Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.
He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of the New York Times Sidney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism.
In this episode, we are joined, for the third time, by renowned author and commentator Morgan Housel. Many of you are familiar with Morgan's bestseller, The Psychology of Money, and he is back to discuss his latest book, Same as Ever: A Guide to What Never Changes. He is also the partner at The Collaboration Fund, a network of fund managers investing across asset classes while identifying and supporting companies at the intersection of for-profit and for-good. In our conversation, we delve into the timeless principles that shape our perspectives of the world and why things are the Same as Ever. We discuss the importance of holding cash, challenging traditional analytical approaches and encouraging a broader reflection on life beyond numbers. Discover the recurrent nature of once-in-a-lifetime events, the pitfalls associated with the insatiable desire for certainty, the value and power of storytelling, and the complex interplay between incentives and expectations. Gain insights into the value of forecasting behaviours instead of market dynamics, why pessimism is more common and more captivating than optimism, embracing slight inefficiencies on the path to success, and much more! Don't miss this engaging discussion with a master storyteller and gain new perspectives on finance, human behaviour, and the principles that remain the Same as Ever with Morgan Housel. Tune in now!
Key Points From This Episode:
(0:03:28) Why it is important to understand the aspects that never change, with examples.
(0:05:58) Morgan explains the value of random and seemingly inconsequential events.
(0:07:43) Discover the most persistent characteristic of risk and the ways expectations impact behaviour and decision-making.
(0:13:04) How he has been dealing with the success of his book, Psychology of Money.
(0:15:11) What makes once-in-a-lifetime events more common than expected and the problems that a desire for certainty brings with it.
(0:19:16) Leveraging storytelling to understand the world and how to filter out the good information from the bad information.
(0:25:41) Explore the role of incentives in influencing expectations and how calm can turn into crazy.
(0:31:06) Learn how success can develop into failure and the problems that stem from investors trying to squeeze too much too soon from their investments.
(0:37:13) Advice for understanding the normal ‘growth rate’ and what motivates innovation.
(0:42:29) Balancing stress and adversity and why being slightly inefficient is a good thing.
(0:46:46) Navigating hassle and nonsense on the path to success.
(0:48:30) The time scale differences in materializing good news and bad news.
(0:50:31) Strategies for combining optimism and pessimism to make informed and effective long-term decisions.
(0:53:03) Examine the challenges of predicting the impact of future innovations.
(0:55:43) The tendency for people to perceive others or businesses as better.
(0:58:38) Hear about the difference between permanent and expiring information.
(1:00:36) Reasons why complexity and length are appealing and how personal experiences shape perspectives.
(1:05:00) Morgan shares the biggest takeaways from his books.
Read The Transcript:
Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.
Cameron Passmore: Welcome to episode 290. This week, we welcome back for a third time, well-known author and commentator, Morgan Housel. He's here to talk about his most recent book called Same as Ever: A Guide to What Never Changes. I think many listeners, Ben, are well aware of who Morgan is, and likely read his first book, The Psychology of Money, which was a monster bestseller, and he'd shared with us that it's now 5 million copies sold. That's even more than I thought. Just an incredible blockbuster success. Same as Ever was, in my mind, every bit as good and just as fascinating.
A bit of a background, Morgan is the partner at the Collaborative Fund, author of these two books which I mentioned, and he also has an exceptional blog that comes in every couple of weeks, and every one of them is extremely insightful and well-written. You can find that at collabfund.com/blog. Very worthwhile to sign up for that subscription. This conversation, I thought was really fascinating. I mean, Morgan has just got this ability to take stories and books and history and weave them into sensible observations that are just so simple, elegant, yet profound. What did you think?
Ben Felix: I like the book, too. He uses stories to go through a bunch of things that he's saying, don't change over time. I'll let you tell them more about what those things are. We tried to ask him questions that were based on the things that don't change, and talking about those things. But a lot of it comes back to human behaviour, where the facts of each situation change over time, but the way that humans react tends to be pretty similar. That's in very, very broad terms, how I would summarize the thesis of the book. It's a very pleasant read because it's all told through stories. I did enjoy it. Morgan is a very impressive speaker.
Cameron Passmore: Yes.
Ben Felix: We talked at the end about how when you've said something a hundred times, you get pretty good at saying it. It really shows. He's very good at talking about his book.
Cameron Passmore: This is Morgan's third time joining us. He was with us back on episode 128 to talk about the book, The Psychology of Money. He also joined us on episode 191 to talk about his reading habits.
Ben Felix: Lots of good insights. I was just thinking about it, we had the episode recently with Scott Cederburg, talking about how great stocks are in the long run relative to bonds. We talked with Morgan during this episode about, in his view, why it's super important to hold cash. It's just a very different way of arriving at that conclusion than the Cederburg analytical approach. Morgan talks about that, too, that you can't answer everything in life with analysis and numbers. There's interesting stuff like that throughout the episode to reflect on.
Cameron Passmore: It's a good point. Okay. With that, let's go to our conversation with Morgan Housel.
***
Cameron Passmore: Morgan Housel, welcome back for the third time to the Rational Reminder Podcast.
Morgan Housel: Nice to see you guys. Thanks for having me back.
Cameron Passmore: Yeah. Great to see you again, and congratulations on your book. It's fantastic.
Morgan Housel: Thank you.
Cameron Passmore: Let's kick it off. Why is it important for people to understand the things that never change?
Morgan Housel: I think for me, this idea really started with just being involved in the financial media for the last 17 years, and becoming disgruntled, almost to the point of cynical about how bad everybody was at forecasting. Virtually, the entire financial media space is forecasting. When's the next recession? When's the next bear market? That's what it's all about. Nobody's any good at it. That's hardly an exaggeration.
I took that observation with also, this idea that I'm an amateur student of history. Most of what I read is history. It would always just astound me when you're reading history about something that happened 50 years ago, or 500 years ago, when you can come across something where you're like, “Oh, that's exactly how it works today.” The details are different. The characters are different, but it's the same behaviour. You put those two together, it's like, look, we are not good at forecasting what's going to change. But can we put all of our emphasis on these things that are not going to change?
Those things tend to be behaviours about how people respond to greed and fear and risk and uncertainty. I think if you put your weight into those things, then you do have a fighting chance for trying to understand the future, even if you or anybody else has no idea what is going to change.
Ben Felix: Can you talk more about at a fundamental level, what does not change over time?
Morgan Housel: There's this great quote that I love from Voltaire where he says, “History never repeats itself, but man always does.” I think that's really gets to the core of it, of the details of what's going to change. The technologies, those always change. What industries are going to dominate? That always changes, and it's nearly impossible to predict with foresight what that's going to be.
How people respond to changes tends to be completely stable over time. We have no idea what's going to cause the next bear market, or what industries are going to be impacted or when it's going to occur, but we know exactly how people are going to respond to it, because that's never changed. It's the same with any military conflicts or any different political upheaval, natural disasters, how people think about in their own lives, greed and fear and risk and opportunity. Those things are very stable over time. They're just innate parts of human behaviour.
To me, it's always been about, rather than trying to study the details of different industries, or different companies, how can you try to understand how people think and how you yourself think? Because those are the things that tend to be more stable over time that you can put your emphasis into understanding what the future is going to bring.
Cameron Passmore: Further to that, Morgan, how important are random, seemingly inconsequential events to the way that the future does unfold?
Morgan Housel: I think if you think about the most important news stories in the United States over the last 100 years, you would probably come up with five or six different news stories. You would say, the Great Depression, Pearl Harbor, leading to World War II, 9/11, COVID, and maybe in more recent times, Lehman Brothers going bankrupt.
