RG 241 – What Kind of Investor are YOU? Understanding YOUR Behavioral Algorithm w/ Dr. Richard Smith

Richard is an expert in Risk and he has a solid foundation in the maths of uncertainty and investing and trading experience. He has an acute sense of the critical role that risk and money management play in navigating financial markets. He is passionate about levelling the playing field for individual investors. He made his first dollar as a child doing a paper round. He went to Berkley College and has a Phd in systems science.

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Podcast Transcript

Richard Smith (00:35):

The way that people approach investing, it’s sort of like, they want to learn to fly a plane and they think they can just walk out to the runway, hop in the cockpit, pull back on the stick, take off and not die, but that’s not how it works. Nobody would think that when it comes to flying a plane, right, but that is what we think when it comes to investing. Somehow we can just jump in here. We don’t have to take the time, not a ton of time, but some time to educate ourselves, to learn a little bit about history, okay. To, um, maybe play around with a little bit of money, instead of all of our money, you know,

Reed Goossens (03:24):

I have the pleasure of speaking with Richard Smith. Richard is the founder of risk Smith. When he’s with his background and mathematical theories of uncertainty combined with his own personal investing in trading experience, Richard has an acute sense of the critical role that risk and money management play in successfully navigating financial markets. Richard is passionate about leveling the playing field for the individual investor. In today. We’re going to talk a lot about risk and the philosophies around risk, and how do you make the right decisions when you go into an investment I’m really excited and pumped to have him on the show today to share his incredible knowledge with us, but enough that, I mean, let’s get him out of here. Get I Richard, welcome to the show.

Richard Smith (04:00):

Great to be here, Reed. Thanks for having me looking forward to spending a little time together with you and your audience,

Reed Goossens (04:06):

Mate. It’s a real pleasure having you on the show. It’s something that we don’t talk a lot about, which is around the philosophy of, of risk and how it scares us and reptilian brains and all that sort of good stuff. We’ll get into that in a little bit, but before we do, let’s rewind the clock and tell me how you made your first ever dollar as a kid.

Richard Smith (04:22):

Oh, my I started young, uh, I had a paper route, so I think I was 10 years old. I started working when I was 10 years old and I haven’t stopped since I had a paper route. Um, I started working at a, a Baskin Robbins, you know, uh, there in Los Angeles, grocery stores and, and I actually did some acting. So I was on a McDonald’s commercial and an episode of Lou grant. Uh, my sister went on to a bonafide career and, uh, in enacting there in LA, but, uh, I got out of the business when I was about 14, but I had enough money to buy my first computer and, uh, and a used car. So, so I’m an addict for a long time.

Reed Goossens (05:18):

It sounds like you’ve got a healthy relationship with, with earning money. And it’s great to see the question is really designed to see how your boredom right lovers or your family wanted to empower you to go out and own your own dosh and make your own way in life. So,

Richard Smith (05:32):

And then I ended up going to Berkeley for college and that kind of set me back, I would say in terms of appreciating business, you know, and, uh, that was quite a, quite a wild ride. But, um, now I’m back

Reed Goossens (05:48):

About it a little bit. Yeah. Let let’s, let’s talk about that. The, the journey, because that’s the whole point of what this show is about. It’s about the journey of you coming through as entrepreneur, as a thought leader. Um, so maybe walk us through that, you know, the last 20 or 30 years, you know, and how you came to what you’re doing today.

Richard Smith (06:07):

Well, so I studied math at, uh, at Berkeley and then I went on to get a PhD in a field called systems science and system science is, uh, kind of a blend of mathematics and computers and heuristics, a lot of, kind of the, uh, search engine algorithms, you know, that are so powerful today kind of came out of that field with genetic algorithms, neural networks, fuzzy logic, et cetera, all these ways of kind of using computers to model the way we think and the way we make decisions, you know, kind of model uncertainty. Right? So, um, so that’s what I did my dissertation on was, uh, how scientists and researchers can be more honest about the uncertainty in their models and not put false information into their models that wasn’t warranted. Okay. So, um, I was basically developing new mathematics to help people kind of distinguish better between what was really signal and what was just noise.

Richard Smith (07:17):

Meanwhile, it’s 1999 and what’s happening in 1999. The internet is coming on, right? The stock market is booming and the boom is going on, right? So I get my life savings, which thankfully didn’t amount to much at the time, uh, get involved in the market. And in like 12 months, I’ve run my accounts up 300%. So I’m like patting myself on the back, right. I’m saying, man has PhDs really paying off. And, uh, I’m about to get married and I’m going to tell the in-laws, Hey, don’t worry. I got the, I got the wedding expenses covered, you know, I’m a real man. And then March of 2000 hit, and it only took about 30 days to give back those 300% gains instead of the, you know, 12 to 18 months, it took me to accumulate them. And moreover, it was just a very shocking jarring experience for somebody who, you know, regarded themselves as being semi literate, financially and numerically, right.

