Modern WisdomThe Best Ways To Build Your Personal Wealth - Nick Maggiulli
EVERY SPOKEN WORD
150 min read · 30,052 words- 0:00 – 1:52
Intro
- NMNick Maggiulli
... concentrate to get rich but diversify to stay rich. I think you can get relatively rich through diversification. I don't think you need to concentrate. For most people, they're probably going to be fine, have a great life, live a decent life with that type of lifestyle. And it's much easier than trying to concentrate and then you get hit with some crazy risk and then you lose more money or something. You know, it's really tough that way. (air whooshing)
- CWChris Williamson
The world of personal finance I find quite interesting because it's similar to diet in that everybody needs to eat. Similarly, everybody needs to have money and earn money, and yet it seems like there is no widely accepted wisdom about the single best way to construct your financial life. I understand people have different requirements, but it does kind of surprise me a little bit that it's still so contested even though everybody should have an opinion on it.
- NMNick Maggiulli
Yeah, definitely. I think it's contested for a host of reasons because I really don't think there's, like, one right way to do it. And I kind of... You know, I've discussed this a little bit. Like, there's that, uh, I think that line from Anna Karenina which is like, you know, "All happy families are the same, but all unhappy families are unhappy in their own way." Well, it's kind of the reverse in wealth management, which is... Or start with, like, building wealth. Like, there's, like, only a few ways you can go broke, but there's a lot of different ways you can get rich, right? There's people who got rich in real estate. There's people who got rich buying stocks, individual stocks, you know, index funds, you know, you can name it, farmland, whatever. There's a lot of ways people get rich, but everyone goes broke one of, like, a couple ways. It's usually high risk, high spending, or leverage, or some mix of those things there that usually causes it. So that's kind of how I look at the world. So I think that's why it's contested, because there's real estate people saying, "You have to own real estate. You have to do this." And there's stock market investors saying, "No, real estate's dumb. I don't want to waste time doing that. The hassle of a, of frozen... the pipe that bursts." And there's always that same tale, right? And I think they're both wrong. I think there's both... There's pluses and minuses and everyone has their biases, and I can get into mine, but I think that's why it's contested.
- CWChris Williamson
Yeah, you're probably right.
- 1:52 – 7:27
Biggest Myths of Personal Finance
- CWChris Williamson
What do you think are the biggest myths in personal finance? I've only a couple of times, uh, dropped into Fin Twitter, which I didn't even know was a thing.
- NMNick Maggiulli
(laughs)
- CWChris Williamson
Um, but I've been CC'd in a couple of times, and it's a, it's a complete cesspool. Um, so yeah, talk to me about the biggest myths that exist in personal finance.
- NMNick Maggiulli
So I'll just... I'll talk about three of the biggest myths in, in personal finance. The first one I think is that you can, um... Cutting spending is, like, a reliable way to build wealth. Now, unless you have really high income and you have really high spending, that's the only way it's going to work. For most people, cutting spending just isn't, like, a reliable way. And the reason I say that is because if you actually look at the data, and I was using, you know, data in the United States on, you know, how households spend money, there's not much to cut for a lot of lower income households. And the, and the fact is the savings rate is positively correlated with income. So as people's incomes go up, their spending does go up, but not as quickly as their income. So that difference is how you save money. It's pretty obvious. And so-
- CWChris Williamson
So, so the best way to actually save money in a, a psychological way is actually to earn money because you're going to end up outearning your ability to spend?
- NMNick Maggiulli
Yes, generally. I mean, of course there's... Everyone's going to be like, "Well, I know this person who spends all their money." Well, like, yes, that's the exception. Most people with higher income don't do that. And I think... And obviously some people are going to hear this and say, "Well, that's very obvious to me." And I'm like, yes, that's an obvious point, but there's a lot of people... I mean, there's still a lot of personal finance gurus that say you need to cut your way, you need to get rid of your lattes, you need to stop doing this and that. And I think anyone who's looked at the data will see obviously, like, it's clear that incomes go up with savings rate. Like, savings rate is positively correlated with income. The higher your income is, generally the higher your savings rate. That's, like, been empirically proven across a lot of studies in, in a lot of ways. So that's the first one I'll talk about. The second one I think is more of an investing question, which is, like, there's this idea of like, "Oh, I'm waiting to buy the dip. I'm just going to save cash until I buy the dip," right? And I think this, um, this one's a little bit more difficult to understand, but I think it's a subpar strategy because generally most, you know, equity markets over time have gone up and to the right over the long term. So by sitting in cash, you're usually going to lose out because you're waiting for that dip, and by the time that dip occurs, you're now buying at a higher average price. And so, like, imagine the, the price is 100. You're like, "Okay, I'm going to wait till there's a 20% dip, then I'm going to buy." Now the price goes to 200, right? And now let's say there's a 20% dip. So 20% of 200 is 40, so 200 minus 40 is 160. So it goes from 100 to 200. It goes down to 160. Now you buy. You're like, "Wow, I bought this dip. I'm so smart." But it's like you just bought 60% higher than what you could have bought, you know, before. Now it's, it's usually not that drastic, but imagine that on a much smaller scale, right? And so that's, that's why, you know, waiting to buy the dip doesn't usually work. And, and behaviorally it's really tough because while the market's dipping, it's the time when you're going to be least enthusiastic to buy. You're not like, "Oh my gosh." You know, March 2020, if you were like, "Oh wait, this is a deal," and then, like, you bought, and then it's like, oh wait, it went lower and lower and lower. And then you're like, "Oh my gosh, I didn't get a deal after all." So you're gonna beat yourself up. Um, so that's another thing. And the, the third piece of that is like even if you, you win now, what... You're gonna think you're a genius, and then later you're going to hold cash and the dip's not going to come 'cause those dip, big dips are rare, and then you're going to miss out. So I think that's the general course of history. And so that's another myth which I would like to smash. Um, and let's just do a third one. I usually talk about 401 (k) , but I know, like, I knew you have probably a more global audience, so let's not discuss 401 (k) 's and, like, stuff in the US. Um, the third big myth I think is out there is that everyone says, like, debt is bad. There's a lot of people that think debt is bad. I think debt is... can be good or bad. Depends on how you use it, and depends on kind of your, you know, your what's going on in your financial situation. So the thing I like to say is debt is best for people who don't need it. If you don't need debt, you can use debt really well. For example, I'll use a very extreme example. A lot of the super rich, like Elon Musk and people like that, they use debt all the time. And it's like, how? Because they take their assets, they give them up as, like, collateral, and then they borrow against it because rates are so low. So they end up not having to sell anything, sell down their equity, have to pay taxes. There's a lot of benefits to that when the, when the after tax yield on selling your, you know, your capital gains and everything is higher than what you would get from just paying the interest rate. So I think there's a lot of ways people can use debt, um, in a smart way. And I just think you have to... If you don't really need it, then it's really useful to you. It's kind of one of these ironic things, you know. Like rich people get paid a higher interest rate because they have more money in the bank than poor people, right? It's like, it's very weird how that is, but that's just like a general rule of life and that's the same thing with, with debt as well.
- CWChris Williamson
Yeah.
- NMNick Maggiulli
So those are kind of three, three myths.
- CWChris Williamson
Would you say that people that are highly leveraged, if they've got a property portfolio, whatever, 25% loan to value, um, is that the same thing? Would you consider that being like a, a smart use of debt, so to speak? Because I'm leveraged up to my eyeballs when it comes to the property portfolio that I've got in the UK.... but-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... all of those are positive, uh, cash generating machines. They're all-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... sitting at a good interest only mortgage, et cetera, et cetera. Is that another way to look at it?
