#659： Do You Want to Be Rich or Wealthy？ (And Why the Difference Matters)
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Summary
Morgan Housel is a journalist and the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. In this episode, he talks about why you need to know the financial game you re playing, and not play someone else s, why it s hard to be satisfied with your position in life when your expectations keep rising, and why not continually move the goalposts to the most important skill in personal finance.
Transcript
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A journalist and the author of The Psychology of Money, Timeless Lessons on Wealth, Greed, and Happiness.
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Morgan kicks off our conversation by explaining how doing well with money is less about what you know and more about how you behave.
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And illustrates this point by comparing the stories of a janitor who saved millions and a prominent Wall Streeter who went bankrupt.
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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.
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From there, we get into why you need to know the financial game you're playing and not play someone else's.
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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.
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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,
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keeping the man and the car paradox in mind, and understanding the distinction between being rich and being wealthy.
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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.
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We then discuss why you should view volatility in the stock market as a fee rather than a fine,
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why pessimistic financial opinions are strangely more appealing than optimistic ones,
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and why it's best to split the difference and approach your money like a realistic optimist.
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We end our conversation with the two prongs of Morgan's Iron Law for Building Wealth.
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After the show's over, check out our show notes at aom.is slash moneymindset.
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So you got a new book out, The Psychology of Money, where you basically encapsulate all your thinking about,
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you've done about money and investing, I mean, some big principles.
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And this is the culmination of sort of your work, your career.
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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?
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Yeah, so my whole background has been a financial writer.
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I write about the history of finance, the history of investing and economics, and I'm interested in the psychology side of money.
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So not necessarily what should we do with our money, where should we invest it.
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I'm interested in what's going on inside people's heads.
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When they make decisions with their money about what to spend, what to save, where to invest, what's going through their heads.
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That's what I'm interested in, the history of how people think about money has always been my kind of beat.
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Now, what's important is that I kind of stumbled into writing in 2008.
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I wanted to go into finance and work in private equity, be a big investor.
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I stumbled into writing kind of haphazardly because in 2008, the world was falling to pieces.
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There were not a lot of private equity jobs available, but I did find a job as a financial writer.
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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.
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And I spent my early years as a writer trying to answer the question of what happened.
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Why did people make the decisions that they did during the housing bubble, during the financial crisis?
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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.
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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.
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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.
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And I just don't think finance is actually that.
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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.
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People in the United States think about money different from people who live in other parts of the world and vice versa.
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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.
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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.
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It's not how sophisticated you are in terms of making financial decisions.
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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.
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Those are not the typical ways that we think about finance, but I think those are the single most important parts of finance.
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So that just led me down this road of behavioral finance.
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And the book is written as 19 short stories that highlight the most important parts of behavioral finance, in my view.
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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.
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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.
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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.
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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?
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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.
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So there's two people that I profile in the introduction of the book, and these are both true stories.
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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.
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He worked as a gas station attendant and a janitor his entire life.
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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.
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His friends who knew him said that the only hobby that he had was chopping firewood.
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He was the first person in his family to graduate from high school, just one of these down-to-earth guys.
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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.
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And everyone who knew him said, where did Ronald Reed, this gas station attendant and janitor, get $7 million?
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And they started digging through his papers, and they realized that there was no secret.
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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.
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And that compounded, that grew into this fortune that he left to charity.
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Now, one other person that I profile in the story is a guy named Richard.
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And Richard had almost the exact opposite upbringing of Ronald Reed.
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He went to work on Wall Street in the 1980s, and he truly became one of the most important men in global finance.
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He retired in his 40s to pursue charitable activities.
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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.
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He told the bankruptcy judge that the financial crisis of 2008 completely wiped him out.
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The juxtaposition of these two stories is fascinating because I don't think there's any other field where those stories are even possible.
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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.
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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.
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He saved diligently, and he just left his money alone.
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He just let it compound over time and built a fortune.
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He had all the resources in the world to do well financially, and he just swung for the fences too hard.
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He had a lot of debt, a lot of leverage, went way over his head with debt.
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He had several homes, each of which was more than 25,000 square feet.
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All had massive mortgages on them that he couldn't keep up with during the financial crisis.
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So even though he had all of the knowledge, the financial sophistication, the greed side, I think, just caught up with him.
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But to me, it's just there are very few other industries where that's the case.
