Do You want to Be Rich or Wealthy？ (And Why the Difference Matters)
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Summary
Morgan Housel is an investor, financial journalist, and the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. In this episode, he explains why doing well with money is less about what you know and more about how you behave.
Transcript
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Hey, it's Brett. It is fall break here in Tulsa, so our family's taking a short trip,
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so we're going to do a rebroadcast today. Episode number 659, Do You Want to Be Rich
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or Wealthy and Why the Difference Matters? with Morgan Housel. It's one of the most
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popular episodes in 2020. I think you'll enjoy it. See you back on Monday with a brand new episode.
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Brett McKay here, and welcome to another edition of the Art of Manliness podcast.
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When we think about finance, we typically think about numbers and math.
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My guest today, however, argues that doing well with money is less about what you can put on a
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spreadsheet and more about what goes on in your mind, and that if you want to master your personal
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finance, you've got to understand how things like your own history, unique view of the world,
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and fear and pride influence how you think. His name is Morgan Housel, and he's an investor,
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financial journalist, and the author of The Psychology of Money, Timeless Lessons on Wealth,
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Greed, and Happiness. Morgan kicks off our conversation by explaining how doing well with
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money is less about what you know and more about how you behave, and illustrates this point by
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comparing the stories of a janitor who saved millions and a prominent Wall Streeter who
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went bankrupt. He then explains how the seemingly crazy decisions people make around money actually
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make a kind of sense if you look into it a little more deeply. From there, we get into why you need
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to know the financial game you're playing and not play someone else's. We then turn to why it's hard
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to be satisfied with your position in life when your expectations keep rising, and why not
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continually moving your goalposts to the most important skill in personal finance. We discuss how
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getting off the never-ending treadmill of wanting more requires seeing money not just as a way to buy
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stuff, but to gain greater autonomy, keeping the man and the car paradox in mind, and understanding
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the distinction between being rich and being wealthy. We then talk about the unappreciated,
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mind-boggling power of compound interest, using the example of Warren Buffett, who made 99% of his
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wealth after the age of 50. We then discuss why you should view volatility in the stock market as a
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fee rather than a fine, why pessimistic financial opinions are strangely more appealing than optimistic
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ones, and why it's best to split the difference and approach your money like a realistic
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optimistic optimist. We're in a conversation with the two prongs of Morgan's Iron Law for Building
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Wealth. 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
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about, you've done about money and investing, I mean, some big principles, and this is the
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culmination of sort of your work, your career. For those who aren't familiar with your work,
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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. I write about the history of finance,
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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? I'm interested in
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what's going on inside people's heads. When they make decisions with their money about what to spend,
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what to save, where to invest, what's going through their heads. That's what I'm interested
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in, the history of how people think about money. That's always been my kind of beat.
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Now, what's important is that I kind of stumbled into writing in 2008. It was not part of my plan.
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I wanted to go into finance and work in private equity, be a big investor. I stumbled into writing
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kind of haphazardly because in 2008, the world was falling to pieces. I needed something to do.
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I just graduated college. There were not a lot of private equity jobs available,
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but I did find a job as a financial writer. I was writing for The Motley Fool at the time.
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And so it was never part of my plan, but what was interesting is that obviously what happened
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in 2008 was a global financial crisis where the global economy fell to pieces. And I spent my
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early years as a writer trying to answer the question of what happened. Why did people make
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the decisions that they did during the housing bubble, during the financial crisis? What were
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people thinking? And have we learned our lesson? Will we do it again? There was no aha moment,
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but I kind of realized as the years went on that the answers to those questions could not be found
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in any economics textbook or any finance textbook, but you could find subtle clues about why people
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behave the way that they did in a psychology textbook and a sociology textbook and a political
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science textbook, which just led me to the belief that I think we generally tend to think of finance
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as a math-based field. Like it is charts and numbers and formulas and data and, or like it's
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something like physics where two plus two equals four. And that's always been true. That will always
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been true. It's very clean and very precise. 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
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where I will think about risk different, different than you will different from anyone else from,
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from someone else who's listening. People in the United States think about money different from
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people who live in other parts of the world and vice versa. Like it's a much more nuanced topic that
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has a lot to do with not necessarily the decisions that we do make with our money, but what's happening
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inside of our heads. So that just led me to this belief that what's really important in finance
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is not what you know, it's how you behave. It's not how smart you are. It's not where you went to
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school. It's not how sophisticated you are in terms of making financial decisions. It's just about
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things like your relationship with greed and fear and your ability to take a long-term mindset and how
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gullible you are, who you trust. Those are not the typical ways that we think about finance, but I think
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those are the single most important parts of finance. So that just led me down this road of
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behavioral finance. And the book is, is written as 19 short stories that highlight the most important
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parts of behavioral finance. In my view, they're fairly short chapters. I did that out of respect
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for readers. I'm a big reader myself. I'm sure lots of listeners are themselves, but I don't finish
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a lot of books because I think most books do not require 300 pages of explanation to get your point
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across. So I wanted to write short chapters, each of which can kind of live on their own to make some of
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the most important parts about how we think about money, how we think about saving and investing and
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how we can think about finance and risk in a more productive way. All right. So let's go back to
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something you said there, because one of the main arguments in the book is that success in finances,
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success in money, isn't based so much on how much you know or your sophistication of knowledge of
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investing and things like that, but how you behave. Can you give us an example of someone who knows a lot
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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 not very sophisticated when it comes to their finances,
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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
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true stories. These are all real people. One is a guy named Ronald Reed, and Ronald Reed is about
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the humblest guy you can ever imagine. Even if you're cherry picking, like central casting,
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the most humble guy. 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,
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but he just had a very down-to-earth demeanor. His friends who knew him said that the only hobby
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that he had was chopping firewood. He was the first person in his family to graduate from high school.
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Just one of these down-to-earth guys. And when he died, Ronald Reed shocked everyone who knew him,
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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,
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get $7 million? And they started digging through his papers, and they realized that there was no
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secret. There was no inheritance. There was no lottery winnings. There was nothing like that.
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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,
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just stocks in big, large-cap companies. And he left it alone for like 50 years. And that compounded,
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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. And Richard had
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almost the exact opposite upbringing of Ronald Reed. He was born to a wealthy family. He went
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to Harvard. He got his MBA from University of Chicago. He went to work on Wall Street in the
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1980s. And he truly became one of the most important men in global finance. He was a vice chairman for
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Merrill Lynch. He retired in his 40s to pursue charitable activities. That's just how successful he was.
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And what's so interesting about where these two stories collide, these two men never knew each
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other. But shortly after Ronald Reed died, Richard filed for personal bankruptcy. He told the bankruptcy
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judge that the financial crisis of 2008 completely wiped him out. He had no money left, no income,
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no assets. And I just think it is so fascinating. The juxtaposition of these two stories is fascinating
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because I don't think there's any other field where those stories are even possible.
