Modern WisdomHow To Create & Manage Your Personal Wealth | Morgan Housel | Modern Wisdom Podcast 142
EVERY SPOKEN WORD
120 min read · 24,274 words- 0:00 – 2:19
Defining wealth as time freedom (not just more stuff)
- MHMorgan Housel
And I think at the highest level, what I've thought about in terms of wealth, and that I really believe in terms of wealth and- and studying this stuff for so many years, and studying other wealthy people and thinking about money myself, is I think what wealth can really do for you that will legitimately make most people happy is to the extent that you can use wealth to control your time. To give yourself options, to let you do what you want, when you want, with who you want, for as long as you want to. That is wealth's great power.
- CWChris Williamson
Mr. Morgan Housel in the building. How are you, man?
- MHMorgan Housel
I'm- I'm good. Thanks for having me. I'm excited to be here. Thanks, Chris.
- CWChris Williamson
Yeah. Me too. Me too. We're talking wealth today, right? Everyone- everyone wants it, but I don't know how to get it.
- MHMorgan Housel
It's- it's very elusive.
- CWChris Williamson
(laughs)
- MHMorgan Housel
And it's not even that people don't know how t- to get it. I think it's a lot of people don't even think about defining what it is or what it's gonna mean to them, or what it could do for them, or why they want it. I think a lo- there's just a natural urge to want more of it, but answering the question why, it seems like a funny question to a lot of people. Like, of course I wanna be wealthy. Why- why would you even ask? But you start getting these like more philosophical questions of like, why do you wanna be wealthy? Is it a status thing? Is it because you want more stuff? Is it because you want more control over your time? Is it because you think it's gonna erase problems that, you know, that you currently have in your life? If you had more money, those problems would go away? And I think there's a lot of different elements to that. And I think at the highest level, what I've thought about in terms of wealth, and that I really believe in terms of wealth and- and studying this stuff for so many years, and studying other wealthy people and thinking about money myself, is I think what wealth can really do for you that will legitimately make most people happy, is to the extent that you can use wealth to control your time. To give yourself options, to let you do what you want, when you want, with who you want, for as long as you want to. That is wealth's great power that it can do for us. But that's usually not what people think about wealth wanting to do for them. Usually what they think about it is, more stuff. Bigger house, nicer car, better clothes, maybe some travel whatnot. And there's nothing wrong with that. I like fancy cars, I like big homes, I like it all. Um, but we just have so much evidence. It's almost- it's- it's- it's almost cliché at this point to say, you know, buying the bigger house and the fancier car will make people happy. We have a lot of evidence on that.
- 2:19 – 5:18
The Ferrari misconception: status signaling vs what observers actually think
- MHMorgan Housel
That there's this hedonic treadmill that people, when they're anticipating getting the Ferrari, that's really exciting. But then they actually get it and they say, "Eh, it's just a car. It's just got a steering wheel and whatnot." And there's a- a lot of different elements to that. I think what's really ... This is something I learned when I used to be a valet at a- at a fancy hotel in Los Angeles when I was in college. These people would come in driving their Ferraris, and I would look at the- I would look at the car and be like, "Wow, that's ... Wouldn't it be cool if I had that car? Wouldn't it be cool if I was driving that Ferrari?" And it took me a while to realize the irony of that thought, which was that those people drove in and I never said, "Wow, that driver, the guy driving the Ferrari, he is really cool. He must be impressive." As an observer, I just said, "I wanna be in that car." I didn't care about the driver.
- CWChris Williamson
(laughs)
- MHMorgan Housel
All I did is I- I imagined myself driving his car. But the guy driving in, when he's driving the Ferrari, he's probably thinking, "Everyone thinks I'm cool." And they did it. The peop- the valet on the curb was thinking, "I wanna be in ..." Like, "I don't care about you, I just wanna imagine myself be- sitting in that seat." And I do. It's just like this irony of like no one cares about the guy in the car, but everyone wants to be the guy in the car.
- CWChris Williamson
(laughs)
- MHMorgan Housel
And- and to this- to like- to the extent that you want to buy a Ferrari, and a Ferrari is like, of course, the extreme example. Doesn't need to- need to be that-
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
... luxurious. But to the extent that you want, uh, wealth to buy you stuff because you think it's gonna bring you respect and admiration and prestige, I think, it- it- you know, there's probably some of that that has a good signaling effect.
- CWChris Williamson
Mm-hmm. Mm-hmm.
- MHMorgan Housel
But to a- a lot of that is just a misconception about you think people are thinking X but they're actually thinking Y. I think that's a big reason why the perception of being wealthier seems like, "Oh, I'm gonna be so much happier when I'm wealthy." But if you look at the statistics about how happy wealthy people are, they're just- they're not that much health- they're not that much happier-
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
... than the rest of us.
- CWChris Williamson
Yeah.
- MHMorgan Housel
Of course, there's like a minimum level of meeting your daily needs and comfort and whatnot. But after that, a lot of, like, the status wealth, the- its propensity to make people happy is- is really not there. But I bring that up because what we know does make people happier, has like a legitimate lasting long term impact on their happiness, is when they can control their schedule. When they own their time, when they can do what they want, when they want. When they can wake up every single morning, seven days a week, and say to themselves, "I can do whatever the hell I want today." That makes people happy. So if you can use wealth to generate that, to own your schedule. And for ordinary people, maybe that's taking a job that doesn't have a long commute or y- you know, working in a job that pays less, but it's doing something that you love or/and something like that. Or if it's, uh, you know, at a higher level retiring early, just retiring when you want to or retiring when you're 32, which is like the big movement these days. Stuff like that does make people happy. When you can control your time, that's a lasting impact. So when I think about wealth at like the highest, the fundamental level, the first question is like, "What do you want it to do for me?" And for me, personally, it's just a- a level of independence. It's a level of waking up every day and saying, "I can do what I want now." That's what- that's the goal of wealth for me.
- 5:18 – 7:44
Why choice and agency matter more than comfort
- CWChris Williamson
I get it, man. Man, I've got a- a million doorways open in my mind. One of them being, um, "Being rich might not make you happy, but being poor will make you miserable."
- MHMorgan Housel
Yes.
- CWChris Williamson
Like, I love- I love that quote. And it- it really is- it really is very, very true. Anyone that you know, it's what I call diet brain. You know, when you're on a diet and the only thing that you can think about is food?
- MHMorgan Housel
Yes, exactly.
- CWChris Williamson
It's the same- precisely the same as that if you have money worries.
- MHMorgan Housel
My ...
- CWChris Williamson
There is nothing that happens-
- MHMorgan Housel
Yes.
- CWChris Williamson
... that is not framed by, "But I don't have enough money. But what happens about the next paycheck? What about my bills?"
- MHMorgan Housel
Right. My- my mother-in-law brought up an example years, and I mean a decade ago now, that I really (laughs) -I really thought was really insightful. She said, "Camping is fun. Being homeless is miserable."... the difference, the difference between those two is one is a choice and one is being forced. But you're sleeping in a tent outdoors.