Richard Smith (08:24):

And, and a, uh, you know, up and coming expert in risk. And I was like a deer in the headlights, you know, it was like, what do I do? And, and I remembered saying, Oh, well, you know, so I had $10,000 and I ran it up to $40,000. And then it was like down to $35,000. And I said, well, you know, let’s not get greedy here. If it gets back to $37,000, I’ll sell, you know, and then we’d get back to $37,000, then I’d say, well, you know, it could get back to $40,000. Why couldn’t it go to new highs, you know, and, and just lying to yourself. Hm here’s something to help people out there feel better who are intelligent, have high IQs and have lost money.

Richard Smith (09:11):

Um, you, uh, part of the reason that you lose money, if you have a high IQ is because you’re better at making up stories to justify your essentially emotional decisions. Okay. You’re good at telling stories. You’re good at making up narratives to kind of explain what amount to kind of gut instinct emotional decisions. So that was very shocking to me. And, um, and also very intriguing to me. Right. Um, and the financial markets are a really wonderful environment for anybody who loves data and loves computing and loves problem solving. You know, it’s a, it’s a very rich environment for you to test out and validate your theories. So that kind of sent me off on a journey and, um, and figuring out how I could take this idea of kind of quantifying uncertainty and helping investors do that instead of, um, scientists and researchers. Cause I didn’t really like academia that much.

Richard Smith (10:16):

Um, I found it kind of a little too pretentious and, uh, I liked the street. So, um, so I got involved in, in developing algorithms for myself. And then eventually I started a business, a website, actually one of the first FinTech websites called trade stops, dot com T R a D E S T O P S still out there today. I recently, uh, sold my interest in the business, but it’s a great service. And, um, it started out tracking, trailing stop loss alerts on stocks. Okay. So you buy a stock at a hundred dollars. You’re going to use a 25% trailing stop. That means if the stock just goes straight down from there, which I found sometimes that happens, uh, and it hits $75 you’re going to sell. Right. But if it starts going higher, you’re always having your protective stop 25% below your highest point of profit.

Richard Smith (11:18):

Okay. So you are, you have a mechanism for getting out if it doesn’t work right. But you’re also kind of locking in your gains as they accumulate. Right. So really powerful. It’s very powerful. And what I discovered was why it was so powerful. And the reason I kind of got on to protective stops in the first place was because I took my own portfolio. Right. What I had gone through in 1999 and 2000. And I said, okay, let’s say I just bought the exact same stocks, the exact same amount of money at the same time. Right. And then I sold them strictly based on a 25% stop loss strategy. Okay. Take all the stress out, read, you know, no worries. Right. Just buy it, wait until your stop loss gets hit and exit. So I would’ve gotten out with $25,000 instead of giving back all my profits. And then I started testing it on literally dozens and then hundreds of other people’s real decisions. And I found that, you know, way more than half the time it would improve people’s returns, you know, like 50 to 100%.

Reed Goossens (12:35):


Richard Smith (12:37):

So I said, what’s going on here? Right. First of all, I got to get this service out there and let people use it. Right. But, but what’s going on here. So that’s when I connected it to the Nobel prize, winning research, not my Nobel prize, but a Daniel Conaman. Have you heard of him thinking fast and slow isn’t as popular book. Right. But he goes way back, you know, Kahneman and Tversky. I studied them in graduate school, in my system science program. Right. Uh, you know, they, uh, basically developed the field of behavioral finance, behavioral economics, right. Their work was popularized by Michael Lewis and Moneyball and, uh, you know, ultimately made into a movie with Brad Pitt, Michael Lewis wrote another book called the undoing project, which was really, you know, more explicitly about their work. And, you know, basically what they said was, Hey, you know, this idea of sort of the, a rational man, rational decision maker out there really doesn’t hold up under scrutiny, you know? And especially when you got money on the table, uh, we are, or as Dan Arielli put it in his book, we’re predictably irrational.

