 Welcome to Bogle Heads on Investing podcast number 26. Today our special guest is Morgan Housel, an award-winning writer and the author of a new book, The Psychology of Money. Hi everyone. My name is Rick Ferry and I'm the host of Bogle Heads on Investing. This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501C3 nonprofit organization that can be found at BogleCenter.net. Today our special guest is Morgan Housel. Morgan is a partner at Collaborative Fund and previously a columnist at The Wall Street Journal in the Motley Fool. He's a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, the New York Times-Sydney Award and a two-time finalist for the Gerald Loeb Award for Distinguished Business Writing. With no further ado, let me introduce Morgan Housel. Hello Morgan. Thank you so much for having me, Rick. Happy to be here. It's a really a pleasure to have you on. I'm really excited to be talking about your new book, The Psychology of Money, which I found to be just a really enjoyable read. In fact, I hated the book quite frankly because as I was reading it, I was saying, yes that's me, yes that's me, yes that's me, but it was a great book. That's true, which is the whole point of the book. So before we get to the book, I did want to dig into your background. So I think like many careers, I never planned to become a financial writer that I've been for my entire career. The only real job, quote-unquote real job I've had, is as a financial writer. It's all I've ever done. I started writing for The Motley Fool when I was a junior in college and I really didn't have any plan or any intention of doing that. I just kind of stumbled into it on accident and I thought maybe I would have that job for three months or six months before I found another job in private equity or investment banking, which is what I wanted to do at the time, but I ended up staying at The Motley Fool for 10 years and I just fell in love with the process of writing. I had been very interested in investing in finance before that and I knew that my career was going to be in finance. That was a plan, but writing I had no interest in, never thought about it, but I loved writing from the perspective of, it really dawned on me and it took me a while to figure this out, but I think writing is about much more than just communication. Writing is a thinking process. It helps you really crystallize a lot of the thoughts that you have in your head, just the vague ideas that you have in your head that when you are forced to put them down on the paper, you really start to see either, oh wow, now it makes a lot more sense, this vague gut feeling that I had that I always kind of knew but never putting the word, now it makes a lot more sense. Or you realize the opposite, you put it into words and you say, oh, that feeling that I had that I thought was so true, that I believe so strongly, now that I put it into words, the writing in a sentence, it actually looks pretty ridiculous, maybe it looks wrong. So I think writing was a great way to think and they're a great way to learn and I really fell in love with it from that perspective. So after you were at The Motley Fool for 10 years and you came to the realization that you loved writing, you ended up then going to The Wall Street Journal. Yeah, I was at The Wall Street Journal for several years. There was actually when I was still at The Motley Fool, I was full time at The Motley Fool and I was writing the Saturday investing column at The Wall Street Journal, did that for several years, which was great. Obviously, it's one of the foremost financial publications in the world. So it was great from that perspective. It was very different for me, though, because The Wall Street Journal is capital J journalism, whereas everything else I had been written that I had written up until that point was more or less a blog where I could take much more liberties in terms of giving my opinion, writing in a more casual format. And casual style was Wall Street Journal was very by the book in a great way. That's why it has the reputation that it has, but it's a very different style of writing for me. And then four and a half years ago, I joined the Collaborative Fund, which is a venture capital private equity firm. And all I still do there is write and speak, but it's back much more to the blog style of writing where, of course, your reputation is on the line, but you can be much more open about your own opinions, how you feel about things, and much more open with your ideas rather than the very strict journalism format. Let me ask a question about the Collaborative Fund, because I dug into that a little bit. I wanted to understand what exactly is it that that fund does? Yeah, so we invest mostly in early stage startups, but also later stage growth companies that are multi billion dollar companies, but all in the private markets. So most of what we do by volume, the number of deals that we do is in seed stage series, a stage companies, very young startups. But the most of what we do by dollar, if you waited by dollars, it's later stage companies that are more mature companies that are getting very close to going public. So so I'm actually not involved at all on the investing side. All of what I do is what you see it's the writing and speaking. So I'm I'm a partner at the firm, a part of the firm, but day to day the investing process picking investments is not is is not in my wheelhouse, so to speak. The fact that I write about behavioral finance, public markets, etc. And I work at a private equity firm has not been I think any roadblock in the slightest for me. It's been a great home for me, even if on the outside it seems like a weird fit. It was also true at the Motley Fool. I mean, I'm a passive investor writes about investing history in Motley Fool, of course, a stock picking website. So I felt like that was in some ways kind of a weird home too, but it worked for me. So I guess my whole career, I guess, I've had I've been at a home, which is which has seemed a little bit opposite from what I actually write about. You've written a few books in the past, although nothing quite as ambitious as the psychology of money. Yes, the first two books that I wrote were very short ebooks better described as like a long form blog post that we turned into a candle edition. One of them was called 50 years in the making the Great Recession is aftermath. I always have this view that whenever there's a big event in the world, whether it is a big recession or pandemic or war, whatever it is, all the big events that happened in life actually have very deep roots. They seem like they came out of nowhere. And they just happened, you know, the 2008 financial crisis. We view it as maybe, you know, the real estate bubble started in 2003 or 2004. But they always have these deep roots. All these events have have ancestors. They have parents and grandparents and great grandparents. I wanted to get back and really try to go back and think what was the cause of the 2008 financial crisis? And I