The Psychology of Money with Morgan Housel #265

Morgan Housel has a degree in economics and started writing about money and investing 13 years ago. He's a partner at The Collaborative Fund which is a venture capital firm that invests in companies that are trying to make the world a better place. Morgan is also a former columnist at The Motley Fool and the Wall Street Journal but his work has also been published in Time, USA Today, Business Insider. He's truly an expert on behavioral finance and he recently published his book, "The Psychology of Money: Timeless lessons on wealth, greed, and happiness." This episode is all about the behavioral aspects of our money, because as Morgan explains- there is a massive gap between knowing the right things to do with our money, and doing the right things with our money.

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Episode Transcript

Speaker 1 (00:00):
Welcome to How the Money, Um Joel and I am
Matt and today we're talking the Psychology of Money with
Morgan Household. Our guest today is Morgan Household. Morgan has

(00:28):
a degree in economics and started writing about investing thirteen
years ago. He is a partner at the Collaborative Fund,
which is a venture capital firm that invests in companies
that are trying to make the world a better place.
Morgan is also a former columnist at The Motley Fool
and The Wall Street Journal, but his work has also
been published in Time, USA, Today, Business Insider, and he's

(00:49):
recently published his book The Psychology of Money, Timeless Lessons
on Wealth, Greed, and Happiness. We're excited to talk about that,
so let's go ahead and dive into our discussion today. Morgan,
thank you so much for runing us on a podcast.
Thanks so much for having me so Morgan, Matt and
I were We love craft beer. We're drinking a craft
beer right now as we speak, and it's something that's
important to us that we value now while saving an

(01:10):
investing well for the future. So do you have something
like that in your life that fits that bill for you? Look,
there's no craft beer equivalent, because craft beer is something
that you would drink on an a regular basis. But
let me tell you about something that I did fairly
recently that I would put into this bucket of a
splurge that made me so happy. Uh. We bought a
new mattress. This sounds silly, this sounds trivial. Completely changed

(01:32):
our life and is the perfect equivalent of the mattress
that we had before. We had had for over ten years,
and I thought, look, it's fine, it's it's fine. It's
a perfectly fine mattress. There's nothing wrong with that. We
sleep just find no issue until we finally we have
young kids. They wind up in our bed too often
at night. So we said, we need to move from
a queen to a king size bed. We're gonna get
went out and got a nice king Cannot tell you

(01:54):
how much of a difference it makes, life changing, And
I kicked myself for not doing it sooner. It necessarily
that we didn't do it sooner because it was a cost,
because it was too expensive. It was just kind of like, oh,
we have this one that works. Still problem until we
went out and splurged, and then it was what have
I been missing for the last ten years. I'm so
glad I did it. Can you spend a third of
your life there? Right? So it is it is something

(02:14):
worth putting some money into, right right When when when
you phrase it that way, when it's a third of
your life, it's you you should be spending tens of
thousands of dollars on the match. But yeah, I'm glad
we don't have to. But yeah, it wouldn't be unreasonable
time to start a new company. Basically moved to like
one of those foam mattresses as well, and didn't like
you kind of swapped it out because you hurt your
back on it or something. Was the deal with that?

(02:35):
I bought like a hundred dollar foam mattress and and
we don't you don't want to go that cheap? Yeah,
I end up putting my back like the first day,
sold it on Facebook Marketplace and made my money back,
and then got one from Costco. So it's it's a
tough thing. It's like it's like you said, it's well,
spent a third of our lesson there, but we don't
spend that much time thinking about it. And I'm even
a person I travel a lot pre COVID. I would
travel all the time, so I slept in hundreds of
hotels beds, and I never really noticed that much of

(02:56):
a difference, maybe because I only sleep on it for
a night or two. But when it's your sleeping on
a bad mattress or just an okay mattress night after
night after night for years, it really starts to add up. Yeah,
for sure. Here you well so kind of piggybacking on
our physical bodies. Yeah, you've mentioned before that you walk
a good bit, you know, like you walk, you do
a good bit of thinking that way, and that's a
huge part of your job as a writer. Do you

(03:18):
find that kind of cleanse your head or you know,
like like do you do you do this on a
regular basis? Or maybe do you you know, step outside
and go for a walk, like when maybe you're stuck
on a topic or something like that. How does that
how does that actually play out in your life? It's
definitely regular. It's at least twice a day one night.
I would say it's at least once a day, often too,
sometimes three times a day that I get out and
a walk. And for me, and it's not just me,

(03:39):
there's actually a lot of scientific research on this, legitimate research.
It shows when people walk their brain works differently, because
when you're sitting at your desk, your brainking kind of
shut off because there's no threats in front of you.
You're not going to trip over a curb, you don't
have to watch out for the cars coming. Your brain
just kind of shuts down. And therefore the amount of
just getting your getting the gears moving in your head
for creative thinking thinking about a topic also kind of

(04:00):
slows down with it. Whereas when you're walking, you're just engaged.
And they said, you're you're watching out for the traffic,
you're listening to the birds, you're smelling the wind, you're
making sure you don't trip, you're making sure you're looking
at the bikes coming towards you, etcetera. And it's just
it's a level of engagement that keeps you going. So
for me as a writer, this has always been the
case for me, but I think it's true for a
lot of people that I do the majority of my
quote unquote writing when i'm walking, and I'll take notes.

(04:23):
Sometimes I'll send myself emails when i'm writing, and a
lot of times if I can't figure something out in
an article or or or or when I was writing
the book, I would go for a walk for ten
fifteen minute walk not that long, and figure it out,
and that's when it starts to come. And that's when
it comes. So for me, it's not just a physical thing.
I mean, that's part of it. I'm so antsy anyways
that I have a hard time sitting down for long

(04:44):
just because I get I get fidgety, so I gotta
get up a move. But it's also just a good
mental exercise as well. It's physical and mental exercise. So
that's why I love doing and recommend more people try it.
Are you one of those weirdoes? Account steps are now? No?
I mean I haven't, you know, accounts in your phone
automatically and once in a while I'll go back and look,
but I'm not obsessed with it now. Okay, all right,
Well let's talk about your book. Morgan. In on why

(05:06):
you chose to write the book, you said, the biggest
realization I've had about investing is that it is not
the study of finance, is the study of people, how
people behave with money. The gap that we see between
knowledge and results doesn't exist. In any other field. So
how you behave is more important than what you know.
Why is that? I think what's important is that, Look,
you can be the smartest financial mind in the world.

