Expert Investor: Meir Statman – How To Avoid Being Eaten By A Lion

HOSTS Alec Renehan & Bryce Leske|13 December, 2017

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

The stock market can be an emotional place, and often investing decisions are made based on emotion, and sub-conscious thought, or cognitive bias, with returns not always ending well! Recognising and understanding how you think when you invest, and how to avoid emotional traps, is vitally important for long-term success. This episode we talk with Meir Statman – an expert in behavioural finance, and understanding how investors think. Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. His most recent book is “Finance for Normal People: How Investors and Markets Behave.” The questions he addresses in his research include: What are investors’ wants and how can we help investors balance them? What are investors’ cognitive and emotional shortcuts and how can we help them overcome cognitive and emotional errors? How are wants, shortcuts and errors reflected in choices of saving, spending, and portfolio construction? How are they reflected in asset pricing and market efficiency? In this episode you will learn: • The difference between a rose, a watch and a stock • The major cognitive bias that investors fall victim to, and how to avoid them to improve your investing • How to make sure you’re not eaten by the lions of the market • What the ‘greater fool’ means, and how you can take advantage in your investing Stocks and resources discussed: • Finance for Normal People: How Investors and Markets


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Bryce: [00:01:25] Equity Mates Equity Mates Episode number 26 is a podcast that breaks down the world of investing to make it easier for you guys. And as always, I'm joined here bright and early on a Saturday morning with my equity buddy, Ren. How are you going? [00:01:41][16.4]

Alec: [00:01:42] I'm very good. Bryce very glad to be with you on a Saturday morning and excited for this interview. We're bringing everyone. [00:01:48][6.1]

Bryce: [00:01:48] This is our first international guest. [00:01:50][1.6]

Alec: [00:01:50] Well, Toby Carlyle last week, he is living in America, but he is from Australia. So this is our first international guest that has no connexion to Australia. I guess you could say. [00:02:00][10.0]

Bryce: [00:02:02] Meir Statman was his name and he is behavioural finance. Professor Statman is the Glenn Klimek, professor of finance at Santa Clara University in the United States. His research focuses on behavioural finance. He attempts to understand how investors and managers make financial decisions and how these decisions are reflected in financial markets. One of his most recent book is Finance for Normal People How Investors and Markets Behave. And you've read that or parts of it, haven't you, Ren? [00:02:32][30.3]

Alec: [00:02:32] Yeah, I started it for the interview. I haven't finished it yet, but if it was a good it was a good read from what I've read. So to give everyone the broader picture. Richard Thaler just won the Nobel Prise in economics for his work in behavioural economics. And essentially what that has done is the traditional field of economics assumed everyone was rational and consumers choices were always made to maximise their utility, which is usually maximise the amount of money they have. What Richard Thaler and some other people, including sort of Danny Kahneman, Ivan Tversky, some of the work they did was recognise that people aren't always rational and don't always make the decisions that maximise their economic utility. And so they applied psychology to economics and they've done some really interesting experiments. And two of them won Nobel Prises for economics, Thaler and Kahneman. Tversky probably would have as well. But you can't win a Nobel prise for human life after you die. However, you say that word. Mia has taken a lot of that work that they've done on applying psychology to economics, and he's applied it to markets and to finance. And so he looks at how investors make decisions because traditional financial models and studies of finance have assumed that investors are always rational and will always make the decision to maximise their economic utility, i.e. make the most money in the market. But what media talks about and what his book is really good at explaining is that in fact, there are a number of different drivers of investors behaviour in the market. He applies the sort of psychological principles to investing. And so it's a good way to sort of check how you think, check your own biases. You give some advice and some tips to analyse your own thinking and to maybe make yourself a better investor. [00:04:30][117.3]

Bryce: [00:06:11] Yeah. Without further ado, here's Meir Statman on behavioural finance. In a video we saw of you, you thought that it was ridiculous that people in finance thought financial products were unique and different to products like roses and watches to the beginner investor. This seems like there is a stark difference between these two. But can you elaborate on what you mean by this? [00:06:38][26.5]

