“Writing is the best way to crystallize the vague thoughts you have in your head.“
Morgan Housel is a partner at The Collaborative Fund, a venture capital firm focused on providing seed and early stage funding to technology companies, and a former columnist at The Motley Fool and The Wall Street Journal. He is the author of the new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.
Investors should be writing out their ideas more frequently. When you’re writing, ideas that may have seemed logical and fantastical in your mind may actually turn out to be disjointed and nonsensical. Only through the logic-inducing process of writing can investors make more sound financial decisions.
There is also no one-size-fits-all description of a successful investor. However, two principles govern their potential for success: patience and the ability to put up with uncertainty. In finance, soft skills like these often get swept under the rug because they’re immediately measurable in charts or returns.
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SPEAKER
Morgan Housel
Partner
The Collaborative Fund
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. And today we're intersecting all that with psychology as well and we're very excited for today's SALT talk. SALT Talks is a series of digital interviews that we launched during the work from home period, with the world's foremost investors, creators and thinkers. And what we're trying to do during these SALT Talks is replicate the type of experience that we provide at our SALT conference series. And that's really to provide a platform for what we think are big, important ideas that are shaping the future, as well as provide our audience a window into the mind of subject matter experts. And we're very excited today to welcome Morgan Housel to SALT Talks. Morgan, today is a partner at the Collaborative Fund, which is a venture capital fund, and he's a long time former columnist at The Motley Fool, as well as the Wall Street Journal.
John Darsie: (01:00)
And I personally, I know Anthony has been reading his work for years in those outlets, and it's great that he finally wrote a fantastic book to bring his work to an even larger audience. And he's the two time winner of the best in business award from the Society of American Business Writers and winner of the New York Times Sidney award, and a two-time finalist for the Gerald Loeb award for distinguished business and financial journalism. His new book, as I mentioned, is called The Psychology of Money. It came out September 8th and he's on a variety of different bestseller lists. And we were talking before we went live, we're hoping that once all the votes are counted, that his book will be on the New York Times bestseller list in short order. But it's a fantastic book, very easy to read and he distills a lot of great anecdotes down into key lessons that you can teach your children or teach yourself, whether you're an amateur investor or a professional investor, frankly, about how to be a better investor and how to put the right priorities around creating wealth.
John Darsie: (01:57)
Just a reminder, if you have any questions for Morgan during today's SALT Talk, you can enter them in the Q and A box at the bottom of your video screen. And conducting today's interview is Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT. And with that, we'll turn it over to Anthony for the interview. Anthony today is in the lovely Beverly Hills Hotel and not in his normal environment and so we're going to give them a very low room rating, but Anthony, go ahead and take it away.
Anthony Scaramucci: (02:25)
And my head, all of a sudden didn't become 400 times the size of yours and Morgan's, but that's fine. Morgan, welcome to SALT Talks. I have to tell you that I do a lot of reading, obviously in finance and read a ton of books on finance, but your book, The Psychology of Money is by far the best one I have read about literally the psychology of money. So I've been handing it out to people, you should be very proud of your work, by the way, we think it's a phenomenal book. And so I want to get into the book in a second, but I want to talk a bit about you and how you got to where you are. So go ahead, tell our delegation about your career arc.
Morgan Housel: (03:07)
Well first, yeah, thank you for having me, Anthony, thank you for those kind thoughts about the book. How did I get here? I think like a lot of careers, it wasn't planned. I never had a plan to become a financial writer in the slightest. If you go back to my time in college, around the mid 2000's, I wanted to go into investment banking, that was all I wanted to do. My plan was A, B and C was to become an investment banker. A lot of young people in the mid 2000's wanted to do that, investment banking was the peak of financial prestige. From my view in my early '20's, that was where the money and the power was, that's what I wanted to do. I got an investment banking internship my junior year and day one and not only day one, I would say the first hour of walking in there, it was clear to me that this is not for me.
Morgan Housel: (03:48)
The culture of investment banking was such a turnoff to me. And I'm 100% for hard work, but it was not hard work, it was just a hazing atmosphere where it wasn't about your productivity or what kind of value can you add, it was just let me beat the crap out of you because someone beat the crap out of me during my career. It was so unappealing to me. So then I got a job in private equity. This was still, I was a junior in college. I got an internship and I love private equity. I thought it was great, great mix between business and finance. The culture was so much more aligned with what I wanted. And this was the summer of 2007 and then the whole global economy hit the fan.
Morgan Housel: (04:25)
And my plan was to stick around in private equity, but the firm basically said, they relied on borrowing a ton of money to make the deals work, everything froze solid, so it was, "Hey, we're not going to have a full time position for you after college." So I needed to do something else. And I had a friend who was a writer for The Motley Fool at the time and he said, "Hey, you should apply to become a Motley Fool writer, you are interested in finances. Let's do it." I had no writing background whatsoever, I'd never written anything about investing before, even though I was interested in it. And so I thought I would do that for three months or six months before I found another private equity job. And I ended up staying for 10 years and just fell in love with the process of writing.
