Welcome to The One Percent Show with Vishal Khandelwal. This show is an open-ended exploration into the minds of the wisest people around to help us learn to think, invest, and live each day a little, as little as one percent, better. You can learn more at vishalkhandelwal.com.
My guest today is Morgan Housel, a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a BA in Economics from the University of Southern California and has won multiple prestigious awards in the field of business and financial journalism.
Morgan is the author of the amazing book The Psychology of Money that contains 19 short stories exploring the strange ways we think about money and teaches us how to make better sense of one of life’s most important matters. He has spent a large part of his life being a storyteller to help us explore how we as investors deal with risk and how we can think about risk in a more productive way.
The noted author Stephen King wrote this in his autobiography On Writing, and I quote – “Writing is not about making money, getting famous, getting dates, getting laid, or making friends. In the end, it’s about enriching the lives of those who will read your work, and enriching your own life, as well. It’s about getting happy.”
And I can sense that happiness that Morgan must be enjoying while writing all that brilliant stuff that he publishes week after week. And I must thank him for the happiness he gives to millions of his readers to be able to read such simple yet wonderful stuff. So, thank you Morgan for that.
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Vishal Khandelwal (VK): Morgan, welcome to The One Percent Show. Thank you for agreeing to do this.
Morgan Housel (MH): Thanks so much for having me. I am happy to be here. Thank you.
VK: My very first question to you is about the tweet you posted just yesterday where you asked people to name something harder than they assumed it would be before they tried it. I could not see your answer. So, what has been that thing for you, Morgan? And why?
MH: It’s such an obvious answer for me, which would be writing. I’ve been a professional writer for 14 years now, and it never gets easier. You find your little tricks, you find your flow, you find what works for you, but writing is pretty difficult. And I think that’s true for everyone and it doesn’t get much, much easier. I think it’s almost like the more you write and the more you try to figure out who you are, and you figure out who you are, and you realize that you don’t know all these other things and it gets harder over time. So, I enjoy it. I love the process of writing. But what’s true for every writer, whether you are a first-time writer or a professional, doesn’t matter, is that the reader is seeing the final product. And they’re not seeing all the edits and the drafts and the deletions that went into it.
They’re not seeing the times where you sat at the desk, pulling out your hair, trying to figure out what to say. So, it’s always the case that writing looks easier than it is because you’re seeing such a small part of what actually happened going into it. So I am always surprised, and it’s kind of a sad thing that it feels like writing never gets easier for you.
What writing is to me is taking the gut feelings that you have, things that you know are true, and trying to put them into words and making that connection of, I know this thing is true. I can feel it, but how do I explain it? How do I put that into words that make sense, that catches people’s attention, that is interesting, that’s not going to bore them? That’s always a difficult thing to do.
VK: Being a writer myself, I’ve experienced that so many times in the past so many years. In terms of writing, what’s the most fascinating thing that you think there is about writing, and what’s the least fascinating thing?
MH: What’s just interesting to me is writing is a form of clarifying your own thoughts. So, most people have this idea that writing is for others, that you’re writing a blog post for other people to read, that you’re writing a book for other people to read, which is true. But there’s a whole another aspect of writing that I call selfish writing, which is clarifying your own thoughts. And the idea that someone who wrote a book, or a blog post, knew all of that stuff before they wrote the book is wrong. It’s never the case. It’s never the case that people have all of these ideas in their head, and all they have to do is get them onto paper. That’s not how it works. The process of writing helps you figure these things out. And then, so by writing a book or a blog post, you yourself, the author, the writer, is doing as much learning as the reader.
I think that’s what’s most interesting for me. So, when I sit down and write a blog post, I have no idea, 90% of the time, where it’s going to end, or even what my point is going to be. It’s just like, “Oh, I have this little thought idea. Let’s start writing and see where it takes me.” And then you write one sentence and you’re like, “Oh, that reminds me of this other thing.” And then you write another paragraph you say, “Oh, that reminds me of this book that I read. Let me go do some research on that.” And then it all starts coming together. And that idea of writing for yourself, it’s your tool for your own learning, I think is really underappreciated. Howard Marks, a great investor, who has become famous for his investing memos, where he just writes down a paragraph or two, or two or three pages about what he’s thinking about in the market and investing, he tells a story that when he started writing those, I think in 1990, no one was reading them. He mailed them to his clients and his clients wouldn’t read them. And then when he talked to his clients, they’d be like, “Oh yeah, we don’t ever read those.” And it didn’t bother him at all, because he was saying that he was writing the memos for himself. It was his own clarification process that had a huge benefit to him, even if no one was reading them. And that’s what I think things like journaling for one, even if no one is reading it, your own personal journal can be super helpful in terms of clarifying your own thoughts and your
VK: How long you been journaling, Morgan?
MH: See, I don’t… I’m not proud of this. I kind of wish I did, but I don’t journal. And part of the reason that is, is because in investing and in finance, everything that I think is published online. It’s all out there, whether it’s on my Twitter feed or in the blog. So, it’s all there. But in terms of just a journal about my life, how is my marriage going, how are my kids, how are my friends, that’s stuff I don’t, and I wish I did. But if you were to ask me a question like “What do I wish I would do differently in my life?” that [journaling] would be near the top. Because I think I’d take a lot of pleasure in it, both in terms of what it would teach me on a day-to-day basis of getting those thoughts on the paper, and also going back in time and to saying, “Oh, I have this idea that in 2012, I was a happy person or a sad person, whatever it might be,” and to go back and kind of verify what I was thinking at the time.
I think people are very bad at remembering who they were at various points in time. And it’s very easy for people to get stuck and say, like I just said, “I used to be happier. I used to hate this job. I used to love doing this.” And those memories I think are often false. It’s very natural to remember what you want to remember and create a coherent story that makes sense and is easy to recall, but that’s not how usually life works. It’s not an easy coherent story. It’s a really complicated, messy story. And that’s where I think journaling comes into benefit, where you can go back and really verify what you were thinking at the time and check it with whatever your memories of that period might be.
