We Study Billionaires - The Investor’s Podcast Network - TIP351: The Psychology of Money w/ Morgan Housel

Starting point is 00:00:00 You're listening to TIP. On today's episode, I sit down with Morgan Houssel, who is a partner of venture capital and private equity firm Collaborative Fund. He's a former columnist at The Motley Fool and the Wall Street Journal, and also the author of the international bestselling book, The Psychology of Money, which I got to tell you, is probably the best book on behavioral finance today. In this episode, we cover how time is the biggest factor in Warren Buffett's success, how Ben Graham wouldn't read his own book today, how success is a lousy teacher, how risk and luck

Starting point is 00:00:35 go hand in hand, and how to win and investing requires playing a different game than everybody else. Morgan is a storyteller. You can't help but be captivated when he speaks. I had so much fun in this interview, and I know you will too. So with that, please enjoy my discussion with Morgan Housel. You are listening to The Investors Podcast, where we study the the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, everybody, welcome to The Investors Podcast. I'm your host, Trey Lockerby, and today I am so excited to have with me, Morgan Housel. Thanks for coming on the show, Morgan. Thanks for having me, Trey. Happy to be here.

Starting point is 00:01:29 I just read your book, The Psychology of Money, and I got to say, there's no wonder it's an international bestseller. I mean, this is today's best book on behavioral finance. And it was a page turner, which is very impressive for a nonfiction finance oriented book. I read it in probably four or five hours. I mean, it was just devoured it. So I really appreciate you writing the book. And one word that kept coming to mind for me when I was reading it was perspective. You just give an excellent perspective, this ability to zoom way out and see the big picture. for each of these topics in your book was really fascinating. And one perspective that was especially enlightening, I would say, was your detailing of

Starting point is 00:02:15 Warren Buffett's success. So I want to start there. Talk to us about the long tales of Buffett's success and what investors should truly take away from his career. Thanks. And it's awesome to be here. I'm happy to do this. What's interesting about Buffett is everyone knows, A, he's a very good investor and he's

Starting point is 00:02:33 very wealthy. That's what everyone knows about Warren Buffett. And if you dig into some of the numbers, that's all true, but it's a little bit more nuanced. And really what it is is Buffett is a good investor, yes, but his secret is that he's been a good investor for 80 years. And the time that he's been investing for, the fact that he's 90 years old today and he's been investing full time since he was 10 is really what makes all the difference in the world. Because I point out in the book that 99% of Warren Buffett's net worth comes after his

Starting point is 00:03:01 50th birthday was accumulated after his 50th. birthday and 97% comes after his 65th birthday when he qualified for Social Security and could have retired. Now, this is so important because if Buffett was like a normal person who retired at age 60, you would have never heard of him. He never would have become a household name. He would have retired to some beach in Florida at a place to play golf with a couple hundred million bucks as there are like hundreds of those people in Florida. You never would have heard of him. The reason he's so successful is because even after his quote unquote, quote, quote, elderly years, that he was wealthy beyond imagination, he kept going and going and going.

Starting point is 00:03:39 And it's just the amount of time he's been investing for. And this is so important for investors because so many of us focus and spend so much time and energy trying to answer the question, how did he do it? And lots of other investors, how did they do it? How do they invest? How do they think? What are their skills? And we go into grand detail with Buffett about things on moats and how he thinks about

Starting point is 00:04:00 business models and all these other really complicated. topics, which are great. Those are important topics. But the number one reason he's so successful and so wealthy is because of the amount of time he's been investing for, which I think is almost too simple and basic for people to take seriously. People who work in the industry want to think that it has to be more complicated than that. And it's also kind of disheartening for some people to hear. Some people want to read a book and say, what is the secret that I can learn today that I can start putting to use tomorrow? Like everyone wants the secret formula. And when you hear that the formula is be patient and wait another half a century, people don't want to hear that.

Starting point is 00:04:38 That's a hard thing. Maybe that's the point. All great things in life, like the most incredible things, there's a cost to them. There's a cost of admission. It should be really hard. And the fact that being patient for three quarters of a century is really hard is why it's so powerful and pays off so well. I think that's one of the biggest things we can learn from Buffett.

Starting point is 00:04:59 Well, as Buffett says, no one wants to get rich slowly. But funny enough, Buffett did want to get wealthy pretty quickly. I mean, you read about his biography. He's so entrepreneurial and he had all these businesses. He was really trying to go on above and beyond and start compounding as early as possible. I'm just curious, is it the fact that this was just his game? For example, like, is there something about him personally that you detect or tease out that says he's unique, not just because he waited a long time because he's a certain personality or has a certain psychology that's different from everyone else? I think if there is a trait, and this kind of comes from his biography called The Snowball,

Starting point is 00:05:37 that is really, really fascinating to read this side of him. I think he's so obsessed, and that's the right word, with investing and with business, that his entire life he's had more or less a singular focus on valuing and picking companies. And if you read his biography, you can tell that that comes at the expense of his family life, his social life, all these other things. It's really fascinating how many people in the industry admire him. Then when you read about what his whole life is like, if you want to be someone, you can't just cherry pick their net worth. You can't just cherry pick their job. You've got to think the whole package. And the whole package of Warren Buffett, honestly, doesn't really seem that great

Starting point is 00:06:14 to a lot of people, including myself with someone who really admired him and then read the biography and I kind of went, it's a fascinating guy. It's fascinating story. But do I want that life? I don't, I don't know if I do. I think he's obsessed with investing and picking companies and allocating capital more than anyone else has been over the last century probably. I think that's not an exaggeration. And look, that obsession boils down to and comes down to the fact that when he was in his 70s and he was a multi-billionaire, he said, I'm not slowing down.

Starting point is 00:06:44 I'm not going to quit my job. I'm going to keep doing this with as much passion and fervor as I've always had. That's a level of obsession that you don't see many places. Most investors, including myself, I would say, want to get wealthier. They want money. They want to build wealth so that they can maybe go do something else so that they can have a level of independent and go do, fulfill other hobbies, spend more time with their families, et cetera.

Starting point is 00:07:06 And I think for Buffett, it was never a means to an end. It was always just he loves playing the game. And the rewards, this shows up in his lifestyle as well. The rewards, I think, is just a scorecard to him. The fact that he lives in the same house he bought when he was 25 years old shows that the wealth that's accumulating is just the scorecard of how he's doing. But I think he loves the game. He loves the process of picking stocks more than the outcome that's made him so wealthy. Well, Buffett was obviously an early student of Ben Graham, who lays out these very simple

Starting point is 00:07:35 formulas that have become the cornerstone of value investing that investors follow today, mostly from the intelligent investor. And when I met Buffett, I brought a copy of my intelligent investor book and had him sign it because I know it's one of his favorite books. And that's a lot of how investors start today and sometimes even stay with. That's the philosophy they stick with. But so much has changed in the world, even by the time that Graham was on his deathbed, that he even admitted that he wouldn't have even followed the same investing approach that he laid out in his earliest work.

Starting point is 00:08:09 Just let that sink in for a minute. I mean, I don't think enough people even know that. This may be an untold story for a lot of our listeners. So tell us a little bit about what happened here. First of all, Graham's book, The Intelligent Investor, had, I think, six different editions. Maybe it was five, something like that. And in every different edition that came out, the formulas that he showed in the book of, here's the formula you can use to pick winning stocks.

Starting point is 00:08:32 Those formulas changed in every edition. If you look at the Intelligent Investor Edition 1, Edition 2, they have different formulas in there. The reason he updated them is because the old formula stopped working. So he found a new formula that worked and he put it in the book and he said, he's basically saying, this is what works now. So Graham, when he was writing these books, did not intend, I don't think, for these books to be used as a how-to guide, an owner's manual 90 years in the future. And look, there are, of course, timeless principles in the book. Of course, of course there are.