- CWChris Williamson
(laughs)
- MHMorgan Housel
But r- rich people ... And it's like, I, I really have to choose my words carefully and not, you know ... And I, I, I really, I try to, to really empathize with people who are homeless. But that's, I think that's a b- a great way to frame the extreme ends of it.
- CWChris Williamson
Absolutely.
- MHMorgan Housel
Is that it's not even, like, the absolute conditions that we're in. It's whether we have a choice to do it or not.
- CWChris Williamson
Yep.
- MHMorgan Housel
And if you're forced to do something, uh, that's against your will, you don't wanna be homeless, you don't wanna be out sleeping in the cold, that is miserable. But if you're, if you're camping, it's kind of a thrill to it. And some of that is because you camp for one night, you're not doing it all the time.
- CWChris Williamson
Yeah.
- MHMorgan Housel
But it's just like I, I thought framing that as, uh, you know, just the difference between whether you want to do it or not makes all the difference in the world.
- CWChris Williamson
100%.
- MHMorgan Housel
There's this great story about FDR, Franklin Delano, uh, uh, Roosevelt, where his, his mom was talking about ... I think FDR was, like, 10 years old at the time. And he complained to his mom that he was unhappy in life because his entire day was structured in, in a really strict regimen. "At 7:00 AM you do this. At 8:00 AM you do that." And he came to his mom and he said, "All these rules make me unhappy." So his mom said, "Okay, for one day, you can do whatever you want. It's al- it's all up to you." And his mom wrote in her diary that night that during that day when FDR could do anything he want, he followed his own rou- his old routine.
- CWChris Williamson
(laughs)
- MHMorgan Housel
He did the same 7:00 AM and then he did his homework at 8:00 AM. But just, just the fact that he was doing that on his own will rather than someone telling him to do it made him feel better. It's like people don't have a say what to do. And even if they get to do what they, if they're doing what they wanna do on their own terms, they still might do the same thing, but they're doing it on their own terms. They're camping. They're not homeless.
- 7:44 – 11:35
The hidden costs of wealth: sacrifices and fear of losing it
- CWChris Williamson
That's such a good distinction. That agency, the, the, uh, uh, allowance to make a choice. Another thing as well, you were talking about the guy in the car, and it makes me think about, uh, the Naval Ravikant quote, which is, um, "You cannot take part of someone's life. You have to take the whole." It's like you look at the guy in the car and you think, "Fuck, that car's cool." But what's the price he's had to pay for that car? Not $250,000. Like, what are the sacrifices he's had to make? Like, how many relationships has he destroyed? How many ... Or, uh, uh, uh, she, has she decided not to have, forego children-
- MHMorgan Housel
Right.
- CWChris Williamson
... so that she can make it to 40 years old and be the CEO of some company? You don't know what the price that someone has had to pay to acquire that wealth is. And I think it comes back to what you said before. It appears to be the, uh, it's very, very essence what wealth gives someone is freedom, agency, control of their own time, control of what it is that they get to do, what they have to do. And that's a much more holistic way of looking at it than, like, Dan Bilzerian. Uh, that, that's not say the, the Dan Bilzerian approach isn't a good thing, but you get what I mean.
- MHMorgan Housel
Yeah, totally. And af- of course, you know, back to your point, when you see the Ferrari, you don't see what went on to getting that Ferrari. All you see are the shiny wheels and the big growling engine. You don't see working till midnight. You don't see, you know, never getting to hang out with your kids. Not that everyone who drives a Ferrari is in that, is in that boat, but there's a sacrifice that you don't see. But the per- person driving that Ferrari, they're acutely aware of it. They know how hard they had to work for that thing. So there's a big difference between what you see and what actually, what it, what you, what it takes to get that stuff. And that I think is another reason why the perception of wealth feels a lot better. The dream, the daydreaming of wealth feels better than actually having it, 'cause when you actually have it, uh, you know, you, you, you realize all the costs that are associated with it. Uh, I, I think there's this thing too that once you gained wealth, a lot of people get paranoid about losing it. And you don't ... It's, it's not easy to think about that before you have it. When, when you're sitting here thinking about, "If I won the lottery, what would life be like?" you think about all the fun trips you're gonna take and all the beautiful house and the beach and everything. A lot of people don't ... It's very hard to conceptualize until you're there what it's gonna feel like to, to think to yourself, "What if I lose all of this? What if I make a bad decision? What if I spend it all? What if the huge annual bonus that I got last year, that was a one-time fluke? I'm not gonna get that again. And then so therefore, maybe I don't wanna spend, maybe I wanna hoard this." It's hard to really think about those feelings until you're in the trenches-
- CWChris Williamson
Yeah.
- MHMorgan Housel
... until just imagine those feelings. But those are real feelings that happened and for the people doing this. Bill Gates had a quote. Uh, I heard him say this a long time ago, but I've yet, I have not been able to find the source from this, so I'm paraphrasing what he said. But, uh, it was something to the effect of now that he's the richest man in the world, like his biggest, his only money thought was not losing what he had. It was not growing more. He already has more than he could ever ... It was just not losing it. And how many people who are thinking about Bill Gates' wealth, his money mind frame, think that he's sitting at home worried about losing what he has? He's got more than ... Like, it's, it's absurd, but that's what goes through people's heads. And I think that it's a really common thing that comes up when you hear very wealthy people talk about the psychology of their own money. Being paranoid about losing what they have is a big thing that comes up, and that's a stress that is hard ... You know, of course, there's a, a big point of this where it's like, "Boo-hoo," you know?
- CWChris Williamson
(laughs) Yeah. There's someone who's living on the poverty line that's like, "Oh, yeah, it sounds really hard."
- MHMorgan Housel
Exactly. But, uh, there's also a sense, and this is not a popular statement, but first world problems are, are real problems.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
Like anxiety in your head is real no matter how wealthy or how absurd it looks to someone else. Anxiety is real. High blood pressure is real no matter how crazy it looks.
- CWChris Williamson
(laughs)
- MHMorgan Housel
And a lot of people, you know, in those situations have issues that you cannot fathom until you're in their shoes.
- 11:35 – 14:58
Perspective and “first-world problems” are still real
- CWChris Williamson
Yeah. I, I, I was talking to James Altucher the other day who is ... He's like the patient zero for make it, lose it, make it, lose it-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... make, make it again. Um, also as well on that kind of relativistic worldview, I remember this really early memory with my mom, and I was walking down the street, uh, and she's ... I, I was complaining about something, something small. Uh, I was cold or it was wet or it was whatever. And she turned and said, um,... and I was only 10 at the time. She turned and said, "Christopher, look, like, there's bigger problems in the world than you being cold or wet." And I remember turning to her and saying, "Yes, but this is my world. This is the biggest-"
- MHMorgan Housel
It's your world, right.
- CWChris Williamson
"... problem in my world right now." We're not absolute beings, we are relative beings.
- MHMorgan Housel
Right. I mean, one person in the world right now is suffering more than everyone. And everyone else, their suffering is just, is- is all just irrelevant.
- CWChris Williamson
(laughs)
- MHMorgan Housel
Right? That's- it's always like- and it's all on a spectrum. And everyone, no matter where you are in that spectrum, like someone is probably- there's only one person who is- who is suffering more than anyone else. Everyone else, it's just a matter of perspective. And we all live on that. I mean, I- I wrote a piece, um, many years ago that, uh, a- a lot of people did not appreciate.