think you can actually tie it back really to the end of World War Two. When all the GIs came home and there was a big fear among policymakers that ending the wartime spending was going to shove us right back to the depths of the Great Depression that we had just gotten out of. And because of that, they started a ton of stimulus programs to create U.S. individuals, U.S. families into consumers, a lot of stimulus packages and new policies, new incentives to get people to consume, to go to the store and spend as much money on goods and services and appliances and cars as homes as they could. And that became kind of the new mantra of the United States. And around the 1980s, there was a big fundamental shift in terms of a new growth of income inequality. And in very simple terms, think what that created by a large was a small group of people who were doing very well financially, inflated the aspirations and the expectations of everyone else who were not doing quite as well. And everyone else that lower group of people filled the gap between their financial reality and their expectations with debt. And that became kind of the big debt surge of the last 40 years that came to a head with the 2008 financial crisis. I think largely from a social perspective, that was lots of people whose incomes had not risen. We're trying to fill the gap to keep up with people's whose incomes did rise by a lot and were inflating their material expectations of what they expected out of life. So what you just described is probably with a phrase, keeping up with the Jones, right? Yeah. And for most of US history, that was fairly easily because the Joneses, your neighbors, most likely lived a life that was very similar to you. They probably worked at the same factory, earned a similar income. Of course, there were disparities between people, but it was much more closer than it is today. And I think one of the big causes of this too was the rise of social media, where all of a sudden the people quote unquote around you that were influencing your behaviors were not just your neighbors or your coworkers, but they were people all over the world. Fueled by algorithms that were designed to give you the most flamboyant pictures that you could see. And all of a sudden your expectations of how you can live a good life, so to speak, whether that was the cars you drive or the vacations that you take, all of a sudden became much more inflated because the purview of what you see around you and your expectations grew so much. And you actually talk about that in the psychology of money and outward appearances and keeping up with the Jones causes people to do a lot of things they wouldn't ordinarily do. Yeah, yeah, people judge their well-being relative to everyone around them. And so even though we've had a lot of progress in the United States over the last hundred years and progress around the world, I think a lot of that progress does not necessarily make us feel that much better because our expectations have increased by and large in lockstep, if not greater than our incomes have. So this is true like if you're to look at, you know, something like John B. Rockefeller, who is the richest person in the history of the world is net worth adjusted for inflation and something like 300 billion dollars. But Rockefeller never had penicillin. He never had sunscreen. He never had Advil. He only had sunglasses, sunglasses in the later stages of his life because it hadn't been invented yet. But no one should be able to say that a lower income American today should feel better off than John B. Rockefeller because they have penicillin in Advil. That's just not how people's heads work. People's expectations of what is normal and what they should appreciate, you know, grow over time and inflate over time. And so I think that expectation inflation that is normal and natural and understandable also has a big impact is how on individuals think about their money because your ability to be happy with your money is not just your income or your wealth. It's your income and your wealth relative to your expectations. And we talk a lot about in the financial industry how to increase your income, how to increase your wealth. And of course, that's very important. That's a great conversation. But if we're not talking about how to also manage your expectations, then any sort of growth that you have, if you are fortunate enough to have it in your income or your wealth is not going to feel nearly as good as you once thought it would. So I think the hardest and the most important financial goal is getting the goalposts to stop moving. It's a very difficult thing. But if you're not able to do it, I think you're probably going to be disappointed if even if you are lucky enough to have a growing income and rising wealth throughout your life. So John Bogle wrote a book called Enough, which talks about this exact concept. You have to know when you have enough. Right. And you know that concept that Bogle talks about with having enough is something that I read about in the book. To me, there's a really fascinating story, several fascinating stories that fall into the extreme end of this topic. One of them that I talk about in the book is Bernie Madoff, who everyone knows and what he did. To me, the most fascinating part about Madoff that was this, if you go back to the 1980s, Bernie Madoff was running a legitimate, non-fraudulent business as a market maker in stocks, matching buyers and sellers. And it was not a fraud. It was a legitimate business. And he was, by some accounts, making upwards of $50 million per year from the legitimate side of his business. Very successful. He still looked at that ostensibly and said that's not enough. And he wanted so much more, so badly that he created one of the biggest financial fraud in history. So there are lots of similar stories like that, maybe not as extreme, of people who are doing very, very well financially. But because of whatever it's their expectations, it's who they associate with, who they look up to. They want more so badly that they're willing to push the boundaries of risk or the boundaries of the law, in Madoff's case, so strongly that they end up ruining their lives and ruining other people's lives well. Now, that's, of course, an extreme example. But I think all of us need to have some sort of calibrated view on what enough is. And that's not to say you shouldn't strive for more or have goals for your future, for your family, like, of course, I do, everyone else does. But unless you're willing to have some view of managing your expectations and some idea of what having enough is, I think you're going to have a hard time financially in life. There's a story that I love from Daniel Kahneman. After he won the Nobel Prize, you do very well for yourself financially, with speaking and books and whatnot. So Kahneman went to a financial advisor several years ago, and he told the financial advisor. He said, I have no goals to grow my money. I don't want to grow my money. I just want to keep