Morgan Housel: (04:59)
I think no matter what field you're in, writing is really important because writing is not just about getting your thoughts across to other people, it's not just about communicating. Writing is the best way to crystallize the vague thoughts you have in your head. These vague ideas that you have about whatever your field is, whether it's finance or politics or anything else, you have these gut feelings, until you are forced to write them on paper, those gut feelings just float around, they're not making a lot of sense. But once you're forced to put them on the paper, you really realize that either A, your thoughts suddenly make a lot more sense than they did when they were gut feelings or B, when you put them onto paper, you realize that your thoughts look ridiculous. When they were gut feelings in your head, you could run with them and say, "This is okay." But sometimes you put them into words you say, "Ah, that makes no sense whatsoever."
Morgan Housel: (05:44)
So I fell in love with the process of writing. It was not part of the plan, I just stumbled across it haphazardly, but we're now 14 years into this. So I joined Collaborative Fund four and a half years ago. It's a venture capital private equity firm, but my sole job there is to write and speak about the intersection of investing history and behavioral finance. I like to learn about the history of how people think about risk and opportunity and greed and fear in finance and what we can learn about that for ourselves to become better investors and better with dealing with money in general.
Anthony Scaramucci: (06:15)
Well, in reading your fantastic book, and it's a great introduction to everything that we're talking about, but in reading your book, it struck me that there were two things going on. You were trying to explain to people how to become a successful investor, but then also how to develop a healthy relationship with money, which is something I'm still trying to do, frankly. I think a lot of us have that difficulty. And so let's break it up for our listeners, how do you become a successful investor Morgan?
Morgan Housel: (06:47)
Well, to me, it's different for everyone and how I invest is very different from how I know you invest, which is going to be different for everyone. So there's no one size fits all prescription. But to me, the foundation of good investing, the most common denominator across all investing strategies is two things. You need to be patient and you need to put up with uncertainty. That's it. Very simple, very basic, it's not blowing anyone's minds, but that's the common denominator. There's always a cost of admission in investing. You can do very well in markets, no matter what your strategy is, but nothing is free. Of course, nothing good in the world is free, nothing worthwhile is free, everything has a cost. And the cost of admission in investing is a combination of patience, which is where you get compounding and dealing with uncertainty and volatility, which is what markets make you put up with.
Morgan Housel: (07:29)
I think that those two things are easy to overlook and it's easy to not view them as a cost because most costs have a dollar figure on it. [inaudible 00:07:37], if you get a hotel in Los Angeles, there's a dollar figure on it. But the cost of volatility is much more nuanced. And it's very easy and intuitive, I think, in investing to view volatility and patience as a fee or pardon me, as a fine for doing something wrong, your portfolio declined 10% and you screwed up, you did something wrong. And look, for some strategies, that might be the case. But very often, if you are dealing with volatility and your portfolio declines 10%, let's just say, that's not a fine, that is a fee. It's the cost of admission for what you need to put forth, enable to do well over time.
Morgan Housel: (08:11)
So I think that's how people become good investors. It's difficult to do that because it's not necessarily analytical. We can't just summarize patience in a chart or in a formula. So people who are very analytically smart and you got your PhD from MIT, does not have any correlation with whether you're actually going to be patient. So these soft skills in finance often get swept under the rug because they're so different from how we are usually taught finance in terms of an academic field where it's something closer to physics that is governed by clean formulas and charts and data, we can measure things with precision. The softer side of investing is not necessarily there. So I think that's the common denominator of how people can become good investors. I know it's not blowing anyone's mind, but that's the point. The simplicity of these things makes easy to ignore. So I actually think when I explain these things, it is the most sophisticated and educated investors who need to be reminded of these things, that the most important things are the things that are easiest for the educated people to ignore and overlook.
Anthony Scaramucci: (09:09)
Well, I mean, you bring this up in the book and I want you to address it. There's emotion involved. The rational actors seem to do best, but it turns out that we're really not that rational, particularly when it comes to money. And if I take $10,000 of my money and I put it into a stock and it drops 25%, that may be the best time to buy it, but now I'm in a panic. And it's not like women's apparel that goes on sale at a department store or chopped meat in the supermarket. When stuff goes on sale, Morgan, people panic, and they have a tendency to sell bottoms and buy tops. So you write about it in the book, explain why people do that and explain what your recommendations are to prevent them from doing that.