Meir: [00:06:38] Yes. So when you think about roses, roses have no utilitarian benefits. You cannot eat them, you cannot drink them. Your beloved cannot eat or drink them. But of course, roses have a lot of expressive and emotional benefits. With a rose, you say to your beloved, I love you with a rose. You say, I am a thoughtful man. You'll do well to marry me. Now, when you think about watches again, like all products, it has utilitarian, expressive and emotional benefits, of course, and like roses, which is have utilitarian benefits. They show you the time. But a ten dollar watch shows you the same time as a 100 thousand dollar watch. So why is it that people buy 100000 dollar watches? They are not stupid, they are not irrational. They are using that to enjoy the expressive benefits of that. They can afford to buy an expensive watch, impress others perhaps, and that pride they have in themselves, being able to have earned enough money to buy those kinds of flushes. Well, the same applies to to securities, to stocks, to bonds, to other investments. They have utilitarian benefits if we save money and invested in stocks or bonds, will have money to spend in retirement. But think also of the expressive and emotional they give you today, not just in retirement. Today, when you are twenty five or twenty six, you have that sense of security, of well-being that you will have money to retire on and that you're on your way, that you don't have a money if you want to get married and buy a place to live and so on. And so there are many insights that we lose when we think about financial products and services as being entirely unique. And unlike roses or watches, [00:09:01][142.5]

Alec: [00:09:01] your field of study is behavioural finance. Many listeners will know that Richard Thaler just won the Nobel Prise for economics for his work on behavioural economics. Is behavioural finance similar and an offshoot of this work, or is it something completely different? [00:09:18][16.3]

Meir: [00:09:18] Oh, it is. It is not an offshoot. It really developed in parallel with behavioural finance. I was introduced to the topic by by my colleague and friend, her shefrin. And Hirsche worked with Thaler when they were both at the University of Rochester. And so the difference between economics and financial economics is that financial economics, of course, focuses on issues that relate to financial choices, whereas economics is broader than that, it can apply to issues such as labour, economics or health economics and so on. So they they developed in parallel. My own interest is, of course, in the financial economics and behavioural finance is my thing. [00:10:12][54.0]

Alec: [00:10:13] I am. I was reading your book, Finance for Normal People, and you talked about how your part of the second wave of behavioural finance. And I found that really interesting, the change that has happened. So can you explain what happened between the first wave in the second wave? [00:10:29][15.9]

Meir: [00:10:29] Yes, I think that the notion of of the second wave of the second generation of behavioural finance is not a well accepted. Now, it is really something that I try to promote. And my sense is that with behavioural economics and finance, we moved away from rational people who consider, for example, only utilitarian benefits of their investments and not expressive and emotional ones. We we moved to describe people as irrational people who are not only are not computer like as in the rational people of standard finance, but they are people who are erratic still. And if they make mistakes, they may make those mistakes, cognitive and emotional mistakes, they they make them a persistently, consistently. I think that we have missed the people in the middle, people like me, people like you, people like your listeners, people who are normal, normal people are not stupid. Normal people are generally smart, but sometimes we are stupid. Normal people are generally knowledgeable, but sometimes we are ignorant. But we can convert ourselves into knowledgeable and smart people when we when we learn. And so what is important in the second generation of behavioural finance is to begin with what it is that people want before we conclude that their actions are irrational or stupid. For example, if you think of people who trade a lot for one reason they trade is because they are stupid. They are ignorant of that, that the more you trade, the more likely you are going to lose. Another is that very much like video games, some people just enjoy the activity of trading. And so it is important to educate people and say, listen, trading is going to cost you money, but then golf is going to cost you money, too. Are you sure that you are getting enjoyment out of trading? If the answer is yes, you know how much it costs. You suppose that you tell them that is going to cost them five thousand dollars a year. And if they say fine, that's worth it. I pay more for golf. Then then fine. But but if it is ignorant that got them into it, then of course we hope that they're going to learn and stop being stupid. [00:13:17][168.2]

Bryce: [00:13:18] Given your background, you might be best placed to answer the age old question for us than markets efficient. [00:13:25][7.1]