- CWChris Williamson
(laughs)
- MHMorgan Housel
But it was- it was during- it was in 2011 during the Occupy Wall Street protests, if you remember that.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
Where there was a big public backlash, I think a lot of it was justified against the 1%. And it was the 1% versus the 99%. And I wrote a piece that said, "Look, in the United Sta- uh, no, in the world, if your- if your income is over," I think it was, "$32,000 per year, uh, you're in the top 1% of the world." And everyone- so- and how many of the people in the United States saying, "The 1% are- are- you know, it's unfair, they're ruining it," they are actually part of the 1% of the world. And I didn't mean it in this- I just wanted to add some perspective. I wasn't- I wasn't saying that their protests were wrong. I just wanted to say like, it's all a matter of perspective.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
And we all sit on this- this spectrum and we all kind of think that we are- where we sit is the- the baseline, the foundation, but it's not.
- CWChris Williamson
Yeah.
- MHMorgan Housel
Your foundation is like the top of the mountain for other people.
- CWChris Williamson
That sphere of awareness is so biased, right? Like, it's not the 1%. It's not down with the 1%, it's down with my 1%. Down with the 1% that I see, the 1% that's close to me.
- MHMorgan Housel
Your 1%.
- CWChris Williamson
Yeah. That's what it is. Um, so...
- MHMorgan Housel
Yeah. There's also, the point that I want to make too is that, you know, when I say something like that, I'm not saying you p- that you people are out of touch, because everyone lives in their own world. Everyone- like, and again, like your problems, whether you are like Bill Gates has problems or someone else, like anxiety is anxiety, fear is fear, w- losing sleep is losing sleep, no matter how wealthy you are. It still hurts the same the next morning. So like we- it's- it's wrong to say, "Hey, because if you make $32,000, you're in the 1%, so you should feel wealthy."
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
"Shame on you for not feel..." That's not the point whatsoever. The point is just that, you know, we all live on this spectrum and it's all just a matter of perspective. And I think the bigger point is realizing that people who are on a much higher spectrum, it- it's not that if you're on a lower spectrum, you should feel thankful. It's that people who are on a much higher spectrum, they also hurt. They hurt as well. And sometimes that's not a popular view, I- I get that. But I think- I think to me the bottom line is like no matter what your wealth is, the psychology of money and what it does to our feelings and our wellbeing and the lack thereof is pretty universal.
- 14:58 – 17:39
Rich vs wealthy: income versus assets and savings rate
- CWChris Williamson
Absolutely. So let's get into it. Let's talk about the basics of- of wealth creation. What is- what is wealth? Is there a difference between being wealthy and rich and- and how- how do I get it?
- MHMorgan Housel
I think, uh, if there is a difference, of course this is just- this is just- it's semantics. This is not, uh, and you know, this is sort of something I've made up. But I- my definition of rich is you have a big income, big relative to your peers around you. So of course that's a big range as well, but if you have an income higher than most of the people around your peer group, you can call yourself rich. Wealthy is much different, because wealthy is you have assets in the bank that you can spend in the future. And that's very different from being rich, because a lot of people will have a large income this year but they're not- they're not saving any of it. They're on the razor's edge of insolvency, they're blowing through all of it as quickly as they can. And those are- there are a lot of people who are, uh, rich in that sense, but not necessarily wealthy. Uh, years ago, Chris Rock, one of my favorite comedians, made- made, uh, it was- it was in one of his skits and he was talking about the difference between rich and wealthy and he says, uh, and I have to preface this thing, this is Chris Rock joke, I'm not taking-
- CWChris Williamson
(laughs) Uh-huh. That's fine.
- MHMorgan Housel
... I'm not taking credit for any of the social dynamics on this.
- CWChris Williamson
(laughs)
- MHMorgan Housel
But he said- he said, "Shaq is rich. The guy who signs his check is wealthy."
- CWChris Williamson
(laughs)
- MHMorgan Housel
"That's the difference between..." (laughs) like that's- and I think that was a great way to put it. And the- the- and the thing is like, no, Shaq is wealthy. Shaq is like, he's- he's got an empire. But I thought that was like a great way to frame it, that applies to a lot of us too. Because there are people who make $40,000 a year that save a lot of it and they're wealthy. And there are people who make $5 million a year that blow- that spend 6 million a year and they are on the razor's edge of poverty. So it's just a big relative thing that doesn't- like rich has to do with your income, but wealth has to do with your savings rate. And savings rate is totally independent of your- of your richness, of how- your- your- your annual income. And we've seen this in a big way in the last decade when the FIRE movement, Financial Independence Retire Early movement came along, where you have people who are making 40, 50 grand a year, you know, sometimes more, 100, 200 grand a year. They live a very low-key lifestyle and they save 50% of it or more, and those are people whose incomes are not that impressive, but they're wealthy. And you can compare that to a lot of people that we've heard of, uh, I- I'm writing about- I'm writing a book on the psychology of money right now that starts with a story about someone who made a tremendous amount of money on an annual basis and blew it all and went bankrupt. And so, you know, we- I think we very often think that wealth is just how much money you make, and it's- there's a lot of evidence that that's not it. It's a personal lifestyle choice more than it is anything to do with the number of zeros in your annual income.
- CWChris Williamson
Mm-hmm.
- 17:39 – 23:17
Wealth is what you don’t spend—and it’s hard to see
- MHMorgan Housel
And so, uh, to me it's just been about, you know, it's less how much money you make or what your investment returns are, and more just the decisions that you make about you're going to spend your money and what you value in life. Do you value a big car? Do you value fancy clothes? Do you value- value jewelry? Going out to dinner? A lot of these people- for a- for a lot of people, including me, some of those answers are- are yes, I do value those things. But there are other things that I really don't value whatsoever, and I would rather save money to build wealth. And that wealth that you save is what you- it's what people don't see.... so it's the, like, wealth is the, the Ferrari that you did not buy. It's the car you didn't buy. It's the square footage that you did not buy. It's the first class seat that you didn't buy. And I think that's, uh, like, of course, that's what it is. Wealth is what you don't spend. It's the wealth, it's the money that you saved up. The problem with that is that when we, when you and I and everyone else is trying to look at the world and see how other people are managing their money, all we see is what they spent. We don't see what they didn't spend. I see the car that you drive, I see the, uh, the, the house that you're in. I don't see the house that you could have afforded but you did not buy, and that house that you could have afforded but didn't buy, that's your wealth that you have right now.
- CWChris Williamson
(laughs)
- MHMorgan Housel
The car that you, w, that you could have bought that you didn't, that's your wealth. But I never see that. And that's why I think a lot of people have this misconception of what wealth is, is because we don't see it. And I've used the analogy of like, uh, you know, when people exercise, they get into good shape. And being in good shape is something that you can see. You can see muscles, you can see, you know, thinness. You can see that. And you can see the opposite of exercise, it comes in obesity and whatnot. And then therefore, so everyone else viewing you, I, I can look at you, Chris, and say, "You look like you're in good shape."
