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

00:00:00.000 Hey, it's Brett. It is fall break here in Tulsa, so our family's taking a short trip,

00:00:03.580 so we're going to do a rebroadcast today. Episode number 659, Do You Want to Be Rich

00:00:07.360 or Wealthy and Why the Difference Matters? with Morgan Housel. It's one of the most

00:00:10.740 popular episodes in 2020. I think you'll enjoy it. See you back on Monday with a brand new episode.

00:00:22.200 Brett McKay here, and welcome to another edition of the Art of Manliness podcast.

00:00:26.000 When we think about finance, we typically think about numbers and math.

00:00:29.020 My guest today, however, argues that doing well with money is less about what you can put on a

00:00:32.920 spreadsheet and more about what goes on in your mind, and that if you want to master your personal

00:00:36.300 finance, you've got to understand how things like your own history, unique view of the world,

00:00:40.260 and fear and pride influence how you think. His name is Morgan Housel, and he's an investor,

00:00:44.600 financial journalist, and the author of The Psychology of Money, Timeless Lessons on Wealth,

00:00:48.520 Greed, and Happiness. Morgan kicks off our conversation by explaining how doing well with

00:00:52.140 money is less about what you know and more about how you behave, and illustrates this point by

00:00:56.300 comparing the stories of a janitor who saved millions and a prominent Wall Streeter who

00:00:59.820 went bankrupt. He then explains how the seemingly crazy decisions people make around money actually

00:01:03.800 make a kind of sense if you look into it a little more deeply. From there, we get into why you need

00:01:07.780 to know the financial game you're playing and not play someone else's. We then turn to why it's hard

00:01:11.900 to be satisfied with your position in life when your expectations keep rising, and why not

00:01:15.940 continually moving your goalposts to the most important skill in personal finance. We discuss how

00:01:20.180 getting off the never-ending treadmill of wanting more requires seeing money not just as a way to buy

00:01:24.260 stuff, but to gain greater autonomy, keeping the man and the car paradox in mind, and understanding

00:01:28.760 the distinction between being rich and being wealthy. We then talk about the unappreciated,

00:01:32.720 mind-boggling power of compound interest, using the example of Warren Buffett, who made 99% of his

00:01:37.360 wealth after the age of 50. We then discuss why you should view volatility in the stock market as a

00:01:41.780 fee rather than a fine, why pessimistic financial opinions are strangely more appealing than optimistic

00:01:46.280 ones, and why it's best to split the difference and approach your money like a realistic

00:01:49.760 optimistic optimist. We're in a conversation with the two prongs of Morgan's Iron Law for Building

00:01:54.400 Wealth. After the show's over, check out our show notes at aom.is slash moneymindset.

00:02:07.880 All right, Morgan Housel, welcome to the show.

00:02:10.260 Thanks so much for having me.

00:02:11.360 So you got a new book out, The Psychology of Money, where you basically encapsulate all your thinking

00:02:16.520 about, you've done about money and investing, I mean, some big principles, and this is the

00:02:21.300 culmination of sort of your work, your career. For those who aren't familiar with your work,

00:02:26.360 can you tell us a bit about your background and how it led up to this book?

00:02:29.260 Yeah, so my whole background has been a financial writer. I write about the history of finance,

00:02:33.720 the history of investing and economics, and I'm interested in the psychology side of money.

00:02:37.740 So not necessarily what should we do with our money, where should we invest it? I'm interested in

00:02:42.020 what's going on inside people's heads. When they make decisions with their money about what to spend,

00:02:46.140 what to save, where to invest, what's going through their heads. That's what I'm interested

00:02:49.220 in, the history of how people think about money. That's always been my kind of beat.

00:02:52.760 Now, what's important is that I kind of stumbled into writing in 2008. It was not part of my plan.

00:02:57.660 I wanted to go into finance and work in private equity, be a big investor. I stumbled into writing

00:03:02.460 kind of haphazardly because in 2008, the world was falling to pieces. I needed something to do.

