MI307: Unpacking The Money Mind w/ Robert Hagstrom

24:26But Charlie Munger, along with Buffett, began to talk about what do they discount those cash flows, the John Burr-Williams cash flows. It was 1992 that Warren introduced John Burr-Williams to the Berkshire shareholders and said, it's not high PE, low PE. It's not high price to book, low price. It's not any of that stuff. It's the cash that comes out of it. It works for the bond market. It works for the stock market. It works for businesses. That's how everything is valued. But then the whole idea about discounting got to be puzzling because Warren said that he would discount by the risk-free rate, which would be the 10-year treasury.

24:57And when I wrote the book in the 1990s, we were looking at 10-year yields at 8%, 7%, 9%. So that was pretty high. He didn't add an equity risk premium. He would just adjust the purchase price for the riskiness of the underlying business, the predictability of the underlying business. But then Charlie came up with something interesting. He says, we discount by our opportunity costs. And I thought about that. I said, okay, let's go through that. And he says, if you were to lend money to the stock market, you're going to lend your capital to the stock market. Your expectation is to get at least a 10 % rate of return.

25:30That's been the average return for stocks for pretty much a century. So if I'm going to give money to the stock market, I expect to get at least 10 % back or more, certainly not less. I'm lending you money. The average return for stocks are 10%. I expect that's my opportunity cost. So when we began to think about that, we began to think, well, probably the right idea is to discount your cost of capital by your opportunity cost. You're lending money with an expectation of 10%. So let's discount it 10%. Let's not worry about the risk-free rate. Let's not worry about the equity risk premium. Just the historical rate of return of stocks being 10%, that would be my opportunity cost to lend you money.

26:08I'll discount the cash flows at 10%. If we do better than that, great, but we better not do worse than that. So that's kind of how we got to it. In investing the last liberal art, you said, quote, to build good mental models, we need a general awareness of the fundamentals of various disciplines, plus the ability to think metaphorically. So one problem I've been trying to solve is making thinking in multiple mental models into a habit. You probably already think this way, but for myself and other investors in the audience, what are the best ways to apply these various mental models into our thinking on a daily basis?

26:40Well, you're right. It does, you know, when I wrote Investing the Last Little Art, it was around 2000. And it takes a while to incorporate it. But the best way that you can do it, is I'm looking at my library. I can't see it here on the camera, but across the room there, I have a library shelf full of books about physics. I have a library shelf about biology. I've got sociology over there, psychology, philosophy, mathematics, art. We didn't talk about art in the book, but we maybe do that one day. History and all that. What I will do every once in a while as I'm heading out the door, I'll just try to grab a book from a different shelf and just try to keep myself fresh in the discipline just to kind of keep myself aware.

27:22I'm already, you know, I'm not saying that physics is where I'm going in life because I think it's more of a biological system than a physics system. But you just begin to allocate your time and your reading to things other than just finance and accounting. You know, you just, I mean, you've got to keep up with the news. It's information. You've got to get the facts in the moment. But your allocation of time should be spent studying other things as well. You know, sociology is big, how to think about markets. And the whole idea about diversity breakdown in markets, you can see how that works when attitudes become one way or the other.

27:56The wisdom of the crowds type approach that we think about, we think about that as in markets. But you just have to develop a habit. There was a professor, Dr. Beeman, at the University of Pennsylvania, who was talking about Benjamin Franklin, who obviously started the University of Pennsylvania and considered to be one of the great liberal arts thinkers. And he called Benjamin Franklin, he had a marvelous habit of mind, habits of mind. And habits of mind are basically to be widely read, not singularly read just on one topic. So I think you just have to discipline yourself to always grab a book outside of investing, outside of finance, outside of economics, and just noodle through it and see if there's anything that helps the light bulb go off.

28:39And I think we did something in the investment last level arc, which was when you read something, you don't have to read it slowly. You can skim it fast to see if there are any important parts that would be worthwhile for you to spend more time with. So it's called intelligent skimming. So, you know, when I go through a book, I'll try to go through it pretty quickly and, you know, go through the indexes and footnotes to see if I see anything new and different. And I'll read the first chapter, sometimes the last chapter to see if anything sparks because your time is valuable and you don't want to let a book take up more time than it deserves.