Morgan Housel: (09:55)
I think it's very easy to personalize what's going on in markets, even if markets are a giant thing where tens or hundreds of millions of people are participating. It's so easy to say, "Look, if I buy it and it goes up, that's because I'm smart. And if I buy stock, it goes down, that's because I'm stupid. I made a mistake." They personalize what's going on in the market, even if the market does not know who you are, doesn't care who you are, has no correlation with the decisions that you made by and large. So I think that's largely why we do it. In a way that if we're talking about math, long division is not emotional, it's just a formula, you do it, sometimes you're wrong, but you don't get emotional about it. Whereas our personal net worth, this is not just our ability to retire and send our kids to school, this is the scorecard for how we're doing in life by and large, particularly for some people.
Morgan Housel: (10:41)
It's not necessarily going to affect your day to day wellbeing, but it's a scorecard for how you're doing and you take it personally. If your portfolio's down 20%, that means that my worth to the world, my intelligence is down 20%, is how it's typically viewed. I think to the greatest extent, back to what I was saying earlier, if you can view volatility as the cost of admission, this is the price that you are paying, if you're going to go out and buy a fancy car, there's a price to that and you know it, and you know the price is worth it because you get a nice car in return. If you can view volatility as more of a fee that is worth paying, rather than a fine, a signal that you screwed up, that to me, is the biggest way that you could move the needle towards a healthier relationship with the investing side with money.
Morgan Housel: (11:20)
And we also have to address this thing too, where money is emotional, it's not just the investing returns, it's people's relationship with money. And it doesn't matter how wealthy you are, this is true for the deca-billionaires of the world. That how satisfied you are with your money, how well you think you're doing with your money, it's just the gap between what you have and what your expectations are. And if people's expectations grow in lockstep with their net worth over time, or if their expectations grow faster than their net worth over time, it doesn't matter how wealthy you become, you're always going to feel like you're running on a treadmill. That too, I don't think will blow anyone's mind, but it's the most pervasive issue with money that we have over time.
Morgan Housel: (11:57)
Look, if you were to look at the average median American, the median American's income adjusted for inflation has roughly doubled since the 1950s, just for inflation, median income. But we view the 1950's as the golden era of middle class prosperity, even though we are twice as rich, adjusted for inflation at the median level than we were then. I think a lot of the reason that is, is because expectations in the United States have grown faster than people's incomes. And look, there's been a lot of stagnation across middle incomes in the last 20 or 30 years, of course, but so much of the expectations in terms of what a middle class family should have and how they should live, have grown faster than incomes over time. Just one way to summarize that is that the median square footage of a new American house, has increased from about 900 square feet to 2,500 square feet. So that's just expectations rising faster than income and that's true at every single income level, no matter how wealthy you are, successful you are.
Anthony Scaramucci: (12:54)
Well, unfortunately the plate at the diner, Morgan, has also expanded, so we've got that issue going on as well. You got a lot of great anecdotes in the book and some of them are related to common mistakes that people make with their money. I was wondering if you could, I don't want to steal the thunder of the book, but just share one or two of them that you think are compelling to explain what the commonalities are in terms of how people miscue money.
Morgan Housel: (13:24)
Sure. I mean, here's one from the book that's always stuck with me and the story has nothing to do with investing, but this will all come back around to a good investing lesson, I hope. Back before antibiotics, if you got syphilis, the main treatment for treating syphilis was to actually-
Anthony Scaramucci: (13:40)
John, are you paying attention to this, John? Let me just make sure-
Morgan Housel: (13:44)
I knew this is going to go somewhere like that.
Anthony Scaramucci: (13:45)
All right. John pay attention, he's speaking directly to you, John. Okay, just go ahead, let me go back to active speaker. I'm sorry. Go ahead.
Morgan Housel: (13:54)
The main treatment for syphilis was to inject you with a low end strain of malaria. That was how you were treated for it. And the reason was because injecting yourself with malaria and intentionally giving yourself malaria, would trigger a very high fever. You get a fever of 104 that would last for a week, and the fever would kill the syphilis. Which is just to say that we have known for a long time, that fevers play a very key role in fighting infection. That used to be how we actually treated illness, was to trigger fevers in you. And look, we don't do that anymore because now we have antibiotics, thank God. But there's this interesting thing where we know that fevers are beneficial. Fever is a good thing. Fever is a sign that your body is fighting a thing you're trying to get rid of.
Morgan Housel: (14:32)
But what's interesting in the modern world, is that no one, including doctors, views a fever as anything other than a nuisance. And if you get a fever, you should take Tylenol right away, get rid of that damn thing, get it out of here, even if it's a beneficial thing that is helping you get better. Why is that? Why do we try to get rid of something that is beneficial? To me, the best explanation is just because fevers suck. They hurt. They're miserable. Let's just sit under the covers shivering. So even if it is helpful, even if it's rational to want a fever, it's not reasonable. And if there's a pill that can help me get rid of it right away, give me that pill, I'm going to take it 10 times out of 10.
