Morgan Housel: The Psychology of Money

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Welcome to the new retirement podcast. Today we're going to be talking with Morgan Housel, a writer, former columnist at the Motley fool in the Wall Street Journal and a partner at the Collaborative Fund. He has a degree in economics from USC and is a student of history. Morgan was also the fourth, fourth guest on our podcast where we discussed the pending $30 trillion generational wealth transfer. Morgan and I met in person a couple of years ago at a conference in Southern California, and we're going to dive into his new book, the Psychology of Timeless Lessons on Wealth, Greed, and Happiness and his perspective on 2020. So with that, Morgan, welcome to our show. It's great to have you back.

Thank you for having me. I didn't realize I was guest number four. I didn't realize I was one of the very early ones, but I enjoyed it last time, so I'm happy to be back.

You know, before we jump into the book, I'd love to just kind of catch up with you a little bit on. I know you moved to Seattle. I was curious, you know, why you moved and kind of how life has changed. I think when we first talked, you were in Virginia, is that right?

That's right. Yep. Yep. Lives in D.C. for about eight years. We just moved back to Seattle two months ago. My wife is from here. She grew up here, and she and I lived here after college. So it's just, it's not, it's not new to us. We're coming back, be closer to family. It was always our plan. We had no reason to be in Virginia. We. We went out there for my wife's grad school, and we had just ended up staying for several years after. But it's always been our plan to get back here. Now we picked May of 2020 to move us and our kids across the country. I always joke I've been alive for like 400 months. And I picked May of 2020 as the month to move everyone. Like, he couldn't, couldn't have been worse. We planned to move well before COVID of course, but it all worked out well. Now we're happy to be out here. Summers in Seattle are unbeatable, weather wise. I would have a different response if this were in January, but things are going great so far.

Yeah, you know, it's. I, I mean, my brother runs a business up in Seattle, so I've spent some time with her. But one thing that's noticeable that I, that I tend to forget unless I go up there is just how much longer the days are. Right. Because you're northern latitude. Right. Doesn't the sun stay out until like 10 or something like that?

Sometimes 9:30. And the opposite in the winter. In January, it starts getting dark at 3:30 and 4:15. It's pitch black kind of thing.

Yeah, it's brutal. It's weird. Like, it's weird to get how much. How different that is. Um, yeah, I went. I mean, the reason it's kind of. So my. My brother also, like, lives in San Diego, so I went down to visit him this summer and I was like, oh, I want to go for an. An evening surf session. And where I am in San Francisco, it'll stay light to like nine. But where he is, it's getting dark at like 8:15. I'm like, why is that? I'm like, oh, yeah, we're like 400 miles or 300 miles farther south here. So that makes a difference.

It's a big difference for what seems like not that much distance, though.

It's. Yeah, no, it's kind of surprising. So, yeah. Just in terms of your career and kind of how you got here. So went to usc, Motley Fool, Wall Street Journal. You're a venture partner at a fund. Did you have kind of a plan for how you thought your life was going to go?

No, there's zero plan. There still is no plan for better or worse because how everything panned out. And I know this is not unique to me. This explains so many people's career, but I had a plan and it fell to pieces. And I ended up doing something that I never in a million years would have imagined. My plan, all throughout college studying economics, was to be an investment banker. That's what I wanted to do. That was my dream. And I had no plan B. That was everything to me. I was like, some kids want to be basketball players. I wanted to be a partner at Morgan Stanley as an investment banker, as this is everything. And I ended up hating it. I had an internship, investment banking, Hated every moment of it. Wanted to jump out the window. It was awful. They couldn't stand it. So I actually fell into writing just on accident. I needed something to do. It was like a summer of 2007. So no one was hiring in finance because the world was falling to pieces and the Motley fool was hiring financial writers. I had a friend who was there at the time, and I thought, maybe I'll give this a try, see if it works. Who knows what's going to happen? But I ended up loving it. And I never had any interest in writing whatsoever. I would say I had a negative interest. Writing repelled me. I didn't do it, so I wasn't good at it. It didn't interest me.

So.

So doing it as a career, like, absolutely not. And if you would ask me at the time when I wanted to be a big, powerful investment banker, what I thought of journalists, which I don't know if I am one now, but I would have been like, what? No, no. But I couldn't love what I do more. Just getting to learn about things, read about things, and then write about it, share it with the world. To me, it's like an absolute dream to get to do. But I had no so. And also going forward, I really have no plan either because I've. I think I've been as many people have just kind of humbled about how their plans went astray in the past, which makes you a little bit more hesitant to forecast the future.

Yeah, it's pretty interesting hearing your evolution there. I mean, it feels like maybe you're at the tail end of the people who aspired to be bankers. So my brother was an investment banker. He graduated from college. He got into J.P. morgan's program. You know, back in the day, that was like a big deal. I remember once he flew across the country on a private jet and like their corporate jet. And that was like, you know, he was in his early 20s and that was like a huge deal. And people did like, it's like, yeah, let's become, you know, Titan of Wall street, whatever. And now I think younger people, they aspire. Well, for a while it was like, hey, let's be a tech founder. Let's do this or that. You know, it's interesting how these gener. These things kind of change generation to generation. Like, what do you want to be?

In the 60s, it was NASA. Let's go work for NASA. And then I think for a while it was like, ge. Like, let's go. Like, if you graduated from Harvard's business school, you're like, I'm going to ge, or Proctor and Gamble. And then it became Goldman Sachs, Morgan Stanley, and then it became Google, Facebook. I actually don't know what it is today. It's probably still Google and Facebook, but it's fading. That's definitely fading. The allure of working. If you went to Stanford business school in 2014, then if you got a job at Google, you won. Like, you made it, you won. I don't think it's that way anymore. I think that's fading, but I don't know who's going to Take the baton next. I don't know.