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Like there's no other field other than finance where someone with no education, no background,
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no sophistication, no training can massively outperform someone who has the best education,
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the best training, the best background. And I think what that really highlights that we were
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talking about earlier is that Ronald Reed, the humble gas station attendant, had the psychology side
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of money mastered. He was patient. He took a long-term perspective. He left his money alone. He saved
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diligently. And he just left his money alone. He wasn't being too greedy. He just let it compound
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over time and built a fortune. And Richard was, I think, the opposite. He had all the resources in
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the world to do well financially. And he just swung for the fences too hard. He had a lot of debt,
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a lot of leverage, went way over his head with debt. He had several homes, each of which was like
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more than 25,000 square feet. There's these massive sprawling mansions. He had several of them,
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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,
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the greed side, I think, just caught up with him. So I think those are extreme examples. But to me,
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it's just there are very few other industries where that's the case. You can have all the
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financial sophistication in the world. But if you do not manage your relationship with greed and fear,
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it has the ability to neutralize all of the financial sophistication that you have. That's true for
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everybody. Well, I think that goes to, I think a lot of people when it comes to their finances,
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I know I went through a phase where you just devour as many personal finance books as possible
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or investing books as possible. And eventually you realize they all say the same thing.
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There's nothing new here. And the trick is just 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
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and very boring. It's not dissimilar to diet and exercise where, look, the key to health,
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not everything. But what moves the needle the most is eat a good diet, get some exercise,
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sleep eight hours a night, don't smoke, don't drink too much. That's the key to success. But it's very
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boring. If you are someone who has a PhD in biology from MIT, you don't want to focus all your time on
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that stuff. You want to be doing molecular biology stuff. You want to do the really complicated,
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complex, intellectually stimulating stuff. So that's where your attention goes.
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Even if by paying attention to the complicated stuff, you start to ignore,
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to discount the basic stuff. I think it's true in finance as well, where some of the smartest people
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to tell them, hey, live below your means, save your money, buy a diverse, low-cost portfolio and
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be patient. That's like 90% of what you need to know to do well in investing over time. But it's
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not exciting. It's not intellectually stimulating. So if you are a very smart finance person, you are
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probably spending a lot of your time focusing on really complicated investments, deep into the weeds,
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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. But if doing that takes away any of your
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focus from the simple stuff, like living below your means, making sure you can afford your debts,
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et cetera, that kind of stuff, then none of the complicated stuff that you're doing is going to
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matter. All the basics that you ignore will just neutralize it and overwhelm it, which is exactly
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what happened to Richard. All right. So as you said, you organize this book and sort of into 18 or 19
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big chapters, not big chapters, like they're big ideas, but they're small and concise and easy to
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read. And the first one is no one is crazy. Now, in your introduction, you're talking about what led
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you to start writing about finances. One of the things you explored was the meltdown that happened
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in 2008 that was driven in big part by the housing bubble. And we look at that back on that now,
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it's been, and it's been 12 years. We think, well, that was just collective craziness. Like people just
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went crazy. So how was that not crazy? Like what, what was not crazy about the housing bubble of 2008?
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I mean, look, I think one of the takeaways is that people do crazy things with their money all the
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time. They make terrible decisions with their money. They make just boneheaded decisions. They
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blow money. They make terrible investments, but no one is actually crazy. What I mean by that is when
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everyone makes a decision with their money in real time, it is checking all the boxes that they need to
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in their head in that given moment. And look, in hindsight or to another person, those ideas might
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look crazy, but to you in any given moment, it makes sense to you. And something that's really
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important about this is that all of us have had very different backgrounds. We come from different
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upbringings, different generations. Some of us are born in different countries, live in different
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countries. Our parents raised us with different values. We've had different amounts of luck and
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whether it's good luck or bad luck in our life 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. The
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assumptions that I have about how the economy works and how the stock market works are different from
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those that you have, different from those that everyone has. We all have different views. I mean,
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one really simple way to frame this is, look, if you were born in the United States in 1950,
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then during your teens and twenties, your young impressionable years, the stock market went nowhere
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adjusted for inflation, 0% return during your teens and twenties. Your introductory experience to
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the stock market is, this is a joke where you don't earn any money at all. If by contrast,
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you were born in 1970, then during your teens and twenties, the market went up tenfold during your
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teens and twenties. So just if you were born 20 years apart in your early years, you got a completely
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different view about how the stock market works. And that will stick with you for the rest of your
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life, shape your expectations, shape your views of risk. And it's not that one generation is smarter
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or has better information than the other generation. It's just that they grew up seeing
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something different. They see the world through a slightly different lens that shapes how they think
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about risk. And that is why people can make decisions that make sense to them, but are crazy
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for other people that look crazy for other people. I mean, one more recent example of this is after
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the 2008 financial crisis, gold as an investment became very popular when the central bank was printing
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a lot of money after the financial crisis. The generation that gold was most appealing to during that
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period was baby boomers. If you look at the baby boomers' children, they've never experienced
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inflation in their life. If you are a millennial, you've never experienced any amount of significant
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inflation in your entire life. But if you were a baby boomer and you came of age in the seventies
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and eighties, you remember when inflation was off the charts and you remember gas lines and you
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remember watching your paycheck disintegrate to inflation week after week, that stuck with you for the rest of
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their life. And that was why even in 2008, gold was most appealing to one generation and had
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almost no appeal whatsoever to a younger generation. They had just seen the world through a different
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lens. And it would be easy for a millennial to criticize a baby boomer for wanting to own so much
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gold after 2008. And that is why the decision to the millennial may have looked crazy. So the baby boomer
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who has the emotional scars left over from experiencing inflation, it's not different
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whatsoever. 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 tickets
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and by far the most lottery tickets, it is the poorest Americans. The lowest decile of Americans
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based by income, by the majority of lottery tickets, they spend an average of $400 per year
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on lottery tickets. It would be very easy for myself or you or a lot of people listening to this
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to hear that statistic and say, well, that's crazy. They're making a bad decision. If you are so poor
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that you can barely afford to pay your bills, but you're spending $400 a year on lottery tickets,
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that's crazy. And maybe that is the right answer. Maybe we could just end there and move on.
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But I think if other people try to put themselves in the shoes of someone who is consistently in the
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lowest decile of income, then maybe their explanation for why they buy lottery tickets
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would be something like this. They would say that they do not feel like they have the opportunity to
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advance in their career, to save their money, to invest their money like other people with higher
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incomes due. And therefore, buying a lottery ticket is the only time in their life where
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they feel like 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. The only time that
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they have the possibility of that is not dreaming about getting a big promotion or making a great
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investment. The only time that they can feel that joy is by buying a lottery ticket. So even if it
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doesn't make any sense to me or you, it might make perfect sense to them. And I think just that idea
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that equally intelligent people can come to very different conclusions based off of their life
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experience explains a lot about why we do what we do with our money.