Morgan Housel: (15:05)
Which is just this explanation that there are things in life that are rational, that makes sense on paper, that makes sense in a spreadsheet, but they're not reasonable. They're not reasonable because no one wants to be uncomfortable in the world. And I think that is also true for investing. There are a lot of things in investing that makes sense on paper, that are rational, all the numbers line up, but they're not reasonable for people to have. And aiming to be just reasonable with your money instead of coldly rational, is, I think, a better guideposts for most people, regardless of how wealthy you are in terms of making decisions with your money. Let me give you one example. There's a well known home bias in investing, where people in the United States, only own American companies, people in Germany, only own German companies, et cetera. You own the company, you own the stocks based off of where you live, based off your own local state, your local neighborhood.
Morgan Housel: (15:51)
There's no reason to think that that is a rational thing to do with your money. The idea that the best companies to own happen to be the ones located nearest to your house, it's ridiculous. There's no ration to that. But it's actually a pretty reasonable thing to do. If taking the leap of faith of investing your net worth into companies that you are more familiar with, if that helps you to take the leap of faith that you need to be a longterm patient investor, to feel comfortable with your investments, then it's a very reasonable thing to do, even if it's not rational.
Morgan Housel: (16:18)
There are other things like paying your mortgage off, which is the most ridiculous thing you could do with your money right now, because you can get a 30 year fixed rate mortgage for 2.9%. But it's a pretty reasonable thing to do if it gives you an added sense of safety, security, it helps you sleep at night. It actually makes you happier with your money, helps you tuck your kids in bed and say, "Hey, we're going to be okay. No one can take this away from us." Even if you can't justify it on paper, in a spreadsheet, there are things like that that I think are actually wonderful things to do with your money, because they're the most reasonable things you can do, even if they're not rational.
Anthony Scaramucci: (16:49)
Talk about the hamster trail. And what do I mean by that? You're up on that hamster, circulating, you're always trying to catch the person ahead of you and you have that wanting for more, that expectation that you're talking about. When I was a kid, I grew up with no money, now by the grace of God and some hard work, I've lived a good part of the American dream, but you always have that pressure on you. And then conversely, and I know a lot of people that grew up the way I did, you always are staring at your bank account and you're wondering ... Chris Rock had like this great line, Morgan. He was like, "I'm in this beautiful house in Alpine, New Jersey, but I have a bag packed by the front door because I'm waiting for somebody to knock on the door and say that the house really isn't mine and I have to leave." It was something I really related to as a blue collar kid.
Anthony Scaramucci: (17:36)
So explain that because I think you do a great job of that in the book. How do you get off the hamster trail? How do you accept your wealth and social status? How do you immobilize your ego, if you will?
Morgan Housel: (17:48)
I think there's two of this. One, we have to recognize that the hamster wheel is actually what makes the economy work. The fact that virtually none of us, no matter how much we have, the fact that it doesn't feel like enough is what gets us waking up in the morning and going out and trying to make the world better, build new businesses and keep going. So in one sense, it's phenomenal. If everyone wants their net worth to hit a million dollars, if everyone quit working, the economy would go nowhere of course, we wouldn't have anything. So in one sense, it's good, we shouldn't fight against it. At the individual level, I think if you're trying to manage your expectations, managing your ego, to me, the biggest revelation for me is realizing how little people actually care or think about the stuff that you have.
Morgan Housel: (18:25)
No one is thinking about you, no one is thinking about your image, no one is talking about the cars you have or the house you have, more than you are. I use this example in the book, when I was in college, I was a valet at a really nice hotel in Los Angeles. And I realized that, look, if someone drove into the hotel, driving a Ferrari, I would never look at the driver and think, "Wow, I want to be you. You're cool." What I would think is, "Wow, if I was sitting in the car, people would think I'm cool." I never thought about the driver, I thought of myself in the drivers seat.
Anthony Scaramucci: (18:54)
That's because they weren't in a Rolls Royce though, Morgan. What if they were in a Rolls Royce?
Morgan Housel: (18:58)
Well, then that's a different story.
Anthony Scaramucci: (18:59)
I'm kidding, I'm kidding.
Morgan Housel: (19:00)
Look, I never, and this is true to today, I never think about the person driving the car, I think what people would think about me if I was driving the car. And that fundamental irony is just driving home the point that no one thinks about you more than you. And once you could really grasp that, it's a difficult thing to do, but once you grasp that, then I think it goes a long way in keeping your ego in check. And for me, it's also been, well, okay, if the Ferrari is not what I want and look, for me, it actually is, I love cars, this is not a plea to live like a monk. But if that's not what I wanted, what am I going to do with my money? To me, it's always been using money to control my time, control my schedule, doing what I want, when I want, with whom I want, for as long as I want to, that is going to give me a lasting level of happiness and joy with my money, more than almost anything material will. So that's what I want to use my money for.