00:03:07.620 I just graduated college. There were not a lot of private equity jobs available,

00:03:10.960 but I did find a job as a financial writer. I was writing for The Motley Fool at the time.

00:03:14.400 And so it was never part of my plan, but what was interesting is that obviously what happened

00:03:18.640 in 2008 was a global financial crisis where the global economy fell to pieces. And I spent my

00:03:23.220 early years as a writer trying to answer the question of what happened. Why did people make

00:03:27.820 the decisions that they did during the housing bubble, during the financial crisis? What were

00:03:31.680 people thinking? And have we learned our lesson? Will we do it again? There was no aha moment,

00:03:36.240 but I kind of realized as the years went on that the answers to those questions could not be found

00:03:41.220 in any economics textbook or any finance textbook, but you could find subtle clues about why people

00:03:46.380 behave the way that they did in a psychology textbook and a sociology textbook and a political

00:03:51.660 science textbook, which just led me to the belief that I think we generally tend to think of finance

00:03:56.820 as a math-based field. Like it is charts and numbers and formulas and data and, or like it's

00:04:03.000 something like physics where two plus two equals four. And that's always been true. That will always

00:04:07.160 been true. It's very clean and very precise. And I just don't think finance is actually that

00:04:11.800 finance is much closer to something like psychology where it's a soft, mushy topic with a lot of nuance

00:04:17.300 where I will think about risk different, different than you will different from anyone else from,

00:04:21.940 from someone else who's listening. People in the United States think about money different from

00:04:25.420 people who live in other parts of the world and vice versa. Like it's a much more nuanced topic that

00:04:30.360 has a lot to do with not necessarily the decisions that we do make with our money, but what's happening

00:04:34.500 inside of our heads. So that just led me to this belief that what's really important in finance

00:04:38.840 is not what you know, it's how you behave. It's not how smart you are. It's not where you went to

00:04:42.740 school. It's not how sophisticated you are in terms of making financial decisions. It's just about

00:04:47.140 things like your relationship with greed and fear and your ability to take a long-term mindset and how

00:04:52.140 gullible you are, who you trust. Those are not the typical ways that we think about finance, but I think

00:04:56.480 those are the single most important parts of finance. So that just led me down this road of

00:05:00.880 behavioral finance. And the book is, is written as 19 short stories that highlight the most important

00:05:07.340 parts of behavioral finance. In my view, they're fairly short chapters. I did that out of respect

00:05:11.860 for readers. I'm a big reader myself. I'm sure lots of listeners are themselves, but I don't finish

00:05:15.980 a lot of books because I think most books do not require 300 pages of explanation to get your point

00:05:21.100 across. So I wanted to write short chapters, each of which can kind of live on their own to make some of

00:05:26.240 the most important parts about how we think about money, how we think about saving and investing and

00:05:31.100 how we can think about finance and risk in a more productive way. All right. So let's go back to

00:05:35.300 something you said there, because one of the main arguments in the book is that success in finances,

00:05:40.360 success in money, isn't based so much on how much you know or your sophistication of knowledge of

00:05:44.800 investing and things like that, but how you behave. Can you give us an example of someone who knows a lot

00:05:51.080 about finances, money, investing, monetary theory, but still doesn't do very well with their money?

00:05:56.600 And then someone like the opposite, someone who not very sophisticated when it comes to their finances,

00:06:01.120 but nonetheless, they make out pretty well with their finances.

00:06:05.560 So there's two people that I profile in the introduction of the book, and these are both

00:06:08.920 true stories. These are all real people. One is a guy named Ronald Reed, and Ronald Reed is about

00:06:12.920 the humblest guy you can ever imagine. Even if you're cherry picking, like central casting,

00:06:17.580 the most humble guy. He worked as a gas station attendant and a janitor his entire life.

00:06:22.860 He was, by all accounts, from those who knew him, he was a lovely gentleman,

00:06:25.920 but he just had a very down-to-earth demeanor. His friends who knew him said that the only hobby

00:06:31.060 that he had was chopping firewood. He was the first person in his family to graduate from high school.