The common denominator of those events is that virtually, nobody saw them coming, at least in the form in which they came, until they actually happened. If you're talking about Pearl Harbor and 9/11 and COVID, then really, nobody saw those things coming, at least when they were going to occur. Even Lehman Brothers, in which there were people who were, of course, saying, “Oh, there's a financial crisis brewing.” The details in which it happened and how it played out were completely unforeseeable. A little detail there, Barclays was seconds away from buying Lehman Brothers the day before it went bankrupt. There's so many alternative histories of how it could have turned out that were impossible to see coming.
The things that move the needle the most, that have more cultural and economic impact than anything else that comes before that are usually things that you could not see coming. It’s these out-of-the-blue events that were not on anyone's radar, not on any economic forecast, any analyst outlook before they happened and did all of their damage. If you think if you are somebody who studies financial media seven days a week. Think about all the news stories that you read over the past 24 years. You read about companies raising guidance and where interest rates going to go up by 10 basis points, or 20 basis points. There's hundreds of news stories every day. More or less, the only ones that mattered were 9/11, Lehman Brothers, and COVID. Everything else was an offshoot of those. The things that actually matter are these things that by definition, nobody could have seen coming.
Ben Felix: What would you say is the most persistent characteristic of risk over time?
Morgan Housel: There’s this a great quote from Carl Richards, a financial advisor. He says, “Risk is what's left over when you think you've thought of everything.” That, I think, is really what it is. We can spend all day thinking about the risks that we can envision. Today, it's the risk of a soft landing or a hard landing. All these things that people talk about all day long. That's good. That's important. Or in your own individual life, it's like, I have a big project coming up at work. I'm up for a promotion. There's all these risks you can envision that you should put emphasis into.
Whether it's the macro-economy, or your individual life, every single time, in hindsight, the biggest risk is what nobody saw coming. As I mentioned, September 11th and COVID, those things that you can't see coming. One consequence of that, when people think about risk in their own lives and how to manage risk, particularly in their financial lives, is that if you are only saving and preparing for the risks that you can envision, you are going to miss a surprise 10 times out of 10. Obviously, makes sense when you frame it like that. Most people who think they have a very good financial plan, they're like, “Oh, I need to buy a house in five years, and I'm going to need a new car in four years. I need to retire in 30 years.” They're planning for those things that they can imagine.
It's pretty rare that you find someone who's like, “I'm just saving for a risky world and a risky life. A world in which I might lose my job, I might get divorced, I might get cancer, whatever it might be, saving for things that you cannot envision, I think is the only way to really understand and think about risk.” When Warren Buffett was looking for a successor, this is probably 12 years ago or so now, when he put out a job rec more and less for his successor, and they eventually hired Ted Weschler and Todd Combs, who are going to take over for Buffett and Munger.
He said in that job rec, so to speak, it was in the annual letter. I’m paraphrasing, but he said, “I need to find somebody who is prepared for dealing with risks that nobody has ever encountered.” That's really what it is. If you're just data mining history and saying, “Okay, there's a recession on average every 9.7 years” you're just taking a historical analytical look at it. You're completely missing how risk actually plays out in the real world.
For individuals, at a very technical level, I think most people need more cash and liquidity than seems reasonable to them. If the amount of liquidity that you have seems reasonable and you're saving for the risk that you can envision, then you're always unprepared for what's actually going to happen. If your conservative part of your portfolio, it should make you wince a little bit. It should feel like it's a little bit excessive. That's when you know you have a fighting chance of actually dealing with how uncertain and how fragile the world can be.
Cameron Passmore: It's really interesting. How do you think people's expectations affect the way that they actually experience their lives?
Morgan Housel: I read this quote just about an hour ago, just as I was sitting here reading at my computer. The quote was, “Your fantasies derail your realities.” There's a lot of interpretations of that. What people expect in life and what they dream about comes at the expense of what they're actually experiencing in life. I think for a lot of people in the modern economy, particularly in prosperous economies like the United States and most Western countries, a lot of it is it's so easy to dream about what your future can be. I'm going to be a billionaire hedge fund manager. I'm going to be a successful entrepreneur. I'm going to be a musician. I'm going to be a pro basketball player. Those dreams seem like they're in within grasp.
Because of that, the fantasies that can come from that, whatever the fantasies might be, I'm going to be rich. I'm going to be famous. Even if you achieve that, even if you achieve that reality, it's never going to feel as good as you thought it would, because you're just meeting expectations. You're just doing what you always thought you could, which you always dreamed about. Most happiness comes from the gap between expectations and reality. It's, I expected to earn $1 and I ended up earning $2. That's where happiness comes from.
I think, especially because of social media these days, the ability for people to just have these off-the-charts fantasies about what their life is going to become because they spend all day looking at people who are richer, happier, prettier, and more successful than they are, or at least they appear that way, their expectations become so high that even if we live in a very prosperous economy, where things are going great, it doesn't feel that great. Or even it feels pretty bad.
I mean, it's very interesting right now in the United States where by any technical measure, the economy is absolutely going gangbusters on fire prosperity right now. Unemployment is 3.7%. Stock market’s near an all-time high. You can earn 5% on your cash. Debt to income levels have been declining for years, even with rising interest rates. Things are really, really good right now, analytically. But look at consumer confidence. People are as glum as they've been in years. The consumer confidence levels that we have are what you would normally see during a deep recession right now. I think at least a small part of that discrepancy, not all of it, but a small part of it is because it's just easier to inflate your expectations these days relative to what it's used to be.
I think this is like, we're just now seeing what that can do in real-time, where maybe that's the norm going forward, where even if the economy is actually very prosperous, nobody ever feels that good about it, because they're dreaming about an economy that is just ridiculously prosperous. It's like the Louis CK, where it's like, everything is amazing and nobody's happy.
Ben Felix: Your last book was this incredible success. How have you thought about the goalpost moving, or your expectations drifting as your personal financial situation has changed?
Morgan Housel: In many ways, one of the main, and maybe my favourite chapter and the same as ever is about keep your expectations low. Same as ever, as a book was trying to do that for myself. Our first book, Psychology of Money, has sold almost 5 million copies.
Cameron Passmore: Oh, my gosh.
Morgan Housel: When people say like, “Oh, then your next book is going to sell 10 million.” No, it doesn't work that way. It's very much like in venture capital or something, where like, if your first investment was in a startup called Facebook, people are like, “Oh, your next investment is going to be even bigger.” You're like, no, no, no. You can't really replicate something like that in clean ways. It's been an exercise in keeping expectations low. But I try to do that for everything in life, for keeping my expectations low. Easier said than done. Very easy for people to say, “Oh, if I achieved X, the next time I'll achieve X plus two.” That's a very natural way to do it.
I was talking to another author whose first book sold extremely well. His second book sold very, very well. His second book, by any definition was a blockbuster success, but it was one-tenth of what his first book did. I asked him how he felt about that. He said, “Even if I knew it was going to happen before the book came out, I knew that was going to happen. It still hurt.” Even if you're expecting it, the natural tendency to compare today to the past, or your future dreams is like, it's almost unavoidable in life.
In a way, that's really good, because that's what drives people to do better next time. Because so many people wake up in the morning feeling inadequate about what they've achieved in the past, that's why we have amazing technologies and medical technologies. That's why the world is so prosperous. We have this fancy equipment that you and I are recording on right now. In a way, it's great.
I heard this other quote recently that, “People are not designed to seek happiness. They're designed to seek status.” That's really what it is. A lot of status is, “I'm increasingly getting better at what I do. My income is going up. My book sales are going up.” People don't want to be on the decline, because that's a negative status. In many ways, I think, dealing with this book relative to previous books is that in real time for me.
Cameron Passmore: Very cool. What makes once-in-a-lifetime events more common than people actually expect?
