The best-selling author on what makes financial paradoxes interesting, why stories are the best way to teach about money, what constitutes financial freedom, and more.
Our guest this week is Morgan Housel. Morgan was one of our first guests on The Long View back in May 2019, and we’re happy to welcome him back. Morgan is a partner at The Collaborative Fund, a venture capital firm. He is also a successful author—his first book, The Psychology of Money, having sold more than 2 million copies and been translated to 49 languages. In addition to his book, Morgan frequently publishes content to The Collaborative Fund’s blog and is active on social media at @MorganHousel. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of The New York Times Sydney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He also serves on the board of directors at Markel.
The Psychology of Money, by Morgan Housel
Storytelling and Advice
“What’s the Curse of Knowledge, and How Can You Break It?” by Loren Soelro, Ph.D., psychologytoday.com, April 28, 2021.
Cancer: The Emperor of All Maladies, Ken Burns Presents a Film by Barak Goodman
Robert A. Weinberg
“Best Story Wins,” by Morgan Housel, collabfund.com, Feb. 11, 2021.
“Never Saw It Coming,” by Morgan Housel, collabfund.com, April 25, 2022.
“Deep Roots,” by Morgan Housel, collabfund.com, March 31, 2022.
Contradictions and Enough
“Little Rules About Big Things,” by Morgan Housel, collabfund.com, Oct. 11, 2022.
“Expectations (Five Short Stories),” by Morgan Housel, collabfund.com, Oct. 6, 2022.
“Good Enough,” by Morgan Housel, collabfund.com, Sept. 7, 2022.
“Surprise, Shock, and Uncertainty,” by Morgan Housel, collabfund.com, March 3, 2022.
Randomness, Chance, and Happiness
“Tails, You Win,” by Morgan Housel, collabfund.com, July 26, 2022.
The Intelligent Investor: The Classic Text on Value Investing, by Benjamin Graham
“Wealth vs. Getting Wealthier,” by Morgan Housel, collabfund.com, June 28, 2022.
“Low Expectations,” by Morgan Housel, collabfund.com, March 9, 2022.
Behavioral and History
The Great Depression: A Diary, by Benjamin Roth
“We’ll Get Through This,” by Morgan Housel, collabfunds.com, March 9, 2020.
“The Big Lessons of the Last Year,” by Morgan Housel, collabfunds.com, April 2, 2021.
Jeff Ptak: Hi, and welcome to The Long View. I’m Jeff Ptak, chief ratings officer for Morningstar Research Services.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Ptak: Our guest this week is Morgan Housel. Morgan was one of our first guests on The Long View back in May 2019, and we’re happy to welcome him back. Morgan is a partner at The Collaborative Fund, a venture capital firm. He is also a successful author. His first book, The Psychology of Money, having sold more than 2 million copies and been translated to 49 languages. In addition to his book, Morgan frequently publishes content to Collaborative Fund’s blog and is active on social media at @MorganHousel. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of The New York Times Sydney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He also serves on the board of directors at Markel.
Morgan, welcome back to The Long View.
Morgan Housel: Thanks for having me.
Ptak: Oh, it’s our pleasure. We’re thrilled to have you. I wanted to start maybe with a focus on where you came from, your upbringing, your formative years, so to speak. Your parents set an excellent financial example for you and your siblings during your upbringing, which I think you’ve described as comfortable but maybe not extravagant. Can you talk about what you saw them do or not do that inculcated good financial habits in you?
Housel: The example that my parents set, I think, was interesting because they had a very bifurcated career themselves. My dad started his undergraduate college when he was 30 and had three kids. I’m the youngest of three. He started undergrad when I was one month old. And then, he became a doctor when I was in third grade. And I’m the youngest of three, so, for my two older siblings, it was even later in life for them. All throughout my early childhood, we were completely broke. My parents were students. My dad was a med school student, and then he was a resident and residents make like $15,000 a year or something like that. My mom was in nursing school for a lot of that time and then raising the three of us kids as well.
So, my childhood up until I was 12 years old, we were very poor. That’s the right word. It was like qualified-for-free-lunches-at-school kind of thing. We were very happy. It was a great childhood. I didn’t know any different. When I was 12, I liked riding my bike with my friends and we went camping every summer. I thought it was great. But then, my dad became a doctor when I was in third grade and things got more comfortable for us after that. The quirk that I didn’t recognize at the time, of course, when I was so young, but looking back I now realize was that the frugality that was demanded of my parents when we were so poor stuck with them after their incomes increased fairly substantially.
And so, even during my teenage years when my parents had a good upper-middle-class income—my dad was an ER doctor and ER doctors are kind of on the lowest spectrum of doctor pay. This is not like brain surgeon pay by any means, but it was a good upper-middle-class income. But my parents were very frugal, and we lived a good life. We had a nice middle-class house. We drove a middle-of-the-road car, but they were very frugal. They had a very high savings rate. And as I got to become an older teenager, I kind of looked down upon them for that. I didn’t understand. I knew how much money my parents made, and I knew how little they spent, and I didn’t like it. And I always criticized, like, why can’t we have a bigger house? Why can’t we have a nicer car?
And then, as I got older—this is going into about 10 years ago from now—my dad woke up one day and realized that he wanted to retire. He had been an ER doctor for 20-some odd years. He was a paramedic before that. He had been in emergency medicine for 30 years, something like that, a very stressful career, where people are literally dying in your arms every day. He woke up one day and realized that he had had enough. He was very proud of his career. He enjoyed it, but he wanted to move on to the next phase of his life. And then, he just quit. He just retired. It was a little bit more planned than that. But as soon as he was done, he just left. And it was like that moment that I realized why my parents were so frugal and why their savings rate was so high. It was because at the very second that they wanted it, they had full control over their time. And at the moment that he wanted to retire, he could, and a lot of his colleagues, by the way, could not. They had to keep working because they lived a much higher lifestyle than we did.
