Recorded in front of a live audience for the CFA Society of Detroit’s Annual Luncheon, Morgan Housel shares key insights from his new book Same As Ever.
Morgan Housel is a partner at the Collaborative Fund. His first book, The Psychology of Money, has sold over four million copies and has been translated into 53 languages.
Listen now and learn:
- Why people get so focused on predictions
- How optimism and pessimism are needed for success
- The importance of stories in a world overflowing with data
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Show Notes
This week’s episode was recorded in front of a live audience for the CFA Society of Detroit’s Annual Luncheon at the Fox Theater.
This updated edition of the investing classic provides the foundational knowledge you need to avoid the most common pitfalls and build a portfolio in today’s roller-coaster world of investing.
A special thank you to the CFA Society of Detroit for hosting us and a special thank you to this week’s guest Morgan Housel who signed hundreds of copies of his new book for the audience AND listeners of this show (more on that in just a moment).
Morgan Housel is a partner at The Collaborative Fund. His book The Psychology of Money has sold more than four million copies and has been translated into 53 languages.
He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of the New York Times Sidney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. In 2022, MarketWatch named him one of the 50 most influential people in markets. He serves on the board of directors at Markel.
If you want to understand the world around you that is constantly changing, you must start by understanding what always stays the same. And that is the focal point of his new book, Same As Ever.
Fill out this form for a chance to win a signed copy of Morgan’s new book, Same As Ever. (The webpage has a big image of my book because I wasn’t expecting this surprise giveaway on such short notice. You are signing up to win a signed copy of Morgan’s new book Same As Ever though.)
You will receive a message confirming your mailing address and your eligibility to participate. You will also be automatically added to my newsletter, which comes out every other Wednesday. Winners will be announced in the December 13 newsletter.
With that, here are my notes from our conversation…
Inspiration for Same As Ever (3:00)
As a financial writer for his entire career, Morgan has been well aware of how bad the financial industry is at forecasting. The track record is abysmal for fund managers, economists, and investors of all kinds.
In Morgan’s view, there are two things you can do with that insight. The first is to become a cynic and say nobody knows anything. Alternatively, you can be comfortable with the fact that nobody can predict the big changes or events that truly move the needle, and instead focus on what is never going to change.
This was the driver behind his newest book, Same As Ever. A second thing that got Morgan interested in this idea was his favorite finance book, The Great Depression, which is a diary written by an Ohio bankruptcy attorney named Benjamin Roth. When reading the firsthand account of what Roth was seeing during the Great Depression, Morgan notes that it could have just as easily been published during The Financial Crisis.
There’s one point in particular that Morgan highlights in the diary that was written at the bottom of the Great Depression in 1932–reading the text, you could change the dates to 1984, 1875, or 2008, and the story remains exactly the same.
The details and actors change, but it’s the same story over and over again. Morgan notes this is true beyond depressions, too. There’s so much to learn from bear markets and all financial cycles. Not necessarily from the technical details of what happened, but from the behaviors that took place and haven’t changed for hundreds of years.
So rather than pretending anyone can predict the big changes or events that will cause the next downturn, it’s better to put all our emphasis on focusing on the behaviors that never change.
Why People Like Predictions and Misunderstand Risk (5:30)
Morgan shares two reasons why predictions will never go away despite the horrible track record in the financial industry.
First, it’s exciting to predict change. It can be extremely lucrative if you’re correct, so we’re always going to be drawn to predictions.
Second, there is a lot of discomfort in the uncertainty that humans feel from the idea that the future is inherently unknowable. And predictions (even if incorrect) reduce that discomfort.
One really important point that Morgan makes is that the financial industry as well as many other fields (politics, medicine, etc) are reasonably good at predicting some parts of the future, but they are terrible at forecasting the surprises, which tend to be all that matter.
Events from the past 25 years that truly moved the needle in the economy and changed the world were surprises like 9/11, the Lehman Brothers collapse, and COVID-19. The common denominator of all three is that nobody saw them coming. These once-in-a-decade events are always going to be impossible to predict.
Morgan uses one of my favorite quotes from Carl Richards: Risk is what’s left when you think you’ve thought of everything.
