Bogleheads® on Investing Podcast 026 – Morgan Housel, host Rick Ferri (audio only)

00:00:00.000 | [MUSIC PLAYING]

00:00:13.840 | Welcome to Bogleheads on Investing, podcast number 26.

00:00:17.760 | Today, our special guest is Morgan Housel,

00:00:21.080 | an award-winning writer and the author of a new book,

00:00:24.480 | The Psychology of Money.

00:00:26.040 | [MUSIC PLAYING]

00:00:39.200 | Hi, everyone.

00:00:39.920 | My name is Rick Ferry, and I'm the host

00:00:41.960 | of Bogleheads on Investing.

00:00:44.280 | This episode, as with all episodes,

00:00:47.160 | is brought to you by the John C. Bogle Center

00:00:49.560 | for Financial Literacy, a 501(c)(3) nonprofit organization

00:00:55.640 | that can be found at boglecenter.net.

00:00:59.700 | Today, our special guest is Morgan Housel.

00:01:03.320 | Morgan is a partner at Collaborative Fund

00:01:06.080 | and previously a columnist at The Wall Street

00:01:09.000 | Journal and The Motley Fool.

00:01:11.000 | He's a two-time winner of the Best in Business Award

00:01:14.000 | from the Society of American Business Editors and Writers,

00:01:17.200 | the New York Times Sydney Award, and a two-time finalist

00:01:20.520 | for the Gerald Loeb Award for Distinguished Business

00:01:23.220 | Writing.

00:01:23.920 | With no further ado, let me introduce Morgan Housel.

00:01:28.280 | Hello, Morgan.

00:01:29.400 | Thank you so much for having me, Rick.

00:01:30.400 | Happy to be here.

00:01:31.600 | It's really a pleasure to have you on.

00:01:33.320 | I'm really excited to be talking about your new book,

00:01:36.000 | The Psychology of Money, which I found to be just

00:01:39.400 | a really enjoyable read.

00:01:41.040 | In fact, I hated the book, quite frankly,

00:01:43.000 | because as I was reading it, I was saying, yes, that's me.

00:01:46.040 | Yes, that's me.

00:01:47.080 | Yes, that's me.

00:01:48.520 | But it was a great book.

00:01:49.560 | That's all of us, though, right?

00:01:50.880 | That's true, which is the whole point of the book.

00:01:54.520 | Before we get to the book, I did want

00:01:56.720 | to dig into your background.

00:01:59.680 | So I think like many careers, I never

00:02:01.640 | planned to become a financial writer.

00:02:03.280 | That I've been for my entire career.

00:02:05.400 | The only "real job" I've had is as a financial writer.

00:02:09.080 | It's all I've ever done.

00:02:10.160 | I started writing for The Motley Fool

00:02:11.700 | when I was a junior in college.

00:02:13.720 | And I really didn't have any plan or any intention

00:02:16.440 | of doing that.

00:02:17.040 | I just kind of stumbled into it on accident.

00:02:19.280 | And I thought maybe I would have that job for three months

00:02:21.960 | or six months before I found another job in private equity

00:02:25.280 | or investment banking, which is what

00:02:26.720 | I wanted to do at the time.

00:02:28.080 | But I ended up staying at The Motley Fool for 10 years.

00:02:30.640 | And I just fell in love with the process of writing.

00:02:33.880 | I had been very interested in investing in finance

00:02:38.000 | before that, and I knew that my career was

00:02:39.880 | going to be in finance.

00:02:40.840 | That was the plan.

00:02:41.800 | But writing, I had no interest in, never thought about it.

00:02:45.280 | But I loved writing from the perspective of--

00:02:48.000 | it really dawned on me, and it took me a while

00:02:49.960 | to figure this out.

00:02:50.720 | But I think writing is about much more

00:02:52.440 | than just communication.

00:02:53.760 | Writing is a thinking process.

00:02:55.480 | It helps you really crystallize a lot of the thoughts

00:02:58.160 | that you have in your head, the vague ideas

00:03:00.560 | that you have in your head, that when you are forced to put them

00:03:03.240 | down onto paper, you really start to see either, oh, wow,

00:03:06.760 | now it makes a lot more sense.

00:03:08.080 | This vague gut feeling that I had that I always kind of knew,

00:03:11.160 | but never put into words, now it makes a lot more sense.

00:03:13.880 | Or you realize the opposite.

00:03:15.280 | You put it into words, and you say, oh, that feeling

00:03:18.400 | that I had that I thought was so true,

00:03:20.480 | that I believe so strongly, now that I put it into words

00:03:23.320 | and write it in a sentence, it actually

00:03:24.840 | looks pretty ridiculous.

00:03:25.880 | Maybe it looks wrong.

00:03:26.840 | So I think writing was a great way to think

00:03:28.760 | and a great way to learn.

00:03:30.160 | And I really fell in love with it from that perspective.

00:03:33.760 | So after you were at The Motley Fool for 10 years

00:03:37.240 | and you came to the realization that you loved writing,

00:03:41.360 | you ended up then going to The Wall Street Journal.

00:03:44.520 | Yeah, I was at The Wall Street Journal for several years.

00:03:46.480 | It was actually when I was still at The Motley Fool.

00:03:48.320 | I was full time at The Motley Fool

00:03:49.880 | when I was writing the Saturday investing column at The Wall

00:03:52.520 | Street Journal, did that for several years, which was great.

00:03:55.240 | Obviously, it's one of the foremost financial publications

00:03:59.000 | in the world.

00:03:59.720 | So it was great from that perspective.

00:04:01.320 | It was very different for me, though,

00:04:02.900 | because The Wall Street Journal is capital J journalism,

00:04:06.720 | whereas everything else that I had written up until that point

00:04:09.840 | was more or less a blog, where I could take much more liberties

00:04:12.600 | in terms of giving my opinion, writing in a more casual format

00:04:16.520 | and casual style, whereas The Wall Street Journal was very,

00:04:19.480 | by the book, in a great way.

00:04:21.000 | That's why it has the reputation that it has.

00:04:22.920 | But it was a very different style of writing for me.

00:04:25.440 | And then 4 and 1/2 years ago, I joined the Collaborative Fund,

00:04:28.160 | which is a venture capital private equity firm.

00:04:30.440 | And all I still do there is write and speak.

00:04:33.400 | But it's back much more to the blog style of writing,

00:04:36.680 | where, of course, your reputation is on the line.

00:04:41.360 | But you can be much more open about your own opinions,

00:04:43.560 | how you feel about things, and much more open with your ideas

00:04:47.120 | rather than the very strict journalism format.

00:04:50.800 | Let me ask a question about the Collaborative Fund,

00:04:53.080 | because I dug into that a little bit.

00:04:55.400 | I wanted to understand, what exactly

00:04:58.640 | is it that that fund does?

00:05:02.560 | Yeah, so we invest mostly in early-stage startups,

00:05:05.800 | but also later-stage growth companies

00:05:07.520 | that are multibillion-dollar companies,

00:05:09.140 | but all in the private markets.

00:05:10.800 | So most of what we do by volume, the number of deals that we do

00:05:14.240 | is in seed-stage, Series A-stage companies, very young startups.

00:05:18.400 | But most of what we do by dollar--

00:05:19.880 | if you weight it by dollars, it's

00:05:21.240 | later-stage companies that are more mature,

00:05:23.280 | companies that are getting very close to going public.

00:05:26.360 | So I'm actually not involved at all on the investing side.

00:05:29.960 | All of what I do is what you see.

00:05:31.360 | It's the writing and speaking.

00:05:32.640 | So I'm a partner at the firm, a part of the firm.

00:05:34.960 | But day-to-day, the investing process, picking investments,

00:05:39.240 | is not in my wheelhouse, so to speak.

00:05:41.120 | The fact that I write about behavioral finance,

00:05:44.360 | public markets, et cetera, and I work at a private equity firm

00:05:47.000 | has not been, I think, any roadblock in the slightest

00:05:49.160 | for me.

00:05:49.660 | It's been a great home for me, even if on the outside,

00:05:52.360 | it seems like a weird fit.

00:05:53.680 | That was also true at The Motley Fool.

00:05:55.220 | I mean, I'm a passive investor who

00:05:57.040 | writes about investing history.

00:05:58.320 | The Motley Fool is, of course, a stock-picking website.

00:06:01.040 | So I felt like that was, in some ways, kind of a weird home,

00:06:03.480 | too.

00:06:03.960 | But it worked for me.

00:06:04.920 | So I guess my whole career, I guess,

00:06:06.720 | I've been at a home which has seemed a little bit opposite

00:06:10.520 | from what I actually write about.

00:06:12.360 | You've written a few books in the past,

00:06:15.200 | although nothing quite as ambitious

00:06:17.440 | as The Psychology of Money.

00:06:19.360 | Yes.

00:06:19.840 | The first two books that I wrote were very short e-books,

00:06:22.280 | better describing them as a long-form blog post that we

00:06:24.720 | turned into a Kindle edition.

00:06:26.800 | One of them was called 50 Years in the Making--

00:06:29.040 | The Great Recession and Its Aftermath.

00:06:30.720 | I always had this view that whenever

00:06:32.280 | there's a big event in the world,

00:06:34.200 | whether it is a big recession, or a pandemic, or a war,

00:06:37.600 | whatever it is, all the big events that happen in life

00:06:40.280 | actually have very deep roots.

00:06:42.040 | They seem like they came out of nowhere.

00:06:43.840 | And they just happened.

