Path to Confidence: Why the Best Investors Rarely Swing

0:00If we want to be great investors, we actually need to think like a former baseball legend, Ted Williams. He played 19 seasons for the Boston Red Sox, and he did one of the most unique things in baseball history. He divided the entire strike zone into 77 different squares, and he knew the exact batting average for every single grid square. You don't swing at every pitch. You just swing at the ones that are in your zone. So we're going to talk about it. Buckle up. Let's go. There's a huge misconception that to start a business, you need to invent some revolutionary product, but the truth is you really don't.

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1:59Gemini and Chrome is here for it. Ready to make anything online make sense? There's no place like Chrome. Check responses set up required, compatibility and availability varies 18 plus. You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. compounding discipline and the conviction to buy wonderful businesses and stick with them your path to financial freedom start now and welcome back to the investing for beginners podcast everybody my name is steven morris he is andrew say there and andrew you have to give me props for bringing up a night was at 1930 to 1940 or 1940 to 1950 baseball legend ted williams i mean come on like you're the baseball guy i'm not but give me some props bro yeah yeah like you actually maybe watch the game or two in your life like big big big round of applause because that was a good pull awesome and in the intro i got his uh his batting average slightly wrong it was

3:14.406 when he retired in 1941. But just to hammer home, I know this is in the sports podcast, and you may not even give a poll about baseball, there have only been 28 batters in the history of the MLB to bat over 400. And he was the last to do it. Think about that. Like the 1940s, that was the last time someone bad. And there are a lot of reasons for that. But that just goes to show you how clinical, how successful you can be when you're super clinical about what you're doing. And it's just a crazy, crazy unique story. If you've never heard of him, I highly recommend you look him up. Just read his wiki page or something like it.

4:06Really cool story. But today, Andrew, we're going to be covering, you know, we've already talked about in this series we're doing of your path to confidence. We've already talked about defining what type of investor you are. You and Evan talked about building that good, solid foundation for you to invest from. So if something happens in the market, you don't freak out. Today, we're going to be talking about circle of confidence. And, and I know we've talked about that a lot, especially recently. And so like, and if you're listening, like instead of rolling your eyes, like it's pretty important.

4:48So if you haven't written your circle of competence down, I highly recommend you do that, but maybe someone's new and they've never even heard us talk about it. Andrew, say your brother is like talking to you about wanting to start investing. and he's like, you know, what should I do? And you're like, well, what's your circle of competence? And he looks at you like you're an absolute idiot. And he's like, what's that? How would you explain circle of competence to him? Well, I mean, basically there are thousands of stocks to choose from in the stock market. And even though it can feel like, you know, if I don't have the best stock on the planet, I'm not going to do well.

5:28That's actually not the case. there are a handful of companies that, to use the baseball analogy again, completely hit the ball out of the park. And so as investors, we all have 24 hours in a day, seven days in a week, 365 days in a year. We, at the end of the day, have to decide how to invest our time. And then you just make the best educated decision that you can and then move forward. So because our time is limited and we can't just spend thousands of hours on every single stock in the stock market, we are forced to find a circle of competence. And so some people, they find that through trading, they find algorithms, they find what you call quantitative analysis, where you've done all the numbers and it's a very systematic, no emotions involved kind of approach.

6:28which I've chosen over time to lean more towards a qualitative, where I want to buy a business that does the work for me. Let me buy a good business and let them do the hard work, let them do the compounding. When you are on that side, even if I'm just barely on that side, I'm still on that side, that means you have to be positive about the business you're investing in. to feel positive and optimistic about that business. You have to know what that business does. And so we all, again, just have a limited amount of time, limited amount of energy, limited amount of skills and experiences that can kind of shape how you identify what a good business is or not in different industries.

7:16And so that's where having a circle of competence can help because by saying no to industries where you don't think you have an advantage, you now say yes to being able to dive deeper into places where you do have an advantage.

7:32Absolutely. I love that. Oh, go ahead. And he's probably like, okay, I didn't need the lecture. Thanks. Thanks, Dad. No, no. I think that's a great definition. That was awesome. The sidebar comment. Did you know, Andrew, obviously you've heard the jack of all trades, master of none saying before, right? did you know that's not the whole quote no it is the whole quote is a jack of all trades is a master of none but oftentimes is better than a master of one and if you think about it that completely flips what how we understand that saying today and when you hear it in its entirety. I bring that up because I feel like when I started, you know, obviously we've talked about it before.