Starting point is 00:09:03 But a lot of what's in the book is hyper-specific to the era in which he was writing in, which is like the 1940s and 50s. This is a long time ago. And you mentioned when Graham died, which I think was either 1972 or 74, something like that, right before he died. And one of his last interviews, he was asked whether picking individual stocks in the way that he laid it out in security analysis and the intelligent investor, who's asked, does that still work? And Graham very clearly said, no. I'm paraphrasing here, but he said, that used to work when we wrote it, but it does not anymore. Or he said, it's unlikely to achieve a level of success like it used to.

Starting point is 00:09:39 And this was in the early 1970s. So you can imagine what he might say today if he was still alive. And look, this is not to poo-poo the book at all, because like I said, there are timeless principles in there. But anyone who doesn't accept how the world changes over time and is reading a book that was written in the 30s as rock-hard verbatim, this is what you should do today, is going to have a hard time. I think that's one of the reasons why so many people have tried to copy Buffett and so few

Starting point is 00:10:08 if anyone has been able to emulate his success, even like the kind of returns. Because if you look at the kind of fanatic who says, okay, Buffett used to pick stocks doing X, Y, and Z using this formula to discounted cash. Like, whatever the model it would be. And you're not updating it for how the world exists in 2021. You're going to have a really hard time. And I think this is true for Buffett and Munger as well. If you look at how they invested in the 70s versus today, it's a lot different.

Starting point is 00:10:36 Not just because they invest more money today, not just because they have more capital that forces them to invest differently, but just how they see the world is very different. What one company has Buffett made more money on in dollar terms, not percentage terms, than any other investment he's ever made? Do you know what it is? Apple. It's Apple. Yep. Which 10 years ago, Buffett would have said, I guarantee you and I could find a quote of Buffett saying, like, I don't understand Apple.

Starting point is 00:11:01 I couldn't do it 10 years ago. And it ended up being in dollar terms the most money he's ever made ever. So even at his age, they're willing to adapt their worldview over time. And I think that's a really critical component. I think most people want to find the secret formula and then hold on to that forever. And in a world that changes, in a capitalistic world that changes as much as you can, I just don't think you can ever do that in investing. And this goes for all forms of investing.

Starting point is 00:11:26 Look, I'm a fairly passive investor. I write about that in the book, which is a different story that we can get into. But would I say that I'm going to invest in these Vanguard index funds for the rest of my life? No. How can I look at history and how much things have changed? and the composition of indexes and the new products that are available to investors. Everything that's changed. And how could I say that I found the Holy Grail that's going to work for me for the next 50 years?

Starting point is 00:11:52 That's ridiculous. If anyone were to say that, I think they're being ignorant of how history has worked over time. So I love the idea, the quote that's been attributed to many people, strong beliefs weekly held is a really important part of investing. You know, you can believe in these principles and you put a lot of faith into them. But as soon as you start writing things in stone, things get really tricky, particularly if you're talking about tactics and investing strategies. Now, again, I would add that there are principles of investing that I think will never change because they're fundamental to human behavior. But actually how people

Starting point is 00:12:25 invests always changes. Yeah, too many people get caught up, it seems, trying to emulate success. And there's this great quote in your book by Bill Gates that says, success is a lousy teacher. His point, Gates, and you know who's actually made a better example of this and has a better quote of this is Mike Moritz of Sequoia, who's probably the most successful venture capitalists of all time. He did an interview with Charlie Rose 10 or 20 years ago. And Charlie Rose said, look, Sequoia investments has been the most successful venture capital firm, not just for five or 10 years, but for 40 years. And he said, how do you keep that? Like, what's your secret to that kind of consistency and longevity? And Michael Moritz said, we're always scared

Starting point is 00:13:06 of going out of business. And he said, only the paranoid survive. And what's so interesting about this is that if you run Sequoia Capital and you have that track record, that's like the one person in the world who can look into themselves in the mirror and say, I'm pretty talented. Like, maybe I do know what I'm doing. And yet that's not what they do. They wake up every morning scared out of their minds.

Starting point is 00:13:26 And that's why they've been so successful. And I bring this up because the idea of success being a lousy teacher, as Bill Gates says, is that success tends to give you an idea that you know, what you're doing and that you know how the world works. And there's a quote from Jason's Weig where he says, being right is the enemy of staying right because it leads you to believe that you know what you're doing. And once you have confidence that you know what you're doing, you start locking on to strategies and worldviews and grasping them really tight, they become part of your identity. And then all of a sudden, you're not able to adapt. You're not willing to

Starting point is 00:13:58 adapt. Or if you're a business, you get fat and happy. You get lazy once you're so successful. And how many companies has that applied to? General Motors, AIG, Citig, Citig, and going down the list of companies that got fat and happy. And they let things go. They let risk management slide away because they're too big to be able to management or they just kind of got lazy. When I bring up those examples, it's not to poke fun of them because I think this is a very universal human condition that success brings a degree of laziness. And the companies and the people who are able to fight that are the unique ones. Those are the standouts. But the Path of least resistance is that when you're successful is to say, okay, I can slow down now.

Starting point is 00:14:38 I don't need to run as hard as I used to. I don't need to wake up at 4 a.m. and a cold sweat racking my brain because I've earned the success. That's what most people do. And I think that's part of why competitive advantages, whether you're talking about an individual or a company, don't have a very long shelf life most of the time. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the high. height of the summer. You've got long days of daylight, incredible food, floating saunas on the

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Starting point is 00:18:55 Go to Shopify.com slash WSB. That's Shopify.com slash WSB. All right. Back to the show. You kind of touched on, I would call it, you know, confidence bias and consistency bias. A lot of these biases that are pretty much well documented at this point, even by Daniel Kahneman, who you talk about in your book. But something that occurred to me when I was reading your book is you don't really use

Starting point is 00:19:21 the word bias, I don't think, in the book very often. Is that intentional? Maybe subconsciously intentional for two reasons. One is that it sounds academic. And even if these are academic topics, as soon as you use a word, like bias is not a big word, but it's an academic word. As soon as you use something like that, people are like, I don't want anything to do with this.

Starting point is 00:19:41 And two, I think it's just overplayed. Like, it's awesome that behavioral finance has gotten a lot of attention over the last 20 years. But as soon as you say confirmation bias, at least people in my circle are going to be like, I've heard this a thousand times. You're not teaching me anything new. So if someone like myself can take a concept that people already know like confirmation bias and tell them a story that they haven't heard before that shows it, that puts a spotlight on it,

Starting point is 00:20:05 maybe that's still kind of trotting some new territory. In all books, all investing books, all business books, if you're just going to use the same phrases and the same words that have been used a thousand times before, no one's going to be interested in that. Well, let's talk about those stories that most people probably don't know. And what really ties with a concept in your book, you talk a lot about, which is risk and luck and how they kind of go hand in hand. So I want to start with maybe the third beetle, if you will, with Buffett and Munger, which is Rick Uren. So maybe talk to us about this name because maybe a lot of our listeners haven't heard about this man.

Starting point is 00:20:43 Rick Uren is a guy whose name I have seen pop up in books and articles and whatnot through the years as someone who is kind of in the Buffett Club going back. to the 50s and 60s. He was kind of like one of the original deep value investors from that gang, kind of that Wu-Tang of value investors who came about, you know, in 50s and 60s. And it actually used to be a trio of Buffett, Munger, and Rick Gurren. The three of them used to kind of be a trio making investments. And Buffett has talked about when Berkshire bought Seas Candy, Rick Gurren went with Buffett and Munger to interview the CEO. Like they were a trio together. And everyone knows Buffett and Munger now. But then there's this question of, What happened to Rick Gurren?

Starting point is 00:21:23 Several years ago, Monash Prabrae won one of the charity lunches with Buffett, where he paid like 600 grand to have lunch with Buffett. And he asked Buffett. He said, what happened to Rick Gurren? I know he used to be part of the tribe. And then he kind of, you're still around. He's still investing money, but he kind of broke off from Buffett and Munger. He said, what happened to him?

