Where is the world going?

Welcome to the fourth podcast for new retirement. Today we're going to be talking with Morgan Housel about where the world is going, how millennials and a 30 trillion dollar wealth transfer may change our future. I'm really looking forward to this discussion because I'm a fan of Morgan's writing and I think he brings a very unique perspective to our audience. Morgan is a 34 year old award winning writer and venture capitalist with the Collaborative Fund who is broadly interested in finance, behavior, history, psychology, neurology and sociology. He's written for the Wall Street Journal and the Motley Fool. I ran across his writing on Twitter and it's clear that he's a talented writer, insightful and well educated. He grew up in Lake Tahoe skiing squaw, where I was last week as a high level ski racer. All right, Morgan, welcome to the show. I appreciate you coming on board.

Thanks for having me.

So the broad theme of this podcast is your paper. You can see where this is going, where progress comes from and how the next generation will invest their money. That I read on your. I think it's a 2017 paper that was posted on Collaborative Fund. I was just wondering if you could give us a quick overview of your conclusions from that paper and kind of what drove those conclusions.

Yeah, yeah. So I mean, the broad idea, and this really goes back as many generations as you can take it, is that it tends to be the case that every generation gets a little bit more empathetic towards other people as time goes on. It's a slow progression, but if you look at the long, awkward history, there has been a pretty noticeable shift towards people becoming more empathetic, more understanding, more involved, and more willing to cooperate with other people. And this is really looking at the long arc of history over the last several hundred, several thousand years. And kind of the themes for that, the explanations for that, for sociologists and psychologists who've dug into this is basically the idea that as people gain access to more information. So whether that is the spread of tribes and travel, the spread of newspapers, the spread of books, the spread of the Internet, as people gain more information, they just gain a little bit more perspective on how other people live and seeing how other people live, the conditions that other people live in, trying to understand other people's different views so that strangers aren't just a complete foreign body to you. They are someone who have come from a different world and live a different lifestyle. But the more information that you have on them, the more you kind of realize that we're all humans, we're all in the same bucket. So that's kind of the broad thesis. And if you fast forward to today with what's happening with millennials, and more to the point, I think more than millennials is Gen Z, which are the current cohort that are in their mid to late teens. And what's really happening with these generations is Millennials and Gen Z are the first generation who grew up with the Internet as being something that. Not something that was new that they had to learn about, but something that they always had, was always in front of them. For their entire life, they've had a huge funnel of information, not just about themselves and their own situation, but information and exposure to how a huge number of groups of other people have lived. And I think what that's done, and we have a lot of evidence for this, is that in a pretty short period of time, you have a shift in kind of values towards being more empathetic and more open to other points of views than previous generations. Just because you have Millennials that have grown up with Facebook, seeing how other people can live. If you put this in a business perspective, grown up with things like Yelp, where they have so much information to how companies operate, seeing how companies treat their customers, seeing how companies treat their employers, where they source their food from and whatnot, there's just so many things that in previous generations, people and companies and countries could hide behind this veil. That veil has now been pulled back. It's just made people a little bit more open and demanding to work with and partner with and spend their money on companies and partnerships whose values align with their own. That's really how we look at it from an investing standpoint, is looking at this generational shift of consumers who. This has always been the case, but it really just started growing exponentially in the last 10 years once millennials started. Once Millennials start coming into financial power and corporate power, where they start becoming managers and whatnot, is this shift towards consumer consumption to companies that were driven by more than just a utility and profit goal, companies that wanted to have a positive social mission for doing something beneficial in the world beyond just earning profit. That's how we look at it from an investing standpoint, is that there have always been companies that try to do good in the world. Usually it's been, well, clap your hands. Good for you. Hopefully you guys can sleep a little better at night. Our investment thesis is those companies that are trying to do something good in the world, trying to really promote diversity and culture and just a stronger willingness to do good Those are. The companies will actually use that as a competitive advantage over the next generation. Those will be the companies that actually produce some of the greatest financial returns. And I think a good example of this, to just put this in concrete terms, is what we've seen in the last year with Uber and Lyft. You have Uber and Lyft that have virtually the exact same products, nearly identical products that are indistinguishable. But in the last year, you had the corporate culture and some of the behaviors of Uber that came into the spotlight, and you had a lot of consumers that just looked at that at Uber had this one culture of trying to get ahead at any cost and step on toes if you have to, to get versus Lyft, which has had a little bit nicer and more accepting and more empathetic kind of corporate ethos. And you had literally tens of millions of customers in the last year that looked at that and said, I'd rather be with Lyft. Lyft aligns more with my values, and that's what I want to do. I think that's an example of the broad idea, the broad shift that we're seeing taking place in consumer markets and an example of, of companies that are actually taking advantage of it in real time.

Well, that's. That's awesome. Yeah, it's. It's pretty interesting to get your perspective. I mean, you know, I have a couple. I have a couple teenagers in the house here, and I would say. And also when I talk to kind of millennials, I mean, definitely they have a finely tuned kind of BS detector. And I think that when they look at companies, they're saying, you know, where are they coming from? You know, are they authentic? Is the messaging authentic? You know, you know, why are they doing what they're doing? It would be interesting to look at data about how much of an impact this is having on these companies, bottom line, to see what. I don't know if anyone's done any looking at Uber, but how much market share did they lose because of what happened with their culture getting exposed.

