality, confidence is king, as John Maxfield told us. Don't miss the opportunities in banking when the market gives you those opportunities because they're very cyclical and the market will, will run in fear and the valuations will get crazy cheap. And that's the time to buy, right?

So trying to learn the right lessons I think is really, really important here.

[00:41:58] Jeff Santoro: Yeah. And just so just to kind of recap before we take our break and do the second part of the show. What I think I'm taking away from our conversation is almost like just a reminder of some of the stuff we've been talking about honestly for the last year, and this wasn't like any sort of preplanned way I wanted to wrap up this part of the show. It's just really the, the feeling I'm having in the moment of this conversation, which is the toolbox we talk about so much, is almost something I wish I had like just started writing down, like maybe I had like a note on my phone, like investing toolbox, and I write down all these little things we've talked about over the years because I do think like hearing, , hearing you say and us talking through things like you don't have to make a decision right away.

It's worth thinking about, really thinking about if you're lucky or good or it's worth looking back at your mistakes and seeing where you went wrong or looking back at your successes and identifying what made them successes. It, it's sort of reassuring in a way to know that it doesn't take superhuman power to be a good investor, and it, it, it really just takes not forgetting all the things you already know that are kind of good things, good best practices to, to keep in mind when you're trying to make good investing decisions.

[00:43:14] Jason Hall: Yeah. I agree with that. And if I were to kind of bullet point this as a summary, I think as a starting point, finding humility I think is really, really important here. Because when you find a place of humility, you're more likely to acknowledge when you were lucky. You're also going to be more likely to forgive yourself when it was a mistake that you made, right? And then you can start really learning lessons, right?

Learning the valuable lessons, being more objective about finding the lessons that help you, and it's gonna help you kind of stay in that, okay, what, what am I trying to solve for? What are, what are my goals long term, short term, am I going about this the right way? Am. And how can I take all of these lessons? The, the wins and the losses, right? And the stuff, let's be honest too. There's not just gonna be wins and losses. There's also gonna be stuff that just was kind of sucky, but okay, you made some money. It's like, what do I do next?

So like really thinking about all of those things and just doing better, right? Learning how to do better and, and I think it's a really healthy thing to do, and you can break that cycle of being the above average driver who can also beat up a chimpanzee.

[00:44:20] Jeff Santoro: What a way to wrap it up. Well said.

All right. We're gonna take a quick break and then when we come back, we're going to debate whether or not we actually are in a bull market again. So we'll be right back.

[00:44:31] Jason Hall: Hey, welcome back everybody. So for some reason Jeff thinks we're in a bull market and I think that's bullshit. I'm kidding. Welcome back everybody. Time for the second part of our show and we have a question, two questions we're gonna ask each other.

Are we at a bull market? And does it even matter?

[00:44:53] Jeff Santoro: All right, I'm gonna answer the second one and you're gonna answer the first one. So I'm gonna say no, it doesn't matter, but we'll get to that in a second. I wanna know what you think about the, the bull market. I'll, I'll say that I don't think we are because it sure doesn't feel like it yet.

[00:45:09] Jason Hall: Yeah. So, and I can tell you, I can tell you why it doesn't feel like it Jeff. So first of all, defining a bull market is generally - so a bear market's, the market's down 20% from a recent high, right? So we saw that from early 2022 through October 12th, 13th, somewhere around there, 2022, the market was down more than 20%, right?

Good bit more than 20% Now, since that low the market's up and we're recording this June 28th, the market's up about 22%, give or take a little bit. But here's the thing. Most prognosticators, and again, don't even know if it really matters, say that for it to really be a bull market, the market has to be back above previous highs.

And right now we're still down roughly 9% from the all time high, which was the first trading week of 2022, a year and a half ago, Jeff, it's been a year and a half since we hit an all time high.

[00:46:16] Jeff Santoro: Yeah, it feels like it's been longer than that, but I also have a very short stock investing life. So everything feels like a really long time.

So the other thing that I think is interesting is, one of the things I've heard is a lot of the returns we've seen this year, right, the, the, or the 20% that the market's been up since it's low, has been really driven by the biggest companies, right? The mega caps, the Apples, the Amazons, the Microsofts, those companies, and I've heard some people say that, okay, so if you back them out, the market's only up a few percentage points from it's low.

And that, I've seen some people use that as like a reason to say we're not in a bull market. I wanna push back on that a little bit only because a lot of people are in index funds and a lot of index funds are heavily weighted towards those mega caps. So it's not like you can just like ignore them because I think that's driving and has driven and probably will continue to drive the wealth of people of most investors forever.

