Afford Anything - Why Investors Need a Latticework of Ideas, with Morgan Housel

Episode Date: September 14, 2021

#338: This month, we’re running four episodes based around the four pillars of F.I.R.E. — financial psychology, investing, real estate and entrepreneurship. Today’s episode, which originally aired in April 2018, offers advice to investors who want to sharpen and hone their competitive edge. Here are three lessons from this conversation with investment writer Morgan Housel: Lesson #1: Great investors need patience and humility. Lesson #2: Read broadly. Don’t just read books about finance and investing. Read from a broad multi-disciplinary array of subjects, so that you can form a latticework of ideas. Lesson #3: Play a strong defense. On the surface, it seems like playing defense is a conservative strategy. Emergency funds and a strong income-producing allocation, for example, both sound conservative. But in the long-term it could prove to be the opposite. Enjoy this interview, which originally aired in April 2018. For more information, visit the show notes at https://affordanything.com/episode338 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to the investing episode of the 2021 September sabbatical. During the month of September 2021, we are playing four favorite episodes from our archives around the four pillars of fire, financial psychology, investing, real estate, and entrepreneurship. Today's episode is based around the eye of fire investing. And we'll be listening to a talk with esteemed investing writer Morgan Howell. This episode originally aired in April 2018. Enjoy. You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that's true, not just of your money, but also your time, energy, focus, attention, anything that's in your life that's a scarce or limited resource.

And I'm not saying this to promote a scarcity mindset. Of course, I believe in abundance, but the fact remains that everything bears an opportunity cost. This leads us to two questions. Number one, what are your priorities? And number two, how do you align your daily actions to reflect those priorities? Answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pan. I'm the founder of Afford Anything.com and the host of the Afford Anything podcast. Joining me on today's episode is one of my favorite writers, Morgan Housel.

Morgan is a former columnist for the Wall Street Journal and the Motley Fool. He has also been published in Time Magazine, USA Today, Businesses, Insider and several other publications. And he is one of the foremost thinkers and writers in the world of investing in money. He has an incredible skill for taking complicated issues and explaining them in a way that is simple and easy to digest without oversimplifying it. And I am very pleased to say that he is just as talented at that in the spoken word as he is in the written word. So, without any further delay, here is Morgan Housel discussing how the average person can gain a competitive edge in the world of investments. Hi, Morgan.

Hi, how are you? Thanks for having me today. Absolutely. Thanks for joining us. You bet. I want to start with your background. I know that when you were a college student, you wanted to work in investment banking until you tried it, at which point you wanted to do absolutely anything else but that. That's right.

I mean, that's a too long, didn't read version of the story. the slightly longer version of the stories, you know, this was the mid-2000s. And back then, for people who remember, kind of in the mid-2000s and maybe the previous 20 years before that, investment banking was a very popular sought-after field for finance and economics majors. It was kind of what everyone, particularly young men who were finance majors, that's what they wanted to do because it had this allure of power and money and influence. And if you could get into investment banking, that was the biggest thing in the world that you can do in finance. So that was all I wanted to do going through college.

I knew I was really interested in investing, but investment banking was plan A, B, and C. And then I finally got an investment banking internship in my junior year. And I thought, great, I've won the lottery. This is what I've always wanted to do. This is my ticket up. And I'm so interested in it. And the first day I get in there, and I just recognize instantly, not, I wouldn't even say the first day.

I would say within the first hour, I recognize that this was not for me. Because the whole culture of investment banking, and I think it's gotten a little. little bit better today than it was, let's say, 10 or 15 years ago. But the culture of investment banking was just so type A grind you into the ground, like financial boot camp. Like, we're just here to make you miserable and everyone will work until 4 in the morning, grinding out spreadsheets that no one's going to look at anyways. And it was just so intense for me. And I think some people thrive in that culture. And for me, I've just always been the type of person that thrives in a culture where I can stop and think something through and not have a ton of time pressure to really

push things out as soon as humanly possible. And I think that kind of carried into an investment philosophy of long-term thinking of using time and patience and being able to think problems through as your competitive advantage rather than just trying to compete on a timeline of go, go, go, go, go, how can we get this done sooner? Who is the toughest? Who's the strongest? Who's the fastest? So I think it actually, in a roundabout way, it actually kind of not only influenced my career decision to move on from investment banking and do something different, but also I think it truly also kind of changed my mindset about investing overall and thinking about money overall, just towards a way of, you know, doing things the fastest, maybe the most glamorous and it might, you know, from the

outside, gain you the most respect. But I think a true competitive advantage is when people can slow down and use time and patience to their advantage. And you recently wrote about how doing nothing is often the smartest investment choice that you can make. Yeah, I think that's really true. You know, if we're talking about investing, the idea of doing nothing is effectively dollar cost averaging into index funds and not doing anything else, just being patient after that. And I think a lot of people know this, even if they read it and they agree with it and they say, yeah, you're right. That's the best investing strategy. There is such a temptation to act and to do something different.

And I think the reason because is because in most fields, there is a correlation between activity and results. If you want to be a great golfer, you should go out and practice golf, you know, 12 hours a day. Go to the driving range and hit 1,000 golf balls. That's how you get better. If you want to be the best basketball player in the world, go to the court and practice dribbling by yourself for 10 hours. That's what Kobe Bryant used to do when he was a kid. Like, that's how you get great. There's a clear correlation between action and activity and results.

