Investing Unscripted Podcast 94:  Politics, Investing, and Bias

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Note: All transcripts are edited for clarity. We may earn commissions from some (not all) links. Thanks for the scratch.

Jason Hall: Hey everybody. Welcome back to Investing Unscripted where we ask the hard questions about investing. I'm Jason Hall. I'm joined as usual by my good friend, the voice of the people, Jeff Santoro. Hey Jeff, I have one question for you. Are you ready to make a podcast? 

Jeff Santoro: This might be the worst podcast we've ever made because this is the first time I think ever that you haven't asked me if I was ready as the countdown to record was coming.

So you've messed up the whole mojo of the show. So I want to apologize in advance to our listeners. If this does not go as well as our other shows, it's Jason's fault. 

Jason Hall: This is going to be the best episode we've ever made because we're changing things up. 

Jeff Santoro: Look at you, such an [00:02:00] optimist. 

Jason Hall: We got a fun show planned today and this one, I'm going to tell you, a lot of people have probably already, you've read the title, unless you're on a run and it's just your iTunes or whatever they call it nowadays is feeding it to you.

I just dated myself there. Anyway, okay, boomer, but if so, if you haven't, if you haven't read the title, this one is called politics and investing and we're going to partly talk about that. But what we're really going to be talking about Jeff is bias and investing. 

Jeff Santoro: Yeah. And so the we'll get into the impetus for this episode because I think that's where the title came from.And that's what sparked our conversation that led to the show.

Real quick. I got to be honest with our audience here, Jason. It's been a while Since we got a review on Apple Podcasts and it's also been a while since we've seen some ratings come in on both Apple Podcasts and Spotify. So if you're listening and you enjoy the show, if you could do those things, if you could rate us and review us and tell a friend.

It's so easy just to send a link to the up to an episode you [00:03:00] enjoyed to a podcast slash investing loving friend help spread the show. We really appreciate it. And that is all I have for the housekeeping today. So Jason, you sent me a, I guess it's a research paper that was about basically if you know someone's politics, it will.

Shade how you view them in all other aspects of life if I'm paraphrasing it in one sentence and you can go into it a little bit deeper and that got us thinking about, that specific phenomenon in the world of investing because so much of what we do when we hear other people's points of views is either agree or disagree and there's either a good debate about it or there's hot takes on Twitter.

It can go in either direction. It was interesting to me to think about if there's been times that I have Made a decision based on the politics of someone else, right? And I don't know that I consciously have, but I'm sure maybe subconsciously I have. And we're not going to go too deep into the politics piece of it, but that got us thinking about different types of biases in.

Investing. So that's [00:04:00] what we're going to dive into today. 

Jason Hall: Yeah. First, I want to give a hat tip to Tim Hanson. Tim Hanson is with Permanent Equity. It's a private equity company. Writes a newsletter that comes out daily. A good chunk of the year. I encourage people to, to find him on Twitter. We'll put his Twitter handle in the, transcript go to InvestingUnscripted.com, sign up for our newsletter. You get a Sunday newsletter and you'll get the transcript every Wednesday when the podcast dropped. You'll be able to find Tim there. So hat-tim to him. He mentioned this particular study in one of his daily screeds that I get in my email and the title is epistemic spillovers, learning others political views reduces the ability to assess and use their expertise in nonpolitical domains.

Jeff, here, when I mentioned this to you, that's a lot, right? Yeah, that's quite a title. We will also have the link in the, in the transcript, maybe not the show notes, but definitely in the transcript here's what really got me thinking about this. When when I read Tim's note, it got me thinking back to [00:05:00] the pro four years ago, the prior presidential election cycle there was a lot going on, right?

We were in the pandemic was. One of the most divisive periods, certainly politically in my lifetime. And I think that's probably the case for a lot of people. You've got to really get back to maybe the 60s. When there was that kind of divisiveness with Nixon. Even back during the 80s when there was a lot of turmoil.

We didn't have that same level of divisiveness. I think that we had experienced. And it was like at the point where. If you go back and look at my history, you can figure out my politics pretty easy. We're not gonna talk politics on the show or our personal leanings. I'm pretty middle of the road.

That's as much as I'll say, but I've, I had people, I was getting attacked by people from both extremes. And I was just trying to mostly talk about investing. And it got me thinking about that. The reality is. In this year, this is the one thing that we know without a doubt that this is going to be a constant theme in [00:06:00] the news and that is going to have some effect, not just on the markets, some effect on the markets.

But mostly it's going to affect the way people think and go ahead. 

Jeff Santoro: No, it is. And what you were just saying about getting attacked online back in 2020 reminded me that one of the things we talk about a lot in investing isn't is confirmation bias. So we're going to go into these biases later, but I think this is this relates directly to what you're talking about, which is our confirmation bias.

I should say that's and I think it's natural for us to try to find people who agree with us. And I think we talk about it through the context of investing, but that's probably something we all do all the time in life. And I remember seeing the same thing online back then, which was basically, if you expressed a political view here, and then tied an investing thing to it, people who agreed with you, and people who Like, agree with your politics, agreed with the investing thing, and people who disagreed with your politics disagreed with the investing thing, and I don't know that they were ever separated.

And I think we put ourselves in bubbles on [00:07:00] social media in who we follow, and who we interact with in all walks of life, but I think since this is an investing 

Jason Hall: show Jeff, I think it can be worse than bubbles. I think it can be echo chambers. 

Jeff Santoro: Yeah. Echo chamber, that's the same thing. Echo chambers, bubbles, however you want to think of it.

