#576: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor | The Tim Ferriss Show

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Key Takeaways

  • Money isn’t a means to wealth, it’s a means to autonomy and independence
  • “Investing isn’t an IQ test, it’s a test of character” – Morgan Housel
    • Don’t move your own goalposts on behalf of anyone outside of you and your loved ones
  • Sometimes a reasonable decision will make you happier than the rational decision
    • Detach yourself from other people’s benchmarks, judge your investments based on your happiness and fulfillment
  • “Risk is just the odds that something will prevent you from achieving your goals” – Morgan Housel
    • Risk has a nuanced and personal definition based on your goals, objectives, and time horizons
  • “Have a level of savings in your asset allocation that doesn’t make sense” – Morgan Housel
    • This is the only way to prepare for risks that you can not envision–even though it feels conservative
    • Stay in the game. Do not get wiped out. Invest with a large enough bankroll to continue participating through an improbable string of bad luck or a radical economic event.
  • Strategies are unique to the investor and the time period, it’s not always advisable to emulate others
    • You can’t mimic luck or market conditions, study their life philosophies that translate into their investing strategies
  • If you make 100 investments, you’re probably going to make the most money on five or fewer of them
    • This is why you can’t take every suggestion by a great investor to heart, the returns are only super successful about 5% of the time–even for the best of the best
    • You just don’t hear about the failures. In the early decades of Disney, the company was a disaster if you took away Snow White.
  • Check out the rest of the post for countless references to finance-related books, websites, journals, Twitter accounts, strategies, and more

Intro

  • Morgan Housel (@morganhousel) is a partner at the Collaborative Fund and serves on the board of directors at Markel Corporation. He is also a former columnist at The Motley Fool and The Wall Street Journal and is the author of award-winning book The Psychology of Money.
  • Tim and Morgan discuss how understanding investing and risk tolerance is more of a phycological challenge, as opposed to a purely financial one.
  • Host: Tim Ferriss (@tferriss)

Recommended Finance Resources

Warren Buffett vs. Jim Simons and Honorable Mentions

  • Who is the wealthiest investor of all time: Warren Buffett
    • 21% long-term average annual returns per year
    • Incredible endurance as an investor, he’s been doing it for 80 years
    • 99% of his wealth was accumulated after his 50th birthday, 97% came after his 65th birthday–if he retired at 60, you would have never heard of Warren Buffett
    • Maximizing your total money throughout your lifetime is not about having the best return rate, but finding returns that are repeatable and long-lasting–compounding returns
  • Who is the greatest investor of all time: Jim Simons
    • 66% long-term average annual returns per year
    • Mathematician that used algorithms to formulate his quantitative investing approach
    • He’s simply smarter than every other investor
  • Honorable mention investors:
  • Strategies are unique to the investor and the time period, it’s not always advisable to emulate others
    • You can’t mimic luck or market conditions
    • Study the life philosophies of great investors, their investing strategy stems from these anyway–apply them to your own unique circumstances

Financial Advice for My New Son

  • Financial Advice for My New Son was an article written by Morgan Housel for The Motley Fool
  • #1: Choose respect and admiration over any fancy car or watch
    • Man in the car paradox: When you see someone driving a nice car, you probably don’t think, “Wow, that person is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Do you see the irony? No one cares about the guy in the car. Have fun; buy some nice stuff. But realize that what people are really after is respect, and humility will ultimately gain you more of it than vanity. (excerpt from the article)
  • Check out the article for nine more tips
  • Modern Disclaimer: Now that his kids have grown up a little bit, he realized that it’s impossible to know how your kids will turn out–meaning universal financial advice is extremely nuanced

Investing

  • “Investing isn’t an IQ test, it’s a test of character” – Morgan Housel
    • Don’t move your own goalposts on behalf of anyone outside of you and your loved ones
  • Money isn’t a means to wealth, it’s a means to autonomy and independence
    • This may be the one universal financial law, stay financial true to what makes you happy
    • COVID lockdowns, for many people, thought us that there is not a lot of room for error. One or two weeks of unemployment can quickly expose a large percentage of people’s vulnerable financial dependencies.
  • Sometimes the reasonable decision will make you happier than the rational decision
    • Some investment strategies work on a spreadsheet but simply don’t comply with the real world
    • Invest to improve your quality of life, not to improve your wealth
    • Detach yourself from other people’s benchmarks, judge your investments based on your happiness and fulfillment
  • If you make 100 investments, you’re probably going to make the most money on five or fewer of them
    • This is why you can’t take every suggestion by a great investor to heart, the returns are only super successful about 5% of the time–even for the best of the best
    • “Look at the underreported analysis” – Tim Ferriss
    • In the early decades of Disney, the company was a disaster if you took Snow White away
    • Amazon and Apple have had countless products that have failed but you don’t hear about those too much
  • You can’t take money with you and there’s only so much money you can pass down to your kids that won’t ruin them
    • “I want to leave my kids enough money to do anything, but not so much that they can do nothing” – Morgan Housel quoting Warren Buffett
  • Read the bottom of investment articles before reading the whole thing
    • The author has to disclose their investments and may just be schilling the whole article

Risk

  • “Risk is just the odds that something will prevent you from achieving your goals” – Morgan Housel
    • Risk has a nuanced and personal definition based on your goals, objectives, and time horizons
    • Stock market debates aren’t really debates considering the differing risk definitions between parties
  • “When you get into a situation like [COVID], it’s so easy to respond to risk in ways you never thought you would” – Morgan Housel
    • Your ability to say “be greedy when others are fearful” is so much greater than your ability to execute–Warren Buffett quoted this and he even fails to do this at times
  • “Risk is what’s left over when you think you’ve thought of everything” – Morgan Housel quoting Carl Richards
    • If you’re only planning for the risks that you see coming, you’ll most likely get hit by the biggest risk you didn’t see coming
    • Big economic events in history are rarely predicted accurately
  • “Have a level of savings in your asset allocation that doesn’t make sense” – Morgan Housel
    • This is the only way to prepare for risks that you can not envision–even though it feels conservative
    • Stay in the game, do not get wiped out. Invest with a large enough bankroll to continue participating through an improbable string of bad luck or a radical economic event.

Leverage

  • “If you’re smart, you don’t need leverage. If you’re dumb, you shouldn’t be using it” – Morgan Housel quoting Warren Buffett
    • Using leverage or shorting are two fast ways to not overcome improbable luck, because these strategies can go to zero much faster than investing

I Have A Few Questions

  • I Have A Few Questions by Morgan Housel is a list of questions he has, Tim reviews a few of them
  • What does Morgan think is true, but is actually just good marketing?
    • Doesn’t know the exact answer, but he does know that some things he believes deeply in his heart are just not true
  • What looks unsustainable, but is actually a new trend we haven’t accepted yet? 
    • Crypto, it’s well on its way
  • What has been true for decades that will stop working, but will drag along stubborn adherence because it has such a long track record of success?
    • Value investing will always work but the formulas evolve
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Notes By Drew Waterstreet

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