- NMNick Maggiulli
Yeah, I think, I think that's how you have to look at it is, like, how much... Yeah, it's debt-to-leverage ratios matter. That, that matters a lot. And I think in terms of leverage, whether, it depends how you're using your leverage and everything, but I think, like, the leverage thing I like to look at is, like, Warren Buffett never went over, like, 1.5 to one, and that's like, he was a stock investor, obviously, right? He wasn't buying property. But if Warren Buffett never took more than, you know, 50% above his capital in leverage, then, like, you definitely shouldn't, right? So like (laughs) this, it's about how much you do it. It's how much and how much you want to, you know, crank that up, right? I think that's the key. And so obviously, there are probably certain cases where if there was some sort of crazy, you know, local event that, like, happened to hit all your properties in a way and you didn't have enough insurance, like, there are cases where you can still get wiped out, but they are probably very, very, very rare and very unlikely. They'd have to be like almost world ending, and in those cases, like, your investment portfolio
- 7:27 – 11:44
Should I Save or Invest?
- NMNick Maggiulli
doesn't matter. So it's another thing I talk about a lot.
- CWChris Williamson
There's bigger problems. Yeah, there's bigger problems.
- NMNick Maggiulli
Yeah.
- CWChris Williamson
If that, if the stock market does go to zero, if the S&P pulls-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... back by 80%, you've got concerns about people-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... fighting in the streets and, like, Mad Max going on outside. So yeah, I understand. All right.
- NMNick Maggiulli
Yeah.
- CWChris Williamson
So let's, let's, let's begin. You, you, what I like about the new book that you've just released is that you break up personal finance into sort of its two components, like the saving/earning and then the investing, right? So income and the output, I guess, on the other side.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
So how do people know which one they're supposed to focus on first?
- NMNick Maggiulli
Yeah. So in the first chapter of the book, I talk about something called the Save-Invest Continuum. And everyone's on this continuum, everyone on the planet. You just have to figure out, you just need two numbers and you can figure this out. First number is how much could you save in the next year, assuming it's a positive number, right? If it's negative, that's a (laughs) we, that, we have all sorts of other issues there. But let's assume you could save, like, I don't know, 1,000 bucks, 10,000 bucks, whatever, 10,000 pounds in the next year. That's your first number. Your second number is, how much can your investments earn you in the next year, right? So the example I always give is, let's say you had 20,000 pounds or something, and you're getting 5% on that, you know, so that's 1,000 pounds a year. So you have 10,000 pounds you could save, you know, in a year, you have 1,000 pounds you can earn, right? So that's 10 to one. Whatever one's bigger, that's where you need to focus. And so what, what do I mean? So in this case, if you could save 10,000 pounds a year, but your, your income can only, or your investments can only earn you 1,000, you need to find ways to keep, get that money and get it invested. So you raise the other number. You want to raise the investment number as much as you can until it's, like, almost equal to what you can save, right, ideally. And over time, you should see this happen with the growth in the market. Like, when I first started this, I had almost no investment income, right? But I could save a lot more money. And over time, I basically started saving. And now I'm at the point where I, I basically can save as much as my portfolio can earn me in a good year, assuming there's a good year. Obviously, if there's a down year, it doesn't, you know, it's not gonna matter. But if there's a really bad down year, I couldn't save my way out of it. Like, it would take maybe two years of income, of savings to get my way out of, like, a bad year, assuming like, assuming I sold. I'm not gonna sell, but let's assuming I sold, right, and I had to, like, make up with that cash, it would take, it might take me a few years. So that's, that's a simple example. You just see like, where am I focusing? And over time, what you should see happen is you should move from the savings you can save more to over time, your investments should be able to earn more than you can save, right? And, and the simple example does this, right? Imagine you're 23 years old, you have 1,000 pounds in your, um, whatever, in your brokerage account or whatever. Even a 10% return, that's 100 pounds. That's nothing. You can go spend that out at the pub or whatever very easily, right? But now imagine, you know, you have 10 million pounds, you know. Even a 10% drop in your portfolio is a million pounds. That's, like, a lot of money, right? You're not gonna be able to save, unless you have a really, really high income, you're not gonna be able to save a million pounds in a year, right? So those are extreme examples, but they show, like, in certain cases, investing is everything, and in other cases, all about what you can save. And so usually, that's correlated with age too. So that's the thing to think about there.
- CWChris Williamson
What does that look like practically when you're saying you need to focus on saving or you need to focus on investing? Like, how does that manifest in people's lives?
- NMNick Maggiulli
Yeah. So for, I'll, the example I'll give, when I was 23, I was spending way too much time on my investments. What do I mean by that? I had spreadsheets about, oh, here's my allocation, here's, I'm gonna optimize this, and oh, should I be 5% bonds or 10% bonds? I'm caring about all that. What I should have been doing was building my skills, you know, networking more with my career, doing all that to focus on the income aspects of my financial life, not the investments, 'cause I didn't have that much money to invest, right? And so what does that mean on the opposite side? Let's say you're 65 years old, you're retired, you can't really save anymore. All you have to care about is like, what am I doing with my investments? I need to care about taxes. I need to care about tax yield. There's all sorts of things that when you're 22, it doesn't matter. You're like, "Oh, should I do, like, a Roth IRA or a normal IRA, or should I put it into 20% bonds or 10% bonds?" When you're 22, it doesn't matter. It really doesn't. O- outside of, like, a couple lucky people who bought an NFT that went up 10 trillion percent, it d- that's very rare. That should not happen again. Those things are incredibly rare. Like, outside of those exceptions, like, it's not gonna matter. Like, your asset allocation is not gonna matter that much. It's gonna matter a lot more when you have a lot more, you know, money at stake, basically. So that's, that's where to think about. When I say where to focus, I mean like how much time and energy, what are you focusing on? Are you caring about taxes? Are you caring about risk? Are you caring about things? That's the investment side. Or are you caring about your career and how you're gonna build income? That's the saving kind of earning side.
- CWChris Williamson
What do you think
- 11:44 – 18:58
Crypto & NFT
- CWChris Williamson
NFTs and crypto and these huge balloons in individual personal wealth that's been facilitated pretty much exclusively in the last 10 years... I'm sure that you could probably give me an example from history when some stock's gone, gone wild as well, but you know-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... like ballistic, neat WallStreetBets, sat at home people that are being made. What do you think that's teaching us about what it means to either be rich or be financially successful or be wealthy? 'Cause I have s- some concerns about what I think this means sort of on a broader psychological, uh, basis for people.
- NMNick Maggiulli
So I think if you had asked me this question in November 2021, it would have been a far more, it would have been a far better question because back then, all the tech stops, and all the tech stocks in the US were up a lot.... crypto was up a ton, right? Right now, a bitcoin, as, as of this recording, is trading at 40K, which is, like, not half but, like, a l- you know, a little more than half below where it was, right, its peak. So you start thinking about all these things and, like, if you had asked me that back then, the lesson was, "Oh, everyone gets rich, but it's a bull market." Now that these things are down 40, 50%, there's a lot of people who got rich in 2021 that are now seeing those losses and in big ways. Now, of course, those people that got into crypto and NFTs in the early, you know, 2018, 2019, 20- when all these things started popping, they're doing very well regardless. Um, I hope it doesn't teach the wrong lesson of like, "Oh, I'm, I'm smart and I did this." And some of these people, I'm not saying you're not smart, I'm just saying you might have gotten lucky. And if you, if you recognize there's some luck in this process, that's what's important. I'm not saying you're not smart. Like,, uh, you saw something I didn't, that's true, but does that mean you're gonna see every other thing that someone else isn't gonna see? That's the question, and so-
- CWChris Williamson
Dude, Nick, Nick-
- NMNick Maggiulli
... just be a little humble.