Starting point is 00:21:41 And Buffett told him a story that back in the 1970s, Rick Gurren had a bunch of margin debt. I think he owned his Berkshire Hathaway stock on margin. And during the 1970s bear market, he got a margin call. And Buffett said it was actually Buffett himself who purchased the Berkshire stock from Rick Gurren so that Rick Gurren could make his margin call. And the point that Buffett made to Pabri was he said, Charlie Munger and I always knew we would be rich. He said there was no doubt in our mind that we would be rich.

Starting point is 00:22:12 So because of that, we were not in a hurry. We weren't in a hurry to get rich. We knew it was going to happen. It was inevitable. We just had to play our game and do it. But he said Rick Gurin was just as smart as Buffett and Munger, but he was in a hurry. He wanted to get rich faster than Buffett and Munger did. And to me, that's fascinating.

Starting point is 00:22:29 A, because so much of what we talk about in the industry or what we look for in the industry is intelligence. And when Buffett says Rick was just as smart as he had Munger, he had the same amount of intelligence, but he didn't have kind of the behavioral instincts, I think, that Munger did, of patience. Something so simple and basic. The phrase that Buffett uses where he says, Rick was in a hurry is so fascinating and important to me that you can take someone who's just as smart, who just doesn't have the grasp on

Starting point is 00:22:56 behavior as well as Buffett and Munger did, and it breaks everything. Now, I think Gereen did go on to still become a successful hedge fund manager. I think he recovered from his accident, so to speak, but not to the degree that Buffett and Munger did. And I think if you were to look at the Arkego's hedge fund meltdown that just happened a month ago or what's going on with GameStop and some of the hedge funds that got blown up from that. I think you see the same thing. You find people who are very smart, very intelligent, but they're in a hurry.

Starting point is 00:23:25 Or they don't have any of the dozens of behavioral flaws that are necessary to avoid to become a successful investor. And this is to me is kind of the premise of my book. It's just that good investing is not about what you know. It's not about how smart you are or where you went to school or how sophisticated the Excel model you have is. good investing is overwhelmingly just about how you behave. It's about your relationship with greed and fear and your ability to take a long-term mindset and who you trust, how gullible you are, those

Starting point is 00:23:54 kind of things. And to me, the most important part is that behavior is hard to teach. It's almost impossible to teach, even to someone who's very smart. You can teach them calculus and you can teach them data analysis. You can teach them how to read a balance sheet, but you can't teach people how to be patient. It's just some people have it and some people don't. That can be disheartening to hear, but I think it's really true. And all the evidence that we have shows that that is true. That I don't think there's any evidence, unless we're talking about like the marshmallow test at like a really basic level. I don't think there's much evidence that people who are extremely intelligent are also going to be patient investors. Or the opposite, the people who

Starting point is 00:24:30 don't have a lot of training and sophistication, those people can be patient, very successful investors. And I think it's just very easy to overlook that in this industry, the disconnect between behavior and intelligence. You mentioned finance and investing is probably the only industry where this kind of disruption can happen, where someone like a janitor can go on to leave millions to charity, whereas these MBA hedge fund managers can collapse out of greed. And that juxtaposition is really profound. So maybe talk to us about that story.

Starting point is 00:25:06 It's a real story. I think virtually every year there's a story in the news of, Very humble person, a janitor, a secretary, whoever it might be, dies and leaves millions of dollars to charity. And no one knew that they had this money. Every year, one of these stories comes about. There's a story about a woman named Grace Grunner. So that happens in investing, that complete novices who come from humble backgrounds do very

Starting point is 00:25:28 well. You are never going to hear that story in heart surgery or fixing a root canal that a complete nobody novice janitor performed open heart surgery better than a Harvard trained doctor. That would never, ever happen, or built a fully perfect iPhone in their garage. There's some things that just an amateur novice could never do. But those stories do happen in investing. And they happen a lot. I don't think they are really necessarily like crazy one in a million anecdotes.

Starting point is 00:25:58 If you look at the vast majority of investment dollars in the United States, the vast majority of dollars are for people who contribute from their 401K. Every other Friday, they put 200 bucks in their 401k, and they invested in a next fund and they never touch it for decades. That's the majority of investment dollars that happens. Most investors, to that extent that they're just dollar cost averaging in their 401k, are really good investors. What we hear about and what we see and what moves the market are the people who are fiddling with the knobs, the hedge fund managers, the traders, the day traders, the Robin Hood investors, etc. that are constantly fiddling. But the vast majority of investors are actually

Starting point is 00:26:35 doing great. And the vast majority of investors, even if they don't know it, are outperforming, some of the best investors in the world. And that, too, just doesn't happen in any other field. Like, what would it be like if your average golfer, your average just like plays twice a summer, like goes and rent some clubs, was consistently shooting a lower score than the best golfer in the world? Like, that's what investing is. I think people don't even know it.

Starting point is 00:27:00 They don't even realize it. That the person who has no idea what they're doing, their employer just auto-enrolled them in a 401k and they dollar cost average in index funds, they're among like the top quartile of investors. And they don't even know it. And there's just no other industry where that exists. And it's a really important part of the story of how we behave as investors. So you make this salient point that we treat investors like members of a basketball team that are all playing the same game. And you just kind of mentioned how nothing could be further from the truth. And I was just talking with Joel Greenblatt recently. And he was, you know,

Starting point is 00:27:33 his analogy was, well, how do you beat Michael Jordan? You don't play him in basketball. You play in a different game. And that's kind of, I think, what you're alluding to here is that these people who are almost not even realizing it, these employees who are dollar cost averaging are enrolling themselves in this really advantageous style of investing and playing somewhat of a totally different game than a lot of these other investors. That's right. I think there's a really powerful kind of logical idea that investors are playing the same game, that we're all investing in the stock market. We're often buying the exact same stocks, so therefore we're doing the same thing. And I think nothing could be further from the truth,

Starting point is 00:28:13 that you have everything from high frequency traders on one end to pensions and endowments that have century-long time horizons on the other and everything in between. And to think that those investors should agree on what the right price of a stock is, or agree on what news is pertinent, or agree on what the next best move is to do in the market, is ridiculous. And we're all playing completely different games. And what's so important about this is that most investors who don't distinguish one game from another are liable to take their cues from investors who are playing in different game. So one example of this is like, let's go back to 1999 and Cisco stock or Yahoo stock, whatever was big back then, is going up 10% per day. It's the 1990 stock bubble. Why is that

Starting point is 00:29:00 stock going up? Is it because there are long-term investors who believe that Cisco was worth $800 billion or whatever? By and large, no. The reason the stock was going up is because day traders thought that it was the stock was going to go up between now and lunchtime. And by and large, they were right. That was the game that they were playing. The day traders didn't care that Cisco's market cap was well in excess of its future discounted cash sales.

Starting point is 00:29:23 That's not the game they're playing. The game they're playing is stock currently trades for $70 and I think it's going to 71 before the end of the day. That's their game. But that was really dangerous if you were a long-term individual investor saving for retirement because you saw the stock going up and maybe you thought, hey, maybe these investors know something I don't. Maybe the stock is going up because this is the next wave of the future.

Starting point is 00:29:46 And maybe the fact that it's going up says that that's a signal for me that I should be buying more before it keeps going up even more. So the long-term investors start taking their signals, their cues from the day traders. And of course, once the tide goes out, the day traders are gone. They've sold, they moved on. They did something else. The bagholders, so to speak, are the long-term investors who took the, their cues from someone playing a different game. And I think this happens all the time. I mean,

Starting point is 00:30:11 if you were to watch CNBC and you go on and someone, you know, the guy wearing a nice suit, says, you should buy Netflix stock. Well, who is that advice for? Is that for a 19 year old day trader? Is that for a 90 year old widow on a fixed income? Because let's not pretend that those people are the same. So when someone says, you should buy this, like when we all play different games, then you have advice that is good for one person that will be disastrous for another. It's such an obvious simple point, but it goes overlooked all the time in a way that I think maybe even the majority of bad investing behavior is caused by people who are taking cues from people who are playing a different game than then.

