Smattering Podcast 63: Peter Atwater's Confidence Map

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[00:00:00] Jason Hall: Hey, everybody. Welcome back to The Smattering, where we ask the hard questions about investing. I'm Jason Hall, joined by the voice of the people, Jeff Santoro, as usual. Hey, Jeff, how are you, buddy?

[00:00:11] Jeff Santoro: Hey, I am doing well. I'm excited. We have a great guest this week who wrote a really interesting book that I had the fortune to read just over the past couple of weeks. We'll, we'll introduce him in just one second.

[00:00:23] Jeff Santoro: Real quick, 10 second plug for everyone listening, do us a solid, give us a rating and a review on the podcast apps. Help the, help the podcast get out there to more people, especially after this episode. We really think that more people should find this episode so more people can find the book of our guest. So Jason, why don't you introduce them for everyone?

[00:00:41] Jason Hall: Yeah, I'm really excited to have Peter Atwater here. Peter, how are you?

[00:00:44] Peter Atwater: I'm doing great, Jason and Jeff. Thank you.

[00:00:47] Jason Hall: Yeah. So you were introduced to, to me and Jeff by our mutual friend, John Maxfield. At some point, we'll talk about how you know John and how we know John and tie that in together.

[00:00:57] Jason Hall: But before we do it, the reason we had you on is as a starting point, you've got a book coming out called The Confidence Map: Charting a Path from Chaos to Clarity. Is the book, I can't remember, is it out yet? Because I know the date, the publication date moved. What is the publication date?

[00:01:14] Peter Atwater: The publication date is July 25th. We moved it up a week because of the likelihood of the UPS strike.

[00:01:20] Jason Hall: There you go, that's right. That's what it was. So right now it is July 24th as we're taping this, so it is going out tomorrow. That is wonderful friends. Look in the show notes on the podcast. You'll be able to get the link to that. We're going to make sure the link's there.

[00:01:34] Jason Hall: Also, for those of you that get our transcript from our newsletter. We'll have the link in the transcript too. If you don't subscribe to the newsletter, please subscribe to the newsletter. That's in the show notes in your podcast app too.

[00:01:44] Jason Hall: So Peter Atwater, let's talk first about your background. You gave a great description, you kind of referred to yourself as a recovering financial services industry professional. Let's talk about what you did before and let's talk about what you're doing [00:02:00] now and how that led to this, this wonderful book.

[00:02:03] Peter Atwater: Sure. So I have, I have two very separate careers. I have a pretty traditional Wall Street career. Worked for JP Morgan right out of college happened to- my career happened to coincide with the beginning of the asset backed securities business, packaging up car loans, credit card loans, which I did. Helped grow that business for Morgan and then went to work for one of my clients, First USA. We got bought by Bank One, and I spent seven years in Columbus, Ohio, working there as treasurer and then in their asset management business, and then ultimately their private client business. From there, I pivoted back to credit cards with the team from First USA, who was starting up a new bank called Juniper, which we ultimately sold to Barclays.

[00:02:49] Peter Atwater: A couple of years later, I was blowing the candles out on my 45th birthday, and my son said, Dad, you're halfway to 90.

[00:02:59] Jason Hall: Woof.

[00:02:59] Peter Atwater: [00:03:00] Woof is right. That was exactly my response, and three months later I quit my job, not sure what next was going to be.

[00:03:11] Peter Atwater: Next turned out to be working with some money managers through the financial crisis. This was 2008, and knowing a lot about banks and rating agencies and regulators and securitization, it was a pretty easy path for me to navigate, helping others to anticipate what was going to happen next.

[00:03:31] Peter Atwater: Where things hit a wall and why I'm doing what I'm doing now is that when the market's bottom in 2009, I didn't think the crisis was over. And I didn't understand how we could go from these feelings of hopelessness, to a market that was suddenly rallying and wouldn't stop rallying thereafter. And, and that's what led me down this path of, [00:04:00] so, what's going on in the minds of investors and people at large?

[00:04:05] Jason Hall: You know, I want to spend a minute and talk about this because one of the things that we try to do here on the podcast is help people deal with the psychological and emotional side of investing. Because successful investing-- in my experience and the experience of essentially every single person I've ever talked to -- is managing your own behavior as much as managing your portfolio often even, even more.

[00:04:29] Jason Hall: And thinking about what we went through in 2020 and then for myself, you, not a lot of people really, because it's been, I mean, we're talking 15 years at this point, a lot of people don't know what March of 2009 was like, what all of 2008 was like, and then really 2010, , because double dip recession, like all of that stuff. And if there was some way we could bottle those emotions and put them on a shelf and be able to pull them out and sniff them a little bit when we get a little bit overconfident. [00:05:00] It's such a healthy thing.

[00:05:02] Jason Hall: So let's, let's talk a little bit about, there's two pieces of that. Right. So, and we're gonna talk about this a lot with the book there's, there's what it felt like, and then there's what you observed, as an industry professional.

[00:05:16] Jason Hall: And then of course you have all the hindsight bias, right? Because everybody looks back and says, Oh, it was obvious the market was going to crash and housing and... Horseshit. Nine people knew, right? Let's be honest about that.

[00:05:26] Jason Hall: So I want you to be like specific about what you observed on the finance side, on the banking side, what you saw, the things that you were concerned about, and then what you saw the market was actually doing.

