Motley Fool Hidden Gems Investing - Morgan Housel on Economic Forecasts, Resolutions, and Writing

Episode Date: January 7, 2024

Let’s say you have a big goal for 2024, financially or personally. What happens after you reach it? Morgan Housel is the best-selling author of “Same As Ever” and “The Psychology of Money”. Dylan Lewis caught up with Housel for a discussion about:  - Setting up processes, not resolutions for the new year. - The biggest significant economic story (that’s already known). - What early criticisms of cars, airplanes, and AI have in common.  Host: Dylan Lewis Guest: Morgan Housel Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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The Fed is cranking, cranking, cranking. And what did housing prices do? They went up. What did the stock market do? The S&P 500 was up 27%. All of these things that should not have happened if you're using logic to think about how the economy works. You know, it went the other way. i'm mary long and that's best-selling author morgan housel host dylan lewis caught up with

housel for a chat about what parts of the economy we can and really can't predict where a lot of fear about artificial intelligence comes from and how to set up systems rather than resolutions for Better 2024. We're here talking in early January, and this is, I think, resolution time for a lot of people. I'm curious, do you have any resolutions for the year? I really don't think I do. And I didn't come up with this philosophy, but I forget who did. But I read this a couple years ago where it was like, you don't want goals in life. I know it sounds counterintuitive, but generally you want systems. And the difference is a goal tends to have like a finish line. So the example that I think was given was if you say, I want to lose 10 pounds, that's a goal. And then once you lose 10

pounds, you're like, what do I do now? But if you have a system where you say, I'm going to eat better, that's a system. And there's no finish line to kind of trip you up. So I think for a lot of things in life, including maybe especially for me, financial stuff, I really don't have any active goals of saying, I want my net worth to be this. I want to save this amount. There's really nothing like that. It's a system of doing the best that I can all the time. And whether it's January 1st or December 7th or July 8th, whatever it is, I'm going to do that system all the time. So that's my way of backing out of your question and saying, no, I really don't have many resolutions, but I think it's for, it's, it's, it's, it's well-meaning and, and, and, and well-intentioned.

It's not bah humbug. I like that Morgan, because it isn't so much a to-do list that you're creating for yourself. You're, you're kind of creating the more, the more sustainable approach to doing things instead of things that you're almost looking to check off of a list. Yeah. I mean, everybody knows it's a, it's cliche, like how many new year's resolutions are broken and broken by like January 10th kind of thing. And I think it's, I think this is why it's like, if you have a goal, a, you tend to be very ambitious in that goal. Like if you're going to set a goal, the intuition is like, let's, let's swing for the fences. And then when you meet that or realize that the cost of whatever that goal is, is more than you're willing to bear, then you feel like

a failure. So I feel like a lot of people on January 1st are so optimistic and ambitious. And by January 10th, they're borderline depressed because they swung for the fences with their goal. They realized it was too much and they couldn't. And I think financial matters, of course, that's what we're talking about here. I think this really applies for a lot of people who say, man, my finances have been a mess. In 2024, I'm going to save X percent of my paycheck. I'm going to invest this much. I'm going to earn these returns this year. That gets really tough. And I think a lot of people, it's easy to set the goal without digging into why you were not able to accomplish that last year. So if last year you didn't save any money and you say this

year, I'm going to save 10% of my paycheck, just a simple example like that. A lot of people need to dig into first, why were you living paycheck to paycheck last year? Was it because you're living above your means? Are you living above your means because you have some social aspiration that isn't met. And you're trying to like show off that you are worthy of people's attention beyond your paycheck. I think it gets much deeper. And that's why so many of these new new year's resolutions are, are not met early on. Yeah. I don't think anyone has a more high achieving and ambitious version of themselves than on December 31st or January 1st. I think, I think that is when our future versions of ourselves are as incredible and capable as

they'll ever be. Uh, and I'd love for that version, you know, the person that we have in head to meet the person who's then signed up for those resolutions down the road. And I think in some ways, that's good. It's good to have that ambitious drive to be like, look, I want to be better. I could be better. But I think the goal mentality versus the systems mentality sets you up for failure. So if you have a system that doesn't have a time limit, doesn't have a finish line, I think you're much more likely to achieve something, A, because you can back into it slowly. So if you have a goal that says, I'm going to save 10% of my income this year. Well, if by February 1st, you've only saved 2%, you're already failing your

goal. But if your system is, I'm going to save as much as I can this year, I'm going to do the best that I can. Then if you've only saved 2%, you're actually on your way and you're making progress to what you're doing. All right. I'm going to ask you the similar question, but phrased a little bit differently to work within that approach. Are there any frameworks or systems you've adopted that you find particularly helpful maybe over the last year or so? One thing that's true too for financial matters is I think, and then this is almost like heretical to say, but I think a lot of budgets set people up for failure too, because they are sometimes denying or withholding types of spending that they really want to do. So if you're like,