And so, that was like, oh, now I got it. The reason that you were frugal is not just because you were being cheap, it’s because you wanted to control your time. And that, when I saw, it was like I think that’s the ultimate purpose of money. It’s not to buy nicer stuff or a bigger house or a fancier car. Even though I like that stuff as much as anyone, the ultimate purpose is to control your time and just be able to do what you want, when you want, with whom you want. That was the example that my parents set. And I don’t think they set that example on purpose. I don’t even think they knew what they were doing. It just felt like the best thing to do. This was not their master plan. It all just kind of worked out in a way that’s stuck with me.
Benz: So, that idea of money equaling freedom is a theme that certainly runs throughout your work. I want to stick with your backstory here. Your adolescence in high school years were pretty unusual. You were a competitive snow skier and didn’t really have any formal education. In fact, you said you finished high school with a weak grasp of even remedial math, and then followed a nomadic path through higher education. What did you learn from that experience?
Housel: I really don’t have any high school education to speak of. I did an independent study program that was designed for juvenile delinquents, which I was not one. I was an athlete who just wanted to spend all my time skiing. But it was designed for people who had been expelled from every other high school and this was the last resort that the state provided was this independent study program. I did nothing for it. I did no educational work at all. I really think that’s true. And when I was 16, they gave me a piece of paper that said “diploma” on it. And I remember thinking, I didn’t do anything for this, though. I didn’t do any work for this, but I’ll take it if you want. And then, as I became 19 or 20, that’s when I realized, I actually want to go have a career outside of skiing. I’m really interested in finance. I want to have that career and I want to go to college now. But since I had basically an eighth-grade education, I had this enormous chip on my shoulder and this sense of embarrassment and inferiority relative to my peers. And I think that chip on the shoulder just set my expectations so low that when I started college it was like, if I can just make it through this one course, I’ll feel like that was a win, let alone graduate, let alone have a career after that. I feel like I was just on one test at a time—was my field of vision.
And since my expectations were so low, as I started to do a little bit better and I actually got some decent grades, I was like, oh man, I might be actually able to do this and have a career someday. This is amazing because I never thought that. I was always stuck in this level of oh, I didn’t go to high school, so I’m just going to be a low-level service worker for my entire life. That was my expectation when I was 20 years old. So, I think once I broke out of that since my expectations were so low, it just made the eventual progress that I made in education and my career feel that much better. And I think that sticks with me today. I still think there’s a part of my personality that still thinks I belong as the person who doesn’t have a high school education who should just be making $8 an hour doing service work. There’s part of my personality that still feels like I’m right there. So, when I compare that to where I am now, I think the gap between expectations and reality is so great and I think that gap is what accrues to people in terms of happiness and well-being.
Ptak: I wanted to ask you about storytelling, particularly as it relates to money. What do you think it is that makes storytelling more effective when it comes to teaching people about money?
Housel: Well, if you go back to talking about college and education, everybody knows, and everyone has experienced the college course—usually a math or a science-based course—where the night before the final exam, you memorize all the formulas, you go take the test the next day, and as soon as you put your pencil down on the last question, you forget everything. It’s just rote memory that you’re cramming through. And then, maybe there’s some purpose for that, but obviously, one day later, to say nothing of 10 or 20 years later, you don’t remember necessarily what you learned or what the purpose was. And if you compare that to a story where there are people who, if you hear a good story, you will remember it 50 years later, it will stick with you forever. It’s so much easier to remember. And if you think about learning, the purpose of learning is to give you life lessons that will stick with you for your whole life. Well, rote memory does nothing. It’s going to stick with you for 24 hours, whereas a story that can stick with you for life, that’s when people actually remember these lessons.
And so, I think if you can take storytelling and implement it in a field like math or science or finance, that’s a great thing. So, there are, of course, the formulas of finance, and if you were to get an academic degree in finance or economics, it’s very formulaic. But if you can implement storytelling into that kind of field, A) it’s more interesting. It’s more exciting than just memorizing a formula in my view. But also, it’s going to stick with you. You will remember it. And so, I think, as a writer, who obviously wants to get people’s attention, storytelling is important for me because I want you to read and enjoy the article. But it is beyond that. It’s beyond the clickbait aspect of it. If I can tell you a story, I hope that you will remember it a year, two years, five years from now versus just a statistic that you’re going to forget tomorrow. And so, I think for that reason, in all fields, stories are always more powerful than statistics because they’re easier to contextualize if you’re looking at just data on a spreadsheet versus being able to empathize with a human being who is dealing with something in life, and they’re so much easier to remember, and that’s why they’re more powerful.
Benz: When you speak to groups of financial advisors, what advice do you give them on the role of storytelling in their practice of dispensing advice that sticks with their clients? When is storytelling especially helpful and when might it not be so helpful?
Housel: There’s a thing in psychology called the Curse of Knowledge, which is that experts from almost every field underestimate how little other people who are not in the field understand what they’re talking about. And we see this all the time in finance. It happens in medicine a lot, too. Where in finance, you might have a financial advisor who’s talking to a client and the financial advisor will say something like, “Well, given where the yield curve is and Fed funds expectations…” And they’ll start going down these things that to the advisor makes a lot of sense. And they have no clue. They’re completely oblivious to the idea that the client on the other side of the table has no idea what they’re talking about. It’s a foreign language to them. And it’s easy for everyone—myself, you guys, everybody—it’s easy to underestimate that knowledge that is so basic to you and lingo that is used every day to you is totally foreign to other people.
