Behavioral Finance with Morgan Housel – Podcast #172 | White Coat Investor

Podcast #172 Show Notes: Behavioral Finance with Morgan Housel

Our guest this week is one of my favorite writers. Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.  His passion for finance and investing come through in his writing. I am intensely jealous when I look at his writing because of his talent. He is insightful and easy to read.  He takes complex and important topics and makes them simple to understand. We really dive into behavioral finance topics in this episode. My favorite piece of his was called The Psychology of Money and was the base for his new book coming out September 8th. It is filled with so many pearls that it should be required reading for humans. I pull a few of those pearls out today and discuss them. We talk about some of “the flaws, biases, and causes of bad behavior” he has seen often when people deal with money. Listen to the episode and go pre-order his book. It will almost surely be a best seller and definitely on my recommended reading list. 

Instead of helping 11 – 30 patients a day, what if you could affect exponentially more? In just 30 minutes, you can positively impact the patient journey, improve the development of medical devices, and influence emerging treatments. Join more than two million healthcare professionals around the world who take part in paid medical studies with M3 Global Research. You have a wealth of medical knowledge and experience that few others possess. Join M3 Global Research and help shape the future of healthcare. 

Quote of the Day

“Of course, hubris isn’t the exclusive domain of financial professionals; plenty of individuals engage in self-confident prognostication on uncertain matters, too. Wherever you turn, it seems, you run into a shocking amount of confidence in matters that are open-ended at best.” – Christine Benz

I think it is particularly helpful in finance to realize that there are not answers to a lot of the questions out there. So don’t be too confident in what you think is correct. We talk a little bit more about that with Morgan in this episode.

Behavioral Finance

When you get into medicine, you are fascinated by the disease, the physiology, the pharmacology, all the medicines and the surgeries. But after you’ve been practicing for a decade, what is most interesting is the people and their behavior and why they make the decisions they make and how you can influence them to do what you know they need to do. Whether it’s to take their medications or be admitted to the hospital or exercise more and eat less or whatever it might be.

The real challenge becomes connecting with and understanding people. Morgan has discovered the same thing in finance. While there are the hard and fast financial rules of investing in personal finance and all the numbers, in the end, what matters most is behavior.

“We often historically have looked at finance as something like physics, where there’s a right answer to the questions. And you can look at the topic as: what is the data? What are the formulas? The formulas will give you the answer. And then everyone just goes, and does that answer like a really crisp, clear topic. It’s just clear that it’s not. That is not how finance works. Particularly at the individual level where everyone is going to come to different views about what is risk, like how do you even define risk? How much risk should you take? What are your goals? What do you want to do? What is important to you? What is really mattering day to day are people’s desires, people’s wishes and how people think about risk and reward in life.”

Risk and Luck

Morgan has two children and said that after becoming a father his view on money changed. Previously it was about what his money could do for him, how he had a pot of money to spend on himself one day, and that switched to a pot of money that gives his children safety and options for the future. He still saves the same amount and invests the same way but his mind has shifted. When each of his children have been born, he writes an article giving them advice.

To his daughter, his first piece of advice was to not underestimate the role of chance in life. He said,

“Well, most reasonable people agree that both privilege and hard work have roles in building wealth. How can you distinguish how much influence each of those has on success? How much each contributes to success? And should you even bother trying to figure it out or just control what you can control and be thankful for the rest?”

In his new book, there is a chapter on risk and luck and how those are the opposite side of the same coin. He mentions that Bill Gates went to one of the only high schools in America that had a computer at the time. That is obviously what got him into computers. When he was at the age of 14, he had access on a daily basis to a more powerful computer than almost any college did in the United States. That was just luck. Without that high school experience, there would have been no Microsoft.

I mean, Bill Gates is a genius and a hard worker, but you cannot discount that ridiculous element of luck that got him to where he is. Morgan went on to talk about Bill’s friend, Kent, who was just as interested in computers and more business-oriented than Bill. They planned to go to college together, and he would have been a co-founder of Microsoft.  But before he graduated high school, he died in a mountaineering accident. Bill got the luck side. Kent, who was in the same situation, faced this black swan risk and he died when he was 17.

“That is like the risk and luck side of life. And we don’t appreciate that enough. It can be so difficult to piece that together in hindsight, because people don’t want to look at someone who’s very successful and say, “Well, they were just lucky.” Because most of the time, they weren’t just lucky. Of course, they put in the effort, they have the intelligence, they have the drive, they took the risk. But in almost every particularly extreme case of success, there was an element of luck that is easy to discount. It is just very difficult to measure those two things with any sort of precision, but they obviously play a huge role in outcomes in life.”

He tells his daughter to be careful judging people’s successes and failures, especially your own. Be careful looking at people who are very successful and just saying, “Well, they’re smarter than me. They worked harder than me”. Maybe that’s true, but there’s an element of that which is not true. Be careful looking at people who are less successful than you, less wealthy than you, who work in much lower circumstances than you and attributing that position to the lack of effort or laziness, or lack of intelligence that they had, because that is almost certainly not the case, at least on average, most of the time.

His advice is just to be more cognizant of the role of luck and risk in life.

Evolving Goals and Values

Another piece of advice he gives it that it is okay to admit that your values and goals have evolved. Forgive yourself for changing your mind, especially when you’re young. It is appealing to think you have the world figured out in your early twenties.

“Realize that there is so much of the world that you have not seen yet, and that you’re not going to see until you age in life. And even at the end of your life there, you’re only going to have viewed and experienced a tiny fraction of the world and a tiny, tiny, infinitesimal fraction of the people who are out there who have different experiences and different views than you have. And therefore, just being okay with the evolution of your ideas. I love the phrase, the saying, “Strong beliefs, weakly held” which is a great way to think about a lot of things in life. It’s okay to have really strong views about how things in economics and finance work. But be open to the idea that because you have only seen a tiny fraction of the world, that the views that you have, have been influenced by that, that tiny fraction of the world. And there’s this huge other side of the world that is going on, that you haven’t seen, you haven’t experienced. You’re unaware of that, that is a puzzle piece of how the world works that you’ve not experienced.

As you go through life, seeing more of that and meeting new people who have different experiences then you, your views are going to evolve and that’s not only okay, that is a great thing.”

I think this is a big issue with doctors. Doctors get locked into this career in the early 20s. They finally pull their head up at the end of the training pipeline in their mid-30s and realize, “Wait, this isn’t what I want anymore. I’ve changed dramatically in the last 15 years”.

A lot of them feel very stuck because now they owe $200,000 or $300,000 or $400,000 in student loans. They’re not qualified to do anything but doctoring that could possibly have a chance of paying off those loans. It becomes a serious existential dilemma to them that they’re doing something with their life they don’t really want to do and feel stuck about doing. What advice does Morgan have for doctors in that position?

His advice would be to people who are in college, thinking about medical school.  The value in delaying a decision for a couple years, even if you’re delaying it for one year, while you go out and you do something else.

“Especially if you look back and you’re in your 30s, 40s, 50s, what was the cost of delaying a decision by one year? By starting med school at 24 instead of 23 or whatever it was? Nothing. It would probably mean nothing to you. In hindsight, that one year is nothing, but in your early 20s, that one year is everything. It’s like reverse compounding. The short term is so valuable, but in the long-term, it doesn’t matter that much. So, the opposite of compound interest. That would be my advice for most people And that’s true for not just medicine, but almost any career. Like me, myself, I wanted to be an investment banker. I wanted to be a private equity CEO and I ended up as a journalist. People change. You always change.

I think also in terms of financial planning, I have a chapter in my book about this, the extreme ends of finance, by which I mean, people who have extremely high savings rates, they’re part of the FIRE movement and they’re saving 90% of their income. Or like the YOLO movement of people who are just blowing everything and burying themselves in debt because you only live once.

The extreme ends of finance, obviously, they increase the odds of future regret. I just think the odds of balancing things out and realizing that you should save money and you should also live and enjoy your life. It’s not shocking advice, but there are so many people on the extreme ends of that. Those extreme ends of any sort of financial planning always make me a little bit nervous.”

In the article titled, “The Psychology of Money”, Morgan said, “things change, and it’s hard to make long-term decisions when your view of what you want in the future is so liable to shift.”

How do we avoid becoming too devoted to one path, to one goal or one outcome and end up regretting it when our desire inevitably changes? How do we avoid that? Do we just avoid these extremes, avoid being hyper FIRE and avoid being totally YOLO? How do we avoid that?

“Realize that the most valuable financial assets you can have are options. And I don’t mean derivatives. I don’t mean call options. I mean, having options in life. The ability to do; one of those is flexibility in where you live, flexibility on when you can retire, flexibility on the kinds of jobs that you can do, flexibility on the different companies that you can work for.

Anytime you lock yourself into anything, anything, even if the thing you’re locking yourself into seems amazing. If you accept how much people change over time, you realize that having options are so incredibly important.

This, to me, is something that’s really simple, just like saving cash. A lot of people will say, “Well, what are you saving for? Are you saving for a down payment on a house? Are you going to buy a new car?” And I was like, “No, I’m just saving so I have options.”

I have no idea what is going to change in my views or my values in the future. But I know that they are going to change. And I just want to have enough options in my finances and in my career and where I live and what I do so that when I change, when I come to that fork in the road, I can say, “That’s what I want”.”

Using Past Data Effectively

A second great pearl from that article was this one:

“The idea that the past offers concrete directions about the future is tantalizing. It promotes the idea that the path of the future is buried within the data. Historians or anyone analyze the past as a way to indicate the future, some of the most important members of many fields. I don’t think finance is one of them, at least not as much as we’d like to think.”

 

So how can we use past data effectively without relying on it too much?

“Let me first give you an example of what I mean. We have good data on the stock market, going back to the mid-1800s, going back to the Civil War era. Jeremy Siegel of Wharton, Robert Shiller of Yale have put together these data sets that basically recreate the S&P 500, going back to the 1800s.

So, we can look at that and say, “Look, now we have this huge data set that we can use to learn about the market. What is the historical average PE ratio going back to the 1800s? What is the historical frequency of different shifts in industries?” We have all this data we can look at, but so much has changed.

Like the idea that we can compare the S&P 500 in 2020 to the S&P 500 of 1865 is absurd, just about things like before about  the 1950s, the majority of public companies were banks, insurance companies, and railroads. That was it. And then a few industrial companies sprinkled in there.

You look at the S&P 500 today. It’s overwhelmingly technology companies, multinational companies that have a completely different asset makeup. They have very few physical assets. They’re not rebuilding manufacturing plants every year. They’re not railroads that are heavily regulated like they were back then. It’s just a totally different makeup. So, we should not pretend that the stock market of even the 1970s is comparable, apples to apples, to what it is today.

