The Compound and Friends - Why Markets Crash In The Fall, The Luck Of Bill Gates (w/ Morgan Housel), Why We Don't Set Goals For Our Advisors

Episode Date: September 11, 2020

This week on The Compound Show - why investors and market watchers are captivated by the months of September and October. Plus, Josh talks with Morgan Housel about the stupendous luck of Bill Gates, the piracy of Cornelius Vanderbilt and what we need to know about the Psychology of Money. Morgan's new book is now available wherever fine books are sold (or downloaded). Plus, the message Josh gave his firm's employees on the eve of their seventh anniversary, and why there are no goals set for financial advisors who work there. Leave us a rating and review, they really go a long way! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey guys, it's downtown. Welcome back. Hope you're well rested. Hope you're ready for fall. We had a pretty nasty sell-off at the end of last week, continuing into this week, and then a little bit of a recovery. But many of the highest flying tech stocks fell 15 or 20%, even the really big ones like Apple. Tesla was down about 34% from its all-time high into the low point, which I think was Tuesday of this week or yesterday. Seasonally speaking, September and October, like right around this time of year, loom large in the imaginations of market watchers. People that know the history, they look out for these

two months. The peak for the stock market back in 1929, after going up hundreds of percentage points, happened right around now. It was right before Labor Day weekend of that year that stocks just after years and years, just magically stopped going up. Nothing specifically happened. People just seemed to have returned from the beach and decided not to pay higher prices anymore. And that was the stock market top. A few weeks later, the crash came. Now, there wasn't any significance about either the day the market stopped going up after Labor Day or the day it decided to crash. I wrote a book about stock market pundits throughout history.

And when you do the historical research, it's very clear that no one in particular had seen the crash coming and there wasn't really any news that caused it. had seen the crash coming, and there wasn't really any news that caused it. The closest thing we have as an answer as to why the market might have crashed in October of 1929 is actually pretty flimsy. There was a guy named Roger Babson, who was a big time business and finance guru, and he was giving a speech that happened to have been broadcast onto the New York Stock Exchange during the week of the crash. And he was giving this speech from hundreds of miles away up in Massachusetts, where his namesake college still stands, right? Babson College. That's the guy. Some of the things he was saying were hitting the primitive version of what we would

now refer to as the tape or the newswire. The problem with describing the market action that week to Babson's remarks and giving him the credit for having caused the crash is that he was basically repeating the same things over and over again for years. He made this whole series of cautious or bearish speeches about the excesses of the roaring 20 stock market. It kind of became his shtick. So it's very hard to then say that this single instance of the news headlines picking him up and having him repeat himself in the press was all of a sudden the catalyst for what would eventually become the worst stock market crash in history. The selling began in the afternoon

of October 18th in 1929, panic set in, and by October 24th, which will forever be known as Black Thursday, almost 13 million shares changed hands in New York. That night is probably the first time it becomes common knowledge and it hits the mainstream press that something f***ed up is going on in the stock market. Remember, people aren't walking around with apps on their phones back then, like all over the country. Nobody has any idea for the most part. The stock market is, they're aware of it, but it's not that important to them. The next morning, some of the leading bankers and brokerage firms and investment companies, they come out and put on a show of force. They buy up as much stock as they can and they talk loudly about it in the press.

They're on the balconies at the end of the day announcing why they bought all these shares. So they managed to stabilize the market heading into the weekend. And then everyone comes back the following Monday and that's when all hell breaks loose. So that's the famous Black Monday. It's just this wave of selling that crashes over the tape.

And there's really nobody left to buy. Most of the people who had large investments, the people personally who had large investments in the market were leveraged. One thing that I think not a lot of people understand, there were maybe five mutual funds back then. Most of the money, if you had it in a pool, was in what we now refer to as a closed-end fund. And the difference between a closed-end fund and a mutual fund, also known as an open-end fund, a closed-end fund uses leverage most of the time.

So basically, investors put a million dollars into a closed-end fund in total. The closed-end fund buys $1.5 million worth of bonds or of stocks, and they're using that leverage. And there was this historic switchover after the crash where all the closed-end funds got wiped out because they were using margin debt, and the mutual funds then took over and became the dominant vehicle.

And it's not because mutual funds were necessarily a better structure. They just didn't have any leverage. They didn't have any debt. Anyway, so that's Black Monday. The next day, Black Tuesday, is a complete and total wipeout. Everything collapses. They trade 16 million shares on the New York Stock Exchange, which today sounds quaint, but it is orders of magnitude above what a normal day on the NYSE would have seen up until that point. Stocks end up down 80% from where they were trading as recently as September, which is unbelievable. And the thing to remember is that at that time, most Americans don't have

investments in stocks. A majority of Americans are still working in agriculture or some of the relatively newer jobs, which are in factories. They don't have IRAs. They don't have 401ks. There's no retirement investing. These people are going to make metal cans until they drop dead, preferably at their place of business. That's how disconnected the stock market is from the majority of American families, American workers. They look at brokerage accounts as being for gamblers. And then you've got these investment partnerships and again, closed end funds,

but they are the exclusive province of the rich. Most people don't have excess money. They have 12 kids. They hope three of them live and they're trying to feed those three kids because they're all going to drop dead in their late 40s. Like that's literally what America is like back then. So the idea of like, oh, I'm going to put money into a fidelity fund.

No, most people aren't doing that. So the majority of Americans, they hear about a stock market crash and their attitude is serves them right. Who lost money? Arnold Rothstein? F*** them. Bunch of rich gamblers, criminals, scam artists, Jewish bankers? F*** them. Not our problem, right? Rich Europeans, they can't even conceptualize the connection between the stock market and their own livelihood. It's like there are like eight layers of separation between them and what happens on Wall Street and broad. So, okay.

So now billions of dollars lost on the markets end up affecting everyone in the end. It affects rich people. It affects poor people, city folk, country folk. Doesn't matter who you are. We had had panics and crashes before. In fact, very frequently, really dating back to the Civil War, we've got documented in the press panics and crashes in stocks. That's not new. But this was the first time the pain and the damage were so widespread that it literally became like a cardiac arrest for

the whole economy, coast to coast, everybody. The modernization of the markets and banking system and trade finance and raising money for manufacturing and corporate expansion, that cut both ways. It was great on the way up in the 20s, but in the 30s, everyone had to see the downside of that phenomenon. And man, it was ugly. It's worth pointing out that the infamous panic of 1907 also began in the middle of October. I think it was the 16th.

