Full Transcript: Robert Hagstrom on Risk, Concentration, and the Casino
Revisiting The Warren Buffett Portfolio 25 Years On, From Markowitz to the Cathedral
Matt: You’re watching Excess Returns. This is Hundred Year Thinkers, which sounds like a really long time until you start really thinking about it. I’m Matt Zeigler. Bogumił Baranowski from Talking Billions is with me as always, and we have a special conversation today. We’re talking to Robert Hagstrom, two on one, I guess, and we’re talking about The Warren Buffett Portfolio, this beautiful book, this beautiful man right here, and we’re talking about this 25th anniversary edition.
Very, very cool. How does it feel, Robert? Do you feel 25 years old again, to have a 25th anniversary edition?
Robert: No, you know, they go by, you know, it... We were just saying earlier, man, it’s just time is flying. I just don’t, you know, it’s just hard to wrap your hands around. I can’t believe that book was 25 years ago. That’s how quickly this stuff goes by. And it’s interesting, though, when you say hundred year thinkers, that’s a long time, but, you know, as we get into the conversation, you know, it was Markowitz in 1952, so what are we up to? We’re up to, like, 78 years since he wrote those papers.
And so, you know, it’s almost been a century since he decided to get involved with investing and stock markets and stuff like that, and that was 1952. So where are we now, right?
Matt: Well, where are we now is we’re still plus 90% of active managers underperforming.
Robert: Yeah.
Matt: We’re still swimming in a sea of people who think, you know, okay, volatility isn’t risk. Permanent loss of capital is risk. And once you accept that, that standard playbook really shows up as the solution to a problem that maybe doesn’t exist, and ignores the ones that does. This is why we’re reviewing this book. If you haven’t, this is some timeless stuff. Let’s go straight into the deep end on Markowitz. A Nobel Prize for defining risk as variance. And Buffett comes out and says, “Fearing that kind of volatility can lead you to do very, very risky things.” Who’s right? Who’s right?
Robert: Well, obviously, you know, I’ll side with Warren on this. The bigger issue and—
Matt: You’d have picked the wrong book name if you didn’t side with Warren.
Robert: Yes. Yeah. We’d be in trouble. I think what we wrote in the book, and this comes from Peter Bernstein’s book, Capital Ideas, so let me give credit where credit was due, which is a great book, and Capital Ideas goes through the advent of modern portfolio theory and things of that nature.
And he writes about Markowitz, and one of the things when I was doing the research, I was just stunned by the fact that when you go to the very first day, you go... Let’s start at the beginning of this whole modern portfolio theory and risk as variance and stuff like that. You know, here’s this 22, 23-year-old kid, and he was a kid. I mean, he’s a nice boy. I mean, you know, played the violin. He got good grades, you know. He respected his peers and things of that nature. He’s a great kid, but you know, he was a liberal arts major at the University of Chicago, the only school that he ever applied to.
Wanted to hang around, got involved in the economic graduate program that was at the University of Chicago. And was fishing around for a dissertation topic and had this fascination about, you know, when he was studying economics, how do you think about risk and return in economics? And, uh, you know, along the way, kind of shifted from macroeconomics into the stock market and how to think about financial markets and things like that.
And so he came up with this theory just out of the blue. I mean, it was nothing, no sourcing, no, you know, “Somebody said this. I’m quoting this.” You know, he just kind of dreamed it up, that, uh, when you think about the financial markets, you think about the stock market. When you think about risk and return, return was not the problem. He just said, you know, return is the expected yield of the stock, whether it’s the dividend, the earnings and stuff. Like, he had that part right. He just said return is the expected yield of the investment.
And risk, though, he just said, “Well, I think risk is gonna be variance.” And, of course, you know, in the 1950s, sitting in Chicago, he wrote this paper and it wasn’t a very long paper, I think about 14 pages. It was quite unremarkable in the amount of words that he used, a lot of graphs and things of that nature. But, you know, he just plucked out of the solar system out there and says, “You know, I think people don’t like variance. They don’t like bounciness and things of that nature, and so I think I will define risk as the variance of return.”
Okay. That’s fine. He got his PhD several years later. They didn’t anoint him at the time. As a matter of fact, Milton Friedman, and this was in the book too, but, you know, Milton Friedman voted down the dissertation. He didn’t like the dissertation at all, said, “This has nothing to do with economics.” He goes, “I don’t even know why this guy’s writing this.” But nonetheless, he wrote it. And nobody paid any attention. Nobody cared, you know, 1950s.
What I found fascinating when I was doing the research is that he did quote one of his books, which was The Theory of Investment Value by John Burr Williams. And that’s actually the same book and the same hypothesis on the dividend discount model that Warren cites when he talks about intrinsic value. But in the preface of John Burr Williams’ book, he cites that risk—he didn’t say anything about variability. He just said risk is if you buy above those discounted cash flows, you’re taking on risk. If you buy something below those cash flows, you’re taking less risk. And so he spelled it out in the preface.
But, you know, Markowitz didn’t even cite that at all. He didn’t cite what Ben Graham said, that risk was a margin of safety question. Nobody was saying it was variance. He just decided that he was going to take it upon himself to say that risk was variance. And, um, you know, somebody should have raised their hand and said, “You know, I think you might think about this differently or just cite other sources.” But the dissertation committee didn’t force the hand, and nobody said, “You know, you should look at Graham,” or, “You should reread John Burr Williams.”
And, you know, he got his PhD and he actually went to work for the RAND Corporation, and nobody cared. The ‘60s came along and, um, Bill Sharpe, who was at UCLA, he was a, you know, never invested in the stock market, never owned a business, just like Markowitz, just a student. He was looking for a dissertation topic, and his professor said, “Why don’t you go check out this guy Markowitz?” And he tracks him down, and the problem with Markowitz’s work was that he was doing correlations between stocks. If you had a negative correlation, that was a good diversifier. If you were positively correlated, then adding the stock didn’t diversify your portfolio. And it was a real pain in the butt because even before Excel spreadsheets and things of that nature, you had to do that manually.
And Sharpe came along and said, “You know, why don’t we find a base factor of which to measure the stock volatility against?” And he said, “You know, the biggest impact on stock price is the market itself.” And he came up with the beta factor. And he said, you know, things that are above a beta of 1.0 have more variance than the market, we’ll call that risk, and things with less than 1.0 than the market variability, we’ll call that low risk. And nobody cared. They said, “Okay, fine. You can have your PhD. It’s no big deal.”
But this all came to a head following the ‘73, ‘74 bear market, and that’s where Bernstein really hits it hard and says... You know, at that point in time, that was the biggest stock market crash since the 1929 stock market crash. You know, things were cut in half. Pension plans were well underwater. People were worried about whether they could retire or not. And so as you got through the ‘73, ‘74 bear market, you come out on the other side and people start returning to the stock market, as they typically do after a few years of licking their wounds, and they come back to the market.
