The human brain makes thousands of daily decisions, most of which have no impact on your long-term success. And when we are faced with a decision that requires deep reflection, we are too often influenced by subconscious bias. Our brain creates a narrative and we are vulnerable to faulty decisions as a result. In this episode, we offer nine questions you can ask yourself to improve the quality of those big decisions.
Watch the episode here
Listen to the podcast here
Before You Make That Big Decision
9 Questions To Ask Yourself To Optimize Your Decisions
How’s it going?
I’m good. How are you? I’m making some big decisions over here.
What’s your big decision? What are you going to eat?
What am I going to have for lunch?
I am thankful that you’ve withheld that decision until after we do this episode. Frank is eating breakfast and lunch, which can be a challenge sometimes if I have to talk longer than I would like to before I can ask him questions. If you open the newspaper, we are March 2022. Businesses, politicians, companies and organizations are littered with dilemmas and big decisions they have to make, much bigger decisions than where Frank has ordered DoorDash from. Should NATO and America give more military support to Ukraine? Do they cross the border and get more active in this war? Do we do more sanctions?
Where should Deshaun Watson go play football?
It has already been chosen. The Browns went and traded for a quarterback who has multiple lawsuits with 22 different people who are accusing him of sexual assault at massage parlors. It’s not an easy decision if you are an organization to go into that situation. Hire a guy in a long-term contract where you have unresolved lawsuits.If you put someone in there who is going to make decisions that could impact the next 50 to 100 years of this country, you should make sure that you vetted that person and put the right person in. Click To Tweet
You’ve got the country electing a Supreme Court judge. That is a very big decision in the history of the country. There are only so many judges and they only come around so often. If you put someone in there who is going to make decisions that could impact the next 50 to 100 years of this country, you should make sure that you vetted that person and put the right person in. We have got inflation. The Fed raised rates.
There’s always that argument that if you raise them too fast, you will kill the economy and take care of inflation. Do you raise it a quarter-point, half a point or a full point? Should the NCAA allow a biological man to compete in a woman’s swim meet? It’s a very big dilemma going on. If you are not following some of that, a biological man won the 500-meter freestyle. A lot of people are pretty miffed whose daughters spent their whole life trying to get there and then had to compete against a man. That somehow is a very big dilemma where people are arguing that that’s okay.
What about what’s happening in Chicago schools?
It got us thinking about what goes into a big decision. When we have been faced with big decisions, how do we handle them? We believe in constitutes a big decision. That was something interesting. We were talking about what’s the last big decision you made? What’s a big decision you are chewing on? It’s hard to define big. A big decision is, “I left the company for another one. I moved to another city. I left my husband of ten years.”
If you are talking about monumental decisions, we don’t come across those too often. There are impactful decisions that you are making every week that move the needle in your career and investments for what you are trying to do. We are going to try to unpack how to look at some of those decisions.
For our loyal readers, I’m a new-ish dad. We are also making decisions on, “Is our family finished? Are we expanding that family? Is two enough?” Those have ripple effects and you take some of these things for granted in your life, but there are super big decisions. We are talking about things we take for granted. The small stuff that if you were programming a robot, an important decision like, “Should I smash into this wall or should I walk around it?”
Those are the things you take for granted. Together and collectively, that’s what we hope to talk about. What is the unconscious and what is quite conscious? Is there a gray area between the two where sometimes it’s like, “I’m going to put this one on autopilot?” It’s like, “Maybe you should slow down a little bit, not put that one on autopilot. Think it through.”
Most managers say that critical thinking is important in an employee. They ask questions to try to get down to their decision-making capacity and their ability to make a good decision.
We test in eight different ways.
You ask behavioral interview questions about it, but there’s not a lot out there on how to get better at it. There’s a lot of discussion about how we make decisions and how the brain works. My favorite book on the topic of decision making is a book by Daniel Kahneman. If he’s not number one, he’s a top-five researcher in the field of decision-making, how the brain processes and how cognitive biases work.
He breaks it down in his book, Thinking, Fast and Slow, which is a great book. I would recommend it to anyone. He says there are two systems that the brain works on. There is system 1, which is intuitive and system 2, which is reflective. System one is by far the most active part of our brain system. It’s based on impressions, associations, feelings and intentions. It’s effortless. It produces this constant representation of the world and it allows us to walk to avoid.
To give you an example. Before we started, Frank and I always make sure to go to the bathroom, so we don’t have to interrupt the episode. On the way there, I probably made hundreds of decisions. If I was a robot going to the bathroom in my office and you needed AI, think of all the things I had to do. Stand up, don’t run into the desk, pick my foot up and step over the backpack that I left on the ground.
Open the door. Don’t run into the wall when you go to the bathroom. Wash your hands. All those things I did subconsciously. I didn’t have to think. I randomly walked over there. All of this subconscious thinking, which those hundreds and thousands of decisions a day that you make like brushing your teeth and bantering with friends, you are not taxing your brain when you do those kinds of things.
System two is much slower. It’s deliberate, takes effort, and is fully effective when we are learning something. It’s mostly in the background, but it materializes when the stakes are much higher. It requires a little bit more rule-based reasoning. The best example I can think of is if Frank gets into his truck and drives to go get some lunch, he’s not going to be using system two or any of it. It’s pretty much automatic.Even an expert was a beginner once. Click To Tweet
Frank knows his neighborhood, where the taco stand is that he’s going to, how to drive, what a street light is and how his truck works, but if a sixteen-year-old Frank got in that same truck that he had never driven before, who had never driven in his life and he had dad sitting in the seat next to him, his system two would be working on overdrive.
Everything would be new to him. Nothing would be in the background. He would be sweating and nervous. He’d be clenching the wheel a lot more and use rule-based reasoning. He wouldn’t know the roads, so he would be trying to use a map or navigation. Think about yourself. When you learned how to drive, you had to use system two for a while until you got good at it, so it’s pretty much on autopilot when you drive.
