Morgan Housel (00:03:56):
We go into grand detail with Buffett about things on moats, and how he thinks about business models, and all these other really complicated topics, which are great. Those are important topics but the number one reason he’s so successful and so wealthy is because of the amount of time he’s been investing for, which I think is almost too simple and basic for people to take seriously. People who work in the industry want to think that it has to be more complicated than that. It’s also kind of disheartening for some people to hear. Some people want to read a book and say, “What is the secret that I can learn today, that I can start putting to use tomorrow?” Everyone wants the secret formula. When you hear that the formula is be patient and wait another half a century, people don’t want to hear that. That’s a hard thing.

Morgan Housel (00:04:40):
Maybe that’s the point. All great things in life, like the most incredible things, there’s a cost to that. There’s a cost of admission. It should be really hard and the fact that being patient for three-quarters of a century is really hard is why it’s so powerful and pays off so well. I think that’s one of the biggest things we can learn from Buffett.

Trey Lockerbie (00:05:00):
Well, as Buffett says, “No one wants to get rich slowly,” but funny enough, Buffett did want to get wealthy pretty quickly. I mean, you read about his biography. He’s so entrepreneurial and he had all these businesses, he was really trying to go above and beyond and start compounding as early as possible. I’m just curious, is it the fact that this was just his game, for example, is there something about him personally that you detect or tease out that says, he’s unique, not just because he waited a long time because he’s a certain personality or has a certain psychology that’s different from everyone else?

Morgan Housel (00:05:33):
I think if there is a trait … and this kind of comes from his biography called The Snowball, that is really, really fascinating to read this side of him. I think he’s so obsessed and that’s the right word, with investing and with business, that his entire life, he’s had more or less a singular focus on valuing and picking companies. If you read his biography, you can tell that that comes at the expense of his family life, his social life, all these other things. It’s really fascinating how many people in the industry admire him. Then, when you read about what his whole life is like, if you want to be someone, you can’t just cherry-pick their net worth. You can’t just cherry-pick their job, you got to think the whole package.

Morgan Housel (00:06:11):
The whole package of Warren Buffett honestly, doesn’t really seem that great to a lot of people, including myself as someone who really admired him and then read the biography and I kind of went, it’s a fascinating guy, it’s a fascinating story but do I want that life? I don’t know if I do. I think he’s obsessed with investing and picking companies and allocating capital more than anyone else has been over the last century, probably. I think that’s not an exaggeration. Look, that obsession boils down to and comes down to the fact that when he was in his 70s and he was a multi-billionaire, he said, “I’m not slowing down, I’m not going to quit my job, I’m going to keep doing this with as much passion and fervor as I’ve always had.”

Morgan Housel (00:06:48):
That’s a level of obsession that you don’t see in many places. Most investors, including myself, I would say, want to get wealthier. They want money. They want to build wealth, so that they can maybe go do something else, so that they can have a level of independence, go do fulfill other hobbies, spend more time with their families, et cetera. I think for Buffett, it was never a means to an end, it was always just he loves playing the game. The rewards … this just shows up in his lifestyle, as well as. The rewards, I think it’s just a scorecard to him. The fact that he lives in the same house he bought when he was 25 years old, shows that the wealth that he’s accumulating is just the scorecard of how he’s doing, but I think he loves the game. He loves the process of picking stocks, more than the outcome that’s made him so wealthy.

Trey Lockerbie (00:07:30):
Buffett was obviously an early student of Ben Graham, who lays out these very simple formulas that have become the cornerstone of value investing, that investors follow today, mostly from the Intelligent Investor. When I met Buffett, I brought a copy of my Intelligent Investor book and had him sign it because I know it’s one of his favorite books, and that’s a lot of how investors start today. Sometimes even stay with like, that’s the philosophy they stick with. So much has changed in the world, even by the time that Graham was on his deathbed that he even admitted that he wouldn’t have even followed the same investing approach that he laid out in his earliest work. Just let that sink in for a minute. I mean, I don’t think enough people even know that. This may be an untold story for a lot of our listeners. So tell us a little bit about what happened here.

Morgan Housel (00:08:18):
First of all, Graham’s book, the Intelligent Investor had, I think, six different editions, maybe it was five, something like that. In every different edition that came out, the formulas that he showed in the book of, “Here’s the formula you can use to pick winning stocks,” those formulas change in every edition. If you look at the Intelligent Investor edition one, edition two, they have different formulas in there. The reason he updated them is because the old formula stopped working. So he found a new formula that worked and he put it in the book and he said … he’s basically saying, “This is what works now.” So Graham, when he was writing these books, did not intend, I don’t think, for these books to be used as a “How to” guide, an owner’s manual, 90 years in the future.

Morgan Housel (00:08:59):
Look, there are of course, timeless principles in the book, of course. Of course there are, but a lot of what’s in the book is hyper-specific to the era in which he was writing in, which is like the 1940s and 50s. This is a long time ago and you mentioned when Graham died, which I think was either 1972 or ’74, something like that, right before he died in one of his last interviews, he was asked, whether picking individual stocks in the way that he laid it out in security analysis and the Intelligent Investor, he’s asked, does that still work? Graham very clearly said, “No.” I’m paraphrasing here but he said, “That he used to work when we wrote it, but it does not anymore,” or he said, “It’s unlikely to achieve a level of success like it used to.”

Morgan Housel (00:09:39):
This was in the early 1970s, so you can imagine what he might say today if he was still alive. Look, this is not to poo-poo the book at all, because like I said, there are timeless principles in there, but anyone who doesn’t accept how the world changes over time, and is reading a book that was written in the ’30s as rock hard verbatim, this is what you should do today is going to have a hard time. I think that’s one of the reasons why so many people have tried to copy Buffett and so few if anyone has been able to emulate his success, even like the kind of returns because if you look at the kind of fanatic who says, “Okay, Buffett used to pick stocks, doing X, Y, and Z, using this formula, the discounted cash flow,” like whatever the model it would be, and you’re not updating it, for how the world exists in 2021, you’re going to have a really hard time.

Morgan Housel (00:10:29):
I think this is true for Buffett and Munger as well. If you look at how they invested in the 70s versus today, it’s a lot different. Not just because they invest more money today, not just because they have more capital that forces them to invest differently, but just how they see the world is very different. What one company has Buffett made more money on in dollar terms, not percentage terms, that any other investment he’s ever made? Do you know what it is?

Trey Lockerbie (00:10:53):
Apple.

Morgan Housel (00:10:53):
It’s Apple.

Trey Lockerbie (00:10:54):
Yep

Morgan Housel (00:10:55):
Which 10 years ago, Buffett would have said, I guarantee you and I could find a quote of Buffett saying like, “I don’t understand Apple. I couldn’t do it,” 10 years ago and it end up being in dollar terms, the most money he’s ever made ever. So even at his age, they’re willing to adapt their worldview over time and I think that’s a really critical component. I think most people want to find the secret formula, and then hold on to that forever. In a world that changes, in a capitalistic world that changes as much as you can, I just don’t think you can ever do that in investing. This goes for all forms of investing. Look, I’m a fairly passive investor, I write about that in the book, which is a different story that we can get into, but would I say that I’m going to invest in these Vanguard index funds for the rest of my life? No.

Morgan Housel (00:11:39):
How can I look at history and how much things have changed, in the composition of indexes, and the new products that are available to investors? Everything that’s changed and how could I say that I found the holy grail that’s going to work for me for the next 50 years. That’s ridiculous. If anyone were to say that, I think they’re being ignorant of how history has worked over time. So I love the idea of the quote that’s been attributed to many people, “Strong beliefs, weakly held,” is a really important part of investing. You can believe in these principles and you put a lot of faith into them. As soon as you start writing things in stone, things get really tricky, particularly if you’re talking about tactics and investing strategies.

