MICHAEL KEMP | Creating Real Wealth

Join Michael and me at the Australian Shareholders' Association QLD Investor Summit 2025 September 21-24 on the Gold Coast to dive deeper! Use the Promo Code: QLDSUMMIT for a $150 saving on a 2 day summit pass, total cost $595 (normally $745). ** Non-members only** Follow this link to find out more.

In this episode I chat with Michael Kemp, author of three investment books—Creating Real Wealth, Uncommon Sense, and The Ulysses Contract. Our conversation was inspired by Michael’s presentation at the 2025 Australian Shareholders Association (ASA) conference, diving deeply into the quirks of human psychology and how they shape our investing decisions.

Our brains are wired for survival in a prehistoric world, often leading us astray in modern financial markets. Michael pointed out that our ancestors needed to make snap judgments to avoid becoming a predator’s lunch. This instinct to form quick beliefs based on minimal evidence was life-saving back then but can be disastrous for investors today.

He shared Munger’s philosophy: “It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.” Investing isn’t about being the smartest person in the room—it’s about avoiding dumb mistakes. Michael emphasised discipline, patience, and consistency, qualities often overlooked in the rush for quick returns.

We also tackled the allure of market commentators and economic forecasters, who often sound authoritative but rarely face accountability for their predictions.

He cited research by Philip Tetlock, showing that expert forecasts are often no better than random guesses.

One of the most fascinating parts of our chat was Michael’s take on priming, a psychological phenomenon where exposure to certain ideas makes us more likely to believe related ones. He drew a vivid analogy to the Loch Ness Monster, recounting his meeting with Adrian Shine, a skeptic who’s spent decades investigating sightings. Despite over a thousand reported sightings, none have been confirmed. Yet, people primed to believe in the monster see it in every shadow or ripple. In investing, this manifests in things like chart patterns—flags, pennants, and triangles—that enthusiasts swear by, even if the evidence is shaky. “If you believe it, you see it,” Michael said, a warning to check our biases.

We also explored cognitive dissonance through the lens of a 1950s doomsday cult, the Seekers, led by Dorothy Martin. When their predicted alien rescue didn’t materialise, instead of admitting error, they rationalised it away, claiming their faith had saved the world. Investors do this too, Michael noted, holding onto losing stocks like Magellan Financial Group despite mounting evidence against them. His advice? Imagine you don’t own the stock and ask, “Would I buy it today?” If the answer is no, it’s time to reconsider.

Finally, Michael wrapped up with practical advice for retail investors like us. He urged us to emulate great thinkers like Einstein, Darwin, and Munger by seeking disconfirming evidence.

He also recommended using tools like ChatGPT to access peer-reviewed research, making it easier than ever to verify claims. And for those attending the ASA’s Gold Coast conference in September, he hinted at a retirement-focused presentation—sadly, no Led Zeppelin played backwards this time!

TRANSCRIPT FOLLOWS AFTER THIS BRIEF MESSAGE

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EPISODE TRANSCRIPT

Phil: Michael has written three investment books, Creating Wealth, Uncommon Sense and the Ulysses Contract, how to Never Worry about the Share Market Again, all advocating for disciplined long term investing strategies. These days he focuses on managing his personal investment portfolio, traveling and contributing to financial education through articles and podcasts, most notably with the Australian Shareholders Association. We met face to face, not virtually for the first time, at the 2025 annual conference. And this interview is based on Michael's presentation. And you're going to be making a presentation this year at the upcoming Gold Coast Conference, aren't you, Michael?

Michael Kemp: That's right, Phil. Yeah, it's sort of. The theme is going to be about retirement.

Phil: Well, I'm very excited about that. Well, not about retirement, but about seeing you at the conference again. But I'm assuming we're not going to be listening to Led Zeppelin backwards this time.

Michael Kemp: Yes, yes, yes, that proves you were there. No, no, no, that was something I used uniquely for that presentation.

Phil: Yeah, so just a reminder as well in the episode description and the blog post, you can avail yourself of a substantial discount which is available for listeners of the podcast, not, uh, members of the association, by the way. Okay, let's jump straight in. Tell us about the difference between trying to be smart and trying not to be stupid when investing.

