Matt Hall: The Legend of the Man in the Green Bathrobe (Season 2, Episode 13)

Welcome to Take the Long View with Matt Hall. This is a podcast to reframe the way you think about your money, emotion, and time. The goal? Helping you put the odds of long-term success on your side. Hey, Long View listener, I'm flying solo today and excited to share a few updates and one classic story that relates to the recent madness in the markets surrounding GameStop. But quickly, just a reminder, who am I? I am the co-founder of Hill Investment Group, the leading evidence-based investment advisor for successful families, and Hill Investment Group helps investors simplify their lives and take the long view. In addition, I've led training for other wealth managers, created new evidence-based mutual funds, and I'm the author of a book called Odds On: The Making of an Evidence-Based Investor. I live in St. Louis with my wife, Lisa, and my daughter, Harper. Well, there you have that. And a couple of other quick updates I wanna share with you before we get to the story of the man in the green bathrobe. First, the most popular episode of this past season. Can you guess it? It's not the most famous person or the most high-profile guest. It's actually a pretty recent guest named Morgan Housel. Why? Because Morgan has a huge following and his book is fantastic. As I said on the episode, it's the best personal finance book I've read. And why? Because it's aimed at helping you, the investor. It's not a show-off book written for practitioners, written for wealth managers, advisors, brokers. That's too often the case. It's a book for you. I've given away 200 copies and we're going to give away more. So should you have an interest in a complimentary copy, email me at matt@hillinvestmentgroup.com and I'll have one shipped to you as a gift. That's how passionate I am about "The Psychology of Money." It is a rockstar resource and I want you to have it. I want you to read it. And check out the episode. Make it even more popular. By the way, just for those of you who might be interested, that episode is not more popular than the most downloaded episode of the two seasons I've done. The number one is Sid and Ann Mashburn. Sid and Ann Mashburn. Interestingly, it's the only time I've had a couple on. Maybe that's part of the secret sauce of that episode being so popular. But Sid and Ann have a huge following too, and they're fantastic people. So check out those two episodes and keep ringing in those big numbers for those. Next, I was on a call with New York Times personal finance columnist Ron Lieber, and he has a new book coming out. It's just out called The Price You Pay for College: An Entirely New Roadmap for the Biggest Financial Decision Your Family Will Ever Make. Actually, Ron was going to join us on the podcast, but the times won't permit him because it could be construed as an endorsement of my firm. Too bad, but I think Ron went much deeper in his book than I initially suspected. It's more than just how you save money or tricks and tips. It's about values. It's about the decisions your family makes about paying for college and what it says about your values and where you find value. So if you have kids headed to college in the next 5 to 10 years, I'd get this book. And I happen to have a few copies. Email me at Matt Hall Investment Group if you're interested. Side note: what kind of advisor, planner, wealth manager, whatever title you want to give, does a person like Ron Lieber, who writes about personal finance, what type of What advisor does he use? I asked, and Ron said he does have an advisor, and he looked for two things, a DFA acolyte and a high EQ. Now hang on, one or both of those filters might require an explanation. I'll translate for you. If someone says a DFA acolyte, that's referring to a mutual fund company called Dimensional Fund Advisors, and they're a pioneer in sort of this evidence-based world. So that first part just means a firm who cares about data and evidence. The second part, high EQ, you may be more familiar with that sort of expression, just means, I think, someone with a heart. So if you like data and evidence and you have a big heart, those are the two key filters Ron, personal finance guru at the New York Times, is looking for. And I totally agree. That's actually what more people deserve. That's what my firm, Hill Investment Group, is about. Reach out to us if you're looking for some of the same kind of thing. And whether it's us or someone else, we can help you find people that fit those two criteria. Okay, now on to the story I want to share. I first heard this story from my former mentor, Larry Swedroe, author of many books and guru in the evidence-based investing space. And it goes like this. I was asked to consult with a friend who had been lucky enough to buy a popular tech stock when the price had fallen to about $20 per share. At the time I spoke with him, the firm's stock had reached $76 a share, leaving this investor with the potential to earn a