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Brett McKay here and welcome to another edition of The Art of Manliness podcast when we think about Finance, we typically think about numbers in math my guest today. However, argues that doing well if money is less about what you can put on a spreadsheet and more about what goes on in your mind. And then if you want to master your personal finance, you've got to understand how things like your own history unique view of the world and fear and pride influence how you think his name is Morgan housel, and he's an investor Financial journalist and the author of the psychology of money Timeless lessons on wealth greed and happiness more than kicks off our
Relation by explaining how doing well with money is less about what you know and more about how you behave and illustrates this point by comparing the stories of a janitor who saved millions and a prominent Wall Street who went bankrupt. He then explains how the seemingly crazy decisions people make around money actually make a kind of sense. If you look into it a little more deeply from there we get into why you need to know the financial game you're playing and not play someone else's we then turn to why it's hard to be satisfied with your position a life when your expectations keep rising and why not continually moving your goal posts the most important skill in personal finance we discuss how
Ding off The NeverEnding treadmill of wanting more requires seeing money not as the way to buy stuff but to gain greater autonomy keeping the man in the car Paradox in mind and understanding the distinction between being rich and being wealthy. We then talked about the unappreciated mind-boggling power of compound interest using the example of Warren Buffett who made 99 percent of his wealth at the age of 50. We then discuss why you should view volatility in the stock market as a theory rather than a fine why pessimistic Financial opinions are strangely more appealing than optimistic ones and why it's best to split the difference in approach your money like a realistic.
Wiener conversation with the two prongs of Morgan's iron law for Building Wealth as the show's over check out our show notes at aomg is money mindset.
All right, Morgan housel. Welcome to the show. Thanks so much for having me. So you got a new book out the psychology of money where you basically encapsulate all you're thinking about you've done about money and investing in some big principles. And this is the culmination of you sort of your work. What will your career for those who aren't familiar with your work? You tell us a bit about your background and how it led up to this book.
Yeah. So my whole background has been a financial writer.
Read about the history of finance a history of investing and economics and I'm interested in the psychology side of money. So not necessarily what should we do with our money? Where should we invest it? I'm interested in what's going on inside people's heads when they make decisions with their money about what the spend what to save where to invest what's going through their heads. That's what I'm interested in the history of how people think about money has always been my kind of beat now. This is what's important is that I kind of stumbled into writing in 2008 was not part of my plan. I wanted to go into Finance work in private Equity be a big investor. I
Doubled into writing kind of haphazardly because in 2008 the world is falling to pieces I needed something to do. I just graduated college or not a lot of private Equity jobs available, but I did find a job as a financial writer. I was writing for the Motley Fool at the time. And so it was never part of my plan but was interesting is that obviously what happened in 2008 was a global financial crisis where the global economy fell to pieces and I spent my early years as a writer trying to answer the question of what happened. Why did people make the decisions that they did during the housing bubble during the financial crisis? What were people
Thinking and have we learned our lesson will we do it again? There was no aha moment. But I kind of realized as the years went on that the answers to those questions could not be found in any economics textbook or any Finance textbook, but you could find subtle clues about why people behave the way that they did in a psychology textbook and a sociology textbook and a political science textbook, which just led me to the belief that I think we generally tend to think of Finance as a math based field like it is charts and numbers and formulas and data.
And or or like it's something like physics where two plus two equals four and that's always been true. That will always been true. It's very clean and very precise and I just don't think Finance is actually that Finance is much closer to something like psychology where it's a soft mushy topic with a lot of nuance where I will think about risk different different than you will different from anyone else from from someone else who's listening people in the United States think about money different from people who live in other parts of the world and vice versa like it's a much more nuanced topic that has a lot to do with it.
Certainly, the decisions that we do make with our money, but what's happening inside of our heads so that just led me to this belief that was really important in finance is not what you know, it's how you behave it's not how smart you are. It's not where you went to school. It's not how sophisticated you are in terms of making financial decisions. It's just about things like your relationship with greed and fear and your ability to take a long-term mindset and how gullible you are who you trust those are not the typical ways that we think about Finance, but I think those are the single most important parts of Finance so that just led me down this road of Behavioral Finance.
And the book is written as 19 short stories that highlight the most important parts of Behavioral Finance in my view. They're fairly short chapters. I did that out of respect for readers. I'm a big reader myself. I'm sure lots of listeners are themselves, but I don't finish a lot of books because I think most books do not require 300 pages of explanation to get your point across. So I wanted to write short chapters Each of which can kind of live on their own to make some of the most important parts about how we think about money how we think about saving and investing and how we can think about
Finance and risk in a more productive way.
Let's go back to something. You said there was one of the main arguments in the book is that success in finances success in money isn't based so much on how much you know or your sophistication of knowledge of of investing and things like that, but how you behave can you walk give us an example of someone who knows a lot about finances money investing monetary Theory but still doesn't do very well with their money and then someone like the opposite someone who not very sophisticated when it comes to finances, but nonetheless
The less they make out pretty well with their finances.