There are also things like shifts in different rules for how businesses report the results, how they account for the results that change over time. So, comparing the earnings of the S&P 500 today is not comparable to how it was in even the 1980s. Like fairly recent history, we can’t compare that.

And that’s why you have things like, the S&P 500 has traded above its long-term PE ratio 97% of the time for the past 30 years. Now, some people would look at that and say, “The stock market’s been a bubble for 30 years”. I would look at that and be like, “No, the data is just not comparable. You can’t compare what’s going on today to the average PE ratio over time”. So that’s where people get hung up in history.

And look, if you view finance as something like physics, that is a force of nature with immutable laws, like we can compare how physics worked in the 1800s to how physics works now. Like nuclear energy was the same in 1945 as it is today. Those things don’t change. The laws of physics don’t change, but finance evolves. It evolves incredibly.”

 

Morgan said we can try to pick out the common themes over history, not the specific data points, but the themes of human behavior that show up all throughout history that don’t change over time.

“Things like calm plants the seeds of crazy. Calm times in the economy, calm times in the stock market, plants the seeds of the crazy times. The lack of recessions, plants the seeds of future recessions, because not having recessions causes people to take risk and go into debt. And that debt causes the next recession. The lack of bear markets causes people to get really excited about the stock market and a bit of valuations. And then high valuations increase the odds of a bear market. A takeaway like that is something that we can learn from history. How people think about risk and greed and fear doesn’t change over time, because it’s fundamental to who we are as humans, even if the specific data about what’s going on at the technical level is always evolving. The few behaviors that really guide economic booms and busts, the stories that matter, don’t change over time.”

Wealth

Morgan said, wealth is what you don’t see. The car, clothes, or diamonds not purchased. The renovations postponed. The first class upgrade declined. Wealth is assets in the bank that have not yet been converted into stuff.

“When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars”, which is literally the opposite of being a millionaire.”

This is especially true for young people. Why is this concept so hard for people to understand?

Morgan compares it to physical fitness. You see someone in great shape and want to look like them. You see it and that is how you learn from it. But you can’t see someone like the classic millionaire next door, who is a multimillionaire but lives in a very modest house and drives a 10-year-old station wagon. It’s so hard to look at that person and say, “That’s my role model. That’s the person who I want to be”.

“The person, particularly as I say, for young men who their financial role model is the guy with the Ferrari and the guy with the Rolex and the guy with the 10,000 square foot house. If you see someone driving a Ferrari, the only thing that you know about their finances is that they have $300,000 less in the bank than before they bought the Ferrari. That’s all you know. And if you understand the history of people “faking it till they make it”, particularly in America, the amount of debt that is fueling so much consumption, it’s off the charts.”

So what good is wealth if you are just hoarding it in the bank and not using it on yourself? For Morgan, it gives you options. Options in your career, your time, where you live.

“Having those options, controlling your time, is the highest dividend that money pays. If you have control over your time, control over your calendar, that is going to lead to more legitimate happiness for the most people than any material possession will ever bring you.”

Pessimism

Morgan talks about pessimism. He describes it as seductive. Why are people so attracted to pessimistic financial outlooks when the history of man and even finance could be titled “The Triumph of The Optimists”?

“I think by and large pessimism is appealing. It’s seductive because it sounds like somebody’s trying to help you. Whereas optimism sounds like a sales pitch. Somebody is trying to sell you something. Daniel Kahneman, the great psychologist, talks about how a lot of this is just a function of evolution. We are trained to react to threats with much more intensity and alertness than we are to opportunities because that’s what keeps people alive over time.”

He points out that an optimist would say “things are going to be okay over time” and the important phrase is “over time.”

“An optimist is someone who knows that the world is going to be filled with recessions and bear markets and collapses and pandemics and crazy political times, that the world’s going to be a constant chain of disaster, that there’s always bad news out there, but that does not preclude long-term growth. That’s what a real optimist is. And that’s where I think a lot of people get these things wrong. Are you an optimist or a pessimist? I’m an optimist in the long run. But I also know that the short run is going to be a disaster because it always is.”

Morgan reminds us that the world breaks about once per decade. Once per decade something happens in the world that just makes you want to quit. Covid-19, 2008, September 11th, Fall of the Soviet Union, the Oil Wars in the 1970s, JFK being assassinated, World War II, the Great Depression.  But that does not preclude long-term optimism.

Investor Behavior Triumphs Everything

If you can’t get your behavior correct as an investor, your asset allocation, fee avoidance, security selection, and even tax planning, doesn’t even really matter. Morgan pictures it as a pyramid where investor behavior is the base of the pyramid on which everything else is built. What does he mean by good investor behavior, and what are the best ways for an investor to learn it?

“I think good investing behavior by and large means understanding yourself. Being introspective about yourself and understanding your own goals, your own risk tolerances, so that you can let compounding do its work. And what I mean by that is, if you understand that you are someone who has maybe a lower risk tolerance than other people of your age and income and assets would, you just accept that. You’re introspective about yourself and you say, “Look, I just don’t have a desire to take that much risk. So, I’m going to have more of my assets in cash and bonds and whatnot. So therefore, I’ve set myself up so that I can have an investing behavior that works.”

So when the market falls, you can remain invested during those times. If you panic when the market falls, none of it matters.

“If they have not mastered the behavior of what they’re getting themselves into, of understanding how they are going to react, how they’re going to feel when the market loses 30% or 50%, and, when it does do that, panicking at the bottom, that extinguishes all of the intelligence that you had before. So, it’s that pyramid, and intelligence and IQ is at the top. If you don’t get the base of controlling your emotions, if that base crumbles, all of the intelligence above it just falls away. None of it matters.”

Current Actions of the Fed

A lot of people are worried about the actions of the Fed, this quantitative easing, this money that the Fed is pumping into the economy by buying up bonds and deliberately keeping interest rates low. But Morgan has written that the Federal Reserve learned how to keep the financial system from falling apart. That has both kept a lot of the economy humming and ruined a lot of assumptions people had about how the economy works. What consequences does he see down the road from these unprecedented actions?

“What the Fed is doing is of course creating risks. It is, in my view, a smaller risk than not acting. We’re doing chemotherapy right now. Is that a risk? Yes, but cancer’s a bigger risk. So, that’s kind of what we’re doing. What the Fed is doing is chemotherapy for the economy. And so, is there a potential that, in 10 years, we’re going to look back at this and we’re going to have a record high inflation that stems from this? Yes. I don’t think that’s likely, but yes, of course that’s possible.

And the reason I don’t think it’s necessarily likely is, I’ll try to explain this in a simple way. When the Fed is printing money, that is very different from a lot of historical bouts of printing money. If you’re looking at Germany, or Zimbabwe, where they had legitimate hyperinflation, what the Fed is doing is very, very different.

In those historical cases of hyperinflation, what the central banks were doing was printing cash and handing it to people in the streets or paying their bills or paying their soldiers or paying reparations to France. That’s printing money and putting it back into the economy, just, like, adding new supply to it.

What the Fed is doing these days is very different, which is printing money, but it’s using the money to buy bonds. Why does that matter? Because for every dollar that the Fed is printing in cash, they are deprinting $1 in bonds. So rather than adding new supply to the economy, they’re swapping one asset for another. That doesn’t make it risk-free by any means.

But that is why, after 2008, when the Fed was doing the same thing, a lot of people said hyperinflation, inflation, inflation – That didn’t come 10 years later. I think that that’s the reason why. It’s very, very different from what other cases of hyperinflation have been caused by in history.

The other thing about historical bouts of high inflation is that, obviously, inflation comes from too much money chasing too few goods. That’s what causes inflation. Historically, the most important side of that equation is too few goods. When you have hyperinflation, it’s because it’s Germany after World War II, and their entire manufacturing capacity has been bombed. That’ll give you hyperinflation because it can’t produce goods. There’s almost no historical example of hyperinflation in which the economy is not fundamentally broken in some way, usually from a World War or extremely poor government mismanagement.

Now we could have broken industries that come from Covid-19 because hotels, airlines, if this lasts another six or eight months, and it probably will, you could foresee a situation where half the restaurants and half the hotels shut down.

And then when demand comes back and there’s not enough hotels, there’s not enough restaurants, you’re going to have more money chasing fewer hotels, that could lead to inflation. Absolutely.

So, it’s not risk-free, but I think it’s not as clear as it might seem. It’s not as simple as it seems as Fed printing money and that leads to hyperinflation. That was something, that simple logic is really appealing for most of the last decade. And I think we have to ask ourselves, why did it not lead to the soaring inflation that seemed like it was so inevitable? And I think those two reasons are most of the reason why.”

 

Personal Finance is More Personal Than It Is Finance

Morgan said what is really true in investing and finance is that no one is crazy.

“People do crazy things with their money, but everyone is just trying to use the view that they’ve had of the world to make sense of the world, to build a model of the world, and then trying to manage their money around that.”

We have all had different views of how the world works with different experiences. It is common in finance to think that there should be one right answer. But there are generally no right answers.

“People do things that might look crazy to me or you with their money. But if you actually dig into their reasoning and their logic, it makes a lot of sense for them. I think that is probably the most overlooked, underrated part of investing and finance. It is just getting to a plan that works for you. If it works for you and it’s helping you sleep at night, great. I think that’s the highest goal that you can get with money.”

Ending

I hope you enjoyed that interview as much as I did. I really enjoy reading Morgan’s writing and it was great to talk with him. That was part of the reason I invited him out to WCI conference in March. You can check out his talk in the Continuing Financial Education 2020 course.

You can also preorder his new book now. It will be out next month, The Psychology of Money.  I think it is going to be a bestseller. I expect just as good things out of that as I do Jonathan Clements’s excellent book, How to Think About Money.  I expect to see it on my recommended list if it is half as good as the article that formed the foundation for it.

Full Transcription

Intro:
This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We’ve been helping doctors and other high-income professionals stop doing dumb things with their money since 2011. Here’s your host, Dr. Jim Dahle.
Dr. Jim Dahle:
This is White Coat Investor podcast number 172 – behavioral finance with Morgan Housel. Instead of helping 11 to 30 patients a day, what if you could affect exponentially more? In just 30 minutes, you can positively impact the patient journey, improve the development of medical devices and influence emerging treatments.
Dr. Jim Dahle:
Join more than 2 million healthcare professionals around the world who take part in paid medical studies with M3 Global Research. You have a wealth of medical knowledge and experience that few others possess. Join M3 Global Research and help shape the future of healthcare. Go to www.whitecoatinvestor.com/m3global today to learn more.
Dr. Jim Dahle:
All right, welcome back to the podcast. Hope you’re having a great month. We’re recording this, let’s see in July, July 30th to run on August 20th. Sorry, we got to record things in advance sometimes when I go on too many trips. Apparently, we’re not going to be recording for a few weeks due to a trip to the Tetons I’m taking my daughter on. So hopefully this isn’t totally out of date in three weeks, but I don’t think it will be. I think it’s going to be pretty evergreen.
Dr. Jim Dahle:
Let’s hit our quote of the day. This one comes from Christine Benz, the director of personal finance at Morningstar. She said, “Of course, hubris isn’t the exclusive domain of financial professionals; plenty of individuals engage in self-confident prognostication on uncertain matters, too. Wherever you turn, it seems, you run into a shocking amount of confidence in matters that are open-ended at best”.
Dr. Jim Dahle:
And I think that’s particularly helpful in finance to realize that there are not answers to a lot of the questions out there. And so, don’t be too confident in what you think is correct. And we’ll talk a little bit more about that I think with Morgan, as we get into this interview today.

