Nobel Prize-Winning Research: How Removing Emotion Is The Key To Investing with Dr. Richard Smith on Episode #0196

Intro [0:00]
EA Interviews Episode 196. Inspiration, transformation, success stories, and the Imperfect Action Round seven days a week. Join Mario Fachini for today’s Expert Authority Effect Interview.

Mario Fachini [0:46]
Investing, you’re doing it with your life, you’re doing it with your health, you’re doing it with your family, but what are you doing for your wealth and your business? I’m excited to have Dr. Richard Smith here talking about investing with minimal risk and using no Nobel Prize research to take the emotion out of investing for huge gains. I’m going to bring them up right after we thank our sponsor.

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Mario Fachini [1:26]
Here he is, ladies and gentlemen, Dr. Richard Smith. Richard, how are you feeling today?

Dr. Richard Smith [1:31]
I’m doing great, Mario. It’s great to be here. I loved your intro. I love that you connect investing to a bigger picture than just the stock market.

Mario Fachini [1:43]
Well, thank you. I appreciate that. Usually, I have to wait until the behind the scenes afterwards for people to say they enjoyed it. But, sincerely, thank you. I appreciate that. I want to just dive right into it. I mean, investing is, depending on who you ask, some people think it’s sexy and it’s fun. And others think it’s the most boring thing in the world. And why did you want to get into it? And how do you make it sexy and fun and not boring? Because I know there’s a lot of upside if you know what the heck you’re doing with it, would you agree?

Dr. Richard Smith [2:16]
I think there is. And what I’m really inspired to do is kind of change the way people think about investing. So that’s why I love that you kind of connected it to what you’re doing in your own business, what you’re doing with your family, what you’re doing with your education. Because I think that most people approach the financial markets a little bit too much like a game, you know, or conversely, exclusively like a business. So those are the people who find it really, you know, boring. You’re just treating it exclusively like a business. And then the people that are treating it like a game or like going to Las Vegas –

Mario Fachini [2:51]
Oh, you can say gambling.

Dr. Richard Smith [2:51]
– that’s sexy, but it just doesn’t work. You know, Robin Hood is bringing a lot of people into the markets right now, young people, and I think that’s phenomenal. I hope that they stick around for a while rather than just get kind of drawn in by the sexiness of it. And they got their whole lives to make this incredible wealth building mechanism work for them. And they just need to think in a little longer time horizon. So I think, how do you make it sexy and boring at the same time? I think that’s the trick. One of the biggest contributors to the kind of chronic underperformance of the individual investor is overtrading and trying to do too much.

Mario Fachini [3:47]
How would you define that? Because I’ve heard that before, but does that mean ten times a day, ten times a week, ten times a month, 100 times? I mean, how would you define the overtrading?

Dr. Richard Smith [3:59]
For me, my core system is really about helping people build their core portfolios that they hold for the positions on average for at least 12 to 18 months. And I think that’s actually a sweet spot for individuals because if you’re trying to do day trading, it’s really kind of like jumping into the MMA octagon when you really haven’t even been to the gym and think that you’re going to survive there. You might do okay for a little while until the big guys come in and put you down on the mat. So I think 12 to 18 months holding period, that definitely puts you in the minority. And that can still be sexy and fun, but it’s not overtrading. I think, if you want to do shorter timeframes in that, you really got to be prepared to put a lot of your life energy into the markets. But if you’re willing to build a portfolio of 15 to 20 core investments, and have a target holding period of at least 12 to 18 months for those investments, it can be very sexy, it can be very creative, it can be very individualistic. But it also won’t take over your life.

Mario Fachini [5:23]
So I just want to put a disclaimer here, nothing being said is – what do we have to say? Check with your attorney. None of this is actual advice. I do want to say it and I’m not completely joking, but I was about to ask you something. And I go, I should probably put a disclaimer here first. The question was, when you’re talking 12 to 18 months in holding, what are some of the best areas you should get into in your portfolio? And, again, I know it’s not actual advice and all the legal stuff. But I also wanted to ask, does it depend on the person? Should you go towards your passion? Or should you just focus on the profits? Because you can invest in something and it might not be making a ton of money, but you’re just excited about it. Is that a good or bad thing?

