We Study Billionaires - The Investor’s Podcast Network - TIP657: Morgan Housel's Lessons to Build Wealth w/ Clay Finck

Starting point is 00:00:00 You're listening to TIP. Hey, everybody, welcome to the Investors podcast. I'm your host, Clay Fink. On today's episode, I'll be sharing the biggest lessons I've learned from the New York Times bestselling author, Morgan Housel. Morgan has been on our show a couple of times now in his two books, the psychology of money and same as ever, are certainly worth free visiting. I put this episode together to share some of the lessons I found to be most impactful

Starting point is 00:00:26 from reading these books. During this episode, I'll explore why the best story was, wins, why the biggest risk is the one nobody sees coming, the seduction of pessimism and why it pays to be an optimist, the importance of knowing what your goals are and what is enough for you, the importance of patience and having a long investment time horizon, and why humans tend to create market cycles. I really enjoyed putting this episode together, and I think you'll enjoy it as well, so without further ado, I give you today's episode sharing the biggest lessons I've learned from Mr. Morgan Housel.

Starting point is 00:01:02 million downloads. You are listening to the Investors Podcast Network. Since 2014, we studied the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Now, for your host, Clay Fink. I decided to break this episode up into six of the best lessons I've learned from Morgan Housel, primarily from his two books, the psychology of money, and same as ever. What I really love about Morgan's content is that in a world full of timely information, which the vast majority of is frankly noise, Morgan's content tends to be timeless. Whether you've read his books in 2024 or 2054, I think much of what he says will be quite valuable, which of course ties into the name of his second book, same as ever.

Starting point is 00:01:57 So the first lesson I wanted to start with is that the best story wins. In his book, same as ever, Morgan writes, the best story wins. Not the best idea, or the right idea, or the most rational idea. Just whoever tells a story that catches people's attention and gets them to nod their heads is the one who tends to be rewarded. And Morgan explained to me in my interview with him that people generally have short memories. You could give someone the best argument for why a stock is cheap based on all these numbers and all these statistics,

Starting point is 00:02:30 and the next day they're just going to totally forget about it. Morgan stated on the show, by and large, statistics and numbers do not change, people's minds. Stories do. That's because statistics and numbers, frankly, aren't memorable, but stories are. I think this ties into the fact that we as humans are just very emotional creatures. Numbers generally aren't going to trigger your emotions, unless you're a total math nerd like myself. People just cling to stories because they trigger that emotion. The person with the best answer doesn't get ahead, but the person with the best story does. The most successful people in business are oftentimes some of the best storytellers. So for me,

Starting point is 00:03:14 the people that come into mind are people like Steve Jobs, Elon Musk, Howard Schultz, Jeff Bezos, and Warren Buffett. But certainly, there are also exceptions as well. When we're looking at some of these companies as investors, Aswat Demotoran shared with us on the show that we need to be able to craft a story around what the company is going to look like in the future. Morgan stated that every single company's value is derived from a number of not. number from today, multiplied by a story about tomorrow. For Tesla, you might look at the current year's earnings and then multiply that by a P.E. Multiple that tells a story about how rosy the future is going to be for Tesla, at least in the market's expectations. During the tech bubble, people

Starting point is 00:03:55 clung to the story that the internet was going to change everything, and they put little to no emphasis on the current earnings from that time. Once people's view of the internet and the story that was being told in relation to the internet changed, we then saw the NASDAQ fall by 83% over two and a half years. And then you look at companies like Amazon, their fundamentals continue to improve, but that didn't stop their stock from falling by 91%. And this idea of best story wins doesn't just have to apply to investing. If you want to take the next step in your career, next step in your business, the next step in your relationships, anything where information is exchange, maybe you just need to start telling better stories. Another reason that people like

Starting point is 00:04:40 stories is that most of us just live busy lives and we don't want to have to sift through all this information and all this data to try and get the right answer. Great storytellers can take a complex topic and turn it into something that's simple, entertaining, and interesting. Housel writes, when a topic is complex, stories are like leverage. Housel also discusses stories in chapter 18 of the Psychology of Money titled When You Believe Anything. He explains the hypothetical example of an alien landing on Earth with the job of keeping tabs on our economy. This alien looked at the economy in New York City at the start of 2007 and at the start of 2009. Both years, he sees plenty of partygoers, roughly the same number of

Starting point is 00:05:25 people hustling through the city, roughly the same number of office buildings, and a similar number of factories and warehouses surrounding the city. So when looking at the economy, not really a lot changed from 2007 to 2009. Technology certainly improved, but it's not a night and day difference by any stretch of the imagination. Then this alien went to other cities and other countries and found a very similar trend. Not a lot changed in the economy. He comes to the conclusion that the economy is in the same shape, maybe even better in 2009 than it was in 2007. What this hypothetical A hypothetical alien is surprised to find is that U.S. households were $16 trillion poorer in 2009 than they were in 2007, and the stock market is worth half of what it was two years before.

Starting point is 00:06:14 Howsell explains that what changed was the stories that we told ourselves about the economy. He writes, in 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. By 2009, we stopped believing that story. That's the only thing that changed, but it made all the difference in the world, end quote. It goes to show that stories and narratives are one of the most powerful forces in the economy because it's the fuel that lets the tangible part to the economy work. I also think that stories can give us a false sense of certainty as investors.

Starting point is 00:06:53 Just because somebody has a great story and they sound like they know what they're talking about, It doesn't mean they really have a complete view and understanding of the world. The financial world especially is full of uncertainty and full of unknowns. Howzel writes here in the psychology of money, most people, when confronted with something they don't understand, do not realize they don't understand it because they're able to come up with an explanation that makes sense based on their own unique perspective and experiences in the world, however limited those experiences are.