Michael Kemp: Yeah, that was the theme of my presentation. I just want to kick off by saying that what we're going to discuss today Phil, is probably the most important issue, the most important skill that any investor needs to get right. And it's the way they think, the way they process information. And your first question is kicked off with that straight away. You'remember in the presentation I talked about the great Charlie Munger. He was once asked at a dinner party what it was that made him such a great investor and he simply replied with two words. He said I'm rational. The implication in that was that most investors aren't rational. So just getting things right delivered him an edge. I think this is reflected in how many different investment techniques there are out there. And there's a near endless list of the way people interact with the financial markets. Technical analysis, market timing, value investing, Dow theory, swing trading. I mean the list is near endless. The thing that gets me is there are passionate adopters of these techniques. And equally there's as many opponents that say that they don't work. Each denies each other's technique and they argue about what works. They can't all be right. And I used to wonder why that was. It used to confuse me when I first entered the, uh, sort of interacted with the financial markets myself and I went down quite a few blind alleys. But the FX started to clear when I realized that the diversity of opinion was due principally to the way people form their beliefs. That people can passionately believe something without a lot of evidence. In other words, wrongly. And while definitive answers are often difficult to find in finance, proving something people's faulty thinking is a huge issue here. It takes very little for people to start passionately believing in something. And while rational people look for evidence before they believe anything too strongly, most people just simply bypass that step. So this gets right to the core of how we need to behave as investors. Don't form ideas quickly, don't form

00:05:00

Michael Kemp: beliefs quickly, because if you hold stupid ideas about investing, then you'll use investment tools that don't work and you'll lose money. So getting back to Charlie Munger, he used to tell us this, so in my presentation I quoted him, he said it's remarkable how much long term advantage people like us. And by RC Min, he and Warren Buffett, who is his great pal, have gotten by trying to be consistently not stupid instead of trying to be very intelligent. This all ties in with a world worn Ben Graham quote that an investor's chief problem, even his worst enemy is likely to be himself.

Phil: I, uh, know. It's also. There seems to be this feeling that people have, is that in most areas of life, you achieve by working very hard and just trying to keep the wheels turning as much as possible. But it's not the way with investing, isn't it? Sometimes you, uh, just want to be slow, don't you? Anderative.

Michael Kemp: And this is what I stressed in my most recent book. It's all about discipline. It's all about patience, and it's all about consistency. You know, people, a lot of investors, particularly young actors, they were, uh, young investors, I should say. They're just spinning their wheels. They try this, they try that. They're, you know, they're impatient. They want to make big returns quickly. And that's not what investing is all about. Took me years to work that. That was about 30 before I started investing sensibly. Uh, way past 30 now.

Phil: I could tell you just a day or two. That's just embarrassing, isn't it? When we think about, you know, some of the mistakes that we've both made. You seem to be dismissive about behavioral finance, because this is a whole discipline we hear about as well. You know, behavioral finance is something that's really studied, and there's professors and academics who we're just working on this. But you think the answers are in basic psychology, don't you?

Michael Kemp: Yeah, but I think they're linked. I mean, all we're doing when we're looking at behavioral financ is the outcome of what I'm talking about. It's sort of the superficial way that people behave. So it's not that I'm dismissive of behavioral finance. I just think a lot of it, a lot of the way it's described by, you know, Kan, and he's Mate Tversky, unfortunately died years ago. Mor Stapman, Richard Thaler, these guys are professors of behavioral finance in the States. I just think a lot of it's too observational, and it doesn't get to the core of the problem. It's the outcome of the problem rather than understanding why it happens. I think it's a lot more powerful when you understand the reason or reasons behind why we behave. Irrational. If you understand why, then you can internalize it. Realize that you yourself are prone to that behavior, and then you're sort of more empowered to change your behavior, to behave more rationally. I've always wanted to understand why. And if you understand why, you can act much more powerfully. And I Talked about, you know, a couple just then, Danny Cayman and Amos Tversky, they talked about prospect theory. This is one example of behavioral financ. I'll give uh, and an example helps explain what I'm talking about. They talked about prospect theory where a financial loss is felt with greater emotional impact and a gain of the same size. I mean we've all heard that they developed the concept together in the late 70s and Kaman was later uh, awarded the 2002 Nobel Prize in Economics for that work on prospect theory. I thought it was actually rather strange that he got a Nobel for that because something that amuses me about that is I'm a reader of James Bond books by Ine Fleming and his s 1955 book. 1955, I mean this is long before 2002 or the 1970s. His book Moonraker, uh, in Fleming wrote about a night when James Bond was out, uh, and he'd made a big win at the gaming table and Fleming speculated that the loser would be feeling more pain than James Bond would be feeling pleasure. I mean it's prospect theory in 1955. And if you want to go back even further, Daniel Defoe, the author of Robinson Crusoe, the 18th century author, wrote about exactly the same thing 300 years ago amidst England s South Sea bubble. So uh, I'm surprised that Kaman got a uh, Nobel Prize for that. But he's not here to defend himself anymore, unfortunately. Look, behavioral finance covers a near endless list of heuristics and biases that we have. It describes irrational behavioior, but I don't think reading about them helps people much because they just look at them and they say, well none of that describes me. You know, I, I'm rational, that other people do that sort of stuff. The fact is Phil, that none of us are truly rational. We just differ in how irrational

00:10:00

Michael Kemp: we are.

