Latest / The Dutch Investors / #32 | 5 Universal laws applied to investing | Part 2

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#32 | 5 Universal laws applied to investing | Part 2 · The Dutch Investors

• 0:00
  SPEAKER_00: Today we're diving into some of the strangest, most counterintuitive universal laws that explain why markets behave the way they do, why investors keep making the same mistakes, and why history keeps repeating itself in ways that feel painfully obvious in hindsight.
• 0:18
  SPEAKER_00: By the end of this episode, you'll see investing and life through a different lens.
• 0:24
  SPEAKER_00: Before we jump in, do me a quick favor.
• 0:28
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• 0:33
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• 0:36
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• 0:39
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• 0:41
  SPEAKER_00: Alright, let's get started.
• 0:45
  SPEAKER_00: Let's start with the Lindy effect, which says the longer something has been around, the longer it's likely to last.
• 0:55
  SPEAKER_00: This universal law doesn't only apply to my girlfriend.
• 0:59
  SPEAKER_00: The Lindy effect states that the longer something has existed, the longer it's likely to continue existing.
• 1:06
  SPEAKER_00: Take books, for example.
• 1:08
  SPEAKER_00: A novel that's been in print for a hundred years will probably still be around in another hundred years.
• 1:15
  SPEAKER_00: Because time has filtered out the junk.
• 1:18
  SPEAKER_00: The same goes for investing.
• 1:20
  SPEAKER_00: A company that's been successful for decades is more likely to survive than a fancy new startup.
• 1:27
  SPEAKER_00: The best strategies tend to be the oldest ones as well.
• 1:30
  SPEAKER_00: Think of value investing.
• 1:32
  SPEAKER_00: It worked for Benjamin Graham in the 1930s.
• 1:36
  SPEAKER_00: It worked for Buffett in the 1960s, and it still works today.
• 1:40
  SPEAKER_00: Perhaps not exactly the same, but it's still trying to pay less today than what you're getting in a few years.
• 1:48
  SPEAKER_00: Human psychology hasn't changed.
• 1:50
  SPEAKER_00: People still get greedy, fearful, and irrational, which creates opportunities for patient investors.
• 1:58
  SPEAKER_00: ETF investing has withstood decades of market cycles, outperforming most active traders over the long run, and despite critics calling it debt every few years, it keeps proving them wrong.
• 2:12
  SPEAKER_00: Or what about buy and hold, or the coffee can portfolio?
• 2:17
  SPEAKER_00: Warren Buffett has been preaching this since the 1960s, and guess what?
• 2:22
  SPEAKER_00: It's still the most reliable way to build wealth.
• 2:26
  SPEAKER_00: Or think of Coca-Cola, founded in 1886.
• 2:30
  SPEAKER_00: It's still the most famous soda in the world.
• 2:34
  SPEAKER_00: Or what about Snickers?
• 2:35
  SPEAKER_00: This was the most famous candy bar decades ago and it still is today.
• 2:41
  SPEAKER_00: Both brands survived wars, depressions, and market crashes.
• 2:46
  SPEAKER_00: Or what about Johnson ⁇ Johnson?
• 2:49
  SPEAKER_00: They have led the healthcare industry for over 130 years.
• 2:53
  SPEAKER_00: Or Nestle, founded in 1866, Proxer and Gamble founded in 1837, American Express founded in 1850, or Rolex founded in 1905.
• 3:06
  SPEAKER_00: The point is this.
• 3:08
  SPEAKER_00: If a company has been around for decades or centuries even, it's more likely to last.
• 3:15
  SPEAKER_00: So is there a lesson here?
• 3:18
  SPEAKER_00: Of course there is, otherwise I wouldn't be sharing it.
• 3:21
  SPEAKER_00: But if an investment strategy has worked for decades, it's probably worth paying attention to, and being skeptical of new ones.
• 3:30
  SPEAKER_00: If it's only worked for a couple of years, be a lot more skeptical.
• 3:36
  SPEAKER_00: Okay, next one.