And therefore, I think a lot of financial advisors innocently will use data and lingo and just have a set of expectations when speaking with their clients that is over their head. And the problem with this is that most clients—this is the same in medicine, too—a lot of clients do not want to raise their hand and say, hey, I don’t understand what you just said. By and large, they want to sit there and nod their head because they don’t want to feel like the dummy in the room who’s supposed to know what the yield curve means even if they don’t know what it means.
And so, I think if you can remove the technical aspect of finance and just tell stories about how people deal with risk—let’s not talk about the capital asset pricing model or the yield curve or any of that stuff—tell a story about how humans deal with risk and uncertainty and how they feel when the market falls 20%. Don’t forecast that the market is going to fall 20%. That’s a tough thing to do. Talk about how people feel when it might fall 20%. That’s something that I think your clients can empathize with and again, that will stick with them. So, it’s two things. It’s talking at their level and understanding that you, the educated certified advisor, probably underestimates what their level is and also, speaking to them in a way that they are going to remember and be able to contextualize within their own life.
Benz: A related question is to what extent do you think that for some advisors, that complexity, that a little bit of obfuscation and not quite having the client follow along is intentional where they want the client to think, well, this person is in charge, and I’m just sort of sitting here and going along with it?
Housel: I think for a lot of times, it is innocently intentional, if that’s a phrase that makes sense. I think a lot of advisors, A) tend to be very smart, very educated, very highly paid. And because of those three things, they don’t want to give simple advice. And a lot of advisors, too—I think this is innocent, too; this is not in a cynical way—but they want to justify their fees, which makes sense. Of course, they do. And I think it is very difficult to feel like you are justifying your fee if you are talking in simple words using short sentences and giving simple advice. To justify your fee, you often want to say, “I’m doing this very complicated complex thing for you.” And I think there are a lot of clients too that feel the same way that say, “Hey, if I’m going to pay you 100 basis points a year (or whatever it is), I want you to do something that I can’t. I want you to do something fancy. I want you to have this giant machine contraption trading system behind you to make it feel like I’m getting something for my money.” And I think 99% of that is innocent. It’s very easy to become cynical about that and say, “You’re just trying to obfuscate, you’re trying to confuse the client.” Of course, that happens here and there. But I think, by and large, that’s not the case.
And I think it’s very true in medicine as well. I keep using that example, because I think a lot of the dynamics and psychology of the relationship between doctor and patient is very similar to what it is between financial advisor and client. And that happens a lot in medicine too where there are a lot of times in medicine, not always, of course, but a lot of times where the answer from your doctor is you need to eat a better diet, get more exercise, and get more sleep. That’s the answer to your problem. But the patient doesn’t want to hear that. The patient wants to hear what is the pill that I can take that’s going to make my problems go away? And the doctor who had spent 10 years in school and is very educated and very smart probably wants to go down that path as well, saying what is the complex study that I just read about that might be able to fix these problems versus the underlying cause of these very simple and basic things that nobody wants to pay attention to.
There’s this interesting thing, again—back to medicine—that’s happened in the war on cancer, which is that we know that the biggest move that we can make in the war on cancer that would move the needle the most is prevention. It’s to double-down on prevention, which is primarily diet, exercise, and smoking. And there was this documentary by Ken Burns on the war on cancer, and there was an MIT researcher, his name is Robert Weinberg, and he made a comment about why it’s so hard to get prevention to be taken so seriously, and he said, it’s because doctors like him do not find it intellectually stimulating. They want to talk about cells and molecules, because that’s what they know, that’s what they do, that’s how they’re smart even if the prevention side of it is going to be more effective than whatever the next cancer treatment might be. And I think that irony also exists in finance where there are things that are so basic and so boring, but they’re very effective—save more money, dollar-cost average, spend less money than you make—the really simple basic stuff is not intellectually stimulating for a smart advisor to actually want to bring to their clients even if it works very well.
Ptak: I wanted to ask you about contradictions and paradoxes. You wrote a piece recently. I think, a day or two ago, I was marveling over this piece. It’s called “Little Rules About Big Things.” You wrote it in early October. We will include it in the show notes. And it’s an amazing piece. I think it’s 88, they’re not bullet points, but they’re just short little stanzas, and many of them are exploring contradictions, paradoxes in everyday life. It could be life, financial life, what have you. What is it that draws you to those sorts of things that feature so prominently in your writing?
Housel: I think one of the big things is that we tend to think of finance like there is one right answer for everyone, and if we can just find that one right answer, we’ve discovered the truth that everybody should follow. Very similar to like in physics, there is one right answer for everyone. And in math 2 + 2 = 4 no matter who you are. No matter where you’re from, how old you are, how much money you make, 2 + 2 always equals four. And in finance, it’s not anywhere near like that. We think it is. We want to pretend that it, but it’s not. And you can take people in finance who are the same age, from the same country, who earn the same amount of money, and the right financial decision for those two people might be completely different. How much money they should save might be completely different, how they should invest their money might be completely different, because they have different personalities. And again, in math, your personality doesn’t matter. In finance, it’s everything. Your risk tolerance is everything, your social aspirations, your family dynamics, how your spouse feels about risk tolerance, to say nothing of your own risk tolerance, that’s everything. That’s not a part of it, that’s everything.
