#132: Take Better Market Risks by Using Technology

Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast. 

Josh: So welcome back to Accelerated Investor. I’m here with Dr. Richard Smith. And we’re excited to have this conversation today. Thank you so much for joining us. And Richard, why don’t you just jump in right off the rip and tell us a little bit more about with all your background and experience and market cycles and investing. What are you working on right now, today in the middle of this corona virus pandemic? What are you working on that you’re excited for? What new information are you learning? What are some things that you think that you’re most excited to tell our audience you’re working on today that might help them with their investing going forward?

Richard: Well, thanks, Josh. It is great to be here with you and your audience, so thanks very much for having me. And, you know, I’m really excited about one thing in particular, and that is, how can I use technology to help individual investors really master what I regard as kind of the last mile problem of successful investing.

Josh: And what is that last mile? What do you mean by that?

Richard: It’s human behavior. Yes. So that darn thing called emotion or something called emotion. But it’s you know, it’s more than just emotion because we’re heart, but we’re also head. And, you know, we also are like physical.  So sometimes I mean, have you seen that heard about that study of, like, Israeli judges who, you know, they’re less forgiving in parole, you know, hearings, you know, like an hour before lunch.

Richard: You know, they tend to grant more parole when their bellies are full and less, you know, right about when it’s time to break for lunch. Literally, there are so many drivers of our decision making that people don’t really understand. And look I’m a data guy. I’m a math guy. I love the data. I love the analytics. You know, I love the numbers. At the same time the central factor in all of your decision making is you. And so I think there’s an incredible opportunity with technology today and especially how intimate technology is becoming in our lives and how much it’s with us all the time. In particular in our mobile devices and even wearables that I think there’s a huge opportunity for those people that are willing to be… Who love self-knowledge, right, and who are willing to examine themselves and want to self-actualize, let’s just say who wants to continuously improve?

Richard: I think there is a cohort of people out there that want to do that. And there’s a lot of people who have, you know, really want to be involved in the markets but have been burned. Because the markets are really tough. You know, I always tell people it’s sort of like, you’re starting out investing. And you have good intentions.  But it’s sort of like you’re walking into the MMA octagon and you haven’t even been to the gym, you know.

Richard: Not really sure what to do. And well, and not that you’re not sure what to do, but there’s lots of people out there who are sure what to do. And they are going to eat your lunch, bro. And, you know, and that’s just how the markets are set up. So, look, there’s the last mile of successful investing and speculation in all its forms is the behavioral enigma. And I think Dave Ramsey in the personal finance space has done a great job of bringing people’s attention to behavior like you says, it’s really 80 percent behavioral and 20 percent informational. And I agree with that. So that’s what I’m excited about. I am actually developing new financial technology that I call behaviorally informed. So how do we give people a user experience and interaction with the markets that not only presents, you know, the right data at the right time for you?

Richard: But also really incorporate some of the technology available to us today to help you kind of better self-assess. Get a better sense of your own risk tolerances. And really execute. You know, because that’s the biggest problem that I see individual investors have, is that we’re jumping from one thing to another.  And we don’t really self-assess. We don’t select a strategy that’s going to be a good fit for us and then execute like nobody’s business. You know, that’s what it takes to be successful. You want to know what differentiates the winners from the losers in the markets? It’s consistency.

Richard: Yeah. And people are inconsistent. You know, it’s like, oh, that didn’t work. Let me go try something else. So that didn’t work. And I’m just speaking from my own experience, you know?  I was literally, when I started investing, I was finishing up my PhD in the mathematics of uncertainty. Right. And it’s 1998. And I get in the market and I run my account up 300 percent. And, you know, I’m patting myself on the back go. And, jeez, what a brilliant guy. Must be the PhD. And then March two thousand hits, you know. And I’m literally like an expert in the theory of risk. But I’m like a deer in the headlights, man. I’m just flat footed. You know, I’m lying to myself constantly about what I’m going to do and when I’m going to do it and why I’m going to do it, you know? Well, God.