Yeah. What's hard, obviously, is that we can't pinpoint exactly how much of Lyft's market share gain in the last year was due to the fault of Uber. I can tell you, in the last year, if you look at nationwide, Lyft's market share went from about 20% to 33%. That's a big market. Gaining 13 percentage points of market share in one year is huge. I think just from a measurement standpoint, it's such a perfect comparison because again, their products are as identical as you can get. They're more identical than, than like Coke and Pepsi. Coke and Pepsi have some differences in flavor and whatnot. But if you are, the difference between Uber and Lyft is not. It's the same drivers in the same cars going to the same locations for virtually the same price. So the fact that Lyft has gained so tremendously over Uber, I think definitely points towards the direction of consumers just doing this because they think Lyft is more reflective of their own values that they want to associate with.

Yeah, it's pretty interesting. I mean, I'll say it's definitely interesting also seeing people get more activists on Twitter. So, you know, recently we had the whole the shooting in Florida and then there are a lot of call outs on Twitter about, hey, look, here's the companies that are giving NRA discounts and do you want to associate yourself with that? And then watching these companies kind of very quickly in a matter of like, you know, 24, 48 hours, saying, you know what, we're canceling those discounts. We don't want to necessarily be associated with that. Yeah.

And you know what's important to point out here too, because I can imagine a lot of people who listen to this or read about it think that it's a very self centered view of millennials to think, oh, now that we're here, we are better, we have better values than our parents did. So I think it's important to emphasize that this shift, I think, happens every generation. It happened with baby boomers, it happened with the greatest generation. Every generation gets a little bit more empathetic. And with baby boomers, for example, it was pushing back against kind of the hardline social norms of their parents, particularly around women in the workforce where you had pre baby boomers, it was just culturally accepted that women were either not accepted or were inferior throughout most of the labor force. And it was really baby boomers who kind of took the torch with that and said, no, that's not a value that we share and we're going to push for something to be different. So this is not a millennial specific trend. I think it's something that's always happened, but I think it's especially pronounced with millennials because the dawning of the Internet and the power of the Internet happens. So just in a course of five or 10 years, it went from something that was mostly irrelevant to something that was completely dictating the entire social and commercial lives of most people.

Yeah, I think it's interesting when you kind of look back in kind of the fullness of time, if you will, about what's happened. So I was watching. You were talking about women's rights when the boomers. And I was watching, sitting there with my 9 year old, and we had like the History Channel on and there's this thing on civil rights. I had to explain to him, well, like literally 50 years ago in this country, there were parts, there were restaurants and there were bathrooms and these different things for non whites and for white people. And you know, that was kind of like, huh, you know, just kind of explain that to him. Like now it's like, well, that's a crazy idea, right? But back in the day that was accepted and just kind of.

I think what's interesting about that too is that people say back in the day and you know, when you're explaining it to your son, it might seem like ancient history, but we're talking the 1960s here. That's not that long ago at all. Which I think just highlights how quickly these things change. And I think when you think about companies having a social mission today, Even today in 2018, I think for a lot of people it's like, oh, that's cute. That's marketing. That's something you're just kind of doing to get some attention. But I truly think in another 10 or 20 years that will be kind of the core principle and core philosophy for companies is like, what is our social meeting to exist? And that their social mission driving not just being part of their corporate strategy, but being kind of the foundation of it.

Right. Well, I know that kind of socially aware investing has become a much bigger deal. And now there are tools where investors can go out and say, hey, listen, I want to layer in. Do the companies I'm investing in align with what I believe? Whether it's like, I don't want to support cigarette companies or I don't want to support gun companies, or I do want to support this or that. Do you have any data on just like how quickly that's getting adopted out there in the market?

I mean, it's different for every industry. But I think what's important to point out is it's so segmented by generation. So if we're talking about things like support for marijuana or support for gay marriage or support for guns rights or something, if you, you know, most of when that's reported, you know, do Americans support gay marriage, whatnot, it's usually supported, it's usually reported overall. But if you segment that out by generation, there are just massive skews between Gen Z and millennials and let's say, you know, their grandparents. And this too is something that's always been the case, like these generational shifts in values. And kind of what happens is it's more or less like a conveyor belt. It's like as one generation starts dying off, the other generation that has very different values not only becomes more dominant, but they become older. So they gain financial clout and they gain corporate management clout, and they gain political clout as they start running for office. And that's really when things start taking over again. I think for the baby boomers and things like civil rights and women's rights, this was something that was hard fought in the 40s, 50s, and 60s. But as Baby boomers started taking over into financial power and managerial power and political power, so let's say the 80s and 90s, it not only became accepted, but became something that predominantly, with exceptions, of course, became something that most Americans would consider something that would be even crazy to not think about.

I mean, you're touching on a lot of the stuff you covered in this paper on Gen Z and Millennials and how they're embracing socially responsible investing. And I thought I. I saw one call out in there that in 2008, you know, Lehman and pretty much everyone else at that time frame, they talked about, you know, maximizing shareholder value. I mean, I remember that, you know, that was like the term that was thrown around that. And that was like, hey, this is what we're here to do. We're here only to, you know, drive up the share price. And that's basically it. And then you contrast that with what Jeff Bezos is saying, which is like, look, there is a lot more information available. The balance of power is shifting toward consumers away from companies. And the right way for companies to respond is to focus on building killer products versus doing marketing and shouting about what they have. Whether kind of interesting to hear you call that out. And I want to see if you had any color on that.