Dr. Richard Smith [6:10]
I think it’s a great thing. One of the reasons I’m in this business is because I see a problem that needs to be solved and I think that there’s way too much herd mentality that goes on in the financial markets. And of course, you see that in the story stocks that everybody’s paying attention to that anytime a story comes out in the media, you’re guaranteed to get some reads if you’re talking about Tesla or TikTok or, you know, all the story stocks that are in the news at any given time. And then ETFs and indexing and everybody being in the exact same stocks, you know, to me, that’s not the American way. People with capital or people who want to have capital, when you are investing that capital, it’s a serious thing. You are turning over your life’s energy, in a way, to an enterprise, that, yeah, you want it to be successful in a passive way, because you’re not in there running it yourself. But it kind of matters where you put your capital. And I think investing is a lot more engaging This is how you kind of make it sexy longer term, is to align it with your values but be able to think on a little longer term timeframe. So my work is all about helping people have a systematic way to engage in the financial markets, where you really can kind of put some of your own – you can use tools and technology to make sure that you kind of hold your own against everybody and you don’t make any terrible mistakes. But, ultimately, I believe in people. I believe in individuals. And I believe that how you allocate your capital is part of your life. It is part of your creativity. And I think not enough people think about investing that way. And so that’s really what I’m inspired to do is kind of create a framework and a technology where people really can express their values in the market more effectively, and still, you know, set themselves up to be successful.

Mario Fachini [8:17]
And I’m glad you’re bringing this up, because it seems like people just get drawn into how can I make fast money, this, that, the other thing? And I know there’s software’s out there and people out there who are doing micro trades, hundreds of transactions a second, and it’s just all about the calculations and algorithms. But I also know that when it originally started and I’m sure – I don’t know the percentage, but I know there’s companies still out there that you put ten years into a business, you go, “Well, let’s make it go public.” The intent for 100 people to just hop on board and see if they can make a couple of bucks after everything you’ve put into it, it really is let’s raise capital so we can take it to the next level and get people who want to support us. I kind of equate it like to a birthday party, are you going to invite 1,000 people, and 980 of them? Maybe 920, because we want it to be a good party, or maybe not – whatever. There’s going to be 100 people there.

Dr. Richard Smith [9:18]
This is actually one of the reasons I was excited to come on your show, because I think your audience kind of understands business better than a lot of audiences. Because you do have an entrepreneurial background yourself and I think a lot of the people that you talk to are entrepreneurs. And I think that people need to think about investing in a similar way. At least, I think there’s a missed opportunity here.

Mario Fachini [9:46]
You want the right people backing you, not just running algorithms and stuff.

Dr. Richard Smith [9:52]
Exactly. And I think algorithms definitely help to kind of help you do risk management, keeping from blowing yourself up. And we can talk about that. That’s where some of the Nobel Prize winning research comes in. But, ultimately, I think there’s an opportunity for people to really understand what they’re investing in better, to express their values better, and still be successful, and not just have to kind of follow the machine.

Mario Fachini [10:19]
I would like to dive into that, because I’ve thought about it before. Like, would I ever want to take my company public? Or would I always want to keep it private? And I know, there’s pros and cons of both. But this really is for me. Is there a way you can only let certain people invest in the company? Or is the whole point of going public is it’s public?

Dr. Richard Smith [10:44]
I mean, when you go public, it’s public.

Mario Fachini [10:49]
You generally don’t always give everyone an invite to the party.

Dr. Richard Smith [10:52]
Yeah. When you go public, it’s public. You’re trying to raise capital at a very high level there. And you will have large shareholders, of course, that will be influential. And the rest, you know, most of the other shareholders will not have any influence. But it is –

Mario Fachini [11:12]
Is that when you’re talking about the Class A and you know, the people who invested before it went public and –

Dr. Richard Smith [11:18]
And people that acquire your shares, businesses, large institutions, pension funds, et cetera.

