With Mark Tobak, Psychiatrist, Author of Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools to Build Your Wealth
Steve reads a lot about the psychology of investing from general sources. But a new book, commended by Warren Buffett, caught his attention. The book, Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools to Build Your Wealth, is written by Dr. Mark Tobak. Tobak’s insights are unique because he is a practicing adult psychiatrist who studies investor behavior.
Thinking, Fast And Slow
Tobak begins by talking about the big picture of how humans think. He cites Thinking, Fast and Slow, a seminal book by Daniel Kahneman, who won a Nobel Prize in economics for his experiments and observations on human behavior.
Kahneman identifies two human mindsets. The Type One mindset is geared to survival and thinks and makes decisions quickly. It lets you jump out of the way if you sense danger coming at you.
The Type Two mindset is slower, thoughtful, and rational. It helps you figure out complicated problems, such as the real growth impact of compounding.
Mark Tobak highlights Type One and Type Two mindsets with the following example. Start with one penny on July 1, then double it every day. You’d have two pennies on July 2, four on July 3, eight on July 4, and so on.
If you ask someone how many pennies they’d have by July 31, the fast thinking part of their brain will guess they’d have a bagful by month end. But if you slow down and run the numbers, you’ll find that compounding leads you to an astonishing $10 million by month end!
Investors, Get Out Of The Fast-Thinking Trap
In Anyone Can Be Rich!, Tobak notes that investors often fall into the Type One trap. They make hasty decisions based on a few blips of data and lines and charts on their screens. They do not bother with detailed analysis and end up losing money.
Instead, investors should focus on Type Two thinking. They should hold off on impulse investments and analyze every investment decision slowly and carefully before pulling the trigger.
To make his point, Mark Tobak highlights Warren Buffett’s example. Buffett compounded his fortune steadily. The real benefits of compounding kicked in in later years. That’s when $2 billion grew to four, four to eight, and so on, causing his wealth to grow dramatically in his later years. Similarly, investors should focus on slowly compounding their money so they have sizable sums in retirement.
Overcome Your Fears
Steve believes most people live Type One lives. They are fearful of what tomorrow holds. They would rather enjoy their money today than invest it and watch it grow. Fear also drives investor psychology.
Mark Tobak says that fear can significantly destroy one’s path to wealth by causing us to sell our holdings when markets are down. He attributes this to our fight-or-flee survival instinct.
When investors see a severe market crash, they go into emergency mode. Emergency mode entails quick, irrational thinking and a take-your-money-and-run mindset.
Instead, if you take the long view, you will see that every crash is followed by another boom. If you only wait out the crash rather than sell, you’ll do fine.
When the market is in free fall, even rational investors are wary of buying because of fears that stocks could go even lower. The near-term pain of loss far outweighs the long-term benefit of gain.
Berkshire Hathaway stock, for example, lost 50 percent of its value three times. To Vice Chairman Charlie Munger, this was a non-event. It did not bother him because he trusted his long-term view of things and attributed the drop to the market’s crowd mentality.
Read Mark Tobak’s book, Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools to Build Your Wealth, to build your fortune through rational thinking and action.
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Steve Pomeranz: I read a lot about the psychology of investing, and I share this with you quite often on my show. Rarely, though, have I read about the psychology of investing from an actual trained practitioner, like a psychologist or a psychiatrist. That’s why I’ve invited my next guest, his name is Mark Tobak, he is an MD, he is the general adult psychiatrist in private practice. His works have appeared in the American Journal of Psychiatry, Psychiatry Times, and the American Journal of Medicine and Pathology, and he’s turned his attention towards investing. He is the author of Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools to Build Your Wealth, which I understand has received high praise from Warren Buffett himself. So I welcome him to the show. Mark, welcome.
Mark Tobak: Thank you.
Steve Pomeranz: Let’s begin with the bigger picture of how we humans are wired to think. In a scientific way, someone has called it fast thinking and slow thinking. Take us through that a bit.
Mark Tobak: Well, that’s the wonderful work of Danny Kahneman.
And he actually won a Nobel Prize for his work, and there’s no Nobel Prize in psychology, he won a Nobel Prize in economics. And it’s because that thinking is so very relevant to economics. The traditional rational man or woman of economics really doesn’t seem to exist because we are not rational creatures when it comes to how we deal with money.
The mind that Danny Kahneman hypothesizes, and these are not structures in the brain, but they are functions of the mind, is that there’s the quick, common sense mind, which he deems type one. And there’s the thoughtful, considered mind, the rational mind, that he calls type two. Type one is fast, that’s the part of your mind that lets you jump out of the way when something’s coming down the road. And type two is the type that lets you figure out a complicated mathematical problem.
Steve Pomeranz: So would you say that type one is that kind of common sense thinking, where you take a couple of brain cells and you go, well, I put one and two together and so, therefore, and also my previous experience, boom, I make a decision. Where type two is slower, you have to actually kind of know how to work out a logistics or logical problem. Is that-?
Mark Tobak: Well, exactly, and the example that I think best illustrates this is compounding because if somebody doesn’t know the answer to this question, they will virtually always get it wrong.
If you take one penny on July 1st, double it on July 2nd to make two pennies, double it again for four pennies on July 3rd, and eight pennies on July 4th. Going forward, what will you have on July 31st? Most people think it’s just a bag of pennies if they’re thinking with system one.
