Afford Anything - The Psychology of Money, with Morgan Housel

Episode Date: September 15, 2022

#402: Do you wrestle with the idea of leaving your savings in an account earning next to nothing versus investing it in the stock market? Do you use investment strategies that allow you to work with your nature, rather than against it? Are you careful to seek investment advice from those who share your investment goals, or do you get caught up in the trends of day traders? Morgan Housel, author of The Psychology of Money, joins us to discuss why investing is not the study of finance, but the study of how people behave with money. Morgan is an award-winning financial journalist, former columnist for the Wall Street Journal and The Motley Fool, and one of the foremost thinkers in the world of investing. As a long-term investor who shares our buy-and-hold philosophy, Morgan has behavioral finance insights that can help us invest for financial independence with more clarity and a better understanding of ourselves. We discuss how to develop self-awareness around biases, the importance of flexibility for long-term strategies, saving like a pessimist and investing like an optimist, becoming durable in the face of market adversity, the key difference between patience and stubbornness (and how it affects your mindset), expectation management, the importance of bonds and emergency funds, and a difficult lesson about tail risks that Morgan learned at age 17. You’ll enjoy this episode if… You’re super Type A with your investment portfolio and have a hard time letting go of plans that didn’t work out You want to learn a framework that can help you roll with the inevitable punches of the stock market You feel behind and have no idea how to develop a sense of what ‘enough’ is You’re tired of trying to overcome your inherent biases and reactions to the market and want to try something different For more information, visit the show notes at https://affordanything.com/episode402 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a tradeoff against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource you need to manage. And that opens up two questions. First, what matters most? And second, how do you align your decisions accordingly?

Answering those two questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast, and we are currently on what we call the September sabbatical. If you have been a longtime listener of this podcast, here's what we do. Every year, we've done this for the past at least three years, I think. During the month of September, we air some of our favorite episodes from our archives,

and we theme these four weeks of episodes around the acronym F-I-R-E, which we've rebranded, as financial psychology, investing, real estate, and entrepreneurship. This week, we're playing the letter I, investing. And from our archives from more than 400 episodes that we've produced, one of our favorite, most insightful, most educational interviews around the topic of investing was our interview with award-winning financial journalist Morgan Howsell. He's a former columnist for the Wall Street Journal and the Motley Fool, the best-selling author of the book The Psychology of Money, and one of the foremost thinkers in the world of investing. In this interview, we discuss how to develop self-awareness around cognitive biases.

We talk about saving like a pessimist and investing like an optimist. We talk about how to be durable in the face of market adversity, which is particularly relevant right now. Have you seen, you know what, actually don't, don't look at what the markets are doing right now. Hint, hint, you're not going to like it. So we talk about how to be durable in the face of that. We discuss the key difference between patience and stubbornness and how this affects your mindset. We talk about expectation management. And we discuss a very difficult lesson, the death of a friend.

And what that taught Morgan about risk. This interview originally aired in November 2020 as episode 284, and we are thrilled to share this with you this week as part of our four-week September sabbatical series. Also, before we dive in, in case you didn't hear the announcement, I am in the cast of a movie that's on Netflix. That's kind of a surreal thing to say, but I'm in this movie on Netflix. So are many other people in the financial independence base. P. Adeny, better known as Mr. Money Mustache, Tiffany Aliche, who's better known as the Budget Nista. Ross Mack, who is a huge following on YouTube.

The four of us are in this movie. We are financial coaches, and we work with four financial protégés and help them along their journey. So if you want to watch it, it's on Netflix. It's called Get Smart with Money. If you watched it and liked it, please share it on social media, leave us a review on Rotten Tomatoes, give it a thumbs up on Netflix.

We're super excited to be able to spread the message of making smart financial decisions and to bring that to a platform like Netflix. So check that out, make that your next movie night. And with that said, here is our interview on The Psychology of Money with Morgan Housel. Hi, Morgan. Hi, Paula. Thanks for having me today. Oh, thanks for coming on the show.

Morgan, you just wrote a book about the psychology of money. And what strikes me is that you are an index fund investor, you know, like most of the people who are listening to this episode, you share the same philosophy of the audience of live below your means, invest in index funds, don't panic, don't get seduced by market timing. How are you, given that these are such classic principles, how are you able to write a lot? about it. What is there to say about it, so to speak? Look, in terms of the actual strategy of how I invest, there's almost nothing to say. I could summarize everything that I do in terms of managing my own finances, from investing to saving personal finances. I could summarize all that on an index card. But I think there's a tremendous amount to say on the behavioral side of investing. This is the whole thrust of the book is we have by and large as an industry figured out

investing. We've solved investing over the last century. If you go back 100 years, years ago, people did not really understand the mechanics of diversification, of discounted cash flows. Like, a lot of the real hardcore mechanics of investing were not discovered yet, but we've discovered them. We have a lot of information. We have a lot of computers that are scouring the world for opportunities and exploiting inefficiencies. I think we've largely solved the scientific part of investing. And what is left to exploit, and it's a big thing, not just to exploit, but to figure out for yourselves and to pay a lot of attention to is not necessarily what should you do with your money. It's not where you should and

It's not where do you think the economy is going. It's what happens inside of your head when you try to think about your own personal finances, when you try to think about your own risks, your own opportunities, your own relationship with greed and fear, your own time horizon. I think that is a much more complicated topic that does deserve a lot of attention, not nearly enough as we are giving it. There's quite a lot to say about it. One point that that kind of clicked for me many years ago that was maybe the early genesis of this book is this idea that investing is not the study of finance. Investing is really the study of how people behave with money. It's the decisions that they make, the justifications for those decisions. And that is actually

a much deeper, complicated, nuanced topic than what we would consider traditional financial advice, which is, you know, put 60% of it here, 40% of it here. Here's how, you know, max out your retirement accounts. It's not that that's bad. A lot of that stuff is phenomenal. And that's good things to talk about. But I think there's a whole other level that sits below that. of what's going on inside your head when you try to use that advice. So the behavioral certainly is more important than the tactical. To what extent are people able to recognize their own emotions? I mean, I doubt that there are many people who are self-aware enough to articulate,

I feel fearful, I feel greedy. It comes out in coded thoughts. How can people develop that self-awareness? And there's two sides of this. Not only can they, is it very difficult to preemptively notice that about yourself, But even after you fall for it and you become a victim of greed or fear, it is very common to piece together some sort of story in hindsight about how you were, you did not actually fall for greed and fear.