And I think since this is an investing show, that's one of the things I want to explore, which is are we letting, are we keeping out conflicting or opposite investing views because they go along with political views we may not agree with. I think that's something just to be conscious of.

Jason Hall: Yeah. And I want to we're going to take that and expand it to broadly to more unconscious bias for, politics is just, that's the nascent thing that's going to. Overlay all of 2024. So that's the jumping off point. 

Jeff Santoro: Yeah, so that's the jumping off point. Now, as we were planning the show, we totally had an idea and a plan, I swear, everyone, but then we found a really great article on Investopedia that was literally, biases in investing. And we thought this is the perfect framework for the conversation we want to have. So on [00:08:00] our outline here, we have a whole bunch of different types of biases from this article, we will link to it in the show notes. So we're giving credit where it's due.

And, but I thought it was a really great way to sear the conversation. Even if it was someone else's work. So the first one on the list here that they had was, this is what they, this is what Investopedia said. Representative bias may lead to snap judgments because of a situation's similarities to an earlier matter.

And I thought that was a great starting point. So I was curious if you had any, anything that came to mind, either a move you made or didn't make or a time when you. Maybe fell victim to this particular type of bias. 

Jason Hall: Yeah. I think one of the ways that this sort of bias can creep in is. When you're looking for the, I don't know, the Netflix of pizza delivery, or the Amazon of, I don't know, fashionable underwear, I don't know, just it, we're always looking for like the next whatever, [00:09:00] you know and it creates these it's like a false trail.

And I think this one of all of the biases maybe ties most into the pattern seeking part of our brain. We've evolved to, to like our human success is so much based on pattern recognition, right? Recognizing the change in the temperature and know that it's time for your group to move somewhere that it's warmer or cooler following the migrating animals all of those things that we figured out that are successful pattern recognition in nature.

And that thing is we carry it over to investing and we're trying to find those same signal of opportunity. In the markets. And the problem Jeff is there's not going to be, particularly when we like I'll use Tesla as an example, like everybody, you look at the EV stocks. This is one that I feel I'm going to brag a little bit, cause I feel like I was fortunate and also it was a little bit of skill.

We talked a couple of weeks ago about. Trusting your [00:10:00] gut and how early your gut is just your biases without the experience to back it up and lead you in better directions. I feel like this is a good example for me where we saw all these EV companies that went public 2019 and then 2020 with SPACs and the big IPO run the opportunity that those companies took to raise billions of dollars.

Because everybody wanted to get on the next Tesla and there's not going to be a next Tesla in EVs, right? Tesla's already done the thing right and these companies are trying to copy a model that has already been created and I recognize that and was able to avoid that representative 

Jeff Santoro: bias so the one that jumps out to me in my investing is Celsius Holdings, which is an energy drink company if people are not familiar with it And I'm going to pat myself on the back a little bit because I think I've been very aware of this bias in how I think about the company.

Because it is a mirror or a spitting image of the [00:11:00] trajectory that Monster Beverage went through, ? If you had said to me, not knowing what Monster Energy did a energy drink company was going to have massive returns, I probably would be skeptical because that's the kind of thing that seems to me to be just up to tastes, and tastes change.

There's very few enduring brands involving taste that last a really long time. I guess Coca Cola might be, Starbucks, those might be exceptions to the rule. But then you take a look at what Monster Beverage was able to do, granted, a couple decades earlier, and there's enough. Similarities in the situations to think to yourself it could be done again, but then I catch myself and I think, but what are the chances there's going to be two massive winners that did the exact same thing?

A decade or two apart and then I saw I really I'm constantly back and forth and that's why I've left a lot of money on the table in terms of gains because I've had this tiny position for a really long time because I'm just conflicted to go too deep with the with something that my guts telling me maybe isn't [00:12:00] really going to be able to replicate.

What monster beverage did, but then that the other side is it doesn't need to, it can just be very good. I can still make out. Okay. So that's one that it just jumped out to me from my own portfolio as being like the screaming example of this type of bias. 

Jason Hall: Now, I think this is a great example, right?

And I want to contextualize a couple of things that you said there, you said that, you described like your timeframe here is a really long time. It's not. It's a couple of years. Yeah. Yeah. Yeah. Yeah. I think that's really important. When you think about using the monster parallel, so monster went public in the late 1980s, I think it was Hanson natural, I think was the name of the company back then.

But if you look at the stock from its IPO through like early 2000, it was down. Guess what Celsius, this, overnight success company's been around 14 years. 

Jeff Santoro: It's been around, I forget exactly how long, but it's been around a lot longer than you think, considering how it's really come only come on people's radar in the [00:13:00] last couple of years.

Jason Hall: And similar to like the Hansen story it's monster wasn't the first product out there and Celsius has been working and working to find the right formula and get product success and Monster, a lot of monster success was doing being really smart about brand association and sponsorships and stuff that 

Jeff Santoro: they hooked up with the military really big time at a time when that was yeah, 

Jason Hall: And Celsius, of course, is leveraged influencers and celebrities and things like that.

That's helped lift it. Which is 

Jeff Santoro: sort of the thing to do now, right? I feel like monster 

Jason Hall: thing, right? That's exactly the thing. And then, um, these companies that kind of wandered in the desert for years become overnight successes, right? But the other part of it too, that's an interesting parallel monster with this distribution agreement with Coca Cola, right?

Yeah. Pepsi co and its distribution deal with Celsius holdings. All of a sudden the door. To the mass market gets opened and sure you're giving away some of your profits, but it is the low capital way [00:14:00] to get into every store in the world almost. 

