In this episode of Motley Fool Answers, host Alison Southwick and Personal Finance Expert Robert Brokamp are joined once again by Morgan Housel to discuss the most important lessons from his book, The Psychology of Money, and how they’ve impacted the way he manages his family’s finances. Plus, you get to hear the backstories of a few of the most popular songs about money.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on February 16, 2021.
Alison Southwick: This is Motley Fool Answers. I’m Alison Southwick, and I’m joined as always by Robert Brokamp, Personal Finance Expert here at The Motley Fool. Hey, Bro, how are you doing?
Robert Brokamp: Just fine. How are you, Alison?
Southwick: I’m doing great. In this week’s episode, Morgan Housel is back. He’s going to talk about his book, The Psychology of Money. All that and more, on this week’s episode of Motley Fool Answers.
Brokamp: Well, Alison, what is up?
Southwick: Well, Bro, I feel like you are the ham to my cheese, we compliment each other. You bring the practical money advice. Like, “Here are 14 different studies about required minimum distributions.” That’s Bro’s department.
Brokamp: Which everyone loves by the way, they just love it.
Southwick: Right. Well, you are the bachelors of science to my BA more liberal arts degree.
Brokamp: So you’re saying I’m the one with the BS, is that what you’re saying?
Southwick: I say it outloud, but yes. If you want to sit in an overstuffed armchair, gaze out a window and say, “You know what’s fascinating about the art on currency in Australia?” That’s my department. If you want practical tips and facts, go down the hall to Professor Bro’s office. Because where I am, we just talk about, like, isn’t that funny? Here we are. For today’s What’s Up, Alison? I present the backstory to three songs about money. Is this practical advice you can use to rebalance your portfolio? Absolutely not. Is this pure waiting at the Volkswagen dealerships for your car to get fixed? Escapism? Yes, it is. That’s why this was written, here we go. By the way, the bill came out to only $64, so we’re fine.
First up, Rich Girl by Hall and Oates. The single originally appeared on the 1976 album, Bigger Than Both of Us. “You’re a rich girl and you’ve gone too far because you know it doesn’t matter anyway. You can rely on the old man’s money. You can rely on the old man’s money.” This song was rumored to be about the then scandalous newspaper heiress, Patty Hearst. However, when the song was written in 1977, Daryl Hall was dating a girl named Sarah Alan. But it’s not about Sarah either. No, it’s about Sarah’s ex boyfriend, Victor Walker, described as a spoiled fast food heir, who was a total burnout. For those of you in the Chicago area, you might know the Original Pancake House. Apparently his dad, Victor Walker Senior, owned them and some other franchises. Why didn’t Hall just title it, “Rich Guy?” I guess it doesn’t have that same balance, but the motivation probably lies somewhere in the Venn diagram of misogyny, money, and power. But according to peer research, the wealth gap between America’s richest and poorest families has more than doubled from the late ’80s to 2016. Is the guy Rich Girl was written about even richer today? Well, it looks like Victor Junior’s brother is actually still in the family business of pancake restaurants. When you Google Victor Walker, you either learn about his entrepreneurial dad or that Victor Junior is memorialized forever as a big, rich jerk. Lesson, if you’re going to be wealthy, don’t be a jerk about it, because your ex girlfriend’s going to tell everyone, and then next thing you know, yeah, that’s what you’re famous for.
Brokamp: Here’s what I remember that song for. I was eight when that song came out and it had another word in it that rhymed with rich and it was quite scandalous that they actually played that song on the radio back then.
Southwick: Yeah, the B word.
Southwick: Yeah. Things have changed.
Brokamp: Yes, true. It’s true.
Rick Engdahl: I grew up with that song somehow never knowing that it was Hall and Oates.
Southwick: Oh, yeah?
Housel: Yeah. I don’t know why. I just never knew that.
Southwick: You are today years old that you learned that Rich Girl is by Hall and Oates?
Housel: Yeah. It’s weird. It’s not the song.
Brokamp: Because that was one of their first big hits, and then they really became famous in the early ’80s.
Southwick: Bro, Rick, I’m not going to ask you, because you probably don’t know, “Cash Rules Everything Around Me.” Were you going to get it?
Brokamp: I was not going to get that, no.