Dr. Jim Dahle:
But before we do that, I want to introduce you to three communities we have here at the White Coat Investor. Each of them has a slightly different flavor and a slightly different feel. We have one that is hosted right on the White Coat Investor website.
Dr. Jim Dahle:
If you go to whitecoatinvestor.com/forum you will find the WCI forum and a group of very helpful people, thousands of people actually, who are there to help you answer your questions about your portfolio, about your finances, or just talk shop if you’d love talking about this stuff. And it’s a great place to hang out, get your questions answered, answer other people’s questions, and really understand what the WCI community is all about.
Dr. Jim Dahle:
We have a second community group of people that can be found in the White Coat Investor Facebook group. This is actually a much larger group. It’s probably close to 50,000 people now who are in that private Facebook group. Now, obviously any group with 50,000 people in it, isn’t going to be that private. So, keep that in mind when you post things.
Dr. Jim Dahle:
But it’s great to get a lot of different opinions on your investing plan and so on and so forth. It’s interesting sometimes that there are people who don’t listen to the podcast, don’t read the blog, haven’t read the books but are still in that Facebook group. And so, some of the questions in there reflect a shocking degree of ignorance of basic personal finance, but that means there’s a lot of opportunity to help there as well. So be sure to check that out, especially if you like being on Facebook.
Dr. Jim Dahle:
Our third community is found on Reddit. And some people love being Redditors. They love the format of Reddit, being able to upvote and downvote things. But we have a White Coat Investor subreddit – r/whitecoatinvestor on Reddit. So, if you are a Redditor check that out and again, it’s an opportunity to help others get your questions answered and talk about all things finance for high-income professionals. So be sure to check those things out.
Dr. Jim Dahle:
Thanks for what you do. It’s not easy. And it’s even harder to do your job in these times of Covid, whether you’re trying to do some work from home or whether you are in clinic and exposed to a potentially deadly virus every day, it can be stressful and dangerous. I don’t think I felt as anxious in my entire life as I have the last five months.

Dr. Jim Dahle:
It’s just a Covid related anxiety I think a lot of us are feeling. Just reading the paper today, or I guess it’s not a paper, it’s a website. I was reading the news today and it looks like Herman Cain, who was recently a candidate for president not that long ago, died of Covid this morning. The day we’re recording this. And so, it certainly is a very much a real illness. You need to protect yourself and do what you can to protect your family and your patients from it.
Dr. Jim Dahle:
It’s very interesting. I had a patient last night in my shift in the ER, who has two family members who were Covid positive. And so, of course, I tested her. She wasn’t sick enough to be admitted. So, I was discharging her home and she wouldn’t be getting the results for a couple of days until the state lab turns around. But like a lot of patients, she comes out of her room, looking for her discharge paperwork before the nurse gets in there.
Dr. Jim Dahle:
And so, she’s sitting there, at the desk, in front of our clerk and so on and so forth. And there are members of our staff that are pulling down their masks and this lady’s like five feet away from who’s almost surely got coronavirus.
Dr. Jim Dahle:
And so, keep in mind, what’s dangerous in your life. Reduce the risk as much as you can. Try not to be around large groups of people, wear your mask, wash your hands, maintain social distancing and all that kind of stuff, because it very much is real. And it’s something we’re going to be living with for quite a while, unfortunately.
Dr. Jim Dahle:
Okay, we’re going to get into our interview now. Let me get our guest on here and we’ll introduce him.

Dr. Jim Dahle:
Okay. Our special guest today on the White Coat Investor podcast is Morgan Housel, who you may know from most likely from his writing, his actual employed position is as a partner at the Collaborative Fund, which is an early stage venture capital firm. He actually lives in Alexandria, Virginia.
Dr. Jim Dahle:
He’s a graduate of USC where he got out with a major in economics in 2008 and was previously a columnist for both the Motley Fool and the Wall Street Journal, which is likely the reason why you’ve heard of him before is because of his writing at one of those two places. Morgan, thank you so much for coming on the White Coat Investor podcast.

Morgan Housel:
Thanks so much for having me. It’s definitely an honor to be here. I followed you for years as well, so it’s great to be here doing this.

Dr. Jim Dahle:
Yeah, in fact, I just learned just before we went live that his father is actually a physician as well, practicing in emergency department and now running a family practice. So that’s always the little connections to medicine here with our guests it seems.

Morgan Housel:
That’s right. And I learned 90% of what I know about money and investing from him as well. So even though he’s a doctor by profession, he’s had a long-term interest in finance as well. So, that’s where I got it from.

Dr. Jim Dahle:
Yeah. So, Morgan is also one of our speakers in our online course, our 2020 Continuing Financial Education course. If you like what you hear today and want to hear more of it, you might want to check that out as well. But let’s get to know you a little bit better to start with, Morgan. I learned your father was a doctor, but can you tell us a little bit more about your upbringing and what it taught you about money?

Morgan Housel:
Well, yeah. Let’s actually start with there because my father and my mother’s upbringing were different as well. My father started undergraduate college when he was 30 and had three kids and he became a doctor when he was, I think 44 and had three teenagers. So not a normal path getting to his career.
Morgan Housel:
And what came of that, that was really relevant to money was for all of my early years, I’m the youngest of three. So, all of my early years into my late adolescents, we were completely, completely broke because my dad was a med school student. We were living off of grants and student loans. My mom was in nursing school at the time. They were two students raising three kids. So, we had absolutely no money whatsoever. We had a little bit of family support that was keeping our heads above water.

Morgan Housel:
But other than that, we were as poor as it came Free lunches at school, et cetera. What’s interesting is that, in hindsight, we didn’t know that. We thought, like I had a really happy, fun, loving childhood.
Morgan Housel:
But what also came from this is that when my dad was in his mid-40s and me and my siblings were in our early teens, my dad became a doctor and we went from completely broke to not completely broke. Literally overnight.
Morgan Housel:
But here’s what I would say. It changed a lot in terms of the comfort with all sudden, we had a stable home, we bought a new car. We went on vacations for the first time. But my parents learned through necessity. This kind of like, I would call it like extreme frugality. Not extreme in terms of just like obsessing about it.
Morgan Housel:
But my parents know that what is important in life is not what you can buy. We learned how to have fun without money. By going for hikes, by going for walks, by doing things like just from my early childhood by necessity. Everything that we did for fun did not involve money because they had no money.
Morgan Housel:
So, when my parents got money, when my father became a doctor, all that kind of frugality, that simple living that high savings rates stuck around. It stuck around with them for good. That was kind of like from my upbringing. That was the foundation of the money lessons that I was taught.
Morgan Housel:
It is that even though we had a moderate amount of money, it was savings, frugality. You don’t need to spend, use up the old stuff first, et cetera. I grew up around Lake Tahoe, California, and I was a ski racer throughout my teens.
Morgan Housel:
And because of that, I actually more or less bypassed high school. I don’t really have any high school education. I did an independent study program that it was more or less like prove that I can tie my shoes and add single digit numbers. And here’s a paper that says diploma on it, but I did nothing for it because I was skiing the whole time. And it was just this program that it did absolutely nothing for me.

Morgan Housel:
And because of that, I didn’t start college until I was 20. And because of my high school lack of education, I had to start at the very, very basics, bare bones, not even math 101, like math, like basic. It was like freshmen high school math. Like the people who made their way into college, but still needed the bare bone.

Morgan Housel:
So, I had to start at ground zero and work my way up from there. And I eventually transferred to USC, as you mentioned, and gotten a degree in economics. And I was always interested in finance and investing. I knew from the time I was 18, that’s what I was going to do for my career. I just loved it. It was fascinating to me. It was the only thing outside of let’s call it “kids’ stuff” like TV shows and video games. It was the only like let’s call it “real-world” topic that I loved. I was fascinated in.
Morgan Housel:
So, I knew I was going to get into investing. And the plan all throughout college was investment banking. This was the mid-2000s when investment banking had a lot of allure, particularly for young men who looked at it as power and prestige, and you can make so much money. And the investment bankers were the titans of industry. So that’s what I wanted to do.
Morgan Housel:
And I got an investment banking internship in my junior year of college. And day one, I hated every single aspect of it. I couldn’t run out of the door fast enough. It was just pure, miserable, hell, every aspect of it I hated. So, then I’m like at this crossroads of like, “Well, what do I do now? That investment banking was my only plan and I hate it”. I hated the culture. I hated the kind of fraternity hazing aspect of it. It was just so inefficient and dumb to me.
Morgan Housel:
So, I needed to do something else. I got a job in private equity, which was kind of like investment banking light I would say. Investment banking was a good combination of finance and business, but you could still go home at 06:00 PM or 7:00 PM, unlike investment banking.

Morgan Housel:
So, I loved that. But that was the summer of 2007 when the world’s starting falling to pieces. Particularly if you were a leveraged finance company, like private equity firms are. So, things hit the fan so to speak. And I was told there would not be a full-time position for me after school. So now I’m like, “What do I do now? Investment banking is out. Private equity is out. What do I do? I love finance, but I don’t really have a career path now”.
Morgan Housel:
And I had a friend who was a writer for the Motley Fool at the time. And he said, “Hey, you should apply to become a Motley Fool writer”. And I had no background or interest whatsoever in writing, but I loved investing. So, I was like, okay, I’ll try doing this. Maybe it’ll work for a couple months and I’ll find another job in private equity.

Morgan Housel:
And I ended up staying for 10 years and loved it and fell in love with the process of writing, the process of researching investing history and psychology. And just trying to figure out what’s going on, trying to learn something about investing and then sharing it with the world. I just loved it. It has never felt like work to me. It’s just what I love doing. Just spending my day researching the topic and then trying to share what I’ve learned.
Morgan Housel:
So, it was just like a complete serendipity accident that I fell into this career that had to do with the financial crisis of 2008, breaking the other career paths that I wanted to go down.

Dr. Jim Dahle:
Wow. That is quite a story to go from that and end up being a writer in the end, which I totally agree with you. I love writing as well, particularly, in kind of the blog post format. 1,000 words, 2,000 words, 3,000 words. Writing a book, I’m not quite as thrilled about that. That feels more like work to me, but knocking out a blog post, I agree. Learning something and sharing it with others, hardly feels like work.
Dr. Jim Dahle:
But somewhere in there, you transitioned from writing to working at the Collaborative Fund. Yet you still write. Tell me how that transition happened.

