What if we were in the midst of a gold rally, and no one was talking about it? Now that gold is up 7-8% over the last few months, Dan sheds light on why the uptick is so unreported, going largely unmentioned by mainstream media like The Wall Street Journal and Financial Times.
Dan thinks the answer lies in the aftermath of the Federal Reserve’s latest meeting, and the dovish interpretation that prevailed.
Clearly, the Fed is now thinking about supporting asset prices, now that their stated objectives of reaching full employment have already been met. Of course, that has some inevitable consequences. “If you screw with the market this long, the market says, “Uncle, Uncle!” And you gotta have some gold.”
Dan then gets to the far more famous asset rally in Bitcoin, now topping $11,000 as we write. The last time Bitcoin crossed $11,000 on the upswing, Bitcoin $19,873 was just a few weeks away.
Dan then turns to this week’s podcast guest.
Albert-László Barabási is the Robert Gray Dodge Professor of Network Science and a Distinguished University Professor at Northeastern University, where he directs the Center for Complex Network Research and holds appointments in the Department of Medicine at Harvard Medical School and the Central European University in Budapest. A native of Transylvania, Romania, he received his Master’s in Theoretical Physics at the Eötvös University in Budapest, Hungary and Ph.D. at Boston University.
Barabasi is the author of Bursts: The Hidden Pattern Behind Everything We Do, and Linked: The New Science of Networks. He is the author of Network Science and the co-editor of The Structure and Dynamics of Networks and Network Medicine. His work has led to many breakthroughs, including the discovery of scale-free networks in, which continues to make him one of the most cited scientists today.
We think you’ll be fascinated by his insights on what makes people truly successful, and why people’s performances and impacts are actually extremely predictable, if you know a few data points about the networks they support – and in turn are supported by.
Robert Gray Dodge Professor of Network Science and a Distinguished University Professor at Northeastern University
Albert-László Barabási is the Robert Gray Dodge Professor of Network Science and a Distinguished University Professor at Northeastern University, where he directs the Center for Complex Network Research and holds appointments in the Department of Medicine at Harvard Medical School and the Central European University in Budapest. A native of Transylvania, Romania, he received his Master's in Theoretical Physics at the Eötvös University in Budapest, Hungary and Ph.D. at Boston University. Barabasi is the author of Bursts: The Hidden Pattern Behind Everything We Do, Linked: The New Science of Networks He is the author of Network Science and the co-editor of The Structure and Dynamics of Networks and Network Medicine. The titles have been translated into more than 15 different languages. His work has led to many breakthroughs, including the discovery of scale-free networks in, which continues to make him one of the most cited scientists today.
NOTES & LINKS
3:25: In a world where gold averages 1% returns a year for the last 150 years, while equities have managed 12-15%, Dan explains why people should still take notice of the gold market, and why this comparison is so nonsensical.
6:34: Dan explains why the Fed seems to agree with Trump’s warnings not to raise rates (Hint: It’s got nothing to do with his tweeted demands.)
10:54: Now that gold is already ticking up – is the smart move to get in as well, or has the rally left the station? Dan explains how much further this asset could run – and how the different vehicles for playing it could pan out.
19:00: Dan makes a big prediction on where gold is headed, and when it gets there. “I think it odes eventually take out its all-time highs.”
21:54: Dan makes sense of Bitcoins 174% rise this year. “I’m still on the fence about bitcoin… I bought $1000 just so I have skin in the game.”
27:21: Dan introduces this week’s podcast guest, Albert-László Barabasi. Albert-László is the author of Bursts: The Hidden Pattern Behind Everything We Do, and Linked: The New Science of Networks. He is the author of Network Science and the co-editor of The Structure and Dynamics of Networks and Network Medicine. His work has led to many breakthroughs, including the discovery of scale-free networks in, which continues to make him one of the most cited scientists today.
29:46: Albert-László explains the field of networking science, developed 20 years ago to make sense of the often-unnoticed networks that govern our lives and interactions. “Even our very biological existence is made possible by the intricate networks within ourselves.”
31:36: Albert-László explains the difference between performance and success in a worldview where communities and individuals are inextricably linked. ”Your performance is about you, but your success is about us. From a data perspective, that’s a very important distinction.”
40:14: An exceptional data center allowed Albert-László to track the career of every major artist over the last 40 years – and he found something surprising in this field where performance is statistically unmeasurable. “Give me your favorite artist’s name, and the last five exhibits, I can fast-forward her career.”
56:35: Silicon Valley is no different from other areas of performance – but there’s a reason, Albert-László says, why the biggest-impact founders tend to be so young.
59:45: Dan answers a mailbag question from Michael O., an economics professor who has some thoughts on resource streams, discounting, and Beyond Meat’s product he just tried for the first time last weekend.
Announcer: Broadcasting from Baltimore, Maryland 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 to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value. That's a value-investing service published by Stansberry Research. We've got a really cool show with an awesome guest today. So let's just get on to it.
Okay. It's time for my weekly – I'm going to call it my weekly perturbation [laughs], which is a crazy word, and I'll explain it at the end of the show in the mailbag. I don't know if I'm really going to call it this every week but I just thought it was funny to do it this week. So the weekly perturbation is about gold. Because it's up a bunch recently, about seven or eight percent last few months here. And it's just coming on really strong. And I don't see a lot of people talking about it. I went to both The Wall Street Journal website and the Financial Times, website, just before we started recording my words here, just a few minutes ago. And I just typed in the search box the world "gold." And at The Wall Street Journal, I got zip, zero, nada, nothing. On the entire front page scroll, all the way down, nothing. Financial Times, I got one mention of gold. It said, "Gold hits six-year highs," and there was a link to a short article.
And I think that's a little odd. Don't you? I mean, all of a sudden, gold has come on super strong. And I think we need to talk about this. It's at a six-year high. Just in the past few weeks here it's outperformed stocks and bonds, both of which are up, by the way, and just about everything else. Investment-grade bonds, junk bonds. I think the only thing it hasn't outperformed is Bitcoin, which we're actually going to talk about that a little bit too.