Phil: Uh, and it's interesting, isn't it, that the fact that this kind of research has a Nobel Prize attached to it gives it another level as well, doesn't it? That it's, it's a Nobel Prize. This must really be something worth following and worth thinking about when in fact.

Michael Kemp: What you're actually saying is it's a relatively simple idea.

Phil: It's a relatively simple idea, isn't it?

Michael Kemp: Yes it is. In fact, I think a lot of us have felt that, really have. I mean we've got a share that's, that's climbing and you sort of get excited about it first. And after all, after, after a while it's a bit of a yawn. But if a stock goes down by the same amount, you actually do feel a bit more pain anyway.

Phil: Yeah, and I think it was interesting just thinking back to the last time we chatted as well, that you talked about dividends and the power of dividends, because we've got another guest coming on next week talking about dividends as being kind of a very good ballast to you psychologically. So it helps you to build resilience just knowing that you're going to be getting that dividend payment into your account every six months or so.

Michael Kemp: And it's a very important skill once you hit a certain age, certainly when you hit retirement, because the capital movements of your stocks either up or down, they seem to wash over you after a while, particularly when you've been through a few crashes. You know, I was on the stock market floor in 87, and of course I went through, you know, the global financial crisis and everything else that's happened since. After a while, it all becomes a bit of a yawn the first time it hits, maybe. But after a while you just go, well, they keep pay, the stocks keep paying dividends. So it was overpriced or underpriced. Who cares?

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Michael Kemp: Yeah, the stock market'volatile. Who cares?

Phil: Okay, well, let's get back to our brains. And what's the effect of having a brain that's been developed to avoid becoming a wild animal's luncheon?

Michael Kemp: Yeah, look, I think it's really important when you think about behavioral finance or how we think or how rational or irrational we are, I should say, to place human existence in some sort of perspective. Scientists have traced our ancestry back to a small hominid that walked around Earth about 2.5 million years ago. And we've progressed from it, we've developed from it, eventually into Homo sapiens, which has been around for about 300 to 400,000 years. So our brain development can be traced back millions of years. It means that our brain developed in a very different world than we live in today. And we still think like that animal. It used to walk around in the hostile environment. So about 99% of our brain development time has been in a hostile world where our, uh, greatest threat wasn't cancer or heart attack or even our shear portfolio collapsing but from a violent attack, either by another tribe or a wild animal. The result is our brain is primed to come to rapid conclusions, not to seek evidence before we come to that conclusion. And the ever evolutionary hangover about all of that is that today we still develop strong beliefs very quickly and based on very little input. You can see that that was very rational for our ancestors to behave that way because it was life saving. Didn't really matter if the threat wasn't real. At least they reacted when it was real. But it's not rational today to behave that way. Particularly in financial markets, we shouldn't be coming to rapid conclusions and rapid decisions and form opinions very quickly. We do it subconsciously.

Phil: Do you find that there's a lot of market commentators who form decisions and talk about them very authoritatively?

Michael Kemp: They're as prone as well as anyone else is. You know, I call them the Pied Piper. A lot of them are just as irrational as we are. Uh, but we listen to them. Well, I don't listen to them as much as I used to, to be quite honest.

Phil: And they talk about it with such serious authority. Yeah, I'm just trying to look for another word to say authority, because I seem to be saying authority a lot and authoritatively, Phil.

Michael Kemp: I think the handpicked. Because no one wants someone, you know, to be, uh, indecisive. I was asked a number of years ago if I'd, you know, talk on TV about these things, about what happened on the market or what's going to happen in the economy. And I said no. And I think I did for a very good reason. If they'd asked me a question, I would have answered it so honestly. I might have said, o, I don't know, or who cares? I mean, the market didn't move March. It was only half a percent. It doesn't mean anything. And

00:15:00

Michael Kemp: I, uh, would have lasted one program, they would have said, the producer would have said, where'd they dig this guy up from? You know? But the person who answers the question on TV always has an answer, always. And there isn't always an answer to deliver. So I don't really listen to them that much anymore. Anyway, we've got sidetracked again. The belie we did the believing.

