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Announcer:                 Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.

Dan Ferris:                 Hello and welcome, everyone to another episode of the Stansberry Investor Hour. I am your host Dan Ferris. I’m also the editor of Extreme Value, that’s a value investing service published by Stansberry Research. Cannot wait to get to our interview today. It’s going to be awesome. I’ll just leave it at that.

Right now I’m going to rant at you for a little bit. OK, went to the doctor, to the podiatrist recently. I won’t get into the details. You don’t want to know. But aside from hurting me a lot, when I went back for a follow-up visit and was told that everything is A-OK, she was telling me about tourniquet times. Apparently, that’s how they measure how long a surgical procedure takes, right?

So, she said that the new residents, I think she’s a chief resident at the local hospital here, and she says, “My new residents get really caught up with tourniquet times. They’re very competitive about it. They focus a lot on it. They’re somewhat obsessed with it.” Of course, my doctor told me she thought the residents were leaning too heavily on this one measure of performance in surgery. She thought that they should think about things like, oh, I don’t know, whether or not the patient is doing better after the surgery than they were before it, or maybe even whether or not the surgery was truly necessary.

And she was telling me this whole story and I was smiling and nodding the entire time because the analogy for me was so clear with investors. It’s the exact same thing. Investors, they start out when they’re fresh out of the gate and they think they know a little something, they focus on one metric or another, whether it’s some momentum-based thing, RSI just say, or whether it’s a value-based thing like price to book value or something very simplified. They just focus on that to death and believe it’s some holy grail of predicting outcomes, you know?

Of course, it never is, but one thing that caught my attention, it struck me as especially odd that these folks who had actually been through years of medical training before they became residents were engaging in this. So, they understood the complexity of what they were doing and yet couldn’t resist the urge to oversimplify it and be very competitive about it in the process too. That’s probably a whole other rant someday.

But versus most individual investors who obsess on the first few things they learn about, they’ve generally had little or no training. It didn’t seem to matter whether or not somebody is highly trained or not. The point was we’re human beings, it’s an extremely complex undertaking, and I think it’s only human nature to try to reduce a complex undertaking to a simple metric that’s easy to calculate. It’s hard to keep the complexity of complex activities in mind.

I keep recommending this book by Howard Marx called The Most Important Thing and it has how many most important things? Like 18 most important things, right? That’s the joke in the title. Marx tells the story about going to his clients. He’s talking to one client and he says, “The most important thing is risk. The most important thing is cycles” to the next client, and “The most important thing is value” to the next client.

And he winds up with 18 of these things in the book. It’s complex. When you get something with 18 most important things, that’s pretty complex, and he’s got three chapters on just risk and three chapters on just cycles. But each chapter, though, there are things that are important enough to investors that he felt he needed to separate them from the other attributes of risk or cycles. You see? He couldn’t uncomplicate it anymore I guess is what I’m saying.

Overall, each individual chapter stands on its own as a separate most important thing. Investing in the stock market is a complex undertaking. Is it like surgery? Well, gosh, this sounds crazy to surgeons, but yeah. Now look, people don’t die if you get your stock market investing wrong, OK? It’s not like surgery in that way, but they’re extremely complex activities.

On the one hand of course we have these highly trained people doing it who go through this rigorous process, and on the other hand, most of the people on the stock market are the rough equivalent of an untrained, unlicensed hack doing surgery in his garage or something. When you kind of frame it that way it’s like, oh gee, boy, I better bone up. I better study. And it’s true, you better, we all better, and we better learn to know ourselves a lot better so that we don’t make this mistake that even highly trained people can make of focusing on one little thing and thinking that’s more important than everything else.

The point is, buying and selling equities and managing your own money is a very complex thing, and to do it well, however you think of training, you must be trained just like the surgeons. Now I’ll maintain the perspective of a bottom-up value investor for this rant, but I understand there are other ways to skin this cat, right?

There are plenty of top-down traders and plenty of all kinds of other traders and investors, but I would say if they’re doing it right, they need training too. You can’t just open an online account without having any idea what you’re doing and expect good results any more than you can decide you’re a surgeon and not kill everybody, right?

Another example here. I could’ve started this story any number of ways. I recently subscribed to a magazine called Classical Guitar because that’s what I studied in college and I’ve been playing a little bit more these days after not playing at all for over a decade. So, I got this magazine and there was an article in the summer edition, the latest edition, about a guy named Aaron Shearer.

So, Shearer trained the guy who taught me at Towson University of Maryland. My teacher went to Peabody Institute in Baltimore and he teaches or taught at Towson University. So, Shearer is easily like the greatest guitar pedagogue in history, I think. He’s the guy who started the still ongoing slog to get the guitar on par with instruments like the violin or the piano, and in the article about him he’s quoted as saying, “There’s no such thing as a self-taught concert violinist or concert pianist.”

He noted that three centuries of study have produced a teaching system if not perfect leaves few unanswered questions, and when he started teaching at Peabody in the 60s, that was the state of things. The guitar was nowhere near on par with these other instruments, these classical instruments that have been around and developed this rich tradition of teaching. So, this guy helped turn classical guitar into a more serious instrument, but it still has a long way to go.

I listened to a podcast of one of the great virtuosos of our time, Manuel Barrueco, and Manuel said he pleasantly surprised a conductor of an orchestra by being able to count in time and by not missing any notes. Because for the guitar that’s like a miracle practically. That’s the situation, and that’s kind of the situation I feel like investing is in with individuals managing their own money. There’s no place they can all go, and Stansberry is trying to be that place more and more, but it’s tough to establish – I mean, I’m talking about establishing a whole tradition, a huge body of work to teach people how to invest, and that’s really a huge thing all by itself, you know?

So, the average investor and an embarrassing number of professional ones are where classical guitar was in the 60s. If I just think about the average non-professional investor, the overwhelming majority of folks managing their own accounts, you can tell they don’t know what they’re doing. There’s a study by a company called Dalbar called the QAIB, the quantitative analysis of investor behavior. They put it out every year. It looks back 20 years at the difference between mutual funds that individual investors buy and the returns that those funds got versus the returns that the actual investors in those funds got, because they’re different, right?