And I just think in investing, there's not. It's one of the very few fields where we know distinctly that people that put in the least effort, the least action, who are the least hands on. They end up generating some of the best results. This is not true just for individual investors, but professional investors as well. If you just look at individual investors that bought an index fund 20 years ago and then went to the beach, never even checked their account, literally did nothing after that. Those investors who did nothing, would be in the top quintile of professional investors if you grouped everyone together. So even if you're just looking at the whole universe of investing, we know definitively the people that kind of do nothing, so to speak, are the ones that have much higher odds of success over time. But there is such an inactive, there's such a propensity to do something different. And I think those actions are in investing. If you can control that aspect of investing and wrap your head and your attitude and your mentality around a do nothing approach, I think that alone is probably the most important thing that individuals and professional investors can and should think about.

Tell me about your shift. Because, you know, one thing I find interesting about your work is that although you constantly keep up with what's happening in the markets at, if not the day to day level, at least the week to week or month to month level, your core personal investments are index plus, right? You dollar cost average into index funds and then you have a little bit in individual stocks. How did you come to that philosophy? Yeah, I mean, I would say back early in my career, I was really into the value investing individual stock selection, you know, style of investing. And that's still a way of investing that I have a lot of respect for, for people who do it and really devote themselves to it. I think it's a great way to invest. For me, I think the turning point was really the 2008 financial crisis. When it kind of pulled a curtain back and unveiled a lot of really bad investing behavior among the both individuals and professionals who saw what was going on in 2008 and 2009 and said, wait a minute, I don't like this. This feels broken. I want out. I want safety. And I'm going to sell. You know, in late 2008 or early 2009, which we know in hindsight and should have known at the time is the absolute worst thing you can do for yourself as a long-term investor, particularly

if you're an investor that has 10, 20, 30 years in front of you, which a lot of investors did at the time. And so I got really interested in just the concept of behavioral psychology and kind of how, like the intersection of investing history and psychology is really what I started getting interested in. I think as I dug into it and started learning about it, it became apparent to me for the reasons that we were just talking about in terms of being hands off, that investing psychology and maintaining control over your emotions was likely to have a bigger impact on your investing results over time, over the course of your career, then the individual stock selections that you picked.

So a different way of saying that is, you know, a person who has phenomenal control over their investments but just invested in index funds was likely going to do much better than someone who was phenomenal at picking the best stocks but did not have control over their investments or did not have control over their psychology. And then so for me, it just kind of. dawn on me that that's how I wanted to invest. I wanted to spend very little, if any, of my time thinking about the individual stocks that I bought. And I wanted to spend all of my time thinking about my behavior as an investor and trying to align my attitudes and my philosophy around

long-term thinking. And I think the only way that I could do that, and this is different for everyone, I'm not saying this is what other people should do. But I know that the only way that I could gain enough mental bandwidth and enough focus to truly focus on the, on the long-term thinking and around my investing behavior was to just completely take the stock selection part out of the equation. And so that's why I kind of gravitated towards index funds. It's not that I don't believe in people's ability to pick winning stocks over the long run on average in a diverse portfolio. It's just that I tend to think that behavior in psychology is a more important part of the equation. How do you form an approach that's based around behavior and psychology

while also recognizing, as you've written about, that humans are notoriously bad at predicting our future behavior. Yeah, I would love to have an answer for you right at where I'd say, well, here's how you get around that. But I don't. I think the honest answer is, you're right, it's really difficult. It's difficult for me, someone who spends pretty much their whole career thinking about and researching this stuff.

It's kind of egotistical or narcissistic in a way to think that I can sit here and say, study investors bad behaviors but think that I haven't figured out for myself. So I think the honest answer for you would be, I think there's a good chance that I will look back at myself in 10 or 20 or 30 years and be able to pinpoint flaws in my thinking, biases that I fell for. I hope that because I put so much effort into it, it will be lower than the average investors. But I think a broad point around your question is investors should really get attuned with their own past behavior and see their past behavior as a good indication of their future behavior. And a lot of people when they're trying to predict their future behavior, they predict themselves,

they kind of extrapolate from today. So let's say today in 2018, the market has done really well over the last nine years. A lot of investors feel pretty good about their investments. They've made a lot of money in the last nine years. And it's very easy in that mindset to say, you know, if the market were to fall 30% in the future, I'm going to try to envision how that would make me feel. And you know what? it doesn't seem that scary. I think I would see it as an opportunity. That's the forecast that a lot of

investors make today. And I would caution against that. And I would recommend, rather than trying to predict how you feel in the future, you should go back and look at what you did in the past the last time the market fell 30 percent and say, what did I do back then? Did I panic and sell? Did I truly look at it as an opportunity? What was my mindset back then? And I think using your past behavior as an indication of your future behavior is likely to be much more accurate than any kind of forecasts that you might put forth today. Right. Yes.

And you've mentioned the risk assessment questionnaire is kind of bonkers for exactly that reason. Yeah, that's right. This is what something a lot of financial advisors do when they onboard a new client. They have a questionnaire where they're trying to gauge the clients their attitude towards risk. And they say, Mr. client, tell me how you would feel if the stock market were to fall 30%. And the client says, you know, oh, that would, that would, that would.