Richard: You know, I’m down twenty five percent. Well, can’t keep going down from here. You know, if it just goes back up another 10 percent, I’ll get out then. You know, I’m not going to get greedy. And then it goes back up another 10 percent. It’s like, well, that’s up 10 percent. Keep going up. Maybe I’ll not get out from here. Right. So, you know, we’re telling ourselves stories and not following the rules. You know, we’re like dust in the wind. And it doesn’t matter how smart you are, how intelligent you are, how many tools you have in front of you.

Josh: Dr. Richard, how do we start to harness the couple things you mentioned? So to start to unpack that with a couple things that I just heard, and I think that our audience is thinking is all right. So if it’s 20 percent knowledge and 80 percent behavior. Yeah. What are some tools or mindsets that allow us to harness the proper behaviors to consistently do that?

Josh: Is it taking a longer-term approach and not worrying about the day to day so much? Because we know that if we’re convinced that a certain strategy will work long term in the stock markets and the real estate markets. We know that strategy is going to work. We’ve been educated on it. We understand it. We’re convicted in it. But something bad happens in the short term. The behavior could say, I don’t want to do that anymore. But you’ve already convinced yourself that it’s going to work if you do it long term. So is that a part of that solution? If have the proper data then on execution, like so many people, analyze, analyze, analyze. Then all of a sudden, they’re ready to click the button to buy those shares of stock or they’re ready to sign the purchase agreement to buy that piece of real estate and then they freeze.

Josh: Even though the knowledge says this is the right decision, but the emotion says, I’m scared. I’m fearful. How do we get beyond that? Because behavior and fear, behavior and execution is, even when you have the knowledge then that there’s that second step, which is, like you said, that last yard, it’s that last mile. And so many people are like, oh. And then they finally do it. Then they do something wrong and then they never jump back in.

Richard:So I got a couple of answers to that question. One is, I just have to tell you about probably what I think is the biggest behavioral bias that undermines people being successful in the stock market. And probably and most all speculative, speculative activities. All right. And I’ll get to something more concrete after this. But look, it really is important to understand how you work, right? I think it’s the most important thing, actually. So two Nobel Prizes in economics have been awarded now for pointing out the fact that we hate to lose.

Richard: Daniel Kahneman, in the early 2000s, he was along with Amos Diverksey, the founder of Prospect Theory and kind of credited with the founding of behavioral finance. And then more recently in the last few years, Richard Thaler, who was Daniel Kahneman’s student, he’s at M.I.T. now and he got the Nobel Prize in economics for adding to Kahneman’s Nobel Prize work of we hate to lose. I mean, how shocking is that? You can get a Nobel Prize for that?

Josh: Wow. I hate to lose. I wish my daughter hated to lose last night at volleyball. They’re having too much fun. And they got their butts kicked. And I had to tell her. I mean, I know it’s summer sand volleyball, but you got to hate the lose.

Richard: Yeah. It’s not a problem that we hate to lose. But so here’s the rub, OK? When it comes to investing, at least. I’m not sure this applies to volleyball. But let’s talk about investing for the moment. We’ll see. So the fact that we hate to lose has different consequences for when we’re losing and when we’re winning on an investment. OK. When you are losing on an investment, when you’re down, when you’re in the red. OK, you don’t want to sell. Because selling means loss. Yes. OK. So you have a behavioral mechanism, staying you, you’re losers. OK? And you will double down. You will triple down. You will say, well, this was a short-term trade, but now it’s a long term investment.

Richard: You will rationalize to yourself why this is the right decision to stay in this loser until and this is what Richard Thaler got his Nobel Prize for. You get back to break even. So any time you hear yourself say in your little old head, I’m going to get out when I get back to break even you should get out now because you are not in the right state of mind to be successful. OK. And look, I still struggle with this today. I’m a frickin mathematics, PhD in uncertainty. I’m a 20 plus year market veteran. I’ve helped tens of thousands of investors. I’ve taught about this. I’ve lectured on it to audiences.

Richard: And it’s still hard for me today. OK. So this is simple stuff, but it’s not easy stuff. These are very powerful, you know, probably, you know, ingrained urges in us to protect us. Right. And so I’ve covered kind of what our state of mind is when we’re underwater on an investment and we don’t want to sound we want to get back to break even. Now, on the flip side, when you’re ahead on an investment, the fact that you hate to lose attaches itself to your profits. Yes. So you become attached to. You become fearful of losing your profits. What does that make you want to do? It makes you want to sell because you don’t want to lose those profits. Yes. So you don’t want to lose your profits. So you have an urge to sell.

