You can listen to the podcast and read the show notes here.
In this interview, I spoke with David Schneider.
Michael Light: I'm here today with David Schneider, author of The 80/20 Investor, and I know you have a new book coming out David. What's the title of that?
David Schneider: The title is not decided yet. It's probably called Index Investing Fallacies, and it's about index fund investing. By the way, thank you very much for inviting me here today. It's a pleasure talking to you.
Michael Light: Yeah. Happy to have you. It's been good knowing you for about a year now.
David Schneider: Yes, that's right. It's almost two years.
Michael Light: Two years.
David Schneider: We met in, I think, Barcelona. Didn't we meet in Barcelona?
Michael Light: Yeah.
David Schneider: So it's about two years.
Michael Light: What I wanted to talk about today was using intuition in your business, both in your investment business, but also as your work as an author. I know you did a lot of research on investing for The 80/20 Investor, so maybe you have some-
David Schneider: That's right.
Michael Light: Insights into using intuition in investment as well.
David Schneider: That's a very good question and that's a very complicated question. There are several types of investors and from my research, what I've done, let's say 2000 years back, all the successful investors used their intuition, that's for sure. They had, of course, mathematical tools at their hand, depending on the period. For example, [inaudible 00:01:48] in the Roman Empire period, or the Rothschilds during the 18th century, and the Warren Buffeters these days, they all had their mathematical tools, but, in terms of decision making, I mean, investing is about making a bet on an uncertain future, if you like it or not.
Michael Light: That sounds like what business is as well.
David Schneider: Exactly, yeah. A great part of business is making investment decisions where you allocate off of precious resources, such as your working capital, your precious time and so on. You have to make a decision, and there's no way that you can't do that without intuition, so it's a very good point and my point of view that all the successful investors in the past used their intuition as a major tool to make the important decisions in their life.
Michael Light: I completely agreed with you that it's key to use intuition in investment and in business. I'm interested in why you think that. Why can't you just do spreadsheets and figure out what to invest in?
David Schneider: That would assume that through mathematical formulas that you already know the future, and, as far as I know, it might work for a certain period of time. For example, in my last book I talked about quant investing and this group of investors are getting stronger and stronger. The problem is it will only work as long as it works, and then suddenly it doesn't, using mathematical formulas and predicting the future. Suddenly, it doesn't and then they'll lose enormous amounts of money, for example, all the money they have gained over the last five year they lose in one big, major loss. A good example is long term capital management. They used highly sophisticated mathematical formulas trying to predict the future, based on probability theory and so on. It worked for a couple of years in a row, quite successfully, and then suddenly it didn't and they lost huge amounts of money, and they almost-
Michael Light: Billions.
David Schneider: Billions, billions, and they brought the US financial systems almost to the brink of collapse, and the coincidence was that was 1998, and 2008, 10 years later, it was when Lehman finally succeeded in bringing the financial system down. Anyway, if you use a quantitative models, you assume that mathematics can predict the future, but that's not possible. Nobody knows the future, even models programmed by humans, basically. They can't predict the future accurately all the time. That's impossible. The future's always uncertain, by definition.
Michael Light: How does intuition help?
David Schneider: It's a psychological component in my point of view. A person who has no intuition, who has nothing to rely on, is lost, like a person who travels a complete new country and has no clue, doesn't speak the language, has never visited before. He's lost. But, with intuition you can somehow, first of all feel better about your decision, and second you feel more confident going forward. This first step and then the next step and so on. It's vital.
Michael Light: It sort of like gives you a GPS for where you're going with your investing.
David Schneider: Exactly, and, in my point of view, it's a huge psychological advantage if you have your intuition.
Michael Light: I know you use your intuition in picking your investments. Are there any other famous investors who are known for doing that?
David Schneider: As I said, al the famous investor are doing it from my point of view.
Michael Light: All of them?