So there's two people that I profile in the introduction of the book and these are both true stories is are all real people one is a guy named Ronald read and reread is about the humblest guy. You can ever imagine if you didn't even if you're cherry-picking like Central Casting the most humble guy, he worked as a gas station attendant and a janitor his entire life. He was by all accounts from those who knew him. He was a lovely gentleman but he just had a very down-to-earth demeanor his friends who knew him said that the only hobby that he had was
Popping firewood. He was the first person in his family to graduate from high school. Just one of these just down-to-earth guys and when he died Ronald read shocked everyone who knew him that who learned that he left. I think seven million dollars to charity to his local hospital some local libraries and everyone who knew him said where did Ronald read this gas station attendant and janitor gets seven million dollars and they started digging through his papers and they realize that there was there was no secret. There was no inheritance. There was no lottery winnings. It was nothing like that. All he did was he saved what little he could
As a janitor and he invested it in Blue Chip stocks just you know stocks in big large cap companies and he left it alone for like 50 years and that compounded That Grew into this fortune that he left a charity. Now one other person that I profiled in the story is a guy named Richard and Richard had almost the exact opposite upbringing of Ronald read. He was born to a wealthy family. He went to Harvard. He got his MBA from the University of Chicago. He went to work on Wall Street in the 1980s and he truly became one of the most important men in global Finance.
That he was a vice chairman for Merrill Lynch. He retired in his 40s to pursue charitable activities. That's just how successful he was and what's so interesting about where these two stories Collide. There's two men never knew each other but shortly after Ronald Reed died Richard filed for personal bankruptcy. He told the bankruptcy judge that the financial crisis of 2008 completely wiped him out. He had no money left no income no assets and I just think it is so fascinating the juxtaposition of these two stories is fascinating because I don't think there's any other
and where those stories are even possible like there's no other field other than Finance or someone with no education. No background no sophistication. No training can massively outperform someone who has the best education the best training the best background. I think what that really highlights that we were talking about earlier is that you know, Ronald read The Humble gas station attendant had the psychology side of money mastered. He was patient. He took a long-term perspective. He left his money alone. He saved diligently and he just left his money alone. He
He wasn't being too greedy. He just let it compound over time and built a fortune. And Richard was I think the opposite he had all the resources in the world to do well financially and he just swung for the fences too hard. He had a lot of debt a lot of Leverage right way over his head with dead. He had several homes Each of which was much more than 25,000 square feet is he's massive sprawling mansion He had several of them all were had had massive mortgages on them than that. He couldn't keep up with her in the financial crisis. So even though he had all of the knowledge the final
Tatian the greed side just I think just caught up with him. So I think you know those are extreme examples, but to me, it's just there are very few other Industries where that's the case. You can have all the financial sophistication in the world. But if you do not manage your relationship with greed and fear, it has the ability to neutralize all of the financial sophistication that you have that's true for everybody.
Well, I think it goes through I think a lot of people when it comes to their finances. I know I went through a phase where you just devours many personal finance books as possible or investing books as possible and the visually
Realize they all say the same thing. Look there's nothing new here. And the trick is just like putting those really simple things into
practice Yeah. I think I think what's really important is that the most most important stuff in finance is very basic and very boring. It's not dissimilar to like to diet and exercise where look the key to health not everything. But what moves the needle the most is eat a good diet get some exercise sleep eight hours a night don't smoke. Don't drink too much. That's the key to success, but it's very boring.
And if you are someone who has a PHD in biology from MIT, like you don't want to focus all your time on that stuff. You want to be doing molecular biology stuff you want to do like the really complicated complex intellectually stimulating stuff. So that's where your attention goes. Even if I paying attention to the complicated stuff you start to ignore to Discount the basic stuff. I think it's true in finance as well where some of the smartest people, you know to tell them. Hey live below your means save your money by a diverse low cost portfolio and be patient. That's like 90% of
What you need to know to do well in investing over time, but it's not exciting. It's not intellectually stimulating. So if you are a very smart Finance person, you are probably spending a lot of your time focusing on really complicated Investments deep into the weeds trying to figure out what companies are doing the best where Industries are going next. It's not that that's bad that you shouldn't do that. But if doing that takes away any of your focus from the simple stuff, like living below your means making sure you can afford your debts etcetera that kind of stuff then none of the complicated stuff that you're doing.
Is going to matter all the basics that you ignore it will just neutralize it and overwhelm it which is exactly what happened to Richard.
All right. So as you said you organized this book and sort of end to 18 or 19 big chapters, not big chapters like their big ideas, but they're small and concise easy to read and the first one is no one is crazy. Now in your introduction you talk about what led you to start writing about finances. One of the things you explored was the the Meltdown that happened in 2008 that was driven big part by the the housing bubble and we look at that that back on that now.
It's been and it's been 12 years with a well. I was just Collective craziness. Like people just went crazy. So how is that not crate? Like what what was not crazy about the housing bubble of 2008.
I mean look, I think one of the takeaways is that people do crazy things with their money all the time. They make terrible decisions with their money. They make just boneheaded decisions. They blow money they make terrible Investments, but no one is actually crazy what I mean by that is when everyone makes a decision with their money in real time, it is checking all the boxes that they need to
in their head in that given moment and look in hindsight or to another person those ideas might look crazy but to you in any given moment. It makes sense to you and want something that's really important about this is that all of us have had very different backgrounds. We come from different upbringings different Generations. Some of us are born in different countries live in different countries. Our parents raised us with different values. We've had different amounts of luck and whether it's good luck or bad luck in our life that has given us a different view of the world. And so we all have a different view a different model in our
Head of how the world works the assumptions that I have about how the economy works and how the stock market works are different from those that you have different from those that everyone has we all have different views. I mean one really simple way to frame this as look if you are born in the United States in 1950, then during your teens and 20s, your young impressionable years. The stock market went nowhere adjusted for inflation is zero percent return during her teens and 20s your introductory experience to the stock market is this is a joke where you don't earn any money at all if by contrast you were
and in 1970 the during your teens and 20s the market went up tenfold during your teens and 20s. So just if you were born 20 years apart in your early years you guys completely different view about how the stock market works and that will stick with you for the rest of your life shape. Your expectations shape your views of risk and it's not that one generation is smarter or has better information than the other generation. It's just that they grew up seeing something different. They see the world through a slightly different lens that shapes how they think about risk and that is why people can make decisions.
