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.
[Edited 2020: Morgan’s new book Psychology of Money is a must-read for everyone]
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 let’s 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 the 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 snowstorm, 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.
Dev: As an investor, the hardest thing about investing is to find a balance between 1) Riding out periods temporarily unfavourable to your views and 2) Realizing your views are wrong and moving on. How should an investor maintain that balance?
Morgan: There’s no simple answer. It’s a really complicated problem, and usually you only know the answer in hindsight.
The best solution is a combination of humility, and being totally open to opposing viewpoints. It’s natural to fight back against people who disagree with you, because you take their opinions as an attack on your intelligence. It’s a really dangerous mindset.
The best investors in the world pay close attention to opposing viewpoints, trying to find out how they’re wrong, rather than looking for information that confirms they’re right.
Charles Darwin spent most of his life trying to prove that evolution was wrong, obsessing over evidence that disconfirmed his own views. That made him an incredibly effective scientist. It seems counterintuitive, but it’s such a smart way to think.
Dev: It’s very easy to say that investors should only invest when the value on offer is blindingly more than the price that needs to be paid. But how does one implement that in reality? Being greedy when others are not, is actually quite difficult to do.
Morgan: It’s way easier said than done. The mindset you need to have in investing (and this goes for most things in life) is “If things get really awful, will I be able to handle it and do OK?”
When you can answer yes, the odds fall in your favour because you’ll be able to endure a huge range of outcomes, both positive and negative.
It’s the classic margin of safety, which many investors understand but few actually implement. Most people need their forecasts to be accurate in order to do OK, which is a really dangerous spot to be in.
Dev: In his book Thinking, Fast and Slow, Daniel Kahneman mentions about two approaches to thinking. System-1 (which is fast, instinctive and emotional) and System-2 (which is slow, effortful and calculating). How can an investor make use of these two systems to invest? At the face of it, System-2 seems like a better choice. But are there any market situations, where thinking in System-1 mode can work wonders for long term investors?
Morgan: I don’t think so. Investments are inherently long-term things and are distorted by emotion.
Anytime you’re forced to make a snap judgement about what to do with your money the odds of future regret are extremely high.
I’d actually recommend waiting at least a week before making any investment decision.
Dev: We as humans are not only very poor at predicting the future, but we’re not even good at remembering the past in certain situations. How does one correct at least the 2nd part (Remembering the Past) and also, how not to fool oneself when one remembers the past?
Morgan: One thing I love doing is reading old news. I live in Washington DC and can visit the Library of Congress, which has every edition of the Wall Street Journal, NYT, and Washington Post going back to the mid-1800s.
I absolutely love reading old versions, seeing how people thought and what people predicted with the benefit of hindsight. There’s so much to learn.
Another thing I find helpful is keeping an investment journal, writing down your thoughts and how you feel about the market and different investments so you can recall them objectively later.
The only way to fight how tendency to rewrite the past in our minds is to actually write today down to revisit it tomorrow.
Dev: How do you think one should view markets through the long lens of history rather than the short-term news filter? Any mental tools you use to achieve it?
Morgan: Most people have a distant financial goal, like retirement or funding your kids’ education. A helpful lens when reading financial news is to ask, “Does this story have any impact on my ability to retire in X years?”
99% of the time the answer is “no” and you can happily move on.
Dev: Do you think the lack of preparedness is what causes most investors to miss out on wealth creation opportunities in stock markets? (Both mental as well as financial preparedness)
Morgan: It’s a lack of understanding of what an opportunity looks like. There’s a fundamental irony in investing that all past bear markets look like opportunities, but all future bear markets look like risks.
So even if people prepare for bear markets, not realizing how beneficial they are for long-term investors is part of the tragedy.
Dev: In another of your interviews, you said: What’s really interesting about finance is that the more you learn the more you realize how little you know.
Can you elaborate on that? How can common investors, who are almost always short of time, realize the importance your quote?
Morgan: I think this is true for a lot of things in life. The deeper you dig, the more you realize how much randomness, chance, and luck plays a part in determining the specific path of individual outcomes.
What was the most important economic event of the last 20 years? Probably 9/11, and it’s so easy to see how it could have either been foiled, or way worse than it actually was. Same with WW2, the Cold War, the fall of the Soviet Union, etc.
There’s a long history of things that never happened and alternative outcomes that people discount more than they should.