So a lot of the old time panics and crashes occurred or began in September and October throughout history, especially before the advent of the Federal Reserve banking system. They would send it from their bank or the banks would send it of their own volition up to New York. And that capital would be used to speculate in stocks or they would send it up to Chicago to speculate in commodity contracts. And the way you moved money back then in the early 1900s was literally by train or by wagon, like Wells Fargo shit. or by wagon, like Wells Fargo shit. And with the Pinkertons riding aboard these trains or these wagons serving as armed escorts, the Pinkertons were really like the first badass security service for commerce, interstate commerce, protecting people's money when it was en route, whatever it is. So that money would make its way to the cities and it would circulate through the banks, brokerage firms, stock market, bond market, currencies,

commodities, and that would go on for nine months, like a merry-go-round. And it was a lot of fun if you were in the game. Jesse Livermore was very much in the game. But then you'd get to late summer. And again, remember, we were a largely agrarian economy at the turn of the century. Four-fifths of all the available jobs in the US economy had something to do with farming or feeding people or both. So every year around late summer, that money had to be called back from New York, called back from Boston. It was physically, this is not a metaphor, physically sucked out of the markets and carted back to where it came from, usually in the form of gold bars or coins. And it had to be taken back to the banks in Nebraska, Kansas, Missouri, local communities all over America where farmers needed hard currency to hire people to bring in the crops. They needed tools and plow horses and all kinds of other materials. So the banks would call this

money back to make these loans or to provide this hard currency to their farmer customers who could then buy the things they need. And the harvest was financed and the crops were brought in. But that money being sucked out of the investment markets caused an annual bout of forced selling of financial assets in the big cities that had stock exchanges. And all that gold pouring out of the cities created an environment of illiquidity. The money is, again, not metaphorically, physically, the money is leaving town. And if enough people want or need their money back all at once, you get a bank run. You get a stock market panic. You get a crash, right? And crashes and panics and bank runs, they feed on each other. People see one bank being run on and they go run on the other bank

just in case. Stock market panics feed on themselves. I don't know why everyone's selling, but I better sell too. So unless you have someone like J. Pierpont Morgan, who's willing to assemble all his fellow bankers and step in to save the world, as he so famously did in 1907, you have a really big problem on your hands. And then some very forward-thinking bankers and a handful of progressive senators said, and this really got started in the 19-teens, they said, why the hell do we have to go through this every year? Why can't we have like a bank of last resort that's going to fill in these illiquidity pockets when they sprout up so that we don't have to have physical gold flooding out of cities back to the farms and then flooding back into the markets

the next spring. Why are we doing this? These progressive senators and forward-thinking bankers would then go on a listening tour of European nations, many of which had already installed a national central bank. And they went to France and they went to England and they went to Germany. And they realized that America was overly reliant on people like J. Pierpont Morgan and their sense of patriotism. And we really, as a nation, had not built a financial infrastructure of our own. So we had strong banks, but there was very little coordination, especially between cities across the country. like a curse word in the days of Andrew Jackson, as he dismantled our early attempts of having a banking system. And we just really hadn't evolved. You know, from from Jackson, which is mid 1800s, really up until up until the 19 teens, we just kind of like, it was a patchwork. And we had these ongoing booms, busts, crashes, panics, and they would be severe and they would do substantial damage to people's lives.

We're not talking about blips on a computer screen. We're talking about people not being able to feed their kids. reasons that eventually we ended up with a Federal Reserve banking system with the major cities from the West Coast, San Francisco, Minneapolis, Chicago, New York coordinating policy. But traders and historians still have the mental scars pertaining to the month of October, just from knowing its history. And let's not forget, even in the post-agrarian economy, October has played host to some of the most horrific moments in modern times. The crash of 1987, for example, had nothing to do with farming. Lehman Brothers went bankrupt at the end of September 2008. And that triggered the failed congressional vote for TARP in October, the rescue plan.

And when that vote failed, that set off the fireworks that eventually put an end to dozens of major banks and brokerage firms and forced the rescue of AIG, the rescue of Fannie Mae and Freddie Mac, and ended up sending the S&P 500 down 57% from its all-time high, double-digit employment, globally synchronized recessions and depressions. So that was October. In 2018, very recent, tell me if you remember this, we had a 20% stock market crash that unfolded between the end of September and Christmas Eve. It was really, really quick. And the recovery afterward was just as fast. But that bout of selling that drove a 20 percent bear market in just a month and a half, two months came out of nowhere. It was like a rogue wave. And those are the types of things that people,

when they think about September and October, they feel that, right? They feel that that's a thing that could happen. And I don't know if it has to do with change of the weather or just people being more pessimistic when the summer's gone. I don't want to go much further on that. But that's why this time of year in particular, when you see a bout of volatility ripple through the markets like we just saw, remember that many of your fellow market participants know the history and they're on the edge of their seats, their fingers trembling, hovering over the sell button for no better reason than where we are on the calendar. All right. I have a packed show for you today.

First, speaking of harvests, I'm going to share with you the message I gave to all of my employees this week to celebrate our seventh anniversary as a firm at Ritholtz Wealth. We founded the firm September 13th, I think was our official first day, all the way back in 2013.

So I'm making this message public. I think there's a lot of good stuff in there. I hope you enjoy it. And if the feedback is good, I may consider bringing out more of this material to the podcast. So you guys will let me know. Then I have my good friend Morgan Houselon to discuss the psychology of money. know. Then I have my good friend Morgan Houselon to discuss the psychology of money. Morgan is easily one of the best financial writers and thinkers of our generation. His new book is

absolutely flames. He has all these amazing stories and lessons about what we do with our money, why we do it. You are absolutely going to love listening to him explain. So stick around. But first, Duncan, we got to do the disclaimer, hit the music, do the intro, right back at it after. Welcome to The Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

All right. Not if you can hear me, Zoom people. Yes. Everybody looks so handsome today. Beautiful. Energetic. Guys look fired up. I hope your Labor Day was as good as mine was. Had a really nice time. And just a reminder that although we're all dealing with a lot of challenges, the summer just wasn't quite as terrible as maybe I had expected it to be. And I hope that's what all of you were able to determine as well. We are farmers. Don't do the rest of the song. You're all on mute anyway, so you can't. We are farmers. Let me tell you what we do. We plant seeds. We do what I would consider to be world-class investing and personal finance content in a variety of formats, all different fields we plant these seeds in, from television to radio, podcasts to blogs, Twitter to Instagram, Facebook, LinkedIn.