Reed Goossens (13:51):


Richard Smith (13:51):

So, um, bear with me here, the meat of the matter in terms of condiments, Nobel prize, and then more recently, Richard Taylor, who was Conaman student and he’s at MIT now. And, uh, he wrote misbehaving another great book, um, is that we hate to lose shocking, isn’t it? No one likes losing, but the, the rub is that the fact that we hate to lose has different consequences for when we’re losing on an investment or when we’re winning on an investment. When you are losing on an investment, the fact that you hate to lose makes you not want to sell

Richard Smith (14:43):

Because you don’t want to take the loss. So what do you do double down, triple down say, well, was a short-term trade, but now it’s a long-term investment. Uh, you know, one of my favorites was, believe it or not, this guy, one of my customers, he was a explosives engineer at Lawrence Livermore labs in Berkeley. And he made the explosives that went on the, um, oil rig platforms out in the Gulf of Mexico. These explosives sever the rig from their moorings, if there’s a crisis. So they have to work when they need to work. And, and they have to only work once. Right. And they have to be very high reliability, but he had bought this stock that supposedly was going to mine gold on the ocean floor, Nautilus minerals. You’re out there, buddy. Sorry about telling this story. I won’t give any names, but, um, you know, the stock had become a penny stock and he said, yep. I know it’s going to come back though. I’m going to give it to my grandkids.

Richard Smith (15:54):

So I thought that was still to this day, the ultimate denial, the ultimate loss of version, right? Yeah. That’s the Stockton workout, but Hey, my grandkids are going to benefit from it, even though I didn’t, I know I’m going to be right. Eventually. That’s what it boils down to. You know, we don’t want to be wrong. We don’t want the embarrassment of being wrong. So when we’re losing, we are risk seeking. We take on more risk. We doubled down, we put more money into the position, right. Um, we hold on. We, and then Richard, dailer got his Nobel prize for adding the fact that we always want to get back to break even. So I used to say I was out speaking to a lot of audiences. Anytime you hear yourself say to yourself in your head about an investment, well, I’m going to get out when it gets back to break. Even, you know, you are in trouble, you’re toast, you know, get out because it’s not going to get back to break even. And even if it does get back to break, even you’re probably lying to yourself and you’re not going to sell it then. So, so anyway, when we’re losing, we are risk seeking. Okay. And feel free to stop me if, if I’m losing any of this.

Reed Goossens (17:14):

No, no, I think I will just jump in with, um, with a couple of things here, because I think what you’ve, what you’ve highlighted to this point is really, uh, an innate sense in all of us that we all know exists. Right? We do some consciously, we do. Uh, but for trying to understand it and lay it out for us so we can be better investors rather than just the algorithms that you’re now putting in place, which are really powerful because it takes all the emotion out of it and know that the stock drops 25%. Boom, you’re gone is sold

Richard Smith (17:44):

Two emotion here. Right? Let me keep going here. So I’ve talked about what, um, a loss aversion does when we’re underwater on a position. Okay. Now let’s think about what it does when we’re winning, when we’re ahead on a position, what our fear of loss attaches itself to our, our profits. So we become risk averse. When we’re winning, we want to sell a stock, gets up a hundred percent. It becomes almost intolerable to hold onto it. At that point, you know, I is isn’t that true?

Reed Goossens (18:30):

Right? Yeah. You think, you think this is too good to be true. You know, happened in three months,

Richard Smith (18:36):

I’m going to make a confession. So I bought Tesla at a $450, you know, back in wow, March, right. That, Oh my God, this is my chance to get into Tesla. Musk is a stud. And uh, if you see him in LA say hello,

Reed Goossens (18:58):

Uh, you know, yeah.

Richard Smith (18:59):

And then it went up like a hundred percent in, in like 60 days. Right. And it’s not crazy to take some profits at that point, but it became hard not to sell it. Right. And, um, so I sold half of my position just to relieve the pressure and sure enough, where’s Tesla today, it’s over a thousand bucks. Right. So if I had done nothing, you know, I would have been up more. Right. So, so we’re risk averse when we’re winning and we’re, risk-seeking when we’re losing. Okay. So I don’t have evidence to prove this, but my experience and my gut tells me that this loss aversion that we all have is responsible for half or more of the chronic underperformance of the individual investor when it comes to investing. Okay. I think it’s that serious. It is in every decision we make, you know, and if you start to watch this in yourself, you will see it over and over and over again.

Richard Smith (20:13):

You know, you, you get into a position where you’re in the hole and you say, well, I’m going to stick it out. I’m going to double down. I’m going to lower my cost, average, whatever, you know, I’m going to get back to break even. And then when you get ahead, you’re like, Oh God, I’m up a hundred percent. I, gosh, I gotta get out of here. And so psychologically, we have a mechanism for disaster. Like we can dig a hole deeper and deeper and deeper and deeper, right. We can go to zero and it happens all the time. Right. Do you know if you have a 90% loss, what kind of gain you have to have to recover from that?