(05:27):
You can have a PhD and finance from Harvard. You
can know all the equations, all the statistics, all the
charts you can come across as how we generally think
of what intelligence is. You can check all those boxes.
But if you do not have a good relationship with
greed and fear, or you are not able to take
a true long term mindset, if you or if you
lose your cool when the world is falling apart, like

(05:48):
in March of this year when when COVID you know,
really came in came into our minds, or in two
thousand eight during the financial crisis. If you can't keep
your cruel doing those periods, then none of the analytical
intelligence that you had matters. So the behavioral part is
important because it can neutralize all of the intelligence that
you have. It sits above it. So if there's like
a pyramid a hierarchy of financial skills, behavior is the

(06:11):
base of the pyramid, and nothing above that matters until
you've mastered it. UH and I think there aren't many
other fields that are like that. There are a lot
of fields like look, if you're if you're an engineer
or something, then it's just the analytical intelligence that you have.
But engineering is not emotional in the way that finances.
I think if there's one field that is a that
is somewhat equivalent to uh to finance in that in

(06:34):
that regard, it's medicine and health where you can be Look,
I I used to know this doctor many years ago
who was a doctor, very educated uh knew a lot
of about medicine, of course, like he's a doctor, and
he was extremely overweight and he smoked. And I think
that's the equivalent of people who can know everything about finance,
but if their behaviors get in the way, it doesn't matter.
So I think that's I think medicine is in that

(06:55):
as well. And I mean it's even to the extent
where if you are you know, a Harvard train cardiologists,
you are so good at what you do, but you
have a terrible bedside manner to the extent that your
patients don't trust you or they don't come back to you.
Then again, your education, your intelligence doesn't necessarily matter if
you haven't mastered the behavioral aspect of your field. So
that's true in finance as well. Yeah, so I mean

(07:17):
in addition to to that, you know, like, how do
how do you feel that our own history how how
does that come to bear on our behavior and how
it is that we handle our money. I think what's
important about our history is that we all have different
backgrounds everyone, particularly from generation to generation. People who grew
up during the Great Depression versus people who you know,
we're in Europe during World War Two versus the millennials

(07:39):
who grew up with kind of you know, just experiencing
not eleven. I remember September eleventh was just before my
eighteenth birthday. Uh. And in the United States, when you
when you're a male, you turn eighteen, you are you
are required to register for the draft, and there's not
actually a draft into it, but you have to. They
send you a postcard and you sign it and return it.
And that was like a week after September eleventh, and
I remember that was such a Holy Craft moment or

(08:00):
me anyways, So like the generational differences of where your
life aligns with what the world is doing is really important,
and it's different from generation to generations, different from country
to country, and also just personality wise, my financial goals
and what's important to me might be completely different than
what's important to you and someone else. So even if
you and I are just as informed as one another

(08:21):
and are just as smart as one another, we might
come to vastly different conclusions based because we want something
different out of life. What we want for our families
and are what our goals are different. Which is just
to say there's no one right answer for most financial topics. Uh,
Look in physics and in math there is one right answer,
it's a precise answer. But in finance, I think you
know to to to make different different comparisons to other fields.

(08:44):
It might be something like dating or or your spouse,
where like look what some people want out of a spouse,
what is appealing and attractive them is completely different from
other people. There's no one answer for this is what
makes a good husband or a good wife, because there
are there are common denominators, but it's different for every one.
And I think money is the same that people, and
I think the screws a lot of people up that
people are always looking for the right answer, and finance

(09:07):
they're saying, what is the rational thing that I should
do with my money? What does the textbook tell me
I should do? And I think the answer to that
question is no, that's not how you should think about it.
You should do what you want to do with it.
Of course, there are things you should know and you
should be aware of. You know where you're likely to
go astray and what you're likely to to regret in
the future. But everyone does a little bit things differently
with their money. They spend their money differently, they say differently,

(09:29):
they invest differently because they have different goals. Yeah, and
in our own history can have a major impact on
how we view risk as well. Right, And that's a
topic that you cover a lot in the book. You
discuss the in chapter two you talk about Bill Gates
and his best friend Kent and how they're different outcomes
are striking. So can you discuss the role of risk
and luck in their lives and then maybe how we

(09:50):
view and handle our money. So it's interesting about about
Bill Gates, and this is uh this is somewhat well
known because Bill has has talked about this himself several times.
Bill gets onto one of the only schools in the world,
one of the only high schools in the world that
had a computer, and that was his introduction to computers. Uh.
It was the Lakeside School in Seattle. That was where
he found computers. That's where he met Paul Allen. They
went on to solve to to found Microsoft. Uh. And

(10:12):
Bill Gates has said, in no uncertain terms, he said, look,
if there was no Lakeside, there would be no Microsoft.
And now, look, is Bill Gates hard working? Is he
a genius? Is he for looking? Was he willing to
take risk? Of course all of those? But was Bill
Gates ridiculously extraordinarily lucky, Yes, because he went to one
of the only high schools in the world that had
a computer. Now during that time. To show the other

(10:34):
side of that equation, when Bill was at Lakeside, his
best friend was a guy named Kent, And Kent, by
Bill's reckoning, was smarter than Bill, more technologically minded, more
business minded. He was like Bill, but just a little
bit better. This is this is all according to Bill
and Kent. And Bill always assumed that throughout high school
they were inseparable friends, that they would go on to

(10:54):
college together and they would start a company together. So
Kent easily could have been the co founder of Mike
or soft and he may have been the CEO Ken
may have. It could have been that Bill Gates was
kind of second fiddle to Ken's uh to Ken's company.
But Ken died in a mountaineering accident in uh when
when when he was eighteen or or or or nineteen
years old. Uh. So here you have. Bill had the

(11:16):
good side of luck. He got very lucky by going
to lakeside and discovering computers. Ken had the really sad, tragic,
unfortunate side of risk that he was never able to
achieve his dreams because he had this freak accident uh
during his teenage years. Which is just to say that
I think luck and risk are kind of the opposite
sides of the exact same coin. They're both this idea
that there are things that happened in the world that