Morgan Housel: It dawned on me a couple of years ago that it seems like, every year we hear about a once-in-a-century thing happening. Oh, this is a once-in-a-century flood. This is a once-in-a-century recession, once-in-a-century hurricane, whatever it might be. It happens all the time. It was like, yeah, of course it does. Because in any given year, if there is a 1% chance of a devastating flood and a 1% chance of a devastating recession, a 1% chance of a pandemic, a 1% chance of going down the list, that in any given year, the odds that at least one of those things will happen are very good.
Every year, we have a once-in-a-century event of something. Once-in-a-century pandemic, once-in-a-century stock market crash, whatever it might be. Because of that, when you experience a once-in-a-century event, I think it's easy to say, this was bad, but this will never again happen in my lifetime. That might be true, but some other form of a once in a century event will probably happen in the next six months. We're constantly surprised, even if we shouldn't be.
That's why what's happened in our adult lifetimes, let's say, 9//11, dotcom crash, housing market bubble, housing crash, COVID, all these things that you would think would be once in a lifetime events, but they happen every two or three years. I think people are just, because of how that math works, they are more surprised than they should be, and they're less prepared than they should be for these crazy 1% once in a century events from impacting their lives.
Ben Felix: Related to that, can you talk with the problems that stem from the desire that people have for certainty?
Morgan Housel: My first experience with this was the 2016 presidential election, when Nate Silver, who was a statistician who makes a lot of predictions about who's going to win the next election. The night before the 2016 election, I think, I might be getting these numbers slightly wrong, but I think he gave Hillary Clinton a 75% chance of winning and Donald Trump a 25% chance of winning. Obviously, Donald Trump won. A lot of people, even news organizations had headlines the next day to some effect of saying, “Nate Silver got it wrong.”
Nate Silver himself was like, “No, no, no, I gave him a 25% chance of winning. That's actually pretty good.” People don't want to think about the world in probabilities. They want black or white. They want someone to tell them, “This person is going to win. Not this person has a 90% chance of winning.” They don't want that. The only way to tell whether Nate Silver is right is to look at how he's done over the last 20 elections. If he says this person has a 75% chance of winning, that person needs to win 75% of the time.
We usually don't have that. Even if we do have that data, we're much more comfortable thinking in just binary black and white, yes or no. This will or won't happen. If you want good advice from your doctor, you want a doctor who's going to say, “This treatment has a 75% chance of working.” Rationally, that's what you should want. What people actually want is a doctor who tells them, “This is going to work, period.” They want certainty. It's just the observation that uncertainty is very uncomfortable to hold in your head because you're admitting to yourself that you don't know what the future risks in your life are going to be. That sucks. You don't want that feeling.
When you have a pundit, or a doctor, or an analyst who is willing to relieve that uncertainty that you're having your head by just saying, “This is what's going to happen.” You feel great and you embrace it. Even if you understand that you should want probabilities, people are much more likely to click to people who have certainties. That's why the punditry business does that. Nobody goes on CNBC and says, 68% chance of recession. Who goes on there, or at least who gets the attention is as someone who says, not only there is a recession, but it's already happening right now. That's what people want to hear. Removes all the uncertainty that they have.
I think, in a lot of fields are like that. It creates a world in which, again, it makes it very hard for people to have a good grasp on what's going to happen in the future, or what they should do today. Because everything in the world is about probabilities, but everything that we want to cling to is about certainties.
Cameron Passmore: Part of your book that I really enjoyed was where you talked about storytelling. How important are stories to the way that we do understand the world?
Morgan Housel: It's this idea that what gets people's attention and what gets people to nod their heads and follow along with you. It's rarely just the person who has the right answer who's going to do that. It's a person who tells the best story. You see this very clearly, maybe most clearly in politics, where the person, doesn't matter what party it is, it's not the person who's coming up with the best policies, who is the policy wonk and has all the data on what's best to do. It's the politician who tells the best story. It's always been like that in every country and always will be.
Stories are just much more powerful than statistics. One example that I love as an author, especially, is the book Sapiens has sold, I think, over 30 million copies. It's one of the best-selling non-fiction books ever written. Just an absolute gang-buster success. My understanding is that it has pissed off a lot of anthropologists because there is nothing new in that book. There's no ground-breaking research. There's no new discoveries. There's no new topics. What it has though is that it's extremely well written. It's just a very good story. It's a book that's hard to put down.
Even if there's nothing new in there, it's written so much better than every other anthropology book that came before it, that it gets all the attention. To the academics to whom that pisses off, I think what they're missing is that the best story wins. If you are an academic and you're like, “I came up with this ground-breaking research idea,” but you wrote it in academic jargon, you're going to go nowhere. The guy who takes the old ideas that everybody knows and tells a good story, gets everybody's attention.
My other favourite example, because I'm such a fan of them is Ken Burns, who makes documentaries about US history. Most of what are in Ken Burns’ documentary is very well-known information. Like, his documentary about the Civil War. The Civil War is one of the most documented, studied periods in US history, of course. Everybody knows how it ends. In his documentary on the Civil War, which, I think, is 14 hours long, there's no new information. Everyone knows the battles that took place. Everybody know who won. What he did is he told the most captivating story about what happened during the Civil War. Because of it, when the documentary came out in 1990, more Americans watched Ken Burns’ documentary on the Civil War than watched the Super Bowl that year.
This is something that everybody knows what happened. This is not a new story. It's just a very good story. Ken Burns, I watched this interview of him and this just knocked me off my feet. He said, when he is writing the script of a documentary, he will literally change the words in the script so that a certain word the narrator is saying matches to a certain beat in the background music. So that when a narrator says a powerful word, it hits with a beat in the background music.
You compare that to the academic historian, who's just writing in jargon in a white paper that is impossible to read. It's just so dense and rambling. Compare that to Ken Burns, you're like, of course, he gets more attention. The best story is who wins, not the person who has the right answer. You see that, too, in investing. My favourite example of this is someone tweeted this a couple of years ago. I forget who it was. But they said, “The best product that Elon Musk has ever made, it's not a Tesla car. It's not a SpaceX rocket ship. It's Tesla stock.” It's the ticker TSLA. Because he has gotten so many people to believe so fervently in the future of Tesla. Not what it is today, but the story of what it could become in the future, that you take a company that is not that profitable, if not money-losing for almost all of its history, in an industry that is synonymous with loss and bankruptcy, and you've convinced people that this is a trillion-dollar company. That is an incredible story to tell.
Elon Musk is not only one of the best engineers, he's one of the best storytellers who's ever existed in business. I think that's also true for Thomas Edison, Bill Gates, and Steve Jobs, of course. It's not their technical prowess, or it's not just that. It's their ability to tell a story about what they're doing that's so powerful.
Ben Felix: If the best story wins, how can people who want to consume good information, not necessarily the best stories, how can they filter out the good information from the bad when there's so many good storytellers out there?
Morgan Housel: I think at the society level, you can't. I mean, there's a lot in same as ever where I'm not giving solutions to these problems. I'm just highlighting what the problems are and how powerful they would be. It's always going to be the case that people will cling to the best story, even if the answer to that story that's being told is wrong.
You see this all the time in politics. The majority of a nation clinging to a disastrous idea, because it was a very compelling story. That's always been the case and always has been. It's led to enormous tragedies throughout humanity of investors clinging to stories that sounded very good, but in hindsight, were either over promises, if not outright frauds. That's always been the case and always will be.
I cling to stories that make a lot of sense to me, that are compelling to me. You do, too. Everybody does. Most of those, we're not really aware of. The stories that are most compelling to us are synonymous with truth. That's why they're so compelling to us. I think a lot of it is just how impatient people can be. To really think down and think about the mathematical, technical, scientific truth about a topic takes a lot of horsepower and patience, versus just a story that sounds good about, hey, that person's to blame, or this person's got the answer. Way more compelling.