VK: Yeah, I’m sure about that. So, about storytelling, Morgan, since we are on writing. You’re a wonderful storyteller and you are great at quoting examples from history in your writings and talks. Is there a process that you have for capturing this information, processing it and condensing it into a form of simple and so insightful writings that you share week after week? Basically, my question is, how do you organize all these stories that you come across in your life? And are there any specific tools that you use for this?
MH: There’s not much organization. And I wouldn’t say there are any tools. Other than maybe the tool is just a lot of curious reading, through various subjects. So of course, I’m a financial writer, I’m an investing writer, but I almost never read finance and investing material, books, even blogs. I just don’t read a lot of them. I read a lot, but it usually has nothing to do with investing. And that’s by design as well, because I want to be able to connect the dots in the world that point back to investing. What can I learn from other fields that teach me something about how people think about risk and greed and fear, which is all that investing is. So, if I can just spend all my time reading about things that have nothing to do with investing, I’m going to learn a lot about investing, and I’m going to have a better time doing it because I’m viewing the world through a much wider lens, trying to figure out how things work.
And I just think it’s more interesting to me. If you spend your entire life studying balance sheets, some people might like, but for most people that’s not a very exciting way to go through life. But if you can say, “I can learn about and read about anything: space, biology, physics, history, military, whatever it is.” That to me is just much more intellectually stimulating. It sparks a lot more curiosity than it would be if you just view the world through your tiny narrow lens.
And that’s true for a lot of things. If you’re a doctor and you only view medicine through the lens of medicine, that’s not necessarily bad, but if you also have a view about how people think about, how your patients think about risk and sociology and psychology and politics, there’re all these other elements that factor into how people think about their own health and diet and exercise. And if, as a doctor, you understand that aspect of it, that’s kind of not necessarily in the lens of medicine. It’s not just biology per se. But having a greater sense about how people think about the world, you’ll probably be a more effective doctor. So, I think it’s true for almost any field that diverse, broad learning is better than just really tight, narrow learning.
VK: Oh yeah. I think your thoughts also take me back to what Warren Buffett says about investing and being a businessman. He says, “I’m a good businessman because I’m a good investor, and vice versa.” I think that applies to writing as well. You end up becoming a good thinker because you try to write well, and you end up becoming a good writer because you start thinking well. So, I think it’s a self-feeding process.
Anyways, often when I sit down to write, the first thought that strikes me is, “What do I write about now?” I’ve written almost everything that I could have been capable of writing with the last 10 years, almost like thousand plus articles. Every time I get down to write, I think I’ve exhausted the universe. Do you get that feeling too, after having written on investing in business for the past 15 plus years, and if yes, how do you get over that churn and how do we actually still pull out those remarkable pieces one after the other?
MH: I’ve been having that feeling for 14 years since I started writing, that I’ve got nothing else to say. And there’s two things that come to mind here. One is that you’re always going to think of something to say, because if you broaden your lens again, outside of finance to I’m thinking about investing through the lens of just how the world works, that is something that you could be a writer for a million years and never scratch the surface.
There’s so much out there that you don’t know. And I think when people have the feeling that I have nothing else to say, I have no more stories, that is almost like a really selfish, egotistical thing, because almost what you’re inherently saying is, “I know everything.” That’s almost what you’re saying. If you’re saying, “I have nothing else to say,” you’re almost saying, “I know everything.” So, if you feel like you have nothing else to say, well, there’s a billion other things to learn out there that would teach you something else to say out there so that whenever you get that feeling, and I get the feeling, everyone gets that feeling, it’s almost just like a prompt of, “Okay, I need to expand my horizons, read something different, go out and try something new.”
What’s really important about writing, what’s really important about any creative field is that you cannot force creativity. You can’t just say, “Okay, at Monday morning at 9:00 AM, I’m going to come up with a good idea.” It’s just not how it works. You can’t do that. But a lot of people do try to force it. You have to have faith that you will eventually come up with a good idea, but never try to schedule it. Never try to force it. And you’re going to go through periods for days, weeks, maybe months where you don’t come up with anything new. That’s true for me. That’s true for everyone. No one can force it. And as long as you have the faith that you will eventually get there, then it’s not really disheartening to go through that.
Michael Lewis talked about this once, where he said he writes a new book whenever he comes up with a new idea and his publisher wants him to stay on a schedule, “Okay, let’s write a book every two years. Once you’re done with this, maybe six months later, we’ll start the next book.” And he always says, “No, no, no, no, no. I’ll write a book, whenever I find the next idea. That might be next week. It might be 10 years from now.” And he went almost 10 years, I think, between Liar’s Poker, his first book, and when he started writing other business books. He was doing other things in between them. But his cadence of book publication has not been consistent at all. And the reason is you can’t force creativity.
So, I think if you hold onto those two things, there’s a lot to learn out there, but you can’t force it. That’s when you just become more comfortable with that idea that in any given moment, you might not be able to think about something to write about, but eventually you will. It’ll come around.
VK: I think that’s a great lesson that I’ll remember while getting down to writing my next post. But yeah, I completely agree with you that creativity cannot be forced. And you have to be in that state of flow, whenever that flow comes, and that’s where the best writing happens, and you cannot really force it.
So, from writing we go back to the start. You mentioned in The Psychology of Money about how your parents lived their adult years in two stages. One is dirt poor, and the other is moderately well off. And you must have observed how they conducted their lives in both these stages. Tell us about your growing up years and the most important lessons that you learned at home and through your years of education, that really helped you over the next couple of decades.