So there's this one report on Yahoo that came out I think yesterday, and they said Citigroup expects the metal to reach $1,500 to $1,600 per ounce. This always happens when something goes up real fast: some big bank says, "Hey, it's going to go up even more over the next 12 months." I don't think I disagree with them though in this one. I think over the next 12 months we probably will see $1,500 or $1,600 gold. In fact, I think if this move over $1,400 holds, you're going to see $1,600, and maybe even new highs like $1,900, faster than you would've anticipated.
And this strategist from – what is it? – QTRON Investments – never heard of them – says that investors are getting ahead of themselves with the gold rally, and historically over the past 150 years equities have returned anywhere from 12% to 15% on average, gold 1% on average. That's a really dumb comparison, isn't it? Because equity is a share in a business and gold – well, gold is money. I realize 50%of the supply is in jewelry. But really gold is money. So comparing the dollar performance of gold and equities over the last 150 years makes no sense because for most of that time gold was pegged to a certain – it was used for the backing in the currency to a certain degree. I mean, the Bretton Woods system wasn't really that great. I mean, you and I weren't allowed to redeem for gold but countries and big banks were.
And the official gold price in the United States was like $35 an ounce and then they raised it to $38 and then they raised it to the current – I think $38 was 1973. They broke the tie with gold in 1971. And sometime after '73 they raised it to the current official price of $42.22 an ounce. But who cares? The market doesn't care, and it's over $1,400 an ounce. So if you take gold's performance since the official – well, really since 1971, since we broke the last vestige of any backing of the U.S. dollar with gold, it's from $35 to $1,400. That ain't bad.
So the next question of course is: why? This is a standard thing that everyone wants to know: why? And I think the answer really is in the actions since the last Federal Reserve meeting. Basically they said, "We're not going to do anything. We're not going to cut. We're not going to raise." And people took their comments sort of dovishly. In other words, they think they're going to maybe cut rates. And that talk has been going on for some time now. And so what you're seeing, I believe – if you need to interpret why gold went up so much in short period of time, which I don't know if I really need to do that. But if you force me to explain, put a gun to my head, "What's going on?" it's like this.
We're 10 years into a huge bull run that started in March of 2009 at the bottom, after the financial crisis. And during that time we saw zero interest-rate policy, so-called ZIRP. And then the Fed got in and they raised rates, I don't know, like six or seven times. It doesn't matter. And of course then we saw what happened last fall: stock market down 19% from the September high to the Christmas Eve low. And so the Fed went, "Oh, wait a minute. We're raising too fast." And of course President Trump tweets, "You're raising rates too much." And so the Fed basically agreed with him and said, "Boy, we're raising rates too much." And they may actually wind up cutting them. And I think the market is discounting that.
So stocks are up. That's a standard thing, right? The Fed cuts rates; stocks go up. Bonds go up, right? Interest rates are lower. But gold going up a lot, and even Bitcoin having quite a rally here – that tells me that something else is going on too this time around. People are getting skeptical. They're saying, "You know something? There's only so much that you can expect the Federal Reserve to do by cutting and cutting and cutting rates." The Federal Reserve – this is not a magic wand. They don't wave a magic wand over the market and prevent it from crashing and prevent it from falling. They don't wave a magic wand and support asset prices, period. Real estate, stocks, bonds, whatever you think they're doing. Whatever they think they're doing.
And that is clearly what they're up to. They're not even hiding it anymore. This mandate of full employment, and what is it, two-percent inflation or something. The Fed – they're not thinking about that. They're thinking about supporting asset prices. Because they know there's a wealth effect that comes; people spend more money when their 401(k)s are up, and they're trying to support that. And the market eventually of course gets wise to these things. And I think that is exactly what is happening here. The market said, "Oh boy. They're going to cut rates now, after 10 years, zero interest rates?" And then they raised rates, whatever it was, six times, and four times last year. And, oh, then the stock market went down.
So now they're dovish and they're probably going to – I think they're probably going to cut rates. And the market probably thinks that too. Or the market definitely thinks that. If you look at the futures market and what's happened with gold. And that really is what's happening. Eventually if you screw with the money this hard for this long, the market's going to say, "Okay, okay, uncle. I gotta have some gold. Gotta own gold." And then there's a technical effect too, right? All the technical people are watching and they say, "Well, if gold gets over" – I think it was $1,350 was a key level. "Oh, boy, that's a big deal." If it can sustain that, over $1,350. Oh, then $1,400. "Oh, if it can sustain this, wow, that's good."
And as I'm talking to you, I think gold is around $1,430 an ounce. And not too long ago, it was below $1,300. So that's a heck of a move. So that's my belief. That's my belief as to why gold is up.
Then of course good investors ask, "Hey, what's next? What's in store for the future of gold?" I wish I knew is the answer [laughing]. Actually, I do know, don't I? And so do you know too. You know that you don't know the future. That's what we know. You know that gold tends not to correlate with financial assets. You know we're near the end of a long bull market. You know stocks are very expensive. You know bond yields are tiny. You know the Fed thinks it can do anything with interest rate policy and a heavy dose of jawboning, right? You also know that the Fed is kind of delusional and that cycles matter.
Nothing goes up forever. And in fact, the cure for high prices is more high prices and the cure for low prices is more low prices. And we're at the high end on stocks and bonds and real estate and financial assets. So there's gotta be some kind of a correction or a bear market or something around here somewhere. I don't know if it's two months away or two years away. But there's got to be something around here somewhere. Because things just don't tend to stay this expensive for this long.
So, then what should you do, right? That's what you really want to know: "What should I do, now that gold has just run up so quickly? Should I buy a bunch right now?" Because that's what everyone feels like doing, right? You always feel like buying a whole bunch of whatever just went up a whole lot. Let's think about that for a moment. When we say, "Buy gold," there's a lot of options, right? You can buy gold stocks. You can buy gold bullion, gold coins. You can buy a gold ETF that owns gold. You can buy gold futures. Did I say that? Gold futures. You can do lots of different things. What should you do? Well, that's up to you.