Yeah. One way to think about it is to think about business is do you think business is zero sum, or do you think it's positive sum? Do you think of business as if we win, someone else has to lose, or do you view it as if we create something that's great, then everyone can win? I think if you think about business from the point of, let's say, Lehman Brothers in 2008 saying our goal is to increase shareholder returns, period, that seems like a very zero Sum philosophy of we are just here to make our shareholders rich and we're going to cut everyone else down to the bone and able to do that. Versus I think Jeff Bezos looks at business as a much more positive sum game of hey, if we take care of everybody, if we take care of our employees, they're going to stick around and be happy. If we take care of our customers, they're going to keep coming back. If we take care of our community, they're going to support us. If we think about all of our stakeholders, then guess what, our shareholders are going to benefit too. Because by taking care of everyone else, we're just creating this great business machine that's going to keep compounding for generations. So it's just a more positive sum view over what your goal as a business is. And I think for decades a lot of this was driven by a lot of academic research that took place in the 60s and 70s. But there were several decades, I would say predominantly from the 1980s through probably the financial crisis where the prevailing view of what business was is something that was zero sum, that the goal of a business was to increase profits and its mission was to do whatever it needed to do to get there. So whether that was paying employees absolute rock bottom wages or treating your customers like dirt, or treating your community like dirt, and that's a harsh way to say it because I think most businesses were good hearted people doing this. I'm being a little dramatic by saying that, but I think that was the general ethos was that our sole goal is to increase profit without looking at it as something that hey, you know what, there's actually a better way to truly maximize profit over the long term. And that's by thinking about the well being of all your stakehold in the short and medium term. That's actually how you leverage and stick around and create sustainable long term value versus what you think is maximizing short term value, which is actually in practice turns out to be just maximizing short term value at the cost of probably going out of business in the medium or long run.

Yeah, it's pretty interesting. I mean, I think that you're right that we're definitely the pendulum swinging, you know, towards kind of taking a look at the, you know, one way to look at is the total cost of ownership, right? Or the total cost of something. So if you look at, you know, cigarettes or oil, you know, you're kind of like, hey, okay, we can make a lot of money selling cigarettes and you know, you know, today. But then if you look forward in time or if it's, or it's unhealthy foods or lots of sodas or something like that. But if you look over someone's lifespan, there are these massive health care costs that actually get socialized and put onto everybody else through government health programs and whatnot that end up not being factored into the economics of the initial sale of a single unit of that product, if it's oil or if it's cigarettes or if it's sodas and things like that.

Right? Yeah, exactly. One example of that is the percentage of workers who work full time for minimum wage. The percentage of those workers who are on food stamps. I don't know it off the top of my head, but it's a double digit percentage. And you could look at that as, you know, look, companies aren't paying these workers enough to feed themselves and therefore the government has to step in to provide them food stamps. And therefore like that, food stamps, that food stamp is more or less a direct subsidy to the company because if you take that away, the companies would have to pay their employees enough to sufficiently feed themselves. Now this is a different argument of politics and morality that's kind of out of my pay grade. But there's, I mean, just to get back to your point, there's all these costs that I think get kind of shifted around and moved around kind of in the name of making something zero sum. When in reality, if you think of business as more of positive sum, it's like these costs are going to be paid by someone. It's just a matter of who's going to pay them and what the distribution.

Right. Yeah. I mean, and listen, I don't want to be come across as like I'm, I'm down on capitalism because I think it's definitely by far the, the best system out there. And you know, we do have to, you have to provide people incentives. And I think, you know, I do believe in like the animal spirits. Like hey, you know, people have to want to build things. They have to be incented to build things. And you know, we do create a lot of, and we have created, you know, a ton of value, a ton of productivity improvements which has led to higher quality of life across the world. So I think there's definitely a lot of awesome things about capitalism and what we're doing here. And it's, and it's, you know, being thoughtful about, you know, what is the total cost. And you know, it's kind of interesting having this conversation and seeing that, yeah, future generations or these Rising generations are really kind of taking that perspective. Just real quick, before we move on here, I'd love to get your thought on kind of. I think one thing that I see out there is that there's this massive wealth inequality out there driven by, hey, capitalism does work. Although in today's more information based economy there are these massive winners that are just crushing it. And then there's a lot of people that are doing, some people are doing okay, and there's a lot of people that aren't doing that great. And if they don't feel that they can succeed, that they can achieve greatness, then how does that affect their thinking and therefore their willingness to kind of work hard to going forward?

