Author Morgan Housel on Stock Market History and Wild Minds | The Motley Fool (2024)

Morgan Housel is the best-selling author of The Psychology of Money and Same as Ever. Motley Fool personal finance guru Robert Brokamp interviewed Housel recently. In this portion of the interview, They discuss:

• Why professional money managers often underperform the market.
• The relationship between success and luck for investors.
• Saving like a pessimist and investing like an optimist.
• What spreadsheets can't tell you about spending.
• The benefit of losing money early in an investing journey.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on July 28, 2024.

Morgan Housel: I've been an investor for 20 years. People here have been investing for a lot longer than that. But at every single point in the last 20 years, you could have made a very reasonable, plausible argument that we were on the cusp of a bubble that things were unsustainable, that national debt was running out of control, that inflation was right around the corner. You could have made a very reasonable argument at every single one of those points and over those 20 years, the S&P 500 is up fivefold.

Mary Long: I'm Mary Long, and that's Morgan Housel, the best-selling author of The Psychology of Money, and Same as Ever. Robert Brokamp recently caught up with Housel, in person at our member event Fool Fest. Today's show is a cut of that conversation. Bro and Housel discuss why novice investors can often beat Harvard MBAs, what it means to be a reasonable optimist, why visionary CEOs often have a dark side, and why there's always a case that the market is in a bubble.

Robert Brokamp: One of the things you wrote about in your book, and it's the foundation of the book, is that about a decade ago, you decided you're going to read more about history, read less about forecasts, and you said it was one of the most enlightening choices that you made. Tell us about that.

Morgan Housel: Well, a lot of it just came from my time as a Motley Fool writer, just spending that much time with the financial media, whether it was CNBC or various blogs or whatnot, how bad the forecasting track record is, and it is abysmal. I'm not talking stock picking. I'm talking to people saying, the next recession is going to start in June or the stock market is going to go down 7% this year. That kind of forecasting, the track record over time for the last century is as bad as you can possibly imagine. It's terrible, but we keep doing it over and over again. I very quickly said, I don't want anything to do with that. If I'm going to write about finance, I do not want to do this thing that everyone else seems to gravitate toward that has such a terrible track record. But I always, as many of you are, just an amateur student of history, and what was always so interesting to me about the history of economics and investing was, if you read about what happened in the Great Depression in the 1930s or some of the depressions of the 1870s, people reacted exactly the same back then as they do today. The behaviors of the economy, how people respond, agree and fear and risk never change. It's been the same forever. Therefore, you can say, it's probably going to be the same in the future, too. If people responded to the financial crisis of 2008, the exact same way that they did the Great Depression in 1929, you know how they're going to respond to the next one whenever it might occur. Rather than doing the futile effort of saying, when's the next bear market? When's the next recession? I always thought it was fun and interesting to say, how did people respond to it? Let's focus on that? Then whenever it comes, whenever it might come, you'll have a better understanding of what is timeless rather than fooling yourself into thinking that you can predict the changes.

Robert Brokamp: It's difficult to predict those changes. But yet we still have to make some predictions. Every investment to a certain degree is absolutely. I think this investment is going to be worth more than this other investment. Or as me as a financial planner, if I want to help someone look at their retirement planning, use a retirement calculator, I have to use some predictions about inflation, tax rates, what the stock market will return. How do you do those types of predictions when you still have to make some forecast?

Morgan Housel: I think there's two ways to think about it. One is what I would call just a good enough forecast, which is, if you're thinking about recessions, rather than saying, let's look at all the different variables in the economy and try to predict whether it's going to happen this year or next year, nobody can do that. But if you said, look, historically, over the last century, there have been on average two recessions per decade, one of which is usually pretty bad and I expect that to be the case going forward. That's not a forecast. It's just like a baseline expectation of what you are likely to experience as a baseline. Maybe it's better, maybe it's worse than that, but as a good baseline, I think that's a good enough forecast. That's one way to think about it. The other is the idea that every stock market valuation is a number from today multiplied by a story about tomorrow. That's how you get every valuation, a number like earnings multiplied by a story of what the future might entail, good or bad. I think if you think about it in those two buckets, the story about tomorrow is almost impossible for anyone to predict. That's what makes forecasting what the stock market is going to do so difficult. Because really what the story is is what kind of moods are people going to be in. Are they going to be optimistic, are they going to be pessimistic? If someone's on C&C and they say, I think the stock market is going to go up 12% next year. That sounds reasonable. But if somebody came on and said, I think next December, people are going to be in a 12% better mood than they are today. That's ridiculous. But that's what they're doing. I think when you are making a specific forecast, just breaking it up into buckets of what is knowable, and what is clearly not. If you're focusing on the number from today, the quality of the business, the quality of the management team, whatnot, that's something worth paying attention to. The story about tomorrow is always going to be this nebulous factor that no one can really wrap their heads around.