(11:36):
are outside of our control that have a bigger influence
on outcomes than anything that we intentionally do. That's what
luck and risk both are. And we think of them
as completely different things like luck and risk that we
we we really wrench mentioned those in the same sentence,
But I think they're the exact same force, just in
the opposite direction. Uh. And what's important about this is
that as investors for people are dealing with their money,

(11:58):
we are very clear, keenly aware of risk. We talk
about risk all the time. Risk is like the central
topic in investing. And and if you're a professional investor,
sometimes they hire risk managers, and if you're a portfolio manager,
you adjust your returns for risk risk adjusted returns. But
we never talked about luck in the same way. No
one ever reports, no investor reports luck adjusted returns. No

(12:19):
one is ever going to hire a luck manager. And
a lot of that is because look, if I claim
that you were just lucky, I look like a jerk.
If if if if if I were to say, hey,
you're really successful, but you just gotten lucky, I look cynical.
I look mean. So no one wants to do that.
Few people want to do that. Or if I did
something successful myself and I look in the mirror and say,

(12:39):
well I just got lucky, well that's hard for me
to swallow as well. I don't want to accept that.
So even though we know that luck is present in
the world and it's a big impact in the world,
has a huge impact on results, we tend to sweep
in under the rug because it's not very comfortable to
talk about, either for other people or ourselves. And so
I think we just have to be a little bit
more careful when we are look finding role models in

(13:01):
the world, particularly in finance, and saying, well, that person
got a lot of success, so I should try to
do what they did, And a lot of times that
is a recipe for disappointment because you cannot replicate what
someone else did if that person had any element of
luck in their paths and success. And the more successful
someone is, the higher the chances that luck played a

(13:22):
significant role in their outcome. And again it's after rate.
It's not to say that people who are successful are
not hard working, or are not you know, didn't make
a right decision, didn't take a risk, it's all of
those things. But there is but there is also an
element of luck that is easy to ignore. Yeah, it's
a combination of the two, and it's it's something that
we have to hold, you know. At the same time,

(13:42):
I think it definitely takes a kind of a humble
nature or kind of posture in order to, you know,
to accept that we are lucky in our lives. But
you know, like when it comes to investing, like, how
do we come back this this problem of like risk
perception in our lives. You know, there is a lot
of volatility recently in the market, but we've so recently
seen in an almost unending tenure bowl market, and so

(14:03):
how can we put those into perspective in order to
make better investing decisions. One of the things that I
think is really important when we're thinking about risk in
the economy and from the stock market is rather than
having a forecast of what you think it's going to happen,
is going to think that's happened next, It's much better
to just have expectations of what might happen next. Those
might seem like similar things, but let me explain the difference.

(14:24):
If I were to say, hypothetically, the next recession is
going to happen in two three, that's a forecast, very
specific forecast. But if I were to say, in general,
there tend to be about two or three recessions per decade,
and we don't know when they're going to come, but
in general we should expect there to be two or
three per decade, that's an expectation very different from the forecast.
Because I don't know when it's going to come. I

(14:45):
don't know where it's going to occur. I don't know
how big it's going to be. It's just part of
my baseline expectation of what to expect. It's kind of
how people like, if you live in California, this is
how they think about earthquakes. Everyone in California knows that
there will be more earthquakes in the future. They know
that some of them will be little, some of them
will be huge. But no one knows when it's gonna come.
No one tries to forecast. No one says, oh, there's
gonna be a there's gonna be a big earthquake. Uh,

(15:09):
you know, in on December fifteenth. You just can't do that.
So so rather than that, the people in California just
expect there to be earthquakes, and they build their homes
expecting them to occur at any point. Their emergency crews
trained for them to occur at any point. And I
think we should think about recessions and bear markets and
problems in our own financial lives in the same way,
rather than trying to predict it, just expecting as a

(15:31):
baseline scenario of what might come. Your way, and then
that moves you towards rather than, you know, trying to
predict the next recession so that you can sell your
investments ahead of time and get out of stock so
you avoid the decline, it pushes you more towards saying,
how can I just be durable and rather than trying
to avoid it, how can I just make sure that
I can endure whatever comes my way? And I think
that is just such a better way to deal with

(15:52):
uncertainty in the world, rather than fooling ourselves again and
again and again, like we do that we are able
to predict what's gonna happen next, and that we can
do something about it and get out before and get
back in read at the bottom, which is what we've
been fooling ourselves that we can do for ages. This
is not anything new. We've always been doing this, despite
any significant evidence that we're actually capable of doing that.

(16:13):
And I think that single point leads to a lot
of financial trouble for investors, and we're we're in a
whole lot of uncertainty right now. Morgan, Like, what impact
do you think that the pandemic is going to have
on a generation of young people when it comes to
their view of risk and then how they approach investing.
I think, uh, you know, if you were to ask
me this back in March or April, I would have

(16:34):
given you a slightly different answer, because back then would
what I would have said is something like this, COVID
nineteen is impacting everyone indiscriminately, which was true back in March.
Basically the entire economy was shut down except for you know,
grocery stores. Virtually everyone was was was in deep trouble,
and the stock market was crashing. So whether poor rich,
everyone was getting you know, just just just really scuffed

(16:57):
up in March. Now that we are six months ahead
of that, we know that's really not the case. And
to grossly generalize, but by and large, if you are
in the in an upper income group, say if you
earn more than a hundred and fifty dollars a year,
by and large the recession for you is over. I'm generalizing.
Of course, no one hold me you know there, and
of course there are exceptions to that, but by and large,
the recession is over. Stock markets back in an all

(17:18):
time high. Most people in those jobs are able to
work from home and keep their businesses going, and for
people who are earning a lower income, let's say less
than sixty dollars a year. This is truly the Great Depression,
if not worse than anything we've seen during or since
the Great Depression. So I think, just as we move
on in these months, the segregation in terms of how
people are doing in the economy has grown so much

(17:40):
relative to where we were back in March or April.
And that's really important because back in March or April,
I would have told you that since it is impacting
everyone indiscriminately, that the lessons that we learned from that
will be kind of economy wide and and you know,
and and and really span across all different groups in
the economy, Whereas now I think we're going to be
left with two separate, distinct groups coming out of COVID.