Richard: I had the good fortune, the luck to buy Tesla, you know, on the recent market correction at like four hundred and fifteen dollars. Right. Yeah. What is it? Today it hit. It hit eighteen hundred. Yeah. I don’t know where it’s at today. I got out because I couldn’t take it anymore.

Richard: I sold it at 1650 or 1675. You know, because it was intolerable to be up 400 percent, you know, in three months. And hold on to that, you know, because I couldn’t take it for records. And, you know, I’m not complaining. Right. That was if one of the best traits of my life. You know, you’re right. But still, I could feel those powerful urges. So the way Kahneman put it and what he got the Nobel Prize for is we are risk seeking when we’re losing.

Richard: We take more risk when we’re losing. We put more money into it. We double down. We hold it for longer periods of time. OK. And we are risk averse when we’re winning. Now the markets can remain irrational longer than you can remain solvent. Have you heard that one? I have. That is John Maynard Keynes, I believe. OK. What that speaks to is that the markets have momentum. They do things that are outside of what they’re expected to do all the time. Right. So they do two, three, four or five, six, seven standard deviation events. You know, you hear Nassim Talib talking about this and they do crazy things, right?

Richard: I mean, this this corona virus correction was nuts. It was 40 percent in like three weeks. Right. And then rocketing back up, you know. That’s not what the markets are supposed to do. Best’s supposed to be statistically impossible, you know. But it’s not. That’s the way markets behave. So the fact that you are risk seeking with your losers and your risk averse with your winners, win those market, you know, outside the norm, events take place. You are, because of your psychological bias, you are in a position to be victimized by them and not to capitalize on them.

Josh: Wow, that’s powerful guy.  How are people victimized? They call it like you’re playing poker. They call it being on tilt. Right. So if you’re losing. Yeah. And you’re even losing more. And now you’re willing to take on more risk to make up for the money that you lost.

Richard: You know, people that are using their stimulus funds to trade in Robinhood. You think that’s going to end well for them? I don’t. Again, it’s like stepping into the octagon and you haven’t even been to the gym. So people need to take a step back. I’m a big fan of people engaging in the markets. That’s what I’m doing. I’m helping people to learn these lessons, you know, faster than I learn them to bring some risk management and mathematics to the table. Right. So that’s another thing we can talk about. And and then couple that with how do we leverage technology today to really help us adopt better investing behaviors? Technology is a very powerful behavior shaping asset.

Richard: Unfortunately, the ones doing most of the behavior shaping our Google and Facebook and Twitter, Instagram and the propagandists of the world. They’re shaping our behavior through technology. So how about we use technology to shape our own behavior in the directions that we want to go? That’s what I was going to ask you. And opt into ourselves, you know, instead of somebody else selecting for us.

Josh: Yes. I was going to ask you. So if you were going to give some advice to our audience or to your younger, less experienced self now that you’ve been in the markets, PHC, you know. Yeah. Working on through the cycles 20 years and you’re advising thousands, tens of thousands of clients through your technology platforms that you’ve sold off. And the ones that you’re developing now. Yeah. What is some specific advice that you think maybe two to five pieces of advice you would give your younger former self or some of our audience or some of your clients on how to more effectively be an investor today using some things you talked about technology, behavior, what are some things you could pass along and that in that way?

Richard:So you have to be risk averse with your losers and risk seeking with your winners.

Josh: I like that.

Richard: You have to invert. The state of mind that you’re in by default and that almost everybody is in. And the simplest way to do this is with a trailing stop loss. That’s how I discovered this, because in 2005, I founded a product called TradeStops.com. And it was a trailing stop loss alert service. Twenty five percent trailing stops was the most common thing that people did on the platform. And they would just, you know, hey, I bought this stock and I want to track a twenty five percent trailing stop on it. And keep track of it for me and send me an alert when my stop gets hit.