And so, the contradictions I think really bring that to light. And I think a lot of times, the biggest contradiction is, I think the majority of financial debates between people, which is what 99% of financial media is, is people debating whether X, Y, or Z is going to happen. The majority of those debates are not actually people disagreeing with each other. It’s people with different risk tolerances and different time horizons talking over one another. And people are either oblivious to the fact that other people might not have the same goals and aspirations and risk tolerances that you do, or when they understand that other people have a different risk tolerance than they do, they’re upset about it, like how could somebody else view the world differently than I do? And they almost view it as a threat to their own worldview when they discover someone else who thinks differently. And so, those contradictions are everywhere.
And by the way, they exist at the personal level, too. There are probably things that I do with my own money that contradict each other. I can’t even think one at the top of my head, but everyone is a walking contradiction, and money is such a window into how people think about risk and reward and greed and fear, these really big topics that impact a lot of areas in life, and money is a window. The financial decisions that you make are a window into that. So, I think the contradictions are exciting to me because it is proof and a window into the fact that there is no one single right answer in this field.
Benz: Seems like you’re at peace with the notion of something being too hard to figure out and this idea of not letting the perfect be the enemy of the good. Have you thought about how you’ve gotten OK with the idea of something being good enough?
Housel: I think it’s hard to have any kind of historical view of finance and economics even in recent history of the last one to five to 10 years and not be completely humbled with other people’s ability and most likely your own ability to know what’s going to happen next, both at the individual level, like what’s going to happen in your own career—a lot of people, their ability to forecast where they will be in their career five years from now is atrocious. They have no ability to know. If they’re looking back and being honest with themselves, it was a completely blank slate in front of them. And at the broad economic level, the ability to know what’s going to happen next, is so humbling if you’re honest with yourself.
The recent example that I like is The Economist magazine, which I really admire. It’s probably the most astute financial publication that’s out there. I’ve read it for years. It’s great. Every January they publish an edition that is a review of the year ahead. So, here are the economic and investment risks that are going to impact you over the next 12 months. They do this every January. Their edition in January of 2020 did not say a single word about COVID. Of course, nobody was talking about it in January of 2020. That’s not a criticism. And their edition in January of 2022 does not have a single word about Russia, Ukraine, or energy markets. Again, because nobody was talking about it back then. I’m not criticizing them. But that ability of even literally a couple of weeks before these things completely changed the world. The most astute financial thinkers and writers are totally oblivious to it. I think it’s like that every single year that the biggest economic risk in front of you is something that nobody is talking about. It’s always like that. And you can say with so much confidence today that the biggest investing risks, the biggest economic risk over the next 12 months, over the next five years, is something that nobody is talking about right now. And you can say that because it’s always the case.
So, to me, the only like practical takeaway from that humility of our inability to forecast is to have some level of good enough, good enough forecasting to where I’m like, I have no idea what’s going to happen over the next 12 months or the next five years, but maybe I have some baseline expectations of—I expect there to be market volatility, I expect there to be recessions, I expect there to be bear markets. I don’t know when they’re going to come. But that’s good enough. If I can just have a baseline expectation of what’s going to happen, that’s good enough for me. And also, I think at the personal finance level, if you don’t have a concept of enough, then no matter how much money you make, it’s never going to feel satisfactory.
And one truth in finance is that if your expectations grow faster than your income, you will never be happy with your money, and it doesn’t matter how much money you make, if it’s $10,000 a year, or $10 million a year. That’s like an iron rule of finance that has to be obeyed. And one thing that I’ve always found fascinating is that there is so much effort, almost all of the effort in the financial industry goes toward the first part of that equation, which is increasing your money, increasing your income, increasing your net worth, which is great, of course, that’s an important part. But there’s almost a complete and utter ignorance of the other part of the equation, which is keeping your expectations in check. And it should not be any surprise that a lot of people, by and large, will go through their life where on average over a period of time, their income will rise, their net worth will rise, and are they any happier for it? Maybe a little bit, but not nearly what you imagined you would be.
And for most people, if I said, if your net worth doubled in real terms, if your real net worth doubled from here, how would you feel about it? Most people would say, I would feel amazed. That would be incredible. That would be such a windfall. I would be happier. We’d go on better vacations. We’d live in a better house. But when that actually happens to people, by and large, they’re not. They’re not. And everybody knows this. What I just said is not even controversial. But the reason it takes place is because people’s expectations grow just as fast, if not faster than their income. And so, I think the only way that we can fight against that and use our money to live a better life is to put just as much effort into keeping our expectations low as goes into growing our net worth and growing our incomes.
Benz: You recently told five short stories about people who thought they wanted something, only to realize that they didn’t want that thing, or it didn’t live up to their original expectations. The people you profile range from David Cassidy, the teen heartthrob, to astronauts, and a blind woman whose vision was restored. Why did you write that, and what pertinence does it have to the way we set our goals?
Housel: Those to me are some of the scariest stories I think that I come across because most people have some aspect of dream in their life where they’re like, oh, if I could get X, Y, and Z, I’d be happier. And X, Y, and Z is different for everyone. Maybe it’s a higher income. Maybe it’s if I got this career promotion. Maybe it’s if my kids achieve this, or if my spouse does this—whatever your aspirations are. And there are so many examples where people who achieve those enormous goals and they feel nothing for it or they’re even less happy than they were before.