David Schneider: Yeah. All the successful ones. Even, look at George Soros. He's a speculative trader. He bet against the Bank of England. He argues, of course, he knew everything in hindsight that what happen, but during that time where he was betting a billion dollars against the Bank of England I'm pretty sure he was also a little bit nervous, but, I think, a major advantage he had, it was his conviction and his conviction was based on his intuition that something was amiss in the financial system, at least in the currency markets. He had no way of knowing that he was right, and it was certain, but it was a bet. A good, well-calculated bet with a decisive factor; his own personal intuition. Now, coming back to Warren Buffet is the same. He has this radar, so to say. Well, we can call it intuition, that tells him he should stay away, don't touch it with a three foot pole, or he should commit billions of dollars into a deal. Again, he might called the Omaha of- The Oracle of Omaha but even he makes mistakes, but I think his guiding factor is his intuition, his personal intuition.
Michael Light: Great. Can you share a bit about how you use your intuition? How you access that if you're deciding what to invest in, or whether the invest.
David Schneider: That's a good question. It's very difficult. It depends on the situation. I mean, if I could explain it very easily then I would probably write a book myself. If you deal with an uncertainty, you can only rely on what you have experienced before, even if you have a fuzzy memory, your inner feeling whether it feels right or wrong and, if a lot of money is on the line then it is vital to have something to back you up. Now, a lot of people use data and so on, but in the end. All the data will not help you make a decision because you take responsibility for it in the end, right? So, I use intuition-
Michael Light: When you're looking at a potential investment, do you get a feeling in your stomach? Or, do you just get a knowing that it's going to be good, or that it might not be good?
David Schneider: It's difficult to answer. I think it's based on experience then. I need to trust on my experience and whether- It's a little bit like smelling a ruse. The financial market's all about deception and so on, and sometimes you see the similar patterns you have seen and you can quickly judge whether this is real, but this is not real. It's based on experience and experience, I think is a major component in terms of developing a good intuition for it.
Michael Light: I'll give you an example I had last year. There was a private investment. It was a bridge loan for a company and they were going to pay a 30% interest rate per annum. It was 15% for six months, and on paper it was the perfect invest. I'd have made 15% in six months. It was all protected by different levels of collateral. If they screwed up and they- They were getting another series of funding, and even if the didn't get that they could pay back the money, but I listened to the teleconference with the CEO and his legal advisor and it just, something felt off. It just didn't feel right, so I didn't invest. Some of my friends did invest. Unfortunately the thing went bankrupt and all the protections didn't work out, and I just knew there was something wrong with it so I didn't-
David Schneider: Yes.
Michael Light: I could have succumbed to my greed and that's one of the things that happens in investing. People often get carried away with the greed.
David Schneider: Exactly, and they don't even listen intuition, right. They completely ignore, some call it common sense sometimes, but they ignore it completely. These are these powerful cognitive biases, which I mentioned also in my last book. That reminds me of a good example, I think, Malcolm Gladwell had in his book, Blink, where there was a similar case of art fraud.
Michael Light: Yes.
David Schneider: Yeah. Do you remember?
Michael Light: I just re-read that. Tell us about that.
David Schneider: I read the book a couple of years ago, but as far as I remember it was an art dealer who offered a very rare sculpture, and a famous museum. I think it was The Getty Museum was interested in it and they hired a couple of consultants and experts on that. The technical experts, they said, “Yeah. That's an authentic statue. You should buy it.” But, then the people, the old fashioned people, the people with decades of experience, they said, “Something is wrong with that thing. I can't put my finger on it, but there's something is wrong. You should be a little bit more cautious and do more research.” At the end, the people with the decades of experience, they were right. It was a fraud. It was fake, basically, right. They couldn't exactly pin point where that fraud was, but they had that feeling, this blink. They saw it, and it was the blink, and they thought, “This is not, let's call it kosher.” It was not kosher. It was not a kosher deal. I think that's part of this intuition. An exciting topic. A very interesting topic.
Michael Light: Yeah. I mean, in that case with the museum, that was a statue that had been sold for millions of dollars.
David Schneider: Exactly, right, and there was-
Michael Light: All the paperwork looked correct, and all the experts said, “Yeah. This is all real. This is an amazing discovery.” But, really, it was a fake.