Reed Goossens (20:55):

Is it the 110,

Richard Smith (20:57):

1000 Reid? It’s 1000 you have to have a 10 bagger to recover from a 90% loss. It’s a thousand.

Reed Goossens (21:08):

So, um,

Richard Smith (21:12):

Those are tough numbers. People have 90% losses all the time, but very few people have thousand percent gains, right. So I knew enough math to go, what’s wrong with this, right? Like how come I’m not having a thousand percent gains and I’m having 90% losses. And it’s because of this bias that we have. It’s because, you know, we have this mechanism where risk seeking when we’re losing and we’re risk averse when we’re winning. And so you regularly can have 80, 90 total losses. You know, I used to have one stock on my, in my brokerage account that I couldn’t get rid of the thing. Right. It had gone to zero. I couldn’t even sell it for a penny and it would sit there and mock me for years until I finally closed down the brokerage account. Right. So I connected that to, you know, uh Conaman and Baylor and prospect theory.

Richard Smith (22:06):

And I started to see how even the humble, uh, trailing stop makes you risk averse when you’re losing and risk seeking when you’re winning. Right. That’s what the data showed me. And so that was great. Um, you know, to me, the magic of investing successful investing, I should say happens. Um, when you start to do something that works, you know, and you do it consistently and you stick to it and it becomes like a discipline, right? So one of my personal heroes in the investing space is a guy named cliff Asness. He founded a advanced quantitative research AQR. It was kind of one of the original quants, um, by the way. So he got his PhD at the university of Chicago under one of the efficient market hypothesis. Guys, maybe Eugene Fama, I gotta get back, got to figure out if I’m saying that right or not.

Richard Smith (23:10):

But he proved to the efficient market hypothesis guy, that momentum was an inefficiency in the markets. Momentum exists in the markets. It’s the only thing that the academics and the technicians agree on momentum exists in the markets, which when you couple momentum with our, um, loss aversion, you can see how we really get ourselves into trouble, right? So there’s a famous quote from John Maynard Keynes that says the markets can remain irrational longer. You can remain solvent. Okay. So what that’s saying is sometimes the markets go nuts, right? Sometimes COVID-19 hits sometimes, you know, the mortgage crisis hits sometimes the dot bust hits, but other times the dot boom hits. Other times, if you have a rally from March, 2009, all the way up to, you know, February, 2020, right. Who knew in March of 2009, you know, when the S and P 500 hit six 66 or whatever it hit, you know, that it was going to just basically go up uninterrupted, you know, for the next 10 years, right. That’s not what anybody was thinking at the time. So markets, um, defy logic, right? And our logic of, you know, wanting to hold onto our losers and sell our winners makes us suffer from when the markets define logic. So I say, you know, how do we have our profits defy our logic, logic, defying profits, instead of logic, defying losses. That’s what I’m in it for

Reed Goossens (25:01):

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Richard Smith (26:07):

Well, I’m working on that. I don’t have all the answers yet. Um, I’ve got some ideas, you know, and I’ve definitely, um, I’ve developed tools and algorithms. Um, I’m developing new software right now that, that I hope will address that very question. You know, I’m a big believer in the behavior shaping power of technology and in the opportunity to leverage technology, to help us learn behaviors, new habits. Okay. And to be, and to be more self-aware of our current habits. Okay. So that’s what I’m working on. So I’m building it and, um, I’m excited about it. I, I like to use an analogy of learning, to fly a plane with learning, to invest the way that people approach investing. It’s sort of like, they want to learn to fly a plane and they think they can just walk out to the runway, hop in the cockpit, pull back on the stick, take off and not die, but that’s not how it works.

Richard Smith (27:23):

Nobody would think that when it comes to flying a plane, right. But that is what we think when it comes to investing. Somehow we can just jump in here. We don’t have to take the time, not a ton of time, but some time to educate ourselves, to learn a little bit about history. Okay. To, um, maybe play around with a little bit of money, instead of all of our money. You know, one of my early mentors, I said to him, uh, his name is Jake Bernstein. I said, Jake, what’s the difference between the winners and the losers. And he said, the winners don’t need the money.