Right. Well, definitely how people think about work and what they want to do. You know, it's so different now in terms of, I think the entrepreneurial stuff is there. I also feel like a lot of these folks are. They see how the world is changing, the economy is changing, and it's like gig work on demand work. Like you gotta be in much more control of your own career then like historically, hey, you could, you know, 50 years ago, join a company, get a pension, work your whole career at one company. Right? That's, I think, what, even 10, 15 years ago it was like the average person had nine jobs. Now it's probably more, you know, maybe like.

And that, I think that's even been more like, if you had said that in January, that would have been true. But just what's happened since COVID in the last couple of months makes that so much more true. Because now so many of those companies, those same tech companies are moving to remote only. Or there's more accepting of remote work. Which means that you can live in Jackson, Wyoming and not work for one of these companies, but kind of be a contractor for like three or four of them. It just accentuates the possibilities of technical gig work. Not like driving an Uber car, but like being a contractor for several tech companies and living in Maui or something. That's more feasible today than it was 90 days ago. Like so much has changed this year.

I'm sure there's some super clever, productive people that are like, they actually have two jobs at once and they're just like, yeah, I'm working for you, Google, and I'm working for someone else at the exact same time. And maybe drawing two, like full salaries or close to it.

We knew it. We had a family friend who did something similar like that. They had kind of a repetitive technical job at one company and they hired out a consulting firm in India to do that job for them for some minuscule rate. And then he went and got another job. So he had his two full time jobs until the one company caught onto it and shut it down. But yes, there's been that kind of thing for a while and it's more feasible today than ever.

Yeah, that's incredible. So I'm also curious. I've been watching your Twitter. I remember when I first, I think when I first met you, you had like, I don't know, 80,000 Twitter followers and maybe, I don't know, whatever. But now it's like, I looked recently, it was like 177,000 Twitter followers. So what is that like to have that many Twitter followers? And, I mean, I see Twitter. And just as an aside, I was always. I was always wondering, like, do people that have this many Twitter followers, they have, like, did they outsource part of that to, like, look at what's happening and kind of filter it? Or is it like, do you manage that stuff yourself?

No, it's all me. It's just me laying in bed on my phone dealing with it. But I would say, look, the more, like, for someone who writes for a living and has built my career on content, more followers is great. Of course. Like, that's what I want. I want more people to read it. I want more viewers, and then it spreads more. There's also this. This other side that is easy to overlook, which once you reach some sort of critical mass of followers, there is nothing that I couldn't say that wouldn't lead to a half dozen people ripping it to shreds or a death threat or something. Once the number is high enough, the number of trolls just. I feel like I could tweet good morning, and 10 people would unfollow me, and 10 people would say, it's actually not a good morning because the world is going to. It just gets to a point where you're like, ah, come on. Whereas with a smaller number of followers, I feel like just the law of large numbers. You're not going to have that many people poking at you. And, of course, it's totally different if you are. I'm watching the documentary, the phenomenal documentary, the Last Dance with Michael Jordan. He talks a lot about that. I realize I'm not comparing myself to that. He was in a completely different stratosphere of recognition, but he couldn't do anything. He couldn't wake up in the morning without people writing a column for Sports Illustrated about what he did wrong. The more people that look at you. There is a definite downside, but it's also, since it's what I do, I love it and I want more of it.

All right. Yeah, no, it's cool. It's interesting. All right, so let's jump into the book. So why'd you write the book?

For 15 years now or so, I've been writing about the intersection of investing history and behavioral finance. That's kind of been my zone, my beat. How do investors think about money? How do people think about money and investing? And what is the history of what they've done? What can we learn from the history of what they've done? That's always what I've written about. So about three years ago, I wrote a long form post called the Psychology of Money that just outlined 20 of these little quirks that I've seen people fall for over time, historically, and what we can learn from them. The post did really well. About a million people read it. It was 8,000 words or something, which is a really blog posts. And I knew that there was. Even though it was long, I was being so cautious to truncate what I wrote to keep everything as brief as possible because there was already so much in there that I knew when it was done. And it caught on, like the structure of it caught on that I could turn it into a book. So the post is 8,000 words. The book is 55,000 words. Expanding on. And there's. I actually use some different topics, some different points. It's not like a mirror of the book at all. It's not a copy of the book at all of the article at all, I should say. But it's just kind of. I would describe it as like the highlights of what I've learned, the most important things that I've learned after writing. Thinking about this topic and writing about it for 15 years. So it was really, it was really fun to put together. There's this weird thing with books where it's like, you know, I've written thousands of articles, but if you put, if you put a couple articles between two pieces of cardboard, people take it more seriously. So, you know, it's. But it's fun to write a book. It's cool. I actually just got the first copies of it myself a few days ago. It's cool to see it come to fruition.

Yeah, that's awesome. I mean, from watching yo, I was always wondering when you would write a book and so have you been thinking about writing a book for a while? Was that I was like, hey, this is kind of coming up in my career. Or was it really spurred on by. You wrote this article. You saw the traction. You're like, okay. And then it was a little of both.

I never felt that much pressure to do it because I was writing every week, twice a week. So it was like, it's not like I'm not getting my thoughts out to the world. I'm still doing it in the blog. And it didn't seem that relevant to me to say, well, I'm going to put them between two pieces of cardboard. And then it's different. But there is like an arc of a writer's career where it's like Okay, I should write a book. But I never wanted to force it. I didn't want to say, like, I'm going to write a book because. Because I'm due for one. I never wanted that. I really wanted to wait until it was like, okay, this. Like, I know I could turn this into 55,000 words. And it wasn't till I wrote the post a couple years ago, I was like, okay, now I have something that I know I can work with. I think a lot of. I've seen a lot of writers in their career, their journalists and whatnot, fall for that. Like, I'm due for a book, and they kind of force something out because it's due, or a publisher offered him some money to do it. And sometimes it works out and sometimes it does. So I just wanted to be patient until I could write something that I felt like I was going to feel good about.