One of the stories that I mentioned in this article that you just brought up was this woman who was blind her entire life. She had zero vision her entire life. I think she was injured in childhood. So, her entire adult life she can’t see anything. She has this experimental surgery to replace her corneas I think it was, and it worked. It was a miraculous success. And after the surgery, she could see. She had a full field of vision. And you would think that is the most incredible, should be the happiest thing that could ever happen to someone. They’re blind their entire life and all of a sudden, they wake up one day and boom, you can see the world. That’s amazing. And this woman, who it had happened to, was not happy, she was not ecstatic. It was completely overwhelming. And she told the doctor a few weeks after the surgery that she wished she could go back, that she was very accustomed to her world as a blind woman. And because she was disabled, she never had a job, she never had a career, she lived off of government assistance and she became accustomed to that. And now that she regained her vision, the government and the rest of the society expected her to go get a job and that was so overwhelming for her.
There’s another story that’s very similar to that about a guy who has this exact same situation. He was blind his entire life, regained his vision almost completely when he was in his 40s. And it was so overwhelming. The world was so overwhelming to him that a lot of times he walked around with a blindfold on. He couldn’t handle it. He couldn’t handle the stimulation. So, those experiences where people win the proverbial lottery of whatever the lottery winnings that they wanted were—whether it’s money or regaining your vision, whatever it is—and not only are they not happier, they’re overwhelmed with it, that’s pretty fascinating. If people like that are humbled by achieving their dreams, then what are my much lower dreams of what I want in my life—it’s not regaining vision. It’s my dreams of having a marginally higher net worth. If people who win the lottery are not any happier, what are my little dreams going to do for my happiness? And it’s so humbling to read and think about those stories. And to me, it gets back to the previous point about keeping your expectations in check. And it’s like, yes, I have aspirations and I have dreams. But if I don’t keep my expectations and how those dreams are actually going to make me happier—if my expectations for those are not low, I’m going to be so incredibly disappointed throughout my life.
Ptak: I wanted to ask you, do you think there’s a contradiction in the way that capitalism can often reward qualities like boldness, innovation, and action while successful investing might punish those very same qualities?
Housel: I don’t know if there is much of a contradiction there because I think both in business and investing, the same qualities that you might need to become very successful are also the same qualities that will bankrupt you. It’s taking a huge risk, and it’s very difficult for us to distinguish which was which. The line between bold and reckless is so thin, and we often are totally blind to that line, or if we can see it, it’s only like barely visible in hindsight. So, take a lot of the most successful entrepreneurs. They took risks that could have, if not, should have bankrupted them. Every single one of them, without exception, took a risk that should have bankrupted them. And the fact that they ended up on the successful side of the risk that they took, should not blind us to how big of a risk they took to begin with.
And I think it’s the same in investing. And a lot of the most successful investors, not ordinary investors, but the multi-billionaire investors, they too, by and large—maybe not every single one of them, maybe it’s a little bit different—but the majority of them took risks that could have sent them on the other side of the risk/reward spectrum. And it’s so difficult for us to parse that out, and it’s so easy for us to look at the billionaire hedge fund manager and try to emulate what they did. And I think the reason that it is so difficult, if not impossible to emulate those big successes, is because it’s hard to accept or hard to measure that some of those people took a risk that was a 1,000 to 1, a million to 1 and they ended up on the good side of that bet, whereas everyone else who is trying to emulate that is very likely going to end up on the bad side of that bet. That’s a difficult thing.
I think what’s important is that when you look up to a successful CEO or a successful investor that you try to emulate things that are capable of being repeated. So, if I look up to Warren Buffett, by and large, I cannot emulate his stock-picking skill. I obviously cannot emulate the era in which he grew up in. I can’t emulate any of those things. Can I try to replicate or emulate his time horizon, the fact that he’s been a good investor for 80 years? That might be something that I have a chance of copying. So, it’s important that when you’re looking up at these people and looking to these role models, looking for things that you can learn from them, you are looking for things that you have a fighting chance of being replicable, and by and large, we don’t, because the huge majority of people who look up to Warren Buffett say, how does he value companies, how does he look for management teams, how does he pick stocks? And maybe there are some things at the margins that are very important to learn from that. I don’t want to poo-poo it completely. But, by and large, a lot of the things that made Warren Buffett successful are not replicable to 99.99% of people, but time horizon, temperament, something like that is, and those are the lessons that we should take away from those people.
Benz: Sticking with lessons, you’ve written about Walt Disney and investor Ben Graham’s successes in business and investing. What do those successes have to teach us about probabilities and pay offs?
Housel: Both Walt Disney and Ben Graham—and by the way, virtually every other successful entrepreneur you can think of—owe the huge majority of their success to a tiny number of the actions that they took. So, for Walt Disney, if you go back into, I think it was the 1930s, he had been a cartoonist for years at that point, and he had made dozens of cartoons. And a lot of them people liked, but all of them lost money. And Walt Disney was absolutely an abysmal businessman and terrible with money. And there was a point where his cartoon shop was on the verge of bankruptcy. And then, Snow White and the Seven Dwarfs came out and completely changed everything, and he made so much money from Snow White and the Seven Dwarfs that it made up for all of the losses over the previous 20 years. It let him build this huge new studio, and it completely changed—everything that we know that Disney became happened because of Snow White. If it weren’t for Snow White, Disney would have gone bankrupt and maybe he would have been like a starving artist the rest of his life, whatever it would have been, everything is Snow White.
And then, Ben Graham, one of the most successful investors of all time. Not only is he Warren Buffett’s mentor, but a very successful value investor himself. It’s so interesting. The last chapter of The Intelligent Investor, which I’m sure virtually no one has read. It’s a very long book. No one gets to the last chapter. It’s actually the postscript in this book. He talks about this investor who broke all of his rules. All of the rules that he laid out, he broke all the rules, and he owes all of his success to one investment. And if you remove this one investment from that investor’s career performance, if you just take this one stock out, the career performance drops to average. The one stock that he’s talking about is GEICO and the investor is himself, Ben Graham.