MH: Well, as I wrote in the book, my parents were students for most of my early childhood. So, we didn’t really have any money at all. And we lived a great life, my siblings and I were really happy. It was great. I have nothing but good memories of that period. But we didn’t have a lot of money. And then my father became a doctor. He was in med school when I was a child and became a doctor. And then he had more moderate means after that. And what I learned from that, that I write in the book, is that the frugality that was forced upon them when they were poor, they didn’t have any choice, it was forced frugality, stuck with them even when it didn’t need to be forced anymore.
They just learned how to live efficient lifestyles. They learned how to find happiness outside of things that didn’t revolve around spending money, like going camping and hiking and exercising, spending time with your family. That’s where they learned to gain their happiness. And they learned because they had no choice. They didn’t have any money to go out and find their pleasure on expensive vacations or something like that. They just couldn’t do that. So, that really stuck with me. And then I also write that in the book that when my dad got tired of his career, he got kind of burnt out of his career, stressed out from his career, he quit. He retired on his own terms.
And then I realized that all of the frugality that stuck with them led to a high savings rate, which led to them being able to control their time. When he got done with it, he said, “Okay, I’m done. I’m proud of my career. I love that I did my career, but I’m done. I’m out.” And being able to do it on his own terms versus saying, “I’m stressed out, but I need to work another 10 years to save for retirement,” or your boss saying, “Hey, you’re done.” Doing it on his own terms meant everything. That, I think, led to an incredible amount of happiness and satisfaction in their life, that they were in control of it, both my parents. And so that has had a big impact on me in the last decade. When I saw them go through that, that to me has become my and my wife’s financial goal, our only target.
To me, the only purpose of building wealth is independence and control. It’s different for each person. Each person will have various shades of that. But for me, it’s almost everything. It’s just like all I want out of savings and money is the ability to wake up every morning and say, “I can do whatever I want today.” And most of the time, what I want to do is do some reading, do some writing, do a little bit of work. That’s what I want to do, but I want to do it on my own terms. I want to do it because I like doing it. Not because someone made me do it because I’m working for them. I just want to do it because I like doing it.
And that doesn’t eliminate all of the stress in life. It doesn’t eliminate even the majority of it. There’s still health issues, family issues. There’s going to be a million things that come up. But I think if you can have even a degree of independence in your life, you’re really moving the needle in terms of how happy you’re going to be throughout the rest of your life.
Or the other way to think about this is the reverse, which is that you can make so much money and have a great family, a great career, a lot of respect and admiration, but if you don’t control your time, if you’re not in control of what’s going on day to day, you wake up and someone else has scheduled your day saying, “I need you to do this at this time and do it this way,” that is, I think, something that will lead to a lot of unhappiness, no matter what your financial circumstances might be. So, I would rather be poor and independent than rich and not have my independence. I would rather be rich and independent. That would be the best of both worlds, but given one or the other, I would take independence over just some degree of wealth where I didn’t control my day.
VK: You talked about independence. You talked about saving and being frugal. But in your book and through your articles, you’ve also talked about this idea of ‘enough.’ And I would love to hear how you feel about this idea of enough in your personal life. And how have you developed a sense of contentment which is the most difficult thing for most people to develop, even when they have enough. So, are there still places where you struggle with yourself on this and how are you overcoming those challenges, if you are having some challenges on defining what that ‘enough’ for you is? The reason I ask this is because getting this goalpost of enough to stop moving is one of the hardest financial skills. And you’ve also written about that. So, what have you done on this front and the challenges that you face and how you’re dealing with that?
MH: I think it’s not something my wife and I struggle with. The idea of “do we have enough?” Or “are we moving the goalposts?” I wouldn’t say we struggle. I think we do a pretty good job at getting the goalposts to stay where they are. But I don’t think this is a topic in which anyone becomes a master. Where anyone just says, “Okay, it’s completely stopped. We’re a hundred percent content where we are.” I think you can get close to that, but it’s always a struggle. And I think it’s the most natural thing in the world to move the goalposts. I do.
So, do we have higher expectations today than we did five or 10 years ago? Maybe, and a lot of that is just because we have kids now. So, our expectation for the life that we want to live, it’s not just about us. It’s about the kids now. So maybe things have expanded because of that. But I think, in general, we do a pretty good job. We find our happiness through other things and having some degree of financial success makes things easier. It was particularly as a parent. When you say, “Look, I know I can take good care of my kids and they’ll be able to get a good education.” That’s great. And that requires financial resources that we didn’t have 10 years ago.
Would I say, “If we went back to the financial condition that we were in 10 years ago, would we be as happy as we are today?” I think the answer to that question is “No.” So, does that mean that we’ve moved the goalpost? Maybe. Probably. That’s probably what it means.
So, I think rather than viewing this as black and white and saying the goalpost has to stay exactly where it is, I think what really matters is that your expectations are growing slower than your income, growing slower than your net worth. That’s what matters. It’s not that they don’t grow. It’s that they grow slower than your income. And ours have, for sure. So, in that sense, I think we’re doing okay.
One way to just measure this, analytically, would be if your income rises over a period of time, over 10 or 20 years, a long period of time, did your savings rate also increase? And if the answer to that question is “yes,” I think you’re probably doing it right. If the answer is “no,” or your savings rate is declining, then it’s not necessarily that you’re doing it wrong, but that’s when you find a situation where your expectations might be growing at least equal to your income. And in that situation, I think most people’s happiness will not grow with their income relative to what they thought.
I think your happiness relative to your income only increases if your expectations grow slower than your income. Because that’s when you start saying, “I’m happy where I am, but look, now I got more money that I didn’t even need. I didn’t even need it, but now I have it. And now my money relative to my expectations is greater than I thought it would be.” So that’s the only way to really gain happiness with your money is if you keep your expectations in check.