00:06:36.000 Just one of these down-to-earth guys. And when he died, Ronald Reed shocked everyone who knew him,

00:06:41.580 who learned that he left, I think, $7 million to charity, to his local hospital, some local libraries.

00:06:46.160 And everyone who knew him said, where did Ronald Reed, this gas station attendant and janitor,

00:06:50.600 get $7 million? And they started digging through his papers, and they realized that there was no

00:06:55.040 secret. There was no inheritance. There was no lottery winnings. There was nothing like that.

00:06:58.920 All he did was he saved what little he could as a janitor, and he invested it in blue-chip stocks,

00:07:05.220 just stocks in big, large-cap companies. And he left it alone for like 50 years. And that compounded,

00:07:10.740 that grew into this fortune that he left to charity.

00:07:12.760 Now, one other person that I profile in the story is a guy named Richard. And Richard had

00:07:17.340 almost the exact opposite upbringing of Ronald Reed. He was born to a wealthy family. He went

00:07:22.880 to Harvard. He got his MBA from University of Chicago. He went to work on Wall Street in the

00:07:27.420 1980s. And he truly became one of the most important men in global finance. He was a vice chairman for

00:07:33.200 Merrill Lynch. He retired in his 40s to pursue charitable activities. That's just how successful he was.

00:07:38.900 And what's so interesting about where these two stories collide, these two men never knew each

00:07:42.920 other. But shortly after Ronald Reed died, Richard filed for personal bankruptcy. He told the bankruptcy

00:07:48.680 judge that the financial crisis of 2008 completely wiped him out. He had no money left, no income,

00:07:53.860 no assets. And I just think it is so fascinating. The juxtaposition of these two stories is fascinating

00:07:59.480 because I don't think there's any other field where those stories are even possible.

00:08:03.380 Like there's no other field other than finance where someone with no education, no background, 0.97

00:08:08.700 no sophistication, no training can massively outperform someone who has the best education,

00:08:14.240 the best training, the best background. And I think what that really highlights that we were

00:08:18.220 talking about earlier is that Ronald Reed, the humble gas station attendant, had the psychology side

00:08:23.080 of money mastered. He was patient. He took a long-term perspective. He left his money alone. He saved

00:08:29.200 diligently. And he just left his money alone. He wasn't being too greedy. He just let it compound

00:08:34.000 over time and built a fortune. And Richard was, I think, the opposite. He had all the resources in

00:08:39.720 the world to do well financially. And he just swung for the fences too hard. He had a lot of debt,

00:08:44.280 a lot of leverage, went way over his head with debt. He had several homes, each of which was like

00:08:49.020 more than 25,000 square feet. There's these massive sprawling mansions. He had several of them,

00:08:53.520 all had massive mortgages on them that he couldn't keep up with during the financial crisis.

00:08:58.440 So even though he had all of the knowledge, the financial sophistication,

00:09:02.760 the greed side, I think, just caught up with him. So I think those are extreme examples. But to me,

00:09:07.480 it's just there are very few other industries where that's the case. You can have all the

00:09:11.180 financial sophistication in the world. But if you do not manage your relationship with greed and fear,

00:09:15.740 it has the ability to neutralize all of the financial sophistication that you have. That's true for

00:09:20.560 everybody. Well, I think that goes to, I think a lot of people when it comes to their finances,

00:09:24.040 I know I went through a phase where you just devour as many personal finance books as possible

00:09:28.840 or investing books as possible. And eventually you realize they all say the same thing.

00:09:34.460 There's nothing new here. And the trick is just putting those really simple things into practice.

00:09:39.980 Yeah. I think what's really important is that the most important stuff in finance is very basic

00:09:44.840 and very boring. It's not dissimilar to diet and exercise where, look, the key to health,

00:09:50.920 not everything. But what moves the needle the most is eat a good diet, get some exercise,

00:09:57.060 sleep eight hours a night, don't smoke, don't drink too much. That's the key to success. But it's very

00:10:01.260 boring. If you are someone who has a PhD in biology from MIT, you don't want to focus all your time on

00:10:06.820 that stuff. You want to be doing molecular biology stuff. You want to do the really complicated,

00:10:11.200 complex, intellectually stimulating stuff. So that's where your attention goes.