Visions that makes sense to them but are crazy for other people that that look crazy for other people. I mean one more recent example of this is after the 2008 financial crisis gold as an investment became very popular when the central bank was printing a lot of money after the financial crisis the generation that gold was most appealing to during that period was baby boomers. If you look at the Baby Boomers children, they've never experienced inflation in their life you are if you are a millennial you've never experienced any amount of significant inflation in your entire life if you are a baby boomer,
Murr and you came of age in the 70s and 80s you remember when inflation was off the charts and you remember gas lines and you remember watching your paycheck disintegrates to inflation week after week that's stuck with you for the rest of their life. And that was why even in 2008 gold was most appealing to one generation. It had almost no appeal whatsoever to a younger generation just had they had just seen the world through a different lens and it would be easy for a millennial to criticize a baby boomer for wanting to own so much gold after 2008 and
Is why you know the decision to the money I may have looked crazy. So the baby boomer who has the you know, the emotional scars left over from experience inflation. It's not different whatsoever. I'll give you one more example that I think is maybe the most powerful that I use in the book if you look at who buys a lottery tickets what group of Americans buys the most lottery tickets and by far the most lottery tickets. It is the poorest Americans the lowest decile of Americans based by income by the majority of lottery tickets. They spend an average of $400 per year on lottery tickets.
It would be very easy for myself or you or a lot of people listening to this to hear that statistic and say well that's crazy. They're making a bad decision. If you are so poor that you can barely afford to pay your bills, but you're spending $400 a year on lottery tickets. That's crazy. And and maybe that is the right answer and they like maybe we could just end there and move on but I think if other people try to put themselves in the shoes of someone who is consistently in the lowest decile of income the maybe they their explanation for why they buy lottery tickets would be something like this.
I'd say that they do not feel like they have the opportunity to advance in their career to save their money to invest their money, like other people with higher incomes do and therefore buying a lottery ticket is the only time in their life where they feel like they have a little bit of hope to get to the other financial side to have the things that have more security to be able to buy what they want. The only time that they have the possibility of that is not dreaming about getting a big promotion or making a great investment. The only time that they can feel that Joy is by buying a lottery ticket. So even if it doesn't make any sense to me or you
You it might make perfect sense to them. And I think just that idea that equally intelligent people can come to very different conclusions based off of their life experience explains a lot about why we do what we do with our money.
Yeah that last example another thing I've heard two guys place of why poor people typically buy a lot of lottery tickets is that they don't have like a sense of like agency, right? Because they they got a bad draw when they were born and like something just happened. So they get the idea that well the only way you can become success. It's just all luck right? You have no control so might as well and if you if you
From like a middle-class effluent from you. You can see it by your actions. You can actually do things with your life and in advance your life, but if you're poor that's harder to do sometimes right order to
see and it's so it would be so easy to say like should you or should you not buy a lottery ticket? That sounds like a math based topic you just like calculate the odds of winning and it should tell you what they should do it or not. But that's not how people think about risk with their finances. It's heavily tied to the generation. You were born into the country you live in and your socioeconomic status throughout the course of your life. So people come to very different conclusions about
out these
topics. So what's the big takeaway from that and that principle is just like if whenever you're looking at your own money or how other people treat their money just understand that everyone's playing a different game. Maybe
we're all playing a different game as particular. If you look at something like investing, you know, if there is one stock market there is one Apple stock. There is one Tesla stock that we all buy we're all in the same. We're playing while playing on the same field, but people pay eight play very different games because you in your you'll just in the stock market you have everything from day traders to endowments who are investing for
Like century and it would be crazy to think that a decision or information would be relevant to both of those groups. So you have the information that is very relevant to a day trader that is not relevant whatsoever to a long-term investor. Now, this is really important if we're talking about watching CNBC or reading the newspaper. We're very often you will have a market pundit who comes on and says, you know making this up you should buy Netflix stock. They'll say something like that and the question I always want to ask is well. Who is you are you talking to a seventeen-year-old day?
Eider are you talking to a 97 year old Widow because the like the decision to you like whether you should buy Netflix stock is going to be completely different based on who you're talking to. So again, this is an area where it is easy to view Finance like physics. Like there's one right answer and two plus two always equals 4, but in finance is just so much more nuanced. There's a there's a financial advisor named Tim. Our who has a great quote that I love. He says personal finance is much more personal than it is financed. And I think that explains so much of what happens in this field.