As they were starting to rebuild Wall Street, if you will, somebody said, “Well, what do you want to do about this thing? How can we avoid a ‘73, ‘74?” And somebody mentioned Markowitz and variance of return and, you know, somebody said, “Well, why don’t we make that risk?” And everybody went, “Yeah, that’s a great idea.” Variance of return is really bad. It goes down and nobody likes that. And so that takes off in the late ‘70s, early 1980s. And that formed the bedrock of how modern portfolio theory, or the modern way in which to manage money, exists still today, you know, 40 some odd years later. We have it in our mind, or at least some people have it in their mind, that risk is the bounciness of the stock.
And you want to get rid of that. You know, that’s bad. We don’t like that, and so we need to find ways in which to mute that. And that’s how that happened. And then Buffett was basically, you know, he’d already been schooled by Ben Graham. He’d run the partnership from ‘56 to ‘69. He’s making tons of money. He’s doing great with the margin of safety concept as a risk concept. So none of this ate into his psyche at all. He was moving on. But there’s the two schools, and one of them became the most dominant approach to money management, which still exists today, and that is that risk is defined as variance of return, which we disagree with. People that follow Buffett would disagree with that.
Bogumil: I have a confession to make. When I first heard about it, I was at school and professors were teaching me that. It didn’t sound right, but I don’t think I had the understanding and the vocabulary, and I picked up “One Up On Wall Street” by Peter Lynch soon enough after that, and I saw the light. And what you just explained, and at the heart of it all, is the fact that this idea completely ignores the underlying business behind the stock ownership.
Robert: Yeah.
Bogumil: We almost don’t have to know, don’t have to care what kind of business we own. Which defies what I think the three of us, and many of the listeners, see as underlying principles of investing. You own pieces of businesses. And—
Robert: Yeah. People, you know, to this day don’t get that. But, I mean, the whole idea of modern portfolio theory is just managing a portfolio of prices. You’re putting prices together.
Matt: Yeah.
Robert: And hopefully there’s enough negative correlation in the portfolio that when one’s going up, the other one’s going down. But there’s no business valuation in modern portfolio theory. Nobody’s actually doing deep intrinsic value work on what a business is worth. Modern portfolio theory is really just surface management of volatility and stock prices. That’s all it is. But, you know, it’s taken hold, it’s taken root, and it’s a very, very big deal. It’s a very big deal.
Bogumil: The scariest part of it all for me is that it absolutely ignores the actual risk, which is buying a business that’s worthless, a business that will get in trouble. It absolutely misses the point that you might be buying something that’s not worth holding and could be worth zero. I wanna ask you about how you structured the portfolio. And you did those studies, numbers of thousands of portfolios, and what you concluded, and I’m curious for you to share with us, more concentrated portfolios have better odds of beating the market, and you did that study over, I think, more than two decades. What did you see? It’s a wide range of outcomes, but one of the points you’re making is fewer stocks is better.
Robert: Yeah. Well, the way that it started, Bogumił, is at first, when we wrote “The Warren Buffett Way,” we didn’t do anything in portfolio management. I think I was so obsessed with trying to figure out how Warren thinks about buying stocks that when we wrote “The Warren Buffett Way,” in portfolio management, we said, “Well, you know, he holds them for a long period of time. He rarely sells,” but that was the extent of portfolio management.
And so after “The Warren Buffett Way” came out in, I’m sorry, in ‘94, um, you know, I would watch, back then it was CNBC or Financial News Network, whatever the case may be, and, you know, somebody would say, “I like to buy really great companies with great economics run by shareholder-oriented managers,” and, you know, “We basically try to buy them for less than they’re worth.” And I’m thinking, “Well, that’s pretty cool. That’s ‘The Warren Buffett Way.’” Right? And then you look at the portfolio, and they’d have 100-plus stocks in the portfolio, and the turnover ratio is 100%. And I went, “Well, wait a minute. You’re talking the talk,” which is how does Warren think about buying stocks, “but you’re not walking the walk about how do you do the portfolio management.”
So that was the motivation to write “The Warren Buffett Portfolio,” was that we missed the portfolio piece. And when I talked to Warren about it, you know, I said, “We’re gonna write a second book, and I’m gonna talk about portfolio management.” He called it focus investing. You know, that’s how he thought about it, was focus investing.
So what I did before I got into those 3,000 portfolios in that laboratory, Bogumił, we just looked at Buffett, and then we looked at Charlie Munger’s portfolio, and then we looked at the Sequoia Fund, which was Bill Ruane’s portfolio that took over a lot of the Buffett money out of the partnership. We looked at Lou Simpson, who managed the GEICO portfolio, and then we looked at John Maynard Keynes, who managed the Chest Fund. These were all focused, concentrated, low turnover portfolio managers that were somewhat of the same ilk of how Buffett was thinking about buying stocks, and they all had great track records.
And Buffett was the only one that beat the market 13 years in a row, had never had a negative year in the partnership. And actually had lower standard deviation than the market. But everybody else, um, you know, all of the greats, you know, Keynes and Charlie Munger and Sequoia and Lou Simpson and all those guys, they had wild standard deviations and variance in the portfolio. They had periodic underperformance. They might have been only outperforming about, you know, 60% of the time, 65% of the time. But they put up these really great numbers.
And so it became clear to me that there’s something going on there. The idea of doing the 3,000 stock portfolio, Bogumił, was that, you know, if you have three, four, five, six people, the statisticians are gonna say it could still be random, it’s a fluke, you don’t have enough statistical observations. So we ran a computer simulation, and we did 3,000 portfolios of different sizes, 250 stocks, 100 stocks, 50 stocks, 15 stocks, and did 3,000 in each category, and then that’s what you’re referring to.
What we saw then explicitly was the 250 stock portfolios had very poor performance but didn’t have much variance at all. I mean, their tracking error and standard deviation wasn’t very, very high, but their returns weren’t very, very high either. I mean, they were less than the market or right at the market, and after you take management fees and expenses out, they would underperform the market. And so then we got to 100 stocks and we started to see some outperformance. We got to 50 stocks, we definitely started to see some really big outperformance in those portfolios. And then we got down to 15 stock portfolios, and out of those 3,000 we saw significant, significant alpha that was coming out of those. But there was also significant underperformance, right?
And so, as I said in the book, as you reduce the number of stocks in the portfolio, you’re increasing the odds that you will beat the market, but you’re also increasing the odds that you’re going to underperform the market by a significant degree, right? So stock picking becomes critical, right? And so then you go back to Buffett and he goes, “If you’re a know something investor who can think about stocks as businesses, do intrinsic value work and stuff like that, this broad diversification stuff makes no sense for you. You shouldn’t do that. If you’re a know nothing investor who can’t do business valuation work, then have a broadly diversified portfolio. Better yet, just have an index fund and save all the money on fees.”