- CWChris Williamson
... some people, some people saw something that you didn't. Others just fucking memed their way to multimillionaire status. Like, don't get me wrong-
- NMNick Maggiulli
Yes.
- CWChris Williamson
... there are, there are people out there... I have a friend, uh, who told me about Ethereum in 2016 when it was $23, and I put about £1,000, maybe £2,000 in, and it went from 23 to 110, and then it had a little pullback. And I was like, "Right, cool, I'm out. Fucking yes, bro, 4X'd my investment."
- NMNick Maggiulli
(laughs)
- CWChris Williamson
And I, you know, that, that to me still now is like w-... And, and it was in, uh, eToro as well, so it was, um, it would've been tax-free 'cause it's just whatever bet, bet spreading or-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... whatever it's called.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
Um, but (laughs) the concern that I have, especially around sort of the NFT craze and, and, and crypto and stuff like that, it seems to me that there is a big chunk of people, this isn't everybody, a big chunk of people who do not give a single fuck about the fundamentals, about the technology, about what it can do for people in war-torn countries like the Ukraine who can't send money back to their families, people that are under dictatorial rule that g- have got whatever financial, uh, uh, bureaucracy that's stopping them from doing stuff. That's what they say. It's, uh, how would you say, um, ruthless capitalists masquerading as good Samaritans. And you go-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... "Dude, if it wasn't for the fact that you can make millions and millions of dollars off this, would you still care?" No, you wouldn't. No, you wouldn't.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
And fuck off-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... if you say that you would. You would not give a single-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... shit. You like the fact that it's, you can sit in a hoodie and meme your way to millions of bucks. That's what you like about this.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
You won't tell me-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... that it's... Again, there is technology that underlies NFTs that may be useful in the future. There is technology that underlies the blockchain that almost certainly probably will be useful in the future. But don't start fucking telling me about why, like, Cardano ne- is this beautiful thing and it's gonna change the whatever. It's like, no, bro. You're, you're long on, you're long in this fucking investment. Like, you have the- (laughs)
- NMNick Maggiulli
Yeah.
- CWChris Williamson
... the highest number of, uh, perverse incentives here. Fuck off.
- NMNick Maggiulli
Yeah, the skin's, skin's in the game, right? Yeah, even, like, I'm a big proponent of stocks and low-cost stock index funds, but even, like, my, you know, of my equity portfolio, which isn't even, you know, it's only like, I think equities are only 70% of what I own, right, in total, and you know, the rest is bonds and, and you know, I do own some crypto and some art and some other things, right, so that's the rest, but some REITs as well, but... So of the 70%, only half of that's in US stocks, right, 'cause it's kind of close to like... I basically try to get a market weight cap. So, like, my total investment portfolio is, like, maybe 35% US stocks. So even if I'm like, "Yeah, you guys should buy, like, US stocks or whatever," like, that's only benefiting me 35% of, right... You know, versus someone who's like 100% Cardano, I, I agree with what you're saying. And yeah, there's, there's obviously gonna be those types of perverse actors. Some people just do it for the fun. They're just, it's their momentum, they're really momentum traders. That's what they're doing. They're following momentum, and that's fine. That's a, that's a strategy that's worked. But it's really tough, 'cause when it turns against you, it turns against you really badly. So, you know, I know the data on that, and I don't recommend that people go out and just try and do that type of stuff. I think it's very difficult to do, especially over the long ru- long run. But yeah, you're right, I think it, it could be teaching the wrong lesson to people. But, you know, what I say is, you know, a- a- as long as people have, like, tried to help and try to tell people and try to get the message out there, like, you know, at the end of the day, it's like, you know, there's a great book, Devil Take The Hindmost, you know, just let it, l- let chips fall where they may, you know. We can, we can try so much, but at some point, you have to be like, hey, like, you made the choice, you know. If someone's lying to somebody, that's one thing, but if you're really trying to, like, get the message out there, help people, and these people are still like, "Ah, you're stupid, I know what I'm doing," then, you know, what can I say to you? So...
- 18:58 – 22:49
Spend Less or Earn More
- NMNick Maggiulli
So...
- CWChris Williamson
Okay. So getting back to the way that people look at saving. Uh, you mentioned-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... there about the difference between spending less or earning more, and-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... there's a, a good debate around this. There was always something icky... not icky, that's the wrong word. There was something that I didn't like about the FIRE movement, the Financial Independence Retire Early, and-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... I, I think it, it was a combination of this kind of like overbearing frugality with an- a complete obsession in young age about finances, and the fact that you kind of need to put your nose to the grindstone to get that going. Um, so stripping all of that back and all of the ideology that's around this sort of stuff, what do the stats say when it comes to spending less versus earning more?
- NMNick Maggiulli
Yeah. So we talked about this a little earlier, but basically, like, when you earn more, like, that's very highly correlated with savings rates. So, like, the more you earn, your spending doesn't generally go up with your, with your higher income. And you can look at this across, like, income dec- or I'm sorry, um, income quintiles, you know, groups of five, right? 20... you have, you know, the bottom 20%, the 20th to 40th, et cetera, right? And you look and you see. You say, "Okay, here are the income, um, quintiles here. How much are each one of these groups spending?" And you look in each one of those quintiles and you see the spending does increase as it goes up, right? As you would expect, right? People generally who earn more generally buy nicer stuff. But it's not that much nicer. I call it, like, the law of the stomach. Like, it's not like if you earn ten times more than me, you're going to eat ten times more calories, right? Like you're just gonna eat... you know, you might even eat less calories for all we know, right? So it's like... it's one of those things where, like, you know, at some point your consumption is not going to keep going up. Now, there are people, you're like, "But I know someone who's like..." Yes, there are exceptions to the rule, but they're exceptions, right? And I think... I love this. I love when people say, "You know what?" Like, "Cutting spending is everything, controlling your spending is everything, because, like, look at these rich celebrities that went bankrupt." Like, "Look at this rich celebrity, that rich celebrity or this." You know, and they'll have, they'll have, you know, a good number of examples. They may have 10 examples, right, of celebrities that went bankrupt. But I'm like, "Okay, you have 10. I have every other celebrity." Like you're- you have N equals 10. I have N equals number of celebrities minus 10, right? It's like-
- CWChris Williamson
(laughs)
- NMNick Maggiulli
It's like, are you thinking about what you're saying? You know, it's like you're- like, you're literally... Like, every- I could name every other celebrity that's rich, right? Too. And that's like a lot of the stuff in this space. It's like, I don't really care as much about mindset. I know mindset matters for raising income. I know it matters for, you know, getting yourself motivated. I would not debate that. But, like, mindset's hard to test. And until we can get some sort of brain monitoring so we can understand mindset, I think the data shows it's income. Like, for example, I know nothing about The Rock or Oprah, right? Or any other... you know, pick a... or, you know, Paul McCartney. I know nothing about how they think about money and their money mindset, right? Someone may know something, but I don't know. But what I do know is they all have high income, right? They all have, you know, wealth of some sort that provides them with income. And I know that with, with a fact. So I know that they can probably save decently because they have high income. I don't know if they're good with money. They could be terrible with money, but they're still not terrible enough to offset their massive amounts of income, right? That's the key, you know? So I think thinking about that is what's important. So just... you know, that's why I try to challenge these types of things.
- CWChris Williamson
Well, the reason that The Rock's rich isn't because he's optimized his Avis points on his, like, flyback miles and stuff.