Starting point is 00:07:25 We all want the complicated world we live in to make sense. So we tell ourselves stories to fill in the gaps of what are effectively blind spots, end quote. Although stories may give us comfort and a sense of certainty, when taken too far, the wrong stories can absolutely crush us financially. They can lead us to over concentrating our portfolios. They can influence us to use leverage. They can fool us into doubling down on bad bets when we feel that the odds are in our favor. We as humans have this great desire to want to feel like we're in control, and stories help

Starting point is 00:08:00 give us that sense of control, but as investors, we have to accept that there's so much in the investing world that is simply outside of our control. You can either accept that or turn the blind eye and potentially get burned by it. I think we all put a lot of weight on the things we do know and underestimate the effect or the potential impact of the things we don't know. We overweight our skills and our prowess and underweight the role of luck. And I like to understand the why behind many of these things. So why is it that humans plings so much to stories? One of the reasons is that when we listen to a story, our brain synchronizes with that of the storyteller. So we experience a story as if we're living in it ourselves. And stories activate the reward system in our brain,

Starting point is 00:08:48 releasing dopamine and making us feel good. Dopamine also enhances our memory and attention, making stories more memorable than other methods of communication. Stories can also trigger the release of oxytocin, which is a hormone that promotes trust and empathy. So lesson number one here is that the best story wins. Lesson number two I'd like to share is that risk is what you don't see. I think this concept ties in well with chapter one and same as ever titled,

Starting point is 00:09:18 by a thread. Morgan writes, A big lesson from history is realizing how much of the world hangs by a thread. Some of the biggest and most consequential changes in history happened because of a random, unforeseeable, thoughtless encounter or decision that led to magic or mayhem, end quote. In that chapter, Morgan tells a story of how he lost two of his best friends while snow skiing in the mountains and then an avalanche hit. Morgan and his two friends, Brendan and Brian, they had skied out of bounce after Lake Tahoe had seen some fresh snow. And after they skied their first run,

Starting point is 00:09:55 Brendan and Brian wanted to go again. But for whatever reason, Morgan just didn't want to go for another run. It was just purely coincidence. This decision really had no logical explanation from Morgan, but it's a decision that probably saved his life as an avalanche sweep through burying his friends in the snow. The possibility of an avalanche likely wasn't something that crossed any of their minds that day. They had skied out of bounds countless times as they'd been skiing most of their lives at this point in their teenage years and were super comfortable with skiing. Morgan writes here, so much of the world hangs by a thread. An irony of studying history is that we often know exactly how a story ends, but we have no idea where it began. So here's an example.

Starting point is 00:10:38 What caused the 2008 financial crisis? Well, you have to understand the mortgage market. What What shaped the mortgage market? Well, you have to understand the 30-year decline in interest rates that preceded it. What caused falling interest rates? Well, you have to understand the inflation of the 1970s, and so on forever. Every current event, either big or small, has an infinite number of factors that led to it, many of which are totally unpredictable. Events compound in unfathomable ways, which helps explain why forecasting complex systems

Starting point is 00:11:10 is so hard. For example, one might think that higher gas prices would cause people to drive less. But what if higher gas prices leads more people to buy hybrid or electric vehicles, which may actually lead to people driving more? Or what if high gas prices leads to a boom in oil production, which coincidentally leads to low prices? Morgan writes here, the absurdity of past connections should humble your confidence in predicting future ones."

Starting point is 00:11:38 And it's a humbling reminder that most outcomes look all. obvious with the benefit of hindsight because we apply this basic logic that makes sense to us based on what actually happened. Once we can appreciate how random and how unpredictable our world can be, you can appreciate the risks that we can't see. He writes, the biggest risk is always what no one sees coming, because if no one sees it coming, no one's prepared for it. And if no one's prepared for it, its damage will be amplified when it arrives, end quote. And I love the quote he shares here also from Carl Richards. Risk is what's left over after you've thought of everything. And if we look at the big events that have really changed the world, you know, Morgan shares

Starting point is 00:12:22 COVID 9-11, Pearl Harbor, the Great Depression, the common trait among them was not that they were big, but that they were surprises that practically nobody expected. If we go back to October of of 1929, the stock market hit the peak of the craziest stock market bubble up until that point. And the economist Irving Fisher famously told an audience that stock prices have reached what looks like a permanently high plateau. We can laugh at comments like this from Fisher today knowing that stock market bubbles aren't sustainable, but when we look back at what other people were saying, it turns out that nobody forecasted the Great Depression at that time. Some people believed that the market was overvalued, but no one expected a decade-long depression

Starting point is 00:13:07 with the market falling by 89%. Morgan writes, the biggest news, the biggest risks, the most consequential events are always what you don't see coming. So let's look at the economists, which publishes a forecast each year for the year that lies ahead. In January of 2020, COVID-19 wasn't even mentioned. In January of 2022, Russia's invasion of Ukraine wasn't covered. Again, it's a humble reminder of just how difficult it can be to predict the future. It brings me to one of my favorite quotes from his book here, The biggest risk and the most important news story of the next 10 years will be something nobody is talking about today. No matter what year you're reading this book, that truth will remain, end quote.

Starting point is 00:13:52 And I believe this is a critical reason as to why we should implement a margin of safety into our lives. Build a cushion for detrimental things to happen to you because they can't have. happen to any of us. For me, this means saving a little bit more than what I deem to be necessary, having a little more cash than what feels comfortable, ensuring I'm not paying too high of a price for my investments, diversifying my assets, don't have excess levels of debt, have car and home insurance to protect against the unforeseeable, build up my own skill sets to help ensure I'll always have a source of income coming from somewhere, but know that there's only so much we can do to protect ourselves against such risks.