[00:05:38] Peter Atwater: So before the crisis, what I observed was stupidity on steroids. So you had people who shouldn't have been lending, lending enormous amounts, almost with blindfolds on. I mean, if you think about ninja loans, these, they [00:06:00] were making loans to people without jobs, without income, without any, any scrutiny whatsoever.

[00:06:07] Jason Hall: Yeah, the, the lender, they would show up with a mirror and hold it under your nose. And if there was fog on the mirror, it meant you were alive. That meant they'd issue you a loan.

[00:06:16] Peter Atwater: And if it didn't fog by itself, they would spray water. I mean, I mean, it was just such such a belief that home prices only go up that nobody cared about the current value of homes.

[00:06:31] Peter Atwater: And so it, it sucked in, and this is something that I see over and over, this, this almost social vortex where everybody has to participate. And then you see what's happening on television. You know, Flip That House and, you know, Cribs and all of these shows that are feeding into this, this frenzy.

[00:06:55] Peter Atwater: And so, you know, we'd like to blame different people. I think we were all culpable [00:07:00] in the process. And as a result, the consequences were, were dramatic and very widespread.

[00:07:09] Jason Hall: When the music plays, most people stand up and dance.

[00:07:12] Peter Atwater: Yeah.

[00:07:13] Jeff Santoro: It's interesting how you phrased that whole period, because I was not someone who was interested in investing at that point in my life, but I was someone who bought two homes in the period of two years during, like, from '03 to '05. And I remember at the time being kind of shocked when I applied for the mortgage and the amount that they approved me for, I ran the numbers, it was like, I cannot afford that much, that much of a house. I was like confused, like you think like that, that's, that's like the, the the Bible, like this is what you can afford. And it was way more than I could swing. So thank God I was smart enough to not listen to the paper.

[00:07:49] Jeff Santoro: But yeah, like looking back, it's, it's obvious now that that was that stupidity on steroids that, that you were talking about.

[00:07:55] Peter Atwater: I mean, loan to values were routinely over a hundred percent where [00:08:00] the lender would give you the money, not only to buy the house, but renovated all the closing costs. I mean, it was really wild that the assumptions that were being made.

[00:08:10] Jason Hall: We've talked about on this podcast before. It's, it's one of one of my origin stories as an investor. We, we bought a house. My wife was still in grad school. We bought it with an interest only loan for 80% of it. There was 20% that was another loan that was the down payment. And then we got stuck in a situation where we had to move a couple of years later, and that, of course, corresponded of as timing goes with the market really hitting that that peak. And yeah, there was a lot of, a lot of collateral damage for a lot of people that went through that.

[00:08:43] Jason Hall: So you observed that firsthand. And as you're in the middle of kind of making this transition. Peter, at that point, you're still, you've still kind of got one foot in industry, you're consulting for others, but then you start to make a transition at some point and now you spend the majority of your time you're an adjunct professor at William [00:09:00] Mary and University of Delaware, I believe. You do a lot of speaking engagements and, and, and other things as well. You're kind of a thought leader in this, I think is a good way to describe it.

[00:09:10] Jason Hall: So let's talk about that transition in your life and what led you down the path of, of, you know, entering the ivory tower here but taking real world experience with you that's so, so valuable.

[00:09:22] Peter Atwater: Yeah. So what I started to do was to do all sorts of research on prior crises and, you know, behavioral economics. And one of the things that I was struck by was some work done by Robert Prechter.

[00:09:38] Peter Atwater: And some of your listeners may be aware of Bob because he's generally seen as a proponent of, of Elliott Wave theory. He has a very unique and, and I think important. work that he's done in the field of socionomics, which looks at the relationship of mood and decision making. And the big a-ha to me with Bob's work was [00:10:00] it was a reversal of causation. We think of actions as causing behaviors, as actions causing emotions to change.

[00:10:09] Peter Atwater: And Bob's belief is no, how we feel drives what we do. And that seems so obvious, and really transformed my search from, okay, I get that, but now why. How is it that that happens? How does it happen consistently? And are there patterns that we can, that we can see that then become a useful framework for future decision making?

[00:10:39] Jeff Santoro: Yeah, that sort of reframing of the same idea is is certainly a theme I noticed throughout the book of sort of turning that on its head. You know, it's not this that leads to that. It's that that leads to this.

[00:10:51] Jeff Santoro: So turning to the book, the confidence map, there's a really good way to sort of wrap your head around it.

[00:10:57] Jeff Santoro: If you look at the graphic of the actual [00:11:00] confidence map. And since this is a mostly audio format, it's not going to work super well, but really quick. It's basically a four square box, with high and low control on the up and down access and certainty low and high on the left to right access. And then you name each quadrant and talk extensively about the kinds of decisions we make and the emotions we feel when we're in each of those boxes.

[00:11:23] Jeff Santoro: So that's my 30-second sort of summary of the book, but we want to give you an opportunity to give your quick summary and then we'll dive in a little bit to some of the things that stuck out to us as we read it.

[00:11:33] Peter Atwater: Sure. So I concluded that when you boil it all down, this thing we call confidence and, for a word we use and overuse and overuse, it's been fascinating how little we understand it. But I boiled it down to two elements. Certainty and control. We need to feel that things are predictable, that we have a sense of what's coming, and we need to feel like we're prepared for it. That we have the tools, the resources, the skills that we [00:12:00] need to be successful in the future that we imagine.

[00:12:03] Peter Atwater: Confidence is a funny word, because when we say I'm confident, I'm really not talking about the present. I'm talking about the future that I see. So it's inherently forward looking and that forward looking is important because it's entirely consistent with the way investors make decisions. They're always looking ahead.