So that’s how the laboratory work basically began to put some meat on the quantitative defense of why you should run focused portfolios. So this is ‘98. And then 10 years later in 2009, it was Martin Cremers and Antti Petajisto at Yale University, Yale School of Management, that started to write about high active share. And then boy, the academicians just really got after that, and they came to the same conclusion, which is, you know, to the degree that you own fewer stocks that are different than the market, you stand a better chance of outperforming the market. So it came full circle, but it was about a 20-year turnaround to get that done.
Matt: The distinction that you bring up there that Buffett arrives at, where it’s the idea of know something versus know nothing. Is that the reason we see the financial industrial complex that is, you know, the Vanguards, the BlackRocks, the whatevers of the world, with all the passive vehicles. Is that why they’re good businesses to scale up? Is that why there’s a whole reason to create all these products?
Robert: Well, I guess if you and I were in the business of doing an index fund, we really wouldn’t have to worry about doing any valuation work. We’re just putting a collection of businesses together, putting them in an ETF or a fund and stuff like that. And so you really don’t have to do valuation work. You’re buying a section of the market, either the entire market or a sub-sector of the market. And so it wasn’t incumbent upon you to do valuation work. You’re just putting things together.
But then if you basically say, “Well, okay, I’m gonna be active in my selection, not buy them all. Try to buy the best of them,” however you define the best of them, then you gotta start to think, right? You gotta start to do some work. And, um, but I would argue even if you’re an active manager using modern portfolio theory as your guidepost, you’re really not doing deep gut financial analysis and business valuation. You’re too busy putting things together in the portfolio that are non-correlative, that keeps you close to the market, that keeps your variations down, your variabilities down. You’re broadly diversified, and you understand these companies more at a surface level of what their intrinsic value is. But what you’re most concerned with is not getting too far afield from the market. And, you know, you’re constantly worried about your short-term performance. And so it’s a totally different game. They’re just thinking about it differently, but they’re not doing deep thinking on what they think the business is worth.
Bogumil: Robert, I recently recorded with Paul Johnson, who teaches value investing—or, he corrected me.
Robert: Paul’s great. Yeah, Paul’s terrific, yeah.
Bogumil: He said, “Fundamental investing, Bogumił.” He said fundamental investing. Fundamental, okay. I said, “Okay.” You call it businesslike or business-minded, like Buffett calls it. But he reminded me of something that I haven’t thought about in a while, and he says, “Look at Ben Graham.” So Paul teaches in the tradition of Ben Graham, Roger Murray, for those that don’t know. And he said Ben Graham didn’t talk about relative performance at all. That was one thing that he pointed out. The second thing that I was thinking since my conversation with him was that the benchmarks today and the benchmarks when, you know, Vanguard and passive investing started half a century ago are different creatures. Back then, it was something to be observed. It was created by humans. It’s not God-given. It wasn’t in the Bible, I wanna remind people. It’s man-made.
But now we have this way of investing in the benchmark. So the observer and the observed start to have an impact on each other, right? So the benchmark, and I don’t wanna go as far, but if you want to have a true benchmark of a market, of however you wanna define it, you almost want to not allow people to invest in the benchmark given the experience we had over the last half a century. Because the minute you allow people to invest in it, and it aligns with what you just said, we’re trying to game the system, right? So somebody put 8% in one stock in the benchmark, I have to have at least 8%.
Robert: Yeah. That’s right. That’s right. Particularly if you’re worried about your tracking error or your standard deviation relative to the market. You know, you are very much aware of your benchmark today in professional money management. You should know who you’re competing against. You should know what bets they’re making. The question that you’re asking yourself as an active manager is, “Okay, if I’m gonna beat that benchmark and I know the bets that they’re making, what bets will I make differently? How will I do it differently to beat those bets or how they’re betting?” And so what happens is high active share is an overtly different approach, a strategy to beating the market than owning, you know...
So the S&P 500’s got 500 stocks, but if you get to 50, 60, 70 stocks and you own some of the bigger cap ones, you are the index. You are what is called a closet indexer. So if you have low active share, which means your portfolio closely resembles the S&P 500 or the index, whatever you’re being measured against, you’re really just a closet indexer and you’re just playing games around the edges there. But if you’re a true active manager trying to add value up and beyond what you’re competing against, it’s important to know how they’re betting, what they’re betting, and then it’s important for you to know what are you doing differently, and it should be substantively different than what the index is doing. If it’s close to the index, then you’re gonna get index-like returns.
Matt: I wanna talk Kahneman. I wanna talk decision-making in the moment, after it. What does that body of literature bring to the table for you? How’d that shape how you’re thinking about this?
Robert: Yeah. Well, Kahneman wears so many hats, and then obviously... I think modern portfolio theory should probably erect a statue to Danny Kahneman and to Amos Tversky, who, you know, sadly passed away before Kahneman was awarded the Nobel Prize, or they both would’ve won the Nobel Prize. But the whole prospect theory came in 1982. And if you go back and look at that paper, they didn’t talk about stocks then. They were just talking about returns, right? They were just talking bets. They were talking money. And were basically saying it was not a utility function, that you treat losses and gains the same way mathematically. There’s a psychological component here where people have a tendency emotionally to feel twice as bad about a unit of loss as they do getting one unit of gain and feeling good about it. So it’s twice as painful for a loss than it is for an equal amount of gain.
And that was good. That was good science. That’s good research. I mean, they basically put it out there. And of course then modern portfolio theory goes, “Yay, we’ve got it.” We’ll latch onto these guys because they basically are making our point, right? And so if I’m running modern portfolio theories, I’m putting these guys up and saying, “See? See what they’re saying? You know, you feel horrible when you lose money. You feel twice as bad when you lose money as you do getting a unit gain. So I tell you what, we’re gonna take away all that bad stuff, all that price stuff. We’re gonna take that away and we’ll make you feel better.”
So, you know, someone said to me, and I wish I could remember the name ‘cause I should attribute it to him, that if you think about modern portfolio theory, it adds no value, right? Its only value is to make you feel good, to give you an emotionally comfortable ride. That is the objective of modern portfolio theory. Take the badness out. Take the variance out. Take that anxiety out. Take that “I hate losing money” thing out. But there’s no value added. All they’re doing is just trying to give you a smooth ride.
Now, the big problem that they have, and this is where, you know, Matt, you were saying the SPIVA data, the S&P index versus active managers, it just shows that, you know, 60, 70, 80, 90% of active managers over time can’t beat the market. And I would assume, I didn’t do the work, but I would assume a great many of them have broadly diversified high turnover portfolios. And that just simply can’t get it done. And when we go back to our 3,000 portfolios that we did in the book, we point out very clearly that as you add the number of stocks in your portfolio, you’re gonna get market-like returns. Okay, then I gotta deduct my management fee, then I gotta deduct high turnover ratios and taxes and implications and bid-ask spreads and stuff like that. And so it should be no surprise why we can’t beat the market. You’re constructed not to beat the market. You know, the way you’ve constructed your portfolios and the behavior of that portfolio, it’s very, very hard to beat the market.