It’s great to analyze all of the risks in front of you and come up with a probabilistic analysis of how they’re going to impact you, particularly at the individual level as you think about the risks to your personal finances. But then you have to accept the biggest risk is what’s not on that paper. And it’s always been like that.
You can state with certainty that the biggest economic event of the next 12 months, five years, or ten years is something that nobody in the world is thinking about. There are many great examples Morgan shares in the book as well as in our conversation.
And with all of these examples of risks that nobody predicted, they seem obvious with the benefit of hindsight. But even this feeling ignores how fragile history can be. One of my favorite examples of this in Morgan’s book that he shared during our conversation has to do with the Revolutionary War—because Morgan is such a great storyteller, though, summarizing those examples here wouldn’t do them justice.
How Your Personal Experience Shapes Your View of the World (12:30)
What we’ve experienced in our own lives impacts what we believe about the world. But since everyone has experienced just one-millionth of a percent of what’s happened in the world, we are blind to how other people think and how the world really works.
The impact of personal experience on one’s worldview has been well studied and documented among generations who experienced the Great Depression. Young adults during that time were scarred by the experience, which impacted their willingness to take risks and their feelings about debt.
Baby Boomers who came of age in the 1970s and 1980s remember 15% inflation and 16% mortgages. Millennials and Gen X can read about that period and look at the data, but we wouldn’t have the same scar tissue from it.
Or consider Australians, who, before COVID, had not experienced a recession for 27 years. Before the pandemic, they viewed recessions as more of a theoretical risk. They knew it could happen, but even grizzled veterans had never actually experienced it. That’s a very different experience than Americans who have experienced three or four recessions (two of which were very bad) over that same period, so naturally, we’d expect Americans to have a different view of recessions.
A really good example today is inflation data, as measured by the CPI Index, versus your personal inflation experience. The CPI Index measures a basket of goods and services that’s weighted based on how the average household spends their money. But, by definition, nobody is actually average.
Consider that housing makes up about 25% of the CPI Index weighting, but something like 25-33% of homeowners own their house outright with no mortgage. In this instance, roughly a quarter of the CPI doesn’t apply to a large group of people.
That’s just one example, but there are endless anecdotes of how the headline inflation data doesn’t apply to people individually, which can lead someone to believe CPI is “wrong” or a scam of some sort. This isn’t so—CPI is just the measure of an average household among a giant distribution of individual experiences.
I think this has probably always been the case, but it’s been so long since there has been meaningful inflation in the U.S. that there hasn’t been as much opportunity for disparate inflation experiences.
Why the Media’s Tone is Always Negative (19:30)
A big change in the last half-century was that the news went from local to national to global. It used to be that every small town had three newspapers, and you’d hear about the national stories, but you mostly cared about the news in your area. As the news spread to a more national and then global platform, the media has turned more negative because that’s what is most likely to get your attention.
News stories are presented in a manner that makes the world seem crazier than ever, but Morgan thoughtfully lays out the statistics of why that isn’t necessarily the case. In our conversation, he uses an example of the odds of someone being murdered in an individual town. But if you expand the opportunity set to national news, the odds that someone is murdered go up dramatically. Then when you expand to a global platform, the odds of a murder or any other terrible event skyrocket.
The odds of their being some out-of-the-blue, one-in-a-million event locally are relatively low, but they’re nearly 100% when the platform is expanded globally to a much larger sample size. And because the media focuses on negative events to get your attention, it’s easy to believe the world is scarier or more unstable than in the past—even if that’s not true.
With social media, the effect can be amplified because it is designed to show you what you’ll react to, so it’s easy to scroll through any social media feed and think the world is going to hell. But there are also so many different sources of information—many of which are biased and unreliable even if their audience doesn’t know it—which is very different from the days of everyone getting their evening news from Tom Brokaw. Now, whatever you want to hear is out there and Morgan suggests that the phenomenon is still new enough that it is difficult to know with certainty what the full ramifications of this evolution will be.
The other reason why news and social media have such a negative tone is that pessimism is more intellectually seductive than optimism. Morgan has several stories and examples of the importance of balancing optimism and pessimism in both The Psychology of Money and Same As Ever as well as our conversation.