00:10:14.700 Even if by paying attention to the complicated stuff, you start to ignore,

00:10:17.840 to discount the basic stuff. I think it's true in finance as well, where some of the smartest people

00:10:22.960 to tell them, hey, live below your means, save your money, buy a diverse, low-cost portfolio and

00:10:29.780 be patient. That's like 90% of what you need to know to do well in investing over time. But it's

00:10:33.900 not exciting. It's not intellectually stimulating. So if you are a very smart finance person, you are

00:10:38.300 probably spending a lot of your time focusing on really complicated investments, deep into the weeds,

00:10:44.340 trying to figure out what companies are doing the best, where industries are going next.

00:10:48.220 And it's not that that's bad, that you shouldn't do that. But if doing that takes away any of your

00:10:53.600 focus from the simple stuff, like living below your means, making sure you can afford your debts,

00:10:57.880 et cetera, that kind of stuff, then none of the complicated stuff that you're doing is going to

00:11:02.040 matter. All the basics that you ignore will just neutralize it and overwhelm it, which is exactly

00:11:06.140 what happened to Richard. All right. So as you said, you organize this book and sort of into 18 or 19

00:11:10.800 big chapters, not big chapters, like they're big ideas, but they're small and concise and easy to

00:11:14.840 read. And the first one is no one is crazy. Now, in your introduction, you're talking about what led

00:11:20.900 you to start writing about finances. One of the things you explored was the meltdown that happened

00:11:24.620 in 2008 that was driven in big part by the housing bubble. And we look at that back on that now,

00:11:31.760 it's been, and it's been 12 years. We think, well, that was just collective craziness. Like people just

00:11:36.560 went crazy. So how was that not crazy? Like what, what was not crazy about the housing bubble of 2008?

00:11:43.260 I mean, look, I think one of the takeaways is that people do crazy things with their money all the

00:11:47.280 time. They make terrible decisions with their money. They make just boneheaded decisions. They

00:11:51.740 blow money. They make terrible investments, but no one is actually crazy. What I mean by that is when

00:11:56.640 everyone makes a decision with their money in real time, it is checking all the boxes that they need to

00:12:01.580 in their head in that given moment. And look, in hindsight or to another person, those ideas might

00:12:07.180 look crazy, but to you in any given moment, it makes sense to you. And something that's really

00:12:12.020 important about this is that all of us have had very different backgrounds. We come from different

00:12:16.320 upbringings, different generations. Some of us are born in different countries, live in different

00:12:19.640 countries. Our parents raised us with different values. We've had different amounts of luck and

00:12:24.360 whether it's good luck or bad luck in our life that has given us a different view of the world.

00:12:28.740 And so we all have a different view, a different model in our head of how the world works. The

00:12:33.560 assumptions that I have about how the economy works and how the stock market works are different from

00:12:37.200 those that you have, different from those that everyone has. We all have different views. I mean,

00:12:40.600 one really simple way to frame this is, look, if you were born in the United States in 1950,

00:12:46.220 then during your teens and twenties, your young impressionable years, the stock market went nowhere

00:12:51.820 adjusted for inflation, 0% return during your teens and twenties. Your introductory experience to

00:12:56.940 the stock market is, this is a joke where you don't earn any money at all. If by contrast,

00:13:01.360 you were born in 1970, then during your teens and twenties, the market went up tenfold during your

00:13:06.180 teens and twenties. So just if you were born 20 years apart in your early years, you got a completely

00:13:10.840 different view about how the stock market works. And that will stick with you for the rest of your

00:13:15.000 life, shape your expectations, shape your views of risk. And it's not that one generation is smarter 0.65

00:13:21.040 or has better information than the other generation. It's just that they grew up seeing

00:13:25.780 something different. They see the world through a slightly different lens that shapes how they think

00:13:29.400 about risk. And that is why people can make decisions that make sense to them, but are crazy

