Jim O'Shaughnessy on Bitcoin, Investing Psychology, and the Secret to a Long-Lasting Marriage

Jim O’Shaughnessy is a Wall Street legend and the founder, chairman, and chief investment officer of O’Shaughnessy Asset Management, which has $6.2 billion in assets under management.

O'Shaughnessy is also my friend. We've gotten to know each other since he subscribed to my newsletter, The Profile, and I had a wide-ranging conversation with him on his podcast, Infinite Loops.

In March, O'Shaughnessy participated in an hour-long, live "Ask Me Anything" with readers who are part of The Profile's members-only Telegram chat. (To join, consider becoming a premium member here.)

We discussed the stimulus package, digital assets, intellectual curiosity, and why O'Shaughnessy believes we're living through "the golden age of the individual investor."


Below are the highlights of his Q&A with the readers:

Q: Loved your interview with [your son] Patrick O'Shaughnessy. Can you describe the process of premeditated success?

O'SHAUGHNESSY: Thank you! I’m glad you like the interview with Patrick. So, premeditated success was something I learned from my grandfather. He told me that when you really think things through, you need it to premeditate all of the possible outcomes of what you were trying to achieve and the way you were trying to achieve it. When you go through this process, you sometimes find holes in your knowledge that the process uncovers. You may also find that maybe you really don’t want to do this activity at all. I recommend doing this as a writing with a pen and paper exercise.

Q: You mean it should be a conscious stream of writings on a specific project I have in mind (more like the Morning Pages of The Artist's Way) or using my intellect to brainstorm all possible scenarios and outcomes?

Ideally, both. It’s a bit like a pen and paper Monte Carlo simulation. It’s worked very well for me and I have used it since I was in my early 20s. Writing about something often shows you how well you understand it or don’t understand it! It’s a great exercise end it unlocks a creative stream.

Q: How do you take notes and remember them?

As far as note-taking goes, I use a variety of methods, so for example, I read everything on Kindle for iPad where I make many many notes and then export them to Word. I then review them and jot down with pen and paper the ones that I want to explore more, or combine with others to come up with a new way of looking at things. Paper notes can definitely be a hassle, but I also then transfer the most important stuff to a searchable database on the computer.

Q: What’s your view on bond yields and the stock market?

I think the future for bonds is quite negative given where rates are. Bonds are pretty much pure math, as interest rates go down, bond prices go up and as interest rates rise, bond prices decline. I think it depends on what your time frame is as far as the stock market is concerned. Trying to time the market has been something I’ve never been able to do. But for long-term investors, I think world stock markets are a great buy and hold.

Q: What are your thoughts on the recent stimulus bill passed, and what impact will this have on assets? Also, do you have an opinion on Bitcoin and other digital assets being held on the balance sheets of companies?

As to the stimulus bill, as usual, when Congress passes one of these massive packages, there is a tremendous amount of waste and patronage being doled out to their favorite constituencies. But people on Main Street need this money, and I guess that’s the price we must pay. When COVID began, I was unusually vocal about the need for a $5 trillion package to be passed to keep people solvent.

As to Bitcoin on balance sheets, that’s a more difficult question. Typically, corporate treasuries keep cash in stable instruments. Whether you love or loathe Bitcoin, it has been anything but a stable instrument. My problem is, the company is on the hook for this type of behavior, and it could end in tears particularly if Bitcoin goes into a bear market.

Q: What have you seen are the best ways for investors to control their psychology and emotions during bull and bear markets?

I’ve long said that the Four Horsemen of the Investment Apocalypse are fear, greed, hope and ignorance. Only ignorance is not an emotion.

We unfortunately are optimized for an environment that no longer exists. When our fight or flight instinct kicks in, it literally takes over the decision-making in your brain. That’s why I often say there’s a big difference between understanding something intellectually and emotionally. My solution was to become a quantitative investor whereby all of our models and algorithms that we have built buy and sell securities based on our research. This has allowed me to in essence gate my very human emotional responses using the models.

If quant isn’t your thing, there are several ways to deal with these emotional take-overs. One would be to have a friend or significant other that you can discuss the emotional reaction with, kind of like a co-pilot. I have a friend in Vienna who is not a quant at all, but notices when his emotions are rising, and then he immediately gets up from his computer, puts on some running gear and takes a run, which allows him to break the emotional cycle that he was spinning into.

Q: How do you generally avoid blind spots/bias — do you run these by outsiders or members of your team?

Good question. We all have blind spots and simply acknowledging that they exist helps us to understand and look for them. I think we’re making a mistake when we think that we have a complete solution to almost anything.