Starting point is 00:14:31 Asim Teleb stated, invest in preparedness, not in prediction. We don't know what's going to happen, but we can try and prepare for whatever does end up happening. If I assume I'm going to be an investor from age 18 to age 80, then it's purely common sense to think that there's going to be a ton of calamities that are going to be impossible to predict. So as a result, we can be overprepared now. So when that calamity inevitably does strike, then we can be well positioned and potentially even capitalize on such an opportunity. Someone who was over-prepared in March of 2020 may have taken advantage of some of the best investment bargains in their lives, while someone who was under-prepared

Starting point is 00:15:12 may have had their investments liquidated at the worst possible time because they came across something that they would have previously considered to be just impossible. Successful investing inevitably contains some element of luck and things totally outside of our control. So, Naval has this framework that if we lived out our lives in 1,000 different parallel universes, you want to be wealthy in at least 99 of them. You don't want to shoot for the moon and try and play out the scenario where you just get totally lucky, you win the lottery or whatnot. You want to minimize the role of luck by all means possible. Morgan also said during my interview with him that the definition of a good life is that you end up in the top half of all the potential outcomes. You can of course have always

Starting point is 00:15:59 done better, but at least you prevented the risk of ruin to the best of your ability. What this also requires you to do is to remove FOMO from your investment approach or at least largely eliminate it. It's one thing to put 1% or 2% of your portfolio into a moonshot play, but it's another thing to go all in because of FOMO. 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 height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd,

Starting point is 00:16:40 2026, the Oslo Freedom Forum is entering its 18th year bringing together activists, technologists, journalists, investors, and builders from all over the world, many of them operating on the front lines of history. This is where you hear firsthand stories from people using Bitcoin to survive currency collapse, using AI to expose human rights abuses, and building technology under censorship and authoritarian pressures. These aren't abstract ideas. These are tools real people are using right now. You'll be in the room with about 2,000 extraordinary individuals, dissidents, founders, philanthropists, policymakers, the kind of people you don't just listen to but end up having dinner with. Over three days, you'll experience powerful mainstage talks, hands-on workshops on freedom tech,

Starting point is 00:17:26 and financial sovereignty, immersive art installations, and conversations that continue long after the sessions end. And it's all happening in Oslo in June. If this sounds like your kind of room, well, you're in luck because you can attend in person. Standard and patron passes are available at Osloof Freedom Forum.com with patron passes offering deep access, private events, and small group time with the speakers. The Oslo Freedom Forum isn't just a conference. It's a place where ideas meet reality and where the future is being built by people living it. If you run a business, you've probably had the same thought lately. How do we make AI useful in the real world? Because the upside is huge, but guessing your way into it is a risky move.

Starting point is 00:18:10 With NetSuite by Oracle, you can put AI to work today. NetSuite is the number one AI Cloud ERP, trusted by over 43,000 businesses. It pulls your financials, inventory, commerce, HR, and CRM into one unified system. And that connected data is what makes your AI smarter. It can automate routine work, surface actionable insights, and help you cut costs while making fast AI-powered decisions with confidence. And now with the NetSuite AI connector, you can use the AI of your choice to connect directly to your real business data. This isn't some add-on, it's AI built into the system that runs your business. And whether your company does millions or even hundreds of millions, NetSuite helps you stay ahead.

Starting point is 00:18:55 If your revenues are at least in the seven figures, get their free business guide demystifying AI at netsuite.com slash study. The guide is free to you at netsuite.com slash study. NetSuite.com slash study. When I started my own side business, it suddenly felt like I had to become 10 different people overnight wearing many different hats. Starting something from scratch can feel exciting, but also incredibly overwhelmed. and lonely. That's why having the right tools matters. For millions of businesses, that tool

Starting point is 00:19:28 is Shopify. Shopify is the commerce platform behind millions of businesses around the world, and 10% of all e-commerce in the U.S., from brands just getting started to household names. It gives you everything you need in one place, from inventory to payments to analytics. So you're not juggling a bunch of different platforms. You can build a beautiful online store with hundreds of ready-to-use templates, and Shopify is packed with helpful AI tools that write product descriptions and even enhance your product photography. Plus, if you ever get stuck, they've got award-winning 24-7 customer support. Start your business today with the industry's best business partner, Shopify, and start hearing... Sign up for your $1 per month trial today

Starting point is 00:20:13 at Shopify.com slash WSB. Go to Shopify.com.com slash... WSB. That's Shopify.com slash WSB. All right. Back to the show. Many people, for example, regret not investing in Tesla years back and thinking that Elon today is a total genius and they missed out on such an amazing opportunity. And these people, they feel like they missed out, likely don't know that in 2018, Tesla was weeks, if not days from bankruptcy.

Starting point is 00:20:47 One could easily argue that Elon Musk is extremely, extremely lucky just because Tesla is still an operational business in 2024. This is a classic example of survivorship bias. In some sort of parallel universe, there's another tech company that went up by a hundred times that a lot of people would have regretted not buying early on. And nobody would have ever been talking about a company like Tesla because they would have been out of business and bankrupt. So again, we want to bet on an investing strategy that we can put a lot of confidence in working

Starting point is 00:21:21 out most of the 1,000 parallel universes. And since the biggest news story of the next 10 years is something we simply can't foresee, it's also a reminder of just how difficult predictions can be. If there's one lesson from history is that we can only plan on things not going to plan. At about any point in time, financial luminaries can paint a story or paint a picture of how things are going to pan out. And at the time, it's going to make a lot of sense, most likely. But in hindsight, it oftentimes just looks absolutely ridiculous. So since forecasting is so, so difficult, we need to position our portfolios in a way where we can almost anticipate things not going

Starting point is 00:22:03 to plan at some point, because history tells us that this is the way it's always been. I suspect that most airline companies, for example, didn't position themselves in a way where they would survive just fine if global travel essentially came to a grinding hole. It seems like something that's almost an impossibility, but that's exactly what happened in March of 2020. One example of somebody who did a good job of innovating and building a better future, while at the same time preparing for the absolute worst in the near term is Bill Gates. Bill Gates in the 1970s created Microsoft, and he believed that with the rise of the internet, there was going to be a computer on every desk in the world.