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Jason Hall: So I think, one last thing on this before we transition, because again, the example that I used was EVs, and people trying to find the next Tesla is the exception in the auto industry of a big winning stock in the past several decades. You [00:16:00] look at the beverage industry.

There've been a lot of really good companies that have made a lot of money and generated good returns for investors. So I think when we're talking about this sort of bias. As in it, when in broadly in investing you need to start pulling back the layers and look at the industry that you're investing in and find out are you swimming upstream or is this the kind of place where the returns can be made?

And that's the key here. 

Jeff Santoro: Yeah. Agreed. All right. So here's the next one. Cognitive dissonance, which leads to an avoidance of uncomfortable facts that contradicts one's conviction. I feel like we don't need to spend an incredible amount of time on this one, because this is one we talk about a lot. You can call it confirmation bias, I think, is tied into this.

I, for me, this I feel like this is every story stock that has not gone well for me falls into this cognitive dissonance bias, like when I was brand new and I was investing in Peloton and Stitch Fix and Blue Apron, simply because these were things I liked and used and I knew people who use [00:17:00] them.

I was so blinded by wanting to be right that I was ignoring some pretty obvious. Signs just in the numbers that maybe I wasn't sophisticated enough to pick up on yet, but also other people who were more experienced investors than me pointing things out like, Hey, sometimes these things are fads and I don't think everyone's going to change how they shop or cook or work out forever.

Like some pretty obvious, I like to think I wouldn't make those same. Mistakes now, but who knows? But yeah, this is a common one. I think everyone, I don't, you're a liar. If you think you've never fallen prey to this, I think, yeah, I 

Jason Hall: think, I think you're 100 percent right about that. So here's a non investing example of how powerful cognitive dissonance is. Newspapers publish a story and it's False. There's something inaccurate they put in it and they issue a release that says this was not correct. Here's the correct information.

The crazy thing about it because of how we're wired is you can show somebody the story. That's the first thing they saw is the, the [00:18:00] the nonfactual information. Then you can show them the correction and they still want to believe the nonfactual thing. Especially if it ties into some sort of inclination that they already have, right?

It is amazingly powerful how hard it is to unlearn, right? And that's, I think that's one of the biggest things. 

Jeff Santoro: I think too, one of the things I want to make sure we do with each of these is pull it back to The toolbox and think about like ways. I think the first step to all of this is just being aware that these biases exist and that no one is immune from all of them or maybe- 

Jason Hall: And knowing that they exist does not make you immune from them.

Jeff Santoro: No. But you have to knowing them knowing that they exist, I think will at least can get can at least give you pause, maybe put a couple roadblocks in front of you before you go full speed ahead into a bad decision. So yeah, I think that's it. Yeah. This one for me, something I said an episode or two ago, is I have this default thing online when, or, whether [00:19:00] it's social media or a newsletter or a YouTube video where someone's giving their opinion on a stock, I have this sort of default thing I make myself, it's mental exercise I force myself to go through, which is this person's wrong.

This everything person. Everybody's an idiot. Everyone's an idiot. Everything everyone is telling me is wrong and they're stupid. And I it, and obviously I'm being facetious here, but it's a good way to, I think, help me personally at least understand that the uncomfortable facts that contradict my convictions are worth considering.

Yeah, 

Jason Hall: that's the thing, right? You have to monger it and you in invert that, and you have to say everything that you believe. What if I'm an idiot? , 

Jeff Santoro: that's not an option in this scenario. 

Jason Hall: But you tell me I'm an idiot all the time. Oh, no, you 

Jeff Santoro: are. Oh, all right. That's the perfect place to pivot to the next point in this article.

All right. Here's one for you, Jason. Illusion of control bias, which is when you have a cognitive, it's a cognitive belief where investors overestimate their ability to influence outcomes. 

Jason Hall: This one [00:20:00] is, I think one of the things this ties to, and maybe this is the part that investors can relate to is.

When you buy a stock and you have your thesis and you think everything's going the right way and the stock still goes down. It feels so out of control with what you expect should be happening.

Jeff Santoro: And then you feel like you should like it shouldn't be that way because of what you think should happen Is that what you're saying? 

Jason Hall: Yeah. 

Jeff Santoro: To me this one the first thing that jumped out to me when I read this was I feel like people who trade Actively day traders, especially the ones who are bad at it are probably a little bit guilty of this because I feel like It's what we've talked about previously about sometimes the thing to do is nothing.

Yeah. And there's this innate human thing to feel like if something's not going the way you want it to, you need to do something right. You need to sell in order to accomplish this goal, or you need to buy more in order to accomplish this goal. And I feel like the trading mentality of oh, I can time this right. Or I can double [00:21:00] down and make my money back. 

It's almost like flirts. It goes over the line a little bit into the gambling mentality too, right? You lose several hands in a row in a casino, and you just keep doubling down to try to catch up on. Again, I think what I'm saying, what you're saying are the same thing.

That's the illusion of control bias. It's the this illusion that you do have. And you don't. I let you say something that I think is Okay. Thanks. Worth remembering here that I like which is I'm willing to spend up till this amount of money and then it's up to the Company to make me the rest of my returns, right?

Like I'll give them X percent of my portfolio in capital and then it's time for them to do the work And that's an egg at that I think that is a healthy way to not fall into the illusion of control bias because you're saying There's only so much I can do I can make the best decision I can make, I can put my money to work, and then it's up to the management team to, steward the business in the right direction so that I get some returns.

