PR 50 | Trust Your Instinct


Paying attention to your senses is a critical skill to learn for successful investing. Why? Because our senses pick up things that our minds haven’t processed yet, often adding even more important information to our analysis. The father and daughter team of Phil and Danielle Town has mastered the skill of making big decisions in business and investing under tremendous stress by learning to trust their instincts. As a father, Phil has taught Danielle the importance of trusting yourself 100% when investing, rather than going along with what others are doing. As a daughter, Danielle has taught her father that the market doesn’t have to be wrong for him to be right. Phil and Danielle share how to trust your instincts when investing, along with other time-tested investment lessons.
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Trust Your Instincts: The Number One Rule of Investing with Phil and Danielle Town

I love the fact this content is consumed all over the world at all times of the day and in all different circumstance. That’s one of the most beautiful things to me as a reminder of something that is a belief for sure. It’s a faith for sure. I can’t necessarily prove it if you asked me scientifically to prove it, but I know my own name, I know that we’re all connected, that we’re all a spark of the same mother fire and you could extend that out and say that we’re all one and again. I can’t prove it but it’s a beautiful thing to feel especially since it feels true as well. I love that as we take a breath in this moment together, that we’re breathing together. It’s all over the world. We’re all taking breaths at the same time and it is the breath of life and that’s a beautiful connection point. In this moment that I am receiving this breath, I am grateful. I can’t think of anything in all the years that I’ve been on the earth and I’ve been thinking, consciously aware of my thoughts as a husband, as a father, as a business owner, I can’t think of anything more important than to take that breath and to be grateful. With that, I am so happy to be not just here breathing alone, breathing with all of you and breathing with two beautiful friends of mine, a father-daughter team. This is the first on our show that we’ve got that. As a daddy of three amazing young women, this is just making my heart swell in this moment. I get a little emotional, a little carried away with that, and you guys can rope me in. Phil Town and Danielle Town, my two dear friends. I know Phil longer than Danielle. I’m so happy that I’ve got to meet you, Danielle. I want to share a little bit about the amazing things you’ve been doing in the world.

Father-daughter team, Danielle Town and Phil Town, are the co-authors of Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad)which will be published by Harper Collins. They also co-hosts InvestED: The Rule #1 Podcast, which US News and World Report named one of the Top 10 Podcasts of the Year and has reached number two on iTunes Investing Chart and has been downloaded over 3 million times. A startup and venture capital, Attorney Danielle Town earned her law degree from New York University and holds degrees in religion from Wellesley College and the University of Oxford. She spent four years as a big law firm corporate attorney before developing her investing practice and now researches rights and speaks about finding financial freedom through investing on her website and her social media.

Phil town is an investor and the author of two New York Times bestselling books on investing, Rule #1 and Payback Time. Formally a broke river guide in the Grand Canyon, a chance encounter led him to start investing with less than $1,000. Five years later, he had turned that money into $1 million by following the strategies of investing created by Ben Graham, Warren Buffett, and Charlie Munger. As hedge fund manager, podcaster, personal stock investor in venture capitalist, he’s grown a portfolio of investments from basically nothing into millions of dollars.

Welcome to the show, dear friends, Phil and Danielle. Welcome to Conscious PIVOT Podcast.

Thank you, Adam. It’s so good to be here.

It’s great to be here with my daughter and it’s great to be here after hearing you talk about being grateful because the obvious things we could say are they were grateful to be here, which we are. I don’t know if you know this, but the number one best investor in Japan is a man who died recently in his late 80s, Wahei Takeda. He attributed his skill and investing and the success he had in investing to a daily practice of gratitude. I spent three days with him in Japan and this is what he wanted to talk about, being grateful as a basis for making billions of dollars. That’s a pretty powerful testimony for gratefulness right here.

Not only that, but he instituted into his companies. He would invest in something and then insist that the management put that practice into their actual company systems and employees, and if they refused, wouldn’t he get out of the investment?

He literally thought that the practice of gratitude, only the Japanese can do it. You’re going to do it and you do it religiously. The practice of that every day in the corporation would give the corporation wings to fly. Without it, they were grounded and they would have to struggle. He believed in it so deeply that if the corporate CEO did not embrace the concept of gratitude as a practice, a daily practice he instituted in this corporation, Wahei pulled his money out and moved on. What he told me was that those investments did uniformly phenomenal. The rare investment that was based in ingratitude did badly.

He had learned the hard way that when you go at it just on your own understanding and trying to struggle away, the results were not as good. He implemented that in the early ‘50s and pounded away at it his whole life. At the end of his life, that was the thing that he wanted to pass on his legacy. I asked him what of everything that we had talked about in terms of investing that he felt that he had to add to the whole discussion. He said, “Warren Buffett has pretty well nailed down the way you invest properly.”What he wanted to add to that was this legacy of gratitude.