I didn't save any money last year, this year I'm going to save 10%. Well, that means you're going to have to cut something out of your life that you may have enjoyed. And it's like the addict who is like, you're going to go through withdrawal at some point. And so this is why I think if you're having financial matters, it's usually much deeper than the spreadsheet. It's a problem that you can't fix in Excel where you're just like, oh, let's crunch some numbers. And that's going to tell me there's usually some behavioral component to it and some deep personality identity component that is latched into it. And I think this is why I think a lot of society tends to be segmented into one or two groups financially. Either it comes very easy to

them, regardless of how much money they make. Even if they're a low-income person, they can save money, they can invest money, it's no problem. Or the opposite, where even if they're a high-income individual, high-income household, they can never save. They're always drowning in debt. And it's usually one or the same. It's one or the other. And I think a lot of the reason that is, is because so many of these issues, like I said, they're not spreadsheet issues. They're identity and personality issues. And so I think if you're trying to make a big improvement in your finances and you're using January 1st as that target date, as a springboard to jump off in, that's where you should start. It's not the numbers. It's like, look in the mirror about your identity and who

you want to be and your social aspirations and who you're trying to impress and why you're trying to impress them or how you're going to use money to give you and your family a better life. That's a much deeper and more important issue than just looking at the numbers. So your advice would be to unpack the goal and kind of get to the why of whatever the goal is? I think that's it. It sounds cheesy. It sounds borderline cliche, but I think that's why so many of these goals are not met. Resolutions are top of mind, and I think forecasts are also kind of top of mind this year.

We're in that period where people are looking out and making, in some cases, you know, very well-reasoned predictions about what may happen this year. In other cases, you know, reckless predictions kind of for the sake of fun. What do you have in your head as you see those types of articles come up in the news? I think what's really interesting is that in late December, every single year, you see the same headline. You see all economists got this year wrong, but here's what they're predicting for next year.

That's pretty much verbatim what you see every single year. But we're never going to stop doing that. There's never going to come a point where people say, last year's predictions were so wrong. I don't want to hear next year's predictions. People love predictions because they reduce uncertainty. Even if you know that the accuracy of them is non-existent, they're going to demand them because uncertainty is uncomfortable. And that person making this prediction reduces that uncertainty that you have in your head. So it feels good. So you want more of it. But there's a great quote from Nassim Taleb where he says, before you think about next year's

predictions, review last year's predictions. And I think that should be like a rule in financial commentary. If you're putting out a list of predictions for 2024, you should be required to staple on your predictions that you made for 2023. And of course, nobody wants to do that. Very few people want to do that because you know what the results would be. They would be horrendous in any given year. It was definitely like this in 2023, but it's like this every year. The biggest, most consequential news story is something that nobody predicted on January 1st. For global news, what was it for 2023? It was probably Israel Hamas. That was the biggest global news story of 2023. How many people were predicting that? Not January 1st. How many people

were predicting that on October 1st of 2023? Virtually nobody. It's like that every year. COVID was that. 9-11 was that. All the big news stories that move the needle are impossible to see. You can stay with so much confidence that as we sit here on January 3rd, I think it is today, that we are recording this, that the biggest news story for the rest of the year is something that you and I and nobody else is even talking about today. And it's always like that. It's uncomfortable to think about, which is why people don't want to admit that. But if you look historically, it's like that every single year. And it's not even just the biggest news story, Morgan. It's like all of the big stories, like banking crisis. I don't think anyone

necessarily had that one on their bingo card for 2023. That was a massive story that almost seems like an afterthought now that we're about nine months removed from it happening. But yeah, anything that really is resonant for the year, probably not on anyone's radar. The other thing that was just astounding in 2023, one of the biggest economic stories was, of course, interest rates go up and up and up. The Fed is cranking, cranking, cranking. And what did housing prices do? They went up. What did the stock market do? The S&P 500 was up 27%. all of these things that should not have happened if you're using logic to think about how the economy works. It went the other way. And that, I think, tends to happen almost every year too,