David Schneider: Yes, and they should have trusted that expert from the very beginning, right? So, at this blink moment. I think that's part of what you call, probably, intuition, right?
Michael Light: Yeah. No, that's accessing your intuition there, and the same thing with making investments. I can tell that there's something right about an investment for me, or there's something wrong and I shouldn't be going into it, and it's so easy to get carried away with the details they give you on investments.
David Schneider: Yeah, totally agree with you. I remember you told me, when we met last time, that you are a mathematician by training, and you might have heard that a group of hedge funds, these quants, these argo traders, and so on, who have autonomous trading, artificial intelligence trading. How do you feel about this? They basically claim they know the future.
Michael Light: Well, they recognize patterns in the current trading minute. I was going to say trading day, but really they're not looking through the whole day. They're just looking at-
David Schneider: A program.
Michael Light: Yeah, milliseconds. They put out price bids and then they see how other people react and they close their positions out in seconds. They don't leave them open for very long.
David Schneider: But they work without any kind of human intuition, I would say.
Michael Light: Yeah, they're using an algorithm and whatever learning they put into it to extract more value from the market in short time periods. Really, the reason that they can work is that humans can't deal in milliseconds for trading typically, so they're extracting value out that people weren't getting to before. They can go in a wrong direction, and, as you said, there's been several example where they were making money for a while, for a few years and then some unexpected black swan event happens and they're just screwed, or there's a problem with the algorithm and they all follow each other down, selling off stocks, losing money and not realizing what's gone on. It is very interesting to see that and how that compares to how a human investor reacts to a situation.
David Schneider: Yeah. Totally agree with you.
Michael Light: I mean, in some ways, investing in the market is sort of like warfare conducted in an electronic and money environment, you know?
David Schneider: Yeah, it's true. As I said last time, it has become a huge casino and in a casino it is kind of zero-sum game, so the stronger player wins against the weaker player, and in computer trading nowadays the person with the best algor or the fastest execution will ultimately win and the rest will lose, or will pay the winner basically.
Michael Light: Yeah, that's typically what happens.
David Schneider: It's a little bit discomforting, right?
Michael Light: Yeah, and it's still possible to make money investing by, you know, with both experience and intuition. It's still important to look at the numbers as well.
David Schneider: Yeah, exactly. Of course. I would like to say investing does not automatically mean stock markets, funds, and so on. Investing means really putting money into the future in order to get something back in return, and that does not have to be necessarily in stock or bonds, or mutual funds or something like this. I think, especially, as you also know, the DC communities, I think there's a bunch of really great investors because they invest in their own businesses and they have, as far as I can tell, very successful so far, and they will beat any index fund any day I would say. May I say so.
Michael Light: Yes. Often, if you have your own business, that's a much better investment than any fund you might put your money in, though it still may make sense to invest in other things just to diversify your holding because otherwise-
David Schneider: I agree.
Michael Light: You've got everything in one company, which if things don't go well, or the market changes, that may not be so good.
David Schneider: May I say something in this regard. Diversification. I'm all for diversification currency, in currencies or in asset classes, and so on. I just want to say that people are misunderstand my point of view. Diversification they say, “Okay, I have $100 today, and I need to diversify it today.” I think that's the wrong approach. You need to diversify it over time, and not at the same moment, at the same time. For example, let's you have $100 and you say, “Okay, I'll put 30 in stock, 30 in bonds, and 30 in real estate.” But in this decision they never consult-
Michael Light: Who's taking the other 10 there?
David Schneider: Yeah, but they do not even consider whether they over pay for this asset class. Do you understand?
Michael Light: Yep.
David Schneider: Rather than waiting, “Okay, at the moment I'll, today, let's say stocks are cheap. I'll buy stocks, but I'll keep the rest in cash or cold, or whatever liquid assets, and when real estate becomes cheap I will buy then. I commit 30% of my portfolio then.” [crosstalk 00:17:40] Exactly. You make use of the time and basically you make use of what the market offers to you and not the other way around, so that is very important.