Bogumil: Robert, in the book you share some fields, ideas way outside of traditional finance, which I love, and I think Matt appreciates it too. You talk about Darwin, Wittgenstein, that you brought up on this show. Emerson, complexity theory. Disciplines that a lot of, you know, students of finance probably are never exposed to, especially at traditional schools. Which one of them has really stood out to you and had the biggest impact in how you think about the markets?
Robert: Yeah. Well, you know, let me give a nod to Bill Miller. When I worked with Bill at Legg Mason for 14 years, you know, he was the walking embodiment, if you will, the practitioner of, of what Charlie Munger talked about, you know, the art of achieving worldly wisdom and being a multi-disciplined thinker. And so having the ability to work with Bill for 14 years, and Bill being a... He did his PhD work in philosophy, absent his dissertation, but he was a multi-disciplined thinker. We joined the Santa Fe Institute, which is a multi-disciplined research institute that studies complex adaptive systems. So all of Legg Mason Capital Management when I was there was multi-disciplined in their thinking. We were charged with being aware of what was going on in biology and philosophy and psychology and sociology and all down the round. So that’s just how we thought. You know, we were told this is the way to do it.
And so, when we sent over some questions for me to think about and stuff like that, you had Darwin at the beginning, and I think that’s absolutely true, right? So if you think about it, and you can go back to Marshall, when Marshall, the great economist Marshall, was writing his book, you know, he even, in the earliest part of the 20th century, was beginning to question the Newtonian framework of reversion to the mean and Newtonian physics as being the backbone of economics. He was saying, “I’m not sure that works. That’s just not the way in which markets behave.” And he was leaning already into a Darwinian interpretation of markets. And then Schumpeter comes along, you know, out of Harvard and his creative destruction. And so there was more and more work being done that was basically coming to the conclusion that markets are more biological in nature than they are Newtonian physics in nature.
And that’s absolutely true. And so then if you look for who’s the poster child here, who should we go and study? Who would be the poster child for a biological interpretation of markets? It would be Darwin, right? And so Darwin basically helped us to understand that things change. That, you know, just as the environment changes, the ecology changes, living things change and adapt and things of that nature, so does the economy, so does the stock market. It has the same attributes. And so if I would say that there would be one poster child that I would say, you know, have in my office and say, “Okay, never, never, never forget that the market is biological in nature.”
Now, this is interesting because Bill used to say most people operate with a correspondence theory of truth. That is, they’ve identified how they believe the market operates. They’ve identified how the market behaves. They’ve identified how stocks are going to behave and stuff like that, and they build a nice little model, and they then believe that throughout time, the market will always be a reflection of these attributes. So I have a correspondence theory of truth, how the world works, right? The problem is a correspondence theory of truth doesn’t work very well with change. If things start to change, you’re then violating your correspondence theory of truth because basically you say, “I’ve already got it figured out. This is how the world works,” right? And then you say, well, it’s not working like that anymore. What should you do?
And Darwin would say, well, the system’s evolving. It’s learning. It’s adapting, right? The second person I would put on there before I would jump to Wittgenstein, though, would be William James, ‘cause William James was a philosopher, and his philosophy of pragmatism is most closely associated with the biological interpretation of markets, of which is Darwinian in nature. So if you think about pragmatism and Darwinianism, if you will, Darwin and pragmatism are linked. It’s the science and the philosophy. William James would be the poster child for a biologist if they kind of thought about it. And he had a pragmatic theory of truth, which is figure out what’s working, and whatever’s working, if it makes sense and it’s rational to do so, go do that.
Whatever’s going on, the correspondence theory people go, “Don’t pay attention to that. We already know what’s working. We already know how it works.” But then they get into a drought, and you saw this with the low PE value crowd for so many years. They were just hung out to dry because the market had already moved, as Warren figured out and Bill had figured out, that it really was about cash, about return on invested capital. It was economic returns, not just low PE reversion to the mean type stuff. So they have a pragmatic theory of truth. So I would put Darwin and William James as probably the two central cast members of who you need to understand in order to be able to successfully navigate markets over time. Because both of them are speaking to you in a language that is consistent with the behavior of how the economy and the markets work. So that’s kind of how I think. Not that Wittgenstein doesn’t have things to add, but the two biggest influences would be Darwin and William James.
Matt: I mean, he had the ruler. If nothing else, he gets credit for the ruler, right?
Robert: Yeah. You know, with Bill, we were charged with thinking about... Not, you know, we were all CFAs and we all were doing the crossing the Ts and dotting the Is, but he would push us further and harder. I mean, we would read books that would have nothing to do with the market, you know, philosophy books, psychology books, fiction, nonfiction. I said, “How do you figure this stuff out?” And he says, “Well, I’m just really kinda intellectually promiscuous. I just go wherever I want. I think this will be...” I mean, I would walk into his office, and on his desk, he would just have piles of books. And I would look at the titles, and none of them would be in the CFA curriculum. I mean, none of them would be in an MBA class, none of them would be in getting a master’s in finance. None of them. I mean, he was just all over the map. But clearly, clearly one of the greatest minds in investing has been Bill Miller, no doubt about it.
Matt: Well, let’s tie this one direct to Bill. I wanna talk about the cathedral and the casino metaphor, which has come up a million times here. But I’m curious, there’s three levels of this. Where you think we are today in the balance between these two and how we treat them, how Bill Miller reshaped you for being... ‘Cause there’s an awareness to both that I feel like is so critical, and then maybe start with Buffett. Where does this even come from?
Robert: Well, the cathedral, that’s Warren, right? That was his last speech in 2025. And it was at that midmorning that he gave the cathedral and the casino speech. And then it was at lunchtime when he announced that he was going to turn the reins over to Greg Abel. So the cathedral and the casino was classic Warren Buffett. And, um, it’s funny because even before he did the cathedral and the casino, he used to talk about Berkshire Hathaway as being a Sistine Chapel. Now, a chapel’s not a cathedral, but the metaphor still works. And he says, “With me, Berkshire Hathaway is the Sistine Chapel. I’m in there painting the ceiling every day, and that’s kinda how I think about it.” So he had that metaphor in his mind. And the casino certainly shouldn’t be hard. I think he’s always looked upon the behavior in the market as being more like gambling than it has been investing.
