When generations undergo any kind of collective life-changing event, it shapes how people think about money -- and how they think about spending and investing. Past upheavals like the Great Depression, the inflation of the 1970s, and Weimar-era hyperinflation, had profound effects on the cohorts that lived through them. So what will be the effect of the pandemic on current generations? And what is the combined effect on people who lived through the pandemic, the Great Financial Crisis, and 9/11 in a span of less than 20 years? On this episode, we speak to Morgan Housel, personal finance expert and author of the bestselling book
The Psychology of Money
, on the lasting impact from these recent societal disruptions. This transcript has been lightly edited for clarity.
Key insights from the pod:
The rise of financial blogging during the GFC — 3:28
Skipping cold coins into the ocean — 6:11
How major events shape entire generations — 8:50
Is speculation optimistic or pessimistic? — 7:42
Is the economy normal now or is this the anomaly? — 15:30
How the pandemic divided the country, economically — 20:24
Should savings accounts always pay 5%? — 24:29
Tribal mentality in investing — 25:53
Keeping up with the Joneses to keeping up with the Kardashians — 30:04?
How to focus on the things that never change — 34:08
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Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Joe: (00:16)
Tracy, you know what topic we'd never really talk about or really do? We never really do anything related to, like, personal finance.
Tracy: (00:24)
Like what to actually do with all the information that we talk about on a biweekly basis? What it means for making money?
Joe: (00:32)
Yeah, it's a huge part of finance media, but it's like, you know, we like to talk usually, about what's going to happen with quantitative tightening or something.
Tracy: (00:39)
It's a tough one because I feel like you can talk about it, generally. But also there's the temptation, and a lot of people end up doing this, to give specific recommendations.
Joe: (00:49)
Right. Like, “Get this credit card.”
Tracy: (00:51)
Buy Tesla!
Joe: (00:52)
Yeah, either buy this stock, get this credit card, don't buy avocado toast. All this stuff, or like, you know, move your money. It’s kind of like a cliched topic. But, on the other hand, I do think it's interesting right now because we've just had this extraordinary three years of inflation, [which] many people have never really experienced in their lives. And so to my mind, that raises some interesting questions. How is this going to change people's behavior and what have people done in the past during periods of inflation? There are really interesting sort of personal finance, spending, investing questions that will come out of this era.
Tracy: (01:27)
Well, absolutely. And also the prospect of just finally actually earning some interest on a basic savings account. I know it's still below the level of inflation, but for people who've been earning 0% for most of their professional lives, I think it's very exciting.
Joe: (01:42)
I think now it's kind of positive, right? Because you could probably get, it might be like 5% in a CD. And maybe inflation will be three and a half. You know, I asked my dad recently about his memory of the 1970s. I was like, what was that like? You know, the first thing he said was, “Oh, you could really get a lot of money in a bank account in those days.”
Tracy: (01:58)
Oh, there we go.
Joe: (01:59)
Yeah. So you know, there's all kinds of interesting things about how people actually deal with [this].
Tracy: (02:04)
Right, and also what happens when we have a sort of regime change. And how do people react to it? And how much have things actually changed?
Joe: (02:12)
Well, you know, and we've been talking about some of the real estate episodes we've done. How much people anchor to the ZIRP era, as if that normal. So have people adjusted? Is there still a big adjustment left to go? There's just some really interesting questions. I think we should talk about them and we really do have the perfect guest. We are going to be speaking with Morgan Housel, longtime writer, the author of the bestselling book, The Psychology of Money. He has more books coming out. Hugely popular in this area. Morgan, thank you so much for coming on Odd Lots.
Morgan (2:37)
Well, Joe and Tracy, happy to be here. Thanks for having me.
Joe (2:50)
Can I just say, alright I'm going just say something just to set the scene a little bit. I said in the beginning of the conversation, like personal finance as a genre, it's a little hackneyed, it’s kind of cliche...
Tracy: (02:59)
But Morgan does it well?
Joe: (03:01)
Yes. Years ago, like 2011, 2012, I was at Business Insider. Morgan was at the Motley Fool. And I said to my former colleague at BI, Sam Ro, that Morgan is the first personal finance writer that I like. And now he has this huge following.
Tracy: (03:17)
That's high praise. High praise from Joe.
Morgan Housel: (03:19)
That means a lot.
Joe: (03:20)
Yeah, I just want to say I was long Morgan Housel from very early on.
Morgan: (03:23)
Well, I was long Joe during that period as well as well. So this is a thing.
Joe: (03:27)
What have you been up to since then?
Morgan: (03:28)
I feel like I've always done the same thing since 2008 when I started this, which was, you know, you mentioned most personal finance writing kind of falls into two buckets. It's either “here's the credit card you should use” or “here's the hot stock you should buy.”
