You're listening to Teip on today's show, we have a really fun and exciting guest, Mr. Chris Voss. Chris is the best selling author of the book, Never Split the Difference. And he's an expert in negotiations. Chris is an adjunct professor at Georgetown University and he spent 24 years in the FBI's crisis negotiation unit. So without further delay, sit back and enjoy this outstanding interview with Mr. Chris Voss.
You are listening to the investor's podcast where we study the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to the Investors podcast, I'm your host brought us, and as always, I'm accompanied by my co-host, Preston Peche. We have an exciting guest for you here today. As our listeners know, we are big on reading and there are a few books that I read as many times or should I say reread as many times as never split the difference.
It's by far one of the most important business books I've ever read. So with that said, ladies and gentlemen, we have the privilege of having the author, Chris Voss, with us here today, Chris Welch, on our show. Thanks for having me on. It's a pleasure to be on. Chris, your background at first glance, it looks like it's as far away from business as it can get for you have experience as a former FBI hostage negotiator, but as our listeners to know, I'm sure that will agree with me that it can't be more business than what you're actually doing.
So perhaps the best way of explaining that is to go back to the very first hostage assignment you had back on September 30th, 1993. Could you tell us what happened? I'm working in the FBI in New York, hostage negotiator with the FBI, a member of the Joint Terrorism Task Force, about eight thirty in the morning bank alarm goes off. Brooklyn, New York, buddy of mine walks up to my desk, says there's a bank robbery with hostages in Brooklyn.
Let's go. And Charlie jumped into a car. We got out there. We found ourselves on top of the bank without realizing it. I mean, we were in the intrapreneur, which is normally where you're not supposed to start your day. But so we bail out of that Crown Vic, big four door American made car low, crawled to the nearest bank across the street, which is where the command post was, and went inside and get ready to negotiate.
Turned out there were two bank robbers in the bank with three hostages. We didn't know how many there were at the time. We thought maybe they're up to seven bank robbers. But we got on the phone and started talking to. Human interaction is just decision making, and it's the context changes, but decision making is the same as business with its hostage. And you're talking about a bank robbery with hostages in Brooklyn and the business plan that they started the day with went awry.
You know, there's an American general that once said no plan ever survives the first encounter with the battlefield. You know, that sounds like people's business operations, but we got into the middle of it. And in hindsight, the bank robber on the inside was the classic CEO negotiator. He was trying to avoid being backed into a corner. He was hiding the amount of influence that he had and he wanted to maximize his revenue for the day. It ended up with a hostage negotiation team together between the FBI and the NYPD.
P.D. had their negotiators out there. We trained together. We understood the language. We didn't call emotional intelligence back then, but that's what it is. And we spoke the same emotional intelligence they put a negotiator on. First, I was his coach, the commander of the PD. Who McGowan Brandt. Dude, brilliant man. He ran the operation and we started to negotiate the bank robber on the other side. The first guy that got on the phone, he was really evasive and really brilliant way.
He tried to make himself look powerless when in fact, he was the one that had all the decision making on the other side. But he kept saying, like, you know, there are other guys in here with me. They're more dangerous than I am. You know, I don't know what they're going to do. You know, he realized that we had snipers, you know, and if we thought he was a threat, maybe one of our snipers did shoot them.
So he kept talking about how dangerous everybody else was so he wouldn't be a threat. And other thing that was brilliant. He did everything he could do to manage the threats. You know, I got to put you on hold for a minute. The girls want something to eat. You know, I got to put you on hold for a minute. The girls have to go to the bathroom. He kept acting like he had taken great care of the hostages when in fact, they've been very abusive to them up to that point in time.
So, Chris, one of the ideas that you talk about in the book is this idea of mirroring. Explain to our audience a little bit more about this.
Just repeating the last one to three words roughly of what the person is just said. Obviously, you can't repeat less than one word. You might repeat as many as five kind of word for word. It's not paraphrasing. You get more than five, to paraphrase, and it triggers an automatic response. And the other side, particularly someone who's being really guarded or really focused. And what they're saying now, the bank robber in this case, he was extremely guarded and cautious about every word that came out of his mouth.