Mario Fachini [11:24]
Excellent. So let’s get some tangible steps. Because, yes, Expert Authority World is entrepreneurs and they’re already successful. It’s not beginners. They’re looking to go to that next level that you’re already at. And they just need some guidance. Let’s do three, what are the top three things you could say if you’re looking to do investing seriously? You already said a little bit long term, 12 to 18 months. But is there a three to five year mindset or ten year mindset you should have?

Dr. Richard Smith [11:58]
Absolutely. Absolutely. So let me take a step back for a minute and just talk about one of the most important mindsets that you need to have. And this is where the Nobel Prize winning research comes in. So two Nobel prizes in economics have been awarded for the shocking observation that – drumroll please – we hate to lose.

Mario Fachini [12:21]
I’m sorry I was drumming. Say it again.

Dr. Richard Smith [12:23]
We hate to lose. Do you hate to lose? I hate to lose. But the rub is that, we behave differently depending on if we’re losing on an investment or if we’re winning on an investment. So Daniel Kahneman – ever heard of him? – he wrote Thinking, Fast and Slow, a popular book out right now. Richard Thaler, more recently, he wrote a book called Misbehaving. Michael Lewis, writer of Moneyball, he was writing about Kahneman and his early colleague diversity. And what they found out was that, you know, when we’re losing on an investment, when you buy a stock and it goes down, you don’t want to sell. Because to sell, in your mind, means that you lost. And so you hold on to the stocks that are going down in the hope that someday they’re going to get back to breakeven. That’s what Richard Thaler got his Nobel Prize for, showing that everybody wants to get back to breakeven. So when you’re losing, you are risk seeking. You’re wanting to take on more risk. You will double down on the stock. You will triple down on the stock. You’ll turn a short term trade into a long term investment. Anything but sell the stock, because that means you lost and we hate to lose. The problem is, when you are ahead on an investment, the fact that you hate to lose attaches itself to your profits. And you become fearful of losing your profits. So you become risk averse when you’re winning. You tighten up. You loosen up when you’re losing and you tighten up when you’re winning. Now, couple that with the fact that the markets have momentum, it’s the only thing that the technicians and the academics agree on. Things that are going up tend to keep going up and things that are going down tend to keep going down. And every once in a while the market just you know, completely defies logic. John Maynard Keynes famously said, the market can remain irrational longer than you can remain solvent. So sometimes markets just go nuts or individual stocks go nuts. And so behaviorally, we have a psychological bias that makes us not be solvent as long as the markets can remain irrational. But we don’t have the corresponding profit behavior to let our profits go nuts and get away from us in ways that we never thought possible. So we’ll let our losers get away from us in ways we never thought possible. But we don’t let our winners ever get away from us in ways we never thought possible. So that is really important to understand. I think it’s responsible for the vast majority of why individuals don’t succeed in the markets. And I think it’s one of the things that professionals really understand better than all the individuals that aspire to succeed in the markets. And I think it’s something that not just applies to the markets, it applies to life, too.

Mario Fachini [15:39]
Wow.

Dr. Richard Smith [15:41]
Is that resonating with you?

Mario Fachini [15:42]
That is absolutely resonating. And I know I’m not the only one. Do you have any tips on how to not have that emotional attachment or trick your own subconscious, because, obviously, if you’re losing money and I’m not even referring to putting call options but you want to hedge your bet. And if you’re losing it, you want to dump it before you lose ten times too much in the hopes that in a decade it levels back out. And maybe it will. Maybe for someone that makes sense. But conversely, if you’re profiting, I want to examine more how do you turn those profits and go to what you were saying the point where you can’t comprehend it, instead of hanging on and preventing it from happening.