Starting point is 00:30:50 I'm a long-term index fund investor. So that means that companies quarterly earnings, even like quarterly GDP, it makes no difference to me. But if I were a momentum fund manager, then that news would be very pertinent. to me. I think there's a big, there's a lot, it happens in investing too, where one investor will kind of criticize or minimize how other investors behave. Why is this person paying attention to short-term data? Why is this person so oblivious to a stock that's going down and they keep hold it, even though the trend lines are going down? And a lot of arguments in this industry are not necessarily

Starting point is 00:31:25 people disagreeing with each other. It's people who are kind of upset that they realize that other people are playing a different game. I think it's a cause of a lot of bad behavior. Best things that's so critical for any investor to do is just define the game that they're playing and make sure that the information and the cues that they take that are going to dictate their behavior are only relevant to your personal game. One thing that you highlight that you do that I find so overlooked is just starting out with the end in mind and saying, what are my goals? You know, I want to retire with X amount of money. I have this amount of money today.

Starting point is 00:32:01 I can probably contribute, you know, why. So what rate do I need to compound at to get there? And typically speaking, more generally speaking, probably the indexes will be a satisfactory return in that regard. So talk to us a little bit about, you know, your own investing style and how you adopted that. I think a lot of it has to do with this concept of enough that no matter what we're doing, and this applies to a lot of things in life, you have to have to have. have at least some boundary of saying like, that's enough.

Starting point is 00:32:31 And once I get to this point, I'm not going to reach aside. Like, that's just enough. Maybe it's possible to get more, but it's enough. I think it's a really critical investing skill. And for me, what it's been is just this observation that, look, if I can dollar cost average into index funds for the next 50 years, I'm going to achieve every financial goal that I have and then some. I'll be able to take care of my family in this life.

Starting point is 00:32:54 I'll be able to leave some to my heirs. I'll be able to leave some money for the betterment of society. I'll be able to travel everywhere I want to go, live in the house. I want to, like, every financial goal will be met if I can do that. So why, if I'm currently doing that, why would I want to reach for more? If reaching for more is going to add more risk that everything is going to blow up in my face, it's going to be more complicated, it's going to take more work. If I can already get everything that I want, why would I push even harder?

Starting point is 00:33:19 What's the logic in that? If I'm already getting everything that I want. So that's kind of how I look at it, that if I can do this simple investing strategy, that doesn't take really any mental bandwidth, and I can achieve all my goals. Like, that's it. Now, that works for me and that works for my goals, my wife's goals, but it might not work for other people. Other people might have a little bit more of a type A personality that I do.

Starting point is 00:33:42 So their goals are different. But I think knowing what is enough and staying within that boundary, wherever your boundaries are, just making sure you're staying within them is so critical for investors. The other thing for me, for my investing strategy is I'm a passive investor. But I'm not a passive zealot. I'm not one of the people who says, you can't beat the stock market. No one can do it. It's a waste of time.

Starting point is 00:34:03 It's all marketing. I'm not that person at all. And I know investors and fund managers who I have a good degree of confidence will outperform the market this year or next year over the next five years. So then the question is, why don't I invest with those people? If I'm honest, I think they will earn returns above the index. And the reason I don't is because I think the more complicated that I make my personal investments, the higher the odds.

Starting point is 00:34:27 that I'm not going to be able to sustain it over time. If I were to invest in one of these fund managers, maybe I'll do very well over the next year or five years. But is that a manager that I can stick with for 50 years? Am I going to get to a point where I don't believe that they have their skills anymore, that I'm going to have to question them, that I'm not to have to pull out. Maybe I pull out the worst possible time. The more knobs I have to fiddle with, the higher the odds that I'm going to interrupt my

Starting point is 00:34:51 investing process at some point versus I think if my investment strategy is very simple. There's like no knobs to fiddle with. It's just the Vanguard total stock market. And it's just so brainless. That's it. I think that gives me a higher chance of sticking with it for 50 years. And if I can stick with something for 50 years, compounding is going to go nuts. That's all it is.

Starting point is 00:35:12 All investing is just money and time. And the time is the most important part of that equation. So all I want to focus on is maximizing time. It's not maximizing annual returns. It's maximizing how can I stay here for 50 years. I'm going to be able to do that with as much simplicity as I can. And maybe it works for me, too. I have almost no susceptibility to FOMO. It just doesn't really bother me that much. That's not true in other parts of life. I think in other parts of life, I see people doing something and I'm like,

Starting point is 00:35:41 I really want that. For investing, it's just not, it's not there. I'm totally okay, earning the returns of the Vanguard Total Stock Market Index when I could have been all in feigned stocks or all in Bitcoin or whatever it might be. That really doesn't bother me because I'm just so attached to this idea that if I can do this for 50 years, I'm going to achieve everything that I want to do. So I just focus on that single topic without much variance. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates

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Starting point is 00:39:17 This and other information can be found in the income fund's prospectus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. So psychologically speaking, though, why does investing in index funds just sound like someone prescribed you a broccoli only diet? I think because there's no action to be taken. Like in most fields, the harder you try, the better you do. Like, if you want to become the best golfer in the world, well, go to the range for 12 hours a day and hit 1,000 golf balls. If you want to be the best basketball player, go live in the court and practice all day long. If you want to be a doctor, go study in med school for a dozen years.

Starting point is 00:39:56 Most fields, there's a very strong correlation between effort and outcome. And investing is just not one of those fields. It's one of the counterintuitive fields where the harder you try, the worse you're likely to do. That's usually the case. And therefore, if you have a passive strategy, I think it just kind of tickles people to say, like, intuitively, that doesn't feel right. It feels like, of course, you should be able to do better if you try harder. Like, imagine if you wanted to become a good golfer and the strategy was like, oh, never practice, never hit a ball, never think about it, never read the golf news.

Starting point is 00:40:29 That doesn't make any sense, but that is the right investing strategy for a lot of people. So I think it's just one of the few fields where it doesn't necessarily work. And then the other answer that's a little bit cynical, but I think there's truth to it, is that if you're a financial advisor or a fund manager, you can't charge a fee for telling people going an index fund. And by the way, the only company that's been able to really make it work is Vanguard, which is a non-profit. That's why it's worked is because they don't need to make a profit by selling people, a lot of the BS that exists out there. So the fact that Vanguard only works because it's a nonprofit, to me, is like all you need to know about why other firms push back against it.

Starting point is 00:41:07 You can't make any profit doing it. I think that's a cynical answer, but I think there's quite a bit a truth to it. Just thinking out loud, do you have any opinions on equal weighted indexes versus market cap-weighted indexes? Not a lot of deep research. So I'm not going to pretend to be an expert on this topic. But one thing I would say is, from what I understand and the cursory knowledge that I have out this topic, a lot of the fundamentally weighted indexes have very good back tests and not

Starting point is 00:41:34 that great actual results, which is that's like that story's been told a thousand times in investing for every different kind of. of investing strategy. I'm pretty sure that's the case for a lot of them. The back tests are beautiful, but the actual returns, even if you're looking over a 10 plus year period, are okay at best. And maybe that's because a lot of them are value tilted and value just hasn't worked over the last decade for various reasons. Maybe it will in the future, but it hasn't over the last decade. Maybe that's some of the reason. But one thing about fundamentally weighted indexes is that, or equal weighted indexes, is that it's not just a stock market that heavily weights towards

Starting point is 00:42:09 winners. Capitalism heavily waits towards the winners. When capitalism is kind of a winner take all field in most industries, it would make sense that you want to have the most weight to the biggest, most successful companies. That makes a lot of sense. Now, is there also logic that the biggest companies tend to be the most overvalued? In the 1990s, it was Dell and GE, and maybe today it's the fang stocks that are the most overvalued, the most likely to underperform in the future. I think there's a lot of logic to that as well. But to me, personally, it kind of falls in the bucket with fiddling around the edges in a way that might work and might not. And when I weigh those out together, I say, I'm fine. I'm fine owning cap-weighted stocks. I accept that there's going to be periods,

Starting point is 00:42:46 even fairly long periods, when cap-weighted doesn't work as well as other things could have. But again, if I'm thinking about just sticking with something for 50 years, that's totally fine with me. You've mentioned in the book that your success as an investor will be determined by how you respond to punctuated moments of terror. And I love that. Not the year spent on cruise control, but exactly the emotional response during those moments of terror, those have the long tails. So talk to us a little bit about how we should look at that as investors. I finished writing the book in January of 2020, so pre-COVID more or less.