(18:01):
Whenever this ends, however, you wanted to find that one
that is emotionally scarred for life and financially scarred for life,
that you know, businesses will collapse that won't be able
to be rebuilt, people will go through, will have their
retirements destroy, their savings wiped out, etcetera, etcetera. And then
another group of people for whom uh COVID nineteen from
an economic perspective, was kind of a wild ride for

(18:22):
two months that they that they moved on, and they
really have no discernible impact on their behavior going forward.
If there is any kind of society wide change that
I think might come out of this is I think
there will probably be a higher demand for social safety
net then there was before, and that will be like
a bipartisan not in any sort of political way, but

(18:43):
I mean we saw this with the Cares Act back
in March, the big stiminars package that past the Senate. Zero.
I mean, you could hold a vote in the Senate
that says, you know, just just two plus two equal four.
There's going to be at least ten detractors from that.
The fact that it was it was, that everyone voted
for it, you know, just kind of shows that there
is there is huge demand when when things are breaking

(19:04):
and things are hitting the fan, then having the federal
government step in the backstop the system is a very
bipartisan thing to do. And so things like enhanced unemployment
benefits that are now expired, I have a feeling those
will come back and will probably be some sort of
permanent thing, not six dollars a week. But I think
there's gonna be greater demand once people realize that the
federal government is capable of really backstopping a lot of

(19:26):
the pain of recessions, and anything less than that just
seems cruel going forward. So once we kind of experiment
with that, once, it's very hard to take that back,
and I have have a feeling that will become sort of
a permanent thing that we have. That's great. That's we
appreciate your thoughts there, Morgan. We're gonna take a quick break,
and after that we're going to continue to talk about
the psychology of money with you, and we'll get to
that right after this. We're back from the break. We're

(19:55):
talking with Morgan Housel. We're talking about the psychology of
money and Morgan, you you write in your book you
say that it's impossible not to be emotional about our money.
We've covered some of that already, but you mentioned that
we should embrace those flaws. What do you mean by
embracing the flaws that we have when it comes to
our emotions. I think a lot of it. When we're
talking about behavioral finance, what a lot of people ask is,
how can I overcome my biases. Like it's one thing

(20:15):
to point out the biases, but then people ask, Okay,
what can I do about this? Uh. It took me
a while to realize this. It took me years to
realize this, but I've come to the conclusion that no
one can overcome most of their financial biases because it's
not something that you can just read about in a
book or have a conversation with someone and then assume
that you fixed it. Because we're dealing with dopamine and
cortisol and these these hormones that are controlling our behaviors.

(20:39):
That there's no way that we can just read a
book and overcome the influence of dopamine. That's not how
people's bodies work. So people are I think people are
just hardwired to think about greed and risk in different
terms that they are by and large unable to overcome.
And if you accept that, then it makes sense of
Rather than saying, how can I fix my biases, what
you should do is become introspective, try to figure out
what your faults are that we all have, and then

(21:01):
just accept them and say, Okay, I'm gonna I'm gonna
invest my money and save my money and have a
financial strategy that just embraces the flaws that I have. So,
for example, if you are someone who looks back at
yourself and you realize that you panicked in March, and
you panicked in two thousand eight, and you panicked in
two thousand one, whenever the world feels like it's falling apart,
you hate it. It feels like it's broken, You can't

(21:21):
stand losing money, and you sell a new one out.
And that's quite a few people who fall into that bucket.
I think rather than assuming you can will ever learn
your lessons, so to speak, and to assume that you
won't do that next time, I think you should just
embrace that that's who you are. Then maybe you have
a lower risk tolerance than you thought you did, and
therefore you should have less of your money in stocks
than you may have at one point in your life
assumed that that you could have. Uh. I think doing

(21:43):
that is a much more sensible approach than having panicked
two or three times in the past and then assuming
you've learned your lesson. And what's hard about that is
that when the stock market rebounds like we are like
we're at today, back near or at all time eyes.
It gets easy to assume you've learned your lesson because
you made your money back. Hey look and look at
the stock market fell. I got scared, but hey, they

(22:04):
came right back. I've learned my lesson. I won't do
that again. It's very difficult to actually try to anticipate
how you're going to feel during the heat of the
moment when the world is falling apart like it was
back in March. I think most of us, including myself,
if you have asked us in January, how would you
feel if the stock market fell thirty in three weeks?
I think most of us would have said, Wow, that's big,

(22:25):
but that sounds like an opportunity I can buy more.
That sounds like stock to your cheek, let's get in.
But it's very difficult to actually be able to tell
yourself with foresight and say, how would you feel if
the stock market was falling in three weeks? Because we
had the greatest pandemic in a hundred years, and it
looks like we're going back into the great depression that
was going to ruin the entire world and might kill
all of us, including our families. That is something that

(22:46):
is much more difficult to anticipate how you're going to
feel in the moment, and that is why people are
just generally bad at anticipating what they're gonna do during
risky moments. And then so rather than trying to look
forward and assess how you might feel, we should just
look back and say what did I do in the past,
because that's the best guide of what I'm likely to
do in the future. I like it. Yeah, creating systems

(23:06):
that fit with Yeah, what your tendencies are behavior profile? Yeah, exactly. Morgan.
You you recently wrote a post where you advise folks
to to save like a pessimist, but to invest like
an optimist. You're saying a lot with that simple phrase.
But what is it that you actually mean by that.
I think it's this idea that there is that getting
rich and staying rich are two completely different things. They

(23:28):
are different skills that require they're they're different topics that
require different skills. We need to nurture them separately. And
getting rich requires, you know, taking a risk and being
optimistic about the future, investing for the long run, understanding
that people are going to solve problems, and that p
and and that and that businesses will will create profits
that will a crue to shareholder that will accrue to shareholders.
It's this long term optimism. But staying rich requires kind

(23:51):
of pessimism about the short run. You need to be
able to put up with all the ups and downs
that are that are guaranteed to come our way. And
if you look at history, I mean history is a NonStop,
continuous chain of setbacks and disappointments and recessions and bary
markets and pandemics and terrorist attacks. There's always something going
on that is getting in people's way. And in order

(24:12):
to do well over the long term, you have to
be a long term optimist. You have to invest like
an optimist, but you have to save like a pessimist.
Those scenes seem like they're contradictory, but they're not. But
they're not. They work together. Uh you you know, compounding
works in the long run, So that's where you need
to invest. Being able to enjoy the long run and
get to the long run. You need to be able
to survive the short run. You need to have enough

