 Hey everybody, David Chang here and welcome to The Art of Thinking Smart. I'm really glad you can join us today. And today's guest I have is Steve Connell and I'm very excited to have him on the show. And Steve was one of the top mutual fund managers in the world with American Group, also known as Capital Group. Many of you may have invested in their funds and we'll talk a little bit about it, but he's a guy who in the late 70s bought 20% of Samsung with his fund. So he was able to definitely think smart and make successful decisions. So today we'll be talking about seven traits that he sees on what people can do to become more successful and smart. So Steve, thank you very much for coming to the show. It's a pleasure to be here. Yeah, I always enjoy being with you. So I always love that story, I tell people about it. Let's talk about Samsung and what was going on at the time now besides unfortunately the Note 7 issue. I still love the Galaxy and Samsung is one of my favorite companies, but back in the 1970 Asian financial crisis when everybody was trying to get away from it, you decided, hey, let's go all in. Now tell us a little bit about that, I think it's a fascinating story. Well, it was a unique period. Samsung now is a $200 billion company and back then it was a $10 billion company. And back then everybody thought they made memory chips, commodity memory chips like Samsung. But they actually made much more customized things with higher value. And so the way that I really discovered this was visiting with the management, visiting the company. So it's important as an analyst to get to know a company in depth. And so spending time with the management in Korea was really what opened my eyes to the changes that they were making. They had reduced their headcount by 50%, their turnover had improved twofold. And a lot of people don't know this, but Jack Welch from GE, where I used to work, was heavily involved in the restructuring of Samsung in the late 90s. That's right. Yeah. And I always ask questions, never be afraid to ask stupid questions. So when we were talking to the manager of Samsung, he said, we're involved in a process of workout. And I said to him, and when I worked at GE, workout was a very specific term from Jack Welch, which he used to restructure the company. It involved getting managers, putting them on stage so they couldn't see who worked for them and having them criticize their manager. Interesting. Right. So this is called workout. Jack Welch called that workout. And so the CEO of Samsung Electronics said to me, we've been involved in a process of workout. And I stopped. And he said, do you know Jack Welch? And he said, yes, he is helping us restructure the company. Right. So Jack Welch would go to, when he went to Asia, he would stop at Samsung on his way. And he helped them through their restructuring process, which took them from a $10 billion company to $200 billion. What was the purpose of, okay, so I know Korea especially has a very, what they call the, in the book Malcolm Gladwell talks about a high power index ratio where hierarchy is extremely important. So here was the subordinates being able to open the, voice their concerns to management. Is that, is that what it was? That's a great question, David. And when we went down the escalator for lunch, right, there were maybe a hundred people on the floor and they all went, wow, on the ground, on their knees. Okay. Got it. I don't think a culture like that would not be innovative and not be free thinking, but that's not true. Samsung, I think it has to do with loyalty. The Koreans during the financial crisis, the Asian financial crisis, 1997, they would take their jewelry, oh, you're Korean? Yeah, yeah, yeah. So I know about this. They would take their jewelry to the government and melt it down to help pay for the debt. So you have this hierarchy which you mentioned, but you have this intense loyalty to the company. Every morning at 8 a.m. employees stand up and say the Samsung National Anthem. It really is. There's a Samsung Anthem plays and they stand at attention 8 a.m. to 8 a.m. Don't be late. Yeah, yeah, yeah. Wow, okay. So Samsung is the most, I mean, I've seen thousands of companies. Samsung is the company that is, is the most nimble giant that I've ever seen. And I think, and I don't know how they do that. Okay. But they can continue to do it because they're under new management now, right? Okay. The founder of Samsung had a stroke and he's now turning the company over to his son. The founder gave it to his third son and then third son had the stroke and now it's going to the third generation. No, I think the... Oh, yeah, we are. Oh, yeah, okay. Got it. Yes, yeah. You know more about it. The leader of Samsung had a stroke. Right, right, okay, got it. Right. So that's interesting. And you're... So in 1997, you're thinking, okay, this is a great opportunity. So you're managing this fine and you decided, hey, let's do this. And when you were doing that, how... I mean, owning such a large chunk of that company, I'm sure they really were catering to you. You're right. They came to us at Capital when we owned 20%. Sure. And I would actually help them restructure a company because they would come and visit Tokyo where I was once a month, right, show us the plan, get our ideas. So one