Dr. Richard Smith [16:28]
I started a service in 2005 called TradeStops.com. I recently exited that business and the partners I was working with took it over. But we offered simple trailing stop loss alerts on stocks. And this is how I discovered this. So a trailing stop loss, just in case somebody in your audience doesn’t know what that is, if you buy a stock at $100 and you are using a 25 percent trailing stop loss. Then initially, if it doesn’t go up another tick, it just goes straight down from 100 bucks, you’re going to sell if it hits 75 bucks. But as your highest point of profit increases, so if you get up to $200 a share, let’s say, you got to double. Now, your stop loss is 25 percent below your highest point of profit, so at $150. So you are kind of protecting your profits as you go up calling protective stops. So what that does is it makes you risk averse with your losers and risk seeking with your winners. So I was back testing all these people’s portfolios, including professional newsletter writers and professional investors and the guy that I actually learned about trailing stops from – you know, taught me about them. I applied them to my own portfolio. I started investing in like ’99. And my portfolio was up 300 percent in about 18 months. And then it was back down to where I started in about two months after the dot com bust. And I went back and back tested a 25 percent trailing stop strategy on my own decisions over those 18 months. And I would have gotten out, you know, instead of giving back my 300 percent gains, I would have gotten out with 150 percent gains with really no emotion and no stress. Buying the same stocks, the same amount of money, just using a trailing stop loss exit strategy. So I mean, it can be that simple. So I back tested the gentleman who I actually learned about this strategy from, all of his trades, and I knew he was using trailing stops. And he was using trailing stops to limit his losses, but he was getting out of his winners early. And so when you used that system to stay in your winners until they hit the trailing stop, like I bought Tesla at 420 bucks back in March when the market crashed. And then it shot up to, like 1,000 bucks in a month. And it was really hard to not sell it at that point, because it was like, “Oh, it’s up so much in a month. How could it go up more?” And then two months later, it was at at $1,800. So sometimes the markets just go nuts. Individual stocks go nuts. And so even a simple protective trailing stop strategy can make be risk averse with your losers, take rational losses, and be risk seeking with your winners, what I call, irrational profits. This is not easy to do. I can tell you how to do it. In fact, I am telling you how to do it. But I’m telling you that even though it’s simple, it’s not easy. You do have to train yourself.

Mario Fachini [19:59]
Create a habit with it.

Dr. Richard Smith [20:00]
You got to create a habit with it. Absolutely. So I’m a big fan of habit technology. Have you read Atomic Habits by James Clear?

Mario Fachini [20:08]
It’s on my list. I just heard about it from another guest.

Dr. Richard Smith [20:11]
Great book. Absolutely. It is about behavior. It’s about training yourself to have the right set of habits that work for the system in which you’re operating. So to be risk seeking with your losers and risk averse with your winners is the wrong system for the stock market. That’s not how it works. It might work in a business where you’re, you know, selling t shirts or something. But it doesn’t work in the stock market. In part, because the stock market is a system where everybody’s trying to outguess each other. It’s kind of an anticipatory system, as we say in the complexity science world. And so the way it works is counterintuitive, because everybody knows kind of what the majority of people are thinking and what they’re going to do. And the people who are really going to make money off that, especially in the short term, are thinking a couple steps ahead. So that’s kind of sentiment or contrarian approaches to investing. So I hope that helps and gives you a little bit of practical advice. But, also, just really understanding that because we hate to lose and that we’re risk seeking when we’re losing, we want to take on more risk to try to get back to breakeven, and then we’re risk averse when we’re winning, want to take those profits off the table. And you got to flip that. You got to flip it on its head. And even a simple 25 percent trailing stop loss strategy, if you’re trying to hold your stocks for at least 12 months or more, that’ll do it for you. It’s that simple.

Mario Fachini [21:51]
Would you ever advise a 15 percent or 40 percent?

Dr. Richard Smith [21:56]
Yeah. So what I did was I developed some algorithms that use volatility to set an optimal stop loss level depending on the stock. So with a stock like Walmart or Johnson and Johnson, yeah, 15 percent to hold that stock for a year or more is is perfectly adequate. On Tesla and Twitter, no way. That stock can move 15 percent in a week. It can move 15 percent in day. So that’s not wide enough, if you want to stay in for, you know, 12, 18 months or more. So part of really being successful is knowing what your goal is and what your time horizon is, and thinking about that beforehand and having a plan and executing on that plan. And so those are really important questions that people need to have answers to before they put their life force, you know, their hard earned capital into the markets.