- CWChris Williamson
Thank you.
- MHMorgan Housel
I can see that you probably, I can see that you exercise because I can see it. But, but I have no idea what your net worth is. I, I can't see your bank account. I can see your physique, but I cannot see your bank account. And that's why I think, uh, something like exercise is something that it's not very controvert- like, people understand what it is. They have a g- they have role models, they have anti models. Wealth is totally different. For wealth, there's people who live that you, that you, you know. I think almost everyone knows someone who is ten times wealthier than you think. But you don't know that 'cause you can't see it.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
But there's no, but there's no one who is ten times heavier than, than you think.
- CWChris Williamson
(laughs)
- MHMorgan Housel
That doesn't exist 'cause you can see it. So I think, uh, that, like, the fact that it's just hard to see wealth makes it very difficult for people to wrap their head around and learn about.
- CWChris Williamson
Absolutely. Again, I, I can, you can tell that I'm currently spending a lot of time researching Naval Ravikant because every quote I'm coming out with is his, but at the forefront of my mind. Uh, and he has a thing where he talks about socialized rewards versus internalized rewards.
- MHMorgan Housel
Yeah.
- CWChris Williamson
And he talks about the gym being a socialized reward, meditation being an internalized reward.
- MHMorgan Housel
Mm-hmm.
- CWChris Williamson
And that's precisely the same dichotomy that we've got going on here, right? And even the wealth that some people have that is being shown outward is, as you've identified, it's not real wealth. I absolutely love that quote, that your wealth is the Ferrari that you didn't buy. It's the square footage-
- MHMorgan Housel
Right.
- CWChris Williamson
... of your house that you didn't choose. I think that's such a great heuristic for people to use. And again, with that, this is the sort of message which I think helps to educate people about what wealth is. We are mimetic beings, right? We just look around and see what other people are doing and you're like, "That guy's got money. That guy's got a fancy car. What's he doing with his money? He must be fine." And you just, "Oh, well."
- MHMorgan Housel
Right.
- CWChris Williamson
"I, I'll take that." Y- you know, we don't learn about how to become wealthy in school, so I'll just learn by proxy of what other people do that have money. But you don't know if that guy... As you say, that guy's just on that absolute razor's edge, and next month, next year, he's gonna be filing for bankruptcy. So do you-
- MHMorgan Housel
Sure, and here's the thing. There, like there are, of course there are a lot of people who drive Ferraris who are legitimately wealthy, but the only thing you know about their wealth is that they have $250,000 less than they had before they had the car. That's all you know about it.
- CWChris Williamson
(laughs)
- MHMorgan Housel
So there, there is a lot, and there's also a lot of people driving Honda Civics, driving Honda Accords, driving Toyota Camrys that are very, very wealthy but you would never know it. So we just don't know how to size these people up. And when you don't know how to size someone else up, most people have a lot of misconceptions, just a lot of distorted thoughts about what wealth is and how it's generated. That is, uh, I, I think why this topic is so difficult and, uh, sets people on, on a, a, a painful path very often.
- CWChris Williamson
Got you. So fundamentals, is wealth just what you don't spend? Is that it? Or is it more about things-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... that generate money on their own? Or is it money in the bank? Is it if I've got assets that are earning passively? How does that all fit together?
- MHMorgan Housel
I, I, I think, I think less about that. It's more just what you've chosen not to spend. Take the most extreme example in the world, Jeff Bezos, Bill Gates. They're both worth, let's just round and say they're both worth about $100 billion. They could've spent that money in the past. Jeff Bezos could've sold all of his Amazon stock in 2001 and gone, gone out and done whatever, but he didn't. He left it there. So his wealth is what he did not spend. That's true for everyone at every income level. Uh, so, uh, to me, it's less about how much you're earning on that wealth, whether it's, like, cash in the bank earning no interest, that's wealth. Um, stocks in an index fund, that's wealth. Even the, the equity in your home, your real estate, that's wealth. You know, and it's, it's not liquid wealth, but it's still wealth. It's just what you have not spent, because I think anything that you could spend but you have not spent is wealth. That's, that's what it is. If you have, if you have the option to spend it and you choose not to, that is, to me, that's the definition of wealth.
- CWChris Williamson
I love it. So how do I go about... I, I, I just need to spend less, I need to have money in the bank account. Are there any real fundamental principles about how I can maximize my wealth, how I can make the most of it?
- 23:17 – 29:28
Two big levers: luck and living below your means (ego suppression)
- MHMorgan Housel
Uh, the easiest way, Chris, is just to be born to a wealthy parent. That's the, that's the easiest way.
- CWChris Williamson
(laughs) That would be great. Yeah, yeah, dynasty money. That's what I want.
- MHMorgan Housel
And of, and of course I say that tongue in cheek.
- CWChris Williamson
(laughs)
- MHMorgan Housel
But there's, there's honestly... I think people very often overlook not the money that they necessarily inherit from their parents, but how much, how many doors, uh, uh, are either opened or closed for you based on who your parents are. Um, Bashkarmat Sundar, who has shown that income among brothers is more correlated than height or weight. So literally, if you have a brother that is tall and rich, you are more likely to be rich than you are tall.
- CWChris Williamson
(laughs)
- MHMorgan Housel
It's more correlated. It's more... Like do you know that the income among brothers is more hereditary than height or weight? Um, because those brothers probably had the same educational opportunities, they probably had the same doors opened by their parents in terms of, "Hey, I can get you a job," or, "I can't get you a job. I can send you to a good school," or, "I can't send you to a good school." So it's not... Like, it goes both ways. The income is correlated on the downside and the upside. And it's, it's easy for a lot of people to-... uh, to overlook how powerful that is, that some people are just born on a very different, uh, base. And it's, no one wants to... I think if you are very successful, you don't want to say, "Well, I just got lucky."
- CWChris Williamson
(laughs)
- MHMorgan Housel
Like, successful people don't want to say that. And, uh, but, e- and of course it's true, it's always true. You know, I've read, uh, before, something really minor that might not seem like a big deal, but to me it's just, i- it's just extraordinary. Bill Gates went to the only high school in America that had a computer.