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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.
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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.
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And eventually, you realize they all say the same thing.
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And the trick is just like putting those really simple things into practice.
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Yeah, I think what's really important is that the most important stuff in finance is very basic and very boring.
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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.
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If you are someone who has a PhD in biology from MIT, you don't want to focus all your time on that stuff.
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You want to do the really complicated, complex, intellectually stimulating stuff.
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Even if by paying attention to the complicated stuff, you start to ignore, to discount the basic stuff.
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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.
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That's like 90% of what you need to know to do well in investing over time.
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So if you are a very smart finance person, you are probably spending a lot of your time focusing on really complicated investments.
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You know, deep into the weeds, trying to figure out what companies are doing the best, where industries are going next.
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And it's not that that's bad, that you shouldn't do that.
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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.
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All the basics that you ignore will just neutralize it and overwhelm it, which is exactly what happened to Richard.
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So as you said, you organized this book into 18 or 19 big chapters.
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Not big chapters, like they're big ideas, but they're small and concise and easy to read.
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Now, in your introduction, you're talking about what led you to start writing about finances.
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One of the things you explored was the meltdown that happened in 2008 that was driven in big part by the housing bubble.
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And we look at that back on that now, it's been 12 years.
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We think, well, that was just collective craziness.
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Like what was not crazy about the housing bubble?
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I mean, look, I think one of the takeaways is that people do crazy things with their money all the time.
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What I mean by that is when everyone makes a decision with their money in real time,
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it is checking all the boxes that they need to in their head in that given moment.
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And look, in hindsight or to another person, those ideas might look crazy.
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But to you, in any given moment, it makes sense to you.
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And something that's really important about this is that all of us have had very different backgrounds.
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We come from different upbringings, different generations.
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Some of us are born in different countries, live in different countries.
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We've had different amounts of luck, whether it's good luck or bad luck in our life,
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that has given us a different view of the world.
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And so we all have a different view, a different model in our head of how the world works.
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The assumptions that I have about how the economy works and how the stock market works
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are different from those that you have, different from those that everyone has.
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I mean, one really simple way to frame this is, look, if you were born in the United States
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in 1950, then during your teens and 20s, your young impressionable years, the stock market
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Your introductory experience to the stock market is, this is a joke where you don't earn
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If, by contrast, you were born in 1970, then during your teens and 20s, the market went up
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So just if you were born 20 years apart, in your early years, you got a completely different
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And that will stick with you for the rest of your life, shape your expectations, shape
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And it's not that one generation is smarter or has better information than the other
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It's just that they grew up seeing something different.
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They see the world through a slightly different lens that shapes how they think about risk.
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And that is why people can make decisions that make sense to them but are crazy for other
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I mean, one more recent example of this is after the 2008 financial crisis, gold as an
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investment became very popular when the central bank was printing a lot of money after the
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The generation that gold was most appealing to during that period was baby boomers.
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If you look at the baby boomers' children, they've never experienced inflation in their
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If you are a millennial, you've never experienced any amount of significant inflation in your entire
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But if you were a baby boomer and you came of age in the 70s and 80s, you remember when inflation
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was off the charts, and you remember gas lines, and you remember watching your paycheck disintegrate
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to inflation week after week, that stuck with you for the rest of their life.
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And that was why, even in 2008, gold was most appealing to one generation and had almost
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They had just seen the world through a different lens.
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And it would be easy for a millennial to criticize a baby boomer for wanting to own so much gold
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And that is why the decision to the millennial may have looked crazy.
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So the baby boomer who has the emotional scars left over from experiencing inflation, it's
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I'll give you one more example that I think is maybe the most powerful that I use in the book.
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If you look at who buys lottery tickets, what group of Americans buys the most lottery
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And by far the most lottery tickets, it is the poorest Americans.
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The lowest decile of Americans based by income, by the majority of lottery tickets, they spend
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an average of $400 per year on lottery tickets.
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It would be very easy for myself or you or a lot of people listening to this to hear that
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If you are so poor that you can barely afford to pay your bills, but you're spending $400
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But I think if other people try to put themselves in the shoes of someone who is consistently
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in the lowest decile of income, then maybe their explanation for why they buy lottery
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They would say that they do not feel like they have the opportunity to advance in their
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career, to save their money, to invest their money like other people with higher incomes
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And therefore, buying a lottery ticket is the only time in their life where they feel like
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they have a little bit of hope to get to the other financial side.