Phil: That's right. Yep. That's definitely what we're looking into today. And speaking of the believing brain, the Loch Ness monster. Who believes in the Loch Ness monster? Tell us about that and our beliefs.

Michael Kemp: Well, a lot of people believe in the Loch Locc. Ness monster, don't they?

Phil: UFOs all sorts of things.

Michael Kemp: Yeah, look, it's a fascinating study and the reason I talked about that in my presentation is went to the. I went to Loch Ness. I went to Scotland last year, it stayed Inverness, and went out to see the famous lock. And I found it fascinating. The highlight of my day was I got to meet a guy called Adrian Shine, who's arguably the world's leading expert on the Loch Ness Monster. For more than 50 years, he's devoted his life to investigating sightings of the Loch Ness Monster. He lives out there and there's been plenty of sightings. For example, over the last century, there's been, uh, more than a thousand sightings, which sounds hard to believe and he's a skeptic. So I asked him why is he devoted the greater part of his life to investigating something that I, uh, said to himri un. Let's face it's unlikely to even exist. And his answer, believe it or not, had a strong application to finance. And I found it fascinating. We had a great discussion. He found it all also interesting because people's firm belief that the Loch Ness Monster existed didn't actually require any proof. So I thought, well, list this sounds a lot like finance. Their belief was based on something that psychologists refer to as priming. If they came to the lock even with the slightest expectation that the monster existed, then it was more likely they were going to see it, because they were primed to see it. They'd interpret the shadow of a cloud on the water, a seal, and there are seals in the lock. A sturgeon, a floating log, wake of a boat, whatever it is, not for what they really were, but as the monster. None of the thousand reported sightings of the Loch Ness Monster have ever been confirmed as genuine, although there's people walking around swearing that they've seen it. Look, it's easy for anyone to fall prey to priming. This is where this. This whole thing.

Phil: Lead Zeppelin came in.

Michael Kemp: Yes, Stairway to Heaven backwards. I demonstrated in m my presentation with that experiment. I see priming operating in the stock market. And a great example, I reckon, is charting. It's a bit like the Loch Ness monster, because if you believe in charting and you're looking for things like flags and pennants and triangles and support levels amongst a bunch of squiggly lines, then there's no doubt you're going to find them. I'm going to get shot down for second that. But. But I honestly believe it. I think people who believe in charting, there's a lot of things they perceive and see that. That just aren't there. And with that, there's, uh, the human phenomenon of paticity. We look for sense in the world by looking for patterns. And we always have, you know, man on the moon, connecting the stars in the sky and seeing zodiac signs and reading palms and tea leaves. And I think patnicity is very much at play with charting. But getting back to priming, if you believe it, you see it, not you believe it. When you see it, it's the other way around. You're going to believe it. If you believe it first, then you find it.

Phil: So Benedict Spinoza. Now, um, I'm a big fan of Bertrand Russell's History of Western Philosophy. And if you ever want to look up about these philosophers, because they teach raionalists, the rationalists. Yeah, yeah. So what does Benedict Spinoza, what does he have to tell us? What can we learn from Benedict?

Michael Kemp: Some people call him Baruch, so, you know, he carries a couple of names like John and Jack. He was a 17th century Dutch philosopher, and he was one of the three great rationalists in the Age of Enlightenment, when people started to really think in a much clearer and more scientific way. The other two were Gottfri Leibnich and Ren Darts, the Frenchman Dart. These guys were instruments.

Phil: Descart was a drunken fart, I believe. The Pnemonic from Monty Python.

Michael Kemp: No, look, these three guys were instrumental in developing the concept of clear and rational thinking and develop the scientific method. That sort of pulled us into the Age of Enlightenment and we started to discover a lot of. A lot more about life and about the world. Spinoza recognized that people accept a statement as being true simply because they understand it.

00:20:00

Michael Kemp: It doesn't matter if the statement is right or wrong. If it makes sense to them, then they'll accept it as a fact. And this is very dangerous. It's rife in finance. And it's another reason why there's such a diversity of beliefs. I think a great example in finance is economists who like to forecast. They're the masters of the causal theory. You know, they'll tell you why something is going to happen, and they'll tell you through a narrative about how the future is going to unfold. Problem is, these prophecies so often don't, you know, happen. But people are sitting in their lounge room watching the news program and Economist comes on, and they sit there and they go, wow. You know, they believe it because the narrative makes sense to them. But the fact is there is nothing factual about their forecasts on their narrative. Anything could happen, and anything does. So look, we're wired. We're wired to do it. And this is why, getting back to Benedict Spinoza, he identified this hundreds of years ago. If you deliver a story or a narrative that sounds sensible, people will believe it. They won't bother looking for the facts.