(24:32):
pessimism in your thinking that you have enough savings and
you are avoiding debt to a certain degree that makes
it so that when we deal with these inevitable setbacks,
you are not forced out of the game. You can
remain standing so that you and so that when you're
remain in the game, that is when you are going
to be able to let compounding work in your favor
over the long run. Or practically speaking, you're talking about

(24:53):
an emergency fund, right, like just that short term stability.
It's it's that. I think it's a combination of having
a good emergency fund, which I think, by the way,
most people tend to tend to underestimate how much they're
going to need. I mean, for years, financial advisors would
say three to six months, that's what you need, and
then something like COVID happens, and how many people have
been out of work now for six months and have
no prospect of going back to work for many more

(25:15):
months until there's a vaccine. There's the same thing in
two thousand and eight, where you know, financial advisors say,
you know, three month emergency fund, but the average duration
of unemployment was like sixteen months at the period. So
there's I do think people tend to underestimate how much
cushion they might need in their life. That's to say
nothing about medical emergencies or your car breaking down, etcetera, etcetera.
I think there's also just some level of mindset in

(25:38):
there where, and I mean here, here, here's how a phrase.
I think the most important financial skill for investors is
understanding the long history of volatility and realizing that over
the last you know, a hundred years in the United States,
the stock market has done extremely well. But during that period,
the stock market has declined on average ten percent on
average once per year. It's declined uh or more on average,

(25:58):
and on every two or three years it's declined more
on average at least once per decade. And that's during
a period where it did very well. So if you
just have a better sense that something can grow and
improve and do extraordinarily well over time, even though what's
going on in the short run is this constant chain
of setback and decline and breakage and destruction, then it

(26:19):
just gets a little bit easier to deal with these
And when they come, it's not it's not that it's fun,
it's not that you enjoy watching the setbacks, but it
becomes a little bit more palatable, and rather than saying
this feels wrong, something feels broken, you say, look, this
isn't fun, but this is what I expect. I know,
this is what the market tends to do over time.
And this is the cost of admissions that you need
to pay in order to achieve the long term returns.

(26:40):
That's the cost of returns, and investing is putting up
with uncertainty and volatility and having enough patients to let
it work itself out over time. It's all part of
the process. And Morgan, when we're talking about a behavioral approach,
part of that behavioral approach is the concept of having enough.
You wrote about that in chapter three of your book,
and how it's important to avoid some of the mistakes
that we can easily fall into if we have a

(27:01):
good concept of what it means to have enough. Near
the end of the book, you talk about how you
and your wife live similarly to how you live right
out of college, because you were able to stop the
goal post from moving the goals that you have in
your lives, and that seems like it's the hardest part
of money for most people. That goal posts keep shifting
as we continue to grow in age. So how do
you think we can become better better at that as

(27:24):
we as we grow up and get older. It's it's
it's the hardest. But I think most important financial skill
is getting the goal post stop moving, because if you don't,
if your expectations rise and lockstep with your income or
your wealth, if you're you're on a treadmill for your
entire life, of course, and it's you're always going to think,
if I only have X dollars more, then I will
then I will have enough, and you're always you're always

(27:45):
going to move the goal post. It's never gonna end.
So I think we talk a lot about how to
earn more money and how to do better at investing,
and that's obviously a very important topic, but we also
have to talk about how do we manage our expectations,
because if we don't do that, then we should not
be surprised when even if we are lucky enough to
have a growing income and rising wealth, we still don't
feel necessarily feel any better off for it. So how

(28:06):
do you do that well? I mean, first, the first
thing to knowledge is how ridiculously hard this is, because
it's the most natural thing in the world to assume
that if we have a little bit more will be better.
And by the way, that is why the economy grows.
If everyone in the economy had an idea of look,
once they earned, you know, one million dollars, then they're
going to retire and and go live in the woods.
If everyone had the mentality, there'd be no innovation, there

(28:27):
would be no break that, we'd have no economic growth.
So the fact that no one is ever satisfied by
and large an aggregate is actually a great thing for
the economy at large, but at the individual level. To me,
it's here. Here's one realization that I that I wrote
about in the book. When I was in college, I
was a valet at a really fancy hotel in Los Angeles.
It was a great job work there for four years,
got to interact with a lot of very interesting people.

(28:48):
And so something that dawned at me, and I was
I was nineteen twenty years old at the time. But
something that would dawn on me that I thought was
really interesting is that if someone drove into the hotel
driving a Ferrari or Lamborghie or Rose Royce or something.
I would never look at the driver and say, Wow,
that guy is cool. What I would say instead to
myself is if I were in the driver's seat, people
would think I'm cool. And it was this irony that

(29:10):
I had of like, I don't care about the driver.
I just want to picture myself as a driver and
then assume that people will care about me. And it
was this weird thing that everyone driving in in the
cars probably thought, Hey, these people think I'm cool, because
when driving to Lamborghini, everyone's looking at me. And my
realization was like, no, no one's paying any attention to you.
They're just imagining themselves in the car, assuming that people
would be paying attention to them. And then so to me,

(29:33):
it's maybe it's this realization that no one is thinking
about your stuff. No one is thinking about your social status,
no one cares what you have more than you do,
no one is thinking about you more than you. It's
true for everybody. And I think once you come to
terms with that, and then it should not be surprising
that the material stuff that we wanted left, which, by
the way, I like nice cars. I like nice homes
as much as anyone else. This is not, you know,

(29:54):
this is not you know, let's let's all go go
go pray. You know, let's this is not to go
live in the woods because monks. It's nothing like that.
But it's this realization that the benefit that you get
from nice stuff, from a social perspective, in terms of
wanting people to admire you, wanting to be people to
think that you're special, etcetera, is probably going to be
much less than you assume, and therefore it just pushes

(30:17):
you towards wanting other things in life. If you want
respect and admiration and people to think that you're you're
great and you're special and you're important, you're much more
likely to get that from being a nice person, being
a humble person, being a helpful person, than you are
from driving a Lamborghini. Uh. And that's I think very hard,
I think, particularly to signal to signal out a group.
It's particularly hard for young men to understand that. I

(30:39):
think they are just much more predisposed to thinking if
I do get to drive the Ferrari, everyone will think
I'm great, Everyone'll think I'm cool, people think I'm special
and important. Uh. And then those are also the group
that is I think most likely to overlook the driver
and just automatically assume rather than thinking the drivers cool,
they just think of themselves as the driver, and missing
that fundamental irony of what money can actually get you

(31:00):
has a benefit. The social pressure is like essentially they're
the problem, right. That can apply to investing as well,
you know, like on the note of like social comparison
and looking to what others are doing, like how how
could that approach negatively impact our ability to invest? Well?
You know, in your book you talk about identifying what
game it is that we're playing. Why is that so important?