Michael Light: No, that makes sense. So, I know you've written several books David.
David Schneider: Yes.
Michael Light: How did your intuition come into play in your writing.
David Schneider: It's a good question. First, I always wanted to write books and I got this- It was not intuition, but I got this inspiration through the DC community where we are both members. They encouraged me to write a book and I always had role models like Jim Rogers or Mark Mobius. Have you heard of Mark Mobius? He's one of the most famous emerging market investors, and I got this inspiration and I decided to write the books, and my intuition is, of course, to rely on the things I know best. I'm not writing about, let's say, motivation or sport's fitness, or diet or so on, because I have no background and experience in this, but I know something about investing. These books I've written are actually not the future books I really intend to write. I want to write investment books about emerging markets. For example, I go to Iran for three weeks and study the country and look out for investment opportunities along the line. I consider these books I've written so far as a base library for my readers, so to say, to understand what investing really is.
The intuition helped me, of course, to stay on the right path and not to write strange books you can find on the Amazon Kindle nowadays, where you buy a book for $3 and only what you get is 20 pages, and then probably a lot of opt ins and the kind of disclaimer text, and so, right? I think intuition is also part guidance, doing the right thing, I guess. At least, what you feel is good for you.
Michael Light: How do you access your intuition? You gave the example of your thought-
David Schneider: Yeah. Usually through contemplating. Usually through thinking, right. That is a luxury a lot of people nowadays don't have. All people want to write books, but if you write a book you need to think. You need to have ideas and if you don't have the time or not the energy to think, then it's really difficult to write actually a book, in my point of view. Now, that means I use the intuition to, first of all, I need to relax. I need to talk a walk, do some sports and then relax afterwards and then I enter a kind of- You could almost call it a kind of spiritual moment where I think about the things I've experienced. The books I've read, and so on, and it's all part of this intuition which guides me then in my book writing process. That is also in my investment process too. Essentially, it's the same. You need time to contemplate, and I think, if I remember correctly, it was Mark Aurel, the famous Roman Emperor who said, “You don't need to read so many books. You just need to read a couple of books. What is much more important is the time to contemplate about these books.” I, and you, you have that too, I guess. A lot of DC members have this luxury of having the time to contemplate a lot about matters.
Michael Light: For you, and I think this is true for me too, getting to a quiet state, going for a walk, doing something to get out of my busy mind helps-
David Schneider: That's right.
Michael Light: Me to hear my intuition better.
David Schneider: Yes.
Michael Light: Are you one of the people who you actually hear words in your head, or do you get a knowing, or do you notice things in your body?
David Schneider: I haven't thought about this yet, but I would guess more words. There are different types of people, if I can say so, but I'm more a person who feels inspired by sound, so it's probably- Not even visual. It's the sound actually, for me at least. I think it's probably more words which appear in my head. But, it's difficult to say. I'm not a scientist, of course, in this and it could be a mixture of sounds and visual images I created through reading books or something like this. It's a very complex chemical process I would say, but I would say probably from my instinct it's probably words in my head. The sound of the language.
Michael Light: There are many different-
David Schneider: The amazing thing, I'm a native German speaker, right. It doesn't happen in my native German language, but it happens in English actually.
Michael Light: Wow.
David Schneider: That's quite interesting.
Michael Light: People get there intuitive information in different ways. Some people get words, some people get images, some people just get a knowing, some people things happen in their body. Like, George Soros, famous billionaire investor, apparently, when he gets a backache, he knows it's time to sell the position. That's one of his methods.
David Schneider: I would like to have his back.
Michael Light: There you go, yes.
David Schneider: They should preserve his money.
Michael Light: I mean, that's one half of making money with investments is knowing when to sell. The other half, of course, is knowing when to buy.
David Schneider: Unfortunately, I don't have that. I don't have this physical reaction. I guess, many genius people might have that.
Michael Light: Well, we all access our intuition in different ways. There's no one right way to do it.
David Schneider: Yes.
Michael Light: That's good. Then, what about, you have an investment business.
David Schneider: Yes.