Phil: No, that's right, that's right. And how do you believe these narratives form?

Michael Kemp: It gets back again to what I was talking about before. The way we've developed through time, uh, our ancestors long relied on the spoken word. It was the sole method of passing on information from person to person or generation to generation. And so it carries a lot of power. As I said, we've been around, Homo sapiens has been around for about 3 to 400,000 years. We don't know when the spoken word started because obviously there's no record of that. But we do know that the written word has been around for about 5,000 years. So there's absolutely no doubt for a long, long, long time narratives were how we passed on information, how we communicated, how we learned, how our children learn from us. And that's why most people, uh, are more likely to trust a well spun narrative than cod dry research which they're just not bothered to read. So if someone hears a narrative and it makes sense to them, they believe it. And when you believe something, why go looking for the research? It explains Spinoza's conjecture that a good story is enough to establish a strong belief and there's no need to seek any evidence beyond that that it's true.

Phil: So then you really believe that empirical evidence is really hard for people to wrap their heads around in terms of investing and many other things in their life? Obviously.

Michael Kemp: Absolutely. Because when our beliefs are established so quickly, so easily, and so, might I add, passionately, we don't feel the need to seek research unless we're aware of how to be rational. We need, uh, to understand that we're prone to fall prey to narratives. So we should, shouldn't trust our initial beliefs. We should go out and seek the research. And this happens in investing. Investors rapidly develop a belief in whatever it is, be it technical analysis or market timing or value investing. They believe it passionately, so they very quickly just dive in and want to use it. And this is what I was warning investors about, Phil. Don't trust, don't, don't trust what you believe until you actually look for evidence. And this is what Spinoza diccartes were saying.

Phil: Yeah, for me personally, I think this has been one of the great things with the Australian Shareholders association and I Know, I go on about this quite a bit, but just to be able to go to one of their meetings where, you know, there's a few dozen investors sitting around in a suburban hall and listening to them and hearing what they've got to say. And challenging as well, you know, to have your ideas challenged is so em. Important because you want to break these narratives.

Michael Kemp: Thing is, Phil, often correct thinking is challenged because invariably you'll get someone in the audience who has a passionate belief that's wrong. And what they do is they use question time not to ask you a question, but to tell you you're wrong. And I learned from those times. I enjoy it, actually, because it's sort of. It's exactly what we're talking about here. Yeah, they're the really tough nuts to crack, I can tell you, because they just don't want. They don't want to believe you. They don't want to believe you.

Phil: Okay, economic forecasting. Let's dive deeper into that. Now, I know there's a quote, and it's something like, uh, economic forecasting exists to make astrological forecasts look good.

Michael Kemp: Yeah, I think Warren Buffett threw one out like that.

Phil: Yeah, I think Warren Buffett. J.K. gailbraith. I thought it was, but, you know, there's no.

Michael Kemp: Jack. Uh, Galbraith's quote was something like, there were two types of forecasters. Those who don't know and those who don't realize that they don't know. That was Galbraith.

Phil: Yeah. I'd really highly

00:25:00

Phil: recommend reading some Galbraith. He was a fantastic writer.

Michael Kemp: He's John Kenneth Galbraith.

Phil: Yeah, he. Yeah. Completely forgotten these days, really, isn't it?

Michael Kemp: Yeah, no, I've read a few of his books anyway. Oh, what.

Phil: Ye. That's. Talk about.

Michael Kemp: What's the role of. Yeah, I forgot the gl. Of we. What's the role of forecasting and investing? Investing. I don't think it has a role. Uh, I really don't. Because the forecast are so often wrong, people pay attention to. I find it fascinating that people do pay attention to forecasts, and I think they do because it makes them feel better that, look, they don't know what's going to happen in the future. So they look to someone that can fill that void. And why not? Someone who'presented to them as an expert. It was the American economist and businessman Alfred Coles, who. He lived in the. In the last century, in the 20th century, and he said it. Well, people want to believe that someone really knows. And a world in which nobody really knows can be frightening. So it just makes us feel better. But after reading reams and reams of research about their capacity to forecast, and I've read several books on this and a lot of the research, I don't pay much attention to them. Phil Tetlock did a lot of work on this. He was an expert on experts and he basically concluded that their ability to forecast was about the same as a bunch of chimpanzees throwing dart to dartboards. I have a saying that when an economist comes onto TV to deliver a prediction about what's going to happen in the markets or the economy, that the best thing to do is to use the time productively. And my advice is to just leave the room and go and make yourself a cup of tea.