(31:20):
I think it's important because there's this thing that's easy
to overlook because it's not very intuitive, which is this
there's only one stock market and and there's only you know,
one Apple stock that I can buy. You can buy,
hedge fund managers can buy. But we're all playing a
very different game. If you are a day trader, you're
buying Apple stock, and if you are a fund manager
investing for the next three months, you can buy the
same Apple stock. If you are a retiree or someone

(31:42):
who's looking to retire and you're investing for the next
twenty years, you buy the same stock. You're an endowment
fund investing for the next century by the same stock.
So we're all on the same field. We're all playing
very different games, and that's important because a lot of times,
the movement in the stock market sends signals to other
people that other people start paying attention to. But if
the signals are coming from people who are paying a

(32:03):
different game, you've got to make sure that you are
not being influenced those signals. Let me give you one
example from this. If you go back to the nine nineties,
when tech stocks were going berserk every day, they were
going up and up and up five per day. A
lot of that movement was just caused by day traders
who were capturing short term momentum. It made a lot
of sense for them to be buying uh Cisco and
Yahoo stock made sense for them because they were day traders,

(32:27):
and it didn't matter that the stocks were overvalued in
the long run, that they were trading out high price
to earnings multiples, None of that matters. They were just
trading for that day. They were trying to squeeze out
a little bit of money between now and lunchtime. The
problem with that is that that activity pushed up the
price of those stocks, and it caught the attention of
long term investors, and there then and then therefore, if
you are someone who are saving for your retirement, you
looked at what was happening with Yahoo stock and Cisco stock,

(32:49):
and you kind of subconstantly thought to yourself, maybe those
people know something I don't. Hey, those stocks are doing well,
Maybe those are the companies in the future. Maybe I
should invest my retirement money in those stocks. You took
your cues for day traders, and that is really where
the damage of bubbles came from, because the day traders, look,
they were gone. They were out as soon as a bubble,
and as soon as a bubble started to crack, they
sold everything. They were gone. The people who were left

(33:10):
holding the bag with the long term investors who took
their cues from those day traders. So that's just why
it's so important to understand what game you're playing and
not take your cues from other people. This is special,
especially true in financial media, where you know, if you
turn on CNBC or any other financial program, you will
hear people say something along the lines of, you know,
you should sell Netflix. It's not a good time to

(33:31):
own Netflix stock. And I always want to ask, well,
who is that information for. If you're a day trader,
maybe that's great advice. If you are a widowed retiree,
maybe that's the worst advice you could possibly hear. So
it's always presented as if there's only one game to play,
as if the stock market were a single, unified game.
We all have these different goals, different expectations, different time
horizons that make it so that we're all playing completely

(33:52):
different games than one another. All Right, we got just
a few more questions for you, Morgan, and we're going
to get to uh those in particular, we're gonna ask
you about how you invest, and we'll get to those
right after the break. All Right, we're here talking with

(34:12):
Morgan Housell and Morgan, let's let's dive into, like Joel
allotted to before the break, how it is that you invest.
You know, as someone who's been writing about investing for
a while now, you take a pretty boring index fund
approach to your own investments. And so as you've studied
the best, you know, you've thought about the subject deeply,
like why is your approach? You know, kind of the
most simple of all. I think what most people would

(34:34):
assume when they hear that I dollar cost average in
index funds. Most people would assume if that's because I've
come to the conclusion that you cannot beat the market,
that no one can do well, that no one can
pick winning stocks, etcetera. It's actually not that at all.
What my view is is a little bit more nuanced.
It's beating the market is possible, but it's extremely hard.
And these statistics that come out that show of fund

(34:55):
managers on to perform the benchmark that is usually used
as an indictment against the industry. My view is, like, know,
that's how it should work. It should be hard to
beat the market of people who do a great job
of beating the market. Just like there are you know,
two or three percent of college athletes make it to
the pros. But no one says that college athletics are
a scam. People say, look, it should be hard to
make it to the pros. Who expects everyone who tries

(35:15):
to make the NBA should make it? But that's for
some reason. That's effectively how we think about fund managers.
So from my perspective, the other thing that I've just
come across with, well, I mean the first thing that
what I would say as an extension of that is
look over time, if investors underperform their benchmark, then that
means as taking a passive approach and over a period

(35:36):
of time, I would expect to end up in the
top death style, the top ten percent of investors. So
when people say it's a boring conservative approach, my view
is I'm probably gonna outperform of fund managers, So which
one of us is actually being conservative? Like, it's not
necessarily if I'm gonna earn higher returns than you, than
which one of us is actually being conservative? Here? The
other thing that is really stuck out to me that
is more important in my passive approach is that the

(35:57):
single variable that makes a difference in invest thing it's
going to have the biggest impact on your outcomes as
an investor is not how well you do in any
given year or even any given decade. It's just how
long you invest. For the people who do the best
financially over the course of their investing careers are not
the people who are in the highest returns the people
who earn decent returns for the longest period of time.