[00:12:24] Peter Atwater: So, as you said, if I take certainty and control and look at them high and low, what I find is that we're different people depending on the mix. The experience is almost like being in a different country. We act differently, we talk differently, we dress differently. I mean, it's fascinating how those two variables transcend everything we do.

[00:12:51] Peter Atwater: A quick summary of them. When we have both certainty and control, I call that the comfort zone. We're relaxed, it's easy, [00:13:00] it's obviously comfortable. It's where all our successes come from. And I'll talk about its goods and bads, but none of these boxes is inherently a, a all good or all bad experience.

[00:13:13] Peter Atwater: The opposite box, I call the stress center, where we don't have certainty or control. And here we feel things are uncertain, we feel powerless. And in redefining it that way, it then became obvious that the opposite of being confident, is feeling vulnerable. And so vulnerability becomes a huge element in the way we approach the choices that we make. And things are hard in this, in this stress center. It's just, we're anxious, and for good reason.

[00:13:47] Peter Atwater: The other two boxes we don't pay much attention to, but we spend an awful lot of our lives in these two boxes unknowingly. A box where we have an environment where we have certainty but no [00:14:00] control, I call that the passenger seat. Because it's, that's the environment, whether in the backseat of a cab or on an airplane, roller coaster. And the interesting thing about that environment is, it can feel good one moment and terrifying the next. And it also happens to define a maximum security prison. So, this is a, this is a place where, if it's willingly or unwillingly that we're there, it has a big...

[00:14:27] Jason Hall: Whether you choose to be there or not.

[00:14:28] Peter Atwater: Yeah. Yeah. And it has a big bearing on how we feel there. But, but that's a, that's a fascinating box because it's of its fragility, I think.

[00:14:39] Peter Atwater: The last box, upper left hand box, is where we have control but no certainty. And I like to think this is what I call the launch pad. It's where we are when we're rock climbing and we're halfway up the hill. We don't know if we're going to make it back, or plummet to our death. It's when you hit send to shoot your resume out or pull the lever on a slot machine.

[00:14:58] Peter Atwater: Interestingly, [00:15:00] that's the box where we make all of our financial decisions. Financial decisions, lending, borrowing, investing, all involve an element of control, but with uncertainty. And we forget that as investors and lenders and borrowers. We, we put ourselves in the stress center or the comfort zone, not realizing that in reality, all those choices are being made in the launchpad.

[00:15:26] Jeff Santoro: And I, what I thought was interesting was, you do a really nice job of giving solid examples. I want to ask you to talk about the Tom Hanks example in a second. I guess I think that's a, the Tom Hanks during COVID. I think that's a really good way to sort of wrap your head around it. But what I noticed was you can be in and out of these different quadrants within a few moments of, of one another, or you can live in one for a really long time. But maybe only in one part of your life, like you could be in the comfort zone at work, and you could be in the stress center at home and things like that.

[00:15:55] Jeff Santoro: So just as like one example before we kind of move on into some specifics, can you talk through [00:16:00] that, that really nice example you give of, like, how America came to understand what the COVID pandemic was going to be through Tom Hanks.

[00:16:07] Peter Atwater: Yeah, I think self-help experts do us a big disservice in suggesting that once you have confidence, you have it forever. And as you suggest, real life moves us around.

[00:16:18] Peter Atwater: And in January of 2020, we were in the comfort zone. Things looked good. The sky was clear. Markets were high. We had very little to worry about. Employment was great.

[00:16:32] Peter Atwater: And then COVID starts to spread, first in China, and we, like, it's contained in China, so we, we're relaxed, it's like, okay, that's good, it's there. Then it goes to Europe, and we start to get a little more anxious. We, we know Europe, and Europe feels more familiar to most of us. And so you could start to see our sentiment falling, people feeling a little more anxious.

[00:16:58] Peter Atwater: And then the evening of [00:17:00] March 11th, wild things happen to mood that night in two dimensions. Tom Hanks reports that he has COVID and there's panic on social media. Even though Tom Hanks and his wife, Rita Wilson, they're in Australia, but it was one of those things. It didn't matter.

[00:17:22] Jason Hall: They're Americans in Australia.

[00:17:24] Peter Atwater: Therefore they're us. And the same night you had Rudy Gobert and the, and the Utah Jazz about to play in Oklahoma City and boom, the game is stopped. And so these two events had a massive impact on our perception of the, of the outbreak. Suddenly the pandemic became real. And you could see the, the psychological impact, the economic impact, the market impact, all arriving in moments that night.[00:18:00]

[00:18:01] Jeff Santoro: It's a really good example, but so go ahead.

[00:18:03] Jason Hall: I want to, I want to pull back a little bit before we move on to the next one, because when it comes to investing and emotions, something that we talk about a lot, and I think there's clear overlay with, with your book and, and confidence is fear and greed, right?

[00:18:20] Jason Hall: These two key deep seated emotions that tend to like if an emotion is going to grab the wheel, it's going to be fear or greed. So I'm curious, thinking about fear and greed and, and, and this, do you think how much, how much of, of it is again, thinking about confidence being us looking in the future, but basically it's a reflection of, of everything that's around us that's, like the blinders of how we look forward and then applying that to like a framework of thinking about fear and greed.

[00:18:54] Peter Atwater: Yeah So I I got sort of slapped by a psychologist at one point when I [00:19:00] started talking about forecasting the future and perception of it and he said Peter, anytime we're talking about the future we're imagining.