If you look at Ben Graham’s lifetime performance, if you remove one investment that he made in GEICO, his performance is average. And by the way, buying GEICO broke every single rule that Ben Graham put in his own book. And so, that is so fascinating. He writes this incredible book that all of us have read and so many people consider the Bible of investing. And the only reason that Ben Graham was successful was because he ignored all of that advice and did this thing that he never should have done. The rules that he broke was he put a huge percentage of his net worth into GEICO and at the time the valuation that it was at, he broke all the rules that Ben Graham laid out in his book, but that’s the only reason he’s successful. And that too is so humbling. And it’s not to say that there’s nothing to learn from The Intelligent Investor or the rules that he laid out, of course there are. There are some great lessons in there.
But you look at what made these people successful and, by and large, it’s a tiny fraction of the actions that they took, and it’s the same thing for Amazon, and Apple, and Google. All these companies derive the huge majority of their success from a tiny fraction of the products that they experimented with. Amazon has experimented with every single product imaginable from phones—they tried to build everything—the whole company’s success is two products: it’s Prime and AWS. Those are the two products that completely made Amazon what it is. Apple too has tried so many different products over the years, but virtually all of the company’s success is iPhone, that’s it. That’s what made it. It’s this one product that they made. So, I think whenever you view either business or investing success, it’s so easy to underestimate how much success is owed to 1% of the actions that you take.
Ptak: In a related vein, something that you’ve written about at some length is the way people tend to greatly underrate circumstance and luck and how it envelops our lives. What do you think are examples of financial practices and behaviors that would change if people were more cognizant of the role luck and circumstance play in their lives?
Housel: I think it’s so difficult because everybody, including myself, everybody is a prisoner to their own past, and their view of the world of how the world works, how the economy works, how the stock market works is so heavily influenced by just what they have experienced in life, particularly what they experienced early in life that stuck with them. Built a foundation of knowledge that stuck with them, and so much of that is just the dumb luck of where and when you were born and what parents you were born to. Obviously, things that nobody has any control over, no one has any influence over. And you can try to be open-minded and empathetic to other people’s experiences, but nothing is more persuasive than what you’ve experienced firsthand.
And since I have experienced something firsthand that the two of you have not, and vice versa, and should be the same for everybody, everyone is a different experience. We all have a different view of how the world works, and therefore we all have a different view of how we should invest our money, how we should save our money. And this gets back to what I said earlier about most financial debates are not people disagreeing with each other, it’s people who have lived different life talking over one another. That’s always what it is. I honestly don’t think that there is a formula for how we can fix that. I think it’s always going to be true. It always has been true. I think if there’s any way to wrap your head around the risk of it, it’s that how the world works is completely different from how every single person thinks it works, and therefore, you should not be surprised when you are surprised. Nobody has a good grasp on how exactly the economy works or how the stock market works. They all think they do because they are viewing it through the lens of their own experiences with the economy or the stock market. But this is why the whole history of economics and investing is surprise after surprise after surprise, because there are 7 billion other people on the planet who are taking actions and making decisions and have views about how the economy works that would be completely foreign to you and I and everybody else. Everyone is blind to the view that everyone else has. This is especially true if you’re talking about different generations or people from different countries.
Before COVID, Australia had not had a recession in 30 years. They went a full generation with no economic decline. And if you spoke to an Australian before COVID, the idea of a recession was like a theoretical possibility to them. It was like they knew it could happen, but it was just not really a thing. Whereas in America, we have a recession every seven years that like fundamentally resets society. Recessions are the fundamental driver of how everything works in this economy. And obviously, Australians are just as smart as us. They have the same education as us, the same data as us, but a completely different view based off of their own experiences. And then, so a good question that everyone should ask is what would I think about the world, about money, and politics, and relationships, if I were born in a different era or born in a different country? And I think almost by definition you can’t answer that question. But it’s fascinating to ponder, because if your answer to that question is nothing, I would think the same things, you are lying to yourself and you’re blind to how this whole process works of being anchored to your past, if not a prisoner to your past.
Benz: Sticking with that idea of hard questions we should be asking ourselves, you recently wrote “There’s an optimal net worth for most people, after which not only does happiness stop increasing, but more money becomes a social and psychological liability. The number is different for everyone but is probably lower than most people think.” So, what are the best ways for someone to figure out how much is enough for them?
Housel: That’s a great question—what is the formula of figuring out what is enough? It’s different for everyone. Here’s what I think is important. The concept of enough does not mean that you have no aspirations for more. I think my wife and I roughly have enough money, but I still want more, and that’s not a contradiction at all. I think once you get to enough, all it means is that your expectations pretty much flat line even if your net worth is rising. So, I want my net worth to rise, but I feel like it’s all just surplus now. It’s not going to make that much of a tangible difference in how we live and whatnot.
And so, I think, the concept of enough is just being cognizant that you need to keep your expectations in check relative to your income and whatnot. That number is going to be so different for everyone. And the point that I really wanted to make with that little line that you started this with is, there’s this really fascinating example that I read recently from Will Smith, the actor. And he said, when he was poor and depressed, he always used to tell himself, “If only I had more money, my depression would go away.” And it gave him a sense of hope. But then, he said, when he was rich and depressed, he no longer had that hope. He could no longer tell himself, “Oh, if only I had more money, everything would be OK.” And it was almost like having money made him more depressed because it removed his hope. That’s I think one example of what is so easy to overlook about what having more money can and cannot do for you.