We plant seeds everywhere we go. And by plant seeds, I'm basically referring to, we put a little kernel in the back of the people who consume our content's mind that, oh, these people are a perfect combination of serious. They don't take themselves too seriously, though. Serious about investing. Diligent. Smart. Do a lot of research.

Come to conclusions using data. Good communicators. They share those insights via charts, writing, spoken word, conversations, dialogues, and trustworthy because they are actually putting their opinions, what they really think, out there for all of the good and the bad that comes from that kind of sharing with the public. They actually say, this is what we think. And when they don't know what they think, they'll say, these are the things. They actually say, this is what we think. And when they don't know what they think, they'll say, these are the things that I'm considering, but I'm not an expert on

how the world works. I haven't figured it all out yet. Right? And people have that little kernel planted in the back of their minds. They say, all right, I got it. Then they come across something else that we do, something else we say. They say, you know what? I like this crew. I like this guy. Ben really speaks to me. He makes a lot of sense to me, right? Oh, Blair's blog really inspires me. Or Josh pisses me off a little bit, but I think he's smart.

I think he knows what he's talking about. Or I love Barry, right? I'm a huge fan of Barry. Barry makes me laugh. Whatever, whatever. And then you say, okay? I'm a huge fan of Barry. Barry makes me laugh. Whatever. Whatever. And then you say, okay, I'm going to subscribe. That is the seed that we've planted sprouting roots.

And then what do we do for the roots? We water it. We water it. They've subscribed to a blog, to a podcast. They've made my TV show appointment watching, right? Whatever it is, whatever it is, they now need to be watered. They need us to not just plant the seed. Now we've got to nurture that seed. How do we do that consistently with content? And the message behind the content is evergreen. It never changes. What do we emphasize? What do we emphasize?

We try to explain to people that a lot of times a simple answer may not be the perfect answer, but it's good enough. We try to emphasize the fact that after cost and after tax returns are the only thing a client gets to come away with, right? We try to emphasize the fact that the future is inherently uncertain, and there's no such thing as rising uncertainty. It is the most absurd term you hear in the media. You frequently hear it after a day like two days ago

where the Nasdaq's down 1,000 points intraday. Oh, rising uncertainty. No, it's always the same uncertainty. How much certainty was there on 9-10, 19 years ago, right? 19 years ago, plenty of certainty. Early September, blue skies, economy was already a little shaky, but not catastrophic, right? Quite a bit of certainty. And then the whole world changed in one hour, in one hour. So there's never rising or falling uncertainty. There is complete and total uncertainty at all times. And we are very upfront about that. And as we water our seeds, those seeds that we've

planted in people's minds, we constantly remind them of the need for a durable portfolio because uncertainty is permanent change is permanent and we have assumptions today and we try to use logic and reason and data to make those assumptions and they're all subject to change no matter what we do about it we have no power we have no power to change the fact that things are going to change. And sometimes we'll need to adapt. And other times, we won't need to adapt because not all change is permanent. Or not all change is worthy of a financial markets reaction. Politics being a great example of that. All right. So now we're watering those seeds that we've planted and they're starting to mature. They're starting to become fruits and vegetables, right? Pumpkins and wine grapes and beautiful things. And at a certain point, it's time to harvest those fruits. It's time to help those people who've become fans of our content and who have genuine financial planning, asset management, wealth management, tax-related, insurance-related questions, comments, needs, desires.

They need someone. It's the one thing that every wealthy family has in common in America. They almost always need someone's help. That's the nature of money. It's not easy. It's not one thing that every wealthy family has in common in America. They almost always need someone's help. That's the nature of money. It's not easy. It's not easy, right? It's not easy for me, and I'm in the business, okay? So they all need help.

So what are we going to do about it? Are we going to harvest the results of nurturing those seeds and watering those seeds and having them grow into ripe, mature, full-grown fruit, vegetable? Or are we going to trample over them? Are we going to walk by like we don't even see them? Those pumpkins in the patch, right? Those beautiful grapes growing on the vine. What do we do about it? Well, I personally would prefer if we help every single one of those families that comes to us that they're a fan of our message. They understand the content. They feel as though they've become wiser investors as a result of having read or listened or watched us.

That's great. Now we have to do the very, very hard work of harvesting. I think planting the seeds is, I'm not going to say it's easy. I just think it's easier. I could drop a blog post with a lot less effort than I can onboard a $5 million household with all kinds of complicated stuff going on in their finances. I'm being honest with you guys. It's easier for me to make a TV appearance than it is for somebody talking to a case where there are three adult children, there are trusts, there's a divorce, there's a business that's been sold, there are different cost bases. That's way harder. The harvest is harder. But guess what? It's harvest

season. So I don't care if it's hard. We're going to do it anyway. So what we've been doing, the firm turns seven years old at the end of this week. We've been doing this kind of work now for seven years. And the circumstances under which we were doing that harvest seven years ago, we're nowhere near as efficient as they are now. We have gotten better at bringing in the harvest and we'll be better next year. We'll be better the year after. Some of that has to do with technology.

Some of that has to do with increased staff. Some of that just has to do with an institutional knowledge that's been born and bred through the hardships of bringing on accounts. My phone's going off. It's one of my many doctors, which I'll get to in a minute. We have become better at this type of work over time, which is how it should be. And what that means to me is that we ought to be able to harvest more of what's grown, not less, in a more efficient fashion. A lot of the work that

we've done this summer with Operation Threat Level Midnight has been about harvesting with more efficiency. There's been a lot of work done by Barry and Nick on the blog, and I'd like to share something with you that Nick shared with me this morning. More people are hitting the form to reach out to us for more information or to quote, talk to an advisor. Many, many more people. In fact, according to Nick, we have as many inbound inquiries for the month of September today

on the 10th day of September than we did for the entirety of September, 2019. Okay. And according to Nick, he believes that the amount of inquiries coming in will be sustained at twice the old normal going forward. Each month, we have twice as many inquiries coming in than we did each month of last year. Not exactly, but pretty close. Last week, which was a holiday week at the tail end of summer, last week, 38 families reached out to us. Literally in seven days, 38 high net worth families reached out and said they wanted help. I don't know how many of those 38 families become clients, but I hope a lot of them because that's our job. That's the harvest.