The credit card part, you know, I was never that interested in it. And the “here's the stock you should buy,” always felt almost immoral to me because you don't know who's reading your stuff. Is this an 18 year old day trader or a 90 year old widow? Who are you recommending this to? So because of that, I just kind of naturally fell into this bucket of like, what's going through people's heads. I don't want to give anybody advice. I don't want to tell anybody what to do. Because I don't know you, but I'm really curious what's going on inside your head.
Particularly, I started as a writer in 2008, so the world was falling to pieces and it was just this idea of like, “well, what the heck just happened here?” And I think once I kind of realized that you could not explain 2008 through the lens of a finance or an economics textbook. It's just not in there to explain the bubble, the bust, the bailouts. Not in an economics textbook.
But psychology had a lot to say about it. Sociology, keeping up with the Joneses, that perfectly explained the housing bubble. So there are all these other fields outside of finance that filled in the gaps. So that to me was like, ah. I'm just really interested in how you can connect psychology and sociology and political science to try to explain what people are thinking rather than what they should do.
Tracy: (04:49)
Yeah. Both Joe and I, we sort of started our financial journalism careers around 2008 and we talked...
Joe: (04:56)
So we’re all the class of 2008.
Tracy: (04:58)
And it was a great time to do it. Because you were sort of on the same level as everyone else. No one knew really what was going on. But talk to us a little bit more then about your approach. How does taking that sociological or psychological angle actually inform the way you think about personal finance investing?
Morgan: (05:14)
Well, I'd say there's two elements to this. One is I'm a writer and then the other is I'm interested in behavioral finance. And you really have to mix both of those because in writing, particularly as a finance writer, if you are just writing about data and charts, like a lot of people, even in the industry, it's boring. You're not going to catch anyone. So you’ve got to tell a good story.
And so I'm always trying to find examples from fields that have nothing to do with finance that explain how people think about greed and fear and risk. Because not only do I think that gets you closer to the truth of what's happening in finance, if you can really get why are people thinking the way they are. But, and from a writing standpoint, I think it's more interesting if you can be like, “Oh, here's a story from World War II that explains how people think about risk,” and let me tell you how that bleeds into finance. I think it's more interesting as a writer to catch people's attention that way.
Tracy: (06:00)
So we're recording this at an event in Huntington Beach at Future Proof. Isn't one of your most famous stories about parking cars in Los Angeles at one point? Being a valet?
Morgan: (06:11)
So yes, it was, a hotel here in Los Angeles that I was a valet during college. And it was a high-end five-star hotel. A lot of rich people coming through. And there was one member who was just an absolute animal with money. He was very wealthy. I think he was worth hundreds of millions of dollars. And money has never burnt a hole in someone's pockets so fast. He was always drunk and he wandered around with a stack of hundred dollars bills, I swear, six inches thick. And he would just flash money like no other. And we did a lot of errands for this guy around LA. So he tipped very well. And one day he came to one of my colleagues and he peeled off a thick stack of hundred dollars bills.
And he said, “Go down to the jewelry store down the street and buy me some gold coins.” I think there were thousand-dollar gold coins. And he came back with all these gold coins. And this guy with a group of friends sat there at the Pacific Ocean skipping the gold coins to see how far they could go. I was 21 at the time and I remember watching this and thinking like, how long can this last?
And it was probably 10 years later that I said, what's this guy up to? And I googled his name and sure enough he went bankrupt. His company went out of business. When I saw the headline, I was like, of course, of course. This guy. So to me it was always so interesting that he was so smart. He was an entrepreneur who made a lot of money. His companies built parts for satellites. And he had a patent that's in every wi-fi device. Like he was such a genius technically, but his relationship with money was so broken. And so bad. So that was like, it's doesn't matter how smart you are, it's not about like what your IQ is. If your behavior with money is wrong, you're done. It's out.
And there's a flip side of that that's true too, which is that some people who are not that intelligent by their test scores or whatever, but they have a great behavior with money and can do spectacular over time.
Tracy: (08:03)
I'm probably taking the wrong lesson away from this anecdote, but did anyone go after the coins ?
Morgan: (08:08)
For all I know, they're still there.
Tracy: (08:10)
Alright, later today, Joe.
Joe: (08:12)
This is good to know. So obviously there are going to be individuals who maybe don't have a high income but do a good job of accumulating savings over years. Or people have massive incomes and they blow it. All kinds of things.
You know, you always hear these other stories about cohorts of people who went through something together. People who came out of the Great Depression and then they were like hoarders or something like that. Or people who came out of whatever it is. Is that true? People say that all the time. Or people who experienced like the inflation in Weimar Germany. In your research, I take it you read a ton of history, does that seem to be a real thing?