Phil: Okay, so Mark, commentators, as we've been saying, they do prime their audience. What are some of these techniques that you've seen for priming an audience? And ye, how can we avoid that?

Michael Kemp: Yeah, getting back to this concept of priming where if your senses have been primed, you're more likely to believe another input to your senses. Getting back to the Loch Ness monster, uh, I, uh, don't think they do it consciously or deliberately. I think they're just selected. It's just that some people are better suited to deliver forecasts and be on TV or uh, be on radio than others. And they have certain characteristics. It's all about how they present the audience. And this, this gets back to why I said before, if I was asked a question about why the market went up that day and there was no real reason, I'd say so I would self select myself out of being a forecaster on tv. I uh, find that they're not, they shouldn't be too young because we don't believe people that have fresh out of un. Any. They shouldn't be too old because they think, you know, they're a bit doty. They need to be articulate, they need to be well dressed. Wearing a suit, tie helps. They talk the jargon and most importantly Phil, they need to be confident or unwavering in their opinion. People love people who are uh, confident. Interestingly, Philip Tetlock in his research found that the really confident ones made more likely to be wrong. The fact that they're on TV or in the press or on the radio in the first place is a great primer for the audience because it means that someone has selected them as an expert. So that's a primer as well. But look, just none of those things that I've mentioned bestow an ability to predict the future.

Phil: And uh, it's amazing, isn't it, how confident they can be. But there's no mechanism for checking in the past for their predictions. And what they were saying was going to exactly that.

Michael Kemp: That's right. They can get away with saying something and. But the thing is, Philip Tetlock, who I mentioned before, the US professor who studies experts, did exactly that for years. He studied, he looked at their forecasts and saw al right, so he did what most people don't bother to do.

Phil: Ditch the spreadsheets. Shareight is Investopedia's top tracker for DIY investors. Invest smarter, not harder. Grab four months free on an annual premium plan at sharesight.com shares for beginners so how do you guard against these narratives? I mean, is it just the fact if someone's wearing a suit, immediately look at them with suspicions?

Michael Kemp: No, I don't think that I, uh, don't think you should look at them with suspicion. But look, I think getting back to what we're talking about about Spinoza is don't trust a narrative in itself. You need to investigate the facts for yourself. So if someone tells you that, you know, market timing, you know, works, that's their belief. But investigate for yourself. Look up the research rather than just placing blind faith in superficial narratives. Search for yourself. I mean, Darto has outlined this concept in his 1637 book. This is how long ago these guys are around discourse on the method. And

00:30:00

Michael Kemp: it's exactly what he talked about. He described the method of systematically disbelieving everything unless there is a well founded, um, belief or reason for believing it. Sir Francis Bacon, the great Englishman, he said the same thing pretty much 400 years ago. He said doubt all before you believe in anything. I don't believe a narrative is a well founded reason for believing anything unless it's maybe being delivered by someone that you know for sure is basing that narrative on a thorough understanding of the subject themselves. So you need to check that out as well. There's certain people you can trust as being right, but they need to deserve that trust. And I think now. And this leads back to a recent podcast you had about AI And I found that podcast really interesting by the way. Phil, it's never been easier than now to check for yourself the facts. With the development of large language models like Chat GPT and Google Gemini, if someone says something and you want to check up on it, just look up on the Chat GPT and uh, ask for a review of the research on that particular topic. You're interested in. But I found this very important. When you do that search or that request, you need to add the qualifier peer reviewed research so you get the best quality research coming back at you. So, uh, as I said, I don't think it's ever been easier to check this. I mean, you know, Sir Francis Bacon and Ron Darts and Barok Spinoza, they couldn't ask Chap gbt. So yeah, check the facts out for yourself is my answer.

Phil: Yeah. And also you've neglected Rod Stewart and Reason to Believe. We all need a reason to believe. We do need a reason, but we need good reasons to believe.

Michael Kemp: Yeah, yeah, I just. Look, the only song of his I know is Maggie May. That's an oldie. Yeah.

Phil: So we love a good doomsday cult. Um, on this podcast, what have you learned from doomsday cults?