Yeah, I think that last point that you brought up is probably the key of it. And it's kind of like the psychosis of all of this is just not necessarily what does it do to tangible opportunity, but what does it do to people's drive and motivation? I think that's a really important point. But I think there's a few other points to make here, is that one is that in every capitalist system, inequality is always the natural progression unless there is intervention. So inequality isn't something that I think necessarily happens because of certain policies. It can be accentuated by certain policies, but inequality is always going to be kind of the natural progression of where things go in a free market. And two is like, has that been accentuated in the last 50 years? Not necessarily with computers and the Internet, but just with more overall connectivity, which maybe started with the telegram and the radio, if you want to go way back. I think certainly it does. I think Warren Buffett has brought up a good example for this, which is that if you go back 100 years ago, every small town in America had its own opera singer. The town would come out and would hear the opera singer. And a lot of those opera singers in small towns were not that good, but they were the only opera singer in town. So people would still come out and pay to listen to it because there was no one else to do it. And then once radio comes along, it kind of completely shifts the dynamic because now you can have just one opera singer in the entire nation who is the best, who can now be broadcast into the homes of every American across the country. So then at that point you have all these mediocre opera singers who were making a livable wage before this, who are now suddenly they go from the best opera singer in their town to not even notable, not even notable or noticeable on the national stage. And I think that happens to a lot of professions where there's just a much more, I think a natural winner take all dynamic of things in the economy. And then we're seeing that today with newspapers where it used to be the small town newspaper. Again, it was the only newspaper in town, so everyone bought it. And now you have kind of a national influence of Wall Street Journal, New York Times, Washington Post, Bloomberg Financial Times, the Economist that have kind of more or less taken a winner take all mentality to things. I think that's a natural approach to things. And what we should do about it is, is again, something that I think is above my pay grade. I think it's probably a topic that everyone has their own opinions on, but the opinions are largely rooted in politics, which is just kind of a messy way to think about things and kind of just leads people towards argument over finding solutions. But I think the point that you originally brought up is probably the best in terms of what does this do to people's psychology. And there is a lot of evidence that people that face significant financial hardship have a very hard time ever getting out of it. The best research that I've seen on this is a study that looked at people whose careers started during recessions versus people whose career started when the economy was strong. And they tracked these people throughout their entire lives. They started tracking them just when they graduated college, and they tracked them through their entire careers. And there was a very noticeable difference in that. People who started their careers during a recession, when unemployment was high, that stuck with them through their entire career. They earned lower wages, had less progression throughout their career than people who started their careers when the economy was booming and started out with better job opportunities, higher wages, and more confidence in their ability to produce value in the workplace. So it's something that is not just a problem at a point in time, but I think truly sticks with people throughout their lifetimes and throughout generations. We kind of saw this with the greatest generation, that many of whom came of age during the Great Depression, that stuck with them through their entire lives. It stuck with them in terms of how they invested, how they spent their money, how they thought about the stock market, how they thought about risk. That stayed with them forever. It's a serious topic that since it's rooted in politics, is not something that I am confident will ever find a good solution for.

In recent history, when we had the 2008, 2009 downturn, a lot of folks got out of the market, went to cash, and they stayed in cash. And that's affected A lot of people, and I know that, you know, for instance, older boomers are actually in a much better situation financially, while the silent generation, the older boomers, they've been kind of saving and investing, not carrying around a lot of debt. But then some of the younger boomers, you know, they're actually more comfortable with debt and they're, you know, they're potentially in a kind of a less secure place as they, as they, as they approach retirement. Yeah.

I think those generational differences between, like, what different generations experienced during their coming of age years are something that we probably don't pay enough attention to and that we kind of think of that. Myself and my parents, my grandparents, will think about the economy in similar ways, but we don't. We're all very much influenced and tied back to our own personal history.

Yep, totally. So, you know, on this note, I mean, as you see the economy with better productivity and kind of more automation out there, what would you tell your own parents about how they should position themselves as they go into retirement?

I mean, I think what's true, again, and not to keep repeating myself, but this is not just true today, but it's always been the case, is that when is that, does technology and automation create unemployment? I think the answer, if you look back at history, is for one generation, yes. But if you look at overall, the answer is no. But there's always going to be a generation that develop their skills and develop their careers, develop their networks in an industry that gets disrupted by technology during their lifetime. And that generation will have a very hard time because it's incredibly hard. If you've worked in a factory for your entire life to, at age 57, try to go back to school and learn computer programming, of course some people can do it, but it's very, very difficult to do that. And if we went back 100 years, we would say the same thing about people who grew up their entire lives as farmers, who are now trying to find industrial jobs in factories. Those are different skills. And if you worked on a farm your entire life and you tried to get a factory job in your 50s or 60s, when you had all these younger workers who were more familiar with machinery, had stronger backs than you, that was a big problem back in the day. So, I mean, it's always been the case, and it's true today with technology. In terms of what I would tell my parents, I mean, it's different for everyone because I think a lot of baby boomers did and do have skills that are incredibly relevant to today. I think there's one thing that I see that I understand and I don't blame people for doing this, but is something that I wish were not the case, and I would caution against are the number of people in industries that are clearly objectively either in decline or near extinction that are clinging to those fields as something that they don't believe or don't think is going to go away. And I think it's hard to watch that, and it's hard to watch policies being put in place to kind of prop up and support industries that are clearly being disrupted and taken over. But I think embracing reality with both hands about where the economy is not only going, but where it is today is vital to making the quickest decision in terms of what you're going to do next with your career.