Morgan Housel (00:12:17):
Now, again, I would add that there are principles of investing that I think will never change, because they’re fundamental to human behavior, but actually how people invest, always changes.

Trey Lockerbie (00:12:28):
Yeah, too many people get caught up it seems, trying to emulate success, and there’s this great quote in your book by Bill Gates that says, “Success is a lousy teacher.”

Morgan Housel (00:12:38):
His point, Gates … and you know who’s actually made a better example of this and has a better quote of this is Mike Moritz of Sequoia, who’s probably the most successful venture capitalist of all time. He did an interview with Charlie Rose, 10 or 20 years ago. Charlie Rose said, “Looks, Sequoia Investments has been the most successful venture capital firm, not just for five or 10 years, but for 40 years,” and he said, “How do you keep that, what’s your secret to that kind of consistency and longevity?” Michael Moritz said, “We’re always scared of going out of business.” He says, “Only the paranoid survive.” What’s so interesting about this is that if you run Sequoia Capital, and you have that track record, that’s like the one person in the world who can look themselves in the mirror and say, “I’m pretty talented. Maybe I do know what I’m doing,” and yet, that’s not what they do.

Morgan Housel (00:13:24):
They wake up every morning, scared out of their minds and that’s why they’ve been so successful. I bring this up, because the idea of success being a lousy teacher, as Bill Gates says, is that success tends to give you an idea that you know what you’re doing and that you know how the world works, and this is a quote from Jason Zweig, where he says, “Being right is the enemy of staying right,” because it leads you to believe that you know what you’re doing. Once you have confidence that you know what you’re doing, you start locking on to strategies and worldviews and grasping them really tight, they become part of your identity. Then all sudden, you’re not able to adapt, you’re not willing to adapt.

Morgan Housel (00:13:59):
If you’re a business, you get fat and happy, you get lazy once you’re so successful and how many companies does that apply to? General Motors, AIG, Citi Group, you can go on down the list of companies that got fat and happy and they let things go. They let risk management slide away because they’re too big to be able to manage it or they just kind of got lazy. When I bring up those examples, that’s not to poke fun of them because I think this is a very universal human condition, that success brings a degree of laziness. The companies and the people who are able to fight that are the unique ones. Those are the standouts, but the path of least resistance is that when you’re successful, is to say, “Okay, I can slow down now. I don’t need to run as hard as I used to. I don’t need to wake up at 4 AM in a cold sweat racking my brain because I’ve earned the success.”

Morgan Housel (00:14:45):
That’s what most people do, and I think that’s part of why competitive advantages, whether you’re talking about an individual or a company, don’t have a very long shelf life, most of the time.

Trey Lockerbie (00:14:56):
You kind of touched on, I would call it confidence bias and consistency bias, a lot of these biases that are pretty much well documented at this point, even by Daniel Kahneman, who you talked about in your book, but something that occurred to me when I was reading your book is you don’t really use the word bias, I don’t think, in the book very often. Is that intentional?

Morgan Housel (00:15:16):
Maybe subconsciously intentional for two reasons. One is that it sounds academic, and even if these are academic topics, as soon as you use a word … like bias is not a big word, but it’s an academic word. As soon as you use something like that people are like, “Ah, I don’t want anything to do with this.” Two, I think it’s just overplayed. It’s awesome that behavioral finance has gotten a lot of attention over the last 20 years, but as soon as you say, confirmation bias, at least people in my circle are going to be like, “I’ve heard this a thousand times. You’re not teaching me anything new.” So if someone like myself can take a concept that people already know, like confirmation bias, and tell them a story that they haven’t heard before, that shows it, that puts a spotlight on it, maybe that’s still kind of trotting some new territory.

Morgan Housel (00:15:59):
In all books, all investing books, all business books, if you’re just going to use the same phrases and the same words that have been used a thousand times before, no one’s going to be interested in that.

Trey Lockerbie (00:16:08):
Well, let’s talk about those stories that most people probably don’t know and what really ties with a concept in your book, you talk a lot about … which is risk and luck and how they kind of go hand in hand. So I want to start with maybe the third Beatle, if you will, with Buffett and Munger, which is Rick Guerin. So, maybe talk to us about this name, because maybe a lot of our listeners haven’t heard about this man.

Morgan Housel (00:16:32):
Rick Guerin is a guy whose name I have seen pop up in books and articles and whatnot, through the years as someone who is kind of in the Buffett club, going back to the 50s and 60s. He’s kind of like one of the original deep value investors from that gang, kind of that Wu-Tang of value investors who came about in 50s and 60s. It actually used to be a trio of Buffett, Munger, and Rick Guerin. The three of them used to kind of be a trio making investments. Buffett has talked about when Berkshire bought See’s Candy, Rick Guerin went with Buffett and Munger to interview the CEO. They were a trio together and everyone knows Buffett and Munger now. Then, there’s this question of what happened to Rick Guerin?

Morgan Housel (00:17:13):
Several years ago, Mohnish Pabrai, won one of the charity lunches with Buffett where he paid like 600 grand to have lunch with Buffett. He asked, Buffett. He said, “What happened to Rick Guerin. I know he used to be part of the tribe,” and then he kind of … he’s still around, he’s still investing money, but he kind of broke off from the Buffett and Munger. He said, “What happened to him?” Buffett told him a story that back in the 1970s, Rick Guerin had a bunch of margin debt. I think he owned his Berkshire Hathaway stock on margin. During the 1970s bear market, he got a margin call. Buffett said it was actually Buffett himself, who purchased the Berkshire stock from Rick Guerin so that Rick Guerin could make his margin call.

Morgan Housel (00:17:51):
The point that Buffett made to Pabrai was he said, “Charlie Munger and I always knew we would be rich.” He said, “There was no doubt in our mind that we would be rich. So because of that, we were not in a hurry. We weren’t in a hurry to get rich. We knew it was going to happen. It was inevitable. We just had to play our game and do it,” but he said, “Rick Guerin was just as smart as Buffett and Munger, but he was in a hurry.” He wanted to get rich faster than Buffett and Munger did. To me, that’s fascinating. A, because so much of what we talk about in the industry or what we look for in the industry, is intelligence. When Buffett says Rick was just as smart as he and Munger, he had the same amount of intelligence, but he didn’t have kind of the behavioral instincts, I think that Munger did of patience.

Morgan Housel (00:18:35):
Something so simple and basic. The phrase that Buffett uses where he says, “Rick was in a hurry,” is so fascinating and important to me, that you can take someone who’s just as smart, who just doesn’t have the grasp on behavior as well as Buffett and Munger did and it breaks everything. Now, I think Guerin did go on to still become a successful hedge fund manager. I think he recovered from his accident, so to speak but not to the degree that Buffett and Munger did. I think if you were to look at the Archegos hedge fund meltdown, that just happened a month ago or what’s going on with GameStop, and some of the hedge funds that got blown up from that, I think you see the same thing. You find people who are very smart, very intelligent but they’re in a hurry or they don’t have any of the dozens of behavioral flaws that are necessary to avoid to become a successful investor.

Morgan Housel (00:19:22):
This is to me is kind of the premise of my book, is just that good investing is not about what you know. It’s not about how smart you are or where you went to school or how sophisticated the Excel model you have is. Good investing is overwhelmingly just about how you behave. It’s about your relationship with greed and fear, and your ability to take a long-term mindset, and who you trust, how gullible you are, those kinds of things. To me, the most important part is that behavior is hard to teach. It’s almost impossible to teach even to someone who’s very smart. You can teach them calculus, and you can teach them data analysis. You can teach them how to read a balance sheet but you can’t teach people how to be patient.