Sit down and run through the numbers, and you’ll come up with over $10 million. So compounding is something that it takes system two to work out, and common sense will never lead you there.
Steve Pomeranz: Well, it’s one thing to count a bag of pennies. It’s another thing to think of investing in such a fashion that you’re really trying to determine, to some degree, what something may be worth in 10 or 20 or 40 years. And it’s a lot easier to look at a screen and see a dot moving up and down, draw some parallel lines to kind of get a sense of trend, and then make a decision that way. Fast thinking versus slow thinking. How does one get out of this fast-thinking habit or trap and start moving into the slow-thinking manner of investing properly?
Mark Tobak: I think if you read the greats of investing, who inspired my book, if you read Bogle-
Steve Pomeranz: Jack Bogle.
Mark Tobak: Buffett, and Munger, everything they will tell you will teach you to use the second and the better system. Because if you look forward over the years, you can see what eventually happens, and the compounding thing will ultimately work for you when you make your money.
If you look at Warren Buffett’s total assets, and they’re charted on the web, just like compounding with the pennies, it only gets to the huge number after many, many years. And that’s exactly when people need the money, when they’re old, and they’re going to need care. And moreover, they’d like to help their family and leave them something.
So that kind of slow, methodical way of accumulating wealth is the one sure way to do it. And the fact that it’s sure is really great because the only way you can get there early is by gambling, and you’ll probably lose.
Steve Pomeranz: Well, I think it’s very difficult for people to think that far into the future. I mean, personally, you don’t even know if you’re going to be living, you want to enjoy this money while you can, you may be ill, and all of these other factors that seem to tend to one once they get older. It’s a lot more fun to be sitting there and getting the big payout, if you’re lucky, and then spending that and having a good time.
So I think it’s very difficult for people to make that switch from thinking for today and thinking for tomorrow, and I think that’s one of the reasons why people tend not to do that. I want to move into the area, though, of fear. Because fear is a very powerful emotion in, well, it’s tied to survival of the human species, but in investing, it’s an emotion that drives people in various directions, most of them wrong. Talk to us a little bit about fear.
Mark Tobak: Probably the biggest way that fear can destroy one’s path to wealth is by selling out in a crisis. We are wired to kind of go for broke in an emergency, get out of the burning house. And nature would have to wire us that way in order to survive.
And if you view the mind from a Darwinian perspective, in other words, how did we evolve? That requires a very long perspective. That really requires a system to think about how the human mind has evolved. It would have to evolve to escape from emergencies. So most emergencies, fight or flee.
When you see a market crash, you go into emergency mode. What does emergency mode, which is an unthinking mode, it’s a common-sense mode or even more primitive than a common sense, it’s just run for the hills. Take your money and run, take what you can salvage and get out before it crashes and you have nothing.
And that’s how people feel. But if you take the long view, you can see that every crash is followed by another boom. And if you only wait out the crash rather than sell in the crash, you’ll do fine.
Steve Pomeranz: Well, there’s this meme we all know about, it’s about buy low and sell high.
When the market is going down and down and down, let’s take 2008 for example, you may buy, but just because you buy doesn’t mean it that it’s going to turn around and it’s going to go in a positive direction. You may buy, and it may go lower. It may go much lower than the purchase that you paid, even though it was less than it was maybe six months earlier.
That’s a fear that people have. So they won’t buy in because they’re afraid that they’re going to lose even more money.
Mark Tobak: Well, there are a few ways to deal with that. One is to know in advance that you probably, in fact, you certainly don’t know where the bottom is.
And most people do tend to buy before the bottom arrives. Some people recommend waiting until a bottom appears to have occurred, and then jump on board as it comes back up from a very deep low. My own thought is buy on the way down and recognize with a strong stomach, which you should develop for investing, that you have to get in at some point.
And when the market rebounds, you will have made money.
Steve Pomeranz: You know, Berkshire Hathaway stock, which, of course, is mostly owned, a lot owned by Charlie Munger, the co-CEO, and Warren Buffett himself. I think that’s gone down 50% three times in their lifetime. What did Charlie Munger say about his positions when everything, his reputation, his fortune was down by 50%?
Mark Tobak: He said it was a non-event; it was a zero. It didn’t matter, it didn’t matter to him because he knew, from his long-term view of things, that these are the vicissitudes of investment. And that the businesses he owned were solid and would still be there. And it was merely a crowd reaction. And there’s a vast literature on crowd psychology. And it goes all the way back to Freud and Le Bon, Gustave Le Bon, about how crowds overreact. People do things in crowds they’d never do, that’s how lynchings happen. It could be that none of those people would actually kill another person, but in a crowd, they might.
So the crowd reaction is a subject of indifference to Charlie Munger because he has the long-term view.
Steve Pomeranz: My guest is Mark Tobak, MD, the book is Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools To Build Your Wealth. Mark, we have so much more to discuss, but unfortunately, we are out of time.
I recommend anybody who has an interest in this area and wants to get this stuff right to pick up his book, Anyone Can Be Rich!: A Psychiatrist Provides the Mental Tools To Build Your Wealth. Mark Tobak is the author. Thanks so much for joining us.
Mark Tobak: A pleasure.
Steve Pomeranz: If you want to hear this segment again or read its transcript, come to our website, which is at stevepomeranz.com. And while you’re there, sign up for our weekly update in which we will send you weekly all of our interviews, all of the transcripts, and you’ll be informed about any live events that we may have.