The Secrets of Smart Investing: Jason Zweig on Market Giants, Money Myths, and Staying Rational (EP.179)

0:28We all need to make smart decisions with our money. Jason Zweig, editor of The Intelligent Investor, a book that Warren Buffett once called the greatest book about investing ever written. In our first conversation, we talked a lot about The Intelligent Investor. This time, we're going to talk a little bit more about Jason's career and dig into some of his specific works. Rather than read Jason's entire bio again, please check out the last episode or visit thelongterminvestor.com for detailed show notes and links to all the resources mentioned in this episode. Now let's dive into the second part of my conversation with Jason Zweig.

1:06Jason, welcome back to the Long-Term Investor Part Two. We've not actually moved seats. We just are dividing this up into two episodes. Our listeners probably, they had to wait all week and the viewers too, to hear what we have coming up next. Let's start them off with how you got into financial writing in the first place, because I believe you started trying to write novels. I mean, what attracted you to finance as a writing outlet to begin with? Nothing. Nothing. No, it was serendipity. It was sheer luck. All I knew was that I wanted to write. I had worked in my parents' business when I was a kid.

1:43I liked business. I've always been a capitalist, but I had never studied economics or finance. I've never taken an economics class at any level. Neither did Benjamin Graham, by the way. Now that I think about it, although he taught economics, he never took an economics class. Funny how that works. Yeah, right? But I stumbled into it. I started out, my first job in journalism, if you can even call it that, was at a magazine that covered Africa. I spent a fair amount of time traveling around West Africa. And when I got back through people I knew, I stumbled into a fact-checking job at Time magazine.

2:22and eventually they put me in the business section. And then some takeover artists circled Time Inc and they had to cut staff and I got cut loose and somebody knew somebody at Forbes magazine and I interviewed there and I got a job as a fact checker and I started proposing stories and they liked them and the next thing I knew I was a business reporter. But it was serendipity all the way, Peter, because I finally got to the point after three or four years where I had what felt to me like my dream job, which was I was kind of a writer without portfolio. I could write whatever I felt like. I covered everything.

3:08I wrote about the rabbit meat industry. I wrote about toxic waste dumps in New Jersey. I wrote about junk bonds, just whatever interested me. Junk bonds and rabid meat sound about the same. Yeah, kind of, kind of, in some ways. And then Jim Michaels, who was the editor of Forbes, called me into his office and he said, you're my next mutual funds editor. And I walked out of his office about 10 minutes later. I still remember looking down at the carpet, walking back to my office, and I just kicked the carpet as I walked. And I was like, of all the jobs in this place, I get that. The most boring, imaginable thing.

3:52But I woke up the next morning and I said, well, I guess I should make a virtue out of necessity. If I have to do it, I might as well try to do it well. And I came in and I started looking up some information and data. And I think I remember this number right. I discovered that there were a trillion and a half dollars invested in mutual funds. And I said, a trillion and a half dollars, there must be some good stories in there somewhere. And that was that. The positivity there is a lesson in and of itself. But I'm curious if there were any moments in your writing career that were pivotal in how you approach the writing of investment and financial worlds.

4:35Yeah, well, one was at the very beginning, because when Jim Michaels, I'm going to say when he invited me to be the next mutual funds editor, and he was a fearsomely intelligent and intimidating editor when he invited me to do that, which was more like being volunteered Army style. Well, the one thing I remembered in that moment was that mutual funds editor had been his very first job when he came to Forbes in the 1950s. So that immediately popped in my head. And I said, I'd better not say no. And the second thing that popped in my head was I should ask him for advice. and after we finished chatting about it a little, I said to him, well, I know that this was your first job when you came here.

5:30Do you have any advice for me? And without hesitating, he just looked at me and he said, don't get anybody's blood on your hands. And I don't know what my face showed, but I was really taken aback. And as I walked back to my desk, kicking the carpet, it. I was sort of turning over what he had said in my mind, making sure that I was interpreting it correctly. And to this day, I'm convinced that I know what he meant, which is that comes with some power and responsibility because you're advising people what to do with their money. And if you give them stupid advice, you are going to hurt them. Don't get their blood on your hands.