(36:18):
So therefore, the metric that I want to maximize for
it's just my endurance. And look, or do I know people?
Do I know fund managers who I think will be
able to outperform the market this year? Yes, But I
don't know if I invested with them whether I would
be able to stick with that for the longest period
of time. Whereas for the indexing approach, I think it
gives me the highest chance of actually being able to
leave it alone and letting a compound for thirty or

(36:40):
forty or fifty more years. That's what I want to do.
So it's not that I don't believe people can beat
the market. It said, I want to have the approach
that gives me the highest odds of sticking with it
for the longest period of time. And to me, that's
just the investment strategy that has the fewest knobs to
fiddle with, the fewest levers to pull, and for me,
that is the most passive approach that I can take,
so I can spend all of my thought, all of

(37:01):
my bandwidth, focusing on endurance and longevity rather than what
is the economy going to do this year, this month.
And there was another change you made recently in your
life that actually, from what you've said, helped you in
that decision to helps you stay in the game and
to be able to invest over the long over the
long haul. You paid off your mortgage, you own your home,
debt free now and you actually keep more cash on

(37:24):
hand that than most people do. A lot of you know,
traditional money people would say, no, man, you should be
keep that mortgage it's at a low interest rate and
invest more of your money. So why did why did
you make that, take that safer approach? I mean, there's
there's two there's two reasons we did that. One is because, look,
I have no aspiration to be the greatest investor in
the world. What I want to do is use money

(37:44):
to make myself and my family a little bit happier,
a little bit safer, a little bit more more well off.
So even if we should have used that cash to
invest in the stock market versus paying off our mortgage,
by paying off for mortgage and gave us such a
sense of security and safety. And this is our house.
No one can take this from me. This is our house.
We own it. This is it doesn't matter if the
world falls apart. We can withstand a Category five financial

(38:05):
storm and no one's taken this house from us. This
is ours, which that to me, it's just that to me,
that gave my wife and I particular since we have
young kids. That just gave us a sense of like
high five. This is one of the best things that
we've Even if this is the worst financial decision we've made,
I think it's the best money decision that we've ever made.
The other thing, if there is a more technical reason
for it, is because back to longevity and doing you know,

(38:26):
being able to stay in the game for a long
speriod of time. You're only gonna do that if you
become unbreakable financially in the short run, and if once
you've paid off your more which look, this is not
something that that everyone or many people can do. I'm
not saying that this is, you know, something everyone can
go out and do. I'm not I'm not that naive
about people's finances. But if you can do that, then
you've you've reduced your fixed your fixed expenses so much

(38:47):
that you give yourself a level of endurity, of endurance
and and and durability that I think does pay financial
dividends over the long run in the sense that it
increases the odds that I can remain invested in my
stocks for a longer period of time. And Morgan, as
you discussed in the book, retirement like that's yeah, it's
an incredibly new concepts, and so until recent decades, you know,
the concept of saving up to quit work like that

(39:09):
was mostly foreign. How do you how do you feel
about the way people talk about retirement these days? You know,
does it do you feel it puts a lot of
pressure on folks or like, is it even maybe the
right goal for individuals to have? I think it's it's
it's it's definitely the right I think what the right
goal is is independence. Rather than using the term retirement,
which implies you're going to quit your job and nothing else,
it's just independence. So there's there's the fire movement, which

(39:30):
you know, I think is interesting. I'm not necessarily part
of it myself because rather than you know, retiring and
leaving work, it's just more about it's the independence level
of it. Um. But it's interesting about finding about retirement
that you mentioned is yeah, it's a fairly new concept.
I mean, up until kind of the nineties and fifties,
the majority of people worked until they died. There was
no sense of retirement, so security didn't didn't come along

(39:51):
until the nineteen thirties. And even when it came along,
it was absolutely bare bones, way less even adjusted for
inflation than people get today. So the concept that the
majority of people will be able to and deserve a
retirement that will last years or decades is a very
new concept. We're talking thirty or forty years into this
that we've had. I mean, the rath ira a didn't
come about until and the four O one K really

(40:14):
didn't start being used in real ways until early nineteen nineties.
So these things are more or less brand new. And
that's important because we don't have a lot of generational
knowledge transfer in terms of your parents teaching you how
to do it because their parents taught them how to
do it. We're dealing with these things that are one
generation old. So we are we are we're all newbies,
we're all freshmen doing this. It should make sense that

(40:35):
if you take something that we'd have no generational experience doing,
and then we are dealing with the emotions of trillions
upon trillions of dollars of our retirement and our future
well being, it should not surprise people that people screw
up a lot of times doing this. We're brand new
at this, very different If you take something like driving
a car, Let's say my parents taught me how to
drive a car, their parents taught them how to drive

(40:55):
a car, etcetera. Was right now, we're just coming into this.
I think this also affects something like saving for college,
where if you go back forty years ago, a fewer
people wanted to go to college or the the the
expectation that you would go to college was just much
lower than this today, and colleges, adjusted for inflation, were
much cheaper. So the idea of saving a significant amount
of money for your kids to go to college was

(41:17):
just not really part of the social conversation. And that
kind of led to I think my generation. I'm I'm
thirty six years old, so it was kind of my
parents generation that did not buy and large did not
say for their kids college because when they were growing
up with their parents taught them was you don't need
to It's just not something that you are that that's
not that's not part of the financial quiver. So it

(41:38):
was kind of my generation that I think we'll get
stuck with the highest level of student debt because our
parents didn't prepare for it. And I don't blame them
for that because they didn't have any any kind of
generational knowledge transfer to them. And I think if you
look at my generation, how we're dealing with our kids.
I think we learned from our personal experiences the trauma
and tragedy of excessive student debt, and we are buying

(41:59):
large and generals in here saying never will we put
our own kids through that. So we have a much
higher degree of savings and five plans for our own
children going forward. So that too, it's just like a
generational difference that it's not that one one generation screwed
up or wasn't smart enough to do it. It's just
what we've experienced in our own lives that gives us
this roadmap of what we are expected to do with

(42:19):
our money. Plus, by the way, I think part of
the reason our parents didn't save as much for colleges
because the price wasn't nearly as extreme, right thirty years ago, right,
and so garticularly at state universities. Most state colleges could
go back to the seventies and days were free, there
were tuition free, you could you could go to them.
That was a big shift that took place, to say
nothing of private universities that we kind of had a
growing expectation that you know, if you get into Pepperdine,

(42:42):
you should go to pepperdine whether you can afford it
or not. Uh So, I think that expectation didn't buy
and large didn't exist forty years ago. Plus you had
the state college kind of uh safety net where you
could go tuition free. Yeah. Yeah, Well we covered a
lot here, Morgan, Thanks so much for your time, But
we've got one last question for you. What is the
most practic coal action step you'd recommend for folks to
take in order to move from knowing the right things

(43:04):
to do with their money to doing the right things.
You've got to know yourself, just be more introspective about
what you're about who you are, and rather than reading
a financial book, even though I just wrote one, So
I'm speaking against myself here. I've been reading a finance
book to try to figure out what you should do
with your money. You should become more introspective about yourself,
your own goals, your family's goals, and realize that that
personal finance is way more personal than it is finance. Morgan,

(43:27):
this has been a fantastic conversation. We really appreciate your time,
and where can folks find out more about you and
your book. Most of what I do the the book
is on Amazon. It's called The Psychology of Money. Most
of what I do on a day to day basis,
I spend my time on Twitter. My handle is Morgan Household.
First and last name. Awesome, Morgan, Thanks so much, man,
it has been a great conversation. We really appreciate your time.
This has been fun. Thanks again, Yeah, thinks again, Morgan.