- CWChris Williamson
(laughs)
- MHMorgan Housel
Like, you think ab- like, you think about that, and it's just like, of course he was lucky. That's not to say that he's not talented, he's not smart, he's not motivated. He's all of those things. But look where he started. And with... And he had no input on that. He went to this high school, it's called Lakeside School in Seattle. Um, I- I- I believe the story was because he was kind of, he was, uh, very smart and not doing well at his old school because he was so much smarter than the other kids, so his parents put him in this private school, Lakeside, in Seattle, that happened to have a computer. And he found it. And who else was at the school? Um, was, uh, was Paul Allen. The other, you know, he and Paul Allen was at the same school, and they started working on this computer together, and then, and then, and then Microsoft came out of it. That's not to say that Bill Gates would not be enormously successful anywhere else, but he would not be Microsoft Bill Gates. He might be attorney Bill Gates or Dr. Bill Gates, very successful entrepreneur Bill Gates, but not 100 billion dollar Bill Gates. Like, that part was luck. And he, he's admitted this. He said, this is not a direct quote, but he said something to the effect of, "Without Lakeside, there would, there would not be Microsoft." That might actually be a direct quote, but I don't know.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
It was very close to that. So he's, he's not in denial about this. But I think there's that for everyone. I've had a certain amount of luck, you've had a cert- Everyone has a certain amount of luck and misfortune. Bill Gates had a certain amount of misfortune. Bill Gates, not to harp too much on this, but, uh, when Bill Gates was in school, he had, uh, his best friend was, it was Kent. I'm forgetting his last name, but it's, uh, but his name was Kent. And Bill and Kent were the, the two computer geeks, and they did everything together. They were like inseparable best friends. They were equals in terms of their computer programming ability. And, um, Bill Gates said, this is in, uh, the documentary that's on Netflix. Bill Gates was reminiscing about Kent and he said, "Yeah, you know, Kent and I, I'm sure we would have gone to college together, and we would have, we would have worked together." Kent may have been the co-founder of Microsoft, but he died in a mounta- in a mountaineering accident when he was like 18 years old. So that's like, that's the other side of Bill Gates got extraordinarily lucky. Kent got extraordinarily unlucky. And that's ... Like, risk and luck, I've always said are the, are the opposite sides of the same coin. They're both this idea that our outcomes in life, uh, are influenced by more than just the effort that we put into life. And that, of cou- I think people know that, of course, but it's so easy to underestimate how powerful those things are. And then, so to, to bring all this back, when you said m- how do I get wealth? Uh, you know, there, I'm saying it tongue-in-cheek, but there's a really true statement in here of like, you e- you have to be born lucky. You don't have to be born lucky, but oh my gosh does it help. And no one should pretend that, um, you know, a college-educated white male in the United States is on the same plane as, as a child born in Somalia. You know? And of course, that's an extreme example, but we-
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
... everywhere within there, there's a very powerful spectrum. Um, and so, so that's, that's, uh, a huge part of building wealth that we shouldn't overlook.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
And then, so that's, that's the first point I want to make. The second point is so much... and we, we talked about this earlier, so much of building wealth is just the lifestyle that you choose to lead, th- that you choose to lead. And this is true at all incomes groups, but living below your means is everything. At, at any income group, at, at, at any income level, choosing to live below your means is the single most important thing to do to, to build wealth. And a lot of what that is, of what living below your means is, is just suppressing your ego. Just say, "I could spend X. I could spend 10, but I'm only gonna spend eight." And the difference between the two is like my ego going down, like, "I could have a nicer car, but I, I, no, no, I'm not gonna do it. I could have more clothes, but no, I'm, I'm not gonna do it." It's that gap that you're pushing against that's really meaningful. Uh, the point that I made recently, um, about where you really get a benefit from exercising is after you exercise and you're very hungry because you just burned 500 calories and saying, "I'm not gonna re- I'm not gonna replace those calories with a cheeseburger." My body is saying, "Hey, you're hungry. Chris, you're hungry 'cause you just exercised. Go eat a cheeseburger." And you're saying, "No. I'm gonna suppress that hunger." That's the benefit of exercise. It's the suppressing that really helps you. 'Cause if you go-
- CWChris Williamson
Even though you feel, even though you feel like you've earned it, right? You feel like you've earned-
- MHMorgan Housel
Yes.
- CWChris Williamson
... the cheeseburger. You feel like you've earned the money. The money is in your account. I worked hard for this money. I should be able to spend it.
- MHMorgan Housel
But you have to willingly say, "I could and I deserve it, but I'm not going to." And it's not, it's not the earning, it's the, it's that pushing down, that, that is what wealth is. And that, to me, I think is really important. It just gets back to like the F.I.R.E. movement of people who make 50 grand a year but s- but save half of it. They just have a tremendous propensity to keep pushing down, down, down. And they're wealthy because of it. And because they're wealthy, they have control over their time, they can retire early, they can do whatever the hell they want, and they're happy for it.
- 29:28 – 36:45
Spending baselines, material set points, and building a financial safety gap
- CWChris Williamson
How much of someone's set point, their materialistic set point, do you think is predetermined, and how much is in our control? 'Cause I'm fascinated by thinking about this. I, very fortunately, have a, a low set point for materialism, right? Like, I, I don't take, it doesn't take much materialistically to make me happy. I like nice things, but like a new Nike T-shirt, which I'm currently wearing, or you know, like whatever.
- MHMorgan Housel
(laughs) Yeah.
- CWChris Williamson
Like I, you know, I'm not... I don't have huge, huge materialistic goals. But I can imagine in some other iteration of the world, if my mom and dad had been more like keeping up with the Joneses when I was growing up-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... and that y- your, what you wore was a marker of your worth, and, and other things like that, uh, I can imagine a very different me. Um, how, how much of that do you think-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... can kind of be learned and unlearned?
- MHMorgan Housel
I, I think, I think you're onto something really powerful, and I think, uh, a very extreme example of this, but that we see very often, are people who come from very poor backgrounds and become professional athletes. And they might go from literally from food stamps to making $20 million a year, and I think those people have a much higher propensity for flash, for the biggest homes and the fanciest cars, because th- it's like, it's like a chip on their shoulder from their past and showing, like, "I've ... Like, I used to be there, but now I'm up here." Whereas if you're born with a certain level of wealth, I think there's less just trying to prove yourself. You're just kind of like, you're like, "This is me, and look, I'm, I'm where I ... I, I, I don't really have much to prove. This is just who I am and who n- it's who I've always been." So, I think you're onto something really, really important, which is kind of how you're ra- not just how you're raised, but your social status in life is really important. My, my wife, uh, I, I, I say this with, with confidence, my wife will love me no matter what clothes I'm wearing or car I'm driving. If that were not the case, if I did not get as lucky with my spouse and I had a spouse who was really adamant that I drive the fanciest car, I might have a much higher propensity to spend than I do today. So, has my spending been influenced by, um, the way in which my spouse loves me? Absolutely. And that's, you know, I, I, I can't s- it's easy for me to say, "I'm frugal and I don't spend that much money and therefore you should too," when things that are outside of my control, like the s- spouse that I happen to get lucky, has a big influence on my spending. And that's why it's ... there's really no one-size-fits-all advice.
- CWChris Williamson
Mm.
- MHMorgan Housel
And I, sometimes I really get upset with, um ... not upset, but I, I, I, I, I, I don't, I don't like financial, um, pundits or financial advisors who say, "You should do this." It's like, it's different for everybody, and so I think if you can add context about how people think about wealth and try to add different perspectives and think about it, but then saying, "Now that I've maybe helped you think about it, you gotta go figure out what works for you," is kind of the way to do it. Because we're all in such different ... we all have different goals, we all have different, uh, aspirations, we've come from very different backgrounds. We see the world through a totally different lens, through no fault of our own. It's not because I'm smarter than you or you're smarter than me, it's just we've seen the world in a, in a, in a different area, um, through a different lens. So, people have very different views on what's important to them.
- CWChris Williamson
Yeah.
- MHMorgan Housel
Uh, and, and, and that is a big influence on spending.