Starting point is 00:43:23 But it's true that how you behaved in March of 2020 when the world is falling apart will have more impact on your investment returns than all of your behavior in the previous decade combined. I think that's probably right. That's usually true. If you were to look at your 20-year results as investors, the most important things that would matter is, how did you behave during the dot-com bust, how did you behave in 2008, and how did you behave in March of 2020?

Starting point is 00:43:48 Those three little punctuated moments matter more than everything else combined. And if you are one of the investors who panicked last March and sold everything in March of 2020, that's a scar on your net worth that will be with you for the rest of your life. You'll never be able to recover from that. And so that's usually what it works. There's a quote, like a long old joke about pilots, that a pilot's job is hours and hours of boredom punctuated by moments of sheer terror, which is where I got that quote. It's the same in investing.

Starting point is 00:44:13 What really matters is just how you respond 1% of the time. 99% of investing is really boring. But what you do 1% of the time will change your life. Whether that's not panicking during a crisis, whether it's buying more in a crisis, whether it's not getting caught up in the final moments of a massive bubble, like how you respond a fraction of the time is going to account for the majority of your returns over time. I've been on a bit of a quest to determine the best definition of risk. And you highlight a great quote by Carl Richards.

Starting point is 00:44:45 That might be the best one I've heard so far, which is risk is what's left over when you think you've thought of everything. And that's another landmine we're talking about as far as long-term investing, just understanding that you will not know all the outcomes. That's it. And by definition, people hear that and they think, okay, that's great, but let's talk about the biggest risks that are out there. And you're like, no, no, no.

Starting point is 00:45:08 The biggest risk is what no one is talking about because it's impossible to know. Or it's so unlikely, it's so crazy that people just wouldn't even think about it. I mean, here's a story that I wrote about this week that I think is really fascinating. During the Apollo space missions in the 1960s, before we started launching ourselves into space in rockets, NASA tested all of its equipment in super high altitude, hot air balloon. So they would take a hot air balloon up to 130,000 feet, like just scraping the edge of outer space, and they would test their equipment. They'd test their theories before they actually went up in rockets.

Starting point is 00:45:41 So one time in 1961, NASA sent up a guy named Victor Pranther to 130,000 feet, and the goal of this mission in this hot air balloon was to test NASA's new space suit. Prior to actually going into space, they wanted to go up to 130,000 feet, make sure everything was airtight, it worked under pressure, etc. Victor Pranther goes on this mission, goes to 130,000 square feet, tests a suit, the suit works beautifully, everything's great. Pranther is coming back down to Earth, and when he's low enough, he opens up the visor on his helmet, the face shield on his helmet, when he's low enough to breathe on his own. He can breathe the Earth's air. He's not, he's low enough that he can do that. All fine. He lands in the ocean as is planned, and as the rescue helicopter comes to get him, he's trying to tie himself onto the rescue helicopter's rope, and he slips.

Starting point is 00:46:27 slips off his craft and falls into the ocean. Again, not a big deal because a suit is designed to be watertight and buoyant. But Victor Pranther had opened up the mask in his helmet. As he falls into the ocean, he's now exposed to the elements. His suit fills up with water and he drowns. And this to me is so fascinating because the NASA space missions during the moon race in the 1960s was probably the most heavily planned mission ever. You had thousands of the smartest people in the world planning out every single minute detail and checking it over and over again and being signed off by the most sophisticated expert risk committees that exist in the world. And they were so good at it. I mean, to have men walking on the moon, you need like every single millisecond was planned out,

Starting point is 00:47:14 every detail. And with Victor Panther, it was the same thing. They planned out every second of that mission and that you overlook one tiny little microscopic thing, like opening your visor when it's okay to breathe the earth's air and it kills them. And that to me is just an example of risk is what's left when you think you've thought of everything. And I think that's an example of what happens in a lot of fields. I mean, think if you were an economic analyst in the last five years and your job is to forecast the economy and you spend all your day, you spend 24 hours a day modeling GDP, modeling employment trends, modeling inflation, every detail about what the Federal Reserve is doing. You built the most sophisticated model in the world to predict what the economy

Starting point is 00:47:53 is going to do next. And then a little virus sneaks in and 30 million people lose their job. That's how the world actually works. No economists in their right mind would have included that in their forecast if you go back to 2019 or whatever. No one would have said, oh, I expect GDP is going to fall 20% next year because we're going to have no one said that. Of course, you couldn't. You would be ridiculous to say that. But that's how the world works. And I think it's the same thing if you look at September the 11th or Pearl Harbor or Lehman Brothers going bankrupt because I couldn't find a buyer. All the big events that actually move the needle are things that people didn't see coming. There's another one in your book that I just love from World War II, where German tanks

Starting point is 00:48:33 sitting in these grasslands waiting to go to battle are then called to the front lines. And most of them don't work because a lot of these field mice have gotten into the tanks and destroyed the electrical wires. And that is just such an amazing example of this at play. And the purpose of that too. It's such a ridiculous story. And it goes to show like if you were a German tank commander, a tank designer, and you went to your boss and you said, hey, I'm worried about field mice chewing through the wires, they would have laughed at you and said like, son, this is war. We're not worried about mice here. But they ruined the entire fleet of tanks. I think, I just think there's a lot of that too. I mean, one example, if we want to talk about World War II again,

Starting point is 00:49:12 is World War II is in my mind the single most important event of the last 200 years. it might be the most important event of all of human history, just in terms of how much it moved the needle and shaped modern society. Everything that you and I do today is rooted in something that happened in World War II. I don't think that's an exaggeration. And there was a time in the 1920s when Adolf Hitler began his career, his political career, by storming a beer hall in Munich during a political protest. The beer hall punch, it's a well-known thing.

Starting point is 00:49:42 And during this storming this beer hall, there was a gunfight. Again, very well known, very well documented, a guy who was standing right next to Adolf Hitler was shot in the head and died during this period. He was standing directly next to Adolf Hitler. In fact, when he shot and died, he fell onto Hitler and dislocated Hitler's shoulder. That's how close he was when he was shot and killed. Now, you have to ask, what if the bullet that killed this guy next to Hitler was two inches to the left, two inches to the left?

Starting point is 00:50:09 And instead of killing this guy next to him, it killed Adolf Hitler. And Adolf Hitler died in the 1920s. and there's no World War II. What does the world look like today if that bullet were two inches to the left? I mean, go down the list of things that were invented because of World War II. Penicillin, the most important drug of modern times,

Starting point is 00:50:27 came about because of World War II. The freeways that you and I drive on today were built because of World War II. Jets, rockets, atomic energy, microwaves, digital photography, GPS, radar, all of it was built because of World War II or the Cold War that was kind of an echo of war. World War II.