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Yeah. That last example, another thing I've heard too, an explanation of why poor people typically buy
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a lot of lottery tickets is that they don't have a sense of agency, right? Because they got a bad draw
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when they were born and something just happened. So they get the idea that, well, the only way you can
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become successful is just all luck. You have no control. So might as well. And if you came from a middle-class
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affluent flame, you can see it by your actions. You can actually do things with your life and
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advance your life. But if you're poor, that's harder to do sometimes. Harder to see.
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And so it would be so easy to say, should you or should you not buy a lottery ticket? That sounds
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like a math-based topic. You just calculate the odds of winning and it should tell you whether you
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should do it or not. But that's not how people think about risk with their finances. It's heavily
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tied to the generation you were born into, the country you live in, and your socioeconomic status
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throughout the course of your life. So people come to very different conclusions about these topics.
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So what's the big takeaway from that principle? Whenever you're looking at your own money
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or how other people treat their money, just understand that everyone's playing a different
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game, maybe? We're all playing a different game, particularly if you look at something
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like investing. There's one stock market. There's one Apple stock. There's one Tesla stock that we
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all buy. We're all playing on the same field. But people play very different games because just in
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the stock market, you have everything from day traders to endowments who are investing for the
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next century. And it would be crazy to think that a decision or information would be relevant to
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both of those groups. So you have the information that is very relevant to a day trader that is not
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relevant whatsoever to a long-term investor. Now, this is really important if we're talking about
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watching CNBC or reading the newspaper, where very often you will have a market pundit who comes
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on and says, I'm making this up. You should buy Netflix stock. They'll say something like that.
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And the question I always want to ask is, well, who is you? Are you talking to a 17-year-old day
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trader? Are you talking to a 97-year-old widow? Because the decision to whether you should buy
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Netflix stock is going to be completely different based off who you're talking to. So again, this is
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an area where it is easy to view finance like physics. There's one right answer, and two plus two
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always equals four. But in finance, it's just so much more nuance. There's a financial advisor named
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Tim Maurer, who has a great quote that I love. He says, personal finance is much more personal
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than it is finance. And I think that explains so much of what happens in this field where
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there is no one right answer. I deal with this a lot if you're doing podcasts like this or media
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or whatnot, and people should say, we'll say something like, what should people do with their
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money? And the answer that no one wants to hear, but it is always the best answer is,
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it depends on who you are. There are things that I do with my money that I honestly can't explain on a
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spreadsheet. They don't make a lot of analytical sense. And I would not recommend other people do,
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but they work for me. They work for my wife. It's what we want to do. And I think that's a
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really important thing, just realizing that this is a very personal endeavor. And people have to be
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really introspective about who they are, what their skills are, what their weaknesses are,
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what they want out of life, what their goals are, and find a financial plan, a situation that works
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for them, even if it doesn't work for other people, or even if they can't necessarily even explain
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it on a spreadsheet. Well, yeah, that idea of knowing the game you're playing and don't play
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someone else's game, that goes back to the, I mean, you talk about that you make this connection
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in the book to the financial bubble, the housing bubble, right? And the housing bubble, a lot of
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it was driven by people who were flipping houses. And for them, it made sense to do that because
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they weren't planning on owning their home for very long. They're just going to fix it up and
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flip it and sell it for a profit. 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. But these people
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weren't planning on flipping their house. They were planning on just staying there for
00:19:47.940
10, 15 years. And they ended up just buying too much house than they could afford and everything
00:19:52.380
just fell apart because people were playing the wrong game. They weren't playing the game.
00:19:56.120
They were playing someone else's game, basically.
00:19:58.060
Right. And what really happened here was you had the flippers who were just buying a condo and
00:20:02.020
selling it the next month. That was one game. And then you had everyone else, the classic Americans
00:20:06.720
buying a home for their family and to want stability. And the real issue with the housing bubble happened
00:20:11.960
when the people who wanted a long-term house started taking their cues from the flippers
00:20:17.920
who were playing a different game. Just like you said, once people said, oh, look, home prices are
00:20:21.880
going up, so we should buy. We can get a cheap loan. They got that information. They took those cues
00:20:26.660
from the flippers who were driving the market, who were driving the prices up.
00:20:30.560
Now, that's when the damage happens. Bubbles cause their damage when people who are playing a long-term
00:20:35.500
game take their cues from people who are rationally playing a short-term game.
00:20:39.420
You can't necessarily blame the speculators. In the real estate bubbles, it was the flippers.
00:20:44.440
In a stock market bubble, it's the day traders. I don't blame those people at all because they're
00:20:48.500
playing a rational game for themselves. If you are a day trader in the stock market,
00:20:52.620
and I don't necessarily recommend that, but if you are, then if you were to ask the question,
00:20:57.620
is Tesla overvalued? To a day trader, it doesn't matter. It doesn't matter how the business is doing.
00:21:02.220
It doesn't matter what the valuation is. It doesn't matter whether they're going to pay a dividend or
00:21:06.120
whether Elon Musk is going to get sued by the SEC. None of that matters.
00:21:09.420
All that matters to the day trader is, is the stock going to go up in the next hour? That's it.
00:21:13.440
That's all that matters. But if you are a long-term investor, then all these statistics about how the
00:21:17.420
business is doing, the fundamentals are doing, that is all that matters to them.
00:21:21.280
So a price that is rational to one person can be irrational to another, which is not something that
00:21:26.540
is very intuitive in the stock market. We tend to just view it as, is Tesla a good buy, yes or no?
00:21:32.060
So I just think everyone needs to understand the game that they are playing,
00:21:34.840
their own time horizon, their own risk, what they all want out of their money. And just make sure
00:21:38.800
that you are only taking your cues, getting your information, taking your advice from people who
00:21:42.960
are also playing a similar game than you are. And go out of your way to actively ignore,
00:21:47.300
not pay any attention to people who are sending out cues, but are playing a different game than you
00:21:51.620
are. Well, so if individual case studies aren't useful, you know, you can't like, well, if you think
00:21:56.600
like, how should I invest like Warren Buffett? Well, you're not Warren Buffett, so that's not going to be
00:22:00.300
useful to you. Like, how do you figure out like overarching principles that everyone should
00:22:04.880
follow? Like, how do you, are there overarching principles that people should follow? Or is it
00:22:09.000
just going to be case by case? I think if you're, as you're talking about specific people, the big
00:22:13.580
thing that's important to realize here is that we tend to look up to and idolize and try to emulate
00:22:17.800
the massive successes. We try to emulate the Warren Buffetts, the Bill Gates, the Elon Musk,
00:22:22.960
the Jeff Bezos, the LeBron James, the huge successes are the people who we admire. And it's really
00:22:28.180
important just as a rule of thumb, but a really strong rule of thumb is that the greater degree
00:22:31.980
of success, you're talking about extreme success, the more luck played a role. That's not to say
00:22:36.540
it's all luck. Warren Buffett, Jeff Bezos, all the guys, it's not just luck. Those guys are,
00:22:41.340
and women are very skilled, very talented, put in a lot of effort, took the risks, did the right
00:22:46.920
things, made the right decisions, of course, full stop. But in any degree of that level of success,
00:22:51.500
there is an element of luck that is impossible to emulate. I mean, one example that I give in the book
00:22:56.020
is that Bill Gates went to the only school in the United States that had a computer.