[00:19:10] Peter Atwater: And I sort of stopped and he says no we and we need to think of ourselves almost like the, the cartoonists at Disney, because we're, we're creating this vivid image of what's ahead. What we miss Is that image is a mirror of precisely how we feel. If I'm in a bad mood, I'm imagining bad things ahead. If I'm in a good mood, I'm imagining good things ahead. You, you cannot decouple that outlook. Why that matters into your question about fear and greed, is we're making decisions with greed and fear in the expectation that by doing this things will be [00:20:00] really good ahead and that introduces an issue of abundance and scarcity.

[00:20:06] Peter Atwater: I think those two words, particularly in the investment world, are underappreciated because economists talk about the wealth effect, and that's really, to me, an abundance effect. When we feel a sense of certainty and control, it's in what we want. It's in what matters to us. And so, if I'm buying today out of fear and greed, it's because I want that abundance.

[00:20:33] Peter Atwater: I, I want that ahead. And I'm likely to do it when everything around me is like this arena chant, buy, buy, buy, buy. And we're looking at those people who've made all this money. And now we feel like we're left out and we want that too. And so those really all come together, especially near peaks in confidence where we feel [00:21:00] this desperation to get in.

[00:21:03] Jeff Santoro: And that, that actually goes really nicely with the question I wanted to ask specifically about something that you wrote in chapter nine, which was the overconfidence bingo card. Which I got a kick out of because it's, , it's funny when, when I heard you talk about the heightened stupidity we all experienced leading up to the great financial crisis.

[00:21:21] Jeff Santoro: What I've noticed in, my time as an adult paying either close or not close attention to the markets in general is in hindsight, all of the bubbles and crashes are pretty obvious, but , we as a collective group don't ever seem to all see them at, in the moment. And the overconfidence bingo card kind of stuck out to me, as for individual investors, like a lot of our listeners, if you could do something like go through this checklist of, you know, kind of bubbly or frothy things you might see out in the world, it could, it could maybe help us in the moment kind of , you know, prevent us from making some decision at exactly when people are chanting by, like you were.

[00:21:56] Jeff Santoro: So, I dunno if you could dive in a little bit about that, that concept in [00:22:00] the book and, and how that came about.

[00:22:01] Peter Atwater: Yeah. So, the overconfidence bingo card is stepping back and assessing what would it look like if everybody is really confident in a company, in an industry. I do this with business leaders.

[00:22:18] Peter Atwater: And, and that extreme behavior, while subjective, becomes really a useful, objective indicator of mood. People buying new cars, new homes, the kind of debt that they're taking on, the, the size of mergers, you know, all sorts of things that would suggest that there's, there's hubris.

[00:22:44] Peter Atwater: And to do those at a time when things are calm and then being able to look at it, and X them off as you start to notice them. And the goal isn't, you know, to be able to scream bingo, but to realize that [00:23:00] with every box you're checking off, things are getting very close to a major peak. And, and I think investors forget that there's 80 yards between, you know, the 10 yard line at one end of the zone and 10 yards at the bottom, you don't, you don't have to, you know, calling it to the day, to the week, to the month doesn't really matter when you look at these, these big trends.

[00:23:27] Peter Atwater: You can do the same thing with an under confidence bingo card. You know, I'm a big believer that panic is a really useful objective indicator. We get all swept up in the emotion, but when you can look out and say, oh, that's panic, panic tells us that we are rapidly approaching a low in confidence. I think it's God's ironic way of telling us that the worst is behind us.

[00:23:53] Jason Hall: Yeah. And of course, right beyond panic is capitulation, right? But I really appreciate something you said, and I want to emphasize it that you're [00:24:00] talking about there, is it could be really easy for somebody to make the mistake of assuming that this is some checklist to finding the binary outcome of the top or the binary outcome of the bottom. And this, it all exists on a continuum, right?

[00:24:12] Peter Atwater: Yeah. Yeah. Not all the tiles are one color on a mosaic at the top or the bottom, you know, you don't have, you know, glowing white and dark black. There's always, they're always going to be outliers, but the big turns, the lows of 2009, the, I would put, you know the crypto mania of 2021. Those were those are easy to see hubris that's widespread and particularly today because it's we have such wonderful ways on Twitter and social media of people exposing their level of confidence unknowingly.

[00:24:51] Jeff Santoro: So, like, related to that, one of the things that, Jason and I joke around a lot is, is how, or say a lot to each other and to the people who listen to our podcast, like, [00:25:00] basically ignore the financial media, right? Ignore CNBC, ignore the talking heads who are screaming at you.

[00:25:06] Jeff Santoro: But like the idea that that the media mirrors our mood versus the other way around, like that our mood influences the media, right? So do you think we should pay more attention to financial media? You know, just, to sort of see where the sentiment is as an indicator. Like, have you thought about that in terms of like helping individual investors find their way through the, the seas?

[00:25:29] Peter Atwater: Yeah. I, I do that every day. I, I look at the, the cover of whether it's the Wall Street Journal, financial Times, New York Times. I'll look at what's, what are the topics being discussed on CNBC. Because, as you just said, they're just mirroring back what we want to know. Front pages are important, covers are important, because that's really expensive real estate.

[00:25:54] Peter Atwater: And so I know that a story often moves from, you know, C [00:26:00] 29 to B 4 to A 1, and that tends to move along with its, its priority and emphasis. The media is in the business of delivering information that is relevant and resonate. So we need to appreciate that their job is to give us exactly what we want in the tone and the feelings that we're experiencing then in that moment.