Mario Fachini [22:55]
Now, I have a couple questions with the three and five year plus investing? Do you treat those very similar just for longer periods of time? Or are those a totally different strategy that you advise?

Dr. Richard Smith [23:09]
So my goal is to hold my best stocks for three to five years. But I don’t pick out what those stocks are, which stocks those are going to be ahead of time. So I take the approach of I want to identify 100 or 200 candidate investments that I’d feel good about investing in. That’s where the kind of the personal values piece comes in. And then I want to use technology and factors in order to let those stocks kind of sift through a process over time and end up with the most money in the ones that are going to be winners over a three to five year period. So that way, it still has my kind of imprint of what I care about, what I value, what I want to put my money in, yet I’m using well-established market factors to kind of sift through those stocks over time and end up with 15 or so of the absolute best ones in my portfolio, with, hopefully, a longer and longer average holding period on those stocks.

Mario Fachini [24:19]
How long do you test them out for? Do you test for the 12 to 18 months? Or can you do it in six or 12 before you identify which ones you want to hold for three to five years?

Dr. Richard Smith [24:30]
I mean, w when I develop algorithms, I back test those algorithms over, you know, at least a 20 year period because you want to see different market conditions. And I’m not sure exactly I understand your question, but you can’t know ahead of time which ones are going to be the three to five year winners.

Mario Fachini [24:59]
I was asking about the, I guess, I’ll call it an incubation period. Do you always do at least 12 months of watching something before you identify you made the top 10 or 20 out of those 100?

Dr. Richard Smith [25:10]
No. No. My process is to, you know, get into 15 or 20 stocks that I think are good candidates. And then the ones that don’t prove themselves get ejected. New ones get in and the ones that keep winning stay in. So it’s sort of like you’re building up a stable of racecars or horses. And, you know, you’re keeping the ones that are winning. And the ones that don’t pass the test, they go out and you add some new ones in from your stable.

Mario Fachini [25:39]
It’s also reminded me a lot of marketing, because marketing is a test in advertising with paid ads. You know, a lot of people they’re bashful when they get in. They don’t want to put enough. They don’t want to do the testing. They don’t want to get the data. They don’t want to wait. Sound familiar?

Dr. Richard Smith [25:53]
Absolutely.

Mario Fachini [25:55]
And the real key is you do dozens and dozens and dozens of ads, quickly figure out which headlines are working, which images, which this, which that, and you figure out what’s working, then you scale it up. Instead of running two ads and just thinking both of them are going to be bad. Almost always the ones you think are going to work don’t. And the ones you weren’t even looking at somehow do.

Dr. Richard Smith [26:18]
Exactly. And I think you can take a similar approach to investing.

Mario Fachini [26:23]
Yeah. Patience and creating a good habit.

Dr. Richard Smith [26:26]
And using data, for sure. If you know what – do more of what’s working and less of what’s not working.

Mario Fachini [26:33]
That’s a good approach, because it doesn’t lie. And sometimes it might just entertain you. You go, “Huh. Really? Okay.”

Dr. Richard Smith [26:38]
And we do lie to ourselves quite readily. So you do need some data to help you know when you’re telling yourself a fib and when you’re too attached to your investments.

Mario Fachini [26:52]
I will say the biggest one I have to train people on when we’re talking about advertising is at least 30, sometimes 40 to 60, days of testing just to get data. And most people don’t want to invest what they’re willing to ask in the offer. If you have a 5, 10, 20 grand offer, they’re like, “Well, I got 200 bucks for ads.” It’s like you want someone to invest 10 grand to 20 grand with you, but you don’t want to invest it to figure this out. It’s the [unintelligible] [00:27:23]. So I was excited to know the psychology behind with everything you’re talking about, because it’s fun. And once you understand it, it’s not fear. You don’t need to be afraid of it. Everyone has a subconscious and you can overpower it.