Jason Hall: Yeah, I think the key with this one to me is, this is not a release from responsibility. You still have to act [00:22:00] responsibly when you deploy that capital, when you invest, right? It simply means you still have a responsibility for the outcomes because you've chosen to invest in that company at the valuation in the market conditions, and then when you.

Assuming you allocate your capital appropriately and you're not selling because you didn't have an emergency fund and you were done with your financial planning. You're choosing when to sell, right? So you have control over those things. It's about reframing what you do have control over.

And then acting appropriately with that. And not passing responsibility for that aspect of it on to somebody else. I think that's a really big one. Yeah, 

Jeff Santoro: I like that. That a lot with people who are subscribers to either paid or maybe even free. Investment advice services where you said this would be a good recommendation.

I bought it. It went down. This is your fault and then you go, I see this a lot where it's not so much that the person bought it. It's that the person put 10 percent of their net worth [00:23:00] into it. Yeah. And that's where I think they've made that decision. Not necessarily buying it to begin with.

We don't need to go any further down that road. But yeah. That's what I think of when I hear what you just said, 

Jason Hall: yeah when somebody pays money or invests any amount of credibility in someone else and you act based on them you can't pass the responsibility for your actions on them, even if you paid for the 

Jeff Santoro: advice.

Yeah, because if there was anyone who was perfect at it. We would all have found him or her and be rich right now. There you go. Alright. Home country bias and familiarity. Bias lead to an avoidance of anything outside one's comfort zone. So the first thing that I thought of with this one, Jason, was the comfort zone piece.

'cause I think this ties a little bit into your circle of competence. , and willingness or. An ability to invest outside of an area that you have a lot of expertise in. And I think for almost everybody who is an investor, unless you're just very concentrated in only what you know, we're all [00:24:00] investing probably to some degree outside of our circle of competence.

And there's been a lot said about this. I know Buffett and Munger talked a lot about it basically saying you should stay within your circle of competence. That's why they've largely avoided tech stocks, they've said over the years. And We could debate, if we want, the merits of that philosophy, because I'm sure there's a lot of people who've made a lot of money by investing outside of their circle of competence.

So there's that piece of it, too. And then there's this home country familiarity thing that I think is interesting to explore, too. So I'm curious what you think about either one of those aspects of this point. 

Jason Hall: Yeah it's, I think, um, there's a story that I read. years ago on the internet. This was probably in the late nineties when I read that, but it was about the monkey sphere, which is basically, I know, right? 

It's the idea is that if you think about a troop of monkeys, they've evolved the capacity to recognize. Depending on the species of primate here, five or 10 or 20 individuals as being us, right? [00:25:00] And everything else is them. And for humans, it's the same thing, right? We've got a capacity for a couple hundred people that we can identify as like us. And that's like the monkey sphere, right? Your mental capacity to consider anything as. Yours are part of you or that you're a part of, right?

So we, we use proxies for that to make it more than just 200 people or whatever. But that's, that's how we're wired. Again, it gets back to so much about the human condition and how we're wired that I think it's normal that we do this. And there's very much the endowment effect that's tied into this too, Jeff, where.

We overvalue things that we, that are our own, right? I want to, it's, this is a thing that shouldn't be a political thing, but it's a political thing. But like healthcare in the U S is middle of the road, but ridiculously expensive for what we get compared to a lot of other countries.

But because of the, again, the whole jumping off point for the show, there's a lot of people that because of their political bent believe a lot of [00:26:00] non healthcare economics experts. That the U S has the best health care in the world, right? Despite it not being true. So we wire ourselves that way that we immediately assume that what we have is the best right?

Why would I want to invest outside of the u. s? Look how risky it is and the and I think if we take that and go from you know outside of the home country and we say what is your circle of competence? Jeff, yours is music and education, so there's nothing worthwhile. You can 

Jeff Santoro: invest in. No, I am constantly outside of my circle of 

Jason Hall: competence.

The only thing that could have possibly been worse than that is if you worked as an engineer, it's, I don't know, general motors in the 1990s, right? The point is that there's so much about those familiar things. That is just a product of the genetic lottery, right? It's entirely things outside of your control.

So guess what? Let's tie it to one of the biases that we were just talking about, right? The illusion of control. These things are all there. There's there. [00:27:00] Every one of these is on a bell curve, right? And they all, they, these overlapping circles too, where they all are very much tied together. For me, the takeaway from this, and I think the best antidote against it.

Is as an investor always be learning. Yeah. Number one. I was going to say 

Jeff Santoro: that. Yeah. Yeah. Always be 

Jason Hall: learning. The thing that you and I both talk about a lot is because it's the same with confirmation biases, the best investors are the one that spend most of their time trying to disprove the bull thesis, or if they're shorting dis prove the bear thesis.

And the idea of starter positions in areas that you don't have a strong base of knowledge and understanding. That are jumping off points for learning more to finding out if this is a place to continue to invest. 

Jeff Santoro: Yeah, there's so many interesting aspects of this one. I think so. Like one of the one of the examples I that jumped out to me as you were talking about the health care thing is I believe I heard once that there's, survey evidence that suggests.

the average American's view of Congress writ large is bad, but they like [00:28:00] their Congressperson. Know we're mixing endowment effect and home country and familiarity bias a little bit here, but, so this is where I think this is an interesting one. But they're not, 

Jason Hall: there's not, they're not segregated.

