The Art of Manliness - #659： Do You Want to Be Rich or Wealthy？ (And Why the Difference Matters)

00:00:00.000 I'll see you next time.

00:00:30.000 A journalist and the author of The Psychology of Money, Timeless Lessons on Wealth, Greed, and Happiness.

00:00:34.520 Morgan kicks off our conversation by explaining how doing well with money is less about what you know and more about how you behave.

00:00:40.380 And illustrates this point by comparing the stories of a janitor who saved millions and a prominent Wall Streeter who went bankrupt.

00:00:45.640 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.

00:00:51.500 From there, we get into why you need to know the financial game you're playing and not play someone else's.

00:00:55.580 We then turn to why it's hard to be satisfied with your position in life when your expectations keep rising and why not continually moving your goalposts to the most important skill in personal finance.

00:01:04.660 We discuss how getting off the never-ending treadmill of wanting more requires seeing money not just as a way to buy stuff but to gain greater autonomy,

00:01:11.140 keeping the man and the car paradox in mind, and understanding the distinction between being rich and being wealthy.

00:01:16.000 We then talk about the unappreciated, mind-boggling power of compound interest, using the example of Warren Buffett, who made 99% of his wealth after the age of 50.

00:01:23.720 We then discuss why you should view volatility in the stock market as a fee rather than a fine,

00:01:28.140 why pessimistic financial opinions are strangely more appealing than optimistic ones,

00:01:31.880 and why it's best to split the difference and approach your money like a realistic optimist.

00:01:35.700 We end our conversation with the two prongs of Morgan's Iron Law for Building Wealth.

00:01:40.000 After the show's over, check out our show notes at aom.is slash moneymindset.

00:01:43.000 All right, Morgan Housel, welcome to the show.

00:01:55.300 Thanks so much for having me.

00:01:56.360 So you got a new book out, The Psychology of Money, where you basically encapsulate all your thinking about,

00:02:02.260 you've done about money and investing, I mean, some big principles.

00:02:05.680 And this is the culmination of sort of your work, your career.

00:02:09.220 For those who aren't familiar with your work, can you tell us a bit about your background and how it led up to this book?

00:02:14.320 Yeah, so my whole background has been a financial writer.

00:02:16.900 I write about the history of finance, the history of investing and economics, and I'm interested in the psychology side of money.

00:02:23.020 So not necessarily what should we do with our money, where should we invest it.

00:02:26.240 I'm interested in what's going on inside people's heads.

00:02:28.720 When they make decisions with their money about what to spend, what to save, where to invest, what's going through their heads.

00:02:33.620 That's what I'm interested in, the history of how people think about money has always been my kind of beat.

00:02:37.800 Now, what's important is that I kind of stumbled into writing in 2008.

00:02:41.660 It was not part of my plan.

00:02:42.700 I wanted to go into finance and work in private equity, be a big investor.

00:02:46.460 I stumbled into writing kind of haphazardly because in 2008, the world was falling to pieces.

00:02:51.340 I needed something to do.

00:02:52.660 I just graduated college.

00:02:53.980 There were not a lot of private equity jobs available, but I did find a job as a financial writer.

00:02:58.180 I was writing for The Motley Fool at the time.

00:02:59.440 And so it was never part of my plan, but what was interesting is that obviously what happened in 2008 was a global financial crisis where the global economy fell to pieces.

00:03:07.720 And I spent my early years as a writer trying to answer the question of what happened.

00:03:12.160 Why did people make the decisions that they did during the housing bubble, during the financial crisis?

00:03:16.480 What were people thinking?

00:03:17.660 And have we learned our lesson?

00:03:18.820 Will we do it again?

00:03:20.060 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.

00:03:28.640 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.

00:03:43.140 It is charts and numbers and formulas and data, or it's something like physics, where two plus two equals four, and that's always been true.

00:03:51.760 That will always have been true.

00:03:52.720 It's very clean and very precise.

00:03:54.820 And I just don't think finance is actually that.

00:03:57.160 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 than you will, different from someone else who's listening.

00:04:08.020 People in the United States think about money different from people who live in other parts of the world and vice versa.

00:04:13.240 It's a much more nuanced topic that has a lot to do with not necessarily the decisions that we make with our money, but what's happening inside of our heads.

00:04:20.580 So that just led me to this belief that what's really important in finance is not what you know, it's how you behave.

00:04:25.900 It's not how smart you are.

00:04:27.060 It's not where you went to school.

00:04:28.440 It's not how sophisticated you are in terms of making financial decisions.

00:04:31.260 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.

00:04:38.860 Those are not the typical ways that we think about finance, but I think those are the single most important parts of finance.

00:04:44.340 So that just led me down this road of behavioral finance.

00:04:47.180 And the book is written as 19 short stories that highlight the most important parts of behavioral finance, in my view.

00:04:54.460 They're fairly short chapters.

00:04:55.940 I did that out of respect for readers.

00:04:57.420 I'm a big reader myself.

00:04:59.080 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.

00:05:06.780 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.

00:05:19.000 All right, so let's go back to something you said there, because 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 investing and things like that, but how you behave.

00:05:32.760 Can you 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?

00:05:41.740 And then someone like the opposite, someone who's not very sophisticated when it comes to their finances, but nonetheless, they make out pretty well with their finances.

00:05:49.760 So there's two people that I profile in the introduction of the book, and these are both true stories.

00:05:54.580 These are all real people.

00:05:55.620 One is a guy named Ronald Reed, and Ronald Reed is about the humblest guy you can ever imagine, even if you're cherry picking, like central casting, the most humble guy.

00:06:04.300 He worked as a gas station attendant and a janitor his entire life.

00:06:07.900 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.

00:06:13.660 His friends who knew him said that the only hobby that he had was chopping firewood.

00:06:17.620 He was the first person in his family to graduate from high school, just one of these down-to-earth guys.

00:06:22.740 And when he died, Ronald Reed shocked everyone who knew him, who learned that he left, I think, $7 million to charity, to his local hospital, some local libraries.

00:06:31.660 And everyone who knew him said, where did Ronald Reed, this gas station attendant and janitor, get $7 million?

00:06:36.780 And they started digging through his papers, and they realized that there was no secret.

00:06:40.840 There was no inheritance.

00:06:41.800 There was no lottery winnings.

00:06:42.860 There was nothing like that.

00:06:43.600 All he did was he saved what little he could as a janitor, and he invested it in blue-chip stocks, just stocks in big, large-cap companies, and he left it alone for like 50 years.

00:06:55.140 And that compounded, that grew into this fortune that he left to charity.

00:06:58.520 Now, one other person that I profile in the story is a guy named Richard.

00:07:01.880 And Richard had almost the exact opposite upbringing of Ronald Reed.

00:07:05.660 He was born to a wealthy family.

00:07:07.620 He went to Harvard.

00:07:08.560 He got his MBA from University of Chicago.

00:07:10.420 He went to work on Wall Street in the 1980s, and he truly became one of the most important men in global finance.

00:07:16.780 He was a vice chairman for Merrill Lynch.

00:07:19.340 He retired in his 40s to pursue charitable activities.

00:07:22.580 That's just how successful he was.

00:07:24.700 And what's so interesting about where these two stories collide, these two men never knew each other, but shortly after Ronald Reed died, Richard filed for personal bankruptcy.

00:07:32.900 He told the bankruptcy judge that the financial crisis of 2008 completely wiped him out.

00:07:36.980 He had no money left, no income, no assets.

00:07:40.320 And I just think it is so fascinating.

00:07:42.400 The juxtaposition of these two stories is fascinating because I don't think there's any other field where those stories are even possible.

00:07:48.960 There's no other field other than finance where 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.

00:08:00.720 I think what that really highlights that we were talking about earlier is that Ronald Reed, the humble gas station attendant, had the psychology side of money mastered.

00:08:09.940 He was patient.

00:08:10.940 He took a long-term perspective.

00:08:12.480 He left his money alone.

00:08:13.740 He saved diligently, and he just left his money alone.

00:08:16.480 He wasn't being too greedy.

00:08:18.320 He just let it compound over time and built a fortune.

00:08:21.060 And Richard was, I think, the opposite.

00:08:22.800 He had all the resources in the world to do well financially, and he just swung for the fences too hard.

