ATHLLC8585488421

00:00:00.000 | (upbeat music)

00:00:01.880 | - Hello, and welcome to another episode of All The Hacks,

00:00:04.680 | a show about upgrading your life, money, and travel.

00:00:07.560 | I'm Chris Hutchins, and as some of you know,

00:00:09.280 | I'm working on an idea for a book right now

00:00:11.320 | about the principles of an optimized life,

00:00:13.800 | and it'll be no surprise

00:00:15.240 | that money fits into the book a bit.

00:00:17.300 | And one of the things I was doing

00:00:18.560 | as I was brainstorming that topic

00:00:20.280 | was going back and listening to some older episodes I did

00:00:23.200 | on money, investing, personal finance,

00:00:25.720 | and one of those episodes really stood out to me.

00:00:28.000 | It was episode number six with best-selling author

00:00:30.680 | Morgan Housel on the psychology of money.

00:00:33.360 | For those not familiar with Morgan,

00:00:34.760 | he's a notable blogger,

00:00:36.120 | former columnist at The Motley Fool

00:00:38.000 | and The Wall Street Journal,

00:00:38.940 | and a partner at Collaborative Fund.

00:00:40.820 | Now, what stood out to me about that episode

00:00:42.840 | was that even though I did the original interview,

00:00:45.200 | and then I edited the entire interview,

00:00:47.760 | and then I listened to the final version

00:00:50.040 | before I released it,

00:00:51.640 | when I listened to it again last week, it was so good.

00:00:54.900 | I picked up on things that I either missed

00:00:56.680 | the first few times or have forgotten since then.

00:00:59.480 | And in that conversation,

00:01:00.720 | we talked about behavioral finance, investing,

00:01:02.920 | dealing with risk, and approaches you can take

00:01:05.060 | to be more productive with your money.

00:01:07.000 | In fact, I enjoyed re-listening the episode so much,

00:01:09.560 | I suggested my wife, Amy, listen again,

00:01:11.660 | and she had the exact same reaction.

00:01:14.160 | So, since it's been two years,

00:01:16.120 | I know many of you have never even heard that episode,

00:01:18.840 | but if you're one of the few who already have,

00:01:20.780 | I'd encourage you to give it another listen

00:01:22.700 | and see if you pick up on something new.

00:01:24.760 | And whether you do or don't,

00:01:26.440 | please send me a note,

00:01:27.840 | because it's the first time I've done an episode like this

00:01:30.800 | where I bring back an interview from the past.

00:01:33.000 | And while I don't plan to do it that often,

00:01:35.040 | I'd love to hear what you think.

00:01:36.340 | So please shoot me a quick email,

00:01:37.960 | podcast@allthehacks.com,

00:01:39.680 | or you can DM me on Instagram or Twitter.

00:01:41.680 | But like I said,

00:01:42.520 | I think you're really gonna enjoy this one.

00:01:44.120 | So let's jump in right after this.

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00:02:31.840 | toured it, and the next week we were closing.

00:02:34.320 | Since then, it's truly become our second home,

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00:03:15.900 | (upbeat music)

00:03:18.760 | Morgan, thank you for being here.

00:03:20.440 | - Thanks for having me, Chris.

00:03:21.280 | I'm happy to be here.

00:03:22.100 | - So you've been writing columns, articles, blog posts

00:03:24.640 | about money and investing for almost 15 years.

00:03:27.880 | What about the psychology of money

00:03:30.240 | led you to write an entire book this time?

00:03:32.680 | - What actually got me to write the book

00:03:34.160 | was just the realization

00:03:35.280 | that I had accumulated enough stories,

00:03:37.160 | enough material to fill out a book.

00:03:38.980 | That's the honest answer.

00:03:40.160 | And it took a long time.

00:03:41.360 | It took 10 or 15 years of casual observing

00:03:44.480 | and reading about a bunch of things

00:03:46.560 | that led me to find what I thought

00:03:48.480 | were the most important parts

00:03:49.640 | about how people think about money,

00:03:51.320 | and kind of how I've always thought about this.

00:03:53.200 | Not always, but the main way that I've written,

00:03:55.960 | not just written, but thought about

00:03:57.120 | and researched behavioral finance

00:03:59.160 | is through the lens of other industries.

00:04:01.080 | And the reason that is,

00:04:01.920 | if I take you back to when I started writing about finance,

00:04:05.280 | which was 2008,

00:04:06.560 | which of course is when the world fell apart,

00:04:08.280 | the financial crisis,

00:04:09.240 | everything was breaking and crumbling down around us.

00:04:11.600 | In my early years of becoming a financial writer,

00:04:14.440 | I wanted to answer the question,

00:04:16.240 | why did people do the things that they did

00:04:19.080 | during the housing bubble, during the financial crisis?

00:04:21.180 | Why did people take on so much debt?

00:04:23.540 | Why did they make all these dumb, crazy decisions

00:04:25.600 | that blew the world to pieces?

00:04:27.000 | Why did they do it?

00:04:27.840 | That's what I wanted to answer.

00:04:29.000 | And I realized, as years went on,

00:04:31.280 | that the answer to those questions

00:04:33.160 | could not be found in a finance textbook

00:04:36.120 | or an economics textbook.

00:04:37.320 | You could not explain why people did what they did

00:04:40.000 | if you were just looking at finance,

00:04:42.000 | or thinking through the lens and the frameworks

00:04:44.200 | and the theories of finance.

00:04:45.440 | The answers weren't there.

00:04:46.900 | But you could find clues,

00:04:49.400 | like these tangential clues about why people

00:04:51.640 | did what they did,

00:04:52.560 | if you were thinking about psychology and sociology

00:04:55.400 | and political science and biology and neurology.

00:04:58.520 | All these things that had nothing to do with finance

00:05:00.800 | could actually explain

00:05:02.400 | why people did the things that they did.

00:05:04.120 | Things like sociology, like keeping up with the Joneses,

00:05:06.600 | or your brother-in-law buys a big house,

00:05:08.920 | so now you gotta go buy a big house.

00:05:10.360 | Finance can't explain that, but sociology can.

00:05:13.200 | So to me, that just started this idea

00:05:14.920 | that money is not the study of finance.

00:05:18.200 | It's a study of how people behave,

00:05:19.940 | like how people behave with money.

00:05:21.520 | And since it's a study of behavior,

00:05:22.800 | you can learn so much about it

00:05:24.720 | through the lens of all these other disciplines.

00:05:27.720 | And so I spent the huge majority of my time,

00:05:29.760 | I almost never read finance books or economic books.

00:05:32.040 | I read books about all kinds of different topics,

00:05:34.520 | just trying to answer the question,

00:05:36.240 | how do people respond and behave around fear and greed

00:05:40.080 | and risk and uncertainty?

00:05:41.240 | And just trying to piece together little bits and stories

00:05:45.120 | about how people behave.

00:05:46.680 | And so I just did that for many years,

00:05:48.640 | more than a decade before I felt like I had enough

00:05:51.040 | to throw it all together into a book,

00:05:52.960 | and that's where this came from.

00:05:54.040 | - I'm glad you did.

00:05:54.880 | When I was in college,

00:05:56.240 | my wife and I actually went to college together,

00:05:58.080 | and she had a major in finance,

00:06:00.540 | and all of a sudden she was like,

00:06:01.380 | "Wait, finance is all about,"

00:06:03.080 | and I remember specifically taking

00:06:05.120 | the Fundamentals of Futures and Options Markets

00:06:07.320 | with her as a course in college.

00:06:09.120 | And she was like, "This isn't what I care."

00:06:11.200 | I was really interested in how people think about money.

00:06:13.360 | I'm not interested in the Black-Scholes model

00:06:16.020 | for pricing options.

00:06:17.120 | And so that actually, I think if your book was around,

00:06:20.200 | she could have taken a different path,

00:06:21.840 | but she got out of finance pretty quickly

00:06:23.720 | 'cause it was not framed around

00:06:25.560 | how people think about money.

00:06:27.300 | - So that's actually a really good point

00:06:28.720 | because the behavioral side of finance,

00:06:31.600 | the psychology side of finance, is really hard to teach.

00:06:34.800 | Even to really smart people, it's hard to teach.

00:06:37.000 | So what tends to be taught in finance,

00:06:39.440 | in colleges and whatnot,

00:06:40.900 | is the part that is relatively easy to teach.

00:06:43.240 | There's all the formulas and the data and the charts,

00:06:45.320 | the things that you can memorize

00:06:46.440 | and regurgitate on a test.

00:06:47.800 | The softer side of finance is just, it's much more mushy.

00:06:51.260 | It's much more like answering the question,

00:06:53.680 | how do you become a good spouse?

00:06:55.360 | It's hard, you can't teach that in college.

00:06:58.220 | It's a really important topic.

00:06:59.800 | It might be the most important topic of your entire life,

00:07:02.200 | but you can't summarize it into a formula,

00:07:04.040 | so you can't teach it.

00:07:05.280 | And this is true for a lot of disciplines.

00:07:07.280 | What is taught in school

00:07:08.480 | are the things that are able to be taught,

00:07:10.240 | like the things that you can teach.

00:07:11.360 | But there's a lot of things that you just can't teach.

00:07:13.720 | How do you teach someone to respond well

00:07:15.560 | around greed and fear?

00:07:17.320 | Tough thing to teach that

00:07:19.440 | in a way that you're gonna be able to test someone

00:07:21.440 | on a midterm for.

00:07:22.560 | So it's a great point that you and your wife brought up

00:07:26.640 | about how finance is typically taught

00:07:28.440 | versus what it actually is in the real world.

00:07:31.000 | - Yeah, and there's so much in the book

00:07:33.080 | about how to start thinking about different things.

00:07:36.000 | Before going kind of deep on a few of those,

00:07:38.480 | I'd love to talk a little bit about the ultimate goal

00:07:41.440 | of learning and mastering money.

00:07:42.840 | I think you have a pretty good framework

00:07:45.400 | for what that unlocks in life

00:07:47.040 | and kind of what the highest form of wealth is.

00:07:49.400 | And I'd love to hear you kind of talk

00:07:51.160 | a little bit about that.

00:07:52.560 | - To me, the highest form of wealth

00:07:53.880 | is you wake up every morning

00:07:55.520 | and you're gonna say that you can do

00:07:57.680 | whatever you want today.