Financial advice for an individual – it's like the most individualized thing. You gotta know yourself. But I have some ideas if you are of a certain mind. If you think that it's good to own gold because the U.S. dollar will not always be around because fiat currencies always fail – in history they've always failed – then it really doesn't matter how much you pay. Whether you pay $1,400 today and the price goes to $1,300 tomorrow, you don't really care. Because you're going to buy that gold and you're going to hold onto it and you're going to hope you never need it. It's just prudent diversification and a very long-term perspective. "Hope I don't need it." Boom.
Some people say five percent of your assets for that kind of a thing. I don't know. I think they pull five percent outta their nether regions [laughing] just to try to sell you gold. But it makes sense to me. So that's one thing to do: to buy gold bullion coins like Krugerrands or American Eagles or something like that, if you think that you should hold some because the currency isn't going to last forever. And if you think you should do that, who cares whether it just went up 7% or 8% in a real short period of time? It doesn't matter.
So if you're buying gold futures, the fundamentals matter a whole lot less because you're probably trading on some kind of technical signals. Futures aren't a long-term investment. Although some people – a really simple strategy is to buy the front-month contract and just keep rolling it over. If you think we're in a bull market, we're going to stay in a bull market. That's what some people do. But if you're trading futures, you're not waiting for me to tell you what to do; you already know what you're doing. That's a sophisticated, risky instrument, and you don't need me to tell you.
Gold stocks? Well, hey, I've recommended three companies in my newsletter related to gold, and they're all doing pretty well these days. So if you think that you want to own gold equities, that's a different thing entirely. There's the macro reason for owning gold involved there but there's also the micro. Which gold equities? And there's a whole huge spectrum to choose from. At the bottom, the riskiest end is people who think they might be sitting on a whole buncha gold in one hole in the ground somewhere in Moose Pasture, Canada or someplace. And then at the other end is probably the best gold royalty companies like a Franco-Nevada or something like that.
Or, frankly, the companies that I have in Extreme Value, which I can't mention because people pay a whole lotta money for Extreme Value. But I really genuinely believe that we have the three highest-quality businesses in the gold and mining space in general in Extreme Value. So if you're going to do equities, do you want quality or do you want to try to take a flyer, or somewhere in between? That's up to you. So those are the two things that really matter the most to me: bullion or gold equities. And I hope that sheds a little bit of light on how to think about those.
And of course gold has all these properties. It's got the Lindy effect, doesn't it? The Lindy effect says if something's been around for a long time it'll probably be around for that long in the future. Gold's been around – we've been using gold as money for 5,000 years, 6,000 if you count the use of electrum, the naturally-occurring alloy of gold and silver. But at least 5,000 years. So we should probably expect it to be around 5,000 years from now. That's what the Lindy effect says. And it's useful and it conducts electricity. It's divisible. You can divide it into the tiniest amounts. It's one of the most ductal metals in the world. You can pound a single ounce of gold into a sheet that's almost 100 square feet. Like really super-duper thin. Or a single thread – one ounce of gold, a single thread – you can stretch it into a single wire 50 miles long. I mean, it's like five microns wide. But you can do it, theoretically speaking.
So it's a useful thing. It's really expensive so the biggest use is jewelry. Just shy of 50 % of all the gold in the world is in the form of jewelry. So there are these properties about it that are the reason why it's been around 5,000 years and will probably be around another 5,000 years.
So, you know, what should you do right now? Probably nothing different, right? As I sit speaking to you here on the podcast, I've got these three companies in my newsletter that I think are a good idea. And they remain a good idea as long as they're below my maximum buy prices. So my advice there isn't changing. Gold going from $1,300-ish to $1,400 really fast – hasn't been much mention of it in the press. We got this one report that I mentioned of the guy on Yahoo saying, "Gold is overdone a little bit and it's due for some kind of correction."
The price of gold is not correcting as I'm speaking to you. It's up another $9 or $10 to around $1,430-ish. But, like I said, I can't help noticing that The Wall Street Journal, Financial Times, for just two examples, they really aren't saying anything much about it if they're saying anything at all. So, sure, there could be a correction. But I really believe that this push through $1,350 and $1,400 an ounce is the real deal. I think this is the start of a move that's going to take us eventually to new highs, $1,900 and higher. How soon that'll happen, I have no idea. Six months, 12 months, 18 months, two years? I can't tell you that. But I can tell you that I think gold's definitely seen the bottom. The bottom was like $1,050 or something, and now we're at $400.
In fact, if you take the top from $1,900, which was, what, 2011? And then you take the bottom at $1,050, which I guess was, what, 2015? We haven't gone halfway back that distance. And I think halfway back is around $1,450 or $1,460 or something. So we're just about there. We're just about halfway back. And I think eventually gold does take out its old highs of $1,900. By then of course, even at $1,400, a lot more people are making money mining gold who weren't making it before. And $1,500, $1,600, $1,700, $1,800, $1,900 and higher, of course the supply's going to come outta the woodwork. But the funny thing about gold is: it's not really about the supply for use. It's about the supply for hedging and investment. So it's different.
Because, look, if the supply of gold really affected things a whole lot, the price would never go anywhere because we've mined 190,000 tons. There's about 35,000 ounces in a ton. We've mined 190,000 tons of gold. In all of history. And it's all above ground. It's still there, just about all of it. It's hard to destroy this stuff. And we don't like to destroy it. And most of it is just sitting – most of it's in jewelry. The rest of it's sitting in coins and bricks and stuff in vaults and places. And some of it gets some technical uses of various kinds. But mostly it's jewelry, coins, and bricks. And if the supply meant anything, well, we'd all be screwed because the supply just grows and grows and grows by 2,000 or 3,000 tons a year.
But that's not what it's about. It's about other things: the U.S. dollar, the actions of the Federal Reserve. People get nervous. They think there's going to be a catastrophe and they think they need to own gold. And I think they're right. So I think you should own gold. I don't think owning physical gold has anything much to do with the current price or the recent price action. I think that that has more to do with whether or not you own a particular gold mining company or gold royalty company. I think the royalty companies are still good buys at this level. And that's where we are right now. So that's the weekly perturbation.