- CWChris Williamson
One of the things that I tell the guys that work for us, we have a, a lot of formative years, the adult formative years as I call them-
- MHMorgan Housel
(laughs)
- CWChris Williamson
... 18 to 21, big group of university students-
- MHMorgan Housel
Yep.
- CWChris Williamson
... who come and work for us. It's their first professional position. It's the first time they've earned even a m- moderate amount of money, usually. And I'm talking to them about the way that they spend their money, and I'm like, "Look, man, like, you have two choices here. You can choose to keep some back and then spend on the, the summer holiday or whatever it is, or you can continue to spend as you earn as it comes in. But if you drill this materialistic lifestyle now-"
- MHMorgan Housel
(sniffs)
- CWChris Williamson
"... and you don't break that habit, it's going to be, number one, harder for you to do later in life, and number two, if you still have a materialistic habit when you get to be in your later adult years, you'd better hope that you've got an amazing job. Because if you don't have an amazing job and you've still got this materialism trigger going, like, you are in for a very, very tough time because you're never gonna feel good enough. You're never gonna-"
- MHMorgan Housel
(sniffs) .
- CWChris Williamson
"... feel like you're earning enough."
- MHMorgan Housel
Yeah. I think, I think to bring this back to another analogy about athletes, I remember hearing, uh, a football player said, who said, um, a lot of former NFL players are very obese. They're just morbidly obese. And the reason why that occurs is because, um, after they, after their football careers are over, their eating stays the same but their exercise is plunged.
- CWChris Williamson
(laughs)
- MHMorgan Housel
And I think it's, I think that's a, and it's, I, I, I really, I empathize with that. I'm sure that's the case. If you get used to eating 10,000 calories a day and that's just your baseline, this is what you do. You eat, you wake up and you eat a, a seven-egg omelet. That's just what you do. But you go from working out four hours a day to one hour a week or whatever it is, that's gonna, that's gonna make a big impact. And I think it's very similar for income and spending as well. If you're making a great income and you're spending a ton of money, you're, you set your baseline about what you ... that's like your baseline for eating.
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
It's like I, I, I only feel good if I'm spending X or if I'm eating X. And then if your income falls for whatever reason, and I think everyone will go through a period in their life where their income falls at some point, some worse than others, but everyone will go through that at some point, you better hope that your spending is in line with whatever your new income is. And it's very difficult to go down. Going down in life is so difficult. Going down one inch is so difficult, and going up 10 feet can feel like just okay. No one ever wants to go down. If you have to, if you have to downsize your house against your will just because it's what you can afford, that's gonna have a big impact on your well-being. So, to me, it's just like creating a gap between likely future scenarios for my income, of like my income going down and what I'm spending today, and just making sure that, you know, asking yourself, "If my income fell by 5%, 10%, 50%, what would that do to my spending right now?" Um, and, and maybe something like 50% is, is too extreme to think about for some people, but, um, for, for a lot of people it's not. And I think just looking at your, your habits in life and saying, like, m- maybe this works right now, but let me think about alternative scenarios in the future. And I think the biggest guardian of your happiness, of your well-being, is having the biggest gap in between what you s- need to spend to be happy and what could happen to your income in the future. The wider that gap is, the better you're gonna be because that's ... you're, you're, you're decreasing the scenarios in which you're ever gonna have to, uh, push your spending level down. You see it, like if you-
- CWChris Williamson
An in-built safety net, isn't it?
- MHMorgan Housel
In-build safety net. If you can have a situation where your income can fall 30 or 50% and you still don't need to change your spending, you're, you're probably, you're like, in terms of financial happiness, well-being, you're probably gonna be set for life. If you're in a situation where if you take a 3% pay cut and you gotta sell your car, and that's not an extreme-... exam, that's not a crazy scenario that I just proposed. You're gonna have a really hard time in life. So I think setting these things that you have control about, how much money you spend, a lot of, for a lot of people, how much money you make is not necessarily that in your control, uh, to a great extent. But how much you spend is much more in your control, and I think it's th- the more important part of the equation than how much money you make, in terms of financial wellbeing.
- 36:45 – 40:29
Bitcoin as a small allocation—and the real driver of returns: staying power
- CWChris Williamson
I love it. Going back to the point that you mentioned about people getting lucky, there's this, like, hyper-cliche now, right, of that guy that we all know that put $1,000 into Bitcoin 15 years ago and just through s- sheer ridiculous market return now doesn't need to do anything. You know, that's a perfect example that I've just, uh, uh, I've just sort of had in my head about that. Um, one of the questions that I got off Matt from podcast notes, this is specific to Bitcoin, there might be some people listening who think, like, "Cryptocurrency, I've heard I can make, make my fortune on that." Now, there's this guy on the internet, uh, 50 Cent once made a, like a whatever, and then, then he sold it to Bitman, or whatever it was.
- MHMorgan Housel
(laughs)
- CWChris Williamson
Um, (coughs) question is, is there any reason it doesn't make sense to invest 1% to 5% of your net worth into Bitcoin?
- MHMorgan Housel
I think it, it, that can make sense for a lot of people. It does not make sense if the, the calcu- the, the math that you're doing is by saying, "Oh, I can only put 1% in, but Bitcoin's gonna go up 10,000-fold, so that 1% is still gonna make me rich." If that's your calculus, I think it's, it's just setting your expectations of ... Look, Bitcoin's gone up a lot in the last decade. What does that mean for it going forward? No one has any idea. I really don't think anyone has any idea. It's not to say that you shouldn't, you shouldn't own it. A lot of very smart people that I know and whose, whose thinking and decisions I really respect own more than 1% of their money i- in Bitcoin. I think if you're looking at it as a flyer in terms of this is probably not gonna do anything, but there's a small chance that it's gonna do well, then fine. And I think it's also fine to, uh, have 1% of your money in Bitcoin if you just think it's intellectually stimulating. You like the math behind crypto and cryptography, you, it's, it's really interesting to you, I think that's great. We, we don't have to make our portfolios based off of, you know, the perfect academic portfolio of how we gotta maximize returns. I think if, if your portfolio is interesting to you, intellectually stimulating to you, and it helps you sleep at night, and it keeps you engaged with your money versus just forgetting about it and ignoring it, I think that's a, a great thing. So, I, I don't personally own any Bitcoin, but a lot of people who I respect do.
- CWChris Williamson
That's kind of like a Patreon for content providers, right? It's like, "I've got my favorite YouTuber and I'm gonna put some m- some money towards him making his thing." So, I really love blockchain-
- MHMorgan Housel
Right.
- CWChris Williamson
... so I'm gonna put some money into something that contributes to the blockchain, and now I feel like I'm a part of it.
