Modern WisdomMorgan Housel | How To Become Wealthy, Stay Wealthy & Be Happy | Modern Wisdom Podcast 222
EVERY SPOKEN WORD
150 min read · 30,418 words- 0:00 – 15:00
If you were to…
- CWChris Williamson
If you were to write a golden rule of becoming wealthy, what do you think it would be?
- MHMorgan Housel
Live below your means and be patient. That's it. That's 90% of finance. That is 90% of finance.
- CWChris Williamson
(laughs)
- MHMorgan Housel
That's not even, that's not even like the simplified version. If you can actually do that, you have a, you have a PhD in finance.
- CWChris Williamson
(laughs)
- MHMorgan Housel
That's, that's 90% of finance.
- CWChris Williamson
If the people of the internet want to watch me and you mud wrestle for money-
- MHMorgan Housel
(laughs)
- CWChris Williamson
... there is a, there is a pay-per-view audience out there.
- MHMorgan Housel
There's a, there's, I, I, I have a price for everything.
- CWChris Williamson
(laughs)
- MHMorgan Housel
There's a price.
- CWChris Williamson
There's a price on everyone's head. Oh, come on. Let's get started. So this is the third time on the show this year. So to everyone on the internet who is wondering, things are getting pretty serious between me and Morgan now. Welcome back, mate.
- MHMorgan Housel
Thanks for having me. I'm happy to be here. I always enjoy our conversations, so I'm happy to come back for a third and hopefully more times after this. We'll see if I don't screw it up here for the third time, and hopefully there'll be a fourth, uh, forthcoming later this year.
- CWChris Williamson
That's the plan, man. That's the plan. So before we get started, you got a new book out, Psychology of Money. Why should anyone listen to you on finances? What are your credentials?
- MHMorgan Housel
Well, here's, here's the thing about money. I don't think that credentials necessarily move the needle. That's not true in a lot of fields. If I wrote a book about medicine or aerospace engineering or dentistry, you should not listen to anything that I have to say. Finance though is very different because finance, what matters in finance is not necessarily what you know. It's not about how smart you are or the education that you have or the, the sophistication, the credentials that you have. Doing well with finances, whether it's investing or personal finances, is overwhelmingly, overwhelmingly has to do with how you behave. It has to do with just your relationship with greed and fear, how you think about long-term thinking and your, you know, who you trust, how gullible you are. Those kind of soft topics that is not necessarily what you know. It doesn't matter if you went to Harvard and you worked at Goldman Sachs. If you lose your head during March of 2020 or in 2008, none of that stuff matters anymore. So what's important about investing, I'll give you my credentials. I have been a full-time investing analyst and writer for 13 years. I've been researching and focusing on kind of the intersection of investing history and behavioral finance. The history of how we think about money, what we can learn from those lessons and how we can think about finances in a more productive way. That's what I've done, and this book is kind of a culmination of the 20 most important things that I learned during that period. I try to wrap it in with a bunch of stories that have nothing to do with investing, but they all have a, a really important takeaway about how we can think about risk with our money in a more coherent way.
- CWChris Williamson
I think that the way that you've written this book, you're my mate, so I'm allowed to, I'm always gonna gas you up anyway, I'm always gonna say that it's good.
- MHMorgan Housel
(laughs)
- CWChris Williamson
But this particular style of writing, especially a non-fiction book, short sentences, very snappy, short sentences that sounds a lot like a dialogue, I think makes things easier to read. It's not a superbly a jump about like read chapter one, then read chapter 10, pick it up, put it down as you want, but you could. And just I think coming out of that blogosphere, coming out of the internet writing where holding attention is your primary currency, right? You just don't want people to-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... cli- click off the page. Um, I really think that that is, uh, come to the forefront in a very successful way, man. This book is phenomenal and everyone that is listening, if you want, it's the Rich Dad Poor Dad of 2020, um, with, with a, a better looking author. I think that's the, that's the one- (laughs)
- MHMorgan Housel
(laughs) .
- CWChris Williamson
Open it up.
- MHMorgan Housel
Well, thanks, I appreciate that. I'll, I'll tell you what's important to me. I read a lot of books. I know you do as well. But I rarely finish books. Like how often do I read to the last page? Probably like one in 10 books. Even books that I really enjoy and books that I recommend to people, a lot of them I didn't read past chapter five or something like that. And I think the reason is very few topics require 250 pages of explanation to get your point across. It's just not the case. So even a lot of very good books after chapter two, chapter five, whatever, you say, "Look, I, I get the point. It's a great point. I learned a lot from that point, but I don't need, I don't need the rest of this. Like you've made your point. Don't, like quit rambling on here." It was really important to me that, uh, I w- I wrote this book in a way that, A, it's, it's 20 short chapters. Well, first, the book itself is not that long, uh, and each chapter is not very long, uh, either. And every chapter can kind of live on its own. And that was important to me because rather than making one point that I rambled on about for 250 pages, I wanted to make 20 points where I made my point quickly, and then out of respect for the reader's time, I got out of your way. Nothing more. There's actually a book that is one page. It's, it's not even one page. It's like half a page. And when I turned that in, the publisher said, "What's, is there something... What, what happened here? Are you missing something here?" And I said, "No, that's..." I said, "No, that's all I have to say." And they said, "Well, you know, this is a book. Do you want to go in a little bit deeper, do some more research?" And I said, "No, that's all I have to say on the topic. Out of respect for the reader, I'm done here. You move on to the next chapter." And what is important to me, I don't think there's any way to track this, but the metric that I wanted to maximize for when writing this is how many people finish the book. Not how many people bought it, not how many people opened the first page, how many finished it. Now, not everyone will, it's not for everyone. I'm not, you know, that's, that's a different topic. But if it's easy to read and you make your way through because there's no... or it's minimal rambling, uh, that's, that's what I'm aiming for.
- CWChris Williamson
That is a lesson that so many authors should learn, and I think that we're kind of out of that, the particular example that you're giving now, the blog post that could have been a tweet that somehow ended up being a book. Um, like-
- MHMorgan Housel
Right.