You got unlucky or the world was unfair to you, whatever it is. I think even in hindsight, we tell ourselves stories that kind of gloss over our own faults. You mentioned something earlier, which is that the behavioral side of investing is more important than the analytical side of investing. And I think really what it comes down to is that the behavioral side of investing is capable of neutralizing any of the analytical skills that you have. What I mean by that is this. You can be the best stock picker in the world. You can have a PhD in finance from MIT. You can understand the technical side of finance better than anyone in the world. But if you lose your head, if you lose

your cool in March of 2020 or in 2008 or in 2000 during the dot-com bust, if you lose your cool, you lose your temper during those periods, none of the analytical skills that you had leading up to that matter. Like they can all be neutralized by one most. moments of panic when you sell out at the worst possible time. So it's not that that behavior is the most important part. It's just that it has the ability to neutralize all of the other things that we tend to think about in finance, which is what should you do with your money? What is a smart thing to do with your money? And in terms of recognizing your own faults, your own behaviors, it is very difficult. There's a great quote in Daniel Kahneman's book, Thinking Fast and Slow,

where he says, the premise of this book is that it is much easier to recognize other people's mistakes than your own. I think that's really true, that it's very easy that when we're thinking about reading about behavioral finance, we tend to think about we're reading about other people. We're reading about other people's flaws, other people's mistakes, and not our own. And I think the reason that it is very easy to recognize other people's mistakes relative to your own is that if I am looking at your decisions, Paula, I can just look at it through the lens of what you're doing. I can say, you did this with your money and that was a bad decision because of this reason. It's just a very clear-cut cause and effect, whereas if I'm trying to analyze my own

decisions, you know, the mistakes that I made, I have this internal narrative in my head where I can justify my own mistakes. Yes, that didn't work out, but here's why I did it. Here's my excuse for why I did it. My explanation for why I did it. I'm aware of all these internal narratives justifying my mistakes, whereas your mistakes in my view are just black and white. And I think that's why it's much easier to recognize other people's flaws than your own. people are very good at telling themselves stories to justify their own errors. And I think they have to be because if you just accept all of your own errors for what they are, it's hard to get out of bed in the morning, realizing how flawed you are and how capable you are of making bad decisions.

People have to have this sense of irrational optimism in their head about who they are and the decisions that they make in order to go about their day. So it is very difficult. But one related topic to this that I think people can put some more effort into is, you know, one common question that comes up with behavioral finance is how can I fix my mistakes? How can I overcome my biases? How can I fix my flaws? And I think the honest answer, although it's not the answer that people want to hear, but the honest answer is most of the time you can't. I think rather than trying to say, these are my biases, how do I fix them? I think the best we can do is become introspective about our biases and recognize that these are my flaws. I'm Morgan. This is what I do very poorly. These are the flaws that I'm susceptible to.

These are my emotions that are, you know, get out of whack from time and embracing them. and creating a financial situation for ourselves that kind of works around them rather than assuming that we can outsmart our own past mistakes that we've made. Like if you are someone who panicked in 2000 and 2008 and March of this year, the odds that you will panic at the next market decline are very high. Most people do not learn their lessons from those things. And the reason is because it's not really something that you can learn. When we're talking about greed and fear and panic, we're talking about dopamine and cortisol

and stress hormones in our brain, that it's not something that you can read a book and teach yourself to overcome the power of dopamine. It's just something that is much more ingrained in you biologically. And so if you are someone who panicked, I think that's okay to just recognize that that's who you are. And you probably need a lower, a more conservative investing allocation than you might have otherwise thought. So I think just embracing who you are and accepting your own philosophy for what they are is probably the best that we can do in terms of overcoming the behavioral biases that we all have. Work with your nature rather than against it. Right.

You talk in the book about the importance of having a barbelled personality, being optimistic about the future, but also wildly paranoid about all of the things that could derail it, particularly in the short term. Can you discuss more of that framework? I think it's broadly this idea that people should save like a pessimist and invest like an optimist. And what I mean by that is to do well over time, to get rich over time, so to speak. You need to invest like an optimist. You need to be optimistic about the future that people will be able to solve problems and become more productive. and that productivity will create profits that will accrue to shareholders and investors will do well over time. You have to be an optimist in order to get rich and do well. Staying rich, though, requires saving like a pessimist. You have to realize that history is a constant chain of disappointments and setbacks and breakages and disasters and recessions and barren markets and pandemics constantly. And the only way that you can achieve long-term compounding and on your optimistic side is if you have enough paranoia. in the short run, that means that you are going to have enough liquid savings and a shoe debt to a certain amount to make sure that you can survive all of the uncertain problems that we're

going to have in the future, that all of us are going to face, whether it is something like COVID-19 or a recession or a medical emergency, a divorce, whatever it is, that you have enough financial flexibility and endurance so that you are capable of sticking around long enough and not getting kicked out of the game so that you can stick around long enough to enjoy the compounding that comes from your optimism. So I think that barbell personality is difficult for a lot of people to contextualize because it seems contradictory. And a lot of times it is contradictory.

You need to be able to embrace two conflicting concepts of optimism and pessimism in their own context and realize that those are two different skills that need to be nurtured on their own as well. It's not an intuitive thing to think about. I mentioned several examples in the book of people who were very good at getting rich, but had no skill at staying rich. They were very good at swinging for the fences and being optimist, but they had no sense of kind of short-term problems that they might come across that might kick them out of the game and wipe them out. I think there are actually a lot of examples of people who have one side of this. But the people who do well over the longest period of time are people who can embrace both of those sides. If you are just a pessimist, you're not going to get rich. And if you are just an optimist, you're probably eventually going to get kicked out of the game. You have to have both at the same time. How do these lessons apply in a world where there are increasing justifications for this time,

different syndrome. I'm thinking about the beginning of the pandemic where many people said, hey, this time it's different. This has never happened before. I'm thinking about even the emergence of crypto where people are saying, you know what, things are different now. The future is not going to be the same as the past. This is a disruptor. Why would you assume that history will continue? I think what's most important about this topic is that there actually are a lot of things over time in which history is different and things do change. It's hard to know which is which in real time. I mean, all of history, I think, is the study of how things changed and how things were surprising. That's what all of history.

History is the study of changes and surprises. If history was just a bunch of predictable events, it wouldn't be very exciting. But it's exciting because there are things like major world wars that people didn't see coming and huge technological breakthroughs that people didn't see coming. So it's always very difficult to see when it is different this time. I mean, some examples of this, if you look at the long history of recessions in the United States, going back to just after the Civil War, It used to be that in the 1800s and early 1900s, we would have a recession about every two years on average in the United States, a pretty high frequency of recessions. The economy was rarely growing for more than 12 or 24 months before it would slip back again. That started to change around the 1920s and really took off after World War II where the frequency of recessions became much shorter.

The gap between recessions became much longer. And if you look at that over time, something very clearly changed. over the last 100 years that has made the frequency of recessions much different now than it is then. So look, should we be able to say today that it is different this time relative to the history of recessions 100 years ago? Yes, it is different this time. So some things do change. One other example, in the S&P 500, the index did not include financial stocks until the 1970s. So if we are looking at a very long history of U.S. stocks, like it's not apples and apples to compare the index today to what it was in the 1960s or the 1950s.