Starting point is 00:22:45 Even with this out-of-the-world grand vision, he managed Microsoft as conservatively as he possibly could. He would always have a ton of cash on the balance sheet and no debt. He always said that he wanted to have enough cash in the bank that he could pay employees for a year with zero revenues. So Bill Gates approached this issue of the world fundamentally being so uncertain brilliantly, and he did this by positioning himself in a way where he was going to at least be okay no matter what catastrophe was thrown his way. Next, I wanted to jump to chapter 17 titled The Seduction of Pessimism, which is lesson number three for this episode. In this social media and clickbait-driven world, it is so incredibly easy to get sucked into the doom and gloom

Starting point is 00:23:31 predictions. Howzel quotes historian, Deidre McCloskey, for reasons I have never understood, people like to hear that the world is going to hell, end quote. This is a topic that deeply interests me and is something that Francois Rochon discussed with us on the show as well. He highlighted that when you look back at how much mankind has progressed over the past century, it's truly amazing how much progress we've made technologically, and all this has come from the human mind, and the human mind creating these new technologies and human ingenuity continually finding new ways to do things better and better and better. This steady progress has led to the standard of living doubling every 25 years over the past century. To bet against continued innovation

Starting point is 00:24:20 is to bet against humans all of a sudden not wanting to strive to make things better. And from a historical standpoint, humans have generally always wanted to improve their current situation. Of course, we go through temporary periods where we come across something incredibly difficult, but history shows that these tend to pass and mankind continues to overcome them, whether it's pandemics, world wars, economic recessions, or whatnot. So with history as our guide, being optimistic is the best bet for most people because the world tends to get better for most people most of the time. But again, I think even the smartest people can be duped by pessimism, believing that optimism is naive in the worst of times.

Starting point is 00:25:04 In the depths of the financial crisis in December of 2008, the Wall Street Journal ran a front-page article by a Russian professor on the outlook of the U.S. economy. This professor believed that the U.S. would be breaking apart into six pieces. Alaska would be reverting to Russian control, California will be turned into the California Republic and will be under Chinese influence. Texas will be at the heart of the Texas Republic and under Mexican influence. Washington, D.C. and New York will be part of the Atlantic America and may join the EU. Canada will grab the northern states and what the professor referred to as the central Northern American Republic would fall under Japan or Chinese control. Now, this just sounds totally insane, but this was published on the front page of the most prestigious

Starting point is 00:25:52 newspaper in the world. But there are still times where bad things do happen, of course. Some countries experience serious damage to their economy. History is certainly full of examples of that, but even with the consistency of the doom and gloom headlines, people tend to take those much more seriously than the optimistic headlines. So for whatever reason, pessimism sounds smart, and much more plausible than optimism. Morgan writes, Tell someone that everything will be great, and they're likely to either shrug you off

Starting point is 00:26:24 or give you a skeptical eye. Tell someone they're in danger, and you have their full undivided attention, end quote. Another thing that's interesting is that progress is simply very gradual. While progress is made day by day, things can go absolutely terribly bad overnight. It reminded me of the Buffett quote

Starting point is 00:26:44 that it takes 20 years to build a reputation and just five minutes to destroy one. Since Morgan is such a great writer, I just can't help but quote him. He writes, growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds and loss of confidence, which can happen in an instant end quote. In the stock market, a 40% decline can happen within six months, storing up all kinds of emotions and panic for market participants, but 140% gain that happens over six years can go virtually unnoticed. And humans tend to be loss averse, so losses hurt much more than gains feel good. So we want to keep an eye out for anything that might be potentially bad happening within

Starting point is 00:27:31 the economy. Another issue is that pessimists tend to extrapolate present trends without accounting for how markets adapt. Assuming that what is ugly will stay ugly is an easy prediction to make and ignoring the fact that when given new problems, humans tend to come up with new and better solutions. The fourth lesson I wanted to discuss related to Morgan Housewell's work is to know what your goals are and know what is enough for you. I had mentioned earlier that we as humans are hardwired to always want more and to better our situation. The problem is getting more cars, getting a bigger house, having more stuff to fill our house with, more vacations, more money, more assets, whatever it is, this stuff doesn't necessarily make

Starting point is 00:28:15 us any happier. Oftentimes, it does the opposite. And sometimes when we reach for more, we can really do foolish things. Warren Buffett stated, never risk what you have in need for what you don't have and don't need. Housel tells the story of Rajat Gupta in the psychology of money. Gupta was born in Calcutta and orphaned as a teenager. He really built for himself an extremely successful career. So in his mid-40s, he became the CEO of McKenzie, the world's most prestigious consulting firm. He held roles with the United Nations and the World Economic Forum. He did philanthropy work with Bill Gates. And by 2008, he was reportedly worth $100 million, more money than about anyone could imagine being able to spend or even need. But there was this one crucial thing that

Starting point is 00:29:03 Gupta didn't have. And that was that he didn't have enough. He wanted to be a billionaire, and clearly he wanted it badly. Gupta sat on the board of directors at Goldman Sachs, which surrounded him with some of the wealthiest investors in the world. During the great financial crisis, Gupta got word that Warren Buffett planned to invest $5 billion into shares of Goldman, which Gupta thought would send the stock soaring. So he acted on this insider information. Immediately after learning about the deal, He called his hedge fund manager and told him to buy 175,000 shares in Goldman Sachs. In that day, Gupta earned a quick $1 million. Gupta and the hedge fund manager would end up going to prison for insider trading, and their careers and reputations were irrevocably

Starting point is 00:29:50 ruined. That is the potential price to be paid for risking something important to you for something that is not really important to you. Morgan has four key takeaways he lists here that I'll share. First, the hardest financial skill is getting the goalpost to stop moving. When you continually move the goalpost, it can almost feel like you're falling behind instead of getting ahead. And the only way to catch up is to continue taking on greater and greater risks. Second, social comparison is a problem here. Gupta was surrounded by people wealthier than him who he compared himself to. You could be making a million dollars a year, but if you live in the richest neighborhood in New York City, then you'll probably feel broke if you're comparing yourself to those in your

