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Morgan Housel is widely considered as one of the most insightful investment writers in the world today. He is a columnist at the Motley Fool and Wall Street Journal.
I have been a long-time admirer of Morgan’s ideas and can safely say that his writings should be in the must-read category for everybody, who is interested in improving his/her investment process.
I thank Morgan for agreeing to get interviewed for Stable Investor. Apart from his ideas about how to become a better and sensible investor, he also shares how he transitioned from Investment Banking to Private Equity to finally, Investment Writing!
So lets get straight to the interview now…
Dev: You are a celebrated writer. Tell me something about your journey. How did you get to where you are? Did you always wanted to write about investing?
Morgan: I knew I wanted to get into finance when I was a teenager. The idea of earning money for what looked like doing nothing (passive interest) just seemed cool to me.
When I was 17, I put $1,000 into a bank CD (similar to Indian FDs). I must have known how interest worked, but I remember a week later the balance was $1,000.03, and I thought it was the coolest thing I had ever seen.
And investing in – actually owning – shares of great businesses really caught my attention.
Throughout college I planned on being an investment banker.
That was plan A, B, and C.
But I got an investment banking internship in my junior year, and instantly hated it. The culture turned me off 100%, on the first day.
I like thinking things through, researching, learning … but the culture of investment banking was like a fraternity where people were just trying to prove that they were tougher and could work longer hours than the next guy without actually getting stuff done.
So I quit.
I got a job in private equity, which I really enjoyed. But this was summer of 2007, and credit markets blew up – not a good place to be when you need to borrow lots of money to buy companies.
I had a friend who wrote for the Motley Fool, and he said I should check it out. I never in a million years thought I’d be a writer. I really didn’t like writing. But I gave it a shot, and that was 8.5 years ago.
I’m still here, and I love it. Couldn’t imagine doing anything else.
Dev: What do you like more? Investing? Or writing about investing?
Morgan: I view them as one and the same. Writing helps me organize my thoughts and think through how I feel about investing and trying to identify what people do right and wrong in investing.
There’s no doubt that I’m a better investor because I’ve spent almost a decade writing down everything I see, how I feel, what I observe other people doing, etc.
Even if you’re not a professional writer, I think everyone should keep an investing journal. It’s a great way to turn half-thoughts into fully formed theories you can live by.
Dev: In an interview of yours, you said: To get ahead in investing you have to do something other people can’t do or won’t do. So according to you, what are those things?
Morgan: Doing something that other people can’t do means being smarter than everyone else.
But that’s nearly impossible these days, because there are so many brilliant investors. And a lot of the market is now driven by computer machines that humans will never outsmart. So to get ahead you have to be willing to do something other investors aren’t willing to do.
To me, that means having a longer time horizon.
Almost anyone can do that, but very few are willing to do it.
If you can think about the next five years while everyone else is thinking about the next five months or five days, you have an edge over the competition that will serve you well over time.
Dev: Market is a volatile animal and it will remain so. So as a long term investor, how should one control oneself to not to panic? Also, when should one panic (say, panic to buy more when markets falls a lot)?
Morgan: It’s two things. One is knowing enough market history to realize how common volatility is.
If you’re new to investing, a 10% decline seems really strange. You’ll say, “Wait, I just invested $10,000, and now I only have $9,000. This doesn’t seem right. Someone’s scamming me. I’m out.”
But if you know market history, you’ll see that a 10% decline has occurred, on average, about once every 11 months over the last 100 years – a period when the market increased in value by 18,000-fold (in US markets).
Once you know that, you might view volatility as something that’s normal and common, like a big snow storm, rather than something indicating a serious problem.
Second, you have to have an asset allocation that fits your personality. Some people have a low risk tolerance, regardless of age.
If you’re not comfortable having a ton of money in the market, don’t’ feel ashamed to have a lot of your assets in cash and bonds. The low returns from bonds and cash are nothing compared to the devastation you can do to your wealth by selling stocks after a big bear market because you couldn’t stand the pain.
Everyone needs a plan that works for their personality and disposition. For reasons I don’t understand, we rarely talk about that, and pretend that all investors of the same age and income have the same risk tolerance.