Meir: [00:13:26] Well, OK, so the answer unfortunately is not in one sentence. But but if I had to say one sentence is that for individual investors it is useful to think about the market as being efficient. Period. What it means for for me and for you and for your listeners is don't try to beat the market. Stay away from any advice that says pick these stocks or those pick this active mutual fund or that because you are going to be at the losing end. And when I say losing end, I'm not suggesting that people will actually lose money, but rather they will come behind people who just put their money in index fund and just buy and hold and eventually use the money for for retirement or to buy a house or whatever it is for. And so the the answer for for people like us, meaning individuals and mature, is to to stay away from it tends to be the market that is you have to understand the psychology of the markets. There are predators and they are prey. The predators are professionals. They have unique information that is not available to you. It is not something that you will read in the newspaper or hear on television. They have a deep understanding of the industry they are covering and so on. And they trade with people who are in fact the prey. And remember, in every trade there is an idiot. And if you don't know who it is, you ask yourself whenever you are about to trade, who is the idiot on the other side of the trade? Or using another analogy, realise that trading is like playing tennis not against the wall, but against an opponent on the other side who you've never met before and you don't recognise and you don't know the skills off. And so it might well be Djokovic on the other side and winning are not fifty fifty. I get into a game when it is not just for fun. Let's say that that it is one hundred thousand dollars that go from the loser to the winner. Well, it's very clear that you are going to be losing that money. And unless it is worth for you one hundred thousand dollars to play with Djokovic, you lose to Djokovic. Don't do it. It would be [00:16:05][158.3]

Alec: [00:16:05] it would be a great tennis game. Could be over very quickly if I was playing. It's interesting that you talk about that, how investors don't they think about competing against the market rather than competing against. A trader on the other side of that trade and in your book, you talk about how that's a framing error and that's a very common sort of cognitive bias that a lot of investors and traders have from your studies and your research. What's one thing that you think more investors should understand or what's a common thing that a lot of investors are currently getting wrong? [00:16:37][32.1]

Meir: [00:16:38] Well, so people know that they have to save money. People know that they have to calibrate their spending. It is really on the investment side that people tend to make mistakes and and those mistakes begin, for example, not understanding the proper analogy between trading and say, say, playing tennis against the wall or against an opponent on the other side. And so the first thing is to is to recognise the kinds of cognitive errors that you are likely to encounter and even before that, to know that the investment part is really very, very simple. If you follow me and frankly, if you follow academic economists, they will tell you it's very easy for us. You you stay away from individual stocks or bonds. Second, you stay away from any active fund, any fund that promises to beat the market. So you are left with index funds amongst them. Choose only the very well diversified funds that have poor Americans. They have have American stocks, a total stock market for Australians, the equivalent of Australian funds, and then and then have an international fund. My international fund includes Australian stocks. Yours is likely to include American stocks and that. And so in this sense, you already have with two funds with the lowest cost and mine are in the range of four basis points or six basis points. You cover stocks and there are index funds for bonds as well. And that is it. You know, that is it. And so the rest of it really is is to understand the kind of temptations and misperceptions and errors that get in the way and how to avoid them. [00:18:36][118.0]

Bryce: [00:18:36] Can you give us an example of some of those cognitive errors that we may come across? [00:18:41][4.5]

Meir: [00:18:42] Well, one I mentioned before we talked about that this is is framing. So you have to get the framing right again as tennis against an opponent on the other side. Now, another one is is overconfidence. That is, even people who understand that playing tennis against somebody on the other side are really overconfident in their ability to beat their opponent. So they look at their opponent and he or she looks a kind of weak and inexperienced and they say this is no big deal, but of course, they might be wrong. And another one is, is hindsight. That is people look back, for example, at a stock that has done really well or a mutual fund money manager has done very well. And they say, I just knew it. I just knew it. And people look back at 2007 and they say, I just had a hunch in 2007, it is time to get out of the market. But if you ask them to write in permanent ink their hunches about the future, you will find that their knowledge is zero. Not only are individual investors have zero foresight, professionals have zero foresight. It's embarrassing to see what Wall Street strategists forecasted in 2007 about what will happen in 2008. They had no clue. And so don't try to time the market, don't they not only don't have hunches, but also stay away from this notion that you are going to be a contrarian, because in every market, half the people think is going to go up and half the people think is going to go down. Nobody it you'll never have a situation where everybody is exuberant or everybody is fearful. And so the thing really is to control your own exuberance in your own fear that is going to drive you out of the market or into the market, injuring yourself. Just be steady. [00:21:03][141.1]