And technology, of course, is a much greater share today than it was even 10 years ago, to say nothing of 40 or 50 years ago. So things do change. I think what's important is realizing and paying more attention, paying special emphasis to the things that do not change over time. This is a great quote from Jeff Bezos where he says, it is impossible to imagine a world where Amazon customers say that they don't want low prices or fast shipping.

That will never be the case. It is always going to be the case that people want low prices and fast shipping. So Amazon, this is I'm paraphrasing Jeff Bezos here, can put a tremendous amount of effort into those things in terms of keeping shipping fast and prices low and selection high because you cannot imagine the world where that will ever be different. So once you find something that you know is going to be an enduring part of our future, you can afford to put a lot of effort into that. But you have to realize that there are a lot of other things in the world that do change over time. And I guess it's this idea of strong beliefs weekly held. where you can have strong beliefs about things, but you have to be able to realize that things are going to change over the course of our lives in a way that's going to require that you kind of reset your framework of how you think the world works and be a little bit more flexible in your views and your outlooks. With regard to strong opinions weekly held, a lot of this really comes back to self-awareness.

How do you recognize the difference between knowing when to adjust your framework based on the reality around you versus simply bending with the wind? If there were an easy answer to that, we would all be so much better off. I think the honest answer, although it sounds kind of flippant, is hindsight. It is the only time that you know when the world really did change versus you just need a little bit of patience. I think one way to frame this, too, is a difference between patience and stubbornness. Patience is you're just giving yourself the amount of time needed for stock market returns to accrue to you, for a job or a relationship to work out. Some things require patience in order to do well. That's a whole long-term thinking requires that. But stubbornness, is when the world has changed and you just don't want to accept it. When you are investing in a company that is going bankrupt and patience isn't going to do you any good, this company's done. When you're in a relationship where patients is sticking out isn't going to work. It's just fundamentally not working anymore. So there are things where that's the case. I just don't know if there's actually a good way.

Like, what is a good heuristic to tell which is which other than hindsight? I'm really not sure. But I think that problem, the difference between patience and stubbornness is the cause of a lot of problems and opportunities in the world. And so that's the reason why it's so difficult. Like, if there were an easy answer to that, then there wouldn't be so much opportunity in the world. I mean, think about just something like Tesla, which from the day that company was founded, and certainly since the day it went public, it has been so easy to criticize what they were doing

and their financials and the reckless behavior of Elon Musk, et cetera, et cetera. Every single day of its existence, it's been easy to criticize. And the stock is up, I don't know how many hundreds of fold since it went public. and now it's actually turning into a real business where they're actually selling lots of cars and making money on it. Like, it's turning into a real thing. So it's always the case that what looks unsustainable is often just something that, you know, does not apply to past rules. The reason it looks so crazy and it looks like it doesn't going to work is also the same thing that gives it a lot of opportunity to do well and to accrue a lot of profits over time. So I just don't think there's an easy answer to

that question other than realizing that that fundamental framework is one of the most important things that we talk about in business and investing and the economy and a lot of other things in life. And when it comes to patience versus stubbornness, one sort of related concept is sunk costs, the distinction of, am I holding onto something because I'm attached to the sunk costs versus am I simply being patient and sticking with a plan, even when my momentary emotions are guiding me otherwise? You have a great quote in here where you talk about how sunk costs are like letting a stranger make the decisions about your life. Can you talk about how we can avoid a sunk cost fallacy? It's a very difficult thing to avoid because everyone is human. I mean,

I fall for it maybe as much as anyone else. One way to think about this is there's this quote from Daniel Connman that I love where he says, the correct lesson to take away from surprises is that the world is surprising. What he means by that is this. Let's say you made a prediction about the economy and something else very different happened. The correct takeaway from that is that, is not to update your forecasting model with this new information that's going to help you make a better forecast in the future. His point was the correct takeaway from being surprised is that you need to prepare for future surprises. Rather than saying all the effort that you put into the past should be updated so you don't just letting go of that sunk cost. His point is just becoming more attuned and aware to how the world works and the surprises that we're all likely to face in the future.

I guess my sunk cost for this has been early in my career putting in a lot of effort into trying to, to be able to predict what happens next in the economy and the stock market and in financial markets and becoming much more humble, almost to the point of not quite, not fatalistic, but just letting go with whatever is going to happen in the future, realizing that I don't have any idea what the economy or the stock market is going to do next. And that's actually okay because I just situate my finances for endurance. So whatever happens, I will hopefully be able to endure it and stick it out over the long run when results will accrue to me rather than, you know, being very,

specifically tied to firm decisions and forecasts that I've made, which I think in terms of just the decisions that we make is the source of a lot of sunk cost. It's like you made a prediction about what's going to happen next. And if it doesn't come true, you're so wedded to that decision and it's so hard to let go of it, that you just cling to it. And maybe that's a form of stubbornness versus I think the approach that I try to take is much more just let's try to be as durable as I can and see what happens so that I can stick it out over the long run. And that's when I think the odds of success will fall the most in my favor. We'll come back to this episode after this word from our sponsors.

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That's W-A-Y-F-A-R.com. Sale ends December 7th. When you're making decisions or when somebody who's, listening to this makes decisions about how to be more durable in their financial planning, how to make sure that they are staying in the game for the long run, and they're not inadvertently putting roadblocks or putting obstacles or putting undue risk in their way. Given that there are unknown unknowns, how do you calibrate for that? How do you create adequate room for error such that you are durable but not overly pessimistic?

I think first you have to realize that no amount of planning is going to protect you from everything. So I try to be durable with my finances, but look, if we get hit by a nuclear bomb, like, you know, our finances are probably screwed as well. There's some extent where, like, you do have to live with risk in life and you can't protect for everything. I do think that there is a big difference between a forecast and an expectation. A forecast would be like if something where I said, the next recession is going to happen in Q3, 2022. That's a forecast. An expectation is, look, historically, there have been about, you know, one to two recessions per decade. And I expect that in the future, that's going to be roughly the same. I don't know when they're going to

happen. I don't know where they're going to occur. What's going to cause them? But I expect there to be some level of recessions and bear markets and whatnot in my future. I'm not forecasting when the next one's going to happen, but I have an expectation that they will happen so that whenever they do come about, whenever they do arise, I think it's just you're able to deal with it with a little bit more equanimity and keeping your head on straight and being able to take a long-term perspective versus having a forecast, which is when you're specifically tied to one specific version of the future playing out, I think that's the best way that you can protect yourself from unknown unknowns in the most reasonable way that you can. I think to just the greatest extent that you can roll with the punches in life and in finances is the best that you can do for forecasting.

Benjamin Graham, the great investor, has this great quote where he says, the purpose of the margin of safety is to render the forecast unnecessary. And I love that because we spend so much time in finance on forecast. What's going to happen next? What should you do about that? And his point was, look, let's render the forecast unnecessary by just having a room for error in our finances so that we can have enough cash and enough flexibility, flexibility, not just in our finances, but in our expectations about the kind of life that we want to live. I think is probably the single most important financial concept that we have. And it's so easy to overlook.

