Morgan Housel, author of “The Psychology of Money” and partner at the Collaborative Fund, says no one is crazy when it comes to money. But we all need to update our thinking in key ways in order to build true wealth.Morgan Housel
(Note: Morgan Housel will be on HalfTime Report today at 12:35 PM ET and on ETF Edge at 1:10 PM. ETFedge.cnbc.com)
Morgan Housel has become the Mark Twain of financial writers: funny, pithy, folksy, occasionally sarcastic and always seeking to peel away the layers of reality to reveal a deeper truth below.
Housel is a partner at The Collaborative Fund and became a best-selling author with the 2020 publication of his book, The Psychology of Money. It explored the relationship between money and human behavior. The main thesis was to maximize what you can control: managing your own expectations, knowing when was enough, how to stop changing the goalposts.
It was a relatively brief (250 pages) book, with short chapters, laden with Housel's folksy wisdom on savings, the power of compounding interest, and plenty of stories about the role of luck and risk, and how certain key people (like Bill Gates) got lucky breaks that enabled them to go on to greater things (in Gates' case, he had attended Lakeside High School in Seattle, one of the few high schools that had a computer at the time).
The book not only caught on, it has sold roughly 4 million copies worldwide.
To give you an idea of how big that is, a typical financial book will sell roughly 5,000 copies. If you can sell 10,000 copies, you're really doing well.
Now Housel is back with a second book, “Same As Ever: Timeless Lesson on Wealth, Greed and Happiness.”
It utilizes the same style that Morgan rode to success in his previous book: short chapters, paragraphs, sentences and an emphasis on storytelling to reveal deep insights into very broad topics.
Except this time Housel is going for a larger audience than those who wanted financial insights: He is going for timeless wisdom that is aiming to show people how to look at life in general.
Morgan's thesis is that the same things that have motivated men and women throughout our existence (fear, love, hate, greed, envy) are still present today, and because of that, much of what happens is perfectly predictable: Same as ever.
The role of envy
Take envy. Housel cites Charlie Munger, who noted that the world isn't driven by greed, it's driven by envy.
Morgan illustrates this with a fine digression: Why are people so nostalgic about the past, and was it really better than the present?
Take the 1950s, which baby boomers and their parents seem to think was some kind of golden age.
On one level, it was: It was possible to have a family with one wage earner to have a modest, middle-class life.
But the idea that people were better off in the 1950s is not supported by the facts.
Mortality rates were much higher. People died far younger.
Today's families are also far wealthier than prior generations. Housel notes the median family income adjusted for inflation:
- 1955: $29,000
- 1965: $42,000
- 2021: $70,784
“Median hourly wages adjusted for inflation are nearly 50 percent higher today than in 1955,” Housel noted. “And higher income wasn't due to working more hours, or entirely due to women joining the workforce in greater numbers.” It was due to gains in productivity.
More stats about the “golden era” of the 1950s versus today:
- The homeownership rate was 12 percentage points lower in 1950 than it is today;
- An average home was a third smaller than today's, despite having more occupants;
- Food consumed 29 percent of an average household's budget in 1950 versus 13 percent today;
- Workplace deaths were three times higher than today.
So why are we so nostalgic about the 1950s? It gets down to envy and the very human desire to compare how you are doing with everyone else: in the 1950s, “The gap between you and most of the people around you wasn't that large.”
During World War II, wages were set by the National War Labor Board, which preferred flatter wages: “part of that philosophy stuck around even after wage controls were lifted,” Housel noted.
During the 1950s, very few people lived in financial circles that were dramatically better than everyone else. Smaller houses felt fine because everyone had one. Everyone went on camping vacations because, well, that's what everyone did.
By the 1980s, that had changed. Changes in the tax code, among other changes, created a group of ultra-wealthy individuals: “The glorious lifestyles of the few inflated the aspirations of the many,” Housel concluded.
What did people do? They looked around, saw that some people were doing better, some much better, and they got envious. And then they got mad.
Housel notes that envy has been given a much greater boost than in the past thanks to social media, “in which everyone in the world can see the lifestyles — often inflated, faked, and airbrushed—of other people. You compare yourself to your peers through a curated highlight reel of their lives, where positives are embellished and negatives are hidden from view.”
“The ability to say, I want that, why don't I have that? Why does he get it but I don't? is so much greater now than it was just a few generations ago. Today's economy is good at generating three things: wealth, the ability to show off wealth, and great envy for other people's wealth.”
Envy triumphs. Same as ever.
But Housel goes a bit deeper, which is what makes this book satisfying: Besides demonstrating that envy is a key element, what else does this nostalgia for the 1950s illustrate?
This nostalgia, Housel says, “is one of the best examples of what happens when expectations grow faster than circumstances.”
Managing expectations
“When asked, 'You seem extremely happy and content. What's your secret to living a happy life?' Charlie Munger replied: The first rule of a happy life is low expectations. If you have unrealistic expectations you're going to be miserable your whole life. You want to have reasonable expectations and take life's results, good and bad, as they happen with a certain amount of stoicism.”
Housel's conclusion: “Wealth and happiness is a two-part equation: what you have and what you expect/need. When you realize that each part is equally important, you see that the overwhelming attention we pay to getting more and the negligible attention we put on managing expectations makes little sense, especially because the expectations side can be so much more in your control. “
I put this slightly differently: Everyone has circumstances that they are living in: how much money they make, where they live, whom they are living with, what they own. These circumstances have a definitely external reality. Your mortgage is very real, as is your house or apartment, as is your spouse or partner.
