The point that I want to make is that I don’t think there’s any other industry where that dynamic exists. Where someone with no education, no background has the potential to massively outperform someone with the best background or the best training. You can’t possibly imagine that occurring in medicine where someone with no medical experience whatsoever performs open heart surgery better than a Harvard-trained cardiologist. It’s just impossible to think of that happening. 

But it happens in finance. One of the reasons that it happens, you could say that it’s because of luck. That’s why people with no experience can do well. It’s just luck. And maybe that’s one element. 

But to me, the bigger and more important explanation is that doing well with money is not necessarily about what we know. It’s not our education. It’s not about how we behave. It’s just controlling our own emotions. You can have the best financial education background in the world and still do terribly if you don’t gain control over your emotions and your behaviors. 

If you panic in March of 2020 or in September 2018, then none of the IQ that you have is going to make that much of a difference. On the other hand, if you are someone who has a great control over their relationship with greed and fear, and is not persuaded by marketing and whatnot, and you are just a long term patient investor who’s going to leave it alone hands off, you do not need a deep financial education or financial background. 

You don’t need to know how to calculate net present value down to the fifth decimal point. You don’t need to know how to build a discounted cash flow model. If you just have the control over your behaviors and not much else, you can not only do okay, you can do sensational investing.

Sean Murray  4:37  

I agree with you, Morgan. But it’s something that my 28-year old self would have probably found absurd. I went to business school and got an MBA, mainly to try to understand what you’re talking about – the discounted cash flow, understanding net present value, being able to break down to 10K, and being able to look at a company and try to value it. 

I didn’t go to business school to understand that I should save a little bit of money every month, put it away and invest it. Yet, that simple behavior, if it becomes a habit is an almost guaranteed road to wealth. It’s simple but it’s really hard. It’s just hiding there in plain sight.

Morgan Housel  5:16  

Here’s one different way that I’ve explained this. If you think about medicine, all the really technical, complicated stuff in medicine is great. It’s not that it’s bad. It’s wonderful. All the complicated cancer therapies. All the progress that we’ve made with different therapeutics and drugs in the last century. Of course, that is wonderful. 

But it is not as important as this – eat your vegetables, get some exercise, sleep eight hours every night. That is more important in terms of living a healthy life than some of the more complicated stuff. It’s not discounting the complicated stuff. It’s just that the simple basic stuff that is easy to ignore tends to be more important in life. 

You could add don’t smoke cigarettes to that category. The really basic things that are not intellectually stimulating in the slightest. But they move the needle substantially. I think that’s the same in finance. 

It’s not that getting your MBA and learning how to price derivatives in a Black-Scholes model. It’s not that that’s bad. That’s not my argument. A lot of that stuff is great. We made a lot of progress in the field of finance in the last century. The idea of buying stocks for their net present value of future discounted cash flows has only been with us since about 1938. 

A lot of these really important things that you and I probably take for granted are new discoveries. I’m not discounting that. But in finance or in money, there are three important things – living below your means, investing for the long term, and expecting volatility. 

Those three basic things that are so easy, so boring, and so basic explains about 90% of what you need to know to do well in personal finances over the long run. Everything else, or the other 10% tends to be more complicated and more exciting. So if you are someone with a high IQ, you went to Harvard Business School, you went to MIT, and you graduate. You’re looking for an exciting field in finance. That’s probably where you’re going to gravitate to just because it’s exciting. 

But just because it’s exciting and intellectually stimulating doesn’t necessarily mean it’s going to move the needle more than the simple basic stuff that is easy to overlook. Whenever I explain that, I think actually that explanation of focusing on the basic stuff is most relevant for the sophisticated financial professional or the highly educated person. 

That’s not my advice for the basic people who are just getting into it. That’s my advice for the professionals because they are the people with the high IQ, highly educated with lots of financial training. Those are the people that are most likely to discount and ignore the basic stuff because it’s not intellectually stimulating for them.

Sean Murray  7:38  

How do we master some of those basics? I mean, they are simple, but they’re not simple to master. If they were easy to incorporate into our lives, I think more people would be doing it. The road to wealth would be a lot easier. Yet, it’s challenging because it involves psychology, and our emotions. It has many different factors such as how we view ourselves compared to others, and how we spend our money to maybe build up our ego, or to gain possessions that we think are going to bring happiness but actually don’t. What advice do you have for people to really make these basics stick and make them habitual?

Morgan Housel  8:15  

Here’s one thing that I’ve always thought about. I’m making these numbers up. But I think this is roughly right. 10% of people don’t need any help. They don’t need any advice with their investments. They get it intuitively. They understand it. They were born understanding the power of compounding. They just get this intuitively. Those people are fine. 

Another 10% of the population, I think, cannot be helped. They’re compulsive gamblers. No matter what you tell them, they’re always going to have the itch to day trade penny stocks, go into tons of debt, and etc. And then there’s 80% of the population that I think wants and needs good advice. 

They are capable of getting this but they need someone to show and teach them, and to kind of put into words things that they intuitively know but they just kind of need someone to push them in the right direction and help them get there. That 80% chunk is the target market for financial advisors and partly the people who I want to write for. 

Those people who might not know these things, but you can persuade them to tilt in a different direction. I think if you can just tell them stories about people, not data, or charts, or formulas, or complicated things like that, but just stories about people dealing with risk in the real world. That can stick with them. They will remember. That will hopefully persuade them to work in a better direction. 