29:09If it deserves your time, great. If it doesn't deserve your time, then you need to move on. But you won't know that until you get through it pretty quickly. So the first pass through is not like reading a holy scripture. You're just trying to get through here. What are the high points here that I want to think about? So you can motor through more books if you do intelligent skimming. Then if it's good, then you go back and you slow down and you underwrite, highlight, and you make notes. But that's kind of how I attack reading. With markets tanking in the month of September, going over some of Buffett's major tenets during this volatility is very prescient.

29:43But I think Buffett would agree that volatility is a feature of the market and not a bug. What actions do you think Buffett and other Buffett disciples would be doing during these turbulent times to best take advantage of the volatility we're seeing in today's markets? You know, the one thing that I would say with Warren is that volatility is his friend. Now, he has a longer horizon than we do, and he's not measured quarter to quarter, month to month, and maybe not even year to year, like mutual fund managers are professional managers that are, I think, unrealistically held to shorter term performance benchmark.

30:14But for him, volatility is his friend. I think he had a quote that I've always liked. He said, widespread fear is your friend. If the market is gripped with fear and panic, that's your friend because you're going to get some great prices. He said, personal fear is your enemy because once it becomes a personal fear, then you begin to do stupid things, right? And we see it now. We see it with our advisors that with the headlines and the headlines are very, very tragic around the world with what's going on in Ukraine and what's going on in the Middle East and Israel. And then we've got headlines with politics coming up and shutting down the government.

30:48We've got headlines with inflation. We've got all these headlines, right? And to the degree that you let them start to rule you in that fear, and it becomes a personal fear, then you're cooked. You're just not going to be able to take advantage of it. So widespread fear that then is reflected in stock price volatility actually is the friend of the long-term investor because it allows them to pick up more shares at cheaper prices that allows you then to compound a larger number for your portfolio that will increase your rate of return over time. Nobody likes volatility, but price volatility is not risk.

31:23Short-term quotational loss is not capital loss. There's a big difference. Short-term quotational loss is just the market doing its funny stuff. But permanent capital loss is serious, and that's what we try to avoid by owning good companies, good balance sheets, low debt, predictable. We're not concerned about permanent capital loss in our portfolios. And we don't view short-term rotational loss as a measure of risk. It's an opportunity if we can put it to work. Another awesome topic in investing, the last liberal art you discussed, was the returns that Warren Buffett and his friend Bill Ruane had during the sideways markets of 1975 to 1982.

31:59So in these sideways markets, the price of the Dow Jones Industrial Average started and ended at 784. Yet Buffett and Ruane made cumulative returns of 676 % and 415 % respectively. And their trick? Extending holding periods. Can you go over the data that you found and the primary lessons that you learned from this research? What a great question. I'm glad you brought that up because I actually, we did that research report at the earlier part of the year because I think some people are coming to a viewpoint that maybe we're in another sideways market. If you think about it, for two years, we've kind of gone sideways.

32:32So I was working with Bill back then. It was after the financial crisis. And people were saying, we're probably in first sideways market. Now, sideways markets happen all the time. But we have a tendency to think about markets in bulls and bears and don't realize sometimes they just kind of go sideways for a while. And they're really quite common. Now, the uncommon ones, as you pointed out, Kyle, thoughtfully, is the 75 to 82. And that was a period, certainly not identical to now, but it was a period of high inflation, high interest rates, geopolitical risk. And as you rightly pointed out, the Dow didn't move for much of that period.

33:07So the total return for the Dow was the dividend returns. Basically, the average return for the Dow was about 4 % annual, which was the current dividend yield of the Dow. So on a price basis, nothing, and you just got the dividends. S &P did a little better. It was almost an 8 % average annual return, which was pretty good. Once again, half of that was dividend yield. So we went back and looked. And as I said, overdosing on Buffett and stuff like that, I knew Buffett killed it. And we basically did the research to look at the S &P 500 back then and break it apart and discovered that, yes, over one year period, stocks didn't do well.