00:06:44.840 | The 2008 financial crisis, we view it

00:06:47.240 | as maybe the real estate bubble started in 2003 or 2004.

00:06:51.520 | But they always have these deep roots.

00:06:53.280 | All these events have ancestors.

00:06:55.620 | They have parents, and grandparents,

00:06:57.120 | and great-grandparents.

00:06:58.040 | So I wanted to dig back and really try to go back and say,

00:07:00.520 | what was the cause of the 2008 financial crisis?

00:07:04.040 | And I think you can actually tie it back really

00:07:06.560 | to the end of World War II, when all the GIs came home.

00:07:10.600 | And there was a big fear among policymakers

00:07:13.400 | that ending the wartime spending was

00:07:15.180 | going to shove us right back to the depths of the Great

00:07:17.200 | Depression that we had just gotten out of.

00:07:19.120 | And because of that, they started a ton of stimulus

00:07:21.520 | programs to create US individuals, US families,

00:07:24.380 | into consumers.

00:07:25.640 | A lot of stimulus packages and new policies, new incentives

00:07:28.800 | to get people to consume, to go to the store

00:07:30.840 | and spend as much money on goods, and services,

00:07:32.960 | and appliances, and cars, as homes as they could.

00:07:35.880 | And that became kind of the new mantra of the United States.

00:07:39.760 | And around the 1980s, there was a big fundamental shift

00:07:42.200 | in terms of a new growth of income inequality.

00:07:45.160 | And in very simple terms, think what that created by and large

00:07:48.000 | was a small group of people who were doing very well

00:07:51.280 | financially inflated the aspirations

00:07:54.400 | and the expectations of everyone else who were not

00:07:57.320 | doing quite as well.

00:07:58.360 | And everyone else, that lower group of people,

00:08:00.800 | filled the gap between their financial reality

00:08:03.880 | and their expectations with debt.

00:08:05.660 | And that became kind of the big debt surge of the last 40 years

00:08:09.480 | that came to a head with the 2008 financial crisis.

00:08:12.560 | I think largely from a social perspective,

00:08:14.560 | that was lots of people whose incomes had not risen

00:08:18.160 | were trying to fill the gap to keep up

00:08:20.180 | with people whose incomes did rise by a lot

00:08:22.360 | and were inflating their material expectations of what

00:08:24.700 | they expected out of life.

00:08:26.280 | So what you just described is probably

00:08:28.160 | with a phrase, keeping up with the Jones, right?

00:08:31.120 | Yeah, and for most of US history,

00:08:32.920 | that was fairly easily, because the Joneses, your neighbors,

00:08:36.320 | most likely lived a life that was very similar to you.

00:08:39.200 | They probably worked at the same factory,

00:08:41.160 | earned a similar income.

00:08:42.200 | Of course, there were disparities between people,

00:08:43.740 | but it was much more closer than it is today.

00:08:46.040 | And I think one of the big causes of this, too,

00:08:48.240 | was the rise of social media, where all of a sudden

00:08:50.360 | the people, quote unquote, "around you"

00:08:52.240 | that were influencing your behaviors

00:08:54.040 | were not just your neighbors or your co-workers,

00:08:56.000 | but they were people all over the world.

00:08:58.000 | Fueled by algorithms that were designed

00:08:59.680 | to give you the most flamboyant pictures that you can see.

00:09:02.920 | And all of a sudden, your expectations

00:09:04.400 | of how you can live a good life, so to speak,

00:09:06.560 | whether that was the cars you drive or the vacations

00:09:08.680 | that you take, all of a sudden became much more inflated,

00:09:11.680 | because the purview of what you see around you

00:09:14.480 | and your expectations grew so much.

00:09:16.680 | And you actually talk about that in The Psychology of Money.

00:09:20.040 | Outward appearances and keeping up with the Jones

00:09:23.200 | causes people to do a lot of things

00:09:25.640 | they wouldn't ordinarily do.

00:09:27.320 | - Yeah, yeah, people judge their well-being

00:09:30.240 | relative to everyone around them.

00:09:32.360 | And so even though we've had a lot of progress

00:09:34.240 | in the United States over the last hundred years

00:09:36.520 | and progress around the world,

00:09:38.080 | I think a lot of that progress does not necessarily

00:09:40.480 | make us feel that much better

00:09:41.640 | because our expectations have increased by and large,

00:09:44.400 | and lockstep, if not greater, than our incomes have.

00:09:47.640 | So this is true, like if you were to look at,

00:09:49.520 | you know, someone like John D. Rockefeller,

00:09:50.920 | who is the richest person in the history of the world,

00:09:53.560 | his net worth adjusted for inflation

00:09:55.000 | is something like $300 billion.

00:09:57.080 | But Rockefeller never had penicillin.

00:09:59.440 | He never had sunscreen.

00:10:00.800 | He never had Advil.

00:10:02.200 | He only had sunglasses, sunglasses in the later stages

00:10:05.640 | of his life because it hadn't been invented yet.

00:10:07.960 | But no one should be able to say

00:10:10.080 | that a lower income American today

00:10:12.240 | should feel better off than John D. Rockefeller

00:10:14.760 | because they have penicillin and Advil.

00:10:16.600 | That's just not how people's heads work.

00:10:18.720 | People's expectations of what is normal

00:10:20.760 | and what they should appreciate, you know,

00:10:22.400 | grow over time and inflate over time.

00:10:24.520 | And so I think that expectation inflation,

00:10:26.480 | that is normal and natural and understandable,

00:10:29.520 | also has a big impact on how individuals

00:10:31.920 | think about their money.

00:10:32.760 | Because your ability to be happy with your money

00:10:35.440 | is not just your income or your wealth.

00:10:37.560 | It's your income and your wealth

00:10:38.640 | relative to your expectations.

00:10:40.680 | And we talk a lot about, in the financial industry,

00:10:43.160 | how to increase your income, how to increase your wealth.

00:10:45.200 | And of course, that's very important.

00:10:46.280 | That's a great conversation.

00:10:47.600 | But if we're not talking about

00:10:48.760 | how to also manage your expectations,

00:10:50.920 | then any sort of growth that you have,

00:10:52.840 | if you are fortunate enough to have it

00:10:54.360 | in your income or your wealth,

00:10:55.800 | is not gonna feel nearly as good

00:10:57.240 | as you once thought it would.

00:10:58.520 | So I think the hardest and the most important financial goal

00:11:01.520 | is getting the goalposts to stop moving.

00:11:04.080 | It's a very difficult thing,

00:11:05.240 | but if you're not able to do it,

00:11:06.360 | I think you're probably gonna be disappointed,

00:11:08.280 | even if you are lucky enough to have a growing income

00:11:10.920 | and rising wealth throughout your life.

00:11:12.800 | - So John Bogle wrote a book called "Enough,"

00:11:16.280 | which talks about this exact concept.

00:11:19.200 | You have to know when you have enough.

00:11:21.800 | - Right, and you know, that concept that Bogle talks about

00:11:24.640 | with having enough is something

00:11:25.560 | that I read about in the book.

00:11:26.920 | To me, there's a really fascinating story,

00:11:28.800 | several fascinating stories,

00:11:30.480 | that fall into the extreme end of this topic.

00:11:33.560 | One of them that I talk about in the book is Bernie Madoff,

00:11:35.960 | who everyone knows did what he did.

00:11:38.200 | To me, the most fascinating part

00:11:39.720 | about Madoff, though, is this.

00:11:41.200 | If you go back to the 1980s,

00:11:43.000 | Bernie Madoff was running a legitimate,

00:11:45.080 | non-fraudulent business as a market maker in stocks,

00:11:48.680 | matching buyers and sellers.

00:11:50.120 | And it was not a fraud.

00:11:50.960 | It was a legitimate business.

00:11:52.280 | And he was, by some accounts,

00:11:53.440 | making upwards of $50 million per year

00:11:56.440 | from the legitimate side of his business.

00:11:58.400 | Very successful.

00:12:00.320 | He still looked at that ostensibly

00:12:02.040 | and said that's not enough.

00:12:03.600 | And he wanted so much more so badly

00:12:06.440 | that he created one of the biggest

00:12:07.920 | financial frauds in history.

00:12:09.640 | So, and there are lots of similar stories like that,

00:12:11.840 | maybe not as extreme,

00:12:13.040 | of people who are doing very, very well financially.

00:12:16.600 | But because of whatever, it's their expectations,

00:12:18.720 | it's who they associate with, who they look up to,

00:12:21.600 | they want more so badly

00:12:23.080 | that they're willing to push the boundaries of risk

00:12:25.160 | or the boundaries of the law, in Madoff's case,

00:12:28.000 | so strongly that they end up ruining their lives

00:12:30.160 | and ruining other people's lives as well.

00:12:32.160 | Now, that's, of course, an extreme example,

00:12:33.560 | but I think all of us need to have

00:12:35.840 | some sort of calibrated view on what enough is.

00:12:39.200 | And that's not to say you shouldn't strive for more

00:12:41.480 | or have goals for your future, for your family.

00:12:43.720 | Like, of course, I do, everyone else does.

00:12:45.880 | But unless you're willing to have some view

00:12:48.720 | of managing your expectations

00:12:50.640 | and some idea of what having enough is,

00:12:52.920 | I think you're gonna have a hard time financially in life.

00:12:56.240 | There's a story that I love from Daniel Kahneman.

00:12:58.480 | After he won the Nobel Prize,

00:13:00.120 | you do very well for yourself financially

00:13:02.160 | with speaking in books and whatnot.