And then I think that’s the only way that you can do it. Behavioral Finance, by his nature is not quantitative. You can’t sum it up into clean formulas that people can memorize. It’s not elegant math that is really precise. I think the only way for anyone to wrap their head around it and to persuade people with it, is through stories. 

That’s what I tried to do in the book. It’s a collection of stories. Most of which have nothing to do with investing at all. But they have an example about how people deal with risk. How people deal with greed and fear. How people deal with scarcity and opportunity. Hopefully these are stories that you can empathize with, and picture yourself in similar situations or issues. These could help wrap your head around the softer, less elegant side of finance that tends to get swept under the rug versus the more complicated analytical side of finance.

Sean Murray  10:14  

I like this idea of learning through stories. I was doing some research because I knew you’re coming on the show. I went back and re-read a number of your articles and blogs. I couldn’t find one that didn’t involve some kind of a story. I noticed the way that you write and the way that you teach, you bring stories out. You often go back into history, and pull lessons from there. 

Maybe we could take one or two of the stories from the book, and just talk about them. Maybe one that is more powerful as far as moving the needle for people towards wealth and happiness.

Morgan Housel  10:45  

Here’s one story that I used in the book. The chapter is about being reasonable instead of rational. It’s axiomatic that we should be rational with our finances. We should make rational decisions. I want to push back against that a little bit. When people make decisions with their finances, they don’t necessarily make them in an Excel spreadsheet. They make them at the dinner table with their spouse. They make them in a conference room with their co-workers where all these other messy variables are coming into play. 

There is the idea that we can just summarize all those messy variables about your family’s risk tolerance and your spouse is trusting you to make the right decision with your finances. These are all messy variables that cannot be put into an Excel spreadsheet. 

My pitch to people in this chapter is, don’t aim to be rational with your finances. Aim to be reasonable. I think that’s the best way that you can do. Here’s a story that I use to summarize this. 

Having a fever is a very rational thing for your body to do. A fever helps infection. There’s lots of studies that show that patients that have higher fevers are going to go on to have better outcomes when they get an infection. Before antibiotics, one of the main treatments for people who had syphilis was a very weak strain of malaria. This is to trigger a very high fever in their body. That high fever would kill the syphilis. That was the main way of treating these things before antibiotics came along. 

Having a fever is a good thing. It is a rational thing. It is a rational treatment that you should want in your body. But almost no doctor or patient in the world views fever as anything other than a nuisance that we should try to get rid of. Whenever people get a fever, they’re given a Tylenol to get rid of your fever and bring it down. 

Even though it’s a healthy thing for your body, we want to get rid of it. Why is that? Why do we want to get rid of something that is helpful? And the reason is, fever sucks. They hurt. They’re uncomfortable. They make you miserable. They make you shiver under the covers, and I don’t want to be in pain. And so if there is a drug that you can give me to get rid of this, like Tylenol, give it to me right now. 

And so fevers are rational, but they are not reasonable because people don’t want to be in pain. And so even though they are helpful, we try to get rid of them. I think people should view their finances in a similar way. There are things that you can do with your finances that are technically rational, but they’re not reasonable and that’s fine. 

You should just aim for reasonable. I think for a lot of people, having a lot of cash on their balance sheet, particularly if you are young is not a rational thing to do. You’re probably going to earn a higher return if you invest more of your money into stocks. But if having that cash set aside is going to help you sleep at night, help you make you feel better about your portfolio, help you leave your stocks alone and not sell them when there is a market decline that is a totally reasonable thing to do. 

There’s a well-documented what’s called, “Home Bias for Investors”. Investors in the United States tend to only buy US stocks. Investors in Europe tend to only buy European stocks. People invest in what they know. And it’s not a rational thing whatsoever. Investors should be more globally diversified. That’s a rational thing to do. 

But it’s actually pretty reasonable to only invest in your home country stocks because you’re more familiar with them. Being more familiar with the companies that you’re investing in, if that helps you take the leap of faith to invest your life savings into stocks, then that’s a reasonable thing. 

I write in the book about paying off your mortgage. It is one of the least rational things that you can do. Particularly with interest rates, you can get a 30-year fixed rate mortgage for less than 3% these days. It is so irrational to pay off your mortgage. But I think it is a great and wonderful thing to do. 

If it gives you an added sense of security and stability for your family knowing that this house is yours. No one can tell you what to do with this house. No one can ever kick you out of the house. This thing is yours. That’s like the most reasonable thing you can do with your finances. 

I love the quote from a financial advisor named Tim Mauer who says, “Personal finance is more personal than it is finance.” That’s the best way to sum this up. There are things that we can do with our money that I can’t explain on a spreadsheet. I can’t rationalize on a spreadsheet. But it’s the right thing to do because it makes sense for me and my family. I don’t need to explain and justify it any more than that. It’s just a reasonable thing that I do with my money.

Sean Murray  14:51  

That makes a lot of sense and what that requires is for people to understand their own temperament. They should understand their own fears. They should understand their outlook on finance and the risk. 

We’d all benefit from just reflecting on that a little bit. I think I’ve gained some perspective over time. You sort of have to go through some cycles to really understand how you’re going to react in situations and then put the pieces in place to have a reasonable strategy that’s going to work for you. It may not be completely rational, as you said, but it’s reasonable given your own temperament. 

