Best of MFM: Listen To This Before You Invest Another Dollar

0:00How would I take 10K and turn it into a million? Circa 2025, we cannot go into the S &P. The S &P is overheated. So what I would do is I would treat Berkshire Hathaway as the index. If you bought the S &P when the P-E ratio was 23, your annualized return over the next 10 years was between 2 and minus 2. That's all you have to know. Buffett's made at least 400 investment decisions. He's saying 12 are the ones that mattered. The god of investing has a 4 % hit rate. Investing is an infinite game. You don't really win or lose. The players just decide to drop out. Don't be such a freaking idiot. The riskiest thing in the world is the belief that there's no risk.

0:36When the time comes to buy, you won't want to. If I said, what's the number one trait that makes a great investor? What comes to mind? Um...

1:02so let's play a game you're my coach you're my investing coach let's say and i have ten thousand dollars and i want to turn it into a million right podcast called my first million i want to go from 10k to a million so that's 100x how would i take 10k and turn it into a million the thing about investing is that opportunities are not going to show up just because you have the cash so i would make some tweaks to your thinking first about the 10K. So I would say, okay, the 10K is a good starting point, but what I also want you to do separately from that is have a day job. Yeah. Okay. And I want you to spend less than you're earning.

1:42And I want you to take the 10K. And I also want you to take your annual savings. Maybe that's five, 10 ,000 a year or whatever it is. and normally I would say put it into an index, right? The index, like the S &P is overheated. We can't go there right now. Circa 2025, we cannot go into the S &P. Okay, maybe 2035 we can, but not 2025. So what I would do is I would treat Berkshire Hathaway as the index. So I would just say the default currently is you put it, you know, dollar cost average into Berkshire class B shares, right? And you keep doing that day in, day out. And if we did that, you know, the math is really simple.

2:26Even if we were doing 10 % a year, right? I mean, which I think is pretty reasonable for Berkshire. Rule of 72, we would double every seven years. Life is all about doubles. Okay, let's say we had a 20-something guy with 10 ,000 and you go for 50 years or 49 years. It's seven doubles. Right. Okay. seven doubles is 128. Okay. It's 128 times your money. I gave you more than 100x. Right. I gave you 128x in 49 years. Without having to be a genius. Without doing anything. Right. So this is just plan B. Right. Where we put the 10 ,000 in, it becomes more than a million, 1.33 million with no taxes paid.

3:13Right. There's no dividend, there's no taxes, there's nothing. and we haven't even gone to plan A yet, right? This is just sitting there. All right, let's take a quick break because I got a little freebie for you. So if you're listening to this episode and you like what Manish is talking about, you might be like me. You're trying to take notes. You're trying to remember these principles that he's talking about because the dude is just a wealth of knowledge when it comes to investing. Well, the fine folks at HubSpot listened to this episode. They took the transcript. They put down the nine principles that he talks about as well as the examples that he have and they put it all in a PDF for you.

3:42So you don't need to take notes. They did it all for you. You can read that, learn from it. That's a much better way to get more value out of these episodes. It's in the show notes below. Just go download that and enjoy.

3:59So I want to ask about the S &P because you don't know much about us, but the short version of the guy you see across from you there, Sam, is Sam's an entrepreneur. Sam builds his company. He sold his company and he took the money that he made and he said, look, I worked hard for this money. now I want this money to work hard for me, but I need it to be safe. And so Sam went into a mostly, you know, best practice, low cost index funds in the S &P 500. And anytime I ask Sam about his strategy or I tell him, dude, you got to buy Bitcoin, Ethereum, you got to buy this, you got to put some money over here.

4:30Because I'm like, you know, if Sam is vanilla, I don't even know what I am. I'm some flavor off in the side. That's strange. Tutti frutti. Yeah, I'm tutti frutti over here. And I keep trying to pull him over here, but he says, no, no, no, I like vanilla. And so he basically just says, the long-term average of the S &P 500 is 10%. If I just hold this for 50 years, I'm going to double this many times. I'm good. But I do get a little wary when anything seems too safe or too certain or I guess too taken for granted that this 10 % number over the long term will be what it'll be. I guess, what would your message be to Sam?

5:04Is Sam just, is he right? Is he wrong? Would you give him a caution of warning? If he was your nephew, he looks like he might be your nephew. If he was your nephew, what would you be telling him? Well, on the one hand, Sam, you're right. Because if you have more money than you need to eat, the first purpose of your money should be to make you comfortable. It doesn't make any sense. Buffett says, don't risk what you have and need to get what you don't have and don't need. It makes no sense for somebody with a surplus of money to make their daily life less pleasant by going to investments that put them under pressure.