Right. You know, I have one interesting thing that I was talking to a guy, Ken Goldberg, he's a professor at Berkeley. He's also, he lives here where I live in Mill Valley. And I went to a talk that he did about robotics and he said, he told me something I'd never heard before, which is, you know, I think it was in the first half of the 20th century, basically as we, you know, pretty quickly shifted a lot of, a lot of workers from, I mean, this was leading to this. But basically there was a lot of workers that shifted from farming to kind of an industrial economy is like there was something called the high school movement. So it didn't used like the high school graduation rate in the early 1900s was like 20 or 30%. It was like really low, you know, in terms of the population. And then there was like a decade period where we said, all right, you know what, we're going to build high schools everywhere. And then the high school graduation rate jumped to like 70 to 80% in this country in a very short period of time. So I never knew this happened. But basically that was brought about because of this kind of cultural and economic shift that was happening where like, okay, we've got all these people, we don't need all this labor on farms. People aren't going to go off and work on farms when they're, you know, 12 years old. They're going to have more time. And so, boom, we're creating high schools. And now we have a much better, but are much more well educated population. I just wonder if we're going to see a similar thing where, you know, we've got increasing longevity, we've got, you know, kind of new jobs that require different skills. Are we going to have a different way of educating the population that emerges because, you know, it needs to get created.

Yeah, I think, yeah, that's a great point. I think we have seen that for better or worse in the last, particularly the last 10 or 15 years with the rapid increase in the number of people who are pursuing and obtaining college degrees. And I say for better or worse because there's so many people in that category that have, that have pursued subpar credentials from less than ethical universities and end up getting buried in debt. So there's of course, downside for it, but I think there's definitely, as we clearly are now in the full fledged knowledge economy you would expect, and we're seeing like a huge uptick in the number of people who view colleges. It's kind of cliche to say, but it's like today the bachelor's degree is the equivalent of what a high school diploma was probably 25 or 30 years ago. And it's probably reasonable to say that the graduate degree, the MBA or the equivalent, might be the equivalent of the bachelor's degree 15 or 20 years from now.

Yeah, I mean, I think I've definitely seen kind of investors out here saying, hey, kind of, you know, higher education is ripe for disruption. You know, I mean that historically costs there have gone up like 7% a year. It's much faster than inflation. And I think now, I mean, I'm facing this, it's like $60,000 a year roughly for private school, private college per year. So it's tremendously expensive. And you know, it's not, you know, it's not really sustainable. I think also you're going to have the students, the consumers themselves, saying, well, you know, is this a good return on my investment? Do I want to graduate with, you know, $200,000? I mean, I was at a conference once, I met this guy, he was like 25 years old and he's like, yeah, I went to this art school, da, da da. He's like, I have $150,000 in debt. I was like, dude, I just can't imagine. He's like, I'm working two jobs, trying to pay this down. I'm like, I can't imagine starting life and being that much in debt, having to dig out of that hole before I could start pursuing things like buying a house or whatever it was.

Yeah, I think what's interesting too is that we haven't really seen that full lifecycle progression yet, because that story that you just talked about of people who find themselves in their earlier mid-20s with six figures in debt that didn't happen a generation ago. We're just kind of seeing that in big numbers in the last 10 or 20 years. So it's to be determined what happens to those people as they reach their 40s, 50s, 60s, and. And for someone who spends their prime working years, let's say, in their 30s, 40s and 50s, paying off student loans rather than, you know, paying off their mortgage, saving for retirement, all these other things that have been a more traditional thing to do with your finances. We don't fully understand what's going to happen to those people as they go throughout their life cycle.

Yeah, it'll be interesting to see what happens. All right, well that was awesome. So I wanted to shift gears a little bit. I was just curious, you know, for you personally, kind of how you invest your own savings. I saw this a little bit on a podcast, but I'm curious to hear it from you directly.

Yeah, there's definitely been a progression of how I think about and invest my own money. I started my career as kind of a die hard stock picker. Bottoms up. Reading 10ks value investor, concentrated portfolio. That was really what I was passionate about and most of my, I guess, financial training and education was kind of centered around and that's still something that I find fascinating and I appreciate people who do it and take the amount of time that is necessary to put into it, which is a tremendous amount of time for me. My Progression was in 2008, 2009 with the Financial crisis. It just became readily apparent to me that the single most important variable in your success as an investor is not necessarily your allocation. It's not necessarily your ability to pick winning stocks. It's your ability to maintain control over your emotions over time so that you can endure bear markets and so you can actually truly be a long term investor who can invest and let compounding work over 30, 40 or 50 years. When I started thinking about behavior as the fundamental base of the pyramid of investing, I kind of had this shift of well, that's where I want to spend all of my time and focus is making sure that I have control and proper context of my emotions so that I can truly be a long term investor. Because if I spend all of my time going through balance sheets and 10Ks and trying to pick winning stocks, none of it's going to matter if I get scared out of the market and scared out of my portfolio during the next bear market. You can pick the next Google and the next Facebook all day long. But if you get scared out of them during a 20% correction, it doesn't matter. I just started getting this interest in, I would say, the intersection of investing history and behavioral finance and thinking about how to think about risk, how to think about being a long term investor. And with that just putting all of my effort into that and not wanting to spend any mental bandwidth on security selection or more or less asset allocation, I gravitated naturally towards a much more passive approach to investing, to where now all of my public equities are basically index funds and Berkshire Hathaway, which is effectively an index fund, more or less. I've become much more passive over time. And I have a very simple allocation and portfolio. I do that. Not necessarily because I don't think people can't beat the market, even though the evidence shows it's incredibly hard. But can smart, devoted people do it? Yes, I genuinely believe that. But for me, I just want to spend all of my focus and bandwidth on thinking about risk and psychology. And the best way for me to do that was to come up with just the simplest asset allocation I could think of.