Richard Smith (28:07):

And at first I thought, Hmm, okay. So the rich keep getting richer. And the rest of us keep getting the shaft. But over time I came to realize what it actually means is that you can’t put yourself in positions of undue stress, right? You can’t have more on the table. You can’t have more at risk, then you can afford to lose. So I use volatility and I do something that it’s called volatility, budgeting, you budget for volatility. Right? So, um, I developed this indicator, one of the first indicators I developed, um, it’s called the volatility quotient, and it’s just a number of percent. Okay. Mike on Microsoft and, well, let’s see I’m Walmart and Johnson and Johnson. It might be like 12 to 13% on Microsoft and Apple, 18% Tesla, Twitter, 35%, um, you know, junior gold mining stocks and biotech startups, 95%. And what the number is designed to tell you is how much noise there’s likely to be in this investment, how much volatility you need to endure, if you want to hold that stock for at least 12 to 18 months.

Richard Smith (29:35):

Okay. So if you have a sense of that, right? You have a sense, even that, you know, Hey, Tesla is three times as volatile as Walmart, right. That’s very helpful. Right. That’s called volatility budgeting. Okay. So now you can decide, for example, how much are you willing to, um, put in that investment? Okay. So let’s take two simple scenarios. One is a stock that has a 10% volatility quotient. Okay. And one is a stock that has a 50% volatility quotient. And you say I’m willing to risk a thousands of dollars on each of these stocks. How much can I invest? So on the 10% stock, you can invest $10,000. And if your $10,000 investment falls 10%, you’re down a thousand bucks. Okay. But on the 50% stock, you can only invest $2,000. And if your $2,000 investment falls 50%, you’re down a thousand bucks. Okay.

Richard Smith (30:40):

So in the hedge fund world, they call this risk parity, I call it equal risk. And it’s just a very powerful way of, um, doing volatility budgeting, right? So you’re actually budgeting for the volatility in volatility as a proxy for risk. Um, instead of just kind of thinking, well, I’ll just put an equal amount of money into these two investments. So that I’ve found that to be very powerful. I found it to be psychologically very helpful to people, you know, because your puke point is actually a combination of the amount of money that you invest and the volatility of the investment.

Reed Goossens (31:24):

W w w with that, how do you calculate the, the volatility number on a certain stock? Because that is super interesting. And I think that’s a very powerful example of how people can assess the two of them, because that will then you, if you knew that number going in before you bought Tesla, before you bought whatever you’re going to buy, you will have a different, your, your subconscious will tell you, well, hang on, hang on. What’s that that’s 50%, that’s a lot. The other, one’s only 10. Like let’s, let’s, let’s pump the brakes here a little bit and think about what I’m doing. And I guess that pumping the brakes is all you’re trying to do to think twice about something before making an investment decision. Is that what, that’s the whole point of the volatility

Richard Smith (32:04):

Part of it? Yeah. And again, it’s kind of understanding better what you’re walking into, right. What you’re going to have to put up with what you’re going to have to stomach. And, um, that’s, it’s all about expectations. You know, I read a quote, you know, something about a risk is the difference between an outcome and your expectations, right? And so having accurate expectations is half the battle. You know, I mean, if you get into Tesla, you know, and you think that, you know, it’s a thousand bucks today, right? You think, well, I’m going to buy it. You know, and, and of course, it’s going to keep going up because, Hey, it’s on a rocket ship and Musk just literally put some guys in space, man, and landed the drone on, uh, I mean, landed the booster rocket on a drone in the middle of the ocean. This guy can do anything. It was awesome. That was awesome. Uh, and you’re not prepared for Tesla to fall by 50% in the next 12 months. You know, you should not be in that stock, right? Because you’re going to throw in the towel at the exact wrong time. You know, you are, as a, my friend, Stan Ehrlich says you should be, uh, selling into rallies and buying into dips, but instead everybody buys into rallies and sells into dips. Right.

Reed Goossens (33:43):

That brings up an interesting point of how the stock market was today with Clover. You brought up COVID earlier, what, just 2 cents on that. Like what you, you, you, you seeing that a lot of people are thinking that in the next 12 to 18 months where we’re going to recover very quickly and hence why the stock market is above what it was before. COVID like, it’s pretty, it’s pretty crazy. What are you, what, what’s, what’s your sort of tea leaves saying about that with the, how well the stock market has come through, co-ordinate come through, not through COVID, but it is fairing through COVID.

Richard Smith (34:16):

I think it’s a couple of things. The biggest one is the federal reserve. Have you ever heard the saying don’t fight the fed. So they’ve put, um, unprecedented liquidity into the economy, and that is what is driving up the prices. Now couple that with the fact that the, um, with COVID, uh, in my opinion, the cure was worse than the disease and the, um, you know, there was tremendous panic that was fueled rather, uh, gleefully, I would say. So I think that the reaction was over done. I think the recovery is going to be stronger than what people expected. And I think that coupled with the liquidity boost that the fed gave plus we’re in, um, I don’t, I’m not sure if you’ve heard about the presidential cycle pattern, but, uh, you know, we’re coming up on an election and Donald Trump, uh, really, um, is betting the farm on, you know, good, a good economy and, uh, and a good stock market.

