Morgan Housel on money, psychology, and investing

We came across Morgan Housel’s excellent blog post – 140 things to know about investing. As we believe in the importance of financial literacy (see our interviews with Andrew Hallam and William J Bernstein), we reached out to Morgan Housel for an interview.

About Morgan Housel

featuredMorgan Housel is a columnist at the Motley Fool. He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013 he was a finalist for the Gerald Loeb Award and Scripps Howard Award. He holds a B.A. in Economics from the University of Southern California.



Rohan:  It would be great to get a sense of your background and how you got into doing what you do.

Morgan:  I’ve always been interested in finance.  I think just the basic idea of money working for you, that it can make money for you without you having to work is interesting to me.  You can just be sitting on the couch and you’re making money.  That fascinated me from an early age.  All throughout college I was drawn toward investment banking.  That’s really what I wanted to do.  I think I was young and inexperienced.  The money of investment banking is a big allure when you’re young.  You say, “Look how much money I can make when I’m young.”

Right out of college, you can make six figures in the United States.  It’s great; you make millions of dollars later in your career.  That was really appealing to me and I got an investment banking internship my junior year of college.  I realized right away, from the first day, that it wasn’t for me.  That was really depressing for me because that was all I ever wanted to do.  I was dreaming of becoming an investment banker.  It’s a really tough culture in investment banking.  If you’re not familiar with it, it’s just very, very tough.  You work hundred hour weeks, you never see the daylight, your boss is yelling at you all day.  It’s a really difficult culture to excel in.  It just didn’t fit my personality.

So I needed to do something else in finance.  What was I going to do?  I got a job in private equity, which was great.  It’s a little less pressure than investment banking; you can still make a good living.  This was 2007.  The credit markets froze up.  The financial world effectively came to an end.  It was time to do something else.  What was I going to do?  I still loved finance.  I never lost my love for finance even after I kept getting discouraged in all these jobs.  I found a job as an investment writer with The Motley Fool.

I never in a million years thought I would be an investment writer, but I fell in love with it right away.  I think it’s a great way to express your thoughts.  I realized that what I like about investing is thinking about world problems – problems that people have in their personal life and global economies.  I try to think about them in new ways.  I really fell in love with writing about it and trying to change how people think about basic financial topics rather than being the investment banker who’s trying to go out there and really take over the world.  I’m just trying to get people to think differently about investing and personal finance topics.  That’s how I got from dreaming about investing as a kid to where I am today.


Rohan:  In a way I look at what you do as providing some financial literacy.  What has the journey been like?  Is it skepticism that you normally draw?  I’m sure you have to deal with a lot of people who haven’t done anything about their money for 40 years other than just put it in a bank.  Do you have these conversations, or is it much more of an offline relationship where you don’t know?

Morgan:   What’s really interesting about finance -  and I think this is true for a lot of fields whether you’re in physics, math, chemistry, history, or whatever it is – the more you learn the you more you realize how little you know.  That’s really been true for me with finance.  In the years that I’ve been studying it I’ve found that  the more I know, the more I research, the more I talk to other smart  investors, the more I realize how little I know about it.  I realize how complex investing is.

It’s almost always more complex than we think it is.  I think we have a natural tendency to want to think that it’s very clean, simple, and elegant and we can just do A+B=C and it’s very simple.  But investing is very complicated.  It’s an interaction of psychology and math and history and politics, and it’s all just mushed together and it’s really complicated.  It’s always more complicated than we think it is.  My journey has been one towards growing gradually more humble over the years.  I would say each year that goes by, I realize that I know less and less.  It’s been humbling.  That will probably continue going on.  It’ll get to the point where I’m 90 years old and I just throw up my hands and say, “I have no idea what’s going on.”


Rohan:  What is the typical advice that you give to folks who are just getting started or haven’t done anything?  How do you get them started?

MorganIf you really just started in investing, what’s really important is not necessarily when you’re young the investment decisions that you make.  It’s saving as much money as possible rather than getting caught up in the details about the different kinds of investments that you’re making.  If a young person just really focuses on getting their work skills and investing in themselves through education and work experience, and then trying to save as much money as possible, that is really the base of the pyramid so to speak.