Alec: [00:21:04] It's good advice. I guess it's it's a lot easier said than done. [00:21:07][2.9]

Alec: [00:23:00] So from your study of traders and of markets, have you seen or have you got any advice for our listeners on how they can sort of recognise and overcome those cognitive biases? [00:23:13][13.0]

Meir: [00:23:14] Well, remember, I'm not smarter than you or your listeners, and I've learnt debateable. Yeah, well, you know, it is a matter of of learning. And so first, you know, I don't really have to understand precisely what goes on inside my body to know that it is better to have my foot mostly in fruits and vegetables rather than in steaks and in bread. And I trust experts who know that. And I take just the rule and I try to minimise sweets and then maximise the fruits and vegetables. The same applies in investments. You don't have to understand the intricacies of stocks and bonds. In fact, this really is one of the most misleading legends lies that you hear. First, I have to understand how stocks are and bonds are blah blah nonsense. OK, all you need to do is to follow the recipe, to follow the prescription, very much like you follow a physician's prescription. I gave you that prescription before. Now, if you want to delve deeper into it and understand why something that is so obvious is so difficult for people to grasp, then you get into the questions of cognitive and emotional errors. And so if you need to understand that debt can help you in times of crisis, that is if when you are afraid that you want to sell your stocks, if you just pause and ask yourself, who is the idiot on the other side of the trade, then perhaps it will stop you from doing something rash. And so in this sense, it is useful. But in terms of what you should do, simple is best. [00:25:20][125.5]

Alec: [00:25:21] If we can go back to something else that you touched on earlier in the interview and something that you write about in your book, you talk about the three different types of sort of benefits you get from investments so utilitarian, expressive and emotional. And I thought it was interesting that this week we saw Leonardo da Vinci painting go for four hundred and fifty million dollars. So that was clearly a lot of expressive and emotional benefits in that price, you would imagine. Can you just step through what each of those are and maybe how we, as you know, individual investors can sort of watch for what's actually motivating us and, you know, try and correct for that? [00:26:03][42.2]

Meir: [00:26:03] Sure. First, I have to disclose that I'm not the buyer. Second, think about what money is for many times we just say, well, we are in the business of getting the most money if you. Investors, what do you want from your investments that will say profits, but what are profits for? Well, think about it. Profits are amongst these four to prevent you from being poor. And so and so it gives you not being poor, has utilitarian, expressive and emotional benefits. Not being poor means that you don't have to put back some items that you just put on the counter at the supermarket because you cannot afford them. It means that you have the peace of mind, that you will not have to be dependent on your children. And so you have the pride that comes in being financially independent, able to help your kids rather than be helped by them. And that sense of of expressing yourself as somebody who is a somebody who who is who is not somebody who is in the gutter. We also want to be rich and and hope for riches. Of course, we buy lottery tickets and lottery tickets have minuscule utilitarian benefits. You know, people in finance will tell you that that it is stupid to buy a lottery ticket. And yet I bought lottery tickets and you might have and many of your of your listeners have. And there's nothing stupid about it unless you put big chunks of your money in it, because a lottery ticket gives you expressive benefits of being a player with the chance of winning. It gives you the emotional benefits of hope, of winning. And of course, you have that minuscule chance of actually winning and having the utilitarian benefit of all of that money. After all, somebody wins. And why why couldn't it be you? And so what what you need to do is really figure out what it is that you want and then go about it in a knowledgeable and smart way. That is, if you buy a lottery ticket and for for a dollar or five, every so often it gives you hope for an entire week before you find out that you lost again. And that is OK. But of course, you don't want to overdo it. The same thing. You know, that is what else is money for? Well, it is for raising kids. For some people it is for starters. You know, this is what hedge funds are for. You can brag about your riches without appearing to brag. Some people want to express their values, their social responsibility through through investments. And so these are some of many ones that can be satisfied then all of those carry utilitarian, expressive and emotional benefits. [00:29:26][203.0]