makes me nervous or, oh, I don't think that's that big a deal. And then the financial advisor tries to gauge that client's risk tolerance based on that survey. And this is something that a lot of financial advisors do, but it kind of goes against what I just said of when you're asking people to anticipate how they might feel in the future, that forecast, that anticipation is heavily anchored on how you feel today. And it's not really a forecast of the future. It's really just an extrapolation of how you feel today. And therefore, so rather than using the risk assessment survey, like I highly recommend. And I think this is a growing attitude. I'm not unique in this. I think I highly recommend, again, using kind of past behavior and viewing how people acted in the

past and using kind of that as a mirror for what they might do in the future. So what do you do if you're a younger millennial or your generation Z, you just don't have a past that you can reference because you're in your 20s? I think there's two answers to that. One is that there's no way to kind of understand how you're going to react to something until you've been in it. So I think when you're young, I'm tempted to say that's the time when it's okay to learn. And that's not to say, you know, go out and risk everything. But I don't think that there's a way that anyone who has not been in a 30% bear market can actually understand what it feels like to live through one. I would tell young people that

during the next bear market, you're going to learn a lot about yourself. You might make bad decisions. And rather than fearing those bad decisions, I would implore them to use them as a baseline of learning so that they can really set themselves up for a much better financial life going forward as they really start to save substantial amounts of monies as they get into their 30s, 40s and 50s. I mean, that's one point that I would make. I mean, I would also say it's not a bad position to be in if you're a millennial to say, you know what, since I haven't been through this before and I haven't experienced a bear market before, I'm I'm going to substantially lower my risk tolerance right now just because I don't really fully

understand how the stock market works yet or what it's capable of doing. And I think that is counterintuitive advice to tell a young person who has maybe 50 years in front of them before they're going to retire to say, you should kind of be, you know, have a lot of your investments in bonds and cash. That seems counterintuitive. But I think if doing that is going to put that investor in a better psychological state during the next bear market and maybe even give them some capital to take advantage of it and just put them in a more solid footing so that when that bear market comes, they can truly

see and experience and understand what market volatility feels like. That I think is not a bad position to be in. It's just kind of setting yourself up for a longer term learning opportunity rather than being all in and then discovering that in a bare market, the stock market's not for you and then you've lost 30% or half of your money and then you get out and then you're kind of scarred for life, which that alone is probably going to be the single most detrimental factor to your long-term investing success if you're looking at a course of, you know, 50 years. If you get scarred for life in your 20s and 30s, it's hard to think of something that's going to make it harder for you to accumulate a significant retirement sum than being scared out of

the market for life in your 20s or 30s. Wow. So you would prioritize psychological risk tolerance over technical risk capacity? I mean, I'm tempted to say yes, but I also want to make an important point that it's different for everybody. It's always common for people to want to hear, like, what is the rule that works for everyone? What is the advice that everyone should follow? I truly think, you know, there's a saying personal finance is personal. So it's different for everyone. So I would say if you are someone listening to this who feels like they have a pretty good chance of being scared out of the stock market if they were to lose 30% of the money, I would encourage

them to take a slower approach and get their toes wet. So it's different forever. I think there are people that might truly think that they have good control over what market volatility might feel like. And if that individual does feel like they can have a substantial portion of their investments invested in the stock market, that might be the best decision for them. And the learning opportunity that they might have in the next bear market, they might learn that they were wrong or they might learn that they were right. And it was a good decision. And they truly do have the disposition and the stomach to handle it. So it's different for everyone. And I think this is why good financial advisors exist, because rather than just blanket advice

that everyone can follow, I think good financial advice really just requires sitting down with someone in understanding their own circumstances, their own psychology, their own goals, their own assets. So it's, I mean, I'm giving out broad points of kind of how I've learned to think about risk. But I would just put it in the context of, look, it's different for everyone. When a person is looking at financial news or financial information, given that so much of the industry is based around speculating about the future, how does an individual develop and test and improve their own BS filter? Like, how do you separate the wisdom from the noise? For me, it didn't happen until reading financial news constantly for hours and hours a day,

for a decade before I finally got my BS filter down to a level that I thought was pretty sufficient. I mean, something that I found helpful for me. And granted, I have more time to do something like this because it's what I do for a living. But what's been really helpful in eye-opening for me is to go back and read old financial news. If you can go back and read the Wall Street Journal from 10 or 15 or 20 years ago, it's eye-opening because now I have the benefit of hindsight of knowing how these events that people were looking at with supposed foresight 20 years ago. Now I, with hindsight, know how those events ended up. And the gap between what people predicted might happen and what

actually happened is 10 miles across. And it's just eye-opening to go back and see when you read forecasts from 5 or 10 or 20 years ago, or one year ago even, when you see how wide that gap is between forecasts and reality, it just makes you take forecasts much less seriously now. I'll give you one example. And I want to preface this by saying, I think most economists and analysts are good, well-meaning, hardworking people. I don't mean to throw them under the bus. But just this morning, I read a forecast from the International Energy Agency. And they're predicting that the United States will be the top producer of oil by, I think, 24, which is great. A, that's good. That would be good news for the United States. So my first reaction is like, hey, that's great. Like, we're on this great path to be the best

energy producer in the world. But then you have to take a step back and say, what was the IEA predicting seven years ago or eight years ago? And you can go back and see their predictions. And how did those predictions fare out through today? And they're awful. They're terrible. And again, this is no, I don't want to throw anyone under the bus because forecasting is just so inherently difficult. So if you have a good baseline for the accuracy of past forecasts, you just take current forecast with a much thicker grain of salt. I think that more than anything would be my advice for people reading financial news is that it's one thing to kind of read financial news and kind of use it as a puzzle piece to kind of place into a larger mosaic, trying to figure out how

businesses work, how investors think, how policymakers think. But I would caution people to take forecasts, particularly long-term forecasts, with a big fat grain of salt. We'll return to the show in just a moment. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology, built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about.