00:13:34.060 for other people that look crazy for other people. I mean, one more recent example of this is after

00:13:38.760 the 2008 financial crisis, gold as an investment became very popular when the central bank was printing

00:13:44.960 a lot of money after the financial crisis. The generation that gold was most appealing to during that

00:13:49.460 period was baby boomers. If you look at the baby boomers' children, they've never experienced 0.99

00:13:53.900 inflation in their life. If you are a millennial, you've never experienced any amount of significant

00:13:58.940 inflation in your entire life. But if you were a baby boomer and you came of age in the seventies

00:14:03.320 and eighties, you remember when inflation was off the charts and you remember gas lines and you

00:14:08.080 remember watching your paycheck disintegrate to inflation week after week, that stuck with you for the rest of

00:14:12.880 their life. And that was why even in 2008, gold was most appealing to one generation and had

00:14:18.740 almost no appeal whatsoever to a younger generation. They had just seen the world through a different

00:14:24.000 lens. And it would be easy for a millennial to criticize a baby boomer for wanting to own so much

00:14:30.000 gold after 2008. And that is why the decision to the millennial may have looked crazy. So the baby boomer

00:14:35.360 who has the emotional scars left over from experiencing inflation, it's not different

00:14:39.980 whatsoever. I'll give you one more example that I think is maybe the most powerful that I use in the book.

00:14:44.260 If you look at who buys lottery tickets, what group of Americans buys the most lottery tickets

00:14:50.020 and by far the most lottery tickets, it is the poorest Americans. The lowest decile of Americans 0.58

00:14:55.780 based by income, by the majority of lottery tickets, they spend an average of $400 per year

00:15:00.480 on lottery tickets. It would be very easy for myself or you or a lot of people listening to this

00:15:05.460 to hear that statistic and say, well, that's crazy. They're making a bad decision. If you are so poor

00:15:10.460 that you can barely afford to pay your bills, but you're spending $400 a year on lottery tickets,

00:15:15.080 that's crazy. And maybe that is the right answer. Maybe we could just end there and move on.

00:15:20.140 But I think if other people try to put themselves in the shoes of someone who is consistently in the

00:15:25.280 lowest decile of income, then maybe their explanation for why they buy lottery tickets

00:15:30.140 would be something like this. They would say that they do not feel like they have the opportunity to

00:15:34.840 advance in their career, to save their money, to invest their money like other people with higher

00:15:39.200 incomes due. And therefore, buying a lottery ticket is the only time in their life where

00:15:43.540 they feel like they have a little bit of hope to get to the other financial side,

00:15:47.020 to have the things, to have more security, to be able to buy what they want. The only time that

00:15:50.800 they have the possibility of that is not dreaming about getting a big promotion or making a great

00:15:55.260 investment. The only time that they can feel that joy is by buying a lottery ticket. So even if it

00:15:59.860 doesn't make any sense to me or you, it might make perfect sense to them. And I think just that idea

00:16:04.860 that equally intelligent people can come to very different conclusions based off of their life

00:16:09.240 experience explains a lot about why we do what we do with our money.

00:16:13.180 Yeah. That last example, another thing I've heard too, an explanation of why poor people typically buy

00:16:18.360 a lot of lottery tickets is that they don't have a sense of agency, right? Because they got a bad draw

00:16:22.980 when they were born and something just happened. So they get the idea that, well, the only way you can

00:16:27.500 become successful is just all luck. You have no control. So might as well. And if you came from a middle-class

00:16:32.680 affluent flame, you can see it by your actions. You can actually do things with your life and

00:16:37.280 advance your life. But if you're poor, that's harder to do sometimes. Harder to see.

00:16:41.600 And so it would be so easy to say, should you or should you not buy a lottery ticket? That sounds

00:16:45.920 like a math-based topic. You just calculate the odds of winning and it should tell you whether you

00:16:49.820 should do it or not. But that's not how people think about risk with their finances. It's heavily

00:16:53.020 tied to the generation you were born into, the country you live in, and your socioeconomic status

00:16:58.920 throughout the course of your life. So people come to very different conclusions about these topics.