VK: Are there other things apart from your kids that keep you awake at night? So, I’m just seeking a view into if there’s anything that you still feel vulnerable about. Is there anything that you can think of? Maybe money, maybe outside it. What keeps you awake at night, if there’s anything out there?
MH: I’ve always been a huge worrier. I’ve always been a worst-case scenario kind of guy. I’ve always been a pessimist. I hope a rational pessimist. And you mentioned kids and, of course, that’s the big thing. That’s everything. Are my kids going to grow up to be healthy, happy, well-balanced people? That’s everything. We can just stop right there. And I’d say that’s all I care about in life. That’s everything. But are there other things? I love the definition of risk from Carl Richards where he says, “Risk is what’s left over when you think you’ve thought of everything.” And so, I think about that a lot, especially if I’m lying in bed, not worrying, but I’m lying in bed saying, “Everything’s great, man. Life is really clicking right now.” That’s when I kind of start to say, “Ah, what am I missing? What else is out there?”
I think if you go back and look at people’s lives, either very successful people or very unsuccessful people, people who you really want to say, “I don’t want to end up like this person,” you realize that a lot of what brought them to where they are today is just tiny, little, no-nothing decisions at one point in time that ended up compounding on themselves. Either really good decisions that compounded or really bad decisions that compounded. And when you realize how tiny those decisions can be at the seed, it can lead to a lot of angst in the current day of saying, “Is there a decision that I made today that seems like nothing, it seems like the littlest thing that’s going to compound into something tiny?”
I mean, what we’ve learned around the world with COVID over the last year is that tiny things that compound grow to enormous unprecedented, catastrophic things. That’s true in a good way with money that compounds into amounts that we never imagined. And it’s true for bad things like COVID. And so that’s what I worry about is. What am I not thinking about that’s going to compound and lead to something that’s catastrophic? So, whether that’s in my career, some mistake that I might make inadvertently, whether it’s COVID, whatever it might be. I’m always amazed at how tiny decisions can lead to incredible results in either direction. And that’s what keeps me up at night. It’s the things that I’m not thinking about.
VK: Staying with compounding, we all know about the idea of frugality and how simple it is and how we can really pursue happiness or become happy being contented with what we have and saving enough money for our futures. But I think Daniel Kahneman said that it is almost impossible for us to visualize ourselves 20-30 years down the line and that’s one of the biggest reasons that people actually don’t save money because they cannot visualize themselves 20-30 years down the line. Is that one reason that we don’t really think exponentially in your experience? We all know the formula of compounding. We’ve seen Buffett actually doing that right over, and not just Buffett, so many other investors, common people have compounded money slowly, silently, over many years. But despite the rules being out there, despite the results being out there, most people still actually interrupt that compounding and are not able to think exponentially. What, according to you, is the reason for that?
MH: I think there are a lot of people in the world that are either future thinkers or survival thinkers. And a lot of it is just the circumstances that you find yourself in life. If you are in a really financially strapped situation, living paycheck to paycheck, living meal to meal, I think that leads almost anyone to gain a survivalist mindset. And when you are in a survivalist mindset, you are not thinking about how do I compound my money over 10 years. You’re not thinking about tomorrow. You’re not thinking about next week. You’re thinking about what you need to do right at this very moment to survive. I think a big percentage of the world is in that situation. And that’s why so many people in this situation too, will make poor health decisions, poor relationship decisions, decisions around drugs and alcohol and money. It’s because you’re just not thinking about the consequences of your actions, because your entire frame of time is like the next 10 minutes. And it needs to be because you’re in the survivalist mode.
So, I think a big percentage of the world is in that. And probably people who are long-term thinkers, future thinkers, look at those people and don’t really understand. But the people who are in a survival mindset, look at future thinkers, look at people like you and I, and don’t understand it either. It’s really hard to comprehend the other person’s situation, if you are a survivalist thinker or a current thinker.
If there’s one thing I’ve changed about how I think about money and a lot of areas of life in the last couple of years is that I don’t judge people as much as I used to. It’s not to say that I don’t judge people at all, but I’m much less judgmental, particularly around financial decisions because it’s easy for me or you or anyone to look at other people’s financial situation and say, “You’re doing that wrong. You made a mistake. This was a bad decision. You shouldn’t do this.” But until you’ve been inside of their head and understand what they’re going through and in their situation, you can’t really come up with any coherent view of what they’re doing. And this is true for everyone.
Most people who criticize what I might do with my own money, I used to take that really personally. And now I just say, “Look, you do what works for you. I’m going to do what works for me. This is what we’re doing.” I wish money were like math, where there’s one right answer for everyone. Where two plus two equals four for every person in the world. There’s no difference, no matter your background, there’s one right answer, but it’s not. It’s so personalized. And it’s so just based on what you want, and it’s so anchored to your own individual life experiences and circumstances that we cannot, and we will never be able to come up with one right answer for what works for people.
And that’s why if I were to come across a survivalist thinker, I think I used to judge that and I don’t anymore because I can try to empathize with what it might be like to live in a world where the next 10 minutes is the whole range of your time horizon. And I think in that situation, I would be similar.
This is really important. I think virtually everyone on the planet, if put in different circumstances, would act differently. If I were born in a different family, in a different country, in a different era, a different generation, I would think very differently than I do today. And you would as well. Everyone would. We’re all such products of the dumb luck that we’ve been born into in this world, where and when we were born.
Someone emailed me this morning and said, “Hey, I loved your book, but I feel like it’s written just through the perspective of a white male American in the 21st century.” And I wrote her back saying “Yes, of course, because that’s who I am. It’s not my fault. I didn’t choose. This is just what happened to me so of course that’s my viewpoint.”