Let's talk about what's new and then we're going to have a really really really good interesting.
Just a couple quick things in the news here. Just a few quick things. One of 'em – I said I'd mention Bitcoin, and Bitcoin is at $11,000. It hit $11,000 for the first time in more than a year this past Monday. And that was the impending launch of Facebook's Libra cryptocurrency that we talked about in the last episode of the podcast. So Bitcoin is up more than 170 percent so far this year. And that makes sense. It was way the heck up and then it plunged like 90 percent or something and now it's had this big rally. And I'm still on the fence about Bitcoin. I bought some – I bought $1,000 worth just so I have skin in the game so I can just sort of – it causes me to think about it more, even if I just have a tiny amount of money in it that I don't care about.
And I've noticed some things. Expedia takes Bitcoin. Microsoft takes Bitcoin. KFC. The Colonel. Fried chicken. KFC Canada takes Bitcoin. I'm trying to figure out if some Subway locations still take Bitcoin. I don't really have that one. But they did, if they're not still doing it. And you can buy things with Bitcoin. It acts like a currency, which is crazy to me. Because the value went – it was close to $20,000, if not $20,000, then, wham, crashes down to what, $2,000 or $3,000? I don't even pay attention to this stuff that much. I just know that it was way the heck up, I thought it was insane, and then it crashed like crazy, equally insane. Or maybe that was the insanity coming out of it. And now it's back up, whatever, 170% this year. And it's $11,000 U.S.
And you can use it. You can use it on Overstock.com to buy stuff. And you can use it on Amazon too. Not directly. You have to do something. There're some steps to use it on Amazon. But you can use it for money. So you're never going to hear me say Bitcoin is garbage and I know how it's going to turn out becauseI don't know. And I think that Bitcoin being up a bunch recently – for some people, that's the place to go when you are at the end of the cycle and you're scared about the U.S. dollar and you're scared that the Fed is going to ease interest rates too much. That sure is what it looks like. It could be a coincidence and it could be a dead cat bounce, right? We'll see. But I think it's something to pay attention too.
All right. Next in the news, of course the value investor has got to point out a story on CNBC. Here's the headline: "Goldman Sachs Says Value Investing is Still Alive if You Play it with This Twist." And they point out that the valuation gap between the most expensive stocks and the cheapest stocks is now the widest it's been in nine years. And that has historically, according to Goldman Sachs, foreshadowed a strong performance for the value names. And the Goldman chief equity strategist, David Kostin, says, quote, "A rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing." So this guy's saying, "Well, I don't know about gold, but value stocks are probably going to outperform if we get this Fed easing."
"For optimistic investors" – just reading the CNBC bullet points here. "For optimistic investors who want to bet on values' grand comeback, Goldman has screened for value stocks with a quality overlay." So instead of just picking cheap stocks, they're picking what they say are stocks that are cheap that're really good businesses. And their value basket includes Qualcomm, Salesforce, and Facebook. Certainly not traditionally-cheap value names, right? So the quality overlay is the twist that they're talking about.
And I don't have any problem with that. One of the things you learn as an investor – when you start out as an investor, you look at what you know, which is the price, and you try to figure out: what's going to happen on the price chart? And then the next thing you do is you're trying to figure out what the hot technology is. Then the next thing you do: what's the hot industry? And then eventually you find yourself looking at individual companies and trying to figure out individual businesses. And maybe you become a value investor and you start looking for what's cheap. Then you go to the final step where you go, "Wait a minute. I'm going to screen for the best businesses. I'm going to learn what is a great business."
And if this sounds familiar, it is familiar, right? That's what Warren Buffett did. He did all that stuff. He was looking at price charts and figuring out odd lots and all this other stuff. And then he discovered value investing. And he played the sort of statistically cheap game for a while. Then he met Charlie Munger, and Charlie Munger said, "Hey, why don't we just buy great businesses and hold onto 'em for a long time?" And that's where they are now and that's where they've been for decades. And that's where most great investors wind up. And I think I'm going to leave the news just at those few items. There's a lot more going on in the world but let's just leave it at that because by now I think we should have today's guest on the line.
All right. It's time for our interview. And today's guest is Albert-László Barabási. He's the Robert Gray Dodge Professor of Network Science and a Distinguished University Professor at Northeastern University, where he directs the Center for Complex Network Research, and holds appointments in the Department of Medicine at Harvard Medical School and the Central European University in Budapest.
A native of Transylvania, Romania, he received his Master's in Theoretical Physics at the – forgive me for the pronunciation – Eötvös University in Budapest, Hungary, PhD at Boston University. Barabási is the author of Bursts: The Hidden Pattern Behind Everything We Do, Linked: The New Science of Networks. He is also the author of Network Science and the co-editor of The Structure and Dynamics of Networks and Network Medicine. The titles have been translated into more than 15 different languages. His work has led to many breakthroughs, including the discovery of scale-free networks, which continues to make him one of the most cited scientists today.
László, welcome to the program. Thank you for being here.
A-L Barabási: It's a pleasure to be with you. Thanks for inviting me.
Dan Ferris: So, László, the first thing we need to do is: you're not our usual type of guest. We usually have people who manage money for a living. So let's just talk about what you do as a network scientist. My wife said, "Networks? People networks or computer networks?" And it's all networks, right?
All of the above. So, network science is a discipline that was born about 20 years ago that tries to develop a language to think about all kind of networks that pervade our lives. And this kind of grew up from the realization that just about everything we do we do through networks. We communicate through networks. Our friendships and professional links can be really perceived as a network and have to be perceived as a network. Our business ties are there. But even our very biological existence is made possible by the intricate metabolic and genetic networks between our cells. And about 20 years ago a movement has started in science to quantify these networks. And, hence, today I'm a network scientist who studies all of these networks and many more.
Dan Ferris: Okay. Now, I want to talk mostly about your book, The Formula, which I could not put down. I think it's an excellent book. And the first question I have for you is: you said a couple of times in here how – the book is about the laws of success. It's called The Formula: The Universal Laws of Success. Are we really talking about the law of gravity type laws? That's what you say in the book. It's really that kind of a law?