- MHMorgan Housel
Right. Yeah. That's a, that's, that, that, that's a big part of it, and, um, people feel good about that. The biggest, uh, variable in terms of how well you will do in your investment portfolio, this is true whether it's stocks or real estate or Bitcoin or anything, is your ability to maintain those investments when times get hard. When there's a bear market, when Bitcoin's gone down, your stocks have gone down, if you can still just hold on during those periods and hold on f- and, and hold an asset for 10 or 20 or 30 years, that's the variable that's gonna really determine your success. And if you love an asset, you, you love Bitcoin, you love Google stock, you love real estate, whatever it is, if you love it, and by the fact that you love it means that you're gonna be more likely to hold onto it for the long run, that's a good thing. That's a great thing. So, a lot of people, there are a lot of investors who will s- uh, say almost, like, as a badge of honor, "I'm not, I'm not attached to my investments. I'm very unemotional about my investments." And they're proud of that. And I've often thought that's not something to be proud of. I think you wanna love your investments, because if you love them, you're more likely to stick around with them when they get hard. If you don't love your investments and then, you know, you own some stocks and they have a bad year and you're like, "Ah, you know, I don't love these, I'm just gonna get rid of them. Just sell them," that is gonna impact your performance to i- in a huge way over time. Whereas if you love your investments and, and even in a bad year you say, "Look, Google stock's down 30% but I'm, I love Google, I'm sticking with it," that's gonna pay off in the long run.
- 40:29 – 43:08
The ‘price of admission’ in investing: uncertainty and volatility
- CWChris Williamson
Why?
- MHMorgan Housel
Uh, it's, I, I, I think because in any asset, no matter what it is, you get paid to deal with uncertainty. That's, that's where paychecks come from in the investing world. Like, people don't often ask the question, like, "You can make a lot of money in investing. Why? Who's giving you this money? Why are you making money?" You have to give something up. It's not free. What is the cost of returns? There's a, there's an admission price that you have to pay, and the price that you have to pay for any investment is dealing with uncertainty. It's dealing with saying, "I, I'm gonna put $1,000 in this stock and it might go down, it might go up, it might flat line, but over time I think it's gonna do well." And dealing with that uncertainty is what you get paid for. So, if you can stick with an asset when it's out of favor, when it's going through a period where it's not doing well, if you can stick with that rather than saying, "Oh, I, if it's not doing well, I don't want it anymore," your ability to stick with it and put up with the hard times is what you get paid for in investing. That's where the money comes from. That's the price of admission. And I think people who only want the upside and are not willing to put in the downside, uh, or when the downside comes in they say, "I don't, I don't want this. I don't wanna own these stocks anymore," those are people who are trying to sneak into Disneyland. They're not paying the, they're not paying the, the, the cost of admission. They don't wanna pay the price. And I think if you're willing to pay the price, the rewards are, are great. Um, so if you can just put up with the downside, the, and, and view the downside as this is what I'm getting, this is, this is why I'm gonna get made, this is not a punishment but this is the specific reason that I'm gonna do well over time, and if you don't wanna pay that price, there are other assets that you can, you can go in that have certain returns, like cash. You know, the return on cash is very predictable. You're not gonna lose money on your cash. You're gonna earn 1% a year and it's very predictable, but it's a low return. If you can take a variable return, an uncertain return, that's where the big rewards come from. So, I think, you know, just viewing it as, uh, a cost of admission rather than a fine for doing something wrong is a really important way to view volatility no matter what your investing is.
- CWChris Williamson
It's a lovely way to frame it. It's the same as going to the gym, right? The discomfort in the gym-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... is the growth. That is precisely-
- MHMorgan Housel
Yes.
- CWChris Williamson
... what's triggering the growth.
- MHMorgan Housel
... i- if someone said, "I don't like exercising," uh, or, or if someone said, "Exercising doesn't work because my arms hurt after I do bicep curls-"
- CWChris Williamson
Mm-hmm.
- MHMorgan Housel
Like, th- they're supposed to hurt. That's what th- that's, that's the point. You're tearing your muscles and it hurts and then they'll grow back bigger. That's the whole freaking point. And I think for people that makes sense in investing and they... Or, or for exercising, I should say. And they almost like it like, "Oh, I, I'm so sore the next day. That was a good workout." They get it. But no one says, "Oh, my brokerage account, and my brokerage account is down 30%. This is a good..."
- CWChris Williamson
(laughs)
- MHMorgan Housel
It's the same thing.
- 43:08 – 47:12
Forecasting is mostly noise: unknown events dominate outcomes
- CWChris Williamson
So we've spoken there about, um, the success of people who are able to predict things that are coming forward, you know, there's l- all Forex signals online and, you know, uh, the, a number of websites who can give you advice about what stocks to buy for this year and stuff like that. But I know... I've read some stuff that you've put out about the relative success of investors who've actively played the market versus those who've just put their money into a fund or an index and just left it. Do you have some, some examples of that?
- MHMorgan Housel
I think the biggest thing really, i- in general, just as a, a, a starting comment here, the history of ec- the, the accuracy of economic forecasting, investing forecasting is very, very bad. Even the smartest people with the most information, their ability to truly predict what's going to happen next in the economy and the stock market is horrendous. This is true across generations, acro- around the world. It's just not something we're very good at. And there's two ways to look at that. You could say, one, we're just not smart enough. We're not looking at the right data. We're d- we're doing... We're, we're, we're doing this wrong, uh, and, and that's why it's... We're not very good at predicting what's going to happen next. I don't really think that's the case. I think people... If we know what events we're looking at and we have the data, I think people actually are pretty good at predicting what's gonna happen next. But we're still not good at forecasting because we can't predict, we cannot analyze, we cannot forecast events that we can't even think about, because they're complete surprises that no one would ever think about. Let me just give you this current example. The biggest story in the global economy, in the global economy right now is the coronavirus. How many people, if you go back three weeks ago... I'm not saying 10 years, go back three weeks ago, when every Wall Street analyst was putting out their 2020 forecast, "Here's what to expect in the global economy for 2020." How many people said coronavirus?
- CWChris Williamson
(laughs)
- MHMorgan Housel
Zero. None of them said that. And I think that's... That example is true all the time. That the biggest news story is what no one's talking about and what makes a big story is specifically that no one's talking about it because they can't prepare for it. So it's not that we're bad at forecasting the economy because we're not doing the right calculations, it's that we can't calculate things that are unknown, and the unknowns are always what moves the needle the most. If you go back historically, September 11th, huge impact on the economy, and on September 10th, no one except the terrorists who were involved with it could have known that it was coming. No one... It was not, it was not that our models did not accurately, um, you know, uh, didn't, didn't accurately analyze what was gonna happen on September 11th, they just did not know what was gonna happen. Pearl Harbor is another example. Um, uh, you know, uh, Lehman Brothers not being able to find a buyer in 2008. These are all things that no one the day before could have known they were going to happen. Um, and things that are s- that are surprising are always the biggest risk because people have a very good ability to prepare for things that they see coming, which is why... I think a- another kind of good analogy from this from nature is that earthquakes tend to kill more people per event than hurricanes. And the reason why is because earthquakes come out of the middle of nowhere. You can't predict them. They just boom, they're here. Whereas hurricanes, a lot of people, a- in the modern developed world at least, can have a one week warning before it comes and they can board up their windows, they can evacuate.