Starting point is 00:50:45 None of that would have happened if the bullet was two inches to the left. There are a million of those examples that you can give about how the world would be completely different if this tiny little thing went different. I just think it's really helpful for our listeners to hear about this framework that you kind of lay out going all the way back to World War II up until today because what you're talking about, you could also say that today all this talk about inflation, all this talk about needing something radically new right now, this sort of zeitgeist sentiment that nothing's working for anybody right now and that there's this really this polarity between

Starting point is 00:51:17 the 1% and everyone else. All of it kind of seems to tie back to World War II. And a lot of people are talking about this concept of a new roaring 20s, but you kind of touch on how the roaring 50s of sorts is almost a little bit more likely, I would say, to happen. Well, I think it's important that when most of us look back at modern U.S. history, we think of the 1950s and 60s as like the glorious age of middle class. prosperity. And if we could do that then, why can't we do that now? Or more importantly, how have we lost our way? And to me, what's important is this a realization that the 50s and 60s

Starting point is 00:51:52 were the anomaly. Like most of what we've been dealing with over the last 20 years is much closer to normal historically than what happened in the 50s and 60s. And we had a very unique moment in the 50s and 60s where because of the end of the war, a couple of things happened. One, there was a lot of pent up demand for homes and cars and washing machines from all these soldiers who came home and were in the early in mid-20s and wanted to start a family. Huge pent-up demand for goods and services. A lot of that was because during the war years, all the factories that were building cars and dishwashers were shut down and converted to build tanks and airplanes and whatnot.

Starting point is 00:52:28 So the manufacturing of consumer goods and services just came to a stop. So when all those soldiers came home, all of them needed new cars, all of them needed new homes. There was just a huge demand for stuff. All this happened while most of Europe and Japan were literally bombed to rebel, and they were spending all of their investments in their economy to rebuild themselves, which meant that we didn't have to compete with them for car manufacturing and dishwasher management. We had all that ourselves, and we were building stuff for them, too. We were exporting so much back then.

Starting point is 00:52:58 We were just kind of the economic engine of the entire world to a degree that we haven't been since. And we also had this thing during World War II where it brought society together. It was really one of the only times in modern history where virtually everyone in the United States had one common goal. And everyone was just like, guys, we're like, we got to work together. We got to do this and work together to fight this one common enemy. And it created a sense of togetherness and also trust in the government that I think would be hard for you and I to fathom today, particularly trust in the government in the 1950s and 60s was off the charts. The surveys, when people ask, do you trust Congress to do the right thing?

Starting point is 00:53:35 When they ask that question today, you get people like 10% of people say yes. In the 50s and 60s, it was 90% of people saying, yes, I trust the government to do the right thing. And that sense of togetherness that we're all in this together created a society that was much more equal economically. A lot of this too was because to pay for World War II, we had 90% marginal tax rates. So very wealthy people, their actual take-home. incomes were much lower relative to normal workers than they would be today, which is much more of a flatter society. And I'm not arguing that that's the way it should be or that was great, but that's what it was for better. That's just what happened, a much flatter society. You had wealthy

Starting point is 00:54:15 people who drove Cadillacs and poor people who drove Chevys, but they weren't that much different. It's not like a Bugatti towards riding the bus like it is today. It was just much more, and like people sat down and watched the same TV shows, read the same newspapers, listened to the same radio shows, no matter where you lived or how much money you made, people were just on the same page. And I think that created this era that we now look back at with nostalgia. And then as the 70s and 80s, particularly in the early 80s, things started breaking apart a little bit and economic inequality really started to grow. And you had rich people who started doing very, very well and middle, lower class people

Starting point is 00:54:52 whose income stagnated at best. If not, if you are like a middle class male worker, your real wages, adjusted for inflation started to decline fairly rapidly. But since we had this idea of togetherness, that people kind of grow, in the economy, grow the same. And the CEO down the street, you know, yeah, he's got a little bit better life. But if his income is growing, mine should be growing as well. That's the idea that we took away from the 50s and 60s.

Starting point is 00:55:16 So as we started breaking apart and there were legitimately wealthy people who started building mansions and sending their kids to private school and driving Ferraris and private jets, etc. I think it made the middle class and lower class people look at that and say, well, I deserve that too. But the only way that I can afford that is with debt. So if John down the street now has a 4,000 square foot house, well, I want a 4,000 square foot house too, but the only way that I can afford it is with a bigger mortgage. Hey, Steve down the street now has two cars. Well, I want two cars too, but the only way I can afford that is through debt. Jim sending his kid to private school. I want to do that too, but the only way I can do that is with huge

Starting point is 00:55:53 student loans. I think that was the birth of the debt bubble that kind of imploded in 2008, was the middle class trying to desperately catch up with the upper reaches of society that were consistently breaking away in terms of their income. And I think another echo of that, so to speak, is a lot of what's happened in the last 12 years, kind of since 2008, is just more and more people in society, not just in the United States, but around the world, saying, screw this. This doesn't work for me anymore. Whatever this is, if I'm not, It's not working for me anymore. My career's not going well.

Starting point is 00:56:26 I lost my house. Things are breaking apart. Same thing happened to my neighbors. Whatever this is, it ain't working. And I think that explains Brexit. I think it explains the rise of Donald Trump in a way that I don't find that to be political. I think it's just a truth. A lot of people just saying, this isn't working and we need to try something different.

Starting point is 00:56:44 A lot of that can be directly tied back to the togetherness that we had at the end of World War 2 that broke apart over the last 40 years. I have to question a little bit, you know, they said the 70s and 80s. Like, you've all seen the website, what happened in 1971. I mean, obviously, we went off of the gold standard at that point. And I have to wonder in those 50s and 60s that golden age, literally speaking, because we were on a gold standard, if that had anything to do with that kind of leveling of sorts across society, whereas once we went off that standard, the disparity just grew and grew and,

Starting point is 00:57:18 you know, wages stayed stagnated and productivity increased. but is that something you factor into this model of this framework at all? I think it's definitely part of the puzzle. I don't think it's a major part for two reasons. One is that we kind of had the same breaking apart of society in terms of wealth inequality in the 1920s when we were also on the gold standard. So it's very possible to have this fracturing of incomes during a gold standard. The other thing is that the Federal Reserve was not intended to be politically independent

Starting point is 00:57:47 before, I forget when it was, the late 1950s, early 1960s, something like that. And at the end of World War II, it was explicit that basically Congress could go to the Fed and say, hey, we need to keep interest rates low to fund all this debt. So you, Mr. Fed chairman, need to keep interest rates low. If that happened today, people's heads would explode. But that was the normal path of how things worked back then. So the idea that kind of gets thrown around that the Fed is in an unprecedented spot of manipulating society, I think they've been, the Fed, the Fed,

Starting point is 00:58:17 The Fed's been manipulating the dollar since 1913. It's part of the puzzle. There's certainly things that have happened in the last 12 years in terms of what the Fed is willing to do with quantitative easing that has reshaped the dynamic of financial markets in a way that has massively advantaged the wealthiest people in society that own most of the assets. Of course, that's definitely true. But that was also true in the 1920s. And there have also been periods, things that have happened particularly in the last year that

Starting point is 00:58:44 I think have benefited average people more than wealthy people, particularly the stimulus packages and unemployment benefits we've had in last year. I think it's definitely part of the equation, but I think it's not as black and white as it might seem at the first knee-jerk reaction. Well, since it's such a hot topic, I just want to touch on inflation a little bit more because you made a point, I had not heard. It was essentially that inflation, the definition, is too much money chasing too few goods and that not enough people focus on the goods part of the equation.

Starting point is 00:59:15 So talk to us about what you mean by that. Most historical periods of hyperinflation, if we're really talking about real hyperinflation, virtually all of them, I would struggle to find one example that did not take place in a society where they had massive output shrinkages because either it's during a war and their factories are bombed to rubble like happened in Weimar, Germany, or happened at the end of World War II in a lot of countries, or if it's because the government has confiscated the major industries and run them into the ground, as happened in Venezuela and Zimbabwe. It's never just too much money.