Morgan: (08:50)
Yeah, definitely. I think every generation experiences the economy in their own unique way. And those experiences, particularly what you experienced in your teens and twenties, like your formative years where you're starting to pay attention to the economy, really sticks with you. Everyone has seen or probably heard of the studies about the generation that went through the Great Depression and then right after that it was World War II. So that was 15 years of hell. And those people coming out of it, that stayed with them forever.
And there have been academics who've measured how that impacted them. They're very scared of debt, didn't want to invest in the stock market. Way more so even when you talk about people in Weimar Germany or the people went through World War II in Germany or in France. Or in Russia. Those people were completely scarred economically for the rest of their lives.
And more recently, all three of us became young adults in the early 2000s. So for me, 9/11 was the first adult big event. And so that was massive. And I think for our parents' generation, who were adults in the 1990s, when things were so, at least in relative terms, calm, stable, prosperous, not just economically, but politically and geopolitically, were like so solid and there's a recession, or, you know, there's a hiccup in ‘94 and ‘98. But for most people, unless you were a bond trader, it didn't matter. The nineties were great. 9/11 was like, “oh wow. We really got knocked down here.” But that was a onetime event. Like America's still as strong as it's ever been. And then in 2008 it was like, “Whoa, we got knocked down again,” like two times in the last eight years.
That's pretty bad. And then Covid in 2020, it's like the world broke again like three times in 20 years. The world has broken in the United States. And I think that is like, what's the quote? Fool me once, shame on you, fool me twice. Now that people have been fooled, so to speak, three times in 20 years. I think we now, our generation, believes that the world breaks every five to 10 years. And I think that's good. I think that's the truth. I think the previous generation that was “America is strong and stable and nothing bad happens.” That was the anomaly. And I think we're a more pessimistic generation because of it.
Joe: (10:52)
So I was kind of going to go into that. You know, the one thing that I've been really fascinated by over the last few years is,, what sort of strikes me, and particularly in like markets and investing, is this sort of — I almost call it like a sort of like nihilistic bullishness. Like you saw buying NFTs or Dogecoin or whatever, where it's like on some level it looks like optimistic speculative activity, like maybe we saw in the late nineties. But it also has this sort of like edge of none of this really means anything.
Tracy: (11:22)
Well, you're knowingly chasing a bubble or buying a lottery ticket because there's no other way to make money.
Joe: (11:26)
That's right. The WallStreetBets bragging about going broke in your Robinhood account. It seems like we're in this era of like speculation, but not coming out of a place of optimism.
Morgan: (11:36)
Yeah, I almost think the YOLO mentality of trading NFTs or whatever it might be, actually like comes from a very pessimistic place. If you're optimistic, then you're like, “I want to own the S&P 500 for the next 50 years.” That's optimism. Pessimism is, “it's all gonna go to hell anyways. Let's just throw it all on an NFT.”
So it looks from the outset very bullish, like “I'm so bullish on crypto.” I think it comes from a very pessimistic place. You made this point years ago that stuck with me during the gold bubble, if we call it that, around 2011, that there's nothing more pessimistic than betting on a rock. If you're optimistic, you bet on people. And how pessimistic do you have to be to say a rock is going to outperform humans? It's like the most pessimistic thing. And I think there's an analogy in there with NFTs.
Tracy: (12:23)
Wait, I take the point about people being pessimistic about these big sort of sociological breaks in society. But if you look at the legacy of the 2008 financial crisis, it wasn't necessarily a terrible time to start accumulating wealth and money. You know, if you bought the S&P 500 in 2009 right up until 2020, you'd be doing reasonably well. What do you think the legacy is of that particular era where we're still sifting through the wreckage of 2008, we have ultra low interest rates, everyone's worried about deflation and subpar growth.
Morgan: (13:04)
I remember, I don't know if it was 2011, so if I'm getting this date wrong, I’m sorry. But I think it was 2011 and the market went up substantially. Does that sound right to you? 2011?
Joe: (13:07)
2011 was a bad year. We bottomed in October. We had Fukushima, it was a rough year.
Morgan (13:10)
Maybe it was 2010, maybe it was 2012, I forget the year. But the market went up. 2012, I think was a pretty big year. Maybe it was 2012. The market went up 20% or 25%. And I think it was Gallup who polled Americans and said, “Did the stock market go up or down this year?” And it was like 60% of Americans thought the market went down during a year when it went up 25%.
I actually think this was 2009, which makes sense. I think this explains the question of in hindsight it was a great time to accumulate assets, but during the time, even a year when the market went up 25%, people were so sure that the economy was bad, that they assumed the market went down.