People buy and sell at all different times. They don’t get the full return of the fund. They just put out a little press release in March of this year, and they said in 2018 basically the market lost about – at the time they put out the press release they were saying the market lost about 4% during a time when the average investor lost more than twice that, about 9%, and that’s typical over the long run. Dalbar reports this thing every year, and every year it’s like the market did X, Y, Z, 8% a year, and the typical investor did 5% a year.

It’s always like that, always, always, always, because people, they just don’t have the confidence you get from like – pick something simple, like riding a bike. We can train you to ride a bike fairly quickly and you’ll get on, you’ll do it, and that’ll be that, and you’ll never not be an expert in riding a bike again, right? We don’t have that for investing. It’s too much of an extremely complex art. There’s just too much to it.

We haven’t got this body of work that people can refer to that will sort of make them doctors of investing at the end, even for professionals, because it’s just not that kind of a thing. There’s too much uncertainty and risk to deal with. I don’t know if we’ll ever have that. I don’t know if we’ll ever be like doctors of investing, really, you know?

So, it’s a different thing, isn’t it, investing? We’re in desperate need of a kind of training or education which as far as I know really isn’t available unless you sort of put it together yourself. I talk about this because I talk about education a lot, because this problem just bangs me in the head every day. I’m sitting here, I’ve got every edition of Ben Graham’s Security Analysis, all six of them sitting in front of me. If that doesn’t give you a PhD in investing, what does?

But it can’t save you from the fact that you’re going to be wrong sometimes or maybe wrong a lot if you still don’t know what you’re doing, but it goes a long way to fix problems. Graham does have, he gives us a direction here, OK? If you want to be more like these trained professionals, if you want to try to head in that direction and get those kind of results, Graham does, even from the very first edition of Security Analysis.

It’s right in the beginning section, and he has the principle for the untrained security buyer, and that word “untrained” kind of spurred this whole rant about training and the state-of-the-art in music and medicine and investing and whatever. He’s got the principle for the untrained security buyer, and he’s got the principle for the securities analyst, and I infer the word “trained” securities analyst there.

So, the principle for the untrained security buyer is do not put money into a low-grade enterprise on any terms, right? Stick with great businesses if you’re buying stocks. Well, we recommended Starbucks in Extreme Value, stuff like that. High-grade enterprises, very good business. And the principle for the – I’m inferring the word “trained” – securities analyst, Graham says, he says nearly every issue, every stock in the market let’s just say, but he means bonds, stocks, whatever. Nearly every issue might conceivably be cheap in one range and dear in another.

In other words, the trained person has a much wider universe of opportunities open to them because they know how to look at these things, whereas the untrained security buyer, and I’m guessing that there are many of them within the sound of my voice right now, there are many of them among Stansberry subscribers. They write in all the time and just beg for more education. So, I know you’re out there. The untrained folks can’t do that.

Their universe of possibilities, like the number of stocks that they have any business going anywhere near, is smaller. Now there is a training program that does kind of date back to Ben Graham, and they finally put this thing together. I don’t know when it got started. It’s called a CFA, a chartered financial analyst. There’s such thing as a chartered accountant.

Well, there’s a chartered financial analyst, and it costs, I don’t know, I think it’s like $1,000 or 1,500 or something and you read all these books and take tests, and it’s very hard. There’s a lot of math and it’s hard, and at the end of it you become a chartered financial analyst.

But I would be shocked if being a CFA correlates with getting good returns, and I asked a couple of friends on Twitter real quick and a couple of them got back to me and one guy said it was a table stakes kind of thing. It was minimum requirement for getting a job where he works in the city where he works, but otherwise not really essential. It doesn’t really have anything to do with the way he thinks about investing.

Another guy wrote and said, “You know, it was absolutely essential for me to get a job”, same argument. He said, “Would I do it again if I were young? Yes, I would, because it helped me get a job. Would I do it again right now knowing what I know? No way.” He said it’s mostly the kind of stuff that people just don’t actually use.

So, the training is like – admittedly, a sample of two is nothing, OK? If a million CFAs are listening you say, “Oh, you’re wrong.” Write in. Be polite, but write in and I’ll put some of your comments on the air. I’m not saying the CFA is bad or wrong or stupid or unnecessary even. I’m just saying that it’s not sufficient. There is no sufficient training program for investors.

The only thing I could leave you with is what you really need is a program of self-immersion, right? You just need to keep at it. I think you need to read some of the books I recommended, and I think you need to talk to people who do it. It’s sort of like the kind of immersion of learning a language or learning to be a really great artist. It’s kind of the same thing. You have to immerse yourself in it and practice and practice and practice.

So, that’s my rant today. I kind of went all over the map, but you get the idea, right? Investing is hard and it’s extremely complex. You can study it all you want to and get a degree and be a doctorate of finance or something. It doesn’t matter. It’s an art. It’s different, and yet I’ve kind of – I think Graham kind of points the way here a little bit saying start out with the higher-grade enterprises. Stick to those. They won’t treat you too bad, and you’ll learn from those, right?

Think of all the stuff you learn from one of the highest-grade enterprises on earth, Berkshire Hathaway, just from reading those letters. You got decent returns and you’re not taking a lot of risk. So, that’s the rant. I almost didn’t go through with it because I realize I’m not leaving you anywhere that’s very black and white, but I’m still going to leave you there, OK?

Write in. Write in with questions. Maybe between the two of us we can figure out where the heck I’m going with this thing, but I knew, I just know this needs to be talked about, all right? Let’s find out what’s new in the world.

Well, of course, the first thing that’s new is that the market hit new highs recently. The S&P 500 went over 3,000. Look, you know where I’m going to come down on this, right? You do. You know where I’m going to come down on this, so let me just do it and don’t take it as Dan is predicting the end of the world because that’s not really what I’m trying to do. Rather than explaining what I’m trying to do, I’ll just sit here and do it.

The first place I looked was I looked over at Hussman Funds, HussmanFunds.com, at John Hussman’s work, because I think he puts out some pretty good stuff and I like to read it. I especially like to read what he has to say about the valuation of the overall stock market because he’s done quite a bit of work on that. He’s written a piece that was dated July 14. It’s called “They’re running toward the fire” and I’ll read you a quote from there.

He says, “Investors appear exuberant about the prospect for Fed easing, but they seem largely unaware that initial Fed easings have almost invariably been associated with U.S. recessions. They’re running toward the fire.” So, when people believe that the Fed cutting interest rates is a good thing and will push asset prices up, he’s pointing out, you know, in the past, this has always preceded a recession and usually an accompanying bear market. It’s a little bit crazy.