Morgan Housel (00:20:00):
It’s just, some people have it and some people don’t. That can be disheartening to hear, but I think it’s really true, and all the evidence that we have shows that that is true, that I don’t think there’s any evidence unless we’re talking about like the marshmallow test at like a really basic level. I don’t think there’s much evidence that people who are extremely intelligent are also going to be patient investors or the opposite. The people who don’t have a lot of training and sophistication, those people can be patient, very successful investors. I think it’s just very easy to overlook that in this industry. The disconnect between behavior and intelligence.

Trey Lockerbie (00:20:33):
You mentioned finance and investing is probably the only industry where this kind of disruption can happen where someone like a janitor can go on to leave millions to charity, whereas these NBA hedge fund managers can collapse out of greed, and that juxtaposition is really profound. So maybe talk to us about that story. It’s a real story.

Morgan Housel (00:20:57):
I think virtually every year, there’s a story in the news of a very humble person, a janitor, a secretary, whoever it might be, dies and leaves millions of dollars to charity and no one knew that they had this money. Every year one of these stories comes about. There’s a story about a woman named Grace Groner. So that happens in investing, that complete novices who come from humble backgrounds do very well. You are never going to hear that story in heart surgery or fixing a root canal, that a complete nobody, novice, janitor, performed open-heart surgery better than a Harvard trained doctor. That would never ever happen or built a fully perfect iPhone in their garage. There’s some things that just an amateur novice could never do. Those stories do happen in investing.

Morgan Housel (00:21:42):
They happen a lot. I don’t think they are really necessarily like crazy, one in a million anecdotes. If you look at the vast majority of investment dollars in the United States, the vast majority of dollars are for people who contribute from their 401k. Every other Friday, they put 200 bucks in their 401k and they invest it in index fund and they never touch it for decades. That’s the majority of investment dollars that happens. Most investors, to that extent, that their just dollar-cost averaging in their 401k are really good investors. What we hear about and what we see and what moves the market are the people who are fiddling with the knobs. The hedge fund managers, the traders, the day traders, the Robin Hood investors, et cetera, that are constantly fiddling.

Morgan Housel (00:22:23):
The vast majority of investors are actually doing great and the vast majority of investors, even if they don’t know it, are outperforming some of the best investors in the world. That too, just doesn’t happen in any other field. What would it be like, if your average golfer, your average, just like plays twice a summer, that goes and rent some clubs, was consistently shooting a lower score than the best golfer in the world. That’s what investing is. I think people don’t even know it. They don’t even realize it, that the person who has no idea what they’re doing, their employer just auto-enrolled them in a 401k and they dollar cost average in index funds, they’re among like the top quartile of investors, and they don’t even know it.

Morgan Housel (00:23:03):
There’s just no other industry where that exists and it’s a really important part of the story, of how we behave as investors.

Trey Lockerbie (00:23:10):
So you make the salient point that we treat investors like members of a basketball team that are all playing the same game, and you just kind of mentioned how that … nothing could be further from the truth and I was just talking with Joel Greenblatt recently, and his analogy was, “Well, how do you beat Michael Jordan? You don’t play him in basketball. You play him in a different game,” and that’s kind of I think what you’re alluding to here is that these people who are almost not even realizing it, these employees who are dollar-cost averaging, are enrolling themselves in this really advantageous style of investing, and playing somewhat of a totally different game than a lot of these other investors.

Morgan Housel (00:23:49):
That’s right. I think there’s a really powerful kind of logical idea that investors are playing the same game, that we’re all investing in the stock market, we’re often buying the exact same stocks, so, therefore, we’re doing the same thing and I think nothing could be further from the truth, that you have everything from high-frequency traders, on one end to pensions and endowments that have century-long time horizons on the other, and everything in between. To think that those investors should agree on what the right price of a stock is, or agree on what news is pertinent, or agree on what the next best move is to do in the market, is ridiculous and we’re all playing completely different games.

Morgan Housel (00:24:28):
What’s so important about this is that most investors who don’t distinguish one game from another, are liable to take their cues from investors who are playing a different game. So one example of this is like, let’s go back to 1999 and Cisco stock or Yahoo stock, whatever was big back then, is going up 10% per day, it’s the 1990 stock bubble. Why is that stock going up? Is it because there are long-term investors who believe that Cisco was worth $800 billion or whatever? By and large, no. The reason the stock was going up is because day traders thought that it was … the stock was going to go up between now and lunchtime. By and large, they were right. That was the game that they were playing.

Morgan Housel (00:25:06):
The day traders didn’t care that Cisco’s market cap was well in excess of its future discounted cash flows. That’s not the game they’re playing. The game they’re playing is stock currently trades for $70 and I think it’s going to 71 before the end of the day, that’s their game, but that was really dangerous if you were a long term individual investor saving for retirement, because you saw the stock going up and maybe you thought, “Hey, maybe these investors know something I don’t. Maybe the stock is going up, because this is the next wave of the future, and maybe the fact that it’s going up says that … that’s a signal for me that I should be buying more before it keeps going up even more.” So the long-term investors start taking their signals, their cues from the day traders and of course, once the tide goes out, the day traders are gone.

Morgan Housel (00:25:50):
They’ve sold, they moved on, they did something else. The bag holders, so to speak, are the long-term investors who took their cues from someone playing a different game. I think this happens all the time. I mean, if you were to watch CNBC and you go on and someone … the guy wearing a nice suit says, “You should buy Netflix stock.” Well, who is that advice for? Is that for a 19-year-old day trader? Is that for a 90-year-old widow on a fixed income? Because let’s not pretend that those people are the same. So when someone says you should buy this, like when we all play different games, then you have advice that is good for one person that will be disastrous for another. It’s such an obvious simple point, but it goes overlooked all the time in a way that I think … maybe even the majority of bad investing behavior is caused by people who are taking cues from people who are playing a different game than them.

Morgan Housel (00:26:40):
I’m a long-term index fund investor. So that means that a company’s quarterly earnings, even like quarterly GDP, it makes no difference to me, but if I were a momentum fund manager, then that news would be very pertinent to me. I think there’s a big … it happens in investing too, where one investor will kind of criticize or minimize how other investors behave? Why is this person paying attention to short-term data? Why is this person so oblivious to a stock that’s going down and they keep hold it even though the trend lines are going down. A lot of arguments in this industry are not necessarily people disagreeing with each other. It’s people who are kind of upset that they realize that other people are playing a different game.

Morgan Housel (00:27:21):
I think it’s a cause of a lot of bad behavior. Best things that’s so critical for any investor to do is just define the game that they’re playing and make sure that the information and the cues that they take, that are going to dictate their behavior are only relevant to your personal game.

Trey Lockerbie (00:27:36):
One thing that you highlight that you do, that I find so overlooked is just starting out with the end in mind and saying, “What are my goals? I want to retire with X amount of money. I have this amount of money today. I can probably contribute Y? So what rate do I need to compound at to get there?” Typically speaking or generally speaking, probably the indexes will be a satisfactory return in that regard. So talk to us a little bit about, your own investing style and how you adopted that.