this safe and live off of this pot of money for the rest of my life. And the financial advisor looked at it and said, I can't work with you. And to comment, it was shocking that the idea that we should always want more money is so ingrained into us that when someone comes to you and says, I don't want to grow my money, it seemed completely backwards to the financial advisor. So I think Kahneman probably has this extreme view of enough that might be foreign to most of us, of course. But I think having that calibrated view of enough is a really fundamental and important part of being happy with your money and being satisfied with the money that you might be lucky enough to accrue over your life. Good points. But before we get on to the book, which we jumped ahead a little bit, you actually wrote another book prior to that. And by the way, these two books that we're talking about now, 50 years in the making, the Great Recession and its Aftermath, and then the other book, previous book, everyone believes that most will be wrong, motley thoughts on investing in the economy. These are both free through Kindle on Amazon, so you can read these two books for free. And could you tell me what that first book was all about? The first book was really just a collection of articles that I had written at the Motley Fool, very similar actually to the Psychology of Money, which is also a collection of 20 or so points about behavioral finance and how we think about money that all kind of tie in a story to it. The first book that I wrote, which is very short, again, it's more or less a blog post that we turned into Keyville Format and it's free now, is just a short collection of articles and observations that I had put together while writing at the Motley Fool. That was 10 or so years ago. It's a lot of those were early. A lot of those were kind of related to things that happened during the financial crisis of 2008 because you go back to 2010, that's what everyone was talking about, writing about. But that, in some ways, I guess, was kind of the early format that ultimately became the Psychology of Money book that just came out. So let's get into the Psychology of Money, a very well-written book. I really enjoyed it. It's a rather easy read and don't take that the wrong way. I mean, I was laughing as I was reading it and I was seeing myself in this book and it's not a technical book. It doesn't get into quantitative theory or the capital asset pricing model or anything like this. But it's a really good book on what you call soft skills. And I'll just read one sentence from your introduction. I think it sums it up really well. The aim of this book is to use short stories to convince you that soft skills are more important than the technical side of money. But I think you really did that in this book. You were able to bring out all those quirky things that we as human beings do to really hurt ourselves. Yeah, I think what's really important is that we tend to view finance through this academic analytical lens. That's tend to have we think about money, particularly at the CFA, CFP level, in terms of a very analytical field. And it's not that any of that stuff is bad or wrong. That's not it whatsoever. The technical, analytical research data side of investing is very important. But what's interesting to me is that the psychological, the softer side of investing, if you have not mastered that, if you're not, if you're not putting that at the forefront of what you're doing, then none of the analytical skills that sit on top of it necessarily matter. Because look, you can have a PhD in finance from MIT. You can be the smartest, technically minded, data driven person in the world. But if you panic in March of 2020 or in 2008, or if you lose your cool during the tech runup of 1999, none of that analytical skill matters. So if you are not managing your relationship with greed and fear, or your ability to take a long term mindset, it's not that the other stuff doesn't matter. It's that the behavioral stuff has the ability to neutralize any of the analytical skills that you might have. So if you think of a pyramid of financial skills, the base of that pyramid that sits at the bottom is behavior. And everything that sits above that, the analytical skills in terms of asset allocation, stock selection, taxes, et cetera, none of those things matter until the skill that sits below it has been mastered. And if people don't master the behavioral side of investing, then I think none of the technical skills matter. And we can see this in kind of these individual examples. You know, there are people who have PhDs in finance and become partners at Goldman Sachs that go bankrupt. Well, at the same time, you have people who have no financial education, no training, no skills that do very well for themselves financially simply because one person mastered the behavioral side of investing and the other person did it. And there are very few other fields where it's like that, where you can be very technical minded and have all the technical skills. But if you don't master the behavioral side of your field, none of the technical skills matter. One of the things that I battle against are rules of thumb. But I'm speaking with a client. I'll say to them, what do you think your asset allocation between stocks and bonds should be? Very simple question. And what will almost happen almost all of the time is, they won't give me their answer. They'll give me the, well, most people say, or, well, from what I was reading or, you know, the books I've read said that you should have your age in bonds or you should have this and you should have that. And I say to them, just throw all of that out. I don't care what other people say the average investor's asset allocation should be. I want you to tell me what you think your asset allocation should be, forgetting about all of that stuff. And the reason I say that is because in the very first chapter of your book, it's called No One's Crazy. And you're talking here about individual history. In other words, how much risk are you willing to take is what happened to you in the past? So your asset allocation between stocks and bonds is going to have a great deal about what you've experienced in the past. Well, here's one example. If you were born in 1950 in the United States, then during your teens and 20s, your young impressionable teens and 20s, where you're learning like a baseline foundation of knowledge about how the economy works. During those years, the S&P 500, adjusted for inflation, went nowhere, 0% return adjusted for inflation during your teens and 20s. That was your early experience in the stock market. If by contrast, you were born in 1970, then during your teens and 20s, your early impressionable years, the market went up 10 fold adjusted for inflation. So just based off of the generation that you were born into, just born 20 years apart, you started your life, your early experience in the stock market was completely fundamentally different. And that sticks with