big profit. After pointing out that his original investment had grown to a fairly significant percentage of his overall portfolio, I suggested that he sell at least some of the company's stock and diversify his holdings. His response was, "What could go wrong? I only paid $20 for it." This line of thinking is caused by a common mental accounting error, one that we call the belief that you're playing with what's known as the house's money. It's also one of the surest ways we know to turn a fortune into a small one. To help the investor in question consider the issue in the proper context, I related the following tale: The Legend of the Man in the Green Bathrobe. By the third day of their honeymoon in Las Vegas, a pair of newlyweds had lost their $1,000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. He realized it was the $5 chip he had saved as a souvenir. The number 17 was embossed on the chip's face. Taking this as an omen, he donned his green bathrobe, rushed down to the roulette tables, and placed the $5 chip on the square marked 17. And sure enough, the ball hit 17. The 35-to-1 bet paid $175. He let his winnings ride, and once again the little ball landed on 17, paying him $6,125. And so it went until the lucky groom was about to wager $7.5 million. The floor manager intervened, claiming that the casino didn't have the money to pay should 17 hit again. Still clad in his bathrobe, the young man taxied to a better financed casino, and once again, he bet it all on 17. Only to lose everything when the ball fell on 18. Broke and dejected, the groom walked back to his own hotel room. "Where were you?" asked his bride. "Playing roulette," he responded. "How did you do?" she queried. His reply: "Not bad. I lost $5." So this story came up in our office when we were talking about the recent GameStop madness. Consider that the price of that stock over the last 52 weeks went from $2.57 per share at the low to $483. Do you think there might be people who were thinking they were playing with the house's money? Undervaluing hard-earned money. Is really what this is about. The legend of the man in the green bathrobe highlights the mistake of mental accounting, the tendency to value some dollars less than others and thus to waste them. Dollars that are earned the hard way tend to be treated with greater reverence. It's likely that if our groom had earned the money the hard way, he would never have made such a bet. On the other hand, it's easy come, easy go. Mental accounting in this case allowed the man in the green bathrobe to think of the $7.5 million he had just lost as the house's money. Investors make this same mistake. Making this kind of error, believing that you are playing with the house's money, can be avoided by developing and maintaining discipline and patience, a written investment policy statement, a rebalancing process. This will force you to get up and walk away with the house's money if a position in a single stock or asset class grows beyond the maximum tolerance range established by your plan. And if you don't have a plan that includes such tolerance ranges, you should take the time to develop one. And that's a big part of what this podcast is about, trying to prevent real people from making the behavioral errors we are wired to make. I can't say it better than Jason Zweig says it here in a recent article, "Investing isn't a game." You almost never have to make a big move. Investing is a long, repetitive process. And as the investment consultant Charlie Ellis told Zweig many years ago, go to a continuous process factory sometime, a chemical plant, a cookie manufacturer, a place that makes toothpaste. Everything is perfectly repetitive, automated, exactly in place. If you find anything interesting, you've actually found something wrong. Zweig says, "Investing is a continuous process too. It isn't supposed to be interesting. It's a responsibility. If you go to the stock market because you want excitement, then sooner or later you will lose. Everyone who thinks the stock market is a game loses. Everyone. To the last man, woman, and child." Thank you, Jason Zweig, for saying it better than I can. That is precisely the point. I hope you enjoyed this story, and I look forward to sharing more of these little tidbits with you in the future on solo episodes. We're still gonna have guests and have interesting conversations with the goal of helping you put the odds of long-term success on your side. But this story and many others like it support our mission of reframing the way you think about your money, emotion, and time. Thanks for taking the long view. Do you like going to casinos? Please note, the information shared in this podcast is not intended as advice. The intent is to share meaningful experiences. I am likely not your advisor, nor wealth manager, nor financial planner, and my opinions are my own and not necessarily shared by Hill Investment Group. Investing involves risk. Consult a professional before implementing an investment strategy. Thank you.