Jeff Santoro: These are not. All of these overlap to some degree. Yeah, I would agree. But this is where I think it's a little more, at least for me, it's a little more interesting when it comes to investing. So I tend to invest in U. S. based companies, but. And maybe it is a bias, but the thing I tell myself is my reason is at least for countries that are listed here, or I'm sorry, companies that are listed here, the SEC requirements are a little bit more stringent, or at least ones that I'm familiar with.

And the filing paperwork is consistent. So I do get frustrated when I want to see the 10 K or the 10 Q of a company that's not listed in the U S because some of them don't have to, some. companies listed in other countries only report twice a year. So you're getting half the information. The formatting of the documents is different.

They're called different things are a lot harder to find. There's not as stringent auditing and they don't have to follow gap accounting in some [00:29:00] cases. I know there's a European version of it that some companies follow. So like an example is like Mercado Libre, that's the company that is.

It does business largely outside of the United entirely and outside of the United States, but it's listed here and it reports in U. S. Dollars. So it feels familiar even though it's not a U. S. Company. And there's examples of companies like that. And then there's examples where they report in a different currency.

Sometimes it's the euro. Sometimes it's, if you invest in Nintendo, they report in in Japanese yen. So I like to tell myself the reason I Okay. Stick with us based companies is for all those reasons, but maybe it is just. My excuse for my home country bias. I don't know. I just think it's a little bit, there's a little more, a few more layers to it when it comes to investing.

I think I think 

Jason Hall: one of the things too, when it comes to being a us based investor, that whole genetic lottery thing comes into play, we're fortunate to be born or to have come to the U. S. Because so much of the earnings of so many U. S. based companies is [00:30:00] international. Apple earns, I'm pretty sure that they earn most of their most of their profits come outside of the U.

S. now. Yeah. Any 

Jeff Santoro: of these huge companies are global companies, really? Yeah. 

Jason Hall: They, so you no, no less than Bill Mann, who we had on I have to say, I think that the title for our conversation with Bill Mann, international man of weirdness is my favorite. Show that we've done.

But so this is somebody that spent, 30 years learning how to be comfortable investing in uncomfortable places and opportunities around the world. And no less than bill told us you don't really have to because the U S market is so diversified and U S companies are so exposed to international markets 

Jeff Santoro: now.

Yeah. And if you did want to, just one last thing on this, then we should move on. If you did want to dip your toes into other markets to fight your familiarity bias, you can do it using ETFs. And, just to get that international exposure and not have to take individual company risk. All right.

So the next one on the in the article that we're using as our format or our structure here is confirmation bias. I actually want to [00:31:00] skip that, Jason, because we talk about that all the time. I don't think there's anything else we need to say about it. But the next one is interesting. What I just did there, you agree, you agreed.

Yes, I hey, just all right. I will talk about this for a hot second. Do you ever wonder if The fact that we do this podcast together and talk to each other constantly about stocks is our own little confirmation bias echo chamber bubble, 

Jason Hall: Every once in a while, but then we argue about something and I realized that's nonsense.

Jeff Santoro: Yeah. I agree. Because most of what you say to do is wrong. Okay. The next one is interesting. I had never really What you did there. Both 

Jason Hall: things that you did there. 

Jeff Santoro: I never really thought about this one. So I'm interested to see what you think about it. This one is mood bias, where optimism or pessimism bias or, I'm sorry, and overconfidence bias all add a note of irrationality and emotion to the decision making process.

I'll let you start with this one. Yeah, this 

Jason Hall: is, this is great. And for me, it's not exactly this, but one of the things I've talked about is how I'm wired to price anchor and evaluation and to [00:32:00] market cap anchor against investing in very large companies. And I think this is a little bit of that in a niche way, because I'm generally pessimistic that.

The biggest companies can generate the biggest returns and that's been a headwind for me over the past decade because the biggest companies have been some of the biggest winners whether that holds true over the next decades. Another question. But I think that's definitely the case.

And I also think that this is one of the reasons why. I have a process. It's very close to a rule for me. It's one of only two or three things that are almost rules based about creating fit friction and time from when I reach an investing decision and when I act on it, because. FOMO all of like those things that kind of come into play or can overlap with this exact same thing, with what is your natural inclination?

Are you naturally inclined to be a monger, right? Where you're grumpy and you question everything and you're gruff. Or are you more optimistic? [00:33:00] A David Gardner, for example, right? Who's a shining light of hope all the time. Where you need time to process it and not let that gut reaction that's how it built into you affect the decision.

Jeff Santoro: Yeah, this one's interesting because there's the optimist and pessimism piece of it and then there's the just the straight up irrationality and emotion of the decision making process. And I think that this is where frameworks can really help and also knowing yourself as an investor. I almost feel like this specific point is a good way of Thinking about this entire conversation, like the more, about your biases, the more, about your tendencies to be optimistic or pessimistic, it's probably a good thing to know about yourself.

So for example, for me, I can be very aggressive and optimistic and YOLO with small amounts of money and I can be incredibly resident reticent. With large amounts of money, and I've learned that about myself as I've gone from being a weekly investor to a whenever I want to spend more money investor, I would routinely when I was buying every [00:34:00] week sort of Yolo things and be like, I'm not so sure about this, but what the hell?

It's X dollars. And that in the scheme of my investing portfolio is not a lot. If I can recover from this mistake, I can add more later whatever the thing is. And now that I'm trying to buy bigger pieces of companies less frequently, I've said before, I'm a little bit paralyzed. So it's but I'm glad I've made that change because I've learned that about myself and I feel again, knowing that's how I am.