I’ll read you just the first paragraph. That’s just a quote pulled out of the thing, but the first paragraph is interesting. He says, “One of the most important warnings offered by firefighters is simple: get out early. In the face of wildfires, some homeowners get the idea of staying in their homes and riding it out. As one firefighter warned, the point is to go, but if you don’t, it’s better to stay than to panic and run in the midst of a firestorm with smoke and embers.” It’s not the fire that gets you, it’s the heat. Even before the flames reach the house, it can be fatal to stand outside trying to protect what you have.

And he says, similarly, he’s got this exit rule for bubbles which is very straightforward. You have to panic. You basically have to panic before everyone else does, so you have to risk looking like an idiot either by getting out too soon or you’re going to look like an idiot for staying in too long. Now, I think this is a bit extreme. He admits he’s not trying to call a top, but this sounds a little bit like calling a top.

I don’t think it’s necessary. I think all you have to do is be a rational long-term investor, and as he points out, the S&P 500 is priced for crappy returns over the next 10 years, flat, maybe negative, or he’s saying ever so slightly maybe a hair positive a half-percent. Knowing that, and if you’re looking for individual stocks, you’re going to find less of them that are priced decently. So, you’re going to naturally have more cash.

The next thing we’ll talk about in a minute are interest rates. When interest rates are low or negative you’re going to buy some gold, which is a good idea. I’ve looked at the last few bear markets and noticed that gold did kind of well. It was volatile throughout but did kind of well from the peak of the bull to the trough of the bear. So, you’ll wind up with some cash and some gold and fewer overvalued equities if you’re just a normal, rational long-term value-oriented investor.

OK, so another thing that’s somewhat new that falls hard on the back of this, as Justin Brill said in The Stansberry Digest which is a free e-mail to all paying Stansberry subscribers – I realize I said “free” and “paying” in the same sentence, but you get the point. You buy a newsletter and you get this other thing without paying extra.

The Stansberry Digest comes out every day and Justin does a great job with that, and he pointed out that the world now has $13 trillion of debt with below zero yields. Negative yielding debt. Do you understand what that is? That means that the price of the bonds is so high that if you hold the thing to maturity, you get your principle back and you get all your interest payments, and you’ve still lost money. That’s negative yielding debt. It’s crazy.

Now, I’ve read a little bit about this in the digest yesterday, but for everybody else who doesn’t get it, basically half of all European debt is negative yielding including the junk bonds. The high yield debt is negative yielding of 14 companies whose bonds traded Europe. The Wall Street Journal put out an oxymoron alert about this earlier this week, it’s so insane.

That’s crazy to me, negative yielding debt. It’s like what they did with the 30-year mortgage, right? Before the bubble started collapsing in 2008, Wall Street sliced and diced this thing and they turned one of the glorious assets of the world, the U.S. 30-year mortgage, into toxic waste. I think these central bankers in Europe have done the same thing to sovereign debt which is supposed to be one of the safest things you can hold, and it’s insane.

So, I think this is kind of a moment, in terms of valuation, negative yields and highly valued equities, it’s a very expensive moment. I’m not predicting the top, I’m just saying it’s a very expensive moment. OK, that’s the news for right now and we’re going to do our interview. Can’t wait to do this, but first, let’s hear a word from our sponsor.

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Dan Ferris:                 All right, time for our interview. I have been looking forward to this one because today’s interview guest is Annie Duke. Annie Duke is a World Series of Poker bracelet winner, the winner of the 2004 Tournament of Champions, and the only woman to win the NBC National Poker Head’s Up championship. She has authored four books on poker, and in 2018 she released her first book for general audiences called Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.

I’m a little more than halfway through it. It’s an awesome book. We’re going to talk about it today. It’s a national bestseller too. As a professional speaker and decision strategist, Annie merges her poker expertise with her cognitive psychology graduate work at UPenn. She focuses on improving decision-making and critical thinking skills and developing individual and cultural supports to overcome cognitive bias.

In 2014, Annie cofounded the Alliance for Decision Education to build a national movement that empowers teachers, school administrators, and policymakers to bring decision education to every middle and high school student. She also serves on the National Board of After-School All Stars and the Franklin Institute, and she has won a televised championship in a rock, paper, scissors. She does it all. She’s here. Annie Duke, welcome to the program.

Annie Duke:                Thank you for having me. I don’t know if I can live up to that intro, but let’s see how this goes.

Dan Ferris:                 Well, we will be talking about rock, paper, scissors, but I want to start with your formative years. In your book you talked about how you grew up in a competitive gameplaying family, and you talked about your brother who’s a big poker player too just like you. I wonder if you could paint a little more of a picture about that for us. Did you guys play a lot of sports or a lot of games, board games, or was it all card games? Describe that environment for me, would you?

Annie Duke:                Yeah, so my father is an insanely competitive human being. He was a college tennis player. He’s 82 and he still plays tennis like four times a week, and I think his highest ranking, and I think he reached this in his 60s, for amateurs, was like number 27 in the country for amateurs. And, by the way, just to give you an idea of how competitive he is, my father has some sort of – his electrolytes get out of balance kind of easily. This was back in the day when people didn’t really get potassium tablets and things like that, that you could do to sort of counterbalance that issue.

So, he would be playing in the state championships, and he would’ve played a bunch of matches, and he would be in the semifinal. He would win the semifinal, but because it was really humid in August in the summer, he would’ve lost so many electrolytes that he would start cramping up in a crazy way, like so badly that he was screaming in pain from his muscles just seizing up. He’d have to go to the hospital, have to go get an IV in order to get the electrolytes back in balance.

But don’t worry, he was always out on the court the next day for the final. It didn’t stop him. So, that’s how competitive my father was. You were in the hospital getting an IV, and now you’re playing in a match the next day. You’re really insane.

So, my dad, the other love that my dad had besides tennis which is one of his great loves was cards, and in fact, my mother and father met over a game of bridge. My father was playing bridge with two other people and they needed a fourth, and my mother who I think had moved into the apartment upstairs if I’m not mistaken, my father saw her walking by and was like, “Hey, do you play bridge?” and she said, “Yes” and she became the fourth, and that’s actually how my mother and father met.