6:17I think that's what he meant. And to me, a whole bunch of simple rules came out of that. Like, don't recommend any investment that you wouldn't invest in. Always do your homework. Never shoot from the hip. And ultimately, I developed my own rule of investment advice, which I call WWMB, which is similar to the WWJD bumper stickers and other bracelets that we see. You know, what would Jesus do? My version is what would mom buy? If you wouldn't recommend it to your mom, don't recommend it to anybody else. Seems like a pretty good rule. Yeah. That ought to keep the moral compass straight? I think so.

7:09It helps. I mean, what do we call those things? We call them memnonics, right? Simple memnonics work for a reason because we all need reminders, right? And sometimes I'll dig into something and it starts to get really interesting. And I'm thinking, oh, I should write about this because there are some people out there that this might work for. And then I'm like, would I recommend this to my mom? No. And then I drop it. Now, you have also had the great privilege of interviewing and interacting with some of the greatest thinkers of our lifetimes. I mean, when you think back in those that you've interacted over the years in finance, what are some of the names that come to mind, some of the things maybe that you've learned from any one of them or anything that you can think of?

7:58Well, yeah. I mean, when you're an investing columnist for the Wall Street Journal, I mean, people take your phone calls, right? They answer your emails. I'm very lucky and I know it. And luck has played the dominant role, I would say, in my career. So, I mean, I've gotten to know Warren Buffett and Charlie Munger, Jack Bogle, Danny Kahneman, the Nobel Prize winning psychologist, and a whole bunch of other really significant figures in the world of investing. And I've seen the human side of these people, which I don't think you always get to see if you just read about them. When you meet them and you sit down and you talk with them in person, you see a different side.

8:43And one of my favorite moments came from an interview I did with Harry Markowitz, the Nobel Laureate in economics who just died within the past year. And for those listening or watching who don't know. So Harry was, I guess you would say, the primary contributor to modern portfolio theory. But to put it even more simply, he developed what you would probably call the science of diversification, the underlying theory, the principles and how to put it into practice. So I said to him, so your own portfolio, Harry, how did you diversify? And then he said, well, I realized I could put some of my money in stocks and some of my money in bonds.

9:30And if I put all my money in stocks and they went down, I'd feel bad. And if I put none of my money in stocks and they went up, I would feel bad. So I went 50-50, which violates every stricture of his own theory. He did not do a mean variance optimization. He did not analyze the covariances in the asset classes. He just flipped a coin and went 50-50. And it's human moments like that that really, I think, remind me that no matter how great a thinker some of these people may be, they're still a lot like us in a lot of ways. An exercise in regret minimization is not terribly far from what leads anybody to the perfect portfolio for them.

10:26Even though he scientifically was devising what is the, quote, perfect portfolio, maybe perhaps the greatest evidence of all that no such thing exists. It is all very personal. It's really just the one you can stick with the longest. You also mentioned time spent with Nobel laureate Daniel Kahneman, who I know you helped the researching and writing and editing of his just massive book, Thinking Fast and Slow. As somebody who comes from a psychology background, having such an enormous impact on the world of finance, do you feel like Danny knew that that was what his work was going to lead to? At some level, yes.

11:03He and Amos Tversky, his research partner, chose to publish their article on prospect theory in, I think it was 1979, if I remember right, in Econometrica, which is one of the most prestigious journals in economics, because they wanted to reach the economics community. But at the same time, Danny's work was deeply rooted in the psychology of perception, particularly visual perception and optical illusions. And he had studied optical illusions. He understood them very, very well. And the overall point of his research is that just as there are optical illusions and seeing how they work does not prevent us from still falling prey to them.

11:56No matter how many times you look at a particular optical illusion, knowing that your eye is being tricked, your eye will still be tricked. You know, if you think about what's a really simple example of one that's familiar to everybody. Well, there's like the Necker cube. I think a lot of people may be familiar with this. It's a cube, but it's a line drawing of a cube. And if you look at it, it will reverse. You'll feel you're looking at the back of it or you're looking at the front of it, but it never changes. It's just the way your eye perceives it. And so we all fall prey to cognitive illusions too.