There’s a good corollary here. When it’s system two, stakes are higher and as easiest way to stand. Instead of overstanding it, why do insurance companies charge sixteen-year-olds a lot more for insurance than they do 35 to 50-year-olds? It’s because 35 to 50-year-olds have hundreds of thousands of miles of experience driving and it’s become system one.
There’s a testosterone piece and a maturity thing too, but the act had gone from something like, “I can think back to when I was a kid. I was in the car with my dad. It was pouring down rain and I jammed on the brakes. I did a 180 and thank God I didn’t hit anything. I learned at that moment, don’t jam on the brakes, pump the brakes slowly. As a 47-year-old, I do that just like with snowstorms.” These are things that even though you are told or taught at the DMV, it goes from something that’s a two. “I have lived through these hundreds of times like bumping into the wall, go on and take a peek.” You’ll learn.
First, you got to understand that there are two different ways that your mind is always working. System one is fantastic at making the little decisions all day, what you are doing and getting yourself around. It also is good. Think about if your brain had to think about everything. If you had to contemplate every possible outcome ever all the time, you would go clinically insane. You wouldn’t be able to operate if you had to think about everything.
What system one does a great job of doing is it makes sense of millions of inputs, tells you the ones to ignore that you don’t need to worry about and helps develop a narrative. What it does is it actively suppresses alternative stories that might come up in your head. It lets you know that some things are not risks that are worth worrying about.
We have a dog and she’s a year old but as a puppy. Every noise freaked her out and she interpreted it as a threat, like it was a bear or a wolf coming to eat her. No matter what, everything freaked her out. Now she’s a lot more relaxed. Her system one is good at suppressing a lot of the noise. She freaks out when she hears thunder. She hasn’t gotten comfortable with that yet, but it’s similar. Your brain can’t possibly interpret millions of inputs. It has to be able to suppress a lot of it and create its narrative of what you focus on.
The childhood brain or the puppy brain are perfect ways to state it. You graduate from things being system twos, which there are many things being system ones. Once you get over adolescents, out of teens and into your 20s and your 30s and you move past that, you start to have all these experiences and things that were once challenging.
If you ever heard the saying, “Even an expert was a beginner once,” that expert was all system 2 and became system 1. A great argument is Michael Jordan. He wasn’t the athlete that he was at 35. He was still pretty damn good because he had so much knowledge and he would outsmart things compared to others because of that.
One of the things that society rewards people for is how many system decisions do you deserve to make? How many are you given? I read a book on 911, ultimately going after Bin Laden, the number of decisions and people who are making incredibly unique decisions around this very highly sensitive topic and item.
The stakes are high. Obama, the President, admitted, “If this fails publicly, I will be a one-term president.” That’s why this is a publicly elected office. This is a very important job because that’s it. Ian mentioned Supreme Court justices. These are very important things that require a high level of thought and that is the system two types of stuff.
We were talking about what happened with the United States’ decision to withdraw from Afghanistan. That decision was obvious years ago, but it never happened because presidents knew there was a high probability that it won’t go smoothly and could be out of office. I almost give the president a little bit of credit because he’s the only one who had the guts to make an obvious decision. It wasn’t executed well. It could have been executed much better. When Trump and Obama were in, it was an obvious decision. It wasn’t even an obvious decision for Bush to go there. If you look at the history of it, that decision is the stake, so that’s all system two.
Let’s take another nuanced look at that. I’m a new president. Should I do this in year 4 or year 1? In voters’ minds, they are worried about themselves. They have short memories. There’s a 24-hour news cycle. If this flops, I will do it in year 1 because it’s the right thing to do and I got 3 years to recover. That’s system two. This is strategy. These are the pieces that all come together.
The people who are most highly paid are quarterbacks in the NFL and CEOs. People who have these incredible jobs have taken hard things and made their system one. Watch Aaron Rodgers play. He almost looks lazy back there. It’s like this and he goes 50 yards, but he flicks the rest. That isn’t lazy. That’s an incredible amount of work taking something that is insanely difficult. Working so hard, the layperson thinks he’s nonchalant because then he can focus on the system two stuff.Cognitive dissonance is just a separation of the story we believe to be true and new facts coming in, arguing against the narrative in our minds. That's how cognitive biases happen. Click To Tweet
Where we are in the world, that’s how society rewards employees and people. If you are reading this and you are new, this is a great piece of advice that I have talked about here before that I have told Ian. Someone came up to me and said, “If you want to get promoted, can I give you some advice?” “Sure.” This was someone telling me and I said, “What’s the advice?” They are like, “Don’t worry about getting promoted. Become great at your job that we’ll have to promote you.” It fits perfectly right here. What he was saying is take a bunch of system 2, turn it into system 1 and become great. Then we’ll give you more system two in a new role, you’ll process it and what used to be hard will be very easy.
System one is so good at piecing together complete information and building this contextual story that we all live by and are unaware it’s operating. That’s how it leads us astray. When you say the term cognitive dissonance, it is a separation of the story we believe to be true. New facts are coming in, arguing against the narrative in our minds and that’s how cognitive biases happen. There are hundreds of cognitive biases.
Have you ever heard someone say, “I’m not a biased person?” They are full of shit. You are a human being. By nature, you are biased. You are not a robot. Your mind has a story that it’s created. This is important to know. Your mind rejects new information that goes against the narrative that your mind has created. It will either ignore it. It will not listen to it. It will tune it out or it will actively fight against it like a virus.
By nature, it’s called the subconscious bias because we are not conscious of it. We never catch ourselves in the act of making an intuitive error. That’s why it’s called a cognitive bias and unconscious bias because we can’t possibly know that our mind is trying to protect us and make things easier on our decision-making, but by contrast, that’s all system one. If we tackle and fail to solve a difficult problem using system two, we are painfully aware of it.
Let’s go back to the Obama and Osama Bin Laden conversation. Had they raided and he wasn’t there, they went into another country without that country’s approval and it’s all out there that we didn’t get them, with the amount of thought all of those people put into making that decision, they would know exactly where they went wrong. They would go deconstructed and go back. That’s obvious with a system two error that you make in decision-making.