00:13:03.800 | So Kahneman went to a financial advisor several years ago,

00:13:07.040 | and he told the financial advisor, he said,

00:13:08.920 | "I have no goals to grow my money.

00:13:11.720 | "I don't wanna grow my money.

00:13:12.840 | "I just wanna keep this safe

00:13:14.240 | "and live off of this pot of money for the rest of my life."

00:13:17.600 | And the financial advisor looked at him and said,

00:13:19.040 | "I can't work with you."

00:13:20.320 | And to Kahneman, it was shocking that the idea

00:13:22.480 | that we should always want more money

00:13:24.640 | is so ingrained into us that when someone comes to you

00:13:27.400 | and says, "I don't wanna grow my money,"

00:13:28.880 | it seemed completely backwards to this financial advisor.

00:13:31.480 | So I think Kahneman probably has this extreme view

00:13:34.920 | of enough that might be foreign to most of us, of course.

00:13:37.800 | But I think having that calibrated view of enough

00:13:39.960 | is a really fundamental and important part

00:13:42.600 | of being happy with your money

00:13:44.080 | and being satisfied with the money

00:13:45.600 | that you might be lucky enough to accrue over your life.

00:13:47.960 | - Good points.

00:13:48.800 | But before we get onto the book,

00:13:50.800 | which we've jumped ahead a little bit,

00:13:52.320 | you actually wrote another book prior to that.

00:13:54.760 | And by the way, these two books

00:13:56.040 | that we're talking about now,

00:13:57.560 | "50 Years in the Making,"

00:13:59.320 | "The Great Recession and Its Aftermath,"

00:14:01.320 | and then the other book, previous book,

00:14:03.880 | "Everyone Believes It," "Most Will Be Wrong,"

00:14:07.200 | "Motley Thoughts on Investing in the Economy,"

00:14:09.360 | these are both free through Kindle on Amazon.

00:14:13.520 | So you can read these two books for free.

00:14:15.920 | And could you tell me what that first book was all about?

00:14:18.920 | - The first book was really just a collection of articles

00:14:22.120 | that I had written at the Motley Fool.

00:14:24.280 | Very similar, actually, to "The Psychology of Money,"

00:14:27.320 | which is also a collection of 20 or so points

00:14:30.960 | about behavioral finance and how we think about money

00:14:33.400 | that all kind of tie in a story to it.

00:14:35.560 | The first book that I wrote, which is very short,

00:14:37.960 | again, it's more or less a long-form blog post

00:14:39.920 | that we turned into Kindle format, and it's free now,

00:14:42.760 | is just a short collection of articles

00:14:45.080 | and observations that I had put together

00:14:47.800 | while writing at the Motley Fool.

00:14:49.040 | That was 10 or so years ago, so a lot of those were early.

00:14:51.880 | A lot of those were kind of related to things

00:14:53.480 | that happened during the financial crisis of 2008,

00:14:55.640 | because you go back to 2010,

00:14:57.040 | that's what everyone was talking about, writing about.

00:14:59.160 | But that, in some ways, I guess,

00:15:00.360 | was kind of the early format

00:15:02.920 | that ultimately became "The Psychology of Money" book

00:15:06.080 | that just came out.

00:15:07.080 | - So let's get into "The Psychology of Money,"

00:15:09.720 | a very well-written book, I really enjoyed it.

00:15:11.800 | It's a rather easy read, and don't take that the wrong way.

00:15:14.600 | I mean, I was laughing as I was reading it,

00:15:17.160 | and I was seeing myself in this book.

00:15:19.120 | It's not a technical book.

00:15:20.960 | It doesn't get into quantitative theory,

00:15:23.680 | or the capital asset pricing model, or anything like this.

00:15:27.000 | But it's a really good book on what you call soft skills.

00:15:31.120 | And I'll just read one sentence from your introduction.

00:15:34.240 | I think it sums it up really well.

00:15:36.040 | The aim of this book is to use short stories

00:15:39.120 | to convince you that soft skills are more important

00:15:43.720 | than the technical side of money.

00:15:45.800 | I think you really did that in this book.

00:15:47.920 | You were able to bring out all those quirky things

00:15:50.200 | that we, as human beings, do to really hurt ourselves.

00:15:53.320 | - Yeah, I think what's really important

00:15:54.800 | is that we tend to view finance

00:15:58.000 | through this academic analytical lens.

00:16:00.120 | Let's tend to how we think about money,

00:16:02.480 | particularly at the CFA, CFP level,

00:16:05.120 | in terms of a very analytical field.

00:16:07.120 | And it's not that any of that stuff is bad or wrong.

00:16:09.720 | That's not it whatsoever.

00:16:10.840 | The technical analytical research data side of investing

00:16:14.280 | is very important.

00:16:15.560 | But what's interesting to me is that the psychological,

00:16:18.240 | the softer side of investing, if you have not mastered that,

00:16:21.600 | if you're not putting that at the forefront

00:16:24.000 | of what you're doing, then none of the analytical skills

00:16:27.080 | that sit on top of it necessarily matter.

00:16:29.200 | Because look, you can have a PhD in finance from MIT.

00:16:32.560 | You can be the smartest, technically-minded,

00:16:34.920 | data-driven person in the world.

00:16:37.200 | But if you panic in March of 2020, or in 2008,

00:16:41.400 | or if you lose your cool during the tech run-up of 1999,

00:16:45.120 | none of that analytical skill matters.

00:16:47.440 | So if you are not managing your relationship

00:16:49.800 | with greed and fear,

00:16:51.000 | or your ability to take a long-term mindset,

00:16:53.040 | it's not that the other stuff doesn't matter.

00:16:54.480 | It's that the behavioral stuff has the ability

00:16:56.040 | to neutralize any of the analytical skills

00:16:58.480 | that you might have.

00:16:59.680 | So if you think of a pyramid of financial skills,

00:17:02.040 | the base of that pyramid that sits at the bottom

00:17:04.720 | is behavior, and everything that sits above that,

00:17:07.400 | the analytical skills in terms of asset allocation,

00:17:10.200 | stock selection, taxes, et cetera,

00:17:12.560 | none of those things matter until the skill

00:17:15.040 | that sits below it has been mastered.

00:17:17.600 | And if people don't master the behavioral side of investing,

00:17:20.000 | then I think none of the technical skills matter.

00:17:21.880 | And we can see this in terms of these individual examples.

00:17:25.480 | There are people who have PhDs in finance

00:17:27.600 | and become partners at Goldman Sachs that go bankrupt,

00:17:30.280 | while at the same time, you have people

00:17:31.680 | who have no financial education, no training, no skills,

00:17:35.480 | that do very well for themselves financially,

00:17:37.800 | simply because one person mastered

00:17:40.520 | the behavioral side of investing,

00:17:41.840 | and the other person didn't.

00:17:43.120 | And there are very few other fields where it's like that,

00:17:45.440 | where you can be very technical-minded

00:17:47.120 | and have all the technical skills,

00:17:48.940 | but if you don't master the behavioral side of your field,

00:17:51.480 | none of the technical skills matter.

00:17:53.640 | - One of the things that I battle against are rules of thumb.

00:17:57.640 | But I'm speaking with a client.

00:17:59.520 | I'll say to them, "What do you think your asset allocation

00:18:02.980 | "between stocks and bonds should be?"

00:18:06.120 | Very simple question.

00:18:07.960 | And what will almost happen almost all of the time

00:18:11.420 | is they won't give me their answer.

00:18:14.200 | They'll give me the, "Well, most people say,"

00:18:18.240 | or, "Well, from what I was reading,"

00:18:21.300 | or, "The books I've read said

00:18:23.960 | "that you should have your agent bonds,

00:18:26.540 | "or you should have this and you should have that."

00:18:28.120 | And I say to them, "Just throw all of that out.

00:18:31.720 | "I don't care what other people say

00:18:35.800 | "the average investor's asset allocation should be.

00:18:39.000 | "I want you to tell me what you think

00:18:42.920 | "your asset allocation should be,

00:18:45.020 | "forgetting about all of that stuff."

00:18:46.720 | And the reason I say that is because

00:18:48.640 | in the very first chapter of your book,

00:18:50.640 | it's called "No One's Crazy."

00:18:52.840 | And you talk in here about individual history.

00:18:57.260 | In other words, how much risk are you willing to take

00:18:59.960 | is what happened to you in the past.

00:19:02.840 | So your asset allocation between stocks and bonds

00:19:05.160 | is going to have a great deal

00:19:06.580 | about what you've experienced in the past.

00:19:09.840 | Well, here's one example.

00:19:10.880 | If you were born in 1950 in the United States,

00:19:13.860 | then during your teens and 20s,

00:19:15.880 | your young, impressionable teens and 20s,

00:19:18.160 | where you're learning like a baseline foundation

00:19:20.840 | of knowledge about how the economy works.

00:19:22.840 | During those years, the S&P 500,

00:19:25.120 | adjusted for inflation, went nowhere.

00:19:27.420 | 0% return adjusted for inflation

00:19:29.460 | during your teens and 20s.

00:19:30.400 | That was your early experience in the stock market.

00:19:33.540 | If by contrast, you were born in 1970,

00:19:35.980 | then during your teens and 20s,

00:19:37.300 | your early impressionable years,

00:19:38.660 | the market went up tenfold adjusted for inflation.