33:44But if you'd extended the time horizon, you basically began to see that there were some stocks that actually were doing pretty well. and there were some stocks that were doing not so well. But in fact, that there were stocks going up, multiples made you think what was going on. So then we parsed the data even further down by sectors and found out that oil was a big performer. And that was not difficult to discern because we had the oil embargo in 73 when they had the Middle East war and everybody turned off the oil stick and didn't sell oil to the US. So oil prices went up, gasoline went up, inflation went up, interest rates went up.

34:19And that was a very hard period. The industrials did pretty well. But later down the road was consumer cyclicals. And within the consumer cyclicals, there was Buffett and there was Sequoia. They owned newspapers, magazines, television stations, right? They weren't capital intensive businesses, so they weren't required to reinvest capital at high rates, high interest rates, because once you put up a TV tower, you put in a printing press or whatever the case may be, there's not much capital expenditure after that. So it was just a cash flow business. And they were able to price because before the internet, the only way that you got information or you could get advertising out was either through TV, newspapers, magazines.

34:59And so if you looked at their portfolios, that's exactly what they own. They also own advertising businesses, the same thing. So I went, all right, consumer secularists. And then the second smallest sector in the market was technology. Technology wasn't a big part of the market in the 1970s, but almost every single stock in the technology sector doubled over five years. So it led you to think about the difference between trends of the system and the trends in the system. And that's something important to think about markets, which is the market's going sideways. That's the trends of the system.

35:30The system's going sideways. But there are trends in the system where there's some things going up a whole heck of a lot and some things going down a whole heck of a lot. And they basically equalize out and you get this flat line in the market. But recognizing there's a difference between the trends of the system and the trends in the system, no matter what the market is doing, when there's something going on in the market, you just got to go tease it out. And that became very, very important for us to think about. And so what we then began to think about is that in sideways markets, there are two pots of money or two parts of the investment pie that are going to be very important, which is high yield.

36:07Anything that's going to have high income, the price is going sideways. High income is going to do pretty good. I did it in paying stocks. I think the yield on the S &P, you can correct me, Kyle, but I think the yield is maybe 1.8%, 1.6%. So if you're in a sideways market for the S &P, you're not going to get 4%. You're going to get 1.6%, which is going to be less in real estate. So you have to think about, are there dividend-paying stocks that can get me 3%, 4%, 5 % that might be interesting? Now, they've gotten bruised up a little bit with this last bump in interest rates, but that's probably coming to an end.

36:40So high-yielding stocks, high dividend paying stocks make a lot of sense. And then growth companies, companies that can actually grow through this that aren't capital intensive, that have pricing power, that can move, that are in high demand around the world. Growth in a sideways market is very, very valuable. So it's almost a barbell approach where part of the portfolio might be classic value, high dividend paying stocks. The other part of the portfolio may be your secularly advantaged growth companies, like I was talking about network economics and things on the internet, software businesses, this AI thing is the real deal.

37:17How does that impact sales and earnings? Things that can grow secularly, advantage with high returns on invested capital are going to do well. And at the opposite end of the barbell, the high dividend paying stocks. And so not knowing how long this would be a sideways market, it could change, who the heck knows. But if you said to me, we're going to be pretty much at the same place next year as we were this year, then that's the kind of portfolio that I've been going to run. So one of the biggest takeaways that I had from the Warren Buffett portfolio was your excellent research on concentrated portfolios.

37:48The research from Compustad that you did in that book looked at 1 ,200 companies between 1979 and 1986. The conclusion was that holding fewer stocks increased the probability of generating market beating returns. Could you discuss some of the details you took from this study? You know, that was Warren, once again. So I had written the Warren Buffett way in 93, 94, and had done quite well as a testament to Warren. It was one of the first books to come out that actually went through the methodology. And I remember in writing it, and that was 30 years ago. Can you believe that? 30 years coming up, 2004, it came out in 94.