Yeah, is helping me rely on my frameworks, and I'm actually finding myself going back to the processes I put in place originally As a way to navigate that 

Jason Hall: I think one thing to me that's really interesting about that specific aspect for you And it's I think that's the case for just about everybody is that you were in you were allocating a hundred percent of your dollars in those little small bite ways so even though the total amount of dollars that you're allocating today versus what you were allocating six months ago is basically the same, the difference is the way that you eat [00:35:00] the meal, right? Smaller bite, bigger bites versus smaller bites. You're, I think you're taking an approach that is far more conscious of the material risks that you were taking on every time that you invested, right?

Even though the dollars hasn't changed. So 

Jeff Santoro: I think we can, we talked about the endowment effect already. We can skip that one. This one's interesting. Outcome bias assumes a future result will happen based on previous events without regarding how those past events developed. Now, as proof that we planned this episode before we found this article, one of the things you brought up was this exact point of right, either writing down or making a podcast about a decision you made because you will misremember 6, 12, 18 months down the road why you made that decision.

And you will, if it was a good decision, you'll probably have a more optimistic remembering of why you made that decision. You might credit, credit investing prowess more than luck. And if it's a bad decision, you might say you had bad [00:36:00] luck versus had a bad process. So I like this one a lot. I think it's interesting.

And it's something that was clearly on your mind as you brought it up in our original planning session. 

Jason Hall: What's really interesting is that in between the time that we had the initial conversation and started planning out the show and today doing this recording you're familiar with the podcast hidden brain.

Shankar Vedantam is great, by the way. It's one of my favorite podcasts. And they did an episode about. The human memory and can you actually trust it? And it is remarkable. Our brain's ability to create memories that don't even exist. And very much misremember the way that things happen.

One of the guests that came on was was a woman who when she was a young teenager, her mother died, her mother drowned. And many years later, probably 50 or 60 years later, she was at her uncle's 90th birthday party and her uncle, they were talking about family things. And her [00:37:00] uncle said, I can't believe that you found your mother, found your mother's body. And the woman said, no, I didn't, it wasn't me. I didn't find her. And, but he insisted, like he insisted, yes, you, it was you. It was you like so much that after the party and the woman had flown back home days later, she had thought and thought and become so convinced because her uncle was so convincing.

That she actually created a visual memory of her mother floating face down in this pool. And then the next day, her uncle calls her and apologizes and says, look, I was really insistent about that, but I was wrong. It wasn't you. It was my sister, your aunt. That's a very serious example of how this works.

Our brains, because of all of these biases, our brains will absolutely tell us we'll remember things that didn't happen because that's the way we want to remember that, that they were. 

Jeff Santoro: There is a ton of interesting, just knowing a little bit [00:38:00] about how the brain works, because I have a, because I work in education, I remember having to take classes in college about cognitive development, things like that.

I think all that's really interesting. Here's the thing that jumped out to me thinking about this one, Jason, I feel like the last year to year and a half with the financial medias and economists predictions about what the economy is going to do. And also even going back to how we all reacted to the COVID drop and recovery is all outcome bias.

Because if you listen to any amount of financial media, if you listen to the odd lots podcast is really great for stuff like this because they often have people on. Who are in the business of making, not predictions, I would say, but looking at the data that's available to them and thinking about where the economy might be going.

Everyone has been wrong, over and over again, and you hear these statistics, oh the yield curve is inverted, so that means this is going to happen, or we had two consecutive months of this, so that means that's going to happen. That's outcome bias. [00:39:00] That's the 

Jason Hall: funny, the funny thing about it too, with a lot of those things is there's what these economists and these subject matter experts in these different fields, what they say, and generally it's when these.

Conditions have existed in the past. This is what has happened, right? And then from there, the financial media or punditry writ large, then they take it and the headline says, Experts say this will happen. 

Jeff Santoro: Yeah. And I, there are people who are very good about saying, when this has happened in the past, we've seen this, but it may not happen this time.

And you're right. Sometimes it's the media. And 

Jason Hall: of course these experts, when it comes to public situations it's the old saying, experts don't predict because they know they predict because they were asked. 

Jeff Santoro: And the other thing I think about too, let's just use actual stock market crashes as examples.

I think. This is anecdotal, I don't have any data on this, but I would imagine people who are old enough to remember being individual stock investors during [00:40:00] 2008 probably did not, probably made decisions they regret during the COVID crash, because I don't think anyone was thinking, Oh, in three months, we'll be back where we were.

That happened so fast. It dropped super fast and it only took a couple months or a year at tops to get back and past where it was before it. 

Jason Hall: No, less than a year. Top to top. It was 

Jeff Santoro: like nine months. Whereas like the great financial crisis, it took years to recover. Five and a half years. Yeah. So I think that, anyone who said during 2020, I'm not buying, this is going to keep going, or we're hesitant, who took it slow, that's, that was probably the outcome bias, and I don't know, I'm not blaming anyone, because I think you should, anytime something like that happens, I think you should be a little bit careful, but it's that whole we're always fighting the last battle thing, 

Jason Hall: Oh, absolutely. Yeah. And there's no doubt about that. I think Buffett's a good example. Berkshire, the way that it acted in 2020 Berkshire Hathaway and Buffett in particular were lauded as champions of America and saviors of capitalism back during the financial [00:41:00] crisis. And they did nothing.

No, then the, during the financial crisis, they, 

Jeff Santoro: no, I'm saying, but in 2020, they didn't do anything. But 

Jason Hall: there was a difference, right? They had years to act back in, in The financial crisis, and then you look at the environment in 2020 and you're exactly right. Like the big investments that we were talking about were some of the first publicly disclosed stakes in those Japanese trading companies, the four or five big Japanese conglomerates.