(43:50):
Joel Man, what a great conversation we just had here
with Morgan Household discussing his his new book, The Psychology
of Money. We talked through a ton of different stuff, man,
he had a lot of nuggets of whiz them. But
we always end our interviews here with one big takeaway,
and so I want to get your big take away.
What was What was something that stood out to you? Yeah,
that's a tough one because this interview was was packed
with a bunch of stuff, just like the book is. Honestly,

(44:11):
it's just it's a heavy hitter with just so much
good information, so many good stories. It's just incredibly well written.
But I think that the biggest takeaway that I got
from this episode was and it was when I was
reading the book. It really struck me too. Don't try
to overcome your flaws, know them and embrace them, the
emotional aspects of our personalities. Yeah, and I think that's
that's something that you know, we want to change, we

(44:33):
want to do better, and there's nothing wrong with that.
But there's something really powerful about knowing ourselves deeply, realizing
that those flaws exist, and knowing that that we can't
necessarily change them completely, and so we adjust accordingly. When
it comes to investing or saving or how we think
about our money. We need to incorporate some of those
baseline tendencies that we have. We need to think about
our personality a little bit more, and we need to

(44:55):
bring that to the table when we're thinking about the
the decisions we're gonna make. Morgan did that when he
paid off his mortgage. Morgan does that when he invests
in index funds. So much of personal finance is personal,
and a lot of it does calm down to you
and how you interact with the world around you and
with your money in particular. I mean, that's why we
enjoy talking about money so much, because it's so nuanced

(45:15):
depending on who it is you're talking about, and as
we're kind of covering each topic. I love the example
he gave to like Essentially he was talking about, like
if you panicked back in the spring with the market,
you know, completely nose dived, that you probably need to
be maybe be in something that's a little more conservative, right.
But in my mind, I was thinking about how my
tendencies are kind of the opposite, and I realized that
essentially the system I've set up gives myself some flexibility

(45:37):
because I know that, like my tendency is that when
when I see an opportunity, when I see something on sale,
I'm gonna pounce. Uh, And I mean that happened back
in the spring. I've kind of laid out at one point,
like my complex system of if the market is you know,
more than ten percent down, this is how much I
can kind of put towards it. It can for you
up to make some some purchases and make some movements
while sticking to a system that you've essentially predetermined. It's

(45:58):
when you let your emotions the best of you and
you start making unwise decisions in the moment that can really, yeah,
really bite you in the butt. Well, you've also been
conservative in other areas of your financial life that allow
you to be more aggressive there and again that that
save like a pessimist and invest like an optimist. That's
like the best line. Yeah, so it makes so much
sense to me. I love it. Yeah. So my big
takeaway to also had to do with investing, and he

(46:21):
he said a line and he said that volatility is
the cost of admission to investing in the stock market.
And that's a perfect summary of the market in the
short term, right, if you are going to invest for
the long term, you know, if you have a more
optimistic view of the market, which we do. You know,
we see the economy and progress, we see all these
things happening and moving forward. But what that means is
in the short term there's gonna be volatility and you

(46:42):
have to be okay with that. That's the price you
pay in order to invest. That's so important to keep
in mind when you do see big fluctuations in the market,
that they're not something necessarily to respond to, so to
react negatively to and instead just to kind of weather
that storm. Yeah, it's not broken, he said. It's part
of understanding the long history of volatility. That's the way
the system works, and it's part of wealth building that

(47:03):
volatility is essentially built in and you're going to experience
it from time to time, and that's part of behavior again.
You have to know that that's going to happen and
know how you react to that so that you can
invest accordingly. And I think that's why index funds can
be so helpful for us, because it's a one less
decision we actually have to make. And I know for me,
I'm not really great when I have a lot of decisions,
so so that takes care of one for me, right there.

(47:24):
All right, man, let's get back to the beer that
we had on the show today. Today we drank a
beer called Polygamy Porter by Wasach Brewery. There's a beer,
of course, had a Utah. Our friend Sam, who works
for the brewery, sent this one our way. Uh great
little Utah pun in the name of this beer. Yeah,
I think they're kind of poking fun a little bit
at polygamy. But yeah, this is a beer that you
and I got to share. I'll go ahead and say

(47:44):
that as you pour it. Obviously it poured nice and dark.
This is a porter. Uh, it was lighter in body,
you know, it wasn't one of these dark beers that
that's that's really heavy, but it did have those darker flavors,
so you kind of had that nice, light, roasty flavor
going on. You got some of those chocolate notes as well.
I feel like this is the perfect beer as the
weather starts to turn a little bit colder, where you
can get some of those darker flavors without feeling like

(48:05):
you're eating a meal, you know, when you have a beer.
So yeah, those bigger stouts can feel like that, but
but this one doesn't. Right, it's a little bit light.
I feel like it was chocolate caramel. It was really
smooth and and it just had a great flavor going on.
So yeah, I really enjoyed this one. From Wassa to Brewery.
Big thanks to Sam again for sending this one our way.
All right, man, that's gonna do it for this episode.

(48:25):
For people who want show notes, including a link to
Morgan's book, that will be up on our website at
how to money dot com. And if you have a
friend or you know somebody who might benefit from hearing
an episode like this talking about the psychology of money,
we would be incredibly thankful if you forwarded this episode
along to them. Reviews always help, but you know what,
word of mouth is also a really good thing, So
thanks in advance for that, Joel. That's gonna be it

(48:46):
for this episode, Buddy, Until next time, best Friends Out,
Best Friends Out,