And you see people all over the place, professional investors, amateur investors, alike. who have very little to no room for error, either because they chose it or because their life situation does not necessarily allow it. And I think being fragile like that, when you have no room for error, being fragile like that, it is only a matter of time and probably not that much time before you are eventually broken. To me, like all of finance that I'm trying to do as an investor is trying to have endurance, trying to remain robust financially so that I can stick around as an investor for the longest period of time. Many of the people who listen to this often find themselves stuck in analysis paralysis over tending to the details. When do you know that enough is

enough? Let me give an example. I'll often get calls from listeners who say something like, you know, I can't decide should my emergency fund be six months or nine months, or should it be nine months or 12 months? And I can tell from their voice, they are really stressing out about this decision. Certainly a question like that is important to think about. But how do you know when you're overthinking and how do you get yourself to stop? I don't know if there's a good answer. for that because it's different for everyone. People have very different personalities. I do think having some sense of enough, though, is another one of those just fundamentally important parts of finance. Because to me, the most important, but one of the hardest financial skills is getting the goalposts to stop moving in life,

getting your goalposts of where you want to go and how much you need to stop moving. Because if you are someone who is fortunate enough to have a rising income, a rising net worth, but for every dollar of net worth or every dollar of extra income that you earn, if your expectations rise by one dollar as well, you're going to feel like you're not necessarily going anywhere. I think this is the cause of a lot of kind of angst and unhappiness or disappointment with the world. Even for people who look like they're fairly successful, that's what it is. Look, even if we're looking at the median family adjusted for inflation in the United States, the median family's income adjusted for inflation is double today what it was in the 1950s. We tend to look at the 1950s and 1960s as this golden age,

of middle class prosperity. But the median family is twice as wealthy today as they were back then. I think a lot of the disconnect why we have nostalgia for that era is because our expectations have risen so much as well. If our incomes have doubled since the 1950, but our expectations have risen by, you know, 110%, let's say, people are going to feel worse off. You can even quantify some of this stuff by looking at like the median square footage of a new house has more than doubled since the 1950s. The median new house today has more bathrooms than occupants, whereas the median's new house in 1950s was less than 900 square feet. And it's only generalizing a little bit that, you know, in the 1950s and 60s going camping was an acceptable vacation. And hammy downs were

acceptable clothes. And by and large, to a more middle class family today, those things are not because our expectations have risen as well. And look, that's always going to be the case. It should not be that our expectations should be firmly planted in place and we should never expect, you know, to be able to enjoy the progress and the benefits of the world? It's not that, but I think we have to realize that as much effort as we put into growing our income and growing our wealth, we need to put at least as much income into managing our expectations. Because if we don't, it's going to feel like we're going nowhere. One other kind of story that relates to this a lot is with diet and exercise. We spend so much time and money

exercising in the United States, but there's still an obesity crisis. Even among people who spend a lot of time exercising. The ability to lose weight for most people tend to be much more difficult than they imagine. And a lot of the reason, there's a great study that documents this is what they call food compensation, which is to state it really simply, if you go to the gym and burn a thousand calories, but then right after your workout, you go home and you eat 1,200 calories to compensate, you are in a worse position than you were before in terms of being able to lose weight from your exercise. I think it's very similar. So therefore, in health and in exercise, what matters is not necessarily how much you exercise, but the gap between how much you exercise and your ability to

not compensate with food after that exercise. It's the gap between those two that really makes a difference. And it's the same in finance. And it's not necessarily how much money you make that is going to make you feel like you're wealthy. What's going to make you feel like you're wealthy or the equivalent of losing weight, so to speak, is how much you make relative to your ability to not compensate afterwards with rising expectations. Can you get a raise of $100 and only increase your material expectations by $50 or $80. If you can do that, then you've actually accumulated wealth that's going to make you feel better off. But if you get $100 raise and your material expectations raised by $100 or it pushes you into

a new social group that raises your expectations by $200, you're going to feel worse off. And I think that is just, you know, this is the classic hedonic treadmill that I think a lot of people know about, but it is such a fundamental, important part of investing in finance. From the investment perspective, it's this. There are so many investors who will move mountains. to try to increase their investing returns by 1% per year, you know, putting so much effort to try to become a better investor. When I think a lot of those people have, you know, several percentage points of lifestyle bloat

in their finances that they could actually exploit there. Like rather than trying to move a mountain to become a slightly better investor, I think you can actually, you know, manage your expectations and your lifestyle expenditures in a way that's going to have a bigger impact on your ability to accrue wealth over time. So I think managing your expectations can actually be a more powerful. way to grow your money than increasing your investing returns can be. Prior to 2020, there was an amazing bore run, an 11-year, 12-year ball run, and many people during that time experienced what I call a fear of heights. You mentioned earlier that recessions are cyclical, and even though the

duration between recessions has been increasing, it's still the case that more times than not, as history has shown us, recessions do tend to happen frequently. One thing is the case, that more times than not, as history has shown us, One thing that I noticed at that time was I was getting a lot of calls, questions from listeners saying, hey, I'm scared that the market is too high. I don't want to put my money in. That's what I mean by the fear of heights. And that is fundamentally a market timing expression, even though people don't necessarily think of it as market timing. You make a very interesting point in your book, one that really stood out to me, where you talked about how bubbles are not the result of high valuation, but the result of shortened timeline. Can you elaborate on that? Because that was my favorite part of your book. I think a lot of it is whenever there's a time investing, and this is actually true for a lot of fields, where your explanation for why something crazy is happening is, well, people are crazy. People are stupid. You should probably take a step back and say, look, by and large, it's probably not the case. Like, big groups of people don't tend to two things that are really

dumb and crazy, even if the outcome is really dumb and crazy. There's actually usually a more rational explanation for what's going on, even if the outcome looks really crazy. I think for bubbles, it is this. If there is momentum in stocks, which just, you know, just means that stocks are moving in one direction, it is very rational for short-term traders to step in and try to exploit that momentum. Stocks are going up. Let's jump in for the next day, the next week, the next month, to exploit this momentum. That's a really rational thing to do. Once those short-term traders start jumping in, that's going to create more momentum. It's going to push prices up even more in a rational way because they're day traders. They're just trying to figure out how can you squeeze

a little bit of money out of the stock between now and tomorrow. That's all the way. want to do. But here's what happens in that situation. Once the prices of those stocks start rising, then you have long-term investors, people who are, you know, saving for their retirements, people like me and you who might look at those rising stock prices and say, oh, maybe someone else knows something about Google stock that I don't. Maybe they know something about, you know, Cisco stock back in 1999 that I don't. The price is rising. It's catching my attention. Maybe I should buy it too. I think that is when the damage of bubbles occurs. Because look, when the bubble bursts, like it did in 2000 with dot-com stocks, the day traders that were pushing the prices up to begin with,