00:08:28.080 He had a lot of debt, a lot of leverage, went way over his head with debt.

00:08:32.140 He had several homes, each of which was more than 25,000 square feet.

00:08:35.720 There's these massive, sprawling mansions.

00:08:37.300 He had several of them.

00:08:38.560 All had massive mortgages on them that he couldn't keep up with during the financial crisis.

00:08:44.020 So even though he had all of the knowledge, the financial sophistication, the greed side, I think, just caught up with him.

00:08:50.500 So I think those are extreme examples.

00:08:52.120 But to me, it's just there are very few other industries where that's the case.

00:08:55.280 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.

00:09:05.060 That's true for everybody.

00:09:06.660 Well, I think that goes to, I think a lot of people, when it comes to their finances, I know I went through a phase where you just devour as many personal finance books as possible or investing books as possible.

00:09:16.140 And eventually, you realize they all say the same thing.

00:09:19.460 Like, there's nothing new here.

00:09:20.820 And the trick is just like putting those really simple things into practice.

00:09:24.360 Yeah, I think what's really important is that the most important stuff in finance is very basic and very boring.

00:09:31.420 It's not dissimilar 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.

00:09:44.780 That's the key to success.

00:09:45.660 But it's very boring.

00:09:46.640 If you are someone who has a PhD in biology from MIT, you don't want to focus all your time on that stuff.

00:09:52.400 You want to be doing molecular biology stuff.

00:09:54.340 You want to do the really complicated, complex, intellectually stimulating stuff.

00:09:58.120 So that's where your attention goes.

00:09:59.760 Even if by paying attention to the complicated stuff, you start to ignore, to discount the basic stuff.

00:10:04.800 I think it's true in finance as well, where some of the smartest people, to tell them, hey, live below your means, save your money, buy a diverse, low-cost portfolio, and be patient.

00:10:15.620 That's like 90% of what you need to know to do well in investing over time.

00:10:18.700 But it's not exciting.

00:10:19.680 It's not intellectually stimulating.

00:10:21.420 So if you are a very smart finance person, you are probably spending a lot of your time focusing on really complicated investments.

00:10:27.800 You know, deep into the weeds, trying to figure out what companies are doing the best, where industries are going next.

00:10:33.280 And it's not that that's bad, that you shouldn't do that.

00:10:35.760 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, et cetera, that kind of stuff, then none of the complicated stuff that you're doing is going to matter.

00:10:47.740 All the basics that you ignore will just neutralize it and overwhelm it, which is exactly what happened to Richard.

00:10:52.160 All right.

00:10:52.700 So as you said, you organized this book into 18 or 19 big chapters.

00:10:56.600 Not big chapters, like they're big ideas, but they're small and concise and easy to read.

00:11:00.780 And the first one is, no one is crazy.

00:11:03.460 Now, in your introduction, you're talking about what led you to start writing about finances.

00:11:07.480 One of the things you explored was the meltdown that happened in 2008 that was driven in big part by the housing bubble.

00:11:14.520 And we look at that back on that now, it's been 12 years.

00:11:19.160 We think, well, that was just collective craziness.

00:11:20.920 Like people just went crazy.

00:11:22.200 So how was that not crazy?

00:11:23.640 Like what was not crazy about the housing bubble?

00:11:26.600 Of 2008.

00:11:28.380 I mean, look, I think one of the takeaways is that people do crazy things with their money all the time.

00:11:32.740 They make terrible decisions with their money.

00:11:34.400 They make just boneheaded decisions.

00:11:36.700 They blow money.

00:11:37.500 They make terrible investments.

00:11:39.000 But no one is actually crazy.

00:11:40.500 What I mean by that is when everyone makes a decision with their money in real time,

00:11:44.280 it is checking all the boxes that they need to in their head in that given moment.

00:11:48.460 And look, in hindsight or to another person, those ideas might look crazy.

00:11:53.380 But to you, in any given moment, it makes sense to you.

00:11:56.340 And something that's really important about this is that all of us have had very different backgrounds.

00:12:00.640 We come from different upbringings, different generations.

00:12:02.860 Some of us are born in different countries, live in different countries.

00:12:05.460 Our parents raised us with different values.

00:12:07.100 We've had different amounts of luck, whether it's good luck or bad luck in our life,

00:12:11.920 that has given us a different view of the world.

00:12:14.240 And so we all have a different view, a different model in our head of how the world works.

00:12:18.500 The assumptions that I have about how the economy works and how the stock market works

00:12:21.600 are different from those that you have, different from those that everyone has.

00:12:24.220 We all have different views.

00:12:25.100 I mean, one really simple way to frame this is, look, if you were born in the United States

00:12:30.040 in 1950, then during your teens and 20s, your young impressionable years, the stock market

00:12:35.840 went nowhere adjusted for inflation.

00:12:37.860 Zero percent return during your teens and 20s.

00:12:39.960 Your introductory experience to the stock market is, this is a joke where you don't earn

00:12:44.300 any money at all.

00:12:45.700 If, by contrast, you were born in 1970, then during your teens and 20s, the market went up

00:12:49.940 tenfold during your teens and 20s.

00:12:51.820 So just if you were born 20 years apart, in your early years, you got a completely different

00:12:56.280 view about how the stock market works.

00:12:58.560 And that will stick with you for the rest of your life, shape your expectations, shape

00:13:02.340 your views of risk.

00:13:04.420 And it's not that one generation is smarter or has better information than the other

00:13:08.060 generation.

00:13:08.800 It's just that they grew up seeing something different.

00:13:11.600 They see the world through a slightly different lens that shapes how they think about risk.

00:13:15.300 And that is why people can make decisions that make sense to them but are crazy for other

00:13:19.480 people, that look crazy for other people.

00:13:21.820 I mean, one more recent example of this is after the 2008 financial crisis, gold as an

00:13:26.740 investment became very popular when the central bank was printing a lot of money after the

00:13:30.900 financial crisis.

00:13:31.880 The generation that gold was most appealing to during that period was baby boomers.

00:13:36.120 If you look at the baby boomers' children, they've never experienced inflation in their 0.98

00:13:39.680 life.

00:13:39.920 If you are a millennial, you've never experienced any amount of significant inflation in your entire

00:13:45.080 life.

00:13:45.780 But if you were a baby boomer and you came of age in the 70s and 80s, you remember when inflation

00:13:50.200 was off the charts, and you remember gas lines, and you remember watching your paycheck disintegrate

00:13:55.040 to inflation week after week, that stuck with you for the rest of their life.

00:13:58.700 And that was why, even in 2008, gold was most appealing to one generation and had almost

00:14:04.040 no appeal whatsoever to a younger generation.

00:14:06.480 They had just seen the world through a different lens.

00:14:09.380 And it would be easy for a millennial to criticize a baby boomer for wanting to own so much gold

00:14:15.360 after 2008.

00:14:16.540 And that is why the decision to the millennial may have looked crazy.

00:14:19.660 So the baby boomer who has the emotional scars left over from experiencing inflation, it's

00:14:24.640 not different whatsoever.

00:14:25.900 I'll give you one more example that I think is maybe the most powerful that I use in the book.

00:14:29.940 If you look at who buys lottery tickets, what group of Americans buys the most lottery

00:14:34.700 tickets?

00:14:35.060 And by far the most lottery tickets, it is the poorest Americans.

00:14:38.940 The lowest decile of Americans based by income, by the majority of lottery tickets, they spend

00:14:43.580 an average of $400 per year on lottery tickets.

00:14:46.740 It would be very easy for myself or you or a lot of people listening to this to hear that

00:14:51.260 statistic and say, well, that's crazy.

00:14:53.140 They're making a bad decision.

00:14:54.440 If you are so poor that you can barely afford to pay your bills, but you're spending $400

00:14:58.520 a year on lottery tickets, that's crazy.

00:15:01.480 And maybe that is the right answer.

00:15:02.960 Maybe we could just end there and move on.

00:15:05.180 But I think if other people try to put themselves in the shoes of someone who is consistently

00:15:09.920 in the lowest decile of income, then maybe their explanation for why they buy lottery

00:15:14.900 tickets would be something like this.

00:15:16.540 They would say that they do not feel like they have the opportunity to advance in their

00:15:20.540 career, to save their money, to invest their money like other people with higher incomes

00:15:24.580 do.