There is no one right answer I deal with this a lot. If you're doing a podcast like this or meteor whatnot and people should say you will say something like you know, what what should people do with their money what should end the answer that no one wants to hear but it is always the best answer is it depends on who you are? There are things that I do with my money that I honestly can't explain on a spreadsheet. They don't make a lot of analytical sense and I would not recommend other people do but they work for me their work my wife. It's what we want to do and I think that's a really important thing just realizing that this is a very personal and
Endeavour and people have to be a really interesting fact of about who they are what their skills are what their weaknesses are what they want out of life what their goals are and find a financial plan a situation that works for them. Even if it doesn't work for other people or even if they can't necessarily even explain it on a
spreadsheet. We had that idea of knowing the game you're playing and don't play someone else's game that goes back to the MU talk about that. You make this connection the book to the financial bubble that housing bubble right the housing bubble that a lot of it was driven by people who were flipping houses and for them that
Made sense to do that because they weren't plan on owning their home for very long. They just going to fix it up and flip it and sell it for a profit. But then other people saw that you could get really cheap loans and they thought well, I just get a really cheap loan and get a really big house. But these people weren't planning on flipping their house. They were planning on just staying there for 10-15 years and they ended up just buying too much house and they could afford and everything just fell apart because people were playing the wrong game. They weren't playing the game. They're playing someone else's game basically,
right and what really happened here was you know, you had the flippers who are just oh, you know buying a
A condo and selling it the next month that was one game and then you had everyone else the the classic Americans buying a home for their family and to want stability and the real issue with the housing bubble happened when the people who are wanted a long-term house started taking their cues from the flippers who are playing a different game. Just just like you said once people said, oh look home prices are going up. So we should buy we can get a cheap loan. They started they got that information. They took those cues from the flippers who are driving the market. We're driving the prices up now, that's when the
Image happens bubbles cause they're damaged when people who are playing a long-term game take their cues from people who are rationally playing a short-term game. You can't necessarily blame the speculators in the real estate bubbles. It was the flippers in a stock market bubble. It's the day Traders. I don't blame those people at all because they're playing a rational game for themselves if you are a day trader in the stock market and I don't necessarily recommend that but if you are then is, you know, if you would ask the question is Tesla overvalued to a day trader. It doesn't matter. It doesn't matter how the
This is doing it doesn't matter what the valuation is. It doesn't matter whether they're going to pay a dividend or one of the Elon Musk is going to get sued by the SEC none of that matters All That Matters to the day trader is is a stock going to go up in the next hour. That's it. That's all that matters. But if you are a long-term investor, then all these statistics about how the business is doing. The fundamentals are doing that. That is all that matters to them. So, you know a price that is rational to one person can be irrational to another which is not something that is very intuitive in the stock market. We tend to just view it as is Tesla a good bye. Yes, or
So I just think everyone needs to understand the game that they are playing their own time Horizon their own risk what they all want out of their money and just make sure that you are only taking your cues getting your information taking your advice from people who are also playing a similar game the you are and go out of your way to actively ignore not pay any attention to people who are sending out cues, but are paying a different game than you are.
Well, so if individual case studies aren't useful, you know, you can't like well if you think like, how should I invest like Warren Buffett? Well, you're not Warren Buffett, so that's not going to be useful to you.
How do you figure out like overarching principles that everyone should fall like how do you are their overarching principles that people should follow or is this going to be Case by case?
I think if you're if you're talking about specific people the big thing that's important to realize here is that we tend to look up to and idolized and try to emulate the massive successes. We try to emulate the Warren Buffett's the Bill Gates the Elon Musk the Jeff Bezos the LeBron James the huge successes are the people who admire and it's really important just as a rule of thumb but a really strong rule of thumb. Is that the
Degree of success. We're talking about extreme success the more luck played a role. That's not to say it's all luck Warren Buffett, Jeff Bezos all the guys. It's not just luck. Those guys are and and women are very skilled. Very talented put in a lot of effort took the risks did the right things made the right decisions. Of course. But in any degree of that level of sex, there is an element of luck that is impossible to emulate. I mean one example that I give in the book is that Bill Gates went to the only school in the United States that had a computer
So you could ask the question is Bill Gates skilled is he talented as he hard-working? Oh my gosh. Yes. He's one of the most smartest hardest working businessmen of our time. But is he lucky? Yes, of course. He is he went to the only school in the United States. I had a computer that was his introduction to computers. He mentioned this in a speech he did several years ago where he said if there was no Lakeside School, which is where he went to school there would be no Microsoft and that was how closely he tied it to his success. So if you are a young entrepreneur looking up to Bill Gates,
Just great. You should realize that. You cannot emulate that luck that he had it was a just a dumb luck thing. So the skills that you should be looking to emulate from him is his hard work his business decisions like the like some of the like the big broad aspects of what he did, but you should not think that if you were to work as hard as he did and be as smart as he was as analytical as he was your that you will achieve the same amount of success because you can't emulate the luck that he had. I mean this is true for almost any one of those
major successes that you go down. It's that this is a hard topic because whenever someone points to someone who is successful and says the word luck it is very easy to just assume that that person is jealous or bitter or just kind of being a jerk if I say Bill Gates was lucky. I look like I'm jealous and I'm just kind of mean so people don't tend to do it. They don't tend to ascribe luck to other successful people because it makes them look bad and I don't want to subscribe luck to myself because if I look at the things that I am proud of him life and I just say, oh Morgan you just got lucky. That's a hard.
Old a swallow to I don't want to say that I wanted to believe that the things I am proud of I did on my own. So it is very easy to sweep luck under the rug and just pretend it doesn't exist. Even if we know it exists. We know it's a big factor in the world. It's just easy to ignore and this just makes it so that the big takeaways and when we're looking at other people either from their successes or their failures rather than getting really hyper specific about what they did and trying to do that or trying to avoid what they did. We should take the biggest broadest takeaways that
apply to lots of different people and lots of different fields and you know, the things that sort of connect the dots of the the common denominators across various people that were looking at are the things that we should spend most of our time paying attention to when we're trying to learn lessons from other
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Fitt be sure to use promo code manliness to save $100 and now back to the show are so one of the big principles that can lead to financial success high level is learning how to be satisfied with enough and you going back to that one guy you talked about the example who's the finance guy knew lots of stuff went bankrupt that was a guy's example of guy who would like he was never satisfied with just enough. You always wanted more more money more like why is it like why is it even when you your are successful?
Like you you have enough or you didn't have to work ever again. Like you still want more. What is going on there?