Bryce: [00:29:27] So let's just go back. Can you just give us a bit of an idea? Have you always been interested in this field of research? You know, what got you interested in in researching the markets and the behaviour of investors and whether it'll start? [00:29:40][12.9]

Meir: [00:29:40] Well, like all people are, as you grow up as when you're a kid, you're trying to make sense of behaviour or your own behaviour and the behaviour of others. What elicits admiration and what elicits rebuke, what makes you tick and what makes other people tick for me. And the interest at some point, as I was as I was doing my high school work and as I was later on serving in the Army, and I got exposed to to economics and found that fascinating. And so I took economics and statistics as my major is at the university. And I could see that while I followed the norm of of working with models of rational people and so on, that this that this really had some some major flaws in the sense that it did not have much fidelity to what people actually do now. One one anecdote is that, of course, Daniel Kahneman and Amos Tversky are really laid the foundation for behavioural economics and finance. And when I was a student at the Hebrew University of Jerusalem study in one building, they were in the adjacent building doing their work. And I had no idea anything about. Work, I would step into this building from time to time to participate in experiments to earn some pocket money as students do. But I had no idea of what they are doing. It tells you something about the distance between economics and psychology at that time. But but once I got to know their work, my eyes open because I could see that that they offered the bridge and they offer the way to to really reconcile contradictions between theory and evidence. Theory says people don't care about evidence. Evidence says they care about it a lot. So why and this really is is how things develop. And once you you see that, you see stuff all around you. In fact, I serve as my own laboratory. That is, I observe my own behaviour. And I find it funny in the sense that it's not rational. But then I try to make sense of it and I try to see whether this is just me or whether this is common to people more generally. [00:32:28][168.3]

Alec: [00:32:29] When you were at university and kind of an interest to you were there, did you get to work with them at all? No, no. [00:32:37][8.0]

Meir: [00:32:39] Nothing about them. I knew absolutely nothing about that. I didn't know their names. I really it was it's just just inconceivable now how much distance there was between economics and psychology at the time. And so there were things going it to me. That is, I could you know, I remember a class in sociology where where I did topic. One of the topics was about Stacho seeking, and I found that really fascinating. I could see how it relates to money. In fact, it was one of those examples had to do with paintings. That is why is it that somebody is going to pay millions for a painting when a 20 dollar poster is going to cover the same portion of the wall and perhaps and perhaps more? In fact, I, I painted a few paintings, you know, with with many colours and straight lines. And I use it as an illustration to say, you know, a painting is is to bring some life to to a room and be enjoyable. But of course, a painting is also about a status. And so if I step into a room and off of a money manager and I did and see a Picasso on the wall, and I know that that money manager must have made a good amount of money, how he did that well and probably found enough idiots that would invest with him. But he shows he shows to himself and he shows to his guests how successful he has been. And I understand it. You know, I find it ludicrous, but I understand that. But actually, I don't even find that ludicrous because I have a nice wall, some paintings that I paid several thousands, not very many thousands of dollars. And that is and the same can be applied to me. That is. Why didn't you just buy a twenty dollar poster? [00:34:50][131.0]

Alec: [00:34:51] Yeah. So I find it really fascinating how you you when you started your academic career psychology and finance and economics was such separate and you saying them combined, what was there a lot of resistance at first when these ideas of psychology were starting to be applied to markets and to investors? [00:35:13][22.2]