Starting point is 00:59:47 It's always too much money during a time where your production, your GDP is collapsing. And I think that's really important because what happened after 2008 when the Fed started printing a lot of money? So many people, including myself, by the way, were saying in hyperinflation right around the corner, Fed's printing so much money, you know what's going to happen. And it didn't. And I think the reason it didn't is because the economy was well able to soak up a lot of that excess liquidity because we're still, our factories still had all the capacity that they

Starting point is 01:00:14 can make stuff and produce stuff in a way that did not exist during Walmart Germany or in Zimbabwe when the government had confiscated so many of the farms and run them into the ground or in Venezuela where the oil industry has been confiscated and run into the ground because they didn't keep anything up. So it's not to say that you can't have a rise of inflation unless you have a decline in supply. It's not that. But most of the time, the big bouts of inflation comes from.

Starting point is 01:00:40 from a massive shrinkage in any economy's ability to produce. Now, could that happen in the United States too? Sure. Could it happen that we just don't keep up with factory investment or we're not investing in the right fields and we get to a spot where supply is shrinking? Yes, of course that could happen. And it's happening right now in some specific fields. What's happening in housing right now, and particularly lumber, is really fascinating,

Starting point is 01:01:01 where the price of lumber is just going berserk. It's going off the charts. I think it's up about fivefold in the last year, the price of lumber to build a house. And from my understanding, why that is, is not because we ran out of trees or even ran out of cut down timber. There's plenty of timber that's been cut down and stripped of his bark. There's plenty of that. From my understanding, a lot of the mills last spring said, oh, because of COVID, we're going

Starting point is 01:01:25 into the next Great Depression, shut down the mill, don't invest in the mill, lay off the mill workers. And now, even though there's plenty of logs, there's not enough supply to manufacture finished would. So we do have a decline in output in something like that. And sure enough, we have nearly hyperinflation in lumber. So it can happen in specific industries. I wouldn't be surprised if it happens in airlines this summer too, where you have airlines, some of whom have laid off tens of thousands of their workers or just through attrition, have lost thousands of workers, flight attendants, pilots, whatnot, because last year there was no work for any of them. And now this

Starting point is 01:02:00 summer, everyone who's vaccinated is going to want to get on a plane and go somewhere. And so at the same time that you're going to have maybe record demand, you have a huge decline in supply. And could that lead to huge inflation in airlines? I think almost certainly. I think it's some senses it will. The other area where I know what's happening right now is rental cars, where last year, a lot of the rental car companies, just in a bid to survive, started liquidating their fleets, just so that they had enough money to survive. And now that everyone wants to book a vacation right now, there are so many fewer rental cars available right now than that were last summer. So is there going to be huge inflation in rental cars this summer, probably?

Starting point is 01:02:38 But again, I'm making this point that it's not just the money coming in. It's a supply that went out that really causes the problem. Could it also be Morgan the supply of Social Security that we might hit a roadblock with? I mean, we have to essentially, we've been borrowing from Social Security to cover these deficits for years to the point where now it's really in jeopardy it would see, and that's what I'm reading, right? And is this something you read into? And what's your takeaway from how are we going to be able to fund these social security programs into the future? I think what's interesting about Social Security is that if you look at the forecasts of how underfunded it is, it's a disaster. You get numbers of like tens of trillions

Starting point is 01:03:21 of dollars underfunded. But then if you read some of the footnotes of those reports about the changes that you can make to bring things back into balance, some of the changes are like not that hard at all. It's like change the rate of benefit growth from a little bit above CPI, just back down to CPI, just like not cut benefits, just change how quickly they grow, just change the growth rate, and then boom, everything's back into balance. There are a couple of things that we could do that we almost certainly will do that bring things back in. The other thing is that technically, for accounting reasons, Social Security has a trust fund and it's separate, but in reality it's not. Everything is just thrown into one giant pot. And then so when Social Security

Starting point is 01:04:00 is underfunded, money gets pulled from somewhere else. When it's overfunded, money goes to somewhere else. It's all one giant pot that gets in. So on my list of economic worries, I don't think funding Social Security is even in the top 30. Like, is it a thing that's going to need change? Yes, of course. But those changes, if you look at the changes that will actually make a difference, they should be the easiest thing for people to swallow. No one's talking about cutting benefits. They're just talking about cutting growth. Now I have to ask, what is your number one worry economically right now? I'd say the number one worry that we know of, which is an important asterisk because the number one risk is always what no one's talking about. But the thing that we know of

Starting point is 01:04:36 is probably demographics. And look, what's interesting about this is that if you look around the world, America has some of the best demographics in developed countries, some of the best. China, Japan, Russia, Italy, South Korea are disasters economically in terms of their demographics. United States is pretty good, but it's still not that great. And our population growth over the coming decades will probably be something like half of what it was over the last half century. And all economic growth is just population growth and productivity growth. That's all economic growth is one of those two things. So if you really take population growth almost out of the equation, then our potential to grow is substantially less than it was over the last half

Starting point is 01:05:13 century. That's just like a basic math problem. And the demographics, you know, maybe this is the fault of my and your generation tray is we don't have as many kids as we used to. I mean, the thing that my wife and I was talk about is like, if you see someone our age with four kids, it's like, are you kidding me? Four kids? Like, good for you. I'd like amazing that you do that, but that's so rare. Go back to the 1950s and it was not everyone had four kids.

Starting point is 01:05:39 I mean, I'm exaggerating, but that's kind of like the amount of kids that we have right now has declined so substantially. And if you look at what's happening with immigration as well, the numbers are substantially lower than they used to be as well. So you put those two together and just population growth. This is a number of people is going to be substantially less than it was. Now, that could turn. No one really foresaw the baby boom of the 1940s and 50s coming as well.

Starting point is 01:06:01 Things can happen that can turn that around. The biggest wildcard, of course, is immigration. That could either come to a halt or it could be way opened up. Like, no one should pretend they know what's going to happen there. But that's probably the biggest problem that we know of. And throughout the rest of the world, it's a much bigger problem. China's working age population, age 16 to 64, was scheduled to decline, forecast to decline, by 200 million people from 2012 to 1950, 200 million fewer workers during that period.

Starting point is 01:06:30 There is no economy in the history of the world that has ever grown its economy given those circumstances. And it's not at all an exaggeration to say that China over the next 40 years will probably look kind of best case scenario like Japan did over the last 30 years, which, by the way, Japan has been a lovely place to live by and large for the last 30 years. This is not foretelling disaster, but its economy has been more or less stagnant. Now, its unemployment rate has been low. It's been able to invest in society.

Starting point is 01:06:57 The schools are great. This is not apocalypse. It's just much less growth than we've been accustomed to over the last 50 years. So the last myth I want to bust with you because this is so much fun. It's around the money supply, right? Because you wrote a great blog post and I should mention everyone should go out and read your blog post as well as your book. They're all just wonderful weekly blog posts.

Starting point is 01:07:18 But one in particular stood out. And because it's such a hot topic with the M1, M2, to money supply and the increase. So with the M1 money supply, for example, it shot up about 350% if you look at the chart from the Federal Reserve. But it's extremely misleading. We've touched on it once or twice here on the show, but I really want to settle this once and for all and talk to our audience about exactly what's happening with this chart.

Starting point is 01:07:44 I have this idea for a lot of things in life that if you see something that looks unbelievable, it's probably because you shouldn't believe it. It probably actually is unbelievable. And I started seeing this chart of M1, which is a way to measure the money supply in the United States that tracks kind of liquid money, cash, coins and money in your checking account, those kind of things. And the chart over the last year is just a textbook hockey stick. It's kind of relatively flat over time and then it just shoots straight up. And back to my theory of like, if it looks unbelievable, you shouldn't believe it. I just looked at it and said, what's going on here?