You see this during something like COVID, where people who have no medical background, whatsoever, believe something on either side of whatever you want to believe. They either perfectly accept, just wholesale except what this expert says, or they wholesale except what this pundit says because the stories made perfect sense to them. I think most of the time, whenever the stakes are the highest in anything, you're in the middle of a war, the middle of the recession, the middle of the pandemic, that's when people's willingness to believe captivating stories is the highest. Because the stakes are so high and it's like, you don't want to go through the thought process of calculating the odds of this or that. You just want someone to tell you what's going to happen in the future. That story of, I mean, it gets back to wanting certainty, instead of probabilities.
If someone during COVID said, “This treatment will cure you, period.” That's a good story. Again, it's certain, so you're going to cling to it. Or someone says, “This scientist is a fraud, period.” There's no uncertainty there and it's a good story. You can cling to it. The higher the stakes get, the more people are likely to cling to certain stories about what is or is not going to happen in the future.
Cameron Passmore: Why are things that can't be measured important to how we think about the future?
Morgan Housel: I think it's just an observation of how imperfect people are, everybody. That people are not maximizing spreadsheets, just calculating the right answers. They're emotional and hormonal and they have incomplete information and they're seeking vengeance. They're doing all these things that don't make rational sense, but they're going to do them anyway. This has been happening forever. There's always, in every decision that gets made a big decision, there's usually at least some element of factual truth and some emotional human-level part of that decision.
If you are the person who thinks the world works perfectly rationally and it's you're just going through and it's just like, look at the numbers, do what those say. It's generally not how things work. Whether it's in wars, or recessions, or whatnot, there's always some element of people are going to do crazy things that make no sense, but they're going to do them anyways. Part of this is just understanding people's incentives. If you look at the financial crisis, the housing bubble of 15 years ago, whenever it was now, it's easy in hindsight to say, “Why in the world would Lehman Brothers package all these subprime mortgages, made to people who stood no chance of repaying those mortgages?”
Sometimes if you phrase it like that, you're like, “Well, they were greedy. They were evil. They were short-sighted,” all of which might make sense and have some level of truth. A lot of it is just the incentives of the people doing it. If you are a subprime mortgage broker in 2006, and let's say, you are a good church-going, honest, well-meaning person, but you have a job as a subprime mortgage broker, and your boss says, “If you package these subprime bonds, we'll give you a 2-million-dollar bonus this year.” Even if you know those bonds are garbage, you're going to do it. Nine out of 10 people would do it.
Even if in hindsight, you can say, “It made no sense. Why would people do that?” It's because they were incentivized to do something. More importantly, that good, well-meaning person packaging those bonds can convince themselves that it's the right thing to do. People, I think, underestimate the boundaries of their own morality based off of the incentives that they have. You might say like, “I'm a moral person. I would never do X.” Whatever it would be. I think most people underestimate that actually, if you were in incentives were to do X, you would be happy to do it. You would gladly do it, and you would rationalize it in your head. You would tell other people, that it's the right thing to do. All of us have some version of that.
Some people live with varying degrees, but we all have that. There's always these times where big decisions are made, either from society as a whole, or yourself, that don't look rational, don't make any sense, but people still do them, because there is this human element that's just trying to follow incentives in life.
Ben Felix: How does calm plant the seeds of crazy?
Morgan Housel: I read about this years ago about this crazy economist back in the 1960s named Hyman Minsky. Hyman Minsky, he was at the University of St. Louis, and most of his work was around the 1960s. If you go back to the 1960s, there was this huge burst of scientific optimism, because we were landing on the moon, and we had just eradicated polio. There was this more so than any time it's ever existed. In the 60s were the time where people said, “If smart people put their heads together, we can literally do anything.”
A lot of economists back in the 60s put their heads together and said, “We should be able to eliminate recessions,” which didn't seem that crazy of an idea back then. If you're walking on the moon, of course, you should be able to eliminate recessions. It doesn't seem like that big of a deal. Hyman Minsky came forward and he said, “You guys are all crazy. We'll never be able to do it. It's impossible to eliminate recessions.” He came up with this idea called the financial instability hypothesis.
To grossly summarize it, he basically said, if there are never any recessions, people rationally become optimistic. If they become optimistic, they go into debt. When they go into debt, the economy becomes unstable. When the economy is unstable, you have a recession. His idea was like, a lack of recessions guarantees the next recession. The longer you've gone with that recession, the worse the next recession is going to be. His idea was just, calm plants the seeds of crazy.
I think it's the same in the stock market, where if the market never fell, if there's no volatility, people would rationally put all of their money into it, because it's all upside, no downside. When they do that, valuations get very high. When valuations get very high, you have a crash eventually. The lack of crashes guarantees the next crash. I think just that observation of the natural, guaranteed cyclicality of things like the economy, or the stock market. It's actually a great thing to observe and actually, a pretty comforting thing to observe, because when you go through the next recession or the next bear market, you're less likely to say, somebody screwed up. My advisor screwed up, the president screwed up, I screwed up. More likely, just be like, “Yeah, this is what happens. This is just a guaranteed function of how these things work,” I think it's a much healthier way to think about volatility and variability in recessions.
It also makes you more prepared for them, because if you think a deep recession is only going to be caused by somebody screwing up, you're going to underestimate how common they are when you realize that they're actually caused by just guaranteed cyclicality of how the system works. Understanding that calm plants seeds of crazy, I think is one of the most comforting realizations in investing and in finance, because it just makes you so much more prepared and understanding of why the next crash is going to happen.
Cameron Passmore: Further to that, Morgan, why does success plant the seeds of his own decline?
Morgan Housel: For so many people, individuals, and companies, the reason you're successful is because you wake up scared and wanting to grind, to for people, to for companies. It's like, your own paranoia of failing is what's causing you to work hard and succeed. The reason you're doing it is because you think in your head that at some point in the future, you're going to become successful. Then you can justifiably take a deep breath and exhale and know that you've won and relax and take a nap, you've now won.
Once you do that, the thing that made you successful is gone. So many people, like the reason they're grinding is so that one day, they don't have to grind. Once they don't grind, then they've lost what made them successful. Of course, they're going to start to decline at that point. I think if you look at the people who, or the people, or the companies, or even the countries who've been successful for a very long period of time, the common denominator is a constant, never-ending sense of fear and paranoia that never goes away no matter how successful they are. The people who I think don't want to experience that, quit while they're ahead.
Whether it's an individual, like a lawyer who says, “I've done enough. I'm going to retire now.” Or Bill Gates, or Jeff Bezos saying, “I've run this company for 20 years, but it's time to pass the baton.” Those are the people who can have very enduring careers. You contrast that with all kinds of companies that had incredible, competitive advantages at one point that lost it. I use the example in the book of Sears, where it's hard to think about this today, but Sears from the 60s to the 80s had probably the strongest moat that's ever existed in any company. Nobody could compete with Sears. It was impossible, and they completely lost it. I think they're technically still in existence, but they're dead for all intents and purposes.
I think, if you look, or just generalize what happened, the fear and paranoia that made Sears so successful was totally lost because they were so dominant. The ego of the managers in the 90s was so great that we can do anything because we are Sears. Every decision that we make is great because we are Sears. The ego of that is what caused their decline. It's the opposite of what made them great. I've always really admired people who quit while they're ahead. It's a weird thing to admire because you want people to achieve all the greatness that they can.
I was using the example of Jerry Seinfeld, of somebody who was on top of the world when he decided to pull the plug on his show. General Electric, which owned NBC at the time, was going to pay Jerry Seinfeld a 100 million dollars for one more season. Him personally would get a 100 million dollars for one. He said, “No.” Later, there's a book called Seinfeldia. That's a great book on the history of the show. Jerry says at one point, he says, “The only way to know where the top is is to experience the decline. I had no interest in that.”