Southwick: So, if you’re writing a list of the greatest hip hop or even greatest songs ever, a few are going to argue if you put CREAM on that list, the song has a catchy refrain, which I will butcher for you now. “Cash rules everything around me, CREAM, get the money. Dollar, dollar bill y’all.” Trust me, it’s catchy when I’m not doing it, which is why the message of the rest of the song is largely ignored. It’s told from the perspective of a young man who wants to be successful. He’s trapped in poverty and by lack of opportunity. But as the world turns, I learned life is hell, living in the world no different from a cell. But that hook, yeah, it’s so good that other performers sample it, reference it. You’ll hear it in commercials. But of course, they all tend to leave out the bummer parts. Even George W. Bush reportedly listened to CREAM on the campaign trail to himself. That’s fun.
As Pitchfork writes, a song that was meant to be an indictment of the conditions created by a capitalist economy has become synonymous with capitalist pursuits. The song has become a tool of the unscrupulous system it was meant to expose. In a way, CREAM has become something like the hip hop equivalent of Bruce Springsteen’s Born in the U.S.A. If you want to start up some jingoism at a rally in this country, just play Born in the U.S.A. Never mind that it tells the story of a man returning home from Vietnam and not finding much of anything waiting for him. As Rob Harvilla writes for The Ringer, prior to CREAM, I’m guessing that the vast majority of people who’d soon be wearing those Wu-Tang Clan t-shirts, a lot of suburban teenagers for starts, had no idea what winter in Staten Island was like for a poor, young, black person. But can you think of any four sadder words than “winter in Staten Island?” I mean, I assume we have listeners in Staten Island. I mean, you can write to me and tell me I’m wrong. I don’t know.
A 2018 study by Harvard professors Raj Chetty and Nathaniel Hendren looked into what life was like for 20 million kids and their parents as far as economic mobility goes. They found out that black boys are the least likely of any group of children to climb out of poverty. Hendren says that part of that difference might have to do with incarceration rates, which are highest for black men. Yes, that’s in the song too.
Written for the movie 9 to 5 the song was a No. 1 hit in 1981 and went platinum in 2017.
Southwick: Timeless, yeah. The movie and the song were inspired by 9 to 5, an organization that later became the National Association of Working Women that was created in 1973 with the aim of bringing fair pay and equal treatment for women in the workplace. It’s all there in the song. “We know it, working 9 to 5. What a way to make a living. Barely getting by, it’s all taking and no giving. They just use your mind, that they never give you credit. It’s enough to drive you crazy if you let it.” The lyrics go on about how you deserve a promotion, the boss won’t let you move ahead. I swear sometimes that man is out to get me. As the Daily Beast puts it, the feminist movement of the ’70s organized resistance against male bosses who regarded women around the office as office wives and not fellow professional. Sexual harassment, low salaries, no raises or promotions, rapid sex and racial discrimination, no sick leave. It’s just another day’s work for a woman in the ’70s and all too often for many people some 50 years later. It hurts to say 50 years later. [laughs]
Let’s pause for a moment to acknowledge just how genius the typewriter tapping and dings are in that song. I know we’re in this Dolly Parton renaissance where everyone agrees she’s a national treasure. But she’s also a song writing genius and probably just a genius genius. Anyway, things have improved a lot for women in the workplace since the ’70s. The gender wage gap persists though, with women making roughly 80% of what men make and combine that with the pandemic hitting women harder than men. Well, I think this song will continue to be popular well into the future. To learn more about the 9 to 5 movement, you can check out a documentary that was just released in November called 9 to 5: The Story of a Movement. In closing, often songs about money are about excess, living large. Lord, won’t you buy me a Mercedes-Benz? But many songs about money, while insanely catchy, also have a deeper story to tell about the power of money, who has it and who doesn’t. If you’ve heard the phrase, “Don’t bore us, get to the chorus,” in the case of songs like Rich Girl, CREAM and 9 to 5, it’s more like economic equality, get to the chorus. And that, Bro, is what’s up.
Brokamp: Morgan Housel is back. For those who don’t know, Morgan was a writer for The Motley Fool for a decade and is now a partner at the Collaborative Fund, a venture capital firm. Last week, he was on the show to talk about some timely current events, but this week he’s here to discuss timeless lessons on wealth, greed, and happiness. In fact, that’s the subtitle of his book, which came out late last year, The Psychology of Money. Thanks for joining us again, Morgan.