of the things that happens when you're a big investor like that is you can kind of... There's nothing no easier way to predict the future than to determine the future. So if you actually work with a company... So we worked with them to help them improve, to help them restructure, which did part of this. Actually, I suggested and had appointed the first outside board member, Samsung Electronics, was selected by me when I was a kid. Really? Okay. Who was that? He was a guy from Applied Materials. Okay, right. Okay, guy. Now, I know we had the seven things that we want to talk about, but I love the Samsung story. That's fine. What would you say is the one thing that led to Samsung's success from 10 to 200 billion? You talked about Jack Welch. There's a lot of things. What would you say is probably one most important thing? Customer service. Customer service. Okay. So even I had the Note 7 and they, you know, returned it quickly. Exactly. It's a great example. Right, right. They would make what was called Dynamic Random Access Memory, DRAM. So when you look at your phone and you see the latest DDR3, that's what they made. And their policy was if a customer brought it back, no questions asked. Now I don't know how well that's going to work at the consumer space in America. They would, no questions asked, and they would cater to everything the customer wanted. So what happened was there was what's called a legacy product. Everyone would move, Micron, everyone else, Toshiba would move to the next generation. Well, Samsung's customers when in late 90s, the telecom boom started to happen. And when you use memory for telecom servers, those servers have a 20-year life, not a three-year life. So they needed to replace or add to the memory of something that was good. So they needed to use technology that was five years old, 10 years old, 20 years old. So this was called Extended Data Out Edo DRAM before the DDR. And they said, can you make this for us? And Samsung said yes, everybody else said no. Samsung made a billion dollars in 1999 making a product that everybody else phased out of because their customers asked them for it. Interesting. Okay. So it's a highly customer service-oriented company. And it's that nimbleness you're talking about. It's Nimble, which is unusual for a company that makes commodities, because a commodity is a commodity, but they turn a commodity into a proprietary product by wrapping their customer service around it. And so this is probably where Blockberry failed because they didn't respond to client needs. I think they were a little late to the show. Well, they had Steve Jobs to go against. That's a little... Yeah. But Samsung did well. And Samsung did very well adopting Android, which was a knockoff from Apple, which Steve Jobs was very upset about. Of course. Now, before we get into your seven points, Apple versus Samsung, what is your kind of... They still work, they still need each other, right? It's a great point. But there's lawsuits against each other. Not anymore. Okay. So the lawsuits are gone now? Yeah, that was Steve Jobs' ego. Okay. I'm going to say that now. He's not around. Yeah. Yeah. But so Steve Jobs was great at creating things that did not have a lot of protective, competitive mode around them. In other words, he was the first one to make a pink computer. Sure. Sure. Anybody can do that. But he did it first. Right. So he was always making things first. Got it. But they weren't things that had sustainable competitive event. You couldn't patent that. Right. So this is how Apple came to have tremendous value, is that you had a guy who kept innovating. And now that innovation, frankly, is gone. Right. And so that's why stock price has been kind of flat, right? But back to your question about Samsung. So Samsung made all the memory for Apple, right? And the processors, Samsung started doing subcontracting, and Apple was a key... I think they actually had their processors made there. Got it. They're still doing that for Apple? I think they're splitting it now with Taiwan semiconductor, TSMC. But Samsung used to talk about going into this subcontracting business. And you've hit on why the subcontracting business is difficult, because if you're doing subcontracting for a customer, then you can compete against that customer. So it's a very thin line. You have to trust the people you're doing with that. Now what happened when Steve Jobs got very upset about a couple of things. Number one, he got upset that Android was a knockoff. And he got very upset at Samsung, basically using this knockoff to become the leading... And Android being a Google product as well. So now you've got the three companies. So it was kind of Google, Samsung teamed up against Apple. So you had this... So Steve Jobs, very upset about it, went to court to sue them. Now it's a billion dollar lawsuit. Now when you have a company that likes Apple that's worth $500 billion, what's a billion? You could be spending your time doing that. But again, this was Steve Jobs' personality play. Well, that's what I love talking about, that story, I'm sure we can do an entire show on it. But today we're going to talk about the seven traits that you've seen through your experiences being a fund manager of the year, running your own firm now, of being smart and successful. And always