Michael Light: So, how do you use intuition there?
David Schneider: It's complicated. The good thing is I manage only my own money. That's a good thing, so I'm not owing any marketing explanations to my investors these days, but before that I could not have said that that it's based on my intuition. No investor that sells a fund or a product can tell so. I think the investors would flee like cockroaches when the light is switched on. Yeah, it's true. Nowadays, it's about a systematic process, a mathematical approach, so that the unpredictable components are erased as much as possible, right? As I said before, especially the successful investors in the past always used their intuition and so do I. Again, it's a matter of experience and what you have seen and experienced before, whether through reading or through my own experience. Look, I've been in the business since 1994, when the bond crisis happened during that year and, I think, Mexico bond crisis was also at the same time. Of course, another bond crisis in the world, a global bond crisis. 1995 was a good year, even though there was the earthquake in Japan. I think it's called the Kobe earthquake, right?
Anyway, I have a lot of experience. I've seen the different market reactions, so it's part of my intuition now. I've seen the Asian crisis 1997. I've seen [inaudible 00:25:45] blowing up in 1998 and then the Russian default crisis, and so on. It helps enormously to see the market reactions and what the headlines. I can still remember the headlines, similar headlines we have seen today. The headlines don't change actually, in a way. Just the locations change. So, a person with experience, real life experience, I think has an enormous advantage in building this intuition.
Michael Light: Yeah. It gives you a better way to understand the information. I think that is true, and maybe the intuition, in that case, is rolling up years of experience and giving you the information in a quick form.
David Schneider: Yes, yes, yes, exactly. Because, in the end, we have to make decisions, right?
Michael Light: Investing in business, it all comes down to the decisions you make.
David Schneider: Yes, and sometimes you have to make lightening fast decisions.
Michael Light: What's an example of a lightening fast decision you've made the last few years?
David Schneider: That's very easy. I remember 199- Excuse me, 2008, when Lehman collapsed, the first thing that we did is, and that's almost like an instinct. You short index funds. So, the first thing what you do is you panic. You don't know what's happening, so you need to hedge positions, your long positions of course. The first thing what you do is push the cell button, but you're not selling your own position because you're not sure what's happening to your own position. What you do is you surrogate something which is close, which is liquid and which is enormously [ambig 00:27:29], and these are usually index futures, index auctions and so on, and you sell the heck out of it as fast as quick as possible. Now, the losers, on the other hand are the index holders, because they're not fast enough to react to this situation, but every mono-trader does it. There's some black swan event, first thing they do is have their finger on the sell button on index funds and- Sorry, index futures and index options. That's the first thing. That's an intrusion, yeah. You don't know what's going on and it's just bad. Markets are going down. You need to hedge your positions. You sell. You sell futures.
Michael Light: Great. Did you hire staff in your business?
David Schneider: No. I have a, let's say, a master mind at work. I have a virtual- How do you call them?
Michael Light: Virtual assistant?
David Schneider: They are virtual assistants and so on, but most of the things, I'm completely independent now-
Michael Light: So, do you use your intuition-
David Schneider: In terms of investing.
Michael Light: Yeah, makes sense. Do you use your intuition when you're hiring a virtual assistant?
David Schneider: I think so. Sometimes you rely on recommendations, right?
Michael Light: Mm-hmm (affirmative)
David Schneider: You ask about which one you should accept, and then, I guess, again, it's your instinct. In a way, you have to make that decision instantly and there's no way that the best reference or the best CV will protect you. In the end, it's your decision, right? If you hire a virtual assistant is not as, let's say, risky as hiring a long-term partner, which commits capital, or you have to commit capital in this partnership, so I think the decision process is slightly different. If the virtual assistant doesn't work out you just fire this person.
Michael Light: Right. Whereas, [crosstalk 00:29:37] investment or business partner it's a much slower process to disengage.
David Schneider: Exactly, and that goes back to marriage then too. You want to date a little bit before you get into the wedding contract, right?
Michael Light: Yeah.
David Schneider: Marriage contract, sorry.