Best Story Wins (25:20)
Perhaps my favorite chapter in Same As Ever is “Best Story Wins,” in which Morgan gives a plethora of examples in which stories are more important than data. While it’s true across many different fields, it’s especially important in finance.
During our conversation, Morgan used one of my favorite quotes from Same As Ever: “Every investment price, every market valuation is just a number from today, multiplied by a story about tomorrow.”
Most valuations are based on fundamentals (earnings, cash flow, etc) from the past 12 months multiplied by a story about tomorrow’s growth or risks. And the story component is so much more powerful than the current year component. Some of the stories that pushed valuations higher in 2021 and 2022 seemed so crazy if you only look at fundamentals, but realizing the power of stories helps some of the crazy price movements in certain market segments make more sense. This also helps explain some of the interest in gold in past decades or (more recently) cryptocurrency.
Stories also have enormous importance to financial professionals. Morgan suggests that you’re missing 99% of great learnings if you only look through the lens of finance and economics. You can learn about money by studying medicine, politics, military history, etc. because all those fields fall under the umbrella of how people deal with risk, greed, fear, and uncertainty. How people make decisions around those topics is most of what being successful in finance is all about.
Money and Happiness (31:30)
Many studies show money does bring some level of happiness, but there’s an important twist— happiness is the wrong word, it’s contentment.
People think of happiness as waking up grinning ear to ear or walking around smiling all the time. But nobody is happy all the time. If you tell someone the funniest joke in the world, they’ll laugh for 30 seconds and then they’re over it. That type of happiness is a fleeting emotion. But contentment is very different.
Morgan shares an anecdote about Will Smith (the actor). Will said that he was poor and depressed, he had hope that one day he would be rich and the money would take care of his problems. That gave him a sense of hope that he could dream of. But when he was rich and depressed, he realized that he could have more money than he could ever spend and yet still had all the same problems as before—and that removed the sense of hope from his life.
Morgan then paraphrases a Rick Rubin quote: you can’t become truly depressed until you’ve met your dreams. Because when you’ve met your dreams and realize you have the same problems as before, then you are filled with hopelessness.
Morgan acknowledges that it’s a very pessimistic view, but that it’s true for a lot of people because the correlation between money and happiness isn’t what they thought it would be. It can be a sad thing to realize that, after you work so hard and build up a great nest egg, you’re not necessarily happier for it.
It’s not to say that you can’t give yourself a better life. But the things that are actually going to make you happy are your relationship with your family, your health, etc…and the impact that money can have on those things isn’t very much.
How to Be a Great Investor (35:10)
Morgan points out two things necessary for being a great investor.
The first is becoming introspective about who you are, what you want, and (if you’re an advisor) what your clients want. Then you must realize that the right approach to investing is different from person to person. Morgan and I are about the same age, but what we want out of money and how we manage money can be very different. Not because we necessarily disagree with each other, but because we are different people with different risk tolerances, family goals, social aspirations, and previous experiences.
The second thing Morgan highlights is humility in our ability to predict things. Looking back at financial history, it’s easy to connect the dots with the benefit of hindsight, but how could anyone have possibly foreseen any of the wild things that have occurred?
A lot of people talk about being a long-term investor, which is great, but it’s also like standing at the bottom of Mount Everest and pointing to the top and saying that’s where I’m going. The hard part is enduring. Morgan explains that the long-term is just a collection of short runs that you have to experience and endure.
Saying you’re a long-term investor during a severe downturn is easier said than done. That’s why it is so important to have a portfolio you can stick with. We discuss Morgan’s personal investments a little bit, and he describes this being the key driver in his relatively passive approach to investing. It’s not that he doesn’t believe that people can achieve higher investment returns than simple index funds, but he knows that he can stay invested this way for the next 50 years.
Average returns sustained for an above-average period of time lead to magic. If you can stay the course, the odds are in your favor. But the path between now and the endpoint is going to be a never-ending minefield of surprises and setbacks, recessions and bear markets. Success requires that you experience and endure those periods.
Resources:
- The Psychology of Money by Morgan Housel
- Same As Ever by Morgan Housel
- Morgan Housel’s blog The Collaborative Fund
- Morgan Housel on Twitter
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