00:23:01.520
So you could ask the question, is Bill Gates skilled? Is he talented? Is he hardworking?
00:23:05.720
Oh my gosh, yes. He's one of the most smartest, hardest working businessmen of our time.
00:23:10.660
But is he lucky? Yes, of course he is. He went to the only school in the United States that had a
00:23:15.000
computer. That was his introduction to computers. He mentioned this in a speech he did several years
00:23:20.080
ago where he said, if there was no Lakeside School, which is where he went to school,
00:23:23.340
there would be no Microsoft. I mean, that was how closely he tied it to his success.
00:23:28.380
So if you are a young entrepreneur looking up to Bill Gates, which is great,
00:23:32.300
you should realize that you cannot emulate that luck that he had. It was just a dumb luck thing.
00:23:38.060
So the skills that you should be looking to emulate from him is his hard work, his business decisions,
00:23:44.480
like some of the big, broad aspects of what he did. But you should not think that if you were to
00:23:50.060
work as hard as he did and be as smart as he was, as analytical as he was, that you will achieve the
00:23:55.680
amount of success because you can't emulate the luck that he had. I mean, this is true for almost
00:24:00.240
any one of those major successes that you go down. It's that. This is a hard topic because whenever
00:24:04.900
someone points to someone who is successful and says the word luck, it is very easy to just assume
00:24:10.240
that that person is jealous or bitter or just kind of being a jerk. If I say Bill Gates was lucky,
00:24:14.500
I look like I'm jealous and I'm just kind of mean. So people don't tend to do it. They don't
00:24:19.000
tend to ascribe luck to other successful people because it makes them look bad. And I don't want
00:24:23.120
to subscribe luck to myself because if I look at the things that I am proud of in life and I just
00:24:29.140
say, Oh, Morgan, you just got lucky. That's a hard pill to swallow too. I don't want to say that.
00:24:33.120
I want to believe that the things I am proud of, I did on my own. So it is very easy to sweep luck
00:24:39.680
under the rug and just pretend it doesn't exist. Even if we know it exists, we know it's a big
00:24:44.100
factor in the world. It's just easy to ignore. And this just makes it so that the big takeaways
00:24:49.020
of when we're looking at other people, either from their successes or their failures, rather
00:24:53.260
than getting really hyper-specific about what they did and trying to do that or trying to avoid what
00:24:58.000
they did, we should take the biggest, broadest takeaways that apply to lots of different people
00:25:02.980
in lots of different fields. And the things that sort of connect the dots, the common denominators
00:25:08.780
across various people that we're looking at are the things that we should spend most of our time
00:25:13.920
paying attention to when we're trying to learn lessons from other people.
00:25:16.800
We're going to take a quick break for your word from our sponsors.
00:25:20.580
And now back to the show. All right. So one of the big principles that can lead to financial success,
00:25:25.720
high level, is learning how to be satisfied with enough. And going back to that one guy you talked
00:25:32.200
about, the example who was the finance guy, knew lots of stuff, went bankrupt. That was a guy,
00:25:37.000
that was an example of a guy who like, he was never satisfied with just enough. He always wanted more,
00:25:41.900
more money, more. Why is it? Why is it even when you are successful, you have enough or you didn't
00:25:46.860
have to work ever again, you still want more? What is going on there?
00:25:50.920
I think the big thing here is that probably the hardest but most important financial skill
00:25:55.420
is getting the goalposts to stop moving. And here's one way to summarize this.
00:25:59.860
The median American income, household income, adjusted for inflation in 2020 is twice as high as
00:26:06.520
it was in the 1950s. The median household, adjusted for inflation is twice as rich today as it were in
00:26:11.460
the 1950s. But we tend to look at the 1950s as the golden age of middle-class prosperity. That was
00:26:17.400
when the middle-class family got a good job, have a good dignified life, but we are twice as wealthy
00:26:22.260
today. So why do we have this nostalgia for what it was back then? I think the reason why, by and
00:26:27.500
large, is that our expectations have grown more than our incomes have over that period.
00:26:32.040
If the median family's income grew by 100%, if it doubled, our expectations have increased by 120%,
00:26:39.160
130%. You can actually quantify this if you look at something like the median square footage of a
00:26:44.400
new American home. In the 1950s, it was about 900 square feet. Today, it's about 2,400 square feet.
00:26:49.640
So our expectations of what is average, of what we expect in life, has inflated over time. And if you
00:26:55.420
are someone who is lucky enough to have a rising income, a rising net worth, and your expectations rise
00:27:00.180
at lockstep with your wealth, with your money, you're not going to feel better off. Very simple,
00:27:04.720
obvious statement, but it is so incredibly powerful. And it's important to realize that,
00:27:09.220
look, we spend so much time focusing on how to increase your income, how to increase your wealth.
00:27:14.860
And I think it is just important to spend time on trying to manage your expectations and keeping
00:27:19.420
your expectations from growing faster than your income. Because it doesn't matter how wealthy you are,
00:27:23.980
if your expectations are rising with your income, you're not going to feel any better off.
00:27:27.300
That's a really important part. The second important part is that a conversation about
00:27:31.660
what money is for and what we use money for. What is the purpose of money? It seems like a silly
00:27:37.120
philosophical question, but obviously, I think there's two main things to do with it. One is
00:27:41.120
what the majority of people would consider, which is you use money to buy stuff, which is great.
00:27:45.280
Go out and buy a nice house, a nice car, nicer clothes, whatever it is. Go on a nice vacation,
00:27:49.120
you use it to buy stuff. To me, the second part of money that I think is way more important and
00:27:54.100
powerful for people, but it's so easy to ignore, is using money to control your time.
00:27:58.640
Using money to give yourself a level of autonomy and independence where you don't have to rely
00:28:03.320
on the whims of other people to control your time, to control your schedule, to be able to wake up
00:28:08.040
every morning and say, I can do whatever I want today. That is, I think, the other thing that you
00:28:12.140
can do with money besides buying stuff that is so important. And I think it's easy to ignore that,
00:28:17.580
and it's easy to just focus on the money is to buy stuff aspect of money. That's what you use it for.