And I think the idea of an optimal net worth is for a lot of people, once they hit a certain number, whatever it might be—the number is definitely going to be different for different people—but whatever that number is, they realize that more money, not only does not make them happier, it might be like the inverted U ,where it starts to decrease their happiness when they realize that having more money is not going to solve any of their problems. And by the way, now that people realize you have money, people are going to come out of the woodwork asking for money, asking for handouts, asking for you, expecting you to pay for dinner, expecting a nicer birthday present, and so on, in a way that becomes a social liability, and you think your money is an asset, but at some point, it can become a social liability.
The biggest point this happens for higher income people is when they have so much money that they say how can I raise kids that are still ambitious? And a lot of times the reason that the parents were successful is because they came from humble backgrounds that gave them this chip on their shoulder, that gave them this ambition to start their business, whatever it was, and now they worry, they rightly worry that their kids are going to grow up to be spoiled on ambitious kids. And then, to me the perfect way to look at that is the parents’ net worth is actually a social liability on the family. It’s taking away from a benefit that they could give their children. So, whatever that number is, it’s just the knee-jerk reaction is always to view more money as an asset. And it is in a lot of ways, but there’s also this liability component and the liability of money increases with your net worth. And so, I think there’s people like Elon Musk and Jeff Bezos who, in my view, they are probably worse off socially and psychologically at $200 billion of net worth than they were at $10 billion of net worth. All that happened when they went from $10 billion to $200 billion is that they can get in trouble much easier now. And people have much higher expectations, and there’s this social liability hanging over them that they did not have when their net worth was 90% lower.
Ptak: I think you’ve also observed that massive success in one field or subject area often doesn’t translate to others. Maybe a good example of this phenomenon in popular culture is Michael Jordan, the best basketball player of all time, but not a very good NBA franchise owner from what we’ve seen so far. Why do you think this is? And what are the lessons it imparts?
Housel: The most common examples are doctors and engineers who by definition are very intelligent people. That’s how they got to where they are. And then, there is a very common assumption that because they know they are intelligent, that they therefore should be good investors. And they go out and they try to day trade, they try to pick their own stocks, and the majority of them are very humbled by that. But because they go into it thinking I’m an intelligent person, I can figure this out. And by the way, if I can perform open heart surgery, how hard is it going to be to pick good stocks? That’s the knee-jerk assumption, and it’s completely wrong. It’s obviously completely wrong. So, I think understanding the boundaries of your intelligence is very important.
And if we flip that the other way, and if you took a very successful hedge fund manager, and that hedge fund manager said, I can perform my own surgery on myself or on my children, it’s ridiculous. No, you can’t. Of course, you can’t. It’s a completely different skill. But in investing, we’re often blind to that, because anyone can open up an E*TRADE account and start trading today. It’s very easy. Whereas performing surgery is not something that you can do. That’s impossible. So, because the barriers to entry are low at investing and anybody can do it, I think the smarter you are, the more likely you are to trip up on yourselves. And I think it can be very difficult for someone who is very educated, very credentialed, very intelligent in other parts of their career—they’re a doctor or an engineer—to be able to have the humility to say, “I have no idea what I’m doing. I need to go to a financial advisor and pay them to make these decisions for me.” They want to think that they can do it themselves. So, that’s a very common thing is just not knowing the boundaries of your intelligence that we see so often in this field.
Benz: You’ve said that the constant in history isn’t the events or actors involved but rather the behaviors. And so, if we want to accurately forecast the future, you think it’s those behaviors we should be focusing on. Can you talk about that in the context of Benjamin Roth’s Depression-era diaries?
Housel: Benjamin Roth was a lawyer back in the 1930s in Youngstown, Ohio, during The Great Depression, and he was a bankruptcy attorney. But he was just a very astute and observant individual, just a very introspective, a deep thinker, and he kept a very detailed diary during The Great Depression. And since he was a bankruptcy attorney, he had an intimate view of how people in Youngstown, Ohio, were dealing with the depression, and by and large, they were dealing with it very poorly. Everyone was going bankrupt, and the whole economy was melting down. And he kept this incredible diary of just what people were thinking, his own observations about the economy, other people’s observations, other people’s psychology, his own psychology, and then his son published it in 2010. The book is called The Great Depression: A Diary by Benjamin Roth. And I think it’s unintentionally one of the best economic books ever written, and the reason why is because there’s no hindsight bias in it. There are so many books written about The Great Depression and every single one of them was written after The Great Depression, and there’s hindsight bias. You know how the story ends. Whereas Benjamin Roth, when he was writing his diary in 1932, he has no idea what’s going to happen next. So, it’s a very interesting look in that.
But to your point, one of the things I think is so interesting about it, is that when he was writing about The Great Depression of 1931-32, the things that he is observing and the behaviors he is observing seemed like they could have been straight out of the newspaper from 2008. How people reacted to The Great Depression, what they saw, what they predicted would happen next is exactly what they did in 2008. And then, there’s a later chapter where Benjamin Roth says, you know what’s interesting about 1932? It reminds me exactly of 1907, which reminds me exactly of 1878 or whatever it was. And he makes his point that every financial crisis is the same. And then, when I compared 2008 to what he went through, it’s exactly the same. Obviously, the details of those recessions were completely different. Technologies evolved; the economy evolved. But the behaviors of how people reacted to those declines is the same today as it was 150 years ago, and it will be the same 150 years from now. Those behaviors of greed and fear don’t change at all, and how people extrapolate good times and how they extrapolate bad times that will never change no matter how sophisticated we get, no matter how the economy evolves, and it’s just this innate part of how humans deal with uncertainty that would never go away. And so, if you can study and focus on those things that never change, I think you have a much better ability of understanding the future rather than fooling yourself that you can predict what is going to change. Let’s just put all of our weight on the things that we know with certainty are going to be part of how people respond to markets and how they respond to the economy that we know is going to happen in the future. I just want to put all my weight into those things rather than pretending that I can forecast what’s going to change.