And so setting up that analogy, the casino and the cathedral, I think you could go back to 1601 and to the beginning of investing, you know, with the VOC and the Dutch East Indies companies and stuff like that. And basically, even back then there was a casino and there was a cathedral. There were people that were owners of the VOC and ship owners and stuff like that, and people that had invested in VOC. And, you know, I think they thought about it rightly. But then the other people that weren’t so closely tied to VOC and the architecture of what was going on there were really just trading stock prices. So there was a casino even day one.
But, you know, Bogumił may appreciate that if we go to first principles, there couldn’t have been a casino without a company, right? Let’s go to first principles, right? There are no casinos without companies. There couldn’t have been options or derivatives, right, without there being a business first for you to write futures and derivatives and options against that business.
Bogumil: Yes.
Robert: So first principles are this is a business, guys. This is a company that has ownership. It’s a business. Now, microseconds later, somebody figured out, “Well, let’s put some options on these, and let’s trade these prices,” and stuff like that. So the casino came second.
Bogumil: Mm-hmm.
Robert: But, um, you know, I think it’s just innate in people that they have this gambling seed part of their DNA that they just can’t resist, and it’s emotionally supercharged when you start gambling with fear and greed and all that other stuff. And so it takes on a life of its own, separate. But clearly, first principles, before all this crap happened in the casino, there was a business day one. That’s what I do, first principles.
Bogumil: You’re touching on so many ideas, but the big one, 1609, it was really the first time that the public could participate in the ownership of a big business that would reach beyond their imagination, their place of birth and the town they are growing up in. Just mind-blowing. For you and I today, owning a share in a global company, that’s second nature. But in 1609, to think of owning a share in a business like that—
Matt: Uncle Tony’s Corner Store, like the closest you’re gonna get.
Robert: There you go. I mean, you think about the things that really changed civilization, changed wealth, I mean, it was the democratization of being able to invest. It used to be just kings and the wealthy and people that were of the royal court and stuff like that. They had all the wealth, and everybody else was, you know, digging dirt and trying to scrub out a living. But then that day, that time when they started to do the ledger, when people were putting in Dutch guilders to get a share of VOC—
Bogumil: Mm-hmm.
Robert: —you know, they were the commoners. There’s stories about, you know, the guy, he bought some shares for the woman who took care of his house, and the gardener, and he spread the money around and stuff like that. So all of a sudden, this whole invention of a joint stock company, and limited liability and everything that we know, that opened up the world, that democratized the ability to grow wealth.
Matt: Mm-hmm.
Robert: And that is... You talk about being the Newton of the investing world, that is the Newton of the investing world, which is you started something right there by allowing people to invest. Me and you, commoners, poor people, middle class, and the wealthy to invest in a company was earth-shattering. That changed the entire world.
Bogumil: And to me, that’s at the heart of what we’re trying to do and what we talk about, right? The ability to participate in the success of businesses that you and I have not invented. Somebody else is running, and we get to be owners, however small. I wanna emphasize this difference between the cathedral and the casino and tie it back to the earlier point you were making, how different the experiences are and how different the goals and objectives are when we visit one and the other. You talk about the El Farol problem. There’s a certain bar. Can you tell the anecdote? I think it emphasizes what we’re trying to do in the casino and what we are actually trying to do in the cathedral.
Robert: Yeah. I’ll just let you know, guys, on a timeout, my screen’s frozen, but I can still hear you, so I’ll keep talking. Oh, there we are. We’re back. You’re back. There you go. Okay. All right. You jumped back in. The El Farol problem actually came from Brian Arthur, who was an economist at the Santa Fe Institute, and he was the one that was trying to figure out how to predict these complex adaptive systems, right? And so the whole idea is that Newtonian physics are easy to predict because you can run the same laboratory experiment 10,000 times and get the same answer 10,000 times. They don’t change. Those atoms don’t necessarily change.
But when you get into human beings and things of that nature, it’s as Heraclitus said, you know, “A man can’t step in the same river twice.” He’s not the same man, and it’s not the same river. And so when you introduce that into it, it gets really hard to figure out these complex adaptive systems. So Brian Arthur came up with the El Farol problem, which is, there was an Irish bar in Santa Fe, and Brian, being of Irish descent, would love to go there on Thursdays to listen to the Irish music. But sometimes on Thursdays, the crowd was 100-plus people and drinking too much and rowdy, and you couldn’t hear the music and stuff like that. And then at other times, there’d be 20 people, and it would be absolutely the most perfect time in which to go to the El Farol bar on Thursday night. And he was trying to figure out, well, how could you predict how many people are gonna be at the El Farol bar next Thursday and every Thursday thereafter?
And the problem that he came up with is as soon as you come up with a predictive value or some prediction, like you say, maybe more people go to the bar when the weather’s nice or something like that, you have this variable you say is a predicted variable. Then everybody knows that variable, and so then they start gaming that, too. And so as soon as people start trying to outwit that which they’re trying to predict, and they learn something, and then they change their behavior to focus on what they’ve learned, and that changed behavior, everybody’s already done it in such a way that it no longer has any explanatory variable.
I think maybe it’s easier to do it this way. There’s a great book, it was Gregory Zuckerman, I’m looking at it, The Man Who Solved the Markets. It was a book about Simons at Renaissance, right? And if you go through that book, it’s a perfect example of the El Farol problem, which was, it was amazing how many times Jim Simons changed the methodologies of his hedge funds.
Bogumil: Mm-hmm.
Robert: Because the other hedge funds were learning what he was learning. They figured out something, they figured out an exploitation, they figured out a mispricing. Then everybody got on it, and therefore then after that it had no value, it had no use. Simons constantly changed his models because of the El Farol problem. He had to continually come up with new ways in which to think about how to outwit the market. And what Brian was saying with the El Farol problem, it’s a circular problem, right? As soon as you solve it, you’ve already set yourself up for underperformance ‘cause everybody’s doing the same thing that you’re doing. So it’s this constant going around in circles of, “I figured it out. I know what to do.” Well, then everybody else figures it out and knows what to do, and therefore there’s no excess returns.
I think that that was really important for us to finally go, we don’t have... I mean, just go to Santa Fe and say, “Is there...?” These are Nobel Prize people, right? Say, “Is there a science that can predict a complex adaptive system?” Which is the market. And the answer is no. There is no science that can predict a complex adaptive system. So then the question is, why are we spending so much time trying to predict something that is unpredictable?
Matt: Mm-hmm.
Robert: Why are we spending so much time to forecast something that is unforecastable? Well, that’s an interesting question. And so you get into the psychology books, and a guy named Michael Shermer wrote a book called Why We Believe. And the answer is basically the idea that tomorrow is uncertain or unforecastable or unknowable is so uncomfortable to us psychologically speaking, if someone walks by and says, “I’m gonna tell you what’s gonna happen tomorrow,” you glom onto them instantly. “Please tell me what’s gonna happen tomorrow.” Because the idea that I don’t know what’s gonna happen tomorrow is just too damn uncomfortable.