I think if you’re the kind of investor who really has no interest in business, finance, or the stock market, just investing in a low cost index fund, dollar cost averaging so you’re putting in the same amount of money every month over time is really a smart approach for most investors that don’t want to spend a lot of time doing this or are really not interested in it.  

I really think that people who are interested in business, commerce, and economics, but not necessarily interested in trading or the stock market, are the people that I think can really do well for themselves over the long run – over the course of 20, or 30, or 40 years – by investing in really good high quality companies that they feel confident about.  They can do well by investing in a good diverse mix of companies that they plan on holding for a long period of time.  The biggest problem investors find themselves in is that they get impatient.  The worst is day trading stocks, but even if you’re holding stocks for weeks or months you’re really letting random chance dictate the course of events at that point.  People who hold stocks for 10, 20, 30, 50 years, those are the people who end up succeeding as investors.  To sum up, if you’re not interested in it I think index funds are great.  If you are interested, then I think holding a basket of high quality companies for decades is really the key to successful investing.


Rohan:  What has your approach been so far?  Which one do you follow?  What’s a typical overall formula?

MorganI basically go right down the middle.  How I do my investing is that I always dollar cost average every month into index funds – an index fund that tracks the S&P 500 or the Vanguard total stock market index.  I do that every month come rain or shine with the same amount of money.  That’s part of my portfolio.  Once or twice a year I come across an individual investing idea that is very compelling to me.  It doesn’t happen very often.  It really is once or twice a year.  When I come across something that really compels me, where I really think that there’s an opportunity for value for someone who wants to hold stocks for many, many years or decades, then I will invest in that company.   I don’t subscribe to the idea that one should only index or only pick stocks.  I don’t think it’s contradictory to do a little of both, and that’s what I’ve done with my money.


Rohan:  You don’t mention real estate, so tell me a little bit about your views on houses.  The conventional wisdom is typically to go buy a house and then you’re good for a while.

Morgan:  I have some different views on real estate than most people.  I’ve never owned a home.  I don’t own a home right now and I never have.  I will someday, but I think most people really get caught up in the idea that house will make a fantastic investment for them.  I just really don’t think there’s much historical evidence for that.  I think a home makes a good place to live in, and that provides value for you of course.  You’ve got a great place to live in, spend the holidays with your family, have a barbeque with your friends, and that’s great.  The idea of the home as an investment, there’s really not much evidence backing that up.

Robert Shiller of Yale has done some great research on the long term history of home prices in the United States.  It really shows fairly clearly that adjusted for inflation over long periods of time, home prices nationwide really don’t go anywhere.  They’re pretty much flat after inflation over time.  It was really just in the early 2000’s that America got this idea that a home is a great investment, that you can buy it and hold it and you’ll make a fortune off your home.  I think that one of the big pieces that people miss when considering the home an investment is that when most people buy a home they take out a substantial mortgage.  They think, “Great, now I’m not renting a house anymore, now I own it.”

 If you take out a mortgage, the bank owns your home and you are renting the house from the bank effectively.  You’re renting money from the bank to buy the house.  Then when people pay off their house over time and they build up equity, there’s an additional cost to that equity in that the money that you used to buy a home could have been money that you invested in the stock market over time.  Over long periods of time we know historically that the stock market has generated real returns after inflation far superior to that of real estate.

I will buy a house someday when I’m settled down.  My wife is in school right now so we’re always moving around.  It doesn’t work for us right now.  I’ll buy a home someday when I find a house that I like that will fit my style of living.  I’ll never think of it as an investment, I’ll just think of it as a place to live.   


Rohan:  Ideally you think of it as a place that you’re going to be for at least 10-15 years, right?

Morgan:  Exactly.  Here in the United States, most people have a 30-year mortgage, but they live in a house for an average of 8 years.  That really gets people into problems when you factor in realtor fees.  If you buy or sell a house you’re going to pay a big chunk to your real estate agent.  It’s really just like investing.  The single most important variable for investing in the stock market is how long you are invested for, and I think that it’s the same for owning a home as well.  Once I’m settled in a place that I know that I’ll reasonably be for 10-15 years or more, then I’ll buy a house.