I know we don’t have any skeptics here. Some people are probably smiling as I say that, but for the possibility that there’s a skeptic out there that might say, “The guy’s a billionaire. No wonder he’s grateful.” The question is, “Is he grateful because he’s a billionaire or is he a billionaire because he’s grateful?” What precedes pretty much everything that we want in our lives is rooted out of love and gratitude. What I heard you say was that gratitude is good for business and it’s good for investing.

Wahei started and remember 1950 Japan was a destroyed country being operated under a military law. He started there as a kid with no resources, no money, just armed with gratitude. That’s the testimony right there. That’s from the man himself.

We had Ken Honda on the show and I’m pretty sure he may have been referring when he was speaking a little bit about a mentor of his to Wahei Takeda and he was talking about money and happiness. Part of Ken’s message was that we say thank you to create abundance and the difference between, we were teeing up a conversation about the difference between abundance and scarcity and he shared that he thanks the money. He thanks the money. There are 80 million gods or deities in their belief system, and he says, “Like a lot of things, I thank them. I say, Arigato.’” The money comes in, ‘Arigato,’ and the money goes out, ‘Arigato.’” It’s gratitude for it all.

So many people, they are grateful for the money coming in, that’s easy. That’s the part we don’t have to think too hard about. When you pay your bills, you got to pay your taxes, you got to pay your capital gains tax and all the money that people will make when they’re investing following your advice, you still have to pay taxes on those gains. How many people do we know, even really successful people who have that little edge of resentment about the money going out? Ken’s got a beautiful story that’s very much a testament to this idea that you just brought up. That gratitude is so powerful, not just in feeling better because people say, “I get it. I’m going to feel better if I’m grateful.”It’s actually good for business and produces a wealth well beyond money, but a wealth of money as well to practice gratitude.

I was completely skeptical. I’m that person who is the one person here who was skeptical. My dad told me this story and I said, “That is so lovely.” In reality, like during the day, how often is he said, “1,000 times a day.” I was like, ” Okay.” Dad said, “Can you be grateful ten times a day?” I said, “I don’t know. That’s a lot of times.” Maybe once a day I can actually remember to be grateful. It’s harder than it sounds. We came up with what you’re talking about, which was quite extraordinary that Ken Honda also said it, which is this feeling for me of gratefulness.

Thankfulness can feel forced. It’s like, “I’m grateful for the house I live in and my family being healthy and money coming in. Of course, I am.” So are you and so is everybody. Is that that useful to me to acknowledge that? It’s nice, but is it that useful? For me, I started being thankful for my problems. What is it that’s stressing me out right now and can I take that and turn it a little bit and shift it a little bit in me and not in a fake way, in a real way? Can I find something that’s real? I have a cold now. That is hurting me because I have so much stuff to do.

At least, it’s making me focus on my body a little bit. That’s something that I can be grateful for. Even just that tiny little bit makes it a little bit easier for me. It’s come into my investing practice as well because I find lots of obstacles in my investing practice as a total beginner, a newbie at this. It’s hard sometimes and it’s scary sometimes. When I can feel the fear and say, “What can I be grateful for? Let me make sure I practice this.” It’s letting me know how I’m feeling in my body. It feels fearful. It doesn’t matter. Just accept it.

That’s how I’m feeling in my body right now. Is that feeling reflected in the data that I’m seeing or is it me? Is this something where the market is all being afraid and so I’m following the market, or is this something where my intuition is saying to me this company isn’t quite right or it’s not quite the right time? Just by doing that and trying to notice those pain points and shift them a little bit has helped me work through the stuff that’s hard in this practice of investing.

[Tweet “I started being thankful for my problems.”]

Instincts are so important. There are instincts on the field of play, so in sports instincts are really important to have. In parenting, as I said I’m a dad. There was no manual that came with the kids when they were born. I don’t know if Phil got a manual when you were born, but we didn’t get one. It’s to figure all that stuff out and probably it’s a gag that Randi and I will share with each other, but we couldn’t believe when we left the hospital with our oldest daughter who’s 25 who you get to meet. When we left the hospital with Chelsea, I just remembered, I looked at Randi and I said to her, “Are they letting us leave with this baby for real? Don’t they know us?”

If they knew who we were, we were just like two really young, dumb inexperienced kids. We’re going to leave with this baby. They’re going to let us leave the hospital with that kid. Over time, you develop instincts as a parent. You develop instincts as an investor. Phil, has that been your experience because you’re the most experienced? Not the oldest, I’m not saying that, but the most various person on this call when it comes to investing. How much is instincts a part of the success recipe?