Try following as best you can a “scientific method" where you are continually asking questions, putting them to the group, and always have an error-correction methodology as part of your process.

People sometimes confuse bad outcomes with bad decisions. I tend to look at outcomes in aggregate and not individually. I also try to use mistakes as learning opportunities and get excited when I find something that can make me a little less dumb than I was yesterday.

Q: If you could wave a magic wand and help young people truly understand one thing about investing, what would it be?

I guess if I had a magic wand and could help young people understand one thing it would be that successful investing is much less about financial acumen and much more about emotional control.

Q: What's an effective way to communicate and make an investor understand what risk is?

I like Jason Zweig‘s example of how to teach people about risk. He jokes that what we do currently is show people a picture of a snake and ask them how frightened that makes them. His suggestion, which of course is in jest, is that we would get a much better reading by throwing a live snake in their lap and seeing how that affects them. Now I know this is a joke, but it underlines a profound truth: the real time experience of both gains and losses is very, very different than looking at such things on paper.

I think it’s very helpful for the asset manager to point out all of the flaws in him or herself, what I call human operating system, and then try to make the client understand that we all have the same human OS.

Q: It sounds like a lot of your thinking is based upon a strong understanding of our evolution. How would you recommend studying this further to gain a deep understanding of what you called “human OS”?

I often recommend that people read broadly outside of finance, specifically evolutionary psychology and biology. After all, human beings price securities. And yes, even for high-frequency traders, a human being programmed that and can decide if he or she chooses to override it. I think the best advice I can give is to understand that temperament and not intellect is what turns you into a successful long-term investor.

Q: Why did you decide to start a podcast?

I started the podcast because I love featuring people doing cool or unusual things, and I thought that there was room for a podcast that was really more of a conversation than a question and answer. So far, I’ve been absolutely delighted and really enjoyed learning so much from all of my guests.

Q: How is your weekly schedule divided between work, Twitter, podcast, and family?

I am very lucky in that my normal disposition is to be lazy bordering on sloth, but seriously, after I elevated Patrick to CEO of OSAM, I set up my daily calendar to be as open as possible. I basically do a ton of reading every day, have some fun on Twitter, and talk to a lot of people — many of whom I actually met on social media.

I think that for Twitter and other social media to become what they can be, which is a global intelligence network, you need to take the next step and meet people and speak with them in real life. I’ve done that and it’s quite amazing the quality of people you meet, and especially those that come from outside your normal network, which allows for ideas and other thoughts to come in to your domain. I think it’s a tremendous use of Twitter and things like Polina's Profile Telegram chat that we’re doing right now.

Q: You seem to have passed on your curiosity and thirst for learning to your kids. They’re successful and seemingly fulfilled in their own ways. Any parenting tips?

Thanks very much for the kind words about my kids. I really appreciate it. And yes, I do have some advice that worked well for me. When my wife and I were young, we discussed what we wanted to achieve as parents.

Patrick was born when we were both 24 years old, but we already had a very strong idea of how we wanted to raise him and our other kids. In a phrase, our goal was to raise great adults. If you think about that for a minute, you see that it precludes all sorts of behavior that many parents naturally fall into.

You can’t say, 'Because I’m the boss,' you can’t say 'Because you’re living in my house, it’s my rules.' If you want to raise a great adult, you want somebody who can explain and think about why they want something. The same goes for curiosity. I love books and have a large collection, and any time either Patrick or one of my girls came and tried to use me as Google, I would point at the bookshelf and say, 'Look it up in there.'

My kids found that increased their interest in other things they found along the way of looking up the answer they were seeking. I’m very proud of all three of my kids!

Q: What have you found to be the key to a long, happy marriage?

For me, it was the understanding even at age 22 when I got married to my wife that successful marriages don’t just happen — you have to work at them constantly. The best advice I can give on that score is to be as communicative and open with your spouse as you can be, and don’t assume that even though you might have been with them for years that they can intuit what your thoughts or feelings are. We’re not mind readers, and being constantly aware of this keeps you conversing with your spouse and "checking in" to make sure everything is OK.

There are lots of times when things aren’t OK, and you need to deal with them. If you let them fester, they can become deadly. Another thing that both of us agreed to before we got married was that we were truly in this for the long-haul. And so the hills and valleys of our relationship were just that and not anything that would make us want to end our relationship.

Q: What fields or assets are you most excited about over the next 5-10 years?

I think that we are in a golden age for individual investors. The amount of tools, platforms, and access to new ideas both through social media and other areas on the Internet have profoundly changed the field.

