“It’s not a book about what to do with your money. It’s a book about what happens in your head when you try to do things with money.” – Morgan Housel
If you have read this blog for any period of time you are likely familiar with the work of Morgan Housel. You can find his regular writings here and he just published his first, and likely not last book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. It should go without saying that it is a must-read.
If you don’t feel like reading our Q&A, you can also hear from Morgan on some recent podcasts with Barry Ritholtz, Dave Perell, Anthony Pompliano and Ted Seides.
I had to the pleasure to ask Morgan some questions about his new book. You can find part one here. Below you can find my questions in bold. Morgan’s (unedited) answers follow. Enjoy!
AR: Given how quickly technology has accelerated, or compounded, in so many areas, why does it seem that investing/personal finance seems largely untouched? We have better UIs, easier access, robo-advisors, free commissions, but there is nothing from a technology perspective that has truly changed the game.
MH: Technology can solve every analytical investing problem. And it largely has — how many quant funds are out there?
But analytics is probably 10% of what matters in investing. The other 90% is behavioral. It doesn’t matter if you can back-test an investing idea with tenth-decimal precision. Can you keep your head on straight in March 2020? Do you know your own limits around greed? That’s all that matters. And technology can’t fix the behavioral side of investing because it’s not data and formulas, it’s dopamine and cortisol.
AR: A lot has been made over the past few years about the FIRE movement. I would guess you are in favor of FI, but not so much the RE. Any thoughts on the importance of owning your own time?
MH: Independence is so important because losing control over your time — someone telling you what to do and when to do it — is a universal pain. Being able to do what you want, when you want, with whom you want, for as long as you want, is the highest dividend money pays.
The problem with Retire Early is that most of what we “want” to do is productive work, contributing to society and using our skills. Some in the FIRE movement get that, and the FI just lets them work in a field they truly love on their own schedule. Others think they won the lottery when they retire, and they’re bored out of their minds in two weeks.
AR: ‘Tails drive everything.’ Has your experience as a VC changed that view or only reinforced it?
MH: Tail-driven returns are obvious in VC because they happen so fast. You can make 50 investments and within three years half are toast and three are multi-billion dollar companies.
But tails are everywhere. They drive public-market returns, companies’ product successes, career paths, etc. VC makes them clear, but if anything it just made me see tails in other areas of life.
AR: The great investment debates are about whether the future will look like the past, or things are different this time around. Right now, there is a lot of talk about the future of value investing, as currently defined, is done. Any thoughts on whether something has fundamentally changed?
MH: John Templeton is who made the phrase, “The four most dangerous words in investing are, ‘it’s different this time’” famous. But even he admitted that it’s different at least 20% of the time.
The world changes. Of course it does — the whole field of history is basically devoted to studying big changes and surprises.
I don’t know if there’s a way to tell if something is permanently changed, or just in the down part of a cycle. Hindsight is the only remedy. But in general people aren’t open enough to the idea that the way the world worked for most of their life can change for good.
AR: “Understand the game you are playing.” Is an important concept in investing. However I think it is really impactful when it comes to one’s career path. Do too many people frame their career options too narrowly?
MH: It’s tragic that most of us pick our career paths between ages 18 and 20, when we’re selecting a college major. Do you remember being 18 years old? I was a 100% different person.
This is generalizing, but I think the majority of 18-22 year old men (in particular) focus too much on whatever career will gain them the most money and prestige. It becomes almost the main focus. So many of them will eventually realize that a happy career has a little to do with how much you earn and a lot to do with actual passion, good coworkers, finding a good company, etc.
Everyone’s different, so broad advice is hard. But to the extent you can keep your options open in your 20s, do it.
AR: A theme throughout the book involves not using money to feed our egos. Having some humility in the face of the world, our place in it and the luck we have (or don’t). This viewpoint to me is Buddhist. Have you done any reading in this area that influences your thinking?
I read a book many years ago called Buddhism Without Beliefs that I liked. But I think what you’re highlighting is actually the main point of the book: what actually matters with money is less about the numbers and more about individual goals and values.
AR: The book is very much focused helping us all understand our own money foibles and how to better deal with them. Where does a financial adviser come in? It is a nice-to-have or something we should all consider more closely?
MH: The best doctors in the world still go to other doctors for checkups. Money is the same. It doesn’t matter how sophisticated you think you are, you still need an unbiased, unemotional person you can talk openly about your own money with. Everyone needs it.
The trick is realizing that the value of a financial advisor isn’t providing information about investments. Almost all relevant information is free and online. The real value — and it’s a huge value — is having someone who can think about your finances who isn’t blinded by the greed and fear we’re all susceptible to when thinking about our future.
AR: William Bernstein is famous for saying something to effect of ‘when you have won the game, stop playing.’ How do you know when you have ‘enough’? And what are the challenges of changing that mindset?
If there were an easy answer to that we’d all be much happier.
AR: Morgan, thanks for your time and good luck with the book.
*Full disclosure: Morgan was kind enough to send me a review copy of his book.
