In one sentence: Danielle and Phil, during the stressful week of the 2020 US election, argue that you should invest only in businesses you love and understand (Li Lu's "self-discovery"), pace yourself like an athlete returning from injury, and look after your mind so emotions don't take over.
Key ideas
- Pacing as a practice. Danielle, recovering from long COVID, says that doing a little but not too much applies to investing too: don't burn out, and don't do so much today that you can't pick it up next week. Longevity beats intensity. [02:00–05:00]
- Pushing too hard in investing means buying something you aren't ready to buy. Wanting to own something just to own something is the dangerous version. [06:00–07:30]
- The fun meter. Phil says to watch whether you are enjoying the work, especially at the start. Spend your time on companies you enjoy, and save the dull industries for when your knowledge makes them interesting. [08:00–10:30]
- Li Lu: investing is self-discovery. Li Lu (a long-term compounder who also manages money for Munger) says to find what you love and magnify it. [10:00–12:00]
- "Do I want to go on this ride?" Owning a company means living with its ups and downs. A useful test is whether you'd want ten times more of what it makes in the world. [11:30–13:30]
- Neutral is a danger zone. A company that merely meets the criteria but doesn't interest you (Danielle's example is Seritage) is work, and when the price falls you won't have the conviction to buy more, and you'll doubt the analysis. Phil says neutrality leads outside your circle of competence. [14:00–24:00]
- Four boxes. Danielle's matrix: companies you don't like that fail the criteria, companies you like that fail the criteria (Tesla for many listeners), companies you're neutral on that pass, and companies you love that pass. Only the last is the target. [18:00–19:30]
- Know what you don't know. It's easy to pretend, especially when you want to own a stock. Tesla is Phil's example of a company people love but which may not be at a sensible price. [17:00–19:00]
- Trading is a different game. Phil says that when he trades he is above the margin of safety and relying on an edge, so he is taking risk. Investing stays within the circle of competence. Danielle doesn't separate them as clearly. [23:30–26:30]
- Stress and rationality. Stress and fear let emotions override reasoning. Phil and Danielle suggest walking alone without a podcast or music, meditation (TM or others), hard exercise, and avoiding the TV-and-snacks route. [26:30–36:00]
How it maps to RuleOne
- The three-circles exercise from 001 is the way to find "love". Use /stocks/ filtered to industries from your overlap.
- The Story step of the RuleOne routine ("do I still want to own this?") is the question "do I want to go on this ride?".
- On /holdings/, a position you would not buy more of at a lower price is a candidate for the neutral box.
Buffett, Munger and Graham links
- Munger's "invert, always invert" applies to the fun meter: ask what kind of work you'd avoid and what you'd regret owning.
- Phil mentions in passing that Buffett still makes some trades, such as a multi-billion-dollar bet on the S&P 500. Check the source before quoting it.
- Buffett's emotional-temperament point (The Intelligent Investor, preface, and Chapter 8 on Mr. Market) is the formal version of this episode's theme.
Words to know
- Fun meter: Phil's check on whether the work is still enjoyable. Dread suggests you are outside your circle.
- Neutrality: holding something you neither love nor understand well, only because the numbers pass.
- Magnify: Li Lu's word for growing what you already know and love.
Try this
Fill in Danielle's four boxes for five companies you have looked at. For each in the "love and passes" box, write what you'd do if it fell 30% tomorrow. If you'd feel dread, move it to the neutral box and then check it against /stock/TICKER/.
Check yourself
- What is the "fun meter" for?
Answer
To tell when you're drifting into work you don't enjoy. That is often outside your circle of competence and leads to burnout or poor buys. - Why is a "neutral" company risky even if it passes the numbers?
Answer
When the price falls you lack the conviction to buy more and may doubt your analysis. You are also likely to be there for the money alone. - How does Phil distinguish trading from investing?
Answer
Trading relies on an edge above the margin of safety and accepts price risk. Investing stays within your circle of competence and buys with a margin of safety.
Short quotes
"Investing is a process of self-discovery." (Phil, quoting Li Lu, ~10:50, auto-transcribed)