Ptak: And if I’m not mistaken, that’s going to be the topic of your upcoming book, is it not?
Housel: That’s right, yes.
Ptak: I wanted to ask you about something else that you’ve written, which is that most people are good at learning facts, but not great at learning rules, which are the broad lessons from events that will apply to future events. What are the lessons we’ll learn from the pandemic and how do you think that will apply in the future?
Housel: To me, the biggest lesson—he said this well before the pandemic—but there’s this quote from Daniel Kahneman, that I really liked. He said—I’m paraphrasing this—but he said, when you are surprised in life, the correct takeaway is that the world is surprising. It’s not to learn from the surprise. So, for the pandemic, it’s not to say, now I understand how viral pandemics work; now I understand how mRNA technology works. The correct lesson from COVID is that there are things that can completely upend the economy that you and I are not even thinking about right now, because I guarantee you, if we recorded this in December of 2019, you and I, and anyone else—no one else would have brought up viral pandemic as the biggest economic risk.
So, the correct takeaway is that there are things that are surprising that no one’s talking about today. That’s the big lesson. The idea for that quote I think I got from Jason Zweig at The Wall Street Journal where he said, it’s not that investors don’t learn from their mistakes, it’s that they learn too precise a lesson. So, Jason brings up this idea that after the dotcom bust the lesson that a lot of investors learned was don’t buy tech stocks. And so, they learned that lesson, and then they immediately started flipping condos in Miami. Whereas the correct lesson that they should have learned was a much higher level, was like don’t ignore valuation—maybe that was the lesson. But they ignored that lesson for this hyper-specific of don’t buy Pets.com. That was the lesson that they took away. So, there’s always this hyper-specific learning that takes place in markets, whereas I think what you want is the super-high, broad, 30,000-foot lessons that will be applicable to the next market cycle.
Benz: There’s a tension between pleasing an audience and being captive to it. Having written one megahit book already, I would have to think that there’s a temptation to try to top that, which might make you a little bit more prone to playing to your audience. So, how do you avoid falling into that trap?
Housel: I would be lying if I said that were not the case. I try to push back on it as much as I can. Two ways: A) keeping my expectations in check for the next book. I’ve absolutely no expectation that it will sell anywhere near as well as Psychology of Money did. I try to remind myself of that every day. The other thing that I’ve always tried to do with writing is what I call selfish writing, which is, I write for an audience of one, which is me. It’s intentionally very selfish. And I write things that I think are interesting. And frankly, I don’t think for one second if you, the reader, are interested in this, or if you, the reader, will like this. I’m only thinking about what I like. I feel like in the rest of my life I try to be a pretty selfless person, but for writing, I am purely selfish. The reason I do that is because when you write things that you yourself find interesting, you’re going to do your best work rather than trying to pander to your audience.
I think for writing and all forms of communication, the advice of “know your audience,” it seems like good advice. It very quickly turns to pander to your audience, which is terrible. It’s a really dangerous trap to fall into. So, I just try to write things that I think are interesting, and then I take a leap of faith that if I think they’re interesting, some other people might as well. That’s the leap of faith that gets taken. So, that’s how I also try to fight back from it is rather than trying to pander to what other people might like, I only think about myself when I’m writing these and whether I think that last sentence that I wrote is interesting to me. That’s it.
Ptak: Well keep doing it. We’ll be lining up for the next book. I had one more question for you, which is about a skill you probably didn’t imagine yourself having to hone, which is saying no to requests. You’re probably now a level of popularity and demand though where that’s necessary. Has your own personal experience of having to set limits yielded any insights into why success can sometimes be difficult to sustain?
Housel: I have—I will not say who it was—but 10 years ago, maybe 12 years ago, I emailed an author that I really admired, and I said, hey, I really admire your work. If you could spare 10 minutes on the phone for me to just to pick your brain, just 10 minutes, it would mean the world to me. And the author did not respond to my email, and it really hurt at the time. I remember just being kind of crushed that, like, this person who I looked up to so much couldn’t even take the time to respond to me and say no. And I still remember it. I still remember the feeling a decade later. And now, when sometimes that is flipped and I’m on the other side of that email, I realize why it took place that when you are bombarded with emails, even if they are nice emails, it’s like you can’t always get back. And so, now, I both feel guilty when I say no or when if I don’t respond. I do feel guilty because I remember how I felt, but I also understand why it took place. So, it gets so important. The other thing is, if you were to say yes to everything when the requests go up, you suddenly have no time to read and think and write and do the things that may have brought you an audience to begin with. So, if I want to keep this audience happy, then I need to be able to say no to all the requests so that I can go out and keep doing the work that I enjoy doing that hopefully brought the audience there to begin with. It’s a really tough thing, but it’s definitely been eye-opening to me.
Ptak: Well, thank you for saying yes to us. You’re phenomenal. Thank you so much for coming on The Long View and sharing your wisdom. It’s really been awesome.
Housel: Thanks for having me, guys. This has been fun. Thank you.
Benz: Thanks so much, Morgan.
Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.
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Benz: And @Christine_Benz.
Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.
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