And Joe, both of you will remember this, from basically 2009 to 2016, if you were bullish on the stock market, you looked kind of like a fool and you got dragged on Twitter. This was like, “Oh, the CAPE ratio's too high.” And there was all this. So in hindsight it was a generational buying opportunity, but it was, that's all hindsight. It was very hard to be bullish during that era. And a lot of it was 2011 was double dip recession right around the corner. And the idea that the financial crisis of 2008 was just a prelude to what was to the big crash that was coming. That was a very popular view during those years. And I think it was really hard to be a long-term bull.
Joe: (14:54)
So we talked about this in the intro, this phenomenon of people sort of anchoring to what they know. And I feel like for a lot of people, Zirp, really low nominal interest rates, it's like “Oh, that's normal.” And what we have right now, where like the 10-year’s yielding 4% and a mortgage rate is over 7%. That feels like [unusually] high. Again, going sort of back to the past, does it take a while? I mean it must, as you described it, like it seems to take a while for it to sink in that it's like, no, that was then, and it wasn't necessarily like normal or abnormal, but that was a different time.
Morgan: (15:30)
I think that that does make sense. But the counter to that would be in the other direction. You know, in the late nineties a mortgage was 7%. And by 2003 it was 3% or 4%. And I think people got used to that really quickly.
That was kind of the basis of the housing bubble that peaked in 2006, is that by 2006 people were already completely used to low interest rates that didn't exist four years prior. So I do think people get accustomed to it fairly quickly. And a lot of that, at the corporate level, a lot of that debt rolls over every five years. So there's gonna be like that credit cycle's gonna wash out in a fairly quick period of time. But interest rates cycles are also pretty long. Interest rates bottomed after World War II in the early fifties and then peaked in the late or the early eighties. Like it was a really long cycle for them to go from 3% to 15%.
Tracy: (16:15)
What sort of different behavioral patterns do you observe between eras of low interest rates versus eras of high interest rates?
Morgan: (16:23)
I think because the interest rate cycles are so long and there's only been a couple cycles in the post-World War II era. It was like they went up….
Tracy: (16:30)
What were people in the 1960s doing? Tell us!
Morgan: (16:32)
So much of that debt though didn't really exist. Like at the end of World War II in ‘45, consumer credit barely existed at all. In fact, a lot of the GI Bill was introducing new forms of consumer credit to make sure the economy didn't collapse after World War II. It was like, we want you to be spenders. So like credit cards and installment loans. A lot of that just exploded after World War II. But then the rates were so high during that period that it really wasn't until the nineties that consumer credit just exploded.
So we don't have that much history about what it is. And so I don't think there's a ton of precedent for what we're dealing with in terms of like the consumer credit. But there's also a thing where you, you've seen, and I know Joe, you've seen this chart, I think you've tweeted this chart of as a percentage of income, household debt payments right now are actually very low. Like historically near the bottom that they've been in the last 40 years. So if you just look at the nominal amount of household debt, it looks scary, but actually as like a percentage of income, it's actually very low right now.
Joe: (17:29)
You know, obviously economists — like macroeconomists — the last real inflationary period that anyone remembers was the seventies. And interestingly, as sort of the grandees of economics, many of them came came of age during the seventies. So it like looms very large. But setting aside like how academic economists think, from your perspective, we're looking at sociology and history, etc. Does this remind you of the seventies or is that just sort of like a fake analogy because inflation was high then too?
Morgan: (17:58)
I think the seventies were really unique too because in addition to inflation that was so crippling, there was so much social unrest between Vietnam, all of that blended together to just an era of pessimism. So a lot of the pessimism wasn't just because of inflation or just because of Fed policy.
Like there's all these other things boiling up that made people just really upset about the state of America. That all falls in it. And I think that was true in the nineties as well. It wasn't just economic prosperity, it was economic prosperity mixed with political stability mixed with Soviet Union was gone. So America is untouchable. It was just like all these things mixed together.
And I think if you view optimism solely through an economic lens, like 90% of households don't read the Wall Street Journal, don't know what the Dow did yesterday. They're putting all of these things together. It's not just, is the economy strong? It's “is Washington in in good shape?” Are there political fights or is my kids' school in good shape? It's like all these things mixed in one. And I think a lot of financial economists and journalists only view it through one narrow lens, but that's not how most households think.
Tracy: (18:58)
So just on this point, I mean one of the oddities of our current economic environment is that the hard data says we're doing relatively well. But if you look at the survey-based data, if you just look at what people are talking about on a daily basis, it's like we're already in a depression basically. How do you explain that discrepancy?
Morgan: (19:16)
I remember years ago someone saying that consumer confidence, is fueled by three things: the stock market, gas prices and politics. And to the extent that that's true, then I think politics is probably why that's being driven.
Tracy: (19:32)
Partisanship.