- NMNick Maggiulli
(laughs)
- CWChris Williamson
I've just never found-
- NMNick Maggiulli
He may be doing that.
- CWChris Williamson
Oh, well, you've probably got a guy that does that, but-
- NMNick Maggiulli
Yeah, yeah.
- CWChris Williamson
There's, there's a... I don't know what it's called. Do you know what it is? What's that group of people that do YouTube videos about how to get all different special types of cashback and, like, hack cashback with different cards?
- NMNick Maggiulli
You mean, like, rewards card stuff?
- CWChris Williamson
Yeah.
- NMNick Maggiulli
I don't know what they're... credit card hacking or something?
- CWChris Williamson
Yeah.
- NMNick Maggiulli
I think I've heard of it. I know what you're talking about. I can't remember the name. PointsGuys-
- CWChris Williamson
Dude, there's a-
- NMNick Maggiulli
Like, that's like the website for this. Yeah.
- CWChris Williamson
There's a huge, huge community of these people on YouTube. And I kind of watched a bit of it and I was like, "I'm so not compelled by this." It just seems to me it's such a more sort of forward-focused, growth-oriented strategy to go after earning more, whether that be through not necessarily always working harder, but looking at leverage. Look- like leveraging your skills, leveraging your network, so on and so forth. So yeah, I think we're in sympatico there.
- 22:49 – 31:52
Guilt-Free Spending
- CWChris Williamson
Uh, talk to me about being able to spend money guilt-free, because this is something that I, uh, struggle with chronically.
- NMNick Maggiulli
Yeah. So I think there's two things to focus on when you're trying to spend money. The first is, like, think about what fulfills you and find y- and you have to... the hard part... This is kind of a philosophical debate. You have the sorts of like... people have been asking this for, you know, thousands of years. You know, know thyself, right? That type of, like, philosophical... Like, the better you know yourself, the, the easier it is going to be for you to spend money. And what do I mean by that? It's like I, for example, don't spend a lot of money on clothing necessarily. Like this is, this T-shirt's like $8 from Amazon or something. You know, I don't spend a ton. I don't have a car. I'm 32 and never had a car, always lived in big cities. Uber and, you know, Subway everywhere. But I do spend a lot on restaurants. I live in New York City. I like going out to nice restaurants. I will spend what some may consider an exorbitant amount of money in restaurants. That's fine, because that's what fulfills me and that's what I like. Just like someone else may like a fancy watch or a fancy car, et cetera. I think the most important thing is to figure out what you like. And don't always listen to studies. Studies help a lot. They can help guide, but you need to test and learn basically. And I think... Let me give you an example of this. For example, you've probably heard or your audience has probably heard, like, hey, you know, experiences fulfill people more than material goods, like a fancy car or watch. It's better to go on a vacation than have a nice watch, right? But that's the average result, right? You have to realize, like, if most people, let's say if like s- you know, 60% or 80% of people are extroverts. I don't know the exact number. If that's true, then if you ask most people, they're going to be like, people that like to go out and do stuff, they are going to prefer to spend their money on doing stuff, like going out, being extroverted. But if you're, if you're in the minority or you're not one of those people who enjoys that and you're just listening to what everyone else is telling you, you're going to make... you're going to go on these vacations and be like, "I didn't really like that that much. I actually would prefer to stay home and like have a nice watch and maybe go to a, like a local restaurant or something." I don't know, I'm just coming up with theories here. But you, you get my point. Like, don't just listen to what everyone else says and s... I mean, data matters, don't get me wrong. I'm the biggest proponent of data, but it's a guide. It's not like a foolproof thing. You need to really understand yourself. So in terms of how to spend money skill-free, fulfillment is the first one. The second thing, I use, like, tricks. And so one of the tricks I use is called the 2X rule. It's very simple. Let's say you wanted to-... buy a pair of shoes that cost, like, I don't know, 300 pounds. Very expensive, nice dress shoes, you wanna have them for a long time. But you're like, "Oh, that's kind of a splurge for me." So if I'm gonna spend 300 pounds, I'm gonna save another 300 pounds, so 2X, so 600 pounds in total, and I'm gonna, you know, invest that in the stock market or I'm going to invest that in a property. I mean, maybe you can't, it's hard to do 300 pounds into a property, but you get my point. I'm going to put that into a savings fund that I eventually invest into a property, right? The first thing is fulfillment. The second thing you want to think about is what I call the 2X rule. And the 2X rule is very simple, right? Let's say you want to buy a, let's say, a nice pair of dress shoes. You know, let's say they're going to cost 300 pounds. You want to have them for a decade, you're going to have them for a long time. Um, but that's like a splurge for you. That's a, that's a bit, that's a bit more money than you'd spend on dress shoes. So what you do is you save an additional 300 pounds, so 2X, 600 pounds in total, and you take the other 300 pounds that you're not spending on the dress shoes and you invest it in stocks or you save it to eventually invest in real estate or you even donate it. There's a lot of things you can do to kind of get your mind out of this. So that's what I would say to think about is, like, find tricks you can use to, like, mentally get rid of the guilt. So you're not like, "Oh, I'm guilty. I'm spending this 300 pounds on these shoes." Like, "Oh, well, I'm also investing in my future, so that's great." Or, "I'm also helping a charity I care about." So anything like that would be, would be really useful.
- CWChris Williamson
Where do you think the guilt comes from when we spend money? Why do you think it's there psychologically?
- NMNick Maggiulli
Yeah, so I don't know as much about the UK, but I know in the US there's a lot of, like, messages out there, like, "You should be spending less. You should be cutting your lattes. You should be like..." And that message is being repeated so many times that people get into a space where anytime they spend money, they start getting in their heads a lot. I think that's a lot of it. Another thing is personality. Some people just have a personality trait where it's really hard for them to spend money, and that's, I, that's much harder to get over. I don't know the way to do that. If you, if you're like somebody who just, you know, you just can't spend money no matter how rich you are, I'm not gonna be able to help you with that. You're gonna have to, like, look more into that. Um, but I think that's where it comes from. I think there's just a lot of guilt out there. There's a lot of guilt that we, we put on each other that's not necessary.
- CWChris Williamson
I've got a bunch of friends. We're all working class, right? Northeast of the UK.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
Working class of the working class. And slowly over time, we've managed to clamber our way bit by bit, probably up into middle or upper middle class or something like that. But man, your spending habits... Uh, actually, this isn't true. Some people's spending habits outpace their, uh, movement through the class system. Other people's lag behind, and me and a ton of my friends are, whatever dynamic it is that we have, lag behind so badly. So, so badly. We, I remember (laughs) this one time, a little while ago now, I'm much better than this, but I was mid-20s, right? 26, 27. I've been running this nightclub business for ages and it's really successful, one of the biggest in the Northeast of the UK, and we start opening up other cities, whatever. I remember I was in ASDA, one of our supermarkets, and I was looking at the, um, different types of yogurts that were available, and there was ASDA's, like, finest range, which is the top of the range one, and then there was ASDA's normal range. And I remember spending at least two minutes vacillating between whether or not I could treat myself to get the pack of four yogurts that was, whatever, one pound six, five more or something. And, uh, that was, it was a real formative experience that I had on my own in s- in ASDA looking at some yogurts, because I, I realized, like, at that moment, "Dude, this, it simply does not fucking matter." And then over time, as you start to actually learn a little bit more, especially Naval's book, uh, Eric's book about Naval really helped me with this, that, look, um, with those sort of decisions, just expedite them, optimize for satisficing. Just get the decision done and be happy with the decision. And for me, a lot of the time, the happiest sort of decision that I can make is one that I do quickly. I actually take a lot of satisfaction from just, "Uh, yeah, fine, cool, that one." If I allow myself to sink into the decision for a lot longer, that paradox of choice comes up, I start finding myself being more of a maximizer than a satisficer. Um, but yeah, man, I... There's something about being, having that working class background and, and sort of coming through and you just never... I don't know, if money was not a, a problem growing up, but just you, you were always conscious of, of being frugal, right? And, and sort of not splurging. And there's something, I don't know whether it's hardcoded into your DNA, uh, you can definitely get better over time, but it's very conscious for me to, to spend money. That being said, same as you, if I'm out at dinner, I have absolutely no problem just going to town with crispy brussels sprouts side that's 15 bucks-
- NMNick Maggiulli
(laughs) .