00:15:25.340 And therefore, buying a lottery ticket is the only time in their life where they feel like

00:15:28.980 they have a little bit of hope to get to the other financial side.

00:15:31.720 To have the things, to have more security, to be able to buy what they want.

00:15:35.000 The only time that they have the possibility of that is not dreaming about getting a big

00:15:38.900 promotion or making a great investment.

00:15:40.900 The only time that they can feel that joy is by buying a lottery ticket.

00:15:44.320 So even if it doesn't make any sense to me or you, it might make perfect sense to them.

00:15:48.620 And I think just that idea that equally intelligent people can come to very different conclusions

00:15:53.100 based off of their life experience explains a lot about why we do what we do with our

00:15:57.520 money.

00:15:58.220 Yeah, that last example.

00:15:59.180 Another thing I've heard too, an explanation of why poor people typically buy a lot of lottery

00:16:03.960 tickets is that they don't have a sense of agency, right?

00:16:06.380 Because they got a bad draw when they were born and something just happened.

00:16:09.860 And so they get the idea that, well, the only way you can become successful is just all

00:16:13.440 luck.

00:16:13.940 Right.

00:16:14.220 You have no control.

00:16:14.960 So might as well.

00:16:15.780 And if you came from a middle-class affluent family, you can see it by your actions.

00:16:20.460 You can actually do things with your life and advance your life.

00:16:23.480 But if you're poor, that's harder to do sometimes.

00:16:25.820 Right.

00:16:25.920 Harder to see.

00:16:26.640 And so it would be so easy to say, should you or should you not buy a lottery ticket?

00:16:30.660 That sounds like a math-based topic.

00:16:32.180 You just calculate the odds of winning and it should tell you whether you should do it

00:16:35.160 or not.

00:16:35.400 But that's not how people think about risk with their finances.

00:16:37.540 It's heavily tied to the generation you were born into, the country you live in, and

00:16:42.280 your socioeconomic status throughout the course of your life.

00:16:44.940 So people come to very different conclusions about these topics.

00:16:47.420 So what's the big takeaway from that principle?

00:16:49.320 Whenever you're looking at your own money or how other people treat their money, just

00:16:54.020 understand that everyone's playing a different game, maybe?

00:16:57.480 We're all playing a different game, particularly if you look at something like investing.

00:17:00.700 You know, there's one stock market, there's one Apple stock, there's one Tesla stock that

00:17:05.020 we all buy.

00:17:05.800 We're all in the same, we're all playing on the same field.

00:17:08.380 But people play very different games because just in the stock market, you have everything

00:17:13.100 from day traders to endowments who are investing for the next century.

00:17:17.200 And it would be crazy to think that a decision or information would be relevant to both of

00:17:23.060 those groups.

00:17:24.280 So you have the information that is very relevant to a day trader that is not relevant whatsoever

00:17:28.480 to a long-term investor.

00:17:30.600 Now, this is really important if we're talking about watching CNBC or reading the newspaper,

00:17:34.900 where very often you will have a market pundit who comes on and says, you know, making this

00:17:38.580 up, you should buy Netflix stock.

00:17:40.660 They'll say something like that.

00:17:41.600 And the question I always want to ask is, well, who is you?

00:17:44.480 Are you talking to a 17-year-old day trader?

00:17:46.760 Are you talking to a 97-year-old widow?

00:17:49.020 Because the decision to whether you should buy a Netflix stock is going to be completely

00:17:53.480 different based off who you're talking to.

00:17:55.640 So again, this is an area where it is easy to view finance like physics.

00:17:59.460 There's one right answer.

00:18:01.240 And two plus two always equals four.

00:18:03.200 But in finance, it's just so much more nuance.

00:18:06.020 There's a financial advisor named Tim Maurer who has a great quote that I love.

00:18:09.340 He says personal finance is much more personal than it is finance.

00:18:13.480 And I think that explains so much of what happens in this field where there is no one

00:18:18.140 right answer.

00:18:19.000 I deal with this a lot if you're doing podcasts like this or media or whatnot, and people should

00:18:23.100 say, you know, we'll say something like, you know, what should people do with their

00:18:26.620 money?

00:18:26.980 And the answer that no one wants to hear, but it is always the best answer is it depends

00:18:30.960 on who you are.

00:18:32.300 There are things that I do with my money that I honestly can't explain on a spreadsheet.

00:18:36.540 They don't make a lot of analytical sense.

00:18:38.000 And I would not recommend other people do, but they work for me.

00:18:40.460 They work for my wife. 0.84

00:18:41.420 It's what we want to do.

00:18:42.840 And I think that's a really important thing, just realizing that this is a very personal

00:18:46.380 endeavor.

00:18:47.360 And people have to be really introspective about who they are, what their skills are,

00:18:51.500 what their weaknesses are, what they want out of life, what their goals are, and find

00:18:54.760 a financial plan, a situation that works for them, even if it doesn't work for other

00:18:58.260 people or even if they can't necessarily even explain it on a spreadsheet.

00:19:01.720 Well, yeah, that idea of knowing the game you're playing and don't play someone else's

00:19:05.320 game, that goes back to the, I mean, you talk about that you make this connection in the

00:19:08.400 book to the financial bubble, the housing bubble, right?

00:19:11.420 And the housing bubble, a lot of it was driven by people who were flipping houses.

00:19:15.180 And for them, it made sense to do that because they weren't planning on owning their home

00:19:19.180 for very long.

00:19:20.180 They're just going to fix it up and flip it and sell it for a profit.

00:19:23.040 But then other people saw that you could get really cheap loans.

00:19:26.160 And they thought, well, I can just get a really cheap loan and get a really big house.

00:19:29.600 But these people weren't planning on flipping their house.

00:19:31.380 They were planning on just staying there for 10, 15 years, and they ended up just buying

00:19:36.060 too much house than they could afford, and everything just fell apart because people

00:19:38.820 were playing the wrong game.

00:19:40.300 They weren't playing the game.

00:19:41.160 They were playing someone else's game, basically.

00:19:43.100 Right.

00:19:43.380 And what really happened here was you had the flippers who were just buying a condo and

00:19:47.060 selling it the next month.

00:19:47.960 That was one game.

00:19:49.100 And then you had everyone else, the classic Americans buying a home for their family and 0.93

00:19:53.500 to want stability.

00:19:54.640 And the real issue with the housing bubble happened when the people who wanted a long-term house

00:20:00.180 started taking their cues from the flippers who were playing a different game.

00:20:04.340 Just like you said, once people said, oh, look, home prices are going up, so we should buy.

00:20:07.960 We can get a cheap loan.

00:20:09.140 They got that information.

00:20:10.900 They took those cues from the flippers who were driving the market, who were driving the 0.83

00:20:14.140 prices up.

00:20:15.580 Now, that's when the damage happens.

00:20:17.280 Bubbles cause their damage when people who are playing a long-term game take their cues

00:20:21.980 from people who are rationally playing a short-term game.

00:20:25.060 You can't necessarily blame the speculators.

00:20:27.280 In the real estate bubbles, it was the flippers.

00:20:29.660 In a stock market bubble, it's the day traders.

00:20:31.820 I don't blame those people at all because they're playing a rational game for themselves.

00:20:35.880 If you are a day trader in the stock market, and I don't necessarily recommend that, but

00:20:39.160 if you are, then if you were to ask the question, is Tesla overvalued?

00:20:44.020 To a day trader, it doesn't matter.

00:20:45.480 It doesn't matter how the business is doing.

00:20:47.260 It doesn't matter what the valuation is.

00:20:49.200 It doesn't matter whether they're going to pay a dividend or whether Elon Musk is going

00:20:52.180 to get sued by the SEC.

00:20:53.440 None of that matters.

00:20:54.160 All that matters to the day trader is, is the stock going to go up in the next hour?

00:20:57.840 That's it.

00:20:58.600 That's all that matters.

00:20:59.620 But if you are a long-term investor, then all these statistics about how the business

00:21:02.740 is doing, the fundamentals are doing, that is all that matters to them.

00:21:06.320 So a price that is rational to one person can be irrational to another, which is not

00:21:11.160 something that is very intuitive in the stock market.