If what we mean by instincts in investing is that specific feeling lever, let’s crank it. I’ve got this one or there’s something to be concerned about. I don’t know what it is. I don’t have any rational backing for that, but I I’m feeling that feeling. It’s over critical. You need to be in touch with that part of you that tells you to pay attention here, either in a good way or bad way and dig deep at that point. This little warning sign that probably comes from millions of years of evolution says your senses are picking things up that your rational mind hasn’t been processed yet or isn’t able to process because it’s just data that’s out there.

Your senses are picking it up in some capacity. You’ve read something somewhere in terms of investing. You’ve seen something on TV. Some book you read, some person talked to you. It’s not in a structured way. It isn’t about whole foods, that conversation. It was about something else. It’s ringing a bell and that bell needs your attention. Danielle said it very well, you look at that and dig deeper because something’s asking for attention right there.

This is one of those questions that in any area of our life, whether it’s you’re investing, whether it’s parenting, whether it’s your business, any area, how am I feeling in my body is a magnificent question to get present? There’s so much at least, I can just talk from my own experience, making better decisions ultimately when we talk about investing, successful investing, just like we’re talking about. Any other outcome in our lives, any other result in our lives, we’re talking about being able to make quality decisions in a given moment under whatever kind circumstances and other times under really extreme circumstances of stress and the rest. That ability to make spontaneous right decisions has a lot to do with trusting ourselves.

My own experience with investing is when I trust myself, when I trust my instincts, which is an advice my dad gave me early on. “Trust your instincts.” I go, “What the fuck does that mean?”How do you learn how to trust your instincts? When you have learned how to trust your instincts, you’re more often than not going to be right about those things. You’ve taken us to that essential place where your instincts become apparent to you through feedback. I forget what the percentage was, but your body will provide biofeedback 1 million times faster than your mind will. To pay attention, Danielle, like you said, to what’s going on inside, which is more of it by the way is female, more of a yin than a yang way of being.

Men are much less inclined to pay attention to their bodies. This has been discussed for a long time. Men are less inclined to pay attention to their emotions. What’s amazing is how you guys work together. I’m not saying Phil is more leaning towards less emotionality, but he’s a man and it possibly is that he spent more time in his head, and you as a woman may in fact spend a lot of time in feeling state. I’d love to know how it is that you guys have worked together and how you’ve rubbed off on each other in that regard, and how important you do believe it is that we learn how to trust ourselves. Is the body that places of a first sign of I should go or not go or trust or not trust kind of thing. Danielle, would you start us off there?

You just said something interesting, which is how do you get enough experience to trust your intuition? That is so important to this question of emotions and trusting your body because I have trusted myself in moments when I should not have. I was overly optimistic about my skills. That is just as bad when it comes to money stuff as doing something when you should have stopped, when you should have noticed that there was some hesitation there. That’s experience, that’s learning. That’s saying, “I’m not very good at this yet.” My instincts might be a little awry or it might be based on incomplete information.

The way my dad and I have worked together on this is first of all, he’s my teacher in investing. He started teaching me about three years ago. We started our podcast about two and a half years ago. He’s definitely the guru of investing to me. We talk a lot about the tradition of masters and in value investing, we have before for me, so it’s my dad. For him, it’s Warren Buffett and Charlie Munger, and I’ve learned about them through him. They always speak about Benjamin Graham who taught them, and it goes on like that. There’s something beautiful about that and knowing that we’re following along with this great tradition of people who have really proven it over a lot of years.

I’ve also added my own information and experience to our investing practice together because as you said, I’m very different from him. He’s a guy, I’m a girl, so we have that. He is the expert, I’m not. We have that. We’re also just different people with different emotions and experiences about things. I’m a lawyer. I’m naturally risk averse. He’s not and not so we come at things pretty differently. That’s what’s made it work so well for us. There are lots of people who are like me out there. It’s a fantastic quality that my dad has. Dad, there are not a lot of people like you out there when it comes to investing. You are very good at it. You’re very special. For me and all the people like me, it’s important to acknowledge that it can be difficult, that it can be fearful, that it can be isolating sometimes. Talk about that stuff and get it out in the open. That’s what we’ve done with our practice together.

There’s something about this that I want to add because you were talking about making investment decisions under stress and a lot of people are not familiar with that. They’re used to investing in a not rigorous way. Just put the money in and put it in every month, and that’s what’s called investing. Good investing is done almost entirely under tremendous stress because we are waiting for an opportunity to invest when fear is rampant. When people are afraid of putting money into things is when we’re looking for the opportunity to do so. We have to set up something that protects our intuition, our inner life, our emotional life from that outside, mass feeling that’s going on so that we are able to follow our own instincts and trust ourselves 100%.