- CWChris Williamson
... for no reason at all, because I just want to taste them. You know?
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
It is strange, the way that we spend our money and the way that we have that. I think the, the psychological impact of that is, um, is pretty unique. You had a story that I enjoyed about the Vanderbilts and their lifestyle creep. Can you tell people that story?
- NMNick Maggiulli
Yeah, so the Vanderbilts, it's actually very funny. So Cornelius Vanderbilt, who was the original, I don't know, patriarch of the family, right? He grew his, he grew the fortune to, like, I think it was $100 million or something in, like, the late 1880s. I can't remember the exact figures. And he gave it all to one of his sons, just one of his sons. He had two sons ʾat time.
- CWChris Williamson
Was that... Sorry, was that the richest... Was he the richest person on the planet at that time or close?
- NMNick Maggiulli
I... He was up there. He was up there. I don't know if he was the richest. He might have been the richest. I can't remember the exact... But, like, he's, like, top five for sure. He's top five, you know, of his era. And he's like, "I'm not going to split my money because I know that's going to split the fortune, so I'm gonna leave it all with my, the son I trust the most." So he gave it m- basically mostly all of it to one son. That son managed it well, and it doubled basically. He just managed the railroad well, like, everything went well, right? Um, I think it was in railroads mostly. Yeah. And so... But then, that's where the problem started. In the next generation, that, that, that family grew up knowing only... You know, think about it, like, Cornelius grew up with nothing, basically. His son grew up with kind of nothing and then they got rich. But his son's son, right? His... Cornelius' grandson grew up in only opulence, right? So that next generation is where everything just went, went haywire, and they just started spending like... They... So I, I don't know if you knew this, but in New York City on, I think, Fifth Avenue, you used to have all these mansions. Now it's all just massive commercial buildings. Imagine mansions, people just walking up into literally the most expensive real estate, just living there. They had all these mansions, all... They threw all these parties. Like, they had... There are stories about parties where they were on horseback, like everyone was on a horse in someone's house, like, dining, eating, like, d- like, networking. I don't even know how you would do that. You ever, you ever been in a place where you have to hold, like, a, you know, a food and eat the food and drink at the same time? Imagine doing that on horseback. I can't even imagine. They were doing that. They'd smoke, like, cigars rolled with hundred dollar bills. Remember, this is in the 1880s or something. It's like absurd. 1890s or even early 1900s, whatever it was.... and there's just this insane amounts of lifestyle creep, which is just unheard of. And it's not, I don't even say it's lifestyle creep. It was just the sense of, like, well they had a very high income and like the- the fa-, you know, Cornelius's son, so the second generation never really spent that much. But then the third generation is like, "No, our spending should match our income," right? And then they just matched and then they basically lost, they lost almost everything in the Great Depression. They had to sell so many things, like they sold, uh, one house at like, you know, 1% of the value they bought it at. Like just fire sale stuff, like it was that bad. No one could afford any of these luxury goods, so they got wrecked. But that's kind of a great story about like what can happen when your- when your spending's, uh, out of control, so...
- CWChris Williamson
Dude, I, that- that shit blows my mind. And it- it is- it is one of those things where you presume that dynasty wealth's just going to continue. You know, you hear these stories about whatever it is, like, uh, if Jeff Bezos drops 100 bucks on
- 31:52 – 37:10
Lifestyle Creep
- CWChris Williamson
the ground, it's quicker for him to earn it again than by his passive interest than it is for him to bend down and pick it up in half a second or something. So you do kind of think that wealth is this unbeatable thing, and I wonder whether... There must come a point, there simply must come a point where the critical mass of your wealth can outstrip essentially any desire to spend it, shy of trying to pick up nation states. You know, if you've got 50 billion or something like that, I actually don't know whether it would be possible for you to... But the point is, going back to that, that this lifestyle creep, right, the fact that your, uh, tastes can outstrip your ability to pay for them, um, over time, and that's kind of the story that I was talking about with the- with the working class thing, and it does really seem to be sort of two types of people. Uh, I can't remember who it was, this was a Morgan Housel quote where he said, um, "LeBron James is rich. The guy that writes his checks is wealthy."
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
Uh, and he's talking about the difference between... Although LeBron James seems to be a relatively smart businessman too. The- that sort of-
- NMNick Maggiulli
Yeah.
- CWChris Williamson
... athlete mindset, you know, like some kid that maybe grows up in the hood or whatever, and then-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... has never had cash, but super Keeping Up With The Joneses, very much bothered about their labels and status and stuff like that. Um, one of the things that I thought was interesting to do with lifestyle creep, y- y- your, one of your solutions to it is to kind of, uh, mediate increases in wealth versus increases in spending, which you can explain in a second. Take me through that, but then also explain, um, how someone that's self-employed, why those changes in income and wage aren't quite sort of as obvious to see. You- you just sort of get big chunks of cash, maybe you're on dividends you're drawing down, maybe you're on a- a higher commission structure. It's a little bit more difficult to do. So how do people, uh, protect themselves from lifestyle creep, and then what do you do if you're self-employed?
- NMNick Maggiulli
Yeah. So to protect yourself against lifestyle creep, I mean I've actually run simulations on this. Like you imagine someone just getting raises over time, and it's like you, straight linear raises over time. Of course that's not exactly how the world's going to work, but if you assume that and you say, "Okay, I'm on like a good decent..." Let's say you're on a decent financial path now. You're like on track to hit your retirement goals, whatever, you're in a steady state we'll call an equilibrium. The question is how much of my raises can I spend to stay on that track? And I find that on, and I show in the book, there's a table. Depends how much you're actually saving now. So if you're a really high saver now, you have to actually save even more of your raise than what you originally saved. And it's very counterintuitive, but we can go into that in a second. Um, basically I say like roughly it- it converged to about 50%. So ironically the number (laughs) in the book is basically 50% because that's where most people's saving, they have lower savings rates, and so if you save half of your raises or big bonuses, you can spend the other half and you, it's not going to affect your financial future, which means you're gonna be able to keep your consumption consistent over your lifetime, right? If you don't do that, if you spend more than that, then you're, at some point your consumption has to drop off or you have to do something else or have some other income that comes later, uh, out of nowhere that- that up, offsets that. So that's one thing to think about. I think what you were talking about, like, you know, LeBron James is rich and the person who writes his checks is, are, is wealthy, right? I think that's just like stock versus flow type thing. Like- like a LeBron James or someone has high income, they have a high flow, but that doesn't mean they have a high stock, right? They have, they don't have a bunch of wealth that's just paying them consistently, right? So, and I think the, you know, the premise of the book, and even when I was talking about earlier, the save-invest continuum, that's the difference between, you know, the flow, which is your income, and the stock, which is your investments, right, and how that's going to lead to your flow, right? So that's kind of the- the thing there. But I think the biggest way to kind of stop lifestyle creep is just to like make sure you don't... I mean I- I give some recommendations in the book. I think the 50% is about right and it actually matches the 2X rule ironically, so it's like very simple to remember. It's like half's for you and half's for future you, so if you're saving at least half of those raises for future you, you can keep doing that pretty consistently. Um, now obviously there are- there are edge cases where that's not true, but I think if you're doing that that's, you'll- you'll be decently well off, right? So you don't have to be saving 50% of your total income, but if you're saving 20% now and then you get a raise, save half of that raise.