A-L Barabási: I tend to think it is. These are patterns that we extracted by studying the career of millions of individuals. And if you are in the right conditions of your career, we think you cannot avoid that. Hence, they really elevate at the level of laws. Now, not all laws always apply to us. If I'm walking around talking with you, Bernoulli's law doesn't apply to me. But if I start to fly, which is a gas law, then suddenly the only reason the airplane can fly with me is because the Bernoulli's law applies to us. So, fundamentally, when these laws apply to you depends on the circumstances you find yourself in. But these are very generic patterns that apply to all individuals at that stage of their career.
Dan Ferris: Is it accurate to say that you basically study anything that behaves like a network, and the phenomenon of success among human beings is a very scientifically hard version of that? Success is a science, a real science.
A-L Barabási: Well, we certainly would like to think so. And the reason why I got into this is that much of the studies that we've been doing over 20 years focused on how the network looks like, how it evolves in time, and so on. And about 10years ago we started to think of a complementary problem: okay, I'm a node in the network; how does this node affect my success? Does it help me? Does it pull me back? And whether my position in the network will really determine my long-term success.
So we went after this question. And then we realized that if we want to answer it, we need to step back and address much deeper questions. Like: what is success? What is performance? How do they relate to that?
Dan Ferris: Yeah. So let's talk about the difference between performance and success. You gave great examples of performance with tennis players and golf – who'd you talk about? Roger Federer and Tiger Woods. They're examples of great performance, right?
A-L Barabási: So, what is interesting is: as we grow up, one of the things we learn in school and on the running field and everywhere else where we go is that you need to have performance to have success. And in a way that performance really drives success. So the question is: what's the difference between them? Because in our vocabulary, we often use it interchangeably, thanks to this strong belief on the relationship between them. And, from a data perspective, since I'm a network and data scientist, we have to be able to distinguish them. So our approach was relatively simple and straightforward. Performance is what you do, how fast you run, what kind of deals you put together; how do you invest your money? What kind of paintings you paint.
However, success is: what does the community notice from that performance? Whether it acknowledges it and whether it rewards you for that. In other terms, your performance is about you. But your success is about us. We as a community reward you with success for your performance. And from a data perspective, that's a very important distinction. Because, as we will see during the discussion, as in discussing the formula, in many areas, performance is very difficult to measure at the individual level. But success, because it's a collective quantity, it's easily measurable because there are multiple data points around you that pertain to your success. So, measuring success and characterizing success becomes a big-data problem.
Dan Ferris: So let's talk about concrete example. Let's talk about the difference between Tiger Woods and Roger Federer versus the artists you mention in your book, Diaz and Basquiat. What's the difference?
A-L Barabási: Sports is a very special area, and kind of unique in terms of human performance. Because in sports, we have very accurate measure of performance. If you are a runner, I have a chronometer and I can measure your speed. And your speed uniquely determines how well you are regarded as a runner. And indeed we actually ended up analyzing the tennis players like Roger Federer and all men and women's tennis players' performance, how well they do on the field, as well as their success in terms of how many people actually follow them, how many people visit their Wikipedia page, how many people search for them on Google and so on.
And what we found is that in those cases, performance uniquely determine success. That we were able to actually build a formula that, if I plugged in "Where did Federer play last week? Against whom?" and whether he lost or won, that formula tells me uniquely how many people went and visited his Wikipedia page. So, starting from a performance measure, we were able to very accurately predict a success measure, which is curiosity about the particular player.
But, as I said, this is unique to sports. Because in sports we have chronometers; we have accurate measures of performance. Most of us, however, live and work in areas where performance is much harder to gauge. And this is not to say that you can't distinguish the good from bad. But there are actually many individuals with kind of comparable performance.
Now, coming back to your question, sports is one area where performance can be very accurately measured; the other extreme, where performance is inherently impossible to measure, is arts. Is this microphone on the table in front of me – is this an artwork? Or it's purely a microphone? Well, right now in front of me it's a microphone. If you see it on a pedestal in MoMA under a glass box, it's an artwork. Would you be able to look at the object itself and distinguish whether it's an art or an ordinary object? In contemporary art, that's virtually impossible. So therefore you cannot use performance measures to really see how well art does. It all depends on the context. And then you have to start developing other rules and tools and laws to describe how success emerges when performance is not measurable.
Dan Ferris: And I was fascinated by the difference between the two artists you talked about, Jean-Michel Basquiat and his partner – what was the name? – Al Diaz, and their work. Some of their works were virtually indistinguishable, yet nobody knows who Diaz is but lots of people know who Basquiat is, and his work sells for millions of dollars. What was the difference between the two of them?
A-L Barabási: I'm glad you kind of pointed that out. Indeed, for me, the Al Diaz and Basquiat example is a perfect example for what I would call the first law: when performance can't be measured, networks drive success. And indeed we're dealing with two artists who started their career together in the 1970s in New York. Not only they started their career together but they really worked together under one single name, the name SAMO, and they did graffiti art. And they did so for about a year and a half when they broke apart. And within three years, their trajectory completely diverged. Al Diaz is still alive today, working in the New York art scene, and if you haven't heard about him, there's a reason. However, Basquiat three years later paints a painting that became the most expensive sold by an American artist a few years ago.
So what's the difference? Well, fundamentally, networks. When you look at the career of the two individuals, Al Diaz approached art from a performance perspective, to say, "It's about making the right artwork at the right place." However, Basquiat immediately recognized that he has to invest himself into the community of artists in New York. And he befriended, within a few months' interval, some of the biggest names of the art world, like Andy Warhol, and actually moved in and lived in Gagosian's apartment who later on became of course today – is the biggest art dealer out there.
And so Basquiat has mastered the network that really mattered at that moment in the arts, you know, galleries and other artists. Al Diaz, however, continued to approach art from a performance perspective, is trying to produce more and more works. And of course the difference is huge. And what we did is that of course the book doesn't only rely on anecdotes. I have had the possibility to get access, thanks to Magnus Resch, a gallerist in New York and art historian in New York, to an exceptional data set that allowed us to track the career of every single artist in the last 40 years, both in America and abroad. Half a million artists were in the database and we could fully reconstruct their career.