Morgan Housel: (19:53)
Once you realize that people don't care about you as much as you do, but being able to control your calendar, being able to wake up every morning and say, "I can do whatever the hell I want to do today." That is going to give you way more happiness than driving the Ferrari will. Then that, to me, has been how I've personally tried to keep my ego in check, but it's the hardest thing in the world. It's so natural to think that if you just have X dollars more, then your happiness is going to rise by the same amount, or if you have X dollars more, then you'll finally feel satisfied, that's the most common, natural feeling in the world to the level of wealth that you have.
Morgan Housel: (20:22)
That's so difficult to fight against, even if we know it's important, because again, your only ability to be happy with money is just a gap between what you have and what you expect. So we always talk about how can we grow our wealth? How can we grow our income? And of course that's important, but we also need to focus on how can we maintain our expectations because if we don't, then it's never going to feel like enough.
Anthony Scaramucci: (20:41)
So I have one last question for you before I turn it over to John Darsie because we have a lot of questions from the audience filling the queue. And this is related again to something in the book. Is there an evolutionary perspective on why people are easily swayed by pessimism, pessimistic views of the world, when history is actually showing the very opposite, that we've had steady progress, yes, bumps and scrapes along the way, but if you look at a stock chart or evolution or medical technology, it seems like there's a steady progress upward. Why are we so pessimistic?
Morgan Housel: (21:16)
I think there's two reasons why that is, why pessimism is so seductive, even if we know historically that optimism is a better bet. Why does that pessimism usually sound like someone trying to help you? If you read a pessimistic book, a pessimistic headline, it's warning you, "Hey, there's a danger in your life and I'm trying to help you so you don't get hurt." It sounds like someone trying to help you, so you're much more willing to say, "Oh, I should listen to this person." Whereas, optimism often sounds like a sales pitch, "Hey, you can make a lot of money on the stock. There's this big reward down the street." It makes it sound like someone's trying to pull your leg. So I think we are naturally inclined to just be more skeptical of the optimistic views and pay more attention to the pessimism, the pessimistic views.
Morgan Housel: (21:53)
The other reason is that there are lots of overnight tragedies. Things can fall apart in an instant. Things break overnight. COVID-19 September, 11th, for example. But there's almost never overnight miracles. Progress, even though it's more powerful than the setbacks that we've had, much more powerful, we've had so much growth over time, the progress happens slowly. It happens incrementally, 2% per year, which if you compound that over time, is extraordinary, but the setbacks happen overnight. So since setbacks happen so quickly, we can't ignore them. They're in our face, they're in the headlines blaring, what happened today, what happened yesterday. Whereas, the progress is much slower burn over time, even if it's more powerful. So I think that's why, if you have any sense of history, you should be an optimist over time, over a long period of time, but it's so common to get pulled into the allure of pessimism.
Morgan Housel: (22:43)
To me, this has always been from just a practical standpoint of how to deal with this, has always been save like a pessimist and invest like an optimist. I want to save like a pessimist because I know that things are going to hit the fan every month, every year, the world is going to break once a decade because that's always what's happened over the course of history. But I'm an optimist in the long run because I know that people are going to solve problems, figure things out, companies will be profitable and it will accrue to me as an investor. So it's just that Barbara Bell approach to thinking about the future of the world.
Anthony Scaramucci: (23:10)
Very good, Morgan. Let's turn it over to John. He's got lots of questions from our audience.
John Darsie: (23:15)
Including the audience of me. I have questions for you, Morgan. As I mentioned, I've read you over the years and you did a great job in the book of taking a lot of your writings and distilling it down. And you talk a lot about compounding in your regular writings and in the book and about how time is really your most important weapon as an investor and you use the example of Jim Simons versus Warren Buffett. Could you go into more depth about that anecdote in your book, it crystallized in my mind and I think it crystallizes in other people's minds about the value time and compounding and investing.
Morgan Housel: (23:48)
So here's what's really interesting about Buffett. So he's 90 years old, he's worth about $90 billion today. If you look at the trajectory of his life, 95% of Buffett's net worth came after his 55th birthday, the majority of his money has come in his elderly years. And even if you were to say, after age 70, way more than half of his net worth came after age 70, which is just how compounding works. Compounding is always a thing where the gains in early years look minuscule and then a medium years they get big and then in the later years they just explode to something extraordinary.
Morgan Housel: (24:19)
So I use this hypothetical example in the book, Buffett started investing when he was 11 and now he's 90. Let's say hypothetically, he was like a normal person and he started investing at age 25 and he retired at age 65, like a normal person. And let's assume that he earned the same average annual returns, 22% per year, during that period. What would his net worth be if that were the case hypothetically? It's not 90 billion, it's 12 million, that his net worth would be. If Buffett retired at age 65 like a normal person, you would have never heard of him. He would never have become a household name, he would have been a successful investor. But the reason that he is so successful in dollar terms is specifically tied to the amount of time he has been investing for.