Morgan: (19:33)
Partisanship, yeah. And I think it's so extreme that no matter what, the Dow could double and the unemployment rate could collapse to 1%. I mean someone brought up recently, I think it was Josh Brown who was like, “You guys, the stock market's near an all time high. Unemployment's 3.5%, you can earn 5% on your cash. Why are you not happy here?” And I think for a lot of people the answer is politics.
Joe: (19:56)
Hopefully inflation is soon going to be back at target, the Fed’s target, but we don't know for sure. But we obviously had the highest inflation in 40 years. Something we haven't seen. We talked a little bit about some sort of like nihilistic speculation. What do you see as some other knock on effects from the last few years, whether it's the inflation or just the Covid disruption or anything else that we've experienced since March, 2020? Since Covid.
Morgan: (20:24)
It was so interesting because it was so binary in terms of if you were a tech worker in 2020, it would never have been better. Whereas if you owned a laundromat, it's worse than the Great Depression. And the actual Great Depression impacted virtually everyone at the same [time], whereas Covid was so different.
And so you have probably half of America for whom 2020 was a great year financially and half for whom it was the worst it's ever been by an order of magnitude. And because of that, I think when you have half the country that doesn't understand what the other half went through, that also leads to an era of “I don't trust the numbers, I don't trust the statistics, I don't trust the politicians because what this guy is saying is so counter to what I experienced in either direction.”
And I think that also just leads to an era of hyper-partisanship of like, if you're saying that about the economy, how disconnected are you in a way that we really haven't dealt with. And a lot of the reason that a lot of the policies during the Great Depression, the New Deal, got through in a semi bipartisan way is because the Great Depression impacted everybody. 2008 was I think, similar to that as well. Like everyone was going to be screwed if the banks went down so it makes it easier to push through policy.
Tracy: (21:31)
This is also my theory of why people care more about inflation than the unemployment rate. Because if you personally haven't lost your job, it's hard for you to sort of envision, “Oh, unemployment is at a multi-decade low,” but you can definitely see egg prices at your local grocery. Everyone can see those. And so it seems like it becomes a much bigger talking point. But okay. Let's talk about a bright spot, which is, I guess we can now earn 4% or 5% on a bank account or a certificate of deposit. That seems great.
Morgan: (22:02)
Yeah. And it's weird. There's almost a point when, if you're buying a one-year CD right now, you can get five and a half percent. It almost feels like you're robbing the bank. You're like, “Really? You're going to pay me that when you, when you've had 15 or 10 years or whatever observed.” It's a wild thing to deal with, but both of you know this: historically, this is normal. I think that's what's hard to wrap your head around is that historically, what we're dealing with is not the anomaly. This is the completely normal part. And I think it would, I think everything would be better if we live in an era, if we never go back to Zirp, everything would be better. If we have an era where there is some sort of anchor on speculation and people can earn a decent return on their cash with some level of risk. I think that that's so much healthier in every aspect.
Tracy: (22:45)
So one of the weird things though, just on that point, was, you know, earlier this year when interest rates on bank accounts were starting to creep up, we actually didn't see that many people who seemed to actually be moving their money into higher-yielding bank accounts or money market funds. It didn't really happen I guess until March when we had the SVB drama. But what do you think accounts for that? Is it just it takes people a while to realize this is something available to them?
Morgan: (23:11)
Well, I mean, I think there has been quite a bit that have moved into money market accounts. I mean, what are money market accounts now? $5 trillion or something. So there has been money that's moved over, but I think the average American just doesn't think about it that much. And maybe if you don't have a very high level of savings, there's kind of a “why bother?” mentality.
Whereas most, I imagine most of the high dollar amount accounts have moved pretty quickly and it's a wild thing if you think about, you know, anyone's guess of future stock market returns is as good as anyone else's. But if you think at valuations, stocks return like maybe 6% to 7%, something like that, then my guess is as good as anyone else's. So let's say stocks return six and you can earn five and a half percent in a money market account, all of a sudden you're like, for the first time in 20 years, it's a really, it's not an easy decision to make.
Joe: (23:55)
Yeah, I have to say, you know, this has come up a few times on the show and the first couple of times we've discussed that, I'm like, “5%. It’s not that much...”
Tracy: (24:05)
Have you finally been rate-pilled Joe?
Joe: (24:08)
… It doesn't really seem worth it to like move it over, but now like after like a few months, it's like actually “Yeah that is meaningful” And as you say, if historical returns on the stock market are like maybe six and a half percent or something like that, and now you can get a 5% truly risk free.
Morgan: (24:25)
In a money market account. It's crazy.
Joe: (24:27)
That's pretty good, isn't it?
Morgan: (24:29)
But I think that's the world you should live in. There should be some anchor against speculation. There should be some temptation for your money that is not just a YOLO mentality.