We played tons and tons of cards, lots of word games. My father is really, really into word games. In terms of board games, a tiny bit of Monopoly, but it was really Scrabble because that was sort of a combination of the things that my father loved. It was obviously words and a game together. I would say that we were probably playing games like four or five times a week, but not poker, by the way. It was very, very occasionally my father had some grimy set.

Do you remember those old sets of chips that were sort of round with the slots in them for those really crappy plastic chips? My dad had one of those set, and I think that he occasionally would have a boys night every once in a while and he would use this set of chips, but he would pull it out for me and my brother every once in a while. We would play silly games like baseball and pass the trash, but that wasn’t mainly what we played.

We were more playing hearts, gin rummy. By the time I was 14 I was playing bridge with my dad as his partner. So, lots and lots of cards, lots of games that were adjacent to poker but not really poker directly.

Dan Ferris:                 Well, let me ask you this then. Can you imagine yourself having become the poker player you are today without that background?

Annie Duke:                You know, it’s hard to say. I don’t know how much just that competitiveness, that desire to conquer a game and win, I don’t know how much of that is genetic. It’s very hard to say in my family because obviously my father was very competitive, and at least two of his children are also really competitive, but is that because we were brought up competing, or is that just because genetically that’s how we were going to be?

That’s a little hard to say. I certainly know that the activities that we played when I was growing up certainly helped me. Cards are this very particular puzzle where you don’t know what the other player is holding. No matter what game you’re playing, you don’t know what the other player has, and you have to really kind of figure out given the way that they’re acting, what is it that they have in their hand? That’s kind of the classic bridge problem, right?

As you watch them discard their cards, it tells you stuff about what the remaining cards in their hand are likely to be, and that’s kind of like that repeated puzzle that you’re always trying to solve when you’re playing cards. I think you get really trained in thinking about how you make decisions when you clearly have hidden information and how you think probabilistically, right?

That’s another thing for example that bridge teaches you. What’s the probability that the king in a suit is sitting to your left or to your right? You have to sort of figure that out based on what you’ve seen from the players, what their previous bids were, but you don’t know for sure, and how do you get comfortable with that kind of problem set?

So, I certainly grew up tackling that kind of problem set a lot. There’s no question that that helped me. I can’t say that I wouldn’t have become a good poker player without it, but I know it didn’t hurt.

Dan Ferris:                 Didn’t hurt. That’s right. You pointed out something really interesting, though, and you point it out in the book too, or at least you alluded to it just now. You talk in the book about getting feedback from your outcomes of your decisions, and one of the interesting things you pointed out I thought was you often don’t get to see the cards that people held when they were betting maybe against you, so your feedback becomes, as you said, you’re guessing about what the suit is in the hand next to you, and gleaning the feedback becomes this - it sounds to me it’s like an extremely fine art.

You even have to ask this profound kind of tree falling in the forest question, what feedback am I focused on at the poker table? What is the most important feedback?

Annie Duke:                Yeah, so there’s a lot of depth to that question. Let me kind of try to divide it into parts. Part one is that most of the decisions that you’re making at the table, you’re doing it without knowing what the player has. This is like during the hand. So, I don’t know what your cards are, and I have to try to figure out should I raise, should I fold, should I call? If I’m going to raise, how much should I raise?

And I’m doing this where I don’t know exactly what your cards are, but certainly the better I am the better I’m going to be at coming up with a narrower range for what your holdings could be than someone who is a beginner. A beginner is going to have much, much less of an idea of what their opponent is holding, and obviously the better you are at that guess, at that really good educated guess about what your opponent is holding, the better you’re going to be in terms of strategically figuring out what you’re supposed to do in the hand.

So, that’s kind of during the hand, and that’s true of a game like bridge or a game like gin. Any card game is going to have that element. Where poker kind of diverges from some of those other games is what happens when the hand is complete. In other games like bridge or gin, you actually eventually get to know exactly what the other player had because you see those cards getting discarded, and then eventually in gin the hands get laid down because you have to count up the points, right?

That would be true of cribbage or Oh Hell or bridge. Eventually all those cards get exposed, so that creates this interesting feedback where you’re saying I was trying to guess at what my opponent had, and then at the end of each hand I actually get to find out what they had, and now I get to compare those two things. How good was I at that? How close was I to what they were actually holding?

Poker is a different beast because in poker the hands don’t necessarily get exposed, and this is particularly true as you get to the higher levels of poker. When you’re looking at the highest levels of poker, the percentage of time at the end of a hand that the hands get exposed, in other words the way that a poker player would say it is that the hand goes to showdown. Showdown means that we kind of finish the hand, both of us decided to stick with it, and so now we have to show the hands to figure out who wins, right?

The percentage of time that a hand goes to showdown when you get to the highest levels of the game is only about 11% of the time. So, that creates another layer of a problem whereas I’m sort of guessing about what my opponents might have, but the majority of the time I don’t get that kind of closure that I do in other types of card games where I actually get to see the hand and then compare it to what I thought. So, that’s kind of the second-tier problem.

And then the third tier of problem, and this is true across most games but particularly true in poker, is that how you do on a particular hand is not a great signal for what the quality of your decisions were. So, I can take a hand that’s actually pretty bad, and I can play it pretty poorly, and I could end up winning because there’s a luck of the draw element, and I could have a hand that I played very well, and it could be the best hand, but because of the turn of a card I could maybe lose.

And then sometimes I have a bad hand, I play it poorly and I lose, and sometimes I have a good hand and I play it well and I win. So, you can think about all four of those quadrants, and you have to figure out after the hand which quadrant was I in. If I won, was it because I played well or was it because I got lucky? If I lost, was it because I played poorly or was it because I got unlucky? And that’s actually a really hard problem to entangle because when you have luck involved, it actually takes some time to figure that out.

What’s happened on a particular hand and the way that you sort of process the feedback that you get from a particular hand can actually really lead you astray. So, you can see all this influence of uncertainty that exists in all card games but is particularly problematic when you’re playing poker.

Dan Ferris:                 I feel like my initial question, what’s the best feedback at the poker table that you can look for, is too oversimplified.

Annie Duke:                Well, yeah, I mean I think that the problem is that there’s a paradox, which is that a lot of times you kind of aren’t getting the feedback. I’ll tell you what the paradox is in a second. The first thing is a lot of times you kind of aren’t getting the feedback that you need in order to make that really great comparison, and that’s really true in life as well, right?