00:19:41.860 | So just based off of the generation

00:19:43.600 | that you were born into, just born 20 years apart,

00:19:45.860 | you started your life,

00:19:47.220 | your early experience in the stock market

00:19:48.860 | was completely fundamentally different.

00:19:51.020 | And that sticks with people for the rest of their life.

00:19:53.220 | The early experience that they have in markets

00:19:55.820 | tends to stick with them.

00:19:57.260 | This is especially true if you look at the generation

00:19:59.220 | that grew up during the Great Depression,

00:20:01.380 | in terms of that trauma stuck with them

00:20:03.940 | for the rest of their life.

00:20:04.820 | And you can measure their unwillingness to go into debt

00:20:08.740 | or invest in the stock market to greater degrees

00:20:11.060 | relative to other generations.

00:20:12.820 | And what's interesting about this is,

00:20:14.660 | it's not that the generation,

00:20:15.780 | that one generation is smarter

00:20:17.460 | or has better information than another,

00:20:19.100 | that's not it whatsoever.

00:20:20.260 | They're equally smart, they're equally informed,

00:20:22.300 | but because they have different experiences,

00:20:24.140 | they go through their life thinking about risk

00:20:25.940 | and thinking about opportunity

00:20:27.140 | in fundamentally different ways.

00:20:28.780 | This is true from generation to generation.

00:20:30.580 | It's true from country to country.

00:20:32.340 | It's true from different parts of the country.

00:20:34.300 | It's even true just based off of the value

00:20:36.500 | that were instilled in you by your parents,

00:20:38.780 | which is gonna be different for me

00:20:39.980 | than it is different for you, Rick,

00:20:41.420 | than it is different from anyone else listening to this.

00:20:43.940 | We all kind of see the world through this own unique lens

00:20:47.420 | and become prisoners of our own unique past.

00:20:50.340 | And that's fine, I think.

00:20:51.260 | I think one of the big takeaways from it

00:20:53.180 | is just realizing that since everyone is different,

00:20:55.700 | there is not necessarily one right answer in finance,

00:20:58.700 | that the decisions that you come to with your money

00:21:00.540 | are gonna be different from mine,

00:21:01.580 | not because we're disagreeing with each other,

00:21:03.500 | just because we have different goals

00:21:04.860 | and different perspective based off of our experiences.

00:21:07.580 | And a lot of times in finance,

00:21:08.980 | when there are debates about different investing strategies

00:21:12.700 | or where the economy is going next

00:21:14.540 | or what you should do with your money,

00:21:16.060 | it's not necessarily that people

00:21:17.380 | are actually disagreeing with each other

00:21:19.340 | or arguing with each other.

00:21:20.740 | A lot of times what it is

00:21:21.700 | are just people reflecting the fact

00:21:23.500 | that they see the world through a different lens

00:21:25.460 | because of their own experiences.

00:21:27.180 | And I think it's important for us

00:21:28.060 | to come to a greater conclusion,

00:21:30.300 | an idea that equally smart, equally informed people

00:21:33.100 | can come to different conclusions, and that's fine.

00:21:35.740 | That there's a great quote from financial advisor,

00:21:37.860 | Tim Maurer, who says,

00:21:39.100 | "Personal finance is more personal than it is finance."

00:21:42.540 | And I think we should embrace that more

00:21:44.180 | and realizing that, look,

00:21:45.220 | there are crazy things that people do with their money

00:21:48.060 | that you can look at,

00:21:48.900 | you and I can look at and say, that's a bad idea.

00:21:51.140 | But most of the decisions that people make with their money,

00:21:53.380 | check the boxes in their head in that given moment

00:21:56.220 | in terms of, this is how I think the world works.

00:21:58.860 | And this is what I want out of the world.

00:22:00.500 | So therefore, this is what I'm gonna do with my money.

00:22:02.860 | And if you think about that,

00:22:03.900 | just in terms of no one is necessarily crazy,

00:22:06.020 | that we're all trying to figure out

00:22:07.740 | what we should do with our money

00:22:08.940 | based off of how we think the world works.

00:22:11.420 | You become a little bit more empathetic

00:22:13.900 | to differing views and views

00:22:15.220 | that you otherwise might disagree with

00:22:16.660 | that don't make sense to you,

00:22:18.060 | but might make sense and be the good strategy,

00:22:21.740 | the good thing to do with their money for other people.

00:22:24.420 | - I often find it interesting

00:22:27.460 | that when children watch their parents suffer

00:22:30.660 | through something like a downturn

00:22:33.220 | where they would lose their jobs, lose their money,

00:22:37.500 | that the children see this

00:22:39.540 | during their impressionable years.

00:22:41.620 | And the parents are talking about,

00:22:43.980 | I'll never get into the stock market again.

00:22:45.540 | I'll never do this again.

00:22:46.380 | I'll never do that again.

00:22:47.300 | And the children hear this and listen to it.

00:22:49.740 | And that reflects in their attitudes, at least for a while.

00:22:53.260 | And I say that because I recall a conversation

00:22:57.180 | sitting around a table with some young people

00:23:00.540 | who worked on Wall Street.

00:23:01.780 | This was about 2012.

00:23:04.180 | And they had just gotten out of college

00:23:06.460 | and they had just gotten their first job

00:23:08.260 | working on Wall Street.

00:23:09.260 | And we were talking about investing their 401k plan.

00:23:12.700 | And I was absolutely shocked

00:23:14.380 | that some of them didn't wanna put any money

00:23:16.420 | in the stock market.

00:23:17.820 | And they worked on Wall Street

00:23:19.460 | because they had seen, and their answer was,

00:23:21.340 | I watched my parents suffer.

00:23:23.140 | I watched them lose almost everything

00:23:25.820 | in the financial crisis of 2007 and 2008.

00:23:29.980 | And I just don't trust the market.

00:23:33.140 | - Yeah, I think that's true for a lot of things.

00:23:34.780 | It's true for politics by and large as well,

00:23:36.660 | where we think we are open-minded

00:23:38.460 | and some people are more open-minded than others.

00:23:40.580 | But by and large, on average, in general,

00:23:43.220 | people tend to take their political views

00:23:44.980 | from what they learned from their parents.

00:23:46.220 | It's true for finance as well.

00:23:48.020 | It's true in business as well.

00:23:49.260 | Howard Schultz of Starbucks

00:23:51.460 | has made this point many times

00:23:52.900 | that the reason that he is so adamant

00:23:55.620 | on having good health insurance for Starbucks workers,

00:23:58.260 | even at the lowest levels,

00:23:59.620 | is because he personally watched his father,

00:24:02.820 | I believe, break his leg and didn't have health insurance

00:24:06.420 | and was unable to work

00:24:07.900 | and then completely made the whole family destitute

00:24:10.460 | because of it.

00:24:11.300 | And that personal experience

00:24:12.420 | and watching that when he was a kid

00:24:14.060 | is what made him really want to emphasize health insurance

00:24:16.820 | for Starbucks employees.

00:24:18.220 | So there are a lot of things that people like me

00:24:20.740 | and you and everyone else,

00:24:21.900 | we're trying to learn

00:24:22.900 | and read about other people's experiences, which is great,

00:24:25.420 | and try to be open-minded.

00:24:26.660 | But unless you have experienced something firsthand,

00:24:29.740 | I think it's hard to have the emotional scar tissue

00:24:32.460 | that you otherwise would,

00:24:33.420 | that people who have actually been in the trenches

00:24:34.940 | and experienced those things.

00:24:36.260 | And all of us have experienced bad events,

00:24:39.020 | tragic events to different degrees,

00:24:40.540 | but they're all different.

00:24:41.380 | They happen at different points in our lives

00:24:42.980 | to different degrees and different context.

00:24:44.940 | So that's why we just go through the world,

00:24:46.340 | seeing the world through a slightly different lens

00:24:48.460 | than one another.

00:24:49.900 | Really important in finance and economics,

00:24:52.620 | just to realize that everyone

00:24:53.540 | has a different view of the world.

00:24:55.820 | - I asked the Bogleheads, when I'm gonna have a guest on,

00:24:59.020 | if they could give me some questions

00:25:01.180 | that they have for the guests.

00:25:03.100 | One person who responded, who had read your book, said,

00:25:06.180 | "A question I have is whether you have developed insights

00:25:10.380 | "into strategies people can use

00:25:13.100 | "to change their behavior around money."

00:25:16.420 | So we have these innate, ingrained beliefs.

00:25:19.860 | How do you change?

00:25:21.020 | - You know, this might sound cynical

00:25:24.340 | or sort of fatalistic, but I think by and large,

00:25:27.820 | my answer to that question is no.

00:25:29.180 | I don't think there are a lot of things that we can do

00:25:31.780 | for the big behavioral flaws and biases

00:25:34.180 | that we have to overcome them.

00:25:36.300 | This came to me from Daniel Kahneman,

00:25:37.860 | who is, of course, the world's foremost authority

00:25:40.140 | on this topic, who's been asked several times

00:25:42.540 | some variation of the question.

00:25:44.620 | They say, "Dr. Kahneman, you've done all this research,

00:25:46.540 | "all this insight into behavioral finance.

00:25:48.460 | "Has it made you a less biased person?"

00:25:50.580 | And he always says, "Absolutely not."

00:25:52.740 | He has the same biases, the same behavioral flaws

00:25:55.100 | that he's had his entire life.

00:25:56.700 | And which should make sense,

00:25:57.740 | because a lot of the behavioral flaws that we have

00:25:59.820 | in finance have to do with dopamine and cortisol

00:26:03.620 | and these hormones in our brain.