38:23Basically, I was so challenged, I guess, and anxious about making sure I had the right methodology, what we call the investment tenets that Warren Buffett used to select stocks. I didn't spend any time on portfolio management. I think the entire portfolio management explanation of the book was, he owns a few stocks and he holds them forever. That was it. I spent all my time analyzing Washington Post, Cap Cities, American Express, Coca-Cola, Geico, all that stuff, because I was going to get that part wide. So after the book came out, I was watching one of the financial news programs, and there was a portfolio manager on there that said, yeah, I'd just like to buy you know businesses that i understand that have got a good long-term outlook i went yeah that's buffett and he goes you know i like cash earnings and you know good returns on equity i went yeah that's one buffett and uh you know we like management who's rational and how they think about allocating capital and that are honest and straightforward i went guys on board this is what i want to hear and he goes yeah and we always find for less than their worth and i went oh touchdown the warren buffett way and then i'd look up the portfolio and you have 100 stocks and 100 turnover ratio.

39:32I went, wait a minute. You got the first part right, which is, you know, not to think about stock selection, but you totally whiffed on the portfolio management. So that led me to understand and appreciate that I'd left out half, which is stock selection, the other half is portfolio management, and I left it out. So I had an opportunity to call Warren, and you know, this was years ago when he wasn't one-tenth of BC as he is today, right? And I said, you know, I'm thinking about doing a portfolio management book because I left that out. And he said, we were focus investors. We just focus on a few stocks.

40:04And so focus investing was the subtitle of the book. It was the Warren Buffett portfolio, mastering the focus investment strategies, something like that. And we did. So basically all we did, and it was very simplistic, very elementary when I go back and look at it. We just took these 12, we needed to get basically 3 ,000 portfolios. Once you get to 3 ,000 portfolios, it's statistically significant, the conclusion you brought from. And there wasn't 3 ,000 focus portfolios out there at the time. We basically took 3 ,000 portfolios, and then we did them with, I think, 15 stocks, 50 stocks, 100 stocks, and 250 stocks.

40:37And then we just ran them through the computer, both for 10 years and 15 years. And to the T, what you found is, to the degree that you own more stocks, your returns were very much at the market rate of return. And to the degree that you own less stocks, you had a higher percentage number of your portfolios beating the market. But you also had a higher percentage number of the portfolios underperforming the market. And so there was the dilemma, right? And as Warren has said famously, so if you're a know-nothing investor, you can't do stock analysis. You don't have the temperament to think about markets in a rational way.

41:09Then you should own a bunch of stocks like the S &P 500 and you will get a good 10 % rate of return over time. Nothing wrong with that. That actually beats about 90 % of the active managers out there. He said, but if you're a no something investor that can do analysis, that has the temperament, you don't need that many stocks. And 10, 15, 20, 25 stocks is more than enough. So we looked at Buffett's performance in the partnership, and it was phenomenal. We looked at Charlie Munger's performance in the partnership. It was phenomenal. We looked at Sequoia Fund. We looked at Lou Simpson, who managed money at Geico.

41:39We even looked at John Maynard Keynes, who ran the chess fund for Cambridge for so many years, all concentrated low turnover portfolios, with the exception of Buffett, who've never had a bad year in the 13 years that he managed the Buffett partnership. Every one of those guys only outperformed the market about half the time on an annual basis. But their returns were through the roof, right? And so what happens in concentrated low turnover portfolios, if you've got the right company, you're going to compound money over time, but the market is gravitating around you all the time. Sometimes it likes oil, then it likes pharmaceuticals, now it likes small cap, now it likes international, now it likes technology.

42:15So it's going through all its ebbs and flows and sometimes the light shines on you and sometimes it doesn't. And when it doesn't, you underperform. And when it does, you can make them make a lot of money. And so each of them had great long-term track records, but the frequency in which they beat the market was about batting average 50%. And so then we were led back to a mathematical constant, which is returns in markets are not how many times you beat the market, less how many times you don't beat the markets, how much money you make when you beat the market, less how much money you give back when you don't.

42:45And what we saw with these guys and others is that when they beat the market, they just killed it. They were off multiples. And when they gave back, they didn't give back so much. Why? Because they were doing valuation work. They weren't overpaying for growth stocks or they weren't overpaying for stocks. And so when the market moved against them, their downside was not anywhere near as horrible. We then began to understand, okay, this makes a whole lot of sense. Now, let's fast forward. Today, around 2003, 2004, two professors from Yale University, Martin Kremers and Petit Justo, Anthony Petit Justo, brought out a paper called High Active Share.

