Note: This interview was originally published in the April 2017 issue of our premium newsletter – Value Investing Almanack (VIA). To read more such interviews and other deep thoughts on value investing, business analysis and behavioral finance, click here to subscribe to VIA.
I sincerely believe in what Charlie Munger often says about
envy, that it is a really stupid sin because it’s the only one you could never possibly have any fun at. I am lucky to have stayed away from this sin as far as investing and other aspects of life are concerned.
But if there is one, and just one, person who arouses this sin in me every time I read him is…Morgan Housel. And it’s for the simplicity of his thoughts that he puts across through his powerful writings. I have tried to emulate Morgan several times in my writing endeavor, but he raises the bar each time he publishes something new, more simple yet more powerful.
Morgan’s posts at The Collaborative Fund, where he is currently a partner, have been a great source of learning for me. I have also read him for years at his earlier stints at The Motley Fool and The Wall Street Journal.
Morgan is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013, he was a finalist for the Scripps Howard Award.
In this interview, Morgan shared with me his simple investing thought process, what gets most people into trouble in investing, and the people who have inspired him the most in his journey.
Let’s get started right here.
Safal Niveshak (SN): Tell us a little about your background, how you got interested in writing and investing, and how you have evolved in these fields over the years?
Morgan Housel (MH): I started in college in investment banking. I always loved investing and knew I wanted to do it as a career. But the culture of investment banking totally put me off. I like to have time to think things through, and any culture that emphasizes 24/7 speed and fixed process over deliberation is one where I wouldn’t do well at. So, I moved on pretty quickly from that.
I then got into private equity, which I enjoyed. But this was summer of 2007, and global credit markets started freezing up, which is devastating for private equity firms that own highly leveraged companies. So, I needed to do something else.
A friend of mine wrote for the Motley Fool and said I should give it a shot. I never thought I’d be a writer, and I majored in economics in college, which meant I didn’t write much at all. But I applied, thinking a) they wouldn’t hire me, and b) if they did I would do it for six months before I found another private equity job. I ended up staying for 9 years and fell in love with the process of writing about investing.
Two years ago, I met a guy named Craig Shapiro from Collaborative Fund, a venture capital fund. We hit it off right away. Even though we come from very different backgrounds we see the world through a similar lens. I joined Collaborative Fund nine months ago and it’s been an amazing team to work with.
How has my writing evolved? Whenever you do something for 10 years you’d think it’d get easier. But writing has become much harder for me. I’ve written 3,500 articles, which means all the low-hanging fruit is long picked. It’s much harder for me to come up with ideas than it was, say, five years ago. So, I’ve slowed down as a writer. If I used to write 10 articles a week, now I write one or two. Now the stuff I write is generally deeper and longer, but every year it gets harder to come up with new ideas and topics.
Also, I’ve just become much more sceptical over time. That’s probably the biggest change in my writing.
SN: That’s an interesting journey you have travelled, Morgan. Anyways, as much as I understand, you aren’t a full-time investor nor do you manage other people’s money. How do you manage your own money? Is it through direct stock picking, or mutual funds, or both?
MH: My entire net worth is a house, a checking account, and the Vanguard Total Stock Market Index. I don’t think investing needs to be complicated so I keep it as simple as I possibly can. The fewer knobs you have to fiddle with the fewer opportunities you have to screw up over time.
SN: Wonderful! That’s as simple as it could get. What’s your broad investment philosophy? Has your philosophy changed much through the years? If yes, how?
MH: My broad philosophy is that investors are their own worst enemies, and the real key to good investing over time has little to do with the investments you pick and lots to do with how you manage your behavior.
Financial journalists spend years quibbling over investing strategies that might improve your returns by, say, 50 basis points a year, and then a financial crisis hits, people are forced to sell stocks to pay their bills or keep their sanity, which ends up costing them 400+ basis points a year. It’s so clear which one matters more.
To me the evidence is overwhelming that if you spend 10% of your investing energy on picking a portfolio and the other 90% on focusing on keeping your emotions in check, putting market volatility into proper context and doing everything you can to take a long-term view, you’ll end up doing better than the majority of investors.
SN: It’s good you talked about emotions, and how it is a huge mistake investor make falling into emotional traps time and again. When you look back at your own investment mistakes, were there any common elements of themes?