Well, it's getting, I know, very strong early signals from the community of people that have their hands on it and have seen it. Just a quick aside, I know you write on the platform, the Collaborative Fund kind of platform. Do you feel. And feel free. We can skip this one. At a certain point, you're outgrowing. You're becoming bigger. It's almost like. So the analogy would be, hey, you know, you're like a singer, and then you become famous, and then your label is like, oh, you know, look how famous this person is. And they're like, making the whole label, like, they become more important than the platform they're on.

Be independent.

Yeah, yeah, exactly. Basically, like, the brand is me, right? The thoughts are mine. This is the book and all the stuff I'm doing.

You know, I definitely see what you're saying, but I have absolutely no intention of, I think, ever leaving Collaborative Fund. It's such a great group for me to be a part of in a way that I think if I was out doing this on my own, just an independent writer, I would just miss that. I would miss being part of that team. Look, I'm not active in our investing process. My job at Collaborative Fund is to write and speak. I'm not out doing deals or dealings, but it's still part of our deal calls and our meetings and our quarterly get togethers in a way that I love. Like, being part of that team is so important to me. It's just such a great group, particularly because I also have total autonomy in the content that I write. So what's the article that gets published under my name? That's my idea, my writing My editing, for better or worse, the flaws are not like, it's all me in a way that I love. So if you can be part of a team, then you're. And you're part of that, but still have autonomy. What you do to me, like, there's no better situation to be a part of. So I really love that. And I also get to, you know, I speak and write books and whatnot. So I do get to do a lot of things kind of on the side, on my own, that I still have the freedom to do while being part of a team. So to me, it's a great balance.

Yeah. Yeah. Well, it'll be interesting to see what this looks like in three to five years. I bet that there's a reasonable chance that you end up building your own platform. I mean, you build your own platform, build your own team. Right? I mean, if you can write, if you can post an article and get a million people to read it, that's like, incredible.

Here's the thing, too. I'm also, and this is some irony, working at a venture capital firm, I'm not that entrepreneurial. I just need to accept that I'm not. So could I go out and start my own thing and build a platform, hire a team? Like, maybe. Of course there's risk in any endeavor, but I just don't have a desire for that. My only desire is to wake up, read a bunch of books, listen to a bunch of podcasts, go for a walk and think about it, talk to my friends and then write about it. That's it. I have no other desires about it to do anything more than that. So I would do something like entrepreneurial if I was like forced to. Like, if it was like, I need to go out and do, but I just don't have the desire to do that. So for me just to be able to get to do this is like, that's all I want to do.

Yeah, no, I get it. That's awesome. So with regard to what are the key things or some of the key things that you think people should take away from the book, where you think they can add value to people across the spectrum of less literate to more literate, financially literate.

To me, I think that the main thrust of the book is that the way that we are taught and generally think about money is that it is a math based field, that it's numbers and formulas that give you a precise answer that will tell you what to do. And to me, everything I've learned about money, whether it's Personal finance or investing or running a business is that it's not a math based field, it's a soft social sciences based field. It's closer to psychology and sociology and history. And what's going to separate the good from the bad in finance? People who do really well. People who do really bad is not your intelligence, it's not your education, it's not your iq. It's whether you keep control over your emotions. It's about your relationship with greed and fear. It's about who you trust and who you seek information from. All these like soft topics that are easy to get swept under the rug. If you think about finance like it's something like physics where there's just like firm, hard, immutable truths. If you think about it that way, I think a lot of those people go astray. Like there's no other field in which someone with the best education, someone who went to Harvard Business School and works at Goldman Sachs and then goes to work for Bridgewater, one of the best hedge funds, that that person can underperform. Like someone who didn't go to college and knows nothing about investing but just dollar cost average and do a bunch of index funds. There's no other field where someone with no training and experience can outperform someone with the best training and experience. But it happens all the time in investing. And the reason that's the case is because it's a soft, behavioral, psychological based field that has very little to do with your intelligence or iq. That's the main argument of the book. And I use a bunch of stories and examples and kind of different points that kind of tie into that to kind of show how we can do better at money. Thinking about it from a psychological point of view versus a math point of view.

So what do you think the most important psychological attributes are for someone to be successful?

I think in a broad sense it's knowing yourself and knowing that how you think about risk is different than I think about risk, which is different from anyone else. Because we've had different experiences in life, we've seen different things, we have different circumstances, we have different goals. And therefore there is not one right answer that is right for me and right for you and right for anyone else. And I think that's kind of like, it's kind of discouraging for people. It's hard for people to accept that when people want to think that there is a one right answer, they want to think like we're debating, you know, like this is algebra, there should be a right answer and if we're coming to different answers, it's because one of us is wrong. I just don't think it's like that whatsoever. So there's a chapter, the last chapter of the book is called Confessions, where I write about what I do with my own money. I don't give any numbers, but other than that, I open up the kimono and here's what I've done with my own money. And there are things that I do with my money that you cannot justify rationally. They don't make sense on paper, that if someone looked at this and said, you're not doing this efficiently, like on a spreadsheet, this is wrong. And my response is like, I know it's wrong, I know it's not efficient, but it works for me and it helps me sleep at night, which is my only goal. So I think the more that people can embrace that, that this is a messy field with no right answers and your only goal should be to find something that works for you and helps you sleep at night. Not what maximizes your returns, but just helps you sleep at night. I think once people embrace that, then a lot of the problems that they face in money and investing become a lot clearer.