- CWChris Williamson
... that, that shouldn't... That's not the way that it should be. Look, keep it to 360 characters. I read it on Twitter. That's great. Um, but fleshing out to that, and you kind of thirst trap everyone 'cause all of the lessons are in the final few pages, like the main, main, like your synopsis of what the actionable takeaways of what you can do get reput together-
- MHMorgan Housel
Yes.
- CWChris Williamson
... in the last few pages. So there's like a little carrot to dangle. Um, so it's called The Psychology of Money. Why should we be bothered at all about the psychology of money? Money is just numbers in and numbers out, isn't it?
- MHMorgan Housel
See, that's where people get thrown off, I think. I think that's the root of a lot of financial problems, for amateurs and professionals, is that we want to think of finance like it is physics. And in physics, there are very clean formulas. There are s- there are precise answers with precision that never change over time. So if you roll a ball down a hill, we can, we know exactly how fast it's gonna roll, and that answer is the same today as it was 200 years ago. Very precise. Investing is just not like that at all. It's a human endeavor. It's much closer to, I think, uh, you know, I, I think the best analogy is probably medicine. Look, in medicine, there are facts, there are formulas, there are precise things that we know about how the body works. But people's relationship with medicine is very personal and very nuanced and very behavioral. A lot of what matters in medicine in the modern world is, uh, how healthy are you? Do you eat proper diet? Do you exercise? Do you smoke? How stressed are you? Those are behavioral things that feed into the process of modern medicine, but not in a, in a really precise, scientific way. It's this mushy, nuanced, sociology-driven thing. Um, and I, I think, uh, with medicine too, if you take two people with identical cancers, they might come to completely different conclusions on what is nece- on what is worth it for them. One person might have chemotherapy, throw the kitchen sink at it. Another person might say, "Just give me some pain meds. Let me be comfortable, and I just wanna let nature take its course." And th- those answers might be right for that, for those two different people. There's no one right answer. Finance is totally the same, where I can tell you what I do with my money. Here's how much I save, here's how I invest it, here's how I spend it. And that answer might work perfectly for my wife and I, and it might be nuts for you or someone else. Everyone's gonna come to different conclusions, just like we do with medicine. So that's why I think the psychology of money is so important. The other thing is like, we know how finance works. We've made a lot of progress in terms of the technical side of finance over the last 100 years. If you go back 100 years ago, we didn't understand things like discounted cash flows, uh, and you'll d- and, and, and, and dividend discount models. That just, that information wasn't in the social sphere. But we do now. Like we've made, like academic finance has figured out how finance works, and what is left for us to exploit, what is left for us to get better at, is the psychological side of money.
- 15:00 – 30:00
Talk to us about…
- MHMorgan Housel
level of independence is all that I'm going for with money. That's all that I want to ... It's all that I'm really striving for in terms of my financial goals, is just incrementally, with every dollar of savings, being less reliant on others that I, that I ha- that I otherwise would be if I were in debt or had no savings and was relying on the kindness of others to make it through my life financially.
- CWChris Williamson
Talk to us about how luck and risk are related. I know that you bring it up in the book, and I think it's very interesting, the observation selection effect that we have of success or failure with finance, and the total, uh, the total blind, uh, blinkers that we have on either side that don't allow us to see how luck and risk were involved.
- MHMorgan Housel
So there's two points here. The first is that luck and risk are actually like the exact same thing, just, just opposites. But they're, they're, they're cousins. It's just, you know, one's a brother, one's a sister. They're, they're, they're, they're, they're very similar. Both luck and risk are this idea that there are things that can happen in the world that are outside of your control that have a bigger influence on outcomes than anything you did intentionally. That is what risk is, and that is what luck is as well, things that can happen outside of your control that have a big influence on your outcomes. Uh, and what's interesting is that as investors, purely in finance, we are keenly aware of risk. Investors talk about risk all day long, and they hire risk managers, and they adjust their returns for risk. Everything about investing is, "I'm gonna manage risk, manage risk, manage risk." But no one talks about luck, very few people. Uh, no, no investors hire luck managers. You're never gonna see ... Uh, you, you never see any investor who says, "Look, I earned 50% last year, but you have to adjust that return for luck." No one says that-
- CWChris Williamson
(laughs)
- MHMorgan Housel
... even though we are keenly aware of risk. Here, here's the thing. If someone loses 50% in the stock market, they will say, "Oh, really risky year." If someone makes 50% in the stock market, no one says, "Oh, really lucky year." They know, "No, I didn't have anything to do with that." So luck and risk are the same thing, but we treat them so differently. A lot of this is, look, if I am ascribing luck to someone else, I look like a jerk. If I say, "Look, Chris, you've done really well, but you just got lucky," I ... That's, that's a mean thing to say. I don't want to say that to you. Even if we know with certainty that luck exists in the world, I look mean if I'm ascribing it to you. And if I'm ascribing luck to myself, if I say, "Look, I've had this level of success, but it was just lucky. I didn't have anything to do with it," it's hard for me to look myself in the mirror every morning. I don't want to admit that to myself. So that's why luck just kind of goes away. Whereas, look, if something really unfortunate happened to me, if my industry collapsed, if the company I worked for went out of business, then I would say, "Oh, it was a risk." Like, I, I just, I, you know, I got caught up in a risk in life. But with luck, it's just a very different thing. So even if we know it exists, it's just much harder to identify in real life, and we just go through life kind of ignoring it, uh, systematically. Everyone does. I do this too. The other point about luck and risk is that, particularly for extreme success, who are the people that we tend to study, the people who we tend to idolize are the ones who've had extreme success or extreme failure. Those are the people who we pay attention to. The line between huge success and huge failure is very thin, and it's usually only known in hindsight. People who are very successful tend to have taken a lot of risk, and it's only ... And people who are very unsuccessful took a lot of risks too. They just ended up on the different sides of that equation. So it's, it's very difficult to really know. Like, if, if you have a hedge fund manager that really swings for the fences-... and let's say it works out for them. Let's say because they swung for the fences, there was a 10% chance that they would have done really well and a 90% chance that w- they would have failed. Well, if they do really well, they ended up on the, uh, on the, the fortunate side of the 10% odds, and then we say, "That guy is a genius. He's a billionaire, one of the great investors," because he ended up on the correct side of the 10% odds. If that person fails, like they will 90% of the time, and they go bankrupt, then we say, "This person has no idea what they're doing." Even if they made the exact same bet, uh, if they just end up on different sides of the luck-versus-risk equation, like, it w- it co- totally changes how we think about them. A really good example that I use from this is a hedge fund manager named Mohnish Pabrai, (smacks lips) who is one, one of my favorite investors. He's not a household name, but he's really a great investor. And years ago, he made an investment in a company called Delta Financial that went bankrupt. He invested a lot of money in it, and the company went bankrupt. And he did an interview with a financial magazine afterwards, and they asked him about that, like, "What happened with Delta Financial?" And he said, "Oh, that was, that was a, that was a, a, a smart investment. It just didn't work out." And they said something along the lines of, "How can you say it was a good investment if you, it went bankrupt?" And he said, he said, "I would make the same bet again. Like the odds were in my favor to do well on this investment. I just ended up on the unfortunate side of risk." Like if, if, if you were making an investment that has a 90% chance of success, uh, then, you know, there's a 10% chance it's not gonna work, and that, that's what he was saying. Just thinking about the world probabilistically is a smart way to do it. But it's so hard to do that, because we wanna think in a deterministic way. We wanna think the world as just black or white. Were you right or were you wrong, uh, when it's not like that? Odds are really nuanced, and they're h- much harder to wrap your head around. So that's, that's the hard dynamic with luck and risk that's easy to ignore.