So what happens is, in markets, when you turn on the news programs, somebody’s gonna tell you what’s gonna happen in the market next month, next week, tomorrow, next year. And you go, “I gotta listen to this.” Never mind that there’s no way he knows what’s going on in a month. But then they’ll say, “Well, he was successful.” Well, randomness would have solved for that. Just random variables, somebody’s gonna... If you got 10,000 people telling you what’s gonna happen with the market over the next three to six months, somebody’s gonna be right, but that doesn’t mean that they have the gift or the science to achieve it. It’s just there were enough forecasts out there that out of 10,000 forecasts, some of them are gonna be correct out of randomness, nothing else.
But there’s another psychological defect that we have, that people can’t overcome. They’re just too uncomfortable with the idea that I don’t know where the Dow Jones Industrial Average will be in September. As soon as one gets on TV and tells me where the Dow Jones is gonna be in September, I’m all locked in.
Matt: Mm-hmm.
Robert: But you should be like, “Don’t do that. This guy has no idea what he’s talking about, or girl has no idea what she’s talking about.” But it’s psychologically so uncomfortable not to be able to think where the Dow Jones is gonna be a month from now, two months from now.
Now, does a long-term investor care, that owns businesses? Well, Buffett says, “I don’t care.” As a matter of fact, better for it to be down than to be up, but, you know, I don’t care. But we are so... The rest of the bell curve is just so absorbed with trying to figure out where the market is and so glommed on to anybody that tells us what it’s going to do. There’s the seeds of destruction right there.
Bogumil: Real quick, Robert, in my mind when I’m listening to you, when I go to the cathedral, just using this metaphor, I’m trying to solve for what will the businesses do, how will the fundamentals look like, going back to Paul Johnson. And the casino, I’m trying to solve for what you just mentioned, what will the prices do? And with the latter, the problem is, that I hinted before, that I see as the observer and the observed, right? So with the bar, we are trying to figure out who else feels like going to that bar on Thursday.
Robert: Exactly.
Bogumil: And we become the problem too, because we will all come to the bar, all of us on Thursday, but we’ll make it less exciting to be at the bar. It’s too crowded, it’s too noisy. Right? So it’s like you as a participant and observer have an impact, right? That’s why I hinted earlier with the benchmark. The minute you can invest in the benchmark, you know, I’m not gonna ban it, you know? I’m not here. I don’t have the power to do it. But the minute you allow people to invest in the benchmark, you’re distorting the benchmark. Like, you have to distort it, especially—
Robert: Well, it’s, you know, all of this is all forward induction, and the decision-making process of forward induction is you’re trying to guess what the behavior of people is. Well—
Bogumil: Yeah.
Robert: —the problem is the behavior of people changes, right, based upon the environment, and their changed behavior changes the environment. And so you’re exactly right. But, you know, forward induction is very slippery as a way... And that’s short-horizon arbitrage, you know, high-frequency trading, all that stuff, which does work from time to time. It’s all forward induction. We’re just basically making a bet on what we think the future price will be in the near term based upon how the future price would’ve changed in the past. It’ll change like that in the future. Well, that works until it doesn’t work, and then it quits working, and you gotta go find another model, which is what Jim Simons figured out. It works until it doesn’t work, and now I gotta go figure out another model. That’s forward induction.
Matt: So let’s go to the nine most important words ever written, at least according to Buffett, written by Ben Graham: “Investing is most intelligent when it is most businesslike.” So discuss. Beyond forward induction. Take us to this quote because this is where it lands for a reason.
Robert: Okay. Well, I wanna take this to two levels. First of all, the reason why I’m into this business-driven investing, because, like, we all get caught up in the value stuff and the growth stuff. And, you know, Warren says, “It’s not PEs,” which is correct. You know, we’re all value investors. But really, let’s get back to first principles again. What are we talking about here? We’re talking about a business. Warren says, “I am not a macroeconomist. I’m not a market analyst, and I’m not a security analyst,” and how most people think about security analysis, modern portfolio theory. He goes, “I’m a business analyst,” right? Bill Ruane, “I’m a business...” And they’re all saying the same things. “Get to the business, get to the business.” Okay. So stocks are businesses, right?
Now, Graham said it, “It’s most intelligent when it’s businesslike.” He was talking about the behavior, psychological behavior of business owners. He says, “The way in which you treat your business as a business owner, and how you think about your business as a business owner, economically speaking, is exactly what you should do with stocks.” And it’s the same thing, right? If stocks are businesses, and you have a behavior about running a business and how to think about that business and stuff like that, why don’t you just... Graham says, “That’s intelligent. Let’s go put that into the stock market.” Okay. That obviously worked for a few people but didn’t work for the masses, right?
Now, so by way of analogy, so I do seminars for our advisors from time to time around the country. And let’s just say 100 people are in the audience, and I say to them, “You know, my very best clients that I have, who have the most success with me, who’ve had the best return, are business owners, because they basically are thinking about the market and stocks exactly in the same way that I’m thinking about them.” So if you ask a business owner, “What’s the most important thing for you in your business?” And they will tell you, “Cash. Get me cash.”
Matt: Mm-hmm.
Robert: “I gotta have cash to pay my bills, to pay my employees. I need money for my retirement. I got kids going to college.” They’re all looking at cash. And I go, “That’s exactly what I look at. I’m thinking about cash, and how long does that cash last, and what is it gonna grow at?” And stuff like that. And they say, “That’s what you do with the stock market?” I say, “Yeah, that’s what I do with the stock market.” And they say, “Okay.” So we kind of get into this copacetic relationship, and we’re looking at the market the same way and stocks the same way, and it’s great, right?
Matt: Mm-hmm.
Robert: It’s great. And then so I asked the audience, “The people here in the audience, how many of you either currently own a business or have owned a business in the past?” And I’d say maybe 15, 20 hands go up. I go, “Hey, we should talk after the seminar. You and I, we’re blood brothers. This is great. We’re gonna figure all this stuff out.” And I said, “For the rest of the room, how many of you own common stocks, either through mutual funds, SMAs, or individual stocks? How many of you own common stocks?” All the hands in the room go up. And I go, “Well, let me ask you something. What do you think you own?” Right? And there’s the disconnect, right? I just got finished telling them a story about businesses. Stocks are businesses. Business owners are really smart. We both think about things the same way. They’re one and the same and extra be linked.
Matt: Mm.
Robert: And I got 15 people say, “I’m a business owner, and we’re blood brothers.” I got the other 85 people in the room that own common stocks, and they don’t even think about common stocks as businesses. What do they think about common stocks as? Prices, right? It’s going up, it’s going down. You know, why is it going down? And so this is where we get into the casino. There are multiple, multiple, multiple reasons why stocks go up and down every single day that have nothing to do with business valuation. The casino’s at work, right? It’s forward induction. They’re playing different games over there.