00:28:23.780
So no matter how much money you gain, it's always, well, I bought a Honda, but now I have more. So
00:28:28.360
I'll buy a BMW. Now I bought a BMW, but now I have more money. So maybe I'll get the Mercedes. Now I
00:28:32.220
got the Mercedes. Maybe I'll get the Ferrari. That game never, ever ends. And so if the game never ends,
00:28:38.760
I think it's just the only way that you can beat a game that never ends is to not play it and go out of
00:28:43.380
your way to keep the goalposts from moving. And a lot of people would say, okay, if I'm going to
00:28:47.440
earn more money but not spend it, what is the purpose? And that's where it gets back to using
00:28:51.660
that money, using that savings to build wealth, to gain independence and autonomy and control your
00:28:56.560
time. And that is something that I think people will never necessarily get used to or get accustomed
00:29:00.700
to. If you buy a nice house or a nice car, the evidence shows, I think everyone knows,
00:29:05.160
it's not that it won't bring you joy. It's that you will get accustomed to that joy fairly quickly.
00:29:10.000
But controlling your time, waking up every morning and saying, I can do whatever I
00:29:13.380
want today. That is a level of happiness and level of joy that you will probably never get
00:29:17.500
accustomed to. Doing that, waking up every morning with autonomy and independence is something that
00:29:21.980
will bring a smile to your face every day. And so that is, I think, the purpose of money
00:29:25.800
that is so easy to ignore and why a lot of people with a lot of money still don't feel that happy with
00:29:31.040
their money that all of us can think about as a way in order to be happier with our money that we do
00:29:35.780
have. So how do you do it? How do you prevent the goalposts from moving?
00:29:39.280
It's a hard thing to do. I mean, I think there's one story that I use in the book called
00:29:43.060
Man in the Car Paradox. And it came from when I was in college, I was a valet at a very nice hotel
00:29:47.820
in Los Angeles. And so all kinds of incredible cars would come in, Ferraris, Lamborghinis,
00:29:52.540
Bentleys, the whole fleet. And I started realizing when I was a valet that when a Ferrari came in to
00:29:59.180
the hotel, I did not care about the driver. I never thought about the driver. I didn't look at
00:30:03.760
the driver. I cared about the car. Now, when the driver came in, as he's pulling into the hotel,
00:30:09.060
he's probably thinking to himself, everyone's looking at me. Everyone thinks I'm cool.
00:30:13.280
Everyone's impressed with me. Everyone wants to be me. But the reality was, no, I didn't care about
00:30:18.160
him. I pictured myself in the driver's seat. And I thought to myself, if I was driving, people would
00:30:24.060
think I'm cool. I didn't think he was cool. I thought if I was driving, people would think I'm
00:30:27.860
cool. And this was this irony about no one is more impressed with your stuff than you are.
00:30:33.480
And once you realize that no one is more impressed with your stuff than you are, it takes a lot of the
00:30:38.820
pressure off of the social treadmill, the rat race of having new stuff and having fancy stuff that
00:30:45.300
serves no other purpose than sending a social signal. Look, I like, I admire beautiful cars and
00:30:51.640
nice homes as much as anyone else. But I think if you really try hard to think about how little people
00:30:57.200
are impressed with your stuff or your ability to overestimate how impressed people are with your
00:31:02.420
stuff, it takes a lot of the pressure away from that. But what does bring me a lot of joy and
00:31:07.580
happiness, hopefully for other people, for people who I admire, the skills that I, the traits that I
00:31:12.860
admire in them is people who have control over the time, control over their lives, who aren't reliant
00:31:17.560
on other people to work when someone else wants them to work on a project that someone else wants
00:31:23.060
them to do. People who control their destiny and control their time is what makes me happy and it's
00:31:26.900
what I admire. So I think it's just a subtle shift in mindset about what you want in life and what
00:31:31.660
other people are thinking about you that can go a long ways. But the most important thing about this
00:31:35.500
though, is that getting the goalposts to stop moving, while it's the most important financial
00:31:38.620
skill, it is not easy. It's a very difficult thing to do. There's no easy answers to this,
00:31:43.200
but I think it is so powerful, so impactful in finance that we need to be spending a lot more
00:31:47.700
time thinking about how we can control our own goalpost rather than just letting it grow with our
00:31:52.660
success over time. Yeah. I mean, philosophers and like religions have been battling. I've been trying to
00:31:57.020
figure that out for thousands of years, like how to be satisfied with what you got instead of
00:32:00.780
wanting more. It's not an easy thing. And I think it's different at people's, at various stages in
00:32:05.480
your life. If you are a person who is looking for a spouse, looking for a mate, looking for a
00:32:09.460
boyfriend, looking for a girlfriend, your ability to social signal that you are successful to kind of
00:32:14.120
put out your peacock feathers is very important. To have nice clothes, to drive a nice car, that's an
00:32:18.360
important thing. If you're trying to signal to a mate, that's a real thing. That was me in my early
00:32:23.080
twenties for sure. If you are happily married in a stable relationship, it is significantly less
00:32:28.140
important. Or if you are in a field where your outward appearance is really important,
00:32:32.740
you're a high powered lawyer, whatever it is, you need to show your clients that you're dressing
00:32:36.240
well, then it's important. I work from home and I'm a writer. It's a lot less important for me.
00:32:40.420
So it's different for everyone and at different phases of your life.
00:32:43.620
And another point that is related to this that you make in the book is you have to understand the
00:32:46.580
distinction between being rich and being wealthy. I think most people, fairly young people,
00:32:51.060
they focus on being rich. What's the distinction between the two?
00:32:54.020
Rich, I would define as you have enough money to go out and buy stuff. You have enough money in
00:32:58.580
your checking account today to go out and buy something. And you use that money to go out and
00:33:03.060
buy stuff. You have a nice car, you have nice clothes, you have a nice house, you've used money
00:33:06.360
to buy stuff. Wealth, I think, is almost the opposite. Wealth is what you don't see. Wealth is
00:33:10.980
the money that you have not spent. It's the cars you didn't purchase. It's the house you didn't
00:33:15.840
purchase. It's the first class upgrades that you didn't buy. It's money in the bank or in invested
00:33:21.100
that you have not spent yet. And what's important about this is that wealth is invisible. You don't
00:33:25.100
see it. You can see people's cars. You can see their house. You can see what kind of clothes
00:33:29.840
they wear. By and large, you cannot see their bank account. You can't see their brokerage
00:33:33.480
statement. So you can't see their wealth. You can see people's richness or lack of richness.
00:33:38.440
You cannot see their wealth though. This is a big problem, I think, because when you think
00:33:42.640
about something like physical exercise, if someone is in very good shape or in very poor shape,
00:33:46.980
you can see it. You can see their muscles. You can see if they're obese. It's visible.
00:33:50.320
It's right in front of you, clear as day. So it's easy to say, and I think we all do this,
00:33:54.840
oh, I would like to look like this person. I don't want to look like that person. It's easy
00:33:58.280
to see, okay, I should do this. I should not do that. Wealth is not that though. Who do we look
00:34:04.000
up to as someone who we admire if we can't see their wealth, if it's invisible to us?