Dr. Richard Smith [27:39]
Yes. Absolutely. And a lot of it is about having the right expectations. You want to set ambitious and aggressive expectations, but not stupid expectations. You know, like $200 in ads to sell a $10,000 course. It’s just not going to happen. It might happen like getting struck by lightning might happen. But that’s not a sustainable business strategy. Look, I’m finishing up my PhD in 1999. I’m about to become a doctor of uncertainty. So I know a thing or two about the mathematics of uncertainty at this point. And I’m at an investing conference and one speaker is up, and he’s talking about how you can make 12 to 15 percent a year with only a couple hours of work a month. And then the next speaker gets up, and he says who wants to make 12 to 15 percent a year? Who wants to make 100 percent a year trading options? And, literally, keep this in mind, I’m pretty numerically literate at this point. I hear myself say, I have to wait a year to make 100 percent? Like, I want to make 100 percent next month. Now, this is just stupid. It’s stupid. You might make 100 percent in a month, but that will be like getting struck by lightning. Or maybe the market is going nuts and you happen to get into one or two stocks that fulfill your fantasy. But it’s not a sustainable long term wealth building experience. You will give all that back and more.

Mario Fachini [29:27]
You’re up today but it’s not going to last.

Dr. Richard Smith [29:30]
No, it won’t last. Meanwhile, if you set a goal above 12 to 15 percent, let’s say you want to do 18 to 20 percent a year. I think that’s totally achievable if you have a good process, and you’re clear about what you’re doing, and you’re willing to put the time into it, and you’re willing to be disciplined. That’s not a crazy number, you know, 15 to 20 percent a year. That’s what I think most people should be aiming for as individuals investors in the markets. And some years you’ll get lucky and you’ll do 30, 40, 50 percent. Other years, you know, you’ll end up with loss. But you have to know what are the realistic outcomes for the timeframe that you’re working on, that you’re working in and then set your targets a little bit above those, but not stupid targets. You know, not stupid targets.

Mario Fachini [30:28]
I got one more question for you – well, I got a lot more, but one more for this part and it deals with the dividends. Is there a point where you don’t want to cash in on the dividends too early? Do you ever want to pull them? Or what is the good timing for that? Should it only be a certain percentage you take out while it continues to grow?

Dr. Richard Smith [30:50]
So I think going back to one of your earlier questions about, you know, what about a ten year strategy. If you want to be in the markets for, your time horizon is ten years or more, I think, a dividend reinvestment strategy, where you’re actually having the dividends, like you can even do this direct with some bigger companies where you call them and they have a program where you can buy stock through them. And then they’ll automatically buy more stock with the dividends. So that’s a great long term strategy. And then in terms of what you do with the dividends, if you’re not reinvesting them, it’s really a personal question, again, about what is your goal? What are you in this for? Do you need income? Are you getting the dividends for income? If so, then you need to take that money as income. But if you don’t need it as income, then you absolutely should reinvest that money. And maybe it’s not automatically in the same stock that issued the dividend. But it’s going into your brokerage account. You’re leaving it there. And you’re building up cash. And then you have cash available for when there’s a new opportunity.

Mario Fachini [32:06]
Excellent. Well, thank you for sharing that with us. We’re going to do one fun thing and this is called the Wheel of Whatever. And it’s always the right question at the right time.

Dr. Richard Smith [32:22]
All right. I like it.

Mario Fachini [32:25]
There it is, look at that question. For you, it is, what is the best thing someone could invest in now?

Dr. Richard Smith [32:38]
I think that the best thing somebody that can invest in now is their own education. And so all the people that are out there that are getting interested in the markets right now, that have time on their hands, that are getting into the fascination with markets, they are fascinating. It is wonderful. It really is. And you can build tremendous wealth. You need to take a step back. Slow down a little bit. Take the money that you would have put into a stock. Read a great book. And make sure you’re in this for the long haul. And that you have the right expectations and that you hit out of the park.