Meir: [00:35:15] Yeah, I love we were not physically assaulted, but pretty close to that. That is in her shefrin and I had had really the first paper on behavioural finance before it was called Behavioural Finance in a top journal published in 1984. And and only in the years since I had learnt the kinds of struggles that went on. The the reviewer was somebody who is very, very well known. I don't really want to mention the name. And he and he praised it so much that the editors found it impossible to turn it down. But but I later heard that a number of people protested and said that that if. That journal publishes this paper that will never, ever submit the paper to this journal. In fact, when in 1985, there was a conference at the University of Chicago, a kind of pitting standard and behavioural, and in Merton Miller, a Nobel PRISE winner, and really his paper was was a direct attempt to repudiate are not just that particular paper that I mentioned, but but this entire entire field. And another famous person called it called Behavioural Economics and Finance, The Twilight Zone. So so we had we have that and, you know, of course and even then, it was a badge of honour. And that, of course, it means that we are not just adding a brick to a wall that is already there, that we are building another kind of wall, a wall that really serves a purpose that is not being served before. [00:37:26][130.8]

Alec: [00:37:27] The follow up to that has to be in that intervening period. Richard Thaler's won a Nobel prise and then Hardiman's won a Nobel prise. Do you still see the resistance to today's ideas and applying psychology to markets and investing [00:37:42][15.3]

Meir: [00:37:43] some you know, some people in in academia in a still is still resistant, but it is really fading. You know, they say that science develops funeral by funeral. There are there are people who will never change. And so you just you just passed them by. But but today there will not be be an issue when you submit a paper on behavioural finance to to any journal talk or Madley, it is just going to be judged as any other paper based on the evidence. And if it is persuasive, it will be accepted and published. [00:38:28][44.9]

Bryce: [00:38:29] So since you began your research into now, the advancing technology has been significant and it's allowing access to the markets for, you know, our generation, particularly an easier way of doing so. And there's also a big shift happening towards sort of passive forms of investing. And so I'm just wondering if you're starting to see new behavioural trends emerge that previously either didn't exist or were unrecognised and other sort of cognitive biases that are particular for certain age groups and identifiable for certain age groups or they applied across the board? [00:39:07][37.4]

Meir: [00:39:08] Well, you know, technology is a wonderful thing. And, of course, you can use it for good or for ill. And so if people use technology to trade more individual investors, that is bad and that is giving them a gun so they can shoot themselves. And so you have to be really careful with that. That is, in the old days, one had to call the broker and talk with the broker and place the order and and so on. Today you can just click and your order is executed and then you feel like selling it and buying something else. And you can do that a second later. So that is a danger. Some of the above. But you can use it. Well, that is the cost, for example, off of funds. The cost of index funds, for example, has come down a lot since the save the 80s and the 90s. Now it is it is almost free when you pay three or four basis points a year. That is that is free. And so it is really important for you to understand the nature of the game. And there are high frequency traders. They use technology very much. They trade really, really fast. They make money. And who do you think are the people on the other side who are trading against them? Idiots, people who think that they can beat the fastest runners, even though they can hardly run 100 yards in a minute, you know, so so it is it is important for people to understand, again, that that technology means that you have better technology, but they have better technology as well. And so I don't think the technology is giving you an advantage unless you figure out that it does not give an advantage to the people on the other side. Used technology to again. Big index funds diversify and buy and hold until you actually need the money. [00:41:25][137.6]

Alec: [00:41:26] I guess a key trend that we've seen with the advances in technology recently has been the massive advances in algorithms, algorithmic and quantitative trading. Now, obviously, computers aren't subject to the same cognitive bias as humans are. So do you think that these algorithms and traders will win out over human traders in the long term just because they will always be perfectly rational and always maximise their utilitarian benefit? [00:41:57][30.7]

Meir: [00:41:58] Well, remember that behind those algorithms, there are people and those people applying to make the most money. They're trying to beat the market. And so and so the fact is that that, yes, those algorithms are getting faster, but then they are contrary algorithms as well. In other words, imagine that there are no people involved. It is just one computer competing against another computer. Well, one computer is going to be slower. One computer is going to have an algorithm that is not as good. And so that person that the computer is going to lose or rather that person behind that computer is going to lose. And so the issue, you know, technology, again, you know, if you if you think about about surgery, tik-tok developing in surgery means that, say, now a 95 percent of people who undergo heart surgery get better, whereas before it might have been 70 percent. But but that is because the human body, of course, is not trying to compete with the surgeon and move the heart from left to right just to spite that. But the analogy of the surgeon does not apply to the markets again, because you always are competing against somebody on the other side. That is the equivalent of your body moving the heart from from left to right. And so in this particular case, technology does not give you an edge. [00:43:41][102.9]