Richard Smith (35:37):

He identifies with the stock market. And, um, so yeah, so I think all those things are sort of, uh, um, making the stock market, you know, probably disconnect a bit from the economic reality, but that’s what stock markets do, you know, they’re anticipatory systems. So what I mean by that is everybody in the market is trying to out anticipate everybody else. Okay. So, you know, you’re trying to predict what most people are going to do and then make money off of what you think everybody’s going to do. Right. So, um, yes, there are fundamental, you know, economic, underlying drivers of the markets like liquidity. Um, but, but ultimately they are, and this goes back to my system science days, they are anticipatory systems. So in anticipatory systems, you get feedback loops and, you know, those feedback loops can sometimes like when you bring two microphones too close together, right. You’re like, ah, so, uh, so that happens in markets and they, you know, they sometimes disconnect, um, you know, very tough predicting when those disconnections are going to come back to earth. Um, but, uh,

Reed Goossens (36:59):

Well, it’s, it’s very, it’s very, very interesting. And, um, I guess the question for you is what practical steps can investors take today in order to self-assess and be more knowledgeable and all those good things before jumping head first into any new investment coming, coming in 2020 or 2021.

Richard Smith (37:21):

So I think, um, for one thing, you kind of have to know where you’re at as an investor, right? So if you’re just getting started, you don’t know what you’re doing. I don’t care how smart you are, how accomplished you are in other areas of your life. It will not apply to the stock market. The stock market and investing is a bass ackwards. Okay. You end up having to do the opposite of everything that your instincts tell you to do. You know, um, I remember, you know, a year or two into learning about investing and I was learning the hard way. Right. Um, it was like, man, if I had just done the exact opposite of every thing I ever decision I ever made, I’d be wealthy.

Richard Smith (38:17):

What’s going on here. And that’s literally how it works, you know, because it’s an anticipatory system. Um, because you know, there are second and third order anticipations of what, you know, everybody else is going to be doing that. That’s just kinda how it works. That’s how the markets are set up. And so you have to be able to be honest with yourself about where you’re at as an investor, are you just starting out, are you a year or two into this? Are you, you know, two to five years into this five to 10 years into this 10 to 20 years into this, you know, like it takes time. So don’t be afraid to kind of admit where you’re at. Don’t be afraid to ask for help. Don’t be afraid to, um, you know, find a couple of great books and just read them and, you know, and, but you do have to put a little bit of money in the markets and, um, and learn by doing, you know, like I’m not a believer in paper trading.

Richard Smith (39:16):

You can learn a little bit from paper trading, but you don’t make the same decisions, paper trading as you do when you have your own money on the table. Right. So, um, in terms of volatility, budgeting, um, there’s a, there’s a, uh, there’s an indicator called beta, which is available on most, all financial websites on any company. You go to Yahoo finance, you can look at the beta of a stock and it’ll give you an idea of the relative volatility of that stock to the S and P 500. So you can get an idea. You know, if it’s like a one it’s probably about as volatile as the S and P 500, if it’s a two, it’s probably twice as volatile. So right there, that’ll help you do a little bit of volatility budgeting, right? And put more money into the stocks that are less volatile and less money into the stocks that are more volatile.

Richard Smith (40:05):

I’m a big believer that you should have volatile stocks in your portfolio, right? You should have volatility in there. It’s like meat and potatoes are kind of your low volatility stocks, but you want, you know, salt and pepper, maybe even some, you know, uh, some sriracha or some cayenne, you know, I love hot sauce and, and they can actually be incredibly beneficial to even a conservative portfolio. It really can because ultimately you want a portfolio of assets that are not all going up and down at the same time together. Okay. So you want to minimize the correlation of the assets in your portfolio, Ray Dalio, you know, Ray Dalio, everybody knows who Ray Dalio is. He said, the Holy grail of investing is 15 good uncorrelated investment ideas. Okay. So they all are benefiting from the upward momentum overall of the market, but they’re minimally correlated to each other, right?