Mario Fachini [33:25]
Excellent. Do you have a timeframe? Should you learn for a couple of months, six months, 12 months? I agree 100 percent, I tell everyone the same thing for marketing and book publishing and different stuff. There is a point where you have to take action though. How long would you say is a good amount of time?

Dr. Richard Smith [33:44]
I think an initial three months of educational effort. And then you can gradually step your way into your full capital allocation. So say, you know, maybe take 20 percent of the amount of money you ultimately want to invest in the market after your three months of education, you put it in. And then two months later, you put in another 10 percent. Two months later, another 10 percent. So you’re gradually walking in your capital –

Mario Fachini [34:16]
Over the first year?

Dr. Richard Smith [34:18]
Over the first year. Exactly. So you will make mistakes, you know. But you do need to be in the markets in order to really test yourself. Paper trading is not good enough. You will not really go through the emotional ups and downs that you ultimately will have to deal with as a human being in the markets with your money on the table. So, yes, get some skin in the game. You need that as part of your education. But don’t put all your skin in the game right out of the gate. Put some skin in the game, see how you’re doing. Put more skin in the game, continue to educate yourself and, I think, over a year period of time If you do that, you’ll be setting yourself up for some tremendous long term success. And you won’t really miss anything. You got decades.

Mario Fachini [35:09]
Well, I appreciate you for sharing that. We’re going to thank our sponsor and come back for the Imperfect Action Round.

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Mario Fachini [36:46]
And we are back with the Imperfect Action Round. Richard, are you ready to take imperfect action?

Dr. Richard Smith [36:52]
Absolutely.

Mario Fachini [36:53]
Three questions, 60-second answers. The first one is, what is the fastest path to the profits?

Dr. Richard Smith [37:01]
The fastest path to the profits is to be risk averse with your losers and risk seeking with your winners. Have I not made that clear enough yet?

Mario Fachini [37:11]
I did catch that just once or twice.

Dr. Richard Smith [37:13]
So let your profits get away from you to the upside. And don’t let your losers get away from you from the downside. I have a few seconds left, do you know what it takes to recover from a 90 percent loss?

Mario Fachini [37:25]
What’s that?

Dr. Richard Smith [37:26]
Percentage gain. You have to have 1,000 percent gain to offset a 90 percent loss. You buy a stock at 100 bucks and it goes down to 10, that’s a 90 percent loss. To get from 10 back to 100, you don’t need 90 percent gain. You need a 10X on that stock. You need 1,000 percent gain. So don’t let your losers get away from you, because it’s hard to get 1,000 percent gains given our psychological biases, you know, our inability to tolerate big profits.

Mario Fachini [37:58]
Wow. I knew some stats with profits with goods and services and marketing. Like, if you have $100 product and you reduce the price to get – you know, the theory is, I’ll reduce the price 10 or 20 percent, but you need exponentially more people buying it to offset that little bit. It’s almost never worth it. And it sounds very similar but much worse than this scenario. All right. Number two, what’s the biggest problem you see your prospects making and the fastest way for them to fix it?

Dr. Richard Smith [38:30]
It’s really just impatience and, also, being misled by the media and by all of the businesses and mechanisms in the markets that don’t make money when you make money. They make money off of things like you trading. So that’s one of the biggest issues I have with a lot of the business models in the retail space. You know, they make money off of you trading. And overtrading is not good for you. You will not make money if you are constantly churning your account. The only people that will make money are your brokers. And so, have a little bit of patience. Be in this for the longer duration. And turn off the T.V., especially during market hours.

Mario Fachini [39:23]
Excellent. Number three, what is the best way to maximize customer lifetime value?

Dr. Richard Smith [39:30]
Deliver real value. So I think, especially in the financial services, there’s a lot of mistrust, and rightfully so. And I think that people are hungry for real value and real values in our world today. And getting a little tired of, I would say, the value lists. The distractions. And so a way to build trust with your customers and to create real long term value is to be authentic, honest, and deliver real value. And then your customers will stay with you. Like, brand matters more than ever these days.

Mario Fachini [40:24]
Because that’s also the reputation.