that if you're using first order logic, where you're saying, okay, because interest rates are going to do X, the stock market is going to do Y. That is a very humbling way to predict because it's almost always wrong. And so even if you are looking at all the economic data today about, oh, inflation has come down. The Fed is likely going to start cutting rates. Therefore, here's what I think the stock market is going to do. That's a very dangerous thing to go about in your financial life. I won't ask you to make any predictions, but I am curious, what's something that you're reading or you're paying attention to that has really gotten your attention and maybe you think more people should be watching or following? I think the biggest news story that

we know about, let's put aside the surprises aren't going to be a bigger deal, but one that we know about is demographics. And this is a very long-term news story. It's not what's going to happen this quarter or this year or even this decade. But if we look out over the rest of our lives, you and I, Dylan, I think it's the biggest known news story for the economy that exists. Because all economic growth comes from two areas. It either comes from population growth or productivity growth. You either have more people or you make those people more productive. That's how the economy grows. It's that simple. If you remove half of that equation and you say demographic growth going forward is going to be abysmal, and we know that to be the case,

that's a big headwind. And we know it's going to happen. I read this thing over the weekend, and this is very long-term news, but most demographic experts will pinpoint the time where the global economy starts to shrink. Not just an individual country, but the whole global population starts to shrink around 2080. Long time from now, but that's my children will experience that. And if we're lucky, you and I will get to experience this too. And that's when the entire economy, the whole global economy is shrinking. It's very difficult to imagine a world in which the global economy is growing at all in that situation. And this is going to happen in our children's lifetimes. And well before that, you're going to have a situation where even if all the

stars are aligned, you're going to have very, very low economic growth. And the thing about demographics is that unlike predicting technology or something like that, it's a much more stable forecast. Because even if the entire world started a new baby boom tomorrow, which they probably won't, but if they did, those new babies won't become workers for 20 or 30 years. So you kind of know what the runway in front of you is. So in terms of economic predictions that I look at, that's one of the only things that I think is most interesting to me because the ability to forecast with some sort of precision is there in a way that's almost not in any other economic variable that we look at. We've talked before about having

information and then kind of knowing what to do a little bit with that information or how you process it. Given the incredible long-term tail on that story and what it means, is there anything you do with that now? Or is there any kind of base of knowledge that you're kind of establishing with that and building on top of as you look at other things? I'll tell you one way, and this is not a recommendation, but just one thought that I have. The huge majority of the stocks that I own are US-based, not 100%. I own a couple international funds, one international fund, but it's a very small segment of my portfolio. Most are US-based. Now, there's a very well-known home bias in investing where people want to own stocks in the country that they live in because

it's most familiar, it's most comfortable. One of the other ways that I justify that in my head is that if you look around the developed world, the US has the best relative demographics. they're still worse than they were over the last 100 years. We're still in a worse spot than we've almost ever been demographically. But if you compare that to China, Japan, Europe, South Korea, Russia, we are so much better demographically than those countries. And so if you were to look at, I'm a long-term investor. I hope to invest for the next 50 years. If you're just thinking about demographics, and more than that will matter, but just looking at that, the US is where you want to be. The only regions that are really growing and have demographic prosperity are India

and Africa. And obviously those are different beasts to invest in. It's a very different when you're investing in a developing nation than in a more stable nation. So just looking at that, I feel comfortable having the majority of my investments be US-based companies. And look, there's still global diversification in there because if you own Apple, it's based in the US, but they're getting, I don't know, half of their revenue from overseas. So it's not that you're just segmented in the United States, but that's one of the variables that I look at when I think about my asset allocation. When you talk about the demographic health there and the trajectory of the demographics, aside from growth, is there anything else that you're looking at in particular?