people for the rest of their life. The early experience that they have in markets tends to stick with them. This is especially true if you look at the generation that grew up during the Great Depression in terms of that trauma stuck with them for the rest of their life. And you can measure their unwillingness to go into debt or invest in the stock market to greater degrees relative to other generations. And what's interesting about this is it's not that the generation that one generation is smarter or has better information than another. That's not it whatsoever. They're equally smart. They're equally informed. But because they have different experiences that go through their life thinking about risk and thinking about opportunity in fundamentally different ways. This is true from generation to generation. It's true from country to country. It's true from different parts of the country. It's even true just based off of the value that we're instilled in you by your parents, which is going to be different for me than it is different for you, Rick, than it is different from anyone else listening to this. We all kind of see the world through this own unique lens and become prisoners of our own unique past. And that's fine. I think I think one of the big takeaways from it is just realizing that everyone is different. There is not necessarily one right answer in finance that the decisions that you come to with your money are going to be different from mine, not because we're disagreeing with each other, just because we have different goals and different perspective based off of our experiences. And a lot of times in finance, when there are debates about different investing strategies or where the economy is going next or what you should do with your money, it's not necessarily that people are actually disagreeing with each other or arguing with each other. A lot of times what it is are just people reflecting the fact that they see the world through a different lens because of their own experiences. And I think it's important for us to come to a greater conclusion, an idea that equally smart, equally informed people can come to different conclusions and that's fine. That there's a great quote from financial advisor Tim Maurer, who says personal finance is more personal than it is finance. And I think we should embrace that more and realizing that look, there are crazy things that people do with their money that you can look at and you and I can look at and say that's a bad idea. But most of the decisions that people make with their money check the boxes in their head in that given moment in terms of this is how I think the world works and this is what I want out of the world. So therefore, this is what I'm going to do with my money. And if you think about that, just in terms of no one is necessarily crazy that we're all trying to figure out what we should do with our money based off of how we think the world works. It you become a little bit more empathetic to differing views and views that you otherwise might disagree with that don't make sense to you but might make sense and be the good good strategy, the good thing to do with their money for other people. I often find it interesting that when children watch their parents suffer through something like a downturn where they would lose their jobs, lose their money that the children see this during their impressionable years and the parents are talking about I'll never get into the stock market again. I'll never do this again. I'll never do that again. And the children hear this and listen to it and that reflects in their attitudes at least for a while. And I say that because I recall a conversation sitting around a table with some young people who worked on Wall Street. This is about 2012 and they had just gotten out of college and they had just gotten their first job working on Wall Street. And we were talking about investing there for a 1K plan and I was absolutely shocked that some of them didn't want to put any money in the stock market. And they worked on Wall Street because they had seen and their answer was I watched my parents suffer. I watched them lose almost everything in the financial crisis of 2007 and 2008. And I just don't trust the market. Yeah, I think that's true for a lot of things. It's true for politics by and large as well where we think we are open-minded and some people are more open-minded than others. But by and large, on average in general, people tend to take their political views from what they learn from their parents. It's true for finance as well. It's true in business as well. Howard Schultz of Starbucks has made this point many times that the reason that he is so adamant on having good health insurance for Starbucks workers, even at the lowest levels, is because he personally watched his father, I believe, break his leg and didn't have health insurance and was unable to work and then completely made the whole family destitute because of it. And that personal experience and watching that when he was a kid is what made him really wanted to emphasize health insurance for Starbucks employees. So there are a lot of things that people like me and you and everyone else were trying to learn and read about other people's experiences, which is great and try to be open minded. But unless you have experienced something firsthand, I think it's hard to have the emotional scar tissue that you otherwise would that people who have actually been in the trenches and experienced those things. And all of us have experienced bad events, tragic events to different degrees, but they're all different. They happen at different points in our lives to different degrees and different contexts. So that's why we just go through the world seeing the world through a slightly different lens than one another. Really important in finance and economics. Just realize that everyone has a different view of the world. I asked the Bogleheads when I'm going to have a guest on if they could give me some questions that they have for the guest. One person who responded, who had read your book, said, question I have is whether you have developed insights into strategies people can use to change their behavior around money. So we have these innate, ingrained beliefs. How do you change? This might sound cynical or sort of fatalistic. But I think by and large, my answer to that question is no. I don't think there are a lot of things that we can do for the big behavioral flaws and biases that we have to overcome them. This came to me from Daniel Kahneman who is, of course, the world's foremost authority on this topic who's been asked several times some variation of the question. They say, Dr. Kahneman, you've done all this research, all this insight into behavioral finance hasn't made you a less biased person. And he always says, absolutely not. He has the same biases, the same behavioral flaws that he's had his entire life. And which should make sense because a lot of the behavioral flaws that we have in finance have to do with