One of the hardest things I have struggled with people to grasp is to understand that the market is a heterogeneous type environment. There are lots of different people playing lots of different games with lots of different rules that are in the market buying and selling every day. But all of you in this room think when the stock price goes up, the market agrees with my thesis, and if the stock price goes down, you disagree with my thesis or something must be wrong. So when the stock price goes up, everybody goes, “See, I’m smart. Everybody’s agreeing with me.” But when the stock price goes down, then you pause. Uh-oh, something’s up. Stock price is down. Then you start second-guessing your thesis, or you start second-guessing your advisor, or you start saying, “Something’s wrong here.” But there’s lots of reasons why that stock could’ve gone down today that had nothing to do with business valuation because of the multiple games that are being played at the same time, right?
Bogumil: Mm-hmm.
Robert: Okay. Now, getting to the end here, the problem that we’re seeing right now, and the data’s all over the place, Goldman’s got the data, everybody’s got the data, is that when we look at VIX today, and VIX trades 15 to 22, 25. It’s 15 to 25 forever it seems like. It doesn’t move, right? And people go, “Well, nothing’s changed about the market.” At the surface level, the market looks just fine. But if you look underneath the surface and you look at the dispersion of individual stocks, they are at record levels. This individual stock volatility, Goldman Sachs has the work. The individual stock volatility relative to the volatility of the stock market is at record levels, has never been higher in 25 years. Go back to 2000, never been higher.
Bogumil: Mm-hmm.
Robert: So what’s happening is the trends of the system, VIX at the surface level, the trends of the system is very calm. You know, we haven’t had a bear market in quite some time, and it doesn’t last too long. But the trends in the system are doing this.
Bogumil: Hmm.
Robert: Right? But they’re canceling each other out because when a lot goes up and the other part goes down, what is the average? The average smooths out, right? Or it goes this way, or it goes that way, right? So there are lots of reasons why dispersion in the individual stocks is so high, but it’s not showing at the stock market level. Why is dispersion at record levels? The casino’s got a lot more games going on. They got a lot of games going on. Today, the notional value of option trading every single day is greater than the market capitalization being traded that day.
Matt: Yeah.
Robert: More option value is being changed on a daily basis than the market value of what is actually being bought and sold on a daily basis. It is the tail wagging the dog. We’ve got more ETFs than we have individual stocks. And if you knew what was going on in Korea recently and stuff like that, it’s now the two times leverage, three times leverage, four times leverage of these ETFs that are selling like hotcakes ‘cause it’s a new casino game. It’s got new bells and whistles and lights and going on, as Warren says, and balloons going up and everybody’s making money. These levered ETFs up and down are exaggerating the changes in stock prices, causing dispersion to go to record levels. The casino’s got the upper hand now. And that’s what Warren’s warning about. He’s saying, “Look, the casino’s taking over the cathedral. This is a problem.” Or don’t let it be a problem 100 years from now, or a really big problem. As Keynes says, at which point you allow the speculators to allocate the capital of the capitalist system, we’re in trouble. And that’s what’s going on. That’s what’s going on.
Bogumil: So I’ll share what’s going on in my mind as I’m listening to and thinking about everything we touched on. I’m rereading a book that I read years ago. It’s called “Obliquity” by John Kay. I’m sure you’re familiar with it. It’s the idea of achieving goals in an indirect way. How a company can actually do very well without optimizing for profits, but optimizing for customer experience and treating suppliers better and the quality of the product and on and on. Here, when I’m listening to you, I’m thinking, what are we trying to do? We’re trying to own businesses. We’re trying to make money, first of all, right? To end up with more than we started with over a long period of time. You can add to it, and we want to beat the market. Some managers choose to add that to their goals, some of them not. Ben Graham didn’t even talk about it, as Paul Johnson reminded me.
That element of adding relative performance can by itself distort what we’re trying to do, and maybe obliquity is the way to go, where we focus on the cathedral aspect of it. We’re doing fundamental research. We’re finding businesses that make sense. We pay the prices that make sense. And almost by accident, in an indirect way, we may end up beating the market by not doing silly things that the benchmark would be doing at the time. And doing a handful of smart things, but not too many, going back to your concentration. Like, it’s a handful of ideas that will really make a difference. Is that the way to think about it?
Robert: I think so. And, you know, what would help me, and I think about this from time to time, is if there was no price, then how do you judge whether you’re making progress or not? Or making good progress or making bad progress, right? And so we go back to, well, it’s the look-through earnings that Warren talks about. It’s looking at the economics of what you own. So it’s no longer a rat race about trying to get the best short-term price performance. It is about who is doing the best job of growing their economic net worth.
So in my portfolio, we run it like a conglomerate. We know what the weighted average cash flow yield is after CapEx. We know what the weighted average return on invested capital is. We know what our cost of capital is. We have an idea of our sales growth. So we have an economic benchmark line, and if I would say, “I’ll get into a match with you,” which is, who can raise their economic benchmark the best. Now, the governing aspect of this is that, you know, if you overpay for great economics, it’s gonna hurt your investment returns, right? But you’re moving your telescope from stock prices to economics, and I think that’s maybe what you were saying, Bogumił, which is what other things we should be doing altruistically to think about our portfolio.
What is the best benefit of the company, for my net worth, for society, for the allocation of capital, whatever the case may be, is to look at the economic returns, not the price returns. I get that. That makes total sense to me, and that’s what we do. I think that’s a big ask to have the market try to latch onto that as the thing, I think. But maybe that’s, you know, some people say to me that’s the excess return that you’re able to achieve.
And, you know, let me... I’ll give you a question. You guys always get to ask the question. When I wrote “The Warren Buffett Way,” everybody... There were a bunch of, I call them the Berkshire-ists. It’s like a mafia, right? A lot of people are Berkshire-ists, right? They live and breathe it. And boy, I got a lot of hate mail, which is like, “Robert, don’t be telling this stuff in public. Don’t be writing this stuff down, then everybody’s gonna start to do it.” And I said, “Well, first of all, Warren has written it down. He’s already been talking about it for 50 years, right? I’m not doing anything that he didn’t do.” But they were totally convinced that if you keep writing all these books, you’re gonna give all the best stuff away, and everybody’s gonna beat the market, and we’re not gonna be able to beat the market.
I’ve been writing Warren Buffett books for 40 years.
Matt: Mm-hmm.
Robert: It ain’t changed. It’s not like there’s an army of... I mean, how many people do you think manage money like Buffett does or Charlie or, you know... I mean, what are we talking about here? One tenth of 1% of the AUM in this world is managed that way.
Bogumil: Mm-hmm.
Robert: Well, there’s a question why. Why is that? If we know we’ve got these guys, we know what they have achieved, they’ve given us the playbook, they’ve given us the methodology, we’ve got gazillions of books written about them left and right. We’ve got everything laid out for you on how you can successfully outperform the market over time. The answer is, why aren’t there more people doing this? As Charlie Munger said, “If we’re so right, why is everybody else so wrong?” I don’t know what the answer is.