43:22High Active Share is now the academic word for focus investing. You can measure your high active share to the degree that you're different than your underlying index. If you own everything in the index, your active share is zero. You're no different than Martin. If you own 15 companies, 16 companies of different ways, you could have an active share because of your differences in the market of 85%, 90%, 95 % active share. They then concluded, they did the research on all actively traded portfolios and found out those with high active shares, the most concentrated were the ones that outperformed the market.

43:55You had low active share, which is kind of closet indexing. You couldn't beat the market. And then they followed up the study with turnover ratios and found out within the high active share quadrants. Those that had low turnover strategies actually had the single best performance, just exactly the same portfolio that Warren Buffett does. So concentrated low turnover portfolios is absolutely 100 % academically settled, no more debate, the optimal way in which to manage portfolios to generate a return better in the market. But there's a problem because people want to have performance every month, every quarter of the year.

44:28They don't like it when they underperform. And high active share focus, low turnover portfolios will underperform from time to time. So you've got to make sure you have the right fit between the client, the investor, and a high active share portfolio. Because I have learned over my 30 years, I've never met anybody who disagreed with the methodology that Warren Buffett does. I said, look, this is what Warren's doing. Do you want to do it? Everyone says yes. And about three months later, two out of three can't do it anymore. They just fall out. Being out of sync with the market or not owning what's going up in the market in the short run.

45:02They know it, but they can't walk the path. It's the difference between knowing the path and walking the path. They know the path, but walking the path as a focused low turnover portfolio requires a temperament. And Warren would say it's a business person's temperament. You're not buying a stock, you're buying a business. And if you frame it as a business, it's less frightening when you underperform the market because you actually understand your business and you understand the revenues and the earnings and the products. And so when you're underperforming, you're like, well, so what? This is a great business.

45:29it'll outperform later. But you have to get the right mix of people to make it work.

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49:00All right, back to the show. So in Money Mind, you wrote a great passage, quote, all these separate components, your view of the market, your methods, and your temperament as an investor reflect the totality of your philosophy of investing. When all three are working in harmony, we might even say we're looking at a person who displays a money mind. For readers who have not read this book, what parts of each of these components should they try and develop skills to one day acquire a money mind? The way in which we kind of approach money mind, which is not a method book. The Warren Buffett way and the Warren Buffett portfolio are methods.

49:34These are the methods, the steps that you take in order to select stocks optimally, in order to manage portfolios optimally. And I spent the lion's share of my career focusing on methods. If a client was struggling, I'd just sharpen my pencil and try to figure out, well, I just keep working on the valuation to try to convince them that they have a good investment. So I was always focused on methods. But learned that methods alone is not going to get it done. And that's where the money mind came in that Warren introduced in 2017, which is a term that he used about how to rationally allocate capital, a reflection of their temperament.

50:10And when you rationally allocate capital, you think about putting capital work at lower prices, not higher prices. The lower markets are your friends, right? And so how you just think about allocating capital and how you think about changes in stock prices is a function of temperament. The money mind is a temperament model. And it works in such a way, Kyle, that you almost have to turn the stock market off. You almost have to disengage with the stock market and treat it as a sideshow versus the centrality of how you think the world is, is to always look at the screen with red and green on it and what did it do today?

50:45It's interesting, you know, I'll throw this out at you, Colin, you can push back on me. You know, Warren Buff's clearly probably the most famous celebrity in the stock market today. Warren Buff weighs in 18 foreign languages. Everybody knows Warren Buffett. And if you would say to him, you're a celebrity of the stock market, he would go, it's kind of a shame because I really don't agree with the way most people invest in the stock market. It's kind of like just because stock prices or companies have a public stock price, it makes people act in perverse ways, which is, let's just say Apple was a private company, or Google or Amazon was a private company.

51:20And once every three months, you could go to the board and you could buy or sell stocks, right? Shares in those companies. But the rest of the time, there's no stock price. So what are you going to do? Well, you probably look at the, you know, the quarterly reports, you think about trade magazines, think about how the business is doing, you know, you go through what a business owner goes through every single day that doesn't have a stock price. Now, the question then becomes, if that's the way a business person operates owning a private company, why is that not considered the proper way to think about investing in a common stock when it has a daily price.