[00:26:25] Jason Hall: Well, follow the money. I'm a big believer that everyone should understand financial incentives, whether you're an investor or whether you're an employee for a company, when you understand the incentives of the people making the decisions, particularly the economic incentives, you're going to learn a lot more to explain their behavior.

[00:26:44] Jason Hall: And that's certainly the case with modern media, which is very advertising driven, which tends to mean that it starts to kind of get really echo chambery and you kind of hear the same thing from a lot of them. Simply getting the loudest to try to get the [00:27:00] most people's attention.

[00:27:01] Peter Atwater: Yeah, the media today more than ever is in the business of catering to its audience.

[00:27:07] Jason Hall: Yeah. No, that's, that's a really good way to put it. Jeff.

[00:27:10] Jeff Santoro: So one concept that I thought was really unique and interesting that I wanted to ask you about was the idea of confidence diversification, right? So investors are told all the time to have a well diversified portfolio, stocks, bonds, real estate, different asset classes, different sectors, all those things.

[00:27:29] Jeff Santoro: But you wrote about thinking about confidence diversification, and in the sense that if sentiment is really high or sentiment is really low, and you have all companies that would be impacted by sentiment that's a level of diversification you maybe don't have. That's my layman's kind of summary of it.

[00:27:48] Jeff Santoro: So I was wondering if you could talk a little bit about that idea. I thought that was really interesting.

[00:27:51] Peter Atwater: Yeah. So we think about diversification as being based on historic correlations. And so we have all this [00:28:00] empirical data that says one goes up when one goes down or they move together. And as we were approaching 2020 and coming out of 2020 into the early part of 2021, something really unprecedented was happening.

[00:28:21] Peter Atwater: You had trillions of dollars of negative yielding bonds. So prices of bonds were at all times high- price and yield moving in opposition and bonds. At the same time, stock prices were at all time highs. And so if I looked at the pie charts of a balanced investor, every piece of that pie was piping hot based on the sentiment of what was in there.

[00:28:49] Peter Atwater: And we don't think about those pies measured by sentiment. And I think we really need to, because 2022 is a perfect example of what [00:29:00] happens when the pie all cools at once. And I think there's an ongoing risk that that cooling continues.

[00:29:09] Peter Atwater: And so I encourage investors, own things that you would be laughed at to own, that are almost in that capitulatory washout phase. Because those may be the things that rise from the dead next, as the things that you own that you're all excited about and, you know, are so proud of yourself for having bought them, may be rolling over. And I think we need to be buying hot, cold, rising and falling mood, because it's that mix of emotions that's going to protect you because we fall out of favor with things. We fall in love with things in the markets and today, faster and in more things at once than ever before.

[00:29:56] Jason Hall: Yeah. The stock market will [00:30:00] absolutely humble you. And if it has never humbled you, then you are lying to yourself.

[00:30:04] Jason Hall: Right? I think that's, that's important. And being able to see past that- kind of your point, and this is something that Jeff and I've talked about a lot on here- is be, be kind of willing almost to, to let the market let you make you look like an idiot for a short period of time, because chances are the thing that made you look like a short period of time is going to make you look really, really good in a decade.

[00:30:26] Jason Hall: You know, that's, that's the key. Let's see. Sorry, I lost my place on my script here.

[00:30:33] Jason Hall: So, Peter, there, there was, there was a quote from the book that really stuck out to me. I'm looking away from the screen here to read it to you. "Anytime we feel certain about what lies ahead, we need to appreciate that this feeling of certainty reflects our own confidence level far more than it does the accuracy of our forecast of the future".

[00:30:55] Jason Hall: So we talked a little bit about this already, but specifically, what we would [00:31:00] love to hear from you about is thinking about how do you would, do you have any advice for maybe how we can adjust for that?

[00:31:06] Peter Atwater: Yeah. So I encourage investors to think about how certain are you of this outcome. And to, to write it down.

[00:31:17] Peter Atwater: You know, I think the odds of being successful or 90% or, you know, you'd never buy something if you thought the odds were 10% and if you can't imagine an alternative outcome, you need to be really careful because that failure of imagination is telling you, you are overconfident. And the higher the percentages, and, and this works in both directions, I'm sure this company is going to fail, I'm sure this company is going to be the next Amazon, those extreme percentages are nothing more than your own barometer of mood. [00:32:00] And I think any time you deviate far from even odds from 50 50. You're fooling yourself.

[00:32:10] Peter Atwater: And the reason this matters is the more certain we are of an outcome, the larger we are likely to trade that outcome. And we're likely to over trade in terms of size at precisely the wrong moment and so, what kills investors are the choices we make at both extremes in the market. We are over-

[00:32:42] Jason Hall: The people that went to all cash in 2009, the people that were all in plus leverage in 2006.

[00:32:51] Peter Atwater: Yeah. And so those extreme behaviors, if you can, if you can just avoid those. You're going to be so [00:33:00] far ahead of the folks that succumb to those feelings.

[00:33:06] Peter Atwater: You know, I'm a big believer, you know, just, just avoiding those two extremes is what makes the difference between someone who is celebrated for a 50 year track record and somebody who is washed up as an investor very quickly.

[00:33:24] Jeff Santoro: I think what stuck out to me about that quote was the idea that it's a reflection of, we think of like, when you make any decision in investing, I think everyone knows there's a chance that you could be wrong, like, even if you're super confident, I don't think anyone goes into many things with 100% certainty.