Morgan Housel (00:28:11):
I think a lot of it has to do with this concept of enough, that no matter what we’re doing … and this applies to a lot of things in life, you have to have at least some boundary of saying like, “That’s enough and once I get to this point, I’m not going to reach this high, that’s just enough. Maybe it’s possible to get more, but it’s enough.” I think it’s a really critical investing skill. For me, what it’s been is just this observation that look, if I can dollar cost average into index funds, for the next 50 years, I’m going to achieve every financial goal that I have and then some. I’ll be able to take care of my family in this life. I’ll be able to leave some to my heirs. I’ll be able to leave some money for the betterment of society. I’ll be able to travel everywhere I want to go, live in the house I want. Every financial goal will be met if I can do that.

Morgan Housel (00:28:53):
So why … if I’m currently doing that, why would I want to reach for more, if reaching for more is going to add more risk that everything is going to blow up in my face, it’s going to be more complicated. It’s going to take more work. If I can already get everything that I want, why would I push even harder? What’s the logic in that, if I’m already getting everything that I want? So that’s kind of how I look at it, that if I can do this simple investing strategy that doesn’t take really any mental bandwidth and I can achieve all my goals, that’s it. Now that works for me and that works for my goals, my wife’s goals but it might not work for other people. Other people might have a little bit more of a type-A personality that I do so their goals are different.

Morgan Housel (00:29:33):
I think knowing what is enough and staying within that boundary, wherever your boundaries are just making sure you’re staying within them is so critical for investors. The other thing for me for my investing strategy is I’m a passive investor, but I’m not a passive zealot. I’m not one of the people who says you can’t beat the stock market. No one can do it. It’s a waste of time. It’s all marketing. I’m not that person at all, and I know investors and fund managers who I have a good degree of confidence will outperform the market, this year or next year, over the next five years. So then the question is, why don’t I invest with those people? If I’m honest, I think they will earn returns above the index and the reason I don’t is because I think the more complicated that I make my personal investments, the higher the odds that I’m not going to be able to sustain it over time.

Morgan Housel (00:30:20):
If I were to invest in one of these fund managers, maybe I’ll do very well over the next year or five years, but is that a manager that I can stick with for 50 years? Am I going to get to a point where I don’t believe that they have their skills anymore, that I’m going to have to question them, that I’m not going to have to pull out, maybe I’ll pull out in the worst possible time. The more knobs I have to fiddle with, the higher the odds that I’m going to interrupt my investing process at some point, versus I think if my investment strategy is very simple, there’s no knobs to fiddle with. It’s just the Vanguard total stock market and it’s just so brainless. That’s it. I think that gives me a higher chance of sticking with it for 50 years.

Morgan Housel (00:30:56):
If I can stick with something for 50 years, compounding is going to go nuts. That’s all it is. All investing is just money and time and the time is the most important part of that equation. So all I want to focus on is maximizing time. It’s not maximizing annual returns. It’s maximizing, how can I stay here for 50 years and I’m going to be able to do that with as much simplicity as I can. Maybe it works for me too, I have almost no susceptibility to FOMO. It just doesn’t really bother me that much. That’s not true in other parts of life. I think at other parts of life, I see people doing something, “Oh my God, I really want that.”

Morgan Housel (00:31:32):
For investing, it’s not there. I’m totally okay, earning the returns of the Vanguard total stock market index, when I could have been all in FAANG stocks or all in Bitcoin or whatever it might be, that really doesn’t bother me, because I’m just so attached to this idea that if I can do this for 50 years, I’m going to achieve everything that I want to do. So I just focus on that single topic without much variance.

Trey Lockerbie (00:31:55):
So psychologically speaking though, why does investing in index funds just sound like someone prescribed you a broccoli only diet?

Morgan Housel (00:32:04):
I think because there’s no action to be taken. In most fields, the harder you try, the better you do. If you want to become the best golfer in the world, well go to the range for 12 hours a day and hit a thousand golf balls. If you want to be the best basketball player, go live in the court and practice all day long. If you want to be a doctor, go study in med school for a dozen years. Most fields, there’s a very strong correlation between effort and outcome, and investing is just not one of those fields. It’s one of the counterintuitive fields where the harder you try, the worse you’re likely to do. That’s usually the case and therefore, if you have a passive strategy, I think it just kind of tickles people to say intuitively that doesn’t feel right.

Morgan Housel (00:32:43):
It feels like of course, you should be able to do better if you try harder. Imagine if you wanted to become a good golfer, and the strategy was like, “Oh, never practice, never hit a ball. Never think about it, never read the golf news.” That doesn’t make any sense but that is the right investing strategy for a lot of people. So I think it’s just one of the few fields where it doesn’t necessarily work, and then the other answer that’s a little bit cynical, but I think there’s truth to it, is that if you’re a financial advisor or a fund manager, you can’t charge a fee for telling people go in an index fund. By the way, the only company that’s been able to really make it work is Vanguard, which is a nonprofit.

Morgan Housel (00:33:19):
That’s why it’s worked is because they don’t need to make a profit by selling people a lot of the BS that exists out there. So the fact that Vanguard only works because it’s a nonprofit, to me it’s like all you need to know about why other firms push back against it. You can’t make any profit doing it. I think that’s a cynical answer, but I think there’s quite a bit of truth to it.

Trey Lockerbie (00:33:39):
Just thinking out loud, do you have any opinions on equal-weighted indexes versus market-cap-weighted indexes?

Morgan Housel (00:33:46):
Not a lot of deep research. I’m not going to pretend to be an expert on this topic, but one thing I would say is, from what I understand and the cursory knowledge that I have about this topic, a lot of the fundamentally weighted indexes have very good backtests and not that great actual results, which is, that’s like … that move, that story has been told a thousand times in investing for every different kind of investing strategy. I’m pretty sure that’s the case for a lot of them, the backtests are beautiful, but the return, the actual returns, even if you’re looking over a 10 plus year period, are okay at best. Maybe that’s because a lot of them are value tilted, and value just hasn’t worked over the last decade for various reasons. Maybe it will in the future, but it hasn’t over the last decade. Maybe that’s some of the reasons.

Morgan Housel (00:34:29):
One thing about fundamentally weighted indexes is that … or equal-weighted index is that it’s not just a stock market that heavily weights towards winners. Capitalism heavily weights towards the winners. When capitalism is kind of a winner take all field in most industries, it would make sense that you want to have the most weight to the biggest, most successful companies. That makes a lot of sense. Now, is there also logic that the biggest companies tend to be the most overvalued? In the 1990s it was Dell and GE, and maybe today it’s the FAANG stocks that are the most overvalued, the most likely to underperform in the future. I think there’s a lot of logic to that as well, but to me personally, it kind of falls in the bucket with fiddling around the edges in a way that might work and might not.

Morgan Housel (00:35:06):
When I weigh those out together, I’d say, “I’m fine, I’m fine owning cap-weighted stocks. I accept that there’s going to be periods, even fairly long periods, when cap-weighted doesn’t work, as well as other things could have.” Again, if I’m thinking about just sticking with something for 50 years, that’s totally fine with me.

Trey Lockerbie (00:35:23):
You’ve mentioned in the book that your success as an investor will be determined by how you respond to punctuated moments of terror, and I love that, not the year spent on cruise control, but exactly the emotional response during those moments of terror, those have the long tails. So talk to us a little bit about how we should look at that as investors.

Morgan Housel (00:35:45):
I finished writing the book in January of 2020, so pre-COVID, more or less but it’s true that how you behaved in March of 2020, when the world is falling apart, will have more impact on your investment returns than all of your behavior in the previous decade combined. I think that’s probably right and that’s usually true. If you were to look at your 20-year results as investors, the most important things that will matter is how did you behave during the dot com bust? How did you behave in 2008 and how did you behave in March of 2020? Those three little punctuated moments that are more than everything else combined. If you are one of the investors who panics last March and sold everything in March of 2020, that’s a scar on your net worth that will be with you for the rest of your life.