they're out. They're gone. They're just day traders. Once the fun is over, they take their chips, they're out of there. They're gone. The bag holders, so to speak, are the long-term investors who took their cues from those day traders and were left holding the bags. They were long-term investors taking their cues from short-term traders. I think the takeaway here is that it's often viewed like we're playing one game in investing. We're all investing in the stock market. We're all investors, it seems like the same game. But people actually play very different games in the stock market. There are day traders, there are high frequency traders. There are people who are investing for the next week, the next month. There are pension funds and endowments that are investing

for the next century. We're all playing very different games, even if we're playing on the same field. And it is so important that you and everyone as an investor realize what game you are playing and make sure that you were only taking cues and taking for advice from people who are playing the same game. I mean, one place that this shows up a lot is if you're watching CNBC or Bloomberg financial TV, and they'll have a guest on who says something like, you should buy Netflix stock or you should short Microsoft stock. The question for that is, who is you, who are you talking to? Is that advice for a 17-year-old day trader? Is it for a 94-year-old widow? Like, who is this advice for? People play very different games. You know, I'm speaking

hypothetically here, buying Netflix stock might be a great advice for the day trader and horrendous advice for the long-term investor. Let's leave Netflix out of this. I'm just speaking hypothetically here, but something can be great advice for one person and horrendous advice for another if those people are playing different games. And I think it just requires more of us to spend more time, more effort, figuring out what game we are playing and make sure that we are only reading about taking advice from and being influenced by people who understand our game and are playing the same game that we are. In the example that you just cited, of course a person's timeline, the 17-year-old day trader versus the 94-year-old widow, that timeline would have a huge impact on the game that

you're playing. What are some of the other factors that influence or determine which game you're playing? Yeah, I think a lot of it is really just your risk tolerance. What are you willing to endure to get the rewards that you were playing? Look, there are a lot of day traders for whom a 1% loss would be terrible. That would be a catastrophic day. If you lost 1% as a day trader, like you really messed up. You did something wrong there. If you're a long-term investor, a 1% loss in a given day is not something that you should, you'll even need to check your brokerage account. It's nothing. That is the normal course of events that you should be able, that you should be prepared to put up with. So I think just figuring out what your risk tolerance is and your goals are. If you're a

day trader, your goal is to maximize your income today. As a long-term investor, your goal has absolutely nothing to do with today. It's maximize your income over the next 40 or 50 years. So I think that just determines the game that you're playing. There's also, Like some people find trading really entertaining, even if they don't think it's the best way to maximize their money, they enjoy it. And I think that's okay. Like, I don't have any criticism against that. Like, I probably play some dumb games, too. So I think it's okay to do that. I think figuring out the game you're playing is a better way to phrase that is just figure out what your goals are and figure out what your risk tolerance is. And only taking your advice from people who have a similar risk tolerancing goals than you do is really critical. How important is diversification between different types of assets? Is that something that it? is overhyped, or is it increasingly an important way to hedge for the average long-term buying hold investor? To me, like the big point of diversification between assets is realizing that I'm going to own some assets that are capable of producing really high long-term returns,

and I want to own other assets that protect me from being thrown off course from those assets that will earn a long-term return. So let's say I own stocks and bonds. The reason that I own bonds is to guard me from ever being forced to sell the stocks that I own. That's the sole purpose of the bonds that I have. The bonds are the airbag of the stocks that I own. The amount of bonds that I would need to own is whatever I would need to ensure that in a job loss, in recession, in a bear market, whatever it is for different people, that you are never forced out of the stocks that you do own.

That's their sole purpose. I think just that kind of slight change in view about how you think about diversification is really important. And it's really important for bonds right now because for the majority of the last 30 years, bonds produced really high returns. Bonds produced higher returns than stocks in many of these situations and many of these in many of these periods. And I think recognizing that that is the historical anomaly, not the 0% returns that we're

going to get from bonds today, but the super high returns, that is what it was historically rare and realizing that the bonds you own today, the purpose of owning that is not to earn a lot of income because you're not going to. It's not to earn big returns because you're not going to. The sole purpose is providing a cushion from being forced to sell your stocks. but that cushion can have an enormous return over time. Like during the next recession, the next pandemic, the next bear market, whatever it is, if you are forced to sell your stocks after they've declined 30 or 40 percent,

forced financially or forced psychologically out of them, that is a blow to your finances that you will probably never be able to recover from. Like, that's going to be a catastrophic loss on your scorecard. So, look, even if you're earning 0% in bonds today, if those bonds protect you from making a catastrophic, mistake during the next bear market in stocks, then the actual return that you're earning on your bonds is actually really high. It's not a return that you're getting in interest payments or dividends. It's a return that you're getting in improving your behavior in a way that's going to allow you

to let your stocks compound for the longest period of time. As you said that, everything that you said, in my head, I was replacing the word bonds with emergency fund. And it all checks out, too. It's all the same. Exactly. Yeah. The specific return on your emergency fund might be zero. but the real return in the context of your greater life is immeasurable. Yes. I mean, it's so easy to look at a savings account today and say I'm earning 20 basis points return on this account. That's nothing. But the actual return in terms of the options that it gives you, options in terms of flexibility, independence, or, you know, saving your behavior. The actual return that you're earning, that you're earning in kind, so to speak, is really high.

It's just invisible. It just takes some effort to figure out what you're actually earning. We'll return to the show in just a moment. You wrote a very memorable story about your teenage years, your childhood and teenage years as a skier and some lessons that you learned during that time that have influenced you through the rest of your life. Can you talk about that? Yeah. So I grew up ski racing in Lake Tahoe, California. It was great. It's a great way to spend your teenage years. I was a competitive ski racer. I got to ski all over the world. It was a really cool experience. And I grew up with about a dozen and other skiers, my age, friends, my age who were doing this with me. We skied all over the

world together. We skied six days a week for years and years together. It was a really cool experience. I write about a sad experience I had when I was 17 years old where there had been a big snowstorm in Lake Tahoe in Squaw Valley where we were skiing. And I was skiing with two of my best friends who I'd grown up with for many years. And we would ski out of bounds, which is illegal. You're not allowed to do it. You have to duck under the ropes that say do not cross and we would ski out of bounds because that's where all the fresh on track snow is. It was something we did all the time, even though you're not supposed to do it. And the avalanche danger at Squaw Valley was very high that day because there was kind of a layer

of soft, light, fluffy snow. And then on top of that, a layer of very wet, heavy snow, which makes the mountain very unstable, very prone to sliding down because the weight of the heavy snow pulls the light fluffy snow down. And it's just very prone to sliding. So we were skiing out of bounds that morning. It was myself and two of my friends. And we got caught in a very small avalanche that morning. It wasn't that bad.

It came up maybe to my knees. We kind of laughed it off. It wasn't that big a deal. And then we got to the bottom. And my two friends said that they wanted to do that same run again. And I said, I don't want to for whatever reason. I honestly don't remember what my reason was, but I didn't want to do it. So I said, hey, you guys go do it.