Morgan Housel:
And there’s a cork in there as well, which is effectively all I do at the Collaborative Fund is writing and speaking. So even though I work at a venture capital private equity firm, I kind of came back to what I wanted to do working in private equity, so to speak. But my entire role is writing. It’s writing content to raise awareness for the firm, et cetera.
Morgan Housel:
But how I got there. So, I was at the Motley Fool, as I said for 10 years. And my plan was I was going to be there forever. Motley Fool is an excellent company to work for. I loved it. We, my wife and I, bought a house a mile away from their headquarters, situating our life to work there forever. How all of my great friends were there, they are still there. So, it was great. I really loved my time at the Motley Fool.
Morgan Housel:
But then I had this question of like, okay, I’ve worked at the Motley fool since I was a junior in college is when I started working there. And now my plan was to stay there for the rest of my career.
Morgan Housel:
So, then it was okay, if I literally worked there until I’m 65 years old, will I look back at having worked at one company my entire life and regret that? And it took me a long time to answer that question. But eventually, the answer was yes, I think I would. Having never seen another side of the industry, having never met new people, having never been at a small company where I could really have a hundred percent control over the content. Would I regret not doing that? Yes, I would.
Morgan Housel:
So, I joined Collaborative Fund in 2016. I still love everything about the Motley Fool, but I joined in 2016 and it’s been awesome. Collaborative Fund is phenomenal. Even though I’m not really involved in the deal process, my job is content. It’s an excellent organization. It just fits my personality perfectly. And unlike working at the Wall Street journal with Motley Fool, I’m kind of like a one-man content show, which I love. The art of content, I really love. Making it my own, making it mine. The ideas are mine. The writing is mine and the editing is mine. And I love that aspect of it.

Dr. Jim Dahle:
Well, your passion certainly comes through in your writing. You’re a very talented writer.
Morgan Housel:
Thank you.
Dr. Jim Dahle:
That’s why other people that write like me, I mean, there’s obviously a lot of people that like my writing and a very popular blog. And I look at your writing and I become intensely jealous of it because you are that talented at it. It really is good. It’s very insightful. It’s very easy to read. It’s very easy to understand, it feels like after you read it but you still are dealing with fairly complex topics and important topics. A lot of the topics you write about are behavioral finance topics.

 

Dr. Jim Dahle:

And when you first get into finance, it’s kind of like when you first get into medicine, you’re fascinated by the disease. You’re fascinated by the physiology, the pharmacology, all the medicines and the surgeries.
Dr. Jim Dahle:
But after you’ve been practicing for a decade, what is most interesting is people and their behavior and why they make the decisions they make and how you can influence them to do what you know they need to do. Whether it’s to take their medications or be admitted to the hospital or exercise more and eat less or whatever it might be.
Dr. Jim Dahle:
That becomes the real challenge is connecting with and understanding people. And I think you’ve discovered the same thing in finance. That while there’s the hard and fast financial rules of investing in personal finance and all the numbers, in the end, what matters most is behavior.

Morgan Housel:
That’s right. And look, Jim, this is since you are a doctor, most of the audience are doctors. I have no right talking about this, but there’s this theme in medicine that I love. And I’m going to keep this as broad as I can because you and other people might know this so much better than I do.
Morgan Housel:
But my understanding, I mean, to add that asterisk of it is that for most of the 20th century medicine was practiced more or less as the doctor is the boss. The patient doesn’t have much say in the treatment. You go to the doctor, the doctor is going to tell you what is right to do, and he’s going to do it to you.
Morgan Housel:
There are even these stories about people waking up from surgery, having had other procedures done to them during surgery that they didn’t know about from the early 20th century.

Morgan Housel:
And then from what, as I understand, there was a shift in the late 20th century or in the 1970s and 1980s where it became much more a collaborative practice where the patient was in charge, the doctor would lay out. This is what’s going on. This is what we can do. And then would ask, what do you want to do? What are your desires? What are your wishes, particularly for things like end of life care? That’s my understanding of it. You might have different thoughts.
Morgan Housel:
But to the extent that, that is true, that I’ve read about that. I thought it’s so similar for finance that we often historically have looked at finance as something like physics, where there’s a right answer to the questions. And you can look at the topic as what is the data? What are the formulas? The formulas will give you the answer. And then everyone just goes, and does that answer like a really crisp, clear topic.
Morgan Housel:
And it’s just clear that it’s not. That is not how finance works. Particularly at the individual level where everyone is going to come to different views about what is risk, like how do you even define risk? How much risk should you take? What are your goals? What do you want to do? What is important to you?
Morgan Housel:
Just a really simple example for me personally, I’m a passive index fund investor. I’ve talked about this, written about it, and I just have absolutely zero desire to even try to be a great investor. It just doesn’t appeal to me.
Morgan Housel:
And the reason for me is look, if I dollar cost average into index funds for 40 years, I’m going to achieve every financial goal that I have and then some.
Morgan Housel:
So, the idea of like, I should try to devote my life to doing better than that, it just has no appeal to me. But there are other investors for whom, like they would not be able to look themselves in the mirror if they said that. They have to devote their life to it.
Morgan Housel:
And it’s not that I disagree with those people. We just have different views about what matters in life. So, you can’t view finance as a one answer field. If you accept that. Just as medicine, isn’t the same. Two patients let’s say, particularly at the end of life might come to very different desires about how they want to go about treatment plans and whatnot.
Morgan Housel:
So, finance is really similar. I’m often fascinated at the financial parallels to other fields. I actually think finance has a lot of parallels to medicine in terms of it’s a very complicated topic that evolves over time, but it’s often viewed in some ways detrimentally as a clean, simple field, because it’s easy to think about that way in a scientific way. Even though what matters in the end, what’s really mattering day to day are people’s desires, people’s wishes and how people think about risk and reward in life.

Dr. Jim Dahle:
It’s interesting. You talk about what matters most in life. And I believe you had a daughter about a year ago, your second child, I think.
Morgan Housel:
That’s right.
Dr. Jim Dahle:
How’s having young children changed your views about money?
Morgan Housel:
I don’t know if it’s changed dramatically, but it has definitely changed in the sense of, well, also to get a little more personal about it. My wife, when she became pregnant with our daughter, left the workforce. She’s a stay at home mother now. It shifted from, for me, money for most of my life up until then was “I make money and it’s mine. It’s for me. And I can use it to make my life better. I can use the money that I make to buy new clothes and a new car and new this”.
Morgan Housel:
As soon as you have kids, and especially when you become the sole breadwinner, it becomes “Okay, I’m working to give my family safety and stability”. Completely different from what I had viewed money as for all of my life, which was, “This is making me better. This is for me. This is to buy me stuff”.
Morgan Housel:
And now it’s, “Money is just a conduit to provide safety and options to my wife and children”. That’s how I view it. Maybe that’s not a subtle shift. I still save the same amount of money. I still invest the exact same way. None of that has changed.
Morgan Housel:
It’s just, let’s just say, like, if I opened my brokerage account and look at it, before I would have looked at it with kind of a subtle view of like, “Oh, there’s a pot of money that I can spend on myself one day”.

Morgan Housel:
And now when I look at it, I think I suddenly think, “There’s a pot of money that gives my children’s safety and options for the future”. And look, as I say that to you, I actually realize that that’s a big shift. That’s a huge shift, but that’s how I view it. There’s nothing else that matters to me more than my wife and children.

Morgan Housel:
And I would actually just say my children because my wife is of course, completely competent to take care of herself. But to give my children safety and options in life, there’s nothing else that matters in the world. And I know I’m preaching to the choir. That’s every parent’s goal, but that’s what shifted for me money-wise. But I still save the same amount. I invest the same amount. Not much has changed there.

Dr. Jim Dahle:
When each of your children were born, you wrote a column giving them advice. Giving advice to this newborn. You gave your daughter some advice in I think it was a CNBC column. I think it was republished there on your site.
Dr. Jim Dahle:
But your first piece of advice was to not underestimate the role of chance in life. You said, “Well, most reasonable people agree that both privilege and hard work have roles in building wealth. How can you distinguish how much influence each of those has on success? How much each contributes to success? And should you even bother trying to figure it out or just control what you can control and be thankful for the rest?”

Morgan Housel:
Right. So, Jim, I have a book coming out called “The Psychology of Money” that comes out in September. And there’s a chapter in the book on risk and luck and kind of how those are the opposite side of the same coin, risk and luck.
Morgan Housel:
And I use a story of Bill Gates. And this is somewhat well known about bill Gates, but Bill Gates went to the only high school in America that had a computer. It was the Lakeside school in Seattle. And that is obviously what got him into computers. When he was at the age of 14, he had access on a daily basis to a more powerful computer than almost any college, University did in the United States.
Morgan Housel:
So, if you just think about the dumb luck of that, and it was just dumb luck that he went of the thousands of high schools in America, Bill Gates went to the one that had a computer.

Morgan Housel:
And he has said in no uncertain words, he said, the school we went to is called the Lakeside school. And he gave a commencement address about a decade ago. And he said, quote, “If there was no Lakeside, there would be no Microsoft”. Like he knows exactly what that luck led to.
Morgan Housel:
And it’s not to say that Bill Gates is not a genius, but he’s not one of the hardest working devoted men in the history of business? Of course, he is. But you cannot discount that ridiculous element of luck that got him to where he is.
Morgan Housel:
And there’s this other side of the story that’s really interesting, which is that at Lakeside Bill had, as in his own words, a best friend named Kent. And Kent was just as interested in computers as Bill. He was probably more talented in computers and more business oriented than Bill was. Kent was by Bill’s own words, was his absolute genius about computers and the business of how you could turn computers into a business.
Morgan Housel:
And Bill and Kent went through high school thinking that they were going to go to college together and they were going to start a business together. They had this planned out. So, Kent would have been a co-founder of Microsoft. Kent may have been the CEO. He may have been the driving force of Microsoft, but before he graduated high school, he died in a mountaineering accident.
Morgan Housel:
So here is the risk side of it. Bill Gates got the luck side of it. He went to the only high school in America that had a computer. Kent who was in the same situation, faced this ridiculous tail risk, this black swan risk and he died when he was 17.
Morgan Housel:
That is like the risk and luck side of life. And we don’t appreciate that enough. It can be so difficult to piece that together in hindsight, because people don’t want to look at someone who’s very successful and say, “Well, they were just lucky.” Because most of the time, they weren’t just lucky. Of course, they put in the effort, they have the intelligence, they have the drive, they took the risk.
Morgan Housel:
But in almost every particularly extreme case of success, there was an element of luck that is easy to discount. And also, when you have a business failure and investing failure, a marriage failure, whatever it is, there is very often a degree of just risk. Risk being out defined as something that influences an outcome that was out of your control. Things like something that you did not have control over. And that was more powerful than the actions that you deliberately took.