And we got a little bit farther into the scenario. Now, the negotiator had been taken off the police department, the NYPD guy, and I replaced him and I was on the phone with this guy and it was time to confront them. And you can confront as long as you're not aggressive about it, you've got to be gentle. You've got to use a good tone of voice. What I would refer to is the late night deejay, you know, soothing, calming voice.
So I'm using this tone of voice on this guy. I can be very assertive if I use that voice. And I said, you know, there's a van that we have right here now. We had his van and we knew it was his van. We just needed him to it. So I said we got a van out here and we've identified all of the drivers to all the vehicles except this one. And he got nervous and he said, well, we don't have a van.
And I married him. I said, you don't have a van. You said, we only have one van. You only have one van. You said, yeah, well, I my driver away now. I had no idea what this guy's talking about at this point. I'm actually confused, but since I know how to Mira, I'm marrying him and he continues to talk. He's just admitted they got a van outside. Then he admitted that they had a getaway driver that had gotten away.
He just roped into one more of his accomplices without even knowing it. The mirroring kept him talking, and he was probably the most control oriented negotiator I ever ran across. And Amir was just brilliant at not only keeping them talking, but getting him to say things that he didn't plan on say. If you're not familiar with the concept, it almost sounds like a Jedi mind trick kind of thing and people might think, oh, God wish I could so easily tell if people doing it to me, but at least I can say from my own experience, I've tried using it.
I have it done. To me, it's just different. You don't notice it. I don't know if you do. I mean, you're an expert, but it's so subtle that it's almost unbelievable how effective it can be. I think I have a high IQ, I don't have a particularly high IQ, the high IQ and IQ, people love mirrors, like when I run across somebody that said, man, I use it all the time. I love mirrors.
That may be the only thing I do almost every single time. It's somebody who's brilliantly smart in all areas. And I am not I am not a high IQ guy consistently. I don't know if it's the simplicity of it and the simultaneous elegance that appealed to the high IQ people. But if you're immediately attracted to mirrors, I'd be willing to bet that you tested probably really high on IQ.
You just mentioned that before, Chris, that you could use the late night DJ voice in and actually you introduce three different types of voices in negotiation, and that might sound a little surprising to a listeners because most of us are probably just thinking about us having one voice and perhaps they didn't even think about in the first place that you had different types of voices.
So could you lay out for us the three different types we can use and in which to Asian they are applicable, for instance, in this example, in this story here. The three tests, first of all, the late night FM deejay voice is really the voice of really analytical person, and it's a person who likes to think things through at a measured pace. And so consequently, that's the voice that they use. Now, the great thing about that voice is it also causes the other person to be more thoughtful, to slow down, to calm down.
There's neuroscience that backs that up. That's to do with mirror neurons in our brains and neurochemicals. And it's the main reason it hostage negotiators just don't get in arguments and business people do all the time.
But hostage negotiators don't because it's smooth and calming voice actually has an effect on the other person's brain chemistry. Then there's this sort, of course, the direct and honest voice like, you know, this is what I want. And this when I want it, you know, you want to make a deal. This is what I need. Again, it's a neuroscience reaction. It makes people combative. That's not good for you. Negotiations. A third voice is the committers voice, somebody that smiles when you talk to them.
You can feel the smile when they talk.
And again, isn't a neuro chemical reaction and you're thirty one percent smarter in a positive frame of mind. So even if you make yourself smile, you actually make yourself smarter and consequently the other person feels it and they get in a positive frame of mind. And so you get great collaborative negotiations when you smile. And there's actually there's a no chemical response behind it and there's data that backs up the truth.
So, Chris, I really like your contrarian on this next topic that we're going to cover in your book. You talk about not getting to. Yes. Which is a very popular negotiation book that I'm sure most people are familiar with. But you talk about getting to know. So talk to us about this idea. The problem with yes is is always catch with yes, you know, there's always a hidden trap, there's always a catch, and people still teach the Yes.
Momentum or momentum selling and they refer to every. Yes. Is a micro agreement or a tie down. Well, that's a catch. Know, that's a trap. And if you get somebody into three micro agreements, then they have to make the big agreement. So you start to tie him down and you take away their autonomy. Now people feel this and everybody in the world has had this done to them multiple times so that instantly their intuition is getting triggered.