Yeah, that's that. I think that the thought that, like, this is such a, you know, being successful with your money is so much tied up in your head and how you view it is a great insight and different. And also I do, I do think that there's like, some of it can be super simple. So, like one of the things I saw you tweet about and I was actually telling it, you know, a kid I play online poker with. So side story, right? I've been playing in the pandemic. I've been like, some of my friends that are entrepreneurial have started playing poker online for fun and they've invited some of their college age kids. There's a few of us who are playing for fun anyway, so one of the kids was like, who works for Snap? Was like, hey, how should I invest my 401k? And I was like, well, here's a better question. I want to tell you in like 10 seconds how to get wealthy. And this is the same thing you do, which is basically live below your means. So you save money, right? And ideally save as much as you can, like 10 or ideally 50% of your money, right? Invest it in a broad index fund, keep fees low, rebalance on some regular basis, or automate it. Do that for 10 or 15 years and you're going to be financially Comfortable.

That's it.

Maybe. Maybe financially independent. It's like, that's the end of the story.

That's it. And people want to think it's a lot more complicated. Because if you asked a NASA scientist, how do I get to the moon? That's a complicated answer. And people look at how big finance is and all the flashing lights on Wall street and how much money you can make, and I think it's intuitive to think, well, it must be complicated. The fact that there are hedge fund managers that make a billion dollars a year means that it must be complicated. Right. So that's the intuition that is so easy to think about. And. But I'm the same way you explain to people, how do you do well in investing? It's like, live below your means, diversify, be patient. And that's it. I don't have anything else to tell you. That's it. So I think if you understand the psychology of why that is hard to understand, that's the puzzle piece we're trying to fix. For it's not like, do you need to write a book telling people how to invest? No, but you need to write a book telling people what happens inside of your head when you try to think about that simple solution. So that's the thrust of the book.

Yeah. So I think there's a. So just to elaborate this, it's like for people, it's one kind of understand the base concept. Like, it's not. There's no easy way to get rich. I mean, yeah, maybe you buy bitcoin at like $0.20 or something like that, which is a side. On their side note, a friend of mine, When Bitcoin was $0.30, it was first out, I was like sitting in Silicon Valley having dinner with a friend of mine, one of our engineers on our team. He's like, yeah, this thing called bitcoin. Yeah, you should think about buying. I was like, literally, he's like, I'm going to buy some now. He says he's worth like nine figures. I don't know if it's true or not, but he's like, I'm long and loaded up on this anyway. But mostly it's like, you got to grind it out. You got to just do the right things. But I think the other big thing that you're pointing out is like, you need to know yourself and understand your weaknesses, which is for many people, it's super hard. It's like, okay, now I understand the right things to do, how to actually do it right. And if you can't do it yourself. You should get a coach or a financial advisor. You have to pick the right one because a lot of people preying on you and your money that are misaligned with you, right? So that's the hard part. But knowing recognizing that early on can make a huge difference for you.

And the other thing that's so different about investing that throws people off on this topic is that there's no other field that I know of where effort does not correlate with results. Like, if you want to be the best basketball player in the world, you should go to the gym 12 hours a day. There's stories about Tiger woods who go out and hit 1,000 golf balls at the range. Michael Jordan, you're practicing 12 hours a day. That's what correlates with success in those fields. And it's easy to think that if you want to be the world's best investor, you should be sitting in front of your computer crunching numbers 12 hours a day. And look, there's going to be some quant hedge funds that do it and do well, but by and large, for the huge majority of people, it's the opposite. The way that you're going to do better is to stop trying. The way that you're going to do better at investing is to close your computer, close down your, you know, shut down your brokerage account and go for, go do something else with your life and leave it alone and let compounding work. And that's not intuitive because like I said, there's no other field where that's the case. Like, imagine if the way that you become a better doctor was to like not pay attention to med school. There's no other field that works like that. But there's so much evidence that the people who do the best in investing, on average, particularly not just individual investors, but professionals as well, are the ones who leave it alone. Here's one example for that. Even for professional investors, the s and P500 has 500 companies. And there's actually some. It's not just the same companies over time, each year, some companies are being pulled out, other companies are being pulled in from the standard enforce committee that does it. Sometimes because those companies are doing really poorly or going out of business, they take them out, put new ones in. If you look historically, what would happen if those changes were never made? Rather than the weak companies being pulled out and then the committee picking new companies to go in. When it started in 1957 with 500 companies, if you just left it alone, some of those companies died and you just let them die. And now you hold 400 companies, the S&P 500 would have performed 2 percentage points annually better under that scenario, which is massive.2 percentage points better if you had just left it alone. So this is even in a passive index, the little activity that takes place in it is still in anchor over time. So that's like. It's hard to look at something like that and not come to the conclusion that the hands off approach for most people, I'm not talking about Renaissance technologies, of course there's going to be examples of people that have extreme activity and lead to extreme results. But for 98% of investors or more, maybe the fewer knobs you have to fiddle with, the fewer levers you pull, the less effort you're putting into it, the better you're probably going to do over time.

That's right. Well, I think it's important to recognize where you are in that ecosystem. So I agree with you. Listen, I'm a believer in passive low cost index funds is the way that 99% of the world should operate. But on the other hand, I'm sitting here as an entrepreneur taking a massive amount of risk with my own personal, you know, human capital and time. Right. And, and, and I look at people like Patrick o' Shaughnessy and you know, Jim o' Shaughnessy and these guys are active and but I'm like, these guys are so smart and I, you know, listen to this podcast and it's like they have, you know, great insights. And so you, there is this, you do need the animal spirits and the entrepreneur people like taking risk, innovating people, identifying that and investing in that. So you have to figure out where you play and how you want to play in that space.

Totally. Yeah. Look, there's always going to be a huge group of people who are active investors and I don't look down upon that at all. I think that's great. And really smart people who I admire whatnot are successful active investors. I just think if you're looking at this from a probability standpoint, how do you maximize your chances for success? How do the the greatest number of people maximize their chances for success? It's hard to argue anything other than maybe not a purely passive strategy because there's rebalancing and whatnot. So I've always said I'm not a passive zealot in any ways, in ways some people are. But I just think the probability is that it is the best answer for the most number of people.