Michael Kemp: Look, I think they're a great study for psychology because they 10 typically hold really extreme beliefs, beliefs that most other people think that are crazy. So it's a great study in psychology. And this gets to the crux of what I think is really important in finance. Phil, I don't think you should just read finance books. I think there's so much you can learn by diverse reading. I learned a lot by reading work from, uh, Michael Schrmer's a, he's a psychologist who looks at these things, looks at doomsday cults, et cetera, et cetera. Uh, locuckh. Ness monster. How can you apply that to finance? You can. So doomsday cults. In my talk that I presented up for the asa, I spoke about the US psychologist Leon Festinger, who co wrote a book When Prophecy Fails, very famous book back in the 1950s. And to research the book, Festinger, uh, joined a, uh, Chicago doomsday cult called the Seekers. And the cult leader was a woman called Dorothy Martin. And Dorothy Martin believed that an alien who is the current embodiment of Christ was communicating with her through automatic writing, where through her body she wrote out messages that this alien was saying. And this alien, he had a name, his name was Sannander. And he warned her that the world was going to be inundated by a flood on December 21, 1954. So she formed all these, uh, got all these cult members around her and got them to believe as well. But here's the good news for Dorothy and the cult members. Srnander was going to send out a flying saucer that would come and collect them from Dorothy's house at midnight before the flood hit. Guys, this does Relate to finance. Believe me, I'll get there eventually. So they're all sitting around in Dorothy's living room in the middle of the night and I'm, um, surprise, surprised the flying saucer didn't arrive. You know, the press were there and people were watching and, you know, the cult members were expecting it, but the flying saucer didn't arrive. So Dorothy was in a bit of a bind. Rather than admit you was wrong, Dorothy manipulated the facts. She said after a few hours that Sanrnanda was contacting her again, that there was a new message coming through on the line and through automatic writing. The message from Sannander was that the flying saucer didn't come because the group sitting alone all night had spread so much light that God had saved the world from destruction. So Dorothy maintained her belief in the face of what we call disconfirming evidence. Now, what better, stronger disconfirming evidence could there be that the flying saucer

00:35:00

Michael Kemp: didn't turn up? But Festinger found this fascinating. He coined the phrase that we've all heard of cognitive dissonance. I know the story is crazy, but cognitive dissonance isn't crazy because we all do it. When things don't work out or they run against our belief, we change the facts. And I see it all the time in finance, Phil. We deny new facts if they run counter to an existing belief. I said this before, when I present to a big audience and I come up with something that I know as a fact or close to a fact because as close as we can approe to be a fact because I've read the research, someone will stand up and tell me I'm wrong. It's not question time, it's I'm right time and you're wrong time. If it challenges one of their beliefs, what they'll do is they won't ponder the new evidence and even think that they could possibly not have had it right. They'll react strongly to it in a knee jerk reaction. And I find times like that fascinating because what they're demonstrating is cognitive dissonance. And we have to be very, we have to work hard against that. We have to keep an open mind. We have to look for disconfirming evidence, not deny, not deny it.

Phil: And this is really important for cutting your losses as well. I mean, you use the example of Magellan Financial Group that went through some problems, shall we, uh, say, over the last few years, and it was all about cutting losses early when faced with mounting evidence against the initial investment thesis. And again, and it was with a rockstar fund manager as well, wasn't it?

Michael Kemp: Yes, it certainly was. Well, what you're saying is, I guess if you own a share, if you own a stock or have a position and it's running against you, share price is falling. You've got to work against the tendency to come up with reasons why that's happening that are wrong to maintain your position and say, think everything's going to turn out, we'll do it. Investors do it. I've been guilty of it in the past as well. Ah, I hope I'm less guilty of it in the future. But look, when a uh, position turns against you, when a share price starts falling, when you should change your view. Look, this is one of the hardest questions in investing to answer when to getah.

Phil: Because so many people say, uh, oh, well, this is the time to load up even stronger if you're, you know, if you really believe in.

Michael Kemp: Which might be the right answer. It might be the right answer. Look, just because a position is running against you doesn't mean that your initial investment thesis is wrong. It might be, it might not be. But markets are fickle beasts. There can be periods when you're losing money even though you're doing the right thing. And there can be periods when you're making money even though you're doing the wrong thing. In the end, it's the long game that matters. So what do you do if your position is losing money? I haven't answered the question yet. Look, those who believe in stop loss orders would say you just automatically sell when the share prices fall into your stop loss trigger. But confusing that issue, you read Ben Graham. He used to say that you don't sell a position simply because the share price has fallen, which is really conflicting to the new investor. Graham was a value investor. He was pragmatic and uh, he uh, was the view that you should only invest in a stock where you have a reasonable idea about what it's worth. So he would say that if a share price fell and it was an even deeper discount to its intrinsic value, then you should buy more. Exactly what you just said. But Grahame would also be the first to add that if the facts have changed, you need to wipe the slate clean, get rid of your emotional baggage and re evvaluate the stock or the position where a fresh set of eyes difficult to do. A useful way to do that is I worked out is to try and imagine even though you own the stock, try and imagine that you don't own it. And you say to yourself, given what I know today, right now, would I buy it? And if the answer is no, then ask yourself why you're still holding it. So I would say the best plan or investment method to adopt is a well thought out plan that you've established well before the event and stick to it. And a falling share price can invoke a lot of emotion. So the worst time to be making decisions about the stock is when you're emotional. If you use stop losses, keep using them. If you're a buy and a hold investor, remain one. And if you're a value investor, uh, continue to keep that mindset. Remember, there's no such thing as the investor who's right all the time.