They're warning bells, they're internal alarms. As soon as somebody starts to try to get them to say yes, they start thinking like, what's the trap here? What's the tie down? How is this going to back me into a corner? I mean, I literally I've had people say to me. If I say yes to this, what does a commitment to what if I let myself in for? So even if you're not trying to tie people down as soon as you begin to model behavior, the tricksters are modeling.
They think you're a trickster. I mean, I think it's an African saying, you know, once bitten by a snake, you're afraid of ropes. People overreact to fears. And that's what this getting to. Yes. Problem is, every yes. Feels like a trick or a trap. So there's an automatic aversion to the word. Now, the insane thing is people are taught that when they say no, that they've just protected themselves from the trap.
So it's the stupidest change in the question from do you have a few minutes to talk to? Is now a bad time to talk instead of saying, do you agree? We teach people say, do you disagree? Instead of saying, does this look like something that would work for you? We teach, we will say, is this a ridiculous idea? It just switching from yes to no to start with as a massive change in the way people react.
They don't feel trapped. They've been conditioned. That's saying no protects them. So they they relax, they calm down. They're more agreeable. Having said now, you also mentioned there that if you want the other party to commit, we need for them to commit not one, but three times. Could you please explain, perhaps provide an example of those three steps before you potentially close a business deal?
Change your thinking. Don't look at yes as agreement, you know, you're looking for agreement you're not looking for. Yes. And really, when people really agree and they feel like they agree, they don't say yes. They say that's right. So I might say so. It sounds like we could work out all the details on this. It seems like you see some value here. You're going to say. That's right. And I might say so.
That's right. And it go like, yeah, well, you know, if all the details are worked out and you meet our objectives, then this would work for us. And so now you paraphrase it. Basically, the sequence is you label what they've just said. It sounds like that if all the details are worked out, you guys can implement this process. A label starts with the terms, the words. It sounds like that's labeling. It's a verbal observation.
You're not really asking a question. You're making a verbal observation and then whatever they respond with you. Mayor, we talked about the mayor before. They may just say, that's right, you mayor. That's right. That's right. You know, you put an upward inflection on it. They're going to give you a longer answer. The longer answer is your paraphrase. Basically, you've got an agreement and three different forms based on the use of three different skills.
But it's all around the same concepts. So it's expanding. It's just getting so far beyond the limitations of, yes, you're getting into actual collaboration. And the more words you get out of the other person's mouth, the more vested that they are on the deal, the more they're going to feel like they want to do it. Implementation is critical.
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All right, back to the show. In the previous question, we talked about how counterintuitive it is that we need to get to know in a negotiation what perhaps is even more counterintuitive is the so-called sequestration ordered. And perhaps that's also why it's even more effective. What is an acquisition order? The accusations are it is taken audit, take an inventory of all the accusations they might make against you, not that you would make to them, but they would make against you all the insane, crazy things, that unfair, ridiculous things that they might think if you're in sales, you know, that people don't trust salespeople.
That's an accusation that they're making before you even spoke to them. It's not fair. It's unfair. They don't even know you. How could that be fair? It doesn't matter what are the same insane, ridiculous accusations that they might potentially make now, just list them out.
If they've agreed to a meeting at some point in time, they're going to think the meeting is a waste of time. You start off by saying, like, you're probably wondering if this meeting is a waste of time. You don't deny it, you'd call it out. The massive differences never deny a negative. Just call it out. And we know from neuroscience, actually, this is why people make decisions. They have to get past the negatives. They don't ignore them.
They got to deactivate it. They got to reconcile them to some degree. They have to put them to rest. But the most effective way to reconcile the negative thought is just simply stated. You know, in the United States, we've got a phrase, the elephant in the room, you know, what's the problem? The accusation is the elephant in the room. You don't get rid of the elephant in the room by either ignoring it or denying that it's there.
What actually, the best way to get rid of the elephant in the room is say, hey, you know, you're probably thinking there's an elephant in the room. You pointed out you don't deny it and then you don't follow it up. But here's why it's not there. You don't explain it away. You just call it out. It's the most effective way to deactivate negatives on Earth. There's no more effective way to deactivate negatives than to simply call it out, to label it and then delete that label sinkin and diffuse the problem.
You have a very simple technique in terms of identifying whether or not you've been successful with the accusation audit. What is it that you're looking for or what is it that you want to hear from the counterpart? Well, you know, the beautiful thing is when they stop and they say, no, no, no, no, you're being too hard on yourself. Now, the interim steps, they're going to respond one of three ways to your listing of the negatives again.