00:21:13.680 We tend to just view it as, is Tesla a good buy, yes or no?

00:21:16.980 So I just think everyone needs to understand the game that they are playing, their own time

00:21:20.760 horizon, their own risks, what they all want out of their money, and just make sure that

00:21:23.960 you are only taking your cues, getting your information, taking your advice from people

00:21:27.860 who are also playing a similar game than you are, and go out of your way to actively ignore,

00:21:32.340 not pay any attention to people who are sending out cues, but are playing a different game than

00:21:36.520 you are.

00:21:37.520 Well, so if individual case studies aren't useful, you know, you can't like, well, if you

00:21:41.400 think like, how should I invest like Warren Buffett?

00:21:43.660 Well, you're not Warren Buffett, so that's not going to be useful to you.

00:21:45.960 So like, how do you figure out like overarching principles that everyone should follow?

00:21:50.220 Like, how do you, are there overarching principles that people should follow, or is it just going

00:21:54.220 to be case by case?

00:21:55.520 I think if you're, as you're talking about specific people, the big thing that's important

00:21:59.200 to realize here is that we tend to look up to and idolize and try to emulate the massive

00:22:03.900 successes.

00:22:04.740 We try to emulate the Warren Buffetts, the Bill Gates, the Elon Musk, the Jeff Bezos, the

00:22:09.200 LeBron James, the huge successes are the people who we admire.

00:22:12.520 And it's really important just as a rule of thumb, but a really strong rule of thumb.

00:22:15.960 Is that the greater degree of success, you're talking about extreme success, the more luck

00:22:19.960 played a role.

00:22:21.020 That's not to say it's all luck.

00:22:22.740 Warren Buffett, Jeff Bezos, all the guys, it's not just luck.

00:22:25.340 Those guys are, and women are very skilled, very talented, put in a lot of effort, took 1.00

00:22:30.800 the risks, did the right things, made the right decisions, of course, full stop.

00:22:34.720 But in any degree of that level of success, there is an element of luck that is impossible

00:22:38.800 to emulate.

00:22:39.760 I mean, one example that I give in the book is that Bill Gates went to the only school in

00:22:44.200 the United States that had a computer.

00:22:46.540 So you could ask the question, is Bill Gates skilled?

00:22:49.260 Is he talented?

00:22:49.920 Is he hardworking?

00:22:50.740 Oh my gosh, yes.

00:22:51.580 He's one of the most smartest, hardest working businessmen of our time.

00:22:55.780 But is he lucky?

00:22:57.040 Yes, of course he is.

00:22:58.000 He went to the only school in the United States that had a computer.

00:23:00.420 That was his introduction to computers.

00:23:02.240 He mentioned this in a speech he did several years ago where he said, if there was no lakeside

00:23:07.240 school, which is where he went to school, there would be no Microsoft.

00:23:09.760 I mean, that was how closely he tied it to his success.

00:23:13.420 So if you are a young entrepreneur looking up to Bill Gates, which is great, you should

00:23:17.980 realize that you cannot emulate that luck that he had. 0.94

00:23:21.320 It was just a dumb luck thing.

00:23:23.100 So the skills that you should be looking to emulate from him is his hard work, his business

00:23:28.600 decisions, like some of the big, broad aspects of what he did.

00:23:32.940 But you should not think that if you were to work as hard as he did and be as smart as

00:23:38.080 he was, as analytical as he was, that you will achieve the same amount of success because

00:23:42.360 you can't emulate the luck that he had.

00:23:44.400 I mean, this is true for almost any one of those major successes that you go down.

00:23:47.880 It's that.

00:23:48.520 This is a hard topic because whenever someone points to someone who is successful and says

00:23:53.000 the word luck, it is very easy to just assume that that person is jealous or bitter 0.99

00:23:56.900 or just kind of being a jerk. 0.96

00:23:58.260 If I say Bill Gates was lucky, I look like I'm jealous and I'm just kind of mean. 0.98

00:24:01.420 So people don't tend to do it.

00:24:03.780 They don't tend to ascribe luck to other successful people because it makes them look bad.

00:24:07.720 And I don't want to subscribe luck to myself because if I look at the things that I am proud

00:24:13.320 of in life and I just say, oh, Morgan, you just got lucky.

00:24:15.820 That's a hard pill to swallow too.

00:24:17.400 I don't want to say that.

00:24:18.180 I want to believe that the things I am proud of, I did on my own.

00:24:22.600 So it is very easy to sweep luck under the rug and just pretend it doesn't exist.

00:24:27.300 Even if we know it exists, we know it's a big factor in the world.

00:24:30.160 It's just easy to ignore.

00:24:31.420 And this just makes it so that the big takeaways of when we're looking at other people, either

00:24:36.000 from their successes or their failures, rather than getting really hyper-specific about what

00:24:40.580 they did and trying to do that or trying to avoid what they did, we should take the biggest,

00:24:44.920 broadest takeaways that apply to lots of different people in lots of different fields.

00:24:50.140 And the things that sort of connect the dots, the common denominators across various people

00:24:55.200 that we're looking at are the things that we should spend most of our time paying attention

00:24:59.520 to when we're trying to learn lessons from other people.

00:25:02.100 We're going to take a quick break for your word from our sponsors.

00:25:03.820 And now back to the show.

00:25:07.560 All right.

00:25:07.680 So one of the big principles that can lead to financial success, high level, is learning how

00:25:13.120 to be satisfied with enough.

00:25:15.760 And going back to that one guy you talked about, the example who was the finance guy,

00:25:19.660 knew lots of stuff, but went bankrupt.

00:25:21.340 That was an example of a guy who was never satisfied with just enough.

00:25:25.940 He always wanted more, more money.

00:25:27.500 Like, why is it like, why is it even when you are successful, like you have enough where

00:25:31.680 you didn't have to work ever again, like you still want more, what is going on there?

00:25:35.800 I think the big thing here is that probably the hardest, but most important financial skill

00:25:40.460 is getting the goalposts to stop moving.

00:25:42.760 And here's, here's one way to summarize this.

00:25:44.680 The median American income, household income adjusted for inflation in 2020 is twice as high

00:25:51.460 as it was in the 1950s.

00:25:52.800 The median household adjusted for inflation is twice as rich today as they were in the 1950s.

00:25:57.140 But we tend to look at the 1950s as the golden age of middle-class prosperity.

00:26:02.260 That was when the middle-class family got a good job, have a good dignified life, but 1.00

00:26:06.100 we are twice as wealthy today.

00:26:08.020 So why do we have this nostalgia for what it was back then?

00:26:10.800 I think the reason why, by and large, is that our expectations have grown more than our incomes

00:26:16.020 have over that period.

00:26:17.820 At the median, a family's income grew by 100%.

00:26:21.220 If it doubled, our expectations have increased by 120, 130%.

00:26:25.020 You can actually quantify this.

00:26:26.420 If you look at something like the median square footage of a new American home, in the 1950s,

00:26:31.040 it was about 900 square feet.

00:26:32.500 Today, it's about 2,400 square feet.

00:26:34.680 So our expectations of what is average, of what we expect in life, has inflated over time.

00:26:40.020 And if you are someone who is lucky enough to have a rising income, a rising net worth,

00:26:43.800 and your expectations rise at lockstep with your wealth, with your money, you're not going

00:26:47.900 to feel better off.

00:26:48.760 Very simple, obvious statement, but it is so incredibly powerful.

00:26:51.960 And it's important to realize that, look, we spend so much time focusing on how to increase

00:26:58.180 your income, how to increase your wealth.

00:26:59.920 And I think it is just important to spend time on trying to manage your expectations and

00:27:04.260 keeping your expectations from growing faster than your income.

00:27:07.080 Because it doesn't matter how wealthy you are.

00:27:09.140 If your expectations are rising with your income, you're not going to feel any better off.

00:27:12.720 That's a really important part.

00:27:13.940 The second important part is that a conversation about what money is for and what we use money

00:27:18.400 for.

00:27:19.140 Like, what is the purpose of money?

00:27:21.360 It seems like a silly philosophical question, but obviously, I think there's two main things

00:27:25.380 to do with it.

00:27:25.860 One is what the majority of people would consider, which is you use money to buy stuff, which

00:27:29.720 is great.