I might give an example from my career. I started investing in the late ’90s, before the first .com bubble. I’ve lost a lot of money investing in internet stocks. It sort of set the stage for me in feeling that pain. Maybe going through that fever, whatever it was. It set the stage for a more measured and a longer term outlook and a reevaluation of what kind of investment is going to work for me personally in the long run. 

It led me to Buffett. I was reading about Warren Buffett, Charlie Munger and value investing. I benefited from it in the long term, but I sort of had to go through that. I had to understand my own temperament.

Morgan Housel  16:06  

Back to personal finance being more personal than it is finance. The way that everyone views investing risk, the way that they view opportunity, and where they view the economy or the stock market going next, is heavily influenced by their own unique experiences in life. What have you seen in life? What have you experienced? What have you been through? Those experiences obviously vary massively from person to person and generation to generation. 

If you grew up during the Great Depression, you were obviously going to think something very different about the economy and the stock market. And then someone like myself, who was born in the 1980s, who grew up seeing something very different. And if you came of age, in the 1970s, and 1980s, your view on inflation is going to be very different from my view on inflation because there’s been virtually no inflation. No meaningful inflation throughout my life. 

And that is not because one generation is smarter than another or has better information. It’s just because we’ve seen something totally different. When you realize that your own personal experiences are going to be more persuasive to you than anything else that you read or try to learn about. 

I can try to put myself in someone’s shoes who grew up in the Great Depression. I can read about it and try to empathize with it. But I don’t have the emotional scar tissue that they do. And therefore, we’re going to come to different conclusions, even if we’re looking at the same information. 

I’ll take away from that. Again, it’s just figuring out what works for you. That reasonable people will come to different conclusions about what they do with their money. Therefore, I think, it’s just about being less judgmental about what other people do with their money. 

The first chapter of the book is called, “No One is Crazy.” What I mean by that is people do a lot of crazy things with their money, but do ridiculous things with their money. But no one is necessarily crazy. We’re all just trying to make decisions with our money based on the model that we’ve created in our heads about how we think the world works. 

We’ve all had different experiences. Those models vary massively from person to person. Let me give you one example that I use in the book. The social group that spends the most money on lottery tickets by far, by an order of magnitude are the poorest Americans. 

The people who are in the lowest decile of income spend the most money on lottery tickets by far. The bottom 10% of income earners spend an average of $400 per year on lottery tickets. These are people for whom $400 is a life changing amount of money. And they spend that on lottery tickets. 

It is easy for someone like me or you to look at that and say: Oh, that’s crazy. That is dumb. You’re making a terrible decision. What are you doing?” And sure, that’s actually good advice. That’s actually what we should be saying. But I think if you actually strain a little bit, you can try to understand why someone in that position wouldn’t be spending so much of their money on lottery tickets. 

People like me and you, and a lot of the listeners of this podcast are probably in the upper half of income earners. Most of us have a college education. We have career opportunities for advancement. We will go through a lot of our careers with steadily rising incomes. We will be able to save for retirement. We might take that for granted. The fact that we can look at the future and say, “There are probably greener roads ahead for us. There’s more opportunity for us. I can swing for the fences and start a new business. If I put in a lot of effort, I can push myself to a better financial life.” 

If you are someone who is in the bottom 10%, it is harder to have that dream. You might, in a rational way, feel like you are stuck. The career advancement opportunities for a better life and more income aren’t available to you. Therefore, buying a lottery ticket is the only time in your life where you can hold something that gives you a little bit of hope that you can move to the next level. 

It is in the same way that you and I might think about starting a business or investing in a company that’s going to be a 10 bagger. For them, holding a lottery ticket is the only time where they can say: “I got something that might bring me to the next level.” 

And therefore, I don’t agree with the fact that they are spending so much of their money on lottery tickets. I can kind of understand why they’re doing it. I don’t think they’re necessarily crazy for doing it. I think the idea that you’re doing something that’s crazy with your money is actually if I strain is not crazy. I think you’re just using your money in a way that makes sense. That fits around the model that you have built in your head about how the world works for you. 

I think when you go out of your way when you think of those, the freak of money like that, you become less judgmental, what other people do with their money. But also, a little bit more sympathetic to yourself and your own financial decisions. 

Everyone has made financial mistakes and things that they regret. But in the moment, when you made those decisions, you were just trying to use your money in a way that you felt was best given the experiences that you’ve had in life. Let’s just try to be a little bit more open minded and less attached to this idea that there is one right answer for everyone. 

Investing is not math where it’s 2+2=4. Everyone’s going to come up with a different explanation and answer for what works for them and for what they want to do with their money.

Sean Murray  20:48  

I like that concept. One thing that kind of strikes me is that when we think about money, we often do a lot of comparison. We are fairly judgmental. It is like being at a cocktail party or in a discussion or conversation with friends. Decisions or things get thrown out. We’ll often think, “Well, that seems like an odd decision.” 

You’re right. We’re all coming at this from different perspectives and experiences. And just letting the bar down a little bit there is kind of freeing. Being less judgmental of our own decisions in the past is kind of freeing too.

Morgan Housel  21:22  

To me, it’s been clarifying to help justify some of the things that I do with my own money. People will ask me, “Why are you doing this? How do you explain that?” Once you get to the point where I’m like, “I don’t have to justify it. I do this because this is what feels good to me. This is what helps me sleep better at night and that’s it. I’m going to do my money. You do you. We’re going to leave it at that.”

Sean Murray  21:22  

One of the concepts that you talk about in the book is this idea of “Being rich versus being wealthy.” Can you explain that? How might that help us think about living a good life?