It's sitting there waiting. Bring your baskets into the field. Let's help these people. Let's rescue them from the other alternatives that they might come across that are inferior alternatives to working with us, which in my opinion is almost every alternative. alternatives to working with us, which in my opinion is almost every alternative. Sorry, that's how I feel. I understand that I'm biased. But if we bring on one of these 38 families versus them going to, I don't know, a wire house, an independent broker dealer, a guy selling hedge funds, a family friend who watches a lot of CNBC and knows the stocks, whatever, whatever their other choices are, I think we're better. We better be better. We damn sure work hard enough at being better. So I want that harvest brought in this fall

in such a way that it blows away any harvest that we've ever brought in before. I want to help more of our fans and readers and watchers and listeners than we've ever been able to help in a single quarter. I want to see us do that September, October, November, right into the end of the year. I want to crush it for these people. They believe in us. They're reading our stuff. They're following what we're saying. They get it. They get it. That's why they're reaching out. They don in us. They're reading our stuff. They're following what we're saying. They get it. They get it. That's why they're reaching out. They don't all get it to the same degree, but they get it. It's our job to explain what we do, how we can help, and rescue them from alternatives that are inferior to us. It's that simple, and everyone's involved. It's not just client facing advisors who are taking new inquiries from Chris. It's every single member of the staff up to and including Barry and I being pulled on to call three, call four, just to reinforce the message and everyone speaking the same language from the advisor to the admin to the heads of the firm. This is what we have to do. Everyone's involved. Even you, Patricia, you're involved. Everybody. Even you,

Duncan, especially you. Do you have any idea how many of our existing inquiries and current clients are watching the videos? We hear about it all the time. So even you, everyone, it's a joint effort. It's a joint effort. Or we're going to let these opportunities get away from ourselves. It's come to my attention that some of the employees of the firm wish that there were a little bit better communication about the goals or the targets that they're expected to hit on things like inquiries turning into new accounts. There are targets. You will never know what they are.

And they're different for each person. I'm going to share with you three reasons why you will never know what they are. The first is most of you are exceeding your targets on a regular basis. And I don't want to tell you that because I don't want you to stop. I don't want you to, I don't want you to relent. I don't want you to say, Josh is so impressed with me. I'm going to go to Outer Banks and, and, uh, off for a week. Um, cause I'm already way ahead of where I need to be. I don't want it. I want everyone to be talking to the appropriate amount of clients and new clients all the time, bringing in the appropriate amount of referrals. I never want you to think that we have this opportunity to just relax. You will relax when you are significantly older and your client base is significantly more

developed and you are just loving your life and career because all of the clients you've brought on all these years are people that you've helped so much that they are throwing referrals at you. That's when you can relax. I'll tell you when. Your hair has to be at least as gray as mine. Okay? All right. That's number one. The second reason why we're not sharing goal information is because we've got different goals in mind for different people and they're not static. We change our mind. And by the way, we have a lot of input into how many new inquiries are going to how many advisors. inquiries are going to how many advisors. So it's almost not fair to give someone a goal and then not make it possible for them to achieve that goal if we're not putting enough people in front of them to speak with. And there's a reason why we might not put a lot of people in front of you to speak with. And some of that reason might be we just look at how many clients you're dealing

with now and the teacher-student ratio is important to us. And we want you to focus on existing clients more than inquiries. So there's a reason that we might throttle someone back from seeing a lot of people. That's for us to figure out. You got to trust us. We're doing this with the best interests of the clients, the advisors, and the firm. And most of the time, those things are all aligned. So it's not a push and pull by any means.

But we are actively making those decisions about who's talking to who in terms of new inquiries based on what we think is best for the clients of the firm that the advisor manages. We're not always right. We don't always get it right. Sometimes we change our minds. So be it. I think we do a pretty damn good job. Okay. So that's reason number two, that we're not sharing these goals because you don't have 100% control over hitting them anyway. Right? Here's reason number three. And this is the most important reason. My friend Patrick O'Shaughnessy tells this great story about a city, I think it was in India, that was overrun with rats. And they wanted to get rid of the rat problem. So there was a certain type of snake that was very good at catching these rats.

Snake is probably worse than the rat, but we'll get to that in a second. They announced it to the whole town, the whole village or city. I forget what it was. But by the way, it might've been Newark, New Jersey. I'm just saying India because I think that's what it was. But they have this rat infestation and they announce for every rat skin or rat skull or whatever disgusting thing, maybe it was even the tail. Let's say it's a tail. For every rat tail you bring to us, we're gonna pay you X dollars. Well, what do you think happened?

Okay, I'll tell you what happened. The first thing that happened is the snakes that were good at catching these rats were overbred because everybody needed the snakes to make the money on the rats, right? So then they went from having a rat problem to a snake problem. But then something even worse happened. The rats were being bred because it's like printing money. Oh, so wait a minute.

If I bring you five rat tails, I can make $5. That's 25. But what if I can consistently bring you 10? So now you got rat farms in the village. Can you f***ing imagine? This is human nature. If I tell you that you're expected to bring on, let me just make up an arbitrary number, five new clients a month.

Let's say you bring on four incredible families that check every box and they're exactly who we want to work with and we can help them and they like us and we like them and they understand what we do. Let's say you do that and it's like a car dealership. There's three more days left in the month and you know that we have this ridiculous expectation of you bringing in five clients. You might say yes to the wrong people. of you bringing in five clients, you might say yes to the wrong people. You might put yourself in a position where you're just like, you know what? We'll see what happens.