Joe: (24:38)
Do you think, like, it doesn't feel right now in September, 2023 that the speculative fervor that we saw that really peaked in 2021, it still feels like there's still some embers of that, right? Like you still see meme stocks, it's not as much, but it still exists.
Morgan: (24:56)
Bitcoin is still $25,000, yeah. And I think it's wrong to just associate speculative frenzy with interest rates. You gotta remember 1999, like the peak of the dot-com bubble, interest rates were higher than they are today. So you can have a crazy bubble with interest rates. I'm sure it plays a role, but I think just explaining it as like every 10 to 20 years people collectively lose their minds financially. Like irrespective. Interest rates make it easier to do it, but you could have a giant speculative bubble with interest rates where they are today. So it wouldn't surprise me even with the hikes that we've had, if there's a new crypto bubble, a new meme bubble, whatever it would be. I think all of that is detached from interest rates.
Tracy: (25:36)
It feels to me like social media is also — I don’t want to say new because we had message boards in 1999 and 2000 where people were talking up stocks. But it feels like that's sort of added fuel to that dynamic where people are chasing bubbles rather than running away from them.
Morgan: (25:53)
Yeah, and it turns into like a tribal mentality, particularly in the crypto space where your willingness and your ability to buy certain kinds of crypto is your identity. And I think that also existed in the 1990s. Like “I'm a tech stock trader.” That's your identity. And I think anytime in finance where you say “I am a _____,” whatever it is, even if it’s “I'm a value investor.” Anytime you get that kind of tribal identity, you're outsourcing your thinking to the madness of crowds. And I think it's a really dangerous way to invest.
Joe: (26:23)
Is there a way to deprogram that, you know deprogram someone or deprogram yourself because that lock-in effect where some way that you invest, I think even professionals have this all the time. It seems really hard just changing your mind. In your research, are there tools or like ideas that actually work to get better at changing our minds?
Morgan: (26:49)
I don't know if there's tools or ideas, but I think some people are just much better at being independent thinkers than others. Even if you said, “I'm a value investor,” it seems so conservative and so benign. But Josh Brown has made this joke that a lot of value investors just end up own owning typewriter companies for 20 years. Even if you lock yourself into that tribe, it's not safe.
Joe: (27:10)
But even, I was thinking too, you know in the beginning, and they still have this fight, it's like setting aside even investment to like ‘Team Transitory’ or like ‘Team Persistent’ when we were debating inflation, it's hard to change your mind, really, even with new data.
Morgan: (27:23)
And I think social media makes that really hard too, because now there's like a timestamp on every call that you've made in a way that there wasn't before. And people would much rather be consistent than be right. And the reason that is because I think when most people are looking at a pundit online, they want their pundit to be consistent.
And most people, if you tell people what they want to hear, you can be wrong forever without penalty. So if you want to be pessimistic and you listen to Peter Schiff for 10 years saying the dollar's going to collapse next month, even if it doesn't, he told you what you want to hear. And you're gonna buy his newsletters and keep on going. So in the punditry business, that's the right way to do it, even if it's like from an economic point of view, it's terrible.
Tracy: (28:03)
Well, we're very good at avoiding consistency on this podcast, Joe. We don’t have that problem. We change our minds all the time. No, wait. You mentioned value investing and it, it does feel like at least up until 2020 and maybe even beyond it, the big money was in chasing momentum. What does that mean? Because we're talking about the fallacy of group think, but on the other hand, if you have a really good handle on a certain narrative or what's going to attract people to a particular investment, it feels like an advantage.
Morgan: (28:36)
Yeah, there's a great George Soros quote where he says, “whenever I see a bubble I rush into buy it.” And it seems so counterintuitive, like why would you want to buy a bubble? And I think his — I don't want to put words in his mouth — but I think his thinking is he understands that a bubble is very likely to grow bigger than you think, just because everyone else is going to watch their neighbor get rich and they're going to come in, which is exactly what happens every single bubble.
So I think that like the chasing of momentum has a huge behavioral component behind it. Now the hard thing is getting out before everyone else, which someone like George Soros can, but virtually no one else can. So that has no appeal to me whatsoever. Because the idea that you're going to get out before everyone else when you're chasing their behavior to begin with is, I think, the wrong thing.
Joe: (29:32)
So we talked about in the beginning about how personal finance is … there's like two kinds and they're both kind of not that great where it's one is like giving people stock picks and, you know, let’s be honest. And the other one is sort of like, “okay, here's what credit card to get to like maximize miles.” Setting aside the speculative frenzy or investing or meme stocks. Do you think what we've experienced over the last three years will meaningfully change how people consume going forward in some ways? Like just general consumption patterns?
Morgan: (30:04)
I think it's not necessarily the last three years, in terms of Covid being the last three years. I think it's the last 10 years of social media that just massively changes it. It's always been historically that there's no objective level of wealth. Everything is just relative to the people around you, your neighbors, your coworkers, and you're like relative to that person, here's how much money I have.