00:34:08.960
And of course, like we said earlier, there are people who have no outward appearance of wealth,
00:34:13.320
but are very wealthy. And people like Richard who have a huge outward appearance of wealth,
00:34:18.420
25,000 square foot mansions, and they're actually broke. This was something else I learned as a
00:34:23.580
valet in Los Angeles. People would come into the hotel in very fancy cars. And over time,
00:34:29.200
I got to know some of them. And I would talk about, what do you do? What business are you
00:34:33.160
in? Where do you work? And I learned that some of these people who were driving very expensive
00:34:36.800
six-figure cars were not that successful. They were mediocre successes who spent most of their income
00:34:42.980
on a car lease. And this was the thing. The car was their richness, but I couldn't see their wealth.
00:34:48.720
And once you get to know them and you get a better sense of their actual wealth, you realize there's
00:34:52.080
not much there. This is the classic fake it till you make it. There's this great quote that I love
00:34:56.880
in the book from several years ago. Rihanna, the singer, almost went bankrupt. And she sued her
00:35:02.600
financial advisor. And the financial advisor has this quote that I love where he said,
00:35:06.180
was it really necessary to tell her that if you spend money on things, you will end up with the
00:35:11.740
things and not the money? And I think that's a quote that applies to so many of us, that if you're
00:35:17.540
spending money on things, you're going to end up without the money. That's what it is. So it just
00:35:21.200
depends on what do you want? Do you want things or do you want wealth? I want wealth to have a level
00:35:25.560
of independence. That's what I want. So things take a backseat to my wealth, even if it's money that I
00:35:30.120
have not spent and I might never spend it. I want the wealth there to give me independence.
00:35:33.380
So it's just a subtle way of looking at what we want out of the world and realizing that so much
00:35:38.640
of what we're trying to learn about is not visible to us. So we have to go out of our way to learn
00:35:42.880
about it, about how other people are doing it and what our own situation is since it's not
00:35:47.280
outwardly apparent and visible to us in the world. So one way to develop wealth is you want to hold
00:35:51.900
on to your money, but you want to invest it for the long term because that's when the power of
00:35:55.640
compound interest comes into effect. And I think people have heard of compounding, but it can still
00:35:59.860
be hard to wrap your mind around. And you gave some great examples to really put it into perspective.
00:36:04.680
Like one example was Warren Buffett. Most of the money that he has today, his billions of dollars
00:36:10.200
wasn't made till after his sixties. And it's all because of compounding.
00:36:14.060
Yeah. Look at Warren Buffett's net worth. He's worth something like $90 billion. He's 90 years old.
00:36:19.260
But if you look at the course of his life, 99% of his net worth came after his 50th birthday.
00:36:24.080
And something like 97% came after his 65th birthday. That's just how compounding works.
00:36:29.440
Compounding is not something where the big returns come in a year or in a decade. It's something that
00:36:34.120
takes place over the course of a lifetime. And it's important for someone like Warren Buffett to say,
00:36:38.280
look, he's 90 years old. He's been investing full-time since he's been 10 years old.
00:36:41.880
So he's been investing for 80 years. Now what's really important is that the math on this is very
00:36:46.180
simple. You can hypothetically say, okay, if Warren Buffett did not start investing when he was 10,
00:36:51.060
let's say hypothetically, he started investing when he was 25, like a normal person.
00:36:55.200
And let's say hypothetically, he did not keep investing through age 90 like he has. Let's
00:36:59.140
say hypothetically, he retired at age 65, like a normal person. And let's say he was just as
00:37:04.320
successful an investor during that period that he was investing in. He earned the same average annual
00:37:09.180
returns. What would his net worth be today? If he started investing at 25 and retired at 65,
00:37:14.400
the answer is about $12 million, not 90 billion, 12 million. So we know that 99.9% of his net worth
00:37:21.960
can be tied to just the amount of time he has been investing for. That's how compounding works.
00:37:25.880
It is so incredibly powerful, but it is rarely intuitive. Even if you understand the math behind
00:37:30.580
compounding, it's almost never too intuitive how powerful it can be. Now this is important because
00:37:35.480
if you look at someone like Warren Buffett, there are like 2000 books on Amazon that are devoted to
00:37:40.840
answering the question, how did he do it? How did he build this fortune? How did he become
00:37:44.240
the world's greatest investor? And they go into grand detail about how Buffett thinks about
00:37:48.300
valuing businesses and business models and valuation and market cycles. Even if we know
00:37:54.700
that 99% of his success can just be tied to the fact that he's been investing for 80 years.
00:37:59.200
And that if you want to have any sort of ability to emulate what he's done,
00:38:02.360
the single most important thing that you can do is just increase your time horizon. It's not what
00:38:06.840
industry should you buy this year, what stocks you should buy this year. It's how can you be a
00:38:10.320
little bit more patient to let your money compound for the longest period of time?
00:38:13.040
Like is Buffett a good investor? Yes, of course he is. But his real secret is that he's been a good
00:38:17.840
investor for 80 years. That's the takeaway that we should learn from him is that time is really
00:38:22.020
what drives all big success over time. People don't want to hear that answer because you want
00:38:26.360
to get rich today, but they want advice about where they should put their money tomorrow.
00:38:31.740
But we know from a lot of these cases, not just Buffett, but almost any big success that you look at
00:38:35.220
that, the common denominator is that people have made good decisions for a very long period of time.
00:38:39.880
Not a great decision in any given year per se, but good decisions that compound for years or
00:38:45.040
decades over time. That's where the big results come from.
00:38:47.780
And why, despite knowing that, people can understand that intellectually. Again, as you said,
00:38:52.000
the big argument in your book, you can know something, but still be a failure in money.
00:38:56.020
Why, despite knowing that, we have such a hard time putting that into practice,
00:39:00.040
keeping our money in the market, even when you see the market going down, just dropping?
00:39:04.240
I think anytime people say the skill that you need to do well is patience, that's not what people
00:39:09.640
want to hear. Most people are just naturally not very patient. It's a hard thing to do. A lot of it
00:39:13.620
is because if I tell you, hey, invest your money in this fund and this stock and leave it alone for
00:39:18.820
20 years, how do you know? And then let's say it drops over the next year. How do you know whether
00:39:25.080
I was wrong or you just need to be more patient? It's hard to tell in real time whether someone was
00:39:29.600
wrong or patient. It's much easier if you have a lot of feedback, of quick feedback, where you can
00:39:34.260
easily determine whether advice you got was wrong or you just need to be a little bit more patient.
00:39:38.400
It's very hard to do if you're talking about a long period of time. It's also just the math of
00:39:42.120
compounding is never intuitive. If I ask you, what is eight plus eight plus eight plus eight?