I'm sure it'll be fine. I don't want clients within the firm that are not a good fit for what we do for many, many reasons. The first of which is they become unmanageable in certain types of market atmospheres and not just corrections. They become unmanageable in a bull market. Well, I thought you were going to beat the S&P and beat the NASDAQ for me every week. Why are we trailing since May 21st? What's May 21st? Oh, it's my birthday. Why are we behind the S&P since May 21st? I don't want those people as clients. There's nothing wrong with them. They're just not a good fit for what we do. We do rational wealth management. But your temptation,

your temptation, if I put you in that position, it would be my fault, by the way. If I start setting quotas, it would be my fault. So I don't want to ever put you or the firm in a position where we're letting people slip past the goalie that don't belong here. It's going to be more of a headache to fire them or to gently suggest that they might be better served with a Twitter clown on interactive brokers who's going to trade puts and calls for them on a daily basis, right? That might be a better fit for you, sir or ma'am, right? I don't want to do that. I don't want to fire anyone. I hate it, okay?

So the best possible control, and we've spoken about this many times, is to not have a quota that forces people into a position to do things that they wouldn't otherwise do. So those are the three reasons why you don't have goals to work toward. Too bad. But here's the good news. Everyone that works here is a self-starter. Everyone that works here would rip the skin off their bones to do the right thing for somebody that is paying them and that has entrusted their life savings. All of you. Actually, it's one of the first things we selected for when we interviewed.

And we talked to dozens of advisors every year, maybe hire one, maybe hire three in any given year. The thing we're selecting for is how much you care and how much you want to succeed in this industry and how much good you want to spread out and do in this world amongst our clients. That's what we're looking for. So we already know that you don't need a quota or a target. The target is your career satisfaction. The chart should look like this up and and to the right, relentlessly.

Not every day. Let's look at weekly charts, monthly charts, right? But that's the target. The target is you consistently being happy with the quality of work you're doing and scaling it up to work with more and more families. That's the target. You're never going to hear a different target from us. Rest assured, in the back of our mind, we think we know what everyone's potential is. Okay? We think we know. However, you will never know, which gets me back to the harvest, and then I'll wrap up. This morning, this is my five iron. It's a Callaway. My five iron. It's a Callaway.

I used it as a cane to walk into Manhasset Orthopedic Associates because my L4 and L5 discs are protruding out of my back. I was doing dishes last night. Believe me, I didn't suddenly become athletic. I was bending down to take a fork out of the dishwasher and something popped. And I think I might have blacked out. It was so painful. But I ended up on the floor. There are no three people in my family who are strong enough to lift me off the floor.

But I managed to get to my feet and into bed. And we did some prednisone steroids. And we did some, oh, these are good, naproxen we did. And a little bit of, a little garnish with Xanax. And I got to sleep. This morning, I got the got the first appointment thank god i'm doing much better i got a shot of lidocaine directly into the disc uh or the area around the disc and i'm taking more of the naproxen and i'll i'll be okay um but i wasn't i i damn't going to miss this, the zoom call and I'm supposed to be on the halftime report today and I'm damn sure not going to miss that.

And I don't care what pillow arrangement I have to set up on this stool of mine to do that hour long sitting show. Cause I'm going to do it. Cause I don't know how many families that will someday become clients might hear our message for the first time. I don't know how many families that will someday become clients might hear our message for the first time. I don't know. That's my work ethic. I don't miss anything. I did four hours of television every week for eight, eight, nine weeks this summer. I did it. I did it. And I know that that's the same dedication that you guys go into when it's time for a call one or a call two.

I don't need to give you a quota. Nobody gives me a quota. We will relentlessly push our message out. We are doing our job on the content side. There is no doubt that we have doubled the amount of inbound inquiries every week from this time last year. A lot of that is how amazing the new website is. And Barry and Nick deserve a lot of credit from that.

A lot of that is how great the content has been. Michael and Ben are on fire. Blair is on fire, right? Todd has just relentlessly pushing our message out into the world. The work that Duncan is doing on YouTube is ridiculous. Look at Nick Maggiuli. He's a celebrity. I look up guys on CNBC. I look to the left. There's market watches quoting him at length or the Wall Street Journal. Our shit is in barrens. Forget it. We are blowing up on the content side. The message is getting out there. The inbound inquiries are coming. And now I'm asking

you guys to bring in a harvest like never before. We will help these people or we will die trying. Okay. I don't cancel anything. You guys tell me, I need you on a call three. I need you on a call four. I need this client to hear what I've said from your mouth? Do I ever say, can't do it? Anyone? Do I ever cancel? Absolutely not. I will pull over on the side of the road to do that because I know that that is the same effort that every one of you will put in as we build this business. So I want to wish everyone a happy seventh anniversary for Ritholtz Wealth coming up later this week. You guys have helped us build something absolutely incredible. We are so far from done.

I can't even tell you. Believe me, I swear on my five iron. We are so far from done. I can't even tell you. But I want to see that same intensity from everyone as we finish out the year. You're all doing great work. Let's bring in the harvest. Let's kick ass for our clients. And I'll talk to you very soon. See you all on Monday. Thank you.

Hey, guys, downtown Josh Brown. I'm here with my very special guest, Morgan Housel. If you're an investor or a trader or even sentient, you've probably at some point been sent a link to something Morgan has written. I think he's one of the best financial writers of our generation. So happy to have him on to talk about his new book, The Psychology of Money, which you're 100% going to read. And Morgan and I are going to talk about what went into the making of it and how it came out the way it did. And I think you'll really have a lot of fun with this. So stick around. and how it came out the way it did. And I think you'll really have a lot of fun with this. So stick around. So welcome to the show, published author, Morgan Housel. Look at you.

Thanks for having me, Josh. Look at you. Look at you go. I've been a blogger for 13 years and everyone thinks it's a much bigger deal if you take your words and put them between cardboard. For some reason, that means something to people. It is a big deal because it means that a publishing house deemed your words worthy enough to invest actual money in the physical economy. The digital is free. You could write nine books a day. It costs nobody anything. So it's it. Yeah, I guess that's true. But this is true for you. I mean, you've been a blogger for longer than I have. And you've written two books. Did it feel that different when you wrote about it?

I mean, it's the same content, right? Here's why it feels different. Three things. The first thing is I work in the investment management industry. And so the bulk of my clients are people over 50. And yeah, they've seen the Kindle. Ooh, they still like holding a physical book. By the way, this is one of the most old-fashioned things about me.