Robert Brokamp: You talk about focusing on things that never change. But you do talk about in the book how sometimes things do change, and you have to keep an eye on that. You highlight Sears, for example, that was a company that many of us remember from when we were younger, used to be on top of the world, and now it's just a shadow of itself. How do you distinguish between looking at something and thinking, this might change versus something that no this is permanent. This is going to be a part of human nature for a really long time.

Morgan Housel: Here's what's really interesting. Benjamin Graham, who was Warren Buffett's early mentor. He's like the Godfather of value investing. He taught Warren Buffett basically everything that he knows. He wrote the most famous investing book of all time called The Intelligent Investor, he first published it in 1941, or thereabouts and it still sells today hundreds of thousands of copies per year. It's one of the best selling investment books ever written. It's like the Bible of value investing. Benjamin Graham died in I think 1976. The last interview that he gave, he was asked whether he still agreed with a lot of what was put in The Intelligent Investor, and whether he still believed that picking individual stocks as he laid out that you should do was still viable, and he said, no. Because the world had changed so much, and that was in the 1970s. What would he be saying today? Now, there's a lot of timeless wisdom in that book, which is why it's still worth reading. But what was so great about Graham is that he wasn't just an academic, although he was. He was a professor and one of the best, but he was actually a hedge fund manager as well. He was very practical in what he was doing. He was not just a theorist. Actually, I think there were six editions of the intelligent investor that were published. Every single edition, he updated the formulas that he recommended you use. One of them would say, I'm making this up, but it would be something like buy stocks for less than 1.5 times book value. I'm making that up, but it was a formula like that. Then in the next edition, he would say, that doesn't work anymore, use this formula. Three years later, he would say, that doesn't work anymore, use this one. Even though his book is rooted in timeless wisdom, he was practical enough to understand when the world changed. To such a degree that before he died, he said the foundation of his book wasn't even valid anymore. But I think that was why he was so successful. I think a lot of people get so wedded to their ideas, and their identity is tied up in those ideas that they become attached to a philosophy that was very valid 10 or 20 years ago. That isn't anymore because the world changed. That there are so many investing careers that get wrapped up in that. I think it's most common with value investors. There were periods in the 70s and 80s and 90s where just worked so ridiculously well. If you just bought the cheapest basket of stock, you destroyed everybody. It was so good and the world changed. Of course, as a philosophy, it can still work, but as a practical matter, it doesn't work nearly as well as it used to. Understanding what is timeless, which in my view, are the behaviors, and understand what changes, which is the technical details of the world. Is a great quote from Voltaire, who said, history never repeats itself, but man always does. I think that applies to so much is to politics, to war, to investing. I think that's how I think about it.

Robert Brokamp: Benjamin Graham was famous for talking about a margin of safety. Mostly in terms of when you're picking a stock. One of the quotes from your book you mentioned from Benjamin Graham was that the purpose of the margin of safety is to render the forecast unnecessary. But there's a personal margin of safety as well, and you quoted entrepreneur Naval Rovikant as saying, in 1,000 parallel universes, you want to make sure you're wealthy in 999 of them. Tell us what you think that means and maybe what you've done personally to build that margin of safety into your life.

