I have a treat for you. This is Morgan Housel, former columnist at The Wall Street Journal and Motley Fool, who’s now partner at The Collaborative Fund.
You don’t meet deep thinkers like Morgan outside of academia much, and I crafted these questions to get his best thoughts for you in areas like personal finance, psychology, and investing. Let’s dive in.
Morgan, when someone is just discovering personal finance, what should they focus their limited time and energy on?
Finance is overwhelmingly a game of psychology, and it’s absolutely imperative that people understand their own temperament, flaws, goals, and skills. Whether or not you can tear apart a balance sheet or learn how to price derivatives doesn’t really matter, especially in the beginning. Realizing that you don’t have much tolerance for loss, or truly aspire for early retirement, does.
How do you know yourself? That’s the hard part. I think it just comes with time. How I view money, and what my financial goals are, have changed dramatically in the last decade. And I’m sure they’ll change over the next decade. The more life experiences you have the more you realize what kind of stuff actually makes you happy, versus what you think will make you happy when you project into the future. So the first step for personal finance is taking a good, hard look at your life and asking what specific events gave you the most legitimate happiness, and what you need to do to obtain more of those.
An important point here that I see time and time again: Stuff doesn’t make people happier. Control over their time does. So to the extent that the goal of personal finance is to make you happier, I encourage people to view it as a way to gain control over their time, rather than a way to accumulate more possessions.
And with investing? Many people want to start but are deathly afraid. What’s your advice to them?
I’d keep this in mind: Many investors I know become more humble and lean toward a simplified investment approach as they gain more experience. In their early 20s they’re day traders, thinking they have some big insight that no one else does and they can beat a system composed of the collective wisdom of millions of brilliant people. Then, after years of disappointment, they either find a simpler approach or just put everything into index funds. Viewed this way, you can avoid a lot of grief as a novice investor but starting out with the simple approach of index funds. Keep it as simple as possible.
Also remember that investing is a long-term game, and long term means years and decades, not months and quarters.
What mistake hurts investors the most, and what’s the easy fix?
That’s easy — their own behavior. They buy and sell at the worst possible times. They own too much (or too little) stocks given their risk tolerance. They’re ignorant of fees. They don’t know what their goals are. They don’t save enough. They change their allocations based on emotional hunches.
People spend so much time talking about how the market is risky and how financial advisors charge too much in fees. Both of those absolutely pale in comparison to the pain investors cause themselves.
I don’t think there’s an easy fix. Nothing worthwhile is easy. It takes a combination of personality, experience, and mentorship. And no matter how good you are it there’s still a billion things to learn and get better at.
Your own portfolio is a mix of index funds and individual stocks. Why did you decide on this passive and active approach?
I’m actually now down to the Vanguard Total Stock Market Index and Berkshire Hathaway. My entire net worth is now literally a checking account, a house, and those two stocks. I don’t think it needs to be more complicated than that. The more complicated your portfolio is, the more knobs you have to fiddle with, and the more knobs you have to fiddle with the more opportunities you have to make regrettable, emotion-based decisions.
What’s a piece of commonly accepted investing wisdom you totally disagree with?
Buy low, sell high.
It’s right in theory, and it sounds smart. But starting an investment with a plan of when you’ll sell it is setting yourself up for failure. It’s introducing a trading mentality, which might work for some, but it’s far different than investing, which is where the quote is often used. Selling should be something that’s done sparingly and associated with your goals and needs, not what market prices are doing.
You once said you hoped your son would be poor someday. Why?
Nothing teaches you about the value of money than experiencing its scarcity. He’ll always be safe and comfortable. But I want him to feel the power of a $1 by having to make tough decisions around budgeting and prioritizing. John Bogle once said “I grew up with the priceless advantage of having to work for what I got.” He’ll have to do the same. And he’ll thank me for it one day.
What have you changed your mind about in the last decade?
I respect the role of luck more today than I did a decade ago. I used to view successful people as clearly having more intelligence and drive than others. I’ve come to appreciate how much of success is due to luck, not the least of which is being born into a good family in a good country.
It doesn’t take a lot of imagination to see that if Bill Gates were born in Berlin in 1920, his outcome would have been different. The common rebuttal to this is “Luck is what you’re dealt, fate is how you play your cards.” Which is 100% true. But some people are born with a pair of aces. Worse, they never realize it, and go through life thinking everything they have is a product of their own behavior.
Robert Shiller once said “Your own thoughts are not really your own thoughts. Everything you think is a product of the people you meet and the experiences you’ve had, both of which are largely outside of your control.” It’s one of my favorite quotes, and makes me realize how strong the invisible hand of life is.
And what do you wish you could know about the future that we can’t know?
I want to know what commonly accepted truth we’ll look back on 50 or 100 years from now as being totally wrong. I think the odds are close to 100% that we currently believe something akin to “the world is flat” or “cigarettes are good for you.” Almost by definition we don’t know what that idea is today. But our ancestors will laugh at us.
Lastly, you’re a voracious reader. What book had the biggest influence on the way you think about money and life?
I’ll give you two.
The Quest of the Simple Life by William Dawson. It completely changed how I think about financial goals.
The Better Angels of Our Nature by Steven Pinker. It made me a permanent optimist.