Beyond the Money #3: How Associative Thinking Builds Confident Investors

Behind every methodology, there is a thought process involved, a deeper way of thinking that drives decisions. It's the great "why" behind the action. Tune in to the Rule Breaker Investing podcast, as Motley Fool co-founder David Gardner explores three of his favorite types of thinking.

Being an investor alone is not as powerful as being an investor and a businessperson. That analogy is one example of associative thinking, and it is David's third form of thought. Tune in as he draws the parallels between being an investor and having other roles, and how these associated factors will make for more knowledgeable and confident decisions in the market.

Make sure to check out the other two parts of this series:

Beyond the Money #1: Play Things Forward by Thinking in Systems

Beyond the Money #2: Recognizing Patterns in Investing

A full transcript follows the video.

This podcast was recorded on Oct. 7, 2015.

David Gardner: So those of us who were alive in the 1970s will probably remember I think was Reese's, yup Reese's Peanut Butter Cups. There was the regular television advertising at the time had somebody who was eating chocolate bump into by mistake thoughtlessly to somebody who was eating peanut butter. And of course he or she would stick their chocolate bar by mistake in the peanut butter jar of the other person and angrily say, "You just got chocolate on my peanut butter." "Well you just got peanut butter on my chocolate." And then they both take a bite and they go, "Wow that's really good."

And that was of course a good ad for Reese's Peanut Butter Cups. You got peanut butter in my chocolate: associative thinking when you pull something from one context completely out of that context and relate it to another context, and have a discovery.

What is the slightly more awesome you that you become once you start to get better and better at associative thinking? Well for this, I think you're going to come up with more novel, creative, and interesting ideas as a consequence of getting better at associative thinking. I'm going to give a stock market example in the sec, but let me mention a book. I mentioned Donella Meadows' book if you want to get better at thinking in systems, read the book by that name.

There's a wonderful book in 2004 called The Medici Effect which I'm sure some of you have read. It was a business best-seller that year and it's all about how, well using Renaissance Italy as its metaphor, how important it was at that time to have people from completely different cultures, completely different religious, cultural, business practices, all congregating and smashing up against each other like atoms.

They threw off sparks and create all kinds of new ideas and possibilities, really the life of the Renaissance and specifically if you think about Florence, and you think about Italy, kind of the heart of it. So what that meant for art and music and thought and commerce. Really important. And The Medici Effect therefore was, the Medici family dominant in Florence at the time, but it was really that all of the commercial gain since this was a business book possible when you invited many different viewpoints and many different possibilities.

So that's The Medici Effect, a very good book on associative thinking. And I think you'll enjoy it if you haven't read it. Let me give a couple quick examples to close. One is Warren Buffett's great line. And we have this line as the single largest quote I think that you'll see if you ever come visit us at Fool headquarters. It's Buffett, it's my favorite Buffett line: "I'm a better investor because I'm a businessman. And a better businessman because I'm an investor."

Let me explain why I think that's such a great quote and it's pure associative thinking. I'm a better investor because I'm a businessman. Well we all know Warren Buffett is a businessman, he is the founder/CEO I think still, but anyway, Berkshire Hathaway. A company, that is an amazing company, great stock, owns many other great companies. He is definitely a businessman. But what he's saying is he's a better investor because he's a businessman. Well you can imagine why.

Because there's no substitute for being an entrepreneur or trying to run or work within a business to get you to realize what's working and what's not. It gives you insight into when you're starting to pick stocks. Do I admire this or that aspect of that company based on my own knowledge of my industry, or the culture at my company?

You are a better investor because you are a businessman and to reverse it he also says I'm a better businessman because I'm an investor. Let's think about that for a sec, well the very act of picking stocks has you constantly, at least me constantly, looking for best practices, who's winning out there, who do I think's going to win, you're constantly looking and trying to find excellence.

And to complete the circle here I would hope that you'd start trying to pull some of that excellence into your own business. Again, whether you are an entrepreneur of a small business, we have many listening to this podcast. We have a lot of small business owners who are Motley Fool fans and followers. But we also have many other people who just work within businesses. And I'm speaking to all of you. We as investors should be learning and studying the best and then influencing those around us to pull those things into our company.

In fact one of the best things we did at The Motley Fool in the last five years is we had an all-company challenge a few years back where teams of 8 to 10 Fools were sent out actually by their own autonomous choice somewhere in the greater Washington DC area where we work. And to find a company and to spend a little time with that company's permission learning about them and to learn something awesome that they do at that company which ever one it was. And we covered about 50 companies that we could try at our company.

And as a consequence a few years later we're a much better company as a consequence of that. We are better businessman because we are investors. So that's great associative thinking, and I want to close with an example about a stock that I once picked. And it's Martha Stewart Omnimedia. This is a stock I picked more than a decade ago in Motley Fool Stock Advisor.

I'm hoping some of you were there with me buying along with us at the time. But what was funny, the associative thinking for me is normally I would never have invested in Martha Stewart Omnimedia. It was a beaten up stock and I prefer winning companies that are doing well and adding lots of value to the world. And no question in my mind Martha Stewart has added value to our world, but at the time she was under fire for the insider-trading. I'm sure a lot of us remember that. And her stock had absolutely tanked. And I decided I was going to recommend it.

And in fact, I think it was Hulbert or a Wall Street Journal article mentioned six months later that of all the stock pickers in their database, there was only one that was long Martha Stewart Omnimedia and it was the Motley Fool Stock Advisor. I'm happy to say that one worked out pretty well for us but my experience that I had had just before picking that was to play a board game. And we have actually a board game called the Motley Fool's Buy Low, Sell High. I think you can find it on Amazon. I'm definitely not peddling it. We don't make much money from sales of board games, I assure you.

But the experience of that game has you looking for things that have just been crushed, which is not even my own investment strategy. That's not what we talk about in Rule Breaker Investing. But it really, the way to play that game is when everyone else has given up on one of the three stocks that you can buy in the game, that's the time to start buying.

And I translated that experience associatively. The Medici effect here, directly to the side to step out of my own normal comfort zone and pick Martha Stewart Omnimedia which did end up being a wonderful stock pick. Because we truly did find Martha at the darkest time for that company and the stock did pretty well in the succeeding couple years. Although I wish we'd continued holding it. We sold it a little early. Anyway, associative thinking.