Bryce: [00:43:42] Stay on the theme of technology based on all the experience and research you've done. What is this? Is Bitcoin doing to human behaviour and rationality? Like what? Can you tell us what your read on all of this is? [00:43:55][13.7]

Meir: [00:43:56] Well, you know, if somebody asked me, so what is the fundamental value of a Bitcoin? Well, there's no fundamental value. It is it is simply a creation out of nothing. It is really a pure bet. A technology underlying it eventually is going to be very, very useful in transfers of money and banks are going to be very, very good users of it and will all benefit. But the speculation in buying yet or selling it is is madness. And it does not mean that people who buy it for 5000 dollars will not be able to sell it for ten thousand dollars. It is like like moving light to a match from finger to finger. Eventually it is going to burn somebody. [00:44:46][50.3]

Alec: [00:44:47] So are you noticing any sort of massive cognitive biases in in this Bitcoin trading or is it is, you know, like a herd mentality that that everyone is sort of piling in just because everyone else is? Or what are we saying? [00:45:02][15.2]

Meir: [00:45:03] Well, you know, when when you when you look at people who are just new to it, they don't understand, for example, the analogy of tennis in trading. They they it's fine. It is new. It is exciting. And, you know, I was talking with with with an undergraduate student who was very much into it. And they and so he has no idea about it other than that it has gone up and he bought it and God helped and it went up there. I don't know, it might have gone down since. But it is it is kind of the sense that it is a game and it's a game of skill. And if you know when to get in and when to get out, you're going to make a pile of money. And the thing really is that that many people do really stupid things and and eventually succeed. And that is kind of discouraging. You know, that that is if you if you want to try and right. And you turn the wheel left, you're going to get yourself into an accident. But sometimes you buy Bitcoin, which is a stupid thing to do. And then. To a triple and quadruple your money, and of course, people are going to say that's because I'm smart and I say this because you're lucky. [00:46:26][82.9]

Bryce: [00:46:27] Yeah. Are you in on the bitcoin? [00:46:28][1.0]

Meir: [00:46:32] I is it is it is really. I stay away from those like imagine. [00:46:37][5.6]

Alec: [00:46:40] So I read an article that you wrote in the Wall Street Journal about financial literacy, and one thing particular jumped out at me. You talked about the informational asymmetry between professional traders and non-professional traders, and you said because of this asymmetry, non-professional traders will always lose. So does this mean that we just shouldn't bother investing ourselves? [00:47:02][22.0]

Meir: [00:47:03] Well, again, it is not it is not a matter of not investing. It is a matter of protecting yourself as you go into this goal that we call financial markets. That is, you can protect yourself very easily. I'm sorry to repeat myself by buying index funds. And I am alone and that is it. But but but you have to to realise that every time you step into the market to try to switch because you think that that this stock or that stock at that market is going to do better than the other, it really is equivalent of the gazelle wandering into the hunting ground of the lion. And and so a gazelle is, of course, are smart enough to stay away from the from the lion and the and I think that if investors learnt the same thing, they can munch on the grass, they can get pretty good returns from index funds without becoming the prey of the lions of the market. [00:48:17][74.5]

Bryce: [00:48:18] We like to end our interviews with three questions that we ask all of our guests. But before we do so, we also just like to give you the opportunity to tell our listeners where they can find you on any social media or if they want to look further into your work. Do you have any books or. I know you write for The Wall Street Journal. So if you just want to give our listeners somewhere where they can find more about you. [00:48:42][23.7]

Meir: [00:48:42] Well, of course, the book and my recent book that you mentioned is Finance for Normal People. It was published recently by Oxford University Press. It is not a book of advice about this. I think that it is one that will, I think, guide people, write and open their eyes as to the kinds of policies they like likely to find in markets and how to avoid them if people put my name in a Google or another search engine. The first item that should come is my website at the university. And so you can look at that and you can then follow by looking at what what has been mentioned in the last week or the last month. And you will get a sense of the new work that I am putting out. [00:49:47][64.3]