Even though the show was on top of the world, he's going to quit while he's ahead, so he never has to experience the decline. I love that. I have so much admiration for that. Again, Jeff Bezos, Bill Gates, people who were the absolute best at what they do, and were still by all accounts at the top of their game, and they passed the baton. They say, “I'm done. I'm going to move on to something else.” I think, at least one of the reasons they do that is because they don't want to experience the decline. It's a really admirable trade that I've always looked up to.
Ben Felix: What problems come from investors trying to squeeze too much too soon out of their investments?
Morgan Housel: It's always a case that, okay, if you're a novice student of investing history, and you say, “Historically, the stock market has returned about 10% per year.” Great. That's awesome. The obvious need your question then is, how do I get it faster? How do I get more of it? How can I just speed that up? That's the cause of 99.9% of investing mistakes is taking what the market will just give you for just par for the course and trying to squeeze it into a shorter time period. I think, for a lot of things in life, there is a normal speed, a natural speed, a natural size, a natural return that if you are trying to speed it up, or make it bigger above the natural side, you are liable to fall way below it.
It would be interesting, it would be great if the market returns 10% per year, and you're going to try to do better than that. If you're lucky, you'll do better than that, but the downside scenario is you're still going to earn 10% per year. You're just going to fall to average. That would be great. But it's almost never the case. It's the people who are trying to earn 15% per year. Most of them will end up earning 5% per year. They're going to do worse than the average. Most things in life, if you try to compress the natural size, the natural speed, the natural return, you're going to end up lower than you would have if you just tried to go for the natural, normal speed.
I think the same philosophy is true for a lot of businesses, that there is a natural growth rate and a natural size of your business. A lot of problems are just trying to become bigger and faster than that normal, natural size. I'll tell you one example where you see this a lot in is people on social media that are trying to increase their following by doing what the algorithm tells them is the right thing to do. They come up with some of the most cringe-worthy content, and they're trying to grow as fast as they can and do what's going to get the most likes and the most retweets. They're going to burn their audiences out at some point.
There was one point where they were making great content, but then they're just like, “I need more followers. I need to grow, grow, grow, grow, grow.” They lost what was actually making them great and they're going to end up lower than where they were before. So many businesses that are like, look, the natural growth rate of your business is 5% per year, but you have a CEO who says, “We have to grow by 20% per year.” Well, you know where that's going to end up eventually. Any time you're trying to exceed the natural rate of whatever you're doing, you're liable to fall well below that rate.
A lot of things in life, including investing, it's like, A, know what that natural size is, know what that natural growth rate is. B, realize that anytime you're trying to exceed that, you're actually likely to fall way below that normal line in the end.
Cameron Passmore: How do you think you'd know what the normal growth rate is? How would you advise people to think about that?
Morgan Housel: In investing, I think just looking at the average historical return is imperfect, but the best way to look at it. In the United States, it's been 6% per year after inflation. Six percent real returns. Any time you have a portfolio manager or an economist who's saying, “I can get you better than that,” especially way better than that. You have someone who's saying, “I can get you 20% real returns.” They are trying to go so far above the normal, natural rate of returns, that the risk imposed there is enormous. It's not to say that nobody can do it. It's just understanding what the delta is between the normal rate and what you're trying to achieve is really important. The other thing is in the stock market, you can say, there is a natural time horizon in which you should be willing to invest before the odds of earning a positive return are squarely in your favour.
Historically, it's about 10 years. Where historically, if you are investing for 10 years, there's an extremely high chance you're going to end up with a positive return. Anything less than that, you're relying on luck. If your time horizon is one year, or three years, or five years, there's a decent chance you're going to end up with a negative return at the end of a two-year period, or a three, or five-year period.
If you are the person where you're like, “I need to retire in three years and I can't lose any money,” you're trying to go outside the boundaries of what the historical norm is. I think, just the Bayesian odds of what's happened in the past using that as the “normal,” it's very imperfect, but I think it's the best way to do it. I mean, there's all these other examples of businesses that tried to grow way beyond their customer base. That's a much more of an art than a science of measuring what it is. Any time that I think you are trying to use any marketing tactics to fool your customers into believing that your product is better and more useful and more valuable than it actually is, most of the time, what you're actually doing is trying to exceed the natural growth rate.
Your customers are telling you, we are willing to grow this business by 5% per year. But the business that has to grow up by 10% per year, the only way they're going to achieve 10% growth is by fooling their customers into believing that the product is more valuable than it is. Just like all these examples, once you try to exceed that level, you're much more likely to actually fall below it, because of the cost and the consequences of that.
Cameron Passmore: Interesting. What role do stress and adversity play in individual and societal success?
Morgan Housel: It all gets back to incentives. Everyone is driven by incentives. If things are good in the economy and the world is peaceful and the world is great, then you as an entrepreneur might say, “If I create this new product, I might get rich.” That's a great incentive. That might get you into gear and gets a lot of people into gear. Then, there's all these different incentives. At some point, if the economy is really doing poorly, you could say, “I need to stabilize my business, or else, we're going to go bankrupt.” That's an even bigger incentive that will really get you into gear for figuring things out. That's when you're like, “We need to lay people off. We need to invent a new product.” That's a much stronger incentive than I might get rich.
Then you have these other incentives, like the world faced in the 1940s, when it was like, if we don't figure out new technologies and new military strategies if we don't figure it out today, Adolf Hitler is going to take over the planet. That was the incentive that people faced in the 40s. That incentive sparked the most innovation and the biggest problem-solving that has ever existed, I think, in humankind. The stakes were so high in the 1940s, that the amount of technology and the amount of new innovations that we got is completely off the chart.
In this little six-year period during World War II, we got nuclear energy, rockets, jets, penicillin, microwaves, it’s what started rockets and satellites, all these things happened because people were so terrified. It's the same during the Great Depression of the 1930s. The 1930s were the most productive era in US history, because every business owner in the 1930s, during the Great Depression, they woke up every morning saying, “If we don't get more efficient and figure out how to cut costs, we're going to go out of business tomorrow.” Because of that, they created all these new business technologies and like, everything from the supermarket to the laundromat were invented in the 1930s, that people desperately, frantically trying to solve economic problems.
If you look historically at what innovations happen when the economy is strong, versus what happens when everyone is scared out of their minds, the fear and the stress of recessions and wars and pandemics massively exceeds the innovation that comes when everybody's happy. It's way too early. You could say this about COVID, too, that it's very likely that we will look back in 20 or 30 years and say, because of COVID, not in spite of, but specifically because of COVID, we created and discovered all these new medical technologies that have improved everybody's life.
Just in the way that, look, World War II was crushing and devastating, but it left us with rockets and satellites and nuclear energy and penicillin and all these things that we would not have had if we didn't have the war, it's just a case that like, that's what gets people innovated and moving. It's not comfort. It's stress.
Ben Felix: That part of your book really got me thinking. What do you think at the individual level? Do you think eliminating stress and adversity from an individual life is a good life objective?
Morgan Housel: It's always a balance, because at one end, you could say, look at the trust funder who never has to work a day in their life. Do they have a good, happy, fulfilling life? Nine times out of 10, no. It's the opposite. They become neurotic. They become lazy. They don't really have anything to be proud of. Then you could say, the single mother living in poverty and working three minimum wage jobs, she has all kinds of stress and adversity. Is that good for her? No. It's terrible for her. She would have a much better life if she could remove some of that. It's always some balance in between.