8:28Like obviously my number one sweet spot in investing is the defense sector. I know it better than anything is because that's where I spent most of my adult life. I know how it works and how it operates. I know all the companies in it. Um, I know what to look for thing. You know, I just understand that maybe farming would be my number two. Cause that's, that's how I grew up and I'm very comfortable there. And it's like, you know, I didn't really see a need to grow my circle of competence, but then I got to thinking about it and it's like, okay, so do I follow the, the, uh, jack of all trades quote and try to branch out into different sectors and start learning a little bit over here and a little bit over here or another old reference Thomas J.

9:27Watson senior was famous and he was he was the CEO of IBM like way back in the day like 1915 but he said I'm no genius. I'm smart in spots. So I stay around those spots. So I mean, which is a brilliant approach when it comes to his business, because he grew a massive business that is still chugging along today. So when it comes to our circle of competence, which route is best to take? Is it expanding that circle of confidence or competence? Or is it taking the Watson approach of I'm no genius. I know the defense sector, so I'm just going to hang out there. Yeah. I think there's two different ways we can think about it, but let's use the sector idea as a good example.

10:22I really agree wholeheartedly with you about this idea that being the master of one sector, if you're trying to do what we're doing here, which is build wealth, have a portfolio that hopefully lasts for a long time and buy companies and just hopefully hold them and let the companies do the work, you could be the very best stock picker in the entire planet. But if you constrained yourself to the horse and buggy and you knew that whole industry at the back of your hand, that did not do anything for you. So I think to step back before even saying, do I go into this sector or that sector? I do think it's important to consider where have sectors been and where are sectors potentially going.

11:15I think for any sector, you can make a bull or a bear case. But to me, when I think about some of the different sectors I've chosen, I'm trying to envision when I am at that arbitrary finish line, Do I see that sector continuing to grow and be a profitable sector? Because as we know, there have been industries that have not been profitable over a long time or have really gotten squeezed. I think a good example, I don't know why this has always stuck in my head, but when you read history, ancient, ancient history, they talk about the Silk Road and the trading that went through there. Back then, the AI chips were salt and pepper, you know, and garlic powder, whatever the spices were.

12:08Like, spices were a massive deal back then. And now today, spices is like, what? McCormick? So it's... And if you look at their revenues, like, you know, no disrespect to McCormick. They're a solid company. They've been a great dividend payer for a long time, but they're not growing like other industries are. And so I do think also, like... Some of that needs to be considered. A lot of industries I've noticed start to commoditize and then lose that growth as they get older. Another good example being the pork industry, which used to be a huge thing in Chicago and stuff. I actually love that example, McCormick.

12:52And it's interesting because you probably didn't notice this, but I am a part-time professional chef. No, I'm kidding. I love to cook, though. That's one of my hobbies. And back in, I want to say around like 2005-ish, McCormick came out with, I think it was McCormick. I'm pretty sure it was McCormick came out with a new product called grill mates. And, uh, basically what they were doing is what we've been doing for centuries of mixing our spices to create unique flavors. And so they started doing that on their own end and upcharging, obviously for it. Um, and that like has become the thing. And I actually was just losing my mind a couple of days ago because I wanted something stupid like lemon pepper or something.

13:56I don't even remember what it was I was looking for, but I couldn't find it because the spice aisle was so freaking vast. And I couldn't find just the basic thing I was looking for. And it made me so mad. So then I went to Aldi's because they have a little tiny one. And I got what I needed. But that's really interesting that you bring that up because we talk about it often of how companies stay relevant. And I know this doesn't really have anything to do with circle of competence. I just, you brought it up, so I wanted to share. So moving on. When we're talking about circle of competence, I think one area we can really get hung up in, and I have definitely done it myself.