Alec: [00:49:47] I've started writing your book, Finance for Normal People, and I can attest it's it's fascinating to read and I definitely see some of the cognitive errors in my own thinking. So it's it's been Eye-Opening for me. Well, the first question of our final three is what book or books do you consider must read? [00:50:06][18.8]

Meir: [00:50:07] Well, let me do it in the negative. Don't buy any investment book that is anything that that purports to offer you a way to beat the market, you know, trading strategies, options, futures and so on. Stay away from it like the plague. So in a way, what you need to do, again, I'm repeating myself, is it's the rules of investing and well diversified portfolio of index funds. And if you want to understand why such simple lessons take so long to get through to people, then you can read my book. [00:50:50][43.1]

Bryce: [00:50:53] So do you have a go to source for investing or financial information? How do you how do you like to keep on top of the rest of the world of finance? [00:51:01][8.7]

Meir: [00:51:02] Well, you know, I read I read The New York Times. I read the business section. You cannot really avoid hearing where the market is gone today and and even opinions about where it. Is going to go tomorrow now, you know. Of course, I have direct interest in it because if the market goes up, it means that I am richer and if it goes down, it means that I am poorer. And, of course, that that matters to me. But I know that that it is luck that moves it up and luck in terms of my abilities, that it is all in the hand in the hands of of the gods of the market moving things up or down. So I keep myself, of course, informed about financial issues, but I do that really is a professor of finance. As somebody who is deeply interested in those issues rather than as an investor, was trying to figure out what investment to choose next. [00:52:05][63.3]

Alec: [00:52:06] All right. Now, last question of our final three. What advice now this can be investing or otherwise, would you give your younger self when you were just starting out as an investor and a research and behavioural researcher in behavioural finance? [00:52:19][12.9]

Meir: [00:52:20] Well, you know, it. You have to learn to forgive yourself as you begin, whether it is riding a bike or investing, you'll make mistakes and you're going to bruise some ankles. And so you'll have to forgive yourself, but you'll have to learn as fast as you can to avoid those kinds of mistakes. And so I know it's tempting to listen to somebody who says that there is a surefire way to to triple your money at all. But you have to remember that, that the cliche advice is good, that is saved. First of all, invest in yourself, get education, get the job that that is is right for you, save some of the money that that you earn, but don't become a stingy and dad and, you know, just just just do the usual stuff. Fine. Find the spouse is going to it's going to be, you know, like, like, like my wife and me. We are going to be celebrating in two years. We are going to be celebrating our fiftieth anniversary and and, you know, just just let all the other things just slide, leaving them leaving them alone. You know, your your listeners, of course, are young, but old people have a problem not of saving, but learning to spend the amount that they have saved because they have become so enamoured with saving and so used to saving that they forget that the money is there to enjoy. [00:54:01][100.6]

Bryce: [00:54:01] Fantastic. That's some really good advice. We'll wrap up there, man. And we really appreciate you coming on. I mean, one of the big underlying takeaways for me out of this whole interview was, you know, buy paintings and bitcoins. [00:54:14][12.2]

Meir: [00:54:17] I have I'm happy you can summarise it [00:54:20][2.7]

Bryce: [00:54:22] is really good. Some great advice there on protecting yourself. And I'm not trying to beat the market. You know, we're not sure if you play Djokovic on the other side of the court. The likelihood of winning is very low, especially from Afterpay and Alec anyway. And I'm sure for our listeners. So we really appreciate you coming and giving us your time. And, you know, we've been following you on on The Wall Street Journal and you've definitely got some great ideas to contribute and help us on our investing journey. So once again, really appreciate it. And thanks for coming on. [00:54:55][32.9]

Meir: [00:54:55] Thanks to both of you. It was enjoyable for me as well. [00:54:58][2.5]

Speaker 6: [00:54:59] Equity Mates and the people appearing in this programme may have positions in the companies mentioned. This is general advice for me. Please speak to a financial professional to understand how they pertain to your individual situation. [00:54:59][0.0]


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