I think the big thing here. Is that probably the hardest but most important Financial skill is getting the goalposts to stop moving and here's here's one way to summarize this the median American Income household income adjusted for inflation in 2020 is twice as high as it was in the 1950s. The median household adjusted for inflation is twice as Rich today as they were in the 1950s, but we tend to look at the 1950s as the Golden Age of
Middle
class Prosperity that was when the middle class family get a good job. Have a good dignified life, but we are twice as wealthy today. So why do we have this Nostalgia for what it was back then? I think the reason why by and large is that our expectations have grown more than our incomes have over that period the median family income grew by a hundred percent if it doubled our expectations have increased by a hundred twenty hundred thirty percent. You can actually quantify this if you look at something like the median square footage of a new American Home in the
50s was about 900 square feet today. It's about 2,400 square feet. So our expectations of what is average of what we expect in life has inflated over time. And if you are someone who is lucky enough to have a rising income Rising net worth and your expectations rise at lockstep with your wealth with your money. You're not going to feel better off very simple obvious statement, but it is so incredibly powerful and it's important to realize that look we spend so much time focusing on how to increase your income how to increase your wealth, and I think it is just
Important to spend time on trying to manage your expectations and keeping your expectations from growing faster than your income because it doesn't matter how wealthy you are if your expectations are rising with your income. You're not going to feel any better off. That's that's a really important part II important part. Is that a conversation about what money is for and what we use money for like what is what is the purpose of money seems like a silly philosophical question, but obviously the I think there's two main things to do with it. One is what the majority of people would consider which is you use money to buy stuff, which is great go out.
Buy a nice house. Nice car. Nice your clothes. Whatever it is go on a nice vacation use it to buy stuff to me. The second part of money that I think is way more important and Powerful for people but it's so easy to ignore is using money to control your time using money to give yourself a level of autonomy and Independence to where you don't have to rely on the whims of other people to control your time to control your schedule to be able to wake up every morning and say I can do whatever I want today. That is I think the other thing that you can do with money besides buying stuff that is so important and I
think it is. It's easy to ignore that and it's easy to just focus on the money is To Buy Stuff aspect of money. That's what use it for. So no matter how much money you gain. It's always. Well I bought I bought a Honda but now I have more so I'll buy a BMW now about a BMW but now I have more money. So you'll get the Mercedes not get the Mercedes. Maybe I'll get the Ferrari and you did that that game never ever ends. And so if the game never ends, I think it's just the only way that you can beat a game that never ends is to not play it and go out of your way to keep the goal post from moving.
And a lot of people would say okay if I'm going to earn more money but not spend it. What is the purpose and that's where it gets back to using that money using that savings to build wealth to gain independence and autonomy and control your time. And that is something that I think people will never necessarily get used to or get accustomed to if you buy a nice house or a nice car the evidence shows and everyone knows you will pray it's not that it won't bring you Joy is that you will get accustomed to that Joy fairly quickly, but controlling your time waking up every morning and saying I can do whatever I want today that is a level of happiness.
Level of joy that you will probably never get accustomed to that doing that waking up every morning with autonomy and Independence is something that will bring a smile to your face every day. And so that is I think the purpose of money that is so easy to ignore and why a lot of people with a lot of money still don't feel that happy with their money that all of us can think about as a way in order to be happier with their money that we do
have. So, how do you do how do you prevent the goalposts from from moving?
It's a hard thing to do. I mean, I think there's there's one story that I use the book called man in the car Paradox and it came from when I was in
College I was a valet at a very nice hotel in Los Angeles and so all kinds of incredible cars would come in Ferraris Lamborghinis Bentleys the whole the whole Fleet and I started realizing when I was a valet that when a Ferrari came into the hotel I did not care about the driver. I never thought about the driver. I didn't look at the driver. I cared about the car now when the driver came in he probably as he's pulling into the hotel. He's probably thinking to himself everyone's looking at me everyone thinks I'm cool. Everyone's impressed with me. Everyone wants to be me.
But the reality was no I didn't care about him. I pictured myself in the driver seat and I thought to myself if I was driving people would think I'm cool. I didn't think he was cool. I thought if I was driving people would think I'm cool. And this was this irony about no one is more impressed with your stuff than you are and once you realize that no one is more impressed with your stuff than you are. It takes a lot of the pressure off of the social treadmill the rat race of having new stuff and having fancy stuff that serves
Has no other purpose than sending a social signal look I like I admire beautiful cars and nice homes as much as anyone else, but I think if you really try hard to think about, you know, how little people are impressed with your stuff or order your ability to overestimate how impressed people are with your stuff. It takes a lot of pressure the pressure away from that but what does bring me a lot of joy and happiness? Hopefully for other people for people who I admire the skills that I the traits that I admired and them is people who have control over the time.
Over their lives who aren't relying on other people to work, you know, when someone else wants them to work on a project that someone else wants them to do people who control their Destiny and controller time is what makes me happy and it's what I admire so I think it's just a subtle shift in mindset about what you want in life. And what other people are thinking about you that can go a long ways but the most important thing about this though. Is that getting the goalposts to stop moving while it's the most important Financial skill. It is not easy. It's a very difficult thing to do. There's no easy answers to this, but I think it is so empowered is so powerful so impactful.
Phone finance that we need to be spending a lot more time thinking about how we can control our own goal post rather than just letting it grow with our success over
time. Yeah, I mean philosophers and like religions have been battling. I've been trying to figure that out for thousands of years like how to be satisfied with what you got instead of wanting more.
It's not an easy thing and I think it's different at at people's at various stages in your life. If you are a person who is looking for a spouse looking for a mate looking for a boyfriend looking for a girlfriend your ability to social signal that you are successful to kind of put out your peacock feathers is
Important to have nice clothes to drive a nice car. That's an important thing if you're trying to signal to a mate that's that's what that's a real thing. That was me in my early twenties for sure. If you are happily married in a stable relationship. It is significantly less important or if you are in a field where your outward appearance is really important your high-powered lawyer. Whatever it is, you need to show your clients at your dressing. Well, then it's important. I work from home and I'm a writer it's a lot less important for me. So it's different for everyone and a different phases of your life.