Michael Light: So, do you have experience seeing other people get into partnerships where they didn't pay attention to their intuition and it didn't work out, or have you done that?
David Schneider: Yes. Yes. Quite fairly, I don't even want to talk about this on this podcast right now, but I have my fair share of terrible experiences and I have to say-
Michael Light: So, no need to go into details or name any names, but did you have any inkling early on that, yeah, this was not a good idea?
David Schneider: Yeah, I should have seen it coming before, but, again, I didn't [inaudible 00:30:35] ignore my intuition, or I ignored my instincts. Maybe it was greed, maybe it was the excitement that surrounded my decision, but it was against my instincts and a lot of people, when I talk to my family or my friends at that time, they said, “Why did you do this? This is against your instincts.” So, yeah, this is a kind of cognitive bias we mentioned earlier.
Michael Light: It actually pays dividends to listen to your intuition when doing a partnership.
David Schneider: Of course. I mean, it's not a fail safe, but it's definitely something that has developed off of probably thousands of years for humans, so we should definitely listen to it, right?
Michael Light: Yeah. I think it's important people listen to it more. It's so easy to ignore it, and certainly in the United States, and I think all western countries, people are trained to ignore, you know, in school or when they're working in their first job that, like, you've got to produce the numbers to prove what you're doing and ignore any feelings you have.
David Schneider: That's a good point. That is a good point, but that's how society, or the industrial age has developed, right?
Michael Light: Mm-hmm (affirmative). Right.
David Schneider: There's no way back.
Michael Light: Well, I'm not saying throw out that rational thought, just let's add in this extra tool to make running business as stressful and to be able to make decisions and investments faster.
David Schneider: You see that the rational systems are easier to teach, right? These are models. These are mental models and so on, and they're enormously helpful. Intuition is less tangible, of course, and requires, probably, the right role models. To develop good intuition probably requires. Again, I'm not an expert on business. Of course, it's a mixture of instincts. We also have to be careful that maybe we are fooled by our intuitions sometimes, right? Which could be a covered cognitive biased. I'm also studying this right now. As an investor, you need to look at studying cognitive biases. It's called [inaudible 00:33:13] behavioral finance and so on. We need to be careful. Probably it goes in waves. There are periods where people are very distrustful of intuition, and then they reemerge, and then it changes again back to what's more rational thinking. I think these are periods in human time. I think we need to help the balance. We need to help the bias, and we need to use all the tools available in decision making, right?
Michael Light: Yeah. It's just a tool, as is analyzing numbers is just a tool, but let's use all of them together. So, you mentioned be able to tell the difference between cognitive bias and intuition. How do you do that?
David Schneider: I'm studying it. I'm not an expert in this, but I have been studying it for quite. I'll give you a quick example. If you've studied finance you might have to study also con tricks, con artists, and so on, and they may use of these human cognitive bias by appealing to the softer biases, whether it is greed, fear, gullibility, and so on, and they have mastered the game. Scams are a good example. In finance, it's a wonderful area where it is highly rewarded. If you're a good con artist, it's highly rewarded, of course.
Michael Light: Are these con artists working in merchant banks?
David Schneider: I don't want to get sued by [inaudible 00:34:56] call them con artists, but in the end, yes, they have elaborate sales schemes, of course, right? You might have read Influence, by Cialdini. It's a very famous author.
Michael Light: No, I haven't. I haven't seen that one.
David Schneider: It's quite an old printout now, and he talks about some very powerful sales techniques, which appeal to cognitive biases, of course, in order to improve sales in various industries. Very, very good book. I highly recommend. I have to re-read it again, and let me quickly Google it for you. Yeah, Influence by Cialdini, I think. Highly recommend it. Robert Cialdini. The full title, it's called The Psychology of Persuasion. Influence: The Psychology of Persuasion. Highly recommend this book. Anyway, so in finance, it's a big business, right? And sales drives the bonus pools, and so on. So, that means they have studied all the fine arts of sales techniques, including the aspects Mr Cialdini describes in his book, Influence. Then it goes into cognitive biases. In order to maximize your sales you appeal to cognitive bias of people, whether it is greed, whether it is, let's say, the grass is always greener at your neighbor's so you need to compete with your neighbors and so on, so sales people have very interesting techniques to appeal to your cognitive biases, whereas, I think that instinct or, in your case, intuition, can protect you against these things, right?