It’s more important to trust yourself 100% in investing than in many things that people do. The downside is so significant when you’re investing the way we do for having a failure. One of the failures that you can have is to not trust yourself when you knew you should. Everything in you is telling you, you should. Your intellect is saying, “This is the thing you’ve studied and waited for, and now it’s time to load up the truck,” and you don’t do it. You’re afraid. You haven’t gotten yourself to that place where you’re able to fully pull the trigger on a major investment. That’s one thing I wanted to say.

[Tweet “One of the failures that you can have is to not trust yourself when you knew you should.”]

The second thing is that I come out as an investor. I’m coming out of a pretty high risk couple of jobs that I did for years before I invested in. One was to be a river guide in the Grand Canyon and guide down on big whitewater rapids and explore rivers and that haven’t been commercially run yet. Before that I was in army Special Forces and I was in Vietnam as a platoon leader. I’ll tell you for real, that missions that special forces guys go on and I know the guys that were with me and that I know many guys who are still in special forces, active operators, I know lots and lots of them. They’ll tell you that many missions that they’ve gone on, every intuition in their whole body was telling them they were going to die, that they weren’t coming back. They learned to overcome that and go anyway because that’s their duty and laying down their life is part of what can happen in that environment. It’s really strange when everything in you is telling you this bad thing is going to happen and it doesn’t. It’s just like you just go on and do it anyway and it doesn’t happen.

You learn that there’s really 200% of what you want. You want 100% of intuition and you want 100% of your rational intellect that’s there to deal with the fear that happens in these really intense environments. What Danielle is talking about which I say I’m willing to be, I’m not risk averse. I’m extremely risk averse.

I see the word pivot used up in a lot of different contexts these days. A lot of times it’s with stocks so I track through Google the use of that word, and oftentimes it’s used in stocks. A pivot point for example, might be where the market turns and let’s say it’s the herd. I’ll use that word for the market for just a moment, but the herd turns in one direction and your indicators are saying, “Load up the truck in the opposite direction.” This is the moment you’ve been waiting for where there’s misinformation, where there’s a gap between what is happening in a company, what’s really happening in terms of what the valuation of a company might be and what the market perceives, whether it’s through news or some other thing that drives the market in a particular direction.

Now there’s this imbalance and that might be a buying point when all the indicators or the herd is moving away, moving to sell, but yet there’s a buy sign that you get and you’re saying that’s a moment in time when somebody has to make that decision. Am I going to load up the truck and deal with the fear that you’re wrong for one thing? The greatest fear is going to be wrong, but that other people are right, that somehow they’re right and you’re wrong, that they’re smarter than you. The market is smarter than you in that moment. Right there and then, you’ve got to trust your instincts.

I look back at the first book I read on investing was probably a 1990 or so, it was The New Market Wizards, Jack Schwager’s book where he interviewed these traders that came out of the Black Monday, the stock crash of 1987.He interviewed all these titans of the space at the time and the ones that made money and then crushed it, not just survive but crushed it, that day and thereafter, were the ones that were able to see the forest for the trees that day and not and not just do what the herd was doing, which was to sell. Is that what you’re referring it terms of that instinct to be able to pivot there and then when the market might be sending a signal or showing something and you know better? Is that what you mean?

In our way of investing, there is rarely a pivot point in the sense of a technical signal that says that, “The herd is going that way, they’re now changing their direction or something.” What’s more of what happens with us is that we have a very logical crank out, hard come by. You dug the ditch pile of information about a company that we’ve come to understand deeply and have a great deal of confidence in our ability to see that that company is going to be more productive in ten years, which means it’ll survive ten years or longer. That it’s going to be around in ten years, more productive than it is today, that it’s well run. None of that comes from intuition. Not all is just digging the ditch and then here comes the market, selling that wonderful business off. As Danielle so amazingly pointed out to me, I’ve taught her a lot, but she’s taught me a lot too in this last three years of stuff.

Often if you want to learn something, try to teach it to your kid, to your very smart child. What she taught me was that the market doesn’t have to be wrong for me to be right. In fact they’re probably right and in fact, they’re almost certainly right because they’re smarter than I am. They’ve worked harder than I’ve worked. They have more resources than I have. For me to say that these guys are wrong right now would be unlikely and yet they’re wrong. We have to have a situation where paradoxically they’re right and they’re wrong at the same time. What makes that happen is the fact that their incentives as fund managers are in operation over the course of a very short period of time. Danielle could probably find a better way to say this, but they get incentivized to do things well over a one-quarter to a one-year period of time. Doing things well over a five-year period of time, but not over the first four years, is a wonderful way to lose your career. You are dead meat.

You don’t live to see the end of that five-year period is what you’re saying?

No. You’re right on the money and you’re going to make a bazillion dollars. If you have any question about that, have everybody go watch The Big Short where they’re watching Michael Burry banging drums on his desk and listening to heavy metal music while his investors are screaming, “Bloody murder to get the hell out of this fund and I’m going to kill you.” They’re so mad at him that he is short real estate. I need to make some billions of dollars and he never gets a single letter from any of them saying, “Thank you.”