And what we found there: that in case of artists, were performance is unmeasurable, there's a hidden network of institutions that could be mapped out with this data, and that network uniquely determined their success. And this was not only kind of a finding that that network determines their success. But we were able to turn that one into a predictive tool such that if you give me your favorite artist's name and the last five exhibits that he or she had, I can fast forward her career and tell you what level of institutions would actually be really exhibiting in 10 or 20 years from now.
And the reason we can do so accurately is because performance is not measurable; all the predictive power is in the network. Where you are in the network; whom are you connected to? What is the prestige level of those institutions?
So art is a perfect example of the first law of the formula, saying: when performance is not measurable, it's networks that determine success.
Dan Ferris: I'd like to skip over, if you don't mind, the second law of success in your book, which is: performance is bounded but success is unbounded. And I want to talk about the third law, which says that previous success times fitness equal future success. What's fitness? How do we define fitness?
A-L Barabási: Sure. And before we go to fitness, let's first talk about the previous success determines success. And this is a discovery that I made almost 20 years ago while we were studying the World Wide Web. And trying to understand: why do we have certain webpages like Google and Yahoo, back at that time, who had such an exceptional number of links from other websites? And why is my website hardly acquiring any links from outside individuals?
And what we realized there is that the only way to explain mathematically what's happening and what drives the emergence of these hubs on the web is that success drives success. That is, the more links a certain website has, the easier is to find it and the more likely that it will actually acquire further links from other websites. And then we soon realized that this is not only unique to the World Wide Web, but in all areas where you have some measure of success, it's true. It's certainly true for money. People kind of end up acquiring money in proportion to how many they already had. If nothing else, that's what compounding interest is. But it seems to be true also for scientists, of how they acquire impact, that the number of citations my papers get is proportion to how many they got in the past.
Now, the problem with this rule is that it just simply says if you have a lot you will get more. Well, how do you get a lot to begin with? And that's where fitness comes along. Because we realized that there are differences between websites. Some websites like Google are acquiring links much faster than mine, not only because they had more links but because they offer services that are more desirable to the public at large than say what my website offers. And so we named these differences fitness. Fitness is the node's ability to acquire more links, the person's ability to acquire more money, to earn more money, your ability to acquire more friends.
And the way this works is that popularity determines how easy you are to find. But once I've found you, it's your fitness that determines whether I want to link to you, whether I want to give money to you, whether I want to become friends with you, whether I want to write a paper with you as scientist, and so on. So really – and fitness is unique to each individual. And it's not something that you as an individual determine but it's something that the community assigns to you based on what you have to offer to the community. And this fitness is actually measurable in many contexts.
Like in the case of the World Wide Web, what's the fitness of the website? And therefore we arrived to this third law saying it's previous success times your fitness that determines your future success. That if you had low success to begin with but high fitness, you will acquire links faster. And could be very successful, that you have a high level of success, but for whatever reason your fitness drops; then you will actually stop growing and you will stop actually acquiring further links or further money and so on. And your growth will slow down.
Dan Ferris: So, László, fitness to me sounds like it's another way in which you're saying: this is the network's assessment of your performance or your fitness. They sound very – it sounds to me like it's the network saying whether or not you're good enough, whether or not your performance is good enough. Is that accurate or no?
A-L Barabási: Absolutely. So, it's a measure that the community assigns to you. And it's really a competitive measure: how much more attractive you are than the person next to you. And of course this doesn't happen by simply comparing pair by _____ _____ _____. But simply if you have a large community who's choosing between different individuals, between different services, between different songs, through their joint action, they slowly start assigning a fitness to each node. And that fitness – it's not written on any of that but it's kind of measurable – eventually determines the growth rate.
Dan Ferris: Right. And it depends on what the network is looking for. For example, if people like a good female singer to also be very pretty, a better female singer who isn't as pretty might not be deemed as fit.
A-L Barabási: Certainly. But also depends a little bit of: what community are looking at it? So I'm sure that my parents' generation would assign a completely different fitness measure to a Britney Spears song than my generation or my children's generation. Right? So the fitness is kind of incorporating these subjective judgments about whether I like it or not. But because so many people are voting on the object or on you, at the end there's a unique number that allows me to say how fast you would be growing in that particular environment.
Dan Ferris: One of the things that gets me about the emphasis on previous success: when I got to that point in the book I was kind of depressed because I thought, "Well, you know, I've had some success but maybe not so much," let's say. But you give me hope with your fifth law. And I'm skipping the fourth one for now. We can get back to it. You give me hope with the fifth law because the fifth law is: with persistence, success can come at any time, even late in life. No?
A-L Barabási: Oh, I'm so glad that you jumped there. Because that's really my favorite law. And let me give you some background.
Dan Ferris: Yeah. Me too.
A-L Barabási: I just passed 50. And based on all the data out there, my chance of creating an innovation, writing a research paper that would overcome my earlier work, statistically is close to zero. What do I mean by that? It means that when you look at the career of high-performing individuals, there is overwhelming data to indicate that many people make their most important discoveries, contributions to society, to art relatively early in their career, in their 20s and 30s. And this is so severe and so persistent that Einstein once claimed that the scientist who doesn't make his big discovery by the age of 30 will never do so.
So the question we asked: that's definitely very bad news for me. Because it suggests that really I should stop doing what I'm doing, which is running a lab and trying to make new and new discoveries and publish them, and maybe I should just write books. Sounds like you like my book. Maybe that is my next career because the changes are of making a discovery that would be bigger than I did before – it's close to zero. But we were curious. "Let's look at the data. And let's not only look at geniuses. Let's look at everyone and ask ourselves: is it really true that only young people tend to be innovative?"
So we analyzed for example all the careers of all the scientists from 1900 till today in all disciplines, and we confirmed that that seems to be the case. That is, most scientists write their most important paper – whether that's a Noble Prize-winning discovery or something that no one remembers 10 years later – they do so relatively in their kind of – roughly 10 years from the beginning of their career, which is what we call the academic age. So we confirmed the belief that was out there for a long time.