Starting point is 01:08:15 Something happened beyond just, oh, the Fed is printing money. that can't explain what this is. What actually happened here? And I started looking into it and talking to a few people. And what happened is actually very interesting, which is that there's another measure of money supply called M2, which includes everything in M1, but it includes, it also includes savings accounts. A savings account, as the Fed defines it, is anywhere you have your money where you can withdraw your money fewer than six times per month. That's the definition that they use for savings accounts. Now, last March, when the world was melting down, the Fed, in a bid to leave.

Starting point is 01:08:49 give people easier access to their money, just said, hey, the six withdrawal rule, just throw that out. That doesn't exist anymore. If you're a banking customer, you have money in a checking account, you can go access it as much as you want. Just a thing that they did last March to give people access to their money. But maybe touch on the fractional reserve element of that, right? This is so important. So if I put money in a checking account at my bank, the bank, given the rules, has to set aside a portion of that money. If I put $100 in a checking account, the bank has to set aside, let's say $5,

Starting point is 01:09:22 they have to set that aside for reserves to save for a rainy day in case the bank gets into trouble. If I were to put my money in a savings account, the bank doesn't have to reserve anything, which is great for them. And the hitch, though, is that if you're in a savings account

Starting point is 01:09:36 where you don't have to reserve anything, the customer can only withdraw their money fewer than six times per month. That's kind of where these arcane rules come from. And that's the incentive for bank. banks. Hey, if you don't want to reserve any money, you can only let your customers access at six times per month. If you want to give them full access, you need to reserve a little bit on the side. That's how this works. So again, last March, the Fed said, hey, to give people

Starting point is 01:09:56 easier access to the money, just get rid of the six withdrawal rule. If you have money in a bank, you can go access it, no penalties, go for it. Like a really simple, obvious risk-free way, just give people access to their money when the world's falling apart. That there was this really interesting consequence of that, which is that as soon as the Sixth Withdrawal rule was taken away, now in a regulator's eyes, every savings account in the United States instantly became a checking account. Now, for you of the customer, nothing really changed. It's still called a savings account. Maybe your interest rate was the same. Nothing changed. But from the regulator's mind, every savings account was now a checking account. And savings accounts were

Starting point is 01:10:34 accounted for at M2, but they're not accounted for in M1. So instantly, overnight, just because of this rule, all of a sudden, all the money, which was trillions of dollars in savings account, started being accounted for in M1. And on the chart, it looked like M1 just shot up by 350% overnight. And so many people took that and said, dollars going to collapse. Look how much money the Fed is printing. They just quadrupled the money supply overnight. We're all going to die, go build a bunker.

Starting point is 01:11:01 Even though in reality, it was just an accounting rule change that had no impact on the money supply. Now, the Fed has printed a lot of money over the last year, but it's probably 90, percent less than what it looks like if you're just looking at this M1 chart. And these footnotes that explained all of that that I just laid out, I guarantee you they were read by like seven people. No one's interested in that. So many smart investors took that chart and just ran with it when actually it wasn't showing

Starting point is 01:11:26 at all what they thought it showed. And to me, the takeaway from that is just the economic machine is so complicated. And there are so many things that look like one thing at first blush that if you scratch them down a little bit, you realize it's way more complicated. than you thought. And whenever I come across something like that, like this N1 phenomenon, I'm just reminded, like, the more you study the economy, the more you realize that you or anyone else really has no idea what's going on most of the time. And okay, so that's all well and good with M1, right? But then M2 is growing considerably. I mean, it's shot up 27 percent, I think,

Starting point is 01:12:00 from around 15 trillion now to 19 trillion and so. So that, as you mentioned, is real money that's being created and is, you know, maybe potentially debasing the dollar, right? And so now there's an idea out there that since this is basically a type of inflation happening, that perhaps you use something like the M2 growth rate as a discount rate and your valuation as you're kind of trying to evaluate stocks or even the stock market as a whole. Yes, you're an index passive investor, but you have a career in finance, you work at an established fund, you've been a stock picker. So I don't want people to think that's all you do, right? But it's, you're not stock picking. But my point is, what is, do you have an opinion on this idea of using something

Starting point is 01:12:43 like that just to keep up with the debasement? Well, if you looked at M2, yes, it's grown something like 20% of the last year. But M2 velocity, how quickly that money is actually flowing in the economy has declined by the same amount. And the net effect, if you were to multiply M2 velocity by M2 growth, is almost flat. And there's a reason that we track things like CPI. It's because actual money supply does not give you a one-for-one comparison of what the impact is actually happening on prices. The things that need to happen from the Fed printing money, so to speak, increasing bank reserves and that money actually getting into the economy, a lot of steps need to happen in there. Banks need to make loans. They need to do X, Y, and Z, they need to change

Starting point is 01:13:22 reserves into money that actually gets in. It's not just that the Fed is like flying around with a helicopter throwing money into the streets. A lot of things need to happen for the money to actually get into the economy, which is why M2 grows 20% and velocity falls 20% because people actually aren't spending more money. And spending money is what actually creates inflation. So I think this is why we track things like CPI. There would be no need for CPI if the correlation between M2 and actual prices was one to one, but it's not.

Starting point is 01:13:48 It's not even close. So that's why we do it. And that to me is what I look at. Now, CPI is a debate in itself. To me, the big thing with CPI is that it is measuring the prices for the consistent. consumption of the median American, which is effectively nobody. Like everyone's household expenditures are going to be very different. And if you are someone who is renting and has a car payment and spends all of your money

Starting point is 01:14:14 on tuition and health care versus if you're someone who owns their house outright, is not in school, is a vegetarian so they don't eat meat, they don't drive a car, they don't use gas. What inflation means to you is very different. Like everyone has their own unique view of inflation and their own unique inflation number And when the CPI reports an average, it becomes too easy for people to say, that has to be a lie because the CPA says 2%, but my personal household inflation is 5%. Even though that's a completely consistent thing with what the CPI is saying, it's just trying to show an average in a world where nobody is average. I'm just constantly impressed with your perspective. And it's so refreshing.

Starting point is 01:14:52 And it just brings everything back to this book that you wrote that I feel like when you read it, it's just the signal coming through the noise. and a lot of it is pretty common sense. Sometimes it just takes someone to put it back in your face and say, no, here is the signal. And you go, okay, you're right. That is right. I don't know what I was thinking. That's what this book I feel like does. It's just a great refresher in that way with the human psychology elements at play.

Starting point is 01:15:17 So before I let you go, Morgan, I want to give you an opportunity to hand off to your book, to your blogs, any other endeavors you're working on. Just tell the audience where they can follow along. The psychology of money. I spend most of my time on Twitter where my handle is Morgan Housel, first and last name. And you can find all my writing there, all my thoughts and also every blog post that I published there as well. So, Trey, thank you again for having me on.

Starting point is 01:15:38 This has been fun. I really enjoyed it, Morgan. I hope we get to do it again soon. Thank you. Thank you. All right, everybody. That's all we had for you this week. If you're loving the show, definitely don't forget to follow along on your favorite podcast

Starting point is 01:15:51 app so you get these episodes automatically. And look, if you're just getting interested in investing, check out the investor. Podcast.com where we have courses and lots of other tools for you to start with. I highly recommend, for example, the intrinsic value course. I think it saves you two years of an MBA program, but that's just the tip of the iceberg. So check it out or Google TIP Finance and the tool should pop right up. And look, I'm really enjoying hosting these episodes. Definitely give you some feedback. Find me on Twitter at Trey Lockerby. Tell me what you want to hear about. And with that, my friends, we'll see you again next time.

Starting point is 01:16:25 Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network.

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We Study Billionaires - The Investor’s Podcast Network - TIP351: The Psychology of Money w/ Morgan Housel

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