Morgan Housel  21:54  

Let me give you a non-PC way to summarize this. Some people might find it a little bit offensive, but it comes from the comedian Chris Rock. Everything he says is a little bit offensive. 

Here’s how he explained this 20 years ago. He says Shaq is rich. The guy who signs his check is wealthy. That’s the difference between the two. As I would explain, this rich is a high paycheck. Rich is the ability to go out and buy a lot of stuff. You have enough money in your bank account, to go out and buy the things that you want, buy a new car, buy a big house, that is rich. 

Wealthy is very different. Wealth is what you don’t see. Wealth is what you have not spent money on. Wealth is money in the bank, money in your investments that you have not touched, or you have not cashed in yet. That might seem basic, but it’s a really important distinction.

When people say, “I want to be a millionaire.” A lot of times what they mean is, “I want to spend a million dollars.” That is actually the exact opposite of being a millionaire. 

A millionaire is someone who has a million dollars that they have not spent and are not going to spend. That’s what a millionaire is. You can use this for any level of wealth of course. 

But realizing that wealth is what you don’t see, or is the cars that you have not purchased. Wealth is the vacation that you have not taken. The clothes that you have not bought yet. That’s what wealth is. All wealth is unspent money. That’s what it is. 

And if you want to be wealthy, instead of being rich, that’s what you need to do. Have the money that you are not going to spend. Easy follow up question to that is, “What’s the purpose of it? What is the purpose of having money in the bank that I’m not going to spend? What does it do for me?” 

To me, the answer is, it gives you options, and it gives you control over your time. Once you have money in the bank, it gives you options about where you want to work, where you want to live, or when you are going to retire. It’s all in your own control. And when you retire, and where the length of your commute and whatnot, where you work is not based off of the whims of someone else’s desires. It’s up to you. You’re in control over it. 

I think that is a way that you can use your money that is going to lead most people into having the highest level of happiness from their money, versus people who are spending a lot of their money who are spending it on “experiences” which is like the cliche thing to say about. 

“My experiences instead of stuff.” I think people who are spending money on experiences and stuff have a much higher degree of just getting used to it, or getting accustomed to it. So you buy a nice car, and it feels good for about a week. And then it’s just your car, but you’re stuck with the car payment. You’re stuck with the money that you already spent on it. 

Compare this to having options or having control of your time is something that is very difficult to get used to. It’s going to give you a lasting level of happiness. The ability to wake up every morning and say, “I can do whatever I want today.” That is something that is going to make you feel good every morning for the rest of your life. You’re never going to get accustomed to that. 

That is what wealth is and that is the purpose of wealth. Wealth is money that you have not spent. And the purpose of it is to give yourself options and control of your time in the future.

Sean Murray  24:49  

Wow, there is so much packed into that. I’d like to just go into a few of those areas a little deeper. The insight that most people want to be a millionaire. What they don’t realize is that they want to spend a million dollars. It is really a profound insight. Once you spend the million dollars, that’s it. You’re no longer a millionaire.

Morgan Housel  25:08  

For young people, the average 19-year old boy, let’s say, they’d say that they want to be rich. Why do you want to be rich? Well, I want a Ferrari. I want a Rolex. I want a house in Beverly Hills going down the list. “Okay, so you don’t want to be a millionaire. You want to spend a million dollars. That’s what you want to do.” And that’s fine. 

I’m not against spending money in the slightest. I love nice cars. I love fancy homes. I love all of that. This is not an argument that you should go be a monk and live in the woods. It’s just a realization of what wealth is, what the purpose of it is, and how you can use it in a way that’s going to give you a lasting level of happiness. 

Spending your money on the stuff that I love. I love to ogle at and admire stuff that you will get used to very quickly. How can you use your money in a way that’s going to give you a lasting level of happiness?

Sean Murray  25:52  

To save up that million dollars requires each month to say no to a lot of things, such as experiences and cars. You don’t see that as you look around in society and compare yourself to others. You don’t see the person who’s not spending the money, who’s socking it away. 

You’ve got a great quote in one of your articles. You said that “The ability to save is really the gap between your ego and your income.” Talk about that because I think that’s really an interesting insight too.

Morgan Housel  26:21  

Let’s start with the idea that buying nice stuff is by and large a social signal. It’s a way to show people that you’ve made it. And since you’ve made it, you should be respected and admired. You get a fancy car or a big house. There’s not a lot of utility in a 10,000-square foot house. 

A 10,000-square foot house is a signal to others that you are someone who should be respected and admired. That’s great. Looking for respect and admiration is like the most human thing that we could do. But savings and building wealth is the ability to have money in the bank, and to say I could go out and buy a social signal. I could go out and buy some more stuff, some more fancy stuff to show people that I made it but I’m not going to do it. I could do it, but I’m not going to. 

I’m going to decline the ability to go buy a second car or a fancy watch or whatever it is. I’m going to show people that I’ve made it, but I’m not going to do it. I’m going to keep this money in the bank for myself so that I could give myself options. I’m going to increase my personal yardstick, which is my personal internal rate of success, rather than showing the external rate of success for other people. 

Here’s one example that I used in the book. You go to the gym, have a heavy workout, and beat yourself up. You’re sweating and sore. That will raise your metabolism. And by raising your metabolism, it’s going to make you hungry. When you leave the gym, it is more tempting than at any other point in your day to say, “I’m going to McDonald’s right now.”