But then we're data scientists so we started looking a little bit more carefully the data, and look for the placebo effect. What would happen if I make my discoveries completely randomly? That is, what happens if any of the papers that I ever write could be the most important paper of my career? What happens if any of the business deals you put together could be the most important business deal for your career? What if it's completely random in the space of the deals of the papers you write, and so on?
And so we said, "Let's see what happens in the case of a random careers." And, to our surprise, we realized they were indistinguishable from the real ones. And, to make this long story short, what we realized is that really what changes during the career is not the creativity but the productivity. That is, young people tend to put lots of projects out, and as they age, the number of projects decreases. People are not trying any longer. However, what we showed is that each project the scientist puts out has exactly the same probability to be the highest-success project in his or her life. So a little bit discovery and innovation is like buying lottery tickets. Every lottery ticket has roughly the same chance of winning. But if you buy most of your lottery tickets when you are young, it appears that you have to be young when you win the lottery, and it appears that old people cannot win the lottery.
So, at the end, what the fifth law does is that it summarizes really this key discovery that we made a few years ago in my lab, that really innovation is not about age. Innovation is about persistence. And those individuals who keep trying can be truly innovative relatively late in their life. And my favorite idol in that space and example is what I discuss in The Formula, John Fenn. John Fenn is a scientist who was a chemist and he worked at Yale University. And at age 65, or 70 actually, he was forcefully retired by Yale University. This was kind of in the '70s and '80s when there was still a retirement age. And he was still full of energy.
So instead of actually retiring and leaving his lab – because they closed his lab down – he moved on to another university, Virginia Commonwealth University, started a new research lab, and it was there where he published his greatest discovery of his life about electrospray ionization, that 15 years later, at age 85, landed him the Nobel Prize in chemistry. And I don't think that –
Dan Ferris: Amazing.
A-L Barabási: – John Fenn is special. I think John Fenn is just an example of an individual who simply believes that creativity doesn't wane with age, and he just kept trying and trying and trying. And he just actually passed away a few years ago at the age 90-something. And three days before he passing away, he was still in the lab working on the next research paper.
Dan Ferris: So that's a message of great hope for me. Because I'll be 60 in three years. And I really have no interest in slowing down at this point. And you're giving me a lot of hope that my efforts will not be in vain because success could come at any time. But this topic is really good for investors, isn't it? Because we buy a portfolio of stocks not knowing which one will be the best performer. If we knew that, we'd only buy that one. So we buy a portfolio and we persistently change the portfolio over time, never knowing which investment will become our greatest investment. But the point is to stay in the game, to survive and stay in the game. It's a wonderful message.
A-L Barabási: Absolutely. And if I may add something to that, before you think that this is only something applies to scientists, think twice. Because after the formula was published, a colleague of mine – two colleagues of mine from Northwestern University and MIT have looked at the age effect for the funders of the startup companies. And if you want to think of one area where really youth really dominates, that's Silicon Valley. And the belief that you have to be in your 20s to start the next Facebook or Google. And that's certainly to some degree true, and held very closely by the community.
Because if you look at the biggest Silicon Valley awards, they all go to people in their late 20s or early 30s. And when you look at the major firms, the major five firms, and the age distribution, all the funders of the company they support for the first time, it's late 20s, early 30s. So there's a deeply held belief that if you want to make it in Silicon Valley, you need to start early and you need to be successful early.
Yet what my colleagues have done is they looked at not only what age do they actually get these _____ _____ investments, but they also asked: would they succeed? Will the company be sold as an IPO, or be sold or get an IPO? So they measured success in terms of: is there a successful exit? And what they found is that, yes, a huge number of investments go to young people. But the success is not staying with them. And actually a 50-year-old funder has about three times higher chance of having a successful exit than a 30-year-old funder. So, yes, the belief is very strong. But it doesn't mean that it actually leads to success. And Silicon Valley is no different from the other areas of performance. You have to keep trying. And often the biggest successes really come relatively age-related time.
So, yes, the Google funders were young. But they needed an Eric Schmidt to turn into Google what it is today.
Dan Ferris: Wow. That's great. I had never heard that before. László, we're actually towards the end of our time here. I usually like to ask if you could just leave our listeners with one thought about your work with success and networks. I realize it's asking a lot because you've done a lotta work and made a lotta discoveries. But if I asked you to leave them with one thought, what would it be?
A-L Barabási: The most important thing I learned from The Formula is really that your success is not about you but about us. That is that if you want to be successful, it's not enough to have performance. You really need to see how that performance is being recognized and seen in the community around us. And to me that's a very humbling experience. Because it really helped me understand that every decision I go for going forward, if I care about success in that particular domain – and you don't always have to care. But if you do care about success, you need to go outside of yourself and look at your community. Because they are the key to your success.
Dan Ferris: Don't hide your light under a bushel.
A-L Barabási: Absolutely. Thanks for having me.
Dan Ferris: Okay, László. Thank you so much. And I hope we can have you on again someday. Are you working on another book?
A-L Barabási: No. After every book I like to have a four or five-year break. So, yes, I am working on a book. But that's a much more technical book, not general audience. We're writing with my former student, Dashun Wang, a beautiful book called Science of Science, that is really taking these ideas into the scientific place and rethinking how science works.
Dan Ferris: Okay. Well, I guess we'll have to wait a few years for another book like The Formula then [laughs]. But it'll be worth it I know. Thank you so much for being here, László.
A-L Barabási: It's my pleasure. Thanks for picking The Formula to feature in your podcast.
Dan Ferris: All right. That was fantastic, and I highly recommend the book, The Formula, by Albert-László Barabási. It's called The Formula: The Universal Laws of Success: the science behind why people succeed or fail. Incredible. I couldn't put it down.
Okay. It's time for the mailbag. And this is where you get to talk to us and we can answer your questions and respond to your comments. And, look, what I'd really like you to do is tell me what you like and what you want more of in the podcast. Do you want more interview? Do you want more of the opening rant? Do you want less of the opening rant? You want more news? What is it that you would like more of? We'd really like to know. So if you could write to us at [email protected] and tell us that, that'd be really great. Thank you.