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To have the things, to have more security, to be able to buy what they want.
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The only time that they have the possibility of that is not dreaming about getting a big
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The only time that they can feel that joy is by buying a lottery ticket.
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So even if it doesn't make any sense to me or you, it might make perfect sense to them.
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And I think just that idea that equally intelligent people can come to very different conclusions
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based off of their life experience explains a lot about why we do what we do with our
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Another thing I've heard too, an explanation of why poor people typically buy a lot of lottery
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tickets is that they don't have a sense of agency, right?
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Because they got a bad draw when they were born and something just happened.
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And so they get the idea that, well, the only way you can become successful is just all
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And if you came from a middle-class affluent family, you can see it by your actions.
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You can actually do things with your life and advance your life.
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But if you're poor, that's harder to do sometimes.
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And so it would be so easy to say, should you or should you not buy a lottery ticket?
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You just calculate the odds of winning and it should tell you whether you should do it
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But that's not how people think about risk with their finances.
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It's heavily tied to the generation you were born into, the country you live in, and
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your socioeconomic status throughout the course of your life.
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So people come to very different conclusions about these topics.
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So what's the big takeaway from that principle?
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Whenever you're looking at your own money or how other people treat their money, just
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understand that everyone's playing a different game, maybe?
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We're all playing a different game, particularly if you look at something like investing.
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You know, there's one stock market, there's one Apple stock, there's one Tesla stock that
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We're all in the same, we're all playing on the same field.
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But people play very different games because just in the stock market, you have everything
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from day traders to endowments who are investing for the next century.
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And it would be crazy to think that a decision or information would be relevant to both of
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So you have the information that is very relevant to a day trader that is not relevant whatsoever
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Now, this is really important if we're talking about watching CNBC or reading the newspaper,
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where very often you will have a market pundit who comes on and says, you know, making this
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And the question I always want to ask is, well, who is you?
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Because the decision to whether you should buy a Netflix stock is going to be completely
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So again, this is an area where it is easy to view finance like physics.
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There's a financial advisor named Tim Maurer who has a great quote that I love.
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He says personal finance is much more personal than it is finance.
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And I think that explains so much of what happens in this field where there is no one
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I deal with this a lot if you're doing podcasts like this or media or whatnot, and people should
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say, you know, we'll say something like, you know, what should people do with their
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And the answer that no one wants to hear, but it is always the best answer is it depends
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There are things that I do with my money that I honestly can't explain on a spreadsheet.
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And I would not recommend other people do, but they work for me.
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And I think that's a really important thing, just realizing that this is a very personal
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And people have to be really introspective about who they are, what their skills are,
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what their weaknesses are, what they want out of life, what their goals are, and find
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a financial plan, a situation that works for them, even if it doesn't work for other
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people or even if they can't necessarily even explain it on a spreadsheet.
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Well, yeah, that idea of knowing the game you're playing and don't play someone else's
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game, that goes back to the, I mean, you talk about that you make this connection in the
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book to the financial bubble, the housing bubble, right?
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And the housing bubble, a lot of it was driven by people who were flipping houses.
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And for them, it made sense to do that because they weren't planning on owning their home
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They're just going to fix it up and flip it and sell it for a profit.
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But then other people saw that you could get really cheap loans.
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And they thought, well, I can just get a really cheap loan and get a really big house.
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But these people weren't planning on flipping their house.
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They were planning on just staying there for 10, 15 years, and they ended up just buying
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too much house than they could afford, and everything just fell apart because people
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They were playing someone else's game, basically.
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And what really happened here was you had the flippers who were just buying a condo and
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And then you had everyone else, the classic Americans buying a home for their family and
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And the real issue with the housing bubble happened when the people who wanted a long-term house
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started taking their cues from the flippers who were playing a different game.
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Just like you said, once people said, oh, look, home prices are going up, so we should buy.
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They took those cues from the flippers who were driving the market, who were driving the
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Bubbles cause their damage when people who are playing a long-term game take their cues
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from people who are rationally playing a short-term game.
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In the real estate bubbles, it was the flippers.
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In a stock market bubble, it's the day traders.
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I don't blame those people at all because they're playing a rational game for themselves.