00:07:58.800 | Whatever you wanna do.

00:07:59.840 | Even if most of the time what you wanna do

00:08:01.240 | is wake up and go to work

00:08:02.440 | and be a productive member of society,

00:08:04.240 | it's on your terms.

00:08:05.480 | You're doing it at the company you want

00:08:07.240 | for as long as you want.

00:08:08.200 | You can live where you want.

00:08:09.360 | You can work with the coworkers who you want.

00:08:11.200 | Having a sense of independence and autonomy,

00:08:13.360 | being on your own terms,

00:08:14.440 | owning your time, owning your schedule,

00:08:16.120 | having control over your schedule,

00:08:17.760 | that to me is the highest form of wealth.

00:08:20.600 | And it's important because everyone knows,

00:08:23.120 | I mean this is virtually cliche at this point,

00:08:25.800 | but you get used to things.

00:08:28.320 | Cars, homes, it's not that it's bad.

00:08:30.160 | I like nice cars as much as anyone else.

00:08:32.240 | But people get accustomed to them.

00:08:33.840 | The joy that you get from them

00:08:35.880 | is gonna work for virtually anyone.

00:08:37.480 | People massively overestimate how much joy

00:08:39.520 | you're gonna get from stuff.

00:08:40.840 | It's not that stuff is bad,

00:08:41.680 | you just overestimate it.

00:08:42.880 | But owning your time, owning your schedule,

00:08:45.040 | having independence and autonomy

00:08:46.600 | is something that I think will give you

00:08:48.200 | a permanent level of lasting happiness.

00:08:51.360 | Or I think a better, like a little bit of nuance here

00:08:53.640 | is that it's not that having independence

00:08:56.160 | gives you, makes you happier,

00:08:58.160 | it's that it makes you less miserable.

00:08:59.920 | Like people who don't control their time

00:09:01.680 | just have more bad days

00:09:03.120 | than people who have that level of independence.

00:09:04.880 | So to the extent that people can use money

00:09:06.880 | and wealth and savings to gain autonomy in their life,

00:09:10.760 | that to me is like the highest form of wealth.

00:09:13.520 | And there's a couple things about it.

00:09:14.560 | One is that for a lot of people,

00:09:16.760 | the amount of wealth that you need

00:09:18.680 | to gain some level of independence and autonomy

00:09:21.920 | is a lot lower than I think

00:09:23.240 | what most people would consider rich.

00:09:25.880 | And the definition of rich

00:09:26.960 | is different for everyone throughout the world,

00:09:29.480 | different people, different generations.

00:09:32.320 | But having just a level of savings

00:09:34.040 | so that for example, if you were to lose your job,

00:09:36.680 | you can wait to find a good job

00:09:38.880 | rather than having to take the first one

00:09:40.880 | that you can possibly find,

00:09:42.080 | that's a level of independence

00:09:44.080 | that can make your life substantially better.

00:09:46.560 | Having just enough savings

00:09:47.760 | that if you have a medical emergency,

00:09:49.080 | it's not gonna ruin you,

00:09:50.640 | which for whom it does millions of Americans every year,

00:09:53.720 | that's a level of independence and autonomy.

00:09:55.720 | So like obviously independence is a spectrum.

00:09:58.200 | A lot of people when they think of independence,

00:09:59.840 | they think the fire movement,

00:10:01.320 | retire early, quit your job,

00:10:03.040 | go like on a road trip around the country.

00:10:04.820 | That's one level.

00:10:05.880 | But there's a big spectrum below that

00:10:08.080 | that can lead to a lot of happiness

00:10:09.360 | of just being in control of your time.

00:10:11.680 | The other way that people talk about this

00:10:13.240 | is of course like the well-known phrase, F you money.

00:10:15.580 | Like so much money that you can just say F you

00:10:17.620 | to people who you don't wanna deal with.

00:10:19.300 | That's one level of this that gets talked about.

00:10:21.760 | And I think there's like a more polite version of that.

00:10:24.520 | I call it like, please leave me alone money,

00:10:26.460 | of just like, if you have enough money,

00:10:28.080 | you don't have to deal

00:10:30.000 | with a lot of the hassles that you have in life.

00:10:33.000 | You can just like, look, I don't report to anyone.

00:10:36.580 | I'm not on anyone else's quarterly performance metrics.

00:10:40.480 | You can just kind of live the life that you want

00:10:42.240 | and pursue the creative ventures that you want

00:10:43.880 | in a way that I think is really underestimated in life.

00:10:47.320 | - Yeah, I think in today's environment,

00:10:48.900 | I hear lots of people say, gosh, you shouldn't hold any cash.

00:10:51.040 | It's the interest rates are so low

00:10:53.160 | that you actually forget that the value

00:10:55.920 | or the kind of return on that money

00:10:58.120 | that's sitting in cash

00:10:59.160 | can be something really, really significant

00:11:01.820 | if you are able to use it to turn down a job

00:11:04.680 | or you're able to use it to work less hours

00:11:07.580 | on your hourly job and pursue something you're excited about.

00:11:10.040 | So I'm a big fan of using cash to buy yourself freedom

00:11:14.220 | and treating that freedom as a similar return,

00:11:17.340 | though very different from the kind of return

00:11:20.380 | that's more tangible of investment returns

00:11:22.660 | and that kind of stuff.

00:11:23.500 | - You're so right that people look at the return on cash

00:11:26.140 | and they say, look, 0.1% interest.

00:11:28.220 | Like, why would I possibly do that?

00:11:29.620 | And then once they hit,

00:11:30.860 | whether it's next month or five years from now,

00:11:32.840 | once they hit some sort of life emergency

00:11:34.760 | where they need that cash

00:11:35.880 | and they realize that cash is the oxygen of independence.

00:11:39.080 | Like, you don't think about it until you need it

00:11:40.960 | and then when you need it,

00:11:41.800 | it's the most important thing in the world,

00:11:43.360 | nothing else matters.

00:11:44.720 | And so I think once every 10 years,

00:11:46.640 | at least everybody, everybody once every 10 years

00:11:50.520 | will have something happens in their life

00:11:52.320 | where they think, where they realize,

00:11:53.920 | oh, I'm so glad I had this buffer of cash

00:11:56.280 | that I didn't know what I was gonna do with

00:11:57.540 | or, oh my gosh, I wish I'd like,

00:11:59.740 | things would have been so much better

00:12:01.040 | if I had just saved a little bit of cash.

00:12:02.360 | Everyone will deal with that once every 10 years.

00:12:04.740 | And during the other 99.9% of the time,

00:12:07.440 | your cash feels like it's a drag on your net worth.

00:12:10.060 | And then one week every 10 years,

00:12:12.400 | it's the most important thing

00:12:13.480 | that completely transforms your life

00:12:14.720 | because it gives you options over your time,

00:12:17.000 | over your control of what you're gonna do

00:12:19.400 | and where you have to go, et cetera.

00:12:21.080 | - So building up that cash,

00:12:23.480 | there's lots of ways to do that.

00:12:24.920 | And it ultimately comes down to having more money

00:12:27.960 | and you could save more or you can earn more.

00:12:30.640 | And by earn more, you could work

00:12:32.480 | or make investments that grow.

00:12:35.040 | I personally think that saving is much easier to focus on.

00:12:38.520 | It's totally in your control,

00:12:40.200 | but it seems like everyone I talk to

00:12:42.280 | is focused on making more money

00:12:44.120 | and usually making more money from investments

00:12:46.640 | and seeking high returns.

00:12:48.520 | Why do you think it's so hard for people

00:12:50.680 | to save more and spend less?

00:12:53.960 | - I think, look, both sides of the equation

00:12:55.600 | are really important.

00:12:56.440 | Like, of course, earning more and like proper investing

00:12:58.960 | and like long-term compounding,

00:13:00.120 | that's so important, of course.

00:13:02.200 | But I think the side of the equation,

00:13:04.120 | which is just, you know,

00:13:05.560 | like all of wealth is money in minus money out.

00:13:08.440 | Like that's what it is.

00:13:09.280 | And the money outside of the equation

00:13:11.080 | is just more in your control.

00:13:12.920 | Like to double your money in the stock market

00:13:15.100 | over the next five years is doable,

00:13:16.620 | but it's not always easy.

00:13:18.220 | Like people who are new to investing

00:13:19.760 | might think that's crazy

00:13:20.600 | because it's been so easy lately.

00:13:22.060 | But most of the time,

00:13:23.040 | like doubling your money in the stock market

00:13:24.840 | takes a lot of work and a lot of patience

00:13:26.480 | and a lot of just like sticking it through.

00:13:28.240 | But lowering your expenses

00:13:30.240 | is so much more in your control

00:13:32.220 | 'cause you have no control

00:13:33.120 | of what the stock market's gonna do next.

00:13:34.920 | But you do have control over how big your ego is

00:13:38.480 | in terms of how much you need to flash

00:13:40.400 | and show the world how much money you have

00:13:42.480 | through the cars you're driving

00:13:43.480 | and the clothes you're wearing

00:13:44.420 | and the vacations that you're posting on Instagram.

00:13:46.600 | Controlling that side is so much more in your control

00:13:50.080 | than assuming that you can have any control

00:13:52.200 | of what the stock market's gonna do next.

00:13:53.920 | So it's just, it's not that one side

00:13:55.600 | is more important than the other.

00:13:57.080 | It's just, if you're looking at the odds of success

00:13:59.960 | and you're trying to find the highest odds

00:14:01.820 | of like what's the lever I can pull

00:14:03.320 | that when I pull it, it's actually gonna make a difference.

00:14:05.780 | For the huge majority of people,

00:14:07.640 | it's on the spending side of the equation.

00:14:09.200 | And that's how they can really move the needle

00:14:10.600 | in their life.

00:14:11.420 | And things that are more in your control

00:14:13.640 | are just so much more valuable.

00:14:14.600 | Like the expected value of something like that

00:14:17.360 | is so much more valuable than for most people

00:14:19.560 | to try to increase their income by a significant amount.

00:14:22.080 | So why don't people wanna do that?

00:14:24.520 | I think there's two reasons.