It's pretty much just that. I mean, the variable you want to look at are the number of working age people that you have in a country and the percentage of the working age population as a percentage of the whole population. Age 16 to 64, that's working age. What is that segment going to do in raw numbers and as a percentage of the overall population? That's what you want to look at. In China, for example, China's working age population, age 16 to 64, will decline by 200 million between now and 2050. It's enormous. Even as a percentage of the population, it's a very big number. That's just the decline. And so you can have a situation where even if China is very productive, cope with all kinds of new technologies, and have a great economic boom, overall

economic growth is very likely to be extremely low, if not zero, if not negative, just because you have fewer people every year than you did before. So one of the biggest levers is basically being removed, and you're left with the other growth that you're able to find by maximizing, by becoming more efficient, all of that stuff. Yeah. And not all of this is doom and gloom necessarily. It's kind of weird to think about, but the one historical case that we have for massive population decline is the Black Death, which was, I don't know, the 1300, something like that, where 20, 30% of Europe died. And then the survivors in the aftermath were like, we need to rebuild society now. What happened during that situation was very interesting, which is that

the lowest wage workers saw a huge boom. The peasants before the Black Death who were making not even enough money to feed themselves, all of a sudden became very valuable because there were fewer workers. So if you were a blacksmith and you needed to hire workers, there were fewer people setting in their applications or however they did it in the 1300s. So they became more valuable back then. And you had like this middle-class boom that had all kinds of impacts on society. So that's something that if you're looking at this, it's easy to say it's all net loss. Look, I think it's going to be harder to grow the economy, but there could be some little areas like that where it's actually kind of like a cool thing to witness. And maybe the counter to all this too is that with AI and whatever else is coming down the pipe, we become so productive that we're able to offset the population growth that we've had over the last 100 years.

So in the United States for the last 100 years, it's been roughly 2% population growth, 2% productivity growth. That's how we've grown the economy by about 4% in real terms for the last 100 years. Let's say over the next 100 years, it's 1% population growth or half a percent population growth, but our productivity growth goes to 3% or 4%. Then you could get the same result. It's just a different mix. But either way you spin it, it's a headwind that we've never had before. You mentioned AI there, and you also mentioned the fickleness of projecting out technology a little bit before. It feels like more than any other year, technology was front and center just because generative AI took up so much attention, grabbed so many headlines. And I think so many

people were both impressed by it, but also wondering what is next or what do I do with this thing? Is there anything in particular you're paying attention to in that space right now? I think what's astounding about ChatGPT and AI is so much bigger than that, but just focusing on the product that people know, that it is one year old. I mean, it came out in December 2022. And this is already a product that every business, every teacher is talking about how it's going to disrupt them or how it's going to improve their work, whatever it is. And this is one year. And think about the early versions of the consumer internet, not the geeks at MIT, you

know, sending messages back and forth, but the consumer internet was like 1994. But it really didn't take off into a way that it was impacting virtually everybody's life until the early 2000s, late 90s, early 2000s. So it was five or 10 years before people were like, oh, now I get it. I can see how the impact. Whereas ChatGPT, I think has in many ways done that in 12 months.

And we're still in the early versions of what it could be. And that's just one product of probably hundreds that are going to come out in the next couple of years. So I don't think it's an exaggeration and I don't think I'm being brave. I think it's almost accepted now that it's a technology that we will look back at in 20 or 30 years as equal to what the car, the airplane, the computer did to society. Now, with any new technology like that,

the car, the airplane, computers, whatnot, you're going to have a big chunk of society that is disrupted in a negative way. And so I think you're seeing that right now. I think most of the AI fear of the AI apocalypse of like, oh, it's all going to be robots that are going to destroy humanity. I think a lot of that fear is rooted in people who are just uneasy about what it's going to do to their career, what it's going to do for them. But I think that's nothing new in the history of technology too. That's how it's always been. It's interesting as someone that was kind of on the younger side during the dawn of the internet, so much of my understanding of that period is looking back on what other people were saying during that time and also processing and

knowing the inevitability of it long term, just the trend continuing up into the right. And so I feel like generative AI in particular has been really the first time. There are a couple other technologies like streaming also plays into this, where I've been able to see this thing just probably is going to keep chugging along. There are going to be those articles almost every single day saying it can do this, but it doesn't do that very well. It's not capable of doing that yet. We tried it and it tested it and it got this wrong. And I have to, in my mind, gut check every single time I see one of those with, yeah, but where's the long-term trend?