00:26:05.420 | And it's ridiculous to think that we can read a blog post

00:26:08.380 | and change that, change those hormones

00:26:10.420 | based off of something that we read in the moment.

00:26:13.180 | So for me, rather than trying to assume

00:26:14.740 | that we can fix our flaws, that we all have,

00:26:17.260 | they're all different flaws,

00:26:18.100 | but everyone is behaviorally flawed in some way,

00:26:21.260 | rather than assuming we can fix them,

00:26:23.100 | to me, it's just becoming a little bit more introspective

00:26:25.540 | and embracing your flaws and realizing,

00:26:27.900 | and if you look at your past and realizing the areas

00:26:31.420 | in which you have erred in your financial life,

00:26:33.700 | realizing that that is probably a good indication

00:26:35.780 | of what you are likely to do in the future,

00:26:37.740 | and then situating your finances, investing your money,

00:26:40.420 | having an asset allocation that embraces those flaws,

00:26:43.180 | rather than assuming you've learned your lesson in the past.

00:26:45.860 | So for one example, if you are someone who panicked

00:26:48.700 | in March of this year, and in 2008, and in 2001,

00:26:52.700 | rather than assuming that you have learned your lesson

00:26:54.740 | this time and you won't do it again,

00:26:56.540 | you should probably just embrace the fact

00:26:58.180 | that you have a lower risk tolerance

00:26:59.740 | than maybe you thought you did.

00:27:01.380 | You should have more of your assets into bonds and cash

00:27:05.740 | than you otherwise did,

00:27:06.860 | rather than assuming you can learn your lesson.

00:27:08.580 | I think your past behavior is gonna be

00:27:10.180 | a very good indication of your future behavior,

00:27:12.540 | regardless of how hard you try to fix those flaws.

00:27:15.780 | - I completely agree.

00:27:16.820 | And a lot of times that I'm talking with clients,

00:27:18.700 | I ask them, how did you react during 2007 and 2008

00:27:22.460 | when the market lost 60%?

00:27:24.820 | And if their answer is, I didn't do anything,

00:27:28.860 | well, that's a good indication to me

00:27:31.460 | that their tolerance for risk is probably relatively high.

00:27:35.140 | But if they did something, like got out,

00:27:37.980 | or reduced their allocation, or quote-unquote,

00:27:40.420 | oh, I made a terrible mistake, and I sold, so forth,

00:27:43.500 | it tells me that whatever allocation they had going in

00:27:47.460 | to 2007 and 2008, it might have only been 60% stocks,

00:27:51.100 | but that was still too high because they sold.

00:27:54.860 | So your past actions do tell probably

00:27:59.140 | what you're going to do in the future.

00:28:00.940 | And then in the future, quite frankly,

00:28:03.460 | and I don't know if this has any effect

00:28:05.260 | on what we're talking about,

00:28:06.700 | but once you go from an accumulation to a distribution

00:28:10.540 | in your portfolio, because you're retired now,

00:28:13.220 | and you're gonna live off your portfolio,

00:28:15.100 | your portfolio, you can't make up the mistakes

00:28:17.580 | as easily anymore because you're now distributing money

00:28:21.260 | instead of bringing on more money.

00:28:22.980 | When you're young and you make mistakes,

00:28:24.740 | okay, you don't do it again,

00:28:26.860 | just stay in for the long term.

00:28:28.580 | You continue to, you didn't lose that much money

00:28:30.700 | because you didn't have that much money in

00:28:32.420 | when you jumped out.

00:28:33.540 | You're gonna continue to earn money

00:28:34.740 | for the next 20, 25 years.

00:28:37.140 | But when you're 65 or so and you decide to retire,

00:28:41.300 | you can't afford to lose it.

00:28:42.820 | You can't afford those biases to take hold of you

00:28:45.460 | where you capitulate.

00:28:46.700 | - No, it's really important.

00:28:47.620 | I mean, one story that people talk a lot about these days

00:28:50.380 | is what's going on with Robinhood right now.

00:28:52.380 | Surge this year in popularity, surge in volume,

00:28:55.140 | seems like virtually every young person

00:28:57.340 | under the age of 25 has a Robinhood account

00:28:59.420 | and they're all buying bankrupt companies and penny stocks.

00:29:03.380 | There's actually one maybe silver lining from that,

00:29:05.860 | which is, A, first,

00:29:07.620 | you know exactly how that story is gonna end.

00:29:09.260 | You don't know when it's gonna end,

00:29:10.300 | but you know exactly what's gonna happen to those people.

00:29:12.300 | It's all gonna end in tears, of course.

00:29:15.020 | But then there's maybe one silver lining to that,

00:29:16.780 | which is learning that lesson

00:29:18.980 | when you are 19 or 20 years old

00:29:21.500 | is probably so beneficial

00:29:22.980 | rather than learning that lesson about risk

00:29:25.300 | and taking unnecessary risk in the stock market

00:29:27.980 | when you are 45 or 50 or 60 years old.

00:29:30.540 | So maybe that's one silver lining

00:29:31.940 | to the Robinhood story this year

00:29:33.460 | is that people are learning about risk the hard way,

00:29:35.980 | firsthand, when they are by and large young

00:29:38.340 | versus later in life

00:29:39.340 | when they are either saving for their kids to go to school

00:29:41.580 | or saving for their own retirement, et cetera,

00:29:43.700 | when those lessons become very devastating

00:29:45.900 | versus learning it when you're 19 years old.

00:29:48.020 | - Yeah, absolutely.

00:29:48.900 | Let's go ahead and get back to the book

00:29:50.580 | and some of the chapters in the book.

00:29:53.560 | In chapter four, you have confounding and compounding.

00:29:58.200 | And you talk about Warren Buffett,

00:30:00.920 | and you said that he was worth, when you wrote the book,

00:30:05.280 | $84.5 billion,

00:30:07.240 | but $81.5 billion of that came after he was age 65.

00:30:13.560 | Now, he's 90 years old now, so that's 25 years ago.

00:30:17.960 | But the point is that most of his wealth

00:30:19.880 | actually occurred after age 65.

00:30:22.160 | And it was all due to compounding.

00:30:25.160 | And once people learn the benefits of compounding

00:30:29.720 | and staying the course,

00:30:33.200 | this is where, eventually, over time,

00:30:35.920 | they begin to make money.

00:30:38.240 | - Yeah, I think what's interesting about Buffett

00:30:40.240 | is that if he were a normal person

00:30:42.480 | and had started investing when he was 22 or 25

00:30:46.160 | and retired at 65, like most people would, a normal person,

00:30:49.480 | and if he had earned the same average annual returns

00:30:52.600 | during that period, 22% per year, great returns,

00:30:55.640 | you would have never heard of him.

00:30:56.920 | He never would have become a household name.

00:30:58.800 | His net worth would have been literally

00:31:00.120 | something like $12 million, with an M, not a B.

00:31:03.160 | You would have never heard of him.

00:31:04.000 | The reason he is so successful in dollar terms

00:31:06.640 | is because he started investing at age 11,

00:31:08.920 | and he continues through today at age 90.

00:31:11.400 | That's why he is so successful.

00:31:13.280 | So yes, he is a great investor.

00:31:14.640 | He is a skilled investor, of course, period.

00:31:16.800 | But the real secret to his wealth in dollar terms

00:31:19.160 | is just the amount of time he has been investing for.

00:31:22.160 | And that's really important,

00:31:23.000 | because whenever there are investors who talk about Buffett

00:31:26.200 | and try to piece together how he's done it,

00:31:28.240 | they go into great detail about how Buffett thinks about

00:31:30.640 | moats and business models and brands

00:31:32.600 | and market cycles and whatnot,

00:31:34.000 | which is all good, important stuff.

00:31:35.720 | But the single most important part of explaining his success

00:31:38.640 | is just the amount of time he has been investing for.

00:31:41.080 | Now, I think that explanation is just too simple

00:31:43.760 | for people to take seriously.

00:31:45.400 | They don't wanna think that his success

00:31:46.720 | can be just tied to something as simple

00:31:48.880 | as the amount of time he's been doing it for.

00:31:51.080 | But that, again, just highlights the idea

00:31:52.520 | that compounding is not intuitive.

00:31:54.320 | It's not intuitive to think that someone

00:31:56.480 | could achieve that much success after their 65th birthday,

00:32:01.120 | even if he's 90 years old today.

00:32:02.840 | It's not intuitive to think that all of the gains

00:32:05.600 | can be tied to his geriatric years,

00:32:08.360 | even if he's been doing this for his entire life.

00:32:10.240 | But that's how compounding works.

00:32:11.720 | The gains for compounding are almost unnoticeable

00:32:14.400 | in the early years.

00:32:15.480 | They get good in the middle years.

00:32:17.160 | And then it's not until you've been investing

00:32:18.520 | for 30, 40, 50 years

00:32:20.680 | that things can just start getting ridiculous.

00:32:22.840 | So look, if you are someone who is 60 years old

00:32:25.880 | listening to this, you might say,

00:32:26.880 | "Well, that doesn't do me any good.

00:32:28.120 | "I don't have 50 years in front of me."

00:32:30.040 | But that's just the hard truth about how compounding works

00:32:32.760 | is that it is something that takes place over decades.

00:32:35.280 | And of course, all of our attention goes to

00:32:37.440 | what is happening in the stock market this month,

00:32:39.720 | this quarter, this year, even this decade,

00:32:42.040 | when we know over the long course of investing history,

00:32:45.000 | what really matters is not necessarily

00:32:46.880 | what's gonna happen this year or even this decade,

00:32:49.040 | but what's gonna happen over the next 20, 30, 40, 50 years.