• 3:38
  SPEAKER_00: The Jeffins paradox says the following As efficiency increases, total consumption often increases instead of decreasing.
• 3:49
  SPEAKER_00: The more fuel efficient cars become, the more people drive.
• 3:55
  SPEAKER_00: The cheaper data storage gets, the more we consume and store.
• 4:00
  SPEAKER_00: The more high speed internet spreads, the more time we waste online.
• 4:06
  SPEAKER_00: The easier and cheaper something gets, the more recklessly people use it.
• 4:12
  SPEAKER_00: We can see this happening in vesting as well.
• 4:15
  SPEAKER_00: The cheaper and easier it becomes to invest, the riskier behavior gets.
• 4:21
  SPEAKER_00: Think back to the pre two thousands.
• 4:24
  SPEAKER_00: If you wanted to buy stocks, you had to call a broker, pay fifty dollars in commissions per trade, and wait for manual order execution.
• 4:37
  SPEAKER_00: It was a huge hassle, and because of that, people thought carefully before buying or selling.
• 4:44
  SPEAKER_00: Then came companies like Robinhood or FlatEx the Giro, with zero fee trading or very low-cost trading, along with other mobile apps like Trading 212.
• 4:57
  SPEAKER_00: Trading became as easy as swiping left and right on Tinder.
• 5:02
  SPEAKER_00: And suddenly people started using it like a lot.
• 5:05
  SPEAKER_00: Day trading became mainstream.
• 5:08
  SPEAKER_00: Leverage use skyrocketed, and crypto gambling exploded.
• 5:14
  SPEAKER_00: Ironically, making investing more accessible led to worse decisions.
• 5:20
  SPEAKER_00: Instead of investing wisely and patiently, people started treating the market like a casino, piling into meme stocks, YOLO options, to the moon stocks, specs, crypto, NFTs, and speculative bubbles.
• 5:36
  SPEAKER_00: It's Jeffen's paradox in action.
• 5:39
  SPEAKER_00: So the lesson here is the following.
• 5:42
  SPEAKER_00: Just because investing is easier and cheaper, doesn't mean people make better decisions.
• 5:48
  SPEAKER_00: Often it leads to more reckless risk taking.
• 5:52
  SPEAKER_00: If anything, the more efficient markets get, the more disciplined you need to be.
• 6:00
  SPEAKER_00: Alright, the next one is called the Cobra Effect.
• 6:04
  SPEAKER_00: And this one was really fun when I found out.
• 6:07
  SPEAKER_00: The Cobra Effect comes from an old story in British-controlled India.
• 6:12
  SPEAKER_00: Back then the British government wanted to reduce deadly cobra snakes, so they offered a bounty for every dead cobra.
• 6:20
  SPEAKER_00: At first it worked.
• 6:22
  SPEAKER_00: People killed cobras and collected the reward.
• 6:26
  SPEAKER_00: Then people started breeding cobras just to cash in on the bounty.
• 6:31
  SPEAKER_00: When the government realized what was happening, they ended the bounty.
• 6:36
  SPEAKER_00: But now with no reason to keep the cobras, people released all of them, and the end result, more cobras than before.
• 6:46
  SPEAKER_00: This happens in investing all the time.
• 6:48
  SPEAKER_00: Take executive bonuses tied to short-term stock performance.
• 6:54
  SPEAKER_00: The goal was to align CEOs with shareholders.
• 6:58
  SPEAKER_00: But the result was CEO focusing on short-term tricks, stock buybacks, cutting RD, or delaying expenses, to temporarily boost stock prices and cash in on bonuses.
• 7:11
  SPEAKER_00: Long-term investors suffered while executives got rich.
• 7:15
  SPEAKER_00: Or look at what the Fed is doing with lowering interest rates to support the economy.
• 7:21
  SPEAKER_00: The goal was to make borrowing easier and stimulate growth.
• 7:25
  SPEAKER_00: But the result was cheap money, fueling speculative bubbles, real estate, tech stocks, crypto, and making markets even more fragile.