00:27:30.320 Go out and buy a nice house, nice car, nicer clothes, whatever it is.

00:27:33.380 Go on a nice vacation, you use it to buy stuff.

00:27:35.520 To me, the second part of money that I think is way more important and powerful for people,

00:27:39.940 but it's so easy to ignore, is using money to control your time.

00:27:43.700 Using money to give yourself a level of autonomy and independence where you don't have to rely

00:27:48.360 on the whims of other people to control your time, to control your schedule, to be able

00:27:52.640 to wake up every morning and say, I can do whatever I want today.

00:27:55.960 That is, I think, the other thing that you can do with money besides buying stuff that

00:27:58.880 is so important.

00:28:00.560 And I think it's easy to ignore that and it's easy to just focus on the money is to buy stuff

00:28:06.640 aspect of money.

00:28:08.160 That's what you use it for.

00:28:08.740 So no matter how much money you gain, it's always, well, I bought a Honda, but now I

00:28:12.940 have more.

00:28:13.320 So I'll buy a BMW.

00:28:14.120 Now I bought a BMW, but now I have more money.

00:28:15.760 So maybe I'll get the Mercedes.

00:28:17.120 Now I got the Mercedes.

00:28:17.840 Maybe I'll get the Ferrari.

00:28:18.880 And that game never, ever ends.

00:28:21.960 And so if the game never ends, I think it's just the only way that you can beat a game

00:28:26.320 that never ends is to not play it and go out of your way to keep the goalposts from moving.

00:28:30.600 And a lot of people would say, okay, if I'm going to earn more money but not spend it, what

00:28:34.100 is the purpose?

00:28:35.120 And that's where it gets back to using that money, using that savings to build wealth.

00:28:38.740 To gain independence and autonomy and control your time.

00:28:41.980 And that is something that I think people will never necessarily get used to or get

00:28:45.420 accustomed to.

00:28:46.260 If you buy a nice house or a nice car, the evidence shows, I think everyone knows, it's

00:28:50.640 not that it won't bring you joy.

00:28:52.280 It's that you will get accustomed to that joy fairly quickly.

00:28:54.960 But controlling your time, waking up every morning and saying, I can do whatever I want

00:28:58.600 today.

00:28:59.140 That is a level of happiness and level of joy that you will probably never get accustomed

00:29:02.940 to.

00:29:03.620 Doing that, waking up every morning with autonomy and independence is something that will bring

00:29:07.320 a smile to your face every day.

00:29:09.300 And so that is, I think, the purpose of money that is so easy to ignore and why a lot of

00:29:13.620 people with a lot of money still don't feel that happy with their money that all of us

00:29:17.640 can think about as a way in order to be happier with our money that we do have.

00:29:21.460 So how do you do it?

00:29:21.940 How do you prevent the goalposts from moving?

00:29:24.460 It's a hard thing to do.

00:29:25.460 I think there's one story that I use in the book called Man in the Car Paradox, and it

00:29:29.620 came from when I was in college.

00:29:30.980 I was a valet at a very nice hotel in Los Angeles, and so all kinds of incredible cars

00:29:35.920 would come in, Ferraris, Lamborghinis, Bentleys, the whole fleet.

00:29:39.580 And I started realizing when I was a valet that when a Ferrari came into the hotel, I did

00:29:45.480 not care about the driver.

00:29:46.980 I never thought about the driver.

00:29:48.220 I didn't look at the driver.

00:29:49.400 I cared about the car.

00:29:50.740 Now, when the driver came in, as he's pulling into the hotel, he's probably thinking to himself,

00:29:55.700 everyone's looking at me.

00:29:57.040 Everyone thinks I'm cool.

00:29:58.320 Everyone's impressed with me.

00:29:59.600 Everyone wants to be me.

00:30:00.740 But the reality was, no, I didn't care about him.

00:30:03.680 I pictured myself in the driver's seat, and I thought to myself, if I was driving, people

00:30:08.960 would think I'm cool.

00:30:09.920 I didn't think he was cool.

00:30:11.120 I thought if I was driving, people would think I'm cool.

00:30:13.260 And this was this irony about no one is more impressed with your stuff than you are.

00:30:18.520 And once you realize that no one is more impressed with your stuff than you are, it takes a lot

00:30:23.380 of the pressure off of the social treadmill, the rat race of having new stuff and having

00:30:29.380 fancy stuff that serves no other purpose than sending a social signal.

00:30:33.600 Look, I like, I admire beautiful cars and nice homes as much as anyone else.

00:30:38.380 But I think if you really try hard to think about how little people are impressed with

00:30:43.060 your stuff or your ability to overestimate how impressed people are with your stuff, it

00:30:48.060 takes a lot of the pressure away from that.

00:30:50.340 But what does bring me a lot of joy and happiness, hopefully for other people, for people who I

00:30:55.380 admire, the skills that I, the traits that I admire in them is people who have control over

00:31:00.000 the time, control over their lives, who aren't reliant on other people to work when someone else

00:31:05.940 wants them to work on a project that someone else wants them to do.

00:31:08.540 People who control their destiny and control their time is what makes me happy.

00:31:11.800 And it's what I admire.

00:31:13.020 So I think it's just a subtle shift in mindset about what you want in life and what other

00:31:16.960 people are thinking about you that can go a long ways.

00:31:19.320 But the most important thing about this though, is that getting the goalposts to stop moving

00:31:22.520 while it's the most important financial skill, it is not easy.

00:31:25.240 It's a very difficult thing to do.

00:31:26.440 There's no easy answers to this, but I think it is so empowered is so powerful, so impactful

00:31:30.660 in finance that we need to be spending a lot more time thinking about how we can control

00:31:34.540 our own goalpost rather than just letting it grow with our success over time.

00:31:39.200 Yeah.

00:31:39.260 I mean, philosophers and like religions have been battling.

00:31:41.640 I've been trying to figure that out for thousands of years, like how to be satisfied with what

00:31:45.200 you got instead of wanting more.

00:31:46.660 It's not an easy thing.

00:31:47.520 And I think it's different at, at people's, at various stages in your life.

00:31:50.900 If you are a person who is looking for a spouse, looking for a mate, looking for a boyfriend,

00:31:54.820 looking for a girlfriend, your ability to social signal that you are successful to kind of

00:31:59.160 put out your peacock feathers is very important to have nice clothes, to drive a nice car.

00:32:03.100 That's an important thing.

00:32:03.920 If you're trying to signal to a mate, that's, that's, that's a real thing.

00:32:06.920 That was me in my early twenties, for sure.

00:32:09.280 If you are happily married in a stable relationship, it is significantly less important.

00:32:13.680 Or if you are in a field where your outward appearance is really important, you're a high

00:32:18.560 powered lawyer, whatever it is, you need to show your clients that you're dressing well,

00:32:21.500 then it's important.

00:32:22.340 I work from home and I'm a writer.

00:32:24.020 It's a lot less important for me.

00:32:25.400 So it's different for everyone and at different phases of your life.

00:32:28.320 And another point that is related to this that you make in the book is you have to understand

00:32:31.480 the distinction between being rich and being wealthy.

00:32:34.380 I think most people, fairly young people, they focus on being rich.

00:32:37.700 What, what's the distinction between the two?

00:32:39.680 Rich, I would define as you have enough money to go out and buy stuff.

00:32:42.920 You have enough money in your checking account today to go out and buy something.

00:32:46.380 And, and you, and you use that money to go out and buy stuff.

00:32:48.520 You have a nice car, you have nice clothes, you have a nice house.

00:32:50.640 You've, you've used money to buy stuff.

00:32:52.360 Wealth, I think is almost the opposite.

00:32:53.960 Wealth is what you don't see.

00:32:55.720 Wealth is the money that you have not spent.

00:32:57.640 It's the cars you didn't purchase.

00:32:59.720 It's the house you didn't purchase.

00:33:01.460 It's the first class upgrades that you didn't buy.

00:33:03.980 It's money in the bank or in invested that you have not spent yet.

00:33:07.500 And what's important about this is that wealth is invisible.

00:33:09.580 You don't see it.

00:33:10.980 You can see people's cars.

00:33:12.580 You can see their house.

00:33:13.900 You can see what kind of clothes they wear.

00:33:15.580 By and large, you cannot see their bank account.