Morgan Housel: Thanks for having me. Good to be here.
Brokamp: Now, when people talk about your work, they express appreciation for your insights, but also, your writing skills. To showcase both, I thought for this interview, I’d read 10 items from your book, most are direct quotes, and then you expound upon them. How is that, sounds good?
Housel: Sounds good.
Brokamp: All right. Here we go. No. 1, this came from your introduction and you were talking about two guys who basically ended up in two different places financially toward the end of their lives. Here’s the quote: “In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections, massively outperform someone with the best training, the best education, the best connections? I struggle to think of any.”
Housel: I think, that’s true in investing, that there are people with no experience who do better than the professionals. Not just a couple of random examples, but a lot of people will end up doing, if you are just dollar-cost averaging into your 401(k) and leaving it alone for 20 years, you will probably outperform the huge majority of professional Wall Street investors. I think that dynamic just doesn’t exist in other fields. To me, the big takeaway from that is that good investing is not about what you know, it’s not about how smart you are or where you went to school. Good investing is overwhelmingly about how you behave. It’s just your ability to take a long term mindset, your relationship with greed and fear, how gullible you are, who you trust. Those kinds of things are not something that are necessarily taught in school that you learn from going to Harvard Business School, it’s just an innate part of who people are.
To me, it’s an optimistic takeaway that ordinary people can and do really achieve great investing results that are equal, if not better than a lot of professional investors. There aren’t many other fields that are like that. You don’t have ordinary people who can perform open heart surgery better than Harvard-trained cardiologists. That will never happen, but it does happen in investing, which to me is just, again, a takeaway about what we should focus on investing, the behavioral side versus the analytical side, and an optimistic realization that ordinary people can do it.
Brokamp: Yeah. The story that you told in your book was really the story of one guy who worked at a gas station and worked at JCPenney at night sweeping floors and died with millions of dollars compared to a Wall Street guy who had millions and millions of dollars, but lost most of it during the Great Recession.
Housel: Yeah. That to me is just a perfect example of just what matters in investing. It’s not about how smart you are, it’s just your ability to be patient and keep your hands off it and let compounding work for decades versus all of the insight that you might have about where you think the economy is going to go this year.
Brokamp: Yeah. One of my favorite Warren Buffett quotes talking about investment professionals: “It’s the only industry I can think of, where the professionals’ efforts subtract value from what the layman can do himself.” Let’s move onto quote No. 2. It’s pretty simple. It is, “Bill Gates went to one of the only high schools in the world that had a computer.”
Housel: To me, this chapter is about luck and risk. The interesting thing about luck, and if you think about it, Bill Gates went to the only high school in the United States that had a computer, that is an incredible stroke of luck. That by his own telling, is what created Microsoft. If he didn’t go to the Lakeside School in Seattle, there would have been no Microsoft. That’s how Bill Gates phrased it himself. Was Bill Gates lucky? Yes. Incredible stroke of luck. But that doesn’t mean that he was just lucky. Of course, is Bill Gates a hard working, visionary genius? Yes, of course. 100 times, yes, of course, he is. But there’s this big element of luck. We often overlook luck in business and investing, because if I were to say, “Your investing success is due to luck,” I look jealous. I look like I’m being mean. People don’t want to say that. If I were to say that my own investing success was luck, I don’t want to look myself in the mirror and admit that. It’s a hard thing to accept.
Even though we know that luck is a big part of what happens in business and investing, I think it is systematically overlooked in the world. The other point I made in this chapter was that, the definition of luck is that there are things that can happen in the world that are more powerful and influential than what you did on purpose, that have a bigger influence over outcomes in anything you did on purpose. That’s the definition of luck. That is also the exact definition of risk. The definition of risk is that there are things in the world that are outside of your control that have a bigger influence on outcomes in anything you did intentionally. Luck and risk are the exact same things, just in opposite directions. This is important in investing too, because investors spend so much time thinking about risk and trying to measure risk and risk-adjusted returns, like, risk is the central feature of investing. But we spend so little time thinking about luck, even if it’s the exact same thing as risk. I think that the reason we do that is like I just said, luck is just much more difficult to talk about, because it’s hard to swallow for yourself, and it’s hard to ascribe luck to someone else because it makes you look jealous of their success.