Richard: What a trailing stop does is it limits your losses. So you set a fixed level of loss that you will tolerate. Right. And then as your profit increases, that trailing stop loss will trail your profits and always be a fixed percentage, you know, below your profits. Right. So you are locking in profits. Right. And you’re setting a fixed percentage where if the loss expands beyond that, you will exit. OK. So what you’re also doing is you’re giving yourself a mechanism to let your winners go crazy, to stay in your winners longer than you ever imagined possible to achieve what I call irrational profits. Right. Right now, we take irrational losses and rational profits. It’s let’s take rational losses and irrational profits. OK. Let’s let the markets madness work in our favor instead of against us.

Richard: So, look, most of the time, you know, the way investing plays out. You have a bunch of singles, right? You have a couple doubles, you know, and when I say singles and doubles list, I’m talking about losses and winners. OK. So a single can be a lot. A single can be a gain. Right. It’s like maybe let’s say it’s a 10 percent gain rate. And then occasionally you have some 50 percent, you know, losses and gains and. Yeah. And so, you know what it takes to recover from a 90 percent loss. If you’re down 90 percent?

Josh: I don’t know the number, but I know simple math is I used to talk about this when I sold financial products. You know, if you go for one hundred dollars and take a 90 percent loss on a 10 out of 10 bucks and not get 10 bucks to back to a 100 is not only a 90 percent gain now. So 90 percent gain.

Richard:So it’s a thousand percent. Yeah. You got to have a thousand percent gain to recover from a 90 percent loss. I had a 90 percent loss. You know, I have. Right. Have you ever had a thousand percent gain? Those are darn tough to come by because we don’t allow thousand percent gains. I couldn’t endure a thousand percent gain. And Tesla. I couldn’t hold on. You know, I have 400 percent was all I could take. Why not? Why not hold on until a Tesla goes to 5000 or 10000? That’s not outside of the realm of possibility. You know. Sure. They are transforming an industry. And they are the technology leaders in an industry that’s more going more and more technologies.

Josh: And are you are you tempted to buy back in?

Richard: I am, I just think that there’s going to be a sale at a lower price, you know, sometime in the future. In the future. But look, that’s just a speculation. The bottom line is I sold. And I didn’t hold on for a thousand percent gain in Tesla. So and again, look, this is just kind of the realities of the markets and the realities of our human psychology applied to the markets. Right? So a simple trailing stop loss can be a very powerful tool to make you risk averse with your losses and risk seeking with your gains. Right. Yeah. And then I added later on, I started to incorporate volatility to do what’s called volatility budgeting and volatility-based stop losses. So, you know, a a stop loss on a Wal-Mart or Johnson and Johnson, if you want to hold that stock for a year or more.

Richard: That goes back to your question about timeframe, which that’s a great topic to talk about. You know, maybe a 12 to 15 percent stop loss on those blue-chip stocks would give you enough room to make sure you don’t get taken out by noise. And that you have a chance to get on board a significant trend. On the other hand, something like Tesla or Twitter, you might need to go like thirty five percent. Right, because those are lot more volatile stocks. And if you want to hold those stocks for. You know, a year or more there is going to be 35 percent noise in those stocks just because of the uncertainty. So getting back to my P HD, quantifying uncertainty.

Richard: How can you kind of quantify how much noise there’s going to be for a given timeframe? And you can use volatility as a proxy for risk in that regard. And that’s one of the wonderful things about the stock market and the financial markets in general, is that there’s so data rich, you know, that it’s not that hard to calculate what the historical volatility is on something like Tesla. Because you can see what it’s done over the past year and you can apply some simple math to it, like a standard deviation. And how much is this move around, up or down? One of the things you can factor that into decision making, and that’s part of the technology, the new technology that I’m developing right now.

Josh: That’s phenomenal. One of the things I talk to my audience about, because I often have investors who are in the markets and they’re trading stocks or they’re in mutual funds and they have a managed account and they want to get into real estate. And they have a loss maybe in the markets, and they’re like, well I don’t really want to sell it. Yeah, I want to wait. Like you talked about so it comes back to even. I wanna break even. Then I’ll sell it and move it over to real estate with you and we’ll get in this next apartment building or we’ll do whatever. And I often will tell them, look whoever told you that you had to make up your losses in the same exact position, the same exact stock, the same exact investment. You don’t have to make up all the money in the same thing.