Morgan Housel (00:36:27):
You’ll never be able to recover from that. So that’s usually what it works, there’s a quote like a long old joke about pilots, that a pilot’s job is hours and hours of boredom punctuated by moments of sheer terror, which is where I got that quote. It’s the same in investing. What really matters is just how you respond 1% of the time, 99% of investing is really boring. What you do 1% of the time will change your life. Whether that’s not panicking during a crisis, whether it’s buying more in a crisis, whether it’s not getting caught up in the final moments of a massive bubble, like how you respond a fraction of the time is going to account for the majority of your returns over time.

Trey Lockerbie (00:37:03):
I’ve been on a bit of a quest to determine the best definition of risk. You highlight a great quote by Carl Richards, that might be the best one I’ve heard so far, which is, “Risk is what’s leftover when you think you’ve thought of everything.” That’s another landmine we’re talking about as far as long-term investing, just understanding that you will not know all the outcomes.

Morgan Housel (00:37:28):
That’s it and by definition, people hear that and they think, “Okay, that’s great but let’s talk about the biggest risks that are out there,” and you’re like, “No, no, no, the biggest risk is what no one is talking about, because it’s impossible to know,” or it’s so unlikely, it’s so crazy that people won’t even think about it. Here’s a story that I wrote about this week that I think is really fascinating. During the Apollo space missions in the 1960s, before we started launching ourselves into space in rockets, NASA tested all of its equipment in super high altitude hot air balloon. So they would take a hot air balloon up to 130,000 feet, like just scraping the edge of outer space and they would test their equipment. They test their theories before they actually went up in rockets.

Morgan Housel (00:38:07):
So one time in 1961, NASA sent up a guy named Victor Prather to 130,000 feet and the goal of this mission in this hot air balloon was to test NASA’s new spacesuit. Prior to actually going into space, they wanted to go up to 130,000 feet, make sure everything was airtight, it worked under pressure, et cetera. Victor Prather goes on this mission, goes to 130,000 square feet, test the suit, the suit works beautifully. Everything is great. Prather is coming back down to earth and when he’s low enough, he opens up the visor on his helmet. The face shield on his helmet, when he is low enough to breathe on his own, he can breathe the Earth’s air, he’s low enough that he can do that. All fine. He lands in the ocean as is planned and as the rescue helicopter comes to get him, he’s trying to tie himself onto the rescue helicopter’s rope and he slips. He slips off his craft and falls into the ocean.

Morgan Housel (00:38:56):
Again, not a big deal because the suit is designed to be watertight and buoyant but Victor Prather had opened up the mask in his helmet. As he falls into the ocean, he’s now exposed to the elements. His suit fills up with water and he drowns. This to me is so fascinating because the NASA space missions during the moon race in the 1960s, was probably the most heavily planned mission ever. You had thousands of the smartest people in the world planning out every single minute detail and checking it over and over again, and being signed off by the most sophisticated expert risk committees that exists in the world. They were so good at it. I mean, to have men walking on the moon, you need … every single millisecond was planned out, every detail.

Morgan Housel (00:39:42):
With Victor Prather, it was the same thing, they planned out every second of that mission and then you overlook one tiny little microscopic thing like opening your visor when it’s okay to breathe the Earth’s air and it kills him. That to me is just an example of risk is what’s left when you think you’ve thought of everything. I think that’s an example of what happens in a lot of fields. I mean, think if you were an economic analyst in the last five years, and your job is to forecast the economy, and you spend all your day, you spend 24 hours a day modeling GDP, modeling employment trends, modeling inflation, every detail about what the Federal Reserve is doing, you build the most sophisticated model in the world to predict what the economy is going to do next.

Morgan Housel (00:40:21):
Then a little virus sneaks in and 30 million people lose their job. That’s how the world actually works. No economist in their right mind would have included that in their forecast if you go back to 2019 or whatever. No one would have said, “Oh, I expect GDP is going to fall 20% next year, because we’re going to have …” No one said that. Of course, you couldn’t, it would be ridiculous to say that, but that’s how the world works. I think it’s the same thing if you look at September, the 11th or at Pearl Harbor, or Lehman Brothers going bankrupt because they couldn’t find a buyer. All the big events that actually move the needle are things that people didn’t see coming.

Trey Lockerbie (00:40:55):
There’s another one in your book that I just love from World War Two, where German tanks sitting in these grasslands waiting to go to battle are then called to the front lines and most of them don’t work because a lot of these field mice have gotten into the tanks and destroyed the electrical wires and that is just such an amazing example of this at play.

Morgan Housel (00:41:16):
The purpose of that too, like it’s such a ridiculous story and it goes to show like if you were a German tank commander, a tank designer and you went to your boss and you said, “Hey, I’m worried about field mice chewing through the wires,” they would have laughed at you and said, “Son, this is war, we’re not worried about mice here,” but they ruined the entire fleet of tanks. I think there’s a lot of that too. I mean, one example, if we want to talk about World War Two again, is World War Two is in my mind, the single most important event of the last 200 years. It might be the most important event in all of human history, just in terms of how much it move the needle and shaped modern society. Everything that you and I do today, is rooted in something that happened in World War Two. I don’t think that’s an exaggeration.

Morgan Housel (00:41:57):
There was a time in the 1920s when Adolf Hitler began his career, his political career, by storming a beer hall in Munich, during a political protest, the Beer Hall Putsch, it’s a well-known thing. During this storming of this beer hall, there was a gunfight. Again, very well known, very well documented. A guy who was standing right next to Adolf Hitler was shot in the head and died during this period. He’s standing directly next to Adolf Hitler. In fact, when he’s shot and died, he fell onto Hitler and dislocated Hitler’s shoulder. That’s how close he was when he was shot and killed. Now, you have to ask, what if the bullet that killed this guy next to Hitler was two inches to the left, two inches to the left and instead of killing this guy next to him, it killed Adolf Hitler, and Adolf Hitler died in the 1920s and there’s no World War Two? What does the world look like today, if that bullet were two inches to the left?

Morgan Housel (00:42:47):
I mean, go down the list of things that were invented because of World War Two. Penicillin, the most important drug of modern times came about because of World War Two. The freeways that you and I drive on today, were built because of World War Two. Jets, rockets, atomic energy, microwaves, digital photography, GPS, radar, all of it was built because of World War Two or the Cold War that was kind of an echo of World War Two. None of that would have happened if the bullet was two inches to the left. There are a million of those examples that you can give about how the world would be completely different if this tiny little thing went different.

Trey Lockerbie (00:43:21):
I just think it’s really helpful for our listeners to hear about this framework that you kind of layout, going all the way back to World War II up until today because what you’re talking about, you could also say that today, all this talk about inflation, all this talk about needing something radically new, right now, the sort of site guy sentiment that nothing is working for anybody right now and that there’s this … really this polarity between the 1% and everyone else. All of it kind of seems to tie back to World War Two and a lot of people are talking about this concept of a new roaring 20s but you kind of touch on how the roaring 50s of sorts is almost a little bit more likely I would say, to happen.

Morgan Housel (00:44:00):
Well, I think it’s important that when most of us look back at modern US history, we think of the 1950s and 60s as like the glorious age of middle-class prosperity, and if we could do that then, why can’t we do that now or more importantly, how have we lost our way? To me, what’s important is this realization that the 50s and 60s were the anomaly. Most of what we’ve been dealing with over the last 20 years, is much closer to normal historically, than what happened in the 50s and 60s. We had a very unique moment in the 50s and 60s, where because of the end of the war, a couple of things happened. One there was a lot of pent-up demand for homes and cars and washing machines from all these soldiers who came home and were in their early to mid-20s and wanted to start a family.