00:39:48.040
You can probably figure it out in five seconds. It's not very difficult. But if I ask you,
00:39:52.440
what is eight times eight times eight times eight times eight? Even if you're very smart,
00:39:56.460
you're going to struggle with that answer. The difference between linear thinking and
00:40:00.820
exponential thinking is absurd. And particularly if you're talking about something like investing
00:40:05.440
for 80 years, like a long period of time, it just gets completely out of whack. It's never
00:40:09.480
intuitive how powerful it can be. So that's why the combination of it just being a skill that is
00:40:15.440
very difficult for people to actually be patient combined with the counterintuitiveness of compounding
00:40:20.600
is why it's so easy to overlook. I also think tying this back to what we discussed earlier,
00:40:24.800
if you are someone who is very smart, if you have a degree from Harvard or MIT,
00:40:29.160
and you're very analytically smart, you do not want to hear that the explanation for Warren
00:40:33.660
Buffett's net worth is patience. You don't want to hear that. It's too simple. It's too boring for
00:40:38.020
you. You want to dive into the weeds about how he valued companies, about how he thinks about
00:40:42.320
economic cycles. That's what you want to put your big brain to work at. You don't want to hear the
00:40:46.400
simple answer. Even if we know, as this is a simple matter of arithmetic, that the simple answer,
00:40:51.000
that it's his time horizon that led to the dollar amount of his net worth is the right answer.
00:40:55.920
And have you found any practical tips on helping people to become more patient with their money?
00:41:00.520
I think the most important thing that any investor can do is be more familiar with the history of
00:41:05.300
market volatility. Become more familiar with how often and how normal it is for the market to fall
00:41:10.560
10%, 20%, 30%. Because if you look over the last 100 years, for example, the market has declined
00:41:16.360
on average 10% on average every 11 months. That's been the average duration between 10% declines.
00:41:22.380
It's fallen more than 20% on average every three years, more than 30% on average at least once per
00:41:28.040
decade. If you become familiar with those statistics, then when the market does fall 10%, it's not that
00:41:33.240
it's fun, but it's much easier to say, okay, I know this happens. This happens all the time. It'll come
00:41:38.160
back. It's okay. Even when the market falls 30%, you say, gosh, this hurts. This sucks. This is a gut
00:41:43.000
punch, but I know this happens. Historically, this is the normal path of success, the normal dynamic
00:41:47.680
of success that I need to put up with. I think it makes you realize that volatility is the cost
00:41:52.780
of admission to market returns, that you can do very well over a long period of time in investing,
00:41:57.780
but you have to give something up for that. Like anything else in life, there's a price.
00:42:01.160
And the price you have to pay is putting up with volatility and uncertainty. Once you view
00:42:05.460
volatility as the cost of admission, the worthwhile cost of admission, then you realize that when the
00:42:10.640
market is declining, you just say, look, the bill's coming due. I have to pay this fee.
00:42:14.700
Just like if I want to go on a trip to Hawaii, I have to pay the airlines a fee to get on the
00:42:19.500
plane. It's the same thing in investing. This is a fee that you have to pay. I think it's much more
00:42:24.000
common though to view volatility like it's a fine. And the difference between a fee and a fine is
00:42:28.640
this. A fine is something you are not supposed to pay. If you get a fine, you got in trouble.
00:42:32.120
You got a speeding ticket. You've been a bad boy. Don't do that ever again. You need to learn your
00:42:35.300
lesson. So if you view a 10% market decline as a fine, then you say, oh, my portfolio lost 10%.
00:42:42.100
What do I have to learn here? I made a mistake. I got to make sure I never do this again.
00:42:45.560
I just think that's not the right way. That's not conducive to patience. If you view it as a fee
00:42:49.960
and you say, look, my portfolio fell 10%, but this is just what happens. I put up with this. I'm patient
00:42:54.080
over time. I think just understanding that history of volatility and the meaning of what volatility is,
00:42:59.940
is probably the only way in investing at least that you can push people to more of a long-term
00:43:04.660
mindset. Well, so this idea of looking at the volatility in the stock market is either a fine,
00:43:09.220
which is like a negative way, or a fee, which is more of a positive way to look at it. One thing
00:43:13.820
you tackle in your book is being a pessimist or an optimist when it comes to investing in your money.
00:43:19.860
And you make this case that it's really easy to be overly pessimistic about money. Why do you think
00:43:25.740
it is? Why do we like to read the articles from people saying, oh, yeah, the next depression is here.
00:43:31.600
You're going to stock up on food, but we don't tend to think about, well, maybe it's going to be bad,
00:43:38.020
but it's going to get better eventually. I think it's always the case that pessimism
00:43:42.600
sounds smarter than optimism. It's always the case that we're going to pay more attention to
00:43:46.540
pessimistic headlines than we will optimistic headlines. Even if we know that historically,
00:43:50.340
optimism has been by far the correct mindset. If you just look at the growth of human achievement
00:43:55.640
over time of living standards and expectations, you should definitely be a long-term optimist.
00:44:00.280
But pessimism sounds smarter. I think one of the reasons is that it's very easy for pessimism to
00:44:05.720
sound like someone trying to help you. Hey, there's a risk in front of you. I'm trying to
00:44:09.200
help you. I'm trying to get you out of the way. It sounds like someone's trying to help you.
00:44:12.160
Optimism, I think, Austin, sounds like a sales pitch. Like, hey, I've got an opportunity for you
00:44:15.780
to make a lot of money. Do you want to see it? It sounds like a sales pitch. So it's easy to overlook
00:44:19.700
in that sense. One other reason that pessimism is always more appealing than optimism is that the good
00:44:26.260
things in the economy and in a lot of things in life happen slowly. Whereas the setbacks,
00:44:30.640
the bad things happen very quickly. And this is true for economic growth where over the course of
00:44:35.440
time, we've grown so much economically. We're so much richer, wealthier on average and aggregate,
00:44:40.700
way wealthier than we were a hundred years ago. But the growth took place slowly. Like in any given
00:44:46.240
year, the average economic growth has been about 2%. It's easy to ignore in any given year. But the
00:44:50.640
setbacks, the declines come very quickly. You have things like with COVID-19 in March of this year,
00:44:55.520
where everything just collapsed over the course of about two or three weeks. The whole economy just
00:44:59.140
collapsed virtually overnight. There's nothing in terms of growth that happens overnight. There are
00:45:03.380
no overnight miracles, but there are lots of overnight tragedies. And that is why it is so much
00:45:07.660
easier to pay attention to the overnight tragedies, things like COVID-19 or September 11th that literally
00:45:12.560
happened in the blink of an eye. Whereas the growth that is more powerful over time, it's just so much
00:45:16.980
easier to ignore because it compounds very slowly over time. Then how do you, okay, so you want to
00:45:21.540
be optimistic, but you all say you don't want to be overly optimistic. What is like, how can over
00:45:25.180
optimism get you in trouble? I think I like this idea of what I've called realistic optimism, which
00:45:30.180
is simply this. If you are someone who believes that everything will be okay in the future, you're
00:45:35.100
actually not an optimist. You are a complacent. If you think everything is going to be good, nothing bad
00:45:39.200
is going to happen. You're just being complacent about how the world works. A realistic optimist,
00:45:43.380
I think, is someone who thinks that the future over the long run will work out and things will
00:45:48.160
improve over the long run. But the short term is going to be a constant, never-ending chain
00:45:52.300
of disappointment and setback and crash and decline and recession and bear market and pandemic all the
00:45:59.220
time, a never-ending chain of bad news, even if that does not preclude long-term progress.