Morgan Housel:
And it’s just very difficult to measure those two things with any sort of precision, but they obviously play a huge role in outcomes in life. And so, the advice to my daughter and I wrote something similar to my son as well, was be careful judging people. I phrased this much better. I’m trying to remember exactly how I phrased it.
Morgan Housel:
But be careful judging people’s success and failures, especially your own. And be careful looking at people who are very successful and just saying, “Well, they’re smarter than me. They worked harder than me”. Maybe that’s true, but there’s an element of that, of which that is not true.
Morgan Housel:
And be careful looking at people who are less successful than you, less wealthy than you, who work in much lower circumstances than you. And attributing that position to the lack of effort or laziness, or lack of intelligence that they had, because that is almost certainly not the case, at least on average, most of the time.
Morgan Housel:
That was my advice to them. Just to be more cognizant of the role of luck and risk in life.
Dr. Jim Dahle:
Another piece of advice you gave her was that it’s okay to admit that your values and goals have evolved. Forgiving yourself for changing your mind as a superpower, especially when you’re young. Why do you think the young struggle with changing their mind?
Morgan Housel:
It’s appealing to think. I think this is especially true for young men. It’s less true for young women, but for young men, it is appealing to think that you have the world figured out by about age 22 or 25.
Morgan Housel:
Because that is the age I think, at which you start realizing that you do have intelligence, and you can add value in the world that you do start to understand things like economics and politics. You gain a little bit of understanding. It’s easy to just jump to a conclusion then that you have it all figured out.
Morgan Housel:
And you realize, look, I’m 36. So, I don’t want to pretend like I have things figured out. When I’m 66, I’m going to look back at what things I say today and realize they were ridiculous.

Morgan Housel:
But that’s the point, realizing that there’s so much of the world that you have not seen yet, and that you’re not going to see until you age in life. And even at the end of your life there, you’re only going to have viewed and experienced a tiny fraction of the world and that a tiny, tiny infant decimal fraction of people who are out there who have different experiences and different views than you have.
Morgan Housel:
And therefore, just being okay with the evolution of your ideas. I love the phrase, the saying, “Strong beliefs, weakly held” which is a great way to think about a lot of things in life. Like it’s okay to have really strong views about how things in economics and finance work.
Morgan Housel:
But being open to the idea that because you have only seen a tiny fraction of the world, that the views that you have, have been influenced by that, that tiny fraction of the world. And there’s this huge other side of the world that is going on, that you haven’t seen, you haven’t experienced. You’re unaware of that, that is a puzzle piece of how the world works that you’ve not experienced it.
Morgan Housel:
As you go through life, seeing more of that and meeting new people who have different experiences then you, your views are going to evolve and that’s not only okay, that is a great thing.

Dr. Jim Dahle:
No, I think that’s a big issue with doctors. There’s a fair number of people that get locked into this career in the early 20s. And they finally pull their head up at the end of the training pipeline in their mid-30s and realize, “Wait, this isn’t what I want anymore. I’ve changed dramatically in the last 15 years”.
Dr. Jim Dahle:
And a lot of them feel very stuck because now they owe $200,000 or $300,000 or $400,000 in student loans. They’re not qualified to do anything but doctoring that could possibly have a chance of paying off those loans. And it becomes a serious existential dilemma to them that they’re doing something with their life they don’t really want to do and feel stuck about doing it. Do you have any advice for those people?

Morgan Housel:
Well, I think we accentuate this problem that for all careers, including medicine, we basically ask people to figure out what they want to do for the rest of their life at age 18, or even less than that. If you’re applying for college and you’re picking out a major, age 17. 17, are you kidding? Have you met a 17-year-old? They’re going to figure out what they’re going to be doing 40 to 80 hours a week in their 60s. It’s nuts.
Morgan Housel:
In a lot of ways, I really appreciated that I did not start college until I was 20 and I didn’t graduate till I was 25, because I think just there’s so much maturity progression that takes place in your early to mid-20s. And a 25-year-old on average, I think understands things about themselves then a 22-year-old does not. The growth happens so quickly in those years. That it’s really important.
Morgan Housel:
I don’t know if I have advice for someone who’s a doctor who’s in their 40s or 50s or 60s who is realizing that they don’t necessarily know what they want to do. I think there are many people. I assume Jim, I’m going to make assumption that you do love medicine, but you’ve obviously found a niche in finance and writing outside of that, doing something else, which I think is amazing.
Morgan Housel:
But less so far for advice for people who are in that position, I think my advice would be to people who are maybe in college, thinking about medical school, that the value in delaying a decision for a couple years, even if you’re delaying it for one year, while you go out and you do something else. If you hike the Himalayas and you’re just thinking about, it’s just like the solo mission where you’re learning about yourself is so ridiculously valuable for everyone.

Morgan Housel:
And that, especially if you look back and you’re in your 30s, 40s, 50s, what was the cost of delaying a decision by one year? By starting med school at 24 instead of 23 or whatever it was? Nothing. It would probably mean nothing to you.
Morgan Housel:
In hindsight, that one year is nothing but in your early 20s, that one year is everything. It’s like reverse compounding. The short term is so valuable, but in the long-term, it doesn’t matter that much. So, the opposite of compound interest. That would be my advice for most people in those.
Morgan Housel:
And that’s true for not just medicine, but almost any career. Like me, myself, like I wanted to be an investment banker. I wanted to be a private equity CEO and I ended up as a journalist. Like people change. You always change.

Morgan Housel:
I think also in terms of financial planning, I have a chapter in my book about this, the extreme ends of finance by which I mean, people who have extremely high savings rates, they’re part of the FIRE movement and they’re saving 90% of their income. Or like the YOLO movement of people who are just blowing everything and baring themselves in debt because you only live once. Let’s just do it.
Morgan Housel:
The extreme ends of finance obviously, they increase the odds of future regret. I just think the odds of balancing things out and realizing that you should save money and you should also live and enjoy your life. It’s not shocking advice, but there are so many people on the extreme ends of that. This is particularly true in the last couple of years when the FIRE movement really took off and people who are saving 90% of their money so that they can retire when they’re 25.
Morgan Housel:
It’s a great movement, obviously. I think it’s great because controlling your time is so important to happiness, but my guess would be not only some, but the majority of those people will look back and not necessarily regret it, but realize it wasn’t the best decision for them.
Morgan Housel:
Because so much of life fulfillment and happiness is the stuff that you get from work. And not just working on projects that you love, but working in an office with other people, meeting people who you don’t like and disagree with is an important part of life. Those extreme ends of any sort of financial planning always make me a little bit nervous.
Dr. Jim Dahle:
You addressed some of those in what I think is the best article you ever wrote, which I’m not surprised is the title of the book you have coming out. The psychology of money. This is something you wrote in 2018. It’s an article I deeply wish I had written because it’s filled with so many pearls that it should be required reading for humans. I wanted to pull a few of those out today and discuss them.
Dr. Jim Dahle:
The first one, you just touched on, but in the article, you described it as, “Things change, and it’s hard to make long-term decisions when your view of what you want in the future is so liable to shift”.

Dr. Jim Dahle:
So how do we avoid becoming too devoted to one path, to one goal or one outcome and end up regretting it when our desire inevitably changes? How do we avoid that? Do we just avoid these extremes, avoid being hyper FIRE and avoid being totally YOLO? How do we avoid that?

Morgan Housel:
It’s probably that, but it’s also just from a general sense, realizing that the most valuable financial asset you can have is options. And I don’t mean derivatives. I don’t mean call options. I mean, having options in life. The ability to do, one of that is flexibility in where you live, flexibility on when you can retire, flexibility on the kind of jobs that you can do, flexibility on the different companies that you can work for.
Morgan Housel:
Anytime you lock yourself into anything, anything, even if the thing you’re locking yourself into seems amazing. If you accept how much people change over time, you realize that having options are so incredibly important.
Morgan Housel:
This to me is something that’s really simple about just like saving cash. A lot of people will say, “Well, what are you saving for? Are you saving for a down payment on a house? Are you going to buy a new car?” And I was like, “No, I’m just saving so I have options.”
Morgan Housel:
I have no idea what is going to change in my views or my values in the future. But I know that they are going to change. And I just want to have enough options in my finances and in my career and where I live and what I do so that when I change, when I come to that fork in the road, I can say, “That’s what I want”.
Morgan Housel:
It’s subtle. And I don’t have any firm things on this because it’s so different for everyone. I think the only way to think about it is through a subtle thing, like give yourself options.
Morgan Housel:
You’re right. That’s something like going to med school in particular. More so than even something like law school locks you into one field. If it doesn’t lock you in, you have the option of quitting and doing something else, but you’ve invested so much into it that it creates risk.

Morgan Housel:
There is a sense of this, that just accepting that amount of risk is inevitable in life. That there’s not much you can do about it. I wish I could give you an answer and say, “Here’s the easy solution about how to get around this”. But I don’t think there is one.
Morgan Housel:
I think this was one of those unfortunate realities of life that the best you can do is remain cognizant of that. So that when you are making a decision to lock yourself into it, you realize what you were getting into and that you were diving into this feet first, without thinking that locking yourself into something that even feels great in one moment is still going to feel great in the end.

Morgan Housel:
Another part of this is realizing that particularly when you lock yourself into a career, whether that is medicine or finance or law, particularly the highly compensated careers, it’s very easy to say, “Look, I know this is going to be hard work. I know this is going to be stressful, but I’m going to make a lot of money. So that’s, what’s going to make it worth it”.
Morgan Housel:
And that mentality, I think is almost universally for everybody is something that is easy to fool yourself about. Because the evidence that everyone gets accustomed to the amount of money that they make is so overwhelming.
Morgan Housel:
And the evidence that people will not get accustomed to the stress of a long commute, the stress of working night shifts, that you will not become accustomed to that, but that will always be a bug in your side is overwhelming as well.
Morgan Housel:
That to me, particularly for regardless of your career, this is mostly, I think, as I’m saying this advice for people in college, that if you are willing to accept things that you know are going to suck in your career, but you think it’s okay because you’re going to make six figures. That’s when I would stop and say, “Hold your horses. This is something you’re almost certainly going to regret 10 or 20 years down the line”.

Dr. Jim Dahle:
Yeah. I think there’s a lot of truth to that. And I think our listeners have great insight into that fact. I think many of us learned it the hard way, but we’ve certainly all learned it.