I’m hungry because I just worked out. I burned a lot of calories. I’m hungry. I deserve it because I just did a heavy workout. I deserve to go to McDonald’s and get a Big Mac right now. I deserve that. 

That’s the exact same thing. You have to decline that meal if you want to benefit from your exercise. You have to do that if you want to have the net benefit and become healthier, lose weight, build muscle, or whatever it is. 

The ability to gain health from a workout is not the actual exercise that you do. It’s declining the meal after you exercise. That’s what’s going to make you healthy. It’s the same way with money. It’s not earning money that’s going to make you wealthy. 

Earning money is the exercise. What’s going to make you wealthy is declining the stuff that you could buy afterwards. It’s just like you’re declining the Big Mac after you’re exercising. It’s earning money and then saying, “I could go buy a Rolex but I’m not going to.” That gap which is saying, “I’m not going to,” is what builds you wealth.  

A lot of that gap as I say in the book is just your ego. I don’t mean that in a negative way. Everyone in their innocent way wants to show people that they made it in the world. I want to do that. You want to do that. No one wants to have all of their excesses internalized. 

This is not black and white. But if you can keep that as low as possible, and say that the main yardstick that I want for myself is internal or for my family. Only the people around me are going to get to know about it and benefit from it, versus flashing it and showing the whole world how it is. Suppressing your ego to that level is how you build wealth over time.

Sean Murray  29:10  

The other aspect of this idea of wealth versus being rich that I really find so insightful and impactful is this idea of wealth is the ability to do what you want, when you want or having options on your time. Time is another resource. If we think about money as a resource, and then we think about time, time is the ultimate resource that is constrained. We just don’t know how much of it we’re going to have. 

The other thing about time that I find just fascinating. We’re recording this here in Seattle. Two of the richest men in the world live not far from where we’re recording. Jeff Bezos and Bill Gates have thousands of multiples more in wealth than you and I Morgan, but they have a limited amount of time just like we have. We don’t know who has the most limited.

It’s limited. They can’t buy more of it. I think that gets to where the true value of wealth is. It is this idea that we have a limited amount of time on this earth to live the life we want to live. Wealth can be a way to maximize that if we are wise about it.

Morgan Housel  30:11  

That’s right. Everyone is different. I’m not type A. I’m not the person who wakes up at 5:00 AM, has to go start a new business, and check 10 things off my list. That’s not me at all. My perfect day is a completely empty calendar, where I can wake up and leisurely read the paper, go for a walk with my family, come back, take a nap, and listen to a podcast. That’s my dream life. 

I know that that is not everyone else’s dream life. I don’t want to say this is black and white. But for me, it’s just controlling my time. Controlling my time for me means what I just described, taking a nap going for a walk. For other people, controlling their time means having the amount of time that they can go out and start a new business, start a new project, and go out and do something really ambitious.

What people do with their time is very different. The act of controlling your time, I think is pretty universal. Just being able to do what you want when you want. I used a story in the book of Franklin Delano Roosevelt. When he was a child, and was about five years old, his mother had a very strict regimented schedule for him. 

Every day, 5-year old Franklin Delano Roosevelt had to wake up. At 7:00 AM, he had to do this, at 8:00 AM, he met with his tutors. It was very strict. He came to his mom one day and he said: “I hate that I have no control over my life. Everyone dictates when I do these things.” And his mom said: “Okay, how about this, for one day, you can do whatever you want. I’m not going to give you any schedule. Tomorrow, you can do anything you want, whenever you want to do it.” 

His mom wrote in her diary that night that that day, where FDR could do anything he want, he did the exact same things at the exact same time that he normally does on the schedule. But he was happier because he got to do them on his own terms. No one was telling him to do it. Even though he did the exact same thing, it made a difference to him because it was his idea rather than someone else’s idea. 

Having control of your time doesn’t mean that you’re going to retire early. If you wake up every morning and say, “I can do whatever I want.” A lot of those days, you’re going to wake up and say, “I want to go to work. I want to go be productive in the office.” That’s what you want to do. But the fact that you’re doing it on your own terms instead of someone else makes all the difference in the world. 

One other example I’ve used in terms of just doing things on your own terms is that camping is fun. Camping, which is like going out and sleeping in the woods and a tent is fun. Being homeless is terrible. It’s miserable. Even though you’re camping, you knew that you’re living in a tent. The only difference between those two is that one is on your own terms, and the other one is forced. It’s not by and large. 

And so having control over what you’re doing, even if you’re doing the same things that you’ve always done makes all the difference in the world.

Sean Murray  32:37  

That’s so true. I absolutely believe that one of the things we would want to do if we had complete control of our time is go to work. But we would work on something meaningful, or something that’s providing deep meaning. It’s deeply rewarding in some way. 

Wealth is another path to that sort of activity which I believe in the long term is where you’re going to get the most reward from life. It is working on those activities. It might be writing, or some creative pursuit. It may be giving back in some way. It’s going to be different for everyone. But finding that and having the resources to indulge in that is a great way to spend your time.

Morgan Housel  33:21  

Not only is it going to be different for everyone. It’s going to change for you over the course of your life. What you want to do this year or for the next 10 years is going to be very different 10 years from now. People change over time. People evolve their goals. Their preferences change.

That’s another thing. If you get completely locked into one thing because you don’t have options, you get locked into one career. In that career, your boss tells you what to do and when to do it. There might be a period in your life early on when you love that. And then you move on with your life and it starts becoming miserable. 