00:14:25.360 | One is what we talked about before,

00:14:26.440 | which is that when most people gain more income,

00:14:28.560 | they instantly wanna say, how can I spend this?

00:14:30.500 | Because their view of money is the sole purpose of money

00:14:33.320 | is to buy stuff.

00:14:34.560 | Which seems like a really rational statement.

00:14:37.120 | That's what money is, money is to buy stuff.

00:14:38.840 | That's what it's for.

00:14:39.680 | That seems so obvious.

00:14:41.280 | And even when I say it, I'm kinda like,

00:14:42.480 | yeah, of course that's what it's for.

00:14:44.040 | And so most people stop right there

00:14:45.520 | and they say, well, if I just got $1,000 raise,

00:14:47.720 | I'm gonna go spend $1,000 'cause that's what money's for.

00:14:50.360 | But I think once you view money as,

00:14:51.960 | oh, actually this can give you independence

00:14:53.740 | if you save it and invest it and this gives you wealth,

00:14:56.200 | now you have control of your time,

00:14:57.320 | now you can do whatever you want.

00:14:58.380 | Now when life throws a curve ball at you,

00:15:00.480 | you're gonna be okay.

00:15:01.680 | Then you start thinking about it a little bit different.

00:15:03.840 | And so if you don't have that little nuance

00:15:06.240 | on what money can do for you

00:15:07.520 | and the independence side of it,

00:15:08.960 | it makes savings much harder.

00:15:10.200 | Because you're saving money and you're saving,

00:15:11.520 | what's the point of this?

00:15:12.960 | What am I saving it for if I'm not gonna spend it?

00:15:15.200 | That's how a lot of people think.

00:15:16.840 | Once you view it as, I'm saving this

00:15:18.440 | so I can have control over my time,

00:15:19.840 | so I can live whatever life I want,

00:15:21.640 | then I think it becomes quite a bit easier to save.

00:15:23.920 | So that's always the lens that I viewed it through

00:15:25.560 | when saving for myself.

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00:15:46.480 | past addresses, and the names of his relatives.

00:15:49.320 | And that was just one of the 69 listings that had his info.

00:15:53.880 | Fortunately, instead of spending hours

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00:18:17.780 | - Is there anything you've learned about psychology

00:18:19.620 | that helps people who have gone through that exercise

00:18:22.660 | of, "Yeah, I do want my freedom,"

00:18:24.380 | but struggle with stopping themselves from wanting more,

00:18:27.800 | stopping themselves from wanting the nicer car,

00:18:30.460 | the nicer house, or whatever it is?

00:18:32.340 | Is there any tactics that people can use

00:18:34.680 | to stop that feeling?

00:18:36.240 | - No, I don't know if there's any specific tactics.

00:18:38.540 | It's like the most natural thing in the world.

00:18:40.260 | And even myself, who writes a book about this topic,

00:18:43.400 | of course it's tempting for my wife and I

00:18:46.360 | to say, "Hey, we gained a little bit of income

00:18:48.280 | "from this or that.

00:18:49.440 | "Should we go buy a nicer?"

00:18:50.860 | That temptation never goes away, ever.

00:18:53.100 | I think it's the most natural thing in the world.

00:18:54.960 | It's natural from a social level

00:18:57.300 | to try to show your friends and your coworkers

00:19:00.740 | and your spouse or your potential future spouses

00:19:03.940 | that you've made it in the world.

00:19:05.580 | That's the most natural thing in the world.

00:19:07.980 | Take your peacock feathers and flay them up

00:19:10.020 | and be like, "Hey, look at me.

00:19:11.160 | "This is what I've done."

00:19:12.380 | That's the most natural thing in the world.

00:19:13.860 | And even if you're not thinking about it

00:19:15.020 | through the social sense,

00:19:16.840 | the idea that nicer stuff will make you happier

00:19:19.620 | is true to some extent.

00:19:20.940 | We just overestimate how much it's going to be true.

00:19:23.660 | So it's a really difficult thing.

00:19:25.540 | I think that the people who find a way to do it

00:19:28.260 | are just the ones who are just totally comfortable

00:19:30.780 | in themselves and who they are

00:19:32.580 | and don't feel a lot of obligation or urge

00:19:35.340 | to try to gain the social ladder.

00:19:37.180 | They're comfortable with their friends and their spouses

00:19:39.500 | or their significant others.

00:19:40.540 | They're totally comfortable with that.

00:19:42.220 | And those people love them and appreciate them.

00:19:44.220 | And they just don't feel that much need

00:19:45.700 | to climb the social ladder.

00:19:46.920 | They're happy where they are.

00:19:48.100 | Those are the people that can really gain total control

00:19:50.380 | over their financial lives

00:19:51.660 | because they're not on just constant hamster wheel

00:19:54.820 | of trying to keep up with the Joneses.

00:19:56.460 | And the Joneses thing is such a huge problem

00:20:00.060 | because there are a lot of Joneses

00:20:01.940 | and some of them are extremely wealthy.

00:20:03.780 | So no matter how much money you gain,

00:20:05.740 | there's always someone who's making more than you.

00:20:08.400 | And if you're making 50 grand

00:20:10.020 | and then you're looking up to the person

00:20:11.340 | who's making 100.

00:20:12.380 | And then once you make 100,

00:20:13.500 | you're looking up to the guy who's making 200.

00:20:15.100 | And that keeps going forever.

00:20:16.960 | That never ends.

00:20:18.500 | So like I use the example in the book of like,

00:20:20.580 | if you are a professional baseball player,

00:20:23.340 | the minimum wage is about half a million dollars per year,

00:20:26.180 | which by any definition is rich.

00:20:28.220 | Like in the United States,

00:20:29.140 | you make half a million dollars a year,

00:20:30.260 | like you're crushing it.

00:20:31.580 | You're like, congratulations, you made it, you're rich.

00:20:34.420 | But I guarantee you that every minimum wage baseball player

00:20:38.900 | in professional baseball does not consider themselves rich

00:20:41.700 | because there's people on their team

00:20:42.660 | who make $10 million a year.

00:20:44.340 | And the people who make 10 million

00:20:45.620 | might not feel that great

00:20:46.460 | 'cause they're looking up to the players

00:20:48.020 | who make 30 million.

00:20:49.100 | And the guy who makes 30 million

00:20:50.300 | is looking at the hedge fund manager

00:20:51.460 | who's making 500 million.

00:20:53.340 | And the hedge fund manager who makes 500 million

00:20:55.020 | is looking at Jeff Bezos.

00:20:56.460 | Like that never ends.

00:20:58.500 | So people, once you realize,

00:21:00.020 | like I use this quote in the book of a friend of mine

00:21:02.300 | who goes to Vegas every year.

00:21:03.940 | One year he walked in and he asked the dealer,

00:21:06.080 | he said, "Hey, what games do you play, Mr. Dealer?"

00:21:08.860 | Like in Vegas, what games do you play?

00:21:10.740 | And he said, "I don't play any games."

00:21:12.740 | He said, "The only game that you can win in Vegas

00:21:14.700 | "is not playing.

00:21:15.840 | "That's the only way that you can win in Vegas

00:21:17.460 | "is to like walk out of the casino."

00:21:19.460 | And I feel like it's the same with that,

00:21:21.180 | like climbing the social ladder.

00:21:22.860 | There's no end point.

00:21:24.180 | So people are like, I'm on this mission to win the game.

00:21:27.020 | And it's like, no, you're never gonna win the game.

00:21:28.540 | The game never ends.

00:21:29.940 | So when you realize the game never ends

00:21:31.420 | and it can't be beat,

00:21:32.740 | then for myself, it's different for everyone,

00:21:34.700 | but for myself, it's like,

00:21:35.540 | well, if you can't beat the game,

00:21:36.700 | I don't wanna play the game.

00:21:37.840 | I'm gonna try hard as I can not to play the game.

00:21:40.300 | That's not a tip or a trick or a tactic in how to do it.

00:21:44.080 | It's just a little bit different way of thinking about it.

00:21:46.700 | I think it's such an ingrained part of human nature

00:21:49.500 | that it's never gonna be the point

00:21:51.100 | where the majority of people will be able to achieve it.

00:21:53.860 | If you're mindful about the forces

00:21:55.460 | that are pushing you away from happiness with your money,

00:21:58.140 | maybe it's a little bit easier to wrap your head around.

00:22:00.280 | - Do you think people can go too far to the other end?

00:22:02.780 | You mentioned the fire movement,

00:22:04.500 | which I was actually in a documentary

00:22:07.460 | about the fire movement called "Playing with Fire."

00:22:09.540 | And I remember someone mentioning

00:22:11.900 | in the process of talking with lots of people

00:22:13.980 | that there's some people that like to wash their tinfoil,

00:22:16.780 | some extreme things to save small amounts of money.

00:22:19.940 | And I sometimes ask, and I've asked myself this question,

00:22:22.940 | it's like, can you go too far in that direction

00:22:25.060 | and end up with all of this money

00:22:26.840 | that gives you all this freedom,

00:22:27.980 | but you spent so many years not actually enjoying life?

00:22:31.620 | And what happens when you go too far?

00:22:34.020 | - I think the answer is absolutely yes.

00:22:35.420 | And I think the biggest one

00:22:37.260 | is if you create this incredible frugal lifestyle

00:22:40.420 | and it turns off your friends and families

00:22:43.700 | and significant others in a way

00:22:44.940 | that they start rejecting you for it.

00:22:46.820 | That's what people overlook.

00:22:48.420 | So people are like, they might be being honest

00:22:50.940 | with themselves when they say,

00:22:52.660 | "I would be happy living off of $4,000 a year,"

00:22:56.020 | whatever it is, and they're honest with themselves,

00:22:58.820 | but their friends aren't, their spouse isn't,

00:23:02.080 | their boyfriend and girlfriend isn't.

00:23:03.460 | And then all of a sudden, this other part of your life

00:23:05.980 | that was probably the single most important part

00:23:08.700 | of your life, the people around you,

00:23:09.900 | your friends and families that you love

00:23:11.240 | start rejecting you for it.

00:23:12.660 | I've seen that happen a number of times,

00:23:14.460 | and it's devastating to the people

00:23:15.900 | because they're like, "Look, I was honest

00:23:17.420 | "that I could live this life and be happy,

00:23:19.420 | "but these people who I loved weren't on the same page,

00:23:22.220 | "and now I've ruined my life over it."