And another point is related to this that you make in the
because you have to understand the distinction between being rich and being wealthy. I think most people really young people they focus on being rich. What's the distinction between the two
rich? I would Define as you have enough money to go out and buy stuff you have enough money in your checking account today to go out and buy something and you use that money to go out and buy stuff. You have a nice car. You have nice clothes. You have a nice house. You've used money to buy stuff wealth. I think is almost the opposite wealth is what you don't see wealth is the money that you have not spent it's the cars you didn't purchase it's the house.
Didn't purchase it's the first class upgrade that you didn't buy its money in the bank or invested that you have not spent yet. And what's important about this is that wealth is invisible. You don't see it. You can see people's cars. You can see their house. You can see what kind of clothes they wear by and large you cannot see their bank account. You can't see The Brokerage statement so you can't see their wealth. You can see people's richness or lack of richness. You cannot see their wealth though. This is a big problem. I think because I mean think about something like physical exercise if someone is in very good
good shape or in very poor shape. You can see it. You can see their muscles you can see if they're obese. It's visible. It's right in front of you clear as day. So it's easy to say and I think we all do this. Oh, I would like to look like this person. I don't want to look like that person. It's easy to see. Okay, I should do this. I should not do that wealth is not is not that though. Like, who do we look up to as someone who we admire if we can't see their wealth if it's invisible to us, and of course like we said earlier there are people who have no outward appearance of wealth, but are very wealthy and people like Richard.
You have a huge outward appearance of wealth 25,000 square foot mansions, and they're actually broke. This is something else. I learned as a valet in Los Angeles people would come into the hotel in very fancy cars and over time. I got to know some of them and I would talk about you know, what do you do? What business are you in where you work? And I learned that some of these people who are driving very expensive six-figure cars. We're not that successful. They're just there are mediocre successes who spent most of their income on a car lease and this is the thing like
like the car was their richness, but I couldn't see their wealth and once you get to know him and you get a better sense of their their actual wealth you realize there's not much there. This is the classic to like fake it till you make it there's this great quote that I love in the book from several years ago Reata, the singer almost went bankrupt and she sued her financial advisor in the financial advisor has this quote that I love where he said was it really necessary to tell her that if you spend money on things you will end up with the things and not the money and I think that's like as quote that applies to
Many of us that you know, if you're spending money on things you're going to you're going to end up without the money. That's what it is. So it just depends on like what do you want? Do you want things or do you want wealth like I want wealth to have a level of Independence. That's what I want. So things take a back seat to my wealth, even if it's money that I have not spent and I might never spend it. I want the welfare to give me Independence. So it's just a subtle way of looking at what we want out of the world in realizing that so much of what we're trying to learn about is not visible to us. So we have to go out of our way to learn about it about how other people are doing it and
And what our own situation is since it's not outwardly apparent visible to us in the world.
So one way to develop wealth is you want to hold on your money, but you want to invest it for the long term because that's when the power of compound interest comes into effect. And I think people have heard of compounding but it can still be hard to wrap your mind around and you gave some great examples to really put it into perspective like one example was Warren Buffett most of the money that he has today. His billions of dollars wasn't made to laughter his 60s and it's all because of
compounding. Yeah. We're going to look at Warren Buffett's
Worth his worth he's worth something like ninety billion dollars. He's 90 years old. But if you look at the course of his life 99% of his net worth came after his 50th birthday and something like 97% came after his 65th birthday. That's just how compounding Works compounding is not something where the big Returns come in a year or in a decade. It's something that takes place over the course of a lifetime and it's important for someone like Warren Buffett to say look, he's 90 years old. He's been investing full-time since he's been 10 years old. So he's been investing for 80 years now. It's really important. Is that the
Math on this is very simple. You can hypothetically say, okay if Warren Buffett did not start investing when he was 10. Let's say hypothetically he started investing when he was 25 like a normal person and let's say hypothetically he did not keep investing through age 90 like he has let's say hypothetically he retired at age 65 like a normal person and he would say he was just as successful and investor during that period that he was investing and he earned the same average annual Returns. What would his net worth be today? If you started investing at 25 and retired at 65 the answer is about
Million dollars not 90 billion 12 million. So we know that 99.9% of his net worth can be tied to just the amount of time. He has been investing for that's how compounding works it is. So incredibly powerful, but it is rarely intuitive. Even if you understand the math behind compounding it's almost never to it intuitive how powerful it can be. Now. This is important because if you look at someone like Warren Buffett, there are like 2,000 books on Amazon that are devoted to answering the question. How did he do it? How did he build this Fortune? How did he become the world's greatest investor?
And they go into great detail about how Buffett thinks about valuing businesses and business models and valuation and Market Cycles. Even if we know that 99% of his success can just be tied to the fact that he's been investing for 80 years. And then if you want to have any sort of ability to emulate what he's done, the single most important thing that you can do is just increase your time Horizon, it's not what industry should you buy this year? What stocks you should buy this year? It's how can you be a little bit more patient to let your money compound for the longest period of time like is Buffett a good investor. Yes, of course.
Is but his real secret is that he's been a good investor for 80 years. That's the takeaway that we should learn from him is that time is really what drives all big success over time. People don't want to hear that answer because you want to get rich today, but they they they want they want advice about where they should put their money tomorrow, but we know from a lot of these cases not just buff it but almost any big successfully look at that. The common denominator is that people have made good decisions for a very long period of time not a not a great decision in any given year per se but good decisions that compound for years or decades.