Dr. Jim Dahle:
A second great pearl from that article was this one. You said, “The idea that the past offers concrete directions about the future is tantalizing. It promotes the idea that the path of the future is buried within the data. Historians or anyone analyzing the past is a way to indicate the future. Some of the most important members of many fields. I don’t think finance is one of them, at least not as much as we’d like to think”.
Dr. Jim Dahle:
So, here’s the question for you? How can we use past data effectively without relying on it too much?
Morgan Housel:
Let me first give you an example of what I mean. We have good data on the stock market, going back to the mid-1800s, going back to the Civil War era. Jeremy Siegel of Wharton, Robert Shiller of Yale have put together these data sets of basically recreate the S&P 500, going back to the 1800s.
Morgan Housel:
So, we can look at that and say, “Look, now we have this huge data set that we can learn about the market. What is the historical average PE ratio going back to the 1800s? What is the historical frequency of different shifts in industries?” We have all this data we can look at, but so much has changed.
Morgan Housel:
Like the idea that we can compare the S&P 500 in 2020 to the S&P 500 of 1865 is absurd. Just about things like before about 1950s, the majority of public companies were banks, insurance companies, and railroads. That was it. And then a few industrial companies sprinkled in there.
Morgan Housel:
You look at the S&P 500 today. It’s overwhelmingly technology companies, multinational companies that have a completely different asset makeup. They have very few physical assets. They’re not rebuilding manufacturing plants every year. They’re not railroads that are heavily regulated like they were back there. It’s just a totally different makeup. So, we should not pretend that the stock market of even the 1970s is comparable apples to apples, to what it is today.
Morgan Housel:
There also things like shifts in different rules for how businesses report the results, how they account for the results that change over time. So, comparing the earnings of the S&P 500 today is not comparable to how it was in even the 1980s. Like fairly recent history, we can’t compare that.

Morgan Housel:
And that’s why you have things like the S&P 500 has traded above its long-term PE ratio, 97% of the time for the past 30 years. Now, some people would look at that and say, “The stock market’s been a bubble for 30 years”. I would look at that and be like, “No, the data is just not comparable. You can’t compare what’s going on today to the average PE ratio from overtime”. So that’s where people get hung up in history.
Morgan Housel:
And look, if you view finance as something like physics, that is a force of nature with immutable laws, like we can compare how physics worked in the 1800s to how physics works. Like nuclear energy was the same in 1945 as it is today. Those things don’t change. The laws of physics don’t change, but finance evolves. It evolves incredibly.
Morgan Housel:
And just compare also the makeup or the structure of the stock market. Compared to the high frequency trading today, where trading is literally going down in picoseconds, which I think is a trillionth of a second. That’s how they measure high-frequency trades today.
Morgan Housel:
Compare that with even as recently as the 1960s, where there was a couple of guys on the floor. Not the 1960s but the 1990s. There’s a couple of guys on the floor, like waving signs, like “Buy me tension. No, 10. No, 7”. And now it’s like this high frequency, it’s completely different. So that’s when we get hung up in history.
Morgan Housel:
What we can do about that though, is try to pick out the common themes over history, not the specific data points, but the themes of human behavior that show up all throughout history that don’t change over time.
Morgan Housel:
Things like calm plants the seeds of crazy. Calm times in the economy, calm times in the stock market, plants the seeds of the crazy times. The lack of recessions, plants the seeds of future recessions, because not having recessions causes people to take risk and go into debt. And that debt causes the next recession.
Morgan Housel:
The lack of bear markets causes people to get really excited about the stock market and a bit of valuations. And then high valuations increase the odds of a bear market. A takeaway like that is something that we can learn from history.

Morgan Housel:
How people think about risk and greed and fear doesn’t change over time, because it’s fundamental to who we are as humans. Even if the specific data about what’s going on at the technical level is always evolving. How the few behaviors that really guide economic booms and busts the stories that matters don’t change over time. And I think that’s what we can learn from history.

Dr. Jim Dahle:
There is another pearl in there, which I’m sure other people have talked about in the past, but I think you put better than I’ve ever heard it before. You said, “Wealth, in fact, is what you don’t see. It’s the car that’s not purchased. The diamonds not bought. The renovations postponed, the clothes forgone, and the first-class upgrade declined.
Dr. Jim Dahle:
It’s assets in the bank that haven’t yet been converted into the stuff you see. When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars”, which is literally the opposite of being a millionaire. This is especially true for young people. Why is this concept so hard for people to understand?

Morgan Housel:
It’s hard I think because the idea that wealth is what you don’t see. Because it’s impossible to learn about finance and to learn from other people, unless you can see what they’ve done. I’ve used this analogy before. I use this analogy in the book.
Morgan Housel:
Take something like physical fitness. A lot of people will learn about physical fitness and have goals about physical fitness because they see somebody else who’s in great shape. And they say, “I want to look like that person. They got their chiseled and they’re in good shape and they look great. I want to look like that too”. You see it and that’s how you learn from it.
Morgan Housel:
And you can’t see someone like the classic millionaire next door, who is a multimillionaire but lives in a very modest house and drives a 10-year-old station wagon and it has a Casio watch. It’s so hard to look at that person and say, “That’s my role model. That’s the person who I want to be”.
Morgan Housel:
The person, particularly as I say, for young men who their financial role model is, is the guy with the Ferrari and the guy with the Rolex and the guy with the 10,000 square foot house.
Morgan Housel:
If you see someone driving a Ferrari, the only thing that you know about their finances is that they have $300,000 less in the bank before they bought the Ferrari. That’s all you know.
Morgan Housel:
And if you understand the history of people “faking it till they make it”, particularly in America, the amount of debt that is fueling so much consumption, it’s off the charts. It’s off the charts.
Morgan Housel:
I was a valet at a high-end hotel during college. And what’s cool about valets, you get to know the regulars who come in. You become friends with them. There are people who come in three or four times a week. And I was flabbergasted at the people who would come in Porsche’s, and Ferrari’s. And my initial reaction as a 20-year-old was, “Oh, this guy’s rich. This guy is successful”.
Morgan Housel:
And you get to know them and get to know what they do and realize a lot of them were not that successful. They were mediocre career successes who spent all of their money on a Porsche. And it just blew my mind. I met so many people like that. It completely changed my view of what wealth is because you meet those people.
Morgan Housel:
And then on occasion, you’ll meet someone who is so modest and mediocre, and you realize they have $10 million or whatever. And that’s when you realize that wealth is what you don’t see.
Morgan Housel:
A question then becomes, “Well, then what good is wealth? If you’re just to hoard it in the bank and not use it on yourself, what good is it?” To me, it’s always to get back what we were talking about before. It gives you options. It gives you options in your career. It lets you do whatever you want to do. It lets you shift your career. It lets you move to where you want to do.
Morgan Housel:
I use the example in the book of my dad, who as you mentioned was an ER doctor. Working in the ER, as you will attest, I’m preaching to the choir now is stressful. The stress of it. The night shifts. It grades on people. My dad did it for 22 years, 25 years, and then he quit.

Morgan Housel:
And he quit because as I mentioned, his poorness from his early years, led him to save a big part of his money. Not a crazy amount, but he had very good savings, right? So, when he wanted to quit, he had options. He could say I’m done. And I compare that to some of other doctors, coworkers of his who didn’t save as much and had to keep grinding away when they were so exhausted and didn’t want to do it anymore, but they didn’t have the option to quit.
Morgan Housel:
So, having those options, controlling your time, I say, is the highest dividend that money pays. If you have control over your time, control over your calendar, that is going to lead to more legitimate happiness for the most number of people than any material possession will ever bring you.
Dr. Jim Dahle:
Well said. Well said. You’ve also talked a lot about pessimism in the past. You’ve described it as being seductive. Where are people so attracted to pessimistic financial outlooks when the history of man and even finance could be titled “The Triumph of The Optimists”?
Morgan Housel:
I think by large pessimism is appealing. It’s seductive because it sounds like somebody’s trying to help you. Whereas optimism sounds like a sales pitch. Somebody is trying to sell you something.
Morgan Housel:
If someone comes to you and says, “Jim, there’s something about your portfolio. There’s a hidden bomb in your portfolio and it’s about to bankrupt you”. That is like red alert. I want to hear what you have to say. If I come to you and say, “Hey Jim, I have a stock that’s going to triple in the next week. Do you want to hear about it?” Some people will say yes, but more people will say, “That’s BS, get out of here. You’re just trying to sell me something, get out of here”. And that’s true for a lot of topics.
Morgan Housel:
Daniel Kahneman, the great psychologist talks about a lot of this is just a function of evolution. We are trained to react to threats with much more intensity and being alert than we are to opportunities because that’s what keeps people alive over time.
Morgan Housel:
So, I just think it’s mainly a matter of what it sounds like. It’s just so much more appealing to think that the people who are out there saying, “There’s a recession coming, the dollar’s going to collapse, hyperinflation is right around the corner” that those people know something and are more astute about the economy than the people who say, “Look, things are going to be fine over time. Things are going to be great”. That tends to look naive. The people who say, “Things are going to be fine over time”, they look like they’re naive.

Morgan Housel:
One kind of quirk about this is I think the optimist who says, “Things are going to be okay over time”, the most important phrase, the words in that phrase is “over time”. And a true optimist is not someone who thinks that things are going to be okay. They are always going to be okay. That’s being complacent.
Morgan Housel:
An optimist is someone who knows that the world is going to be filled with recessions and bear markets and collapses and pandemics and crazy political times that the world’s going to be a constant chain of disaster that there’s always bad news out there, but that does not preclude long-term growth. That’s what a real optimist is. And that’s where I think a lot of people get these things wrong. Are you an optimist or a pessimist? I’m an optimist in the long run. But I also know that the short run is going to be a disaster because it always is.
Morgan Housel:
If you study particularly financial history, but also things like politics as well, you just have to accept that the world breaks about once per decade. Once per decade, something happens in the world that just makes you quit, that just throws everything for a loop. Covid-19, 2008, September 11th, Fall of the Soviet Union, the Oil Wars in the 1970, JFK being assassinated, World War II, the Great Depression.
Morgan Housel:
Every decade, something happens that just throws everything for a loop. And that’s always going to be the case. But that does not preclude long-term optimism. All those events that I just said, how much economic growth and stock market growth have we had during those periods when the economy, when the world broke once a decade? Ridiculous amount of growth.
Morgan Housel:
So that’s my form of optimism. It is being cognizant and accepting of a short of constant short-term disasters but realizing it does not prevent long-term growth.

Dr. Jim Dahle:
Now you’ve written that investor behavior trumps everything. If you can’t get that right, your asset allocation, fee avoidance, security selection, and even tax planning, don’t even really matter. You’ve kind of pictured it as a pyramid where investor behavior is the base of the pyramid on which everything else is built. What do you mean by good investor behavior and what are the best ways for an investor to learn it?