Everyone does that. And I think the best you can do is just become cognizant and just become aware that I’m writing through the lens of this individual’s circumstance. And it’s not my fault, but it’s a tiny, tiny view of the world. That’s actually the first chapter of the book is that everyone’s experiences have a profound impact on how they think, and everyone’s experiences are totally different. My life has played out very differently from yours, not better or worse, but just different.
I did a conference recently with a group of pro athletes and it was really fascinating because so many of the pro athletes grew up in poverty. And then in their twenties, they start making sometimes tens of millions of dollars per year. And then in their twenties, their career usually ends.
So, they go from like deep poverty to extreme income to no income. And one of the things that came up during this event that I thought was really profound and maybe it’s obvious, but just hearing them say it was really profound is that when you grow up in some sense of poverty and then you make a lot of money, that’s not your money. That’s the community’s money. You can’t make $20 million a year while your cousin is living in a really rundown, beat-up apartment. You got to go out and take care of the people who are around you, in a way that would be quite hard for me to comprehend because if I came into a bunch of money, well, everyone in my immediate family and friend circle is doing just fine. They don’t need my money. So, if I made a lot of money, it would be mine.
That’s not to say I wouldn’t do philanthropy and whatnot. But if you’re in a different situation, if you grew up in a lot of poverty and you make a lot of money, that’s not just yours. That’s everyone’s money. That’s mom, dad, cousin, brothers, that’s the whole community’s money. You need to share it with them. They explain that mindset in a way that was really eye-opening for me. And again, it just comes back to different people with different circumstances, thinking about money in a different way. That again has led me to become less judgmental about what people do with their money than I used to be.
VK: I think writing about biases is one thing, but really imagine people living with different worldviews, which is based on the experiences of several decades. And trying to understand why they do what they do, that’s another stuff. So, I agree with you on this side. Anyways, before we talk about investing and how you invest and your thoughts about the process of investing, I would just like to digress a bit because we talked about kids. I take you back to this letter that you wrote to your son when he was born in 2015. And you hope he’s poor at some point in his life. You explained that there is no way to learn the value of money without feeling the power of its scarcity. And at the same time, you hope that in being poor, your son was never struggling or unhappy. I’m sure there are a lot of happy poor people. like there are a lot of unhappy rich people, but how does one remain happy being poor, having less money? I would love to have your thoughts on this concept of money versus happiness that is talked about a lot. These are the two foremost pursuits of most people’s life, money versus happiness. What’s your take on that?
MH: Let me give you my view that I hope to do as a parent. My two children are pretty young. We’re not dealing with financial issues with them yet because they’re so young. But let me tell you about my general philosophy on it. And I hinted at this in that letter which is that I want my children to be poor because I want them to feel the power of money’s scarcity. But I never want them to be suffering or miserable. And how I hope to foster that as a parent is becoming the ultimate safety net.
“If you fall on your face, I’ll be there to pick you up. I’m never going to let you become destitute. You’ll always have good food and shelter and education. I’ll never let you fall flat on your face, but you got to find all the upside yourself. I’m not going to give that to you. I’m not going to give you the money. I might open doors here and there, but you’ve got to find that on your own. And I think if you can do that and you say, look, I want you to be poor, but not suffering. I’m not going to let you suffer deeply. I’m not going to let you be miserable if we’re just talking financial matters, but you got to find all the upside yourself.”
I think that’s the best that a parent can do. That’s what I hope to do with my kids, that is, become a safety net but not a fuel. That’s what I want to be. And I think if I can do that for my kids, then hopefully they will learn the power of money scarcity, because I’m not going to give them money. I’m not going just going to say, “Oh, here’s a bunch of money that you can go spend.” So, they’re going to have to learn it themselves. They’re going to have to say, “I want this thing, but I don’t have enough money for that.” So now all of a sudden you realize the power of money scarcity, which is a good lesson to learn.
But I think some parents view this as black and white in terms of “I’m either going to shower my kids with money” if they’re able to do that, or “I’m not going to give them anything. When they’re 18, they’re out of the house, you never get anything from me again.” I think it’s somewhere in between there, being a safety net but not a fuel is what I hope to do for them.
In many ways, that’s what my parents did for myself and my siblings. There were no big cash grants. By the time I was 18, it was like, “If you want money for anything, it’s all on your own as, as it should be.” But they were a good safety net. And I always knew, even if subconsciously, when I was 18, that if I fell on my face, my parents would pick me up. So just knowing that even subconsciously, I think allowed letting me take risks more comfortably, letting me worry a little bit less. Even if I still had to be like, “Okay, if I want any money, if I want one dollar, I need to go earn it on my own. But I know that there is some downside protection there.” I think that was really helpful for me. And that’s what I hope to pass to my kids as well.
VK: That’s helpful. How have you changed as a person since becoming a father. And apart from money lessons, what are the most critical lessons that you want to leave your kids with?
MH: I’m sure I speak for every parent when I say that before children, it was all about me and all about my wife. It was just so self-centered, and not in a bad way. But I think that’s natural. And I think I woke up every day saying, how can I better my life? What can I do to grow my career, to make myself happier, to make myself better? And then once you have kids, instantly shifts towards, “It’s not about me, not about me anymore. It’s all about them.” It’s not that I don’t care about myself anymore. It’s not that I don’t want to make myself better, but the first priority is a hundred percent them. I think that shift is so stark on the day your first child is born. It’s so obvious. It’s so intuitive. And it changes everything else in life that whenever I have a friend who’s expecting their first child, that’s always what I say, “Whatever you think it’s going to be like as a parent, you’re wrong. And it’s not because you’re not smart enough. But until that moment arrives, when they put the baby in your arms and you’re like, I don’t matter anymore. It’s just about this.”
I believe you experienced that. It’s hard to describe the natural selflessness that comes from being a parent. So that’s what’s changed the most. Everything that I view now, whether it’s book sales or career, like everything is like, “Oh, well, how does this help my children in a way that I love,” I feel is a great way to go about life.