Josh: I remember my dad telling me, oh, I’m up 80 percent in this one mutual fund one year of back when I was a kid. And then it was down forty five percent the next year. And my dad said I don’t sell it now. I’m down forty five percent. I said, Dad, what makes you believe that you have to make up your losses in the same exact investment? Why can’t you just move it over, buy something else that you know that you feel better about and make it up over there? So if you have a loss in one position, like you said, be a little bit more conservative with those losses, protect those losses, maybe sell them off, get rid of them, and cut your losses at a certain point. I’ve had to do that with some real estate deals, Richard, where I was then at a certain point, it was becoming over leveraged. I was over budget. I was over by time. I got screwed by a contractor.

Josh: And I’m like, you know what? Just get rid of it. Because then mentally, what it did for me and I would love for you to comment on this. I was able to exit the because you’ll have a certain amount of power, a certain amount of brain power in your brain that you could allocate to different things. When I exited that deal, it wasn’t just about the fifty thousand loss I took. It was about the mindshare that no longer had to go into that deal. And I could focus now on positive things. And we’ve been able to make that fifty thousand up, you know, tenfold or twentyfold. That to me is I don’t know why people get married to these losses? I’m going to hold onto this asset forever and then I’m going to think about it every night. I’m going to lose sleep over it. That’s the crazy part about investing that many people just won’t say, hey, I didn’t do great in this trade, but I got plenty of time. There’s always time. There’s always the next thing.

Richard: Now it’s crazy. You’re absolutely right. You’re spot on. I love that term. Mindshare. You got to think about that because it absolutely is about the mindshare that you have in your head and heart. It does stress you out. It takes a toll. And you will be risk seeking with that investment, which has already proven itself, by the way, to not be worth your time and energy. Right. And you’re going to invest more in it. And invest more time and energy into it? Instead of just letting it go? When as a business person, you can look at it and go, hey, you know this isn’t the smartest use of my money right now. So this is, you know, exactly. It’s called the sunk cost fallacy by the way. And because we have sunk cost in it.

Richard:So we don’t want to let it go. Plus, the fact that we hate to lose and we don’t. And, you know, it’s so egotistical. I mean, when you think about it, it’s just crazy. It makes no sense. I mean, there’s 10000 stocks in the US stock market. Why does one stock matter right now? And is it a personal criticism of you that you bought a stock and it went down or you bought a real estate investment and it went down? Is that a personal failure? I mean, is that somehow a judgment? Are you going to go to hell now? It’s like that’s how seriously we take it. And it’s irrational.

Josh: All those reasons that you mentioned, like I feel like a failure. I have sunk costs in it. And I think for a lot of people, the concept of money is limited. And money is not limited. In the world, the world can be as big as we want it to be. Our eco system, the money that we can use. There’s leverage that we can take in real estate deals. We can bring in other people’s money. In your world, you can get margin accounts and other dollars to use to make up those losses. It’s because people think the money that I have is a finite amount of money and that’s not how the world works. Just because I lose doesn’t mean there’s always somebody else that has to gain.  There’s always more opportunity. There’s always more dollars.

Josh: I mean, Warren Buffett made his fortune off other people’s money. Everybody knows that he started that business and didn’t put a nickel of his own money into it. Now he’s super rich because he believed that if he knew what he was doing, people would invest with him. He could use their dollars to earn a fee or joint venture with somebody or partner with somebody to make up those losses or to make another investment.

Josh: So mentally, why does so many people hang their hat on the fact that money is so limited? I only have X amount to work with and they don’t have a much bigger idea of where money goes. Money is always going to flow into good investments. There’s always joint ventures happening, partnerships happening on companies and deals. But so many think that all the money in the world is just a little bit of money that I have to trade with or to invest. That’s not the case.