Morgan Housel: (24:57)
And I use the example of Jim Simons of Renaissance Technology, whose average annual returns are triple what Buffett's are. The average annual returns of the medallion fund are over 60% per year. So he is, on an annualized basis, way more successful than Buffett, but Buffett is much richer than Jim Simons just because he's been doing it for so much longer. And I use this ridiculous example and I'm warning you that it's a ridiculous example to say, let's say if Jim Simons had earned his 60% annual returns for as long as Buffett had been investing for, let's say Jim Simons started investing at age 11 and continues through age 90 and earned a 60% returns. What would his net worth be hypothetically? And the ridiculous answer is something like 60 quintillion dollars, it's something absurd that's hard to even wrap your head around.
Morgan Housel: (25:46)
So I think compounding, even if you are a smart, mathematically minded person, it's just not intuitive. It's not intuitive to think that 95% of Warren Buffett's net worth would come in his elderly years. Even if you understand compounding, you can explain it to a five year old, it's never intuitive how it works. And so I think someone like Buffett, is he a great investor? Of course, period. But his skill is investing, but his secret is just time. The secret that explains his net worth is just the amount of time he has been investing for. And that's true for all of us as well. It's not comfortable to hear that if you're already 70 or 80 years old, but we have to realize where the gains come from, is less about what we're doing in any given year, even our average returns over our life and more of just how long we've been doing it for. That's true for people, it's true for investing, it's true for companies, it's true for nations, it's true for careers, that time is really where you get the big leaps in outcome.
John Darsie: (26:38)
I think it was Bill Gates that said, you'd be hard pressed to accomplish much a year, but over 10 years, you'd be surprised at what you can accomplish. That's been attributed to multiple people, but I think the same thing applies in investing.
Morgan Housel: (26:50)
And Buffett would say, you'd be surprised what you can do in 70 years. That's where the ridiculous gains come from. And there's so many people who, like I mentioned, there are 2000 books on Amazon that are devoted to how did Warren Buffett do this. And they go into grand detail about moats and business models and how he thinks about markets and economies. And to me, it's always been, you can explain Buffett's success and I'm generalizing here, but I think this is generally true, you can explain the majority of his success pretty simply. He's a pretty good private equity fund investor, who doesn't charge fees and he's been doing it for 70 years. That's how you explain Buffett. That's where it comes from. If you were to compare his returns against another fund that charges two and 20 and has been doing it for five years, of course, Buffett's going to blow them out of the water, just because of those simple things. But those explanations, they're too simple for people to take seriously and they're often not intuitive.
John Darsie: (27:39)
And he and Charlie Munger, had a third partner early in their business career, that you don't hear anything about. Why is it that you don't hear anything about that third partner?
Morgan Housel: (27:48)
So everyone knows about Buffett and Munger, they've become household names. But if you go back to the 1970's, there was a third guy in that group named Rick Guerin. And Rick Guerin was just as involved with Warren and Charlie in terms of doing deals for Berkshire Hathaway, he was part of the crew. They talk about when they bought See's Candy, Rick Guerin was the one interviewing the CEO of See's Candy, he was part of the Berkshire crew and you don't hear about him anymore. And what happened, from what I understand, speaking with different people who had heard the story from Buffett, is that in the 1970's, Rick Guerin used a lot of margin and when the stock market collapsed in the 1970's, he got wiped out.
Morgan Housel: (28:29)
And the way that Buffett explained this to a hedge fund manager named [inaudible 00:28:33], who told me this story, was that Warren and Charlie always knew they were going to be rich. They knew it was going to happen, so they weren't in a hurry. They were not in a hurry to get rich. They saw it as inevitable, so why rush it. Whereas he said Rick Guerin was a little bit more in a hurry, he wanted to get rich fast, so he used a lot of leverage to get there. And that was his undoing, so to speak. So he's still around, he's still investing, just not with the success that Warren and Charlie had, he didn't become a multi-billionaire like they did. Which to me, it just gets back to investing, how it really works, it's just a matter of time. And if you're trying to speed that time up, if you're trying to cheat the system and say, "Well, look, I don't want to wait 30 years. I want to get those returns in the next two or three years." That's the opening line of a lot of horror stories in finance.