14:52I'm not sure if you have, but that's kind of letting our own hubris take control. I think I'm a pretty smart guy. Not the smartest, but I'm fairly smart. and I let myself think I know more than I do. One, have you ever had that happen to you? And if that is a worry, is that a worry we should all have, I guess? Yeah, absolutely. I'm getting flashbacks of different times. I had like whole years in the stock market where I just thought I was way better than I actually was. and it is something I think we need to constantly remind ourselves because stock picking in the way that we do it, trying to find great businesses can become emotional and if you let your emotions kind of take you, you can start to miss the forest for the trees.

15:55So yeah, I think we all need to remember. One of the things like when you're buying, which they don't tell you this in the intelligent investor, but when you are being a value investor and you are trying to buy something that's cheap, a lot of times that's kind of an arrogant move. You're saying like, I know something the market doesn't know. Because the market's actually really smart. There's a lot, like some of the smartest people are making these same decisions right next to you. So as you really try to go against the crowd, you're really kind of sticking your neck out there. And so I think if it's done callously, I think if it's done with arrogance and I don't know, I'd be curious your thoughts on ways to maybe potentially identify it in ourselves.

16:44I think when you start having your mind's absolutely made up and there's nothing anybody could say to make you reconsider your perspective, I think that's a pretty good symptom that maybe you're riding on arrogance. There's a difference between arrogance and confidence. But if you absolutely refuse any suggestion that, hey, you might be wrong about this stock, then I think that that's a good potential indicator. But what do you think? What are some other ways we can try to keep ourselves from getting too confident? I mean, that's a really hard question to answer because it's really the, there are so many different personality types and levels of knowledge and so on and so forth.

17:34You know, I think of like a doctor or a surgeon, you know, there was a really cool company. I can't remember its name now that I was checking out a while back. They do robotic surgical stuff. And the cool thing about what they did is the way they designed everything. You literally, as long as you use their robot, you're pretty much in bed with them. Like they have to maintain it. because you're not a robotic engineer like you're you're a surgeon um so they have to maintain it for you they have to upgrade it for you they have to repair it for you which and it all makes sense i don't think any of it's like nefarious on their part or they're trying to like you know scam the hospitals out of money a very valid structure the way they have it and so i'm thinking if i'm a surgeon and i use this equipment every single day i'm going to feel fairly confident that i know this business inside and out um so i do a quick scan of the numbers and it looks solid and then all of a sudden you know like you said i go from confident to arrogant and i think that's how we make that switch.

18:53And that's because we just knew our knowledge, in-depth knowledge of the company is so deep and our understanding of how it works is so deep that we become blind to ourselves. And so for me, the number one thing I try to do is just always approach everything as I'm the biggest idiot in the world. Not because I'm trying to be self-deprecating, but because I understand that there are people way smarter to Andrew's point. Like some of the most brilliant people in the world are doing this and they are way smarter than me and they still lose. And if they can still lose, I definitely can still lose.

19:37So that's how I try to approach everything. And it's easy for me because I'm still relatively new. And, you know, I guess at the end of the beginner stage, we can say, but I'm learning new stuff every single day. And so, I mean, I think if you're in a place where that's a struggle, then I would, you know, me, I like to write stuff down. so you know write yourself reminders uh you know or make yourself a hard rule that you can't buy a stock without talking to this person who is also an investor or something like that and you have to be able to prove to this person that it is a good investment and if you can't do it you can't buy it whatever um but i would say you really need to sit down look at yourself in the mirror and say okay, I am being brutally honest with myself.

20:37This is my personality type. This is what's going on. These are the mistakes I know I'll make because of my personality type. And then once you have that put in guardrails for yourself. Yeah, I like that a lot. I guess I could throw a couple on there as well. Just ideas for kind of getting past the blind spots.

21:05Philip Fisher, I mean, now to go back to the 1940s, 1930s, he wrote a really popular book, and it might have even been the 1920s, but it was called Common Stocks and Uncommon Profits. And so this is a legendary book. Buffett has talked about how he learned from Fisher. And Fisher's, one of his main points is this idea of scuttlebutt. He calls it scuttlebutt. But basically, when you want to learn about an industry, you go out and you talk to people in the industry. And you not just ask the person who's in there, but you ask about who of your competitors is the strongest. And get them talking about up, down, sideways, all views of the industry.