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If you are a day trader in the stock market, and I don't necessarily recommend that, but
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if you are, then if you were to ask the question, is Tesla overvalued?
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It doesn't matter whether they're going to pay a dividend or whether Elon Musk is going
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All that matters to the day trader is, is the stock going to go up in the next hour?
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But if you are a long-term investor, then all these statistics about how the business
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is doing, the fundamentals are doing, that is all that matters to them.
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So a price that is rational to one person can be irrational to another, which is not
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something that is very intuitive in the stock market.
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We tend to just view it as, is Tesla a good buy, yes or no?
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So I just think everyone needs to understand the game that they are playing, their own time
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horizon, their own risks, what they all want out of their money, and just make sure that
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you are only taking your cues, getting your information, taking your advice from people
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who are also playing a similar game than you are, and go out of your way to actively ignore,
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not pay any attention to people who are sending out cues, but are playing a different game than
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Well, so if individual case studies aren't useful, you know, you can't like, well, if you
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think like, how should I invest like Warren Buffett?
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Well, you're not Warren Buffett, so that's not going to be useful to you.
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So like, how do you figure out like overarching principles that everyone should follow?
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Like, how do you, are there overarching principles that people should follow, or is it just going
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I think if you're, as you're talking about specific people, the big thing that's important
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to realize here is that we tend to look up to and idolize and try to emulate the massive
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We try to emulate the Warren Buffetts, the Bill Gates, the Elon Musk, the Jeff Bezos, the
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LeBron James, the huge successes are the people who we admire.
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And it's really important just as a rule of thumb, but a really strong rule of thumb.
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Is that the greater degree of success, you're talking about extreme success, the more luck
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Warren Buffett, Jeff Bezos, all the guys, it's not just luck.
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Those guys are, and women are very skilled, very talented, put in a lot of effort, took
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the risks, did the right things, made the right decisions, of course, full stop.
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But in any degree of that level of success, there is an element of luck that is impossible
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I mean, one example that I give in the book is that Bill Gates went to the only school in
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So you could ask the question, is Bill Gates skilled?
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He's one of the most smartest, hardest working businessmen of our time.
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He went to the only school in the United States that had a computer.
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He mentioned this in a speech he did several years ago where he said, if there was no lakeside
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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.
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
00:23:44.400
I mean, this is true for almost any one of those major successes that you go down.
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
00:23:58.260
If I say Bill Gates was lucky, I look like I'm jealous and I'm just kind of mean.
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.
00:24:18.180
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.
00:24:31.420
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.
00:25:07.680
So one of the big principles that can lead to financial success, high level, is learning how
00:25:15.760
And going back to that one guy you talked about, the example who was the finance guy,
00:25:21.340
That was an example of a guy who was never satisfied with just enough.
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
00:25:44.680
The median American income, household income adjusted for inflation in 2020 is twice as high
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
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
00:26:21.220
If it doubled, our expectations have increased by 120, 130%.
00:26:26.420
If you look at something like the median square footage of a new American home, in the 1950s,
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
00:26:48.760
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
00:26:59.920
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.
00:27:09.140
If your expectations are rising with your income, you're not going to feel any better off.
00:27:13.940
The second important part is that a conversation about what money is for and what we use money
00:27:21.360
It seems like a silly philosophical question, but obviously, I think there's two main things
00:27:25.860
One is what the majority of people would consider, which is you use money to buy stuff, which
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
00:28:00.560
And I think it's easy to ignore that and it's easy to just focus on the money is to buy stuff
00:28:08.740
So no matter how much money you gain, it's always, well, I bought a Honda, but now I
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
00:28:35.120
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
00:28:46.260
If you buy a nice house or a nice car, the evidence shows, I think everyone knows, it's
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
00:28:59.140
That is a level of happiness and level of joy that you will probably never get accustomed
00:29:03.620
Doing that, waking up every morning with autonomy and independence is something that will bring
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.
00:29:25.460
I think there's one story that I use in the book called Man in the Car Paradox, and it
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
00:29:50.740
Now, when the driver came in, as he's pulling into the hotel, he's probably thinking to himself,
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
00:30:11.120
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
00:30:50.340
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.
00:31:13.020
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.
00:31:26.440
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.
00:31:39.260
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
00:31:47.520
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.
00:32:03.920
If you're trying to signal to a mate, that's, that's, that's a real thing.
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,
00:32:25.400
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.