There’s a number of lawyers and doctors who are so into their career early on. And then by their mid 40s to early 50s, it’s not necessarily what they want to do anymore. Not all doctors, of course. But the amount of career regret that takes place in those two professions, particularly medicine is really high. 

A lot of the reason I think is because if you go to medical school, there’s virtually only one thing that you can do, which is to become a doctor. Meanwhile if you get your MBA, there’s a billion things you can do with an MBA. Even with a law degree, there’s a lot you can do in there. 

If you go to med school and you do a residency in cardiology, you’re going to be a cardiologist. That’s what you are doing. In the end, when you come to a road where you don’t want to do that anymore, well, you’re kind of locked into it. You don’t have a lot of options now, do you? 

It’s just an argument for the role of options in your life. When you realize that not only are people different from person to person, but you yourself will change. It really opens the doors to saying, “Okay, if I have options so that in the future I can do this, but maybe I’ll do that. I have the option to do this. I have the option to retire early. I have the option to move somewhere else.” Having those options makes so much of the difference in terms of people’s lifetime happiness. 

Sean Murray  34:53  

I think the lesson there then is to think about how you value options. You may be willing to trade more income, more guaranteed income, or options. That maybe something that people, I’d recommend reflecting on. Consider the value of options. 

I think we can undervalue them potentially maybe earlier in our life, and regret them later. There is another aspect of managing these simple behaviors that aren’t simple to master. I would say, it is simple to talk about, such as saving a little bit every month and investing in an index fund, and letting it grow and compound over time. It’s a pretty basic concept. 

From my experience, it’s harder to do than it sounds. The idea of having some rules is something that I find important. This is something that comes up in Buffett’s writing. There’s one story that he talks about. Imagine if you had only 20 options to invest in your lifetime. It’s almost like a punch card. I think he wrote about this in one of his letters to his shareholders. He believes that people would do better in investing if they just had 20. 

Each time you make an investment, you punch the card. That was it because we’d put More time and effort into each one. Do you have any rules like that that worked for you or that you came across in different stories that might be beneficial for people?

Morgan Housel  36:09  

In terms of rules for my own personal finances, I dollar cost average into index funds. I’ve been doing that. As long as I’ve been investing, I will probably continue doing that. So to an extent, that’s a rule. That’s how I invest. 

My wife and I have never had a household budget. We’ve never sat down and said, “We’re going to spend X dollars on this and X dollars on that.” We have a high savings rate, just because the things that we desire don’t cost a lot of money. We spend money on whatever we want to. It’s just that we don’t necessarily want that much. 

We’ve never really had stringent rules like that. I do think in general, when you accept what we’re talking about earlier, how everyone is different, has different goals and desires. It’s not just from person to person, but among their own life. I think what becomes important are not necessarily rules. These are hard, firm rules that you never break, but just guidelines.

These are the things that push you in one direction, and say, “Look, this is the direction that I’m going. This is the direction that I’m pointing. But at some point, I might need to take a break. I might need to shift in a slightly different direction.” It’s not just a computer where it’s like, “This is the code” and you always follow the code. You never break the rules. That to me, I think just isn’t a very realistic view of how most people’s finances work. 

Most people’s finances are going to go up and down. They might get laid off. They might get a huge bonus. They might get an inheritance. They might have kids who need to go to college. Their finances are going to be very lumpy throughout their life.

I think just being a little bit more flexible in what you do tends to be a better strategy and philosophy than having firm rules. You can also have rules at periods of time in your life. But it should come with an understanding that those rules will need to change over time, rather than a 100% set into this. 

I have my financial strategies and philosophies. I’m 36, and I know with certainty that if you were to interview me 20 years from now, I could tell you a dozen things that I do differently from when I was 36 today. I know that’s going to happen. I don’t know what it’s going to be, but I know that’s going to be true. 

The only alternative to that is telling you that I know everything about finance. I’ve learned everything. I’ve created a system that is always going to be true. Of course, that’s false. Of course, there’s more that I have to learn. It’s not just about finance, but about life, who I am, and what my family’s goals are. It’s just being open to change. It’s being firm in your beliefs, but open to change over time. 

Sean Murray  38:26  

Another aspect of your writing that I really appreciate, which I think comes out in the book as well, is this idea of learning from history. You talk a lot about experiences in the past. The human journey is sort of coming back around each generation. We have to sometimes learn the same lessons. What are some of the lessons that you’ve pulled out of history and how do you pull lessons out of history? 

I read a lot of history books. I just had Elizabeth Samet on the podcast. She annotated Ulysses S. Grant’s personal memoir. I read his memoirs. I was kind of thinking about the Civil War there for a while. It’s such a big event in our country’s history. And trying to pull some lessons from that, I find it’s not always easy. How do you do that? What are some of the big ones that you’ve pulled out that helped guide you?

Morgan Housel  39:14  

I love this quote from Voltaire. He says, “History never repeats itself, but man always does.” I love that because I think that’s how you learn from history. You’re looking at history, and you’re looking for precise lessons. Let’s say, when x happens, and you should expect y. 

The precise things about how things happened, I think, is not a good way to learn from history. The precise events never repeat themselves. But man always does. The behavior repeats themselves. This includes people’s relationships with greed and fear, or overshooting greed and fear, how people react under extreme stress and how they adopt views that they never would have thought possible. They never would have considered until they experience this extreme stress, and then they say, “Okay, well, I’m going to embrace that now.” 