If I have the choice, I would rather hold a book than read something on a screen. I mean, I read on the beach. I don't want to sit there with electronics. So that's why, number one, it's a big deal because for a very large amount of the book reading public, especially investors, they respect books. They respect books. So that's one. And then two, when the media talks to you, they now look at you differently. You're not like a guy on WordPress. You are a published author. You're right about that. I just think it's an interesting quirk. I've always joked too that if you take a blog post and convert it to PDF, people will take it more seriously. They'll be like, oh, this is a white

paper. Like there's something about the format that makes people take it more seriously. And a book is the ultimate example of that. Umberto Eco, I think this might've been in Foucault's Pendulum. I'm not sure which book, but the plot was that there's a couple of guys running what used to be called a vanity press. You know what a vanity press is? Have you heard that term? No. So they're in Rome or maybe Florence.

And people that want to have written a book come to them and pay them like $50,000 or $25,000. And they will make someone's vanity book for them. And they might even write it for them. Because the book is like the stepping stone to a lot of other things. And I think this book's from the 80s. So it was probably even bigger deal then because there was no internet. You could call it the art of the deal or something. Yeah. And then I know like many authors, I'm not going to use anyone's names, but I know many authors who bought out the whole first printing of the book that they had ghost

written. Tell me that's not the most Wall Street mentality you've ever heard. It's like, okay, here's my autobiography. I dictated it to some guy sitting by the pool over Christmas vacation in Miami. And now the book's coming out and I'm going to buy up every single copy so it's sold out and I can make the New York Times bestseller list. Like I literally know three people who have done that. And I actually read one of these books like an idiot without realizing that it was ghostwritten. And I immediately regretted hours of my time that I gave to nothing. So that's the thing. All right.

But you're not doing that. You're, I think you, I've said this before, you and Ben Carlson are probably the two best financial writers of your generation. And I think what you do really well in this book is the chapters are short and sweet. There are many chapters. The book is like 200 pages ish, right? 210 pages. It's 255. When I sent out to start writing it, it was like, look, I'm a big reader and I know you're a big reader, but how many books do I actually finish? How many books do I read to the last page? For me, it's maybe like one in seven, one in 10, maybe something like that. I probably go through periods where I haven't finished like any of the last 20 books that I've

read. And to me, what I really wanted to do with this book is the statistic I want to maximize for, and you can't track this, I'm never going to know, but it's how many people actually read to the end. And for me, it was, look, most books do not, most topics do not require 250 pages of explanation to get your point across. Like the whole Declaration of Independence is like 4,000 words. So don't tell me that you need, you know, 90,000 words to explain interest rate cycles or something. Hold on. Like you just know most books are too much fluff. Will you force yourself to finish a book if you feel like you're supposed to because of either who the author is or the subject matter?

So you don't feel guilty? Absolutely not. And no, and there are a lot of books that I recommend to people and I love. I think they're great books. And if I, and I, when I would speak honestly and say that was such a good book that I didn't people and I love. I think they're great books. And when I would speak honestly and say that was such a good book that I didn't finish because I got the point. The point was very good. I learned something from the point, but then most books are just another 300 pages of supporting evidence. And I'm like, okay, I get it. I get it. So what I want to do for this book

was rather than making one point and rambling about it for 250 pages, I wanted to make 20 points. I wanted to get my point across really quickly. And I want people to be able to finish that because there's, I hope, I don't want to jinx it, but I hope there's not a lot of excessive rambling in this. I hope it's like, here's my point. I want to make that point in a coherent way and then move on. And then we move on to the next point. You're not rambling. You're making the, you're writing with what they said. The expression is you're writing with economy. Like you're getting big points across with a couple of paragraphs and then you're moving. Like it keeps moving. So I really appreciate that. Just keep, just keep it going. Yeah. So, so the book is 19 chapters. Each chapter is

about 2,500 words, which if you're not familiar, a normal length blog post is probably a thousand words. So this is 20, 2,500 word chapters that are in the book. Okay. So a lot of the things that, so I've found this to be, I don't like the word quirk, maybe let's say an idiosyncrasy of your writing style. You're really good at matching an easy story to tell that everyone can relate to with a financial premise or a financial concept. to tell that everyone can relate to with a financial premise or a financial concept. But I find that a lot of the examples you choose have to do with the fact that a lot of things happen where the circumstances can never be repeated. So like just to reference in chapter two of your book, you tell this story that is like

nobody knows this story, but everybody should understand it about Bill Gates being one of the only high school students in the world with access to a computer in a classroom in 1968 when he's 13 years old. That confluence of things. So he's obviously a genius, obviously brilliant, but he's in this specific school, Lakeside School outside in the suburbs of Seattle. And it's the only school that has this particular machine and he can use it whenever he feels like it. So him and his friend, Paul Allen have endless time to play around on it. And he's at the perfect age, this formative age of 13. It's a one in a million chance that out of the 300 million people that are like a teenager or a high school student in that time, he just happens to be one of them.

So I just think it's like, you do a really good job at explaining. Yes, this seems like it was meant to be, but it was completely random. Can you talk a little bit about why that concept is so important to everyone? It's really important because look, that chapter is about luck and risk and luck and risk, I've always said, are like the opposite sides of the exact same coin. Both luck and risk are this idea that there are things in life that happen outside of our control that have a bigger

impact on outcomes than anything we did intentionally. And people understand that in investing. They understand risk. Everyone talks about risk. You adjust your returns for risk. You hire risk managers, talk about risk all day long. But in investing, we rarely talk about luck or because if you're talking about someone else's luck, you look like a jerk. Oh, that guy was successful, but he just got lucky. Or if you're talking about your own luck, that can be hard to look yourself in the mirror. Maybe someone has been successful, but they don't want to look in the mirror and say, well, I mean, have I just been lucky? That's a hard thing to swallow. So even though we know that luck is all over the world, we hardly ever talk about it. So Bill Gates, I make this point.

Bill Gates is obviously, obviously, obviously a genius. One of the hardest working businessmen of our time. He'd like, this is not to say that Bill Gates was just lucky, but when you realize that he went to the only high school in America with a computer, you realize there is a massive element of luck right here. You cannot ignore that. And he says, if someone says Bill Gates was lucky, they'd say, no, he's a, he's a genius. He worked a million hours a week. So it's hard to separate that both of those things can be true. And what, to me, what it really means, this is really true in investing where we have a lot of idols, whether it's Warren Buffett or Elon Musk or Ken Griffin, whoever your investing idol is, Jim Simons, that we tend to look at that person and say, well, what did he or she do? And how can I emulate that? Because what are the daily habits that they had?