Now what do I want to impart on them? I think the biggest thing that I kind of hinted at earlier is realizing that the situation that they might grow up in, and this is true for anyone, is different from other people’s. That there are going to be people out there in the world who grew up much poorer than them, much richer than them, much luckier than them, much less lucky than them. They realize that their view of the world is a tiny, tiny, tiny fraction of what else exists in the world. And I think everyone does this, but I struggled with this as well.
On September 11th (2001), I was 17 years old. And that was my first view that there was a world that was bigger than the little bubble that I grew up in California. That there were other things going out in the world. It was the first time that I thought, “What’s going on in the middle east? Why are they so angry at us? Why would they do this to us?” It was the first time that I stepped out of my little bubble and realized like the way that I think is not how everyone else thinks. I didn’t realize that at the time.
So, I think going through that is really important. And the earlier in life that you understand that the way you think is not how other people think, the better off you’re going to be. So many of the world’s problems, politically, financially, whatever it might be, come from people getting upset that other people don’t think like them. That’s what it is. And once you just accept that, that you and I can disagree and neither of us is right nor wrong, we’re just a little bit different, that’s fine. As soon as you accept that, I think life becomes a lot easier and you’re probably going to be a lot more successful if you can do that. So the biggest thing I hope to impart on my kids is just understanding that their lives are not reflective of everyone else’s life.
VK: I certainly agree with that. I think it is said about America that 9/11 changed the country. Right now, on a global scale, we are seeing things changing exponentially and this has been brought about by technology and disruption. The pace of change is multiplying, and our formal education system seems insufficient to teach all that is required to thrive. In this light, what advice would you offer to your kids or say young adults in self-educating themselves. What are the most undervalued skills that they must learn and practice to do well over the next few decades?
MH: I think the most undervalued skill is learning how to get along with people that you disagree with. And this is getting more important with technology because it used to be, not even that long ago, 10-20 years ago, that most people lived inside their own bubbles – their own political bubbles, their own religious bubbles. They just interacted with people who were like them, in their home, in their work, their friends. Your sphere of influence in your social group was really tight in your local community. And now because of social media, your social group might be all over the world. You and I are talking in different continents right now. Like the kind of things that didn’t happen 10 or 20 years ago, but now we do it all the time. And because of that, you’re much more exposed to the views of people you disagree with.
We’ve seen this in America and around the world with politics. Politics has always been nasty, but once you bring in social media, then all of a sudden people are exposed to people who think differently than them. And they react with that with anger, “How dare you think differently than I do?”
The difference of views has always existed. We’re just aware of them now because of technology. And in that world, there’re basically two options. One, you can get increasingly angrier that other people think differently than you, and you have no ability to change their views. And that makes you angry and cynical. Or two, you can learn how to get along with people who disagree with you. Now, there’s always going to be situations where people you disagree with so fundamentally that it’s just not going to work.
But having just a wider acceptance of different views in the world and saying like, “Look, I don’t agree with you on this, but let me try to be empathetic in terms of how you think about money or politics or whatever it might be.” My brother-in-law is a social worker. I tweeted this the other day and he said something that I thought was really profound. He said, “All behaviour makes sense with enough information.” And so, when you come across someone who you disagree with, even vehemently disagree with, I think if you just rather than just saying, well, you think that because you’re wrong, you think that because you’re an idiot, you think that because you’re not smart. If you instead to try to dig through like what they’ve been through, what their incentives are, what they’ve seen, what they want to have occurred. Behaviour makes sense if you dig deep enough. And so, I think in the world of technology, that becomes so critical. I think it’ll probably be the most critical skill of the next generation – learning how to get along with people that disagree with, because suddenly we are all shoved in the face of people who we disagree with. And it’s only going to get more so as time goes on.
VK: Coming back to The Psychology of Money, it’s a beautiful book and I’ve, I’ve read it almost like 2-3 times so far. You’ve written 19 stories and all teacher highly insightful lessons on how we must manage ourselves and our money. And I especially love the ones on Bill Gates and Kent Evans and the role of luck in life, Rajat Gupta and the idea of enough, and then you’ve talked about Buffett and what people miss about his secret of compounding, which is starting early and being through it right throughout. Which one is your favourite story out of the book and why?
MH: The postscript of the book. It’s not even a chapter, it’s the postscript, which is kind of the history of the US consumer. I’ve said before the reason I included that is because I finished the book and I thought it was too thin. I thought it wasn’t long enough. And I didn’t want a pamphlet. I wanted a book. So, I said, “Okay, I need to add 5,000 words to this, just to kind of fatten it up. So let me just add in this history of the US consumer.” That I think might actually be my favorite. I’m just connecting the dots. Now it’s all US centric. So, for an Indian audience, it might be interesting but not as interesting as to me. But that to me is my favorite. Just connecting those historical dots of how we got here.
And I think it’s something that we don’t think about enough in terms of just like the state of the world today. How did we get here? Most people think about that question. They think about what happened in the last year or the last six months or something, but I think everything that’s happening right now, politically, economically, you can tie the roots and the roots go back decades or centuries. And I think understanding those roots is really beneficial in understanding how this all works. And if you understand, like how deep the roots are, you understand how susceptible to change or not susceptible to change some of these trends might be. So that to me was probably my favorite.
In terms of the chapters in the book, I think the chapter on ‘reasonable versus rational’ might be one of the most meaningful to me in terms of changing my own life. Because I used to think about finance in a rational way. What makes sense on the spreadsheet? That’s what everyone should do. And I just realized over the years that that’s not the case. We’re not spreadsheets, we’re not machines, we’re hormonal, emotional people. And, therefore, the best you can do is to be reasonable instead of rational. And even if there are things that you do with your money, that don’t make sense on a spreadsheet, they don’t make sense on paper, if they work for you, if they’re reasonable, then it’s the right thing to do. That’s had a big impact on how I think about my own money.