And you're not explaining, you're not denying and you're not following on any other than a list that they're going to give you silence. You're going to say that's right. Or they're going to say, no, you're being too hard on it. Let's get to it now. Silence means you're on the right track and you haven't gone far enough. That's right. Means, of course, you nailed it perfectly, deactivated everything. They're now ready to listen.
You're trying to put them in a frame of mind where they will listen to you. And then if they say, no, no, no, you've been too hard on yourself, that's too much. They've actually not only they said. That's right, but they've stepped over to your side of the table. They've embraced you. They're helping. They're on your side now. Complete collaboration. Those are the only three responses to the accusations are. If I was there, salary negotiation, I'd say, look, you're going to think I'm greedy, you're probably going to think I'm self-centered, you're probably going to think I'm not a team player.
You're probably going to think I'm not concerned about the future of the company. You're probably going to be shocked at how high my salary demands are and all intents and purposes, every deal that my company negotiates. When someone is asked to surprise. Our response is ridiculously high, more than you've ever paid, more than you plan on paying, and then we go completely silent. Now we don't haggle. I say haggling is for hacks. We don't bargain.
We don't do that anymore. We have a price and we overdelivered always and we're the most expensive and we get paid. And we just raised our prices because what we also found out was if after I've said to my price is ridiculously high, the person on the other end of the conversation can stop and imagine a number higher than I had in mind. And so then when I give my number, my number is actually a relief. And we had people say to our director of sales so many times like, oh, wow, I thought I was going to be much higher than that.
She started asking, OK, well, you know, what did you imagine? And they started calling us ridiculously high prices and we thought, wow, they were prepared to pay that price. So we just raised our prices. You know, if you have a lousy product, you can do this, too, but you're going to destroy your business because first of all, the price you had before, it wasn't worth what you were charging. But if you believe in over delivering the way that we do, then you're entitled to every penny, every dollar, every euro, whatever your means of exchanges, you're entitled to all of it.
You should never cut your price. If you over deliver, you should never cut your price. You know, it's so elegant the way that you try to prime the other person, you just let them think there for a second. And one of the favorite stories that I got from your book is the way that you can always get a late check out of a hotel room. And I know it seems like I'm digressing here, but it's just such a neat story that I'm really sorry.
But I have to ask you to tell that and then ask for people to test it out themselves. I absolutely love this. So please go ahead, Chris. Yeah, it is so ridiculous, too, because, like, I'm in a hotel the other day and I think we get a late check and I called them from my room and I go, like, look, I need a late checkout. We can't give you one. We could give you one for seventy five dollar charge.
And I'm thinking like, do I really have to do this because I didn't do it right, because I know that they're going to give it to me so I get lazy. And so I said, OK, thank you very much. And I hung up the phone and I walked down to the front desk and I walked right up to the person I'd just been on the phone who just denied me a late checkout. And I looked at this young lady and I said, I am getting ready to ruin your entire day.
You know, his shoulders went down, she slouch, she looked down, she took a deep breath and she said, OK, what is it? And I said, I need to check out. She goes, Oh, OK. Sure, sure, sure. Before Clark, what for? Here you can have it right away. This is a person been on the phone when I didn't do it right. The priming that you talked about, you know, we referred to this also as emotional anchoring, but an emotional anchor in advance.
You just told me not to save my time in the very beginning. If I had just done it right from the beginning because I had to walk down to the front desk, I had to walk back, but I got lazy, know, I didn't want to take the other person's emotions into account. I got very self-centered. I was just focused on what I wanted and it took longer. And as soon as I took the other person's emotions into account, I saved myself tons of time.
So these different techniques that you talked about, Chris, how important is it that you sit in front of that person and how much can you do, say all the phone? Well, with practice, you can handle it all over the phone. I mean, there's a massive amount of information comes from somebody tone of voice when you practice listening for it. So it's only practice. A hostage negotiator does everything we never looked at anyway. What does that mean?
We just got in our practice. I get used to hearing everything. And with practice, you can I mean, it's all there. The brain is capable of processing the data with the practice, your gut instincts, your subconscious processes, a massive amount of information, I mean, a mind boggling amount of information, which is why as soon as people start listening to their intuition, their intuition actually gets very good. It's just their brain interpreting data, all the data you just got to give your brain the chance to do.