51:55Or put it differently, just because a common stock has a daily price, why do you act so bizarre? Perverse. You're trading too often. You're trying to make bets on the economy that you can't predict. Another thing about the Santa Fe Institute and complex adaptive system, there is no science that can predict a complex adaptive system. It's not been invented yet. So all these market strategists, all these economists that are constantly telling you what's going to happen in the economy market, they have no idea because there is no science that can tell them what is going to happen. At best, it's a hunch, right?

52:27At best, they're waiting probabilities. But if anybody had the model to predict economies in the markets, they have all the gold, but they don't. The question then goes back to just because there's daily stock prices, why do we behave so poorly, so badly in such ways that are adverse to our long-term best interest? And there's, to me, a puzzle. If you can answer that and solve that for mankind, people would do a lot better in investing, I can guarantee you. I completely agree. One of the things that I've worked on myself for my own investing was just creating a environment where I'm trying to make fewer mistakes.

53:03I know a lot of people check their portfolios 50 times a day. I used to do that. And you just put all this stress on yourself. And so I was just like, you know what? I'm not going to do that, deleted all my apps. And I just basically refused to kind of bite into that, the dogma that most people follow. And that helped me a lot. I think that's brilliant. I think that's what people should do until at which point you can look at it with detachment. You can look at it just as, it's almost like a cartoon. It's kind of like, oh, I see what it's doing to it. It's acting silly. It's kind of like, you know, the roadrunner's going off the cliff.

53:34It's kind of like, okay, you can look at it, but you're not absorbed by it. It's not ruling you. You're just observing it, right? To the point when markets are ruling you and forcing you to do things that you otherwise would not do if there were changes in prices. That's where you run into it. But people said to me, what's the best advice? I just say, turn it off. Turn off CNBC. Turn off Bloomberg. Turn off everything. And turn it on on the weekend. In the old days, before there was internet, we'd just get the barons on Saturday. We'd look at prices once a week, kind of check the portfolio and check the mutual funds.

54:08But now you're right. People do it. When I leave this afternoon, I'll stop by. I'll see people on their phones checking their portfolios. I'm going, you're no richer today or tomorrow than you're going to be next week. So relax. It's going to be fun. You've got the right attitude. I really enjoyed how you linked Ralph Waldo Emerson's teaching on self-reliance to how Warren Buffett thinks. You outlined three major themes from Emerson's essays that Warren has lived by to this day. Quote, first is solitude and community. Emerson warns us that community is a distraction to self-growth. He believes more time should be spent in quiet reflection.

54:43Second is the sense of nonconformity. Emerson said, quote, whoso would be a man must be a nonconformist. He argues that an individual must do what is right no matter what others think. Lastly, the theme of spirituality is especially important. Emerson tells us truth is within oneself and warns that relying on institutional thought hinders an individual's ability to mentally grow. Now, can you outline how Warren has utilized these three themes in his investing career and give some examples of how investors can use it to improve their thinking? We said in the book that he learned the philosophy Emerson from his dad, Howard Comenbucket, who was a great, great man, most important man in Warren's life.

55:26And he was a politician, but he was very much into, he was a libertarian, kind of get at the root of it. He was friends with Murray Rothbard, who was a big libertarian. And libertarian is always about the celebration of the self over the state, where the state is not thought to be able to make the most optimal decisions that the self can, that the individual can. And so Emerson was trying to point out, to the degree that you sit in quiet reflection and solitude and think and read yourself, as opposed to being in the mosh pit that is the stock market listening to hundreds of people have opinions and stuff like that.

56:03It's more likely that you're going to be more successful to the degree that your reflection is in solitude and reading and things like that. So think about Buffett. All Buffett does is read. That's all he does. Occasionally gets on the phone. Some say he has CNBC, but I've heard from credible sources he keeps the volume off. He only leaves it on in the corner for chance of something interesting about a company that he owns or might want to own flashes across the screen. He doesn't talk to other people about the market. One, they don't know what they're talking about. And two, it's like, I'm making the decisions.

56:34They're not making the decisions. I'm making the decisions. I'm not going to turn my money over to them. So what do I care what they have to say? So it's this whole idea about the self. and to the degree that you invest in yourself by reading, reflection, and educating yourself, you strengthen your ability, you strengthen your resolve to act appropriately, optimally at those times, independent of what's going on in the community, what's going on in the market. And that's what you have to do. And to be a nonconformist, I'll preface it with this, one of my favorite Buffett days, polling does not replace thinking.