What are the systems that they have? And I want to copy those habits so I can be just as successful. And if you don't realize how much of an element luck plays into success, particularly massive success, the bigger the success, the more the element of luck is likely to play at some point in there. I think so. I think it has to be. I don't think anyone can be wildly successful through 100% effort. Time out. So then what do you, all right. So let me challenge you on that. And I'm not saying you're wrong, but I've heard it phrased differently when people say, how many times can somebody be successful in a row before you stop calling what they've done luck and just recognize that they are the superior player in their game? That's very different because previous success creates momentum to future success.

Okay. But the first success that got you there is like Bill Gates. It's not that, you know, when Bill Gates was successful in 1980 and he was also successful in 1990 and he's also successful in the year 2000. So he, like you can say, like he's, there's continual success. It's all path dependent, but the original thing that got him there in his own words was the fact that the dumb luck that he went to Lakeside high school. And so we just need to be more careful as investors about who we worship and taking the right lessons away from those people and saying, look, if I admire Warren Buffett, I'm not necessarily going to say, well, he eats at McDonald's every day and he does this. And these are the books that he reads. And these are the

exact formulas that he uses. And then therefore, if I copy those, I'm going to be as successful as him. You can never make that connection because there's so much of an element of path dependent luck that happens in everyone's successes and everyone's failures as well. It's easy to look at different failures and say, look at these idiots. They obviously made big mistakes. And of course they probably did. But there's also this element of like risk where like the line between success and failure can be so thin and only known in hindsight. So I use the example in the book of Cornelius Vanderbilt, who's one of the most successful, richest businessmen of all time. And if you talk to people today, people will be like, oh, he was a great businessman. He was very successful. He was scrappy. His net worth adjusted for inflation was like $300 billion.

successful. He was scrappy. His net worth adjusted for inflation was like $300 billion. But if you go back and read about the guy, he was at every step of the way, flagrantly breaking the law, just running it over, tearing it up, spitting on it. He was a pirate. They were all pirates. He was a pirate. And so you can so easily imagine where the story of Cornelius Vanderbilt was not the most successful businessman of all time. It was this pirate who ended up in jail. That easily could have been the story. And just because it went a slightly different way, this means we need to be careful at looking at him and saying, what did he do that I should do as well? Yeah. So that's such an important point. And then I think just the era you live in and what opportunities exist for you in one decade that two decades later, somebody trying to emulate

what you did and those opportunities are not there. And, you know, in technology, the implications of that are obvious. In investing, they're less obvious, but they should be more obvious. And just this idea that, well, I practice a style of value investing that's been seasoned over 70 years. Congratulations. You have 70 years worth of people – worth of information that's now being copied not only by your competitors but by computer programs, flawlessly replicated. So best of luck with that. So I think that's one element that people, I think, don't appreciate enough. And then the other thing, which you get into, the backdrop of the times in which you live and invest are going to have such a huge impact on what your results are, regardless of how much effort you put into it. And this example you give of somebody being born in 1950, they're teenage and 20s,

right? So starting at age 13 through the age of 30, what the stock market returns is going to have a big impact on how they feel about it. So that person living in 1950 starts becoming aware of the stock market in 1963. Over the next 15, 17 years, the returns are zero. Inflation adjusted. They make no money. It's a disaster with multiple crashes. But that same person born in 1970 sees the market rise tenfold in their teens and 20s. And, you know, Nick Maggiuli wrote something about this where if you had outperformed the stock market by 5% a year in the 1960s and 70s, your returns would be worse than the person who underperformed the stock market in the 80s and 90s.

Because the tailwind of the time you live is going to be so much more important than whatever you think your own skill is for the most part. Why do you think we don't appreciate that factor as much as we should? It's impossible, I think, to put yourself in someone else's shoes. So like you and I can look back and say, and study people from the Great Depression, and we can read about it and read about what they went through and try to say, what would it be like for me to live like that? But unless you've actually been there, unless you actually did it, unless you actually lived in the great depression, unless you actually, you know, you know, served in world war two, whatever the big event is, you cannot, you cannot put yourself in those shoes and replicate that kind of fear and uncertainty that people live through. So I, this is, this is, this is

always true. One recent example that's, that's relevant this year with COVID is why did Europe and Japan after World War II say, we want nationalized healthcare. We want healthcare for all. The government's going to pay for it. And the United States said, absolutely not. Why did that happen? Well, it's a really complicated topic. I don't want to pretend like there's one reason why that happened. But to me, one of the most compelling reasons is that Europe and Japan were destroyed physically during World War II. They were bombed to rubble. And at the end of the world, at the end of the war, you had the whole citizenry coming together and saying, we are, you know, we desperately want safety and security because we're literally starving. We're

living in rubble. Whereas the United States paid a human element in the war, but there was no physical destruction in the homeland. So it was easier for us at the end of the war to say, no, we don't want safety and security. We want to swing for the fences for growth. And so just because like, whoa, like people who've lived through a very different experience and had different life experiences can come to vastly different conclusions in terms of what is meaningful to them in life and what they want in life. And that's true for investors as well. You know, like one of the, I've joked before that the three most important investing skills are saving a lot, a long-term time horizon, and living during a period when interest rates fall from 10% to 0%. Like that's like, those are the three investing skills. And you have people like famous bond managers who like think they're geniuses and I'm sure

they're smart. This is back to like the Bill Gates thing. They are smart. They are hardworking. But if you are an active bond manager during a period when the 10-year treasury rate went from 18% to half of 1% or 1%, whatever it is, of course, that's going to have a different impact versus if you were a bond manager, you know, from 1950 to 1975. You're fighting uphill or you're rolling downhill like a snowball. Like those are the two conditions you can be in, in any given market or medium or whatever. People love really clean, easy to understand stories. And the cleanest, easiest story is I was smart and I made the right decision.

By the way, so many other factors playing into it. It sounds like you read my one page book on how to be a real estate multimillionaire. What is it? Well, the key is you want to be born into a family where the grandfather bought a few buildings in Manhattan in the 1940s. And then that's it. That's it. And then the end.