• 7:36
  SPEAKER_00: Or what about stop losses?
• 7:38
  SPEAKER_00: The goal is to protect investors from big losses, but the result is that when markets drop fast, automatic stop losses trigger even more selling, causing crashes to spiral out of control.
• 7:51
  SPEAKER_00: Let me give you two other examples of the Cobra effect.
• 7:54
  SPEAKER_00: Uber and Lyft, the famous ride-sharing apps, were supposed to reduce congestion and car ownership.
• 8:00
  SPEAKER_00: Instead, they led to more traffic as more people opted for Uber over public transport, and drivers stayed on the roads for longer waiting fares.
• 8:11
  SPEAKER_00: What about fast fashion companies like Xiin, Zara or HM?
• 8:16
  SPEAKER_00: Cheap clothing was meant to make fashion more accessible, but instead it led to a massive environmental crisis with millions of tons of waste and exploited workers in developing countries.
• 8:28
  SPEAKER_00: So sometimes the things we do to fix a problem in investing ends up making it even worse.
• 8:35
  SPEAKER_00: Quick fixes often create bigger long-term problems.
• 8:40
  SPEAKER_00: Let's continue with the next one.
• 8:42
  SPEAKER_00: Dunning-Kruger effect.
• 8:44
  SPEAKER_00: It's about overconfidence.
• 8:47
  SPEAKER_00: And this one is really important, and it's and it's named after, well, you guessed it, David Dunning and Justin Kruger.
• 8:55
  SPEAKER_00: Let me tell you a quick story.
• 8:57
  SPEAKER_00: I've been training MMA for over 10 years.
• 9:00
  SPEAKER_00: It's a passion of mine and love the never-ending ability to learn.
• 9:04
  SPEAKER_00: I remember when a guy walked in, and let's name him Gary for the sake of the story.
• 9:10
  SPEAKER_00: A few years back, Gary strolled into our gym like he owned the place, just puffed out full of confidence.
• 9:17
  SPEAKER_00: You could tell from the way he talked.
• 9:20
  SPEAKER_00: And to be honest, we kind of had a feeling what was going to happen next.
• 9:24
  SPEAKER_00: A trainer, a seasoned pro, gave him a chance to roll on the mats.
• 9:29
  SPEAKER_00: At first he took it easy.
• 9:30
  SPEAKER_00: He let Gary move, tested his reactions, and gave him space to prove himself.
• 9:36
  SPEAKER_00: But then Gary saw an opening, and instead of keeping it controlled, he went for it.
• 9:41
  SPEAKER_00: Hard.
• 9:42
  SPEAKER_00: Way too hard.
• 9:44
  SPEAKER_00: He was trying to hurt our trainer, to prove something.
• 9:47
  SPEAKER_00: And that's when the trainer flipped the switch, and 15 seconds later, well you guessed it, Gary was choked out.
• 9:55
  SPEAKER_00: Not violently, just pure effortless technique over brute force.
• 10:00
  SPEAKER_00: It was a lesson not just for him, but for all of us.
• 10:03
  SPEAKER_00: Because the truth is, you don't know what you don't know until you do.
• 10:08
  SPEAKER_00: In life, in investing, business, sports, relationships, everything.
• 10:14
  SPEAKER_00: The Dunning Krueger effect is a dangerous cognitive bias.
• 10:19
  SPEAKER_00: The less experience you have in something, the more confident you tend to be.
• 10:24
  SPEAKER_00: It's not stupidity, it's just a lack of knowledge about how much knowledge exists.
• 10:31
  SPEAKER_00: Warren Buffett, arguably the greatest investor ever, constantly admits that he doesn't know.
• 10:38
  SPEAKER_00: And here are some of his most famous quotes all related to this topic.
• 10:43
  SPEAKER_00: And I quote, The more I learn, the more I realize how much I don't know.
• 10:49
  SPEAKER_00: Risk comes from not knowing what you're doing.
• 10:53
  SPEAKER_00: The stock market is designed to transfer money from the active to the patient.