Interesting. So, Chris, because this is an investing podcast, we covered prospect, theory and loss aversion multiple times and how to use those concepts whenever we want to invest in the stock market. But how can we use these concepts in business, in negotiations? Loss aversion, so that is, you know, lost things twice as much as an equivalent gain and reality is loss is the overriding factor in human decision making. How do you factor that into business?
Principally in a business negotiation? The real enemy is the status quo. Getting someone to change what they're doing, they're more likely to change to avoid a loss. How do you get them to think about the loss? You can't say, look, you're going to lose all this money if you don't do this, which you have to do is a little bit of what we talked about before. You got to use a good question or what question. What happens if you do nothing?
What are the consequences of inaction if your rate of return that you're offering is 15 percent or let's say at seven percent or whatever your percentages, you can say, hey, look, make this decision and your rate of return will be seven percent. Or you can say stay where you are, do nothing, and it will cost you seven percent every day while you're sleeping. It's going to cost you seven percent. That's making a decision to avoid a loss instead of making a decision to accomplish a gain, do this and gain seven percent.
You say do nothing and lose seven percent. The second one has a higher compliance rate. Now, does it work every time? Nothing works every time you have to go with what has the highest compliance rate and loss aversion has the highest compliance rate. So, Chris, one of the really fascinating parts that you talk about in the book is using odd or numbers that just seem like there that they've been calculated. If you will, talk to us about why this works so well.
They feel more solid to the other side. They feel more thought through and even number feels like a soft number, like an estimate, like a temporary placeholder. The pricing around the world is triggered. You can't buy anything for a dollar or for a euro. Whatever your exchange is, you can't buy it anywhere. It's always an odd number. It works everywhere. Every society on Earth uses a numbering in their pricing because it feels better to the other side.
And then you start to kick it up to the next level. Like I've got a colleague that's selling some training for fifty five dollars a person because he's gotten out of the nineteen ninety nine, one hundred and forty nine or the dollar forty nine. He's gotten away from numbers that end with nine. So he likes fifty five. But it just feels like something about that makes it work for the pricing that he's doing. So this isn't pricing globally, just take advantage of it in your negotiations.
We always coach people to make counteroffers in odd numbers and certainly your last offers got to be in an odd number. That is a great point because it seems like you can't do anything more at giving everything away and, you know, 53 cents, absolutely example. And I think that to our audience, you know, they're listening to you. And like I heard you saying, well, you know, in our company, we don't really hackle and they might look at you and say, well, I'm not Kresse, you know, I don't have any hostis skills.
Perhaps they think luckily they have a very different background and they're used to negotiations where at the end of the day comes down to which slice of the pie you are getting and the counterparty is getting. And so they might feel that from time to time they're being forced into some real bare knuckle bargaining. One of the things have really picked out from your book was at the FBI. You learned this called the Acumen Model for those type of situations. Could you please explain to us how to use that system?
Acromion model is the most effective bargaining system out there, bar none when you get into bargaining. It's based on a dynamic of three. Again, you see the dynamic of three in human nature prop up over and over again. So it's based on you're going to plan out for three rounds of Barg. You come up with a target price and you're going to allow yourself to be moved into that target price in three increments. Your increments have to be decreasing increments.
Every move that you make has to be smaller than the one before. The other side will feel the increments getting smaller. They will feel victory every step of the way, but they will feel each victory was harder and harder won so that if you get to your number, they felt like they got everything they could. And that number then becomes a tremendous victory for them, which if they don't take it, they've lost it. Again, this is this loss aversion.
People don't want to lose victories. You want to make them feel like they won because they're more likely to stick to it. So the principle concepts are three rounds of decreasing increments, decreasing incremental changes, critical that each change is in a decreasing incremental use of odd numbers. And then in between those three, the other side has to counter. Otherwise, you're bargaining against yourself, which is what everyone in the world is trying to get you to bargain against yourself, which you cannot do because you're taking yourself hostage.
You lose. So the other side's got a counteroffer and then you have to apply lots of paraphrasing, summarizing tactical empathy in each round, which also, again, makes the other side feel like they've worked really hard for the outcome.