12:38And becoming aware of them does not make them go away. And Danny himself was the first to admit that he constantly struggled with all of the pitfalls of the human mind that he had so clearly delineated. And people would say to him, oh, so this doesn't happen to you anymore. And he would say, of course it does. It happens to me all the time. It's just when it does, I know it's happening. And I don't fool myself into thinking I've outsmarted myself. You made a comment at a conference in the late teens, the evidence-based investing conference here in New York. I actually remember sitting between you and Morgan Housel at lunch and thinking, well, how is this even possible?

13:23I'm sitting among the two greatest financial writers. I remember that. Yes. And I was talking about my first book and you were talking about your money and your brain, really a deep exploration into some of the biology and science behind some of these behavioral tendencies. What would you title that field in general? Maybe tell us a little bit about that field, because I remember you saying everybody thinks they're looking through a window when in fact they're looking into a mirror with these behavioral errors. Yeah. So the field is commonly called neuroeconomics, Peter, and it's a mashup of three scientific disciplines, economics, neuroscience, and psychology.

14:05And there's a lot of overlap across those three. There are a lot of people calling themselves neuroscientists who don't technically have a degree in neuroscience. They might have a degree in economics or psychology and vice versa. There are a lot of people with a neuroscience degree doing economics or psychology. So it was a neuroscientist at NYU, Paul Glimcher, who gave the field that name, neuroeconomics, which I think is very well chosen. And the central lesson of the field, which is very hard for people to accept, it's hard even for the researchers themselves to fully impound into their own behavior.

14:51And ordinary people are very resistant to the idea, But the central principle of this field is that we have unconscious biases, that our brains are predisposed to make us form judgments and generate choices without us ever being consciously aware that we've been influenced. and maybe one thing some people can relate to is if you were around the color red a lot, you would probably experience a slight increase in your heart rate. Your pulse would go up. Your breathing rate would probably increase. Your palms might sweat a little bit. The pupils of your eyes might dilate, you probably wouldn't be aware of it.

15:46But it happens. And if you're presented with a financial decision to make while you're surrounded with red, if it's a coin flip kind of decision to buy or to sell on a calm day when you weren't around red, you might well buy. If you're inundated with red, it might incline you to sell. It's not that these unconscious biases drive your behavior. It's that they influence your behavior at the margin. And you're not going to be aware of it. And again, it gets us back to the same principles that Graham outlined in The Intelligent Investor, which is that this is why you need decision structures in place so that your investing hygiene will keep you from engaging in behaviors that can be harmful to you.

16:43That investing hygiene, the decision hygiene, the filter that you apply to your life is so important. And people like us can tell everyone else to do it as much as we want, but it's hard for people to really believe it. And something that was interesting in your money in your brain was just some of the research behind brain scans that people did showing some of the similarities that are happening. I'd love you to talk about that. But just so that I don't forget, there is also a portion in the commentary of this latest edition of the Intelligent Investor where you'll remember what it is, as I kind of butcher the example where, you know, if you have a big decision and you're feeling like a lot of pressure, have a snack, go outside, take a walk.

17:24All these really basic self-care items that can put your brain in a better spot to make a rational, calm, thoughtful choice. Full circling, though, back to some of the studies that you referenced in Your Money in Your Brain. Can you share some of that, some of the learnings from what we see when we study the human brain going through some of these things? Yeah. So I think probably the most interesting one to mention is that if you're on a financial hot streak, let's say you've bought a stock or you're investing in some crypto coin, whatever it might be, and it keeps going up and you start to see something like this on your monitor or your phone, a green line, upward sloping to the right.

18:10Blinking, maybe even. Probably blinking. your brain will automatically generate a representation of the next point in that line and it will be up and you are getting a dopamine hit from anticipating what is going to happen next and what you're anticipating is a reward that your experience tells you is likely to happen and that occurs automatically, involuntarily and unconsciously. And, you know, if somebody stops you and says, what do you think will happen next? You might not actually realize that you expect it to happen, but you do. And you will act on it. And if someone does an MRI scan of your brain at that moment, the activity in your brain will be indistinguishable from that of a cocaine addict who's about to get the next hit.