Richard Smith (41:07):

So you can actually lower the volatility of even a conservative portfolio sometimes by putting in a volatile stock, that’s negatively correlated to the other holdings in your portfolio. You can lower your volatility. So you want to overall, you want to kind of maximize the volatility of the individual stocks while minimizing the volatility of your overall portfolio. You want to stop taking gains and losses personally on individual stocks. Okay. I say, you know, a pilot would never take the weather. Personally, don’t take a loss on an individual stock personally, as though it was a personal failure. Okay. It wasn’t, you know, you didn’t know that COVID-19 was going to hit, you know, that’s not personal. And, um, and so, you know, a pilot who’s going to fly from point a to point B is going to expect turbulence is going to hit air pockets, right? Not going to expect to take off and have a completely smooth flight, you know, Naria cloud in the sky and land at your destination and just go, ah, it’s perfect. It doesn’t work that way. You know? So don’t take things personally, understand a little bit about probability and expected value and volatility use some algorithms, but also, you know, own it. You gotta be, you gotta be in the game, you got to own it. You know, it’s nobody else’s decision, it’s yours. And, uh, I think that’s what, you know, a lot of people miss and, uh, markets, aren’t just a game, you know, like it’s, uh, it’s capital allocation.

Richard Smith (42:52):

It’s actually a values based activity. If you, if you let it be, you can express your values in the marketplace.

Reed Goossens (43:03):

Well, Richard, I think that’s been insightful in terms of how much you’ve unpacked upon us today in terms of the, the different, the, the, the ways in which turtles look within oneself to understand that we do all have these floors within each other and how we can mitigate those floors and just having certain like the volatility next, I think that’s a bloody great thing that people should be looking at if you’re interested in investing in stocks.

Reed Goossens (43:29):

Okay. They’re just flaws when it comes to the stock market.

Reed Goossens (43:35):

Because as you said before, you know, the, the, the, the higher, the IQ, the better the story you can make, which is, I think that’s a, that’s a great story. Seriously. You do, you do the, the chatter inside the head and the BS that you can telling yourself, it’s going to be fine when I get back to neutral and I’m going to sell it, I’m going to sell it at 45 grand. Now we’ll wait to get to 47. Oh, I love it. But look at the end of every show, we like to do the top five investing tips. You’re ready to get in.

Reed Goossens (44:02):

All right. Maybe what is a daily habit you practice to keep on track towards your goals? Uh,

Richard Smith (44:15):

I get up in the morning and before everybody else gets up and I just spend a little time thinking about my goals and, uh, um, making sure I’m clear about what the day ahead is going to be about, uh, before the day gets a hold of me.

Reed Goossens (44:34):

Hmm. Love it. Just having a little bit of quiet time. I think that’s really absolutely question number two, who is the most influential person in your career to date

Richard Smith (44:44):

A man named Albert Lou ongo. And, uh, I met Albert probably 25 years ago and I’m kind of old school Italian guy. And, uh, he, um, yeah, he’s been just a real mentor to me. He got me into being an entrepreneur. You know, I probably would have ended up going down more of an academic bent, but, and he’s opened up 30 plus restaurants in his life and nightclubs and, uh, just done all kinds of amazing things yet. He’s a very wise and spiritual person. And, um, and he really taught me, you know, what, what, what he called and what I’ve come to see is the romance of business. And, uh, it’s fun. You know, like I said, I went to Berkeley and I’ve kinda ha I had to recover from that. That was out there in the anti-apartheid rallies, you know, and, uh, in the mid eighties, late eighties and, um, you know, business gets a bad rap, but it’s an incredible pursuit. You know, it’s so creative and it is adventurous and even romantic and, uh, very grateful to Albert for helping open my eyes to that.

Reed Goossens (46:05):

That’s very poetic, I think, uh, BR uh, businesses, a romance. I think that’s very, very true. And you have to understand that as ed evolves,

Richard Smith (46:14):

Another one that I’ll just share with you quickly of what he said was a good company, should be good company.

Reed Goossens (46:23):

Yeah. Enjoy the people you do business with. It’s like, life is short. You don’t, you’re not being put on this earth to do people do business with, excuse my language. You know, I’ve got this saying that, you know, I’m pretty good at being after traveling the world quickly, assessing whether I’m going to have a be with someone or not. Um, just through backpacking, I’ve done backpacking and you get really quickly going within the first 30 seconds. First 30 seconds coming up, what’s coming in your mouth. I’m going to jump. I’m going to have a beer with you. If I can’t see you light, I’m going the next bar. You know what I mean? And that’s how you got to have be a little bit with your business. Tell them, tell them to pound sand question number three in your business today. What is the number one or the most influential tool that you use on a daily, on a daily basis? And when I say tool, it could be a physical tool like your phone or a computer or a journal, or, or it could be an actual piece of technology that you use day in, day out that you can’t, you can’t run the business without.