00:46:04.240
That's what I think a realistic optimist is. So I think for money, I've often said people should
00:46:08.660
save like a pessimist and invest like an optimist. You want to save like a pessimist knowing that the
00:46:14.140
short term is going to be filled with lots of bad news. There's going to be recessions and bear
00:46:18.000
markets and job losses and medical emergencies all the time. It never ends. So you have to save,
00:46:22.840
you almost have to be paranoid about the short run so that you can survive setbacks. But you should
00:46:27.160
invest like an optimist. You should invest like an optimist with the idea that people are going to
00:46:30.700
solve problems and we're going to become more productive over time and that the productivity is going to
00:46:35.380
increase profits and accrue to shareholders. We're going to get much better over time,
00:46:38.540
but we have to be able to survive and endure the short run in order to get there. So I think that's
00:46:43.580
how you can avoid being a complacent optimist is just marrying your long-term optimism with short-term
00:46:49.380
pessimism, if not paranoia. That sounds a lot like Nassim Talib's like a barbell strategy, right?
00:46:54.560
You have like a whole bunch of like cash, maybe just something really safe, but then you invested in
00:46:58.680
something a little more risky and you can afford the loss because you got that reservoir of cash that you can
00:47:03.200
fall back to. Yeah. I mean, there's some investors, I wouldn't, I wouldn't recommend this particularly
00:47:06.880
for most people, but there's some investors who will put, you know, 95% of their money in cash or
00:47:11.900
U S treasury bonds, and then 5% in super risky options. And that's like their barbell strategy.
00:47:17.780
They're pessimistic on one end and very optimistic on the other end. And like, you know, and swing for
00:47:23.320
the fences on the other end. I think that's not a bad, in theory, that's not as like, it's, it's much
00:47:28.160
more difficult for individuals to pull off that specific strategy, but I love the concept of it,
00:47:32.300
of marrying optimism and pessimism. That seems like it's contradictory. So it's not very common
00:47:37.140
people, you know, one, one or the other, are you optimistic? Are you pessimistic? They view it as
00:47:41.420
black or white. I think you need to marry the two at the same time and realizing that optimism and
00:47:45.880
pessimism can coexist and they should coexist in various parts of your life. And they're two different
00:47:50.160
skills that you need to nurture separately to be optimistic about the long run and pessimistic about
00:47:55.020
your short run, because it's your ability to survive the inevitable setbacks in the short run that are
00:47:59.700
going to give you the ability to compound and enjoy and benefit from the long run.
00:48:04.440
So like a modified barbell strategy, be like, do you have a, have an emergency fund, six months
00:48:08.020
emergency fund maybe, and then, you know, just invest regularly in a, some sort of fund, an index
00:48:14.080
fund of some sort. Yeah. So you're investing for the longterm, but you have enough cash and a lack
00:48:18.420
of debt to survive anything that will be thrown at you during the short run. Gotcha. So we've been
00:48:23.520
talking some high level principles. Like what is, what do you think this trend? What do you, how does it
00:48:28.000
translate into like concrete action? And again, we have this, we have to remember that everyone's
00:48:32.740
different. Everyone's playing a different game, but like high level, like, what do you think people
00:48:36.920
can start doing today to start implementing some of the things we've been talking about
00:48:40.640
concretely? What is, it is, it is different for everyone. I think that that's a really important
00:48:45.160
point that there are no one size fist all. Here's what you can do. I mean, if there is a golden rule
00:48:49.460
of finance, and again, this is really simple, but it's the fact that it's simple makes so that so many
00:48:53.920
smart people ignore it. The golden rule of finance is live within your means and be patient. If you
00:48:58.500
can do that, you don't need to know that much more about finance to do well over a long period of
00:49:02.680
time. Look, I didn't tell you what stocks to buy or what the market's going to do next. I don't think
00:49:07.280
any, because those are things where I think people, either people don't know, or they're different from
00:49:10.920
person to person. I think the common denominator though, is just live within your means and be
00:49:14.520
patient, which again is living within your means, which is savings. That's your, that's your
00:49:18.700
pessimism about the short run and be patient, invest for the long run. That's your optimism
00:49:22.700
about the long run. If you can do those two things, I think that is probably one of the only
00:49:26.280
common denominators of success across people, across various stages of their lives, various
00:49:31.160
backgrounds, various goals. That is something that is kind of like the iron rule of finance,
00:49:35.420
the iron law of finance in a field where there are very few laws because everything's different and
00:49:39.800
everything evolves over time. It sounds like, yeah, you just got to be mostly reasonable for most of
00:49:44.120
the time. You're going to, you're probably going to be okay. I mean, one of the things in finance
00:49:47.720
is that you don't need to make many great decisions to do well over time. You just have to
00:49:51.480
consistently not screw up. If you consistently avoid screwing up, you'll probably do not just
00:49:56.400
okay, but phenomenal over time. So that's, you, you, you know, most people, when they talk about
00:50:01.120
it, they want to know like, what's the next great decision that I should make. And to me, it's just
00:50:05.360
been like, no, there, if you just get the, you know, a good return for a long period of time
00:50:10.360
without screwing up, you're probably going to do phenomenal. Well, Morgan, this has been a great
00:50:13.660
conversation. Where can people go to learn more about the book and your work? The book is all over the
00:50:17.300
place. Obviously Amazon with so many bookstores shut down right now, Amazon is the majority of it.
00:50:20.940
I spend a lot of my time and all my writing and my thoughts on Twitter. My handle is
00:50:25.100
Morgan Housel, my first and last name. All right. Morgan Housel. Thanks for your time.
00:50:28.060
It's been a pleasure. Thanks so much for having me. My guest today was Morgan Housel. He's the
00:50:31.680
author of the book, The Psychology of Money. It's available on amazon.com and bookstores
00:50:34.860
everywhere. You can find out more information about his work at his website, morganhousel.com.
00:50:38.780
Also check out our show notes at aom.is slash money mindset, where you find links to resources
00:50:50.940
Well, that wraps up another edition of the AOM podcast. Check out our website at
00:50:54.920
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00:51:23.700
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