00:32:52.160 | That's where the big gains come,

00:32:53.480 | the big gains that so many of us look at

00:32:56.160 | and aspire to and try to learn from.

00:32:58.360 | And it's so easy to overlook

00:32:59.920 | where those gains actually came from

00:33:01.440 | and what actually caused them.

00:33:03.560 | - I often talk with people who are professionals

00:33:06.920 | about how long it took them to become qualified

00:33:11.280 | to do what they do.

00:33:12.560 | And then even after that,

00:33:14.640 | how long it took to begin to accumulate wealth

00:33:17.000 | and become well-known in their industry

00:33:19.320 | and basically become successful.

00:33:22.960 | And it takes almost a lifetime.

00:33:25.760 | I mean, you start out in elementary school,

00:33:27.400 | then you go to high school,

00:33:29.680 | and then you get into a good college,

00:33:31.160 | and then you study biology,

00:33:33.160 | and then you go to medical school,

00:33:34.920 | then you spend 10 years in medical school at various levels,

00:33:38.240 | and you accumulate all this debt

00:33:40.400 | going through medical school,

00:33:41.680 | and then you finally get out of residency

00:33:43.200 | and you start working.

00:33:44.720 | And it takes years and years and years

00:33:47.320 | to actually see the compounding effect

00:33:51.240 | of all the work that you're doing

00:33:53.360 | to become a successful physician.

00:33:56.360 | And yet, when you look at investing,

00:33:58.240 | people seem to wanna make it like tomorrow.

00:34:01.040 | - That's, I mean, that's the hardest part.

00:34:03.240 | And there are some fields where you can gain

00:34:06.840 | some sort of skill in a fairly short period of time.

00:34:11.000 | And that's why I think it's intuitive to think,

00:34:14.040 | if you are an investor that you need to see results

00:34:16.360 | in the next six months,

00:34:17.320 | let's just say if you are going to the gym,

00:34:19.040 | if you are someone who is not in very good shape

00:34:21.320 | and you start going to the gym every day,

00:34:23.160 | within six months, you should start seeing results.

00:34:25.360 | Not right away, not overnight, not in the first week,

00:34:27.280 | but after six months, you should see some results.

00:34:29.600 | But if you are someone who is just getting into investing,

00:34:32.000 | there is no expectation whatsoever

00:34:34.040 | that after six months or even after one year,

00:34:36.400 | you're gonna see anything that looks like returns.

00:34:38.280 | You could have significantly less money

00:34:39.880 | than you did after a year.

00:34:41.120 | And that's in the normal course of operations

00:34:44.360 | as an investor, just the history of volatility.

00:34:46.560 | So it's not intuitive for a lot of people getting into it

00:34:49.480 | to understand how much time it takes.

00:34:52.800 | But historically, we know that to put the odds of success

00:34:55.960 | in your favor and for the odds of success

00:34:58.320 | to be greatly in your favor,

00:34:59.720 | to where you have a very good chance

00:35:01.120 | of doing well over time,

00:35:02.520 | you need to be invested for at least 10, if not 20 years

00:35:05.600 | before the odds of success are in

00:35:07.680 | between 80 and 90% historically from everything we know

00:35:12.440 | that you will have a decent return accruing to you.

00:35:15.560 | So a lot of investors who say,

00:35:16.680 | "Well, I don't have 20 years in front of me."

00:35:18.760 | I think it's just important to realize

00:35:20.120 | that if that's the case,

00:35:21.080 | you are just relying on a greater degree of luck

00:35:23.680 | to fuel your success, to fuel your returns.

00:35:26.320 | And that's what it is.

00:35:27.760 | Most investors, if you ask them,

00:35:29.000 | "Are you a long-term investor?"

00:35:30.280 | They will tell you yes.

00:35:31.640 | Most investors will say that.

00:35:33.200 | They think they're long-term investors.

00:35:34.720 | But then if you ask them,

00:35:35.600 | "What is your definition of long-term?"

00:35:37.520 | A lot of investors will tell you one year

00:35:39.560 | or three years or five years.

00:35:41.600 | The Federal Reserve actually does a survey

00:35:43.440 | where they ask people

00:35:44.600 | their long-term inflation expectations.

00:35:47.000 | And the definition of a long-term

00:35:48.480 | that they use in that survey is three years.

00:35:50.840 | So for a lot of people, three years, five years, 10 years,

00:35:53.680 | that's definitely the long run.

00:35:55.120 | Whereas we know if you look at the history of investing,

00:35:57.000 | it's at least 10 years, if not closer to 20 years,

00:36:00.040 | that counts as a good definition of long-term,

00:36:02.080 | which is the odds of success

00:36:04.080 | for earning a positive return are in your favor.

00:36:06.800 | - Back in the day when I was,

00:36:08.240 | I think I wrote my first book 20 years ago,

00:36:10.400 | I was looking at how long people held

00:36:13.040 | onto their equity mutual funds.

00:36:15.840 | And the average was about two to three years

00:36:18.440 | before they sold them

00:36:19.520 | and went on to another equity mutual fund.

00:36:22.000 | - Right.

00:36:22.880 | - Let's talk about chapter five.

00:36:25.320 | Now that you've made your money, how do you keep it?

00:36:28.720 | How do you stay wealthy?

00:36:30.600 | - The key point here is that getting rich and staying rich

00:36:34.000 | are two completely separate skills

00:36:36.080 | that often have contradictory skillsets,

00:36:38.520 | but you need to nurture both of them to do well over time.

00:36:41.920 | Getting rich requires being an optimist

00:36:44.000 | about the long run, taking a risk,

00:36:46.000 | being optimistic about the future of the economy,

00:36:49.280 | the future of business, the future of society.

00:36:52.120 | You need to be optimistic about that in order to get rich.

00:36:54.600 | Staying rich requires almost the opposite.

00:36:56.640 | It requires a pessimism,

00:36:58.280 | if not paranoia about the short run.

00:37:00.240 | It requires that you have enough adequate liquid savings

00:37:03.120 | and the avoidance of debt

00:37:04.160 | so that you can survive the short run

00:37:06.200 | because you know the short run is gonna be

00:37:07.920 | a continuous chain, a never-ending chain

00:37:10.680 | of setbacks and disappointments and breakages

00:37:13.560 | and recessions and bear markets

00:37:15.000 | and now pandemics and crazy elections.

00:37:17.480 | You know that that is the history

00:37:19.200 | of the United States and around the world,

00:37:20.560 | that there's always bad news in the short run

00:37:22.760 | that you need to prepare for.

00:37:24.320 | So I think those are the two conflicting skills

00:37:26.720 | that you need to have.

00:37:27.560 | And they seem like they're contradictory,

00:37:29.120 | but to me, for most people,

00:37:31.160 | I think the way to think about this

00:37:32.360 | is that you need to save like a pessimist

00:37:35.160 | and invest like an optimist.

00:37:36.920 | You need to save money with the idea

00:37:38.520 | that we might fall into a new recession at any moment,

00:37:41.360 | that there could be a bear market at any moment,

00:37:43.160 | that you can get laid off at any moment.

00:37:44.800 | You need to save like a pessimist

00:37:46.440 | while investing like an optimist

00:37:48.640 | with the idea that over the next 10 or 20 years,

00:37:51.200 | people are gonna figure problems out

00:37:52.880 | and we're gonna get better in the economy.

00:37:55.800 | We're gonna get more productive.

00:37:57.040 | There's gonna be profits that accrue to shareholders

00:37:59.200 | and the stock market is gonna rise in a rational way.

00:38:02.000 | I think that's investing like an optimist.

00:38:03.400 | So you need to have both of those together at the same time.

00:38:06.080 | Not many people do.

00:38:07.840 | I think there are more people

00:38:09.560 | that are good at one or the other.

00:38:11.560 | They may be good at getting rich

00:38:13.080 | and during bull markets, they do extremely well,

00:38:15.440 | but they're not necessarily good at staying rich.

00:38:17.360 | They're not good at knowing the boundaries

00:38:18.840 | of how much risk they should take

00:38:21.040 | or how to situate their finances

00:38:23.160 | so that when the tide goes out, so to speak,

00:38:25.360 | they're not gonna get wiped out themselves.

00:38:27.320 | And then there are also a subset of people

00:38:28.800 | that are not good at getting rich in the first place.

00:38:31.280 | And they're so conservative, so pessimistic

00:38:33.240 | about what's going on in the world

00:38:34.400 | because there's always bad news,

00:38:36.200 | bad headlines in the news.

00:38:37.920 | They get so caught up in that

00:38:39.480 | that they're never actually able to invest like an optimist.

00:38:42.360 | So I think nurturing both of those skills separately

00:38:45.040 | and realizing that they are separate skills

00:38:47.000 | that have separate skill sets

00:38:48.480 | is really important to do well over the long run.

00:38:51.840 | - One of the chapters is save money.

00:38:54.880 | And I found this to be so basic.

00:38:58.080 | And I think the point that you make in this chapter

00:39:00.800 | is look, just save money.

00:39:03.000 | A lot of people say, I wanna save for a boat,

00:39:05.160 | I wanna save for a house, I wanna save for retirement.

00:39:07.560 | You make the argument, it doesn't really matter.

00:39:10.280 | Even if you're not saving for anything, just save.

00:39:13.120 | - Yeah, I think most people need a reason to save.