Morgan Housel (00:44:43):
Huge pent-up demand for goods and services. A lot of that was because during the war years, all of the factories that were building cars and dishwashers were shut down and converted to build tanks and airplanes and whatnot. So the manufacturing of consumer goods and services just came to a stop. So when all the soldiers came home, all of them needed new cars, all of them needed new homes, there’s just a huge demand for stuff. All this happened while most of Europe and Japan were literally bombed to rebel and they were spending all of their investments in their economy to rebuild themselves, which meant that we didn’t have to compete with them for car manufacturing and dishwashing. We had all that ourselves and we were building stuff for them too. We were exporting so much back then, but we were just kind of the economic engine of the entire world to a degree that we haven’t been since.

Morgan Housel (00:45:29):
We also had this thing during World War Two where it brought society together. It was really one of the only times in modern history where virtually everyone in the United States had one common goal, and everyone was just like, “Guys, we got to work together. We got to do this and work together to fight this one common enemy,” and it created a sense of togetherness and also trust in the government that I think would be hard for you and I to fathom today, particularly trust in the government, in the 1950s and 60s was off the charts. The surveys and people ask, “Do you trust Congress to do the right thing?” When they asked that question today, you get people … like 10% of people say yes. In the 50s and 60s, it was 90% of people saying yes, I trust the government to do the right thing.

Morgan Housel (00:46:12):
That sense of togetherness that we’re all in this together, created a society that was much more equal economically. A lot of this too was because to pay for World War Two, we had 90% marginal tax rates, so very wealthy people, their actual take-home incomes were much lower relative to normal workers than they would be today, which is much more of a flatter society. I’m not arguing that that’s the way it should be or that was great but that’s what it was for better … That’s just what happened, a much flatter society. You had wealthy people who drove Cadillacs and poor people who drove Chevy’s, but they weren’t that much different. It’s not like a Bugatti towards riding the bus like it is today. It was just much more and like, people sat down and watched the same TV shows, read the same newspapers, listen to the same radio shows, no matter where you live or how much money you made, people were just on the same page.

Morgan Housel (00:47:01):
I think that created this era that we now look back at with nostalgia and then, as the 70s and 80s, particularly in the early 80s, things started breaking apart a little bit and economic inequality really started to grow, and you had rich people who started doing very, very well and middle-lower class people whose income stagnated at best, if not, if you are like a middle-class male worker, your real wages adjusted for inflation, started to decline fairly rapidly. Since we had this idea of togetherness, that people kind of grow, and the economy grow the same, and the CEO down the street, yeah, he’s got a little bit better life but if his income is growing, mine should be growing as well. That’s the idea that we took away from the 50s and 60s.

Morgan Housel (00:47:43):
So as we started breaking apart, and there were legitimately wealthy people who started building mansions and sending their kids to private school and driving Ferraris, and private jets, et cetera, I think it made the middle class and lower class people look at that and say, “Well, I deserve that too, but the only way that I can afford that is with debt.” So if John down the street now has a 4000 square foot house, well, I want a 4000 square foot house too but the only way I can afford it is with a bigger mortgage. Hey, Steve down the street now has two cars. Well, I want two cars too but the only way I can afford that is through debt. Jim is sending his kid to private school, I want to do that too, but the only way I can do that is with huge student loans.

Morgan Housel (00:48:20):
I think that was the birth of the debt bubble that kind of imploded in 2008, was the middle class trying to desperately catch up with the upper reaches of society that were consistently breaking away in terms of their income. I think another echo of that, so to speak, is a lot of what’s happened in the last 12 years, kind of since 2008, is just more and more people in society, not just the United States but around the world saying, screw this, this doesn’t work for me anymore. Whatever this is, it’s not working for me anymore. My career is not going well. I’ve lost my house, things are breaking apart. Same thing happened to my neighbor’s, whatever this is, it ain’t working. I think that explains Brexit. I think it explains the rise of Donald Trump, in a way that I don’t find that to be political.

Morgan Housel (00:49:05):
I think it’s just the truth of a lot of people just saying, “This isn’t working, and we need to try something different.” A lot of that can be directly tied back to the togetherness that we had at the end of World War Two that broke apart over the last 40 years.

Trey Lockerbie (00:49:18):
I have to question a little bit, they said the 70s and 80s like … you’ve all seen the website, what happened in 1971. I mean, obviously, we went off of the gold standard at that point and I have to wonder in those 50s and 60s, at that golden age, literally speaking because we were on a gold standard, if that had anything to do with that kind of leveling of sorts across society, whereas once we went off that standard, the disparity just grew and grew and wages stayed stagnant and productivity increased but is that something you factor into this model, of this framework at all?

Morgan Housel (00:49:52):
I think it’s definitely part of the puzzle. I don’t think it’s a major part for two reasons. One is that we kind of had the same breaking apart of society in terms of wealth inequality in the 1920s, when we were also on the gold standard. So it’s very possible to have this fracturing of incomes during a gold standard. The other thing is that the Federal Reserve was not intended to be politically independent, before, I forget when it was, the late 1950s, early 1960s, something like that. At the end of World War Two, it was explicit that basically Congress could go to the Fed and say, “Hey, we need to keep interest rates low to fund all this debt. So you, Mister Fed Chairman need to keep interest rates low.” If that happened today, people’s heads would explode, but that was the normal path of how things worked back then.

Morgan Housel (00:50:36):
So the idea that kind of gets thrown around that the Fed is in an unprecedented spot of manipulating society, I think they’ve been … the fed has been manipulating the dollar since 1913. It’s part of the puzzle. There’s certainly things that have happened in the last 12 years, in terms of what the Fed is willing to do with quantitative easing, that has reshaped the dynamic of financial markets in a way that has massively advantaged the wealthiest people in society, that own most of the assets. Of course, that’s definitely true but that was also true in the 1920s. There have also been periods, things that have happened, particularly in the last year that I think have benefited average people more than wealthy people, particularly the stimulus packages and unemployment benefits we’ve had in the last year.

Morgan Housel (00:51:17):
I think it’s definitely part of the equation but I think it’s not as black and white as it might seem, at the first knee-jerk reaction.

Trey Lockerbie (00:51:25):
Well, since it’s such a hot topic, I just want to touch on inflation a little bit more, because you’ve made a point I had not heard, it was essentially that inflation, the definition is too much money chasing too few goods and that not enough people focus on the goods part of the equation. So talk to us about what you mean by that.

Morgan Housel (00:51:44):
Most historical periods of hyperinflation, if we’re really talking about real hyperinflation, virtually all of them, I would struggle to find one example, that did not take place in a society where they had massive output shrinkages because either it’s during a war and their factories are bombed to rebel, like happened in Weimar Germany or happened at the end of World War Two in a lot of countries or if it’s because the government has confiscated the major industries and run them into the ground, as happened in Venezuela and Zimbabwe. It’s never just too much money. It’s always too much money during a time where your production, your GDP is collapsing. I think that’s really important because what happened after 2008, when the Fed started printing a lot of money?

Morgan Housel (00:52:23):
So many people, including myself, by the way, we’re saying hyperinflation is right around the corner, Feds printing so much money, you know what’s going to happen, and it didn’t. I think the reason it didn’t is because the economy was well able to soak up a lot of that excess liquidity because we’re still … our factories still had all the capacity that they can make stuff, and produce stuff in a way that did not exist during Weimar Germany or in Zimbabwe, when the government had confiscated so many of the farms and run them into the ground or in Venezuela, where the oil industry has been confiscated and run into the ground because they didn’t keep anything up. So it’s not to say that you can’t have a rise of inflation unless you have a decline in supply. It’s not that but most of the time, the big bouts of inflation come from a massive shrinkage in any economy’s ability to produce.