Brokamp: Yeah. It brings a certain amount of humility to a certain degree about how you do in life. A lot of the things that go well are partially due to what you did, but partially you just being lucky. But also, things that don’t go well, it’s not always your fault, it’s just the way things are. You’ve often written about the wealth you have by the time you reach retirement depends an awful lot on when you started investing. If you enter your career in the working world, start contributing to your retirement accounts at the beginning of a bull market, it’s going to be a lot different than if you start doing that at the beginning of a bear market.
Housel: If you retired in September of 1929, very different than if you retired in the early 1990s, a completely different dynamic that funded the rest of your retirement, of course. Just by the dumb luck of when you were born.
Brokamp: Right. One of the things you can mostly control about your investments is, how long you are in investing, your holding period, which brings us to quote No. 3. This is about Warren Buffett, who’s now 90 years old. In the book, you point out some interesting facts that, as of the time when you wrote the book, his net worth was $84.5 billion. But $84.2 billion was accumulated after his 50th birthday and $81.5 billion was accumulated after his 65th birthday. Here’s the quote, the way you phrased it, “His skill is investing, but his secret is time.”
Housel: This is interesting too. 99% of Warren Buffett’s net worth came after his 50th birthday, 97% came after his 65th birthday. What’s important about that is that, if Warren Buffett retired at age 60 like a normal person, when he was 60 or 65, his net worth was about $300 million, of course, a lot of money, but he would never have been a household name. You never would’ve heard of him. He never would have been one of the richest men in the world, a deca-billionaire through his investing skills. He would have been one of dozens of people in Boca Raton who retired with $200 million to play golf. This is important, because when we think about Warren Buffett and we try to answer the question, how did he do it? We often focus on how he thinks about moats and business models and market cycles and valuation, which is all important. But the real reason that he was able to accumulate the wealth that he has, the reason he did it is because he was a good investor for 80 years. That’s really the secret to his success. It’s easy to overlook what we know is not just part of the story, but 99% of the story, which is just the amount of time he’s been investing for, as the most critical aspect of how he achieved what he did.
Brokamp: This is somewhat of an aside, but one of the things you pointed out that he had such a long time period because he began investing at age 10. You have two kids, they’re younger than age 10. Have you thought about how you’re going to get them to start investing?
Housel: They all have a hedge fund trading system set up in their bedroom [laughs] that they use every morning. To answer your question, no, we have not really thought that much about it. I do think that there are some people who understand and are attracted to investing naturally, and there are some people who, no matter what you tell them, they’re not going to get it. I think it’s too early to be putting those skills on my children’s mind. My daughter can’t even talk yet, so let’s take this one step at a time. [laughs] But I’ve been asked that question before and I don’t have a good answer for it, for how I’m going to teach my kids about money. Like all parents, you realize that there are dozens of different ways to raise good kids and you’re always worrying that you’re picking the wrong one, you’re not making the right decisions. I don’t necessarily know what we’re going to do, because everyone’s different, and I don’t know what their personalities are going to be when they are 10 years from now, when they will be in an area where they can and need to really start learning about money. I don’t know what their personalities are going to be. If I don’t know that, it’s hard for me to shape what financial lessons and how I’m going to teach them until we get there.
Brokamp: Got you.
Housel: I’m still changing diapers, Bro. Let’s just take this [laughs] one day at a time before we start talking about retirement for them. [laughs]
Brokamp: All right. Let’s move onto No. 4. I, as the […], these are near and dear to my heart. They’re actually two quotes that I think are related. The first is, “There are a million ways to get wealthy, but there’s only one way to stay wealthy, some combination of frugality and paranoia.” Then the other quote is, “More than I want big returns, I want to be financially unbreakable, and if I’m unbreakable, I actually think I’ll get the biggest returns because I will be able to stick around long enough for compounding to work wonders.”