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is the idea of using time and patience as your natural advantage. And what I mean by that is if you are an investor, I think it's incumbent for you to say, what is my competitive advantage over every other investor that is out there? What can I do better than them? Pretty much the only answer to that question, the only appropriate answer to that question, if you are an individual investor is trying to say I can be a little bit more patient than the average professional investor out there, which is just to say if the average professional investor is thinking about a stock or the stock market over the next six months, and you can think about the stock market over the next five or ten years, you naturally have a pretty big advantage over the average

professional investor. And I think it's the only advantage that you can have because there is no way that individuals out there. And I would put virtually every individual investor in this bucket, even the smartest people out there. There's virtually no way that you're going to have better information or better analysis than the aggregate intelligence of all hedge fund managers and professional investors. I just think there's almost no way that they can do it. But if they can say, I'm just going to be patient and I'm going to endure market volatility in a way that as professional investors are really concerned about their returns over the next quarter, I'm really looking at the time between now and retirement, or the time between now and when my child needs to

go to school, to go to college, have to fund their college. I think that is a strong mental model that does give you a legitimate competitive advantage over the average investor who is out there. And even if you're not looking for competitive advantages of how to do better, that I think is just a baseline for doing okay as an investor over the long term is thinking about market returns and market cycles, not in terms of months or quarters or even years, but multiple years and decades. I mean, we just have so much evidence that there's virtually no way that you can put the odds of success as an investor in your favor unless you are thinking about timeframes in the five to ten plus range. And kind of some data backing this up, if you go back to the late 1800s, which is kind of when we have good stock market data, and you look at what is the highest and the lowest annual returns that you earn in the market based off of different holdings. period. So holding periods of one year or two years or five years, what we see is that it's not

until you get to about 10 and 15 years that the worst that you've done in the market is a slightly positive return. So if you look at all of market history, there is no holding period if you've held stocks for 15 or 20 years that you have lost money in the stock market in real terms, which means after inflation. But if you look at periods of one or two or five or 10 years where you're holding stocks for those periods. There have been plenty of periods historically where you've lost money, which is just to say, like, the odds of success are not truly in your favor until you're talking about holding stocks for 10 or 15 or 20 years. So that's what I would implore investors to really think about, is just using time as your natural advantage. And is that why, I know you've

described long-term thinking is the ability to endure discomfort? Would that be the reason why? Because you have to have the stomach for the volatility in the meantime? That's exactly it. I mean, because in the meantime, you're going to have investors who are not thinking about the long term. They're thinking about today and the next month and the next quarter. And because they're thinking about short-term periods, they're going to be trading around the news. So a company comes out with quarterly earnings that may be missed estimates, or the president comes out with a new economic announcement or the Fed is raising interest rates. And people who are worried about the next quarter or the next year are going to trade around that news. And those trades are going to cause market volatility. And I think it's

important to look at that volatility and say, I understand that some investors are trading around the daily news and causing volatility because that is the game that they're playing. They're paying a short-term game. But I myself am playing a long-term game. So I'm going to ignore that volatility because it's not relevant to my time frame. I'm paying a different game. And I'm just going to, rather than trying to outsmart them and trade around the game that they're playing, I'm just going to endure the volatility, recognizing that it's not relevant to my long game. I'm going to go about my life. and accept volatility as a natural part of investing, or even like the cost of admission to long-term investing, to the good returns that come from long-term investing, and take it and accept it as a

natural part of investing. Similarly to the people who live in places that have great weather most of the year, but every winter you're going to have some cold, dark, gloomy days. And you don't view that as, oh, you know, this is the end of our nice weather, or this is something that I should try to avoid and I should try to plan on flying out of here when I think it's going to be cold and dark. most people would just say, look, it's generally pretty good weathered here in the long term, and we're going to have some cloudy and gloomy days, but we just put up with it and we know that sunny days are going to be here again. I think it's a similar philosophy to successful long-term investing. You described patients in long-term investing as a competitive edge, but you've also written about how competitive edges are difficult to maintain, at least at the business level, at a corporate level. Is the same true for an individual? Because X is a competitive edge that we may have today, will that same X still be a competitive edge 20 years into the future?

It's very different when we're talking about an individual's competitive edge being time and patience versus a company's competitive edge, which is, you know, maybe their strong brain. or their superior product, there is much more direct competition trying to knock down a company's success than there is for individual investors who are trying to be patient. And I think almost by definition, patients can't be arbitraged away because patients can just require more patience. Just as long as individual investors are thinking in longer timeframes than professional investors who are really thinking about the short term, I think it's always going to be a sustainable natural edge. And I don't suspect that professional investors will ever stop being focused on the short term. Because if they stop, then there would be a lot of opportunity in the short run.

If there's less competition, there would be a lot of opportunity. And the markets are competitive enough that they're not going to let a lot of opportunity to sit there free for the taking. So I think there's always going to be a tremendous amount of competition for short term returns. And as long as there is, there's going to be room for individual investors who are a little bit more patient, or hopefully a lot more patient, to find that sustainable edge. Very different, though, for companies where Jeff Bezos, CEO of Amazon has this great quote where he says, your margin, and it means your profit margin, is my opportunity. And that's really how it works for

businesses. Once a business is successful and they have a great product that people love, there's this huge, natural, like, magnetic force of competitors who want to come in and knock that competition down and take some of it for themselves. But it's a very different dynamic for patient investors. I would be shocked if patients as a competitive advantage ever gets to a point where it's not viewed as a true competitive advantage that is profitable over time. As I hear you talk, everything that you say reflects things that I already believe. I'm already a fan of index funds. I'm already a fan of dollar cost averaging.

I'm already a fan of long-term thinking. And I think a lot of the listeners of this podcast are also the same because we are all. all prone to confirmation bias. How does a person stay cognizant of confirmation bias? And again, how do you balance having your own investment philosophy with not falling for your own biases? Yeah, I think that's A, a very good question. And B, I think you've identified probably the single greatest challenge of behavioral finance. And there's kind of this irony that people who are aware of investing biases. They think that biases are something that afflict other people but not themselves. And I think this is true for everyone to think that way. I know it's true for myself. I know it's true

for others. And it's very difficult to get around that. I think there are two ways, kind of one passive way and one active way, that you can try to get around it. But I say the word try because I don't think there's any firm solution to it. I think one is just trying to be brutally honest with yourself about your own goals and your own skills and your own propensity to behave and react in certain ways. And I think if you really just try to look in the mirror at every financial decision that you've ever made and not just analyze what was made, but why did I make it? Why did I think this way? Why did I want that new car?