I think it's hard for a lot of people to find what that balance is of like, what is the balance between enough stress to get you going and motivated, but not so much that it's just going to become crippling. Here's what's interesting. In World War II, did a lot of new technologies come out of Europe? No, not necessarily. A lot of them came out of the United States. Because I think in Europe, for most of Europe, the stress was so crippling. It was death and bombs. It was not the kind of thing where it's like, “Oh, let's go to the lab and figure out a new technology.” In the United States, we were scared out of our minds. But it was not such immediate day-to-day stress that we were incapable of creating all these new things. I think that's where the balance lies in there.
Cameron Passmore: Why is being a little bit inefficient generally a good thing?
Morgan Housel: I think if you appreciate the uncertainty of the world, then you realize that you need room for error in your life in order to do well. For a lot of people, what this comes down to is most of us today have thought jobs, where we are working with our head. What we are doing in our jobs is making decisions with our ideas, rather than with our bodies of digging a ditch, whatever it would be. In that world, it seems so obvious that you need time to think. You need time to just let your mind wander and think about problems and talk to other people.
Of course, it's what you should need. If you have a thought job, you need time to think. But very few workers do. What their bosses want them to do is sit at a desk and type and keep moving and do things that look like work. Even if what would actually be the best thing for you in that position is to sit on the couch and think, or go for a walk and think, or even just go home for the day and just ponder the problem that you're dealing with at work. That would make you more productive. To most people, that doesn't look like work. It looks like laziness. Because of that, what looks very unproductive is actually the most important thing that you can do.
I think, leaving time in your room, leaving time in your schedule to do things that look unproductive, unscheduled activities is incredibly important. It's like, this is also true at the business level. It's interesting what happened in the last couple of years, where for most of the last 20 or 30 years, the push in manufacturing around the world was become more productive, more efficient, more efficient, just in-time manufacturing, squeeze all the inefficiency out of the system. They did that, it was well-meaning. It was like, that's how we're going to maximize profits is to have no room for error, no inefficiency in the supply chain.
Then when COVID hit, everything broke. In 2021, all the supply chains were completely broken down and cost $25,000 to ship something to China. Everything just fell to pieces. It was because of supply chain, all the efficiencies have been rung so tightly out of the system, that when there was even a small hiccup, everything just fell to pieces. All these companies would have been so much better off if they had 10% or 20% inefficiency in their supply chain, more inventory sitting in the warehouse, more excess capacity sitting around. That would have hurt their earnings in 2019 and saved the company in 2021.
It's always a case that once a decade, the world breaks. During that year, during that period, once a decade when the world breaks, the inefficiency that seemed like it was a headwind during the rest of the time is your most valuable asset that you've ever had. Whether it's your individual life, or in a company, having 10% or 20% inefficiency in your life on purpose, time to think, or just room for error to deal with the next surprise is absolutely vital.
Ben Felix: That speaks to your point earlier about having more cash than you think you should.
Morgan Housel: Most of the time, what looks like a drag and looks like it's hurting your returns, it is once per decade, let's say, is going to completely save your butt and become the most important asset that you have.
Ben Felix: How much hassle and nonsense do you think people should be prepared to deal with on the path to becoming successful?
Morgan Housel: This is a very similar topic of, I'm making these numbers up, but I've often thought like, almost everything you do in life, you should have a 10% to 20% allowance for just nonsense and ******** in your life. Your flight's going to get delayed. There's going to be traffic. The waiter is going to screw up your order. Your customers are going to complain more than they should. Just an allowance for things not going according to plan. I remember years ago, I was on a flight and the flight was delayed and then they changed our gates. I think they changed our gates twice maybe.
There was this guy on the flight who was a CEO of a company. I know that because he told everybody in the gate area that that's what he was. He was one of those kind of guys. He lost his mind at the gate agent. Profanities left and right and screaming. I remember thinking to myself, how do you become that successful as a CEO of a company with no tolerance for inefficiency, no tolerance for hassle? How does that possibly work? The answer is probably that he doesn't even know how inefficient things like, people just don't bring him bad information.
Brent Beshore, a good friend of mine who runs basically, a private equity firm that owns lots of small, medium-sized businesses, he has this quote that I love. He says, “Every business is a loosely functioning disaster. Some of them happen to be profitable.” I think that's really what it is. You have to have a huge allowance in life for just things not working and for messy people and for bad decisions and for untrustworthy people. If you don't have that allowance, both in your actual day, but also in your psychology for things going wrong, you're going to have a very hard time in life. You need that allowance for ******** in your life.
Cameron Passmore: Can you talk about how the time scale tends to differ for how good news and bad news materialize?
Morgan Housel: Most bad news happens very fast. Most good news happens very slow. There are exceptions to both of those, but most of the time, that's how it works. Bad news is something that happens in an instant. Pearl Harbor, September 11th, COVID, these things that are like, literally one hour, everything's fine, and the next hour, the world's completely changed forever. There's almost no equivalent to that for good news. What would the good news equivalent be of September 11th, where the entire world woke up and everything was fine and by 9AM, the world was falling to pieces. There's no equivalent to that with good news.
Most good news is slow compounding. The example I use on the book is the massive improvement in heart disease fatality over the last 70, or 80 years has saved tens of millions of lives, but we almost never pay attention to it, because what happened is heart disease, mortality improved by about 2% per year. Now, if you compound 2% per year for 80 years, the result is extraordinary, which is what it's been. But in any given year, or any given month, or any given news cycle, nobody's paying any attention to it.
You're never going to see a news headline that says, “Breaking news, heart disease mortality improves by seven basis points.” You're never going to see that. What you're going to see is “Breaking news, there's a terrorist attack. Breaking news, plane crash.” Things that happen very quickly, it's always what gets your attention. I think the difference between the speed in which these things occur, it really plays into why pessimism is more common and more captivating than optimism.
To be an optimist, you have to believe in slow, compounding good news. Where to be a pessimist, you just have to turn on the news and see what happened very quickly yesterday. Obviously, if you are a student of history, too, you should be an optimist. For most of history, things get better for most people most of the time. If you are just paying attention to what's on the news, it's mostly going to be bad news, because that's what happens so fast, you can't take your eyes off of.
Ben Felix: How do you think people should be combining optimism and pessimism to make good long-term decisions?
Morgan Housel: I dedicated the book to the reasonable optimist, mostly because I dedicated my first book to my wife and kids and parents. I ran out of people to dedicate it to. I was like, I'm going to dedicate it to the reasonable optimist, which as I define it, it's my own definition, but if you are somebody who thinks the world is going to be great, the future is going to be great. That's not optimistic. That's complacent. It never works like that. To me, a reasonable optimist is somebody who thinks in the future, things are going to be much better than they are today. But the path between now and then is going to be a constant chain of landmines and obstacles and setbacks and disappointments and recessions and bear markets.
If I have the fortitude to endure all of that, then the payoff is going to be great. I should be optimistic about the payoff. But let's not fool ourselves about what the path between now and then is going to be like. That to me is reasonable optimism. That's also balancing optimism and pessimism at the same time. Getting themselves to coexist.
There’s this great quote that I love from Admiral Stockdale, who was a US Admiral who was a prisoner in Vietnam. He was the highest-ranking prisoner during Vietnam. He was talking after the war. I'm paraphrasing him here. He said, “You know who did the worst as a prisoner, the people who just lost it, couldn't make it. It was the optimist.” Because what the optimist would say as they're sitting in prison would say, “We're going to be home by Christmas. I know it, we're going to be home by Christmas. War is going to be over.” Then Christmas would come and go and they would be crushed. They would lose all hope once that happened.