5:46Sam Parr:But there's going to be a but on your statement, it sounds like. But. On the other hand, the riskiest thing in the world is the belief that there's no risk. The risk in the markets does not come from the companies, the securities, or the institutions like the exchanges. The risk in the markets comes from behavior of people. And it's for that reason that Buffett says when others are imprudent, you should be prudent. When other people are carefree, you should be terrified because their behavior unduly raises prices and makes them precarious. When other people are terrified, you should be aggressive because their behavior suppresses prices to the point where everything's a giveaway.

6:39So I don't, I mean, look, in the long run, you're right about the S &P. And over the coming years, American companies on balance are going to produce prosperity.

6:57Sam Parr:What's that defined as long term in this? Well, I would say 20 or more is the real long term. And I'll tell you in a minute how I get there. But my favorite cartoon, I have a file of cartoons from over the years. My favorite one, there's a guy, he's got his car pulled over to the side of the road. The guy's in a phone booth. So you know it's an old cartoon because there are no more phone booths. And there's a factory going up in the background. And he's screaming into the telephone, I don't give a damn about prudent diversification. Sell my Fenwick chemical. In other words, prudent diversification calls for certain investment positions and a variety of them in a certain composition.

7:50Reality says, I see Fenway chemicals burning to the ground. Get me out. And you can't ignore reality. Now, what's reality in this case for you? Reality is recognizing where things stand. And J.P. Morgan published a chart around the end of 24, and it was a scatter diagram showing over the years if you bought the relationship between the S &P 500 at purchase and the annualized return over the next 10 years. And it looked like this. On this axis, we had return, and on this axis, we had P-E ratio. And it was a negative correlation, which means the higher the P-E ratio you pay, the lower the return you should expect.

8:49Makes perfect sense. And it showed there was a number here, 23, on the P-E ratio axis, which is what the P-E ratio on the S &P was at the time. And it showed that historically, if you bought the S &P when the PE ratio was 23, in every case, there were no exceptions, in every case, your annualized return over the next 10 years was between two and minus two. That's all you have to know.

9:31I wonder how do you manage your psychology in a period of time where your performance is not as good as you want? Because you seem like a really well-balanced, well-regulated, emotionally regulated guy. But at the same time, this is the game you're playing. And how do you manage your psychology during a window of time like that? So, yeah, it's an absolutely spectacular question. It's funny because I did a sort of dry run through. I'm going to be talking about the fund to our investors in a day or two's time. And I think it's like, it's seven or eight years that I've underperformed the S &P index in this case.

10:09And so I don't know why it always comes up for me when I think of this is the question that was asked to me just after I'd published my book and I was invited to give a talk at Google. And the outperformance was looking better at that point than it is right now. and a very smart engineer asked the question, how do you know that the outperformance you've gotten to date is not luck? And my answer then, as it would have to be now, is we don't know. I'm just one data point and amongst thousands of data points. And so you would argue that 25 years is a long period of time, but eight years of underperformance in that 25 years is also a long time.

10:48And so this was already a year or two ago where I said, in the face of underperformance, what am I going to do? Am I going to say, this sucks, this isn't working, I need to change my strategy and risk everything that's dear to me potentially? Or am I going to say, look, I understand what I'm doing. Somehow the market's not rewarding it the way I would like it to be rewarded, but I know that what I'm doing will, even in the worst possible cases, lead to a really, really good life. even if I am underperforming. And if I take, for starters, my first investors, friends and family had never invested in equities before.

11:31So in their case, even if they're underperforming the S &P, they've vastly outperformed what they would have gotten in fixed income and all the cash instruments that they have there. They've won many, many, many times over. And I actually got to have, I like to call it courage, where I kind of realized that the key is to compound and to make moves that I know will enable me to compound. And if I can end up beating an index, then that would be great. But I cannot jeopardize compounding for the sake of beating the index. I have to focus on compounding. And if you step back, I mean, I think that this idea of playing the infinite game, so many people think they're playing a finite game, but they're playing an infinite game.

12:20Explain the difference, finite and infinite games. Yeah, yeah, sorry. So there's a clear distinction between finite and infinite games. A finite game is one which has a clear set of rules, a clear space in which it's played out, both in terms of time and physical location. So an example would be chess. There's a set of rules. It's played across a board, and there's a winner and a loser according to the time controls or a game of American football. It's played on an American football pitch. There are N players each side. The game starts, it ends. There's a winner, there's a loser. It's declared according to the rules.