00:17:02.040 So what's the big takeaway from that principle? Whenever you're looking at your own money

00:17:06.600 or how other people treat their money, just understand that everyone's playing a different

00:17:10.680 game, maybe? We're all playing a different game, particularly if you look at something

00:17:14.520 like investing. There's one stock market. There's one Apple stock. There's one Tesla stock that we

00:17:20.120 all buy. We're all playing on the same field. But people play very different games because just in

00:17:26.820 the stock market, you have everything from day traders to endowments who are investing for the

00:17:31.660 next century. And it would be crazy to think that a decision or information would be relevant to

00:17:37.660 both of those groups. So you have the information that is very relevant to a day trader that is not

00:17:42.500 relevant whatsoever to a long-term investor. Now, this is really important if we're talking about

00:17:47.220 watching CNBC or reading the newspaper, where very often you will have a market pundit who comes

00:17:52.340 on and says, I'm making this up. You should buy Netflix stock. They'll say something like that.

00:17:56.560 And the question I always want to ask is, well, who is you? Are you talking to a 17-year-old day

00:18:01.340 trader? Are you talking to a 97-year-old widow? Because the decision to whether you should buy 0.97

00:18:06.960 Netflix stock is going to be completely different based off who you're talking to. So again, this is

00:18:11.200 an area where it is easy to view finance like physics. There's one right answer, and two plus two

00:18:16.800 always equals four. But in finance, it's just so much more nuance. There's a financial advisor named

00:18:22.700 Tim Maurer, who has a great quote that I love. He says, personal finance is much more personal

00:18:26.740 than it is finance. And I think that explains so much of what happens in this field where

00:18:31.660 there is no one right answer. I deal with this a lot if you're doing podcasts like this or media

00:18:36.900 or whatnot, and people should say, we'll say something like, what should people do with their

00:18:41.580 money? And the answer that no one wants to hear, but it is always the best answer is,

00:18:45.420 it depends on who you are. There are things that I do with my money that I honestly can't explain on a

00:18:50.980 spreadsheet. They don't make a lot of analytical sense. And I would not recommend other people do,

00:18:54.600 but they work for me. They work for my wife. It's what we want to do. And I think that's a 0.52

00:18:58.420 really important thing, just realizing that this is a very personal endeavor. And people have to be

00:19:03.280 really introspective about who they are, what their skills are, what their weaknesses are,

00:19:07.600 what they want out of life, what their goals are, and find a financial plan, a situation that works

00:19:11.540 for them, even if it doesn't work for other people, or even if they can't necessarily even explain

00:19:15.420 it on a spreadsheet. Well, yeah, that idea of knowing the game you're playing and don't play

00:19:19.800 someone else's game, that goes back to the, I mean, you talk about that you make this connection

00:19:23.180 in the book to the financial bubble, the housing bubble, right? And the housing bubble, a lot of

00:19:27.380 it was driven by people who were flipping houses. And for them, it made sense to do that because

00:19:32.440 they weren't planning on owning their home for very long. They're just going to fix it up and

00:19:36.160 flip it and sell it for a profit. But then other people saw that you could get really cheap loans

00:19:41.200 and they thought, well, I can just get a really cheap loan and get a really big house. But these people

00:19:45.160 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 0.99

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. 0.94

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 0.99

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, 0.96

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

00:50:43.040 where you can delve deeper into this topic.

00:50:50.940 Well, that wraps up another edition of the AOM podcast. Check out our website at

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00:50:58.500 if you'd like to enjoy ad-free episodes of the AOM podcast, you can do so on Stitcher Premium.

00:51:02.560 Head over to stitcherpremium.com, sign up, use code manliness at checkout for a free month trial.

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00:51:23.700 Until next time, it's Brett McKay. Remind you not only to listen to the AOM podcast,

00:51:26.940 but put what you've heard into action.

The Art of Manliness - October 13, 2021

Do You want to Be Rich or Wealthy？ (And Why the Difference Matters)

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