- CWChris Williamson
The problem as well is that in retrospect, you have no idea what the other outcome could have been. It's always brilliant for people to post hoc their way through it. I can't remember who the quote is from. Someone said, "You never get fired for hiring IBM."
- MHMorgan Housel
Right.
- CWChris Williamson
Um, and the same thing is true of my friend Rory Sutherland from Ogilvy Advertising, where he talks about, uh, you never get fired for following the formula when it comes to advertising. If this advert is just the same brand icon, the little meerkat or the little teddy bear or the, the big pirate or whatever it is, uh, in a new scenario, and it doesn't land, and you're, "But look, we followed the formula. Like we did the same thing we've done all the rest of the time." "Hey, man, pat on the back, like, you know, you just sometimes it just doesn't work out, dude. Like-"
- MHMorgan Housel
Right.
- CWChris Williamson
"... maybe we'll go again. It would be maybe the illustration was a little bit off or the timing, it's just a little bit da-da-da-da-da-da-da." But if you come in and you do something really innovative and it works, you're a genius. But if it fails, you're out the door. What, do you have-
- MHMorgan Housel
Right.
- CWChris Williamson
Why didn't you follow the, why didn't you follow the formula? Well, the formula wasn't working anyway.
- MHMorgan Housel
You were reckless.
- CWChris Williamson
I would much sooner fail safely than be successful riskily. And that's-
- MHMorgan Housel
Yes. And I understand why people do that. People are trying to maintain their careers. It's not... I, I don't fault them for doing that, but it's a really important thing. To me, one of the takeaways from the luck-risk dynamic is that we need to be careful in terms of who we admire, uh, and making sure that the people who we admire, we're not taking lessons away from those people that are too specific. If I say, "I really admire this investor, this person," but I'm unable to ascribe how much of their success was luck versus skill, then I need to make sure that I'm taking away the broadest lessons for them. If I say, "This person invested in this company in this way, so if I do that too, I'll be as successful as them," if you take a hyper-specific lesson from them, that's where you're most likely to get caught up, versus a really broad lesson that applies to a lot of number of people. That is where we can be sure that there is something there that we can hold onto, versus the hyper-specific. So a lot of people who idolize Warren Buffett, Benjamin Graham, all these people, will take hyper-specific lessons from them and try to apply it to their own finances. What is the exact formula that Warren Buffett used 40 years ago to pick stocks, and how can I use that today? That, I think, is a really dangerous way to go about learning from anyone in any field. I think the more broader it is, the more likely you are to find something that is something that you can replicate yourself.
- CWChris Williamson
I think that is why I resonate with your particular approach to financial advice. And there's a number of, there's an undercurrent at the moment in the, um, online fitness world. Uh, we, we, we had this period sort of between 2005 and kind of pro- pro- probably about now where people were able to put out crazy diets, whether it's the 48-hour fast or the, the, the, the carnivore diet or the keto or the this, this, and this. And it's kind of all come back around to, it's just calories, man. Like it's just-
- MHMorgan Housel
(laughs)
- CWChris Williamson
... calories in and calories out. Like are you eating more than you expend, or are you expending more than you eat? And that's what it is. And it's this, um, beautiful simplicity that I'm really enjoying us all coming back to, both with podcasting as well. Like this show's a good example. I'm filming on an absolute Logitech piece of shit C220 something.
- MHMorgan Housel
(laughs) Same. Same. I'm doing the same.
- CWChris Williamson
I'm, I'm filming on. We're both doing it. Um, but, uh, I think now the glitz and the glamour and the fancy stuff, people are kind of through that. And you might even see this. I've not even thought of this before. Perhaps this is the same reason Trump got elected, that everyone was sick of the glitzy, very complicated lies. They just want kind of the Thor, you know, like the, I'm not... that is no way an analogy between physically Donald Trump and Thor. But the, the idiot, the blunt instrument, you know, that comes in?
- MHMorgan Housel
Yeah.
- CWChris Williamson
Like I can see through the lie.
- MHMorgan Housel
One of the simple lies, not complicated.
- CWChris Williamson
I know, yeah. I want, I wanted to know what I'm gonna expect. The same thing is true with finances. The same thing is true with stock picks and investing advice. The same thing is true with getting lean or losing weight. You've touched on, uh, Buffett there. I didn't know you... First off, I didn't know you had 2,000 books written about him, which you, you drop in the book, which is like ridiculous.
- MHMorgan Housel
(laughs) Right.
- CWChris Williamson
What can we learn from his wealth and from compounding?