12:55But the thing is, the most important things in life are infinite games. What is an infinite game? An infinite game has no clearly defined rules, no clearly defined game space, no clearly defined time when it begins and ends. And one of my favorite examples for an infinite game was the Cold War. The Cold War was fought across many battlefronts, whether it was the Southeast Asia or building nuclear missiles or rivalry between the superpowers in all sorts of ways. It's not really clear exactly when it started. And here's the thing, and it played itself multiple rules, multiple places. In the infinite game, you don't really win or lose.

13:38Usually one or more of the players just decides to drop out. In the case of Russia, Russia kind of, in a way, imploded and dropped out of it. What's the most important point? The key mistake that we make so often in life is we think we're playing a finite game when we're playing an infinite game. Life is an infinite game. Investing is an infinite game. So how many people, I would tell you, out of I don't know how many funds that were around at the time that I started, how many are around today? And it's like less than 2%. Now, some of the people left that game of investing because they actually were utterly superb, made enormous amounts of money, and decided to go and do something else.

14:21A famous example of that is Nick Sleep. He's in William Green's book. And so there are those people. But I did a study of this about 10 years ago, and there was a Lipper database where I could look up all the funds that were around at the time. They don't really give their reasons for dropping out. But in many cases, because they had an implosion of one kind or another. And so you don't want to be the guy who implodes.

14:52What's the Circle the Wagons philosophy? Well, the Circle the Wagons philosophy actually came out of when I was thinking about Buffett's letter last year to shareholders, the 2023 letter. He pointed out that in 58 years of running Berkshire, there were only 12 decisions that he had made that had moved the needle for Berkshire. Now, Berkshire had a tremendous run. They've compounded, I mean, until recently, they were compounding at 20 plus percent a year for 58 years. If you're 20 percent a year, you are doubling every three and a half years. Okay, and that means after 35 years, it's 10 doubles, and 58 is another 23 years.

15:44So you've got another, what, one, six, six doubles. So 16 doubles, 2 to the power of 16. Now the way to do 2 to the power of 16 is 2 to the power of 10 times 2 to the power of 6. 2 to the power of 10, round number is 1 ,000. It's 1 ,000x, right? and two to the power of six is 64. It's 64 ,000 times what you started with, okay? If you started with$100, it's 6.4 million, okay? $100 is 6.4 million, okay? So he's saying, I would calculate in the last 50 years, 58 years, Buffett's made three or 400, at least 400 different investment decisions. He's saying 12 are the ones that mattered, right? The god of investing has a 4 % hit rate.

16:40That's the god of investing. That's why we should index. Right. What are the rest of us mere mortals supposed to do? Now, the thing is that I was thinking about his 12 bets, right? And I thought about, okay, which were the 12? And I think he never mentioned that, but you could guess which one. Seas would be one of them. Coke would be another one. Amex. Gillette, Cap Cities, Washington Post. You can come up with the names, Berkshire Hathaway Energy. Ajit Jain, hiring Ajit Jain. Probably the biggest bet for them, but paid off huge for them. So what I realized when I thought about these 12 bets was, it wasn't the buy decision.

17:16The buy decision is important. The important thing was they never sold. Seize stayed in the stable for 50 years. Coke has been in this table for 40 plus years, right? So it wasn't the buy decision. It was the paint drying decision. Okay, that was the important thing. So when you find yourself in the happy position of a small ownership in a great business, just find something else to do with your time. Play bridge or whatever. Have you considered golf? I have. Yeah. Golf is great.

18:03Sam Parr:Can I ask you about your reading habits? How do you pick what books you read? I've never read any books about how to be an investor. Like, you know, multiply this by that and add this and subtract that. And the books I've found most interesting have always been the ones about investor behavior. And I mentioned Devil Take the Hindmost. 1999. One of the greatest books I ever read was before that, John Kenneth Galbraith's book called The Short History of Financial Euphoria. That was really pivotal for me. And since I'm a slow reader, I like the fact that it was only about 100 pages. And then, you know, back in 74, I think, Charlie Ellis wrote an article, Winning the Loser's Game, where he said that because you can't predict the future.

18:56Active investing doesn't work. He was a believer in the efficient market. So rather than try to hit winners, like the tennis player, you should try to avoid hitting losers and keep the ball in play. And that has always defined my investing style. In fact, I wrote a memo in the summer of 24 or 23 called fewer winners, fewer losers or more winners. And that's the basic choice of investing style. Today's episode is brought to you by HubSpot. Did you know that most businesses only use 20 % of their data? That's like reading a book, but then tearing out four-fifths of the pages. Point is, you miss a lot.

19:32And unless you're using HubSpot, the customer platform that gives you access to the data you need to grow your business, the insights that are trapped in emails, call logs, transcripts, all that unstructured data makes all the difference. Because when you know more, you grow more. And so if you want to read the whole book instead of just reading part of it, visit HubSpot.com. there's a great, I think, like sort of math paradox that you've pointed out, which is a fund. I don't know if it was your fund, but any fund, it could be, you know, never in the top 10%, but sort of never in the bottom 50%.