Housel: To me, it’s just the realization that there’s a difference between getting rich and staying rich, which is that getting rich requires optimism. You have to swing for the fences, be optimistic about people’s ability to solve problems and businesses’ ability to become productive and generate profits. That’s how you get rich, is being an optimist. Staying rich requires the exact opposite. It requires pessimism and paranoia, and making sure that you can survive the short run, or the unexpected recessions and bear markets and pandemics in the short run that you need to be able to put up with and endure and survive, and able to stick around long enough for long-term compounding to work.
Here’s one other way to phrase this, a subpar investing strategy that you can stick with for decades is going to do much better than a “perfect investment strategy” that you might get scared out of a year or two from now. I think focusing on endurance and longevity really is the secret to building wealth, because all wealth is a function of compounding. The whole secret ingredient of investing is compounding. Compounding is just driven by time, how long you can stay invested in for. When you realize that the key part of the equation is just how long can you stay investing for, then to me, what really matters is being financially unbreakable, making sure that during the next bear market, during the next recession, you are not going to get forced out of the stock market either because you need the money to pay your bills or psychologically, you get scared out of it. That should be all of the focus in investing, just giving yourself endurance to stick around long enough for compounding to really work its magic.
Brokamp: Let’s move on to No. 5 here, and this is near and dear to my heart as well, as a Certified Financial Planner. Your quote is this, “Planning is important, but the most important part of any plan is to plan on the plan, not going according to plan.
Housel: I finished writing the book last January, January 2020, days before COVID started. So this is the perfect example. You can have a plan about what we think is going to happen in 2020, but in every given year, not just 2020, I think every year, every era, every decade, the biggest new story is what no one saw coming. Risks that are in the newspapers, risks about trade wars and budget deficits and elections. It’s not that those things aren’t risky, it’s that they’re not surprises, and they are in the news every day, people know these things are happening. Whereas the biggest risk is what you don’t see coming. It’s things like COVID-19 or September the 11th, Pearl Harbor. Those are the things that actually move the needle in the economy, and the common denominator of those is that no one saw them coming. It was impossible to know that we were going to happen until the moment that they did their damage, and I think that’s always the case. The biggest new story of 2021 will be something that you and I aren’t talking about today, because it’s impossible to know. That’s the case every year. Financial planning is great of course, but you always have to realize that the most important part of that plan is your ability to endure the unknown, to put up with risks that you did not see coming, that no one saw coming, rather than thinking that financial planning means that you have a perfect vision of what the future is going to be.
Brokamp: That’s a perfect leading to the next quote here, and it is in the beginning of one of your chapters, and the quote was, “History is the study of change, ironically, as a map to the future.”
Housel: That’s it. If you’re a history buff, most of what you spend your time reading about are the unprecedented events, the big wars, the big political changes, the big groundbreaking companies that were unprecedented at the time. So history is the study of unprecedented events that had never happened before until they happened. But we often look at history as a map to the future. Particularly if we are talking about something like stock market returns or the path of the economy, we look at history and say, “Well, what was the worst-case scenario in history? What would have things typically done historically?” I think that’s an OK first approximation baseline to use. For example, if someone were to say the worst-case scenario is the Great Depression, that’s the worst-case scenario that we can imagine, is the 1930s Great Depression. Well, back in the late 1920s, people’s definition of a worst-case scenario didn’t include what was about to happen. The fact that something unprecedented could happen in the past, it means that something unprecedented can happen in the future. So, history is a great guideline of what to expect as a baseline. But we know with almost 100% certainty that the future for the rest of our lives, if we look at the next 10, 20, 30, 50 years, are going to include many things, and most important events during that period are going to be things that have not ever happened in the past, so history will give us necessarily a good guideline of what to expect going forward.
Brokamp: One way you seem to account for that in your own financial planning and looking out to the future is you mentioned in the book that when you look at these things, you assume that your returns are going to be about a third below the historical returns. Is that one way to factor in the possibility that the future will be different?