Yeah, no, I think that's pretty interesting. I think there's obviously a lot of data that shows that many people agree with you and that's kind of where the world's going. I mean, I know that vanguard, they're, they're winning $1 billion a day in terms of assets. So people are like, hey, you know, let's go passive, let's go low cost, you know, let's, you know, what can we control? Just, you know, let's buy the market. Right. So I think that that's definitely happening. And I saw that, you know, you wrote a little bit about kind of like how important a, kind of a well diversified portfolio is. And one of the things that jumped out was, you know, JP Morgan did a study and basically said, you know, between 1980 and 2014, 64% of stocks underperformed the overall index and basically a third were reasonable winners. And you know, and 7% crushed it. So basically if you owned, if you were lucky enough to pick one of those winners, yeah, you know, you killed it. But you know, if you, if you picked one of the 64% that underperformed, then you're a loser. So the only way to kind of like, you know, effectively manage risk is to buy everything and, you know, assume that you're going to own the winners in there and then those winners are going to massively outweigh the loser. Because that was the big thing, is that how much those 7% winners, how much they outperformed everything else and drove the overall index.

That's right. And for me there's been this interesting dichotomy of I spent most of my career on the public equity side and now I work in venture capital. And a common comment that I get is, oh, venture capital, it's such a tail driven business in terms of you might invest in 50 startups and half of them go out of business. Maybe 20 of them do okay, you get a 1x return and maybe one or two go on to do really well. And that's true. That is how venture capital works. I think what most people don't realize is that's how public equities work too. That's how The S&P 500 works. And just like the stats that you just brought up, even if you look at large cap public equities like blue chip billion dollar companies over a period of 20 or 30 years, the majority of them will not only do poorly, will do incredibly poorly. I think the stat was from that report is that 40% of large cap companies effectively lose all of their value over a 25 year period. I think it was. The difference is that in venture capital that cycle happens much faster so that shakeout can happen in two or three years, whereas in public markets it might take 10 or 20 years. But the dynamics are more or less the same. It's always going to be the case in capitalism that a very small percentage of both companies, and I would say people, if you're just thinking about careers, are going to drive the majority of value and most people will do not only okay, but kind of just kind of grinding along at a rate that most people would be pretty dissatisfied with.

Right, right. That's pretty interesting. So I want to ask you your quick opinion on kind of your view on financial advice and whether or not people should use advisors and just a little bit background here folks. So actually I originally reached out to Morgan months ago about kind of what we were doing in our business because I'd heard him. I'd actually read an analysis that Ben Carson wrote about a podcast that you and Jason Sweig did. We were kind of talking about democratizing access to financial advice. I thought it was pretty interesting and you know, it's part of what kind of we're trying to do here. And anyway, Ben's view, who I think is a friend of yours. Right. Is that. But financial advice is so personalized that it can't really be scaled or it's really hard to scale. And I was kind of curious what your view on that is and what you think the future of that might look? Well, is it valuable and do people need it and do you think it could be scaled?

Well, I think Ben's exactly right. That's why we have betterment for investing advice where you can give an automated asset allocation to people, but we don't really have a scalable automated financial planning platform because just like Ben said, like personal finance is very personal. And for the same reason that I don't think you could have, you know, an automated doctor, you need a doctor that really knows you and knows your background and knows your family history and your desires and how you want to think about treatment. Like it's a very, it's a very personalized thing to go through. That's why financial planning, I think is probably always going to be done at the skilled, face to face level without a lot of automation. There are some firms like Vanguard has situations where if you have, I think, more than a million dollars with Vanguard, they give you access to a certified financial planner every year. That's a way that a company has kind of scaled it to some degree, but still it's not accessible to a large percentage of their clients. And still at the end of the day, it's speaking face to face with a qualified financial advisor. But to your point of, is a financial advisor and financial planning important? Absolutely it is. If not, there are different ways to look at this. But for me, since again, I really think about investing as a behavioral and psychology game, I think just having a financial advisor who is not as emotional about your money as you are is critical. Because your financial advisor isn't the one who's had to work 40 hours a week, 60 hours a week for the last 30 years to build up the savings. Whereas you are. And that just by that fact alone, the fact that you have so much skin in the game and your savings represents your ability to retire and your ability to put your kids through college, that fact alone is going to make you very emotional about your money. Particularly when there is a bear market and you see your portfolio go down 30% and that freaks you out because you spent so much blood, sweat and tears building this money, building the savings. So I think it's really important to have a financial advisor who is not only qualified and has the technical skills that you might not have, but just as someone who can think about your finances in a little bit clearer and more calm way than you might be able to, there's a financial advisor named Carl Richards who says the purpose of a financial advisor is to put A gap between you and stupid. And I think that's just a great way of thinking about it. That should be one of the main goals for financial advisors, is just kind of to act as a guard between yourself and kind of gut based emotional financial decisions that you might make on your own.