Starting point is 00:30:33 environment. If you're comparing yourself to others, then you'll never feel like you have enough because there's no ceiling where you'll ever feel like you hit the top. The only way to win the battle of social comparison is to simply not play that game. Third, enough is not too little. The idea of enough is not being conservative and leaving opportunity on the table. In fact, it's realizing that the insatiable appetite for more will push you to the point of regret. He uses the analogy of food here. The only way you know how much food you can eat is to eat until you're sick. Few are going to try this because it's very painful to do it, but this logic doesn't translate well into investing. And many will only stop reaching for more when they break or when they're forced to. I quote,

Starting point is 00:31:21 whatever it is, the inability to deny a potential dollar will eventually catch up to you, end quote. And finally, the fourth one here, there are many things never worth risking, no matter the potential gain. Some things are simply invaluable and not even worth considering risking. Morgan lists a number of these things here that are simply invaluable, your reputation, your freedom and independence, family and friends, being loved by those who you want to love you, happiness, all these things are invaluable. When you have enough can help prevent you from risking any of these things.

Starting point is 00:31:59 And another part of recognizing when you have enough is knowing what your goals are. Consider what you want out of life, how much money that's going to take, and when you're going to need that amount of money. In the psychology of money, Howell also argues that we should be reasonable and not rational when it comes to our personal finances. So a spreadsheet might suggest to us that to get the highest returns over the next 50 years, we should put all of our portfolio into stocks the entire time. But some people simply can't handle this level of volatility, so they may add other assets

Starting point is 00:32:31 into the mix in exchange for lower volatility so they can sleep better at night when the stock market happens to be down 50% during a big crisis. For example, Morgan and I discussed his own investment strategy on the show, and Morgan takes a very simple approach to investing. So the vast majority of his wealth is invested in low-cost, vanguard index funds. I think part of the reason for this is that first, this is just a hands-off approach and it lets him focus on what he enjoys doing and what he's really good at doing. He doesn't want to read 10Ks on the weekends. He just wants to allocate his savings in a vehicle that is likely to generate a satisfactory return over a long period of time.

Starting point is 00:33:11 And I think the second thing here is that this approach will likely set him up to achieve his financial goals over time. He doesn't need to catch the next Tesla at its IPO. just needs to generate a moderate return over time and ensure that he stays invested in dollar cost averages through the ups and downs in the market, and he doesn't need to generate the highest returns either. He's recognized what's enough for him, and he doesn't overreach and risk shooting himself in the foot. In thinking about your goals, I think we also need to get crystal clear on what is most important to each individual person and what isn't important. If you don't determine what is most important to you, you may find yourself chasing something that you didn't

Starting point is 00:33:54 even want in the first place. Next here, let's talk about focusing more on your time horizon and less on your returns, which is less than number five. Many people oftentimes become concerned about whether the market is overvalued or undervalued. When Morgan and I chatted about his investment approach on the show, he mentioned that when your time horizon is long enough, it really doesn't matter if the market is overvalued or undervalued today. If you started investing at the peak in the 1920s in September of 1929 prior to a decade-long depression, then your investment returns still converged to the long-term average if you had a 40-year time horizon. Morgan stated, the way that I invest in my strategy is to be average for an above-average period of time.

Starting point is 00:34:43 And I think if I can do that, if I can earn a Vanguard return for 50 years, then I'll probably end up in the top 1% of all investors, end quote. I believe that trying to maximize near-term returns is overrated and maximizing your time horizon is underrated. The greatest rewards come to those who are willing to delay gratification. In the psychology of money, Housel explains that countless books are dedicated to explaining how Warren Buffett built his fortune, many of which, are wonderful books and books I've discussed on the show. But few highlight the importance of

Starting point is 00:35:19 Buffett's Secret, which was his time horizon. He literally started investing when he was a child, and he continually delayed gratification for over 80 years. As of the time of recording, Buffett is worth $135.6 billion. And of that amount, 135.3 billion, or 99.8% of it, was accumulated after his 50th birthday. Buffett is a phenomenal investor, but one of the real keys to his success is how long he's been invested. Had he started investing in his 30s and retired in his 60s, odds are that you never would have heard of him before. Housel writes, his skill is investing, but his secret is time. That's how compounding works. Another point worth highlighting is that achieving high returns like Buffett is impractical for the vast majority.

Starting point is 00:36:12 of people. And not how a lot of us want to spend our time. Buffett's just an outlier in terms of his ability to generate outsized returns. But when it comes to investing longevity, any of us can take advantage of this assuming that we aren't already in retirement today or we're nearing retirement age. I just recently turned 30, so hopefully I still have another 50 plus years of investment runway. For simplicity's sake, let's run the numbers on the power of investing over a 50-year time period, starting at age 30. Let's say this hypothetical investor was a diligent saver throughout their 20s, and they were able to sock away $100,000 by age 30. Instead of worrying about stock picks, they were okay with the approach that Morgan takes of accepting an average return and

Starting point is 00:37:00 taking very long-term time horizon. So if we assume a 7% annual return without any additional contributions, this $100,000 would turn into $2.9 million by age 80. These returns become supercharged when we factor in additional contributions. So let's just say if we add an additional $1,000 per month of contributions during this time period, instead of it growing to $2.9 million, it would grow to nearly $8 million. In the 50th year in this hypothetical scenario, the value of the account increases by over 500,000 in just that one year. This helps illustrate the enormous power of long-term compounding. It's a good reminder that our brains aren't hardwired to think in these exponential figures. Linear thinking is much more intuitive than exponential thinking. And most people don't want to delay

Starting point is 00:37:54 gratification. They don't want to sit on their investments for decades. They want returns this month or this quarter. And that is why the rewards of delaying gratification for that long are so great. As a stock picker myself, I want to find this trait of delayed gratification and the managers that I choose to partner with through the ownership and the businesses that I own. 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 Vantza is a game changer. Vanta automates your compliance process and brings compliance, risk, and customer trust together

Starting point is 00:38:35 on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Ryder spend 82% less time on audits with Vantta. That's not just faster compliance, it's more time for growth. If I were running a startup or scaling a team today, this is exactly the type of platform

Starting point is 00:39:08 I'd want in place. Get started at vanta.com slash billionaires. That's vanta.com slash billionaires. Ever wanted to explore the world of online trading, but haven't dared try? The futures market is more active now than ever before, and plus 500 futures is the perfect place to start. Plus 500 gives you access to a wide range of instruments, the S&P 500, NASDAQ, Bitcoin, gas, and much more. Explore equity indices, energy, metals, 4X, crypto, and beyond.