Rohan:  You said that investing or finance is an interplay between psychology, history, money, etc.  How do you see the role of psychology in this?  A lot of books are written saying that you can build up your portfolio, index funds, etc.  Is it really that simple?  Can everybody do it?  How do you control your mind?  Do you use the famous Warren Buffett quote about investing when you see fear?  It is so hard to do.

Morgan:  That’s absolutely true.  If you look at successful investors over time, the investors who are the most successful are not the people with the best math skills or the most complicated formula or model, the best Excel skills, or the best engineers.  Almost invariably the best investors are the people who have control over their emotions.  We see that time and time again.  It’s people who don’t panic.  There’s a very good book called Deep Survival.  Deep Survival chronicles all these stories about people who have survived extreme events such as plane crashes, being stuck in blizzards, or having their boat stranded in the middle of the ocean.  Why do some people survive and other people perish?  The common denominator in survivors in these extreme situations is that the survivors did not panic when everyone else did.

I think that’s very applicable to investing as well.  The successful investors that you see over time are just people who found a situation where the market was crashing and everyone else around them was panicking and they managed to not panic themselves.  Those are the people who do great over time.  One of my favorite quotes is from Napoleon.  His definition of a military genius was the man who can do the average thing when everyone else around them is losing their mind.  That’s true for investing, too.  You don’t need to be a genius.  You just need to do the average thing when everyone else is going crazy.  If you were just an average investor in 2008, and you just dollar cost averaged and you didn’t do anything fancy, you just kept putting money into the stock market month after month after month, and you just didn’t panic you would have done fantastically over the past 5 years.  People that really lost their minds are the ones that had a hard time at investing.

How do you control that?  That’s the big question.  I think you really have to know yourself and know your own emotions, and if you know that you are the kind of person who is going to get very emotional when the market goes down, you have a low risk tolerance.  Then I think it’s important to structure your portfolio correctly.  Maybe you’ll have a higher portion of your portfolio in bonds or cash or something that won’t be as volatile so that you’re not going to lose your head when the stock market crashes and you see half of your net worth disappear.  That will happen if you have all of your money in stocks.  If you have a strong enough stomach and you can put up with that, great.  Those are the people who make good investors.

It’s really important to know yourself and your risk tolerance and be honest with yourself about how tolerant you are of risk, and structure your portfolio accordingly.  I think the other big thing with behavioral finance is that most people are investing for years or decades.  In today’s 24 hour news cycle, where we have so much information online – Yahoo Finance, CNBC, and whatnot – it’s tempting to look at your portfolio all day long, minute by minute.  I think that’s very dangerous for a lot of people.  Most people should be looking at their portfolio once a quarter, four times a year.  When people start looking at it more, it creates this idea that the market is a short term circus.  That does things with your head.  It changes how you think about risk.  The less attention you pay to the stock market the better.  Those are the kind of people who will do well in the long run.


RohanThe other thing that can help is to understand financial history, I guess.  Every time you get to a bust it feels like the end of the world and the end of the stock market as we know it.  Yet, it isn’t and it’s fairly normal.  Talk me through your views after having read about financial history and the nature of booms and busts.

Morgan:  It’s really important for every investor to know long term financial history.  The most important thing to know when you look at long term financial history is that volatility in the stock market is perfectly normal.  It’s the equivalent of having summers every year.  We know it’s going to get hot every year in the summer, but that doesn’t freak us out.  We don’t think the world is going to melt.  We just know that it’s summer.  It’ll be hot for a little while, and then it will cool off again when fall hits.  That’s just how it works.  People understand that about the weather because it happens every year.

But in the stock market it’s different.  We know historically that the stock market is going to fall.  We don’t know when.  That’s the difference between stocks and seasons.  We don’t know when it’s going to happen, but we know that the market is going to crash.  If you look historically, the stock market falls 10% basically once every year.  If you go back through more than 100 years of data, it happens almost every year.  You get a 30% crash basically once a decade.  You get a 50% crash 2-3 times per century.  The odds are very high that that will be the case going forward.  If you’re a long term investor you can expect every year you’re going to lose 10% of your money.  Every decade, you’re going to lose 30% of your money.  Maybe once or twice in your life you’re going to lose half of your money.  You can expect that as an investor.  It’s perfectly normal.