Why did I think I could be such a good stock picker? And if you're just brutally honest with yourself, and I say yourself because it's hard for people to talk about these with other people. I think they're much less likely to talk about deeply personal, personal finance topics about kind of the psychology of money and ego and want and needs with other people. It's a sensitive topic that a lot of people don't like discussing, even though they should and I wish they would discuss it with other people. But if you can just be brutally honest with yourself about why you're doing things and think

about what makes you happy with money, what financial decisions in the past have truly brought you genuine happiness. Did buying a new car make you happy? or did stocking up your rainy day savings, did that make you happy? I think just going out of your way to analyze these questions is a really important part of understanding investing psychology and kind of just the psychology of money overall. Two, as it specifically relates to confirmation bias. And confirmation bias for people listening is kind of the propensity to only accept advice and information that confirms your existing beliefs and to push back against information or even not seek out information that goes against what you already believe. Steve, that's obviously very prevalent in politics. That's probably where it's most prevalent. I think the

second most area where it's most prevalent is investing. It's not as bad as in politics, but it's pretty darn close. And there, I think, and this is extremely difficult to do, but I think it's really important, particularly if you're a professional investor who is kind of, you know, really going out of your way to have strong investing beliefs about how the stock market works or how the economy It's really important and incumbent to find people who you disagree with, but people whose overall way of thinking you tend to respect. So if there is someone out there who you say, you know, Paula, I respect how you think about X, Y, and Z, but I disagree with your views on the stock market.

But since I respect your thinking on X, Y, and Z, I'd like to hear out your views on the stock market. Because since I agree with you on other topics, I know you're not a crazy person. I know you're not just a whack job from the side. So I really want to hear you out with an open mind even though I disagree with you. I think finding those people in the world is absolutely critical if you're going to have strong investing beliefs that you can with an open mind to someone you respect hear out the other sides position.

And even when you hear them out, sometimes you'll say, great, thank you for sharing that view with me. I still disagree with it because of A, B, and C. But at least you've heard the other side's position. And if you're honest with yourself, you can try to take that information and use it to maybe update your current beliefs. And again, this is something that is just so incredibly difficult to do. But I think it's so important. And the people who truly do go out of their ways to do it have gained a lot of insight for it. You spend a lot of time reading and thinking. How do you balance all of the

consumption of ideas with creating ideas of your own, writing articles, giving interviews, other forms of production? There's two ways to think about it. One is that most of the reading that I do, or I would say now, effectively all the reading that I do, has nothing to do with investing per se. I don't read investing books. I don't read economic books. I'd like to read biographies, and I just like to read history books about different things. And I'm doing that because investing is truly just a game of human behavior. It's a study of human behavior. And really, it's a study of how people react when they're incentivized with money in different ways. And because of that, I think there's a lot that you can learn about human behavior from other

subjects, like sociology and psychology and history and politics, if you can find a topic that has to do with how people are incentivized to deal with risk. I think there's probably something in there that you can learn about investing. So I read about all kinds of different topics. The more do you read, and as you just kind of build up your personal library of books and articles and things that you've read over time, you start to kind of put the pieces together. You can start connecting dots from one idea or one book or one topic to another. So you may be reading a book about World War II history and you read about how someone dealt with risk

and it reminds you of a book that you read about politics and how someone else dealt with risk. You know, you just start connecting these dots and creating kind of a broader lattice work of understanding human behavior and how people do with incentives. That's how I spend most of my time reading and that's also where most of my article ideas come from.

It's just trying to piece together from different topics and different things subjects, just trying to find patterns of how people deal with risk and trying to tie that back to investing in personal finance. What are you reading right now? Or what are some of the books that you've read recently that are not specifically about money or investing that stand out? I'm reading right now, and I've read it before, but I'm rereading it because it's so good.

A book by Saddamathamukharji called The Emperor Volnaalities, which is the history of cancer. It's the history of cancer and the history of how over the last hundred years we have tackled the treatment and the race for a cure for cancer. And he does such a magnificent job explaining it in layman's terms, but in a way that I think is not losing any of the essence of really what's going on. So it's just a fascinating book. Another book that I read not too long ago, that's really a fascinating book around personal finance,

is a book on how the Vanderbilt heirs blew Cornelius Vanderbilt's fortune. And kind of the short summary is, you know, Cornelius Vanderbilt, adjusting for inflation, was worth about $200 billion, adjusted for inflation. And within about five generations, there was nothing left. And then so the book just goes into the absolutely extravagant lifestyles and the poor decisions that his heirs undertook to blow this fortune in a pretty short period of time. And what stands out, that is, you know, this isn't explicitly stated in the book, but as you

just read chapter after chapter, it becomes clear, is how miserable his, he's, you know, airs are. And these are people who are inheriting at birth the equivalent of $10, 20, $50 billion. And they went through their life just miserable. And I think there's just so many personal finance lessons in that of what money can and can't do for you. Money can give you, like, it can provide so many different physical goods and earthly possessions. But it doesn't provide meaning. It doesn't provide social relationships. It doesn't provide purpose in your life. And And those are the things that truly bring people happiness. And when you just take such an extreme example like the Vanderbilt heirs, where it has more money than anyone's ever seen, it just really shines a spotlight on how powerful that can be.

Wow. And what was the name of that book? So it's called Fortune's Children, the Fall of the House of Vanderbilt. That one sounds fascinating. It is. It's one of the best books I've read in a while. And it's just very well written, too. It's a fun read.