21:50And that being a really good way to really get a unique lens into an industry. And so if your competence is there and you like the idea of Scullabutt, that could be a good option. And I would also say there's just a lot of more niche podcasts out there, YouTube channels out there, just really niche industry content that wasn't around even five years ago. And so there's all sorts of places you can go to learn about stuff that might not be easy to understand at the onset. So there are ways to get around this idea. You don't have to just say, oh man, I don't know anything about this now. I'm never going to try.

22:35There's definitely ways to go about it. And I like your approach too, Stephen, of getting feedback. there's something to even like I've explained an idea out loud to my three month old just because my wife said I should just talk to him even if he can't understand me and I literally like had like a realization about like something about that so I don't know you know talk to your dog whatever but getting feedback from people can be really helpful. That's actually a really big psychological trigger that happens in us because we're, when we have everything in our mind and I'm going, I'm not a psychologist, so I'm going to do a horrible job explaining this probably, but everything in our mind is compartmentalized.

23:24And when we're, when we try to say it out loud, we're forced to remove it from its compartments and put it in order so that it can be verbalized. And a lot of times that's why we'll be talking through our process and halfway through we're like, wait a minute, that doesn't even make sense. Hang on. And like I said, I'm not a psychologist, so I probably did a horrible job explaining that. I apologize if you are a shrink, my bad. But you know what I'm trying to say. I'm not going to lie. Running a small business has been stressful lately. swamped in paperwork, different state agencies, and got all these expenses to track and everything.

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26:41What's the best way to get started in the market? Download my ebook for free at stockmarketpdf.com. One of the other big danger zones that I think we need to address when we're talking about circle of competence, Andrew, is FOMO, which stands for the fear of missing out. And that is a real, and I am so fortunate because I don't really feel that like a lot of people do. I don't know if it's just something in my brain or the way I work or what. But I have seen people, especially since I started this journey, it is real. And in a lot of cases, it's paralyzing. It's almost literally painful for people sometimes.

27:31Do you ever experience FOMO or are you kind of like me? I don't know. I guess I've never really tried to analyze myself about that. so I don't know if I can give you a great answer. Do you think I have FOMO? No. FOMO, not so much. Remorse, definitely. Yeah. Like remorse over missing something? Yeah, yeah. Or remorse over making, not seeing something or something like that. But that's an entirely different episode. We can do an entire episode on that too. But no, I don't know. I didn't know if you had that when you first started or anything. But FOMO is real. And that's one of the main reasons I wanted to use that initial analogy.

28:36with those 77 different squares of a strike zone.

28:46Because, like I said, he knew his batting average in each of the 77 zones. And if it wasn't a winning percentage in that zone, it didn't matter if it was a strike or not. He didn't swing. No matter who was screaming at him that they needed a hit, he wouldn't swing because the odds were not in his favor. And so, I mean, I feel like that is the biggest problem with FOMO is it forces us to go into a strike zone where we're batting at an average that's not in our favor, and it's going to cause us to make mistakes. The more mistakes we make, the more frustrated we get, the more frustrated we get, the more likely we are to quit.

29:35Um, and so that, that's really why I see FOMO is just such a dangerous, uh, place to play if it, if it goes unchecked for too long of a time. Yeah, I was, I've been kind of like observing the different cycles throughout just the short time I've been stock picking and like the different IPOs and the different trends that kind of come and go. and I noticed when more and more people are talking about the stock market that's usually when the FOMO hits the worst like GameStop and then most recently SpaceX too you could argue like when stocks enter the general culture or however you want to say it there's just so many more people who are aware I think that's at times where you can see the most FOMO and so if I think about how do you conquer FOMO I kind of started backwards.

30:31I didn't start in the middle of a craze where people were like, oh, go look at this stock, go look at that stock. I never got swept in with a story. And so I always started with books and the books taught me and showed me that you don't need to find these stories that everybody's getting swept into with. Actually, these investors actively pushed the stories away. And so I guess I got that lesson from an early time period. And that's something we can all learn from. It's actually those things that are the most popular in the stock market end up, most of the time, not working out for people. And it's almost like the FOMO helps push the stock price higher.

31:25like it's like a reinforcing loop interesting I've never I've never paid attention to that but it made me it made you remember the Tide Pod challenge back in the day like on TikTok like that's what it made me think of