Morgan Housel, author of “The Psychology of Money,” entered the final round to discuss his latest book, his views on the difference between capital expenditure and capital outcomes, and the relationship between psychology and finance and money.
MYLES UDLAND: The only thing people think about is stay healthy and what they are going to do with their money. And now Morgan Housel comes to us to talk about the money side of things. He is the author of the new book, “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness”. Morgan, thank you for joining the program.
So let’s start with that – through the lens of what’s happening. You and I were talking, I think it was mid-February. The world was about to end. The book was pretty much in the can, and now it seems like we’ve had this big new panic of going over your book again. How did you think about what you wrote, what happened over the summer?
MORGAN HOUSEL: Yeah, it’s interesting, Myles. You and I had breakfast in the middle or late February like you just mentioned, and over that breakfast we discussed the idea that the economy would never slide back into recession that the Federal Reserve found out. And we were a little naughty, but we were probably 30% serious. And I see that as a kind of personal separation from what was going on in business.
But you know, I finished this book in January. And of course that was before COVID, mostly what was going on. And so I had a long discussion with the publisher. Do we need to update it now that the world has changed so much with COVID-19?
And we voted no because we tried to make everything in the book timeless, things that describe how people talked about the emotional, psychological side of investing in terms of fear and greed and opportunity and scarcity think. in a way that has been done for hundreds of years, if not thousands or millions of years, and in a way that people will still make mistakes with their money in years, decades, and centuries. I think there are some things about investing that are really timeless. And those are the most important things we can focus on because we could put so much energy into them, because we know they will be part of our investment journey into the future, no matter what the economy is doing this month. this quarter or this year.
MYLES UDLAND: And I think an idea that’s in the book – and, you know, not just ending our confidential talks – but something we talked about, I remember the seduction of pessimism years ago was a chapter in the book. It’s the idea that the pessimists – and I think we saw that in March and April – always have a full story to tell. You can say the pandemic happens when the financial system collapses and I have to hide in my bunker.
Well, it didn’t go that way. But you could see so clearly during that time I think – and we will see it now, when people start sketching what 2021 will be like, what the rest of the time will be, working from home, all that kind of stuff. You can see that this issue comes up now. And for me, that’s just one of those chapters that is perhaps the most transferable, at least when you’re talking about how people communicate on the internet.
MORGAN HOUSEL: Yes, I think pessimism has two things. One is that pessimism is always more seductive than optimism, and the main reason for this is because pessimism sounds like someone trying to help you. Hey, there’s something chasing you and I’m trying to help you and get you out of the way. While optimism sounds like a sales pitch so often, I have something to sell to you. I have this treat over here that I want to give you. And it’s easy to discount from there.
The other thing is that if you look at it historically, progress is very slow. It’s not something that happens overnight. There are no overnight miracles in business, but there are overnight tragedies. We had one of them this year, of course. So progress is slow. Setback happens very quickly, although the progress is obviously much stronger in the long run. Setbacks are much more likely to be in the news, making headlines today and this week and month, while things have been slow over time, even if more powerful.
That is why pessimism is always more attractive. It’s more seductive. And it’s always more – it’s more in the headlines than optimism.
DAN ROBERTS: Morgan, Dan Roberts here. I know that the book and on Twitter deal a lot with the psychology of money and also talk about the idea of a store of value. I would be curious to hear your current reflections on bitcoin and cryptocurrency that we talk about from time to time here on the show, especially as you suggested, there are some people who are trying to sell you a particular concept. And that’s the community there. It’s about psychology and believing in something that is always around the corner, always in this room.
MORGAN HOUSEL: Yes, Dan, you are absolutely right. I don’t have a position in Bitcoin and I honestly have no beliefs about it. I’m just some kind of intrigued outside observer looking at it. What’s interesting is that Bitcoin, especially if you return two or three years ago, has every single hallmark that you would associate with a bubble – anything to do with the hype, scam, and ridiculous performance that it had. Anything you would associate with a bubble.
But the other thing is that if it was just a bubble, if this was just a passing thing, it would last so long, survive so long where it’s been a big deal in the financial universe for over a decade. Just some kind of staying power that it had – and it wasn’t just a big bubble and then a crash and then it went away in 2017. It’s back to, you know, now decent pricing and good performance. There’s this idea that it probably won’t go away anytime soon.
For me the greatest thing about crypto – and again I have no dog in this fight, I have no other investments in it. The thing about crypto is that some of the smartest people in the world are working on it, trying to solve problems and do things with it that actually have a lot of use in the world. But then you have some of the craziest and dumbest people in the world investing in these and creating those incredible price swings that take you from $ 200 to $ 20,000, back to $ 500, whatever it is.
And I think if you commit to either of these sites on your own, you can somehow get pushed into having that inflated view of where it’s going. If all your focus is on how smart people are working on it, you will likely miss the idea that so many people are investing in the company, driving it to crazy heights that it can suck a lot of oxygen out of the world. And if you only focus on the boom and bust part, you are likely to overlook how many smart people work in it to solve real problems with it. So it’s kind of those two sides that I still haven’t reconciled, and that’s why I don’t have positions on it.
MELODY HAHM: Morgan, if I just think about the actual format of your book as I understand it, there are 19 different short stories. Why did you choose anecdata? What about these stories that you think will take people away? Doesn’t it feel like it’s almost too personal in a sense, or do you feel like readers will connect with at least one of these stories?
MORGAN HOUSEL: I think what is important about investing is that investing is not a study of finance. Investing is just studying how people behave with money. And since this is the study of behavior, there are all of these things that we can learn and take away from other areas that also study behavior, but areas that have nothing to do with investing. I think there is so much to learn how to invest through the lens of things like medicine and biology, politics and military history. All of these things have nothing to do with finance. But they are concerned with how people deal with uncertainty, how people relate to greed and fear, which is also investing.
So most of the 19 chapters start with a story that has nothing to do with investing. But it all comes back to how we can better think about greed and fear and opportunity and topics like that.
The chapters are pretty short because I think most books are too long and boom too long. I didn’t want to waste anyone’s time. So I’d rather have 19 short points that people actually read than one long point that spans 250 pages. And since the stories are all connected, they all have a common theme, but they could all live independently. So you can start with Chapter 17 if you want. Or if you didn’t like one of the chapters, you can just skip it and move on to the next one without missing out on anything important in the book.
MYLES UDLAND: And Morgan, you write this – or you notice the chapters are pretty short and it kind of speaks of how you came into being in the financial world, as a first blogger. I would just ask why write a book? Were … was that your idea? Did someone make you do it?
Do you feel like a crowning glory now? I’ve done it, I’ve done it, but I want to get back to blogging. And we’re in the content business right now, with email newsletters and all of that. The book I think still has appeal to people.
MORGAN HOUSEL: Well, look, I read a lot of books, but I rarely finish books. Maybe I’ll finish one of ten books I start, even books I like. And I think the reason for this is that few subjects require 250 pages of explanation to get your point across. So it rarely happens that you come across something that you can really be honest with yourself and say I can make a book of it.
And it took me a long time to get there, and until this broad topic and just understanding – the realization or the hope, I thought that I could turn it into 19 short stories that weren’t repetitive, weren’t fair keep booming so I can actually turn it into a full-length book. I think that’s the challenge for that. But once I became convinced that I could do it, it was pretty obvious that this was going to be a project I would love to work on.
MYLES UDLAND: All right, Morgan Housel, author of the new book, The Psychology of Money. Morgan, great to have your thoughts. Thank you for participating in the show.