How long can unsustainable things last? It could be much longer than anyone ever anticipated. It is a behavior that shows up across history. It shows how progress happens very slowly. It’s easy to ignore. Setbacks and problems happen very quickly. It’s hard to ignore them. That is a behavior that you can pull from history, even if it’s not a specific event. 

That kind of behavior shows up all across history. You can find that in Roman times, in Civil War, in World War Two, in 2020, and the like. Those are the things where you could find broad behaviors that show up across history. The more fields that they show up in and the more time periods that they show up in, the more confidence you can have that that is just something that is integral to how humans think. 

If it’s integral to how we think, you know what’s going to be part of our own future. These are broad behaviors that show up constantly. I think that the broader they are, the more important they are, or the more useful that they are. That to me is how you learn from history.

Sean Murray  40:57  

Here’s an example with the Grant memoirs. One of the things that made General Grant such a great leader was his ability to be decisive, or to make decisions with imperfect information. I think that’s something that we see today. That’s what I think makes many great investors. It is the ability to make a challenging decision, even though you don’t have all the information.

Morgan Housel  41:21  

Yeah, I think that’s true. When you’re making a decision with imperfect information, you’re just admitting to yourself that your confidence in that decision is less than 100%. You’re admitting that there are things that you don’t know. Out there they are going to influence the outcome, but you don’t know about them yet. 

That’s when you’re just trying to come up with the probability of making a decision based on a probability, rather than a black and white binary, or a yes versus no. That’s a difficult thing to do. It’s also difficult for people like you and me to look back and learn from those people. Obviously, for General Grant, it worked out. Those decisions worked out. You’d won the war. You became president. It all worked out. 

But whenever someone is making decisions where the odds of them being right are less than 100%, or there’s imperfect information, then things can go the other way. Obviously, if you are making a decision where you have an 80% chance of being right, well, there’s a 20% chance of you being wrong. So of course, there is an alternative history where the union didn’t win the Civil War, or where the decisions that Ulysses S. Grant didn’t work out. 

That’s really difficult for lots of us. When we’re trying to find role models in business and in finance, and in life, we will look at people like Warren Buffett and Bill Gates. But both of those people made decisions where the odds of them being right were less than 100%. It is not hard to imagine an alternative world in which those decisions did not work out. 

Let me give you an example that I use in the book. Cornelius Vanderbilt is one of the most successful businessmen. He’s the richest man in the history of humanity. His net worth adjusted for inflation was about $300 billion. He’s just known today as a business tycoon, a very successful businessman. 

You go back and read the biographies of him. He gained his success by breaking laws at every chance that he could. He looked at the laws that were going to regulate the businesses that he was going to be in, and he gave them the middle finger, and saying, “Screw you. I’m going to do it my way.” It worked out for him. 

The authorities more or less left him alone. He was able to lobby enough to change the laws that were getting in his way. It worked out. He was successful. But you could so easily imagine a different story playing out where all these laws that he was breaking just ended him up in jail. He ended up like the next Enron. 

This guy was breaking all the rules. He was a criminal. It collapsed. And rather than today of us thinking of Cornelius Vanderbilt as this successful business tycoon, he just went down in history as just a common thief. John Rockefeller is very similar. There was a judge, and he was taken to court very often. You wouldn’t hear about Standard Oil these days. 

A judge called him no different than a common thief. When you read his biography, it’s the same thing. He was breaking rules left and right that’s why he was so successful. There were rules of law that were holding everyone else back. He just kind of gave them the middle finger and said, “I’m going to do it. Screw you guys. I’m going for it.” 

It is so easy to think about a different world in which John D. Rockefeller, again, would have just been a criminal and went to prison. We were looking like a Bernie Madoff kind of guy. But instead, we’ve looked at him as the most successful businessman of all time. 

Whenever the odds of doing something are less than 100%, it’s difficult for people in hindsight to judge an outcome. The same is true with failures. There are a lot who have failed. Financiers failed business people. 

If the story just played out very marginally differently, it would have gone on to be huge successes. It’s always hard to tell, “What is risk and what is luck?” There’s a very fine line between those two. It’s hard to know in hindsight.

Sean Murray  44:39  

I agree. I think the insight there is to understand and think probabilistically. You should know beforehand that you’re making a decision where there’s a distribution of probable outcomes. You’re making the best decision possible with the information at the time. But knowing that your outcome could end up in a negative outcome rather than the positive outcome that you’re Looking for. It’s a powerful model to apply to your life – that idea of thinking probabilistically.

Morgan Housel  45:07  

It’s something that I think intuitively makes a lot of sense. I would say it makes sense, but it’s not intuitive. If you just explain it to people, yes, you’re trying to put the odds in your favor. “This decision has an 80% chance of coming right. This decision has a 20%.” That’ll make sense to people. 

But how people actually judge success, whether it’s their own or someone else’s, is binary, black and white. “Are you successful? Or are you not?” No one is going to look at Bill Gates and say, “Yeah, he was successful, but he made these decisions that could have gone the other way, so I’m actually not going to admire him.” No one says that. People just say, “Bill Gates is worth $100 billion. He built the biggest company in America. He won.” 

And then we’re going to look at people such as Ken Lay who ran Enron and say, “He failed.” He failed. That was it. But you could also imagine another world where Ken Lay of Enron, just like Cornelius Vanderbilt, got the lost changed and gotten people to go along with him, and became a big success. 