I ask the guests, what is your definition of success and what is your definition of what it means to be smart? Okay. Well, success is happiness. Okay. All right. Now happiness depends on the person. So whatever I say is probably going to vary depending on the person. But I was thinking, because David asked me, I'll let it out, he asked me this question last night. So, I mean, happiness is freedom, health and love. For you. For me. Got it. I see okay. And as I look at most people, I think it has some element of those three. I agree. You can be in love. Okay. And if you're about to die the next day because you're not healthy, then you haven't succeeded. I see. Right? Or if you're in love and you are healthy, but you have no money and you're living on the street, then so I think some element of those three things has to do. So I mean, you see animals, the worst thing that can happen to an animal is to become excommunicated from the community, ostracized. Got it. So a lot of definitions of success happen is don't say anything about the people that we're connected to, but that's actually a huge part of it. In fact, part of the great joy of being at the Capital Group was the recognition of my peers, whether there's money involved or not. Recognition of peers that you respect is a huge part of success, I think. So what I've gone through, I've thought about seven. The other point is, what's successful for a money manager is a little different from what I would rather concentrate on is that success, the wealth building of a person. Got it. And that is called budgeting. God. Things like that. And what we're going to do is we're going to take a short break and then come right back and we'll get into your seven points. And so we look forward to seeing you right back shortly after this break. Aloha and welcome to The Savvy Chick Show on Think Tech Hawaii. I'm the weekly host at 11 a.m. Honolulu time. Very excited for the next six weeks. We have the Aspire series, which is all about the coolest careers I could find and interviewing and getting insights from these amazing people who want to share it with you and help you live your dreams. Look forward to seeing you on the show. Aloha. Aloha. I am Reg Baker and I am the host of Business in Hawaii with Reg Baker. We broadcast live every Thursday from 2 to 2.30 in the Think Tech studios in downtown Honolulu. We highlight successful stories about businesses and individuals and learn their secrets to success. I hope you can join us on our next show on Thursday at 2 o'clock. Until then, Aloha. Hey, welcome back everybody. We're with Steve Connell, who is the CEO of Diamond Head Advisors and also when he was with the Capital Group or the largest mutual fund companies in the world, was recognized as one of the top mutual fund managers in the world and had a great success story with Samsung. And today we're talking about the seven points of what he sees as success and being smart. So let's talk about what is it you've defined success as being, having love, freedom, and health. What is your definition of smart? How is it that, what is it people that need to do to get to those things? And then we'll get to your seven points. Okay. Well, you need to pick the right person to marry. Okay, so that's being smart, okay? Okay, that's important. And you've got to put that person to a test. Okay. You know, take them camping and forget your toothbrush. Right? See how they respond. Oh, okay, okay. Right? Forget the sleeping bag. Right, see, I see. And then have bears around. See how they respond. Right? And then you come back with some different ideas. Be selfish when you're about to get married. I mean, part of being, living a happy life I think is giving and being generous. Right. And the only way to be selfish is I'm going to pick a mate for the rest of my life. Make sure it suits you. Okay, so that's a very good, very good point. So that's part of being smart is making the right fit and right decisions of everything, not just including your mate and being selfish is not being, it's only for me, it's I'm going to make decisions that's right for my situation. Exactly. And eventually if you haven't done what's good for you, it won't be good for the next thing. Self-interest well understood. Sure, sure. Got it. So let's get to your first point. What is the first point, first trait that you see is important for being smart and being successful? So let's concentrate on the wealth side. Okay. And let's, a little bit nuts and bolts. Sure. Okay. So a friend of mine, Robert, I get new life. He says the definition of wealth is spending less than you earn. Mm-hmm. Right. Mm-hmm. Definitely think about that. Yeah, right. So this is not something that is pie in this guy. Everyone can be wealthy. Sure. I'd like to give the example of the man he died last year, who after the war, he worked 30 years as a gas station attendant. He retired, got bored in retirement, came back to work as a janitor for 20 years. And when he died, he had a stock market portfolio of $8 million. Wow. Right. As a gas station attendant and janitor. That's right. Wow. Right. And that's in his means. Right. And so it's kind of, let's look at him. I should have checked his name. You can check his name. Sure. Sure. But so one of the things he did, and this relates specifically to the stock