With system one, you make these mistakes all the time and you don’t know why. You don’t even know it was a mistake. You lost out on something. You are not aware of it. That’s what makes bias so dangerous. That makes the system one. The error is you allowing yourself to use system one on a very big decision. That’s what it comes down to.
You used the wrong processes or system of grading a problem. There’s another part which we are talking about. What about things are programmed problems? What if you have a system one, but you are raised to do it wrong. I will use a simple one, like using a word incorrectly, like grammar. It becomes system two as you are learning your English and everything else. You are learning a language, but someone in your family and this happens in my family, uses the word wrong and then it gets into system one. It’s the word.
You realize it when you are 30. You’re like, “Why do people look at me weird when I use that word?” My wife is a linguist. She’s like, “You got a lot of this program wrong.” I got to unwind them because I now know they are wrong. I didn’t know that. This is how I learned English. It can permeate so many different ways and get into your head because the system 1 stuff is the rote things, but system 2 is the stuff that you have to process.
Something Kahneman says that I like is, “Knowing that you have biases is not enough to help you overcome them.” I love that quote. His take is that too many people in academia focus on teaching what the bias is, not how to tackle decisions that will root out your biases and help you think through the decision better.
The best way we want to attack this to try to help people with this is we look at questions we ask ourselves or we are faced with big questions. What questions can we ask ourselves that root out some of the mistakes we might make and some of the system 1 thinking that forces us to be slower, more deliberate, effortful, reflective, and system 2?
We are going to go through nine questions that you can ask yourself the next time you have very big questions like, “Should I leave my company, go for a promotion, invest in Bitcoin, buy that rental apartment or start a business? Should I put my kid in private school?” The big decision requires system two.
These questions can help you make sure you are making that decision deliberately. The number one question we have is, “Did I seek out dissenting opinions with people?” This is important. Not just dissenting opinions but with people who have no skin in the game. Why do you think I added the no skin in the game piece of it?
It comes down to one of my answers. I talk about two coaches who are foreigners by nature, people who are contrarians. If they stop getting a paycheck from me or if I do send them a check every month, are they unbiased or does their opinion change because of the circumstance? I look like a paycheck now more than I do for someone to give the dissenting opinions. That’s very much part of it.
You want to find someone with no skin in the game also because it doesn’t help to get an opinion of someone who’s also using their system one and has similar biases. I will give an example.An interview panel is worthless if two or three people on your panel of managers have the exact same pressures they're feeling. Click To Tweet
Before you give your example, but it’s also hard to find qualified people who sometimes don’t have this ratcheted back to a system one because you have to be incredibly high. You can go find someone and say, “Should I get my knee surgery done?” They have no idea where the knee is. They are going to give you an uninformed answer. It’s a challenge for sure.
Let’s say there are two managers in a company and the company is severely understaffed. They are desperate to get people. One manager interviews a person who is on the fence with. Going and asking someone else’s opinion to interview that person who is as desperate to hire people, they are probably going to be leaning towards hiring them if they are on the fence as well.
I have a good example of this. I had my manager once that wanted to promote me to a much bigger job. I was in a senior regional job and he wanted to put me over all the regionals. I couldn’t find the right person to save my life. Finally, I had someone I thought had the experience to do it, and the recruiter brought him to me.
The recruiter had a lot on the line. The recruiter wanted me to do it because he’d get paid, but he was also under pressure because he hadn’t found this person for me for a while. I was close to making this decision I could have myself, but my stomach didn’t feel great about it. I asked an HR manager and my peer from a different business that whom this person would never interact.
I made sure they had no skin in the game. I asked them to interview him and it was hilarious. They interviewed him and he could not have bummed worse. They were trying to be nice. They weren’t the toughest guys in the world, but I knew they would be objective, but the stuff they told me that they pulled out of the interview was he was a screamer and a yeller. He admitted to some of those things.
When they asked about why he left one of the companies, he spilled the beans that he had gotten into a lawsuit with them. He had never told me that. It would have been a horrendously bad decision if I would have hired this region manager just because I was desperate and needed to move up in the organization. They saved me. They had no skin in the game and had dissenting opinions. I was in system one trying to create a narrative like, “I can work around his flaws,” when they hit me in the face with a sledgehammer and said, “No, you can’t. This will be a terrible decision if you make it.”
Let’s talk about this because most people here either own businesses or are trying to get promoted. Let’s talk about it from the standpoint of I own a business or I’m a manager. That’s the reason why you have a panel interview in the first place. The panel interview is multiple people who talk to a candidate. I have a story about the same thing. I was trying to interview an executive assistant. She was wonderful to me.
I had two other people who didn’t need the executive assistant, who were other people in the company who I said, “Take a second opinion.” She was awful to them, mean, nasty and rude. They came in and I’m like, “She’s an absolute yes and I needed an assistant.” They were like, “No. She’s terrible. She will be awful for the rest of us.” It was right. It’s a good way to put that in place.
What we do as we are growing is we’ll have a department where we might have a significant need. We’ll have someone who’s not in the department who doesn’t feel desperate also on the panel. I did it subconsciously, but the whole point is that person is often more critical because you don’t bring a bad person in.
If you are interviewing, do realize you’ve got multiple inputs on purpose set up to catch these things and this is how you can do it. You might lean into somebody that likes you or is desperate but at the same time, there are other people there who are hoping to even the playing field to make sure you don’t slip through.
When you put an interview panel together, an interview panel is worthless if your panel of managers, there are 2 or 3 of them, all have the same pressures they are feeling. If Frank takes someone who this person is not going to work for them, they are not even going to work on the same team and in a different department.
If you don’t have this and you are a small company where everyone is in on it, get a friend from another company to do a little interview, talk or go out with them. I also love something you did. A lot of people will have the people of maybe a future peer. They will have them go to lunch with them. A lot of times, that person’s shield comes off by the questions they ask or the way they treat the waiter or that person. They only show respect to people that they work for and you can learn some of those things.
Question number two, “Am I overly influenced by a small sample set or one story?” We talked a little bit about this in an episode called the Gambler’s Fallacy where we are highly influenced by recent data. I have a great story here of one of the worst decisions I ever made in my life. A friend of mine who was known for making terrible decisions for most of his life even though I love him very much struck it big with a penny stock. This is from 1999 to 2000.