John Darsie: (29:21)
You're also a big advocate, both in your personal investing and explaining things through data, of dollar cost averaging, both from a long-term returns perspective, as well as a psychological perspective. Anthony was talking about the relationship between fear and greed and there's always, and we've all experienced it if you've ever invested capital in markets, there's that twinge of regret you get when you don't pick a bottom and when you sell something before it tops. You say, "Man, if I had just waited a couple more weeks to get in." I think probably people felt this in March as well, either buying the dip early and with that big drawdown we saw as a result of the pandemic and then as the markets run away in the subsequent months. But why is dollar cost averaging so important from a psychological perspective, to keep you invested in markets and how does it help determine returns over time?
Morgan Housel: (30:08)
I think there's two parts of it. One is just having humility in our ability to forecast and 2020 is probably the best example of that. If you go back to January, no one of course was saying, "We're going to have a pandemic that's going to shut down the global economy and crash the stock market by March." And if you go back to March, no one was saying, "Stocks are going to surge to new all time highs by August." If 2020 has not made you humble about our ability to figure out what's going to happen next in markets, I don't think anything will. So there's that element to it. There's also just a sense of, if you understand the emotional side of investing, that we are likely to make the worst decisions at the worst possible time, then any way that you can systematize your investments and rather than saying, "Okay, I'm going to invest when the stock market does this, when I think the economy is going to do this next."
Morgan Housel: (30:50)
If you're going to say, "Look, I'm going to invest the same amount of money on the same day of every month, regardless of what's happening in the economy or in the stock market," and just systematize it like that. Then you have fewer knobs to fiddle with, fewer levers to pull, fewer just booby traps to screw you up over time, you're going a long way to take the emotion out of the equation. Not 100% because even if you have a dollar cost averaging strategy, you can break it at any time. So it's not a fail safe, but I think anything you can do in investing for professionals or individuals, anything you can do to try to remove the emotions from it, to the extent that you can, is going to pay off over long periods of time.
Morgan Housel: (31:27)
There's this other element to me too, that I write in the book and I'm pretty open about this, I'm mostly a passive investor. And look, does that mean that I don't think that people can outperform the market? No. Does that mean that I don't think people can pick the best stocks or that there are talented hedge fund managers? No, not whatsoever. But if you look at the statistics for, let's say, actively managed mutual funds, over a period of time, 90% will underperform. And that statistic has usually been used as an indictment against the industry, that 90% trail their benchmarks, that means the industry is failing. I've never viewed it that way at all, I view it as that's how it should be. What world do you live in, in which you would expect the majority of people trying to become stupendously rich in the stock market are able to do it?
Morgan Housel: (32:12)
There's no other area in life where that's the case. Think about what percentage of college athletes make it to the pros? I don't know the figure, but it's probably like 2%. Let's say it's something like that. No one would say college athletics are a scam, college athletics are failing because only 2% make it to the pros. People just know, making it to the pros should be extremely hard and if you get there, it's because you're the tippity top of your class. I view actively managed investing as the same way, it should hard, the majority of people should fail at it. So that's why I think to me, dollar cost averaging in a more passive approach, is often viewed as a very conservative form of investing. But if I have a high degree of certainty that over a period of time, I'm going to end up in the top decile of all investors, it doesn't look that conservative to me. So that's where the hands off, taking the emotions out of it, is actually a way that I think you can make yourself an above average investor.
John Darsie: (33:05)
So your advice based on the data, would be that people are better off as passive investors, as opposed to trying to be stock pickers. I remember there was a study that was done by a brokerage house, I can't remember which one it was, about which accounts perform best over the long term. And what they found was they found a group of accounts that were performing above average relative to the rest of their audience and the people, once they distilled it down, it was actually people that had died that hadn't serviced their accounts and their accounts had been invested passively for a long period of time, without anybody making emotional decisions. I thought it just crystallized in my mind, the themes that you're talking about.
Morgan Housel: (33:45)
And one tweak I would make on your comments is that it's not necessarily my advice, it is what works for me, given my goals, given my risk tolerance. I know if I can do that strategy and hold it for the next 50 years, I'll be able to achieve every financial goal that I have and then some. But look, it's completely different if you are a pension, a foundation, if you are a hedge fund manager, you have different goals, different risk tolerance. This is different for everyone. So that to me, is one of the biggest pieces of advice that I have in the book, is that people do different things with their money and it's not because we disagree with each other, most of the time that's not the case. It's because we all have a different view of the world, we've seen a different side of the world, we have different goals, different risk tolerances and just the idea that rational, educated people can and do disagree in investing.
Morgan Housel: (34:29)
So I would say that's what works for me, but I also know there are people for whom they can not look themselves in the mirror in the morning, if that's how they invested, or they would not achieve their goals and their risk tolerance is if that's how they invested. So it's different for everyone.
John Darsie: (34:40)
Yeah. Ultimately you have to marry the two themes that Anthony mentioned earlier, developing a healthy relationship with money, with how do I, within that framework, develop strong returns as an investor. And you can't de-link those two items, they're inexorably linked, and you have to marry them together for your own personal happiness and psychology.