Starting point is 00:39:42 With a simple and intuitive platform, you can trade from anywhere, right from your phone. Deposit with a minimum of $100 and experience the fast, accessible futures trading you've been waiting for. See a trading opportunity, you'll be able to trade it in just two clicks once your account is open. Not sure if you're ready, not a problem. Plus 500 gives you an unlimited risk-free demo account with charts and analytic tools for you to practice on. With over 20 years of experience, Plus 500 is your gateway to the markets. Visit Plus500.com to learn more.

Starting point is 00:40:19 Trading in futures involves risk of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500, it's trading with a plus. Billion dollar investors don't typically park their cash in high-yield savings accounts. Instead, they often use one of the premier passive income strategies for institutional investors, private credit. Now, the same passive income strategy is available to investors of all sizes thanks to the Fundrise income fund, which has more than $600 million invested in a 7.97% distribution rate.

Starting point is 00:40:53 With traditional savings yields falling, it's no wonder private credit has grown to be a trillion dollar asset class in the last few years. Visit fundrise.com slash WSB to invest in the Fundrise income fund in just minutes. The fund's total return in 2025 was 8%, and the average annual total return since inception is 7.8%. Past performance does not guarantee future results, current distribution rate as of 1231, 2025. Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income fund fund fundus at fundrise.com slash income. This is a paid advertisement. All right, back to the show. Gondam Bade explains this concept in depth in his book, The Joy's a

Starting point is 00:41:42 compounding. Bade writes, all too often, management teams focus on the return variable in the equation. They seek instant gratification with high profit margins and high growth in reported earnings per share in the near term, as opposed to initiatives that would lead to a much more valuable business many years down the line. This causes many management teams to pass on investments that would create long-term value, but would cause accounting numbers to look bad in the near term. Pressure from analysts can inadvertently incentivize companies to make as much money as possible off their present customers to report good quarterly numbers, instead of offering a fair price that creates enduring goodwill and a long-term win-win relationship for all stakeholders.

Starting point is 00:42:28 Most businesses fail to appreciate this delicate trade-off between high short-term profitability and the longevity accorded to the businesses through disciplined pricing and offering great customer value." So to look at two contrasting examples, we can look at the case of valiant pharmaceuticals. They would buy life-saving drugs for rare diseases from innovative companies and then resort to predatory pricing practices. The financial metrics at the time might have looked really attractive due to the rapid EPS growth, but this type of parasitic relationship with customers simply wasn't sustainable

Starting point is 00:43:06 and ended up destroying shareholder value in the future. On the other hand, we have someone like Jeff Bezos from Amazon who would do the exact opposite. When he had the opportunity to earn more profits, he would lower prices at Amazon, trusting that this would gain trust with customers and deliver more shareholder value over the long run as he built out an extremely loyal customer base. Investor Tom Russo, who was a guest on the Richard Weiser Happier Podcast, in episode 13, he referred to this as the capacity to suffer. And in a business's case, this really means the capacity to reinvest and build that long-term competitive advantage at the potential cost of depressing short-term reported earnings.

Starting point is 00:43:48 In looking for these long-term winners in the stock market, I want companies that earn high returns on capital, they have managers who think long-term, and they're managers who allocate capital well and they reinvest for that future growth. So I think good indicators in relation to what Goddams talking about in the book is that looking for managers who don't issue guidance for next quarter's earnings, they're willing to test out new ideas, venture into new territory that offers a low risk and asymmetric payoff. Bade argues that embracing deferred gratification is what leads to the single biggest edge for an investor.

Starting point is 00:44:25 In Thomas Phelps, who wrote 100 to 1 stock market, he stated, to make money in stocks, you We need to have the vision to see them, the courage to buy them, and the patience to hold them. Patience is the rarest of the three. Housel has a chapter and same as ever on Patience titled Too Much, Too Soon, Too Fast. Whenever people discover a good idea or something that's valuable, such as a lucrative investment or a special skill, the natural tendency is for us to ask ourselves, great, but can I have it all faster? Can we push it twice as hard? can we make it twice the size?

Starting point is 00:45:01 Can we squeeze a little bit more juice out of it? Morgan explains that it's a natural question and it's understandable, but most things have a natural size and a natural speed and it backfires quickly when you push things too far. It's a reminder that truly great things take time. Morgan shared a saying from Shamath on the podcast that, however fast something can grow, that's the half-life at which it can be destroyed.

Starting point is 00:45:28 So it's no wonder when someone tries to get rich quick and compress the returns of a decade into a single month that things tend to end up pretty badly for them. Morgan writes, I quote, A good summary of investing history is that stocks pay a fortune in the long run, but seek punitive damages when you demand to be paid sooner, end quote. So over a one month period, whether stocks go up or stocks go down, it's essentially a coin toss. In 52% a month, you'll see stocks increase. But when you invest over a 10-year time horizon, U.S. stocks increase 88% of the time after adjusting

Starting point is 00:46:04 for inflation. So the longer ones time horizon in the stock market, the less one is relying on luck. In a world with short-term headlines, short-term forecasts, short-term EPS guidance, and short-term price targets, it pays to be a patient, long-term investor. I think that the appreciation of the patient that it takes to build long-term wealth also allows us to fully appreciate that wealth as well. Most great things in life gain value from two things, patience and scarcity. Patience allows us to let something grow, and scarcity helps us fully appreciate what it grows into. But just because you're a long-term investor doesn't mean that it's all sunshine and roses going forward. Morgan writes in his chapter on time horizons that,