Over time that's where the big results come
from and why despite knowing that like people aren't can understand that intellectually again, as we said the main argument book you can know something but still be a failure in money like why despite knowing that like, we have such a hard time putting that into practice like keeping our money in the market, even when you see the market going down like just
dropping a I think anytime people say like the skill that you need to do. Well is patients people that's not it's not what people want to hear. Most people are just naturally not very patient. It's a hard thing to do a lot of it is because if I tell you hey,
Invest your money and this Fund in this stock and leave it alone for 20 years. How do you how do you know and then let's say it drops over the next year. How do you know whether I was wrong or you just need to be more patient? It's hard to tell in real time. Whether someone was wrong or patient. It's much easier. If you have a lot of feedback of quick feedback where you can easily determine whether advice you got was wrong or you just need to be a little bit more patient very hard to do if you're talking about a long period of time. It's also just the math of compounding is never intuitive. Like if I take if I ask you
What is eight plus eight plus eight plus eight? You can probably figure it out in like five seconds. It's not it's not very difficult. But if I ask you what is 8 times 8 times 8 times 8 times 8, even if you're very smart you're going to struggle with that answer. It's like the difference between linear thinking and exponential thinking is is absurd it's and particular for talking about something like investing for 80 years ago long period of time, it just gets completely out of whack. It's never intuitive how powerful it can be. So that's why you know the combination of it just being a skill that is
Very difficult for people to be actually be patient combined with the counter intuitiveness of compounding is why it's so easy to overlook as well. Think get tying this back to what we discussed earlier. If you are someone who is very smart. If you have a degree from Harvard or MIT and you're very analytical smart, you do not want to hear that the explanation for Warren Buffett's net worth is patience. You don't want to hear that. It's too simple. It's too boring for you. You want to dive into the Weeds about how he valued companies about how we think about economic Cycles. That's what you want to put your big brain to work.
That you don't want to hear the simple answer even if we know this is a simple matter of arithmetic that the simple answer that it's his time Horizon that led to the dollar amount of his net worth is the right answer
and have you found any like practical tips on helping people to become more patient with their money.
I think I think the most important thing that any investor can do is be more familiar with the history of Market volatility become more familiar with how often and how normal it is for the market to fall 10% 20% 30% because if you look over the last hundred years, for example
The market has declined on average 10 percent on average every 11 months. That's been the average duration between 10% declines. It's Fallen more than 20 percent on average every three years more than 30% on average at least once per decade. If you become familiar with those statistics, then when the market does fall 10% it's not that it's fun, but it's much easier to say, okay. I know this happens this happens all the time. It'll come back. It's okay and what you've won the market Falls 30% you say gosh this hearse the sucks. This is a gut punch, but I know this happens historically this
This is the normal path of success normal Dynamic of success and I need to put up with I think it makes you realize that volatility is the cost of admission to market returns that you can do very well over a long period of time and investing but you have to give something up for that like anything else in life. There's a price and the price you have to pay is putting up with volatility and uncertainty. Once you've you volatility as the cost of admission the worthwhile cost of admission. Then you realize that when the market is declining you just say look the bills coming do I have to pay this this fee just like if I
Want to you know, if I want to go on a trip to Hawaii I have to pay the airline's a fee to get on the plane. It's the same thing in investing. This is the fee that you have to pay. I think it's much more common though to view volatility. Like it's a fine and the difference between a fee and a fine. Is this a finest something you are not supposed to pay if you get a fine you got in trouble. You got a speeding ticket. You've been a bad boy. Don't do that ever again. You need to learn your lesson. So if you view a 10% market decline as a fine, then you say oh my portfolio last 10% What do I have to learn here? I made a mistake. I got to make sure I never do this again.
Yeah, now doesn't that's not the right way. It's not conducive to patients. If you view it as a fee and you say look my portfolio fell 10% but this is just what happens I put up with this. I'm patient over time. I think I think just understanding that history of volatility. And the meaning of what volatility is is probably the only way in investing at least that you can push people to a more of a long-term mindset.
Also this idea of looking at the volatility in the stock market either a fine which is like a negative way or a fee which is more of a positive way to look at it. One thing you tackle in your book is
Being a pessimist or an optimist when it comes to investing your money and you make this case that it's really easy to be overly pessimistic about money. Why do you think it is like why why do we like to read the articles from people saying? Oh, yeah. We're the next depression is here. You need to stock up on food, but we don't tend to think about well, you know, maybe it's going to be bad but it's going to get better
eventually. I think it's it's always the case that pessimism sound smarter than optimism. It's always the case that we're
Going to pay more attention to pessimistic headlines and we will optimistic headlines. Even if we know that historically optimism has been by far the correct mindset. If you just look at the growth of human achievement over time of living standards and expectations. You should you should definitely be a long-term Optimist but pessimism sound smarter. I think one of the reasons is that is very easy to for pessimism to sound like someone trying to help you. Hey, there's a risk in front of you. I'm trying to help you. I'm trying to get you out of the way. It sounds like someone's trying to help you optimism. I think Austin sounds like a sales pitch like hey, I've got an opportunity.