VK: Wonderful! You start your book with a quote from Sherlock Holmes that the world is full of obvious things, which nobody by any chance observes. Tell us about those obvious, very important things that you have observed and that people in general, don’t observe about money and investing.
MH: I think the big thing in money is that people who are very educated and have a lot of financial experience tend to completely ignore the simple stuff that works because it’s too simple for them to think about. So, you have people who spend 80 hours a week trying to beat the market, but they’re not saving enough money, or they’re buried in debt. Like the simplest basic things that are too boring for them to think about. They’re spending all of their time trying to find alpha and factor investing whenever it might be. And the simple stuff is blowing right past them. That to me has always been astounding that the basic stuff is ignored.
I think this is true in medicine as well. Like you can have a brilliant Harvard trained doctor that understands everything about medicine, and they smoke and they’re overweight and they don’t exercise. This is a really basic stuff that gets ignored and it gets ignored because it’s boring, and therefore the most educated people aren’t interested in it.
I think that’s the simple stuff that no one observes in life is really important. The other thing that’s maybe relevant to today’s market is the combined influence of low income, poor traders. So, you look at Robinhood, the average account balance is like $1,500 or something. It’s nothing. But multiplied by 30 million accounts or whatever it is, it’s tremendous influence. And you get things on GameStop and AMC that baffle the smart money, billionaire hedge fund managers, because they’re dealing with teenagers. Like if you’re a billionaire hedge fund manager, you don’t think that teenagers trading from their mother’s basement are going to impact your life. But in aggregate, those teenagers have a lot of influence. And this was true in politics as well, where the combined influence of uninfluential people can be enormous. And, therefore, you get these political trends that sophisticated, educated people didn’t see coming because, individually, every voter doesn’t make any difference, but in aggregate they can completely change the situation. So, the aggregate influence of uninfluential people is another thing that tends to go unnoticed in the world.
VK: Yeah. As I have experienced over the past 18+ years of being an investor, I think one of the reasons most people fall into problems in investing or general decision-making in life and work is that we are generally not able to draw a line between being bold and being reckless. And a lot of which we are seeing in the market today, like you give an example of the Robinhood investors. How does in your experience can one define that line between boldness and recklessness while making investment or any of decision?
MH: I don’t mean to be flippant with this answer, but the only way you can tell is hindsight. That’s the only way you can tell whether something was bold or reckless. All investing is, is probability. And then you want the odds to be in your favour. And when the odds are less than a hundred percent and you make a decision and the outcome is not a hundred percent guaranteed, that means that you can make a good decision that doesn’t work, and you can make a bad decision that does work. It’s really hard for us to tell which was which. And a lot of times when you have a trader or a hedge fund that blew up, or a hedge fund that became a multi-billionaire, they may have made the exact same decisions and just ended up on the different sides of bold and reckless.
I think Daniel Kahneman made the point that whenever there is extreme success, there’s always an element of luck. Because what extreme success is, is you took a chance that had a low probability of success and it ended up working. And so, in that situation, you made a decision that had a 1% chance of working and a 99% chance of not working. The fact that it worked is great and you might deserve credit for that, but we also have to understand that like, most people who do the exact same thing, make the same decision, are going to end up with a vastly different outcome.
I use the example in the book of Bill Gates. Is Bill Gates smart and hardworking, like a visionary? Yes. Like a thousand times, yes. He’s the hardest working visionary of our generation. But did he also get lucky in a way that had complete influence on his outcome? Yes. Like full-stop yes. And that’s not bad. I’m not saying that to denigrate Bill Gates in the slightest. I’m a big fan of his. But it’s true for all areas of big success. And what’s really important is that ordinary people, when they are finding people to admire, finding role models, pick the people who have been the most successful. I want to be Warren Buffett. I want to be Elon Musk. I want to be Bill Gates. And the more successful your role model is, the lower the odds that you’ll be able to emulate their success. Not because you don’t have the skills that they had, but because you cannot replicate the luck that they had to get them there. That I think is really important. And I think it leads to a lot of unhappiness for people who, when they’re infrequently able to live up to their role models because they can’t replicate the luck. They can replicate the skill, the talent, the hard work. But if you can’t replicate the luck, you’re not going to get the same outcome. And it’s really important. Therefore, when you’re looking at people like Warren Buffet or Bill Gates to try to take away the lessons from that, that you can replicate, you can’t replicate their luck, but can you replicate something like patience, you can probably replicate that, but you can’t replicate the market environment that Warren Buffett was trading in 1950 where he earned 70% annual returns. That can’t be replicated, but you can replicate some things. And just distinguishing those two, I think is really important.
VK: Can you replicate simplicity? The idea of being simple? How do you manage to keep things so simple in this complex world? What’s your secret mantra?
MH: My wife said something last week that I thought was really funny, but true. She said that I keep things simple because I’m not smart enough to make them complicated. It made me laugh but I think it’s honestly the truth. And I think there are downsides to extreme intelligence in terms of not being able to simplify things. Now, there are people like Richard Feynman, who is both a genius and can simplify things, but that’s really rare. Most people, if you’re really smart, struggle to simplify things. And I think there’s some sweet spot where you are smart enough to understand what’s going on, but you’re not so smart that the simple stuff bores you. And maybe for my writing, I’ve hit that sweet spot of just like, I’m not smart enough to make it more complicated. If you ask me to write a complicated article about investing, I couldn’t do it.