Just like medicine and healthcare, a lot of people are starting online and doing a lot of research on their own. But then at a certain point you're kind of like, hey, I'm not going to heal myself. I do need to talk to someone and they want to make it. You want to have kind of easy and accessible and I think low cost or efficiently priced services out there. One of the things that we see out there that is potential misalignment is that most of financial advice is indirectly priced. So you kind of pay on the back end, either fund fees or asset management fees to the advisor that are geared towards how much money you have versus the service being provided. And I think that that is going to change. And it's starting to change. I mean, you're starting to see networks of advisors coming out that are like, flat fee, you know, I'll do it per hour, or like a CPA or a lawyer, or I'll do like a flat annual amount. And you know, I think that's. Consumers are waking up to that and saying, well, I have a million bucks. I'm paying an advisor 1%. That's $10,000 a year. I mean, they're definitely providing value, but can I get a similar thing for 2,500 bucks a year? You know, I think you're going to start to see that kind of stuff emerge going forward.

Yeah, yeah. I mean, there's, there's so much opportunity to kind of disrupt the space because it's so important and it's so fragmented right now, but it's. I'm genuinely curious to see where it goes because I have a hard time seeing it moving past the face to face interaction.

Yeah, well, keep an eye on us. I don't want to, I don't want to make this about us, but it is something that we're working on. You know, we're definitely trying to support that.

No, again, it's not something that I'm bearish on. It's just something that I don't understand. So I'm excited to watch people like yourselves who are, who are really running after the problem.

Yeah, it'll be interesting. All right, well, let's shift gears to collaborative fund. You know, I think it's pretty interesting that you guys kind of invest broadly in cities, money, consumers, kids and health. You know, I think those are, you know, those are great themes. And I was just curious, kind of get your perspective on, like, how you chose those things and if you have any kind of like, really exciting kind of companies that you're investing in that you think are going to change the world going forward.

Yeah, I mean, kind of the basis for those groups that we invest in is just kind of where do we see the biggest change right now? So, like you mentioned cities. There's a big migration from the suburbs back into the cities. And for the first time in human history, more people live in cities and live in suburbs and rural areas. So just looking at companies that use kind of technology and information networks to make urban living more convenient is something that we're interested in. So Lyft is a good example of that, of a company that that's precisely what they're doing. They're using technology and social networks to make urban living, particularly in cities that are so dense that car ownership is lower, limited, is now substantially more convenient for people. So that's kind of the basis for cities. Something like kids. You have a group of technologists and entrepreneurs who kind of drove Internet 2.0 in the 2000s, and they were in their 20s and early 30s as they were developing and understanding and building the current technology framework. And now that group of entrepreneurs and group of technologists and engineers are in their peak childbearing ages. And it's kind of, We've definitely seen this shift over the last, let's say, five years of a lot of entrepreneurs who 10 years ago could not have cared less about kids companies because the last thing they were thinking about were kids. And now those people are parents and they're thinking, hey, how can I use the skills that I've developed over the last 10 or 15 years during my 20s to now build something in the kids space. So kids was an area that I think was more or less neglected by the technology revolution that took place in the 90s and 2000s. And we're really starting to see a lot of movement in that sector. I think it's for something like money or fintech. It's just the idea that financial services as well have not been affected that much by technology. You have mobile banking and you have ATMs and you have mobile check deposits, but it's still more or less run on the same network of pipes run by the same banks. And it's been very difficult for startups and technologies to kind of break the incumbency of those banks. But here again too is just an area where there's just tremendous potential to do something different. And again, it's been really difficult for fintech startups to do it, but there's so much opportunity in that space. Consumers. That kind of gets back to what we were talking about earlier of just this kind of shift in values where consumers are want to spend their money on products and with companies whose values align with their own. So companies that are coming out with products that are just a little bit more genuine, not as flashy marketing, kind of have ingredients that are more transparent and more understandable, is something that's really valuable to consumers. We see a lot of money kind of shifting in that direction, not just from investors, but from consumers wallets themselves. So that's just kind of like the broader basis of how we see the world going. And I would say those ideas are something that guide us, but it's not something that we are handcuffed to. Those are just kind of rough rules of where we see the world going that kind of guide us in certain directions. But in terms of how venture capitalists invest, it's always deal by deal, entrepreneur by entrepreneur. And it's still, it's always has been and will be a very messy process at that early stage.

Yeah. You wrote an interesting piece on bubbles that I've actually shared several times. I mean, I think it was mostly because of what was happening with bitcoin, but would love to get your kind of quick summary of that because I think it's really instructive for people to kind of listen to this because I think bubbles drive a lot of bad outcomes for people. I mean, I saw it myself in the dot com boom. Right? You saw these insane valuations and people then losing everything and driving massive unemployment. I also saw it in the housing market here in California, around the US and kind of leading into kind of 2008 where people got crushed, lost their houses, lost all their savings and everything else. And maybe we're seeing it in bitcoin, which has gone from 20,000 to it's been cut in half.