A lot of times we make a decision and you kind of never get the information you need in order to know whether the decision was good, or maybe the feedback loop is really long so you actually don’t find out for a really, really long time. Like the consequences of the decision don’t come around for a long time where you could then connect that up kind of nicely.

So, that’s kind of that problem, but then there’s also this paradox which is that much of the feedback that you get at the poker table, while feedback is certainly necessary for improving and learning, much of the feedback that you get at the poker table actually gets in the way of your ability to learn. And the reason for that is that in general as decision-makers, and this is true outside of the poker table, we really overweight any particular outcome that we have.

So, that outcome sort of casts a shadow over our ability to see into the decision quality. I open the book with this example to kind of try to show this problem of why feedback is both necessary but also really kind of inhibits our ability to learn, kind of teaches us a lot of really bad lessons in learning which is this paradox. I open the book talking about the Seahawks play that’s incredibly famous where -

Dan Ferris:                 Great story.

Annie Duke:                Yeah. In 2015 in Super Bowl 49, the Seahawks are on the one-yard line of the Patriots who are in like every single Super Bowl, so whatever. It’s the Patriots, they’re in the Super Bowl. That’s how you know it’s the Super Bowl. So, they’re on the one-yard line and they’re down by four, and there’s 26 seconds left in the game, and it’s second down.

So, they have a potential of three downs to be able to get this ball into the end zone, and obviously if they get it into the end zone they’re very likely to win the game because there’s so little time left on the clock. It’s extremely unlikely that the Patriots are going to be able to get that ball down the field. This is really a big deal.

So, there’s an expectation as to what Pete Carroll is going to do here, and the expectation is that he’s going to call for Marshawn Lynch to run the ball into the end zone. Marshawn Lynch is one of the greatest short-yarders running backs of all time. His nickname is The Beast, and this is what everybody thinks that Pete Carroll is going to do. Instead, and everybody knows this play, instead, Pete Carroll calls for Russell Wilson to pass the ball to the corner of the end zone.

The ball is very famously intercepted by Malcolm Butler. Here we have some feedback, right? Here’s the feedback, that the play failed. They lost. Ball was intercepted. When you listen to Cris Collinsworth in particular, calling that in game, he’s just really, “I can’t believe that this was the call.” Really very clearly saying, “This is a bad call.”

And the next day when you look at the newspaper headlines, those newspaper headlines not only agree with Cris Collinsworth, but there’s some sort of battle of is it the worst play in Super Bowl history? USA Today actually called it the worst play in NFL history, period. So, here’s where we get into the paradox of experience and how much outcomes really cast a shadow over our ability to see through to decision quality. So, we can just do the thought experiment, so let me ask you this.

Let’s say that Pete Carroll calls for that ball to be passed, and it’s caught for the game-winning touchdown. What do you think that the headlines would be the next day?

Dan Ferris:                 Oh, we all know that it would be the exact opposite of what it was, so it would be “The most brilliant play in NFL history.”

Annie Duke:                Right. I mean, we’d still be talking about this, Dan. It would be like, “He out-Belichicked Belichick. This is why Pete Carroll deserves to be in the Hall of Fame. Bold Super Bowl call.” That’s kind of interesting, right? So, we can see that when it’s intercepted it’s just this complete reaming of Pete Carroll, and when it’s intercepted it’s like a coronation of Pete Carroll.

What’s interesting about that is that whether that particular ball is intercepted or caught for a touchdown actually doesn’t tell you very much about the quality of the play because it’s only one try and there’s luck involved. So, what we really kind of want to ask ourselves is what percentage of the time is that ball going to get intercepted. That’s really what matters because we want to really understand, was that unlucky, or was that expected?

Would we expect that play to fail? If we expect that play to fail it doesn’t matter whether it’s caught for the game-winning touchdown or intercepted or incomplete. It’s probably a bad call. And if we shouldn’t expect it to fail, if the interception rate is really, really low, then it shouldn’t matter whether the ball is caught for a touchdown, incomplete, or intercepted. It’s probably a pretty good call. So, we really want to know this one number, and it turns out the chances that that ball is intercepted are between 1 and 2%, so very, very low. People are very surprised by this.

And by the way, you get the added benefit of by throwing a pass, you actually get three tries at the end zone instead of two because remember, they only have 26 seconds left and one time out, and if you have a pass play in there, in the times that the ball is not caught for a touchdown, almost all the time it’s just incomplete and the clock stops and that allows you to actually hand it off to Marshawn Lynch twice anyway.

So, I think that generally this is the problem that we face in life, right? If you invest in a stock and you make money on it, does that make it a good decision? Well, no. You could’ve just been lucky. If you invest in a stock and you lose money, does it make it a good decision? Well, I don’t know because I don’t know what kind of research you did.

Did you invest in the stock because you liked the product and you didn’t actually do any research on what the price to book was or what the debt structure was, what the futures, what the options market said about it or anything? Or did you throw a dart at the S&P 500 and decide to invest that way? Well, if you did that, then it’s not a good decision regardless of whether you won or lost. But we have this very visceral reaction.

Like if I tell you I invested in a stock and I won money, people have this visceral reaction that that must’ve been a good decision. If I lost money, it must’ve been a bad decision. If I choose a college and I love it, it must’ve been a good decision to pick that college. If I choose a college and I end up transferring after the first year, it must’ve been a bad decision. This is the problem that we have because those two things are actually much more loosely connected than we think they are, and we end up really drawing the wrong conclusions from a lot of the feedback that we get in life.

Dan Ferris:                 Right. And as you point out, we draw the conclusions one way when it’s our own decision, and we draw them the opposite way when it’s somebody else’s decision, right? My good fortune is my skill, and your bad fortune is your lack of skill, right?

Annie Duke:                Right. Exactly.

Dan Ferris:                 Very self-serving.

Annie Duke:                Yeah, so we can think about that. This is something called self-serving bias. So, in general, if we sort of look across most of the decisions that we’re sort of evaluating, so this is assuming that I don’t feel like I’m comparing to you, that I don’t compare myself to you, and I’m not thinking about a decision of my own. We’ll do this thing called resulting which is sort of what happened to Pete Carroll, right?