- MHMorgan Housel
What's interesting about Buffett, like he... Okay, so he's the greatest investor of all time, he's one of the richest men in the world. And if you dig into his wealth though, I think something's really interesting, is that...Buffett started investing when he was 11 years old, and today he's 90 years old, and he's a full-time ... He's still going at it full-time. That fact, the fact that he started so young and cont- so late, into his elderly years, is so fundamentally important to his success. His average annual returns over his life have been about 22% per year, which is phenomenal, of course. But if you were to say, okay, let's, let's assume, hypothetically, that Buffett earned the same returns during his lifetime, but instead of starting at age 11, let's say he started at age 25, like a normal person. And instead of, um, continuing through age 90, let's say he retired at 65 to play golf with his kids, just stopped investing, like a normal person, retire at 65, and earned the same average annual returns during that period, his net worth today, hypothetically, would not be 90 billion. It would be 12 million, 99.9% less than it actually is. 99.9% of his success can be directly tied to the fact that he started investing when he was a kid and he continues at age 90. That's what has ma- His secret or h- his skill is that he's a great investor, no doubt about it, 100%, full stop. But his secret that has created this level of wealth is that he's been a good investor for 75 years. And I think as you bring up in those 2,000 books that are writing about Warren Buffett, how did he do this, what is his strategy, how does he think about business models and moats and markets, none of those books will just point out that we know as a matter of simple math that the reason he's been so successful is just the amount of time he has been investing for. Yes, he's been a great investor. So you can dig into the business strategies, how he's dealt with, uh, insurance float and debt and how he thinks about management teams. That's all really important. But what really moves the needle in terms of the dollar amount of the wealth he's been able to build is just the amount of time he's been doing it for. And that is very often not mentioned because it's too simple. It is too simple. If you are a PhD in finance and you're trying to ascertain how he did this and trying to use your brain power, use your knowledge to pick apart how to invest like Warren Buffett, you don't wanna just say, "Oh, well, he's been doing it for 75 years. So that's, that's it." The other reason is that a lot of people can't do this. If you are 60 years old and you're trying to invest like Warren Buffett, them telling you, "Oh, well, you know, y- y- y- you need to invest for 75 years to achieve these returns," well, if you're s- if you're already 60 years old, you won't, you don't wanna hear that. So it's both too simple an explanation, and I think it's a, it's a painful explanation for people who want to hear it. It's a painful reality that the reason he has achieved this is because he has done something that a lot of us just mathematically cannot do. We don't have that much time in front of us to do that. Which of course, for that kind of success, of course he has done something that most of us cannot do. That's why he's succe- that's why he's worth 90 billion and you and I are not. Like, of course he's done something that is extraordinary. Um, and I think ... So that's, it's just too simple, uh, this idea. The other thing is that Berkshire Hathaway, his company, does not charge fees. Uh, there's no fees attached. If you own Berkshire Hathaway, there's no fees being charged. Buffett's total compensation is $100,000 per year. It's been that way forever. Just that single fact alone, if you were to compare that to a mutual fund or a private equity firm, uh, just that fact alone that he doesn't charge fees accounts for a lot of his outperformance over time. You know, he's outperformed the market, uh, by d- depends on what benchmark you use, if you're looking at private equity funds, by something like five percentage points per year. Well, if you ... Just fees alone accounts for two to four percentage points of that outperformance. But that too, if you were to write a book about how Warren Buffett has done it, no one wants to write in that book, "Oh, we know that the majority of the outperformance came from the fact that he doesn't charge fees." It's too simple an explanation. Uh, Charlie Munger, his longtime business partner, was once asked, uh, kind of how Buffett and Munger did this. And Buffett said, or Munger said, quote, "If you were an observer, you would see that Warren did most of it by sitting on his ass and reading." And that's it. And that's ... But that too is just too simple an explanation for people to take seriously. So there's always this thing where, you know, again, if we are to think about finance like it is physics or like it is, you know, something really complicated, then the answers have to be really complicated, but it's not. So it's not intuitive to think that the m- most important answers are really, really simple and basic, because we wanna use our brains to figure out the secret sauce. Even if it's just right there sitting in front of you, you wanna say, "Well, okay, that's, that's cute and all, but let's really try to figure out what's going on."
- CWChris Williamson
But neither is losing weight. Losing weight is very, very simple. Eat less than you expend for a consistent period of time. Building a podcast or an online audience, post content that resonates or produce content that resonates and do it consistently for a very, very long period of time.
- MHMorgan Housel
100%. I, I wrote an article a couple years ago called Useful Hacks, and I wrote this because years ago at a c- at a different employer, uh, my, my company hired a social media consultant to come in and gave a talk about here's how to really maximize Twitter, here's the time of day you should publish, and how hashtags and how you can interact with them, all these like hacks to increase your sodum- social media, uh, presence. He did not mention at one point during this consulting session that the key to doing well on social media is to write good content. That's it. You wanna do well on social media, write a good tweet that people are interested in. That's it. But you don't wanna say that because people want the simple strategy. They, they, they want the hack. They don't wanna put in the, the elbow grease. They don't wanna grind it out in a way, just like Buffett. Like what is Buffett's secret? Invest for 75 years.
- CWChris Williamson
(laughs)
- 30:00 – 45:00
Yeah. …
- MHMorgan Housel
hear that. Everyone wants to, everyone wants to say, "Well, well, okay, okay, that's great, but how can I do this tomorrow?"
- CWChris Williamson
Yeah.
- MHMorgan Housel
How can I do it today?
- CWChris Williamson
And that's a lovely idea, but what, what, how would you do it in 35? And it's like that ... First off, especially doesn't, doesn't, um, allow for understanding how compounding works.
- MHMorgan Housel
Right.
- CWChris Williamson
So it seems like with everything that we've brought up actually with building your social media or building a good podcast or becoming wealthy, long-term time horizons is a bit of a, uh, the ability to suffer discomfort long term is a, a skill that everyone should acquire.