Because that's how the, the world of index funds and mutual funds and even actively managed funds, as long as they're not niche things, they're gonna have Apple and Amazon and Facebook and all those things in them. So that's just another kind of data point that like I've heard and I wanted to kind of give my thoughts on, do you have any feelings on the, the whole mega cap versus everyone else thing?

[00:47:42] Jason Hall: Oh boy. Do I ever. No. I'm gonna push back a little bit and I, I wanna say that for most investors, most investors defined as people that are actively making decisions about what they own and how much of what they own, it, it certainly matters, right?

I think the average saver, the average just person out there who is not necessarily doing anything more than putting money in their 401k, maybe doing a Roth, that sort of stuff, it doesn't matter, right?

And these, these are the people that frankly, don't really need to be listening or paying attention to much of it anyway, because they're gonna get just enough that's gonna make 'em do those dumb things, right? Like, I can't remember the exact tweet, I was responding to a tweet, Alex Morris is, does the, The Science of Hitting (investing newsletter). Great, great stuff. This is somebody who was an equity analyst for 10 years. A brilliant mind.

I can't remember exactly who the hedge fund manager was that he tweeted that said it, but back in 2010 basically said he couldn't think of a, you know, was, was more worried about the market than he had ever been.

And of course we know that from 2010 through, you know, basically through now we've gone through one of the most amazing periods for stocks in, in generations, right? So the point is, is that we can, when sometimes when people that don't really spend the time and effort to, to do it well hear a little something like that leads them to a binary decision of, oh, well if this really smart guy is saying it, I need to make this binary decision to take all my money outta stocks, right?

And then they forget about it. They don't do anything. They forget that they move their 401k from the Total Stock Market index fund to the cash thing, right? And then five years go by and the market's, I don't know, gone up 50% or 70% or whatever, and they've gained 15%, right? So, so I think it certainly matters, like for investors, not so much for regular people because they shouldn't be paying attention to it.

Now, here's why I think it matters for investors. Okay? So I'm gonna give you some numbers. This is going back to October 12th, roughly. The bottom for the S&P before it started to recover last year. Since then, the S&P is up about 22%. Amazon's only up 14%, but Alphabet's up 23%. Meta is up - goodness. What is Meta up? 125%. Microsoft is up 48%, Apple is up 37%.

You talked about how these mega cap companies make up a big part of the S&P, so, so yeah, so it's really important for those index investors, which again, the vast majority of people, but for individual investors looking for stocks to buy, this is hugely informative because what it says is mega caps have generated a massive amount of the markets gains over this period of time.

So maybe there's still some opportunities. Maybe I should be looking in small caps, midcaps, find some of my favorite smaller companies to start looking at valuations there. And maybe that's where I can find opportunities to deploy new money. And that's why I think, this, that's why I think this matters, right, is, is thinking about how you can use this information to find opportunities to invest and not just say, well everything's expensive now. I'm just not gonna do anything..

[00:51:18] Jeff Santoro: I think it's also interesting to, or or important to remember and I want, I want you to push back at me if you disagree, cuz this is me coming at this from like literally three years of stock investing experience, which I fully realize is not a ton.

[00:51:33] Jason Hall: Preemptively. Jeff, I disagree.

[00:51:35] Jeff Santoro: Thank you. Thank you for-

 Jason Hall: Now what were you gonna say?

 Jeff Santoro: Thank you for disagreeing. Before I even say it. No, but I think what, I know this a little bit from just my regular, you know, index fund investing in retirement investing before I started picking individual stocks. But whenever we do officially have, or we all agree, we're back into a bull market, there's also no guarantee it's going to be.

As crazy of a bull market as we saw in 2020 and 2021, which was, from my understanding of history, a very bubbly, overly enthusiastic, frothy sort of bull market. Whereas you said earlier in the show, you know, like something like 70% of stocks went up. So, we saw a much more prolonged, I wanna say normal bull market over the proceeding, dozen or so years like you were just talking about from 2010 on.

So I think that's another thing that's worth, when we get to the whole, like, does it really matter kind of a thing? Like I, I don't know that it matters, but I also agree with what you just said, like, it's good for people to know that mega cap thing from the standpoint of like, you don't wanna just give up and be like, oh, everything's overvalued because just looking at my own portfolio, there's still what I think are great companies that I own, that I've been adding to that are still. , not participating, so to speak, in the bull market. Yeah. And they've gone up over the past several months, but still valuations that I think are pretty reasonable.