And then you're rich forever. Your children are rich forever. They could be alcoholics, drug addicts. It almost doesn't matter. It's impossible to fall out of that level of wealth. You have to be deliberately trying to. And even in that case, you might not succeed. Your grandkids are rich forever.

They're grandkids because you're doing 1031 exchanges. Nobody's ever paying any taxes. The asset that you bought pretty much every 10 years appreciates all the time. Things get a little tight. Raise rents on people. Things get a little tighter. Buy yourself a few politicians. So that's like this kind of like path dependency.

And then you meet the guy who's like third generation scion of a Manhattan real estate empire and total putts, but it almost doesn't matter. He was fighting downhill his whole life if he fought at all and everything fell into place. This is like the Chris Rock definition of like rich versus wealth. He's like, you can't get rid of wealth. Once you have wealth, it's sticky. You cannot get rid of it. It's there for good. There've been academic papers written about like how there's almost a caste system at this point because the people that are in that top of that distribution, it's not just money they've already made. It's how much money their money makes that makes it impossible to fall out. What do you – when you finish writing a book like this, um, and I know how prolific you are as a writer, are you like, this would be stronger if I could fit in,

you know, these five other concepts, or are you already saying to yourself, I'm ready for book two at some point, because there's a lot I had to leave out. It was hard. And this is something I'm sure you can relate with that you can relate to as well in a blog post. I do this on almost every post where after I publish it, there will be something two days later where I'm like, Oh, I, I, there's a sentence that I could have worded differently, or there's this example that I could have added in and I'll just go in and change it. Just go like in a blog post, you can just edit whenever you want, but a book at some point you have to say it's done and I'm never, I'm never going to change it. So that, that got really tough to turn in the manuscript to the publisher and say, this is done. And then after we edited it together to say,

okay, this is the final, final version. And even after I got physical copies, I was flipping through and I just opened to a page and I read a paragraph and it was like, ah, I could have said that differently. So it's always going to be frustrating. At some point you just have to say it's done. Like, you know, for better or worse, this is, this is what we got out. So that's, that's been kind of, it's, it's, it's a hard thing to do that. I writing the book too was look, I had, you know, I've been writing about this topic for 13 years. So the book is basically the most important points that I think I came across during that 13 years of, of, of, of study. Like what, what are the biggest, most important points and the best stories that I think I came across. But, um, there there's also, there's always when

you're writing it, like, should I go deeper? Is there more, or as you're writing it, you come across something else like, Oh, is this, should this be another chapter? And then you're also thinking like, like what's the ideal book length? Like I could add another, another chapter, but is that going to increase the number of people who've, who number of people who don't finish it? Or is this just excess rambling? So it was tough to put that together. You know, when someone like myself and you are used to writing, let's call it 800 word blog posts, you get used to that rhythm, that pace and that length. So to do something much longer than that is a totally different beast. Well, I'm going to tell you a couple of things. something much longer than that is a totally different beast. Well, I'm going to tell you a couple of things. I think you're making a huge contribution to the body of behavioral finance

books. And, you know, we all know the great ones that exist out there. Obviously, everything that Kahneman has done, et cetera. But like your book is more accessible in many ways than Thinking Fast and Slow. And I almost think like Thinking Fast and Slow should not be an early book that anyone, any investor tries to read because I think it'll turn them off from these concepts. Like it's almost, look, it's, I respect the, obviously all of the academic work behind it, but we're talking about in a lot of cases, presentation.

And the presentation of that book, I don't think is fitting for a 25 year old who just wants to like have some basics about what's going on when they make personal finance decisions or purchase decisions or investment decisions. Your book in many ways should be like a precursor to anyone trying to tackle that. And I would tell like young people, I always give them this list of like three or four books that I found to be really helpful. And this would definitely be one of them. So I think, I think, thanks. Yeah, of course. It's a huge accomplishment. I read it. I loved it. I breezed through it really fast. I may go back and reference parts of it here and there because it was, it was so concise and so well done.

Here's one thing to say about that. One thing I've always tried to do, many years ago, I was a columnist at the Wall Street Journal. And they told me when I started, they said, your job is to write a column that is going to be valuable to a hedge fund manager, but understandable by some random non-professional reading this newspaper column in Iowa. It needs to be both of those things at the same time. It needs to be, and that was tough to do, but I always think about that lens. The lens that I think it through when I'm writing a blog post or the book is, is this valuable to a professional, but understandable to my mom? And my mom is an educated, you know, very, very smart, curious woman, but she has no interest whatsoever in finance or economics.

So if I can write something that is going to be relevant to you, Josh, but my mom would understand it at the same time, that's always a sweet spot that you're going for. And I think most topics, you can do that. Even a complicated topic, you should be able to explain it in a way that doesn't lose any of the essence of what you're talking about, but can you still explain it using small enough words and short sentences and stories that are understandable to everyday people? Because they're not stories about finance or story about how people think about risk and how people think about opportunity and scarcity that kind of like funnels down to this financial concept that is typically presented through arcane formulas and big words just to try to make academic people feel good about themselves.

I think that's a really good point. We know you and I are friendly with a lot of practitioners in the industry and a lot of them are like quantitative and they're extremely smart, way smarter than me. And they write well, but they write very technically, but I think they're doing that on purpose. It's directed to that audience that wants all the details and all the jargon. and they want to like kind of geek out on some of these concepts. That's not what you're doing here. What you're doing here is something that anyone can pick up and learn a lot about themselves, their relationship with money, things about the economy that maybe they didn't understand before reading, etc. So I think you

really capture that spirit. If a hedge fund manager read this, they would get something out of it. And if somebody who's never invested a dollar read it, they would get something out of it. So I think you accomplished that. You want people to buy this Barnes and Noble, Amazon, physical bookstores. What's the best situation for you? Look, it's 2020. So I don't think any of the bookstores are even open. So I think everything is Amazon these days for better or worse. All right. So everyone will check out The Psychology of Money on Amazon. We'll link to it in the show notes. My guest today has been Morgan Housel. You're on Twitter,

at Morgan Housel. That's it. Yep. All right. Good enough. So everyone will follow Morgan Housel on Twitter, pick up the book. Let us know what your thoughts are on these important financial concepts. We love your feedback. We love to hear from you. Go ahead and subscribe to the channel if you haven't already. Give us a like and we will talk to you very soon. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch all of our videos Thank you.