- MHMorgan Housel
... for a lot of industries. Health is another one. Like, you wanna be healthy over the long term, you gotta grunt and sweat in the gym in the short run. That's the cost of it. You wanna be healthy over the long run, you gotta, you gotta push away the Twinkies and eat the broccoli. Like, there's a lot of things where the short-term, uh, you know, the short-term cost of admission is the price of long-term returns. It's true in investing as well. Um, so I, I think that's a lot of things. I, I said, you know, you should, for money, you should save like a pessimist and invest like an optimist. Be an optimist in the long run in terms of, hey, if we invest in the economy, invest in capitalism, invest in businesses, you can do very well in the long run. But you have to save like a pessimist and realize that the short term is gonna be a constant, never-ending chain of recessions, bear markets, pandemics, uncertainty, these things that we did not see coming up. Or at the personal level, job losses, divorces, medical issues. Like, every ... You have to be able to survive the short term and able to achieve and benefit from the long run.
- CWChris Williamson
I love it. Is getting wealthy a different skill to staying wealthy? What are the principles to keep in mind there?
- MHMorgan Housel
There, there, there, they are, it seems like they should be the same thing, like wealth is just a single topic. But as I just mentioned, saving like, like a pessimist, investing like an optimist, that is getting rich versus staying rich. Uh, getting rich, getting wealthy requires optimism, swinging for the fences, doing really well, being optimistic about the future. Staying rich requires a pessimism about the short run where you're saying, "Ah, I don't know what's gonna happen over the next three months. I gotta make sure I have a lot of savings. I gotta reduce my debt because I don't know if I'm gonna be able to keep my job. I gotta, I gotta plan for, you know, unexpected expenses that might come up." Uh, you have to... Those are two separate skills that you have to nurture and think about separately. And if you don't have one or the other, like people are just optimistic about the future, and they're so optimistic that they're really, that they're, they're willing to push it in the short run in terms of no savings, lots of debt, because they're so optimistic. Those are the people that end up running themselves off a cliff. And on the other hand, if you are pessimistic about the long run, if you're just gonna save your money in cash and CDs, then you're never gonna get rich to begin with. So you have to foster both of those, and they are conflicting skills, which is why a lot of people don't necessarily have them. There's a lot of turnover on the Forbes list of billionaires, not because they're all people who died, it's because they're people who became very rich, but had no skill at staying rich. And a lot of it is the skills that will get you to s- to become rich actually counter the ability to stay rich. A lot of people who get rich are, got rich because they are so willing to swing for the fences. They're so willing to take a huge risk, to bet everything on this one big crazy idea. That, that's a skill you need to get rich. Staying rich is the exact opposite. Staying rich requires paranoia, diversification, uh, pessimism.
- CWChris Williamson
(laughs)
- MHMorgan Housel
That's what you need to stay rich. And if you don't have those at the same time, uh, you know, it's then w- then y- ... If you are fortunate enough to get rich or whatever word you wanna use, just well off, doing a little bit better than you are, it's probably gonna be a temporary endeavor. So I'm interested because I'm interested in compounding. I wanna b- I wanna make sure that I can maintain the level of financial, uh, you know, you know, wealth that I have right now for the longest period of time. Uh, this, I'm not interested in doing something for the next year or even 10 years. I wanna remain invested, remain compounded for the next 50 years. And the only way that I can do that is if I am paranoid about the short term, in a sense that is gonna make me have a high savings rate, lots of cash, no debt, in a way that is almost completely counter to my long-term optimism.
- CWChris Williamson
Cultivate Your Paranoia, Morgan Housel, 2020. That's the, that's the synopsis that we've got. (laughs)
- MHMorgan Housel
Trademark. But 2020 is actually the perfect example of the continuous chain of breaking disappointments that happens to all of us that we need to manage for. No one thought that 2020 was gonna end up this way. No one saw this coming. But if you look historically, I think the world breaks about once per decade. Not, not on that exact timeline, but on average, once a decade, the world falls apart. COVID-19, 2008 financial crisis, September 11th, 7/7 for, for, for the UK. Every 10 years, something bad happens. You go back, Great Depression, World War II, JFK assassinated, on and on and on. So if you just use that as your historical baseline, I don't know h- when it's going to break or what is gonna be the cause. Y- it's, it's not a prediction of specific events, but the world is prone to breaking. And if you view that, then it just pushes you towards more safety, security, room for error in your finances for the short term. But even though the world breaks every decade, there's been tremendous progress over the long term. So I want ... To, so to acknowledge the constant breakages, I'm pessimistic about the short term. Uh, but to exploit the long-term optimism, I'm optimistic about the long run. So those are, since those are not ... They seem like opposite, it's hard to put those two together, but they're both necessary to do well over time.
- CWChris Williamson
I love that. There's a really good example from mutual friend Shane Parrish, Mr. Farnam Street, um, where he talks about signal versus noise. And the example, the first ever example that he used, uh, or the first ever example that I heard to explain signal versus noise as a mental model is this one. And he says, imagine that you're an investor and you'd put your money in the stock market and you were tracking where your investment had gone, and you looked once a year at what your investment had done. He says, imagine that you get 50% useful information and 50% totally useless noise. And he says, now let's increase that frequency. Let's check every one month, so 12 times a year. Well, now you're getting towards like 90% noise and only 10% signal 'cause there's a load of little wiggles around. Anyone that's ever looked at the graph on the stock market, looks like a spider going for a walk. He says, and now imagine that you're going to check every day, and that is 99.999% noise and only 1% signal. And that, um, ability...... to, first off, the luxury that you don't have to feel like you need to check it. I don't know how often you check your Vanguard fund, but I'm gonna guess it's just when you want, not when you feel compelled to. It's not every morning when you wake up that you wake up and crap your pants because like, "Where's the Vanguard fund gone?" It's like... (laughs)
- MHMorgan Housel
I, I, I check it when the market's gone up, and I don't check it when it's gone down.
- CWChris Williamson
(laughs)
- MHMorgan Housel
It's a really useful skill to make me believe that I'm only going up over time.