I’m talking about a 200X pop on a penny stock. He struck it big enough that he quit his job for a company a year after graduating college. He went out and bought a convertible sports car and picked me up. I didn’t know anything about penny stocks, but I knew I was pissed that I had 40 years of working ahead of me and he had already retired a year after graduating college on one penny stock.Too many people in academia focus on teaching what the bias is, not how to tackle decisions that will root out your biases and help you think through the decision better. Click To Tweet
He bought several of them, but this one hit. That’s all I had. I have one example that will be like me running out and buying lotto tickets because someone else won the lotto. He straight up won the lotto. What did I do? I took most of what I had at the time, which was maybe $9,000 to $10,000. It’s all I had. I bought the next big penny stock that he had, but it was like Bud on Wall Street. He didn’t have a second idea. He had the first one.
He didn’t have Bluestar Airlines yet. I lost everything. It went to zero. I was overly influenced by a very small sample set and if I have stepped back, I should have said, “Does anyone else who’s made money this way? Has he made more money on any of his other stocks? Can I watch this for a while to see what I’m doing?”
I did almost no research. I bought the next one he bought because I was pissed off that he wasn’t working and he was rich. He subsequently gave all of that money back and it didn’t take long, maybe another year. Had I watched for another year, I would have seen him have to go get a job again at a corporation and seeing that’s probably not a good path for me.
We talk about this all the time and we have ways to think about it. It becomes a system one where you are like, “I’m not going to rush into that.” We have talked about that 1,000 times in this show. Ian and I spent inordinate amounts of time when we were on the phone together talking about, “Should I do this? Should I not?” You start to see things that look like success or problems, leave clues and get smarter over time.
An example that I have of this was being influenced by a small sample set. It’s not necessarily a small sample set, but it’s insulated. I’m in the mastermind world of the single-family real estate world. Ian had quit his job. We were looking to do a couple of deals together and I was like, “Why don’t you come with me to a conference?”
I brought Ian to this conference with me in Miami. We had a great time. It was interactive. I’m in this world all the time, so I don’t think about people’s leverage, their debt structure and how they are. Ian walks up to me after meeting the 35th person who he’s like, “All of these people are incredibly leveraged and cash poor.” Everybody’s betting on the come-in real estate. You are trying to take their money out of your deal and reinvested it in the next deal. It’s constant.
Although that is a way to get rich in real estate, it’s also a way to get broke in real estate. Although I know it, it becomes normal and I let it wash over me. I’m like, “You are right.” It’s an unbiased outsider who has no skin in the game and is looking at the small sample set saying, “You may want to think about this.” Did I make huge changes based on that? No, but what it did do is it was a fresh set of eyes looking at something.
When you get another opinion like that, what it can do is it could make you think, “Am I following a herd? How am I separating myself? Do I want to be known as the one who’s cash-poor and that’s always leveraged the hilt? Can I separate myself by having a little bit more of a cash position?” Shortly after that, we went and saw Warren Buffett, who is never cash poor. He’s not an all in re-invest everything all the time. Warren keeps enough cash to when it starts raining, he goes and buys stuff. You had a couple of data points in a short period that at least made you stop and think, “I want to have some flexibility. It can’t be 100% growth all the time.”
This isn’t in here. We talked about it with Alastair, but it’s also something where when everybody you know thinks something can’t go wrong, it’s usually the moment when it does. It’s like, “There’s no way that can happen. There’s no way Mike Tyson can lose the Buster Douglas.” He did. When you start hearing that small sample side telling you something can’t happen, it’s the time to start thinking, “Could it?”
Question number three, “What are my alternatives? Have I vetted them as strongly as my favorite choice?” Whenever you have a decision, rarely, you are truly the old Ben Franklin. You’ve got to put them on both sides like 50, 50, 100. Your gut is always leaning one way and in the way that will prevent the most loss.
It’s normally the loss of version way that your gut is leaning, but you normally have a favorite. The important thing is that you have a group of people you talk to and do this yourself. Most times, we make a decision it is an either-or, an A or B. It is only two choices. That’s it. A great question, as always, is, “What’s the 3rd and 4th alternative? What are other things we can do?”
I have an example of this. My direct reports came to me. We had a broken closing department in our mortgage company. It wasn’t working. We needed more supervision and leadership. We were growing and putting a lot more on these people at the time because there were more checklists, regulations and a lot of stuff.
The proposal that was brought to me did a good job of vetting it and thinking through it. It was the 2nd or 3rd time they brought it to me. It was to go bring in some regional closing managers and hire several closing supervisors. We would have twenty offices, but there would be more local leadership around hiring standards and things of that nature. It was a multimillion-dollar proposal.
I could have looked at it. We have two choices. Keep doing what we are doing, do nothing and keep making mistakes or go with more local leadership and everything. I didn’t like the second part because it had all of the same trappings as the first one. You could still have turnover, bad hires, and people to separate it to where you were getting a lot of knowledge.Only one person cares about your career for your whole career. Only one person cares about your happiness for your whole life, and that's you. Click To Tweet
What we weren’t thinking about was why don’t we centralize? When centralizing, what would it do for us? What that did is it brought all the leadership together in one place. It let us hire a lot faster because we could train people. It’s easier to train a new closer if you hire them in an office with 50 closers than training 1 closer in an office with 2.
The other two have jobs to do and it’s hard for them to do them. With 50, you spread it out over. The third choice is the one we went with. It was the cheapest, most effective, and one that we could implement even though it was harder to implement because we had to move all those folks. We had to hire a ton of people in Pittsburgh. We ended up putting 100 in 1 centralized apartment and they still have that same department. That was the best decision.
When I was coming up with this, I struggled to come up with an example of what my alternatives are and have I vetted them as strongly as my first choice. I thought of something. We will both tell you this if you talk to us. A lot of times, you bring an idea home to your wife and you start talking about this. Something you knew was certain can turn into being very uncertain quickly because your wife will ask you a handful of questions like, “Do you think about that?”