57:10Now, I'd like contrarianism, But there's some things that go down that are supposed to go down, and there's some things that are going up that should continue to go up. So contrarianism in of itself is not the right way to think about it. But you do want to take a different tack. If you're always walking lockstep with the market, it's going to be hard to beat it. So you want to find pockets of inefficiencies in the market where the market isn't right. So you're not inconformed with the market. You're acting in juxtaposition to the market's thoughts and wishes. And there goes back to self-reliance or the mirror image of self-reliance is self-confidence.

57:45That self-reliance, self-confidence is what allows you to make bets independent of what's going on in the market without needing the market to affirm you being right or wrong at any point in time. You're doing it yourself. It's in you. And so that's a very big deal. There was a study Michael Mobison did one time. I don't know if you know Michael, but great, great writer and author and professor at NYU. and he looked at some of the most famous investors in the world, and they typically lived outside the New York City. Omaha, Memphis, you know, places around the world where they were not near any of the chatter.

58:19They were not in the chatterboxes. And I know a lot of guys outside of New York, and they just seem to be so happy and so relaxed and just so at peace. And that's Omaha, Warren. It is, you know, kind of a quiet sanctuary away from Wall Street that protects him from being influenced by the community, by the bigger whole. And that education gives you that self-confidence, self-reliance to make bets that are not in conformity with the market, but are probably the source of your excess return because the market's mispriced. So you outline a few key attributes of the money mind that Warren learned from his great friend and partner, Charlie Munger.

58:56The first was that a money mind seeks to build worldly wisdom. Second, the money mind actively studies the failures of others. Third, the money mind is a rational mind. And fourth, the money mind is pragmatic in the sense that it appreciates knowledge, but always knows that there's much to learn. Now, I want to focus on the second attribute here. What are some of the best people, businesses, events, or research that investors should study in order to avoid making the most common failures of the past? I want to put it this way. There's just but a handful, less than on one hand, of analysts. I don't follow market strategists or people predicting markets, but people that I actually think understand businesses that are on Wall Street that I favor, that I think are quite good.

59:39But I'm very discriminating and they have to earn my trust. They've got to achieve certain things for me to understand that I think they understand how to value businesses. So set aside those select few. I found the stuff that I enjoy reading would be like trade magazines, things about the industry. So if you're in the computer business or you're in software, something with trade magazines and things like that, what's going on in the businesses? Not what's going on in the markets. Not what's going on in the economies. What's going on in the business landscape? You know, if I own a business called Diageo, which is the world's largest spirits maker.

1:00:14I read a lot about that. We own fashion good businesses. We own Louis Vuitton and Richemont. I love reading about fashion and fashion goods. That's one of the hierarchy of needs that people, as they get discretionary income, the first thing they want is better tasting food. Second is they want better tasting liquor. Third is they want household products and beauty care products. And then fourth is fashion. They want better dress. So we know that they're going to get there. And so I just like to understand what's going on in the fashion world, what's going on in the spirits world. We spend a lot of time in tech.

1:00:42We spend a lot of time in software. We're spending a huge amount of time in AI, which we don't believe is a bubble. It'll be interesting to see how this morphs over time, but it seems to be the real deal. To the degree, though, that I'm reading that, I'm not reading the stock market. I'm not reading an analyst who's saying, I think the stock price is this. Who knows, right? I want to be the best business person I can be. If I can be the best business person in my portfolio, then I probably will be the best stock picker as a result of it. Or as Warren says, we're business pickers, not stock pickers.

1:01:14If you start as a stock picker without understanding the business, you're in trouble. So if you start with a business person's perspective first in the company that you own, then thinking about the stock price later becomes much easier. So trade magazines, anything other than the stock market is what you ought to be spending your time on. And books. I mean, there's great books all the time. I'm not trying to promote this book, but James Besson, The New Goliath, How Corporations Use Software to Dominate Industry. Okay, I own software companies. I'm going to read this book. This is a book that would be very interesting to me.