- CWChris Williamson
(laughs)
- MHMorgan Housel
I, I, I'm only half-kidding about that. I'm, uh, but here's the thing, I don't make any actions when I check. I like checking it 'cause it's fun to watch, but I don't change anything. So I, I think it's fun, I think it's fine to check your portfolio often, as long as you're just checking it. It's dangerous if you check it, and every time you check it, you are tempted to say, "Oh, maybe I should sell this, maybe I should buy that, turn the levers, do this." That's when I think it, it gets dangerous. Um, and back to your Shane Parsons, your Shane example, you know, checking your portfolio every day, let's talk about the Robinhood traders that might be checking it 47 times a minute. Like, we're in a different world here. And that is, of course, back to luck and skill. The shorter the time period that you're looking at, the more likely that the results are the result of, uh, of, of luck or, or risk. And it's not until we've, n- the longer you look, the more you can say, "Okay, this was, this is skill." The longer period of time through a variety of different environments, recession, boom, bust, if you can do well through all those periods, that is something you can say, "Okay, there's a skill there." But the shorter, the more you shrink the time horizon, it's just going closer and closer to luck, risk, noise that you're looking at.
- CWChris Williamson
Tell me that you've seen the WallStreetBets subreddit.
- MHMorgan Housel
I've h- I've heard of it. I've, I, I think I checked it once-
- CWChris Williamson
Oh, Morgan, come on.
- MHMorgan Housel
... but I'm not, but I'm not, I'm, I'm not a frequent observer.
- CWChris Williamson
Dude, this is like, this is like soft core porn to you.
- MHMorgan Housel
(laughs)
- CWChris Williamson
This is just the most entertaining. So everyone that's listening, and you once we're done, Morgan, Google, uh, go into YouTube and search WallStreetBets' dankest trades. Oh, my God. They put together the highlights of this subreddit where people just make outrageous ... they bet their entire life savings on the fact that Apple's gonna go up by 10% by the end of the week, or down by this.
- MHMorgan Housel
(laughs)
- CWChris Williamson
And dude, it is, it makes your bum hole, like, sort of do this-
- MHMorgan Housel
(laughs)
- CWChris Williamson
... like clenching thing a little bit. And, um, it's-
- 45:00 – 1:00:00
Yeah. That, that, that…
- CWChris Williamson
need a helicopter. But there are people out there who have to have the Louis Vuitton bag, they have to have the, the red bottom shoe. They got ... You know, they have to have everything. And for those people, they need to, um, look at themselves very, very carefully and think, "Right, how can I curb the areas of my psychology which aren't aligned with long-term wealth accr- uh, accrual, and how can I service those in the most, uh, I suppose the most prudent way possible?"
- MHMorgan Housel
Yeah. That, that, that brings up two points that I think are really important. One is that, um, I think the most important financial skill is getting the goalpost to stop moving. If you are fortunate enough to be someone whose income and wealth is growing over time, if your expectations grow in lockstep, or if your expectations grow higher than your income, none of it matters. It's not gonna feel that great to you. And I think a lot of the reason why people are somewhat disappointed with the wealth that they might be lucky enough to create ... When they get there, they say, "Oh, this doesn't feel like I thought it would." It's because if you are, uh, if you are, you know, at, at a low level of wealth and you dream about what it would be like to have a million dollars, you are using your current expectations and then, and then transplanting yourself into someone who has a million dollars. So, there's a big gap between your current expectations and a million dollars. But once you get to a million dollars, your expectations go up to a million dollars too, and then it doesn't feel that great anymore. You start looking at people who have 10 million, 20 and 50 million, and that never ends. Uh, so getting the goalpost to stop moving is the single most important skill, because being happy with your money is just the gap between what you have and what you expect. So if those two things move at the same level, you're never gonna feel that great with your money, and keeping your expectations low and having a sense of enough ... It's not to say that you don't want more, but you need to have enou- a, a, a well-honed ability to say, "Okay, this is enough. This is all that I need." If I get more than that, like, then great, that's a cherry on top, but my expectations are not gonna exceed this level. That level might be different for everyone, and even different at, at different points of your life. But if you don't know where that level is and if you're not trying to keep your expectations below it, going out of your way to keep your expectations below it, you're gonna have a hard time with money, no matter how successful you might be lucky enough to be in your life.
- CWChris Williamson
Sort of earn rich, think poor, I suppose, is one of the other little maxims that we can pull out of so far. We need financial role models though, right? We need someone to-
- MHMorgan Housel
Right.
- CWChris Williamson
... to aim for, an example to follow. And that someone has to be properly financially smart and not just like with the flashy displays of wealth, like the, the, uh, fellow with the, the gold coins. Um, but also you had this story about a janitor who saved four million. That really, to me, that's not a poor r- that's a poor role model as well, because it's not a life I would find very exciting.
- MHMorgan Housel
Yeah.
- CWChris Williamson
It doesn't, you know, it doesn't really fire me up. "Oh, yeah, I'm gonna not, I'm gonna live in a tiny flat for all my life and then give away $3 million to charity after I'm dead." So, who should we try and emulate? Is there a perfectly balanced financial role model that you know of that everyone can just go and follow on Instagram or something?
- MHMorgan Housel
No, because the point that I wanna make is that it's very different for everyone. There are people, uh, not you and not necessarily me, although maybe-
- CWChris Williamson
(laughs)
- MHMorgan Housel
... I'm closer to it, who would not, who would not aspire to be someone like Ronald Read, the janitor who gave away $4 million. There are people who would be like, "That's, that's exactly what I want to do." I don't know if you saw the news just yesterday, the guy who started duty-free sto- uh, stores in airports, his name is Chuck Feeney. His net worth at one point was $8 billion from starting duty-free stores. He gave away every ... He kept two million for hi- for he and his wife, two million with an M, and gave away the other 7.9999 billion. And just as of yesterday, as of the, the, the news story came out yesterday, he has officially given it all away.... his net worth is now $2 million. He lives in a small apartment. Uh, he flies coach. He drives, like, a Volvo. Uh, so for him, that is, that is the dream. He never had any material aspirations above $2 million. Uh, and other than that, it was like, "Just get all... I wanna give everything else away to charity." Other people are not like that. So it's different for everyone. And that's why there's no one financial role model, uh, uh, that we can all look to. Because what is, what I want might be very different from what you want, very different from what Chuck Feeney wants, and other people. So this gets back to the idea that personal finance is more personal than it is finance. Everyone is different. And what I wanna do might make no sense to you, and you might criticize it and say, "How can you... How could, how does this make sense, this thing that I'm doing with my money? How does that make sense? How does it make you happy?" Well, for me, it does. And then, and for my wife, it does. So... And look, you, you can do your own thing, and that's fine too. I think health is really similar. I run. I, I, I don't lift weights, but I run. But I'd almost... I, I've increased it a little bit, uh, recently, but I'd never run more than three to five miles. Could I run... Could I train for a marathon and do that? Probably. I, I think, I think I'm capable of doing it, but I don't necessarily aspire to do it, because my goal for running is not to become the greatest athlete, to push the limits as hard as I can, to do well in a marathon. My goal with running is to keep my health adequate enough that I don't gain a lot of weight over time. That... Like, that's, that's... Full stop, that's my goal. Same like if I do lift weights once in a while, it's not like, "How can I get, how can I get huge? How can I get ripped?" It's like, "How can I make sure that, uh, that, that my bones are staying strong enough over time, that I'm not just a total couch potato?" And that's it. I don't aspire for anything more than that. So the... I think people have the same thing with money. Uh, what my goal is might be totally different from yours, just as my health goal is probably different from yours as well.