They would have fired him in the intervening three years that he was doing that if they could have, but they legally couldn’t, so they would’ve fired him. Why? Every year for three years, he lost money, and then he made it all up and a fortune beyond that because he was right. What Buffett says is you’re not wrong because the market thinks you’re wrong and you’re not right because the market thinks you’re right. You have to trust yourself to make a decision over the timeframe that you’re investing in. For me and Danielle, that timeframe is five to ten years. I’m perfectly comfortable for being less than the market for four of those years if in the fifth year, I’m proven right.

PR 50 | Trust Your Instinct

Trust Your Instinct: It’s more important to trust yourself 100% in investing than in many things that people do.

There’s some important nuances here and I don’t know that we can dig into the nuances at great length in this show, but they’re worth trying to get more clear because Warren Buffett said this, “When people are greedy, you should be fearful, and when people are fearful, you should be greedy.” That sounds a lot like emotion to me. When it comes to instincts, use that great example of The Big Short. When the market is saying, “You’re wrong,” you know that long-term, we just pull it back far enough and we can see the market’s usually right longer term. In the moment, they’re wrong. For him, the market was wrong for three years. That’s a long time to hold onto your instincts and your gut and talk about a gut check.

Keith Marcola is a great fund manager and he made the call on real estate in 2006 and was paying money out of his fund for two years. He got fired in November of 2007 because he refused to change the investment structure of the fund and his boss said, “You’ve been wrong for two years, you’re fired.”Three months later, real estate started to crumble and he proved that. Of course, by then his boss had liquidated those investments and lost money with everyone else. Keith was 100% right and then that formed the basis of his new company, which he’s been extremely successful with. You have to play the investing game with a set of rules, and the rules that they’re playing with at a bank or at a big fund are rules about the survival of the people who are running those funds. They’re not rules about great rates of return. There rules about hanging on to the bottom rung because that rung sufficient. That’s going to keep you above the lions. That’s all you need to do. You don’t have to climb the bloody ladder to the top.

In fact, my world is full of cautionary tales of people who have done extremely well in the long run would have been fired in the short run. I can give you one example after another. If you don’t control your own capital, then you almost have to play it the way most fund managers do, which is short-term. We do control our own capital. You control yours, I control mine, Danielle controls hers. That capital, I have control over. I wouldn’t have been willing to manage money for people unless I knew they understood. Randi went through our classes and Max and Chelsea and Matthew and they’ve gone through our classes so they understand what I’m doing. When I’m sitting here and the market’s going up like a rocket ship, you could do it pretty well, I left you alone there, but at some point I’m going to pull out of that thing.

I know there’s no prognostication. There’s no disclaimer on the podcast. We’re talking as philosophy more than anything else about investing and what makes for good investing and what rules and how much the head plays a part. As Danielle said, how much the emotional body and our intuition, some deeper knowing plays a part in this. I want to ask you what you guys are thinking, and do you both align on the same prognostication about the future? Are you both lined up or Feel the same way, gut-check wise? Do you feel the same way or are you different about what the near and longer term looks like for the markets?

I generally listen to my dad on that, so we’re aligned. He’s been through so much more than I have. I’ve been doing this for three years. I’m still a total baby investor in my opinion. I definitely look to him for some guidance on that. I disagree with him constantly. On the markets, he is generally right.

Company-specific, do you have different views on?

I thought you were talking about the market overall.

I was. I just meant when you disagree, what are the types of things that you disagree about? I’m a dad, I’m curious.

Honestly, we don’t end up disagreeing because we have to convince each other. Not only is he my teacher, but he’s my investing partner. I have to be able to make sure he gets it or else I haven’t done a good job doing my research. I haven’t made a good argument for that company. We’ve had different perspective on whether an executive is trustworthy or not. Something like that that’s so subjective and that two people of sound mind can have very different opinions on, that would be something we could disagree on.

We have to convince each other or what price to buy a company at? There’s a little bit of a range that you can come up with based on the equations that we have developed and some people want to be more conservative sometimes and some people want to be a little less conservative sometimes, but you have to make a good case for it. You have to able to make your argument really convincingly to somebody you respect. That’s a really important part of the investing practice.

[Tweet “You have to able to make your argument convincingly to somebody you respect.”]