Housel: So much of that, and that’s not a forecast of what I actually think is going to happen in the future, that’s just setting expectations. A lot of people, just how satisfied they are, whether it’s financial planning, how much money they think they will have for retirement or just their expectations of, wow, I’m really satisfied with how I’ve done with the stock market, it’s just expectations setting. If I look historically, and if you look at the last 100 years or so, the stock market has returned about 7% per year adjusted for inflation. I think that probably is, if you were to put a gun to my head, that’s what I would expect in the future as well. But what I’m actually thinking about when I’m running the numbers for my own household, about how much money will I need by retirement, how much money will I have by retirement, I use way less than the historic average. Look, if it is more, great, that’s just a cherry on top, but I think it’s important to set your expectations and have so much room for error in your forecasting and planning, so that if the last 100 years was a positive anomaly, and we’re not going to experience that much growth in the future, you are at least prepared for it. That to me is the most reasonable way to plan for the future when the biggest […] what we don’t see coming, is just take what has happened historically and discount it so that you’re setting yourself up for better returns.
Brokamp: Seventh item also includes a bit of history. It’s actually not a quote, but some stats that you cited in the book, and then you recently tweeted about similar research, and it’s this. According to analysis by J.P. Morgan Asset Management: “From 1980-2014, the positive returns from the Russell 3000, which is basically the total stock market, the positive return was attributable to just 7% of the companies, and 40% of the stocks lost 70% or more of their value and didn’t recover over that time period.” For you, what’s the takeaway when the market returns are reliant on a small handful of stocks?
Housel: I think it’s always been that way, and it always will be that way. Capitalism is brutally competitive and takes no prisoners. It’s always going to be the case that if you invest in 100 companies in almost any industry, if you were to look out one generation into the future, fewer than half of those companies are still going to be in business. That’s the normal dynamic of how these things work, but it’s not intuitive. For most people, if they invested in 100 companies, they expect all 100 of those companies to do well, because they put in research and diligence, and if I’m investing my money in that, it better do well. Even the most successful professional investors, the majority of the returns come from a small minority of the investments that they’ve made.
Warren Buffett mentioned at a Berkshire Hathaway Conference, five or six years ago, he said that over the course of his life, he’s purchased roughly 500 stocks, and he’s made the majority of his money on 10 of them. This is something that Charlie Munger has pointed out as well, that if you take Berkshire Hathaway’s long-term track record, and you take out the top five investments that it’s made, its track record falls to average. Just take out five investments that it’s made, and then it falls to average. I think that’s always the case. This is true for someone like David and Tom Gardner as well. You look at David Gardner’s long-term track record, which is extraordinary, and you take out a handful of topics, and it very quickly becomes not extraordinary anymore. But that’s normal. That’s not to say that, “Oh, because I showed that, it’s a fluke.” That’s always what happens when you have long-term returns, tails drive everything in the economy. But this is not intuitive, you really have to go out of your way to remind yourself of that.
Brokamp: When people see these numbers, they could conclude a couple of things. First of all, they might say, you know what? I’m just going to be an index fund investor, which is fine, and we’ll get into that later. Other people will think, “Okay, I’m still going to buy individual stocks, but they have to find this balance, where they have to be diversified enough so that they own at least a couple of those small handful of winners.” But there you don’t own so many stocks that you’ve diversified away the benefit of picking one of those winners. Here at The Motley Fool, we talk about this all the time, and different analysts have different opinions. You should own 15 stocks, you should own 30, you shouldn’t own more than 50. It’s a tough balancing act.
Housel: Yes. I mean, one way to show that, if you look at the Dow Jones Industrial Average, which is just 30 stocks, and you compare it to the Vanguard total stock market index, which is 3,300 stocks, 30 stocks versus 3,300, the correlation between those two over time is in the high 90%. If you made a chart on those two indexes, there’s virtually no difference. So, owning 30 stocks or 3,000 stocks gave you roughly the same return with the same volatility. Once you have a couple of those big winners in either index, then the total returns of those portfolios tends to converge.
Brokamp: Let’s get a little bit to the purpose of having money, and here’s how you described it, in our eighth quote here. “The ability to do what you want, when you want, with who you want for as long as you want is priceless. It is the highest dividend money pays.”