Dev: For most common investors, it’s suggested that they should Dollar-Cost Average* through mutual funds. Not trade much in individual stocks. Buy some shares directly here and there. Tell me what is wrong about this that these people fail to understand? *Rupee-Cost Average (in Indian context)
Morgan: I think it’s a great approach, and it’s how I manage my own money. There is, and always will be, a tendency for people to try to squeeze a little more return out of their money by buying this, selling that, hedging this, shorting that … the bias is toward activity because it gives you the impression that effort is synonymous with results. But it rarely is in investing. Investing is one of the few professions where “don’t do anything; just find a hobby and go away” is some of the best advice.
Dev: How do you manage your own money? Funds? Direct Stocks? How do you go about it?
Morgan: I dollar-cost-average from every paycheck into Vanguard index funds, and buy individual stocks occasionally when I think an idea is really attractive. I own about 10 individual stocks. Too many people argue over whether you should be passive or active; I don’t see it as a contradiction to be both. I also have a lot of my assets in cash.
Dev: As someone who spends his day in midst of financial data and news, how do you filter out what is good and what is not to get to your daily reading list? How to become a good consumer of financial content?
Morgan: There’s no substitute for creating a list of trusted sources. If you go into your reading blindly, you’ll step on landmines of terrible content left and right.
Dev: What is your daily reading list?
Morgan: Easiest way is to see the list of those I follow on Twitter.
Dev: So given the importance of reading and researching for someone like you, how does Morgan Housel spend a typical day at the office? What about weekends?
Morgan: I do most of my reading in the morning, and most of my writing in the evening. A lot of writers do the opposite, but it’s what works for me. I can’t write or focus until I’ve consumed an inhumane amount of coffee. So from about 6 am to noon, I’m usually just reading, browsing Twitter, skimming books, trying to think of something to write. I have meetings and other obligations throughout the day, and most of my writing is done between about 3 pm and 7 pm. I read books in the evenings and on weekends.
Dev: 5 quotes that should be framed and put on every investor’s desk?
“Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.” — Nick Murray
“In expert tennis, 80 percent of the points are won, while in amateur tennis, 80 percent are lost. The same is true for wrestling, chess and investing: Beginners should focus on avoiding mistakes, experts on making great moves.” — Erik Falkenstein
“Risk is what’s left over when you think you’ve thought of everything.” — Carl Richards
“If you look carefully, almost all Old Money secrets can be traced to a single source: a longer-term outlook.” — Bill Bonner
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” — Charlie Munger
Dev: 5 books that everyone looking to become better investor must-read. At least one each from domains of building mental models, psychology and financial analysis.
Risk Savvy by Gerd Gigerenzer. It’s about how humans are bad at interpreting statistics and how that causes us to make bad decisions.
The Great Depression, A Diary by Benjamin Roth. Roth was a lawyer during the Great Depression, and kept a detailed diary about what life was like in America was like during the chaotic 1930s. His son published it in 2010, and it is the single best economics book I think I’ve ever read.
The Better Angels of Our Nature: Why Violence Has Declined by Steven Pinker. Violence — war, murder, rape, torture, execution, robbery, lynching, racism, you name it — has declined substantially almost everywhere in the world over the last several hundred years. We are, on average, living in the most peaceful and safe period the world has ever seen, but few want to admit that.
The Half-Life of Facts: Why Everything We Know Has an Expiration Date by Samuel Arbesman. Textbooks used to teach that a human cell had 48 chromosomes. More than one-third of all animals once classified as extinct are later rediscovered. Depending on the field, huge numbers of studies once considered “groundbreaking” can’t be reproduced in subsequent trials.
This Will Make You Smarter by John Brockman. It’s a long collection of short (one-page) essays by some of the smartest people in the world who were asked the question, “What Scientific Concept Would Improve Everybody’s Cognitive Toolkit?” You won’t put it down.
Dev: What is your advice for those who are just starting their investing journey?
- Read as much as you can.
- Be twice as humble as you currently are.
- Realize that time is your most powerful weapon, and one that older investors can only dream about.
Dev: Final question. I love to read what you write in various columns at Fool and WSJ. But when do I get to read a book authored by Morgan Housel?
Stay tuned. Might be a busy year for me. 🙂 New book – Psychology of Money
Dev: That’s all from my side. Thanks a lot for sharing your wisdom with us Morgan
Morgan: Thanks Dev.