Richard Smith (47:20):

Um, I mean, I spend a lot of time in front of my computer for sure. Um, you know, I’ve learned a lot about business and 20 years now. Um, and, uh, it kind of goes back to your first question about goals and I’ve thought a lot about this. Cause you know, I’m really at heart kind of a mission-based person, but ultimately, you know, you do, if you are in business, you have to have a profit, another Albert ism. He said, the definition of business is it’s what you go out of when you don’t have enough of it. So really grappling with those things, you know, and making sure that you have the right metrics to drive your business. So, um, for me, that’s annual recurring revenue is a big one and customer acquisition cost and, uh, lifetime value of a customer. So all those things have taken on a lot more significance for me, I think, as I’ve matured in business. And, um, you know, I think they’re important things for all entrepreneurs to really stay focused on.

Reed Goossens (48:43):

Right. I love it. Love it question before in one sentence, what has been the biggest failure that you have, it’s a code in your life and what’d you learn from that failure?

Richard Smith (48:55):

I’d say a failure of communication. And, um, I failed to communicate to, to always really let people know kind of what was going on with me and where I was having trouble. And, uh, I think like failing in communication, damaged some relationships and, and, uh, you know, was, uh, could have been better. So that’s, um, you know, when you see that kinda makes you sad, so that’s another kind of lesson you learned, the hard way that, uh, you know, we’re not always perfect. We’re not always noble. Um, sometimes we have base desires and, uh, sometimes we’re screwed up from past experiences and, um, traumas, right. And, uh, you gotta work with people that you trust and that you can talk to and that you can sometimes work through that stuff. So you’ve got to communicate. Yes.

Reed Goossens (50:10):

Yeah. Love it. Love it. Last question might before we end the show is where can people reach you to continue the conversation and, uh, w where would they go?

Richard Smith (50:19):

Yes. Uh, so you can follow my work at Richard M. Smith dot, um, uh, and then also I have a not-for-profit that I’m the chairman and CEO of called the foundation for the study of cycles. And you can learn about it@cycles.org cycles.org. And in fact, we have a week long free event with some, uh, leading financial cycles practitioners, including Jake Bernstein, Larry Williams, Jeffrey Hirsch, Perry, Coffman, uh, Peter Elia, [inaudible] bill Sarubi, Stan Ehrlich, myself. Um, and it’s going to be two hours a day between June 22nd and 26th of, uh, um, the best experts out there on how to use cycles in the financial markets. So people can learn about that@eventsdotcycles.org, you can sign up and definitely check out cycles.org, learn more about the foundation for the study of cycles. I’m something I’m very passionate about. We didn’t get to get into that today, read, but maybe another time

Reed Goossens (51:35):

And all the time, my friend, look, I want to thank you for jumping on the show today. Just wanna reflect some of the things that I took away from today’s show. I think there was some absolute crackers of one-liners in there. And I think, uh, you know, obviously in and around the behavioral finance piece of it, I think it’s really important. All of us, uh, understanding who we are as human beings in order to make the right decisions. And it sounds like you’ve done a lot of self-discovery along the way that has led you back to your financing roots, through understanding, being more self-aware being more grounded and comfortable within your own skin. I would even go to say that before to understand who you are to then go make better investment decisions is as, as Wu, is that sounds, it’s not root cause it’s the facts, but you know what I’m trying to say,

Richard Smith (52:23):

You know, people can’t, you can’t avoid it, don’t put it off, you know, whatever your path is, you gotta dig into it. You know, you have to slow down the monkey mind. Uh, you have to still, the, you have to empty the mind. You have to still the body and you have to purify the heart. And then that improves everything you do.

Reed Goossens (52:46):

Well, Mike, I want again, thank you so much for jumping on today.

Richard Smith (52:49):

Thank joy.

Reed Goossens (52:51):

Well, thank you very much. Enjoy the rest of your week and we’ll catch up.

Richard Smith (52:54):

Excellent. Thanks. Take care of Reed. Okay,

Reed Goossens (52:58):

Well, they have another cracking episode jam pack with some incredible advice from Richard Smith. Please do check out all the other links that he mentioned on today’s show, because he is doing some incredible stuff in and around understanding the psychology of investing and trying to make the average investor be better when it comes to making those massive decisions and not overreacting when you’re up a hundred percent and not panicking when you’re down. So, um, definitely check out all his stuff. Uh, I want to thank all the listeners for taking some time out of their day to tune in, to continue to grow that financial IQ, because that’s what we’re doing on this show. We do it to see if we can make out. If you do like this show, please give back by jumping onto iTunes and give them the show. A five star review. I’m gonna do this all again next week. So remember

Reed Goossens (53:43):


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