And I will basically meet you at the bottom. I will, because we were skiing out of bounds. So I, rather than skiing down to a chairlift, we had to hitchhike back from this back country road that spit us out on. So I said, hey, you guys go do it again. I will drive my truck around and pick you up so you don't have to hitchhike back. About 20 minutes later, I went to pick them up. They weren't there. Didn't think that much of it.

But as time went on and we started piecing things together and their parents got involved, we realized this is a big deal. They were missing. And to dump to the punch line, so to speak, they were killed in a massive avalanche on that run. At the time, I was 17, which at the time, we thought we were young adults. And technically, I guess that's true. But I look back at us, and it's like, we were children. And it had a big impact on me because it was honestly the first bad thing that ever happened in my life.

I had a really good childhood, a good upbringing with a loving family. It was the only bad thing that happened in my life. And it had such a big impact on me in that sense. But it also kind of drove home the idea, the theory of tail risks. And what I mean by that is even at the time, even at 17, we knew. that what we were doing was risky. Skiing out of bounds, we were not supposed to do. We knew that was risky.

But we thought that the consequences of our risk might be that we would get our season passes pulled if we got caught, that our coaches would yell at us, maybe that we would break our legs, blow out your ACLs, which is almost like a right of passage for ski racers. That was when we thought the consequences of our risk were. We never in a million years thought that the consequences of the risk that we were taking would be that we'd end up dead. Never, never, never, never once crossed our mind. But it just kind of drove home to me that those tail risks, the tail events, the really low probability

but high impact things, that is what moves the world. That is the most important things in life. Are there these few events where you have this low probability, something happened, but the consequences of it are enormous. That is what moves the needle in life. It really just kind of opened my eyes to that concept. In a lot of ways, I think it probably made me a little bit more risk-averse in life in general. Just when you go through something like that, and by the way, I know my story is not

unique. A lot of people, most people have lost someone close to them or had a near-death experience themselves. I know this is not something that, you know, I've done alone. I think a lot of people can relate to this. I think going through something like that just kind of opens your eyes to the risk in life in a way that changed my view about risk for the rest of my life. It had a big impact on me. And like, did it change even how I invest? Maybe. That might be a step too far, but I think it definitely just made me more cognizant of the big outlier risk in life than I was before. Thank you for sharing that. I want to elaborate on that very last thing that you said, that it made you more cognizant of the big outlier risks in life. In what ways do you see that appearing in your own life these days? I think, I mean, one other thing. I think a lot of people can relate to this too. I have two young kids. And becoming a father, becoming a parent is another thing of just like, like the amount of risk that I was willing to take in life before a parent versus after is night and day. I think a lot of it was before I became a parent. And then once I got married, it was about myself and my wife. And once you have kids, it's like none of that matters anymore. Like I don't matter anymore. Everything is about my kids. I mean, even so much that like I viewed work before I became a parent. Work was great. I get to earn money to buy stuff for myself. That's what,

work was. And now, like, the shift that took place when I became a parent was so stark of now, no, now work is something that I can do to take care of my family. That's what, like, I'm going to gain money to take care of my family. It's not about me anymore. I think that was a big shift. And I think that that has to do with taking risks as well. Like, if everything is about you, then maybe you're more willing to take risk because when those risks backfire, it just hurts you. But now if I take a risk, it's going to impact my son, my daughter, my wife. That's a much bigger deal. And I'm willing to hurt myself a million times more than I would ever try to want to put them in danger. So maybe that's impacted how I think about financial risks now too,

just because my view of what I'm doing all this for has shifted so much. I know you mentioned you keep a 12-month emergency fund. Yes. How does your desire to protect yourself and your family from risk? Now that there are more people who are affected by the decisions that you make, how does it impact career and business decisions that you make? We've We've talked a lot about investing, but there's, of course, the income side. What's your framework for thinking of that now that people are depending on your income? I mean, yeah, there's a really personal side of this, which was I worked at the Mali Fool for about 10 years, and I joined a firm called the Collaborative Fund 40 years ago. When I joined 40 years ago, our son, who was at that point, our only child, was an infant.

And I had a really good job of the Mali Fool. It was and is a great place to work. All my friends were there. I was totally comfortable. I loved my job. Everything was great. leave that and to join the collaborative fund, while I had an infant and we had just bought our first house, felt reckless because everything was going great. And I felt like I was throwing everything

upside down in my career in a way that might impact my son. That really wore on me in a way that I think if I was not a parent, it would have been a much easier decision. But now that I had a hungry mouth relying on me, it felt a lot different. So I don't necessarily know, you know, how I managed my career has changed necessarily because I'm not because I'm a parent. But would I'd be willing to take a one year sabbatical now and, you know, go study plants in the Amazon because it sounds like, no, I'm not like my job is to provide for my family now in a way that I love and is very meaningful and gives me a lot of purpose. That's probably the big point now too. It's like it's like I feel like I'm forced to take care of other people. It's like it's my,

my sense of purpose has changed. And now my, what I want to do is take care of, of my family. And of course, this too is something that I think every parent can relate to where it just becomes not about you anymore, but in a way that is not a negative at all. It gives you a lot of purpose that I think is very gratifying in life. What are your thoughts on the early retirement movement? What I'm really into is independence. And I think retiring, you know, as it's lumped into the fire movement, is something that's very different. And I think this is not a unique take. A lot of people talk about this, about you can become financially independent and still stay in your job. If you like your job, you like what you're doing, you like the structure, you like your

coworkers, et cetera, or because you're financially independent, you can go find another job that maybe pays less, but you actually like doing. To the extent that some people, and I emphasize some, it's not all of them, but some people in the fire movement get the independence thing down and then they retire and they don't really have anything to fill their time, fill the void. That is something that I think is probably going to lead to a less happy, less fulfilling, less enjoyable life than they had before, even when they're grinding away nine to five as a slave paycheck, I think sitting at home doing nothing while all of your friends and your peers are out working, you have nothing else to do, that's a problem. Filling that void with whatever it is, whether it's art at home

or writing a book or finding another job, whatever it is, is the most critical aspect of it. But to me, like, this is my sole financial goal. And I think you and I spoke about this two years ago when you and I first talked. My whole financial goal, like the overarching goal is independence. I just want freedom. I just want to wake up every day and say to myself, I can do whatever I want today. That's my sole financial goal that I've been working towards. How do you know when you'll get there? I don't think I ever will. It relies on not moving the goalposts. And there's a spectrum of independence as well. You don't have to be worth tens of millions of dollars to be independent. Even if someone who has a net worth of $5,000

is more independent than someone with a net worth of $500. Because the $5,000 gives them independence to where if they lose their job, they'll probably be okay for the next month or if their car breaks down, they'll be able to, like having some level of independence, it all exists on a spectrum. So I'm higher on the spectrum than I was many years ago, but becoming okay with where you are on the spectrum is really important. And maybe it's going to be that I don't, that I never feel 100% independent, but just getting closer towards a little bit less worry about what might happen in the world and the economy and my job and my career, whatever it is, that things are going to be okay for my family, which is, again, is, you know, that's who I'm doing all this for. That

is what gives me a lasting level of happiness in terms of things that I do with my money that I really look forward to. Thank you, Morgan. What are some of the key takeaways that we got from this conversation? Here are eight. Number one, work with your nature, not against it. We all have biases. We all have flaws.