- CWChris Williamson
We're out of the safe zone now. We're no longer in your book, and I'm gonna ask you some questions I've had planned since our earlier episodes this year. What is your response to the people that say that Morgan Housel can't pick stocks? Name me one big stock pick that Morgan's got right over the last 10 years. Index funds aren't financial advice. Morgan doesn't know what he's on about.
- MHMorgan Housel
Well, uh, the index funds that I own have big positions in Amazon, Google, Netflix, Apple. Uh, so the odds are that I have owned more great stocks than you, Mr. Stock Picker, have.
- CWChris Williamson
(laughs)
- MHMorgan Housel
So take it. Look, over a long period of time, over a long period of time, I, I'm happy to compare my returns to anyone else's, because look, we know statistically that, uh, people who try to beat the market, 90% of them will fail, which is how it should be. That's... Of course, that's how it is. Like, what kind of world do people expect where everyone who tries to make a fortune in the stock market can? That's crazy. Like, I, I used this as an example before of if you look at college, uh, sports players, what percentage of them make it to the pros? It's like two to 5%, depending on what you're looking at. Uh, no one says that's wrong. No one says that that's bad. No, no, no one says college sports is a fraud. People just say, "Look, it should be hard to make it to the pros." That's exactly what you would expect. The pros are the pros because it's the best of the best. And beating the stock market is the same, which is why 90% of people who try it over the time fail. Which means that myself, as an index fund investor, I almost, almost certainly, by definition, will be, will end up the course of my life in the top 10% of money managers. Which is just to say, like, people can criticize it all they want, but over a period of time, I'm, I'm happy to compare our returns. Especially because the index investor probably has the highest odds of leaving it alone and actually letting it compound for 50 years, versus the, the fund manager who might... You know, fund managers retire, or they go on to do something else, or they... You know, they, they reach a rough patch and their clients take out all their money. I, I think I have the highest odds of just keeping this and letting it compound for 50 years than I would if someone could... Uh, than in an active strategy. That is not to say, and this is where I differ from a lot of index fund investors. Do I believe that some people can outperform the market over time? Yes. Do I believe that there are people who can pick winning stocks better than I was? Yes, 100%. And a lot of index fund investors will tell you, "No, it's just impossible." Uh, I won't tell you no, I just think it's hard. I think just like... Are, are there, are there college basketball players who will go on to be better than LeBron James? Yes. It's hard. Not very many of them. Of course it's hard, but yes, of course it's possible and it exists. So that's, that's just, that's where I land on the, on the investing strategy. I also make this important point, it's probably the most, the most important point, that the way I invest works for me. It might not work for you. And I don't mean that in a dismissive, passive-aggressive way. If it, if, if something works for you, then, then do it. This works for me. This is how I, uh, keep my head on straight and be happy and go to bed at night saying like, "I'm really happy with my finances." If you have a different strategy that works for you, 100%, that's the one that you should pick.
- CWChris Williamson
Another thing to consider is that your particular setup financially permits you to not have to do work. Once it's in, it's in, which I, I guess is also a, a good, uh, strategy for sex, that, you know-
- MHMorgan Housel
(laughs)
- CWChris Williamson
... it's just there, it's in, we leave it there. We don't, we don't take it out, not until the, the time is right. Um, and-
- MHMorgan Housel
I was gonna say, there, there is some conclusion, but yeah, that's fine.
- CWChris Williamson
Yeah (laughs) . Um, whereas, what's the cost? We talked earlier on about like unseen costs of money. If your investing strategy, if you're scalping and y- you've got to wake up and have a, a line of cocaine and five coffees before you begin your workday and sit down at your seven, seven-screen supercomputer that you've got set up in your, in your office or whatever, that is a very different sort of life. Now for some people, there is, there are some people out there who are built for that. They love the adrenaline.
- MHMorgan Housel
Yes.
- CWChris Williamson
They love the anxiety. They love the, the rush of just picking it perfectly, deploying the trades, all the, the take profits trigger at the right... Blah, blah, all this stuff. And then there's other people, and there's everyone in between.
- MHMorgan Housel
Yes.
- CWChris Williamson
And for me, my particular lifestyle is anything for an easy life. I want as much passive investment as property. That here's something I haven't even said. I know a lot of people ask. I own a, a few houses in the UK that are buy-to-lets. I rent them out to students and to young professionals. I'm going to pivot to become managed from probably later this year. Uh, and that is simply for this situation. I've done-
- MHMorgan Housel
Yes.
- CWChris Williamson
... another round of move-ins, uh, June, August and September.... and the tenants are lovely, but it's just too much of a headache. I can't be arsed to do an inventory again. I can't be arsed to, to, to tell them how to work the washing machine, or where the stopcock is, or why the, the, this, like, the banister's a bit wobbly or any of that. I don't want to deal with it anymore, and I'm happy to give away 8% a year of that to make it someone else's headache, right? But that's-
- MHMorgan Housel
Right.
- CWChris Williamson
... the only reason that I know externally what I want is because internally I've done the work. I've aligned-
- MHMorgan Housel
Yes.