Charlie Munger is Warren Buffett’s. He calls them his partner, they don’t control money together, but Charlie and Warren had been investing together since the 1960s. Warren calls him the abominable nomad. Charlie has a much more rigorous set of criteria than Warren does. Charlie doesn’t feel at all responsible to any investors who have put money with him to do anything with it. For example, Charlie has not bought a new stock for the last three years, while the market went from what? $14,000 to $24,000? The market is up 60% or 70% and Charlie doesn’t care. He’s just sitting in cash waiting for what he’s always waited for his whole life, which are very easy bars to jump over. He’s not trying to jump over six-foot bars. This is what I’ve been teaching Danielle and why we share information as investing partners. An investing partner can usually do a better job of poking holes in your beloved company than you can after you’ve spent a week or two falling in love with it.

I’m not in love with it yet. I can look at it pretty much objectively and say, “What about this?” It might not be something she’s considered yet and now she has to go consider that before she can make that investment. Charlie’s criteria are so rigorous about what to look at. He doesn’t want to jump over anything that’s hard. He doesn’t want to invest in anything that’s hard and therefore he has to be very patient to wait until fear builds up in something he really likes, which comes about because of some short-term problem or a recession in the US economy.

Some kind of problem that doesn’t affect the business in the long run, but affects it in the short run and then he can jump in. He sticks to that rigorously and aggressively. That kind of things we trade back and forth with, with Danielle. In terms of the overall market, there are several fundamental things that I look at that I’ve learned from Buffett and one of those is the relationship between the value of the overall stock market. Let’s say $25 trillion and the GDP of the United States, let’s say right now it’s$20 trillion,$18 trillion.

When that ratio gets skewed and you can just look historically at where it’s been, when the market is much less than GDP, you have a great time to be buying stocks in general and when it’s much higher than GDP like it is right now, it’s a pretty bad time historically to be buying stocks. Your next ten to twenty years are likely to be not very good overall because it’s gotten too high too fast. We look at that. Then we also look at some signals that are proprietary that we run with computers that give us an idea of whether the big money is starting to leave the market and as that big money starts to leave the market, and the market is overpriced, we start to exit on those signals. We’ve been pretty good with this.

We’ve gotten out in 2007 before the big crash and got back in 2009 after the big crash. That ultimately is the secret. By the way, I told Maria Bartiromo in 2009, she’s going like, “How do you know it’s the time to get back in? How do you know it’s not just crashing down to 2000?” I told her, “I didn’t know. All this is me knowing the businesses that are on my watch list or now on sale and I’m going to start buying them.” I’m buying $10-bills at $5 and I’ll buy more of them at four and three and two as the market goes down.

Right now, they’re on sale and I don’t have a crystal ball so I’m going to start buying them. That’s what I’ll do with your funds as well, Adam, is I’m patient, as this market melts up, it’s melted up like a son of a gun right now, like 1928 kind of a melt up. As it melts up, we want to be there. We’ll ride this thing and ultimately, it’s going to start to melt down and when it does, we’ll get signaled out and then we’ll wait patiently for great things to go on sale and we’ll buy back in. That’s just Warren Buffett 101. That’s what he does.

Would we call it value investing? Is that the term to use for that?

Yeah. Its value investing with a Charlie Munger rigidity thrown in there, which is to say, you must buy things on sale so you have to wait for that. You must understand the businesses you’re buying so you don’t want to distribute across 100 businesses. You want ten or fifteen, the ones you want to be in and you want to know what they are.

I’ll add an end and you can tell me if that’s appropriate or not. You have to be sensitive to a rationality or looking for that irrational behavior in the market because that’s a signal of something, right?

Here’s the thing, I wasn’t saying it well, but what Danielle pointed out to me, is that it’s actually rational behavior that you’re looking for. You’re looking for the fund managers to do what they do, which is to get the heck out of a burning theater as fast as they can. If it looks like this company is burning because there’s a well that’s on fire in the Gulf of Mexico for a literal burning, then the market out of the fear of the well that’s burning exits every company that’s drilling in the Gulf of Mexico, regardless of whether they had anything to do with the well or not. It’s all of the sudden great companies go on sale, 50% discount. If you understand that the fear is relatively short-term, you can buy these things on sale without much of an IQ being involved here. You don’t have to be super smart. You just have to be patient and have a narrow focus of the market that you really understand and wait patiently for fund managers to do what they do, which is to unload on short-term fear.

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Trust Your Instinct: You don’t have to be super smart. You just have to be patient and have a narrow focus of the market.

That was a completely rational move on their part. This was a short-term event that they knew was going to essentially shut down the Gulf of Mexico for the short-term and they’re short-term investor, so of course they all exited. That’s their job. It wasn’t in that case, to make a long-term investment. It wasn’t that we were acting on people’s irrationality. We were acting on people’s rational choices that made sense to us and that kind of knowledge and everything that you just said about the market overall and the Buffett indicator and ways to see that the market is rocketing to the moon right now are really for me, the antidote to fear. The antidote to being worried about taking that step because once you understand it, it’s easy.