He said, “The people who did the best were the people who balanced optimism and pessimism.” They would say, “We are going to go home someday. I'm going to see my wife and kids again someday. But we're not going to go home by Christmas. This war is not going to be over by Christmas.” Those are the people who actually made it. They were combining optimism and pessimism at the same time. I think that's an extreme example of what needs to occur in a lot of life. I'm highly confident that the economy that my kids will work in is going to be better and more prosperous and have more opportunity than we have today. I also know, the path between now and then is going to be a disaster, constant chain of bad news.
Those two things don't cancel each other out. I think a lot of people are either optimists, or pessimists. It's one or the other. You see this a lot in social media. It's either the tech optimist who just says, AI is going to be so great. No one's going to have to work in three years. Or it's the pessimist of like, dollar is going to zero, put all your money in gold. A lot of it is one of those two things. I think that people who actually do well over time are the people who get it to coexist. It's the Stockdales of the world. We are going to have a great future, but it's going to be a mess between now and then.
Cameron Passmore: Why is it so hard to predict the impact of future innovations?
Morgan Housel: Most innovations are not just somebody invent something and it goes on to change the world. It's all the different permutations of what it could become that actually goes on to do something great. Here's one example of this. When the Wright brothers created the airplane, they themselves did not think it would be that useful for anything, other than maybe the military. A lot of people who were trying to create planes were just doing it because they thought it was cool. The people who are really optimistic about it like the Wright brothers were like, “Hey, we could strap a machine gun onto this. The military is going to be very interested.”
Nobody, including the Wright brothers themselves, envisioned that what this is actually going to do, the biggest impact this is going to have is creating a really big version of this and basically, making it a school bus that you can take people all around the world in this thing. Nobody saw that coming. When you create something great, what other people are going to do with that invention and the different ways that they're going to twist it and add other inventions to it, that is what different inventions can eventually become.
One other example that I think about is Thomas Edison did not invent the light bulb. What he did, there are other people who invented things, who had made things that looked exactly like the light bulb that Thomas Edison eventually became famous for. What Thomas Edison did is he augmented the filament, because all the other light bulbs that other people had invented were way too bright. They would blind you by looking at them, and they could only last for five or 10 seconds before they burnt out. What Edison did is he created a filament that was not blinding and could last indefinitely. That was what he did. That was incredible. He deserves all the credit for that. Let's acknowledge that what he actually did is take a bunch of other people's inventions and twist it and tweaked and turned them into what he did. Every other invention is like that.
Jeff Bezos was recently giving this interview and he was like, look, when he created Amazon in the 1990s, he did not need to create a payment system. It already existed. It was called Visa. He did not need to create a delivery system. It already existed. It was called UPS. In a very real way, what Bezos did is he took all these inventions from other people and he combined them and twisted them and augmented them into a company called Amazon. Every invention is like that. When somebody creates Visa, it's very easy to just look at and say like, “Oh, that's a payment network. That's great.”
It's very hard to look at the creation of Visa and say, “This is eventually going to lead to Amazon, which is eventually going to lead to same-day shipping of anything that you want in the world.” It's hard to fathom what any invention is going to become because you can't fathom all the ways that other people are going to use that invention in their own unique way to create something new.
Ben Felix: Why do people often think that the grass is greener in other people's lives or other people's businesses?
Morgan Housel: It's always been like this, but it's so much more common now with social media, where there's this great phrase that I like from Jonathan Haidt of NYU where he said, “Social media is not a place where people go to communicate. It's a place where people go to perform for each other.” That's really what – it's a performance. It's true for me. It's true for everybody. I post pictures of my kids on Instagram having a good time. I don't post pictures of them having tantrums. You go to the highlight reel, what you're doing, it's a performance of here's how great and wonderful my life is.
I have not been able to find who said this, but it's such a brilliant quote. They said, “The grass is always greener on the side that's fertilized with ********.” It's such a beautiful 10 out of 10 quote. I love that. It's true for a lot of things in life, that if you think that this person is happier, this company is better to work at, this person is smarter, most of the time, not always, but most of the time, it's because you're not getting the full picture of what's actually going on. I think we've seen some pretty stark examples of this in recent years, where – I'm from Seattle and there was no greater king and queen maybe of any city than Bill and Melinda Gates.
Bill Gates created the technology of his generation, became the richest man in the world, gave it all the way to cure malaria. Literally, a fairy tale life, and then they get divorced a couple of years ago. You very suddenly, overnight realized, that it was not as happy and fairy tale-esque as it looked. I'm not picking on them, because there are so many examples of that. I'm pretty sure you and many people in this industry have been a lifelong admirer and fanboy of Warren Buffett and still am. But the book, The Snowball, which is the most deep biography about Buffett, really goes into detail that is well-known, didn't make Buffett very happy about the more unpleasant parts of his life, his personal life, his family life. His wife left him. His relationship with his kids, whatnot. There are so many aspects of his life. I still consider him one of the greatest men to live in modern times. That's how I would phrase it.
But if you're only looking at what is public, his wealth, his fun little quips, giving the money away, that is the grass is greener on the side that's fertilized with ********. If you take the whole picture of what his life is, all of his relationships and whatnot, it's good, but it's not as great as you would think it is. I think when we always have an incomplete view of people's lives, my life, your life, everybody's life, it's so easy to say, “That person has a better life than I do,” because you are keenly aware of all of your problems and skeletons and flaws. But all I tend to see are the things that you're good at.
It's easy to say, “I have all these flaws that nobody else does,” which is almost never the case. Whatever you're suffering from, there's a billion other people who are suffering from it as well. By comparison, it just makes it easier to think that other people are better and happier than you are, when it's usually not the case.
Cameron Passmore: What is the difference between permanent and expiring information?
Morgan Housel: Most people who listen to this look at a lot of financial information. If you come across a headline that says, Microsoft beats earnings by three cents per share, I'm not going to say, that's irrelevant information, but it's expiring information. Because even to someone for whom that is relevant to today, if you ask them in 10 years, how important was it that Microsoft beat earnings by two cents in Q1 2024? It was not important at all. It's expiring information. But if you understand how people respond to greed and fear, that topic will be as important a 100 years from now as it is today, because it was important a 100 years ago.
It's important to segment the information that you come across as permanent versus expiring. Sometimes you find permanent information in the news. The big events that shake history to repeat it for the 20th time in this, World War II, 9/11, COVID, that is permanent information, because those events will change the world forever. It's not just so easy to say, if it's in the news, it's expiring information. Versus if it's in a psychology textbook, it's permanent information. It tends to be like that.
It's important to understand what you're coming across, to ask yourself, is this permanent or expiring? The simple litmus test is when I read the news, or read a book, read anything is to ask myself, will I still care about this in one year? Will I still care about this in five years, or 10 years? And 99% of the time, the answer is no. A lot of times, it's intellectually stimulating. It's fun. I still want to read it. It's gossip news. I'm like, “I'm still going to read this.” But understand that you're not going to care about it in a year. That's really important, because most people, I think, would want to gravitate towards information that doesn't expire. That will still be just as useful 10 years from now as it is today. That's what's really useful in the world.
If you don't go out of your way to ask yourself what it is, you're going to find yourself drowning in expiring information and you think you're making yourself smarter, but you're actually just bearing yourself in all this information that has a shelf life.
Ben Felix: I think related to that, why are complexity and length so appealing?
Morgan Housel: As a book writer, every reader knows that most non-fiction books do not need to be as long as they are. This is true for my books as well. I'm not going to say that I'm exempt from this. It's often so odd that virtually, every nonfiction book is about 230 pages. You would not think that these topics that vary so wildly all need to be the exact same length. But we do. We've just settled on that as the appropriate length. Everyone who is a reader will tell you some version of the quote, this book could have been an article. The thing is, if you write a 20-page book, even if readers say, “That's what I want,” if you read a 20-page book, most people's reaction is going to be, “You didn't try hard enough. You don't know what you're talking about. You don't have all the information.” If you write a 900-page book, instantly, without reading a single page, most people are going to say, “This guy's an expert. Knows exactly – Look at this. He wrote 900. He put so much effort into this thing.”