1:01:50It's not Wall Street Research Now. Do I read Barron's? Do I read the New York Times? Do I read Wall Street Journal? Yes, I do. But it usually is just for facts and information. And that's not where wisdom is. In books and other things, it's where wisdom comes from. You have to get the facts of the moment. You have to understand what's going on in the world. But that's the starting point, not the ending point. To get wisdom and to achieve wisdom, which gives you that ability to act independently the market with self-reliance and self-confidence, you have to gather wisdom from other sources than just the market.

1:02:23A little bit of a long-winded answer, but that's the key. So one of my favorite mental models that I borrowed from you was how you view private equity in a positive light in terms of investing time horizons. Can you outline the lessons you've learned from private equity that the audience can use to help them lengthen their time horizons using long horizon arbitrage? Actually, when you ended it, It was actually two different things, but I thought where you were starting was just thinking about private equity into itself. I'm just so jealous of them, right? They've got it so easy. Why am I jealous of them?

1:02:53Well, what do they do? They own businesses, right? And they may be trying to fix the business or turn around the business or reorganize it with the idea that they're going to sell it somewhere down the road. And that's fine. You know, there's a lot of different ways to make money in the markets. But what I'm so envious of is that they own businesses that don't have stock prices. and so they don't have people dealing with myopic loss aversion and you know prospect theory and all this stuff and i and i look at them and go man that's just not fair i mean you guys have got it so easy right you just all you do is just tell you tell your people what the sales were what the earnings were i said the nav barely moves from quarter to quarter to quarter to quarter if you look at a private equity portfolio the nav very rarely changes you know a little upward slope over time and then when you sell it you know it goes parabolic through the roof right it's one of these amazing things, right?

1:03:42And I said, you guys are kind of so easy, you know, and I'm so, you know, I'm so jealous. And they all laugh and laugh and stuff like that. But that's the truth. But when you said long horizon arbitrage, there's a lot of good academic work is that the price, the part of the market that's most mispriced is long horizon arbitrage. It's the most difficult to figure out as well. Short horizon arbitrage is for traders, and that's a totally different game that I'm not into. Long horizon arbitrage, though, is where the mispricing is. And Michael Moveson said to me, there are not that many companies that actually can grow at high rates of return over a sustainable long period of time.

1:04:15The market figures them out or competition figures them out and creative destruction, all this stuff, it doesn't last as long as it does. But if you find one that does, that can generate high returns on invested capital, that can do it over a long period of time, that can reinvest back in itself to compound over time, most likely the market's got it mispriced. So the mispricing for investors is out what happens three, four, and five years from now, not what happens three or four or five weeks from now. That's hard to arbitrage. That's hard to figure that out, almost impossible to figure that out.

1:04:49But if you've got a company which you think that'll be here in five years, I know what they do as a business. I understand their economics. I understand what management's goals and objectives are. And you look at the price and the economics are above average for the market and they're being priced at the market, you know you've got an arbitrage. But once again, it's that long horizon, long-term investing, which is much harder than trying to figure out day-to-day, even though nobody can figure out day-to-day. It's amazing how many people spend time trying to do it. Robert, thank you so much for joining me today.

1:05:23Before we say goodbye, where can the audience connect with you and learn more about you and your book? Well, Amazon's great. and I think there's a Robert Hackstrom Amazon. You just do Robert Hackstrom Amazon. They've got all the books. I work for a firm called Equity Compass, a great little firm. We're out of Baltimore, Maryland. I do some writings there and commentaries and stuff like that. So I'm never too far afield. I just try to stay out of trouble and keep my nose down to the grindstone. If you enjoy reading the types of books that I discussed with Robert on this episode, I'd highly recommend checking out the Investors Podcast Mastermind Community.

1:05:57It's a community of dedicated value investors who are reading impactful books and discussing our high-level takeaways. But this is just one of the many features of the community. We have a community forum discussing quality investing, special situations, and investing resources, among many other things. You'll have access to exclusive guest Q &As where you'll get direct access to investors like Chris Mayer, Godham Bade, and Tobias Carlisle. If you're interested in applying for the community, please go to theinvestorspodcast.com slash mastermind. Once again, that's theinvestorspodcast.com slash mastermind.

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