00:23:23.820 | That's the biggest risk in these things

00:23:25.760 | is that you create an extreme plan that you're okay with,

00:23:28.540 | but other people are not.

00:23:30.380 | And it's a hard thing to wrap your head around.

00:23:32.220 | And I think there are also a lot of people

00:23:33.400 | that go down a path that is fun for a while, but gets old.

00:23:38.180 | It's fun to be super frugal for 12 months,

00:23:41.200 | but after three or four years, you're kind of over it,

00:23:42.920 | but it's become part of your identity,

00:23:45.060 | especially when there's a name behind it, the fire movement.

00:23:48.140 | Like, I'm in the fire club, it's a tribe.

00:23:51.540 | And then sort of break off from the tribe

00:23:53.160 | is really difficult.

00:23:54.660 | So once it becomes an ingrained part of your identity,

00:23:57.180 | I think people find it hard to move on from,

00:23:59.260 | even if they're ready to move on from it.

00:24:01.180 | Yeah, no matter how deep you go down the path

00:24:03.760 | of saving and frugality, I think at the end of the day,

00:24:07.200 | you talked earlier, it's two sides of an equation.

00:24:09.880 | The money comes in, the money goes out,

00:24:11.560 | that's what you save.

00:24:12.740 | So I do still think it's important to think about

00:24:14.840 | what you do with the money you save.

00:24:16.840 | And when it comes to investing,

00:24:18.200 | I like to contrast athletes and investors.

00:24:20.620 | And it got me thinking,

00:24:22.480 | I have a lot of friends who played sports in college.

00:24:24.520 | They all knew it was really hard to be a pro athlete.

00:24:27.040 | So most of them chose other careers.

00:24:29.040 | And I talked to those same people.

00:24:31.040 | Who know that most active investors underperform,

00:24:35.000 | and yet all of them are always trying to invest

00:24:37.400 | and beat the market and pick stocks

00:24:38.920 | and compare things on what's the return.

00:24:41.160 | Why are people so rational in some areas

00:24:43.480 | and totally irrational when it comes to

00:24:46.400 | their abilities with money in the markets?

00:24:49.080 | I think there's a really easy answer to that question.

00:24:51.280 | And that's, in professional sports,

00:24:53.300 | it's impossible to make it to the NFL by luck.

00:24:57.320 | You have to be skilled, you have to be physically skilled,

00:25:00.360 | legitimately skilled to make it there.

00:25:02.220 | But it is possible, and happens all the time,

00:25:04.980 | that people can be successful in the stock market

00:25:07.200 | by luck alone.

00:25:08.440 | So the fact that it's even possible

00:25:10.320 | is why people go into it.

00:25:11.920 | And a lot of them will just fool themselves.

00:25:13.400 | Maybe they had some sort of beginner's luck,

00:25:15.120 | they opened up a Robin Hood account

00:25:16.600 | and they doubled their money in six weeks.

00:25:18.680 | And they think to themselves, look, this is so easy.

00:25:21.280 | And not only is it easy, but I have the skill.

00:25:24.140 | Maybe other people can do it,

00:25:25.320 | but if they know only 10% of people can beat the market,

00:25:28.960 | everyone thinks they're part of that 10%.

00:25:31.440 | And especially young men are the most susceptible

00:25:35.440 | to assuming, even if they know the odds,

00:25:37.520 | like a lot of people think they're being rational

00:25:39.080 | 'cause they're like, oh yeah, I know the odds.

00:25:40.560 | Only 10% of investors who try to beat the market can do it,

00:25:43.000 | but I'm one of them.

00:25:44.260 | And since it's possible to be in that group by luck alone,

00:25:48.240 | do you have a lot more people chasing it?

00:25:49.800 | The other aspect of this is that

00:25:51.200 | if you're trying to get into professional sports,

00:25:53.000 | it's really obvious whether you made it or not.

00:25:55.120 | You got drafted or you didn't.

00:25:56.880 | Black and white, clear as day.

00:25:59.000 | The huge majority of investors who I've talked to,

00:26:00.960 | active investors, particularly if you're not

00:26:03.280 | a professional investor, you're just an individual investor,

00:26:05.660 | don't accurately track their returns.

00:26:08.200 | And if you really ask them, like, how have you performed?

00:26:11.240 | A lot of them, if they're honest about it,

00:26:12.680 | they don't really know.

00:26:14.240 | They're not auditing their annual returns

00:26:16.520 | and comparing it to the appropriate benchmark every year.

00:26:18.960 | A lot of them do it,

00:26:20.120 | and maybe they think they're outperforming,

00:26:21.540 | but if they're honest with themselves

00:26:22.680 | on an after-tax basis, they're actually not.

00:26:25.280 | Or they're willfully blind to it

00:26:27.320 | because they're afraid to accurately calculate it.

00:26:29.820 | Because, and in the meantime, they like what they're doing,

00:26:31.760 | and maybe that's, and that's fine.

00:26:32.960 | If you like actively investing,

00:26:35.120 | even if you're underperforming, but you love it,

00:26:37.440 | you like the strategy, you like the hunt,

00:26:39.560 | you like the analysis, well, then that's great.

00:26:41.480 | That's a cool little hobby that you have.

00:26:43.240 | No problem with that whatsoever,

00:26:44.400 | but it's much easier to fool yourself

00:26:47.080 | that you can be a great investor

00:26:49.660 | than it would be in sports,

00:26:50.720 | where it's just obvious, clear as day,

00:26:52.280 | you either made it or you didn't.

00:26:54.240 | - And how do you help people who like that,

00:26:57.760 | they're having fun, they might be making some money

00:27:00.440 | or losing lots of money,

00:27:01.800 | and help them understand why

00:27:04.960 | that might not be the best long-term strategy

00:27:07.480 | if their goal is to pursue this independence

00:27:10.640 | and be more confident getting there?

00:27:13.040 | - This might be a disappointing answer,

00:27:14.800 | but I found that for the large majority of these investors,

00:27:19.680 | you naturally end up on one side of the equation.

00:27:21.400 | And once you're on that side of the equation,

00:27:23.040 | it's hard to convert you to the other side.

00:27:24.800 | You know, that's not to say that's not true for everyone,

00:27:27.280 | but a lot of people, if you are a hardcore active investor,

00:27:29.720 | the odds that you will ever be persuaded

00:27:32.120 | to go on to the passive side,

00:27:33.400 | even if your returns are horrendous, are not that great.

00:27:36.480 | I think for a lot of people, they're scratching,

00:27:38.200 | when they're actively investing,

00:27:39.740 | they're scratching a natural itch that they have,

00:27:41.580 | and that itch needs to be scratched.

00:27:43.440 | And if they were passively investing,

00:27:45.400 | they would have this itch that would drive them crazy.

00:27:47.900 | And therefore, that's, so they're always gonna do it.

00:27:49.480 | If there is a way that,

00:27:50.560 | and I've seen a lot of financial advisors do this,

00:27:53.040 | is they say, "Okay, I know you have this itch

00:27:55.720 | "that needs to be scratched.

00:27:56.700 | "You need to trade, you need to actively invest,

00:27:58.600 | "because that's part of your personality.

00:28:00.120 | "Can we put 70% of your net worth

00:28:03.500 | "in a long-term diversified investing plan,

00:28:05.900 | "and then you can trade with 10, 20, 30%?"

00:28:08.920 | So that you can, look, you have this core

00:28:11.240 | that's gonna, this is kind of, you know,

00:28:13.360 | this is the big thrust

00:28:15.000 | that's gonna get you into retirement,

00:28:16.400 | but you can still trade.

00:28:17.320 | We're not gonna take that away from you.

00:28:18.800 | I think that's actually,

00:28:20.240 | like, if you're thinking about it rationally,

00:28:21.600 | that's a wrong thing to do,

00:28:23.160 | because either one strategy works or it doesn't,

00:28:25.920 | so why are you gonna straddle both?

00:28:27.440 | But for a lot of investors,

00:28:29.160 | I think that's the right thing to do,

00:28:30.200 | because it keeps them engaged.

00:28:31.840 | And rather than just getting too bored

00:28:33.440 | with their investments, they're like,

00:28:34.840 | "Look, I still have this pocket

00:28:36.440 | "where I can day trade and buy these stocks,

00:28:38.200 | "and I feel great about it."

00:28:39.600 | So just giving them that outlet to scratch that itch,

00:28:42.020 | I think is really important,

00:28:42.860 | and probably the best way to try to,

00:28:44.520 | if you were to convert people from one side to the next.

00:28:46.760 | But the other thing I would say here

00:28:48.320 | that's really important is I'm not a passive zealot.

00:28:50.960 | I'm not one of the people who says,

00:28:52.520 | "Everyone should index, and no one can beat the market,

00:28:54.920 | "and you shouldn't even try."

00:28:56.240 | Those investors exist, but I'm not one of them.

00:28:59.120 | I've become much less judgmental

00:29:01.080 | as an investor over the last decade,

00:29:02.740 | when I just realized everyone has different goals,

00:29:05.540 | different skills, different needs, different desires.

00:29:08.600 | They view the world through a different lens.

00:29:10.120 | Like, I view the world through the life that I've lived,

00:29:13.160 | and only through that lens.

00:29:14.360 | It's the only world that I know is what I've seen,

00:29:16.380 | and the world that I've seen

00:29:17.620 | is different from the world that you've seen,

00:29:19.380 | and the world that you and I have seen

00:29:20.640 | is very different from different generations,

00:29:22.460 | people who live in different countries.

00:29:23.640 | Everyone is different.

00:29:24.840 | So to say that there's one right way to invest

00:29:27.600 | is something that I probably used to believe,

00:29:29.440 | but I've become much less judgmental as the years go on.

00:29:32.160 | - Yeah, and you mentioned in the book a lot

00:29:33.880 | that people, even that might be similar,

00:29:36.000 | similar geography, similar income, similar job,

00:29:38.560 | might be trying to play a different game.

00:29:40.080 | They might be anticipating more money from inheritance.

00:29:43.160 | They might be trying to earn some short-term money

00:29:45.640 | or really focused on a different goal.

00:29:47.680 | So it's interesting to hear how people compare themselves

00:29:51.680 | to people that might be in totally different circumstances.