There’s all these alternative scenarios that you could come up with. It just makes it hard to judge people for better or worse. Positively judge them or negatively judge them when the outcome could have been different. And whenever you’re thinking probabilistically, which is how people should think, the outcomes could always have been different.

Sean Murray  46:16  

Jeff Bezos recently testified in front of Congress. He said something that I don’t know if you caught this but he was talking about starting Amazon, and the risk he was taking with his and his parents’ capital. I think he put the odds that it was going to fail at 60% or 70%. I thought that was a very realistic view. For a lot of entrepreneurs, they don’t see the downside as much as the upside. I thought that reflected well on his ability to kind of objectively look at events.

Morgan Housel  46:46  

There’s a story that I love from a founder of one of our portfolio companies. It is one of our startups. I won’t give you his name. I don’t know if he wants a story getting out there. But when he was pitching his startup to VCs, there was one VC who came back to him and said: “I think the odds that your company is going to work are 50/50 at best.” 

And the founder says, “50/50? Why, you’re optimistic.” He goes, “In my mind, it’s no better than 10%. You’re being optimistic here.” So yeah, I think being cognizant of your downside is so important. Realizing that even if you do everything right, you can still be wrong. And even if you do everything wrong, you can still be right. It’s just a really powerful and important model that people need to have in their heads when they’re judging other people and themselves. 

That’s not just true when you’re judging other people. It’s true for yourself. And whatever successes or failures we have had, could have gone a different direction. When both my kids were born, I wrote them a letter. One of the things that I mentioned to them in the letter is, “Be careful when judging people’s successes and failures, including yourself.” 

It could have gone other ways. People are born with different circumstances, and different levels of luck. Life plays out very differently in ways that are beyond any of our controls. And therefore, just when you’re looking for role models or looking for people, or anti-role models, you really got to be careful about making judgments that are too black and white.

Sean Murray  48:01  

Great advice. Maybe in the end, we could come kind of full circle back around to this idea of making financial decisions and building towards wealth not just being rich, but being wealthy. That’s having control over our time, and having options. 

I had a guest on the show who you might know. He’s Brian Portnoy. He’s a great guest and a wonderful guy. He explains his concept in “The Geometry of Wealth,” his book. He calls it “funded contentment.” It gets to this idea of when do you say enough is enough? 

If you’re constantly on that, say hedonic treadmill, or you’re on this pursuit of more and more, when do you take a step back and say, “I’m going to spend maybe more time with that walk you’re talking about with your family, or designing your day in the way that you want.” I think people rarely take a step back and think, “What’s the level of funding I need to be content?”

Morgan Housel  48:58  

I think being content is obviously the goal. To me, the most important financial skill, but one of the hardest financial skills is getting the goalposts and stop moving. To become content and say, “I have enough.” Having enough is so difficult to do. I’m not going to pretend that I’m good at doing that either. I don’t think anyone is that great for it, but just trying to push themselves towards a level of contentment versus more and more and more. 

It is so natural. Everyone experiences thinking to yourself, “Once I have x dollars, everything will be okay. Everything will feel fine. I feel like I made it.” And then you get to x and you say, “Well maybe 2 x and then I’ll feel great.” And that game never ends. 

You will keep going until 100 x, 1000 x, a million x. It never ends. Just getting to some level, whatever it is, just getting to x and saying, “Okay now, I’m going to try so hard out of my way to not dream for 2 x anymore. I’m happy with x.” 

Daniel Kahneman, the famous psychologist, tells a story about how he won the Nobel Prize. I’m sure he’s built up a good level of wealth throughout his life, giving lectures and whatnot. He went to a financial advisor and he said: “I have no desire to become wealthier. I don’t want to make any more money. I just want to protect what I have and live out the rest of my days.” The financial advisor said: “I can’t work with you.”

It was just so obvious to the financial advisor that everyone should want to be wealthier. Daniel Kahneman just said, “No, I have no desire to become wealthier.” It was so odd to that financial advisor that she wouldn’t even take them on as a client.

Sean Murray  50:24  

Was it in her DNA? It sounds like the former CEO of Goldman Sachs, Lloyd Blankfein in an interview. I didn’t read the interview, but I just read someone who quoted it. I’m not sure if it’s true. But he said that he didn’t feel that wealthy in the circles that he runs around in. He’s got to be close to $100 million, right?

Morgan Housel  50:42  

Actually, his net worth is $1 billion, as it’s quoted. That’s what I mean. That game never ends. Even Jeff Bezos is probably looking at, I don’t know, other foundations that have sovereign wealth funds that have $500 billion. Again, it never ever ends. If the game never ends, you should just try as hard as you can to not play it.

Sean Murray  50:59  

Force those goalposts to stop somewhere so that you can live a meaningful flourishing life. That’s a wonderful pursuit. Wonderful goal. I hope reading your book is going to help us all get there. 

Morgan, where can people find out more about you and your book?

Morgan Housel  51:14  

So most of where I am online is on Twitter. My handle is @morganhousel. That’s my first and last name. My book is available virtually everywhere. I don’t know if it’s going to be in bookstores this year because they’re all closed down because of COVID. But it’s in Amazon and everywhere else. It’s called “The Psychology of Money.” It comes out on September 8.

Sean Murray  51:30  

Great. Thanks for being on The Good Life. 

Morgan Housel  51:32  

Thanks so much.

Outro  51:34 

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