20:03And there's a strategy of just consistently being above average will place you in the top 5%, right? It'll place you in the top percent. Can you unpack that idea a little bit? I just sort of butchered it. In 1990, I wrote a memo called The Route to Performance. And I had dinner in Minneapolis with my client, Dave Van Benskoten, who ran the General Mills Pension Fund. And Dave explained to me that he had run the fund for 14 years. And in 14 years, the equities, General Mills equity portfolio, was never above the 27th percentile or below the 47th percentile. So 14 years in a row, solidly in the second quartile.

20:43Now, if you said to the normal person, not in the investment business, so this thing fluctuated between the 27th and the 47th, where do you think it was for the whole period? They would say, well, let me think, probably around 37th. The answer is fourth. So if you can do well for 14 years in a row and avoid the tendency to shoot yourself in the foot in a bad year, you can pop up to the top. At the same time, another investment management firm had a terrible year because they were deep value investors and they were heavy in the banks and the banks suffered terribly. So they were at the bottom. So the president comes out and of course things, people in the investment business are great rationalizers and communicators.

21:29And he says, the answer is simple. If you want to be in the top 5 % of money managers, you have to be willing to be in the bottom. Well, that makes great sense, except that my clients don't care if I'm ever in the top five and they absolutely don't want to see me in the bottom five. So my reaction is the first guy's approach is the right one for me. So that's why at Oatree, we go for fewer losers, not more winners. Yeah, I love that because it's one of the unsexy ideas. Like I think any idea you can't make a movie about or won't make you sound really cool are generally undervalued ideas when they actually logically math out the way that one does.

22:10And so I sort of, that was one that stuck out to me. I think nobody's going to give you a motivational video about being consistently above average and just never shooting yourself in the foot. It's all about heroic greatness, huge risks you can take and, you know, being willing to do it. And so, you know, that's all you hear. But, you know, the Financial Times of London, every Saturday, they have an article called Lunch with the FT. And they take somebody to lunch and they write an article about the person, the restaurant, and the food. And they did that with me in late 22. And I took the reporter to my favorite Italian restaurant near the office in New York, where I go 100 % of the time if I have a lunch.

22:57And I said to her, eating in this restaurant is like investing at Oak Tree. Always good, sometimes great, never terrible. now that to me that sounds like a modest boast but if you can do that for 40 or 50 years i think it'll compound to great results uh if you never shoot yourself in the foot and i think it's i think i i don't know if the sec is listening but i think it's descriptive of what of what we've accomplished

23:37the most important thing in life is how long does something take to double okay because that basically leads to everything else so for example if you look at someone like warren buffett right he started he started his compounding journey when he was like 10 or 11 years old i think he's he would say it's when he was seven years old. He's going to be 94 this year. Okay, that's a 87-year runway so far, right? Now, the thing is that if you have a really long runway, then a low rate of compounding would still get you a big number. Or if you have a shorter runway and a higher rate, would again get you the same result.

24:26So it's very important in life, and that's why I think that I wish they'd do this in high school, is to start that engine early. So, for example, let's take a situation of someone who's just finished college, right? At 22 years old, they got some job, maybe like making$70 ,000,$80 ,000 a year or something, and they put away$10 ,000 in their 401k, right? they're 22 years old in an index, right? The index has done 10 % a year. Now, what that means is the 10 % a year means that that 10 ,000 will double every seven years. All right, today's sponsor is a company that I use that I actually built a company on that I sold for millions of dollars.

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25:48And we sold the company for millions of dollars in a year. And the only reason we could do that is because Beehive had all the things we needed out of the box. We needed to be able to write the newsletter, send it, had growth features, referral programs, monetization, everything was built in. And so highly recommend if you're looking for a lightweight business, something that you can get going very quickly, highly recommend Beehive as a place to start. Go to beehive.com slash MFM and you can actually use the code MFM30 and get 30 % off your first three months. So let's take a situation where the person is now 64 years old, right?

26:26Now they started at 22, and it's 64, so it's 42 years. 42 years is six doubles, right? I do this to make it easy. Okay, so six doubles, right? That's two to the power of six. Two to the power or six is 64. So that 10 ,000 that the person saved at 22 is 640 ,000 at 64. But that's not all they have. At 23, they save 11 ,000. That's again, sitting at some big number and you keep going. And you know, sometimes we see these news articles, there's some guy who's a janitor of some college and he gives 4 million to the college and lived in a one-bedroom apartment, whatever, right? Why are we surprised?