And it seems inevitable. I mean, two things stick out here. One is when the car was kind of first came onto the scene in the early 1900s, people who said the horse is so much more efficient were right. The early cars were a joke compared to horses because there were no roads, the cars broke down, there are no gas stations. a horse was way more productive. Of course, that changed very quickly. When the airplane came out, people who said the train is much more productive were right

because planes were crashing. There were no airports. The train was much more productive. The early iterations of any new product is almost always inferior to the incumbent. It makes pessimism about that product much easier than it should be over time. When you look at ChatGPT and you're like, oh, it can't do this. It's getting this wrong. it hallucinates, it gives you wrong answers. That's where I agree with your point where you're like, yeah, but this is basically version one of a 12 month old product. Can you just extrapolate where we're going to be in five years, let alone 20 and think what this can do? If the first version of this looks like it does, it's like, it's astounding to think about. I want to take a left

turn here. You had a pretty big 2023. You released your second book. It was as well received as I was expecting it would be. It seemed like folks loved it just as much as the first, if not more. And I'm catching you now, I think, fully post-book cycle. And you've gone through the press, you've gone through the release, and maybe had a little time to process all of it.

Having gone through all of that and also kind of having the sands of time move a little bit since it's published and since you were done writing it, is there anything that you wish you could have worked into same as ever or any lessons from going through the book publishing process a second time around? I think what's hard for Psychology of Money, my first book, which has been out for three and a half years now, I don't read any of the reviews at all because I have this belief that you cannot

take the positive reviews seriously if you ignore the bad reviews. You have to take them. That's a very dangerous mindset to say the positive reviews are great. The negative reviews are all haters. Don't pay attention to them. So since I don't want to listen to any of them, I can't pay attention any of it. When a new book comes out, I don't have that self-control and I'm going to read it. And it's tough because writing is an art and in art, there's no right answer. And so no matter what you write, if you can write anything you want about any topic, 20% of people are not going to like it. And 5% of people are going to say it's the worst thing they've ever read in their life. And that can be really tough as a writer. Most websites, including I think The Motley Fool,

got rid of their comment sections years ago because they turned into a cesspool. No matter what the website is, it has nothing to do with what the site is. The most astute political science website, the comment sections turn into a disaster. And so if you have a new book and you're reading the comments, it can be tough because I think every writer should write for themselves and think of writing as an art. And in art, there's no right answer. And if you pay too much attention to what people are saying about how you write, what you write, it can be pretty dangerous.

So that's, that's what, what I've been trying to like grapple with for the last two months is yes, I don't, I, I, I'm reading, I'm reading the comments because I don't have the self control not to for a new book, but I also want to be like, look, I need, I want to stay true to just writing for myself and I don't want to take their advice too seriously. That's, that's, that's, that's where I've been. I'm sure there are some listeners out there who, uh, have writing more or have creative activities on there as a, as a resolution, or maybe we'll call it an intention for the new year.

Um, what, what are, what are some systems, uh, or suggestions you have for people that are, that are trying to create that behavior or create that space a little bit for themselves? I think the idea again of writing for yourself is the most important. And I'd frame it like this. Almost everybody, if they were writing a diary or a journal just for themselves, nobody else is going to read. Almost everybody will be a very good writer, if not an incredible writer, their creativity quote come out, their voice would come out.

once those people start writing for another audience, whether it's an email to their boss or a blog post, whatever it is, their writing ability is going to decline 80% to 99%. And I think it's true. And it's true for everybody that if you're just doing it for yourself, it's fun and it shows. But if you're writing for somebody else, then it's pressure and it's work and that shows too. And I think this is true for every artist, musicians, painters, sculptors, writers, the best ones just do it for themselves and they could not care less what the critics are saying about it. And they're not going to take the advice of people saying, why don't you do it a little bit differently? They're just want to do it for themselves. That's my advice for any artist,

any writer that's doing it. Just pretend nobody's watching. As I let you go here, Morgan, I'm curious. We looked out for 2024 a little bit. What's on the horizon for you in 2024? I'm working on another book right now. Books are a very long process, so probably won't be out for two years or so, but I'm chipping away at it now. And, um, just doing this thing that I've been doing for 17 years. I try to do a lot of reading. I try to do a lot of walking and thinking and talking to people and then just sharing whatever I've learned, uh, once or twice a month. I've been doing that my whole career. And I think I'll do that for the rest of my career. No goals, lots of systems. No goals, lots of systems. Uh, Morgan, we always appreciate you coming on and sharing

what you're thinking about, what you're reading. Thanks for joining me. Thanks, Tom. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.