We'll come back to this episode after this word from our sponsors. It's week two of Canadian tires early Black Friday sale. These prices won't go lower this year. So you're lying on the floor? Save up the 50% November 13th to 20th. Conditions apply, details online. Let's talk about financial planning. I know you've mentioned on a different podcast that within the past decade, through

betterment and wealth front, access to good investment planning has become democratized and more accessible. But access to financial planning has not. Why is that and what can we do to change that? It's largely a problem of personal finance being such a personal topic and not something that you can really scale in digital services to something that is relevant to everyone. And I think when you're talking about financial planning, if you are giving advice that is relevant to everyone, it's relevant to no one. Because the only kind of financial planning advice that is truly going to be good advice that you can give out automatically to millions of people or even segmenting it by age or income is probably not going to be. the kind of truly relevant financial planning advice that is needed when you sit down with a financial advisor who truly understands your own personality and your own assets and your own goals.

That is why it hasn't really become that prevalent in the robo-advisor space. I'm optimistic that someone will crack that code eventually. And I think there are people like Vanguard who are doing kind of an interesting hybrid where if you have a certain level of assets at Vanguard, you are entitled to speak with a certain financial planner over the phone for X number of hours per year. I think that's an interesting way to do it. But again, it's just hard to scale at that level, particularly because qualified financial planners who might have the CFP designation, those are very qualified people who don't work for a small amount of money. So to scale it in a way that you can bring that advice to tens of

millions or hundreds of millions of people is not a code that's been cracked yet. But I think it's absolutely essential to kind of filling in the gap that still exists in the financial advice space. When we've made so much progress on the investing front with, again, people like Vanguard and betterment and wealth front, but still really haven't cracked the code of financial planning. But there's a lot of really smart people kind of looking at this in smart ways. So I'm convinced that we'll solve it eventually. But to date, I haven't really seen anything that really makes much of a dent in the financial planning space.

What aspects of personal financial planning do most people overlook, even though they're important? There's two things. I think the biggest is not giving enough attention to the power of compounding. And that works in both ways. It's not understanding how much leverage you have when you're young and also overlooking how difficult it is to build up a substantial nest egg when you start saving when you're older. And there's also a third element of this is not understanding how much. the negative parts of compounding in terms like excessive fees that you're paying to financial advisors or for mutual funds, how those compound negatively over time and can add up to a substantial amount of loss savings over time, even for something that seems small and minuscule in the short

run. So I think that's probably the single biggest thing that people overlook. I think another big thing that people overlook is just kind of this idea of black swans, that there are things that come up in the world that are impossible to predict, or if people are really kind of looking at their future, they would just never predict them happening. Huge health crises and divorces and market crashes, things that people don't necessarily want to think about or talk about. But if you look at the lifespan of people's, you know, the totality of people's lives, there's just a few events, a handful of events that will stick out that will make the biggest difference in their financial life. And I think, you know, for me, kind of how I think about that problem,

you know, that so-called Black Swan problem is that for me, it's been having a much higher amount of safe assets like cash and bonds than I think most financial planners would generally recommend. For me, it's just looking at my own personal finance situation and just trying to become more or less indestructible, that virtually anything I can think of that can be thrown at me, whether that is a job loss or an illness that puts me out for a year or two, or just go through these really awful scenarios that people don't want to think about. How can I prepare myself financially for those so that when, you know, if, you know, knock on wood, hopefully they don't, but if they do come across, I'm prepared for it. So for me, it's, you know, my financial thinking

has been more designed around how can I avoid catastrophe than it has been, how can I make a fortune? And that I don't think makes me a conservative investor. And I'll tell you why. By becoming more or less indestructible, I'm hoping again that that ability to become indestructible financially is what will allow me to be a truly long-term investor. And the biggest gains accrue to long-term investors. Because the situation that I want to avoid at all costs is being forced into a situation where I'm forced to sell my stocks, sell my investments, and able to fund an illness or a job loss. I want to avoid that situation at all costs, completely avoid it. And therefore, by doing that, the investments that I do have, even though it's a smaller percentage because I keep such a high

a high amount in cash and bonds. But by doing that, I'll truly be able to let the stocks that I have invested in compound for another 30, 40, 50 years. So it's just more of a barbell approach to risk where you're being kind of overly safe on one side, but you're doing it specifically so that that's part of your portfolio where you're taking risk and investing in stocks can truly compound for the long run. Yeah, I take on a barbell approach as well. I have my portfolio is 100% equities. And then I also have a very high. cash reserve much more in cash than anyone would recommend. Yeah, I mean, that's how always how I've done it too. And I have people that, you know, I've shown financial advisor friends my asset allocation

and they think I'm crazy. But, you know, A, I think this gets back to finance being personal. It's like, I don't really mind if people think it's crazy. This is what helps me sleep at night. And that's all that really matters. And B, I think I'm truly set up so that, you know, if something that happens, whether that is a bear market or just something that happens to me and my family, no matter what that is, we'll be able to handle it. That to me is more important than any other investment approach or any other investment decision that's made. And I think the way to think about that is just marrying investing with personal finance, which is often not. I think those are often viewed as two distinctly different subjects. You know, people talking about stock market strategies and people

talking about credit cards and paying off your mortgage. Those are viewed as two totally different things, but I think you have to marry them and look at your finances in a more holistic way. The final question that I want to ask before we wrap up, in your interview with Shane Parrish on the Knowledge Project about two years ago, you mentioned that the number one thing on your bucket list is achieving financial independence. Is that still the case? And if so, how, through what methods are you pursuing financial independence? Yeah. I would say yes, that is still my number one goal. I'm substantially closer than I was two years ago when Shane and I had that discussion.

but I say closer and not there because I think it is a constantly moving goalpost. No matter how you look at it, I think it's always going to be the case that you have a goal of reaching X. And once you reach X, you say, okay, maybe I want to do X plus one. You're just constantly moving the goalpost down. So I think if my view has shifted since Shane and I spoke two years ago, rather than saying financial independence in terms of once I hit this mark, I'll have nothing else to worry about and I don't need to work anymore, it's just kind of. it's just kind of looking at it as reducing financial risk from mine in my family's life. That's something that I still think about all the time. That's how I think about savings.