Yeah. And I think also if you zoom out and you look at your whole portfolio, which includes not just your savings and investing, but your home equity, which is like a bond, but primarily your human capital. For most people, their human capital is, like, how they generate all their income and where they're going to generate their wealth. That's essentially one giant active bet, super concentrated in whatever particular company or thing that you're spending your time on. So there's a great argument to say, hey, all your savings should be passive. All your time is essentially this big concentrated bet, and there's a ton of risk associated with it.

There's also these other philosophies that I don't do with my own money, but I think makes so much sense. One that I've always loved is from Taleb, who says, I think, the way he invests, or he talks about this in his book. I think this is from Antifragile, where he says. I'm paraphrasing this. He said, Put 90% of your money in treasury bonds and then the other 10% in really risky puts and calls, and that's how you should invest. And then you're basically like, look, the most you can lose, the most you can ever be down is 10%, but you're basically betting on black swans kind of thing. There's ways that people have active investing strategies that I look at, and I'm like, that makes sense. That makes sense to me, even though I don't use it myself. So I'm not 100% against any sort of activity or effort. It's just the way that I lean.

Right? Yeah. So this. This is good. I think one other thing that jumped out at me in the book that I thought was cool was, like, you kind of talk about the risk and the price that has to be paid and that there's a price for everything. And I think some of your stories, especially on, like, the. The personal side of it, right? With entrepreneurs, it's like, hey, Warren Buffett, you know, he's super successful, he's had time, but he's also spends, like, an enormous amount of time doing what he does at the expense of relationships, family, and other stuff. Do you have kind of stories that kind of resonate for you in that space?

I just think there's always. There's Scott Adams, who is the publisher of the Dilbert comic. He writes in one of his books that good advice for a lot of things. The key to a lot of things in life is just figure out what the price is and then pay it. Be willing to pay it really simple, obvious idea, but it goes really far. And people need to understand in investing, what is the price of investing? You can do really well over time. The rewards are obvious, but what is the price? Nothing's free. What is investing going to take out of you? What's the cost of admission? And to me, if you think about it in those terms, it's obvious what the cost of admission is in investing. It's uncertainty and volatility. And you have to be willing to pay that price. If you are not willing to pay it, you're basically trying to sneak in. You're trying to jump over the fence and not pay the admission price. And it's not going to work out well. So I think you have to. To me, as an investor, it's been looking at and saying, okay, volatility and uncertainty is the price of admission. It's worth the price of admission. The fee is worth it. But I just need to be willing to pay it and put up with the volatility, not try to avoid it, not try to sneak in without paying the price. I just need to put up with it and endure it and deal with it and situate my finances so that I'm able to endure it and deal with it. And once you view it as a price worth paying rather than a fine, that's the difference. I make the distinction in the book, the difference between a fee and a fine. A fee is something that you are willing to pay. You pay $100 to get into Disneyland, but it's worth it. You're happy to pay it to get in. A fine is something that you should avoid. A fine is like, you screwed up. And a lot of people view volatility as a fine. Like, oh, my portfolio was down 20%, I did something wrong, I was fined, and I should try to not do that again. And that's not how I view it. I view a 20% decline as the fee. That's the cost of admission. And if you view it as like, look, I'm not happy about this. I wasn't thrilled in March of 2020. But if you just change your mindset to view it as a fee, then it's like, okay, this is the price that I pay for getting to double my money every decade on average. I think that subtle shift is really important.

I think so many people have a hard time, you know, getting their head around that and, and framing that up and really getting someone to, to appreciate it. This is what professional investors do. They. They know this is going to happen, right? You know, the next downturn is going to happen and you're going to lose money. But most investors, they just. They live in fear of it. They're like, just always hoping it's going to go up into the right consistently. And then if it comes, when it turns down, they're like, oh, this is terrible. It could be in the world. I need to get out. And that's why the average retail investor does terribly. I think their net return is like 2% or something. If they're in the market, it underperforms every asset class.

I would even take it a step further than saying they live in fear of it. I say they're just complacent about it. They, by and large, live with the assumption that it's not going to happen. The general assumption that the market should not fall 30%, because a 30% decline is, in a lot of people's eyes, means that something is broken, the economy is broken. It's like the equivalent of. I think most people view a market like they're flying in an airplane. If you're flying in an airplane, your tolerance for a malfunction is zero. If the engine goes out, not good, not good, not good. This is a big problem. And they view the investing the same thing. So if a market falls 30%, not good, the airplane's going down, get out, get out, jump out of the plane with your parachute on. And it's just. It's not that at all. Like, if you're. If you realize that a 30% decline is normal, historically, happens about once per decade on average, then when it happens again, it's not fun, but you're like, okay, like, I knew this was gonna happen. I expected this to happen. It's not fun, but it's okay. It's part of the process, right?

Yeah. I think you have to be going into it. So, as I even said, like, our users, the average user is kind of 50 to 65 years old, and due to the kind of wealth concentration, has a million bucks. So the median is 600,000. But they have a fair amount of money. Right. So if you walk into the world and you're like, hey, I have a million dollars and it's invested, and, you know, there's a decent chance that it could go down 250,000 bucks this year. Like, if you go, if you know that and accept it and like, hey, if that happens, I'm going to still invest, and, you know, I can survive that, then that's one thing. But I think so many people, they're like, you know, I've got my million bucks. I just hope it goes up 50,000 bucks this year. That'd be great. And they don't think about the other side of it, and they can't deal with it. When it happened, when it happens, that's when they lose it.