MH: Overconfidence. That’s true for most people and I was no different. At various points in my career, I thought I was cleverer than I was or had more insight than I did. The few times it “worked” was likely due to luck. More often it just didn’t work.
Some people are very good at certain segments of active investing. But everyone, no matter how they invest, must fight overconfidence. It’s pervasive and is probably the second-largest cause of investing regret, after ignorance.
SN: When it comes to direct stock picking, the worst problems investors get them into is by falling into behavioural biases. How has been your experience on this front? What tricks do you use to minimize mistakes of behavioural biases? What are the most common behavioural mistakes you make, apart from overconfidence that you mentioned earlier?
MH: This might sound like a weird comparison, but it’s one I think about a lot. I vividly remember on September 11 2001, looking out the window and thinking about the amount of suffering that was going on at that very moment. It’s a weird feeling to know that thousands of people are suffering at a specific spot in real time, in a way that you can accurately visualize, rather than a hypothetical. It just melts your mind.
In 2008 and 2009 I remember having a similar feeling, thinking about all the people who at that very moment were taking actions that would affect them for the rest of their lives — selling when stocks were cheap in a way that would almost certainly impact their ability to ever retire.
Of course, the impact was orders of magnitude less than 9/11, but I had the same strange feeling of thinking about the number of people who, at that very moment in October 2008, were experiencing something that would hurt them the rest of their lives. It felt strange. That’s when I started getting really interested in the behavioral side of investing. I see about 80% of investing as a psychology game.
The big takeaway from 2008 and 2009 was how quickly your own actions could harm the rest of your financial life. It really came down to understanding your own risk tolerance and how that fit into your time horizon. Panic selling is the most common behavioral mistake in investing.
For me, fighting it has been a combination of holding a lot of cash and studying market history. But there’s no easy solution to behavioral biases. These things have millions of years of evolution backing them up. The best you can do is be honest with yourself about your goals and your tolerance for decline.
SN: Okay, what’s the behavioural mistake with the biggest impact that’s the least understood or noticed?
MH: How people think about fees are probably the least-noticed bias.
Most investors don’t actually write a check for their fees. They’re deducted from your fund or investment account automatically. When something is so out of sight, out of mind, you don’t pay rational attention to them in the same way you do, say, the price of a gallon of gasoline.
The result is that investment fees may be one of the largest — if not the largest — annual expenses for upper-middle-class households. A couple nearing retirement with $800,000 in mutual funds could easily pay 1% in fund fees, 1% to a financial advisor, and 0.5% in trading and other costs. So, 2.5% in fees on $800,000 is $1,666 a month — an amount that is very real but for which the customer never actually sees or pays an actual bill. For perspective, the average mortgage payment in America is about $1,300 a month.
A lot of financial advisors earn their fees, especially if they can manage a client’s emotions and endurance. But the way investment fees are structured means people end up paying way, way, way more than they would for other service-based products.
SN: How can an investor improve the quality of his/her decision making? Does maintaining a journal help? What has been your experience in improving your own decision making over the years?
MH: Most medical doctors still go to a doctor to get their own check-up. Investors should do the same. Even if you don’t have a financial advisor I think it’s important for all investors to bounce their ideas off trusted advisors — friends, mentors, family, whatever.
Robert Shiller once said, “You have to understand that your own thoughts are not really your own thoughts.” Everything you know is a product of the people you’ve met and the experiences you’ve had, most of which were out of your control. That’s always stuck with me. It’s a reminder of how hard independent thinking is, and how important it is to hear out the views and thoughts of a diverse group of outside experts.
SN: That’s a very pertinent point you made, that independent thinking is hard. Now, with so much noise all around, it’s become terribly hard. With traditional media, TV, bloggers, twitter, etc., there’s so much information flow these days. It can feel overwhelming. How do we go about curating signal from noise?
MH: I’d think about two things.
One, when someone on TV says (or a journalist writes), “You should do X with your money,” stop and think: How do you know me? How do you know my goals? How do you know my short-term spending needs? How do you know my risk tolerance? Of course, they don’t. Which means you shouldn’t pay much attention to it. Personal finance is very personal, which means broad, general, advice can be dangerous.
For media, I’m most interested in historical finance, which helps put investing into proper context, and behavioral finance, which lets you frame investing based around your own goals, flaws, and skills. But taking direct advice from someone who has never met you is asking for trouble (this includes me).
SN: How do you think about risk? How do you employ that in your investing?