It’s not that I know the advanced stuff and I’m simplifying it. Just the simple stuff is as high as I go. So that makes it easy for me to do. Now you ask – can you replicate simplicity? I think what’s true is that the simple things that work, some of those change over time. So, if you were to look at the last a hundred years of investing and you just say, “Just diversify internationally and be patient, that’s the simple strategy that’s worked.” Is that going to work over the next a hundred years? Probably, but maybe not. And therefore, maybe a hundred years from now, you’ll say all you need to do to be a successful investor is own this specific industry for this period of time. Like maybe the simple rules will change. I mean, that’s been the case for something like politics or military history that the simple wisdom has changed over time in terms of what’s worked. So, can you replicate simplicity? Sometimes, but not all the time. I think a lot of times it’s just things change over time.
VK: Your last article for the Motley fool, which was in 2016 before you shifted to The Collaborative Fund, was titled ‘Investing is a Fascinating Business.’ Tell us more about that. What are the most fascinating things about investing in your experience? And what are not so fascinating?
MH: I just think it’s fascinating because it’s a window into how people think about greed and fear. And greed and fear are not just investing topics. Those are topics that influence every aspect of your life, health, and relationships, and career. But investing brings out those emotions more than any other topic. So, you can learn a lot about yourself and other people and society by looking at how people invest. There’s so much to learn from watching. That’s why I think it’s just so fascinating. It’s just a window into how people think. And a lot of it too is because there’s so much information in investing. There’s CNBC 24×7 live coverage in the markets. We don’t do that for health. There’s no CNBC for like what are people eating today or how many hours do people exercise today.
We don’t have that data. That’d be really cool data. Like how many hours did people exercise around the world today, cumulatively? That’d be cool data to see. And we don’t have that data, but we do for the stock market. How much money do people invest today? Who bought, who sold? What did they buy? What did they sell? We have all that data to look at and we don’t in other areas of life. So that’s what I think just makes investing so fascinating. It’s just the window into how people think about the world.
VK: I agree. You’ve done a very well in your life as a thinker, writer, and I’m sure as investor too. But is there a failure that you remember the most or a mistake that you remember the most and would like to talk about here for the lessons that failure or mistake left you with?
MH: Not huge ones, at least not ones that I would talk about publicly with anyone. But I think if there is a general one, it’s that when I look back, I wish I were nicer to people. There’s never a time when that’s not the case. I don’t think there’s any time in my life where I look back and I say, “I wish I would have been a little meaner to this person,” but there’s so many when I look back and said, I wish I would have been a little more empathetic. I wish I wouldn’t have blown this person off. I wish I would have been a little bit calmer and more patient with this person. That’s always the case. And I don’t know if I’ll get better at that, but if there’s one thing that I look back and I just wish I had done things a little bit differently, it falls into that bucket.
VK: That’s a quick lesson on humility. You’re a highly thoughtful person and in that light, have you thought about or meditated on the idea of mortality? And if yes, what does it mean to you?
MH: Not that much, but yes. And to me the ultimate goal is that on my death bed, whenever that is, if I’m conscious, I have minimal regrets, probably not zero regrets. Let’s say I were on my death bed tomorrow, let’s knock on wood that I’m not, but if I were, I think I would feel pretty good. I think I’d say I’ve a good family, I’ve taught them some good lessons, I’ve worked hard, I’ve tried to add some value, and I made some friends. I don’t think I would have many big regrets. And I just want to keep it that way. That’s all that I really care about for mortality is that I don’t sit on my death bed and say, “God, I wish I had saved more money so that my family can be saved, so that my children will be okay. I wish I had done this differently. I wish I would have saved this relationship that I blew off.” Like, just as long as I have few regrets on the deathbed, then I don’t think I would feel fear of death that much.
VK: Wonderful, Morgan. We are nearing the end of the conversation, and I just have a few more questions, like a rapid fire, quick answer types. My first question is – What is the single best piece of advice you ever got?
MH: Sleep eight hours a night, eat well and get some exercise. It changes everything else in your life.
VK: What is the single worst piece of advice you ever got?
MH: Follow your passion. Because most people’s passions are not something that you can turn into a career that’s going to give you a lot of satisfaction.
VK: As an investor in the public market, what do you disagree the most on with the high-profile people on Wall Street?
MH: That investing needs to be an actively traded turn the levers or pull the levers and turn the knobs kind of thing. Investing is overwhelmingly about time versus activity.
VK: As an investor in the private market, what do you disagree the most on with the high-profile people in Silicon Valley?
MH: That investing is a transactional business, that you should make an investment with the idea of where and when you’re going to sell it versus letting a company grow indefinitely if it’s able to.
VK: If you have to keep just one book with you and give away all others permanently, which one would you keep and why?
MH: Probably Poor Charlie’s Almanack, the book that’s about Charlie Munger, because it’s full of so much wisdom that applies to so many other areas of life.
VK: That’s my pick as well. And here is my closing question. I would just love any other lessons that you feel that I have not asked the right question to extract from you. Or just a final thing that you would want to leave the audience with before we close.
MH: I would just say, if we look at the last year or year and a half, that we’ve all dealt with around the world with Covid, I think in general I’m probably more optimistic about the future than I was before. Just because whenever you go through something so traumatic and jarring and catastrophic like this, historically that’s when people start figuring out the big solutions. Like most innovation comes when the world is on fire. It doesn’t come when everyone is happy and healthy and calm. Innovation comes when there’s a big problem. And we’ve had the biggest problem of the last 80 years occur in the last year. And I think that’ll probably pay dividends that are hard to appreciate or understand today that we won’t recognize for another 20 or 30 years. And we’ll look back and say this great thing, this great medical invention, whatever it might be, occurred specifically because of Covid-19. Not in spite of, but because of it. So, I think if anything, I’m probably net a little bit more optimistic on humanity than I was a year and a half ago.
VK: That’s insightful. Thanks Morgan. I leave you at that. Thank you so much for sharing your insights and a lot of takeaways, a lot of lessons for me as well. Thank you so much for everything.
MH: This has been fun. Thanks, Vishal.