A lot of times, length is the only thing that signals effort. Even if it's a very imperfect signal, it's what people are going to do. It’s the same, if you hire a consultant to solve a problem in your business, even if the actual solution to that problem could be explained in one paragraph, what that consultant is going to do is deliver a 400-page white paper on what you need to do about it. Because if they give you one paragraph, how can they justify their fee? Or how can they claim to be an expert if it's so simple? That's why length and time given to something is always what people are going to lean toward, particularly if they're getting paid for an opinion, just because it's the only signal that they can show that they have put effort into this. They're trying to signal that they know what they're talking about.
Cameron Passmore: How does personal experience shape how people see the world?
Morgan Housel: In such a profound way, the idea that nothing is more persuasive than what you've experienced first-hand. You can try to be empathetic and open-minded, and I can try to understand the life that you have lived. But nothing is more persuasive than the life that I have lived. Because of that, we're all just mirrors of what we've experienced in life and the people who we’ve met in life. The vast majority of which are outside of our control, because most of what you've experienced in life has to do with when, where, and to whom you were born. All three of those are completely outside of your control.
Let's not pretend that if you, or I were born in Somalia in the 1800s, that we would have the same views about the world that we do today. Of course, we would not. We would not have the same religious views, we would not have the same political views, we would not have the same economic views. All of it would be different. It would be different by something that we have no control of, whatsoever.
Just realizing that the experiences that you've had in life are the core of most of what you believe and those experiences have been mostly outside of your control, I think it's really important, just in terms of being humble, just the humility of I think the world works this way. But the only reason I think that is because I've experienced it through that lens. All three of us have experienced the world through the lens as white males. Let's not pretend that if we were different than that, we would not have different views on the world. It's not our fault, because everyone anchors to who they are.
In finance and investing, you do not know what your risk tolerance is until you have lived through a recession until you've lived through a bear market. It's very easy to say, “Oh, if there's a bear market, I would view that as an opportunity. I would go out and buy.” You're only allowed to say that if you have lived through multiple bear markets and you actually did it. Because you don't know what it's going to feel like, until you are actually in the trenches, so to speak.
In the trenches is a great way to frame it, because there's so much evidence that in boot camp and in training, there are so many soldiers that are full of bravado. They're like, “Man, when I get out there on the battlefield, I'm going to go run up, guns blazing. I'm going to go get there.” Then as soon as they get to the front lines, they're terrified. Not a criticism, because you and I would probably do the exact same thing. This is not to criticize their bravery, but it's impossible to know how you're going to feel, until the bullets are being fired at you, so to speak.
I think there are versions of that in everything in life, in business and investing, in entrepreneurship. It's very easy to assume you're going to be one person, but you have no idea until you've actually experienced it first-hand.
Ben Felix: Lots of great lessons in this book, Morgan. When you step back and think about it, from a personal finance perspective specifically, what do you think of the big lessons?
Morgan Housel: I think the biggest from both of my books, Psychology of Money and Same as Ever, two really stick out. One is a plea for humility. Don't pretend like we know what the future is going to hold. We don't. We can focus on these behaviours that never change, but the common denominator of all history in any country, in any topic, is surprise. History is the study of people being surprised. The irony is that they use history as a map to the future, even if what history is is the constant chain of people being surprised. One of it is a plea for humility.
The other in both books, I think, in personal finance is trying to understand who you are individually and recognizing that what is good advice to me might be bad advice for you and vice versa. Even if you and I are same age, same education, whatnot, we're different people. We have different risk tolerances, different social aspirations, we have different families. There's no one right answer in finance, or investing. Everyone just has to find out what works for them individually.
People tend to understand that in other aspects of life. With your taste in food or your taste in music, people know like, “Oh, you like this and I like that. But neither of us is right or wrong. It's just taste.” With finance, people want to say, what is the right answer? What is the right way to invest? I think, it's actually closer to your taste in music. It's like, just find out what works for you. If you like doing that, if that helps you sleep at night, just do that, even if it's wrong for somebody else, or even if other people tell you that you're doing it wrong. Those are the two big takeaways, I think, from both books. Those are the common themes in both of them.
Cameron Passmore: What's the most important lesson that you learned from writing Same as Ever?
Morgan Housel: I think, everything that I write, it's not that I have this information and I'm trying to teach other people. Most of what I write, it's two things. One, I'm trying to write about my own problems. Rather than being like, “Oh, I've witnessed other people having this problem.” I mean, no. This is a problem that I have myself. This is my own flaw. I feel like, my writing is very much like a diary.
The other thing is, I think this is true for every author. With the exception of an autobiography, when authors sit down to write a book, they don't know all the information in that book. The process of writing is what teaches them. It's not like, “Oh, you have all this information in your head. You just need to sit down and spit it out.” Most writing for most authors is you write a paragraph and you're like, “Oh, that reminds me of this.” Or like, “Oh, there's a flaw in my argument. I need to go do more research.” The process of writing is what actually teaches you, the writer. I've always felt like that with my writing. It was like that with Same as Ever, too. I didn't know any of this before I started writing it. It was just the process of writing is what got me thinking about it.
Cameron Passmore: It's a great book. Same as Ever. I loved it. It was this past Christmas, the book that I gave to my kids for Christmas. That so much I enjoyed it. Morgan, great to see you and thanks for joining us.
Morgan Housel: Likewise. Thanks so much for having me, guys.
Ben Felix: Thanks, Morgan.
Is there an error in the transcript? Let us know! Email us at info@rationalreminder.ca.
Be sure to add the episode number for reference.
Participate in our Community Discussion about this Episode:
Books From Today’s Episode:
Sapiens — https://www.amazon.com/Sapiens-Humankind-Yuval-Noah-Harari/dp/0062316095
Seinfeldia — https://www.amazon.com/Seinfeldia-About-Nothing-Changed-Everything/dp/1476756112
The Snowball — https://www.amazon.com/Snowball-Warren-Buffett-Business-Life/dp/0553384619
Same as Ever — https://www.amazon.com/Same-Ever-Guide-Never-Changes/dp/0593332709
The Psychology of Money —https://www.amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681
Links From Today’s Episode:
Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582
Rational Reminder Website — https://rationalreminder.ca/
Rational Reminder on Instagram — https://www.instagram.com/rationalreminder/
Rational Reminder on X — https://twitter.com/RationalRemind
Rational Reminder on YouTube — https://www.youtube.com/channel/
Rational Reminder Email — info@rationalreminder.ca
Benjamin Felix — https://www.pwlcapital.com/author/benjamin-felix/
Benjamin on X — https://twitter.com/benjaminwfelix
Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/
Cameron Passmore — https://www.pwlcapital.com/profile/cameron-passmore/
Cameron on X — https://twitter.com/CameronPassmore
Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/
Morgan Housel — https://www.morganhousel.com/
Morgan Housel on LinkedIn— https://www.linkedin.com/in/morgan-housel-5b473821/
Morgan Housel on X — https://twitter.com/morganhousel
Morgan Housel on Instagram — https://www.instagram.com/morganhousel/
The Morgan Housel Podcast — https://podcasts.apple.com/us/podcast/the-morgan-housel-podcast/id1675310669
Collaborative Fund — https://collabfund.com/
Collab Blog — https://collabfund.com/blog/
Episode 128: Morgan Housel — https://rationalreminder.ca/podcast/128
Episode 191: Emerging Markets — https://rationalreminder.ca/podcast/191
Episode 224: Scott Cederburg — https://rationalreminder.ca/podcast/224