MH: I have two definitions of risk –
- Risk is the odds that you won’t be able to do something in the future that you reasonably need to do to keep yourself happy.
- From Carl Richards: “Risk is what’s left over when you think you’ve thought of everything else.”
The first is a reminder that risk is different for everyone, and is highly dependent on your time horizon.
The second is a reminder of how hard risk is to think about. Risk is, almost by definition, the stuff we aren’t thinking about.
SN: Indeed! Anyways, if you had just two-minutes to advise someone wanting to get into investing, what would your advice be? What are the biggest pitfalls he/she must be aware of?
MH: Keep it simple. Don’t try to be a hero. Compounding takes a lot of time. Volatility is the cost of admission for high long-term returns. That’s the message I’d get across. It’s simple but encompasses the majority of what you need to know.
SN: What are the most important qualities an investor needs to survive the complexity of the financial markets?
MH: I think it’s a combination of humility and a fine-tuned bullshit detector.
You need humility to prevent yourself from overcomplicating investing more than it needs to be and taking risks greater than you’re able to handle.
And you need a fine-tuned bullshit detector to protect yourself from the swarms of sales pitches and get-rich-quick schemes that plague the industry.
There are other things — a good grasp of basic arithmetic, delayed gratification, the ability to live below your means. But those first two are most important.
SN: You wrote a wonderful note in Feb. 2017 on getting vs staying rich. You mentioned about cultivating humility as the way to stay rich. If one is not humble by nature, can humility be cultivated?
MH: Yes — through humiliation. Lack of humility always catches up to you. Look, in markets, you’ll receive some return over the next 20 years, and most people who try to front-load those returns into shorter periods of time will cough up whatever excess short-term returns they earn down the road — reversion to the mean. It’s very similar with humility. Most ego you have today will be balanced out with humiliation down the road.
SN: Which investor/investment thinker(s) do you hold in high esteem?
MH: My top five include –
All have an incredible mix of insight and humility that is incredibly rare. They’re also just great people.
SN: You inspired many through your writings. Which are some of the books, blogs, and other resources on investing, behaviour, and multidisciplinary thinking that have inspired you the most over the years?
MH: This might sound odd, but I think reading about World War II has had the biggest impact on my thinking. There are few events in history that were as transformative and as well documented as World War II, so it’s just an incredible period to study to learn how people dealt with adversity, uncertainty, despair, and hope. The most accessible piece of content here is Ken Burns’ documentary, The War. It teaches you more about human behavior than anything else I’ve come across.
SN: If you were to give away all your books but one, which one would it be and why?
MH: Nassim Taleb’s book
Antifragile is probably the book that I go back to the most. Taleb is a prickly personality but he’s an incredible writer and can explain complicated topics in easy-to-understand ways without dumbing it down at all. It’s a very hard skill and he’s mastered it. If you look past his ego and sharp personality I think he’s one of the smartest thinkers around today. Or at least he’s a very smart thinker and an excellent communicator.
SN: Hypothetical question: Let’s say that you knew you were going to lose all your memory the next morning. Briefly, what would you write in a letter to yourself, so that you could begin relearning everything starting the next day?
MH: I love the hypothetical question, but I think it’s impossible to relearn stuff in a planned way, since so much of what you know is based on past experiences that can’t be replicated. How do you teach someone about what it felt like to lose half your money in 2008? You can’t. You must experience it. Same for bubbles. No book can recreate the emotions of 1999.
But … I’d leave a list of 10 people to talk to, and I’d ask each of them for four or five hours of time where I sit them down and say, “Tell me the basics of your field that explain the majority of the outcomes.”
SN: What would you be doing if you weren’t writing and investing?
MH: I have no idea. I think I might enjoy teaching elementary school, but I’d probably get bored of teaching the same thing repeatedly. But if you strip out the career luck I’ve had and look at my academic background, I should probably be an accountant working 90 hours a week in a dark basement somewhere.
SN: What other things do you do apart from writing and investing?
MH: Mostly reading. I try to read more books and fewer articles. I’m also a growing fan of podcasts. And I try to walk a lot. We have a young son, so we sleep when we can — which isn’t much.
SN: That was brilliant, Morgan. Thank you so much for sharing your insights with Safal Niveshak readers. I wish you all the best for your work and life.
MH: Thanks Vishal! I hope your readers find this useful in some way.