Richard: We’re sadly in the United States for as successful as a society as we are, we’re criminally illiterate when it comes to finance and math. I can’t figure it out, man. How did this happen?  How can it be that in the United States of America, people can be so financially illiterate? So mathematically illiterate that you don’t understand something as simple as expected value? That you don’t understand how money works and that that we have so many messed up, you know, ideas and emotions around money. So about this time in most of my interviews, people are saying to me. Yeah. Well, Richard, tell me what I can really do. Give me something specific. You know, give me a silver bullet. Tell me a stock I can buy or a tool I can use or something. Right? Sure.

Richard: But this is the hard reality of being successful. You gotta deal with yourself. You know, you have to make sure that you’re literate. You have to understand the timeframe that you’re working on. You have to understand this is a journey and not an overnight thing. I was at a conference and investment conference early on in my life as an investor, right. And one guy got up and said, hey, you know, here’s how you can make twelve to 15 percent a year with only a few hours of work. And the next guy got up and he said, who wants to make 12 to 15 percent a year? He said, who wants to make one hundred percent a year trading options?

Richard: And then I, oK, Mr. Math PhD, said I have to wait a year to make 100 percent. Like, I want to make 100 percent in a few months. So that’s just nuts. That’s financially illiterate. And it’s coming from somebody who has a PhD in the mathematics of risk. And has had a job since I was 10 years old. I’ve been working, making mone, Paper routes, grocery stores, ice cream stores. I’m not like, I’m not stupid. And I’m not like, you know, it’s not like I’ve never been around money.

Richard: But we’re really financially illiterate. So what I’m saying is people need to invest a bit in their education. They need to slow down a little bit. They need to realize is going to take some time. And you need to find out, you know, what are these sorts of expected values of the strategies and systems that you’re going to use? You know, where are the dials that you can tune to change that around? Right. So, like, when it comes to stocks, how long do you want to hold your stocks for? I personally think that for most individuals who are going to be in the stock market, they should not even consider holding their stocks for less than one year on average. My philosophy on investing is how do I build a portfolio of 15 good uncorrelated investment ideas?

Richard: That’s what Ray Dalio called the Holy Grail of investing. 15 good uncorrelated investment ideas. Now, there’s not really a lot of tools out there that do that for people today. In fact, you know, especially for the average individual investor. Maybe, you know, for a financial advisor, you’ve got tools and you’ve got back office staff that can do that for you. But this is not out of the reach of the individual investor. And this is part of what I’m working on as my new technology. Most I think the average holding period in the markets lately is something like eight months. 10 months for a stock, right? It’s very short. So, again, it’s about how do you differentiate, how do you separate yourself from most of the participants in the markets? You know, hold your stocks for longer.

Richard: And depending on how long you wanna hold your stock for is going to be a factor in how much risk you need to be prepared to experience. Like, you don’t want to hold your stocks for at least a year or more and you’re just gonna be a buy and hold investor. You need to be okay with probably up to a 50 percent correction in your portfolio. And if you go into it with that mindset and you know that in advance, you know, you’re in a totally different psychological and emotional state for what the market throws at you. You might even be like, oh, my God, the market’s down 50 percent. That’s great.

Richard: I can buy more at half price because that’s what you set your setup for. Right. But if you’re like, you know, you put all your money into the market right now and a year from now, it’s down 50 percent. You know, you’re gonna throw in the towel at the exact wrong moment in time. Like Steve Bannon’s father did selling all his AT&T stock at the bottom of 2008 because he’s watching too much TV. And Steve Bannon went on to get pissed at his old colleagues at Goldman Sachs because they all got made whole and his dad didn’t. And that helped get Donald Trump elected.

Josh: That is phenomenal.

Richard: So that’s really what people have to deal with. And, you know, it’s kind of the hard reality that you got to deal with yourself. Just one last quick thing I would recommend to people. There’s a great talk by Warren Buffett’s partner, Charlie Munger. It’s on YouTube. It’s Charlie Munger talking to, I think, a Harvard audience about the work of Robert Cialdini on influence. Right. And kind of like the psychology of persuasion and influence. But Munger, like a great investor, applies it to himself. And this is what people have to know and deal with in today’s world. People know about those influence and persuasion strategies and they’re being used commercially against us to get us to buy things and take actions and make political decisions and judgments all the time.