00:29:54.560 | - Yeah, I think about myself in college.

00:29:56.840 | There was a social aspect of wearing nicer clothes

00:29:59.940 | and trying to put the peacock feathers up again.

00:30:02.880 | When I was in college, when I was looking for a girlfriend,

00:30:05.240 | when I was looking for a wife,

00:30:06.080 | when I was in that market, that was really important.

00:30:07.880 | Now that I'm happily married

00:30:09.000 | and my wife loves me 'til death do us part,

00:30:11.400 | it's a lot less important for me.

00:30:12.820 | So even myself, over the course of my relatively short life,

00:30:16.880 | like the game has changed substantially

00:30:19.300 | in terms of who I wanna be,

00:30:20.680 | who I wanna show the world that I am.

00:30:22.120 | That has changed substantially in my own life.

00:30:24.380 | So if it changes within your own life in a 15-year period,

00:30:27.960 | then think about people who are different generations,

00:30:29.980 | people who live in different countries,

00:30:31.500 | different amounts of rich countries, poor countries.

00:30:34.040 | Everyone thinks about these things totally different.

00:30:36.360 | The other thing I would say is a couple years ago,

00:30:38.000 | I was in Australia where they hadn't, at the time,

00:30:39.920 | they hadn't had a recession in 29 years.

00:30:42.440 | 29 years with no recessions.

00:30:44.440 | So virtually every adult had never seen a recession, ever.

00:30:49.320 | And then you compare that to the United States

00:30:51.100 | where 2001, 2008, we had these massive recessions

00:30:55.600 | that reshaped all of society.

00:30:58.320 | And Australians, who of course, just as smart as us,

00:31:00.840 | had the same information as us,

00:31:02.860 | they're the same people as us,

00:31:04.200 | they had a completely different view on what risk is.

00:31:08.060 | And at the time, Americans were very cognizant

00:31:10.680 | of like, the world can fall apart at any moment,

00:31:12.920 | you can lose everything, it can just poof.

00:31:15.040 | And Australians didn't, just didn't have that view.

00:31:19.040 | And it's not that we were right and they were wrong,

00:31:21.720 | that's not the right way to look at it.

00:31:22.880 | It's just, we're equally smart people,

00:31:25.180 | the same people that have very different views on the world

00:31:27.320 | just by the dumb luck of where we were born.

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00:34:33.360 | Do you think there's any way that people can start to,

00:34:36.780 | I don't know, force themselves to learn these lessons?

00:34:39.740 | I know anytime you're looking to start investing,

00:34:42.580 | you get often asked or find things on the internet say,

00:34:45.080 | you know, figure out whether you're comfortable

00:34:46.780 | with a 30% downturn.

00:34:48.220 | And it's easy if you invested all of your money

00:34:51.260 | and that downturn happened,

00:34:52.680 | and you got to know, oh, here's what I did.

00:34:55.020 | But for many people, these things happen every 10 years,

00:34:57.560 | or in Australia, every 30 years.

00:34:59.180 | Like how can you start to understand your own tolerance

00:35:03.100 | for this before you see it?

00:35:05.620 | Or can you?

00:35:06.980 | I don't, I think realistically,

00:35:08.900 | you probably can't until you've done it,

00:35:11.120 | because there's no formula.

00:35:12.300 | It would be one thing if it was like,

00:35:13.780 | oh, you just need to know the formula.

00:35:15.780 | You just go read the book,

00:35:16.940 | and then it'll tell you what to do.

00:35:18.580 | But nobody knows who they are

00:35:20.740 | until they've been in the trenches.

00:35:22.480 | No one understands their own unique personality.

00:35:24.740 | And there are a lot of people

00:35:26.180 | who are a very calm personality,

00:35:29.320 | even like an even disposition.

00:35:31.580 | They don't panic very much in life,

00:35:33.540 | but they've never experienced losing half their money

00:35:35.580 | in the stock market.

00:35:36.540 | And when they do, they realize that's the trigger

00:35:38.680 | that'll make them lose their minds.

00:35:40.780 | So even if you are very introspective

00:35:42.700 | about who you are in general,

00:35:44.820 | I don't think people understand who they are financially

00:35:47.980 | until they've experienced some of these big declines.

00:35:50.620 | And I've experienced 2008,

00:35:52.980 | I experienced March of 2020 last year,

00:35:55.060 | but there's a lot of things financially

00:35:56.460 | that I haven't experienced as well.

00:35:58.380 | I have not, and you have not,

00:36:00.860 | lived through a period of sustained high inflation

00:36:03.860 | that hasn't existed since the mid, late 1970s.

00:36:07.900 | So I can research that.

00:36:10.220 | I can try to be empathetic with people who lived through it.

00:36:12.660 | I can try to put myself in their shoes at the time.

00:36:14.640 | But until I've lived through it,

00:36:16.420 | I can't reasonably say that I know

00:36:18.460 | how I would respond to it.

00:36:20.580 | And I think if we're being honest,

00:36:22.100 | like that's true for a lot of people.

00:36:23.540 | Like virtually no one, in the developed world at least,

00:36:27.220 | had any idea how they would respond

00:36:29.060 | to a viral pandemic until last February.

00:36:32.300 | It just wasn't something that was necessarily on our mind.

00:36:35.620 | And I think a lot of people responded in ways

00:36:37.400 | that they wouldn't have fathomed before.

00:36:40.220 | You know, it was completely normal before last February.

00:36:43.540 | If you're on a plane and someone's coughing,

00:36:45.660 | 99% of people, not a big deal.

00:36:47.460 | Someone's coughing, it's not a big deal.

00:36:49.180 | Now going forward, if someone coughs on a plane,

00:36:52.340 | people are gonna lose their minds.

00:36:53.660 | They have a totally different view

00:36:55.140 | that they never would have considered before it happened.

00:36:58.580 | I'll give you one very extreme example of this,

00:37:00.740 | and I have to preface this with like,

00:37:01.940 | this is the most extreme example.

00:37:03.900 | There's a book called "What We Knew",

00:37:06.700 | and it's a book interviewing German civilians

00:37:09.900 | on what they knew during World War II.

00:37:12.420 | During when the Nazis were in power,

00:37:14.540 | what did the civilians know?

00:37:15.900 | Not the guards at Auschwitz, the German civilians.

00:37:18.980 | What did they know?

00:37:19.800 | What was going on?

00:37:21.100 | And there's this passage in the book

00:37:22.260 | where this German civilian said,

00:37:23.180 | "Look, when Hitler came to power in 1933,

00:37:25.860 | the Germans were fully behind them.

00:37:27.500 | We were like, rah, rah, like Hitler, this is great."

00:37:30.420 | And they said, "Why?

00:37:31.580 | Like, I don't understand.

00:37:32.540 | Can you explain why you were so excited about him?"

00:37:34.940 | And the civilian said, "Look, in the 1920s,

00:37:37.820 | Germany lost everything.

00:37:39.220 | The economy fell apart.

00:37:40.700 | We lost everything.

00:37:41.540 | No one had a job.

00:37:42.360 | We lost all of our wealth.

00:37:43.420 | And Hitler came along and said,

00:37:45.240 | "I'll give you a job.

00:37:46.180 | We're gonna rebuild the country.

00:37:47.180 | We're gonna bring back German pride, et cetera, et cetera."

00:37:49.460 | And in that situation where people were so desperate

00:37:52.160 | for anything, they looked at him and said,

00:37:54.040 | "Great, that's my guy."

00:37:55.660 | And they're looking at this in hindsight and saying,

00:37:57.500 | "Look, when people are in a desperate situation

00:38:00.140 | where they don't have any money,

00:38:01.460 | they lost all their jobs, they lost everything,

00:38:04.540 | people will cling to things in that situation

00:38:07.100 | that they never would have imagined.

00:38:08.980 | You'll cling to the craziest person that comes across

00:38:11.540 | if he's willing to give you a little bit of hope."

00:38:14.140 | That's the most extreme example,

00:38:15.340 | but nobody knows what they're gonna do

00:38:17.380 | or how they're gonna react in the heat of the moment

00:38:20.440 | when things are really uncertain,

00:38:21.920 | when you've lost a lot of money,

00:38:23.120 | when you've lost your job.

00:38:24.420 | When things are calm and prosperous,

00:38:27.900 | people don't know how they're gonna respond

00:38:30.140 | during those heated moments

00:38:31.540 | until you've actually experienced it.

00:38:33.060 | In the pandemic, I work at Wealthfront

00:38:35.500 | and we have a passively managed portfolio

00:38:37.620 | and we have risk tolerance questions.

00:38:39.200 | And we ask, "How are you gonna feel

00:38:41.840 | if the portfolio is down?"

00:38:43.260 | And people overestimate what they think.

00:38:45.480 | They say, "Well, if the market's down 20%,

00:38:47.660 | I'm gonna buy more 'cause it's on sale."

00:38:49.420 | But one of the interesting things

00:38:51.340 | that happened during the pandemic

00:38:52.980 | was some people made the complete different decision

00:38:56.520 | and not because they didn't think the market was on sale,

00:38:59.320 | because it wasn't a 20% down.

00:39:01.860 | It was a 20% down in the middle of a pandemic

00:39:04.380 | where some people are shouting from television

00:39:06.420 | that the world could end and half the world could die

00:39:09.580 | and all of these extreme things.

00:39:11.580 | And that feels very different than the academic exercise

00:39:15.460 | of if something goes down 20%, what do you do?

00:39:18.140 | And I personally think the media makes it even harder

00:39:22.420 | to know what to do because it's really extreme.

00:39:25.220 | So, that to me was like a great example

00:39:28.060 | of the risk tolerance questionnaire

00:39:30.080 | isn't sufficient in isolation.

00:39:33.460 | - You're absolutely right.

00:39:34.280 | Because if you were to ask me, "Morgan, how would I feel

00:39:36.700 | if the market fell 30%?"

00:39:38.340 | If you were to ask that question,

00:39:39.740 | I imagine, when I'm trying to picture that,

00:39:42.020 | I imagine a world where everything is exactly the same today

00:39:45.940 | except stock prices are 30% cheaper.

00:39:48.020 | And in that world, it seems like an opportunity.