You’ve made such a great point here, Danielle, because it’s when you don’t understand it, when it looks irrational, Adam, that’s when it’s scary to me. If I don’t understand why they’re getting out, I’m not getting in. Does that make sense?

It does. I think that reframe is important because even the herd mentality, which means that somebody yelled fire and now as opposed to orderly leaving the theater, people are trampling each other to leave the theater and a lot gets lost in that and that’s what I was thinking about what was irrational, but looking at it from the standpoint of what started it all and why it’s happening to begin with is entirely rational from that framework.

If that theater is actually burning to the ground, you’d be pretty dumb to sit there. If I don’t understand why people are getting out, I’m not getting in. Charlie, put it like this. You have to understand the reasons not to buy this thing better than the guys who are not buying it, better than the guys who are selling it. If you don’t, you better step back because they might be smarter than you are.

I think it’s a really great time to hold up the galley. I know this is not the finished copy. I think what’s more important than how pretty this book is, is how chock full of incredible insight is in this book. I am thrilled to be reading it and I’m thrilled that you guys collaborated on it. I know and love you both, so to have you be doing this as a in collaboration and to have it be coming from different disciplines. As you said, Danielle, you were a lawyer. You and I have a lot in common. Only you’re a lot smarter than me, so you got out of practicing law after four years. It took me eighteen.

That just means you were better at it than I am.

Lawyers never send me hate mail about any of this stuff. All they ever do is ask me is, “How do I get out?”

It’s so true, Adam. The first or second page of the book, I looked at the partners in my law firm who I adore and I did not want their life. I said, “Why am I working this much for something I don’t want?” That’s how this whole thing got started.

Talk about uncommon wisdom. Hats off to you. You ask better questions, you get better answers. It took me a long time to look at the other people in my profession, including the people I shared office space with and who had been practicing 30, 40 years and asked that same question. Is that how I want to end up? These were super successful people from all the world’s definitions of success, had all the success and then some, but I didn’t want to end up like that.

Phil, I would love if you just spend the last couple of minutes, both you and Danielle sharing a little bit about your rituals, the practices, the things that you guys do to stay in a head space and heart space, a headspace or both, a combination of both thinking and feeling to be able to have perspective. A lot of what you guys were talking about, being able to know the rules, be able to follow the rules. One of the things I learned in that book, The New Market Wizards was the people that succeeded had rules. The ones that kept the rules were okay and the ones that violated the rules, because the world was changed, all of a sudden is a macro event that changed everything.

The rules no longer applied. They lost their shirts and this ability to be the eye of the. We’ve had storms. We can be sure of one thing for certain, that just as the sun is going to come up tomorrow, we know there’s going to be storms again, storms in the investing world and everywhere else. To be able to know that the rules are there; that you follow the rules, that you trust the rules and that you’re okay so you don’t act out of fear when everybody else might be and that you’re looking at great opportunities in those moments when other people are doing that, you must have ways to keep yourself in a good space. What are those rituals or practices that you guys have?

Honestly, we already spoke about the first one. The first one is thankfulness for your problems. That’s something that just immediately grounds me down in a really good way. That sounds weird. It just immediately makes me feel solid. It puts me into a good space of consciousness of what’s happening around me. Secondly, I do a meditation practice. I’ve done that since I was little, so I have that when I’m feeling really stressed and haywire and overwhelmed. I can go sit, have a moment of just silence and that is incredibly helpful to me. Then the last thing that’s specific to investing for me is to continue educating myself and in the moment.

What that means is just read the news. See what’s happening in the world with my companies that I’m following and with the market as a whole and with other companies. I just continue educating myself so that I don’t have that feeling of being not in the know. That also somehow grounds me into my practice. It makes me feel solid in my practice. Then maybe the last thing which it almost goes without saying is thinking of it as a practice. I’ve been saying that the whole time, but I think of it as a practice. I don’t have a goal. I don’t have pressure to get to a certain place. For me, the process of this is the goal and that also keeps it from being too heavy and too overwhelming.

[Tweet “I just continue educating myself so that I don’t have that feeling of being not in the know.”]

There’s a book in just that all by itself.

It’s in the book.

It could be a book by itself, but I’m so glad it’s in there. Phil, what’s a routine or ritual? I like to call them, these practices that you’ve got.

I started meditating right after I got back from Vietnam in 1972 and it’s a twice a day practice. I’ve been doing it for over 40 years and that’s when Danielle started when she was five is because I’m her dad and she was going to do what I told her and it’s a great practice. Gratitude is a practice. We still do church and every Sunday, Melissa and I. We go to church at our house because we can watch Andy Stanley on TV. He’s great. We watched guy at North Point here in Atlanta. He is phenomenal teacher. Those are our spiritual practices. I try to make really certain that I get outdoors every day.