Dr. Richard Smith [40:26]
Its reputation. And it’s down to the individual level now. It used to be, I remember people saying to me, brand is only for Johnson and Johnson and Pepsi. The rest of us shouldn’t worry about brand. But that’s not true anymore. Reputation is brand. And people know it. It’s not hard to tell. And if you don’t deliver real value to your customers, they’re not going to stick with you. And so the best way to maximize lifetime customer value is to deliver real value, build real trust. And, again, you’re in it for the long haul. We got to slow things down a little bit. We got to think a little longer term. Everything’s been pushed down to the long term.

Mario Fachini [41:09]
I agree. I love planning stuff out at least three to five years, but aiming for that ten year mark, because there’s that quote by someone smarter than me that says, most people overestimate what they can do in a year. And they underestimate what they can do in ten. It’s super true pretty much everything.

Dr. Richard Smith [41:29]
And you know what’s really fun and really satisfying, Mario?

Mario Fachini [41:33]
What’s that?

Dr. Richard Smith [41:34]
Real success over a ten year horizon.

Mario Fachini [41:38]
That wasn’t a fluke that you know you create it and you can create it again.

Dr. Richard Smith [41:43]
No. Like, I worked my butt off in my business, you know, for 15 years. It was 15 years of overnight success. It was really gratifying. And it changed my life. No one trade ever changed my life on a short term timeframe. So, definitely, look out a little longer. You’ll put yourself in the minority of market participants. And you’ll really put yourself above, eventually. It will take a little time. And it will seem like you’re missing out on some things, but you’re not. And what’s really satisfying is winning big time.

Mario Fachini [42:22]
Well, that sounds good. And I appreciate you for sharing that. What are some books that you could recommend to Expert Authority World?

Dr. Richard Smith [42:30]
One that I came across recently, it’s not a hard read but it’s a great book, it’s called Zurich Axioms. Zurich, Switzerland, you know? And written by a guy who is Swiss. And it’s all about risk management and risk taking. And really not a lot of math, more about kind of qualities of it. And I’m working on a book myself called the Risk Paradox. And what I see is that people are so risk averse that they end up actually creating the very risks that they’re trying to avoid. So, you know, you have to take risk to be successful. You just do. Otherwise, you put your money under the mattress, you’re going to get beat by inflation.

Mario Fachini [43:24]
But you got to do it controlled, like you’re saying, don’t be crazy with it and have that 90 percent loss.

Dr. Richard Smith [43:29]
Exactly. You got to learn how to take risk and be in control. And I think the book, The Zurich Axioms, which is one that most people probably haven’t heard of, but I just came across it recently myself in spite of being at this for 20 years. And then I talked to a friend of mine, who’s a 60 year legend in the business, Larry Williams, and, and he said, “Oh, my God, that’s my favorite book.”

Mario Fachini [43:55]
Well, I appreciate that great recommendation. Thank you so much for sharing with Expert Authority World. Where would you like people to learn more?

Dr. Richard Smith [44:04]
At RichardMSmith.com. So I’m working on new technology as we speak that I hope to be out by the end of the year. I’m also working on a book. And the best place to keep abreast of all the new developments is at my personal website. RichardMSmith.com.

Mario Fachini [44:25]
Excellent. Well, I’ll make sure that’s on the show notes page on EAInterviews.com. Thank you again. It has been enlightening and it’s been a pleasure.

Dr. Richard Smith [44:35]
Thank you, Mario. I really enjoyed it.

Mario Fachini [44:37]
All right. Expert Authority World, we have another great episode here today. See you tomorrow. Have a great day. And God bless.

SPONSOR Free Business Book Publishing Course [44:44]
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Mario Fachini [45:18]
Hey, thanks for listening to today’s episode. I hope you got a lot out of it. I know I sure did. If you haven’t done so already, I invite you to subscribe to the show. And also be sure to check out EAInterviews.com for complete show notes, the full interview video experience, links to the resources we mentioned, and more. Have a blessed day and I’ll see you tomorrow.