Morgan Housel:
I think good investing behavior by and large means understanding yourself. Being introspective about yourself and understanding your own goals, your own risk tolerances, so that you can let compounding do its work.
Morgan Housel:
And what I mean by that is if you understand that you are someone who is true for me, who has maybe a lower risk tolerance than other people of your age and income and assets would, if you just accept that.
Morgan Housel:
You’re introspective about yourself and you say, “Look, I just don’t have a desire to take that much risk. So, I’m going to have more of my assets in cash and bonds and whatnot. So therefore, I’ve set myself up so that I can have an investing behavior that works.”
Morgan Housel:
Because when the market falls 30% like it did in March or 50% as it did in 2008, since I’m controlling my behavior so that I can remain invested during those periods, the worst thing that you can do, and you can be the best stockbroker in the world, the best economic analyst, pure genius, have all the mental horsepower that exists in the world.
Morgan Housel:
But if you panic in March of 2020, none of it matters. None of it matters. And a lot of people did that. Particularly some of the smartest people, because they used their mental horsepower, they use their IQ to lever up, to have all of their assets in high risk, small cap stocks, whatever it is.
Morgan Housel:
But if they’ve not mastered the behavior of what they’re getting themselves into of understanding how they are going to react, how they’re going to feel when the market loses 30% or 50%. And when it does do that, panicking at the bottom, that extinguishes all of the intelligence that you had before. So, it’s that pyramid and intelligence and IQ is at the top. If you don’t get the base of controlling your emotions, if that base crumbles all of the intelligence above it just falls away, none of it matters.

Morgan Housel:
So, you really have to get those steps right in order. It’s like behavior at the bottom, you got get that. And then asset allocation above that. You really got to master that. And then as you get up, you can start getting into things like maybe stock picking and taxes and all these other strategies and quirks of finance, but you have to get them right. You have to get them in the right order.
Morgan Housel:
And a lot of people, maybe they are interested in behavioral psychology, but they’re first going to go out and build a really complicated stock model and be a stock picker. And then they want to learn about psychology. It’s like, “No, no, no. You got to get the psychology first. Nothing else matters until you get that”.

Dr. Jim Dahle:
Well said, well said. Speaking of March, let’s talk a little bit about current times. In March you wrote, this is the first global crisis in the social media age. What we’ve learned from social media in the last decade is that information spreads fast, false information spreads fastest just because it’s more sensational and tribal identities are heightened when debates take place online versus in person. So healthy debate quickly descends to my team versus yours battle.
Dr. Jim Dahle:
FDR said, “The only thing we have to fear is fear itself in an era when the only information source was a morning newspaper edited and fact checked by professionals, written by journalists who weren’t motivated by likes, retweets or paid per click”. This seems almost prophetic in retrospect, in describing the last five months. But what has surprised you about the world during this health and financial crisis?

Morgan Housel:
What’s interesting I had read and written about this several times well before 2020. But if you go back and read about what took place during the great plagues, I think the 1300s and maybe the 1600s, I think it was the plague in London. You keep reading these anecdotes about people became absolutely fascinated in witchcraft, in special potions that were going to cure it, just quackery.
Morgan Housel:
And even during periods where we had virtually no scientific knowledge, what was obvious quackery became really, really popular. And I think it’s popular that when you are in a state of extreme duress to be more attracted to BS forms of news, because it gives you something to hold onto.
Morgan Housel:
The world is uncertain, I don’t know what’s going to happen next, but this guy says he’s got the answer so let’s just clean to that because now I got something to hold onto. That’s always been true, but in the age of social media, it’s true like orders of magnitude more because there’s so much crackery out there.
Morgan Housel:
We’ve seen that this year with all kinds of, we’ve been seeing it for a decade, but now this is kind of the first social, big global crisis that’s taking place on social media. If the fall of the Soviet Union or World War II, the Great Depression took place during an era with Twitter and Facebook, it would have played out completely differently because we’ve created a world now where there’s obviously, this is not a crazy idea.
Morgan Housel:
A lot of people have said this, but there’s no universal sense of right and wrong or facts like there has been in the past. In the past during the 1970s during the big financial tragedies of the 1970s and 1980s with high inflation, people’s news source was Walter Cronkite and everyone watched Walter Cronkite and that was it. And that doesn’t exist anymore.
Morgan Housel:
And in a lot of ways, what we have today is better because a centralized news source has a lot of flaws as well. It’s good to hear. To have more people digging into it and more people providing their views. Of course, that’s great, but it has a really big downside in terms of people not getting into one and not turn a green on fact, particularly in something like a pandemic where it’s really vital that people agree on facts and people agree on what is right and wrong.
Morgan Housel:
In a way that, from my understanding of reading it, it didn’t exist in 1918. Back when there were more universal new sources or common news sources in 1918. Even down to things like from my understanding, we call it the Spanish flu because Spain was the only country that was not regulating news.
Morgan Housel:
So, they were reporting on this flu because all the other newspapers were kind of keeping out of the news, which is a bad thing, of course. But it just highlights the fact that people were reading the same news sources and more or less agreeing on the same facts in a way that doesn’t exist today.
Morgan Housel:
And I think that just leads to a lot of unknowns. We don’t know how this is going to play out. We can’t look at how 1918 played out, how the great depression played out because people were gaining their information, gaining their views, and therefore like their actions were motivated by much more universal agreed upon sources in a way that we don’t have today.

Morgan Housel:
That adds a huge degree of uncertainty of what’s going to happen next, including I can foresee one of the big new stories of 2021 being, vaccine is out, it’s great, hooray, we did this and a very substantial portion of the country not wanting to take it. In a way that I think probably didn’t exist with the polio vaccine in 1950s. Just because there are so many differing views and people talking about adding there, in terms of people having a bullhorn who didn’t in previous areas. You can kind of foresee that coming.
Dr. Jim Dahle:
Yeah, it’s pretty wild. I would think that kind of anti-vaccine movement would have been stemmed a bit by the fact that people are getting to see the first real pandemic in our lifetime. This sort of thing used to be common with measles and mumps and polio and whatever. And this is our generation’s only time we’ve ever seen this. And yet there’s still lots of people who are still very much anti-vaccine mostly for some crazy conspiracy theories.

Morgan Housel:
My understanding, I’m sure this is generalizing a bit, but my understanding is that in what is it, 1957? When the polio vaccine came out 1955, maybe it was more or less everyone in the country lined up, rolled up their shirt sleeve and said, “Give it to me”. And I’m sure that’s generalizing, but now you see some of the polls recently where large chunks of societies are saying, “No”. They’re not going to do it.
Morgan Housel:
And maybe that’s because they haven’t seen the data yet. Once they see the data, they’ll say, “Okay, now I’m ready to take it”. But it’s a very different world when everyone has a bullhorn versus a world when you had more regulated bullhorns, people who had the greatest credentials had the greatest bullhorns, and now that’s no longer the case for a lot of disciplines.

Dr. Jim Dahle:
Yeah. That’s certainly true. And people just don’t want Bill Gates nano transmitters injected into their body. Whatever crazy conspiracy is going on out there. It’s interesting at the beginning of every year, all the economists line up and make predictions about what’s going to happen over the year, how much growth there’s going to be in the stock market or what interest rates are going to do or what the housing market’s going to do. What does the fact that the coronavirus crisis, at least its timing was basically completely unpredictable, mean for the value of forecasting and predictions?

Morgan Housel:
So, most Wall Street banks put out their forecast for the S&P 500 for the coming year in December. So, in December, they’ll say, “Here’s our 2020 forecast look ahead”. A lot of economists will put, “Here’s our 2020 look ahead, our 2020 outlook”. They put those out in December. And it’s kind of hilarious in a tragic way looking back at those because obviously not a single one of them mentioned Covid-19.
Morgan Housel:
And if you talk to the people who wrote those, they will now say, “Well, look, of course, what we published in December is no longer valid because we could not have seen Covid-19 coming”. And my response to all those, people’s like, “Yes, that’s my point. That’s why those outlooks are ridiculous”. That’s always the case. It is always the case in history. There is no exception to this, that the biggest news story of the year is always something that people could not have seen coming. I don’t think there’s any exception to that.
Morgan Housel:
The biggest risk is always what you don’t see coming. It’s always what no one is talking about. The fact that no one is talking about it and no one can see it coming is what makes it risky. The things that we can see coming, we have time to prepare for. And people are very good at preparing for things. They’re very good at coming up with solutions and avoiding the worst aspects of what was going to coming.
Morgan Housel:
It’s what is you don’t see coming that’s going to crush you. I’ve used the example of how Harry Houdini died. And so, some people know this, but Harry Houdini, one of his tricks outside of wrapping himself in a strait jacket and burying himself, one of his tricks is that he would invite a big strong burly guy on the stage and he would say, “Punch me in the stomach as hard as you can”. It was one of his shticks that he did and people loved him for doing this.
Morgan Housel:
He said that he could absorb any man’s blows, being punched in the stomach. So, one day he is in his dressing room after a show and a group of students comes back to meet him. And one of the students without warning starts wailing on Harry Houdini stomach. And in kind of a joking way, he says afterwards, “Harry Houdini, I was told that you can accept any man’s punches. So, I just wanted to test it”.
Morgan Housel:
Harry Houdini was not expecting this. He did not see it coming so he wasn’t flexing. He wasn’t prepared for it. Long story short, his appendix ruptured from his blows and he died the next day.

Morgan Housel:
And what’s fascinating about this is that Harry Houdini could survive anything. You could wrap him in a strait jacket, bury him under six feet of dirt, and he could survive that. But a college student comes in and punches him in the stomach that he wasn’t perfect prepared for it and he’s dead the next day.
Morgan Housel:
The biggest risk is not necessarily the biggest event, it’s even a small event that you don’t see coming. Now, Covid-19 is a huge event, but the fact that we didn’t see it coming and we were not more prepared for it is what makes it so risky. When you accept that, that is always the case, it makes things like an annual forecast, annual look ahead, just ridiculous.
Morgan Housel:
And to me, I’ve always thought, look, if that kind of forecast is ridiculous, do I just become a fatalist and just say, whatever happens, happens? I’d be like, I have no idea what’s going to happen.
Morgan Housel:
And I don’t think it’s that. I think rather than having a forecast, you should just have expectations. And rather than saying, we’re going to have a lot of growth this year, or we’re going to have a recession this year. You should just say, look, over a period of time, we’re going to have probably two or three recessions per decade. That’s my expectation. I don’t know when they’re going to come. I don’t know what’s going to cause them, but I expect there to be two or three recessions per decade.
Morgan Housel:
And therefore, when they come, whenever they happen to come, whatever happens to cause them, I’m not surprised when it happens. I’m not trying to forecast when it’s going to happen. But when it does happen, I’m like, “Yeah, this is part of my expectations. My assets are prepared for this. I have enough savings to get through this even if I didn’t see it coming”. I think that’s how you deal with a world in which these kinds of things like the biggest risks are always what we don’t see coming.
Morgan Housel:
I’ve kind of acquitted to how California deals with earthquakes. California knows there are going to be big earthquakes. They know it. It’s a fact of life. But you can’t predict when it’s going to happen. You don’t know where or when it’s going to happen, but they’re prepared for it. People should think about the economy and the stock market in the same way.