19:11It's pretty incredible stuff. Really, really powerful. I think you can apply it beyond investing. You see some of this behavior, anticipating rewards with even something like, a positive example might be planning a vacation. There are studies that show people get a lot of happiness, not from the trip itself, but actually in planning and choosing a hotel and anticipating how the warm sun will feel against their skin and how nice that cold drink in their hand might feel and all these things. I think when you really, as you do so nicely through all your work, blend the learnings from multiple disciplines, from biology, from psychology, from physics, you see the system that we are trying to live within.

19:52And yet here we are with wetware, the same as hundreds of thousands of years ago. It's a big challenge. Well, think about it, Peter. I mean, imagine a restaurant that served you your meal the moment you sat down. So you couldn't read about it on the menu. You couldn't talk about it with your date. You couldn't smell it from the kitchen. You sit down and plonk, there's the plate. Or at an even more basic level, imagine having sex with your partner just instantly. I mean, on the one hand, I mean, you know, we're a couple of guys. Our first thought is probably sounds OK to me, but it's not right.

20:35Because what's missing? Anticipation. And anticipation plays a huge role in investing. It's not just the gains you have made. It's not the gains you are making. It's the gains you're hoping to make, that you're expecting to make. that you're savoring the future of, that's what's really powerful because it's hope. Yes. And if you deprive people of that, you really take away the human emotional aspect of investing. And I think one reason that speculation has become so popular is that simple, plain, safe investing does not have that element of anticipation to it. There's no anticipatory thrill in owning an index fund that is going to double in seven years.

21:38Right. You're like, seven years? What about the next seven days? Right. It's not as fun. It's not as fun. And it feels to some extent that I'll say Wall Street broadly to be the people who are creating product, the people who are running trading platforms, the people who are on TV like we happen to be in this interview, but maybe we're doing a better job. It's weaponizing some of this material that you are outlining. I don't know that there's a whole lot that we can do about it. However, I feel like one of the more fun things that you've done is laugh at some of it. You wrote a book that I love, and I think everybody who is into Wall Street in any capacity should be reading is the Devittles Financial Dictionary.

22:24For the audience who is not familiar with the work, tell us a little bit in your mind what that book is and how you got the inspiration to do it. And then I really want to know if there's ever going to be a revised edition of it. Are we going to get some new terms someday? So one of my favorite American writers is Ambrose Bierce. He was roughly a contemporary of Mark Twain. He lived primarily in the 19th century, although he lived into the early 20th century. And he wrote one of my favorite books. It's called The Devil's Dictionary. And it's full of incredibly sarcastic definitions of common terms.

23:00And it's laugh out loud funny. It's mean. and it's also really true. He understood human nature very well, although he was a much darker person than I would ever want to be. There was not much of the milk of human happiness in that man, but I've always loved the book. And one day I was sitting in my home office, this must have been, I don't know, 1999, I think, or 2000. And I looked at the bookshelf to the left of my window, and I looked at the bookshelf to the right, and I realized, you know, I like that book so much, I have two copies of it. And I happen to have it open on my screen as well, because I was reading an online edition of it.

23:49And it's a book that you can open anywhere, anywhere at leisure, You could read it when you're in the bathroom, for example, or when you're in a library or on a train or whatever it might be, because it's always funny. It's always fun. And I said, you know, I work in a field that could use some definitions like this. And so I started writing my own one at a time. And I just posted a few of them on my personal website. And I would write them whenever the mood struck me. I probably wrote only one or two a year for quite a while. And then around 2010, after the financial crisis, when there was just so much anger and so many false idols had been toppled, I was like, you know, I should write more of these.

24:49and they started popping in my head. And I just kept posting them to my website. And one day I called my book agent and I said, look at this while we're on the phone. And he opened it and he started laughing. And I said, you think there's a book in that? And he said, no, I can see you're having fun with it, but nobody's going to buy this. And then not long after that, I was at a financial industry conference and there were some book publishers there. And two of them came over and said, glad you're here. I think there's a book I want to talk. And it just became a book. And the thing is, that's part of why it was so much fun for me, because I didn't write it as a book.