[00:33:40] Jeff Santoro: But I like the idea of sort of, again, reframing it and thinking of it, not as luck or not luck or anything like that, but just like the way you feel is not a reflection of the future as a reflection of how you're feeling right now I just think kind of naming it can be really helpful.

[00:33:56] Peter Atwater: I Agree.

[00:33:59] Jeff Santoro: So just - go ahead Jason.

[00:34:00] Jason Hall: Yeah. Just on this one, because this is- and Jeff you probably should - if you don't know where this is about to go, you should know about this is about to go because I always bring this book up, I'd say one out of every three episodes, I bring this book up: Louann Lofton’s Warren Buffett Invests Like a Girl and Why You Should, Too.

[00:34:18] Jason Hall: And I think your book's really important, especially for men. I'm not sure if you've really done much research into the difference when it comes to men and women and particularly with investing. It's very, very true, but it's also true with things like putting in for the next promotion.

[00:34:34] Jason Hall: Dudes are so confident and overconfident in general, right? So everything you're talking about, I think it applies plus one to men. I'm just curious as to your thoughts about that.

[00:34:44] Peter Atwater: Yeah. So I've spent a lot of time on wall street trading floors.

[00:34:48] Jason Hall: Oh, you know, exactly.

[00:34:49] Peter Atwater: So I I've seen the male dynamic in real time and, and the certainty that goes along with it. And the, the willingness to, to bet the [00:35:00] ranch-

[00:35:00] Jason Hall: And somebody else's ranch.

[00:35:01] Peter Atwater: And particularly somebody else's ranch.- You know, the bets are easiest when it's somebody else's money. And, and so men far more than women get caught up in that bullish enthusiasm. And I do think we, we call these bull markets for a reason.

[00:35:22] Jason Hall: The, the animal spirits.

[00:35:24] Peter Atwater: The animal spirits and, and that herding, that male herding instinct is, is extreme. And what's so interesting to me is a then struggling male trader will not fold on his own. He must be shut down. And so I, I was always fascinated by managers who are like, you're done. Because they knew that unless they cut somebody off, that person was going to re- argue the position forever, that the stories would [00:36:00] and compound the problem. And so that's a, that's a very, yeah, I'm very familiar with that.

[00:36:06] Peter Atwater: So, so they, they overbuy at the top and then are unwilling to capitulate until they, they are either told by the margin clerk, they, they must capitulate or, you know, they ultimately trade out at the lows.

[00:36:23] Jason Hall: To, to over, to overuse the, the caricature, it's generally guys you see being escorted out the bar by the nice employees at the front of the bar and not, and not women. So it just, it's again, it's a caricature, but it, that, that mindset, that mentality is so powerful and it's so in our DNA. We have to check it. We really do.

[00:36:47] Jeff Santoro: So Peter, we, we asked a bunch of questions based on like the things that stuck out to us in the book, but before we wrap up, I wanted to give you an opportunity. Is there anything else in particular about the book that you want to make sure our listeners know?

[00:36:57] Jeff Santoro: I mean, we're going to plug it, put the, put the [00:37:00] link in our show notes and stuff, but anything else that we didn't get a chance to talk about that you think is particularly important for everyone to know?

[00:37:07] Peter Atwater: Yeah, I, the, the other element I would remind investors of is time horizons. And what our time horizons say about our level of confidence and therefore our behaviors.

[00:37:21] Peter Atwater: You know, if I look at the mindset of investors, at peaks in confidence, they can see forever. They see blue skies far into the future. And the interesting piece is, as a result they're buying dreams, they're buying possibility, things that are incredibly futuristic and abstract.

[00:37:44] Peter Atwater: And we saw this in spades in 2021. EVs and cryptos of every shape and size and SPACs and just that world awash in possibility. And that, to me, is it that time [00:38:00] horizon is another really powerful objective measure. Because if I go to the other extreme, go to March, 2020, the only thing people were thinking about was right then, you know, that now mindset.

[00:38:17] Peter Atwater: And so what we were doing was hoarding cash because, you know, we, the only thing we cared about was having enough for right now. And if you can stop and look at what's your time preference, that time preference is giving you clues about your own level of confidence.

[00:38:36] Peter Atwater: And I always say to investors, look, if you can't look at yourself objectively, look at the crowd because the crowd ultimately is going to determine your price. So diagnose them. What do you see in terms of their, their preferences and behavior and what is that saying about their mood?

[00:38:55] Peter Atwater: And you can, I mean, the beauty is you can do this pretty easily. If I want to know how the rich are feeling [00:39:00] today, I can look up the stock price of LVMH. That's, that's a pretty good barometer of how the rich feel. I do the same with dollar stores and, you know, things at the other end of the spectrum. So we have the ability to use stocks in the markets as barometers for how different groups feel and the market as a whole.

[00:39:21] Jason Hall: Yeah. And it can get really meta too, because then you can also find out the confidence level of one cohort on another cohort based on those stocks as well.

[00:39:32] Jason Hall: Peter, this was, this has been a lot of fun. I'm looking forward to more people being able to read your book. Guys, it's worth a read. Jeff and I were lucky enough to get an advanced copy. So. Again, you can find it here in the show notes. You can find it in the transcript. We'll have a link there.

[00:39:47] Jason Hall: Peter's also on Twitter. You can find him there. We're going to have his Twitter handle in the show notes as well, his website, all the ways out there to find Peter Atwater. So again, president of Financial Insyghts, right? [00:40:00] s-y-g-h-t-s. It's a special spelling.