And when the market is going up, it's easy to kind of try to imagine what it would be like in a bear market. So when everything's going well and you ask investors, how are you going to feel if the market declines 20%? It's easy for those people to be like, oh, that'd be fine, because they're living in a great economic moment and they're optimistic and they can't really contextualize what is going to happen to the world that is going to drag the market down 30%. It's going to be something like COVID 19 or 2008 that fundamentally shifts your ability to be optimistic about the world. So that's why people's perception, even when they try to be cognizant of what's going to happen, of what might happen, how they might feel if the market declines, tends to not actually map out to how they actually act when it does decline. And therefore, the best way to think about your own risk tolerance is not asking yourself when things are going well, not asking yourself how you would feel if things turn south. It's to look at your past behavior and realize that if you sold in March of this year or in 2008 or in 2001, that is probably indicative of how you are likely to behave in the future.

Yep.

And that's fine. You shouldn't be ashamed of that. You should just embrace that with both hands, that you have a lower risk tolerance and you should probably have a less aggressive asset allocation than you have in the past.

Yep. Now, that's a great insight. You know, it's so interesting about the market and the economy is that it's always something new. Like, we've seen the Depression, the Great Recession, you know, we've seen these things. And so you're always like, okay, well, we lived through that. Right. What, you know, what could not, you know, what could make this market go down. Right. And then we have Covid and we're like, oh, yeah, we haven't had a freaking pandemic in 100 years and no one's seen it. Right. And that's alive. And you're like, this is a brand new thing. And even that, you know, what's so interesting about what's happening now is economy's down, it's in the toilet. Right. It's like unemployment through the roof. You know, so many people, you know, it's like the economy is not functioning very well, the Fed is printing money, the market has come roaring back and you're kind of like, all right, everyone's like, what's happening? How's this going to play out?

Yeah, no. Not only was the decline not something that we could have foreseen, but the rally since then, the S&P 500 is up year to date. It's insane. So that rally has been equally unpredictable as well. So it's like even if you had a crystal ball that you could have seen March of 2020 coming, unless you saw the subsequent rally that's taken place since then, once you realize how difficult that would have been, those two series events would have been to predict you again, I think just start leaning more towards a passive, how can I endure volatility and just have an investment plan that lets me just set it in place and then go about the rest of my life? Whatever happens is the best way to go for most people.

Yeah. I mean, so just as an aside, you know, as, as an entrepreneur, one thing I've done is I've always been pretty risk averse with my capital and personal capital and I, you know, I've been sitting on the sidelines for a long time and I had been kind of gearing myself. I'm like, all right, you know, the next time this thing goes down, I'm, I'm going to dump money in. And I did do that. So the market was tanking and I was like, every time I went down 5%, I was like, I'm in. And I kept putting money in. And lo and behold, right now I look like a freaking genius because it's come roaring back. I'm like, hey, it's working. All these things I've been writing about and talking about, but you're still like, but what we were talking about earlier, I'm also in my head, I'm like, hey, you know what? This thing could get chopped in half again. I just feel willing to live with that. And that's how it is, right?

I mean, if it fell by 30% once, of course it could happen again in the future. There's this great quote from, from Daniel Kahneman, the psychologist who says the correct lesson to learn from a surprise is that the world is surprising. So when you are surprised, the lesson is not, you know, oh, what did we learn about market dynamics? What did we learn about. No, what we learned from 2020 is that the world is surprising. The future is going to be as surprising as the last four months have been. That's the lesson. That's the takeaway. The next four months can be as unpredictable as the past four months have been. Of course that's the case. So it's kind of disheartening to think about it like that. But it's like, well, of course that's true. We could have a bigger surprise during the rest of the year than we've had so far this year.

I know. That's what's the incredible thing about. There's also kind of this thing on Twitter. It's like, what else can happen in 2020? And then there's always, like, the next headline. Right. I saw today, like, Trump was like, oh, maybe we'll push off the elections. And it's kind of like, oh, yeah. It's like, okay.

If you had told someone in April that there would have been a news story in America by June 1st that would have completely swamped out COVID 19 news, they would have said impossible. But it was with the protests. It was in the first week of June. Hardly anyone was mentioning Covid anymore. It was all about the protests. And so, of course, something else like that could happen. I think there's a broader point here that historically, the biggest risk is always what people don't see coming. It's not what people are talking about. It's not what they know. Because if they're talking about it, they can prepare for it. They can prepare for it, both psychologically and through actions that they prepare for it. It's always the stuff that no one can see coming. COVID 19, Lehman Brothers. Couldn't find a buyer in 2008, September 11, fall of Soviet Union, Great Depression. There's like, Pearl harbor, all these things that you don't see coming. That's what really moves the needle in history. And again, if you just think about that, that's going to be the case in the future as well. So what's the biggest risk of 2021? It's what no one's talking about. That's always the case.

What we can't even imagine. Right.

It's what we can't imagine.

Yeah. So this is great. I actually want to talk about your view on 2020 some more because you're a student of history. I think it's great how you apply it to your writing, and it gives a lot of context for, you know, how you write and frame things up. I do think we're Going to look back in 2020, it's going to be like, okay, this was an incredible year and turning point in so many places, right? Covid BLM protests, what's happening with the market, the economy. Some people talk about how it's dragging us forward, like on the good side, like, hey, it's dragged everything forward 10 years. We're doing this stuff via Zoom remote work. Everything's changing. I mean, what's your perspective on like how we'll look at this and also how you think the world moves forward from this, you know, in all these areas that it affects so many areas of our life.