It’s become far more level for diligent people who want to search out the latest and most interesting investment ideas. Personally, I think that the basics of investing in public markets remain pretty much unchanged, but one thing that I’m incredibly excited about is the future of customization for people's portfolios.

My company has a platform called Canvas that allows clients to tax manage their portfolios in a way that generates possibly 50 to 100 basis points of additional return outside of market return. We can also immunize large positions that they may have because of where they work so for example, if we have a client who is a bigwig at Google, we can exclude the technology sector from his or her portfolio.

We also have the ability to fine-tune ESG, or social investing, right down to the client's very specific needs. An example, one of our clients wants part of her portfolio to be devoted to companies that have 20% or greater women in C-suites or on the board. We can do that.

For people who aren’t using an asset manager, the quality of insights available just on Twitter really amaze me. I did a podcast with a young researcher named Lily Francus who is famous for her 'NOPE' indicator. It’s really quite a fascinating approach to investing, and now everyone is available to follow her because of social media. These types of things would’ve been impossible when I began my investment career.

Q: What's your favorite story of perseverance that has helped you through your career perhaps and/or other difficult life moments?

I love the books about [Ernest] Shackleton and the perseverance it took to get his team out alive. I also love the book Unbroken, which is about the ability to survive a Japanese prisoner of war camp during World War II. If you’re looking for more current examples that I find inspiring, the book Can't Hurt Me by David Goggins is quite good. (Read David Goggins's Profile Dossier here.)

Q: How do you decide who you will mentor? What generally goes under mentoring?

That’s an interesting question. I have many requests from people who would like to work with me on mentoring issues. One of the things that I look for are traits where I know I may be able to help that person. So once such trait is perseverance. I’m sure you can see where this is going, right? I love to see individuals continue to engage me either publicly on Twitter or privately through DMs or texts.

One thing that I passionately believe is that I can’t change another human being. Only that person can change and only if they want to— I can assist them in that change and I’m happy when I’m able to do that, but I also think that external motivation is very fleeting. You need internal motivation to make any real change. Finally, several of the people I work with I actually invited because I found what they were working on so exciting and different, so this is a two-way street. I am learning a lot too!

Q: What pushes you to stay curious and humble?

I have been voraciously curious since I was a kid. My parents got so tired of me saying, 'But why?' They channeled my energy into things like reading encyclopedias, and in fact, reading virtually anything. I was lucky enough to grow up in a house that had a ton of books, and I find that curiosity is something — as Dorothy Parker remarked — that there is no cure for.

I also like the Steven Wright joke that goes, 'Curiosity killed the cat, but for a while I was a suspect.' So I really don’t have to try to be curious, it’s a natural affliction, but one that I wouldn’t trade for anything.

As to being humble, as you go through life, you learn a lot and one of the first things you learn, is for the most part, you’re not nearly as smart as you think you are. Coming to this realization is a godsend, because it keeps you in what I call 'beginner's mind.'

Q: What are you most interested in learning about these days?

These days, I have been fascinated by and continually studying what I’m calling 'The Great Re-shuffle.'

We are living through one of the most fascinating periods in human history, where all of the old models and institutions are crumbling, and their successors have not yet been determined. Social media has within it the seeds of a global intelligence network, but only if you use it correctly.

Curate your timeline and who you follow with diligence, try and pay as little attention to the noise and the shouting, and spend more of your time concentrating on the great ideas and then getting to know the people who are offering them.

I think a side effect of the great re-shuffling is a sort of emotional mind virus that unfortunately I have seen infect far too many people. It seems to be a result of the increasing velocity of information and knowledge that are rapidly changing what I call base rate or consensus reality. In such environments, many often simply say this is too much and end up reverting to simpler and or more emotionally appealing models. I think generally, that’s a mistake.

So I spend much of my time reading about and trying to synthesize ideas about the world of tomorrow and what it will look like. I personally am very bullish on it and I think if people spend more time looking at sites like progress.org or humanprogress.org, they would see that there is a tremendous amount of great strides being made in the world in general.

Things like the number of people dying from dysentery or bad water are rapidly declining and sometimes we focus too much on our 'first world problems' and lose sight of just how much the rest of the world has advanced.

Q: Since The Profile is all about improving our content diet, what are your go-to sources for quality information or education?

So you begin with an excellent resource, Polina's Profile. There are lots of great blogs like Alex Danco, Tim Urban, and really almost too many to mention. The good news is that most of them are also active on Twitter, so you can curate a kick-ass information resource that was impossible prior to social media.

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