For me, it's not so that I'm not saving so I can, I'm not saving so I can buy a new car or buy something fancy. The more that I save, the more independent I become. And for me, being financially independent doesn't mean I'm going to stop working. I don't think I'm ever going to stop working. and I might do the exact same job that I do today for a long period of time. It's just getting to a point where you're doing it because you love it and you enjoy it and you feel like you're making a difference rather than I'm a salary slave and I have to do this to pay my bills and try to de-risk my financial situation.

I mean, that's kind of the base of the pyramid for how I think about money is just saving so that I can become more independent over time, independent in thought, independent in where I choose to work, independent in the kind of work that I do. And I would say independent from most forms of worry about myself and my family, about if something were to happen again with my job or my wife's job or if one of us were to fall ill, just trying to detach ourselves from a lot of those worries that afflicts so many other people in this country, in this world. And I don't think you'll ever be totally independent of them. It's just trying to put a bigger gap in between yourself and catastrophe.

It sounds like you've mentioned the moving goalpost, and I can easily see how there'd be a moving goal post in terms of the needs bucket and the wants bucket. And the wants bucket can infinitely grow or shrink to whatever size you desire it to be. That goalpost for the needs bucket in terms of reducing the reduction of worry, has that changed or does that change? I don't know if it changes, but I think over time I've realized that there are different segments of the needs bucket. there is absolute bare bones needs of like can I deliver shelter and 2,000 calories a day to myself and my wife and my son. Like that's like absolute bare bones needs, right? And then there is, well, we also might want health insurance and we also might want, you know,

decent clothes and we also want to hang out with friends. We want to travel and see family. So there's a different level of what needs is. And I think it's hard to distinguish like what is truly needs. needed. And I think you could look at it and say, how much do I need to maintain the lifestyle that we've been living for the last few years? How much do I need to maintain that? I think that's one way to look at it. That's a decent way to look at it. But I think even when you've obtained that lifestyle, I think there's always going to be, at least for me, maybe I'm sure people think about

this differently. But for me, I'm such a warrior that even when that level is reached, I think, okay, so even if I have enough money to maintain the current lifestyle, I need to prepare for emergencies. And then once you have enough to, you know, okay, now I can cover emergencies. We need to think about bigger emergencies. What about other emergencies? So like, I'm just constantly moving the goalpost of needs, I think. You know, my wants are pretty low and haven't changed that much. But just, just trying to define your level of safety and need. I think for me is always, is always moving. And I've just accepted that it's going to move with this idea of, I'm not, I'm not really chasing independence as a target. I'm just viewing it as trying to increase the gap

between myself and my worries. Increase the gap between yourself and your worries. I like that. Well, thank you so much for coming on the show. Where can people find you if they would like to know more about you? Yeah, so most of what I do is on Twitter. My Twitter handle is Morgan Housel, my first and last name. And that's where I spend most of my day and everything that I write and post is on

there as well. Excellent. Well, thank you so much, Morgan. Thanks for having me. This is fun. Thank you, Morgan, for this excellent conversation. what are some of the core takeaways that we got from this? Here are three.

Number one, as an investor, your biggest assets, your competitive edge, comes from patience, long-term thinking, and humility. Patience can't be arbitraged away because patients can just require more patience. Patients cannot be arbitraged away. As an individual investor, your job is number one to have both the patience and the four sight to be able to think in decades rather than years. And number two, to have the humility to know that you cannot predict the future. So you should not try because speculating is easy. Getting it right is basically impossible. That's another way of saying anybody can make a guess

about the future, but very few people can make guesses accurately over time. And it takes humility to accept that, to accept that we do not have the ability to know what's going to happen tomorrow, and therefore to make investing decisions in light of that. So that is takeaway number one. Be patient, be humble, think long term. Core takeaway number two. Read broadly. It's very tempting when you get into the world of money management.

I did this myself. If you're very excited about this topic, it's really tempting to only read about this topic. When I started blogging about personal finance, for years, all I read were blogs and books about personal finance because that was what lit me on fire. I shouldn't say all I read. I mean, I suppose that's an exaggeration, but the overwhelming majority of what I read was on the topic, the direct topic of money and investing. And Morgan is absolutely right. By reading about other fields, by understanding history and biology, sociology, psychology, psychology,

It's through that broad understanding of the world that we are able to form a latticework of ideas that allow us to become more critical thinkers and have a deeper understanding of our chosen field of expertise, which in Morgan's case and my case is money management for me, specifically personal finance. So let me give this a few examples. So when I learn the principles of improv comedy, I'm not just learning how to be a better improv actor on stage. I'm learning really a philosophy of life. The number one rule of improv is yes and you accept the situation and then you contribute something to it. That's not just something that I practice on Mondays at 630 p.m. when I go to my improv class. that's something that I at least try to bring into my day-to-day life because it's a good framework for living. It's a good philosophy of living.