- CWChris Williamson
There's a stat or a story that I heard around the government was struggling to get people in the UK to increase their pension contributions, but they knew that they needed to. Uh, and what they found was that there's a psychological... It's loss aversion basically, right, that a- uh, w- coupled with anchoring bias a little bit that like, "This is what I was at before and now you're trying to, what, take more away from me?" Uh, but what they found was that if they suggested to people that when they get a raise that a- a increased portion of the raise was contributed to their pension, uh, people were just well up for ticking that off. So I think that it works, uh, in terms of the stats, it works financially, but it also works psychologically as well. So the pain of doing that, of holding back on, like, money that you didn't have-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... is going to be significantly easier for everyone.
- NMNick Maggiulli
Yeah, that's why I say I think you have to be in a- a decent financial spot initially, 'cause if you feel like you're struggling to get by or you're like, you feel like you don't live the life you want and then you get a raise, you're gonna want to, like, spend all of that to get to where you want to be, right? I'm not gonna lie. Like you're gonna feel that way, right? But if you're like, "Oh my life's decent. I like this. This is good," and then you get one of these what I call positive shocks or a raise or a bonus, then saving half, you can do that, right? So I just... As long as you're mentally in a spot where you feel okay with what your current spending is and how you're saving and everything, that's when the raise and stuff will work. If you're in a spot where you're not, it's gonna be really tough to only save 50 if you just feel like you're just living a subpar life compared to what you want to live. So...
- CWChris Williamson
What about renting versus
- 37:10 – 43:06
Renting Vs. Buying
- CWChris Williamson
buying?
- NMNick Maggiulli
... that's, that's a very difficult question. I think it's probably one of the most difficult questions out there. And my, my lo- my long story short conclusion is I think, you know, at least within the US, most people are going to buy. The question is not if, but when. And I think the main... There's two things I think a- about. One is societal reasons. It's like, you can't rent in certain neighborhoods. You want your kids to go to certain schools? You can't rent. Renters aren't allowed. There is a lot of stigma around renting versus buying, um, that's one piece of it. The other t- thing, which is a big benefit of owning a home, is like, you do lock up your housing costs, right? Like, you- you're not paying the market rent every single year. Like I- I'm been a renter my whole life, so I've been paying the market rent every single year. And going out, I do it basically once a year on average, um, and I go and pay the market rate, right? And so because of that, you know, rents have gone up, and so I'm paying more there. Now, some would say, okay, well if you'd locked in a mortgage in, let's say 2012, I didn't have money, but let's just say I did have money to do that. You know, I could've locked in something great, but I would have to pay for, you know, the taxes on that, the maintenance. I couldn't move, I couldn't be mobile. There's a lot of things. With the- today's world where everything's remote, it's a little bit easier to, to do that, but back in the day I didn't know if I was gonna live and... I started in San Francisco, then I was in Boston, now I'm in New York, so I've jumped around a lot. So, in the book I kind of discuss all the specifics of, well, how much do you have to have ready to, to buy, or, versus rent and all these type of things, but those are the main issues I think about. And even the people that I know that are like very anti-renters, I think a lot of those people end up buying anyways, and if you see, like home ownership rates generally go up with income as well. So, for the most part people end up buying. Um, does that mean you have to buy? No. But I think a lot of people, even those who are like very anti-buying eventually buy too, 'cause they know... It's like, you- it's- you're leveraging too. Like, you think about it, you're... And right now with high inflation, we have very high inflation, I think the print today was 8.5% in the United States. If your payment is fixed but the inflation's high, assuming you're capturing some of that inflation through asset prices, through your job you're getting raises that are matching inflation at least, then you're gonna be paying. That, that, that payment is fixed, but your income's going up. So it's like, imagine, you know... I think the example I give in the book is my grandparents, um, their payment was 270 a month when they, they bought a home for like $27,000 back in like 1972 in California.
- CWChris Williamson
(laughs)
- NMNick Maggiulli
A long time ago. I know it's crazy money. But back then-
- CWChris Williamson
Seven acres with a pool on site and-
- NMNick Maggiulli
Yeah. No, not seven acres.
- CWChris Williamson
Yeah, yeah.
- NMNick Maggiulli
Not a ma- ma- major house. But they, they bought this house and they're paying 270 a month, but 10 years later, by 1982, that payment had been cut in half in real terms. If you just, just adjust for inflation, the same person would... You'd be paying half. Imagine your rent going down by half in the next 10 years. That's what could happen. Obviously that was a very high inflation period, but from now for the next 10 years we could be experiencing that right now, and then 10 years from now that payment's lower because you've locked in when everyone else didn't. So, that's something to think about.
- CWChris Williamson
One of the things that I like about home ownership, at least with the way that I am in the UK... Again, a disadvantage of being from the North East of England, uh, bad weather, uh, not fantastic international flights, and this working class mindset around spending money where you focus o- obsessively on yogurts, but one of the advantages is that the value that you can get from a property is insane, man. Like, I, I've got, I'm just going through on my sixth house, house purchase now, right? Some of those are five beds, the most recent ones are four bed with an en suite in every single room. None of them have ever been more expensive than half the average house price of the UK, if you go on rightmove.co.uk, right?
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
I think the average house price is about 345, and the most that I've spent on any property's, uh, 170, right?
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
Um, I've got my house that I live in, uh, with two, uh, of my housemates that are like my buddies that live there as well. Um, so that... I, I understand one of the challenges people have, if I buy a house then that restricts my freedom, especially if you're young, as people are now marrying later, starting families later, perhaps wanting to be this nomadic entrepreneur thing. Cool. Um, again, it depends on how much headroom you've got above what you're spending, so on and so forth, but I highly, highly recommend for people, if they are keen on putting money into real estate, if they like that security, spending your money by getting a house with at least two other letable rooms means that you basically zero out a lot of the risk. Pretty much all of the risk, right? So, the property that I have back in Newcastle, yes, I'm not benefiting from the fact that I'm living there, which would have been significantly cheaper, but I'm also not losing money by having that property continue to tick over because I've got two guys that live there who pay me their rents for each of their rooms. Now (laughs) , I'm in an Airbnb in Austin at the moment, uh, paying £3,000 a month-
- NMNick Maggiulli
(laughs)
- CWChris Williamson
... because it's a long stay Airbnb. So that, I mean, that stings. You know, I'm paying the mortgage on the house at home, plus I'm paying whatever, three grand to be here.
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
But it still makes sense for me financially. It still ticks over, it keeps everything moving. So yeah, uh, to try and sort of fly the flag for someone who really likes, uh, real estate as an investment strategy, um, but also wanted that freedom and that liberty to be able to move around, thinking about getting a property which you can then, I don't know whether you call it sublet in America, or use, you know, lodges-
- NMNick Maggiulli
Mm-hmm. Yeah, sublet.