00:40:00

Michael Kemp: Even Warren Buffet used to make some really, what he would call dumb mistakes. Dexter Shoes is probably the biggest one he's ever made in his life and he still talks about it. You just need to employ a consistent system that, you know, works in the long run. Uh, I'll give an example of that. Warren Buffett, remember.com back in late 90s, sort of all fell apart in the early 2000s. People really turned against Warren Buffett then. I mean, he was getting some really bad press. Some of the headlines in even in our own AustraliaandN financial review were pretty damning. You know, the guy's lost his touch. He's hopeless. Everyone was making money in dot com. Buffett wouldn't touch the things. The reason Buffett did that didn't change his plan is he had a plan. He worked it out years ago and he didn't. He was not swayed from it and he was ultimately proven right. So even though you can look like you're doing the wrong thing, if you've worked out a system or a method that works, stick to it. Because he can be wrong for a while. So, and I haven't answered your question.

Phil: Definitively, but boy's o a tough question that. Tough question. You know, figures like Einstein, Darwin, Charlie Munger, they've always sought disconfirming evidence. Now, what about the mug punter retail investor just approaching the share market for the first time? How would you suggest that they, um, they look at their, themselves at the market, at the companies that they're buying to guard against the, the beliefs and narratives that we all form for ourselves.

Michael Kemp: Yeah, it's interesting, isn't it, Phil? I mean, you look at those three names. I, um, mean, they'brilliant people. Albert Einstein and Charles Darwin, Charlie Munger. That they would continually question their own beliefs tells you something, doesn't it? If people that we hold in such high regard as great thinkers have challenged their own beliefs, then we as mug punter should be doing the same at least. Look, you said to me earlier on that if people do that, they might be paralyzed by disbelief. I don't think there's any need to be paralyzed by doubt if you're always doubting what you believe. Uh, I don't think that should be paralyzing you. I'd flip it and say that seeking disconfirming evidence sets you free to continue learning. Uh, what Einstein and Darwin and Munger were doing was actively keeping an open mind. They saw that as a way to continue learning, testing what they already knew or believed to progressively get closer to the truth, working to become more rational. By constantly challenging your own beliefs, your own investment beliefs about what works and what doesn't, you'll progressively develop into a better investor. Munga was 99 when he died. I mean, he didn't die that long ago, but he said he was still learning in his 90s and he was seeking disconfirming evidence to the last. And he was a great investor.

Phil: Okay, well, let's wrap it all up into a nice package and bundle for listeners.

Michael Kemp: I think you need to be aware that can be easily influenced through a process called priming to believe things that simply aren't true. For example, don't accept someone as credible just because they'well dressed or articulate or they appear confident or to know what they're talking about because sometimes they're talking absolute rubbish. Don't passionately embrace an investment or trading technique without first seeking evidence that it works because it could be losing money. Keep an open mind and don't continue to blindly defend an investment technique that you've adopted in the face of strong evidence that it doesn't work or only works in an expert's hands. And that's a risk. An expert might be telling you something, but doesn't mean you can do it. Chances are you re aren't an expert. And to keep learning and to read widely, it's amazing how much information from other disciplines can contribute to making you a better investor.

Phil: Fantastic. Okay, well, looking forward to catching up again on the goal coast in September. And I'd like to add that in the episode notes, in the description and blog post, you'll see links to a substant discount. If you'd like to come to the Gold coast and attend, it will ll be a great time there. Michael Kemp, thank you very much for joining me today.

Michael Kemp: Okay, see you, Phil, and thanks and goodbye. To everyone else too.

Phil: Thanks for listening to Shares for Beginners. You can find more at sharesfforbeginners.com. if you enjoy listening, please take a moment to rate or review in your podcast player or tell a friend who might want to learn more about investing for their future.

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