Morgan Housel (00:53:10):
Now, could that happen in the United States too? Sure. Could it happen that we just don’t keep up with factory investment or we’re not investing in the right fields, and we get to a spot where supply is shrinking? Yes, of course, that could happen and it’s happening right now, in some specific fields. What’s happening in housing right now, and particularly lumber, is really fascinating, where the price of lumber is just going berserk. It’s going off the charts. I think it’s up about fivefold in the last year, the price of lumber to build a house. From my understanding why that is, is not because we ran out of trees, or even ran out of cut-down timber, there’s plenty of timber that’s been cut down and stripped of its bark. There’s plenty of that.

Morgan Housel (00:53:46):
From my understanding, a lot of the mills last spring said, “Oh, because of COVID, we’re going into the next great depression. Shut down the mill. Don’t invest in the mill. Layoff the mill workers.” Even though there’s plenty of logs, there’s not enough supply to manufacture finished wood. So we do have a decline in output in something like that and sure enough, we have nearly hyperinflation in lumber. So it can happen in specific industries. I wouldn’t be surprised if it happens in airlines this summer too, where you have airlines, some of whom have laid off tens of thousands of their workers, or just through attrition have lost thousands of workers, flight attendants, pilots or whatnot because last year, there was no work for any of them.

Morgan Housel (00:54:26):
Now, this summer, everyone who’s vaccinated is going to want to get on a plane and go somewhere. So at the same time, you’re going to have maybe record demand, you have a huge decline in supply, and could that lead to huge inflation in airlines, I think almost certainly. I think at some senses, it will. The other area where I know it’s happening right now is rental cars, where last year, a lot of the rental car companies just in a bid to survive, started liquidating their fleets just so they had enough money to survive. Now that everyone wants to book a vacation right now, there are so many fewer rental cars available right now than they were last summer. So is there going to be huge inflation around cars this summer? Probably, but again, I’m making this point that it’s not just the money coming in. It’s the supply that went out that really causes the problem.

Trey Lockerbie (00:55:12):
Could it also be, Morgan, the supply of social security that we might hit a roadblock with? I mean, we have to essentially … we’ve been borrowing from Social Security to cover these deficits for years, to the point where now, it’s really in jeopardy, I would see and that’s what I’m reading, right? Is this something you read into and what’s your takeaway from, how we’re going to be able to fund these social security programs into the future?

Morgan Housel (00:55:38):
I think what’s interesting about social security is that if you look at the forecasts of how underfunded it is, it’s a disaster. You get numbers of like tens of trillions of dollars underfunded, but then if you’ll read some of the footnotes of those reports, about the changes that you can make to bring things back into balance, some of the changes are like not that hard at all. It’s like, change the rate of benefit growth from a little bit above CPI, just back down to CPI just like not cut benefits, just change how quickly they grow. Just change of growth rate, and then boom, everything is back into balance. There are a couple of things that we could do, that we almost certainly will do that bring things back in. The other thing is that, technically, for accounting reasons, social security has a trust fund and it’s separate, but in reality, it’s not.

Morgan Housel (00:56:23):
Everything is just thrown into one giant pot and then, when social security is underfunded, money gets pulled from somewhere else, when it’s overfunded, money goes to somewhere else. It’s all one giant pot that gets in. So on my list of economic worries, I don’t think funding Social Security is even in the top 30. Is it a thing that’s going to need change? Yes, of course, but those changes, if you look at the changes that will actually make a difference, they should be the easiest thing for people to swallow. No one is talking about cutting benefits, who’s talking about cutting growth?

Trey Lockerbie (00:56:50):
Now I have to ask, What is your number one worry economically right now?

Morgan Housel (00:56:55):
I’d say the number one worry that we know of, which is an important aspect because the number one risk is always, what no one is talking about, but the thing that we know of is probably demographics. Look, what’s interesting about this is that if you look around the world, America has some of the best demographics in developed countries, some of the best. China, Japan, Russia, Italy, South Korea are disasters economically, in terms of their demographics. United States is pretty good but it’s still not that great and our population growth over the coming decades will probably be something like half of what it was over the last half century. All economic growth is just population growth and productivity growth.

Morgan Housel (00:57:30):
All economic growth is one of those two things. So if you really take population growth almost out of the equation, then our potential to grow, is substantially less than it was over the last half century. That’s just like a basic math problem and the demographics … maybe this is the fault of mine and your generation, Trey is we don’t have as many kids as we used to. I mean, the thing that my wife and I has talked about is like, if you see someone our age, with four kids, it’s like, “Are you kidding me, four kids?” Good for you, amazing that you do that but that’s so rare. Go back to the 1950s and it was not … everyone had four kids. I mean, I’m exaggerating but that’s kind of … like the amount of kids that we have right now has declined so substantially.

Morgan Housel (00:58:13):
If you look at what’s happening with immigration as well, the numbers are substantially lower than they used to be as well. So you put those two together and just population growth, just the number of people is going to be substantially less than it was. Now that could turn, no one really foresaw the baby boom of the 1940s and 50s coming as well. Things can happen that can turn that around. The biggest wildcard of course, is immigration. That could either come to a halt or it could be way opened up like no one can pretend they know what’s going to happen there, but that’s probably the biggest problem that we know of. Throughout the rest of the world, it’s a much bigger problem. China’s working-age population, aged 16 to 64 was scheduled to decline, forecast to decline by 200 million people from 2012 to 1950, 200 million fewer workers during that period.

Morgan Housel (00:58:57):
There is no economy in the history of the world that has ever grown its economy, given those circumstances and it’s not at all an exaggeration to say that China over the next 40 years will probably look kind of best-case scenario like Japan did over the last 30 years, which by the way, Japan has been a lovely place to live by and large for the last 30 years. This is not foretelling disaster, but its economy has been more or less stagnant. Now, its unemployment rate has been low. It’s been able to invest in society, and the schools are great. This is not apocalypse. It’s just much less growth than we’ve been accustomed to over the last 50 years.

Trey Lockerbie (00:59:31):
So the last myth I want to bust with you because this is so much fun is around the money supply, right, because you wrote a great blog post and I should mention, everyone should go out and read your blog post, as well as your book, they’re all just wonderful weekly blog posts. One in particular stood out and because it’s such a hot topic with the M1, M2 money supply and the increase, so with the M1 money supply, for example, it shot up about 350%, if you look at the chart from the Federal Reserve. It’s extremely misleading, we touched on it once or twice here on the show but I really want to settle this once and for all and talk to our audience about exactly what’s happening with this chart.

Morgan Housel (01:00:11):
I had this idea for a lot of things in life that if you see something that looks unbelievable, it’s probably because you shouldn’t believe it. It probably actually is unbelievable and I started seeing this chart of M1, which is a way to measure the money supply in the United States, that tracks kind of liquid money, cash, coins and money in your checking account, those kind of things. The chart over the last year is just a textbook hockey stick. It’s kind of relatively flat over time and then it just shoots straight up. Back to my theory of like, if it looks unbelievable, you shouldn’t believe it, I just looked at it and said, “What’s going on here?” Something happened beyond just, “Oh, the Fed is printing money,” that can’t explain what this is.