25:35I wrote it for my own fun. and my wife would hear me sitting in the kitchen, like cackling to myself. And I think it's a good general rule in life that if you yourself think something is funny, it's probably not. Yeah, right. I've learned that the hard way. Yeah, exactly. Right. Every standup comedian knows this. But my wife, first of all, she would get very annoyed because she was trying to do her own homework. And then she would say to me, oh, come on, what's so funny? And I would read it to her. And she has, to her credit, very little interest in the world of investing or finance. And she would laugh.

26:16And I was like, well, she's probably laughing because she's my wife. She loves you. Yeah, exactly. But maybe it is funny. And eventually it became a book and And people like it, I think. And I know that of all the books I've done, it's the one that I would change the least. Very interesting. Yeah. I wouldn't go back and rewrite it. I hope someday to answer the last part of your question, I'm going to add to it. But there's very little I would change in it. Well, it is really, really fun. And for anybody interested in markets, it is a great gift. It is a great read. It's much like the devil's dictionary, as you mentioned, to be opened anywhere, any part of the book.

27:01I'm curious, so much of the work that you do is so thoughtful, reflecting on human nature and such. I'm just wondering if there's anything today that you're particularly curious about, either inside or outside the world of finance. Well, outside, we have talked for a week about that. Yeah, there's a couple important questions. I don't know the answer to. I think the first is one we talked about earlier, which is will value investing ever come back? And if so, why? And I don't know the answer to that. And I don't think anybody else does either. Another one is what happens when too many people own index funds?

27:47when will those lines cross? And when will so many people be using index funds that the markets might break down? I think we kind of know the answer to that and that it's something like surprisingly close to 100%. Would have to index in order. Yeah. Yeah. Because if two people are trading, then you're setting prices. Yeah. As long as you have a buyer and a seller for assets that need to trade, you'll get a reasonable price most of the time. And we're probably a long way from that. But the answer might be more complicated than that. And there are a lot of smart people out there who think it is.

28:34So I think about that question a lot. I've written about it a fair amount, and I'm sure I'll write about it more. And of course, there's the other question, which is, is crypto going to amount to everything that its advocates hope for? And how will that change things if it does? And what happens if it doesn't? Now, let me ask you about that, because that conference I referenced in 2017, you said the most impactful line about crypto that I had heard at the time, where it would either be worth a ton or worth nothing. Knowing where it is today, have we reached that it's worth a ton, or is it still somewhere in that spectrum?

29:13Oh, I think crypto... It's not relative where you bought it, but I mean, it seems like it's worth quite a bit. Yeah, Bitcoin in particular could go a lot higher. I mean, if its fans are correct, I mean, it could go to a million dollars or more. Is that going to happen? I don't think so. But I don't think we can rule it out. And I think it's important to recognize that a lot of the arguments that people use against crypto are kind of cheat arguments. Like, well, it has no intrinsic value. It's like, well, neither does money. Neither does gold. Neither do a lot of assets that are extremely valuable.

29:58But I think it's pretty hard to argue that the underlying blockchain technology is not going to have a really significant impact on security and custody and how assets are traded and held. And not just financial assets either. Record keeping. I think it's a really significant technological development. Now, whether Bitcoin has to be the sole or the dominant wheel that powers that system is a different question. And I think it could be obsoleted and it wouldn't surprise me a bit if it was. But whether that will happen anytime soon is anybody's guess. Well, and so many of any one person's view is going to be shaped by their experiences.

30:47And so if we weren't in a country where it was easy to move capital, we might find a lot of value in stable coins. But I can Venmo you$20 right now, no problem. Yes, it goes through financial institutions. Yes, there is a record of it. I don't happen to care. You live in a different country without a stable currency, maybe there's some value there. I will tell you, when I speak to people about Bitcoin or crypto, it reminds me a lot of the conversations I used to have with people who were gold bugs. I used to say the laser eyes are the same as the gold bugs. And people take those terms a little personally.