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Morgan Housel: How to Stay Rich

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Morgan Housel and "The Psychology of Money" book cover Morgan Housel and “The Psychology of Money” book cover.

If the initial goal is to get rich, how, then, do you stay rich? There’s only one way: Be guided by a mix of frugality and paranoia, Morgan Housel, financial writer and partner in the Collaborative Fund, tells ThinkAdvisor in an interview.

A former columnist for The Wall Street Journal and The Motley Fool, he is author of a new book, “The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” (Harriman House-Sept. 8).

The volume grew from a report the popular blogger wrote in 2018 about the 20 most important causes of self-defeating money behavior, which drew more than 1 million readers.

Housel, 36, maintains that financial success pivots more on behavior than financial knowledge.

He has indeed made the case that soft skills are more important than the technical side as both a multi-award-winning financial writer and a speaker who has presented to more than 100 conferences worldwide.

In 2016, he joined the Collaborative Fund as a writer and partner. The firm, headquartered in New York City, invests in startups that use their prowess to do good as an economic advantage. These have included Kickstarter, Lyft and Sweetgreen.

Housel began writing for The Motley Fool as a junior at the University of Southern California, from which he graduated in 2008 with an economics degree. He acquired a FINRA Series 65 license during his decade-long stint at The Motley Fool, at which he also performed wealth management work.

During his 20s, he picked stocks for his personal portfolio and owned about 25 individual equities. Today, he invests exclusively in low-cost index funds.

In the interview, Housel stressed that even the best investors can be off-base half the time yet excel in the long run. In particular, he cited Warren Buffett.

ThinkAdvisor interviewed Housel on Aug. 28. He was speaking by phone from his base in Seattle. Born in New York City, he grew up near San Francisco and in Lake Tahoe.

At USC, he aspired to be an investment banker and interned at a big bank one summer. But he exited after only a month, he says, after finding the work to be “one of the most miserable experiences of [his] life.”

Here are highlights from our interview:

THINKADVISOR: Clearly, there’s a big disconnect between what’s happening in the U.S. economy and what’s happening in the stock market: America is in recession — some say, a rolling depression; an average of more than 900 people are dying of COVID-19 daily. At the same time, the stock market is hitting record highs. What do you make of it?

MORGAN HOUSEL: No one would have predicted that we’d have a 35% [market] decline in March and be back at all-time highs by July. If you don’t have a sense of humility after 2020 — that we don’t know what’s going to happen next — then there’s not a lot of hope for you. This should be at least the most humbling year for forecasters they’ve had in their careers.

What are the reasons for the market’s wild rise?

The S&P is heavily lopsided with just a few companies that are doing very well: Google, Amazon, Apple, Microsoft, Facebook. The other thing is that there’s so much intervention from the Federal Reserve, which is [pumping] trillions of dollars through the system with the express intention of propping up asset prices. That’s the goal; so we shouldn’t be surprised that is what’s happening.

You argue that “money relies more on psychology than finance.” Please explain.

Behavior is the most important side of investing. You can be the best stock picker in the world, have the most sophisticated economic forecast and models — be a financial genius — but if you don’t control your own relationship with greed and fear, your ability to take a long-term mindset, whom to trust, and how gullible you are, then none of those financial skills will matter.

But soft skills don’t get much attention in the financial services industry. Advisors have little training in them. Yet the soft side is apparently becoming increasingly important.

It’s incredibly important. [Investing and planning] seem like such an analytic field, with all the numbers, data, charts and formulas. It’s not that the analytic side isn’t important; but the softer side, the psychological side, is so much more important.

Why don’t financial advisors develop their soft skills to a greater extent?

When you start paying attention to sophisticated models and Excel spreadsheets, it’s easy for the psychological side to get swept under the rug because it feels like [the latter’s] topics are just soft and mushy. But it’s so clear to me that if you don’t have the psychological side, then the analytical side doesn’t matter at all.

“There’s little correlation between investment effort and investment results” because the market is “driven by tail events,” which “move the needle,” you write. Please elaborate. 

You could be wrong on half your individual investments and still do very well over time. It would be intuitive to think that if you’re a great investor, every investment you make is great; but that’s never how it works. This is what happens even with the best investors in the world.

Such as?

Warren Buffett commented several years ago that over the course of his life he has owned roughly 500 stocks but made most of his money on [only] 10 of them. I’m willing to bet that he’s made more on Apple [in which he owns a 5.7% stake and began investing only four years ago] than from all other stocks he’s ever owned combined.

Getting back to tail events: I assume that the coronavirus pandemic is one of those. Right?


Are tails and black swans synonymous?

If you ask Nassim Nicholas Taleb [author, statistician and former risk analyst], who came up with the phrase, black swan, he would say the coronavirus isn’t a black swan because we could have seen it coming. [In contrast], 9/11 was a black swan because unless you were involved in the [terrorist] plot, no one could have possibly known it was going to happen.

Please discuss the fact that this pandemic was anticipated.

The best epidemiologists — like [Dr. Anthony] Fauci — have been warning for years that something like this was going to happen. And Bill Gates, in 2015, warned about this type of thing playing out and that we weren’t prepared. [However], we got complacent about the odds of its occurring, which is part of why it’s such a big deal. We were so unprepared to [cope] with it because we had discounted the odds of its occurring.

“There’s only one way to stay wealthy: some combination of frugality and paranoia,” you write. Please explain.

The ability to get rich is a distinct skill from the ability to stay rich. People who are constantly swinging from the fences, never knowing how to stop, will eventually run over the edge.

You advise to “save like a pessimist and invest like an optimist.” How is that done?

You should be an optimist about the long run but a pessimist about the short run because the short run is always a continuous chain of breakages, problems, errors, recessions, pandemics.

What approach to saving does a pessimist take?

If you have enough pessimism to survive the short run — in savings and room for error — you have [together with long-term optimism] the ability to benefit from and achieve long-term success. It’s hard to have that barbell personality, but that’s what it takes to do well over time. You have to have both characteristics.

You write that people should save consistently even if they have no particular goal they’re saving for. Why?

Because saving is one of the only things you have control over for your financial outcome. It’s so important that we focus on a lever that we can pull, that we can control — and that’s saving. What really matters is that you’re achieving the market return and letting it compound over time. You don’t need any effort to do that. And that is what’s going to put you in the top echelon of investors over time.

Financial plans program only for “known risks” and don’t provide enough “margin of safety” for “unknown risks,” you contend. Please elaborate.

The most important part of any plan is planning on your plan not going according to plan. People think of margin of safety in the investing sense; but it’s so vitally important in a financial plan — and that goes beyond being prepared for unknown setbacks.

What else does it entail?

Compounding works best if you can give your assets many years to grow. The only way you can survive ups and downs, like recessions, volatility, pandemics, is if you have enough room for error to survive the short run.

What’s the upshot?

It lowers the odds that you’re going to have to sell the stocks you own at inopportune times. It’s about letting compounding work to the greatest degree that it can.

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