00:32:39.680
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.
00:33:01.460
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.
00:33:15.580
By and large, you cannot see their bank account.
00:33:20.860
You can see people's richness or lack of richness.
00:33:24.740
So this is a big problem, I think, because I mean, you think about something like physical
00:33:29.320
If someone is in very good shape or in very poor shape, you can see it.
00:33:37.140
So it's easy to say, and I think we all do this.
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
00:33:53.980
And of course, like we said earlier, there are people who have no outward appearance
00:33:59.380
And people like Richard who have a huge outward appearance of wealth, 25,000 square foot mansions,
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
00:34:19.040
And I learned that some of these people who are driving very expensive six figure cars
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,
00:34:38.200
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
00:34:58.740
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.
00:35:08.540
Like I want wealth to have a level of independence.
00:35:12.140
So things take a backseat to my wealth, even if it's money that I have not spent and I
00:35:17.020
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
00:35:34.560
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
00:35:47.020
And you gave some great examples to really put it into perspective.
00:35:52.300
Most of the money that he has today, his billions of dollars wasn't made till after his
00:35:59.240
We're going to look at Warren Buffett's net worth.
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.
00:36:14.480
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.
00:36:28.460
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
00:36:56.780
If he started investing at 25 and retired at 65, the answer is about $12 million, not
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
00:37:10.920
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
00:37:19.540
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?
00:37:28.740
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
00:37:38.340
Even if we know that 99% of his success can just be tied to the fact that he's been investing
00:37:44.240
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
00:38:01.080
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
00:38:09.280
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
00:38:25.340
Not a great decision in any given year per se, but good decisions that compound for years
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
00:38:41.060
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
00:38:55.140
Most people are just naturally not very patient.
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.
00:39:36.700
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.
00:39:56.620
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.
00:40:23.580
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.
00:40:32.060
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,
00:41:24.420
And even when the market falls 30%, you say, gosh, this hurts.
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.
00:41:46.200
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.
00:42:08.100
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.
00:42:20.580
So if you view a 10% market decline as a fine, then you say, oh, my portfolio lost 10%.
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.
00:42:39.640
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
00:42:50.700
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
00:43:04.900
And you make this case that it's really easy to be overly pessimistic about money.
00:43:11.120
Why do we like to read the articles from people saying, oh, yeah, the next depression is here.
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
00:43:25.140
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
00:43:38.000
If you just look at the growth of human achievement over time, of living standards and expectations,
00:43:46.980
I think one of the reasons is that it's very easy for pessimism to sound like someone trying
00:43:57.220
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.
00:44:06.260
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,
00:44:17.700
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
00:44:30.740
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
00:44:43.420
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
00:45:05.320
Then how do you, okay, so you want to be optimistic, but you also say you don't want
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
00:45:22.480
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.
00:45:50.960
I think for money, I've often said people should save like a pessimist and invest like
00:45:56.680
You want to save like a pessimist knowing that the short term is going to be filled with lots
00:46:01.660
There's going to be recessions and bear markets and job losses and medical emergencies all
00:46:07.880
You almost have to be paranoid about the short run so that you can survive setbacks.
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
00:46:22.060
We're going to get much better over time, but we have to be able to survive and endure
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.
00:46:49.600
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
00:47:03.020
They're pessimistic on one end and very optimistic on the other end and swing for the fences on
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.
00:47:22.320
People, you know, one or the other, are you optimistic or are you pessimistic?
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
00:47:49.480
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
00:48:00.460
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.
00:48:08.020
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
00:48:14.920
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
00:48:28.960
I think that's, that's a really important point that there are no one size fist all.
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
00:48:48.380
Look, I didn't tell you what stocks to buy or, you know, what the market's going to do
00:48:51.980
I don't think any, because those are things where I think either people don't know, or
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
00:49:08.600
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
00:49:17.920
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
00:49:26.080
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
00:49:38.200
If you consistently avoid screwing up, you'll probably do not just okay, but phenomenal over
00:49:43.240
So that's, you know, most people, when they talk about it, they want to know like, what's
00:49:49.680
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?
00:50:02.500
Obviously Amazon with so many bookstores shut down right now, Amazon is the majority of
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.
00:50:16.420
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
00:50:36.520
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
00:50:43.520
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00:50:47.600
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00:51:06.900
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00:51:10.080
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