[00:40:01] Jason Hall: Adjunct professor at William and Mary and the University of Delaware. We appreciate you coming on with us and looking forward on having you on next time.

[00:40:43] Jason Hall: Okay, Jeff, we have we've taken a two day break in between. Usually we just take coffee break in between our main segment and our B segment. We took a couple days since we since we talked with Peter Atwater, the author of The Confidence Map.

[00:41:01] Jeff Santoro: There's a lot of stuff we talked about, so we needed a couple of days to process it and come back and talk about it again.

[00:41:06] Jason Hall: Yeah. And I mean, the, you and I both, read through the book and, but having that conversation with Peter, it was, it was a lot to think about. And what we're going to do now is, you know, we talk about on most episodes, we'll talk about building a toolbox as an investor. Thinking about the personal finance things, thinking about having a framework for how you invest for your goals, short term goals versus long term, figuring out incentives, like all of the things that we talk about a lot.

[00:41:35] Jason Hall: And what I wanted to talk about is now taking the confidence map and taking Peter's ideas. And figuring out how do they fit in that investor toolbox.

[00:41:48] Jeff Santoro: Yeah, I, I was thinking as we were having the conversation with Peter a couple days ago, this would be a fun book to do like a book club with other investors with just from the, not that I'm a huge fan of book clubs, but the idea that it would have been fun when I jotted down notes to myself to remember to talk about when we did the interview, it would have been cool to like immediately have just a conversation about it.

Um, so I know one of the things that, that you and I were talking about before we hit record, might be a good place to start, was one of the things we talked to Peter about was his idea of confidence diversification in your portfolio. And I know you, your first kind of thought was it almost sounds like market timing, but we agreed it wasn't. So what were you thinking when we first chatted about that?

[00:42:33] Jason Hall: Yeah, and I think that's one of the things with this whole with the whole book really is I think it's really important for people to be really thoughtful about it. And we're going to have biases naturally, right? One of our biases is to always look for reasons to act. And looking for the signals that he talks about throughout the book and like the overconfidence bingo card. Particularly that stands out is it's really dangerous because it just gives dudes another reason to go [00:43:00] do stupid stuff. And like the idea of overconfidence diversification, that was the thing that like my immediate reaction was, yeah, that's just market timing, right? Trying to get it right.

The reality is that I think by and large and you, you really helped me reframe it is it's more something that we've talked about before and that's looking for, maybe out of favor opportunities.

[00:43:28] Jeff Santoro: Yeah. So when, when we're talking to Peter, the thing I kept thinking about was our previous episodes about running towards fires, running away from fires, I don't know how to invest anymore. And a lot of the common themes that ran through those episodes in the conversations you and I had were about, really, that same idea of confidence diversification, meaning if your entire portfolio is SaaS, software as a service tech stocks [00:44:00] that get very bid up with high valuations in times of market frenzy, you are not well diversified from a confident standpoint, because those are all going to rise as market sentiment rises, you're not running away from that fire. You're. You're you're not running towards the fire. You're you're running away from it consistently, right?

And the thing that jumped to my mind was why do you own something like Berkshire Hathaway, Warren Buffett has even said my stock's not going to do well when the market is at its at its peak. But that's not why you own Berkshire Hathaway. You own it so that you have it in your portfolio when the market tilts totally towards fear right now. That's not, that's also probably not the best time to buy it because people are running towards it for safety. So maybe like right now, because we're sort of. Heading back up market wise is a good time to look at Berkshire.

I don't know, but I think that's how I was thinking of it. , you want to have a wide [00:45:00] variety of companies that will react to different swings and market sentiment, which are driven by confidence or lack thereof so that you can weather all storms.

[00:45:09] Jason Hall: It gets back to something I was, very early in our conversation with Peter that I, that I talked about and that's, that so much of personal finance and particularly the investing side of it, particularly the stock picking and buying side of it is managing yourself, right? Managing your own psychology as much as you're actually managing a portfolio of assets. And I think that this ties really well into that.

And I love the Berkshire example because again, with Berkshire, It's probably going to do fine during a protracted bull market. It's not going to do as well as the things that are doing the best. It’d even underperform the market, but like you said, any port in a storm, and it's certainly one of those ports that is everyone wants to be at being during a storm. So I like that, and [00:46:00] I want to hit on what you're talking about, too, with the, um, the series that we did and in particular banks. And I want to use it because it's such a good recent example of what we've gone through is.

[00:46:15] Jason Hall: We can kind of look at two different similar actions and reach different, different conclusions. You can think about the tech stock bubble that we've gone through that we're still kind of in, even though a lot of those tech stocks have come back. , there's still question about valuation for a lot of those companies, particularly the ones that are still consuming cash. Their balance sheets are weak. Maybe they have a great product, but is that product really a standalone business, and then again, thinking about banks, we saw so many banks in March get extremely, extremely discounted and now as we've moved further away from that mini crisis that we went through, it's becoming more apparent that the banking industry is strong and that there is a lot of consumer confidence in banking, which is like the key thing.

And it [00:47:00] makes it more clear that that was like, that was a great opportunity. And there's still some opportunities there. And I think that that is the key, like you were saying with the idea of confidence diversification is not so much trying to time yourself in and out of the market. So you're always confident and profiting, but so, but by looking for those opportunities, you have different parts of your portfolio that over the long term are moving up into the right. But as we deal with those, the volatility from, from day to day and month to month, you can look at your portfolio in aggregate and have a more balanced view and that can help you stay more confident in your, in your process.