So, we’ll just say if I know what the quality of the outcome is, that tells me the quality of the decision, so if it’s a good outcome it must be a good decision. If it’s a bad outcome it must be a bad decision. But we don’t do that for our own decisions. For our own decisions what we do is if it’s a good outcome we say, “I’m super smart, that was a great decision.” And if it’s a bad outcome we say, “Wow, that was really bad luck.”

So, you could think about this like – actually, this is partly coming from my father. He collected all of these kind of insurance forms, answers that people had filled out for accidents. They’re super hilarious. They’re things like, “I was driving along and a tree got in my way.” Where it’s like, what are you talking about a tree got in your way? That means you drove into the tree. But we’re really kind of trying to offload responsibility. We’re trying to say that it was something that wasn’t in our control.

A guy named Rob McCoon, he’s out of Stanford, he actually looked at this and what he found is that in the vast majority of cases, like 89%or something, I don’t know, it’s in my book, but it’s a super, super high percentage of the time when people are reporting whose fault it was when they get into a two-car accident, so there’s another driver involved, I think it’s close to 90%of the time they’re saying it was the other person’s fault.

Now, that’s obviously impossible. I mean, one would assume that it’s 50/50, right? But we’re always reporting it as the other person’s fault, and they actually found one of the most amazing things was that when it was a single-car accident, so like I drive into a tree, now you would think that there’s no way for me to say that this was not my fault, but it’s like 39%of the time or something people are saying that’s not their fault.

This is super classic in poker. If I lose a hand it’s because I got unlucky, and if I win a hand it’s because I played it well. We can see how that’s protecting our egos, right? It doesn’t feel good to think like, “Oh, maybe I made a mistake. Maybe a belief that I had was not so accurate. Maybe I chose a bad strategy. Maybe there was a way I could’ve played this hand differently where I wouldn’t have lost. Maybe I shouldn’t have played the hand at all.” That just kind of doesn’t feel good to us. It’s a big hit, it’s a big ding to our identity.

We like to really think positively about ourselves. We like to think that our beliefs are generally accurate. We like to think that we’re pretty smart decision-makers. And so, when something goes wrong, processing that in a way where we take responsibility for that really doesn’t feel good.

That’s a really big problem because if I were to take most people and say, “Hey, would you like to be a better decision-maker in a year? If I see you in a year, would you like it to be the case that you’re generally making better decisions, that the quality of your decisions has improved?” Most people would say, “Yeah, I would like that.”

So, if I followed it with, “Well, do you think that if that’s going to be the case in a year that somewhere during that year you’re going to find out that something you believe isn’t true?” They would say, “Yes, that’s probably true. In order for me to improve, I’m going to have to make some adjustments. I’m going to have to calibrate my beliefs.”

And if I said like in the abstract, “Do you think that along the way you’ll have to have identified some mistakes that you made and learn from them so that you can correct those on the way to becoming this better decision-maker that you envision in a year?” almost everybody would say, “Yeah, I’m going to find out that I made some mistakes and I’m going to have to admit those and I’m going to have to learn from them.”

So, that’s all fine and good in the abstract, but when we’re confronted in the moment with, “Why’d you lose that hand?” people do the same thing. They say, “Well, I got unlucky.” And if you do that 100% of the time, how can you possibly become a better decision-maker? I can guarantee you 100% of the time it wasn’t bad luck.

Dan Ferris:                 So, you’re blind to the feedback at that point.

Annie Duke:                You’re blind to the feedback. Basically, what happens is that we can kind of think about a competition. We have competing values, right? We have do I want to protect the way that I feel right now at this moment, or do I want to protect future me? Do I want to be thinking about how can I be processing the world in order to make future me improve, or do I want to be processing the world in a way that’s going to make me feel better right now? What tends to happen is that me right now tends to win in that competition.

Dan Ferris:                 I think this is one of your better ideas, the emphasis here is on beliefs. A lot of people talk about this decision-making process, and they’ll talk about your state of mind going into it, recency bias, maybe you’re biased by something that just happened, availability bias. There’s one data point that’s sticking out and readily available to you mentally. I think you’re at a higher level that corrects for all that because those biases are always there whether you want them to or not.

Like you say in the book, if you see a visual illusion, an optical illusion, it’s still there even though you know it’s an illusion, but you’re talking about belief, and we can change our beliefs. We can’t change whether or not we see the optical illusion, but you can change your belief. That’s really powerful.

I thought that was one of the most powerful things that I’ve read. Like I say, I haven’t finished the book yet, but that alone, it humbles you if you really take the point to heart because you’re like, oh, yeah, OK, well, I believe some stuff that’s really screwing me up. And nobody wants to admit that.

Annie Duke:                No, nobody does want to admit that. We can kind of think about this, when we think about so much of our cognition, and I really recommend people check out Dan Cahan. He’s at Yale and he really talks a lot about so much of our cognition is meant to protect our identity. If you think about what is the thread, what are the threads that form the fabric of our identity that our identity is woven out of, those threads are our beliefs.

So, if so much of the way that we process information is meant to protect our identity, what that means is that we don’t want to tear holes in that fabric, meaning that we don’t want to find out that a belief that we have isn’t true. Here’s the problem. We could think about these two big influences that we kind of started the conversation off with on decision-making. The first we talked about is luck, right?

This is the Pete Carroll problem. I can make a decision that’s pretty good that seems to be pretty high quality, and then luck can intervene. Over 98% of the time, that play is going to go totally fine, but 2-ish percent is still going to happen 2-ish percent of the time, and if it happens on the last play of the Super Bowl it’s pretty unlucky. There’s just an intervention of luck there.

But there’s also the other big piece. This is sort of where we were talking in terms of hidden information with card games, that the cards are face down to you. It’s this problem of we’re always making our decisions with imperfect information, and we could think about the information kind of in two ways. We’ve got the stuff we know, so this is the beliefs we already have, and then there’s the stuff that we don’t know. Both of those have an influence on every decision that we make.

If we think about how do we think about the different options that we have, how do we think about how each of those options might possibly turn out, what’s the set of possible things that could happen if I choose to throw a pass? Sort of thinking about that; what are the set of possible ways it could turn out if I hire this particular employee versus another particular employee versus another person that’s come in for an interview?