00:33:17.680 You can't see their brokerage statement.

00:33:19.040 So you, you can't see their wealth.

00:33:20.860 You can see people's richness or lack of richness.

00:33:23.260 You cannot see their wealth though.

00:33:24.740 So this is a big problem, I think, because I mean, you think about something like physical

00:33:28.480 exercise.

00:33:29.320 If someone is in very good shape or in very poor shape, you can see it.

00:33:32.920 You can see their muscles.

00:33:33.880 You can see if they're obese.

00:33:34.820 It's visible.

00:33:35.460 It's right in front of you clear as day.

00:33:37.140 So it's easy to say, and I think we all do this.

00:33:39.820 Oh, I would like to look like this person.

00:33:41.680 I don't want to look like that person.

00:33:42.900 It's easy to see, okay, I should do this.

00:33:44.620 I should not do that.

00:33:45.900 Wealth is not, is, is not that though.

00:33:47.840 Like who do we look up to as someone who we admire if we can't see their wealth, if it's

00:33:52.720 invisible to us?

00:33:53.980 And of course, like we said earlier, there are people who have no outward appearance

00:33:57.980 of wealth, but are very wealthy.

00:33:59.380 And people like Richard who have a huge outward appearance of wealth, 25,000 square foot mansions,

00:34:05.640 and they're actually broke.

00:34:07.140 This was something else I learned as a valet in Los Angeles.

00:34:09.900 People would come into the hotel in very fancy cars.

00:34:13.100 And over time, I got to know some of them and I would talk about, you know, what do

00:34:16.720 you do?

00:34:17.140 What, what, what business are you in?

00:34:18.340 Where do you work?

00:34:19.040 And I learned that some of these people who are driving very expensive six figure cars

00:34:22.760 were not that successful.

00:34:24.840 They're just, there were mediocre successes who spent most of their income on a car lease.

00:34:29.440 And this was the thing, like the car was their richness, but I couldn't see their wealth.

00:34:33.520 And once you get to know them and you get a better sense of their, their actual wealth,

00:34:36.560 you realize there's not much there.

00:34:38.200 This is the classic, like fake it till you make it.

00:34:40.340 There's this great quote that I love in the book from several years ago.

00:34:44.200 Rihanna, the singer almost went bankrupt and she sued her financial advisor.

00:34:48.820 And the financial advisor has this quote that I love where he said, was it really necessary

00:34:52.800 to tell her that if you spend money on things, you will end up with the things and not the

00:34:57.700 money.

00:34:58.740 And I think that's like a quote that applies to so many of us that, you know, if you're

00:35:02.580 spending money on things, you're going to, you're going to end up without the money.

00:35:05.400 That's what it is.

00:35:05.940 So it just spends on like, what do you want?

00:35:07.120 Do you want things or do you want wealth?

00:35:08.540 Like I want wealth to have a level of independence.

00:35:11.120 That's what I want.

00:35:12.140 So things take a backseat to my wealth, even if it's money that I have not spent and I

00:35:16.200 might never spend it.

00:35:17.020 I want the wealth there to give me independence.

00:35:18.760 So it's just a subtle way of, of looking at what we want out of the world and realizing

00:35:23.120 that so much of what we're trying to learn about is not visible to us.

00:35:26.260 So we have to go out of our way to learn about it, about how other people are doing it

00:35:29.940 and what our own situation is, since it's not outwardly apparent and visible to us in the

00:35:34.400 world.

00:35:34.560 So one way to develop wealth is you want to hold on to your money, but you want to invest

00:35:38.240 it for the longterm because that's when the power of compound interest comes into effect.

00:35:42.840 And I think people have heard of compounding, but it can still be hard to wrap your mind

00:35:46.240 around.

00:35:47.020 And you gave some great examples to really put it into perspective.

00:35:49.700 Like one example was Warren Buffett.

00:35:52.300 Most of the money that he has today, his billions of dollars wasn't made till after his

00:35:56.880 sixties.

00:35:57.380 And it's all because of compounding.

00:35:59.080 Yeah.

00:35:59.240 We're going to look at Warren Buffett's net worth.

00:36:00.820 He's worth something like $90 billion.

00:36:03.100 He's 90 years old.

00:36:04.300 But if you look at the course of his life, 99% of his net worth came after his 50th birthday

00:36:09.120 and something like 97% came after his 65th birthday.

00:36:12.840 That's just how compounding works.

00:36:14.480 Compounding is not something where the big returns come in a year or in a decade.

00:36:18.680 It's something that takes place over the course of a lifetime.

00:36:21.580 And it's important for someone like Warren Buffett to say, look, he's 90 years old.

00:36:24.360 He's been investing full time since he's been 10 years old.

00:36:26.920 So he's been investing for 80 years.

00:36:28.460 Now, what's really important is that the math on this is very simple.

00:36:32.080 You can hypothetically say, okay, if Warren Buffett did not start investing when he was

00:36:35.820 10, let's say hypothetically he started investing when he was 25, like a normal person.

00:36:40.240 And let's say hypothetically he did not keep investing through age 90 like he has.

00:36:44.060 Let's say hypothetically he retired at age 65, like a normal person.

00:36:48.020 And let's say he was just as successful an investor during that period that he was investing

00:36:52.840 in.

00:36:53.020 He earned the same average annual returns.

00:36:55.060 What would his net worth be today?

00:36:56.780 If he started investing at 25 and retired at 65, the answer is about $12 million, not

00:37:01.940 90 billion, 12 million.

00:37:04.180 So we know that 99.9% of his net worth can be tied to just the amount of time he has been

00:37:09.160 investing for.

00:37:09.860 That's how compounding works.

00:37:10.920 It is so incredibly powerful, but it is rarely intuitive.

00:37:14.160 Even if you understand the math behind compounding, it's almost never too intuitive how powerful

00:37:18.420 it can be.

00:37:19.540 Now, this is important because if you look at someone like Warren Buffett, there are like

00:37:22.720 2,000 books on Amazon that are devoted to answering the question, how did he do it?

00:37:27.600 How did he build this fortune?

00:37:28.740 How did he become the world's greatest investor?

00:37:30.740 And they go into grand detail about how Buffett thinks about valuing businesses and business

00:37:35.520 models and valuation and market cycles.

00:37:38.340 Even if we know that 99% of his success can just be tied to the fact that he's been investing

00:37:43.000 for 80 years.

00:37:44.240 And that if you want to have any sort of ability to emulate what he's done, the single most

00:37:48.140 important thing that you can do is just increase your time horizon.

00:37:51.440 It's not what industry should you buy this year, what stocks you should buy this year.

00:37:54.440 It's how can you be a little bit more patient to let your money compound for the longest

00:37:57.480 period of time?

00:37:58.600 Like is Buffett a good investor?

00:37:59.860 Yes, of course he is.

00:38:01.080 But his real secret is that he's been a good investor for 80 years.

00:38:03.880 That's the takeaway that we should learn from him, is that time is really what drives all

00:38:07.920 big success over time.

00:38:09.280 People don't want to hear that answer because people want to get rich today.

00:38:12.700 But they want advice about where they should put their money tomorrow.

00:38:16.760 But we know from a lot of these cases, not just Buffett, but almost any big success that

00:38:19.920 you look at that, the common denominator is that people have made good decisions for a

00:38:23.820 very long period of time.

00:38:25.340 Not a great decision in any given year per se, but good decisions that compound for years

00:38:29.940 or decades over time.

00:38:30.960 That's where the big results come from.

00:38:32.240 And why, despite knowing that, people can understand that intellectually.

00:38:36.020 Again, as you said, the big argument in your book, you can know something, but still be

00:38:39.540 a failure in money.

00:38:41.060 Why, despite knowing that, we have such a hard time putting that into practice, keeping

00:38:45.380 our money in the market, even when you see the market going down, just dropping?

00:38:49.280 I think anytime people say the skill that you need to do well is patience, that's not what

00:38:54.500 people want to hear.

00:38:55.140 Most people are just naturally not very patient.

00:38:57.320 It's a hard thing to do.

00:38:58.160 A lot of it is because if I tell you, hey, invest your money in this fund and this stock

00:39:02.760 and leave it alone for 20 years, how do you know?

00:39:06.820 And then let's say it drops over the next year.