Lie for you to make a lot of money, do you want to see it? It sounds like a sales pitch. So it's easy to overlook in that sense. One other reason that pessimism is always more appealing than optimism. Is that the good things and the economy and in a lot of things in life happens slowly, whereas the setbacks the bad things happened very quickly, you know, this is true for economic growth where you know over the course of time we've grown so much economically. We're so much richer wealthier on average and aggregate way wealthier than we were a hundred years ago, but the the growth took place slowly
Li, like in any given year the average economic growth has been about two percent. It's easy to ignore in any given year but the setbacks the declines come very quickly. You have things like with covid-19 and March of this year where everything just collapsed over the course of about two or three weeks a whole economy just collapsed virtually overnight. There's nothing in terms of growth that happens overnight. There are no overnight Miracles, but there are lots of overnight tragedies and that is why it is so much easier to pay attention to the overnight tragedies things like covid-19 or September 11 that literally happened in the blink of an eye. Whereas the growth that is.
Powerful over time. It's just so much easier to ignore because it compounds very slowly over time
then. How do you okay? So you want to be optimistic, but you also you don't want to be overly optimistic. What is like how can over-optimism getting in
trouble? I think I like this idea of what I've called realistic optimism which is which is simply this if you are someone who believes that everything will be okay in the future. You're actually not an optimist. You are a complacent if you think everything is going to be good. Nothing bad is going to happen. You're just being complacent about how the world Works a realistic Optimist I think is someone who thinks that
the future over the long run will work out and things will improve over the long run but the short term is going to be a constant never-ending chain of disappointment and setback and crash and Decline and recession and bear market and pandemic all the time a never-ending chain of bad news. Even if that does not preclude long-term progress. That's what I think of realistic Optimist is so I think for money I've always I've often said people should save like a pessimist and invest like an optimist you want to save like a pessimist knowing that the short term is going to be filled with
Too bad news. There's going to be recessions and bear markets and job losses and medical emergencies all the time and never ends. So you have to save you always have to be paranoid about the short run so that you can survive setbacks, but you should invest like an optimist you should invest like an optimist with the idea that people are going to solve problems and we're going to become more productive over time and that the productivity is going to increase profits in a crew to shareholders. We're going to get much better over time, but we have to be able to survive and endure the short run in order to get there. So I think that's how you can avoid being.
A complacent Optimist is just marrying your long-term optimism with short-term pessimism. If not paranoia
though. It sounds a lot like Nassim taleb like barbell strategy or you have like a whole bunch of like cash. Maybe just something to really save then you invested in something a little more risky and you can afford the loss because you got that reservoir of cash that you can fall back to.
Yeah. I mean, there's some investors. I wouldn't I wouldn't recommend this particular for most people but there's some investors who will put you know, 95% of their money and cash or US Treasury bonds and then 5% in super risky.
Options and that's like their barbell strategy. They're pessimistic on one end and very optimistic on the other end and like I really and swing for the fences on the other end. I think that's not a bad in theory. That's not as like it's much more difficult for individuals to pull off that specific strategy. But I love the concept of it of marrying optimism and pessimism that seems like it's contradictory. So it's not very common people, you know one or the other are you optimistic or pessimistic they view it as black or white. I think you need to marry the two at the same time and realized
The optimism and pessimism can co-exist and they should coexist in various parts of your life. And they're two different skills that you need to nurture separately to be optimistic about the long run and pessimistic about your short run because it's your ability to survive the inevitable setbacks in the short run that are going to give you the ability to compound and enjoy and benefit from the long run.
It's like a modified barbell strategy be like, do you have an emergency fund six months emergency fund maybe and then you just invest regularly in a some sort of fund an index fund of some sort.
So you're investing for the long term, but you have enough cash and a lack of debt to survive anything that can will be thrown at you during the short run
gotcha. So we've been talking some high-level principles. Like what is what do you think this trend? What does it how does it translate into like concrete action? And again, we have this we have to remember that everyone's different and was playing a different game but like high-level like what do you think people can start doing today to start implementing some of the things we've been talking about concretely.
What is it is it is different for everyone. I think that's a really important.
A point that there are no one-size-fits-all. Here's what you can do. I mean if there is a golden rule of finance and again, this is really simple, but it's the fact that it's simple makes me so that so many smart people ignore it. The golden rule of Finance is live within your means and be patient. If you can do that, you don't need to know that much more about Finance to do well over a long period of time. Look I didn't tell you what stocks to buy or you know, what the markets going to do next. I don't think any because those are things where you having people either people don't know or they're different from person to person. I think the common denominator though is just live within your means and be patient.
Again is living within your means which is savings. That's your that's your pessimism about the short run and be patient investor long run. That's your optimism about the long run. If you can do those two things, I think that is probably one of the only common denominators of success across people across various stages of their lives various backgrounds various goals, that is something that's kind of like the iron rule of finance and iron law of Finance in a field where there are very few laws because everything's different everything evolves over
time. It sounds like you just got to be mostly reasonable for most of the time you're going to you're going
You're probably gonna be
okay. I mean what are things in finance is that you don't need to make many great decisions to do well over time. You just have to consistently not screw up. If you consistently avoid screwing up you'll probably do not just okay, but phenomenal over time so that size you, you know, most people when they talk about it, they want to know like what's the next great decision that I should make and to me, it's just been like no there if you just get the, you know a good return for a long period of time without screwing up your probably going to do phenomenal.
Well Morgan has been a great conversation where can people go to learn more
At the book in your
work. The book is all over the place. Obviously Amazon with so many bookstores shut down right now Amazon is the majority of it. I spent a lot of my time all my writing and my thoughts on Twitter my handle is Morgan housel my first and last name
right Morgan housel. Thanks for your time. It's been a pleasure.
Thanks so much for having me.
My guess. There was Morgan housel. He's the author of the book the psychology of money is available on amazon.com and bookstores everywhere. You find out more information about his work at his website Morgan housel.com. Also check out our show notes at AO m dot is money mindset where you find links to resources ring delve deeper into this topic.
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