[00:47:44] Jeff Santoro: Yeah, I totally agree. You know, the saying, there's nothing new under the sun. That's sort of how I felt about Peter's book. And I said this to him after we finished recording and I meant it actually as a compliment, not as a insult in any way.

There really wasn't anything in the book that I found what to be [00:48:00] something I'd never heard before, just by example, this conversation we're having right now is sort of us reframing his reframing in the way that like we've already spoken about it, but I think-

Jason Hall: That was actually it's getting really meta.

Jeff Santoro: Yeah, I know. Sorry. Got a little deep there, but I think that's actually the strength of the book. And I think why it's worth reading it, it brings up concepts you've heard before, maybe even in other investing books, maybe on podcasts or like this or any other sort of mindset related thing that's been written or recorded in a way that kind of reframes how you can think about it through a slightly different lens.

[00:48:39] Jeff Santoro: And I think that was really interesting to hear the same lessons over and over again, but from a slightly different angle, like that's one of the big things I liked about the book.

[00:48:48] Jason Hall: Yeah. And I think that's one of the most useful things for people that, that read it is exactly that it's going to take useful things that we know to be true. And I think maybe that's the most important part of it is that [00:49:00] these are, these are things we know, right?

But it can help people that might be struggling with managing their portfolio or struggling with fear of missing out and getting caught up in those, we talked about, you know, the bull runs, and that herd mentality and that we're, we're subject to that.

This is another tool to help. Understand human psychology. And I think as an investor, the more you understand human psychology, the more you understand yourself, the more you understand yourself, the better investment decisions you're going to make and the more wealth you're going to build for yourself and your family.

[00:49:32] Jason Hall: I think it's a, it's, I really think it's that simple. It's not that easy.

[00:49:38] Jeff Santoro: But it's, but it, it helps simplify that. Yeah. And to your earlier point about something like the confidence bingo card, potentially being something that forces you to make a decision when, to do something. What I like to think about is, so I'll give you an example from my own life.

[00:49:56] Jeff Santoro: I was a very new stock investor during the [00:50:00] bull run. Well, actually through the crash of the beginning of the pandemic, and then the crazy run we saw after it. But during that time when basically everything went up, I guess I just knew enough either intuitively or because I wasn't, wasn't 22. I was, 41, , that all of the frenzy around just felt to me like this, this is not sustainable. Something's not right. It's just like it, my spidey senses went off. I don't know that I would have had those spidey senses earlier in my life. And or maybe even, yeah, I would say earlier in my life, like if this had happened, if my interest in stock investing had been when I was in my early twenties versus my early forties, I might've seen all the frantic Twitter stuff and been like, I need to get in on this, and there's a lot of people who are in that boat and I don't, I don't think it's a bad thing. It's just, you live and you learn.

So I think of the things like the bingo card and just as just another, again, just another way to reframe it so that anyone who did get caught up in the [00:51:00] frenzy and maybe made some decisions investing wise that weren't the wisest to be like, okay, next time this happens, I'm going to be a little bit more aware, if there's a time magazine cover with a tech CEO on the front, or if, CNBC is saying, you know, buy this and buy that and buy that, you know, I'm just going to take a second, take a step back and just think a little bit more before I make any decisions.

[00:51:22] Jason Hall: That's important because It's going to happen again, right It's it's, um, they say history doesn't repeat, but it does rhyme. So it's, there's going, the animal spirits are going to take control again, and we're going to see some sort of a run up and then we're going to see some sort of a, uh, negative outcome that's going to come out of it. And it's how you're able to manage yourself through it. That's the key.

And, and I do think, I think sticking The Confidence Map kind of in that investor toolbox that we try to build some of those principles is I think it's useful.

[00:51:58] Jeff Santoro: Yeah. I think the last thing I want [00:52:00] to say too. It's not really an investing book. I think that's important for people listening to know we kind of approached it from the investing standpoint but a lot of the stories that are told and a lot of the examples that are given and a lot of the explanation of the confidence map itself are applicable to business leaders. So if you're if you're someone who owns a small business I think it's applicable to people in a lot of different professions.

It's also just sort of applicable to life. You know, the idea that sometimes you're in the stress center and sometimes you're in the launch pad and sometimes you're in the passenger seat and sometimes you're in the comfort zone. That could be because you got a diagnosis you weren't expecting or because you lost your job or because, you propose to someone and they said, yes, like it could be anything in your life that's good or bad or uncertain.

So I think just from like a general, you [00:53:00] know, live your life and understand it a little bit more point of view. There's some kind of interesting things in the book from that standpoint too.

[00:53:07] Jason Hall: I agree.

All right, Jeff, it's official. We did it again. We did it.

Okay, friends, just a reminder. Jeff and I absolutely love giving our answers to these hard questions about finance and investing. Love to have people like Peter Atwater come on and give their answers as well, but it is up to you to find your answers. You can do it. I believe in you. All right, Jeff. We'll see you next time.

[00:53:32] Jeff Santoro: See you next time.

[00:53:35] Jason Hall: Jeff. We did it, buddy. We did it one more time. We have done it. And just a reminder, we'd love to give our answers to these hard investing questions. Have great guests like Peter Atwater on here to share their insights on these hard questions, but it's up to you to find those answers yourself.

[00:53:52] Jason Hall: Find your own answers. You can do it. I absolutely believe in you. All right. We'll see you next time everybody