Michael Light: Mm-hmm (affirmative)
David Schneider: So where it says, “Wait a minute.” Is that really necessary? Wait a minute. That doesn't feel right, but these cognitive bias are so powerful, especially if you have one or two or three cognitive biases working towards one direction-
Michael Light: Just to clarify for people. A cognitive bias here is some deeply held belief that you have that makes you have a blind spot to what's going on. Is that right, or is it something different?
David Schneider: It's more complex than this. According to a definition- Let me quickly have a look at it. A cognitive bias is human misjudgment. We can call them human misjudgments.
Michael Light: But, it's more than an individual misjudgment. It's that you're misjudging a whole class of things.
David Schneider: That's a good question. I think, and again, I'm not an expert on this, but I feel that cognitive bias, it can apply to the individual as well as the group. For example, look at Nazi Germany. It applied to the whole population. It was a complete-
Michael Light: Complete brainwashing.
David Schneider: Brainwashing and you're not talking about the uneducated worker. It was the educated German elite which was brainwashed, and there was cognitive biases, manipulation at the finest level, of course.
Michael Light: You know, that's in some sense what happens in a bull market before it come to a bear. Everyone thinks it can only go up and they have a cognitive bias that, “Yeah. I need to invest because I'm going to lose out if I don't invest.”
David Schneider: Exactly, and these people at Wall Street. They know this of course and they appeal to these cognitive biases, right? They will present themselves as an authority, which is also- You'd make easier misjudgments if you would trust people with authority, of course, which you can see in Nazi Germany or at Wall Street. They present their university degrees, their brand names. “I work for Goldman Sachs. I have ten years work experience and I come from Harvard University.” It makes an impression on you. If you are on working class person or middle income [inaudible 00:39:14] up to the middle class and you are concerned about your retirement and so on. You follow those experts. They should know, right?
Michael Light: Mm-hmm (affirmative)
David Schneider: But they forgot then, and that is the misjudgment here, the human misjudgment is that they are not actually working for you, but they're working for their own financial incentives, which are substantial. Now, I don't want to say something against Goldman Sachs here, but it's just a very good example of it, representative of the entire industry.
Michael Light: So, how do you get around cognitive bias?
David Schneider: It's a combination of having rational thought processes in place. Mental models, so to say, and the easiest example of a mental model is probably checklist. A checklist is a wonderful little tool where you can say, like you go through the list one by one, take your time and think about it. If this checklist strongly urges you actually to stay away from this, for example, investment idea you get presented by a smooth talking sales person, then you should follow this business. It's all about risking action then, anyway, right? Mathematics, of course, helps you. For example, if you buy a real estate- A real estate investment is not that difficult if you follow simple mathematical tools you have available as a real estate investor. It's really not that difficult. If the numbers fit fit, then it's a good investment, and if the numbers don't fit and you have used this checklist in real estate investment, then it probably a bed investment. If there's fraud involved there's nothing you can do. If someone sells you a dud here, if someone sells you contaminated land, there's nothing you can do, except you probably need to be more vigorous in your due diligence. You see what I mean, right?
Michael Light: Mm-hmm (affirmative)
David Schneider: So, the simple mental models definitely helped you avoid cognitive biases, and I think, coming towards your topic of intuition, I think you'd need to listen to your intuition too, especially if it is in directions towards risk aversion, risk- Making decisions that could harm you, actually. Right?
Michael Light: Yeah, because then, if you've got this kind of gut feeling that there's something not right about it, it's good to dig into the numbers or do more due diligence, or just say no to the deal. There's many more deals out there. I think the same thing when hiring. If you have any doubt about whether this person's going to be a good fit, it's not a hell yes decision. Move on. Look for someone else.