The first one is from Michael O. And Michael O. says, "First, as an economics professor, I was happy to hear your explanation of discounting in a recent episode. This is something I teach in my natural resource economics class since it is so central to valuing resource streams but it is surprising to me that it does not come up more in other contexts. In working with people in the finance offices of colleges, I have been shocked to find out how many people don't understand this very basic idea. And these are people running the finances at these institutions.
"Also, out of curiosity, I grilled up a few Beyond Meat burgers this weekend to see what the hype was about. While I will say that they did look like real beef burgers, they still taste like peas and they smell like peas when they are on the grill. There is certainly no way you could give me one of these and fool me into thinking it was meat. So as far as I can tell, the huge breakthrough that people are paying insane prices for is that someone came up with a way to make peas look like meat. We will see a plunge in this one before too long. Very much enjoying the shows, and I'm also a lifetime subscriber to Extreme Value. Keep up the great work. Michael O."
Thank you, Michael. Michael is talking about: two episodes ago, we talked about the very basic core of how to value a business, and it's a process called discounting. And I tried to make it as simple as possible because it's kind of technical and mathematical. And I think I did it. I think I simplified it enough. Because we got a couple good e-mails about it.
All right. Number two. Gordon B. Gordan B. writes a very short question. He says, "What is the best way to buy gold?" Well, Gordon, earlier in this podcast I think I mentioned that if your desire is to hedge currency risk and get your money sort of out of the financial system altogether, then you buy gold coins or gold bullion or some physical form of the metal, which you then put in a vault or a safe or someplace. If your desire is to speculate on a higher gold price, then you would probably lean more towards some type of gold equity like a gold stock of some company or other. And I mentioned gold futures because technically that's a way to speculate on movements in the price of gold. But I'm not [laughing] recommending anyone do it, okay? I'm just telling you it's out there. But those are really the two that I think anybody in the sound of my voice has any business getting near: physical gold, coins and bars, and gold stocks.
Okay. Number three here is from Jacob H. Jacob H. says, "Hey, Dan, love the podcast, as you should know that by now." He's written in before. That's why he said that. And he continues, "Wanted to ask this a while back but was busy with life. You quoted Warren Buffett, saying that if interest rates stay at these levels, then stocks are cheap. Why does the interest rate change the value of stocks? Is it because if money is cheap then companies will invest and grow, thus growing earnings? Or will investors need to invest in stocks, as bonds don't really give a good return, or completely something else? Will be waiting to hear from you during the mailbag. Make it a great week. Jacob H."
All right. You're hearing from me, Jacob. And you're in the ballpark. You have a good feel for the meaning of this. You say, "Is it because if money is cheap, companies will invest and grow, thus growing earnings?" Sure. If money's cheaper, they can borrow it more cheaply or maybe even borrow more of it and invest it and grow or buy back stock or whatever they're going to do with it. And then you say, "Or will investors need to invest in stocks, as bonds don't give a good return?"
Again, yes. People think of alternatives. So if bonds are yielding one percent and stocks are yielding three percent, then stocks are more attractive. And of course bond yields – the bond coupon doesn't grow. The coupon or the earnings with stocks – they can grow. And some of the larger, more stable kinda businesses are actually seen as bond-like substitutes. I don't think that's true. I think that's a bad way to look at them. But that's the way some people think about 'em. And so, yeah, I think you understand exactly what's going on here. Interest rates stay low and it forces people to think about other alternatives, and equity is the big alternative that they think of. And it also works inside each business in terms of the amount they pay to borrow money. Good question.
Number four, last one. This is Chaz B. And Chaz B. says, "Dan, greatly enjoy your hosing of SIH. You and your knowledgeable guests have helped me develop a better understanding of markets and how to invest in them. I hope you get as much out of doing the podcast as we do listening. Rather than a rant, I suggest you do a perturbation at the beginning of each show. As a former neurologist, I like the definition of: 'deviation of a system, moving object, or process from its regular or normal state or path, caused by an outside influence.'" I think that's the definition of a perturbation. And then he continues: "What you are doing is perturbing your listeners' way of thinking about the markets. The expectation or hope is that you would get listeners to think in a different way about how they invest. This is what has occurred for me over the past six months. Keep up the great work. Chaz B."
Well, I called today's rant a perturbation. I'm not sure if I'm going to really go with that one every week because it's a little unwieldy. But thank you for the idea, Chaz B. You got me to do it once. Maybe I'll do it again. Who knows?
But that's it for another episode of the Stansberry Investor Hour. And, yes, Chaz, I really do get a lot outta these podcasts. It's my privilege to come to you all every week. I really enjoy it. So be sure, folks, that you check out our website, where you can listen to every episode, and you can see a transcript from every episode, and you can enter your e-mail in there to make sure you get all the latest updates. Just go to that same address, www.InvestorHour.com.
Okay. One last thing, folks. Every year we do a fabulous conference in Las Vegas. It's like my favorite thing to do with Stansberry every year. It's just a good time. I mean, it's Vegas. Good time. And we're going to do our little conference again this year in October. It's a two-day thing. And then on the third day, we have a meeting for our Alliance members. So if you want to be an Alliance member, if you already are one, you can join us for three days. But it's a two-day conference. We have a special discount that we give you for listening to the podcast. And to get that, all you have to do that is go to InvestorHourVegas.com. And you can sign up there and we'll take a couple hundred bucks off of the registration fee for the conference.
And there's people like – well, of course there's going to be Porter Stansberry, Steve Sjuggerud, Doc Eifrig. But this year we're going to have Dennis Miller, the comedian, Nouriel Roubini, the famous economist who predicted the financial crisis, and just a couple dozen other people giving really great talks over a two-day period. And I'll talk once or twice, and I'm going to play guitar at the VIP reception. So maybe you can see me there. And I just hope you'll come to Vegas and join us. It's a really good time. And there's lots and lots and lots of great ideas that you probably won't get anywhere else. InvestoryHourVegas.com.
All right. That's it for another week. Thank you so much. And I'll talk to you next week. Bye-bye.
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