Dr. Jim Dahle:
Yeah. It turns out everybody’s crystal ball is very cloudy.

Morgan Housel:
Very cloudy.
Dr. Jim Dahle:
So, a lot of people are worried about the actions of the fed. This quantitative easing. All this money that the fed is pumping into the economy by buying up bonds and deliberately keeping interest rates low.
Dr. Jim Dahle:
But you’ve written that the federal reserve learned how to keep the financial system from falling apart. That’s both kept a lot of the economy humming and ruined a lot of assumptions people had about how the economy works.
Dr. Jim Dahle:
Are you worried at all about the actions of the fed in this crisis and what consequences do you see down the road from these unprecedented actions?

Morgan Housel:
Am I worried at all? I would say sure. What the fed is doing is of course creating risks. It is in my view, a smaller risk than not acting. We’re doing chemotherapy right now. Is that a risk? Yes, but cancer’s a bigger risk. So, that’s kind of what we’re doing. What the fed is doing is chemotherapy for the economy.
Morgan Housel:
And so, is there a potential that in 10 years, we’re going to look back at this and we’re going to have a record high inflation that stems from this? Yes. I don’t think that’s likely, but yes, of course that’s possible.
Morgan Housel:
And the reason I don’t think it’s necessarily likely is to try to explain this as a simple way. When the fed is printing money, that is very different from a lot of historical bouts of printing money. If you’re looking at Germany, or Zimbabwe, where they had legitimate hyperinflation, what the fed is doing is very, very different.
Morgan Housel:
In those historical cases of hyperinflation, where the central banks were doing was printing cash and handing it to people in the streets or paying their bills or paying their soldiers or paying reparations to France. That’s what is printing money and putting it back into the economy, just like adding new supply to it.
Morgan Housel:
What the fed is doing these days is very different, which is printing money, but it’s using the money to buy bonds. Why does that matter? Because for every dollar that the fed is printing in cash, they are deprinting $1 in bonds. So rather than adding new supply to the economy, they’re swapping one asset for another. That doesn’t make it risk-free by any means.
Morgan Housel:
But that is why after 2008, when the fed was doing the same thing, a lot of people said hyperinflation, inflation, inflation – That didn’t come 10 years later. I think that that’s the reason why. It’s very, very different from what other cases of hyperinflation have been caused by in history.
Morgan Housel:
The other thing about historical bouts of high inflation is that obviously inflation comes from too much money chasing too few goods. That’s what causes inflation. Historically, the most important side of that equation is too few goods.
Morgan Housel:
When you have hyperinflation it’s because it’s Germany after World War II and their entire manufacturing capacity has been bombed. That’ll give you hyperinflation because it can’t produce goods.
Morgan Housel:
It’s Zimbabwe, after their central government seizes all the farms, which is their main source of economic growth. They seize them, take them in and then mismanage them and all the farms go to hell. And now the economy can’t produce. So, you have too few goods and that is what causes inflation.

Morgan Housel:
There’s almost no historical example of hyperinflation in which the economy is not fundamentally broken in some way, usually from a World War or extremely poor government mismanagement.
Morgan Housel:
Same in Venezuela, where the government seizes the oil production. They have the highest oil reserves in the world, and they’re barely pumping right now. But the industries are just broken.

Morgan Housel:
Now we could have broken industries that come from Covid-19 because hotels, airlines, if this lasts another six or eight months, and it probably will have, you could foresee a situation where half the restaurants and half the hotels shut down.
Morgan Housel:
And then when demand comes back and there’s not enough hotels, there’s not enough restaurants, you’re going to have more money chasing fewer hotels, that could lead to inflation. Absolutely.
Morgan Housel:
So, it’s not risk-free, but I think it’s not as clear as it might seem. It’s not as simple as it seems as fed printing money and that leads to hyperinflation. That was something, that simple logic is really appealing for most of the last decade.
Morgan Housel:
And I think we have to ask ourselves why did it not lead to the soaring inflation that seemed like it was so inevitable? And I think those two reasons are most of the reasons why.

Dr. Jim Dahle:
Let’s turn the page now. You mentioned earlier that most of the listeners of this podcast are doctors and that’s true. Doctors are notoriously bad with money. Do you think that reputation is deserved? And if so, what can an individual doctor and the medical profession as a whole do about it?
Morgan Housel:
I don’t know. I’m pretty sure there are studies out there that look into this. Is it anecdotal that doctors are bad with money? Or is it really systemic? I don’t know the evidence of that, but here’s what I’ll say about it.
Morgan Housel:
It is very common in a lot of fields that if you are very intelligent in one area of life, and obviously all doctors are, by way of getting to where they are, that that intelligence is going to spread to another field.
Morgan Housel:
And just because you are a very talented oncologist or ER doctor, it does not mean that that intelligence is going to spread to stock picking. So, another field outside of doctors are engineers that are historically bad with money because they use their ability. If someone says, “I can build a two-mile bridge, I can send a rocket in the space, of course, I can figure out the stock market”.
Morgan Housel:
That’s a really easy assumption to make, even though those two things are completely separated. The reason being in, what we talked about earlier, which is what really matters for money is not your intelligence. It’s not your IQ. It’s whether you control your behavior or not. And that is totally disconnected from the skills that lead to intelligence and success in other fields.
Morgan Housel:
The other thing that’s true about doctors and other highly compensated fields is that the “keeping up with the Joneses” effect is really strong. And I know, I’ve just seen, I’m sure many people can relate to this, that the sense of “I’m a doctor now so I deserve a 5,000 square foot house and a Porsche and nice vacations to Hawaii, et cetera, et cetera. I deserve to send my kids to Pepperdine.” Whatever it is.
Morgan Housel:
There’s a sense of innocent entitlement that comes from that. And I say innocent because I really empathize with that view, that “keeping up with the Joneses” effect is real. When your friends are also doctors, your coworkers are also doctors, keeping up with that is real.

Morgan Housel:
The other thing is that there’s so much work and stress and effort and investment that goes into becoming a doctor that probably makes it easier to make the jump of “Look, I’ve worked my ass off for 20 years working night shifts and going through med school, I deserve a Porsche”. I can see how that jump would be really easy to make.
Morgan Housel:
So, without seeing any of the data, and of course, without generalizing, there are a lot of doctors who are very good with their finances. That’s probably what I think leads to that assumption, provided that assumption is true.
Dr. Jim Dahle:
We’ve got to wrap up soon. This has been a great conversation. It’s probably going to get 30,000 – 35,000 – 40,000 downloads. What have we not talked about that you think my listeners, these high-income professionals that listen to this podcast need to hear?
Morgan Housel:
I think what’s really true in investing and finance too, is that no one is crazy. People do crazy things with their money, but everyone is just trying to use the view that they’ve had of the world to make sense of a world, to build a model of the world, and then trying to manage their money around that.
Morgan Housel:
And since we’ve all had very different views of how the world works, totally different experiences, we’ve grown in different generations, lived in different parts of the country, different parts of the world.
Morgan Housel:
We all have a different view about how the world works. And it’s really common in finance to again, think that there should be one right answer. Is this asset allocation good or not? Yes or no. Is this a smart thing to do with my money? Yes or no.
Morgan Housel:
And I’ve also thought there’s no right answer to that. And that people do things that might look crazy to me or you with their money. But if you actually dig into their reasoning and their logic, it makes a lot of sense for them.
Morgan Housel:
There are things that I do with my money, that I know a lot of people would disagree with. People say, “Morgan, you’re crazy for doing that”. And I would say, yes, it does look crazy. And even on paper, I can’t justify it, but it makes sense for me. Given my experiences in life, given my goals and outlook with my family, it makes sense for me. I think getting more comfortable with that view that as the saying goes, “Personal finance is more personal than it is finance”.
Morgan Housel:
I think that is probably the most overlooked underrated part of investing and finance. It is just getting to a plan that works for you. Even if it doesn’t necessarily work on paper or someone who is just as smart as you think that’s crazy. If it works for you, that’s great. That’s as most as we can hope for, and more people should embrace those plans that might seem inefficient or not right. But if it works for you and it’s helping you sleep at night, great. I think that’s the highest goal that you can get with money.

Dr. Jim Dahle:
Awesome, Morgan. Well, it’s been great having you on. For the listeners that enjoyed hearing from Morgan, you can hear more from him by taking a look at our 2020 CFE course. It has a talk from him in it.
Dr. Jim Dahle:
You can check out his writing at the Collaborative Fund. His new book, “The Psychology of Money” will be out next month and a lot of great opportunities to learn more from Morgan and his exceptionally brilliant, I think views on behavioral finance and investing. Thank you for being on the White Coat Investor podcast.

Morgan Housel:
This has been a lot of fun. Thank you for having me.

Dr. Jim Dahle:
I hope you enjoyed that as much as I did. I really enjoy reading Morgan’s writing and it was great to talk with him. And that was part of the reason I invited him out to WCI con in March. Unfortunately, he was one of the speakers who wasn’t able to make it due to employer issues, just like a lot of the attendees. But he was more than willing to record his talk and get it into that online course. You can check that out.
Dr. Jim Dahle:
We’ll have a link in the show notes to his new book. You can actually preorder it now. It’ll be out next month – “The Psychology of Money”. I think it’s going to be a bestseller. I expect just as good things out of that as I do Jonathan Clements, excellent book, “How to Think About Money”. And I expect to see it on my recommended list if it’s half as good as the article that formed the foundation for it.
Dr. Jim Dahle:
Thank you to this episode sponsor M3 Global Research. In just 30 minutes, you can positively impact the patient journey, improve the development of medical devices and influence emerging treatments.
Dr. Jim Dahle:
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Dr. Jim Dahle:
Join M3 Global Research and help shape the future of healthcare at whitecoatinvestor.com/m3global.
Dr. Jim Dahle:
Be sure to check out our White Coat Investor communities, both of the WCI forum as well as the subreddit and the Facebook group. Thanks for those of you who have left us a five-star review and for telling your friends about the podcast. It certainly spreads most readily through word of mouth, just from you to your colleagues and your peers and your trainees.
Dr. Jim Dahle:
Keep your head up your shoulders back. You’ve got this and we can help. Stay safe out there. We’ll see you next week on the White Coat Investor podcast.
Disclaimer:
My dad, your host, Dr. Dahle, is a practicing emergency physician, blogger, author, and podcaster. He’s not a licensed accountant, attorney or financial advisor. So, this podcast is for your entertainment and information only and should not be considered official personalized financial advice.
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