00:39:50.180 | Everything is the same except cheaper stock prices,

00:39:52.340 | that's a good opportunity.

00:39:53.420 | But that's not how it works.

00:39:54.860 | The reason the market falls 30%

00:39:56.880 | is because the banking system is about to collapse,

00:39:59.420 | like 2008, where there's a pandemic

00:40:01.180 | that might kill your entire family.

00:40:02.980 | And in that context, totally different scenario.

00:40:06.180 | And that's why people are just in general pretty poor

00:40:08.800 | at forecasting the risk tolerance

00:40:11.140 | and how they might behave during the next big decline.

00:40:13.700 | - Another thing, forgetting major market declines,

00:40:16.540 | just thinking of poor investment decisions,

00:40:19.020 | which I think right now,

00:40:20.440 | there's this big rise of active trading.

00:40:22.420 | And I'm sure you have opinions like I do

00:40:25.660 | about the gamification of investing

00:40:27.860 | and what that causes people to do.

00:40:29.940 | But for people who are making decisions

00:40:31.620 | that end up being wrong,

00:40:33.020 | I think something I took away from the book

00:40:35.180 | and I've seen in practice is that you just will be wrong.

00:40:39.580 | And I think something that I'd love you

00:40:41.700 | to talk a little bit about is how can people

00:40:43.180 | get comfortable with that concept?

00:40:45.060 | Which is like, if you're a doctor,

00:40:47.140 | you don't want to be okay being wrong 20, 30% of the time,

00:40:50.740 | but as an investor, that's okay and that's expected.

00:40:54.420 | - Yeah, like obviously, like if you're a pilot,

00:40:56.760 | then you have to be right 100% of the time.

00:40:58.900 | Like you can't say, "Oh, I really botched this flight,

00:41:01.660 | but I got next time to come."

00:41:03.020 | But investing is not like that.

00:41:04.740 | There's a thing that Benjamin Graham talked about

00:41:06.340 | in one of his books, where he said,

00:41:07.780 | "Investors need to understand the difference

00:41:09.220 | between a positive and a negative art."

00:41:11.540 | And he said, "Investing in stocks was a positive art

00:41:14.780 | because all you need to do to do well

00:41:16.260 | is make sure that you own the good ones."

00:41:18.380 | If you pick 100 stocks and 80 of them suck,

00:41:21.740 | but five of them are the next Apple,

00:41:24.420 | the next Amazon, the next Facebook,

00:41:25.700 | you're gonna do incredible.

00:41:27.020 | Even if 80% of the ones you picked go bankrupt.

00:41:29.780 | So investing is a positive art.

00:41:31.220 | He said, "Owning bonds is a negative art

00:41:34.180 | because what you need to do to do well as a bond investor

00:41:37.180 | is make sure that you don't own any of the bad ones.

00:41:39.480 | Any of the bonds that are gonna default,

00:41:40.820 | you just need to avoid all of those."

00:41:42.960 | So it's important to realize is what you're doing in life,

00:41:45.740 | and this applies to everything in life,

00:41:47.220 | like careers and friends,

00:41:48.620 | is it a positive or a negative art?

00:41:50.460 | Are you trying to find, is it just important

00:41:52.100 | that you find the one or two good ones?

00:41:53.900 | Or is it important that you really avoid

00:41:55.620 | the one or two bad ones?

00:41:57.220 | And investing in the stock market, again, is a positive art.

00:42:00.300 | Which means that it is completely normal

00:42:02.980 | in every, no matter how you're investing,

00:42:05.040 | if you're an index fund investor,

00:42:06.220 | if you're a stock picker, if you're a trader,

00:42:07.500 | whatever it is, that you're gonna make

00:42:09.380 | the majority of your lifetime returns

00:42:11.440 | from a small minority of the stocks that you pick.

00:42:14.040 | Even in an index fund.

00:42:15.300 | I mean, the stuff that's pretty incredible

00:42:16.580 | is that in a 40-year period, from 1980 to 2020,

00:42:21.420 | the Russell 3000 Index,

00:42:22.660 | which is an index of large stocks in the United States,

00:42:24.740 | of 3,000 companies in the United States,

00:42:27.460 | 40% of the components in the Russell 3000

00:42:30.980 | effectively went out of business over this 40-year period.

00:42:34.140 | 40% of the components.

00:42:35.620 | But the index itself had average annual returns

00:42:38.360 | of like 11% per year.

00:42:40.100 | Like, the index did really well.

00:42:42.000 | But 40% of the companies in the index went out of business.

00:42:45.340 | And that's in an index fund.

00:42:46.560 | That's not like a crazy stock picking strategy.

00:42:48.720 | Even in an index fund, like almost half

00:42:51.440 | of the companies that you invest in won't make it.

00:42:53.000 | And that's fine.

00:42:53.840 | That's totally normal.

00:42:54.720 | There's nothing wrong with that.

00:42:56.240 | And the other example I've used in the book

00:42:58.160 | is Benjamin Graham himself was a very successful

00:43:00.840 | fund manager over the course of his life.

00:43:03.280 | But 100%, and he writes about this.

00:43:05.680 | He was open about this.

00:43:06.760 | 100% of his career success is owed to one investment

00:43:10.380 | that he made, Geico.

00:43:11.900 | If you take his career track record and remove Geico,

00:43:15.260 | his track record is completely average.

00:43:17.620 | And Buffett has talked about this as well too

00:43:19.460 | for Berkshire Hathaway.

00:43:20.300 | If you take out the top five or 10 investments

00:43:22.220 | they've ever made, Berkshire's track record is average.

00:43:25.020 | And so that's how successful investing works.

00:43:27.140 | No matter what your strategy is,

00:43:29.100 | you don't need to be right all the time.

00:43:31.020 | You just have to be right some of the time.

00:43:33.100 | And I think a big part of this is if you invert that

00:43:35.380 | is that good investing is not about consistently

00:43:37.940 | making great decisions, because nobody does.

00:43:40.980 | It's about consistently not screwing up so much

00:43:43.820 | that you're kind of pushed out of the game.

00:43:45.380 | Like it's consistently making sure that you don't make

00:43:47.980 | these catastrophic blunders that are gonna ruin everything.

00:43:50.420 | But if you could stick around long enough

00:43:52.580 | and make enough bets or just have enough annual returns

00:43:55.660 | under your belt, you're probably gonna do well over time.

00:43:57.660 | Even if you're gonna experience not just some,

00:43:59.780 | but a significant amount of underperformance

00:44:01.620 | and loss during that period.

00:44:03.260 | And one of the way to think about this

00:44:05.180 | was a study from Morningstar a couple years ago

00:44:06.740 | that looked at the best performing mutual funds of all time.

00:44:10.580 | These are just cherry picking with hindsight

00:44:12.540 | what mutual funds had the best returns

00:44:14.300 | over like a 30 year period.

00:44:15.880 | And the common denominator of the top three funds,

00:44:18.540 | I forget what the funds were,

00:44:19.400 | but the common denominator that they shared

00:44:22.020 | is that they spent almost 40% of the time of their life

00:44:25.540 | underperforming their benchmark.

00:44:27.580 | So these are cherry picking with hindsight the best funds.

00:44:31.180 | And if you actually own these funds,

00:44:33.460 | almost half the time you are underperforming your benchmark.

00:44:37.100 | So it's not easy for people to wrap their heads around that,

00:44:39.660 | that tails drive everything.

00:44:41.620 | That it's just the kind of the tail ends

00:44:44.020 | of the bets that you make and the years that you're around

00:44:46.980 | that are gonna drive everything.

00:44:48.820 | But that's how markets work over time,

00:44:50.380 | whether it's for stock picking

00:44:51.500 | or just long-term index investing.

00:44:53.620 | - Yeah, the two takeaways for me is,

00:44:56.060 | if you're picking something that has the long-term nature

00:44:59.540 | of underperforming 40% of the time,

00:45:01.960 | you need to be long-term in the way you pick it

00:45:03.900 | and take a bet that can pay off over time.

00:45:07.380 | And you talk about compounding.

00:45:08.660 | And I think it's something that,

00:45:09.980 | as much as it's been drilled in our heads our whole lives,

00:45:12.420 | it's something that you still need to kind of recognize.

00:45:15.180 | And then the second is that you need to make multiple bets.

00:45:19.180 | I hear this in Silicon Valley a lot when people say,

00:45:21.460 | I wanna start angel investing.

00:45:23.180 | And everyone says, okay, well, if you wanna do that,

00:45:25.380 | you need to one, make enough bets

00:45:27.620 | that you might find something that succeeds.

00:45:29.480 | And that hit rate is so low

00:45:31.060 | that you need to have enough money to make 20, 30 bets.

00:45:33.580 | But you also need to have so much money

00:45:35.100 | that angel investing isn't your whole portfolio

00:45:37.640 | because you might not get those lucky.

00:45:40.020 | You might not.

00:45:40.940 | And so I think when you can take the approach

00:45:43.020 | of lots of things for a long time, that's great.

00:45:47.140 | But taking the approach of, I'm gonna pick one stock

00:45:49.420 | and try to make money this year, I think it gets risky.

00:45:52.220 | And I feel like we've kind of gamified that in recent past.

00:45:55.660 | - I feel like for all investing,

00:45:56.820 | what you're trying to do

00:45:57.660 | is just put the odds of success in your favor.

00:46:00.040 | And the way that you're gonna do that

00:46:01.740 | in a world where tails drive everything,

00:46:04.560 | the way to put the odds of success in your favor

00:46:06.580 | is to be, yeah, to be taking a lot of bets

00:46:08.540 | and to be sticking around for a long period of time.

00:46:10.720 | The more bets you have, the longer you're sticking around,

00:46:13.420 | the higher the odds

00:46:14.300 | that you're gonna end up owning the great companies

00:46:16.900 | and you'll be around during the years

00:46:18.700 | that they achieve all of their returns.

00:46:20.740 | And you're gonna spend a lot of time

00:46:21.900 | where those companies aren't performing,

00:46:23.540 | the market isn't performing,

00:46:24.420 | but if you stick around long enough

00:46:25.620 | and if you have enough bets,

00:46:27.260 | the odds fall firmly in your favor.