I can think about what I think the outcomes would look like for each one, and then each of those outcomes has a particular probability associated with it, a particular payoff associated with it. There’s a cost to each of those options as I’m trying to construct all of that. At the base of that whole decision process are my beliefs. My beliefs are driving what I think the options are, what I think the outcomes might be, what I think the probability of those outcomes might be, what I think the payoffs might be.

So, beliefs are really the foundation of every decision we have, and that’s the problem is that first of all, the stuff we know is like a speck of dust on the head of the pin, and the stuff we don’t know is like everything else in the universe. That’s problem number one is that there’s just this whole host of stuff that we don’t know, which obviously then has an influence on our decisions.

How many times have you made a decision and then after the fact said, well, if I had known, I would’ve made a different decision? I think that happens daily to people. That’s that influence of that whole universe of stuff that you don’t know. And then to your point, in that little tiny speck that is the things that we know, there’s tons and tons of inaccuracies. Our beliefs are not perfectly formed. They’re not perfectly accurate.

So, now we have this problem with our decision-making which is that we’ve got this kind of error-riddled foundation. The foundation has all these cracks in it that’s really informing all the decisions that we make. The only way that we can try to address this is to really be super open to hearing what the world has to tell us. What we have to do is kind of like operate in the world where we’re maximizing the chances that we find out that we’re wrong.

Because when we find out that we’re wrong in some way, when we have the opportunity to make some sort of calibration to a belief that we have, what we start to do is seal up the cracks. So, we both strengthen the foundation by broadening our knowledge which creates a heftier foundation, and we start to correct the inaccuracies and the beliefs that we already have which starts to shore up the crack. And this creates a better foundation for our beliefs.

The issue is that we don’t want to find out that we’re wrong, not in the moment. That’s what I was saying about if I said, “Hey, do you think that over your lifetime you’d want to find out when you’re wrong a lot of the time in order to get better at this stuff?” you’d say, “Yeah.” But in the moment nobody wants to hear it, and if you ever want an example of the fact that nobody wants to hear it, just go ask somebody who’s very left-leaning what their favorite 24-hour news channel is, and go ask somebody who’s very right-leaning what their favorite 24-hour news channel is.

What you’re going to find out is that the person on the right, they’re not going to say MSNBC, and the person on the left is not going to say Fox. Why? Because they want to watch the stuff that agrees with them. They want to hear people all the time telling them how they’re right, how the other side is wrong, how their beliefs are true, and we just gravitate toward this not just in terms of the news that we watch but in terms of the people that we talk to, and we get into these echo chambers.

Those echo chambers are true not just in politics but in business strategy. We tend to talk to people who agree with our business strategy. We gravitate toward parents who agree with our parenting philosophy. We just gravitate into groups of people who are like us, who think like we do, and the problem with that is that then all we’re doing is reinforcing the beliefs that we already have and basically just making sure that those cracks never get fixed, and certainly making sure that we don’t broaden our knowledge because we’re not exposing us to knowledge that differs from what we already know.

Dan Ferris:                 OK, Annie, so you’ve brought us to a place now where you’ve pointed out all these problems, and I imagine to our listener it might sound a little hopeless. But we’re just about out of time, so if I could ask you to leave our listener with something that is – what’s the solution? If you could leave them with one sort of positive note about all this knowledge, what would it be? What would you tell them about all of this, about how to handle all this?

Annie Duke:                So, basically, yes, we just really talked about a lot of the issues that we have with decision-making. I know it seems like a little bit of a dark cloud, but here’s the good news is that once we recognize the problem, we can actually change our mindset in order to maximize our exposure to disagreement and maximize our ability to admit when we’ve made mistakes. So, let me just say two things that you can do.

The first thing that you can do is really start to try to approach the world asking, “Why am I wrong?” There’s a lot of talk about the power of positive thinking, but what I’ve just told you is that we already think positively about ourselves. I’m really much more interested in the power of negative thinking. You can do for example a pre-mortem, which is when you’re imagining a decision and you’re thinking about making a decision, just ask yourself, “OK, let me imagine that this totally fails. Why did I fail?”

So, now what happens is that you start to see all the places that things might go wrong, all the places that luck might intervene, all the places where maybe you have to get more information so that you can expose yourself. It causes you to almost be your own dissenter. We want to expose ourselves to dissent. When we start thinking about why might I fail at this, or if I did fail, why did it happen, what happens is that you start to sort of expose the dissent for yourself.

You can really sort of think about how do I actually start to imagine that things don’t go well so that I can kind of understand and fight against this kind of reinforcement of my own beliefs and decisions and my own abilities kind of on my own. But the other thing is that part of the reason why we get into these echo chambers is because human beings really are tribal. We like to get into these sort of cohesive social groups, and much of what happens in those cohesive social groups is that feeling of belongingness and that feeling of distinctiveness from other people comes from the belief system of the group that we’re now always sort of trying to reinforce.

But you can get that distinctiveness from other people by actually saying, “No, no, no, in my group it’s all about admitting mistakes. In my group it’s all about being grateful when somebody disagrees with me, being grateful when someone points out a mistake, and this is what makes me feel like I’m distinct from other people.” And you can actually train that. You have to do it with other people.

You can form a decision pod and you can create kind of a social network that has a different social contract than what sort of your default social contract is. The example that I talk about in my book is when I first started playing, I went up to one of my mentors, Eric Seidel, who is an amazing poker player, incredible, incredible mind. And I remember I went up and I did the thing.

Short story, “I lost a hand. I got unlucky. Feel sorry for me, please.” And this is naturally like if you walk the halls of a poker room, this is almost everything that you hear like when players gather together. The majority of those groups are talking about, “Let me tell you how unlucky I got” and then it’s like, “And then I’ll tell you how unlucky I got”, and then “I’ll tell you how unlucky I got.” And everybody is sort of trading sympathies. It’s called bad beat stories, and you’ll hear that.

So, I went up to Eric Seidel and I was like, OK, I’m going to tell Eric Seidel this sad bad beat story about how I got unlucky, and Eric had an amazing answer for me. He literally looked at me and said, “I don’t want to hear this. Why on earth are you telling me this story? If you really got unlucky that means you didn’t do anything wrong and there’s nothing to be learned from it. And by the way, I have my own bad luck that happens that I’m trying to deal with. Why do you think I want your emotional baggage unloaded on to me?”