00:39:09.040 How do you know whether I was wrong or you just need to be more patient?

00:39:12.360 It's hard to tell in real time whether someone was wrong or patient.

00:39:15.380 It's much easier if you have a lot of feedback, of quick feedback, where you can easily determine

00:39:20.080 whether advice you got was wrong or you just need to be a little bit more patient.

00:39:23.440 It's very hard to do if you're talking about a long period of time.

00:39:25.440 It's also just the math of compounding is never intuitive.

00:39:28.880 If I ask you, what is eight plus eight plus eight plus eight?

00:39:33.080 You could probably figure it out in five seconds.

00:39:35.420 It's not very difficult.

00:39:36.700 But if I ask you, what is eight times eight times eight times eight times eight?

00:39:40.500 Even if you're very smart, you're going to struggle with that answer.

00:39:43.500 The difference between linear thinking and exponential thinking is absurd.

00:39:48.520 And particularly if you're talking about something like investing for 80 years,

00:39:51.380 like a long period of time, it just gets completely out of whack.

00:39:53.980 It's never intuitive how powerful it can be.

00:39:56.620 So that's why the combination of it just being a skill that is very difficult for people to

00:40:01.700 actually be patient combined with the counterintuitiveness of compounding is why it's so easy to overlook.

00:40:07.540 I also think tying this back to what we discussed earlier, if you are someone who is very smart,

00:40:12.220 if you have a degree from Harvard or MIT and you're very analytically smart,

00:40:15.880 you do not want to hear that the explanation for Warren Buffett's net worth is patience.

00:40:20.520 You don't want to hear that.

00:40:21.360 It's too simple.

00:40:22.140 It's too boring for you.

00:40:23.580 You want to dive into the weeds about how he valued companies, about how he thinks about economic cycles.

00:40:28.500 That's what you want to put your big brain to work at.

00:40:30.860 You don't want to hear the simple answer.

00:40:32.060 Even if we know, as this is a simple matter of arithmetic, that the simple answer,

00:40:36.320 that it's his time horizon that led to the dollar amount of his net worth is the right answer.

00:40:40.960 And have you found any practical tips on helping people to become more patient with their money?

00:40:45.220 I think the most important thing that any investor can do is be more familiar with the history of market volatility.

00:40:51.640 Become more familiar with how often and how normal it is for the market to fall 10%, 20%, 30%.

00:40:57.780 Because if you look over the last 100 years, for example, the market has declined on average 10% on average every 11 months.

00:41:04.420 That's been the average duration between 10% declines.

00:41:07.400 It's fallen more than 20% on average every three years, more than 30% on average at least once per decade.

00:41:13.660 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,

00:41:20.140 okay, I know this happens.

00:41:21.300 This happens all the time.

00:41:22.840 It'll come back.

00:41:23.540 It's okay.

00:41:24.420 And even when the market falls 30%, you say, gosh, this hurts. 0.99

00:41:26.960 This sucks. 0.98

00:41:27.460 This is a gut punch. 1.00

00:41:28.420 But I know this happens.

00:41:29.840 Historically, this is the normal path of success, the normal dynamic of success that I need to put up with.

00:41:34.620 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 in investing, but you have to give something up for that.

00:41:44.380 Like anything else in life, there's a price.

00:41:46.200 And the price you have to pay is putting up with volatility and uncertainty.

00:41:49.900 Once you view 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 bill's coming due.

00:41:57.880 I have to pay this fee, just like if I want to go on a trip to Hawaii, I have to pay the airlines a fee to get on the plane.

00:42:04.840 It's the same thing in investing.

00:42:06.160 This is a fee that you have to pay.

00:42:08.100 I think it's much more common, though, to view volatility like it's a fine.

00:42:12.200 And the difference between a fee and a fine is this.

00:42:14.140 A fine is something you are not supposed to pay.

00:42:15.820 If you get a fine, you got in trouble.

00:42:17.160 You got a speeding ticket.

00:42:18.060 You've been a bad boy.

00:42:18.860 Don't do that ever again.

00:42:19.760 You need to learn your lesson.

00:42:20.580 So if you view a 10% market decline as a fine, then you say, oh, my portfolio lost 10%.

00:42:27.140 What do I have to learn here?

00:42:28.320 I made a mistake.

00:42:29.060 I got to make sure I never do this again.

00:42:30.600 I just think that's not the right way.

00:42:32.620 That's not conducive to patience.

00:42:33.960 If you view it as a fee and you say, look, my portfolio fell 10%, but this is just what happens.

00:42:38.080 I put up with this.

00:42:38.720 I'm patient over time.

00:42:39.640 I think just understanding that history of volatility and the meaning of what volatility

00:42:44.620 is, is probably the only way in investing, at least, that you can push people to more

00:42:49.200 of a long-term mindset.

00:42:50.700 Well, so this idea of looking at the volatility in the stock market is either a fine, which

00:42:54.360 is like a negative way, or a fee, which is more of a positive way to look at it.

00:42:58.500 One thing you tackle in your book is being a pessimist or an optimist when it comes to investing

00:43:03.700 in your money.

00:43:04.900 And you make this case that it's really easy to be overly pessimistic about money.

00:43:10.080 Why do you think it is?

00:43:11.120 Why do we like to read the articles from people saying, oh, yeah, the next depression is here.

00:43:17.360 You're going to stock up on food.

00:43:19.320 But we don't tend to think about, well, maybe it's going to be bad, but it's going to get

00:43:24.080 better eventually.

00:43:25.140 I think it's always the case that pessimism sounds smarter than optimism.

00:43:29.480 It's always the case that we're going to pay more attention to pessimistic headlines

00:43:32.420 than we will optimistic headlines, even if we know that historically, optimism has been

00:43:36.140 by far the correct mindset.

00:43:38.000 If you just look at the growth of human achievement over time, of living standards and expectations,

00:43:43.620 you should definitely be a long-term optimist.

00:43:45.660 But pessimism sounds smarter.

00:43:46.980 I think one of the reasons is that it's very easy for pessimism to sound like someone trying

00:43:51.560 to help you.

00:43:52.360 Hey, there's a risk in front of you.

00:43:53.880 I'm trying to help you.

00:43:54.480 I'm trying to get you out of the way.

00:43:55.340 It sounds like someone's trying to help you.

00:43:57.220 Optimism, I think, Austin, sounds like a sales pitch.

00:43:59.360 Like, hey, I've got an opportunity for you to make a lot of money.

00:44:01.580 Do you want to see it?

00:44:02.200 It sounds like a sales pitch.

00:44:03.820 So it's easy to overlook in that sense.

00:44:06.260 One other reason that pessimism is always more appealing than optimism is that the good

00:44:11.300 things in the economy and in a lot of things in life happen slowly, whereas the setbacks,

00:44:15.680 the bad things happen very quickly.

00:44:17.700 This is true for economic growth where over the course of time, we've grown so much economically.

00:44:22.780 We're so much richer, wealthier on average and aggregate, way wealthier than we were 100 years

00:44:27.420 ago, but the growth took place slowly.

00:44:30.740 Like in any given year, the average economic growth has been about 2%.

00:44:33.360 It's easy to ignore in any given year, but the setbacks, the declines come very quickly.

00:44:38.100 You have things like with COVID-19 in March of this year, where everything just collapsed

00:44:41.940 over the course of about two or three weeks.

00:44:43.420 The whole economy just collapsed virtually overnight.

00:44:45.940 There's nothing in terms of growth that happens overnight.

00:44:48.260 There are no overnight miracles, but there are lots of overnight tragedies.

00:44:51.400 And that is why it is so much easier to pay attention to the overnight tragedies,

00:44:55.340 things like COVID-19 or September 11th that literally happened in the blink of an eye.

00:44:59.220 Whereas the growth that is more powerful over time, it's just so much easier to ignore because

00:45:03.080 it compounds very slowly over time.

00:45:05.320 Then how do you, okay, so you want to be optimistic, but you also say you don't want

00:45:07.820 to be overly optimistic.

00:45:09.060 What is like, how can over-optimism get you in trouble?

00:45:11.720 I think I like this idea of what I've called realistic optimism, which is simply this.

00:45:16.560 If you are someone who believes that everything will be okay in the future, you're actually

00:45:20.360 not an optimist.