00:39:18.000 | And they're saving for a specific event

00:39:19.720 | that they can foresee in the future.

00:39:21.120 | They can foresee that they need a new car in the next year.

00:39:23.400 | So they're saving for that.

00:39:24.880 | To me, savings has always just been a hedge

00:39:27.360 | against the idea that the most important events

00:39:29.920 | in your life and around the world

00:39:31.280 | are the things that we cannot see coming.

00:39:33.280 | It's COVID-19 that we could not see coming

00:39:35.800 | before it happened.

00:39:36.880 | It's the big recession, the big layoffs,

00:39:39.080 | the big trauma that everyone goes through

00:39:41.640 | at some period in life that you can't see coming.

00:39:43.720 | That's the stuff you need to save for.

00:39:45.480 | So I think you don't need any reason to save money

00:39:48.120 | other than the idea that what's gonna be really important

00:39:50.920 | to both your happiness and your success in life

00:39:53.160 | is your ability to have options and control your time

00:39:56.120 | and be in control of the situation

00:39:58.960 | when something bad happens to you in your life.

00:40:00.960 | If there's a layoff or a medical emergency,

00:40:03.120 | having options in your life

00:40:04.880 | are gonna be one of the most important assets that you have.

00:40:07.920 | And you get those options by saving for things

00:40:10.120 | that you cannot see coming.

00:40:11.640 | Even when everything seems like it's going right

00:40:14.040 | and your career's on track

00:40:15.520 | and the economy seems like it's going right,

00:40:17.160 | to still have a good buffer, a good level of savings,

00:40:20.160 | room for error in your personal finances

00:40:22.760 | that allows you to get through those hard times

00:40:25.280 | that you might not see coming,

00:40:26.480 | that no one can predict coming,

00:40:27.640 | but we know are just an ever-present part

00:40:29.640 | of everyone's life.

00:40:31.400 | - One of the chapters you wrote is called Surprise.

00:40:34.000 | By the way, I love the title of your chapters.

00:40:35.600 | They're very simple.

00:40:36.600 | (laughs)

00:40:38.440 | Very descriptive, too, by the way.

00:40:40.200 | But you say something in here

00:40:41.720 | that is absolutely brilliant.

00:40:44.080 | You say historians are not prophets.

00:40:47.520 | Historians are not prophets.

00:40:49.120 | Explain that.

00:40:50.840 | - The whole study of history, the whole subject of history

00:40:53.320 | is basically looking at surprises.

00:40:55.040 | It's looking at events

00:40:56.040 | that no one necessarily saw coming

00:40:58.080 | because those are the things

00:40:58.960 | that move the needle in the world.

00:41:01.080 | It's things like the Great Depression and the World Wars

00:41:05.000 | that before they happened,

00:41:06.440 | particularly well before they happened,

00:41:07.720 | no one could have possibly seen those coming

00:41:10.040 | and no one could have seen them playing out

00:41:11.520 | the way in which they did.

00:41:13.040 | Those are the things that make the most difference in life.

00:41:15.720 | So of course historians are not prophets about the future

00:41:18.240 | because what historians do

00:41:19.800 | is they spend all their time studying things

00:41:22.160 | that nobody saw coming.

00:41:23.760 | But I think there's an irony

00:41:24.800 | that we tend to look at history

00:41:26.680 | like it is a roadmap of the future,

00:41:28.720 | particularly if for something analytical like investing,

00:41:31.360 | where we have 100 years of investing data

00:41:34.280 | and we combine that data

00:41:36.400 | to give us a view of what's gonna happen in the future

00:41:39.120 | without realizing that a lot of the big events

00:41:41.120 | that we pay attention to,

00:41:42.320 | the Great Depression, the crash of 1987, even 2008,

00:41:45.680 | or this year with COVID-19,

00:41:47.440 | all of those big events in the history that we have

00:41:50.360 | are things that people did not see coming

00:41:52.000 | before they happened.

00:41:53.200 | So how should we use those as a roadmap of the future?

00:41:56.400 | The biggest lesson that we should take away

00:41:58.120 | from those surprises is that the world is surprising.

00:42:01.000 | It was surprising in the past

00:42:02.160 | and it's gonna be surprising in the future as well.

00:42:04.640 | And I think the way to deal with that as an investor

00:42:08.120 | is to have more expectations than you have forecast.

00:42:12.600 | The difference of that is this.

00:42:14.280 | If I were to say hypothetically,

00:42:16.600 | we are gonna have the next recession in Q3 of 2021.

00:42:20.520 | If I were to say that, that is a forecast.

00:42:22.480 | I'm forecasting something specific that's gonna happen.

00:42:24.960 | If I were to say, on the other hand,

00:42:27.080 | on average, you should expect there

00:42:28.600 | to be two recessions per decade

00:42:30.200 | because that's historically what we've had.

00:42:31.880 | That is an expectation.

00:42:33.200 | I don't know when they're gonna come.

00:42:34.760 | I don't know where they're gonna happen.

00:42:36.280 | I don't know how severe they're gonna be when they hit.

00:42:38.680 | But just as my baseline expectation,

00:42:40.440 | I expect there to be two recessions per decade on average.

00:42:43.960 | That is an expectation.

00:42:44.960 | It's very different from a forecast,

00:42:46.560 | but an expectation just makes it

00:42:48.280 | so that when something does come out of the blue

00:42:50.520 | that you did not expect,

00:42:51.840 | it's not necessarily surprising to you.

00:42:53.920 | Even if you did not see this recession coming,

00:42:56.000 | as in 2020, I think virtually none of us did,

00:42:58.480 | even if you didn't see it coming,

00:43:00.040 | if you have it as your baseline expectation,

00:43:01.920 | you're not necessarily surprised when it comes.

00:43:04.600 | I think this is similar to how people in California

00:43:07.800 | think about earthquakes.

00:43:09.120 | Whereas if you live in California,

00:43:10.320 | you know that there are gonna be earthquakes.

00:43:12.840 | Some of them are gonna be big.

00:43:13.840 | You know they're gonna be part of your future,

00:43:15.600 | but you can't forecast when it's gonna come.

00:43:17.840 | No one even tries to predict

00:43:19.440 | when the next big earthquake is gonna come.

00:43:21.440 | You just expect,

00:43:22.440 | and you know that it could come at any moment.

00:43:24.560 | It could happen today.

00:43:25.560 | It could happen 10 years from now.

00:43:27.000 | And then so by expecting it,

00:43:28.680 | you are just building your house

00:43:29.880 | so that it can withstand it whenever it's gonna come.

00:43:32.280 | I think we should think about recessions and bear markets

00:43:35.000 | in a similar way,

00:43:36.320 | that rather than trying to predict when they're gonna come,

00:43:38.160 | which is where all the energy

00:43:39.600 | in the finance industry goes to,

00:43:41.400 | we should just situate our finances

00:43:43.200 | and have robust enough finances

00:43:44.880 | that we can endure them whenever they might come

00:43:47.040 | with the expectation that they might come at any moment,

00:43:50.160 | rather than trying to predict exactly

00:43:52.600 | when they might come in our life.

00:43:54.240 | - A lot of advisors talk about the optimal portfolio.

00:43:58.600 | You know, they wanna put this asset allocation together

00:44:00.800 | and come up with the optimal portfolio.

00:44:02.600 | And I laugh at that.

00:44:04.200 | I say, you know, how do you know

00:44:05.360 | what the optimal portfolio is going to be going forward?

00:44:08.120 | All you're doing is you're looking back at history.

00:44:09.960 | You're looking back at the numbers of what they were

00:44:12.520 | based on whatever was going on at that particular time.

00:44:16.040 | It has very little,

00:44:17.960 | well, it might be some rhyme to it

00:44:19.640 | as to what might happen in the future,

00:44:21.040 | but you can't say that the correlations

00:44:22.880 | between these asset classes

00:44:24.800 | are going to be 0.67 going forward.

00:44:28.280 | And this is the optimal allocation

00:44:30.080 | between stocks and bonds

00:44:31.600 | or the optimal allocation between international and US.

00:44:35.120 | And yet, a lot of people invest

00:44:37.240 | based on very precise backward-looking data

00:44:41.560 | that it could happen by luck, I guess.

00:44:43.920 | I mean, you know, the clock strikes 12 twice a day.

00:44:47.960 | - But other than that, I just don't see how

00:44:51.320 | a lot of what happened in the past,

00:44:54.080 | as far as correlations between asset classes

00:44:56.720 | and, you know, value premiums

00:44:58.680 | and all of these factor models are all looking backwards.

00:45:03.320 | How relevant is it going forward?

00:45:06.360 | - I think where a lot of that comes from, too,

00:45:08.040 | is not realizing what you are actually paid for

00:45:11.600 | in investing.

00:45:12.440 | Let me explain what I mean by that.

00:45:13.640 | Of course, there is, for anything in life

00:45:15.600 | that is good and worth pursuing,

00:45:17.440 | it has a cost.

00:45:18.400 | There's a cost that you have to pay.

00:45:20.240 | It's the same in investing.

00:45:21.160 | You can do very well in financial markets over time,

00:45:23.600 | but you have to, there's a cost to that that you have to pay.

00:45:26.240 | To me, the cost that you have to pay in investing

00:45:29.000 | is dealing with uncertainty and randomness.

00:45:31.280 | That's the cost of the mission that you have to pay

00:45:33.360 | in order to do well over time.