Joe: (30:23)
You always hear people say things like, “Oh well, like compared to like a king in the 1800s, you're so rich.” Yeah great.
Tracy: (30:30)
But my neighbor has like a big screen TV and I don’t.
Morgan: (30:33)
Everyone just looks at the people around you. But now it's the people around you is Instagram. And it's a curated highlight reel of like everyone around the world. Someone said recently it went from keeping up with the Joneses to keeping up with the Kardashians. That's what social media did.
It went from now you're comparing yourself to the highlight reel of everyone's life. So I think expectations of what people's definition is of a good life just exploded over the last 10 years. I can see it with my seven year old son who spends time on YouTube and what his definition is already at age seven of what success looks like. If you watch Mr. Beast all day, success is like driving a Lamborghini and throwing $10,000 at strangers. And I think there's an element of that in social media.
Joe: (31:11)
Is your son skipping gold coins?
Morgan: (31:13)
It turns into that. But it used to be when you compared yourself to your neighbors it was much more mundane than comparing yourself to Instagram. So I think that's the biggest change in consumption. It's just an inflated expectation. And it's the Louis CK joke of “Everything's amazing and nobody's happy.” If your expectations grow that much, then even when there is great economic growth and the stock market's doing well, it never feels like it's enough because you're comparing yourself to something crazy.
Tracy: (31:36)
I mean, listening to that, it sounds kind of dire in the sense that I don't think social media is going away anytime soon, what does that mean for the long term? Is there a way for people to break out of that mindset?
Morgan: (31:49)
I don't think there is. And of course social media is not going away, so it would not surprise — I'm not a forecast kind of guy, but it would not surprise me if in the next generation we have very good economic growth, very good stock market growth and no one is even a morsel happier for it.
I think that that has already happened over the last generation. I mean, that's almost the whole history of economic growth, like great growth, but everyone just gets accustomed to it. And there's parts of that that's great. That's what keeps people wanting to push harder and innovate more is because it never feels like it's enough.
So a lot of that is a great thing. But if you're looking at, it's easy today to think, “Oh, our grandkids, their real income is gonna be double or triple of ours and that means their life is going to be so great.” The second part of that is where people make a mistake. There's a good chance that our grandkids, their real income will be double or triple of ours. And I would bet heavily that they will not be any happier for it.
Tracy: (32:41)
Right. They'll be like, that guy over there has a bigger spaceship than I do.
Morgan: (32:45)
It’s always exactly what it's gonna be.
Joe: (32:46)
That guy’s been to Mars.
Tracy: (32:48)
Yeah. I only went to the moon.
Joe: (32:49)
Well, what do you do in your personal life or with your family or how do you think about these things? [To] like escape some of these traps that are very [easy] to fall into?
Morgan: (33:01)
Not, it's not easy to do. I think my wife and I, who's in the room right now, are pretty good at just being like, this is what makes us happy and we're not going to let a lot of external influences let us in, but it's hard for everybody. No one can escape the comparison game. I think it's just a natural part of how humans behave is just to compare yourself to your peers. So it's not an easy thing to do.
I think there is something to say for the idea that nobody is thinking about you as much as you are. So everyone is like, “Oh, I’ve got to get the nicer clothes so that people will be impressed with me.” They're not impressed with you and they're not thinking about you. They're thinking about themselves. No one's thinking about your car, nobody's thinking about the size of your house. They're all busy thinking about themselves.
Once you understand that, then I think your aspiration for showing off plunges and that's what you need to be like, I'm just happy hanging out with my family, going for a walk with my kids. I don't need to show off to people who aren't paying any attention to me. But some people can do that better than others.
Tracy: (33:54)
We've been talking a lot about how human beings respond to change and the idea that maybe we're going from an environment of low interest rates to one of high interest rates. You have a new book coming out, my understanding is it's all about change. Is that right?
Morgan: (34:08)
It's about things that never change over time, which I think is more important. I got the idea many years ago, there's a Jeff Bezos quote that I'll paraphrase. He said, “people always ask me what's going to change in technology and a better question is what is never going to change?”
And he said, “you can never imagine a future at Amazon where customers don't want low prices and big selection.” So because you can't imagine that future, you can invest all of your money into that knowing it's going to be just as important 50 years from now as it is today, which you can't say about most other technologies. Most other technologies have a shelf life of a year or two and then they're obsolete.
So it was the idea that, you know, part of this started for me with just the observation that both of you know, most economic predictions and stock market predictions are very bad. Our ability to predict what the stock's going to do is not very good. So, and I think part of that reason is because we focus, we try to pay attention on what's going to change. And if we can instead pay attention on what we know is not going to change, how people pay attention and respond to risk and greed and fear, let's just focus on that knowing for certain that's going to be part of our future rather than pretending like we can predict what might change in the future.