Morgan Housel (01:00:47):
What actually happened here? I started looking into it and talking to a few people and what happened is actually very interesting, which is that there’s another measure of money supply called M2, which includes everything in M1 but it also includes savings accounts. A savings account, but as the Fed defines it, is anywhere you have your money where you can withdraw your money fewer than six times per month. That’s the definition that they use for savings accounts. Now, last March, when the world was melting down, the Fed, in a bid to give people easier access to their money, just said, “Hey, the six withdrawal rule, just throw that out. That doesn’t exist anymore. If you’re a banking customer, you have money in a checking account, you can go access it as much as you want.” Just a thing that they did last March to give people access to their money.

Trey Lockerbie (01:01:30):
Maybe touch on the fractional reserve elements of that, right, this is so important.

Morgan Housel (01:01:36):
So if I put money in a checking account at my bank, the bank, given the rules has to set aside a portion of that money if I invest … if I put $100 in a checking account, the bank has to set aside let’s say $5, they have to set that aside for reserves to save for a rainy day in case the bank gets into trouble. If I were to put my money in a savings account, the bank doesn’t have to reserve anything, which is great for them. The hitch though is that, if you’re in a savings account where you don’t reserve anything, the customer can only withdraw their money fewer than six times per month. That’s kind of where these arcane rules come from. That’s the incentive for banks, “Hey, if you don’t want to reserve any money, you can only let your customers access it six times per month. If you want to give them full access, you need to reserve a little bit on the side.” That’s how this works.

Morgan Housel (01:02:20):
So again, last March, the Fed said, “Hey, to give people easier access to the money, just get rid of the six withdrawal rule. If you have money in the bank, you can go access it and no penalties, go for it,” like a really simple, obvious risk free way, just give people access to their money when the world’s falling apart, that there was this really interesting consequence of that, which is that as soon as the six withdrawal rule was taken away, now in a regulator’s eyes, every savings account in the United States instantly became a checking account. Now for you, the customer, nothing really changed. It’s still called a savings account, maybe your interest rate was the same, nothing changed, but from the regulator’s mind, every savings account was now a checking account.

Morgan Housel (01:03:00):
Savings accounts were accounted for M2 but they’re not accounted for in M1. So instantly, overnight, just because of this rule, all of a sudden, all the money which was trillions of dollars in savings account started being accounted for in M1. On the chart, it looked like M1 just shot up by 350% overnight. So many people took that and said, “The dollar is going to collapse. Look how much money the Fed is printing, they just quadrupled the money supply overnight, we’re all going to die, go build a bunker.” Even though in reality, it was just an accounting rule change that had no impact on the money supply. Now, the Fed has printed a lot of money over the last year but it’s probably 90% less than what it looks like if you’re just looking at this M1 chart.

Morgan Housel (01:03:41):
These footnotes that explained all of that, that I just laid out, I guarantee you they were read by like seven people. No one is interested in that. So many smart investors took that chart and just ran with it, when actually it wasn’t showing at all what they thought it showed. To me the takeaway from that is just the economic machine is so complicated and there are so many things that look like one thing at first blush that if you scratch them down a little bit, you realize it’s way more complicated than you thought. Whenever I come across something like that, like this M1 phenomenon, I’m just reminded, the more you study the economy, the more you realize that you or anyone else really has no idea of what’s going on most of the time.

Trey Lockerbie (01:04:19):
Okay, so that’s all well and good with M1, right, but then M2 is growing considerably. I mean, it’s shot up 27%, I think from around 15 trillion now to 19 trillion and so. So that, as you mentioned, is real money that’s being created and is maybe potentially debasing the dollar, right? So, now there’s an idea out there that since this is a basically a type of inflation happening, that perhaps you use something like the M2 growth rate as a discount rate and your evaluation, as you’re kind of, trying to evaluate stocks or even the stock market as a whole. Yes, you’re an index passive investor, but you have a career in finance. You work at an established fund. You’ve been a stock picker. So I don’t want people to think that’s all you do, right?

Trey Lockerbie (01:05:06):
You’re not stock picking but my point is, do you have an opinion on this idea of using something like that, just to keep up with the debasement?

Morgan Housel (01:05:13):
Well, if you look at M2, yes, it’s grown something like 20% over the last year but M2 velocity, how quickly that money is actually flowing in the economy has declined by the same amount. The net effect, if you were to multiply M2 velocity by M2 growth is almost flat. There’s a reason that we track things like CPI, is because actual money supply does not give you a one for one comparison of what the impact is actually happening on prices. The things that need to happen from the Fed printing money, so to speak, increasing bank reserves, and that money actually getting into the economy, a lot of steps need to happen in there. Banks need to make loans. They need to do X, Y, and Z. They need to change reserves into money that actually gets in.

Morgan Housel (01:05:51):
It’s not just that the Fed is like flying around with the helicopter throwing money into the streets. A lot of things need to happen for the money to actually get into the economy, which is why M2 gross 20%, and velocity falls 20%, because people actually aren’t spending more money. Spending money is what actually creates inflation. So I think this is why we track things like CPI. There will be no need for CPI, if the correlation between M2 and actual prices was one to one, but it’s not. It’s not even close, so that’s why we do it. That to me, is what I look at. Now, CPI is a debate in itself. To me, the big thing was CPI is that it is measuring the prices for the consumption of the median American, which is effectively nobody.

Morgan Housel (01:06:32):
Everyone’s household expenditures are going to be very different, and if you are someone who is renting and has a car payment, and spends all of your money on tuition and health care, versus if you’re someone who owns your house outright, is not in school, is a vegetarian, so they don’t eat meat, they don’t drive a car, they don’t use gas, what inflation means to you is very different. Everyone has their own unique view of inflation and their own unique inflation number. When the CPI reports an average, it becomes too easy for people to say, that has to be a lie because the CPI says 2%, but my personal household inflation is 5%, when even though, that’s a completely consistent thing with what the CPI is saying. It’s trying to show an average in a world where nobody is average.

Trey Lockerbie (01:07:16):
I’m just constantly impressed with your perspective and it’s so refreshing and it just brings everything back to this book that you wrote that I feel like when you read it, it’s just the signal coming through the noise. A lot of it is pretty common sense, sometimes it just takes someone to put it back in your face to say, “No, here is the signal.” You go, “Okay, you’re right. That is right.” I don’t know what I was thinking. That’s what this book I feel like does. It’s just a great refresher in that way with the human psychology elements at play. So before I let you go, Morgan, I want to give you an opportunity to hand off to your book, to your blogs, any other endeavors you’re working on, just tell the audience where they can follow along.

Morgan Housel (01:07:53):
The Psychology of Money, I spend most of my time on Twitter, where my handle is morganhousel, first and last name, and you can find all my writing there there, all my thoughts and also every blog post that I published there as well. So Trey, thank you again for having me on. This has been fun.

Trey Lockerbie (01:08:06):
I really enjoyed it Morgan. I hope we get to do it again soon. Thank you.

Morgan Housel (01:08:08):
Thank you.

Trey Lockerbie (01:08:11):
All right, everybody. That’s all we had for you this week. If you’re loving the show, definitely don’t forget to follow along on your favorite podcast app. So you get these episodes automatically. Look, if you’re just getting interested in investing, check out theinvestorspodcast.com, where we have courses and lots of other tools for you to start with. I highly recommend, for example, the intrinsic value course. I think it saves you, two years of an MBA program but that’s just the tip of the iceberg. So check it out or Google TIP finance and the tool should pop right up. Look, I’m really enjoying hosting these episodes. Definitely give me some feedback. Find me on Twitter at @TreyLockerbie. Tell me what you want to hear about and with that, my friends. We’ll see you again next time.

Outro (01:08:53):
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