Richard: If you don’t become aware of how these things work in yourself, one, you’re going to be manipulated for somebody else’s purposes. And two, you’re never going to be a successful investor because the markets will take your lunch money and more because they do know how this works, you know. And so you got to figure this out. You got to figure it out for yourself. You have to give yourself some time. You have to take steps. You know, another analogy I use often is most investors. You have to think about investing like you would think about learning to fly a plane. You know, you wouldn’t just walk out onto the runway, hop into the cockpit of a jet fighter, pull back on the stick and expect to be alive in 10 minutes.

Richard:So it’s a change of mindset, really. It’s a reframing. You know, the frames that we use that we bring to the activities of our lives really matter. And so you’ve got to make sure you have the right frame. And you’ve got to make sure you’re in the right state of mind. And that takes a little time, you know. And it’s wonderful, you know. And going back to the analogy with flying plane. It’s great to fly a plane at. Talk about liberating, freeing, you know, exhilarating, but doesn’t happen just because you get free trades on Robinhood.

Josh: Right. Yeah. Now, that’s phenomenal. There’s a great analogy. It’s interesting to see how many people that want to be a successful trader want to be a successful investor on a successful real estate investor. Yeah, but only if it happens now. And I think, yeah, look, you’re gonna be alive. Let’s say, for the next 50 years. And if instead of wanting all they have all that success right now, taking a longer term approach to your investments and taking a longer term approach to your own education knowledge and understand you’re going to learn something new that you’re seeking new advice, that you’re seeking new knowledge every single day, week, month, year.

Josh: Now, 50 years from now, you’re going to retire. I mean, doesn’t every 50 years now be very, very short term? But let’s just say it’s 50 years from now. When you die, you will die wealthy, happy with peace of mind, sleeping well at night. If you learn a little bit all the time, as opposed to saying, I bought this course, I read this book, I watched this white paper. I read this YouTube video. Where’s it all at? As opposed to the people that I know to take a long-term approaches to investing in the stock market. Long term approaches to investing in apartments. Long term approaches to investing in rental properties and tax advantages and all the stuff that comes with it. That’s really where it comes. And then you could, you know, look, lost some money today. You can still sleep well at night.

Josh: Dr. Richard, we’ve got to wrap up. This has been an amazing interview. And I’m with you. I want to encourage all of our audience to go to Dr. Richard’s Web site. It’s RichardMSmith.com. He’s coming out with a brand-new book very soon. You can get on the pre distribution list there. It’s got a ton of resources, articles and videos there as well. Please engage with them. He’s also got his own podcast to want to learn more about his investing strategies, his advice. Definitely go and check that out. The podcast is called, remind me. I’m looking at it your Web site. Understanding Investing podcast.

Richard: Understanding Investing podcast. And I think we’ve covered a lot of that today, Josh.

Josh: Yeah, absolutely. Listen, thank you so much for joining us today on Accelerated Investor. I had a blast.

Richard:Thanks for having me. Me too. Take care.

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Everyone likes to think that they’re going to outsmart the market, but only 20% of the decisions you make are based on knowledge. 80% of your decisions are based on your irrational, unpredictable behavior. So what are some tools or mindsets you can use to harness the proper behaviors to overcome that huge bias?

Dr. Richard Smith has a PhD in Systems Science, or as he likes to describe it, the mathematics of uncertainty. He knows that human behavior doesn’t act at all rationally, so he set out to build a technology that reduces the risk we create for ourselves.

The truth is, the market can remain irrational longer than you can remain solvent. So as it goes down, and then down even more, how do you protect your assets against your overwhelming urge to stay in until you break even?

Losing over 90% of the value of a stock doesn’t mean you need to regain 90% to be back where you were. It means your stock needs to go up 1,000%. And be honest, how often does that happen? Setting up some parameters can help you from your own worst enemy in risky decisions: you.

This was such a fascinating interview about risk taking, both in the stock market and in real estate. Check out Dr. Smith’s podcast Understanding Investing, or his new book for more on this topic.

What’s Inside:

  • What differentiates the winners and the losers in the market.
  • The biggest behavioral bias that undermines people’s success in the stock market.
  • The moment when people take more risks will surprise you.
  • How can we leverage technology to help us leverage better investing behavior?

Mentioned in this episode​

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