So a few different, I have a few different views and maybe I've changed my views a little bit about this in the, in the, in the past couple months. But what we obviously don't know is whether COVID 19 will be a one year story, a five year story, a 20 year story. Like we just don't know. If you think about like take World War II. World War II was a six year story, 1939 to 1945, but it wasn't. World War II is an 80 year story because there's still so many things going on today that are echoes of World War II. Huge, really important things that are just echoes of what's going on today. Those big events that really shape society, spread their tentacles out for generations to come. And I think we don't know yet. It's possible that let's say the vaccine results in the coming months are great. By January, a vaccine is available, we all get it, the vaccine works, we go about our lives. That's possible. It's also possible that the vaccine doesn't work and that leads to some sort of economic collapse which brings in more political upheaval which has, et cetera, et cetera, et cetera. You don't even want to speculate. But that could happen as well. If it was 1929, let's say it's December 1929 and you would look back and say we are going to remember this as the worst year in the economy in history. That was a true statement in 1929. But by 1932 you were yearning for the prosperity that you had in late 1929. Because by 1932 everything had fallen. The market fell 89% between 29 and 32. In 1929, they had not even begun. They hadn't even opened the door to the Great Depression yet, but they thought they had, they thought they were dealing with it. So maybe, I think that's my question as we sit here in July of 2020. Is this December 1929 or is this 1932? Are we just opening the door or are we at the bottom? No one knows the answer to that question in terms of what I think is going to change though. And a lot of this depends on answering that previous question. But if you go back to the 1918 pandemic, which as of right now, hopefully this doesn't change, but that was worse in almost every aspect. Deaths, infections, upheaval, whatnot. I have not been able to find much of any evidence that there was a lasting social impact from that virus. I mean, 1918 was the biggest pandemic in American history. And the 1920s were the era of the jazz bar, where people were going out in like underground bars and dancing with each other. No one was wearing masks and whatnot. Similar to after September 11th. People very reasonably said, Americans aren't going to get on planes anymore. This is just a new era. People are going to be too scared of it. No, they're not going to do it. And no, a year later, everyone was packing into planes, going on vacations. By 2000, you know, it was, you know, the following decade was like the most prosperous decade for aviation ever. So you can't from that perspective. I just think that probably not much socially is going to change if we get a hold of this in the next year. People will go back on airplanes, they'll go back to schools, they'll go back to bars, they'll go back to socializing. And probably in 2021, you could see if there is a vaccine early in the year that people don't just socialize in 2021, they go crazy with their socialization. I'm not, this is like I yearn right now to go to a bar with a bunch of strangers and high five people, which is like my nightmare before this. But I, I can't wait to do that. So you could see a pent up demand for that and then not much changing, except for probably two things. I think people for the rest of their lives after this year will probably have a higher propensity to save money because the fear that was struck in them in March when business owners and retirees and everyone in between had a great February and then woke up in March and said, I might be going bankrupt. If you're a small business owner, if you're a restaurant owner, you could have had record sales in February and be bankrupt by March. That fear for the people who made it out or didn't make it out, I Think we'll stick with people forever. And just like people who lived through the Great Depression, went through the rest of their lives with a lower tolerance for debt and a higher propensity to save. I think we've been scarred enough already by this that that will stick with us, particularly if you add it into the context that we're only 12 years past 2008. So after 2008, you could have said, look, the great financial crisis was an anomaly. That was a once in a hundred year event. It's not going to happen again in my lifetime. But now that this happened again, now people are like, okay, you can't fool me three times. This is just how the world works. I'm not going to be more conservative with my finances. The other thing that is definitely going to change from this is a higher demand from voters of both parties for a greater social safety net. We're already seeing that with the $600 unemployment check that I think actually lapsed this morning. Some version of that will come back. Once people understand what is possible to be done during a recession, they will demand that that at least be done during the next recession. You cannot imagine us falling into the next recession. Let's say it's 2026 making that up, but let's say it is, and it's a really bad recession. You cannot imagine a world in which that $600 a week subsidy doesn't come back. There's no way that the unemployed single mother is going to say, like, oh, I know it's possible that the federal government can give me $600 a week, but they're choosing not to do that now, and I'm okay with that. Impossible to imagine that world. So I think that will stick in many ways. Europe has obviously had a greater social safety net for most of the last 80 years than the United States has. And the best explanation for why that is is because Europe was devastated in two world wars, socially and then. So if you were a European in 1945 or 1946, you knew that the only way that you could survive was with a government assist. And that kind of stuck with them generationally in a way that America did not endure. We paid a human sacrifice with soldiers in World War II, but at home, World War II was an economic boon. It was the most prosperity we had ever seen. And so I think that explains why Europeans have had a greater demand for social safety net. And now that Americans have been through this, it's probably going to increase the bar of what they demand going forward from the government.

Yeah, no, I agree with you. I think that from saving money, you know, risk assessment, I do think that it's interesting. So the pain, you know, the surprises are coming, you know, the downturns are quicker, it feels like. And I think it's also interesting how yet from the social safety net perspective, really what we're doing, I mean there are kind of socialist, I'm not a socialist, but like there are definitely flavors of that happening. Like, hey, we're shipping people money. So to back up, like in previous things, there was like in previous downturns was the Greenspan put right. The stock market kind of learned that, hey, things go sideways, you know, the Fed's going to start shipping us money now in this downturn. It's like people are learning, oh, you know what? I'm going to get better benefits. Companies are like, oh, I can get ppp. It's like essentially my entrepreneurial friends, our company didn't take it, but lots of companies did take it. And, and it's been good. I mean, you know, it's like, hey, let's not have these. If the options are 25% of like all small businesses are just completely destroyed and they're. That's percent. Right. And then we get a vaccine and they're all blown up. Well, that's not good. You know, that's, that's better to keep them kind of around. Right. And kind of on life support. But I think it's interesting how quickly that happened. Even in kind of a conservative, Republican controlled environment. It's like, look, people recognize it's, it's more destructive, you know, to kind of blow stuff up.