And why wasn't Buffett acting quickly? Number one, I think, yeah, they were expecting more time, but also. The world was in chaos and they've got 35 operating subsidiaries and 175, 000 employees and capital demands. I need to think about retaining that cash to make sure the businesses are still going to be sound if things take a long time to recover.

And we forget about those things. And we project like our own fear, uncertainty, doubt. Ambitions, greed on other people's choices and decisions and completely [00:42:00] disregard the reasons that they're acting or the reasons that they have incentive to act. 

Jeff Santoro: So here's one more specific example. And I think we can tie this to like our own investing processes.

So you and I have talked both on the podcast and privately about the fact that. Invidia is on this incredible run. You could debate whether it's overvalued or not if the based on how much growth you anticipate is still to come. But one of the things you and I have said to each other a lot is this is the kind of company that gives you better opportunities if you just look back at it historically.

So by that logic, you could make the argument like, I'll just wait at, the AI stuff will slow down and this will have, they'll have a bad couple quarters and the stock will fall and it'll be back at a reasonable valuation and then I'll buy it then. And that could happen, but it also might not happen.

I've heard people argue that maybe NVIDIA is no longer a cyclical company. Because of the shift into AI and I don't know if that's true or not, but I think that's a good example with a specific company [00:43:00] of where everyone, or at least a lot of people are probably expecting over time for this company to come back and it might or it may not.

And I think the strategy or the framework or the, the way to think about it as an individual investor is. To just admit that you don't know and be willing to reevaluate, change your mind as the facts change, so to speak. 

 All right, so here's one I think is interesting. Skipping down the list a little bit. Changing risk preference is the gambler's fatal flaw. A small risk, no matter what the outcome, creates a willingness to take on greater and greater risks.

I love this because I feel like anyone who started investing like I did in 2020 has fallen prey to this. I being early lucky. I think is some, in some ways the worst thing for a new investor. What do you think? 

Jason Hall: Yeah, I think there's no doubt about that because it gives you false confidence, right?

That, and you immediately mistake your luck for skill. I think as a general rule, as an investor you don't really know how good you are. For years. [00:44:00] Broadly. 

Jeff Santoro: It's one of those things, not just years. Hold on one second. Not just years, but years through different types of markets. Yeah.

Yeah. I think that's because I think there's a lot of people who've been quote unquote good for years, but those years have been 2008 through 2021. Yeah. And that's, pretty good run. It 

Jason Hall: is. But I think if anybody that's general generated alpha, yeah. Again, alpha doesn't mean making money, it means doing better than whatever you're benchmarking again.

If you've generated alpha over five plus years, you're probably a good investor. If you've done better than the market, but with that said, 

Jeff Santoro: Yeah, I guess that's true. If you think about it versus the market, that's a better, but I will say 

Jason Hall: there's a little bit of truth to what you say though, because the S and P I think the kegger is still a four 14 plus percent.

From the March 2009 bottom through now, right? Obviously we're cherry picking going from that very bottom, but then if you look at like the NASDAQ 100 over that period. It's done a lot better. So somebody that's been more of a tech [00:45:00] heavy investor, and if they've, if they're just measuring themselves against the S& P, but they've underperformed against like the NASDAQ 100, they're not benchmarked.

My point is that you need to you need to appropriately measure your results to, to determine am I really good at this or 

Jeff Santoro: not? Yeah. And I think this is where thinking of investing as buying a portion of a company that will hopefully do well as a business over a long period of time thinking of investing as that is where you can get away from this bias because this but when I first read this, I was like, Oh, that's going to a casino.

Anyone who's ever been in a casino and gambled, whether it's now or when, when you were younger, whatever has done this, you go in your new you're 21, you're trying it out, you play some roulette, you win 250 bucks, and all of a sudden you think you're the end, but that's Gambling, and I think when you translate, yeah, when you translate the gambling mentality into investing, it's very easy to fall prey here, right?

[00:46:00] And I think I, I've, and look I've been guilty of this too, but one of the things that helps anchor me is to think about the fact that I'm not just clicking a button, hoping to make money. Because if that's like clicking the slot machine button and trying to make money, I'm trying to think of it as all of the stuff we hear from, all the smart people about investing, right?

You're buying a part of the business, you're looking at the fundamentals of the business, you're predicting whether or not I can generate cash flows for investors, and if it's profitable and all that stuff. So to me that's the easiest way to combat this, especially if you're newer.

I think if you're newer at it, that's a thing to keep in mind. And just be aware that this exists and try to combat it that way. 

Jason Hall: Yeah I here's how I think about this broadly and tying it back to that, that changing risk prep, like letting risk creep in is thinking like with my goal as an investor now is to achieve an acceptable rate of return.

The desired outcome. For my stock portfolio is to do better than the S and P 500, right? But there's a big difference between my desired [00:47:00] outcome and what my goal is. And I think this is really important for investors because it prevents you from falling down that path of taking on excess risk to try to attain something.

Because you feel like you have to, um, to be more specific about it at the company level. Actually let me back up a little bit. So thinking about where I am as an investor Jeff, you and I are relatively similar age. We're still measuring time to retirement in decades, right? So still needs to be mostly stocks.

But I'm, I am at a point where I can look at the portfolio that, that. That I have and start to do some more precise calculations about how much do I need to continue to invest? What rate of return do I need to get over the next 15, 20 years to get to like my financial goals, right? To have that nest egg that's going to generate the income that, that I'm going to want to have this lifestyle that, that I want to maintain.