dopamine and cortisol and these hormones in our brain. And it's ridiculous to think that we can read a blog post and change that and change those hormones based off of something that we read in the moment. So for me, rather than trying to assume that we can fix our flaws that we all have, they're all different flaws that everyone is behaviorally flawed in some way, rather than assuming we can fix them. To me, it's just becoming a little bit more introspective and embracing your flaws and realizing that and if you look at your past and realizing the areas in which you have erred in your financial life, realizing that that is probably a good indication of what you are likely to do in the future and then situating your finances, investing your money, having an asset allocation that embraces those flaws rather than assuming you've learned your lesson in the past. So for one example, if you are someone who panicked in March of this year and in 2008 and in 2001, rather than assuming that you have learned your lesson this time and you won't do it again, you should probably just embrace the fact that you have a lower risk tolerance than maybe you thought you did. You'd have more of your assets into bonds and cash than you otherwise did, rather than assuming you can learn your lesson. I think your past behavior is going to be a very good indication of your future behavior regardless of how hard you try to fix those flaws. I completely agree and a lot of times that I'm talking with clients, I ask them how did you react during 2007 and 2008 when the market lost 60% and if their answer is I didn't do anything, well that's a good indication to me that their tolerance for risk is probably relatively high but if they did something like got out or reduced their allocation or quote unquote, I made a terrible mistake and I sold so forth. It tells me that their, whatever allocation they had going in to 2007 and 2008, it might have only been 60% stocks but that was still too high because they sold. So your past actions do tell probably what you're going to do in the future. And then in the future, quite frankly, and I don't know if this has any effect on what we're talking about but once you go from an accumulation to a distribution in your portfolio because you're retired now and you're going to live off your portfolio, you can't make up the mistakes as easily anymore because you're now distributing money instead of bringing on more money. When you're young and you make mistakes, okay, you don't do it again, just stay in for the long term. You continue to, you're not, you didn't lose that much money because you didn't have that much money in when you jumped out. You're going to continue to earn money for the next 20, 25 years but when you're 65 or so and you decide to retire, you can't afford to lose it. You can't afford those biases to take hold of you where you capitulate. No, it's really important. I mean, one story that people talk a lot about these days is what's going on with Robin Hood right now. Surge in the seer and popularity, surge in volume, like virtually every young person under the age of 25 has a Robin Hood account and they're all buying bankrupts, bankrupt companies and penny stocks. There's actually one maybe silver lining from that which is A, first, you know exactly how that story is going to end. You don't know when it's going to end but you know exactly what's going to happen to those people. It's all going to end in tears of course but then there's maybe one silver lining to that which is learning that lesson when you are 19 or 20 years old is probably so beneficial rather than learning that lesson about risk and taking unnecessary risk in the stock market when you are 45 or 50 or 60 years old. So maybe that's one silver lining to the Robin Hood story this year is that people are learning about risk the hard way firsthand when they are buying large young versus later in life when they are either saving for their kids to go to school or saving for their own retirement, et cetera when those lessons become very devastating versus learning it when you're 19 years old. Yeah, absolutely. Let's go ahead and get back to the book and some of the chapters in the book. In chapter four, you have confounding and compounding and you talk about Warren Buffett and you said that he was worth when you wrote the book $84.5 billion but 81.5 billion of that came after he was age 65. Now he's 90 years old now, so that's 25 years ago but the point is that most of his wealth actually occurred after age 65 and what is all due to compounding and once people learn the benefits of compounding and staying the course this is where eventually over time they begin to make money. Yeah, I think what's interesting about Buffett is that if he were a normal person and had started investing when he was 22 or 25 and retired at 65, like most people would, a normal person and if he had earned the same average annual returns during that period, 22% per year, great returns, you would have never heard of him. He never would have become a household name. His net worth would have been literally something like $12 million with an M, not a B. You would have never heard of him. The reason he is so successful in dollar terms is because he started investing at age 11 and he continues through today at age 90. That's why he is so successful. So yes, he is a great investor. He is a skilled investor, of course, period. But the real secret to his wealth in dollar terms is just the amount of time he has been investing for. And that's really important because whenever there are investors who talk about Buffett and try to piece together how he's done it, they go into great detail about how Buffett thinks about notes and business models and brands and market cycles and whatnot. This is all good important stuff but the single most important part of explaining his success is just the amount of time he has been investing for. Now, I think that explanation is just too simple for people to take seriously. They don't want to think that his success can be just tied to something as simple as the amount of time he's been doing it for. But that again, just highlights the idea that compounding is not intuitive. It's not intuitive to think that someone could achieve that much success after their 65th birthday, even if he's 90 years old today. It's not intuitive to think that all of the gains can be tied to his geriatric years, even if he's been doing this for his entire life. But that's how compounding works. The gains for compounding are almost unnoticeable in the early years. They get good in the middle years. And then it's not until you've been investing for 30, 40, 50 years that things can just start getting ridiculous. So look, if you are someone who is 60 years old listening to this, you might say, well, that doesn't do me any good. I don't have 50 years in front of me. But that's just the hard truth about how compounding works. Is that even something that takes place over decades? And of course, all of our attention