They are not doing it to be mean, rude or disrespect you, but they have a very different lens with which they are looking at things. They are often bringing up ideas that you hadn’t even considered like, “How would you consider it? It makes no sense to consider it.” They are asking and you’re like, “That is a very good thought that I had missed.”
Warren Buffett talks about this a lot. Who you marry makes a big deal. It’s a big difference in the whole thing like, “Who your support system is? Who do you talk to in the standard course of business?” All of these are different levels of either a safety net or something. Your network, the people you talk to regularly, family, friends and spouse. I’m going to do this and then they asked that question. I have made big decisions that I was 100% certain of and my wife asked me, “Have you thought about that?” I’m like, “I hadn’t.” I changed my mind because it’s another fresh set of eyes that look at something. It’s very valuable.”
Your wife often doesn’t have the same skin in the game. She’s not as close to it and won’t have to live with the decision as much as you will. You shelter her from it. She’s doing hers. She’s got her career. You’ve got your career. You’ll have to live with that decision way more than she will. What also comes back to her is an unbiased opinion that’s not too close to it and she might have a different idea.
Question number four, “What change in the environment would result in this decision looking terrible?” When I say environment, that could be the economy or anything that’s outside of your control. The best example we could think of together is Frank and I have done two substantial real estate deals. Before we have done either of them, went out and asked for money, we go through a list, a litany of misery, I will say.
“What if interest rates skyrocket? What if there’s a banking crisis and we can’t get debt? What if our note gets called? What if there’s an ugly recession? What if a fire burned down every building? What if there’s a 100-year storm,” which turns out that happened to our Westwood property. There was a flood on the first day of owning it. “What about inflation?” We go through all of these things.
At least in the couple of deals that we have done together, Frankie, we have spent a lot more time looking at the downside than we have the upside to the point we’re like, “Once we get to a certain hurdle, that’d be great. Let’s not dream about how much bigger it could be. What’s the downside? Can we get from 25% to 30%? Yes. We can maybe quadruple that but let’s not even talk about it. I feel pretty good about 25%. Let’s talk about how we don’t lose people money.” We do that all the time.
With the riskier stuff, I do it alone with a different entity name and we do these different things, but when we are going to raise capital, you make sure and ask a different level of question. We have been pretty successful. We don’t have a huge sample set of stuff we have done together, but I have done multiple 3,000 to 4,000 deals in my business. You do lose on some, so you have to come up with a metric, thought process or different items that you can ask to say, “How do we do this?” If there is a change in the environment, the thing to think about is, “What are my other alternatives?”
When the pandemic hit, Ian and I had raised all this money. We had a bunch of our friends in the deal. Ian and I were talking. He was playing a ton of baseball with IJ because he couldn’t do anything but be outside. Ian is outside with IJ. They are having these incredible times. He’s like, “When Max is old enough, we’ll come down there, buy a house and help him learn his baseball.” I’m like, “Buy a house? We still have 75 left. You don’t have to buy anything. Move into one of those.” Ian laughs. We had bought 75 houses and sold none of them. Ian’s like, “A little too soon.”
The first thing we did in our quarterly update was you talked about it. You got into this deal because it’s real estate, which usually does well over the long-term. We’re not panicking or selling everything. Although the market is fleeing. We are going to pause, continue to collect rents and see what changes. We had thought about this. If there was a problem we came up with, we can collect rents. If we collect rents, these are the returns. Is it the numbers we hope to hit? No, but is it still a pretty strong return? Yes, and it isn’t a loss. These are things you start to think through.
Number five, “Am I being overly influenced by someone with a competing agenda?” That’s an incredibly important question to ask yourself if you are leaning on one person more than others. That person is overly biased and might have a narrative themselves. My best example of this is when I left General Electric.
I had multiple people pulling on me. It was interesting. I had GE wanting me to move from Chicago to Atlanta. They’d given me a very big promotion and wanted me to be the youngest vice president and all of these things. They were very biased like, “We’re going to make your career. You are on the path. You are going to move so fast.”You never want to recommend anything to anyone you wouldn't want to hold for a long time. Click To Tweet
We had my family, especially Jenny’s family, did not want me to move, “Why are you moving to DC? This doesn’t make any sense. Your family’s here.” I had NVR and my friend McCauley, who’s the one who referred me to NVR, wanted me to come to NVR. If I talked to him, I was always going to get a biased view from him.
He’d already left GE and come to NVR, so he was going to only tell me the good things about the company and he did. It was interesting. I never felt that alone in my life and decision. To her credit, I will say Jenny was probably the most in the middle. She didn’t want to leave Chicago and her family, but she also knew NVR was a good opportunity and was beside me. I felt alone in that decision because who am I going to talk to?
The folks at GE and my friends in Chicago didn’t want me to leave. My parents were nervous about me leaving a great job where I had done well. That’s one where I had to say, “It’s my career. All of these people that are giving me advice are not in charge of my career. They are giving me a little slice of advice. At the end of the day, I’m the one responsible for the next 50 years of earnings in my career. If I screw it up, I’m not going to come back and point at anyone that gave me advice. It’ll be on me if I turn out to not be a very good producer for my family.” I remember feeling very alone at that time and it had to be that way. I knew if I leaned on any one of those contingents too much, they were going to give me heavily biased opinions.
The best example I can come up with this for me is I had a relationship with a woman for almost eight years and people would joke about it like, “You took her baby-making years,” and all these other things. I was torn for a very long time. I talked to Ian about it, but no one wants to tell you to break up with someone. My family all adored this woman. I wasn’t happy in this relationship. I felt trapped. I had all the negatives and I wanted out, but my friends all tried to either be, “I’ll try to be neutral,” and then my family was pulling for this woman. She wanted to stay together, so she was pulling at it too.
There is that thing when there’s a big life decision and someone in my life is going through something similar with this. It’s a job change, potentially moving their family. It’s a big thing. Everyone’s got a competing agenda. Sometimes you pull away, look at it and say, “What is it that is best for me?” There’s a toggle for everyone being selfish and you have to pick that line. It comes down to one of these things sometimes where they tell you on an airplane if it’s going down to put your mask on first before someone else’s. If you don’t protect yourself, you can’t protect others. Sometimes it is as simple as you make the right decision for yourself.