Joe: (35:13)
Well, it's funny, even on the stock market, our friend Sam Ro, who has a great newsletter, TKer.com, his whole thing is like “stocks usually go up.” And, we could talk all about, “Oh, what's going to happen with, you know, if the Fed doesn't hike, you know, if the Fed hikes in November and if the Fed hikes twice, etc.” But history seems pretty clear. In the long term, the line basically goes up.
Morgan: (35:37)
There's another version of that. Derek Thompson from the Atlantic, I think he wrote this in like 2015, 2016. He said, you know, since 2008 there have been hundreds of thousands of articles written about the economy and what's gonna happen. And you can summarize all of that period by just saying “Things got better slowly.” That's all the economic news you needed to know during that 10 year period. And so I think there's a lot of truth there.
Joe: (35:58)
I love talking about all this stuff, but every once in a while I'm like, it's just sort of fun.
Morgan: (36:04)
See, I think that's an important topic. I've been open about how I invest. I dollar cost average into index funds, but I pay attention to the stock market every day. I read all the economic news, I read the Wall Street Journal every day because I think it's interesting. I think markets are interesting and you don't need to take that news and become a day trader with that news. But I think markets are such a fascinating window into human behavior. And there's no other window that shows how people think about greed and fear and risk, which are such important topics in all areas of life. But you see it in finance in a starker way than any other topic.
Joe: (36:38)
Morgan Housel. So great to finally have you on Odd Lots. Thank you so much. This was a really fun conversation.
Tracy: (36:45)
Yeah, the perfect person for our first personal finance episode, I think.
Morgan: (36:49)
This has been fun.
Joe: (36:49)
This was great. Thank you so much. I'm so glad we finally had Morgan on. That was great.
Tracy: (37:06)
That was fantastic. And I'm looking forward to the new book for sure. I also thought the summary of markets and economics as, it's not really about the line going up or down but it's about the human beings involved in it. The emotions, the sort of like intellectual rigor around these ideas. That's the perfect way of summing it up.
Joe: (37:26)
Yeah, I totally agree because I basically am of this view, it’s like the economy will probably over time grow and the stock market over time will go up. And I don't want to just leave it at that because I do think all this...
Tracy: (37:39)
Because that's your job?
Joe: (37:40)
Yeah. Because it's my job. I want people to pay attention. But every once in a while I'm like, “okay, why do we pay attention? And I think that Morgan captured it, and as you said right there, it's interesting. We learn a lot about how people think and how people behave. It doesn't necessarily mean it makes sense to like try to like trade to like Morgan Stanley or Goldman's S&P year-end price target or something.
Tracy: (38:00)
Right. I also thought the point about one of the things that happened in Covid was the fracturing of people's experiences. I thought that was really interesting because I think the knee-jerk reaction to a global event like that is to think, “Oh well, we all went through this big, you know, history-making thing.” But actually as Morgan said, individual experiences varied widely. And I think it makes sense that that might be one reason why people now are much more distrustful of what they're hearing on a sort of collective basis.
Joe: (38:33)
That was such a good point. That was like a light bulb because I guess on some level it's like, maybe that seems obvious, but that was really well put. And I remember July 2020 and I was like, “Oh, things don't seem very good.” But I was following these tech people and they're like, “Oh, I closed another deal today over Zoom.” I was like “wow.”
Tracy: (38:53)
Yeah, “I'm working from home. And like my personal wealth just went up by 10%.”
Joe: (38:56)
Yeah, that bifurcation is really striking. I also thought this idea of like, we had three in the span of less than 20 years. 9/11 in 2001. The Great Financial Crisis/Lehman 2008 and then Covid. So less than 20 years, three pretty sort of earth-shattering moments in one way or another. Like you would see how cumulative, we just begin to expect like, “Oh this is the norm.”
Tracy: (39:22)
Totally. And I think people also react to those in different ways. Because some people might think, “well, I need to save a ton of money. Because I never know when there's going to be a great recession coming up next and I'm going to lose my job.” And other people might just think, you know, screw it, none of this matters. Even if I accumulate all this wealth, put it in an index fund, maybe another 2008 happens tomorrow and it doesn't matter. So I'm gonna buy an NFT instead.
Joe: (39:45)
Or am I going to be happy with the 5% on the CD or, you know, I always think about the Chinese economy, which does seem to have this same phenomenon of a high savings rate. But as you've written a lot about, some of the most intense speculative culture in the world. People [are] like day trading iron ore futures at home and stuff like that.
Tracy: (40:04)
Exactly. Alright, well shall we leave it there?
Joe: (40:07)
Let's leave it there.
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