00:45:21.360 You are a complacent.

00:45:22.480 If you think everything is going to be good, nothing bad is going to happen.

00:45:24.720 You're just being complacent about how the world works.

00:45:27.480 A realistic optimist, I think, is someone who thinks that the future over the long run

00:45:31.620 will work out and things will improve over the long run.

00:45:34.320 But the short term is going to be a constant, never-ending chain of disappointment and setback

00:45:39.580 and crash and decline and recession and bear market and pandemic all the time, a never-ending

00:45:45.100 chain of bad news, even if that does not preclude long-term progress.

00:45:49.180 That's what I think a realistic optimist is.

00:45:50.960 I think for money, I've often said people should save like a pessimist and invest like

00:45:55.760 an optimist.

00:45:56.680 You want to save like a pessimist knowing that the short term is going to be filled with lots

00:46:00.520 of bad news.

00:46:01.660 There's going to be recessions and bear markets and job losses and medical emergencies all

00:46:05.720 the time.

00:46:06.220 It never ends.

00:46:07.180 So you have to save.

00:46:07.880 You almost have to be paranoid about the short run so that you can survive setbacks.

00:46:11.860 But you should invest like an optimist.

00:46:13.420 You should invest like an optimist with the idea that people are going to solve problems and

00:46:16.860 we're going to become more productive over time and that the productivity is going to

00:46:20.420 increase profits and accrue to shareholders.

00:46:22.060 We're going to get much better over time, but we have to be able to survive and endure

00:46:25.720 the short run in order to get there.

00:46:27.980 So I think that's how you can avoid being a complacent optimist is just marrying your

00:46:32.640 long-term optimism with short-term pessimism, if not paranoia.

00:46:35.940 That sounds a lot like Nassim Taleb's like a barbell strategy, right?

00:46:39.600 You have like a whole bunch of like cash, maybe just something to really save, but then

00:46:43.040 you invested in something a little more risky and you can afford the loss because you got

00:46:46.520 that reservoir of cash that you can fall back to.

00:46:49.380 Yeah.

00:46:49.600 I mean, there's some investors, I wouldn't recommend this particularly for most people,

00:46:52.540 but there's some investors who will put 95% of their money in cash or US treasury bonds

00:46:57.760 and then 5% in super risky options.

00:47:01.280 And that's like their barbell strategy.

00:47:03.020 They're pessimistic on one end and very optimistic on the other end and swing for the fences on

00:47:08.900 the other end.

00:47:09.680 I think that's not a bad, in theory, it's much more difficult for individuals to pull off

00:47:14.960 that specific strategy, but I love the concept of it, of marrying optimism and pessimism.

00:47:19.280 That seems like it's contradictory.

00:47:21.140 So it's not very common.

00:47:22.320 People, you know, one or the other, are you optimistic or are you pessimistic?

00:47:26.000 They view it as black or white.

00:47:27.340 I think you need to marry the two at the same time and realizing that optimism and pessimism

00:47:31.300 can coexist and they should coexist in various parts of your life.

00:47:34.620 And they're two different skills that you need to nurture separately to be optimistic about

00:47:38.180 the long run and pessimistic about your short run because it's your ability to survive

00:47:42.640 the inevitable setbacks in the short run that are going to give you the ability to compound

00:47:46.660 and enjoy and benefit from the long run.

00:47:49.480 So like a modified barbell strategy, be like, have an emergency fund, six months emergency

00:47:53.420 fund maybe, and then, you know, just invest regularly in some sort of fund, an index fund

00:47:59.280 of some sort.

00:48:00.240 Yeah.

00:48:00.460 So you're investing for the long term, but you have enough cash and a lack of debt to

00:48:04.280 survive anything that will be thrown at you during the short run.

00:48:07.480 Gotcha.

00:48:08.020 So we've been talking some high level principles.

00:48:09.980 Like, what is, what do you think this trend, what do you, how does this translate into like

00:48:13.860 concrete action?

00:48:14.920 And again, we have this, we have to remember that everyone's different.

00:48:18.280 Everyone's playing a different game, but like high level, like, what do you think people

00:48:21.940 can start doing today to start implementing some of the things we've been talking about

00:48:25.680 concretely?

00:48:27.200 What is, it is, it is different for everyone.

00:48:28.960 I think that's, that's a really important point that there are no one size fist all.

00:48:32.140 Here's what you can do.

00:48:32.840 I mean, if there is a golden rule of finance, and again, this is really simple, but it's the

00:48:37.000 fact that it's simple makes so that so many smart people ignore it.

00:48:40.180 The golden rule of finance is live within your means and be patient.

00:48:43.380 If you can do that, you don't need to know that much more about finance to do well over

00:48:47.120 a long period of time.

00:48:48.380 Look, I didn't tell you what stocks to buy or, you know, what the market's going to do

00:48:51.620 next.

00:48:51.980 I don't think any, because those are things where I think either people don't know, or

00:48:55.320 they're different from person to person.

00:48:57.120 I think the common denominator though, is just live within your means and be patient, which

00:49:00.360 again is living within your means, which is savings.

00:49:02.780 That's your, that's your pessimism about the short run and be patient, invest for the long

00:49:06.940 run.

00:49:07.040 That's your optimism about the long run.

00:49:08.600 If you can do those two things, I think that is probably one of the only common denominators

00:49:12.240 of success across people, across various stages of their lives, various backgrounds, various

00:49:17.360 goals.

00:49:17.920 That is something that is kind of like the iron rule of finance, the iron law of finance

00:49:21.620 in a field where there are very few laws because everything's different and everything

00:49:25.020 evolves over time.

00:49:26.080 It sounds like, yeah, you just got to be mostly reasonable for most of the time.

00:49:29.560 You're going to, you're probably going to be okay.

00:49:31.040 I mean, one of the things in finance is that you don't need to make many great decisions

00:49:35.060 to do well over time.

00:49:36.160 You just have to consistently not screw up.

00:49:38.200 If you consistently avoid screwing up, you'll probably do not just okay, but phenomenal over

00:49:42.680 time.

00:49:43.240 So that's, you know, most people, when they talk about it, they want to know like, what's

00:49:47.800 the next great decision that I should make.

00:49:49.680 And to me, it's just been like, no, there, if you just get the, you know, a good return for

00:49:54.640 a long period of time without screwing up, you're probably going to do phenomenal.

00:49:57.760 Well, Morgan, this has been a great conversation.

00:49:59.320 Where can people go to learn more about the book and your work?

00:50:01.460 The book is all over the place.

00:50:02.500 Obviously Amazon with so many bookstores shut down right now, Amazon is the majority of

00:50:05.860 it.

00:50:06.160 I spend a lot of my time and all my writing and my thoughts on Twitter.

00:50:09.340 My handle is Morgan Housel, my first and last name.

00:50:12.020 All right.

00:50:12.180 Morgan Housel.

00:50:12.620 Thanks for your time.

00:50:13.100 It's been a pleasure.

00:50:14.040 Thanks so much for having me.

00:50:15.300 My guest today was Morgan Housel.

00:50:16.420 He's the author of the book, The Psychology of Money.

00:50:18.440 It's available on amazon.com and bookstores everywhere.

00:50:20.440 You can find out more information about his work at his website, morganhousel.com.

00:50:23.820 Also check out our show notes at aom.is slash money mindset, where you find

00:50:27.260 links to resources.

00:50:28.200 We're going to delve deeper into this topic.

00:50:36.520 Well, that wraps up another edition of the AOM podcast.

00:50:39.120 Check out our website at artofmanliness.com, where you can find our podcast

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00:51:06.900 As always, thank you for the continued support.

00:51:08.740 Until next time, it's Brett McKay.

00:51:10.080 Remind you not only to listen to the AOM podcast, but put what you've heard into

00:51:13.180 action.

00:51:13.540 We'll see you next time.

00:51:16.560 You're welcome.

00:51:17.160 Alright, let's pray.

00:51:17.360 Amen.

00:51:17.840 Thanks for watching.

00:51:18.320 Thank you for watching.

00:51:18.800 Thank you.

00:51:20.240 Thank you.

00:51:20.380 Great.

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The Art of Manliness - November 09, 2020

#659： Do You Want to Be Rich or Wealthy？ (And Why the Difference Matters)

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