Over the long course of that period, despite that volatility, the odds are high that you will do well as an investor.  Just getting acquainted with how normal volatility is is really important.  Like you said, every time we get one of these market pullbacks, people think that this is it.  It’s the end of the world and they need to cash out and get out, even though we know that’s not the case.  Even after some of the worst events that we’ve ever been through such as the Great Depression, World Wars throughout Europe that devastated the entire economies, even after inflation when you include dividends, 10-15 years is about what it takes for the market to recover from these really bad, awful events.  Even during the Great Depression in the United States, stocks fell 90% from 1929-1933.  If you adjust for inflation and dividends – you have to include dividends, that’s a really important part of that calculation – stocks were back to a new high by 1937.  Even after the Great Depression, the worst event we’ve ever experienced, it took 6-8 years to regain your losses.  In 2008 we had a massive market meltdown.  Stocks fell 50%.  Stocks were back at a new all-time high by 2012.  These things are normal.  It’s not fun when it happens, but if you understand how normal they are it makes investing a lot easier.


Rohan:  Who have been your investment gurus?  Where have you drawn your learning and inspiration from?

Morgan:  Some of the people who have been the most influential to my thinking haven’t been investors, per se.  Nassim Taleb, author of The Black Swan has been very influential in how I think about risk.  He is an investor, but when he writes it’s more just about risk, history, and philosophy in general.  He has a very abrasive personality so it’s hard to like him as a person, but he is a brilliant writer and he is a brilliant thinker about risk.  He’s really been influential on me.

There is a journalist from Canada named Dan Gardner who wrote a book called The Science of Fear.  That book changed the way I think about the media and fear more than anything else.   He really details about how risk in general is blown out of proportion by headline writers and the 24 hour news cycle, and how human emotions in general  make us think and interpret risk in really irrational ways.  That really changed my thinking.

A lot of historians have changed how I think about investing in that historians by nature take a very long term view of everything.  Historians measure time in decades or centuries, whereas so many investors measure time in seconds or minutes or weeks.  Being a reader of history has really changed how I think about investing as well.  I also try to spend a lot of time focusing on bad investors.  Rather than having an investment guru that I follow, I spend a lot of time paying attention to the investors that have failed.  There’s a lot more that you can learn from failed investors than successful investors.  I try to spend a lot of time looking at who has done the worst.


Rohan:  So you figure out what they didn’t do?

MorganI think the biggest risk that an individual investor will face in life is not that they will fail to become Warren Buffett.  The biggest risk that they face is that they will become the next Lehman Brothers, that they’ll go bankrupt.  When that’s the biggest risk, you have more to learn from the failures rather than the successes.  

That’s not to say that there’s nothing to learn from successful investors.  I think it’s great to study successful investors.  I think it’s of the utmost importance to study people who have done it wrong, not just in investing but in finance in general.  You can learn a lot from people who have worked in a stressful job all their lives and die unhappy.  You can learn a lot from those people about what is important in life and what is important with money.  You can learn from people who bury themselves in debt and student debt, and have to stay in a job that they hate for decades just to be able to afford their student debt payments.  A young person can learn a lot form those stories, and they can learn valuable life lessons that will affect them more than studying people like Warren Buffett and trying to figure out how to become the world’s richest billionaire.  Studying the failures is a lot more relevant to the average person.


Rohan:  How do today’s exorbitant education costs fit in with your whole framework?  It’s getting tougher and tougher to afford an education these days.

Morgan:  It’s growing more expensive as the years go by.  For the average middle class or below average income, there are ways to go to college that are untraditional.  So many people look at college and say, “I need to go to the best school, the private school that’s $50,000 a year.  That’s where I’ll get my education.  It’s worth it even if I have to take out loans, or I have to take out a quarter of a million dollars of debt to go to Harvard or Stanford.  That’s worth it.”