- CWChris Williamson
Yeah, lodgers or tenants or whatever that's in there. And by doing it this way, I've got a room in a house in the UK where, if all hell breaks loose, if I've got a catastrophe with the family, if I need to get home for a wedding or whatever it is, that's always mine, that's always there. And there's a cleaner-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... that goes every two weeks for £40 and she makes sure that the entire house, you know, it's not degrading over time, that it's being kept in goods-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
Uh, it's perfect. And that, that to me is a real lovely blend of, uh, of the two. Obviously, again, you need some capital to put up in order to be able to make that work. You need to be in the right place. Mm-hmm. If you're living in London or slightly more expensive cities you're going to struggle because you're just not gonna be able to get on the ladder quite as easily, uh, but that's one of the solutions that I've found.
- NMNick Maggiulli
Yeah. The only, that's the issue with this. It's always relative to your situation, so it's really hard for me to give blanket statements when like, yeah, if you're living in, you know, the North East of the UK it's very different than living in London, very different living in New York City, very different living in like, I don't know, Tennessee or something, you know, rural Tennessee or something in the United States. So there's all these different factors you have to take into account, but I, but I agree.
- 43:06 – 56:22
Investing for Beginners
- NMNick Maggiulli
- CWChris Williamson
Let's say that someone hasn't been interested in investing at all, they've just been spending their money like a, a normal human. What do you say to somebody...... when they say that they can't be bothered to work out investing, why is it for me, I don't really got it, it seems like a lot of work, I don't wanna do it?
- NMNick Maggiulli
Um, think about your future self. I think you have to be selfish. I think you have to... 'Cause if you actually look at s- the data on... they ask people about savings motivations, why they save, save and invest money, and the one that works, they can be like, "Oh, what do you want to save for ga- vacation?" Doesn't work. Save for your children, doesn't work, surprisingly. The one that does is save for your future self. Like, imagine... They've done these experiments where they take your face and they, like, age you with this, like, photo, AI aging stuff, so you see your- you see what you look like as an old person. And I remember this went around at one point, I remember there was, like, this Chinese app that-
- CWChris Williamson
FaceApp. Yeah. It- it was-
- NMNick Maggiulli
Yeah, that app today.
- CWChris Williamson
... definitely the Chinese trying to do facial ID on everyone.
- NMNick Maggiulli
Yeah, but this is before FaceApp, but yes. Yeah, but imagine that. You see yourself as an old person, and you can now imagine, wow, I'm gonna be an old person doing all this stuff, so maybe I should be saving for my future. Maybe I need to have income. And so in the US, you know, if you don't have a pension or anything like that, you're not gonna have any income besides Social Security, and so unless you're willing to live on that type of lifestyle, then you're probably gonna need to save some money. So that's the thing. It's like, really, what type of lifestyle do you want to live? And if you can live a really cheap lifestyle n- now and you're like, "I'm gonna live like that forever, I don't need to save as much," then fine. That's fine. There's nothing wrong with being frugal and living a really low-cost lifestyle if that's what you want. Like, I don't shame people for wanting to be super frugal. I don't. That's completely fine. I just don't think that's a great solution for everyone, because I don't think that's true for everybody, right? And so figuring out, like, what works for you is what's most important.
- CWChris Williamson
I tried, uh, stock investing a few years ago. Um, I probably should have just left that fucking Ethereum in and that would have fixed all of these problems.
- NMNick Maggiulli
(laughs)
- CWChris Williamson
But, um, I... And what I found very, very quickly was I don't think that I have the, uh, mindset to be a trader, certainly not one that picks stocks. And the neuroticism that I found myself dealing with around having £1,000 in Activision and £1,000 in Apple and, you know, regularly seeing swings in an entire portfolio of thousands of pounds per day, uh, across a, not a particularly huge portfolio. You only need, you know, like, 10 or 20 grand and you can have a couple of bad days and you're like, "I, I... My net worth just went down by £1,000 today." That's pretty terrifying. Um, so yeah, picking individual stocks makes that a lot worse. However, since then, I've taken Morgan, Morgan's, uh, and your suggestion, and I'm just in the S&P at the moment. I don't obsessively check my eToro every day. Um, you're not a fan of picking individual stocks, presumably for a more data-driven reason than mine. But my point is that I think, for a lot of people, uh, the psychological impact of kind of, like, being in individual stocks is a pretty high toll to pay as well.
- NMNick Maggiulli
Yes, I agree. So there's a, there's two... There's really three reasons, I guess, why I'm not a big fan of individual stocks. The first one is one that maybe your audience has heard. It's what I call the performance argument and the financial argument. Basically, most stock pickers, active managers, whatever you want to call them, don't beat their benchmarks, don't beat the market. So let's say the benchmark's the S&P 500, they don't beat the market after three to five years, after fees, right? And after everything they do, they just don't beat the market.
- CWChris Williamson
Why?
- NMNick Maggiulli
Because on average, and if you think of there's fees, right? So imagine, let's say half the people beat the market, half don't. Remember, they're buying and selling from each other. This is a very theoretical argument, goes back to, I think, I think William Sharpe came up with this argument. Basically, the theoretical. Half the... Remember, bot- they're buying and selling from each other, so half are going to win, half are going to lose, and then if you take out fees, it drops that, right? Like, if only half can be up and half can be down, then, like, on every trade, then like only half can be winners, half can be losers. But then there's fees and transaction costs, so there's, like, some slippage in the system, so it's going to be less than half, right? So that's why only, like, 25% can outperform their benchmarks. And you don't have to calculate all that. There's- they actually already do this. Something called the SPIVA reports, S-P-I-V-A, SPIVA, and they basically do this for you. They look at every equity market across the planet, and you can say, "Let me see the three-year, let me see the five-year. How did these people perform?" And in some markets, some people do outperform a little bit better than others, but on average, it's like 70%, 80% won't outperform over, like, a three-to-five-year period.
- CWChris Williamson
Is it kind of like a gambler that is able to beat the odds in the casino consistently over time? That the longer that you decide to stay in the market, so to speak, if you're picking individual stocks, you're part of the 25% of year one, but then you're also part of the 25% of year two, and then you're also part of the 25% of year three that didn't end up being beaten by the market? So over time, consistently, you actually end up being a, like, a real outlier, anomaly, if you haven't lost money at some point during that period.
- NMNick Maggiulli
Yeah, yeah. That- that's a way of thinking of it. I, I don't like to use gambling because that's, like, a negative expected value game. I would say investing's positive expected value. But what we're talking about here is obviously, as you said, the relative value. Like, you can still make money. Like, you can pick stocks and make money. You're just gonna make possibly, most likely gonna make less than if you just put it into, like, an S&P 500 or a world index fund, something like that, right? So that's the first argument, it's very well-known. The second argument, the one I personally like more, is what I call the existential argument, and that's basically, like, you don't know if you're any good at stock picking, and, like, there's a lot of data to show this. Like, they've found that, like, they can only... Like, they can identify skill in about 10% of stock pickers. So let's say you can identify the top 10% and you can identify the bottom 10%, that's 20% out. That means there's 80%, or four out of five people, you could play this game for a while and not know if you're good. And I think... Let's, let's use a LeBron James example. If myself and LeBron James went to the basketball court, you would know within minutes who has skill and who doesn't, right? You could tell pretty, pretty quickly, right, who's- who's good and who's not. But if me and LeBron James were picking stocks, we wouldn't know for years maybe. Maybe LeBron's a great stock picker. Who knows, right? Just, we're just picking stocks. We have the same amount of money, we have to just throw the capital. You may not know for a year, two years, five years. And one of us could just get lucky. One of us could just have one thing in our portfolio that just mooned, and we would beat the other person because of that one random pick and it got lucky. So that's the difference. Like, there's a lot more luck in stock picking than there is in, like, I don't know, computer programming or basketball or something where the skill is very identifiable. So that's the second argument which I don't like. And what you were talking about with, like, "Oh, I had $1,000 in Activision," like, why was I obsessing over my portfolio? I think what it does... You i- you start to identify with the investment, right? So when you pick the S&P 500, or let's say you pick a world index, uh, equity or stock index fund, when you pick a world stock index fund, that's the default choice. That's like, that's like, "Oh, here you go, here's your choice." You're like, "I didn't choose that." So if the market goes down, it's not your fault, right? It's out of your hands. But as soon as you say, "You know what?... I'm gonna just deviate a little. I'm gonna pick Activision, or I'm gonna pick Apple. And then now you've made a choice. Now it's your fault if it goes down, right? It's 'cause you made the choice. You're the idiot who made that choice. But if it goes up, you're a genius, right? So you see, it's all an identity. I think that's probably the most compelling argument because you're gonna start identifying with your investments. You're gonna be obsessing over the thousand... Like, I remember, I've done this too. I had like 2% of my, my, uh, wealth in, like, individual stocks, and yet, like, the 98% was moving up and down, like, magnitudes more. Like, you know, orders of magnitude more than the 2%, yet I'm obsessing over that because I picked it like some idiot. You know, it's silly. It's a very silly thing to think about, but you obsess over your active picks. You're not gonna obsess over your S&P 500 index fund, whether it's dropping, you know, in the same way, I think.