Housel: That to me is always what I’ve wanted out of savings and money, just independence and control over my time. It’s not that I don’t like nice stuff, nice homes, nice cars, but I think, me and anyone, will just get used to those things and accustomed to those things. You buy something nice, and it feels good for an hour, and then you get used to it, whereas controlling your time, having independence to work where you want, live where you want, retire when you want on your own terms rather than someone else telling you when they go to work and someone else telling you when you can retire, is something that money can provide that adds a lot of permanent happiness to people. One nuance here too is that it’s not necessarily that having independence will make you happier, it’s that not having independence will make you less happy. It’s like having that level of freedom is just taking away a lot of misery and displeasure that people have. If they don’t control their time, they can bring you backup to a higher quality of life than you would otherwise. It’s obvious what money can do for you in terms of buying stuff, but most people end there. But I think the independent side of it is a really important aspect that it can bring that goes overlooked.
Brokamp: In the book, you cited a study that probably many people have heard of, but basically it was asking, I think it was 1,000 people who were toward the ends of their life, what do you regret, or what are your thoughts now; none of them said, “I wish I had worked more. I wish I had more money.” They all said, “I wish I had more time. I wish I’d spent more time with my kids. I wish I had more experience.” Things like that.
Housel: More GameStop, is it what [laughs] they all wanted. That was the biggest regret.
Brokamp: [laughs] So true, so true. All right, coming up onto quote No. 9. It’s related to what we just talked about. Here we go. “Wealth is the nice cars not purchased; the diamonds not bought, the watches not worn, the clothes forgone, and the first-class upgrade declined. Wealth is the financial assets that haven’t yet been converted into the stuff you see.”
Housel: Yeah. I think there’s one other quote that I have in the book, which is that, when most people say they want to be a millionaire, what they actually mean is, I want to spend $1 million, which is the opposite of being a millionaire. What wealth is, wealth is savings that you have not spent. What’s really important about this is that because wealth is what you don’t see, we don’t see it out in society. What you see are the cars that other people are driving. You see other people’s homes. You don’t see their bank account. You don’t see their brokerages statement. You don’t see their wealth. It’s not visible. This is important, because it has a big skewing effect on the role models we look up to. One example that I use in the book is something like physical fitness is visible. If someone is in very good shape or very bad shape, you see that. Therefore, I think subconsciously, you can say, I want to look like this person, they’re my role model, I don’t want to look like this person, let’s just try to stay away from that, because it’s all visible, but wealth is invisible. If I’m looking at you, I have no idea what your net worth is, no clue whatsoever. It’s not visible to me.
How do I look up to people? I might be looking up to someone who I think is very wealthy because they drive a Ferrari and they live in a nice house, but if you see someone driving a $100,000 car, the only thing you know about their financial situation is that they have $100,000 less than they did, fewer dollars than they did before they bought the car. That’s the only thing you know about it. I think just the fact that wealth is invisible just makes it very hard to learn about other people’s financial situation. You add to this how taboo money is, that not only is wealth invisible, but even if you ask people about it, they’re not going to tell you what their net worth is, they’re not going to tell you what their salary is. It’s a very taboo topic that makes it just much harder to learn about than other areas of life.
Brokamp: The final chapter in your book is, to me, one of the most interesting. It’s basically where you talk about how you manage your own money. You’ve been writing about investing for well over a decade. You started investing when you were a young person. You’ve learned a lot. You’ve read about a lot of companies, you’ve read about a lot of stocks. I think some of the ways you manage your money might be surprising to people, so here are the four key takeaways here for our 10th and final item. This is money management in the Housel household: high savings rate. The house is paid for, so no mortgage for Morgan. 20% of your liquid assets are in cash and you invest in index funds and you had a good quote about that, “One of my deeply held investment beliefs is that there is little correlation between investment effort and investment results.”
Housel: I mean, as I mentioned earlier, what I want to do, what I really want is I want to be financially unbreakable because that will give us endurance to compounding work. That’s where the paranoia around debt comes in, which I mentioned, something like not having a mortgage is the worst financial decision you can make. Because you can get a 30-year fixed-rate mortgage for nothing these days, and invest the difference in the stock market, but it would make us a little bit less durable than we would be if our living expenses are so low that we know that we can have the endurance to last and hold the stocks that we do own for the next 30, 40, 50 years. There’s that, and then what we want is independence as well. I really don’t have any desire to become the world’s greatest investor and I never will, so that’s fine. I’m just trying to keep it as simple as I possibly can, so that I can spend all of my bandwidth doing something else, like reading about other topics and writing about other topics, rather than trying to pick the next winners, and I’m not a passive Zealot at all. I’m not one of the people who says, “Everyone should be a passive investor, no one can beat the market.” There are a lot of those people, but that’s not me, but my personality, and my wife’s personality is let’s just keep it as simple as possible. Let’s aim for independence, so we can spend our time doing something else.