And that's an example of how a lesson from what seems to be a completely disparate and unrelated field can influence more broadly every other corner of your life. Here's another example. I used to spend a lot of time reading ideas about how to grow a blog or grow a podcast. And most of these ideas, quite honestly, are in this echo chamber of, hey, survey your audience, find out what they want, look at your analytics, see what performs best. You know, it really goes deep into this world of marketing analytics. And I got really caught up in that for a while. And then I pulled back and I started just looking at other online accounts of people, you know, people who are very influential online in fields such as yoga or vegan cooking. And what I saw was that many of them are not spending all of their time flying to blogging conferences to discuss keyword optimization around yoga.

They're not spending all of their time surveying their audience trying to figure out if people are more interested in recipes that involve chia seeds or if maybe flaxseed is the new hot thing. They're not getting caught up in the analytics hamster wheel. They're being authentic. A lot of my favorite ones are the ones who are just sharing. what they love. And it's really as simple as that. And it took me, you know, I spent so long getting caught up in this world of analytics because that is what we're taught that we're supposed to do if we want to grow a blog or grow a podcast. And it was only when I pulled back and started looking more broadly at other online influencers and other online platforms that I realized,

hey, wait a minute, maybe all of that is just noise. And maybe all I need to do is follow my own interests and then share those interests with the world. So all of that is to say that there's a lot to be gained from reading and listening outside of just one field. Morgan writes about investments and money management, but right now he's reading a book about cancer. But you know what the two have in common is that in both cases, in order to write about such a topic, you have to have the skill set of taking something that's very complicated like investing or cancer and disqualification. distilling it into its most basic, easy to understand nature without oversimplifying it, you know, while still honoring its inherent complexity, but without scaring people away.

If somebody who successfully writes about cancer has the ability to do that, well, then I bet that by reading a book like that, you would learn at a minimum how to be a more clear thinker and at best how to then translate those thoughts in a way that is also clear. There's a great quote by Shane Parrish where he says, and I'm paraphrasing here, but he says something to the effect of true mastery of a subject is when you can both deep dive and simplify. And I believe that having a broader take on life allows you to do that. It facilitates that. All right. So that's takeaway number two. Takeaway number three is to play a strong defense. That's how I think about savings. I'm not saving so I can buy a new car or buy something fancy. the more that I save, the more independent I become. For me, being financially independent doesn't mean I'm going to stop working. I don't think I'm ever going to stop working. And I might do the exact same

job that I do today for a long period of time. It's just getting to a point where you're doing it because you love it and you enjoy it and you feel like you're making a difference rather than I'm a salary slave and I have to do this to pay my bills and try to de-risk my financial situation. I thought this was fairly insightful. Morgan talked about how playing a strong defense allows him to be able to generate wealth in the long term. And that's often the opposite of what people think. Many people think that in order to make it big in the world of investing, you have to be aggressive.

You have to go hard. You have to put all your chips on the table and it's double or nothing. And that certainly might be the Hollywood approach because it makes for good cinematic drama and it might be the clickbait approach because it makes for a good headline. But the reality is playing a strong defense. meaning have your safety net built, put yourself in a position where you will never resort to a financial decision out of desperation, set up that incredible defense. And then once you have that as your foundation, then you have the ability to take big risks, knowing that if those risks don't pan out, that's fine. This, by the way, is how I view financial independence. The net cash flow that comes from my rental properties, I view that as the safety net. And I I should clarify here that I see financial independence as distinct from early retirement. I have zero desire to ever retire.

My hope is that I will be in good enough health, both physically and mentally, that I can work into my 80s and 90s. I love working. I never want to stop so long as my health holds out. But financial independence, passive income, that forms the safety net. It forms the foundation under my feet. And because I have that foundation, you know, because I know that if I take a big entrepreneurial risk and it doesn't pan out, then worst case scenario, I still have the cash flow

from my rental properties that I can fall back on, that I can live on. That financial independence allows me to take bigger risks. And I'm not just talking about financial risks. I mean, any type of risk, I could pour a bunch of time into starting a podcast, and if it doesn't pan out, well, that's fine. Worst case scenario, I've lost time. I've lost some production costs. but it's not going to make me live under a bridge. I have the safety net of the cash flow for my rental property, so I know I'll be okay. But if it does work out, the title of that great Susie Moore book,

what if it does work out? If it does work out, it could be amazing. And that's what I am free to pursue because I've played a strong defense. And I led with that defense first. And so that is takeaway number three from this conversation with Morgan, while on the surface it may seem, that playing defense is a conservative strategy. In the way that that plays out over the long term,

it could be actually the opposite. It could be that by virtue of having that strong defensive footing, you are then able to take bigger risks in other areas. The barbell analogy is a very good one. So those are three takeaways that I got from today's conversation. I would love to know what you think. Please head to Afford Anything.com slash episode 125. That's afford anything.com slash episode one, two, five, where you can read the show notes and share your thoughts, opinions, questions about anything that you heard in today's episode.

If you enjoyed today's show, please do me a huge favor. Head to iTunes or Overcast or Stitcher, whatever your favorite podcast player is. And hit the subscribe button so that you will get new episodes as they come out every Monday. While you're there, also, please leave us a review. Those reviews are instrumental in helping us land awesome guests such as Morgan Housel and Vicki Robin and Rachel Cruz and all of the other amazing people who we've had on the show. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast.

I'll catch you next week. That was our September sabbatical episode for September 2021. It's an interview with Morgan Housel. This interview originally aired in April 2018. Morgan, as you've heard at this point, is a former columnist for the Wall Street Journal and The Motley Fool and a preeminent thinker and writer about the topic of investing. Thank you for listening to the September sabbatical series. We will be back next week with a continuation of this month in which we focus on the four pillars of fire, FIRE, Financial Psychology, Investing, Real Estate, Entrepreneurship. You've just listened to the I.

Next week, we talk about the R real estate and the following week. we talk about the E entrepreneurship. 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.