And it's difficult to overcome these natural tendencies. Morgan recommends that we focus less on quote unquote overcoming our biases and rather on working around them. I think the best we can do is become introspective about our biases and recognize that these are my flaws. I'm Morgan, this is what I do very poorly. These are the flaws that I'm susceptible to. These are my emotions that get out of whack from time and embracing them. If you've been investing for a while, you likely know what fears or actions you're susceptible to.

Do you tend to panic when there's a downturn? Or do you get really excited about the opportunities that happen when there's a downturn? and you tend to raid your emergency fund in order to buy stocks at a moment when they're very volatile. Figure out how you tend to react and then plan accordingly. Are you subject to optimism bias? Are you subject to the availability heuristic and recall bias? What biases tend to trip you up? Observe that so that you can plan around it.

If you have not been in the market for very long, if you're a new investor, ask yourself, generally in life, what do you excel at? And what do you, quite frankly, do poorly? What are your own strengths and weaknesses? Start noticing your thoughts and reactions to events that occur, not just in the market, but in life, and track them. Start observing yourself like an outside observer would because self-knowledge is one of the most critical components to investing success. And so that is key takeaway number one. Work with your nature, not against it. Key takeaway number two. Save like a pessimist, invest like an optimist. In his book, Morgan talks about having a barbell personality,

being both paranoid about everything that could go wrong and optimistic about everything that could go right. You need to both get rich and stay rich. You need short-term paranoia to survive all of the uncertain problems that may occur in the future. Bear markets, a pandemic, recessions. This type of short-term paranoia helps you maintain a healthy amount of savings that allows you to weather those storms. You also need long-term optimism, a belief that over time, industries will thrive, businesses will continue to solve problems,

businesses will continue to become more productive and make a profit, and that you as an investor can participate in that. Many people are good at one or the other, but not both. The people who do well over the longest period of time are people who can embrace both of those sides. If you are just a pessimist, you're not going to get rich. And if you are just an optimist, you're probably eventually going to get kicked out of the game. You have to have both at the same time. Pause for a moment to think about which side you lean towards. Do you tend to be more of an optimist or more of a pessimist?

If you are a good saver, you're great at saving money, you're great at accumulating an emergency fund, but you're afraid to invest. You tend to be a little bit more anxious about investing. Recognize that and make a plan to learn more about investing so that you can become more comfortable with it and put more of your money in the market. Conversely, if you're one of those people who has no fear of the market and you have a tendency towards viewing the market as a high-yield savings account,

you have a tendency towards having such optimism bias that you fail to keep a sufficient emergency fund and you fail to keep a margin of safety, if that is your natural tendency, then recognize that so that you can make sure that you establish a solid emergency fund for yourself. So that is key takeaway number two, save like a pessimist, invest like an optimist. Key takeaway number three, differentiate between patience and stubbornness. The difference between being patient, and being stubborn is crucial in the world of investing. Patience is you're just giving yourself the amount of time needed for stock market returns

to accrue to you, for a job or a relationship to work out. Some things require patience in order to do well. That's a whole long-term thinking requires that. But stubbornness is when the world has changed and you just don't want to accept it. Let's say, for example, that you invest a little bit of money in a startup. And it seems promising, but you want to wait to see what. what happens before you invest more. In that example, you're being patient. Now, on the flip side, let's say that a company that you've invested in a lot already is going bankrupt, and you're

past the point of no return. You refuse to believe it. You refuse to pull your money out. You are locked in sunk cost fallacy. You can't let go. You're being stubborn. That's illustrative of the difference between patience and stubbornness, the difference between prudent caution versus magical thinking. Now, it can be incredibly difficult to figure out what a situation calls for. It can be very hard to know whether you are being patient or being stubborn, but you can try to recognize it within yourself, whether you're being patient or whether you're being stubborn by, potentially by setting guidelines for yourself before you take an action. And then once that guideline is met, then you take the action specified prior to getting into the situation. So, for example,

Maybe you decide to invest a small amount of money into a given stock, and if you decide, before you ever take any action, that if the stock hits X, you'll invest more, and if it hits Y, you'll sell. This might help you avoid stubbornness or avoid sunk cost fallacy. I'm not saying to do that necessarily. I'm just saying that's one of many examples of how you can in advance put guidelines or guardrails in place that save you from yourself. As Morgan talks about, it's important to have strong opinions weekly held. Be durable and flexible. Be willing to see where things go and willing to cut your losses if your expectations do not match reality. As Morgan said, the odds of success will be more likely to fall in your favor if you are both durable and flexible, if you have strong opinions weekly held.

So that is key takeaway. Number three, differentiate between patients and stubborn. This. Key takeaway number four, stop moving your goalpost. One of the biggest challenges in the world of money management is figuring out how much is enough. Because enough can be a moving target. Figuring out how much is your definition of enough is difficult to do, particularly if you're on the path to financial independence. And that's why one more year syndrome is a very real thing for people who want to retire early or make a career change. That just one more year. syndrome, just one more.

Now that we're here, let's move the goal post a little bit more. It's common. It's very, very common in the fire community. And as Morgan says, the key to resolving our discontent or the key to solving this idea that we may never have enough is to stop moving the goalpost. To me, the most important, but one of the hardest financial skills is getting the goalpost to stop moving in life, getting your goalposts of where you want to go and how much you need to stop moving.

because if you are someone who is fortunate enough to have a rising income, a rising net worth, but for every dollar of net worth or every dollar of extra income that you earn, if your expectations rise by one dollar as well, you're going to feel like you're not necessarily going anywhere. We need to manage our expectations appropriately, lest we get caught up in feeling like we'll never, ever have enough. And that being said, once you reach enough, of course, everybody needs goals. A meaningful life is one in which you're working towards,

a target, you're making progress in something that motivates you. So certainly not moving the goal post doesn't mean stop setting goals. It simply means recognizing what's icing and what's cake. What's enough and what's more than enough? One way to do that is to have a gratitude practice. Being grateful and focusing on what you do have can be very helpful for helping you realize that you already have enough, perhaps financially or perhaps in other non-financial forms of wealth. Morgan wrote a great article about this back in August. We're going to link to it in the show notes, and those show notes will be available at afford anything.com slash episode 284. That's afford anything.com slash episode 284. And so that is key takeaway number four. Get clear on what's enough.