- CWChris Williamson
(laughs)
- MHMorgan Housel
Of course, that's not a, a blanket statement because there's people that... In like Hurricane Katrina where we just didn't... We could not evacuate, we did not evacuate people. So it's not a, a blanket statement. But earthquakes are deadly because no one can see them coming and no one can prepare for them. And that's what makes them... That's what makes them so dangerous. The... Just the specific fact that they are surprises is what makes them dangerous. And that's true for the economy as well. So every... The smartest people will say, "What is the biggest economic risk for 2020 or 2019?" I think the right answer is always, no matter what year it is, is the biggest risk is what we're not talking about. And we can't talk about things that we don't know. That's always the case. And a lot of people just think that's kind of a bullshit answer, but that's... I think it's always, it's always the case. The, the biggest risk is what we don't see.
- 47:12 – 52:38
Why analyst ratings underperform—and ‘different games’ in investing
- CWChris Williamson
I've got a, a article clipping here from Richard Shotton, who's a past Modern Wisdom guest, and he tweeted this out recently and this is just pure Morgan Housel. It's got your name written all over it. "AJ Bell, the investment platform, found that the 10 shares in the FTSE 350 index with the highest proportion of sell ratings from analysts had generated a positive return on average of 28.9% last year, that was greater than the 23.2% return generated on average by the 10 FTSE 350 stocks with the biggest proportion of buy ratings."
- MHMorgan Housel
Yeah. No, that's, that's, that's, uh... That, that kind of analysis too holds true in the United States. That's almost always the case so that (...) It's exactly 100%. You know, I think the funny thing is- ... people earn dollars a year for making those ratings. That, that's, that's a different story. But I think a, a lot of what's going on here is just classic contr-... I, I, I think... Well, there, there's several things going on here. We could just say it's contrarianism because they had sell readings, the stocks were cheap, and because they were cheap, they went on to do well. I think that's part... That's, that's partially true. A lot of it though is that the narratives that make sense, that, that a lot of analysts will say, "This stock is a sell because X, Y, and Z, because its industry is contracting, because its management team is not very good." A lot of those narratives that make sense and are comfortable for analysts, even smart analysts to put out there, are not actually what drive stock prices over time. It might make sense that, you know...... if, if this industry is contracting, the stock is going to perform poorly. But there are so many other variables that influence stock prices that don't fit those really clean narratives. (clears throat) You know, if the stock market as a whole is going up, then even if that company's industry is going down, the stock still might go up too, just because everything is kind of moving. You know, there's, uh, for every individual stock, there's kind of three general dynamics that will move it around up or down. There's the movement of the overall stock market, there's the movement of that industry, and then there's movement of that individual company. And a lot of times when we're analyzing a company, we're just thinking about the news that affects that company, or maybe just that industry. But there's also these other forces that have nothing to do with the company or with the industry that have a big influence on stock prices. If this is late 2008, every stock went down. It didn't matter if the companies were doing well, if they were in an industry that was recession-proof, everything went down. And if this is 2019 or 2013, everything went up. I'm, I'm, I'm speaking very generally, that's not, that's not 100% true, but it's very broadly true. Just because there were other macro forces that were independent of the company that, um, that influenced price. So I think that's part of the reason why the correlation between, um, analyst estimates and ratings that are based off of these narratives that might make a lot of sense, don't have that much relationship between what the stock to actually do over the next year.
- CWChris Williamson
Do you ever get really frustrated having to swim through articles of people who are constantly saying that they know what's going to happen in the future financially or economically?
- MHMorgan Housel
Uh, no, because I don't, I don't swim in that pool. I just, I, I go to a different pool. I don't swim there. I just, I don't, I just don't read that stuff. It's just not relevant to me. And I, and I, I need to be clear that I'm not saying that it's, it's bad, that it's wrong, that it's worthless. That's not what I'm saying. But it's not relevant to the game that I'm playing. Some people, if you're a day trader, then a lot of that news might be relevant to you. But for me, for someone who's trying to invest for the next 40 or 50 years, it has no relevance whatsoever. It's not gonna influence my decisions. It's definitely not gonna cause me to take an action, so I'm not gonna read it. And I think it's really important for people to realize that investors play different games. We're not all playing the same game. Some people are day traders, some people are trying to manage for the next quarter, some people are trying to manage for the next 100 years. And because we're playing different games, we should not pretend that all the information is equally relevant to us. And so something that is, is relevant to one person, it's not that I can say, "That's bad information," and that's ... It might be good for someone, it's just not right for me.
- CWChris Williamson
Yeah.
- MHMorgan Housel
And, so, I, I just, I just try to figure out what is relevant to me, and that's all I want to read. And everything else, I'm just, I'm not gonna pay any attention to it.
- CWChris Williamson
So I suppose one man's signal is another man's noise?
- MHMorgan Housel
That's it, that's exactly it. And, uh, you know, this, this, this, this happens very often. I think it happens a lot on financial TV, where someone says, "Is this stock a good buy?" And the, the right answer you need to ask is like, "Well, for who? For a 22-year-old day trader or a 97-year-old widow?" Those, like, we shouldn't pretend that those are the same people. So is it a good buy for who? Uh, that's a really important question to ask and just realizing what game you're playing. And only y- paying, paying attention to information that is relevant to your game. But, I, I think there's a, you get a lot of danger when we're, you know, we're all in the same field running into each other, and we think we're playing the same game, but we're actually totally, totally different things. Um, that, that, I think, is a big cause for investor confusion and mistake and regret, is taking the cues from people who are playing different games than you. So, you know, you own Google stock and it falls after earnings, and you might think, "Oh, like, maybe the, maybe these people know something that I don't. Because they're selling stock, maybe I should sell too." But maybe the people who sold it are day traders and you're a long-term investor, so like, it might have made sense for them to sell and for you to hold. That makes, that's not a contradiction, that's not a difference in view, it's just a reflection of different games.
- 52:38 – 53:48
Wrap-up: where to follow Morgan and upcoming book mention
- CWChris Williamson
I love it. Morgan, we made it, man. We made it-
- MHMorgan Housel
We did it.
- CWChris Williamson
... we made it to the end. We got through wealth, we got through the market, we got through Bitcoin, we got through financial forecasting. We've completed it. So, um, where can we go? People want to hassle you, people want to check out your stuff, where should they head online?
- MHMorgan Housel
The biggest area that I live online is Twitter. My, my handle is Morgan Housel, my first name, my first, first and last name. And that's where I spend most of my time online, that's where I'm the most active online. And then my blog is collaborativefund.com/blog, that's where all my writings live.
- CWChris Williamson
Amazing. Man, thank you so much. I'd love to have you back on at some point in the future. We can see how this, this year or later in the year has gone down.
- MHMorgan Housel
Let's do it. And, uh, you know, later this year, my book, my book's coming out. It's gonna be available for sale September 7th. So maybe when that's the case, let's do another episode.
- CWChris Williamson
We're booked in. Let's get it, let's get it locked in-
- MHMorgan Housel
Great.
- CWChris Williamson
... already, man. I know what your schedule's like, so I'll, I'll reserve myself a date now. (laughs)
- MHMorgan Housel
(laughs) That's smart, I like it. Yeah.
- CWChris Williamson
Thank you.
- MHMorgan Housel
This has, this has been a lot of fun. Really enjoyed this.
- CWChris Williamson
Awesome, man. Thank you so much. (instrumental music)
Episode duration: 53:49
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Transcript of episode 91TgP1D0Kps