Plus, there's a very real chance that they'll settle on your number sooner. You might not even get to your third. No, a lot of people come to the table with Ackerman. They're going to come in with an offer that's roughly sixty five percent of where they want to be. And then with enough tactical empathy, they end up right at that number. I mean, they're shocked. I mean shocked. No shortage of people using Akerman have ended up with their first number because they put so much tactical empathy in with that number that they never had to come off.
Our listeners might be a bit overwhelmed right now to listen to this interview and then like Krisis, right, I need to do this, you know, 12 different things. Next time I go to a meeting and they're already, you know, they're too confused.
So it's kind of like analysis paralysis. So if we can just give them one thing, we're like, this is effective. This is simple. Try it out. If you just have to mention one thing, what would you recommend people starting with sort of to apply these techniques in their daily lives? I'll mention one thing and I'm going to give some people some guidance on how to work it all into the repertoire, because you can if you break it down into small things and that's what I love about you wanted to start was one small thing.
The other thing that's great about this, too, is as soon as you begin to improve at all, the biggest jumps of improvement are at the beginning, like with any skill. So it's just get a little bit better and you're going to see rate of return and change. The first thing to do is really just let the other side go first and try to paraphrase whatever they've said. Don't argue, don't cut off or don't make your value proposition.
I mean, they got a pitch they want to make. Let them pitch it, make an effort to hear them out. If you've heard them out really well, they're going to say, that's right. A bunch of your deals will make themselves as soon as your counterpart says, that's right. Now, how many of them will it make? It doesn't matter, because now those are made and you don't have to put any more work on you just put a whole bunch of time back into your life.
So make an effort to just summarize. Paraphrase what the other side has said. Get it. That's right out of somebody before you do anything else. Whatever percentage of deals will make themselves on the spot. Now, you could put a little more effort into other things, but just get that right.
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All right, back to the show. So Kris, instead of saying do this one thing, how about what would you say is a common mistake that you see a lot of people make? Being a yes addict, I mean, just like a few minutes to talk, this is what I said makes sense. Have I got that right? I mean, there's so many ways that people are addicted to. Yes. And the problem is, again, just because you like hearing it, you've got to remember the other side feels like you're trying to trick them, trap them time down.
So every time you hear the delightful. Yes. Which makes you feel like the angels are singing, the other side feels like they're being trapped, they're being tricked. They're backing themselves into a corner. So it's good for you is horrible for them. This whole Yes. Thing mean get out of. Yes. I mean, just stop trying to get people to say yes, you'll change your conversation. Plus you'll find if you're no longer looking for.
Yes, you're actually listening. You're paying attention to what they're actually saying. You're actually having a conversation. As soon as you get out of all your interactions will improve. Chris, this has been absolutely amazing having a chance to speak with you, and I'm sure the audience would like to learn more. So first of all, we're going to learn more about you, but also your company, Black Swan Group.
The best place is just go to the website, Black Swan, LTT, Dotcom, Black SWC and LTT Dotcom, and the website is a gateway to everything. We have a lot of free content. We've got a lot of stuff that you can get for free. The newsletter is free. You can go to the website and sign up. We've got PDF guides. You know, we got a negotiation preparation guide. We got a lot, a lot, a lot of free tools you can use to get a long way.
You combine it with the book, you're going to put yourself in a position to make a big difference in your life starting this week. And you can begin to make small little improvements every day. And in a very short period of time, you're going to find a negotiation is fun and you're very effective and got more time. And before we just let you go, that one last thing I want to ask you, Chris, is that some people might be thinking, why is it called Black Swan Group?
There's a really interesting story to that name. So I don't know if I could briefly ask you to mention why is it called Black Swan, Drew? Yeah, the impact of the highly improbable, the little things that you would imagine make all the difference in the world, you know, originally the Black Swan was in 16th century Europe, that there were only white swans and people thought, you know, there's no such thing as a black swan. A black swan would be a game changing, a world changing event.
And then they discovered black swans in Australia and people like, holy cow, there are black swans. It's phenomenal. This is crazy. And this metaphor has been applied to modern day times, to the little things that make all the difference. And in negotiations, these tiny little steps make all the difference in the outcome. You uncover things that will change everything fine. Black swans in a negotiation come up with better deals than you ever imagined you could get.