goes to what is happening in the stock market this month, this quarter, this year, even this decade. When we know over the long course of investing history, what really matters is not necessarily what's gonna happen this year or even this decade, but what's gonna happen over the next 20, 30, 40, 50 years. That's where the big gains come. The big gains that so many of us look at and aspire to and try to learn from. And it's so easy to overlook where those gains actually came from and what actually caused them. I often talk with people who are professionals about how long it took them to become qualified to do what they do. And then even after that, how long it took to begin to accumulate wealth and become well known in their industry and basically become successful. And it takes almost a lifetime. I mean, you start out in elementary school, then you go to high school and then you get into a good college and then you study biology and then you go to medical school and then you spend 10 years in medical school at various levels and you accumulate all this debt. Going through medical school and then you finally get out of residency and you start working. And it takes years and years and years to actually see the compounding effect of all the work that you're doing to become a successful physician. And yet when you look at investing, people seem to wanna make it like tomorrow. That's the hardest part. And there are some fields where you can gain some sort of skill in a fairly short period of time. And that's why I think it's intuitive to think, if you are an investor that you need to see results in the next six months, let's just say if you are going to the gym, if you are someone who is not in very good shape and you start going to the gym every day, within six months, you should start seeing results. Not right away, not overnight, not in the first week, but after six months, you should see some results. But if you are someone who is just getting into investing, there is no expectation whatsoever that after six months or even after one year, you're gonna see anything that looks like returns. You could have significantly less money than you did after a year. And that's in the normal course of operations as an investor, just the history of volatility. So it's not intuitive for a lot of people getting into it to understand how much time it takes. But historically, we know that to put the odds of success in your favor and for the odds of success to be greatly in your favor to where you have a very good chance of doing well over time, you need to be invested for at least 10, if not 20 years before the odds of success are in between 80 and 90% historically from everything we know that you will have a decent return accruing to you. So a lot of investors who say, well, I don't have 20 years in front of me, I think it's just important to realize that if that's the case, you are just relying on a greater degree of luck to fuel your success, to fuel your returns. And that's what it is. Most investors, if you ask them, are you a long-term investor? They will tell you, yes. Most investors will say that, they think they're long-term investors. But then if you ask them, what is your definition of long-term? A lot of investors will tell you one year or three years or five years. The Federal Reserve actually does a survey where they ask people their long-term inflation expectations and the definition of a long-term that they use in that survey is three years. So for a lot of people, three years, five years, 10 years, that's definitely the long run. Whereas we know if you look at the history of investing, it's at least 10 years, if not closer to 20 years, that counts as a good definition of long-term, which is just the odds of success for earning a positive return are in your favor. Back in the day when I was, I think I wrote my first book 20 years ago, I was looking at how long people held onto their equity mutual funds. And the average was about two to three years before they sold them and went on to another equity mutual fund. Right. Let's talk about chapter five. Now that you've made your money, how do you keep it? How do you stay wealthy? The key point here is that getting rich and staying rich are two completely separate skills that often have contradictory skill sets, but you need to nurture both of them to do well over time. Getting rich requires being an optimist about the long run, taking a risk, being optimistic about the future of the economy, the future of business, the future of society, you need to be optimistic about that in order to get rich. Staying rich requires almost the opposite. It requires a pessimism if not paranoia about the short run. It requires that you have enough adequate liquid savings and the avoidance of debt so that you can survive the short run because you know the short run is gonna be a continuous chain, a never ending chain of setbacks and disappointments and breakages and recessions and bear markets and now pandemics and crazy elections. You know that that is the history of the United States and around the world, there's always bad news in the short run that you need to prepare for. So I think those are the two conflicting skills that you need to have and they seem like a contradictory but to me for most people, I think the way to think about this is that you need to save like a pessimist and invest like an optimist. You need to save money with the idea that we might fall into a new recession at any moment, that there could be a bear market at any moment, that you can get laid off at any moment. You need to save like a pessimist while investing like an optimist with the idea that over the next 10 or 20 years, people are gonna figure problems out and we're gonna get better in the economy. We're gonna get more productive. There's gonna be profits that accrue to shareholders and the stock market is gonna rise in a rational way. I think that's investing like an optimist. So you need to have both of those together at the same time. Not many people do. I think there are more people that are good at one or the other. They're maybe good at getting rich and during bull markets they do extremely well but they're not necessarily good at staying rich. They're not good at knowing the boundaries of how much risk they should take or how to situate their finances so that when the tide goes out, so to speak, they're not gonna get wiped out themselves. And then there are also a subset of people that are not good at getting rich in the first place and they're so conservative, so pessimistic about what's going on in the world because there's always bad news, bad headlines in the news. They get so caught up in that that they're never actually able to invest like an optimist. So I think nurturing both of those skills separately and realizing that they are separate skills and have separate skill sets is really important to do well over the long run. One of the chapters is save money. And I found this to be so basic. And I think the point that you make in this