- CWChris Williamson
You had a-
- NMNick Maggiulli
So-
- CWChris Williamson
... a couple of stories about even you, somebody that lives in the Fin-Twitter, financial advice world, uh, and you flubbed a few, uh, stock picks recently. Can you tell everyone about those?
- NMNick Maggiulli
Yeah, so I've done... So I, remember, I have a whole... Like, this is how tough, tough this problem is. So I have a whole chapter in my book, chapter 12, called Don't Buy: Why You Shouldn't Buy Individual Stocks. Yet I have 1% of my net worth in individual stocks. And I see, I say, "Hey, if you're doing it for fun or something, that's fine. You know, like, 5%, whatever. Do it, have fun." And that's what I do, basically. So I keep 1%. I did it with some friends. And I bought two tech companies. I'm not gonna say them. I'm not here to pump my bags. They're down massively. They're down bad.
- CWChris Williamson
(laughs)
- NMNick Maggiulli
(laughs) And so one's down, like... One IPO did 19, went down to, like, six. I- it's not doing great. The other one actually was at 15, went to 32. I was feeling pretty good, and now it's down to, like, seven. So that one's down, like, worse than all the others. And so they're down bad, and I have... I'm, I'm sitting on these losses. I might sell at some point and, you know, take the, you know, the loss harvest or whatever, but we'll see. So I'm saying it's tough for everybody, even me, the person... I wrote a little chapter on this, and I still do it, but, like, I do it for fun. And I think it's okay to do it for fun, if you want to get it out of your system. I just don't think you should do it with the bulk of your wealth, 'cause it's a tough game. It's really, really tough. Don't play that game. So...
- CWChris Williamson
Okay. People aren't supposed to buy the dip. We've explained that.
- NMNick Maggiulli
Yep.
- CWChris Williamson
That waiting-
- NMNick Maggiulli
Yep.
- CWChris Williamson
... waiting to buy the dip causes you to wait for so long that you have missed out on potential gains to move up. You've maybe gained a 20% intraday move, but you've lost-
- NMNick Maggiulli
Mm-hmm.
- CWChris Williamson
... a 60% over the last year increase. You should-
- NMNick Maggiulli
Yep.
- CWChris Williamson
... have gone back and done that.
- 56:22 – 1:01:49
How Much of Success is Luck?
- CWChris Williamson
about the luck that's involved in investing. Uh, how much luck is involved, and then how can people mitigate the impact of luck on their investments?
- NMNick Maggiulli
I think the best way to mitigate luck is just kind of your asset allocation, what, how you invest your money, right? So it's like, are you well-diversified, right? Do you have emergency fund? Do you have all sorts of things that help you plan and prepare for the future? Of course, you can't know everything, right? If you're, you know, if you rely on, like, "Oh, well, I own, like, three businesses that are restaurants," and then COVID comes and there's lockdowns and you're hit, there's nothing you can do. That's like some, that's like an act of God, for all practical purposes. There's, at some point, there's nothing you can prepare for. There are certain things you can't prepare for. But, you know, you can probably do something that's gonna be decent, right? So I say, like, diversify, find ways to, you know, to have your wealth so that you're not worried about some crazy scenario. If you have everything concentrated in Apple or Activision, something like that, then you can get hit really bad and it would be really tough, right? 'Cause that type of stuff happens, right? And I think there's this, there's this quote, like, you know, uh, "Concentrate to get rich but diversify to stay rich," right? And I think that's true, but it depends how rich do you wanna be? I think you can get relatively rich, like, through diversification. I don't think you need to concentrate. If you wanna be a billionaire, yes, that's completely true. You wanna be, like, a hundred millionaire, even a ten millionaire? You probably need some sort of concentration at some point in your life. But if you're like, "Yeah, I'd be fine with, like, two million bucks and, like, that'd be a nice life. I could live my life with $2 million, two million pounds," whatever it is, you probably can do that through diversification, just buying over time. And that's the thing what I'm trying to get at. Like, for most people, they're probably gonna be fine, have a great life, live a decent life with that type of lifestyle, and it's much easier than trying to concentrate and then you get hit with some crazy risk and then you lose more money or something. You know, it's really tough that way, so.
- CWChris Williamson
What do most people get wrong during a crisis?
- NMNick Maggiulli
I think the thing during a crisis, I mean, obviously, it's tough. I, I'm not, I'm not gonna sit here and say like, "Oh, yeah, March 2020 was a cakewalk." It wasn't. I watched, I, I lived through it. It was my first real big crash that, where I had money invest, where I saw my wealth dropping 10% one day and then up 2% and then down another 10%, you know, I saw this happen. What I think people get wrong is, you know, I think my favorite investment quote is, um, "Fear has a greater grasp on human judgment than does the impressive weight of historical evidence." You know, and that's from Jeremy Siegel, right? And so that, it's that fear grasping us, and it's like, the world's gonna end, we're never gonna get better, every... And I think humans are more resilient than people think. And don't get me wrong, there are cases where markets, one market goes down badly and something, you know, Russia went down 80% in like a month this year during, you know, early 2020. Or sorry, early 2022. And that type of stuff happens. But if you're diversified, if you don't, if you own only Russian stocks, then yes, you're screwed. If you only own US stocks, you could get screwed. Diversify across other, you know, asset classes and you'll be fine. And in the case where, oh, what if all those drop? Once again, it's one of these apocalyptic scenarios, it's not gonna matter what your investment portfolio is doing. You're gonna have much bigger problems. So that's my counter what to think about a crisis, like yes, there's fear, yes, there's gonna be a 10-year period in the US or Europe or et cetera where these assets don't perform well. They may even lose to inflation. This has happened before. I, I can guarantee in my lifetime, not guarantee, I would say very high likelihood that there's a 10-year period where US stocks have no return after dividends and inflation. And I don't know when that's gonna happen. We could already be have started it for all we know, right? We're already down from some point, we could, 10 years from now, we could be like, "Wow, yeah, remember when I said that 10 years ago?" It could happen. But it's not about wondering what could happen, it's looking at history, and history generally, you know, it's up and to the right over the long term, and just keep buying and see what happens, you know?
Episode duration: 1:17:06
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