My wife is really good about doing that and getting me out of the house because the other ritual that I have is I read everything. I read a lot. I read broadly. Right now, I’ve got a biography on the da Vinci that I’m partly through while I’m reading Ray Dalio’s book Principles. I’ll read stuff for fun. I’ve got Lowenstein’s book on Buffett right here. It’s just sitting on my desk, which I’m reading. I’ve got Thinking In Bets by Annie Duke who’s a professional poker player. Phenomenal ideas come out of there to me about things that are important in my life and how to invest better. That’s something that Charlie Munger said is that all good investors read widely. That’s the major rituals.

Outdoors, I do horses, like aggressively do horses. I try to ride an hour or two every day and that’s both a spiritual practice and a physical practice. Then I have a basic structure in the morning that I walk through that is pretty loose. It’s just designed to make sure that I’m paying attention to the companies that I own and to the companies I would like to own on a daily basis, just to check in and see where they are. That might surprise a lot of people that it’s that loose for investing, but one of my favorite investors is Mohnish Pabrai. I’ll call him a mentor because he wrote a phenomenal book called The Dhandho Investor. Mohnish manages well over a billion dollars and he gets up in the morning at 10:00 AM according to this book, gets up at 10:00 AM and he plays golf every day, lives in Irvine, California. He’s paying almost no attention to the market. Spending a lot of time on top of the market is not about investing. It’s more speculative kinds of investors that do that. We’re just reading and we’re trying hard to understand a few businesses well, and then understand clearly what they’re worth, and then just wait patiently for those to come around. The ritual is to read. That’s the ritual of investing to me.

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Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad)

Some of the feedback we get from people that have joined us on the show is in regards to the rituals, the things that we all do. The few times where I’ve had the opportunity to speak about Warren Buffett in particular, I’ve never met him and I hope to meet him some day, but I know one thing about him. He puts his underwear on one leg at a time just like I do and just like all of us do. It’s really important that we know what other successful people are doing and how we can learn from their habits. As Covey said, those seven habits. What I like about ritual, is there’s a sacredness to it. There’s a consciousness to it. It’s not like the way I brush my teeth with the same hand because that’s my habit to do it. It’s that I’m consciously practicing it. It’s a process. It’s a practice which is just beautiful. I would love for folks to pick this book up. It launches March 27th, Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad), which is so flipping cool. I adore that. Chelsea and I are going to do some podcasting together and I’m excited about that.

I want folks who crave more and really crave more of the two of you and want to learn more about what’s going on in the markets and in the world of investing. They can tune into The Rule #1 Podcast, which is already getting great reviews, rave reviews, and downloaded so many times. Please feel free to go ahead and do that. If you’ve not a left a review on iTunes, we would so love to do that. We’re actually going to come up with the sweepstakes and I’ll let you know soon about what that’s going to be like.

We’re going to give away something. Reward somebody who did something for us. The reviews are great because it’s great feedback for us, but it’s also great feedback for other people who might want to invest their time in education and podcasts just like so many other areas we’ve been talking about is about our education. Your time is valuable. We value your time and your time in leaving a review will be rewarded. Just don’t know what the sweepstakes is going to be yet, so please leave a review. If you’ve not yet subscribed, you can go to to subscribe.

Lastly, before we close out, our Facebook community is growing and people are just doing magnificent things like being really vulnerable and authentic. You can access the pivot Facebook group at and find that you’re in great company and great community with other people, like-minded, like-hearted people who are pivoting in their lives, in their businesses in their finances, in some areas of health and relationships as well. It’s a great space and we look forward to seeing you there. Lastly, I want to close out our show with a reminder about something that we began with and that is how important gratitude is in this moment.

I will share my morning ritual, my waking ritual. First of a series of things that I do, but this one is the first minute of waking. It starts with the hope, with a prayer and an intention that all of you, that you Danielle and Phil, that we all get to wake up tomorrow. On a metaphoric way of looking at things that we’re a little more conscious tomorrow than we are now, a little more open and willing to be even guided by spirit and by the university, by all the other divine beings around us, a little bit more tomorrow than today, and that will put our life in just a wonderful trajectory, keep us on a beautiful path.

As we wake up, as we take that first breath of the day tomorrow as we all will, we realize that that’s no guarantee that in that moment of waking and taking that breath, there will be people taking their very last breath in that moment and there will be babies born that will be taking their first breath in that moment as well. It is sacred. It’s a holy moment and very purposeful. Please be grateful for that. I know that’s the one thing I remind myself every day is like, take a breath and no matter what the challenges may be, I’m grateful then for that breath and for how important it is. Lastly, if you’re willing to do this three step morning ritual that you wake up, that you are grateful and that you say out loud and you intend by these words to mean them, “I love my life. I love my life. I love my life.” It’s been a pleasure. We’ll see you again soon. Ciao for now.

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