Ian is dead right. It’s lonely as hell. There are certain things you can do with others, but there are big moments where you have to do them alone. I will flip to the other side of that when I decided to get engaged and get married. I did that alone. It was a lot easier, happier and funnier and people like to celebrate the good things, but that’s a decision where you can’t call your friends. You got to make that decision alone because, ultimately, it’s your decision. It’s not anyone else’s.
There’s also the other side of it. I knew in that decision that it had to be mine. At some point, I stopped talking to anyone else. It was me thinking, “I got all the inputs. Thank you. I need a few days.” I knew I had to make this decision because if the decision went wrong and I felt like I was influenced by one person, I would be better with that person. I would hold a grudge that I gave advice that I shouldn’t have.
We’ll get to the next question here but based on the relationship piece, I had a friend who had a long-time girlfriend and wasn’t happy. They were close to getting engaged. We went out to dinner and he point-blank asked me my advice. I said, “I’m not going to give you advice because that’s cheap and I don’t go home with her every night. I’m here for you. I want you to understand whatever decision you make. Our friendship is not going to change.” I probably said something similar to you about it.”
What I told this guy was, “I don’t go home every night and spend time with her. You are responsible for being happy. I’m not responsible for the decisions you make to make you happy. If you are not happy, you have to own them.” It’s the same with a career. Only one person cares about your whole career. Only one person cares about your happiness for your whole life and that’s you. You can’t be influenced by other people and you have to make some decisions based on what’s best for you.
It comes back to the opening. In the open, we talked about 1 and 2 on the decisions. People who work properly to turn tier 2 into tier 1 type of decisions, what happens is you get a chance to do better at it and process it. You are ready for it and trained. It’s like getting ready for a professional fight every single day. You are training, sparring and doing all the little things.
Now and again, you get stress-tested with, “Does this relationship work? Do I need to move?” You are building that muscle, but if you haven’t built that muscle, you don’t have the ability to process it. If enough things that are should be tier 1s or still tier 2s, you never have the system built to process the tier two stuff because you are wasting too much time in there with things that should have graduated up.
It’s something you see a lot of time with people. We all have people in our lives. Many of them have been grandfathered in and make terrible decisions. We interlope with them. We don’t see them all the time but we go on a Vegas trip with them or do stuff with them because they are so fun. When you look at their lives from a cross-section, they struggle with the big decisions.
They don’t struggle with, “Should we have another shot?” The answer is always yes. They struggle with these other things and can’t help you with it because they haven’t graduated. Those are the things that are like, “Should I make this decision?” “No, you shouldn’t even ask me that decision because that has to be on you.” That permeates through this episode.
Question number six, “What is the risk of being overly cautious?” Another way of asking yourself this question is, what are the unintended consequences of doing nothing? Let’s fast forward twenty years from my decision to leave GE. Had I done the easy route, which is to stay with a company that was treating me well but the pay and the upside weren’t as great, I wouldn’t have even a small percentage of what I have from having gone to NVR.When you make a decision, you have to force yourself to think about the downside. Click To Tweet
I knew the company was struggling, there were problems with leadership and we were losing market share. Our best years were behind us. I felt it. I know a lot of people that stayed loyal to GE and stayed there a long time. Their retirement accounts aren’t worth crap. Those stocks were down 80% over a year as their stock options and equity never made any money. There’s the riskiest thing at the time. This is what’s wild. At the time, GE is a top ten company in the world market cap. I have been promoted 4 times in 6 years. I have a rocket ship of a career there.
Leaving for a much smaller company in real estate in Washington, DC, my network and everything felt so risky. When I look back, the riskiest decision I could have made was staying at a dying company that I didn’t know was dying. The riskiest decision I ever made was staying still and being an executive at a company that had lost its greatness.
What’s funny about GE is in 2009, what was the risk are we being overly cautious and the unintended consequences? This is a bit of a story, but I’m going to tell it. 2009 in March, I’d already quit NVR. We are in the middle of this recession. The stock market bottoms out. I called Ian. I’m like, “I’m going to buy some GE stock.” GE stock was at $6. Ian had quit GE. He was an insider to a degree, not illegally, but he knew the company. He was like, “Don’t do it. It’s a terrible decision.” I was pissed because it tripled. It’s subsequently bounced back to six or less, but the point is Ian had a different purview than me.
I had good information. I could have made a good decision at that moment in time and I would have written it up, but I didn’t buy it. What did happen was this. I never blamed Ian. He gave me the best advice he knew how to give me. What I did is I synthesize it. The next time I looked at it as an investment, I did bounce it off with people, but I knew.
I didn’t buy stock. I bought houses in Richmond because I knew houses in Richmond better than I knew GE stock. I knew replacement value and those things. I wasn’t cautious and was doing things that prevented me from buying the GE stock, but it changed enough that I was like, “These are the right decisions to make on this.”
That’s where I went all in because I have a subject matter expertise, which is what fueled me. These are the same decisions I make. “Should I continue to put money in real estate or go to Bitcoin? Should I go to this? Should I chase after penny stocks?” I don’t know those things, but I do know these. Am I being overly cautious? Perhaps, but I’m also doing things that have a very good set of understandings. I get it. I know what the exit strategies are. It’s different, but this is how system 2 becomes system 1 and then you get to focus on higher-level stuff.
It’s a fascinating example too. I’m wired the same way I was years ago when I gave you that decision. Looking back, if you asked me again, knowing what I know now, I still would have said that. I never want to recommend anything to anyone that I wouldn’t want to hold for a long time.
It was the right decision.
You are not a stock guy. You don’t even look at the stock market most days. I know that about you. You are a real estate guy and in the weeds of real estate every day. If I need to know about real estate, I call you. That stock could have doubled, went back to six and you wouldn’t even have known it. It was too volatile. We didn’t know enough, so I was like, “Don’t mess with that thing.” I would still probably say it. It’s a great lesson for both of us.