00:46:29.700 | - Yeah, one framework

00:46:30.560 | that a really good friend of mine gave me,

00:46:32.400 | because inevitably you're gonna make a bad decision

00:46:34.460 | when it comes to your money.

00:46:35.660 | He always asked me, he's like,

00:46:36.500 | "Hey, but wait, I know you're beating yourself up

00:46:38.580 | for making the wrong investment or doing the wrong thing,

00:46:41.700 | but did you make the right decision

00:46:43.400 | with the information you had at the time?"

00:46:45.140 | And in one example,

00:46:45.980 | it was, "I wanna make this thing

00:46:48.060 | a higher percentage of my portfolio.

00:46:50.540 | And I chose a day to do that

00:46:52.300 | where the next day it dropped significantly."

00:46:55.620 | And he goes, "Yeah, but at the time,

00:46:57.700 | was that part of your strategy?"

00:46:58.800 | I was like, "Yes."

00:46:59.640 | - Well, then you made the right decision

00:47:00.660 | and beat yourself up

00:47:01.580 | when you make bad decisions with information,

00:47:03.980 | but don't beat yourself up

00:47:04.940 | when you make the right decision, but it goes wrong.

00:47:07.860 | - Yeah, completely.

00:47:08.680 | I mean, we only know one version of history,

00:47:11.900 | the version that happened.

00:47:13.580 | And if we're just looking at a short period of time

00:47:15.020 | over the last 12 or 16 months,

00:47:16.980 | we know the version of history that happened,

00:47:19.140 | which was the government came out

00:47:21.180 | with trillions of dollars of stimulus packages.

00:47:23.340 | We created incredible vaccines

00:47:25.660 | that were distributed very quickly

00:47:27.420 | and et cetera, et cetera.

00:47:28.460 | That's the history that we know,

00:47:29.960 | but it could have been so much different.

00:47:31.880 | It could have been that

00:47:33.120 | Washington had a bunch of partisan squabbles

00:47:34.980 | and there was no stimulus package.

00:47:36.340 | We didn't make vaccines.

00:47:37.880 | You could easily imagine a world

00:47:40.080 | where economically and health wise,

00:47:43.740 | the world completely collapsed last year.

00:47:46.380 | You could easily imagine that occurring.

00:47:48.160 | And if that world occurred,

00:47:49.680 | then the people who sold their stocks last March

00:47:51.760 | would look like geniuses.

00:47:53.120 | And that world easily could have occurred.

00:47:55.260 | Just the fact that it didn't,

00:47:56.740 | doesn't mean that we should ignore the fact

00:47:58.400 | that it easily could have.

00:47:59.960 | That's true for, I think, 2008 as well.

00:48:02.600 | You can so easily imagine a world

00:48:05.160 | where after Lehman Brothers collapsed,

00:48:07.880 | Merrill Lynch and then AIG

00:48:09.520 | and then Citigroup and then Bank of America

00:48:11.280 | all collapsed as well.

00:48:12.920 | And in that world, which so easily could have happened,

00:48:15.600 | we probably would have been looking at

00:48:16.840 | the second version of the Great Depression.

00:48:19.220 | That didn't happen, but it so easily could have.

00:48:21.880 | So I think, just to your point,

00:48:23.540 | when people make a decision

00:48:25.000 | with the information that they have at their time,

00:48:27.020 | based off of the consequences of what might happen

00:48:30.980 | in these situations in the future,

00:48:32.480 | I think it's easy to beat yourself up

00:48:34.480 | because all we have now

00:48:35.540 | is the version of history that happened.

00:48:37.240 | But I think it's really important.

00:48:38.080 | And I think the smartest thinkers

00:48:40.240 | are totally comfortable looking at the histories

00:48:42.520 | that easily could have happened

00:48:43.760 | and how they prepared for them,

00:48:45.360 | even if in hindsight,

00:48:46.700 | it looks like it wasn't the best decision.

00:48:48.900 | With the information that you had at the time,

00:48:50.480 | it may have actually been a great decision.

00:48:52.360 | - Yeah, I mean, you wrote in the book

00:48:53.500 | that the most important economic events of the future,

00:48:56.120 | things that move the needle the most,

00:48:57.960 | are things that history gives us no guide about.

00:49:00.160 | They're unprecedented, like what we saw last year.

00:49:03.040 | Knowing that, how do we use history

00:49:05.380 | as a guide for what to expect?

00:49:06.960 | You know, we always have the disclosure

00:49:08.520 | past performance does not reflect future gains,

00:49:11.240 | but so much of investing is,

00:49:13.440 | well, the stock market generally goes up,

00:49:15.180 | so we should invest in it.

00:49:17.480 | - Jason Zweig is a great writer

00:49:20.200 | from the Wall Street Journal.

00:49:21.040 | He made this point one time that

00:49:22.720 | it's not that investors don't learn from history,

00:49:24.760 | it's that they learn too precise a lesson from history.

00:49:27.880 | So his example was after the dot-com bust,

00:49:30.600 | the lesson that people learned was

00:49:33.160 | when the P/E ratio exceeds 30,

00:49:35.740 | the market is too expensive.

00:49:37.120 | That's a lesson that people took away.

00:49:39.000 | But the actual lesson from the 1990s was

00:49:41.420 | overconfidence leads to trouble.

00:49:43.780 | So people learn, they just learn a very over,

00:49:45.800 | they just learn a very precise lesson.

00:49:47.560 | And since they learned a precise lesson,

00:49:49.720 | what they should have learned was

00:49:51.440 | overconfidence leads to trouble,

00:49:53.400 | but they didn't learn that lesson,

00:49:54.520 | so they took their money and they went

00:49:55.840 | and started flipping condos in Miami,

00:49:57.600 | or whatever it was.

00:49:58.560 | So when you learn, when you look at history,

00:50:00.840 | and you learn really precise lessons,

00:50:02.680 | they're not gonna teach you much about the future.

00:50:04.440 | Because like you said, the biggest events

00:50:06.220 | that's gonna shape the rest of our lives

00:50:08.120 | are surprises that you and I or no one else

00:50:10.320 | can be talking about today.

00:50:11.880 | So to me, the way to learn from history

00:50:13.720 | is looking back and taking the biggest,

00:50:15.400 | broadest, 30,000 foot level views and takeaways

00:50:19.760 | about human behavior.

00:50:20.960 | About how people respond around risk and greed and fear

00:50:24.360 | and overconfidence and surprises.

00:50:26.920 | Like how do people behave around those events?

00:50:28.880 | Not the very specific, granular takeaways.

00:50:31.720 | I mean like, if you were to look at the last

00:50:34.040 | 12 or 16 months, you can have a lot of specific takeaways

00:50:37.320 | about supply chains and we should have had more N95 masks.

00:50:40.880 | The CDC should have had better preparedness, et cetera.

00:50:43.180 | Those are like really specific takeaways.

00:50:45.120 | And depending on what your job is,

00:50:46.380 | those might be good takeaways.

00:50:48.000 | But for most people, the most important lesson

00:50:50.800 | in the last 16 months is,

00:50:52.760 | there are things that can happen in the world

00:50:54.400 | that you're never thinking about

00:50:55.940 | that can completely upend all of your assumptions

00:50:57.960 | about the future.

00:50:59.040 | Whenever you're surprised in a situation

00:51:01.080 | like we all have been in the last 16 months,

00:51:02.920 | the best takeaway is that the world is surprising.

00:51:05.760 | It's not to look at what happened and saying,

00:51:07.200 | how can we make sure this never happens again?

00:51:09.480 | It's looking at the situation and saying,

00:51:11.440 | a surprise is going to happen again.

00:51:13.840 | And I think once you do that, then financially,

00:51:16.320 | it pushes you much more towards having room

00:51:19.960 | for error in your finances.

00:51:21.680 | If I knew all the risks in the future,

00:51:24.400 | I would be able to plan around that really effectively.

00:51:26.680 | I would know that in 2023,

00:51:28.840 | there's going to be a recession that starts in February.

00:51:30.960 | So I'm going to have this cash set aside for that.

00:51:32.940 | But nobody knows that.

00:51:34.360 | And once you realize that we don't know

00:51:35.720 | what the future holds,

00:51:36.880 | it makes you much more comfortable being like,

00:51:38.480 | I have this big chunk of cash sitting here

00:51:40.640 | and I don't know what it's for.

00:51:41.960 | I don't know what I'm going to need it for.

00:51:43.240 | I don't know what I'm going to use it for,

00:51:44.920 | but I'm confident that at some point in the future,

00:51:47.640 | the world is going to break in some way

00:51:49.560 | that I can't forecast or predict right now,

00:51:51.320 | but the world's going to break in some way

00:51:53.240 | and I'll be glad it's there.

00:51:54.860 | Once you become just a little bit more open and flexible

00:51:57.760 | with that room for error in your finances,

00:51:59.560 | I think that's the only way that you can navigate a world

00:52:01.560 | where risk is what we don't see.

00:52:04.320 | - You started this whole conversation off

00:52:06.000 | saying that the basics of finance, the models,

00:52:09.180 | the formulas are what we teach in school

00:52:11.200 | 'cause it's way harder to teach all of this stuff.

00:52:13.320 | And you just mentioned like a lot of the history,

00:52:15.500 | you have to interpret it differently,

00:52:17.360 | which makes me question,

00:52:19.040 | is there a path towards educating people

00:52:22.400 | more about this earlier?

00:52:24.140 | Should this stuff be in schools?

00:52:25.700 | Should this stuff be in colleges?

00:52:27.320 | How do we help people learn these lessons

00:52:29.840 | or at least start to understand these concepts

00:52:32.080 | that aren't just formulas earlier and more broadly

00:52:35.000 | so that people don't make as many mistakes

00:52:37.320 | and are better off?

00:52:39.080 | - There's a German professor named Gerhard Geigerenser

00:52:41.720 | who kind of teaches the science of risk.

00:52:43.760 | And he made this point that in school,

00:52:46.000 | we pretty much only teach the math of certainty.

00:52:49.120 | We teach algebra and trigonometry,

00:52:51.120 | which are maths of certainty,

00:52:52.760 | like gives you very precise answers.

00:52:55.160 | And instead, what we should be teaching more of

00:52:56.840 | is the math of uncertainty,

00:52:58.440 | like probability and statistics.