chapter is look, just save money. A lot of people say I wanna save for a boat, I wanna save for a house, I wanna save for retirement. You make the argument, it doesn't really matter. Even if you're not saving for anything, just save. Yeah, I think most people need a reason to save and they're saving for a specific event that they can foresee in the future. They can foresee that they need a new car in the next year. So they're saving for that. To me, savings has always just been a hedge against the idea that the most important events in your life and around the world are the things that we cannot see coming. It's COVID-19 that we could not see coming before it happened. It's the big recessions, the big layoffs, the big trauma that everyone goes through at some period in life that you can't see coming. That's the stuff you need to save for. So I think you don't need any reason to save money other than the idea that what's gonna be really important to both your happiness and your success in life is your ability to have options and control your time and be in control of the situation when something bad happens to you in your life. If there is a layoff or a medical emergency, having options in your life are gonna be one of the most important assets that you have. And you get those options by saving for things that you cannot see coming. Even when everything seems like it's going right and your career's on track and the economy seems like it's going right, to still have a good buffer, a good level of savings, room for error in your personal finances that allows you to get through those hard times that you might not see coming that no one can predict coming, but we know are just an ever present part of everyone's life. One of the chapters you wrote is called Surprise. By the way, I love the title of your chapters. They're very simple. Very descriptive too, by the way. But you say something in here that is absolutely brilliant. You say historians are not profits. Historians are not profits. Explain that. The whole study of history, the whole subject of history is basically looking at surprises. It's looking at events that no one necessarily saw coming because those are the things that move the needle in the world. It seems like the Great Depression and the World Wars that before they happened, particularly well before they happened, no one could have possibly seen those coming and no one could have seen them playing out the way in which they did. Those are the things that make the most difference in life. So of course historians are not profits about the future because what historians do is they spend all their time studying things that nobody saw coming. But I think there's an irony that we tend to look at history like it is a roadmap of the future, particularly if for something analytical like investing. Well, we have 100 years of investing data and we can mine that data to give us a view of what's gonna happen in the future without realizing that a lot of the big events that we pay attention to, the Great Depression, the crash of 1987, even 2008 or this year with COVID-19, all of those big events in the history that we have are things that people did not see coming before they happened. So how should we use those as a roadmap of the future? The biggest lesson that we should take away from those surprises is that the world is surprising. It was surprising in the past and it's gonna be surprising in the future as well. And I think the way to deal with that as an investor is to have more expectations than you have forecast. The difference of that is this. If I were to say hypothetically, we are gonna have the next recession in Q3 of 2021. If I were to say that, that is a forecast. I'm forecasting something specifically that's gonna happen. If I were to say on the other hand, on average, you should expect there to be two recessions per decade because that's historically what we've had. That is an expectation. I don't know when they're gonna come. I don't know where they're gonna happen. I don't know how severe they're gonna be when they hit. But just as my baseline expectation, I expect there to be two recessions per decade on average. That is an expectation, it's very different from a forecast, but an expectation just makes it so that when something does come out of the blue that you did not expect, it's not necessarily surprising to you. Even if you did not see this recession coming as in 2020, I think virtually none of us did. Even if you didn't see it coming, if you have it as your baseline expectation, you're not necessarily surprised when it comes. I think this is similar to how people in California think about earthquakes. Whereas if you live in California, you know that there are gonna be earthquakes. Some of them are gonna be big. You know they're gonna be part of your future, but you can't forecast when it's gonna come. No one even tries to predict when the next big earthquake is gonna come. You just expect and you know that it could come at any moment. It could happen today. It could happen 10 years from now. And then so by expecting it, you were just building your house so that it can withstand it whenever it's gonna come. I think we should think about recessions and bear markets in a similar way that rather than trying to predict when they're gonna come, which is where all the energy in the finance industry goes to. We should just situate our finances and have robust enough finances that we can endure them whenever they might come with the expectation that they might come at any moment rather than trying to predict exactly when they might come in our life. A lot of advisors talk about the optimal portfolio. You know, they wanna put this asset allocation together and come up with the optimal portfolio. And I laugh at that. I say, you know, how do you know what the optimal portfolio is going to be going forward? What are you doing as you're looking back at history? You're looking back at the numbers of what they were based on. Whatever was going on at that particular time it has very little, well it might be some rhyme to it as to what might happen in the future, but you can't say that the correlations between these asset classes are going to be 0.67 going forward. This is the optimal allocation between stocks and bonds or the optimal allocation between international and US. And yet a lot of people invest based on very precise backward looking data that could happen by luck, I guess. I mean, the clock strikes 12 twice a day. But other than that, I just don't see how a lot of what happened in the past as far as correlations between asset classes and value premiums and all of these factor models are all looking backwards. How relevant is it going forward? I think where a lot of that comes from too is not realizing what you are actually paid for in investing. Let me explain what I mean by that. Of course, for anything in life that is good and worth pursuing, it has a cost, there's a cost that you have to pay. It's the same in investing. You can do very well in