And when you get to that point, you start thinking [00:48:00] less and less about alpha and out performance, because you have a goal, right? You have a goal that you've circled, said, this is the goal. What do I need to do to get to that goal? And there's a numerator and denominator, right? You've got the returns you can get.

You've also got the amount of money you can contribute. You've got the portfolio, the size of the portfolio today, that's going to generate returns. So you start working less and less on trying to chase. Some mythical result or some brass ring that you're trying to grab. And then you start focusing, like you said, on the business and really thinking about the business as a business owner, buying businesses, right?

Because they can generate earnings for you that can create value for you. They can create cash flows that you get, that you can use at some point in your life. And sure, you may, it like, that's the, that's the benchmark you measure yourself against, because if you're not measuring yourself against something, you're probably doing worse than you should, and you're not holding yourself accountable enough and then taking it from that large picture down to the company level picture.

Okay [00:49:00] what can this company do for me, like in an ideal outcome? What can it do for me? If they screw up, what can they do to me? It starts making you look at both sides of that equation a little bit more. And that's how you avoid taking on more risk. 

Jeff Santoro: Yeah. It, this is related, but it's one of the reasons I like to, at some point, definitely read, but sometimes actually listen to a conference call.

And think to yourself what if I was like. In the room with this person and they were trying to pitch me on their business, that's a way I think to think of it as investing in a company and not just trying to make money with by clicking a button on the Internet. And if you 

Jason Hall: take that and you apply your everybody's an idiot, 

Jeff Santoro: yes, because they are absolutely trying to sell you on something when you listen to an earnings comment.

All right, here's the last one. I think we should wrap up with this because I think it's actually really. I have a couple interesting ways of thinking of this. Mental accounting, which is an irrational attitude towards spending and valuing money. Now, I clicked on the link that was in the article, because I wanted to get a little bit more info on the mental accounting [00:50:00] piece, and I loved the examples it gave.

So this is like someone who like, does like the house money. There's two ways I think of it, like the house money thing, right? There's a certain person in my life who likes to go to the casinos, and this person will Let me know, hey I won 250 bucks and then I just played on house money the rest of the night.

But I always tease and poke back and say, no you didn't win $250, you reduced your overall gambling deficit by $250 and you spent more money after that. And or you're you've you increased it back down to where it was, and that's in my mind. That's a perfect example of the mental accounting. And then another good example is someone who's very loose with their money in one part of their life and very.

stingy about it in the other, but doesn't understand that it's all their money. So I live in a small house. We don't go out to dinner a lot. I buy all the non brand stuff at the grocery store, but I also have a Maserati with a $2, 000 a month car payment. But so it's and I'm guilty of this.

I'm better at it now than I [00:51:00] used to be, but I was certainly guilty of this sort of mental accounting when I was younger. I was always trying to justify this money versus that money and not thinking like it's all money. It's all in just one big pot and I need to treat it all with the same level of deference.

Jason Hall: Yeah to build on that when it comes to like actual money and how you spend money I think one of the healthiest things that people can do is to be incredibly miserly. With the money on the things that don't interest them or that don't matter as much and to be incredibly generous with the things that truly matter.

Yeah, that's how you avoid. I've said it before. That's how you avoid spending money on crap. You don't want to impress people you don't like. And it helps you refocus and. And have a better relationship with your financial life as well. And sometimes that means with your family and your spouse too.

But the biggest translate like for me in the house of money, when, especially when it comes to investing is such a just pisses me off so much, but I think when it comes to investing generally. When you [00:52:00] invest money, whether you're buying a company, whether you're buying real estate, whether you're buying bonds, you don't have money anymore.

You no longer have money. You have converted that money into some other assets. So the minute you've converted it into hope yeah, that's true. But you've also converted it into some sort of productive asset. Yeah, right And that productive asset at some point ideally you turn it back into money but by taking that mental step of Turning it away from money.

You remember one of our early shows, I had the conversation with a friend of mine, a good buddy of mine that lives close by that's a police officer. And he said let's say I buy GE stock and the stock price falls by 50%. Where did the money go? And then we had the conversation with Oh God, what's his name?

Jeff Santoro: Jacob Goldstein? 

Jason Hall: Yes. With Jacob Goldstein, author of... 

Jeff Santoro: The money, the truth. I think that the book is Money: The True Story of a Made-Up Thing.

Jason Hall: Exactly. Exactly. And his story about his aunt that said the money was never there, right? It [00:53:00] was never money.

I think is the point. It was the value of an asset. It's the same thing. If your house. The value of your house falls by 10%. That was just the perceived value of that thing, right? There wasn't actual money there. So as soon as you we, we value things by dollars, but there's not a bucket of cash somewhere sitting in your brokerages account that says Jeff's GE money, right?

That's not how it works. It's the way that we value these things. And as soon as you separate the way that they're valued from what you actually own. And think about it as an asset that you own and what do you think it's worth versus what is the market valuing it at today, immediately your returns are going to get better because your relationship with your investments is going to become a lot healthier.

Jeff Santoro: Love it. That's a perfect place to wrap up. 

Jason Hall: Let's do that. Let's wrap it up.

Okay. As always, Jeff and I love to give our answers to these hard investing questions. Sometimes answer the same one, [00:54:00] five or six times in eight or nine different ways. That's okay. You can do the same thing. You need to do the same thing. Because it is up to you to give your answers to these hard questions about investing, finance, biases, and more.

You can do it. I believe in you. All right, Jeff, we'll see you next time. 

Jeff Santoro: See you next time. 

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