00:53:00.420 | And that is taught in school,

00:53:01.400 | but it's secondary to the math of certainty.

00:53:04.260 | Like the kind of math that teaches you precise answers

00:53:06.840 | is that's the first priority.

00:53:08.400 | And then if maybe in college,

00:53:09.640 | you can take a course on probability,

00:53:11.080 | but that's secondary.

00:53:12.360 | He was saying like, that should be flipped.

00:53:14.000 | We should be teaching kindergartners

00:53:15.440 | and then second graders about probability

00:53:18.720 | because that's the math that really matters in the world.

00:53:21.080 | And you're gonna use on a daily basis.

00:53:23.040 | Algebra is important,

00:53:23.880 | but you're not gonna use algebra on a daily basis

00:53:26.280 | unless you have some job,

00:53:28.400 | you're a math professor or something.

00:53:30.000 | 99% of people will not use algebra on a daily basis,

00:53:32.680 | but 100% of people will use probability on a daily basis.

00:53:37.160 | They might not know it.

00:53:38.160 | They're not actually doing the math,

00:53:39.640 | but probability impacts every hour of your life.

00:53:43.580 | And the decisions that you make in life

00:53:45.580 | rely on understanding how probability works.

00:53:48.700 | And we rarely teach it.

00:53:50.260 | It's a math of uncertainty.

00:53:51.500 | This gets back to what I was saying earlier

00:53:52.940 | about what's taught in school is what's easy to teach.

00:53:56.340 | And certainty is easy to teach

00:53:58.940 | 'cause you come up with a formula

00:53:59.980 | that gives you the right answer.

00:54:00.800 | Probability where it's like,

00:54:02.380 | there's all these unknown worlds.

00:54:04.820 | And by definition, it's like,

00:54:05.940 | we don't necessarily know what's gonna happen.

00:54:07.540 | Those are harder to teach

00:54:08.900 | or harder to wrap your heads around,

00:54:09.920 | but they're what really matter in the world.

00:54:11.940 | So if I were king for a day, so to speak,

00:54:13.860 | I think I would probably follow

00:54:14.900 | Gerrit Geiger Enser's advice and say,

00:54:16.820 | flip it around.

00:54:17.660 | We should start with the math of uncertainty

00:54:20.660 | that really makes a difference in your life.

00:54:22.580 | And as you get older and more specialized,

00:54:24.500 | then maybe we can talk about calculus and algebra.

00:54:26.780 | - And since neither of us are king for a day

00:54:29.340 | to make this change,

00:54:30.460 | are there ways that you think someone with kids

00:54:33.380 | that are in school right now

00:54:35.240 | could start to help them learn these lessons?

00:54:38.580 | - I think if we're just talking about investing,

00:54:40.940 | if you start investing and you own a couple of stocks,

00:54:44.420 | you own a couple of index funds,

00:54:45.580 | and you do it for a couple of years,

00:54:48.720 | you'll learn a lot about risk just through experience.

00:54:52.420 | You're gonna experience the market going way up,

00:54:54.300 | the market going way down,

00:54:55.460 | and that will teach you a lot just by learning.

00:54:58.100 | You're in the trenches getting your hands dirty.

00:55:00.240 | I think that's the best way I would say

00:55:02.260 | to teach people about risk and uncertainty

00:55:04.320 | is just being thrown in.

00:55:05.220 | Now, a lot of investors who started investing

00:55:07.020 | in the last year,

00:55:08.260 | all they've experienced is the market going not just up,

00:55:10.360 | but way up.

00:55:11.660 | Like, that's what they know.

00:55:13.220 | So the last year of experience

00:55:15.520 | has not been a very good lesson

00:55:17.480 | because you're not really getting the full side of risk.

00:55:19.820 | You've only learned half the equation.

00:55:21.440 | You really gotta be investing for a couple years

00:55:23.300 | through a couple of cycles

00:55:24.300 | before you're like, "Okay, I get it."

00:55:26.020 | And then you start viewing the bull markets as like,

00:55:27.800 | "Hey, this is cool, but this isn't gonna last,

00:55:30.100 | "and a lot of this is gonna unwind,

00:55:31.660 | "and it's gonna hurt a lot when it does,

00:55:33.560 | "but I'm okay with that 'cause I've been,

00:55:35.100 | "I've lived through this before."

00:55:38.260 | I think that's really the only way to do it

00:55:40.180 | is with your own money, your own skin in the game,

00:55:42.900 | getting your hands dirty.

00:55:44.180 | - I totally agree here.

00:55:45.460 | I wouldn't advocate for what I'll propose

00:55:48.020 | to be any significant portion of your money,

00:55:50.540 | but a conversation I had with a friend,

00:55:52.580 | an investor last week was about cryptocurrency,

00:55:56.060 | and he pointed out that one of the most fascinating lessons

00:55:59.240 | about cryptocurrency that he's seen

00:56:01.400 | is that there's such extreme volatility, right?

00:56:04.140 | You could go up and down 50% almost in a day,

00:56:07.700 | that it's taught him more about market crashes

00:56:11.900 | and bull markets in the shortest amount of time possible.

00:56:15.380 | And it made me think, "Gosh, I don't think people

00:56:17.340 | "should put all of their money in cryptocurrency

00:56:18.820 | "by any stretch of the means, and that's not the advice."

00:56:21.500 | But if you want to learn through investing,

00:56:24.820 | it could be a way to accelerate your learning

00:56:26.940 | because it has just such extreme volatility.

00:56:29.900 | - I totally buy that, 100%.

00:56:31.740 | I mean, I'm in the same boat as you

00:56:33.300 | in terms of recommending crypto,

00:56:35.140 | but I absolutely buy that argument, 100%.

00:56:38.980 | - Well, before we wrap,

00:56:40.260 | we've talked a lot about money and risk.

00:56:41.880 | Are there any main takeaways that you think

00:56:44.220 | people should leave this conversation with?

00:56:47.260 | - To me, the biggest thing that I think

00:56:48.780 | is the most important part of behavioral finance,

00:56:51.020 | and is maybe the one of the most overlooked,

00:56:52.940 | is that in order to do well,

00:56:54.020 | you have to become introspective about who you are,

00:56:56.580 | and realize that you're different from me,

00:56:58.640 | and we're all different.

00:56:59.940 | And the only way that you can really understand

00:57:02.340 | and master the behavioral side of finance

00:57:04.700 | is just really taking a look at who you are personally,

00:57:06.820 | not reading about other people or other people's situations,

00:57:09.180 | but just being honest with yourself about your own skills,

00:57:12.140 | your own weaknesses, your own risk tolerance,

00:57:13.900 | your own goals in life.

00:57:15.380 | And that's different for everyone,

00:57:16.980 | and that's why a lot of people don't,

00:57:18.700 | like most people want one answer,

00:57:20.980 | like what's the right thing to do?

00:57:23.340 | And when you become introspective about who you are

00:57:25.580 | and realize that everyone's different,

00:57:27.140 | you realize that people come to different conclusions.

00:57:29.660 | And what's the right decision for you, Chris,

00:57:31.640 | might be the wrong decision for me.

00:57:33.440 | Even if we're roughly the same age,

00:57:35.420 | people come to different things.

00:57:37.020 | So I would just implore people

00:57:39.380 | to spend a little bit more time

00:57:40.520 | looking at themselves in the mirror

00:57:41.660 | and try to figure out who they are

00:57:42.860 | and what their risks and goals are.

00:57:44.940 | - That makes total sense.

00:57:45.820 | And I'd like to end all these conversations.

00:57:48.660 | This is a show called All The Hacks,

00:57:50.100 | and today I would say it's a little different than some

00:57:52.180 | where it wasn't kind of running through

00:57:53.860 | very tactical things you can do,

00:57:55.500 | but really reframing psychology and money

00:57:58.980 | as something that if you can really start

00:58:00.580 | to understand how things work,

00:58:02.400 | you could probably hack your mind

00:58:03.820 | to start to be a more rational,

00:58:06.380 | or at least a more reasonable, as you say,

00:58:08.220 | investor and more reasonable with money.

00:58:10.540 | But I will ask, are there a few kind of like life hacks

00:58:13.640 | or in any genre for you that are things that you do

00:58:17.020 | that people have often commented are fascinating

00:58:19.940 | or interesting that you'd want to share?

00:58:22.060 | - I'll leave you with one financial hack

00:58:24.480 | that might disappoint you,

00:58:25.780 | but it's the only hack that works

00:58:27.280 | and it works incredibly well in finance.

00:58:29.420 | You want to do well in finance,

00:58:30.900 | spend less money than you make and be patient.

00:58:33.280 | That's 90% of what finance is.

00:58:35.060 | If you can actually do those,

00:58:36.620 | you have a black belt in finance.

00:58:38.220 | It's the only hack that I think really truly works

00:58:40.680 | in a way that moves the needle.

00:58:42.260 | - Yeah, I don't disagree.

00:58:43.460 | Thank you so much for being here.

00:58:45.140 | Where can people find out more

00:58:46.840 | about what you're writing and everything you do?

00:58:49.220 | - My book is The Psychology of Money,

00:58:50.860 | and I spend most of my time on Twitter.

00:58:52.380 | My handle is @MorganHausel, first and last name.

00:58:54.540 | That's where most of my stuff is posted.

00:58:56.920 | - Cool, thank you so much for being here.

00:58:58.540 | This was great.

00:58:59.560 | - This was fun, thanks very much.

00:59:01.240 | (upbeat music)

00:59:02.540 | - I really hope you enjoyed this episode.

00:59:04.260 | Whether it was the first time you heard it or not,

00:59:06.180 | Morgan is a wealth of information.

00:59:08.100 | And if you want to check out more,

00:59:09.140 | his book and blog are both fantastic.

00:59:11.720 | Like I said, if you have any feedback on this episode,

00:59:14.300 | especially around the idea of re-airing

00:59:16.460 | some of the best episodes from the past,

00:59:18.580 | please let me know, podcast@allthehacks.com

00:59:21.300 | or message me anywhere else online.

00:59:23.340 | That's it for this week.

00:59:24.380 | See you next week.

00:59:25.980 | (upbeat music)

00:59:28.580 | (electricity buzzing)

00:59:31.740 | (birds chirping)

00:59:34.480 | [BLANK_AUDIO]