One takeaway from that too, is I always have to have this disclaimer where I write my investing strategy, but I’m not recommending that to anyone else. I’m not saying this is the right way to invest. It’s the right way for us, but everyone’s different. Everyone has a different personality, everyone has different goals. Everyone has a different family situation. No two people are alike. I think we often view investing like it’s math, where two plus two equals four for me, and you, and everyone else, there’s one right answer for everyone. Investing and money management is not that at all. Everyone’s completely different. Just because I do this with my money and you do that with your money, we’re not disagreeing with each other. It’s not that I’m saying the fact that you own this stock, and I own this stock means that we have a disagreement; we’re just different people, and that’s fine. It’s OK to embrace that equally smart people, equally informed people can and do come to completely different conclusions in life. I think the more that we embrace that, the more it gives you a little bit more freedom to use money in a way that makes you happy versus trying to chase the “right answer” of what you’re supposed to do.
Brokamp: Frugality is definitely a part of it. One interesting biographical tidbit I learned from reading the book, even though you and I have known each other now since, I don’t know if you remember, we met at the Berkshire Hathaway […] in 2009.
Housel: I remember, yeah. I do remember.
Brokamp: Your dad went to Med school and became a doctor in his 40’s. You grew up in a household where your dad was in Med school, your mom was, I think, in nursing school.
Brokamp: First of all, I, as someone who is pre-med, am fascinated by the idea of someone going to Med school a bit late. But you learned that you can have a perfectly good, happy life living on relatively modest means.
Housel: Yes, because for most of my childhood and my brother, who is five years older than me, so he had even more of this, it was even a larger chunk of his upbringing, my parents were students and we were just living off of student grants and we had nothing. We were broke, broke, broke. I think a lot of people in that situation will say something similar to this. Particularly, me as a child, I had no idea that we were poor. We had fun, everything was great, but I used it in the book because my dad became a doctor when he was, I think, 43, and my brother was almost in high school. The frugality that was required of them when they were in school stuck with them; even after he became a doctor, that never went away. My parents had a very high savings rate which allowed them to retire when they wanted to. That was the big takeaway from the book, that I saw that independence that it gave my parents in a way that it was like, that’s a really key part of having a good life is having a high savings rate in a way that gives you independence and autonomy to do what you want, when you want. That to me was the biggest takeaway from watching my parents go through that cycle.
Brokamp: Before we did the show I asked you if you have another book coming out. You said you’re already working on it. When can we expect it?
Housel: Books have a long turnaround time, let’s say, so I would guess, and it’s no more than that, by April 2022, it’ll be on the shelves. That’s my guess. Books take a while to put together.
Brokamp: Got it.
Southwick: Do you they, Morgan? [laughs] Do they? Do they take a long time? Take a deadline.
Brokamp: That’s it. If you’ve heard any other interviews with Morgan, you know he had a year to write this book and he kind of waited until he only had a couple of months left to actually write it, so I think that’s the secret. Just give you two months, Morgan, and you’ll get the book out.
Housel: That’s one way to do it, but even after you’ve written it, the amount of time to design the cover, print the copies, distribute the copies to Amazon, whatever, it takes months. I’m used to the blogging world where as soon as I’m done writing, I hit publish and it’s done. The book world is totally different.
Brokamp: Well, fortunately, dear listeners, you don’t have to wait that long to read stuff from Morgan, you could pick up his excellent book that is available now, The Psychology of Money. You could also read his posts at collaborativefund.com/blog. Morgan, thanks again for joining us on Motley Fool Answers.
Housel: This has been fun, thanks guys.
Southwick: All right, well, that’s the show, it’s edited musically by Rick Engdahl, our email is email@example.com, send us your questions. We’ll try to answer them in the next mailbag, or not. We try, we try. For Robert Brokamp, I’m Alison Southwick. Stay Foolish everybody.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
View more information: https://www.fool.com/investing/2021/02/26/morgan-housel-on-wealth-greed-and-happiness/