market. Got it. And let's call this point one. Okay. Is don't listen to the TV. Sure. And today, let's buy this and sell that and, you know, that'll drive you crazy. Sure. The reason that's what they do on TV is because that's what makes the ratings. Right, right. Right. When there's activity, something goes down dramatically, up dramatically. Something makes news and people want to know the news. So they watch it. And that's how those companies make money. But that's not how you, it would be a show that no one would watch if you said, let's buy Google shares today and sit on them for 30 years. Right, right. Exactly. So what would they do on television today? Right, right, right. Exactly. But that's what you should do. Okay. Because that's the only way that you can take advantage of the compounding effect of Google grow in 20% a year. Got it. I know. You get 12. Point B is thinking long term, not the short term. Think long term and when it comes specifically to stocks, buy something that's great. Okay. Right. You know, it's a great company. And get the certificate, don't keep it in the broker account. Sure. And put it away in a vault. Got it. And leave it there. Okay, got it. That's the way you invest money. So you're not destined to see it, okay. So what's your second point then? Second point is, well, second point is what I mentioned. Okay. Spend less than you. Okay. Spend less than you're in the second point. Yeah. You think long term. Right. Okay, got it. And then your third point? Third point is live debt-free. Okay. Okay. And this is becoming easier today because interest rates are lower. And make them mistake about it. Interest rates are permanently lower, right. The days of earning 5% on a CD at the bank are over. And we're not going to see those again, okay. So the days of earning 5% on risk-free money. Right. We're not going to see that again. Now there are disadvantages to that. Sure. And one of those, one of the reasons that we've concentrated on preferred stocks is preferred stocks actually pay you 6% by going on a different part of the capital structure of the company. So in an environment of zero interest rates on risk-free money, preferred stocks are the way to go. Got it. Now a lot of these are not being used by financial advisors. That's an aside. Okay. That wasn't one of the seven points. Okay, got it, got it. Right. So in an environment of low rates, you can get a 15-year mortgage on your house rather than a 30-year mortgage. Okay. With not a lot of difference in your monthly payments. I see. But I'll tell you what, 15 years is very much within your horizon, 30 years is not. Got it. You can get your house paid off. Got it. Until your house is paid off. Right. You don't own your house. The bank doesn't. Right. Right. So you're the third point being living debt-free. Live debt-free. It's a credit card, it's consumer debt, stay away from those and keep them paid off. For mortgage, try to go for a 15-year loan because the low interest rates make it reasonable for people to afford that. Very much so. So what's the fourth one then? The fourth one is lease your car. Okay. Now this is- Interesting. A lot of people think otherwise is you should own your car, but now you're saying lease your car. Lease your car. Okay. And in an environment of low interest rates, leasing is you can get very low rates. Now when you go and lease your car, it's a little complicated, but basically don't listen to what they say the interest rate is. Concentrate only on what the monthly payment is going to be and how much money you have to put down. Okay. And if the monthly payment ends up being much more than $200, tell them, give me another car because what happens is when you lease a car, if you're going to own it for three years. Right. Leasing company predicts that you buy that car for three years out of a life of let's say they think the car lasts for 12. So you only have to finance one third, let's say nine years, one third of the value of the car. Right. Why do you want to finance a hundred percent of the value of the car when you can finance a third of it and turn it in when you're done? Interesting. Right? Now that works with an environment of low interest rates. And the key is what is the residual value that the lessor gives you when you return the car? Sure. And this varies dramatically. Right. So it makes a difference of a monthly payment of $700 or a monthly payment of $300. Got it. Same interest rate. Because if they say after three years when you turn it in, a mustang, a mustang, $38,000, they say if they say when you turn that thing in, it's still going to be worth $25,000, then you're financing a much smaller piece of it than if they say your residual value is only going to be $16,000. Got it. So everything in the leasing depends on what's the residual value that they give you when you lease the car. So that's interesting. And a simple way to do it is just say, what's my monthly payment going to be? Got it. Because in the end that's what tells the story. You can get a BMW today for $390 more. So a lot of people who think you should own your car, but you're saying because of the low interest rate, and for me, I have even made the argument with technology changing so rapidly. I got into a bad car accident a few years ago and because I had a more of a state of