David Schneider: Just to end with this example here. I have a wonderful example, which I read a couple of years back. It's a German fighter pilot in the Second World War. He was the most decorate, the most successful fighter pilot, ever, in the history of fighter pilots. I think he had over 300 hours. Anyway, over the years he developed this intuition of he knew when there was an enemy plane approaching. He knew it. Now, he said, “Okay, nine o'clock, there might be fighter pilots.” And his squadron looked in that direction, nine o'clock, and they couldn't see anything. The human eye could not detect anything. It was impossible, and he had excellent eye sight, of course, but not robot eyes or inhuman eyes. Just normal eye sight, but it was amazing how many times he was correct. He correctly anticipated enemy fighter pilots in the sky coming from that direction, and people said it was his intuition, right. I think he didn't develop just by talent, or by God-given talent. He developed it over many years of flying, [inaudible 00:43:18], so to say. It's a wonderful example for having developing this intuition.
Michael Light: Yeah, I think that's true in business too. Some people will come, are born with better intuition and other people can develop their intuition to be just as good or better. It's just a matter of what we focus on.
David Schneider: I guess we need to develop both. We need to develop our intuition as a backup system, and we need to make use of very easy mental models, such as, for example, a checklist model, or using simple algebra or simple mathematical models, which then can back us up in more decision making.
Michael Light: Yep. Have both of them. This guy's name was Erich Hartmann?
David Schneider: That's right. That's right, Erich Hartmann. That's right. A wonderful book actually. Highly recommend it to you.
Michael Light: Great. Anything else you want to say about intuition and business and investing?
David Schneider: I want to say that business is the ultimate form of investing. If you establish your own business, if you develop your business, you grown your business, it's the ultimate investment. In my point of view it can be, or it usually is the best investment you could ever make. Now, it does not mean it's for everybody, but in my point of view, a lot of people can establish business. It doesn't have to be a Fortune 500 business. It can be a small family business and if you do it within a family people can help you, within the family. I've studied the history of investing and most successful investment operations were actually family business operations, which then were past of to generation. A good example is the Rothschilds, which created a banking dynasty. Intuition will definitely help you, and if you get educated and if you are always having an open mind to develop new mental models, develop your intuition, then I think everybody can be, in his own rights, be a fairly successful investor and entrepreneur.
Michael Light: Well, the Rothschilds were incredibly successful, and still are.
David Schneider: Yes, of course.
Michael Light: So, that's inspirational. I like that, the way you've raised. I think developing your intuition is an investment in your skills for your business and your investments.
David Schneider: Yes.
Michael Light: One of the things I do in that is keep a decision journal, so like if I decide to invest or not invest I make a note of what my decision process was.
David Schneider: That's a wonderful idea, yes.
Michael Light: It's a bit like paper investing, where you don't actually but your money in. You try out your different methods and see what works, but you could do it on real investments and things you didn't pull the trigger on and then look back.
David Schneider: As a matter of fact, I do something similar. For each investment I do I usually write something up, a one pager. I usually write something up, either for something to invest, or for later to have something maybe I might invest at a later stage or something like is, but it gives me a very good piece of time- Piece of to remember and to get back to, I think. I think it's great idea to have something like this.
Michael Light: Yeah. Great. Well, it's been wonderful talking with yo David. I'll look forward to seeing your new book come out.
David Schneider: Yes. Thank you very much Michael.
Michael Light: How would people find you if they were interested in learning more about you?
David Schneider: They should visit nomadicinvestor.com. This is my main website and I publish my reports on this website and, as I said, I want to become an emerging market expert, so I will travel a lot of emerging markets and write about investment opportunities in these countries. If they're interested in my investor's education books, then they can also find it on my website.
Michael Light: Great.
David Schneider: Nomadicinvestor.com
Michael Light: Nomadicinvestor.com. Thanks so much. Have a great rest of your day.
David Schneider: Thank you very much Michael, and I'll see you at the next meeting, I guess.
Michael Light: Yep, sure will.
David Schneider: Have a good time in Chiang Mai. Bye bye.
Michael Light: Bye bye.