Key takeaway number five. Bubbles are not the result of high valuation. but rather the result of shortened timelines. Now, this blew my mind when I first read it in his book. As Morgan explains, when there's momentum in stocks, day traders naturally want to hop in and exploit that momentum for short-term gains. And so when those day traders hop in, they increase the stock prices. So stock price grows rapidly, volume trading volume, grows rapidly, and a lot of buy-and-hold investors might be left wondering, geez, should I get in on it too?

What happens is once the day traders have had their fun, they sell and long-term investors are left holding the bag. So unfortunately, it's all too easy for us to take cues from day traders, but we shouldn't. It's important, therefore, to be aware of who we are taking our cues from. The takeaway here is that it's often viewed like we're playing one game in investing. We're all investing in the stock market. We're all investors. It seems like the same game. But people actually play very different games in the stock market.

There are day traders, there are high frequency traders. There are people who are investing for the next week, the next month. There are pension funds and endowments that are investing for the next century. We're all playing very different games, even if we're playing on the same field. The next time you find yourself caught up and hype around a stock, a company, a trend, take a step back for a second and ask yourself who you're hearing this from. Are you hearing this from someone with wildly different investment goals than what you have? Because depending on your goals, you'll need to seek out advice and camaraderie from people who have similar philosophies, similar goals.

Follow their lead. Don't take advice from people who are playing a different game. And in the world of investing, you may have a whole bunch of people who are all investing in the stock market or investing in real estate or investing in whatever. But those people are playing different games with different timelines and different ultimate end goals and different risk tolerances. and so you'll want to make sure that you're listening to the people who are playing the same game that you are. That is key takeaway number five. Key takeaway number six. Bonds and emergency funds, bonds and cash, have a higher return than you think,

meaning that they have an invisible return or an indirect return. Many people are torn about how much cash they should hold or torn about asset allocation because they're afraid to hold too much of an asset that, in their eyes, doesn't produce good returns. It's not an amazing feeling when you realize that you have savings, sitting in a savings account, that's earning next to nothing. But the purpose of having bonds in your portfolio or the purpose of having an emergency fund or cash reserves is not to provide us with returns directly.

In fact, it's to provide us with a safety net with a margin of error that enables us to take on more risk in other elements of our portfolio. I'm going to own some assets that are capable of producing really high long-term returns, and I want to own other assets that protect me from being thrown off course from those assets that will earn a long-term return. So let's say I own stocks and bonds. The reason that I own bonds is to guard me from ever being forced to sell the stocks that I own. That's the sole purpose of the bonds that I have. Morgan goes on to explain that if we're ever in a bad situation, and we are forced to sell our stocks, that could result in a catastrophic loss that we may not

recover from. And so if having bonds or having cash protects us from having to sell stocks, then they factor into that high return. The same story is true with keeping an emergency fund or keeping cash reserves. That's why it's often referred to as an FU fund. Having cash gives you greater freedom and flexibility and choices. And that freedom and flexibility might not have a direct return in the form of the account that it's sitting in, but it has a huge invisible return in the fact that it gives you the flexibility to pursue opportunities. So you'll have choices as a result of having cash reserves that you wouldn't necessarily have if those savings didn't exist. And so if you feel poorly about the low interest rate on your savings

account, don't. Don't feel bad about it because you are getting a good return on it. indirectly. You are getting a good invisible return in the freedom that it's giving you to pursue other opportunities and to be more aggressive in other elements of your portfolio. And so that is key takeaway number six, that bonds and cash have an invisible indirect return. Key takeaway number seven, don't get too attached to a forecast. When you get attached to a forecast, a financial forecast, you're getting attached to one specific reality that you project or forecast to occur in the future. But there are many possible ways that the future can unfold. You can't plan for everything, but you can have a certain set of expectations, a range of expectations,

that can help you prepare for future unknowns. I do think that there is a big difference, though, between a forecast and an expectation. A forecast would be like if something where I said, the next recession is going to happen in Q3, 2022. That's a forecast. An expectation is, look, historically, there have been about one to two recessions per decade, and I expect that in the future, that's going to be roughly the same. I don't know when they're going to happen. I don't know where they're going to occur.

What's going to cause them? But I expect there to be some level of recessions and bear markets and whatnot in my future. There's a famous quote that I absolutely love from the legendary investor, Benjamin Graham, that says, the purpose of the margin of safety is to render the forecast unnecessary. And so this ties in with what we were just talking about in the previous key takeaway, that the purpose of that margin of safety, those bonds or that cash, that emergency fund, is to render the forecast unnecessary. It's essentially another way of saying to provide flexibility, right?

The purpose of the margin of safety is to render the forecast unnecessary. And if we are rendering forecasts unnecessarily, then by definition, we are not getting too attached to forecasts. We are substituting forecasts for a range of expectations. and for probabilistic thinking, and that is a much more mentally flexible way to approach the way that we think about investments. And so that's key takeaway number seven. Don't get to attach to a forecast. Finally, key takeaway number eight, tail risks, which are risks of low probability and high impact, those tail risks move the world. If something has a low probability of occurring,

it's natural to think, eh, that'll never happen, and to brush it off. And worse, if something something has a super low probability of happening, it may not even cross your mind at all. You might not even consider it. And unfortunately, that's how Morgan learned the lesson that he shared with us during the interview. Skiing out of bounds, we were not supposed to do. We knew that was risky. But we thought that the consequences of our risk might be that we would get our season passes pulled if we got caught, that our coaches would yell at us, maybe that we would break our legs, blow out your ACLs, which is almost like a right of passage for ski racers. That was when we thought the consequences of our risk were. We never in a million years thought that the

consequences of the risk that we were taking would be that we'd end up dead. Never. Risks that are low probability and low impact are not something to spend a whole lot of time on, but risks that are low probability and high impact, those need your attention. And of course, risks that are high probability, of course also need your attention. But low probability, high impact, low probability, high magnitude, those tail risks deserve a lot of attention because it's natural to brush them off, but ultimately those are the ones that make the biggest difference. Those are the ones that move the world. So recognize those tail risks and use this recognition of tail risk to give you another

framework from which to make decisions and assess your risk tolerance. A previous guest on our podcast, Dr. Gleb Soppersky, who is an expert in disaster avoidance says, you know, you want to plan for extremes. You want to plan for both extremes. So it's easy to brush off tail risks, but it is unwise to do so. As you think about your investments, make sure you're thinking of tail risks as well. That is key takeaway number eight. Thank you so much for tuning in. Thank you for spending this time with us. If you enjoyed today's episode, please share it with a friend or a family member. That's the single most important way that you can spread the message of financial independence, smart investing, conscious thinking, deliberate thinking.

That's the single most important way that you can spread the fire. So thank you for being part of this community. Make sure that you are subscribed to this podcast so that you don't miss any of our other awesome upcoming episodes. You can get the show notes, which is a summary of today's episode and all of our upcoming episodes. You can get those delivered to you by going to afford anything.com slash show notes. Thanks again for tuning in. My name is Paula Pant. This is the afford anything podcast and I will catch you in the next episode.