[00:52:59] Jason Hall: Yeah. Here's, here's a couple little data points to throw out at you. Over that same period again, mid-October at S&P's, up 22%. This is just stock prices, so not including dividends or anything, which can kind of like cloud the numbers a little bit if you're looking at small caps and midcaps, which aren't as likely to pay dividends.

But again, S&P up 22% from that bottom. The Russell Midcap, iShares, Russell Midcap ETF is up 14%, 15%, and Vanguard's small cap etf up roughly 12%. Now, if we go all the way back, this is where numbers get started to get kind of fuzzy though. We go back to again, beginning of 2022, like from the peak, from the S&P peak, from most stocks this was the peak. That midcap ETF is still down 14%. That small cap ETF also is still down about 14%.

So it's real easy a lot of times when we hear things like bull market, there's a contrarian part of a lot of people's brains. It's like, well, I, I missed my chance. Guess I just gotta wait for the next one. You know, we're using, we're using 500 stocks, of which about half a dozen make up three quarters of the market value to inform our entire opinion about, I don't know, 5,000, 6,000 stocks.

[00:54:20] Jeff Santoro: Yeah. So here's my, here's my current sort of strategy. So this is how I'm gonna try to tie a bow around the first part of the show and what we're talking about now, and, and also tie it to, to a lesson that I think I've learned/I'm trying to keep learning, which is, How to buy stocks at better valuations.

Cuz that's, I think my big lesson from the last couple years is I bought some, I bought some stock, I bought many stocks at just absurd, like, I mean like 60 times sales, 50 times. I mean, just ridiculous. Cause I just didn't know yet that that was probably a bad idea. So I try to do two things. I try to add to my stocks that are still, that are under like, are worth – a less valuation than what I paid for them.

So that, that I still believe in. So that when I buy at this lower valuation, I'm sort of lowering the average cost basis or what, you know, that kind of a thing. And I also am looking a lot at historical data for the valuation of stocks and trying to think about, you know, how expensive is this right now versus the past three years, five years, 10 years.

Because to me those are very easy, simple things I can do without getting too deep into like figuring out the intrinsic value of stocks, which I'd love to be able to do, but I'm not there yet as an investor. And I feel like if it's in my portfolio, if I still have conviction in what the company is doing, if I'm looking at my spreadsheet and seeing the numbers heading in the direction I want and it's worth, it's trading right now for valuation that's lower than the average valuation I of what I already own and or it is cheaper historically. I feel like that at least directionally it tells me it's not the worst thing in the world to buy it today.

Does that make sense? And what do you think about it?

[00:56:14] Jason Hall: It does. The pushback that I want to give you, and I think this is really important, and you know this, I'm not saying anything you don't know.

I think it's important for our listeners to kind of internalize this, is just because you're paying a lower valuation than you paid before for a company that you believe in, doesn't mean it's a good valuation. Right?

Just because you paid a stupid valuation before doesn't mean you're not just paying a slightly less stupid valuation if it's lower. So again, the context is it still needs to make sense from a valuation perspective.

And I, but I think that's understood from you and I, that's why, right?

[00:56:51] Jeff Santoro: So that's where I've evolved from simply buying, cuz it's cheaper to buying because it's cheaper and I also feel comfortable at where it is historically. So like that's like the second level.

But here's the other thing I would say about that. I also think it matters the kind of stock buyer you are. Like I'm essentially still sort of a dollar cost averager. You know, so I'll use a, a company we've already talked about today, like I'll use MercadoLibre just as an example cause I own it and I'm a big fan of it just like you are.

If I buy that today, because it is historically cheap and cheaper than the average of what I own already I know I'm probably gonna buy MercadoLibre a half a dozen, a dozen, two dozen more times over the course of my investing life. And I think that's a different calculation than I'm gonna drop 3% of my portfolio's value today because it's cheaper than it, than when I bought, when I dropped the last time I dropped 3% of my portfolio's value in MercadoLibre, right?

Those are two very different calculations, I think. Which is where I kind of think I'm, I'm okay in, in my strategy, but I'd love to hear what listeners think about this too. So if anyone's hearing this and wants to push back at me, come at me, bro.

[00:58:13] Jason Hall: Send us an email tweet at Jeff. Literally at him, bro.

[00:58:18] Jeff Santoro: Yeah Tweet at me, bro.

[00:58:20] Jason Hall: There you go. There you go. Hey, Jeff. We've done, we've done it, buddy. We did, did it again. All right, friends, as always, we love to give our answers to these hard questions about investing, but it's up to you to find your answers for those questions. You can do it, you and you too. I believe in you. All right, Jeff. See you next time.

[00:58:41] Jeff Santoro: See you next time.

​