- CWChris Williamson
... my financial setup with my psychological makeup, and that's what-
- MHMorgan Housel
And-
- 1:00:00 – 1:07:27
Yes. …
- CWChris Williamson
who found the infinite money glitch by moving it between Robinhood-
- MHMorgan Housel
Yes.
- CWChris Williamson
... Robinhood Cash and Robinhood Gold? So that was part of WallStreetBets as well, and this guy turned, like, $1,000 into $50,000, then managed to get himself into like half a million... And it went, it was on Bloomberg, like, um, Business and all this sorta stuff.
- MHMorgan Housel
Yes.
- CWChris Williamson
It made national press. Dude, it's, it's phenomenal. Speaking of phenomenal trades, can we talk about Bill Ackman this year?
- MHMorgan Housel
Yeah. I mean, he's-
- CWChris Williamson
Holy sh- shit. Can you-
- MHMorgan Housel
Yeah, I mean, he's, he's swung for the fences a lot. Uh, I, I, I don't, I don't know a lot of the details about it. I, I, if I recall right, so I might be getting this wrong, but he was, he went on CNBC in like March and was talking down the economy, "We're all going into the Great Depression," and then it was revealed that he was short the market. Is that, is that the, the gist of what it was?
- CWChris Williamson
He put a very specific type of insurance onto his trades, I think. I don't necessarily think that he shorted the market. I think he put a very specific, very expensive type of insurance on his trades that protected him against this, this exact thing. And he...... the returns that he made was in the billions, so they're calling it the new Big Short, which obviously-
- MHMorgan Housel
Yeah.
- CWChris Williamson
... the movie made about. But the difference is that Ackman's short took six weeks. It took six weeks to happen.
- MHMorgan Housel
Not, not, not five years like the actual Big Short with the housing market.
- CWChris Williamson
Exactly, exactly. So that ... I mean, Bill Ackman, for all that he, he ... is, is he tried to take down Herbalife, he's been in some sort of ... He's one of these guys who's super, um, uh, prevalent, very, very prominent as well, like, a high visibility when it comes to especially short, like, short investing. But fucking hell, man. Like, what do you say to that? What do you say to a guy who makes his investors, like, billions in weeks?
- MHMorgan Housel
You only need to do that once or twice in your career, and then the rest of the time, you can do whatever you want. You can go buy whatever mansion you want, go to every club that you want, get in all the trouble that you want. If you have one of the ... If you have two of those in y- in your career, then yeah, that's your free pass. But I think that it ... Look, let me make a serious comment about this. A lot of ... No, not a lot. Every one of the best investors over time, um, their career success is tied to a handful of trades. And what they do in the other years don't necessarily matter. They don't move the needle. It's like once every 10 years or once every 20 years, they completely knock it out of the park, and then the other 19 years, they're just kind of meddling along. That's always how it works. So I think the Bill Ackman story is instructive because that's how it works for everyone. Berkshire Hathaway, Warren Buffett. Uh, but, you know, Munger said, "If you take Berkshire's top five investments out ..." They made dozens of investments. Take out five? Their, Berkshire's long-term track record is average, and it's just five big investments, Geico, General Re that have really moved the needle. And, you know, Apple is the other one. Berkshire's made now something like $100 billion in profit. If Berkshire makes $100 billion in profit, all the other little investments that people, you know, look at or the, the other failed investments they
- NANarrator
(mouthing words)
- MHMorgan Housel
... made, none of that matters. Make 100 billion from Apple, wa- wipes everything else away. So that, like, tail-driven success that we see with Ackman, that's, that's ubiquitous across all very successful investors.
- CWChris Williamson
What's happened with Tesla and Apple this year? Is the market sentiment and the price just become completely unhinged from the real world? What's going on?
- MHMorgan Housel
Yes, completely. But then, but the really important question is, how long can that last? Like, just because you found something that is unsustainable does not mean you know when it's going to become more sustainable. Like, things can ... So if ... Is it crazy today? Yes. I, I, I, I joked with a friend. I, I, I wasn't joking. I said, "I feel like there are as many Teslas as Hondas on the road these days." I f- I see Teslas ... I live in Seattle. They're everywhere. And he said, "Okay, you're wrong. Honda sold 10 times as many cars as Tesla." But let's assume you're right. Let's assume Tesla sales are equal to Honda sales. Honda is worth one-tenth of what Tesla is, one-tenth. If ... Their sales are 10 times higher, and the company's worth 10 times less. So th- yes, you look at something like that, and it's like of c- of course it's ridiculous, but that does not mean you know when it's gonna turn, or it does not mean that Tesla cannot increase another tenfold from here. Like, just because something is crazy does not mean you know the boundaries of insanity-
- CWChris Williamson
(laughs)
- MHMorgan Housel
... uh, is, is, is what it, what it comes down to. So that's ... I, I, I, I don't, I don't, I don't have any bets or I don't know where it's gonna go. Betting against Elon Musk has never, has never worked out for anyone. There are a lot of people who are totally convinced that Tesla was a short at $100 a share, and then it went to 3,000 or whatever it was. So, uh, it's fascinating to watch, but I, I don't, I don't place any wagers on where it might go from here. Never underestimate people's ability to, like, fuel crazy things for longer than you might think.
- CWChris Williamson
And never underestimate Elon Musk. That's definitely something to take ... Any man that can drill holes under the ground and then fly cars along it, uh, you just don't wanna, you don't wanna mess with him. So we'll finish up-
- MHMorgan Housel
When he was, like, 29, he made a life bet to colonize Mars. You're gonna bet against someone like that? What were you doing at 29?
- CWChris Williamson
Yeah. No. (laughs)
- MHMorgan Housel
You weren't colonizing Mars, were you?
- CWChris Williamson
I was not colonizing Mars at all. No. Yeah, exactly.
- MHMorgan Housel
(laughs) So, of course, he doesn't ... Of course, this is a guy who does not think the normal rules of corporate boundaries and innovation boundaries apply to him.
- CWChris Williamson
Didn't he get taken off the-
- MHMorgan Housel
Of course he doesn't.
- CWChris Williamson
Didn't he get taken off the board of Tesla after he got accused of, of stock manipulation through tweeting? So he got-
- MHMorgan Housel
Uh-huh.
Episode duration: 1:12:07
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