Morgan Housel: (35:02)
Right. And that changes over the course of people's lives as well. I'm 36, so writing this book today, are there going to be things that I disagree about in 20 years if I go back and read it? Probably. There are going to be things that I've learned in life, I'm going to have different goals, my kids will be moved out, everything is going to change. So the idea of being a long term thinker and being committed to an idea, but also being open minded to the idea that not only the world changes, but people change, people's own goals and values, what they want out of life, changes too. It means we're all going to keep making different decisions with our money, not just rebalancing into different assets, but just a completely different view of how we think the world works over time.
Morgan Housel: (35:39)
Almost no one has a fully formed view of how the economy and the stock market works when they graduate college, that they're going to stick with for the rest of their career. We're all just learning how this works. And as 2020 showed us, big fundamental assumptions that we have about the world, can be completely thrown out the window on a moment's notice, like happened this year. So of course we just have to be flexible with our views over time and it makes the, pound the table, this is how the world works, this is how we should always do it, we just have to be a little bit more flexible than that, I think.
John Darsie: (36:10)
Switching gears a little bit and talk about your writing process. So you talked earlier in the talk about how important it is for people to get their ideas down on paper and it might take ideas that are bouncing around in your brain and allowing you to crystallize them in a productive way by writing. How did you start writing? How did you develop such a passion for writing? What's your process for writing? I think there's a lot of people, I do some writing as well, so a lot of people experience writer's block or they sit down and they have a hard time getting started, but if they regularly wrote things down, it would help them achieve some clarity in their thoughts. What's your process? How would you recommend to people starting a process of writing for their own benefit?
Morgan Housel: (36:50)
Here's two things, it took me a long time to learn these, but these have been the most important realizations I've had as a writer. One is that writer's block, which happens to everyone, is usually a reflection of your ideas, it doesn't reflect your ability to write. If you get writer's block it's because your idea is bad, 99% of the time that's true. Good ideas are very easy to write for everyone, bad ideas are very hard to write for everyone. So if you find yourself stuck in the writing process, I would not examine your writing ability, I would examine your core thesis of whatever you're writing about. That's almost always the case for me. And whenever I'm writing and I get stuck on something, I try as hard to be as honest with myself as I can and say, "Do I just need to abandon this idea?" If I can't figure out a way to say it, that's probably because what I'm trying to say, doesn't make sense.
Morgan Housel: (37:36)
The second thing that's been helpful for me, is for me, when I write I'm writing for an audience of one, I'm writing for myself. I call it selfish writing, this idea that I only want to write things that I myself am personally interested in. I'm not trying to say, who's the audience, what are they going to be interested in? I only want to write stuff, almost like a diary sense of, this is for me. And I take that as a leap of faith, that if I'm interested in something, other people will as well.
Morgan Housel: (38:01)
Because if you do that, there's two things that come from it. One is you're always going to do your best work when you're actually genuinely passionate and interested in what you're writing and I'm not being forced to write this idea or because I think someone else might think it's cool, but I think this topic is cool, so I love researching it, I love writing it. That's when you do your best work. The other thing is when you're writing it, since I'm writing it for myself, I'm always asking myself, "Does this sentence add anything? Do I personally get anything out of that sentence or this paragraph?" And a lot of the time the answer is no, so take it out. If I'm writing for myself, then I'm only going write things that are benefiting me as a reader. So I think just viewing it through that lens has been very helpful for me.
John Darsie: (38:42)
Fantastic. Morgan, thanks so much for joining us. We'd recommend everybody who's on the talk, if you haven't already, go out and buy his book, Psychology of Money. I know Anthony ordered it for our entire office, we're investment professionals, but I think both he and I are attracted to the simplicity of your writing, the simplicity of your ideas. Again, not as advice, but for people to understand, based on history, what has helped people succeed in driving investment returns and what's helped people succeed in terms of developing a healthy relationship with their money. Anthony, do you have any final words for Morgan?
Anthony Scaramucci: (39:13)
Just Morgan, thanks for joining us. And I'm just encouraging the young people, we get a tremendous amount of young people on these SALT Talks, please go out and get Morgan's book. Read it, take notes, and it'll be infinitely beneficial to you in your investing career. Morgan, thank you very much for coming on with us.
Morgan Housel: (39:35)
Thank you so much for having me. This has been fun. Thank you.
Anthony Scaramucci: (39:38)
What else have we got coming up John?
John Darsie: (39:38)
Thanks for putting up with all of Anthony's immature antics as well Morgan, we appreciate that.
Morgan Housel: (39:44)
That's part of the package.
Anthony Scaramucci: (39:47)
We only talked about syphilis, we didn't talk about the White House and what Sarah Huckabee said about me, we just talked about syphilis, not a big deal.