Bogumil: Well, I’ll propose something. I think it takes a certain kind of investor. First of all, when I read your book over 20 years ago, it showed me the light. You know, after reading Peter Lynch, your book to me was, I get it, I see it. And I reread it and the book we’re talking about today added to it as well. But to me, what I’ve learned managing money for the last 20 years for other people, it takes a certain kind of investor to be able to practice what’s in those books. And, you know, I host a podcast. I’ve had over 200 guests over four years, and I have a lot of listeners that reach out, and I have to tell you that more private investors that have no outside money actually are able to practice what’s in your book than professional investors. Once you have outside money, there is a limit to the tolerance of a client, and especially in a case when you’re lagging a rising benchmark. And what we brought up in this episode and what you write about in the book, a lot of famous investors outside of Buffett, you mentioned Sequoia in the book and the others, Munger too, underperformed the market by a huge margin over many years. Was it four years for Sequoia when it was launched? Can you imagine an emerging manager that only talks about market outperformance, underperforms for four years and still has a client with him or her?
Matt: No, you wouldn’t.
Bogumil: No. You wouldn’t. You would not. Now, if you talk to people that manage their own money, inheritance, business they sold, that they got into investing, they’re self-taught, and there’s so many, and they listen to my podcast, they write to me, they share stories, I’m amazed what they accomplished. But they have no outside voice. It’s permanent capital. And the only person they will upset is their spouse. And it’s a very different... hard enough, but it’s a very different ask than having it all in the public eye, what you’re doing, why you’re doing it. Almost impossible to do unless you have a perfect, perfect client for this.
Robert: Well, I think, you know, right fits, right? Someone used to say there are no perfect schools, there are just perfect fits, right? There are no perfect clients, there are just perfect fits, right? You gotta figure out the one that gets it with you. And once you get that relationship, it’s great.
So I’ll pitch it back to Matt, who was talking about Danny Kahneman in decision-making. You know, I loved his book, “Thinking, Fast and Slow,” and he talks about system one and system two thinking. But at the end of the day, what he was saying about system one, which is intuition and gut and opinion and stuff, and it’s very... I would call it very lazy thinking. You know, you’re just being lazy. You’re just taking conventional wisdom or you’re taking a cocktail conversation or just some surface level crap and building some thesis over it. That’s system one thinking, right? System two thinking is hard. System two thinking is getting in the guts. You know, system two is reading annual reports.
You know, I quit doing this in seminars because I got blowback, which I said, “How many of you that own common stocks have read an annual report this year?” You don’t even have to read the whole thing. “How many of you just read the chairman’s letter at the front?” And you didn’t have to read Berkshire’s 30-pager. Just get one that’s maybe six pages long. “How many of you read the annual report?” None. And what I begin to think happened is that we are basically lazy thinkers. It’s laborious to do what we’re doing, what Buffett’s doing. Reading. Reading is laborious, right? Studying is laborious. Now, AI’s making this a lot easier, I can tell you that. But it is harder to do that. That’s system two thinking. And system one is, I’ve got an opinion.
Matt: Mm-hmm.
Robert: You know, I heard this, or I just saw that on television, I’m gonna buy that, or I’m gonna sell that because it’s down in price and it missed its earnings. You know, that’s just bullshit. That’s just surface level crap that’s floating through the market. But that’s the majority of people, because it’s hard work to do system two thinking. This is system two thinking that we’re doing. It doesn’t mean that it’s third level calculus and you’ll never understand it, and it’s too complex. It’s just laborious. You gotta read. You gotta read the competitors. You gotta read about your company. You’ve gotta read the reports. You’ve gotta think. You know, think, for Christ’s sake. But it’s just too easy to pontificate than it is to think intelligently and reflect on that. And I think that has a lot to do with it, Matt, as well.
Matt: I’ve long argued that the most valuable part of Thinking, Fast and Slow is the closing pages when he talks about the water cooler and how fallible even he still is after, whatever, 700 or 800 pages of here’s all the studies, all the research, all the things poured out of their minds, and he went, “I don’t actually know if this makes me any better.
Robert: Mm-hmm. Yeah.
Matt: But I can talk about it. I can engage in what you’re talking about, of that not lazy thinking.” Because hunting and foraging for sticks, berries, and fighting off the neighborhood tribe is very different since the internet and they put one of these in our hands. And we are in a society of making stuff easier constantly, and it’s a choice. And I wanna tie back the other thing you said, too. When you comment the best clients are business owners, that is where I see these principles alive and well.
Robert: Mm-hmm. But yeah. Now, I’ll leave you with a positive note, ‘cause I don’t wanna be a Debbie Downer about this, but with all of this bad behavior in the market, with all of this failure in the market, and we can point to it, we can quantify it, and we know it, it is amazing to me, as Warren says, it is amazing what kind of economic system, what kind of financial markets that we have that can take all of these errors and take all of this bad behavior on mass scale. I’m not just talking about a few random errors. I’m talking about mass scale errors. And still motor forward and still pretty... I mean, you talk about something that is amazing, how we haven’t broken this thing.
Now, what I think Warren was saying in 2025 is, “Let’s not break this thing,” right? I mean, we’re pushing at the edges. You know, we’re giving it all it can take. We’re throwing every casino party that we can and every game at it, and we haven’t broken it.
Matt: Mm.
Robert: Let’s not break it. That’s what I think he was saying. Don’t break this thing.
Matt: So we look forward to having you back on for the 50th anniversary edition. Block your calendar now.
Bogumil: It’s already scheduled.
Robert: Maybe—
Matt: Maybe we should just—
Robert: Maybe we should just go ahead and tape it now, and you can roll it out in 25 years.
Matt: That would be the responsible way to do it. But I’m holding you to it. You’re gonna be back for the 50th one.
Robert: We’ll be back in a month with this too. All right.
Matt: Robert, where should we send people to bug you on the internet?
Robert: Yeah, I mean, you know, if you want the books, Amazon is my bookseller. That’s the books. And we’re CIO, and we manage the global leaders portfolio at Equity Compass, one word, www.equitycompass.com. It’s got the literature. It’s got my commentaries. Come see what we’re all about. I appreciate it, Matt. Thanks for the shout-out, and as well to you, Bogumił.
Matt: Well, it’s always a pleasure. Anytime, Compass. We call it 100 Year Thinkers for a reason. That’s Bogumił Baranowski. Check him out at Talking Billions. I’m Matt Zeigler, Cultish Creative in all the places, and of course, Excess Returns. We’ll have lessons from this episode, a transcript up on the Excess Returns Substack. Like, comment, subscribe wherever you’re listening to this, and we’re out.