the art car, the safety ratings were higher. That's a great point. And so every year there's new standards coming out. Okay. So then what would we say is a fifth point of your seven points? Set aside 20% of what you earned. Okay. Got it. That's another point, which is spend less than you earned. So you need to set aside a budget for yourself. That's key. No matter how much money you make, who you are, do that. And then start to use that. And if you're living debt-free, then you can start to invest in stocks that you're going to put away for a long time, paying off your mortgage, or buying another. If you want to go into making investments, you have to do it with money that you don't need to pay for your everyday living expenses. Not to mention kids, you're probably going to pay. So living below your means and living below your means where 80% is kind of your number where 20% of it's saved. That's right. What would you say the sixth point is? Sixth point and seventh point, I was going to say on the marriage thing. We spend years studying in high school and college, and they never tell us the two most important things, which is, pick the right mate and learn to distinguish the truth from a bunch of BS. This one is learn to distinguish the truth from a bunch of BS. And closely related to that is the seventh point, learn whom to trust. If you're going to go into business with someone, you better trust them. If you've just met them, chances are they're frauds. The extent of fraud in the American economy is very great indeed. And I know this from personal experience as well, where I've been taking advantage of it. So if you would expand upon that for the average person, because we've got two points there, if you're married or not married, make sure that you find the right mate if you're not married. Give them a test. Give them a test. And if you are married, try to make sure that you're open, you communicate, that you're able to distinguish what the truth is from the BS. I think that's what you're talking about. And then the seventh thing is about now, learn knowing who to trust and not trust. And what would you say, and I've learned my lesson by my nativity of trusting everything people tell me, okay, got it, and then I would get into some bad business deals that I've learned my lesson from. For you, what have you found on how do you distinguish that? If this deal is so good, what do you need me for? I see. Ask that question. Okay. If this is so important, if this is so hot, I can't live without it, then why aren't you doing it yourself and why are you coming to me? I see. Okay. Almost nobody can answer that question. By the way, the U.S. criminal system is really set, there's a very high barrier to sending someone to jail. So if you could do a lot of crap and get away with it, and it just gets too expensive to prosecute it. This is going back to our point that there's a lot of criminality everywhere, and so you got to protect yourself because the government can't do it for you. And so back to the point, if it's so good, what do you need me for? And that's for investing in some sort of project, that type of thing. A deal, a company, whatever it is. If someone comes pitching something to you, if you're going to make that much money from it, then what do you want my money for? Why do you want to share that with me? Why don't you just keep it off for yourself? That'll usually do it for you. What if somebody says, well, I need to finance that Apple needed, in the late 70s when Apple got started, he borrowed, I think, a quarter million or half a million, Microsoft borrowed one. Facebook, how would you distinguish the BS versus, because a venture capitalist, 1 out of 10 will win, and they understand that nine companies that they invest in will not take off. So how do you distinguish that BS from, which is just a risk that you take that's not going to work out, but it's not BS, it just didn't work out? If there's anything in the message that doesn't hold water, run away. Got it. Even if it doesn't seem relevant, I'll give you an example, a guy came, he says, I own this house over here, and I checked with it, he didn't own the house over there. I know people, he didn't own that house. That guy got into a lot of trouble. Years later, you never would have expected it. So if anything in their story doesn't hold water, ask them about it, and if it doesn't make sense to you, run away. Another thing that's quite important, listen to their language and the way they write. Criminals use bad grammar and bad language. Interesting. And if they start saying, I'm going to make you two Bs, rather than saying two billion. That's the way criminals talk. I see. So watch their language, watch their grammar, look at their spelling, a lot of these people come from Nigeria, whatever accents, damn emails. And if you get a phone call, what happens to these phone centers? People selling these things is when you answer, it causes their phone to ring. So when you say hello and there's a delay, just hang up. I see. Got it. Well, thank you so much. I mean, we've had a great show. There's so much to go. Thank you for having Steve on the show, for more information on him as well as some of the points he's talked about. You can go to artofthikismart.com and I look forward to seeing you at our next show.