Starting point is 00:46:51 I quote, long term is harder than most people imagine, which is why it's more lucrative than many people assume, end quote. In fact, the longer your time horizon is, the more calamities and the more disasters you're going to experience. Morgan also makes the brilliant point that your belief in the long run isn't enough. Others have to be on board with you as well. So for instance, if you're running a business, you need to be aligned with your partners and aligned with your employees. And it's no wonder that so many managers of public companies, they are pandering to these short-term issues because it's what the analysts and is what the investors want. As an investor in some of these individual companies, like many in our audience, we have to be careful that we aren't taking stubbornness

Starting point is 00:47:35 and disguising it as thinking long-term and being patient. So Morgan writes here, The world changes which makes changing your mind not just helpful, but crucial. But changing your mind is hard because fooling yourself into believing a falsehood is so much easier than admitting a mistake. Long-term thinking can become a crutch for those who are wrong, but don't want to change their mind. They say, I'm just early, or everyone else is crazy, when they can't let go of something that used to be true, but the world has moved on from, end quote. So long-term versus this stubborn thinking is such a tricky line to walk because the world just isn't black and white. But when we're able to recognize that our original investment thesis was clearly wrong, then moving on from such a

Starting point is 00:48:22 mistake is critical to ensure that we don't make the mistake of continuing to hold on to a poor investment. I'm also reminded of the point that Chris Mayer told me on the show, when you find what you believe to be a great business, you need to identify the two or three key factors or the two or three key performance metrics that are going to determine the success or the failure of that investment over a 10-year time period. So then when you have these short-term news headlines, you can ask yourself how those headlines impact those variables that ultimately matter. When you look out over that 10-year time horizon, I think you'll find oftentimes it's just a short-term blip that made for an interesting news headline, but over the long run,

Starting point is 00:49:08 didn't really matter at all. Next, let's talk about market cycles. So this is the sixth and final lesson from this episode. So I actually went in deep on this concept of market cycles back on episode 559, where I discuss Howard Marx's book, Mastering the Market Cycle. But Morgan has such a great way of covering this concept as well. So economies go through these continuous cycles of greed and fear, optimism and pessimism.

Starting point is 00:49:35 And the reason that economies go through these cycles is because we as humans have a tendency to take things too far. When an economy becomes stable, people get optimistic. When they get optimistic, they go into debt, and when they go into debt, the economy becomes unstable. Heimann Minsky put together what he called the seminal theory, which was the stability itself is destabilizing. So a lack of recessions plants the seeds for the next recession. which is why it seems that we can never get rid of them. Once we understand that market cycles are directly tied to our innate human behavior, we can be more equipped to deal with these cycles that inevitably play out.

Starting point is 00:50:19 Households shared a theory from Carl Jung, which was the idea that in excess of one thing gave rise to the opposite. So when an economy hasn't experienced a recession for quite some time, it gives market participants the illusion that the coast is clear. The environment's safe. And the reality is that things can become most dangerous when people perceive them to be the safest. I also love the point in relation to market bubbles. He argues that optimism and pessimism always have to overshoot what seems reasonable.

Starting point is 00:50:52 Because the only way to discover the limits of what's possible is to venture a little ways past those limits. He uses the example of Jerry Seinfeld, who had the most popular show on TV and then he quit. Maybe it could become an even more popular TV show, or maybe it would have started to decline had he not quit, but he had no interest in experiencing that. Hausel writes, if you want to know why there's a long history of economies and markets blowing past the boundaries of sanity, bouncing from boom to bust, bubble to crash, it's because so few people have Seinfeld's mentality. We insist on knowing where the top is, and the only way to find it is to keep pushing

Starting point is 00:51:33 until we've gone too far. When we can look back and say, ah, I guess that was the top, end quote. In the short term, stocks and really any asset is priced based on what someone's willing to pay for it at that given moment. What someone is willing to pay is based on how they're feeling, what they want to believe, and how persuasive of the story people can tell. And these things can't really be predicted. And I love this point here. I quote, every few years, there seems to be a declaration that markets don't work anymore, that they're all speculation or detached from fundamentals. But it's always been that way. People haven't lost their minds. They're just searching for the boundaries of what other investors are willing to believe. End quote. All right. So I also couldn't help but add

Starting point is 00:52:19 just one more bonus takeaway here, since Morgan was actually just on Howard Marks' podcast, The Memo, where Morgan and Howard discussed the impact of debt that I just found to be so incredibly insightful, so I think you're going to enjoy it as well. talked about how Japan in his article titled, How I Think About Debt, Japan has 140 businesses that are at least 500 years old. And then some of these businesses have even claimed to be around for over 1,000 years, which is just incredible to think about considering all the catastrophes and, you know, pandemics, recessions, all the things that happen over a 50 or even a 100 year time period. These ultra-durable businesses share two common characteristics. First, they hold a ton of cash,

Starting point is 00:53:03 and second, they have no debt. Morgan writes, as debt increases, you narrow the range of outcomes you can endure in your life. The thinking here is that when things are calm or things are generally good,

Starting point is 00:53:15 people and businesses, they start to take on debt assuming that things are just going to continue to be that way. If only the world were so kind, volatility in unexpected events is really just a part of the game and really inevitable.