Yep. Yeah. No, the main thing that I think about bubbles is that they are generally viewed as something that is irrational and driven by crazy people making crazy decisions. And I think if you really drill down to what's happening in a bubble, they're actually a lot more rational and make sense than people tend to think. The first is the idea that if markets never crashed and there was no volatility, then what would happen in that situation? If I Guarantee you that the stock market would never crash. What would happen tomorrow is that people would bid the price up exponentially because there's no more risk. Why would you let a company yield, have a 3% dividend yield and there's no risk in that? In that world, why would I put money in a savings account that yielded 1%? You wouldn't. So you would bid up stock prices so high that valuations would get so high. And once valuations get that high and there's no room for error, that's what triggers the next decline when how the world works in terms of uncertainty and risk and people making bad decisions. So if there were never any bubbles, if there were never any crashes, the first thing that would happen is that markets would get so expensive that they were guaranteed to crash. And that's kind of step one in terms of why we keep having bubbles, why we have this process. It's actually a lot more rational than people think. And then the second point is to highlight that it's often viewed as people who are participating in bubbles, whether they are day traders in 1999 or people flipping condos in Miami in 2006, that those people are making really bad, uninformed, risky decisions. That too is something that I think we can push back on. Because if you are a day trader in 1999 or if you're flipping condos in 2006, those behaviors and activities, those look reckless. If you are a long term stock investor, or if you are someone who looks at real estate as something that you should raise, that looks at a home as something that you should raise your children in, then those behaviors look very risky. But the people who are day trading in 1999 and the people who are day trade or flipping condos in 2006, those are not people who are thinking about long term returns, they are rationally thinking about short term returns. Because there is opportunity on the table that people aren't going to give up. What happens, what gets really dangerous with bubbles is when those people who are rationally playing short term gains to take advantage of short term opportunity, once their behavior starts influencing the behavior of long term investors, or people who are thinking about homes as a place to raise your kid, once the short term price activity starts influencing the behavior of long term investors, that's when you get really dangerous. And I think you have to look at short term investing, or it's called short term trading and long term investing are two completely different games that are kind of played on the same field. And once those players start colliding with themselves and playing different games, it gets really dangerous. And that's why I think that's where the danger in bubbles come from. It's not necessarily that people are acting irrational or that people are acting reckless. It's that someone playing one game starts influencing and colliding someone who's playing a completely different game, and that's really where the danger comes from. To sum all that up, it's a recognizing that I think we're always going to have bubbles. They're completely unavoidable, and they're unavoidable because they're not something that is as irrational as people think. The second part is just recognizing as an investor what game you are playing and making sure that you only take your cues and your influence from people who are playing that same game. So that's, you know, there's. I wrote a long paper kind of summarizing all that, but that's the general idea of bubbles.

Yeah. No, I think it's interesting to really, you know, and super helpful people to understand kind of the psychology behind it and how people behave and why they behave. And, you know, and I also. I think you're right that it's interesting how they. The behavior drags other people into it. It's like when you see Bitcoin and you're like, oh, it's, you know, is it a thousand or it's a 5,000, it's 10,000, 15,000. People start to think, God, I'm gonna miss out on this. I really need to do it. You know, it's going straight up. And then it's like, people are like, oh, it's gonna go to a million. And so it starts to drag folks into it, and that's when people get crushed. It's because the. I thought your point in the, in the paper about, you know, the. The late investors are kind of just being dragged in almost by momentum, and then liquidity can kind of leave quickly, and then they get hammered, and then.

Yeah, they're the ones. And that, again, is just people getting dragged into the market, but they think they're playing one game, but they're being dragged into it based off of queues that are being created by people who are playing a completely different game.

Yeah, exactly. Before we go, any. Anyone in terms of, like, big influencers for you that you. You think our audience might appreciate following or hearing about?

Yeah, a few people you've already mentioned. One of them, Ben Carlson, who I think is phenomenal. And some people all work at the same firm. Josh Brown, Michael Batnik, Barry Ritholtz, they all work at the same firm. I think it's a firm that's put together an incredible group of investors that see the world through a similar lens. And it's a lens that I think is both rare and undervalued. They really think about investing and think about risk in general, just in terms of, again, behavior and psychology rather than something that can really be tamed with formulas and spreadsheets. I think they just provide a ton of value to the investment world. And they're all great writers and great communicators as well.

Yeah, I think it's interesting how I've come to, through Twitter, see how they're all related and obviously familiar with Brech Holtz. But I think they're kind of demonstrating the power of writing and getting your ideas out there and, you know, and just how, you know, those ideas can spread and you can get so much traction. I think Josh Brown, like, passed like a million followers on Twitter and it's kind of crazy to see, but, yeah, no, it's the power of ideas and, you know, it's pretty interesting to watch that. Watch that evolve, you know, Morgan, thanks for being on our show. This was really great and really informative. I've definitely lived up to my expectations. Expectations in terms of getting your perspective on these ideas and I think sharing that with our audience. I wanted to thank Datto for being our sound engineer and anyone listening, thanks for listening. Hopefully you found this useful. Our goal at New Retirement is to help anyone plan and manage their retirement so they can make the most of their money and time. We offer a powerful retirement planning tool and educational content that you can access@newretirement.com We've been recognized as Best of the web by groups like the American association of Individual Investors.