I think that’s very often not the case.  If someone is really in a mediocre financial position where they don’t have money from their parents or an uncle or grandparent or a scholarship to get them through college, one of the best ways to do it is to start out a local junior college or a local community college.  You can go there for two years and get all of your general education credits out of the way for dirt cheap.  It’s going to cost next to nothing to go to some of these schools.  After that, transfer to a state university where you can finish up your degree at a state university for usually much lower cost than you can do at a private university.  So you have 2 years of community college, 2 years of state university.  Most people can do that.  It varies by state, but most people can do that for a pretty reasonable amount of money. You may still have to borrow a little bit, and that’s unfortunate.  I see so many people who are of moderate or below average income and they go to a private school and take out a quarter million dollars’ worth of debt.  They end up just burying themselves for the rest of their lives.  There are many different ways that people can go to college.  That’s often overlooked.  There are different colleges out there that serve different purposes at different prices.


Rohan:  What are some books, TV shows or movies that you really like?

Morgan:  There was a historian in the mid-twentieth century named Frederick Lewis Allen.  He wrote three books.  One of my favorite is called The Big Change.  The Big Change looks at how the United States changed culturally, economically, and politically, from 1900 to 1950.  The change that took place in the United States from 1900-1950 was so much bigger than the change that took place from 1950-2000.  In 1900 we had a horse and buggy.   In 1950 we had jets.  That was what we had in the first half of the twentieth century.  In the second half of the century we went from jet to faster jet.  So we went from horse and buggy to jet, and then jet to faster jet.  There was so much change that took place in the early twentieth century and Frederick Lewis Allen does a fantastic job explaining how the average American’s family life and their work life changed during that time, and how their incomes changed.  It was really eye-opening and fascinating.  He also wrote two more books.  One was called Since Yesterday and one was called Only Yesterday.  They described life in America in the 1920’s and 1930’s.  They were very well done.   I learned so much from Frederick Lewis Allen.

I mentioned Dan Gardner’s The Science of Fear.  That was a very influential book that I read.  It really changed how I think a lot.  Daniel Yergin has written two books on energy that were really fascinating.  One was called The Quest and the other was called The Prize.  He won the Pulitzer Prize for his book The Prize.  It was very well done about the history of oil in the United States.  It’s really fascinating.

I also mentioned Nassim Taleb.  He’s obviously famous for his book The Black Swan and now Antifragile.  He wrote another book that didn’t get almost any attention at all called The Bed of Procrustes.  It’s a book of one-liner, quick, pithy phrases that Taleb came up with.  It’s hundreds of little individual sentences about life.  They’re basically inspirational quotes that Taleb came up with.  That is a very good book as well.  If you gave me an hour, I could keep naming off books, but there are five for you.


Rohan:  What are some productivity hacks that you employ to get stuff done?

Morgan:  I think as most writers are, I’m a big procrastinator.  If you give me two weeks to do something, I’m going to do it the night before it’s due.  I do most of my work from home.   I don’t work very frequently in an office.  When I work from home it’s really important that I still keep a normal schedule as if I worked in an office.  When you work at home it’s so tempting to just sit on the couch and watch Breaking Bad, eat donuts, and drink coffee.  It’s very easy to not work.  I try to keep a normal schedule as if I was going into the office.  I wake up and shower, and put on normal clothes.  That’s one of my productivity hacks for working from home.  

I go for a lot of walks.  There are several studies that show, and for me it’s really true, that when you go for a walk or go for a drive, you think differently.  Just the act of the scenery changing around you makes you think differently.  I’m much more creative and thoughtful when I’m walking.  I spend a lot of time going for walks during the day.  It really helps me think.  If you’re just sitting stationary, your mind becomes stationary as well.


Rohan:  What is an idea that inspires you that you would like to share?

Morgan:  The idea that inspires me for investing and most of life is really simple, and it’s not really insightful but I think it’s powerful.  It’s the power of time.  The single most important variable for how you’ll do as an investor is how long you can stay invested.  It’s really imperative for young people in their teens or twenties to really understand how valuable an asset it is that you have so much time in front of you.

If you’re twenty years old, or twenty-five years old, you have an asset that Warren Buffett cannot dream about.  You have the power of time in front of you.  The power that time will give to your investments in compounding, or for your career in that you can make mistakes and try over again, is so incredibly valuable to people.  I’m always astounded when I think about compound interest and the power that it has for investing.  Time is massively powerful.  That’s my secret to investing.  That is the most powerful concept in investing.  It’s very importantly the single most over-looked aspect of investing as well.