Chris, thank you so much for taking the time out of your busy schedule to be speaking with us here on the Masters podcast. It's an absolute pleasure. Thanks for having me on. All right, as we're letting Chris go, we're now ready to answer a question from the audience and this question comes from Mark Preston.
Hi, Steiglitz marketings calling from the UK. I just wanted to say, first of all, thank you for your fantastic, informative show. I have been listening now for the last six months or so, and I've really picked up a lot of tips and really appreciate it. I wonder if you could possibly help me as I'm starting to put together a little bit of a portfolio. And I came across something in a book I'm reading called The Naked Trader just in regards to using shorts as a bouncer for my portfolio.
Now, at present, I run indexes like four to one hundred and so on. But I've seen that there's something called the S UK two, which shorts twice the value of the Footsie. One hundred and wonder, is it possible to create an all weather portfolio between special types of ETF traded funds, but in opposite correlation of each other? I'd love to hear your thoughts on it. Thank you very much. We previously here on the show talked about the all with a portfolio, but just quickly to sum it up for everyone to follow, it's an approach that really was made famous.
And you're basically taking a combination of different asset classes, stocks, bonds, commodities and gold to make sure that your portfolio can perform in all seasons of the financial markets. But to your question, whether or not you can use shorts in an all weather tough portfolio, the answer is yes in theory, but it's likely not as effective in reality. You could perhaps even consider diversifying out of the Footsie for that reason alone, for instance, into global equities.
So you're based in the U.K., so that's why you refer to the FTSE. But follow American listeners. The argument is basically the same.
If they would do it to the Dow, the S&P 500 shorting is generally quite expensive.
So limiting exposure to equities in general will be a cost saver and then invest into an asset class with a yield. And shoaling does not have a yield that is inversely correlated instead. That way you can have your cake and eat it, too, if you want to have a more neutral exposure to the stock market. There's also a different option, even though it's outside the scope of the other weather portfolio. If you think that one stock with relatively outperform another, but you don't want to count on the tailwind of the stock market to help you do so, you can go a long individual stock in, say, for instance, Bank of America and then short Wells Fargo.
That way, even if the stock market tanks, you can make a profit. If you're right about the relative performance of the two stocks. And if you want, you can even do the same thing with two different ETFs, which sounds like Mark is probably more would be getting at, given that you mean invested in indexes? I would say that anything that involves shorting, though, is a bit more sophisticated. And for the vast majority of investors, I would much rather recommend that you diversify into different assets and asset classes rather than into shorting if you want to lower your volatility.
Yeah, so for me on this, I, I'm very worried of of doing anything short these days.
And the main reason why is because you you have central banks and governments around the world that are demonstrating a desire to print and to print a no holds barred. I mean, it is just. It's very different than the cultural setting that we had during the Great Depression, which was let the businesses fail and if you've taken on too much leverage, you should fail. I just think culturally, everyone's looking at the government and saying, why aren't you printing more?
And that's pretty much seen collectively across both parties and on Wall Street, pretty much anywhere you go anywhere in the world, that's pretty much the mindset. So my opinion is that we we might have these deflationary liquidity crunches that are going to manifest themselves. But I kind of suspect that governments around the world are going to step in and print at unseen levels. And so when you think about how a short performs. It's in nominal terms, so if if they're nominally just adding more and more fiat units into the system, I I'd be very concerned having a long term short position and pretty much anything.
So I don't know that I can really help you with a response, because I'm really kind of just it's hard for me to see past what I just described. And so hopefully between my response and Stig's response there, Mark, we got you something that was of some kind of value for asking such an awesome question, which this is an awesome question.
And I think it's something very important for people to be thinking about, especially during these times. We're going to give you free access to our top finance tool, which helps you find just fantastic companies that are pumping out some good free cash flows and that are trading on the market for a good price. Not only can you do that, but then you can look at how correlated those picks are to other picks that you have in your portfolio, and that includes ETFs and stocks.
So it also has a momentum to win all sorts of things that help you and assist you with your financial journey. So we're really excited to be able to give that to you and for anybody else out there. If you want to get a question played on our show, go to ask the investors, Dotcom. And if your question gets played on the show, you get a free subscription to our tip finance tool.
All right, guys. Preston, I really hope you enjoyed this episode of the Investors podcast. We will see each other again next week.
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