I remember this conversation. I was trying to protect you. I was like, “Straight up. Don’t do it,” but what I should’ve said is, “I own zero GE stock. I plan on buying no more GE stock. Here’s why. I don’t know how much more risk they have in European mortgages. Every week something new comes out. I don’t know how many bad decisions they made. I can’t recommend doing something I wouldn’t do.”
I have since changed a lot of that. Even when I invest now or raise capital, I always say, “Here’s why I invested in this deal myself.” I have still yet to raise any money for anything that I’m not personally invested in. I always say, “Here’s why I did it, why the upside is and why I think the downside is controllable.” When you learn that, that’s interesting too.
A good friend of mine started a restaurant. It’s since become an absolute monster franchise, Cooper’s Hawk. I was at the building when it was a shell and he had a bunch of debt. I could have invested in Cooper’s Hawk at the very beginning, but I’d turned it down. I could have put a small amount in it. It would have made 10X or 20X. By being too cautious, the next time of smart, talented friend came to me with a startup, a kid that I believed in, I invested in it.
The second time it happened, I did it again but even bigger. The first one was CodeGuard and I made great money on it. I should have invested more. I was a little bit cautious, but you learn. The first time I said no, I put a good chunk in. The third time it came my way, I put some chips in. I’m not going to look back and say, “I wish I’d have put more into it this time.” There is a risk of being too cautious of passing, especially when the person that’s behind it.
At the same time, you have to be prudent. There’s no right answer all the time. Nobody gets this right 100% of the time. Gary Vee is incredibly good at figuring out tech startups and he missed Uber. He talks about it. Nobody can get 100% and you don’t need to.If you are completely convinced there is no other way other than this, you will become tone-deaf to things that change around you, and you're not going to be able to adapt, pivot, and change Click To Tweet
Question seven, “Am I looking at this based on the best-case scenario? Am I seeing this only from rose-colored glasses?” This is way too easy to do. This is the old saying, “Be fearful when everyone’s greedy, greedy whenever one’s fearful.” When things are going well, that’s when this bias kicks in. When you are looking at a chart that is going from the bottom left corner to the upper right, whether it’s 1 year, 6 months, 2 years or 5 years, it’s easy to take your ruler out, draw a line and extrapolate it out into the future. As soon as you start doing that, basing it on what you’ve seen in the past, you start making decisions based on what’s the absolute best that could happen is dangerous, in my opinion.
I’m in real estate. Everybody thinks there’s no way this thing had because of inventory. It is an effect, not a cause. It’s one of the things to buy a product of the fact that where we are but you have to think of it from the alternative. There are books that Ian and I both talk about all the time and love. Ray Dalio is doing a book. It’s called the Principles for Dealing with the Changing World Order. It makes you think, “Are we standing on a quicksand?” The other one that we referenced often is This Time Is Different: Eight Centuries of Financial Folly. Many people pound their chests like, “I can’t believe I made an extra $100,000 more in this deal.”
It wasn’t you. That was the market. It has the wind at your back and that’s the reason it’s pushing you ahead. You have to be very mindful of that. You have to also think about who are the stakeholder’s salesmen around you who are trying to take advantage, but so many people don’t know it. How many people are incredibly well-researched? That’s where you’re having to train. The first 6 things we talked about are important, so make sure you don’t get trapped at number 7 because most of us look at things with rose-colored glasses.
We are both in this tech startup. The best-case scenario is that we are a $1 billion company, which sure would be great for me and you. We will buy an island, but if I believed that and I got so sold into the fact that this could be there, I would have put my entire net worth and done it, but I did not. Both David and I have got a good chunk, but we are still limited. That’s why we raised $4 million instead of putting more and more of our money into it. You got to look at the reality. It’s a startup and a technology company. Things could go wrong. When things are going well, not just dream when you make a decision, you have to force yourself to think about the downside.
It’s the only way to also stay agile. If you are convinced there is no other way other than this, you will become tone-deaf to things that change around you and you will not be able to adapt, pivot and change. That’s critical. It’s why it’s so hard for super successful people. We talk about the emperor with no clothes. It’s very easy to build those walls around yourself and not let other people give you feedback. As soon as you turn off the ability to take feedback or see what’s happening and know that it’s you that’s going to solve the problem, you are not going to be able to. It closes you in.
Question eight, “Is my worst-case scenario bad enough? Am I even raising the floor of what could happen on this?” Do you remember what my first line was in the first email we sent to investors after RVA 75?
It was like, “COVID happened. What is this thing with COVID? Tom Hanks says COVID. It was like an arc. Did I invest a bunch of money in single-family houses in Richmond?”
I made fun of it. I said, “Frank and I are pretty careful guys. We vetted every possible thing that could have gone wrong. What we didn’t think about was the 100-year plague. We forgot to think about that and we are sorry for that.” The floor can always be worse than what you think it is. You have to ask yourself, what is the worst-case scenario?
The worst-case scenario might not be, “I lose all my money.” The worst-case scenario might be, “I lose all my money and I’m forced to put more money into this.” It could be even more than what you think it is. A lot of the people that Frank interacts with are real estate operators. I don’t think they think about the downsides of all the debt they are taking out there. Their downside is so much incredibly lower than what they are assuming it is because a lot of them are pre-selling anything and are so cash poor. It’s got to be scary as hell.
There is a builder I met who is in Arizona. They sell 400 houses annually and build all of them on spec, which is a bad practice. If you look at any publicly traded builders, they might build 10% on spec, maybe a little more, but most of them are less than 5% on spec. If you don’t know what I mean by on spec, it means on speculation.
I don’t have a pre-sold house with a down payment and a family who’s associated with moving into this house. It’s speculative. It’s either because that family fell out and it’s an inventory without a sale or it’s the other side of the equation where it’s like, “We are going to roll the dice a little bit. If the market continues to appreciate, we are going to sell this thing for more, so we are not going to pre-sell it.” That’s what spec is.