The Cares act, the $2 trillion kind of first round of stimulus that we have, I'm 90% sure this, this is right. I apologize if I'm getting this wrong, but I'm pretty sure that passed the Senate 96 to 0. Like when is there ever unanimous voting from both parties? And this is a $2 trillion deficit financed socialist bill. That's not my phrasing, but you could frame it as that. And the fact that every Republican senator I'm fairly sure voted for it is like, look, when things hit the fan like this, it's kind of like there's no atheists in foxholes. It's like there's no partisans during a depression. It's like, just get the money in there, let's do this, come on. And once you set the bar higher, it's hard to go back on that. I don't think the CARES act would have been possible unless we had the 2009 stimulus package and we showed like, look, no, the government can come together and spend a trillion dollars. And it helps. If that precedent wasn't set, it would've been harder to do this. What Jay Paulson is doing in the Federal Reserve right now would not have been possible unless Ben Bernanke set the precedent for it in 2008. When Ben Bernanke started blasting money through the economy in 2008, it was in many ways unprecedented. And people were like, what is the risk of this? He's being reckless. And now in 2020, since Bernanke, it was just assumed that Jerome Powell was going to do that. It was like, well, of course he's going to do it. And if he doesn't do it, he's reckless. In 2008, they said Bernanke was reckless for doing it. Now they would say Jerome Powell was reckless for not doing it. That's a massive shift that took place in one decade.

Yeah. Well, it's also interesting, however, it's kind of a lot of people are getting educated on how the economy works, what is possible. Like you're saying what the US can do, and we can clearly do it a lot. We have 13, 14 trillion dollar economy. Can we stick $2 trillion in? You know, it's like, hey, if I made 100 grand a year, would I take 20,000 in debt to like kind of keep my household going? Sure. But if you stay unemployed as an individual for two years and you kind of lose your ability to get credit, I mean, the government's the same way. Right. We could do this a few more times, but at a certain point, like if we dump $10 trillion, then the wheels could come off, but if the wheels come off, the whole world is getting crushed.

I think, I think the limits of what the treasury could do right now are pretty high. I think there's a lot that it could do. Right now the Fed is buying the treasury bonds in which this money is coming from a large chunk of them. And when the economy is incredibly depressed and there's so much excess capacity in the system as there is right now, the idea that the Fed buying Treasury bonds is going to spark some degree of hyperinflation now, I think is hard to imagine someday when the economy gets back going, if there's a vaccine and then you have pent up demand and all these hotels and restaurants are shut down, that could spark inflation among some industries. But I think it's difficult, it's not impossible, but it's difficult to make the Argument that there's nothing substantially more that the Fed and Treasury could do without taking risks that exceeded the benefits that they're getting out of it.

Totally. I mean, for inflation to happen, we have to not. We'd have to have both an inflated money supply and a rapid increase in velocity of money. I actually, you know, I did hear one interview with a guy who lived through the pandemic in 1918 and he was like, you know what, it was really like three or four years before people got super comfortable going back to restaurants and stuff like that. So it did come back, but I think it, it can take a little bit longer. And you know, another podcast guest, he's invested in hotels and he's like, yeah, you know, these hotels are shut down. They're going to come back. You know, when this comes, people are travel. But like, you got to still spin up all the conferences. People got to plan their trips. You know, it's like all that, it's all this capacity isn't. You know, we all may flood back into bars, right. And restaurants locally, but are we going to be cranking back and forth across the country and like doing all this stuff? It's going to take a couple of years for this to take a while, I think. Yeah. Okay, well, this is great. So just as we wrap up, kind of looking forward, do you have any thoughts about kind of. I know we've talked a little bit, but where you think things will be in the next year or so?

Look, we got vaccines in development, we got a presidential election and I got a book coming out that's, that's yet to be sold. So my wife talks about those three things about the fourth quarter of 2020 are going to be interesting for us. But everything, everything is predicated on a vaccine. If you get that out, off to the races, pent up demand in 2021 mixed with so much government stimulus, people have made this point. I think it's really interesting that people are underestimating the odds that 2021 could be the best year for the economy in history. If you mix pent up demand with government stimulus, could be because if there's not a vaccine, which of course is the case, or the vaccine has trouble getting out there, it's hard to distribute, you need multiple doses, whatever it is, then you get to the point where people realize that this is not a three month problem or six month problem, but this could be a two or five year problem, then all bets are off. It's either off to the races or all bets are off in 2021.

No, it's interesting. I could see that. I could see 2121 being huge. I do feel like we're gonna get through this, you know, and maybe in some ways it won't be as hopefully, knock on wood, like we're gonna get. We're getting better at treating it. So death rates seem to be, as a percentage of people of cases seem to be declining even though death rates are rising because we had this second surge or extended first surge. Okay, awesome. So any. Any last things? I mean, I always like to ask who you've been reading and you see as kind of been doing good thinking in your space or just kind of in general. Any other closing thoughts for you?

Not much. So, I mean, who have I been reading lately? This is not a new book, but I'm reading Ron Chernow's biography of Ulysses S. Grant, which is fascinating. As someone who I like to pride myself as being a student of history, I know so little about the Civil War other than the absolute basics that you learn about it. So it's fascinating to dig through the social dynamics, the causes, how the war played out, and what life was like after the war when Grant became president. It's such a good book that I've learned a lot from lately.

Nice. Awesome. Well, this has been great. So, you know, I appreciate your time and I'm looking forward to reading the book and, you know, so for our audience, it is the psychology of money. Timeless lessons on wealth, greed and happiness. So definitely check it out. There'll be a link in the podcast notes and just to wrap it up. So thanks Morgan for being on our show. Thanks Dotto Robeson for being our sound engineer. Anyone listening? Thanks for listening and your time and hopefully found it useful. Our goal at New Retirement is to help anyone plan and manage their retirement so they can make the most their money and time. And if you can, we have a Facebook group where there's ongoing discussions and also we're definitely interested in reviews for this podcast because it helps us get the word out. So that's it. Cool.

Thank you for having me.

Appreciate it, Morgan.