Starting point is 00:53:29 With no debt, the number of volatile events one can withstand is fairly high. But as you introduce debt into the equation, your range of what you can endure shrinks. And when you introduce a ton of debt, you know, just one economic shock can just wipe you out. Howard Marks wrote a memo in late 2008 during the Great Financial Crisis titled, Volatility plus leverage equals dynamite. The easy way to think about this is the more leverage you use, the more often you're going to get yourself into trouble, and the more volatile the assets you buy with that borrowed money, the more you get in trouble. And the combination of

Starting point is 00:54:07 both leverage and volatility just can really lead to one blowing up financially. Since Morgan wants to be an investor for the next 50 years, the chances of enduring either a major war, a recession, a terrorist attack, a pandemic, a family emergency, an unforeseen health crisis, or something, you know, totally unthinkable, the chances of at least one of those things happening is 100%. When you take that fact seriously, you start to take the impact of debt more seriously. It's not that debt shouldn't ever be used, but when it is used, we should try and use it responsibly by whatever means possible. And I think we can apply this to not only our own personal finances, but also to the businesses we operate or the businesses we invest in. In that podcast, Howard

Starting point is 00:54:55 expanded on Morgan's ideas by saying that when a company gets into financial trouble, in essentially every instance, it's related to debt. You can't be foreclosed on or you can't be forced into bankruptcy if you have zero debt. Howard was reminded of the pit boss in Las Vegas who comes around and he tells the gamblers to remember that the more you bet, the more you win, when you win. This sounds great and it sounds enticing, but this obvious point also applies to markets. You make more on your winning investments when you bet 20,000 instead of betting 10,000. However, the pit boss failed to mention that the more you bet on your losing hands, the more you're going to lose. And when you bet more with borrowed money, you can be forced into bankruptcy.

Starting point is 00:55:39 Morgan also shared this fascinating story of Rick Gurren. Rick Gurin invested alongside Warren Buffett and Charlie Munger in the 1960s. And the three of them were all investing in many of the same stocks and businesses, and they were just doing exceptionally well. But today, most of us only know about Warren and Charlie. Monish Pabri had asked Buffett what happened to Rick Gurren. And Buffett had said that Rick was buying the same stocks that him and Charlie were, but he was doing so on margin. Buffett stated that Rick was just as smart as us, but he was in a hurry.

Starting point is 00:56:13 In the 1973-74 Bear Market, Gurren experienced the impact of leverage on the downside, and he started to get margin calls, forcing him to sell his positions at the worst possible time. Durran actually sold his Berkshire Hathaway shares to Buffett for under $40 a share, and those shares today trade for around $700,000. Despite these challenges, Gurren managed to recover financially in the subsequent years. His investment partnership, which he managed from 1965 to 1983, it ultimately achieved an impressive annual compounded return of 32.9% excluding fees. Now, Buffett and Munger, on the other hand, knew that they could

Starting point is 00:56:55 achieve higher returns like Gurin before things went south, using leverage, but they were much more focused on endurance and longevity. Just look at Berkshire Hathaway's $276 billion cash pile today. They're set up in a way where the company is virtually indestructible. And then Howard also touched on the inherent volatility of the stock market. So GDP, when you look at how much GDP grows, It tends to range anywhere from 1% growth to 4% growth and averages around 2% to 3%. But since companies have operating in financial leverage, company profits tend to fluctuate much more than how much GDP fluctuates. And then after you factor in investor psychology and the uses of debt, stock prices can fluctuate even more than corporate profits.

Starting point is 00:57:47 Howsell then also discussed the idea of how the lack of recessions can actually sow the seeds of a next recession. And the last big recession and big stock market crash we had was the great financial crisis. And I wonder if this is causing inherent fragility in the markets because I think a lot of investors probably believe that a major correction just isn't likely or isn't possible. But according to Howzel, I think it's the belief that major corrections aren't possible, which sows the seeds for the next major correction. For example, Howard Marks explained that in the 2000s, people looked at history and they said that there's never been a nationwide wave of mortgage defaults.

Starting point is 00:58:29 So they engaged in practices that guaranteed that there would be a nationwide wave of mortgage defaults. So how ironic. There's also a balance when it comes to investing in a sense that if you avoid all debt and you avoid anything that involves risk, then you're avoiding any possibility of returns. Howard refers to this as risk management rather than risk avoidance. This is finding the right level of risk that suits the returns you're looking to get, the volatility you're willing to endure,

Starting point is 00:59:00 and finding a strategy that suits your temperament and allows you to stick with it for the long run. In any investing strategy, volatility and the potential for loss is really just a part of the game. What matters is how many losers you have, the severity of your losers, and how that corresponds to your winners. Knowing that losses and volatility are simply a part of the investing game, it helps ensure that we're not surprised when it inevitably comes. And I love the point that Morgan wrapped up with during that conversation with Howard. He had reiterated Howard's point that these concepts of debt are really econ 101 and just very basic stuff. But the smartest people in finance can be very quick to forget it. When things become good or they can come across a really great idea, the idea of applying leverage,

Starting point is 00:59:47 it just sounds so enticing that they just become blind to the downside risk that they really just can't see at the time. They believe this time's different, they're smarter than everyone else, and maybe it works over a sustained period of time, but all it takes is that one Black Swan event to just wipe out a person that is way over leverage. Remember that the goal isn't to survive the average negative event. The goal is to survive almost any event imaginable because Black Swans inevitably come around every 10 or 20 or so years

Starting point is 01:00:17 depending on what exactly we're dealing with. All right, so that wraps up today's episode sharing the six key lessons I learned from Morgan Housel. This was a really fun one to put together, so I hope you enjoyed it and found parts of it valuable for your own investing toolkit. If you haven't tuned into our episodes with Morgan Housel, I'd encourage you to check those out, certainly some of the most popular episodes on the show here. I interviewed Morgan Hausel this year back on episode 602 chatting about same as ever, and then T. Laugherbie

Starting point is 01:00:45 interviewed Morgan back on episode 351 chatting about the psychology of money. And if you'd like to network with like-minded value investors, you may be interested in joining our TIPB mastermind community. The TIP Mastermind community is our paid community tailored for private investors, portfolio managers, and high net worth individuals. To check it out and join the way of list, you can head to The Investorspodcast.com slash mastermind. Thanks so much for tuning in, and I hope to see you again next week. Thank you for listening to TIP. Make sure to follow We We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to Theinvestorspodcast.com. This show is for entertainment

Starting point is 01:01:30 purposes only, before making any decision consult a professional. This show is copy. by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP657: Morgan Housel's Lessons to Build Wealth w/ Clay Finck

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.