• 10:59
  SPEAKER_00: So why does he stay humble?
• 11:01
  SPEAKER_00: Because he knows markets are unpredictable.
• 11:05
  SPEAKER_00: But also life.
• 11:07
  SPEAKER_00: Just because you made money in a bull market doesn't mean you're good at it.
• 11:11
  SPEAKER_00: It just means the market was easy.
• 11:14
  SPEAKER_00: A little success makes people think they know more than they do.
• 11:18
  SPEAKER_00: The market doesn't care about your narrative, only supply and demand.
• 11:24
  SPEAKER_00: Let me give you some useful tips to avoid the Gary effect or Dunning Kruger effect.
• 11:31
  SPEAKER_00: Assume you might not know everything or you might be wrong.
• 11:35
  SPEAKER_00: If you're 100% sure about an investment, you're probably missing something.
• 11:41
  SPEAKER_00: Don't mistake luck for skill.
• 11:44
  SPEAKER_00: If you made a profit or found a compounder, ask yourself was it skill or was the market favorable?
• 11:52
  SPEAKER_00: Surround yourself with skeptics.
• 11:54
  SPEAKER_00: If your investing circle is just people who agree with you, you're in danger.
• 12:00
  SPEAKER_00: And accept that the market is smarter than you.
• 12:04
  SPEAKER_00: You're competing against millions of traders, hedge funds, AI models, and all of them know way more than you and I do.
• 12:13
  SPEAKER_00: Instead of trying to outsmart everyone, focus on playing the long game and try to get an edge somewhere you can.
• 12:21
  SPEAKER_00: Confidence does not equal competence.
• 12:25
  SPEAKER_00: I just love that one.
• 12:28
  SPEAKER_00: Okay, next one, it's the last one.
• 12:30
  SPEAKER_00: The Peltzman effect and the Peltzman effect is about when people feel safer, they take on more risks.
• 12:39
  SPEAKER_00: Have you ever noticed how the safer people feel the riskier they act?
• 12:45
  SPEAKER_00: A seatbelt makes people feel protected, but instead they drive faster.
• 12:51
  SPEAKER_00: A football helmet prevents head injuries, but it also allows players to hit harder.
• 12:58
  SPEAKER_00: A government bailout is there to stabilize banks, so banks take on even bigger risks.
• 13:05
  SPEAKER_00: This is the Peltzman effect in action.
• 13:08
  SPEAKER_00: When people think they have a safety net, they become less careful, often to dangerous extremes.
• 13:16
  SPEAKER_00: Think about it.
• 13:17
  SPEAKER_00: If I gave you a million bucks and said, whatever you do with it, if you lose it, I'll just give you the million back, you're going to try and make as much money of that one million dollars without thinking about risk.
• 13:30
  SPEAKER_00: And why would you?
• 13:33
  SPEAKER_00: NASA discovered that better safety procedures actually made some astronauts take bigger risks.
• 13:40
  SPEAKER_00: They felt safer, so they ignored safety checklists more often.
• 13:45
  SPEAKER_00: The irony was that the thing designed to protect them made them more careless.
• 13:50
  SPEAKER_00: When people think there is a safety net, they stop being careful.
• 13:54
  SPEAKER_00: That's why bubbles always pop.
• 13:57
  SPEAKER_00: People get overconfident, take on too much risk, and then suddenly realize the safety net isn't there.
• 14:05
  SPEAKER_00: The Peltzman effect teaches us one thing.
• 14:08
  SPEAKER_00: The moment you feel invincible is the moment you're most vulnerable.
• 14:13
  SPEAKER_00: Because risk doesn't disappear, it just moves to where you're not looking.
• 14:18
  SPEAKER_00: And when the safety net vanishes, it's always too late to react.
• 14:23
  SPEAKER_00: So invest as if no one will save you when things go wrong.
• 14:28
  SPEAKER_00: Because in the real world, no one will save you.
• 14:32
  SPEAKER_00: That's it for today.
• 14:34
  SPEAKER_00: Until next time, stay curious, keep learning, and happy investing.