What corporations do is they get a family to say, “I’m going to buy this house and also give you 5% of the total price to build the sales price.” What they do is they take that and deposit it. You mentally move in and have a little bit of money and skin in the game. It’s hard to get out. The other piece of what happens is the builder has less risk. They got 5% of your money that they can have on their balance sheet. That’s a big deal. It changes the game. They might lose a little bit of appreciation, but they have mitigated risk.
What people are starting to do in a lot of instances is they are starting to ignore fundamentals because of how good the market is. Most people haven’t been in the market for an entire recession. We talked about this with Alastair. Most people who are in the real estate game are half cycle. They got in at the last downturn. They didn’t come in at the last peak and ride it through the last downturn. They are not making good fundamental decisions and it’s crazy.
Something else I hear all the time is that debt recourse. All my debts are not on recourse. Recourse means a bank can come after you. Non-recourse debt is I can’t come after you as a bank’s default and see what they do. They are going to come after you and figure out how to get the freaking money back. It could say it’s non-recourse but go to fall on five of those.What you want to get into is a position where you make enough of the right decisions. Click To Tweet
There’s a guy in Richmond who I have had lunch with multiple times who defaulted on a ton of loans. You know what happened to him? He went to jail. They have said, “You know what this guy did? He was a profiteer by not paying back these non-recourse loans.” That’s what it looks like if you default. If you take on debt, you better plan on repaying it somehow because the people who give it to you, it’s not for free. It’s a loan. People think they are talking themselves into these incredible situations that don’t exist and aren’t right.
Take a guy with 400 homes in Arizona. It’s $120 million of inventory without anything pre-sold, no deposits, no cash. That’s all debt. Has that guy stopped to say, “What if there was an ugly recession and sales price has dropped 15%?” Where would that guy be if prices drop 10%, 15% and 20% in Arizona, where there’s been a massive spike up? Where would you be with $120 million if the price had dropped?
What he said to me was this, “We have an incredible way to market. We market different than everybody else.” That sounds to me like, “I don’t understand your business, which is what we work in.” It sounds like someone else told me, “We don’t build houses. We are a tech company who builds houses.” You are ignoring the fundamentals and not being honest. You are putting blinders on yourself.
What did our chairman always say at the home builder we worked for? “You don’t make the market. You serve the market. I don’t care how good you are at marketing. The market is the market.” If you got $120 million in a bank, it believes to be worth $95 million. What are they going to do? They are going to make some calls. That’s the way it works. The worst case is much worse than most real estate investors think it is. We’ll get off of that.
Nine and the final question is, “How does this decision balance with all of my other decisions?” Any decision you make is going to be at the expense of some other decision that you could make. There’s only so much time, money and you to go around. When a lot of people don’t think about enough is how one decision impacts so many other things in their life or investments that could make other decisions.
I’m going through it. “How much more consulting can I take on knowing that we are launching a product?” I have an opportunity to do more of the consulting and it pays well, but it’s also demanding of my time. You go through this every time you are gone for a full week at a mastermind. What could you be doing with your business? How could you be spending that time differently? Trying to force yourself to say, “What expenses come as a result of this decision? How is this impacting?”
I remember when I quit my job and struggled to build this business. These people would show up and talk to me, “Your most precious resource is time.” They sounded like arrogant pricks because my most precious resource then was cash. I was scared shitless that I was going to lose everything I had, have to go put on a suit and go get a job. I was scared to death.
They were right, but their message delivery was garbage. What they should have said is, “What you want to get into is a position where you make enough of the right decisions.” You spend enough time on system 1 thinking or system 2 thinking can be about how do I protect my time? If you were to focus your entire business strategy by taking complicated and making it uncomplicated, taking system 2 and making it system 1, you get the luxury of getting to a point where you get to focus on your time.
“How do I put myself in the position that has the most upside, dynamic or exponential return?” That’s what it comes down to, but most people can’t articulate it, do it, work and grind to get to a point where you get to make these decisions. You have to look at all of this as a flywheel. If you have bad decision-makers around you, things that are pulling at you and negative stuff going along with the positive, the negative start to outweigh the positive, pull you back and pull you down. It forces you to have to focus on things that are more in the system one. It’s the way it works. Most people spend so much of their time misappropriating how they make decisions. It can influence you.
I’m going to wrap it up. I like that question that you ask yourself. Anyone could agree that time is a precious resource and it’s nice to have freedom. That’s what you are saying when time is important to have freedom. What Frank said is important. If you don’t make decisions that build your wealth and cash position, you’ll never have that freedom.
You’ll always be working more, chasing and doing other things. Also, if you make the wrong decisions, even if you have time, it won’t be your time because that real estate will be up in your head. I think about someone with $100 million of debt, the stock market drops, and real estate prices suddenly drop. I don’t care how much free time you think you have. You have none. All you are doing is worrying about your debt. “Will I go bankrupt?”
Having some level of safety-making decisions that give you upside but are conservative enough that you don’t lose sleep every night that I have taken on too much is incredibly important. Your time won’t be yours if you were all in on risk. With everything we have tried to talk about with examples, you have to be relatively conservative but take on enough appropriate risk where you move out of a certain range where you’ll always be grinding day in and day out. These nine questions, regardless of the big decision, can help knock some of your system one thinking out, take some of your biases out, and help you make better decisions.
I’m going to wrap this up that you need to have a system for how you make big decisions. These nine questions are always considered. It’s not like I have these etched on my arm with a tattoo, but I come back to the same type of process over and over when I am conflicted or have a big decision to make. The bigger decisions I make, the more confident I get making another big decision. If you make the right decision, great, but if you make the wrong decision, you are forced to make more decisions and that gives you more time or chance to hone in on what is the right decision around this.
You’ve done an incredible job. The best decision of my life is choosing you as a cohost. I’m proud of you.
I agree with you.
I made a mistake there talking to you about it. Biased. See you, homie.
- Thinking, Fast and Slow
- Alastair – Past episode – Alastair MacDonald – Investing In Times Of Uncertainty
- Principles for Dealing with the Changing World Order
- This Time Is Different: Eight Centuries of Financial Folly