financial markets over time but there's a cost to that that you have to pay. To me, the cost that you have to pay in investing is dealing with uncertainty and randomness. That's the cost of the mission that you have to pay in order to do well over time. But people don't wanna pay that cost or they don't view it as a cost and it makes them feel much better if they are using a sense of precision because it makes them feel like they are in control. And the cost that we are all being forced to pay, it makes them feel like they're getting a freebie if they can use their intelligence and their analytical skills to try to get around that cost. So that's why I think you have people who do a lot of data mining historically to figure out exactly what they should do because it makes them feel like they are more in control in a market where kind of by definition, what we all deal with is uncertainty and randomness. So it's just trying to avoid the cost of the long-term cost of admission in stocks. And to me, it's just so obvious and clear historically that rather than trying to avoid that cost and trying to outsmart that cost, then you should just pay that cost. It's a good fee to pay. It's not a fine. It's not an indication that you did something wrong. It's a fee to get into the theme park. It costs $100 to go to Disneyland, but most people who go realize that it's worth it because Disneyland is fun. It's a good place to bring your family. So they don't mind paying the fee to get in because the rewards are worth it. And I think the fee of uncertainty and randomness and volatility, variability in investment markets is the same. It's a fee, you have to pay it. There's a cost and the cost is dealing with that. The pain, the discomfort of uncertainty, but it's worth paying over a long period of time. It's worth the cost of admission. And rather than avoiding it, we should just try to pay that cost. One last chapter, which I thought was really one of the best chapters in the book is called You and Me. Beware of taking financial cues from people playing a different game than you are. And I thought this was a brilliant chapter. Well, thanks. And really where it comes from is this idea that all of us as investors are playing different games. There are high-frequency traders, there are day traders, there are fund managers managing for the next quarter, the next year, all the way up to pensions and endowments that are managing money for the next century. We're all playing very different games, but we play on the same field. There's only one stock market. There's only one price for Apple stock, only one price for Google stock, even if we're playing different games. And a lot of times the prices of stocks get moved around by people who are playing a different game than you are. And if you are taking your cues from those other investors as a cue for what you should do with your money, you're liable to get them hurt. Here's one example from this from 1999-2000. A lot of the gains in dot-com stocks back then were being pushed around by day traders who were pretty rationally, pretty reasonably chasing momentum. There was momentum in those markets where you could make money. They were rationally chasing it as day traders or as people who are investing for a week. You can't necessarily blame them for doing that. That's the game they were playing. The problem was when Cisco stock and Dell stock and Microsoft stock were going up so much. And then long-term investors looked at that and said, oh, maybe they know something I don't. Maybe the other investors know something that I don't. So I should put my long-term retirement money in those companies as well. Now, when the tide turned and everything unrolled, unraveled, the day traders were gone. They were only in it for the gains that you could make between today and tomorrow. Anyway, they were gone. The bag holders who got left with so much damage were the people who were actually long-term investors who were taking their investing cues from those day traders. That's at least one explanation for how bubbles play out. So I think it's always important in investing that you understand what game you're playing and realizing that other people are playing a different game than you, you've got to make sure that you're not taking your cues from them. One other example is if you were to watch CNBC or Bloomberg TV, any of those shows, you will hear people say something along the lines of you should buy Netflix stock. And it's not that that's necessarily bad advice, but you always have to ask the question, who is you? Are you talking to a day trader? Are you talking to a widowed retiree on a fixed income? It's very different for different people. We're all playing different games. And it's just another realization of what we discussed earlier, Rick, which is that there's no one right answer for most financial questions. The answer that is right for you might be completely different for me. And wrong for me. If you and I are playing different games, and it's so important again to realize that personal finance is more personal than it is finance, and realizing that people can disagree, come to different conclusions, and what is good information and good advice for you might be disastrous for me. And we really have to think about finance through much more of a personal lens rather than a one-size-fits-all lens. I always say everything that's written out there about the optimal asset allocation and so forth is geared towards the average investor yet. In 32 years of doing this, I've never met anyone average. Right, exactly. So here we are. It's a great book, The Psychology of Money. You see yourself in this book. And I have to admit, I saw myself in this book more than I wanted to. But one of the pains that we go through to learn, the question that one of the Bocles heads have for you is, what are you working on now? What's next? You know, I'm still doing what I've always done, which is just trying to do a lot of reading and a lot of thinking about what's going on in the world and trying to piece things together to write about. I do have a second book idea that has been sold that I'll start working on next year, but we'll save that conversation for later when it comes out. But my whole career has been, and I think will continue to be just a bunch of casual reading and casual thinking and trying to piece things together that I can write about that hopefully other people find beneficial and are able to see themselves in the stories just like you were in this book. Well, thank you so much, Morgan. We really appreciate you visiting with us here on Bocleheads on Investing and we wish you tremendous success. What I know will be a very long career. Thanks very much, Rick. I appreciate it. This concludes Bocleheads on Investing, episode number 26. I'm your host, Rick Ferry. Join us each month to hear a new special guest. In the meantime, visit Bocleheads.org and the Bocleheads Wiki. Participate in the forum and help others find the forum. Thanks for listening.