And then he followed it with, “But if you have a question, if you want to talk about strategically what you did in the hand, I’m all ears.” So, now what happened was he changed the social contract for me.

He said, “For you to be part of my group, for you to feel that sort of social cohesion with me that every human being desires, the conversation has to be about, ‘Did I do this right? Did I do this wrong? What were the things that I had control over that maybe I didn’t do correctly? What are my beliefs about the game that might’ve been driving those strategic choices that maybe there are holes in?’ And that’s where the conversation needs to go. Don’t ever come up and tell me a bad beat story.”

So, that started to change the way that I viewed that feeling of making a mistake, because Eric and other people in my group including my brother started to give me this really great positive reinforcement for admitting my mistakes and actually for searching out my mistakes because I needed to gather up material to go talk to them with. So, I really don’t think it’s all negative, and I really don’t think that all is lost. If you understand kind of what the default setting of your brain is with intention, you can battle against it to great effect.

Dan Ferris:                 All right. Well, listen, I think asking, “Why am I wrong?” and going into – what you were describing there made me think, wow, I’ve heard investors, a lot of really good investors, say a lot of the same things. I hope that our listeners will take that home with them and make it part of their thinking, and I hope they’ll read your book too. I think it’s a great book. I can’t wait to finish it. What I’ve read so far is incredible, really great stories starting off with that football story.

Annie, thank you for being here. I really appreciate you making time for us, and I hope you’ll come back and talk to us again sometime.

Annie Duke:                Yeah, I would love to. I have another book coming out in the spring, so maybe we can chat again.

Dan Ferris:                 Oh, great. Yeah. Looking forward to that. I will definitely, believe me, I’ll buy that book as soon as it’s available on Amazon, and we’ll contact you.

Annie Duke:                Oh, actually, I think you can preorder it already, so -

Dan Ferris:                 All right.

Annie Duke:                I mean, I don’t recommend you preorder it this far in advance, but it’s coming out in April, so it’s a long way away, but if people want to search for it, be my guest. They can preorder it.

Dan Ferris:                 That’s fantastic. That’s great. Thanks a lot, Annie, and I hope we’ll talk to you soon.

Annie Duke:                Thank you so much.

Dan Ferris:                 Yeah, you bet. All right, it’s time for the mailbag. Your feedback is very important to the success of this show. This is where you and I get to converse. I talk at you, you get to talk back at me, maybe I read your e-mail on the show, so you can just e-mail with comments, questions, politely worded criticisms to [email protected]. I read every single one of these. Obviously, I can’t respond to every single one, but I do read every single word of every single one unless it’s some kind of weird Russian spam of course, which we do get.

OK, I’ve just got two of these this week. We got a lot of good feedback about Tim Price who was a wonderful guest last time. The first mailbag is from Jacob W. and he starts out, he says, “Dan, what a pleasant surprise to have Tim on the show. Tim had a newsletter a few years ago that I subscribed to, my first ever, and he was responsible for turning me into a value investor. He is a brilliant guy and it was really nice to hear from him.” And he goes on a bit, but I’m going to skip ahead to his question.

Jacob W. asks, “Why doesn’t Stansberry in general use more technical analysis when picking stocks, and do you think it’s important or will it be overly complicated for the average investor? Many think fundamental analysis and technical analysis are opposed to each other, but you need both. It’s like words and music. Best regards, Jacob W.”

Well, yes, Jacob W., a lot of people do have this idea about combining technical analysis with fundamental analysis, and I know people who do it and who seem to have success. For me personally, maybe I’m a little biased. During my musical education I learned about Sergei Rachmaninoff who was a really great conductor and a great composer, and he said, “You can’t hunt two rabbits” and so he became a great composer and the rest is kind of history.

Same with Babe Ruth. We all know the story about him, right? He was a pretty good pitcher and a good hitter, but he thought he could be a great hitter, but he knew he couldn’t be a great hitter if he kept pitching. So, I tend to think that it’s just not given to the average person to be really great at two things, and I think that for me it kind of strains credibility a little bit to suggest that you can just whip out a few technical analysis tools and that’ll improve your results. Maybe it is that way, but I think finding those tools is extremely difficult, and I’m willing to bet they change over time because that just tends to be the way that works.

Also, I should add, sure, you’re aware of course that we have the Ten Stock Trader and the Daily Wealth Trader. Ten Stock Trader is run by Greg Diamond, Daily Wealth is Ben and Drew and then Greg, our technical analysts. So, we have whole products devoted to this, but you were just talking about this combination of fundamental and technical. Great question though, and I don’t proport to have the final answer. I’m just telling you what I do and why I do it. I’d like to hear from others about that same topic.

Number two, this is our last one this week. “Hello, Mr. Ferris. OK, it took me a while, but you’re doing a good job with the podcast. I have to say it was not easy when Porter left the show and you took over. Today’s podcast was one of your best yet.”

That was last week with Tim Price, and he continues, “I hate to ask, but is there a chance that maybe once in a while Porter could make a surprise visit? Anyway, just thought I’d send you a quick message. I don’t do this for just anyone, so you’re making the list of my faves. Keep it up, Brian D.”

Thank you, Brian D. Well, Brian D., we’ve made a point of this before, Porter is working on his own podcast. He’s not doing this one anymore because he’s working on a whole new one that’s going to be completely different than what we do on Investor Hour. Our mission here is to try to help listeners become better investors, and we’re going to stay focused on that. Sure, I’m sure at some point Porter will drop in, but he will be busy with his own podcast, and if I know him, he’s really putting a lot of work into it and spending a lot of time getting it right.

OK, folks, that concludes another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. Be sure to check out our website where you can listen to all of our previous episodes. You can get transcripts of every episode. Just click on the episode, scroll all the way down, and the transcript is down at the bottom.

And you know, if you’re interested in Extreme Value, I’m the editor of Extreme Value, a value investing service published by Stansberry. We mention it now and then. I do mention value investing now and then. If you’re interested in Extreme Value, we always have a link right there on InvestorHour.com on each episode. You can just click on it and it’ll give you a special deal for Investor Hour listeners.

But you know what? I don’t sell it too hard because, hey, I want people who are really super interested in value investing, and if you really are, man, climb aboard. We’d love to have you. We are a group of fanatics, I’ll tell you what.

So, that’s it for another week. I look forward to talking to you again next week. Bye-bye until then.

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This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.

 

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