Beyond your current circumstances, there are needs, and there are wants. Needs are what people require to get by: shelter, food. Wants are what people aspire to: a bigger house, a bigger car, a bigger everything. Those wants are being dramatically inflated by the wealth gap that has opened up and is amplified by social media.
Here's the mental trick: While your circumstances and your needs have a definite external reality, the “wants” only exist in your head; they have no external reality. You don't have to be envious of your neighbor who has the Rolex or the big house. To the extent that is causing your envy and your anxiety, it is completely in your own control to change those thoughts. By changing your relationship with your wants, which only exist in your head, you can change the way you view your circumstances.
Housel comes to the same conclusion: “the expectation side of that equation is not only important, but it's often more in your control than managing your circumstances.”
On risk taking
Managing risk is a topic Housel addressed in The Psychology of Money, and he returns to it again.
“It's impossible to plan for what you can't imagine,” he says, urging his readers to think of risk the way the State of California thinks of earthquakes: “It knows a major earthquake will happen. But it has no idea when, where or of what magnitude.” But the state has emergency crews at the ready, and buildings designed to withstand earthquakes that may not occur for years. The lesson: he quotes Nassim Taleb: 'Invest in preparedness, not in prediction.'”
What does that mean in practice? It's about managing your own expectations, and risk tolerance. “In personal finance, the right amount of savings is when it feels like it's a little too much. It should feel excessive; it should make you wince a little.”
On the right way to view geniuses like Elon Musk, Steve Jobs and even Walt Disney
“What kind of person is likely to go overboard, bite off more than they can chew, and discount risks that are blindingly obvious to others? Someone who is determined, optimistic, doesn't take no for an answer, and is relentlessly confident in their own abilities…the same personality traits that push people to the top also increase the odds of pushing them over the edge.”
On why so many events that are supposed to happen once in a hundred years seem to happen quite often
“If next year there's a 1 percent chance of a new disastrous pandemic, a 1 percent chance of a crippling depression, a 1 percent chance of a catastrophic flood, a 1 percent chance of political collapse, and on and on, then the odds that something bad will happen next year—or any year—are . . . not bad.”
On why companies are much more than just the sum of their financial figures
“The valuation of every company is simply a number from today multiplied by a story about tomorrow.”
On the impossibility of predicting the future and the need to be more comfortable with uncertainty
“The ones who thrive long term are those who understand the real world is a never-ending chain of absurdity, confusion, messy relationships, and imperfect people.”
On the value of patience
“Most great things in life—from love to careers to investing—gain their value from two things: patience and scarcity. Patience to let something grow, and scarcity to admire what it grows into.”
“The trick in any field—from finance to careers to relationships—is being able to survive the short-run problems so you can stick around long enough to enjoy the long-term growth…An important lesson from history is that the long run is usually pretty good and the short run is usually pretty bad. It takes effort to reconcile those two and learn how to manage them with what seem like conflicting skills. Those who can't usually end up either bitter pessimists or bankrupt optimists.”
On why compounding interest is the key to understanding stock market investing
“If you understand the math behind compounding you realize the most important question is not 'How can I earn the highest returns?' It's 'What are the best returns I can sustain for the longest period of time?' Little changes compounded for a long time create extraordinary changes.”
On what the best financial plan looks like
“The best financial plan is to save like a pessimist and invest like an optimist. That idea—the belief that things will get better mixed with the reality that the path between now and then will be a continuous chain of setback, disappointment, surprise, and shock—shows up all over history, in all areas of life.”
On trying to understand people who don't agree with you
The question “Why don't you agree with me?” can have infinite answers. Sometimes one side is selfish, or stupid, or blind, or uninformed. But usually a better question is, “What have you experienced that I haven't that makes you believe what you do? And would I think about the world like you do if I experienced what you have?”
Same as ever?
Housel ends with a series of questions the reader should be asking themselves, including “What strong belief do I hold that's most likely to change? What's always been true? What's the same as ever?”
This is an ambitious book that sits at the intersection between investing, self-help, leadership, and motivation & personal success. The primary message is simple but easy to lose sight of: technology, politics and other trends seem to be accelerating, but human behavior has not changed.
And as long as those age-old emotions that motive us don't change, the new fancy gadgets we all have are just different tools to help us engage the same old emotions.
Thanks to advances in vaccines, home appliances (washing machines, dryers, refrigerators, plumbing), life in the 1950s were “prosperous in a way that would have seemed unbelievable to someone living in the 1920s. … The same is true today—a 1950s family would have found it unfathomable that their grandchildren would earn more than twice as much as they did.”
Here's how often the U.S. stock market has generated a positive return based on how long you held stocks for. One way to think about this chart is that there's a “most convenient” investing time horizon—probably somewhere around 10 years or more. That's the period in which markets nearly always reward your patience. The more your time horizon compresses, the more you rely on luck and tempt ruin.
Housel spends a good deal of time discussing the amazing progress that has been made in expanding the human lifespan in the last century, noting that the age-adjusted death rate per capita from heart disease has declined more than 70% since the 1950s, but that few pay attention to it because the progress has occurred only gradually.
Good news comes from compounding, which always takes time, but bad news comes from a loss in confidence or a catastrophic error that can occur in the blink of an eye.
The irony is that growth and progress are way more powerful than setbacks. But setbacks will always get more attention because of how fast they occur. So slow progress amid a drumbeat of bad news is the normal state of affairs.
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