00:45:35.320 | But people don't want to pay that cost

00:45:36.880 | or they don't view it as a cost,

00:45:38.120 | and it makes them feel much better

00:45:40.000 | if they are using a sense of precision

00:45:41.880 | because it makes them feel like they are in control.

00:45:44.080 | And the cost that we are all being forced to pay,

00:45:46.480 | it makes them feel like they're getting a freebie

00:45:48.520 | if they can use their intelligence

00:45:50.160 | and their analytical skills

00:45:51.520 | to try to get around that cost.

00:45:53.320 | So that's why I think you have people

00:45:54.480 | who do a lot of data mining historically

00:45:57.760 | to figure out exactly what they should do

00:45:59.880 | because it makes them feel like they are more in control

00:46:02.400 | in a market where kind of by definition,

00:46:04.440 | what we all deal with is uncertainty and randomness.

00:46:07.880 | So it's just trying to avoid the cost of,

00:46:11.040 | the long-term cost of admission in stocks.

00:46:14.360 | And to me, it's just so obvious and clear historically

00:46:17.640 | that rather than trying to avoid that cost

00:46:19.840 | and trying to outsmart that cost,

00:46:21.680 | that you should just pay that cost.

00:46:23.040 | It's a good fee to pay.

00:46:25.360 | It's not a fine.

00:46:26.280 | It's not an indication that you did something wrong.

00:46:28.520 | It's a fee to get into the theme park.

00:46:30.680 | It costs $100 to go to Disneyland,

00:46:32.480 | but most people who go realize that it's worth it

00:46:34.360 | because Disneyland is fun.

00:46:35.480 | It's a good place to bring your family.

00:46:37.120 | So they don't mind paying the fee to get in

00:46:39.680 | because the rewards are worth it.

00:46:41.200 | And I think the fee of uncertainty and randomness

00:46:43.720 | and volatility, variability in investment markets

00:46:46.840 | is the same.

00:46:48.200 | It's a fee, you have to pay it.

00:46:49.720 | There's a cost and the cost is dealing with that,

00:46:52.920 | the pain, the discomfort of uncertainty,

00:46:55.000 | but it's worth paying.

00:46:55.960 | Over a long period of time,

00:46:57.000 | it's worth the cost of admission.

00:46:58.840 | And rather than avoiding it,

00:46:59.940 | we should just try to pay that cost.

00:47:02.000 | - One last chapter that which I thought was really

00:47:05.180 | one of the best chapters in the book

00:47:06.520 | is called "You and Me."

00:47:09.040 | Beware of taking financial cues

00:47:12.520 | from people playing a different game than you are.

00:47:16.720 | And I thought this was a brilliant chapter.

00:47:19.160 | - Well, thanks.

00:47:20.000 | And really where it comes from is this idea

00:47:22.120 | that all of us as investors are playing different games.

00:47:25.520 | There are high-frequency traders, there are day traders,

00:47:28.180 | there are fund managers managing for the next quarter,

00:47:30.920 | the next year, all the way up to pensions and endowments

00:47:33.440 | that are managing money for the next century.

00:47:35.400 | We're all playing very different games,

00:47:36.700 | but we play on the same field.

00:47:38.240 | There's only one stock market.

00:47:39.480 | There's only one price for Apple stock,

00:47:41.160 | only one price for Google stock,

00:47:42.800 | even if we're playing different games.

00:47:44.300 | And a lot of times the prices of stocks get moved around

00:47:47.900 | by people who are playing a different game than you are.

00:47:50.200 | And if you are taking your cues from those other investors

00:47:53.520 | as a cue for what you should do with your money,

00:47:55.680 | you're liable to get them hurt.

00:47:57.280 | Here's one example from this, from 1999, 2000.

00:48:01.360 | A lot of the gains in dot-com stocks back then

00:48:05.440 | were being pushed around by day traders

00:48:07.480 | who were pretty rationally, pretty reasonably,

00:48:10.560 | chasing momentum.

00:48:12.240 | There was momentum in those markets

00:48:13.680 | where you could make money.

00:48:14.680 | They were rationally chasing it as day traders

00:48:17.000 | or as people who are investing for a week.

00:48:18.840 | You can't necessarily blame them for doing that.

00:48:20.360 | That's the game they were playing.

00:48:21.900 | The problem was when Cisco stock and Dell stock

00:48:25.300 | and Microsoft stock were going up so much.

00:48:27.800 | And then long-term investors looked at that and said,

00:48:30.120 | "Oh, maybe they know something I don't.

00:48:32.280 | Maybe the other investors know something that I don't.

00:48:34.520 | So I should put my long-term retirement money

00:48:36.860 | in those companies as well."

00:48:38.480 | Now, when the tide turned and everything unrolled,

00:48:40.880 | unraveled, the day traders were gone.

00:48:43.080 | They were only in it for the gains that you could make

00:48:45.360 | between today and tomorrow anyway.

00:48:46.600 | They were gone.

00:48:47.520 | The bag holders who got left with so much damage

00:48:50.560 | were the people who were actually long-term investors

00:48:52.880 | who were taking their investing cues from those day traders.

00:48:56.640 | That's at least one explanation for how bubbles play out.

00:48:59.920 | So I think it's always important in investing

00:49:02.100 | that you understand what game you're playing

00:49:04.320 | and realizing that if other people

00:49:05.600 | are playing a different game than you,

00:49:07.260 | you got to make sure that you're not

00:49:08.600 | taking your cues from them.

00:49:09.960 | One other example of this is if you were to watch CNBC

00:49:12.360 | or Bloomberg TV, any of those shows,

00:49:14.400 | you will hear people say something along the lines of,

00:49:16.840 | you know, "You should buy Netflix stock."

00:49:20.240 | And it's not that that's necessarily bad advice,

00:49:22.120 | but you always have to ask the question, who is you?

00:49:24.960 | Are you talking to a day trader?

00:49:26.400 | Are you talking to a widowed retiree on a fixed income?

00:49:30.120 | It's very different for different people.

00:49:33.240 | We're all playing different games.

00:49:34.720 | And it's just another realization

00:49:36.120 | of what we discussed earlier, Rick,

00:49:37.320 | which is that there's no one right answer

00:49:40.220 | for most financial questions.

00:49:41.920 | The answer that is right for you

00:49:44.480 | might be completely different for me and wrong for me

00:49:47.800 | if you and I are playing different games.

00:49:49.640 | And it's so important, again,

00:49:50.760 | to realize that personal finance

00:49:52.080 | is more personal than it is finance

00:49:54.120 | and realizing that people can disagree,

00:49:55.920 | come to different conclusions,

00:49:57.160 | and what is good information and good advice for you

00:49:59.920 | might be disastrous for me.

00:50:01.720 | And we really have to think about finance

00:50:03.360 | through much more of a personal lens

00:50:05.120 | rather than a one-size-fits-all lens.

00:50:07.760 | - I always say everything that's written out there

00:50:10.560 | about the optimal asset allocation and so forth

00:50:14.840 | is geared towards the average investor.

00:50:17.720 | Yet in 32 years of doing this,

00:50:19.560 | I've never met anyone average.

00:50:21.860 | - Right, exactly.

00:50:23.320 | - So here we are.

00:50:24.160 | It's a great book, "The Psychology of Money."

00:50:26.560 | You see yourself in this book.

00:50:28.720 | And I have to admit,

00:50:31.080 | I saw myself in this book more than I wanted to.

00:50:33.660 | But one of the pains that we go through to learn.

00:50:37.840 | Question that one of the Bogleheads have for you

00:50:40.680 | is what are you working on now?

00:50:42.800 | What's next?

00:50:43.640 | - You know, I'm still doing what I've always done,

00:50:46.760 | which is just trying to do a lot of reading

00:50:48.640 | and a lot of thinking about what's going on in the world

00:50:51.140 | and trying to piece things together to write about.

00:50:53.600 | I do have a second book idea that has been sold

00:50:56.800 | that I'll start working on next year,

00:50:58.360 | but we'll save that conversation

00:50:59.960 | for later when it comes out.

00:51:01.120 | But my whole career has been,

00:51:04.620 | and I think will continue to be,

00:51:05.740 | just a bunch of casual reading and casual thinking

00:51:08.260 | and trying to piece things together

00:51:09.860 | that I can write about that hopefully

00:51:12.700 | other people find beneficial

00:51:14.420 | and are able to see themselves in the stories

00:51:16.660 | just like you were in this book.

00:51:18.740 | - Well, thank you so much, Morgan.

00:51:20.420 | We really appreciate you visiting with us here

00:51:22.500 | on "Bogleheads on Investing,"

00:51:23.900 | and we wish you tremendous success.

00:51:26.140 | What I know will be a very long career.

00:51:28.180 | - Thanks very much, Rick.

00:51:29.020 | I appreciate it.

00:51:29.860 | - This concludes "Bogleheads on Investing,"

00:51:31.840 | episode number 26.

00:51:33.800 | I'm your host, Rick Ferry.

00:51:35.980 | Join us each month to hear a new special guest.

00:51:39.320 | In the meantime, visit bogleheads.org

00:51:42.700 | and the "Bogleheads" wiki.

00:51:44.440 | Participate in the forum and help others find the forum.

00:51:48.680 | Thanks for listening.

00:51:49.880 | (upbeat music)

00:51:52.460 | (upbeat music)

00:51:55.040 | (upbeat music)

00:51:57.620 | [MUSIC PLAYING]

Bogleheads® on Investing Podcast 026 – Morgan Housel, host Rick Ferri (audio only)

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