Morgan Housel: I think it's impossible to know when you see someone who is very successful, like a billionaire, how much of that was truly foresight, skill, and how much was luck? There's a great quote from Daniel Kahneman, one of the greatest psychologists died not too long ago, where he said, without exception, the higher degree of success, the more that luck played a role. It's not to say that luck played the only role, though sometimes that's the case, but you never know what the balance is. Is it 10%? Was it 50%? You have no idea. When you're thinking about what to do in the future, particularly when you're looking up to, how did Steve Jobs do it? How did Warren Buffett do it? Let's try to emulate what they did? Well, what can you emulate and what can you not? Buffett himself has said that most of his returns, not in dollar amount, but the percentage returns that he earned came from the 1950s to the 1970s. That's when he was literally earning like 80% per year for decades on end. That's the bulk of his success came during this period. He has said that was just a very specific period in time, when the strategies that he was implementing, was he was just picking up free money off the ground. But it's not like that anymore. When you look at Buffett, there's a lot that you can learn from him and say, I want to learn about his patience, his endurance, but I can't emulate the market conditions that he had in the 1950s, and he can't. It's just picking out, like if you had 1,000 parallel universes, what would you want to do to try to be at least decently successful in all of them, rather than attaching to something that may have just been specific to a period in time?

Robert Brokamp: Part of that gets to having a certain amount of humility about your own success, looking at other people, their circ*mstances, and maybe not being overconfident. You talk about overconfidence quite a bit in one of your podcasts, you said that you think one of the reasons that professional money managers under perform the market, maybe because of overconfidence, attracts so many smart people and they might be too smart for their own good. I think the line you used is that there's a fine line between intellectual rigor and believing your own book. [laughs] Which Motley Fool analyst do you think that describes the most? [laughs] Just kidding. Although I have ideas.[laughs]

Morgan Housel: I think investing is one of the very few fields in life where the harder you try, it's likely the worse you will do. There's so much evidence for that, but it's not like that in almost any other endeavor life. If you want to be in good physical shape, you got to work hard, you got to sweat, and investing, there's just so much evidence that the people who do best are the ones who just leave it alone. It turned out the story is not true. This is apocryphal, but there was a great story. I wish it were true because it's so good, and it probably would be true if they actually did it that Fidelity ran a study, and they learned that the people who earned the highest returns of their client base were the ones who are dead because they stopped trading in and out.

Robert Brokamp: It's not a recommendation. We want you to stay alive.

Morgan Housel: It turned out and I think I told that story at Motley Fool event a decade ago, at the time I thought it was true. It turned out it's apocryphal, but it probably would be true if they ran it, where the people who are just not pulling the levers or leaving it alone and letting it go earn the highest returns. Here's one example of that. The Dow Jones Industrial average is 30 stocks. But stocks come and go out of that. There's a committee that kicks this stock out, brings this one in. Jeremy Siegel, who's a professor at Warden, he did the study years ago where he said, what if there were no committee selecting what gets kicked out and what gets brought in? What would that hypothetical dow that was truly just set in 1950 and they left alone? It's like two percentage points, higher returns. Even in a passive index, there's still activity. But if you look at what would happen if there were no activity, it's better. There are so many cases in the dow where they kick out a company just before it's about to explode, and they bring in a company just before it's about to fall 80%. There's so many examples of this in investing where the less effort you put in, the better you do. That's why investing is one of the only industries where you have novices with no financial background, no experience that beat the pants off of the best, Harvard-trained MBAs who work at Goldman Sachs. Because when you have a PhD in physics, and you go work at a hedge fund, you can't show up to the office every morning and say, I'm not going to make any changes today.[laughs] You have to put your big brain to work. You see this with individual investors too, and I'm sure there are people in this room, but historically, there have been studies that show this, the individual investors who perform the worst. Some people in this room are going to like this, doctors and engineers. Because those are people who assume and it's very natural and innocent to assume that if you are very smart in one domain, that that will transfer over into other domains. You use your intelligence to try to come up with a better trading formula that almost always backfires.

Robert Brokamp: I have to ask, Morgan's dad is a doctor, very impressive story. I went to med school later in life. Is your dad a good investor? I'm not going to tell him.

Morgan Housel: Yes he is. My parents have dollar-cost average into index funds for 40 years and never sold anything.

Robert Brokamp: Glad to hear that. There was a chapter in your book. About how calm plants the seeds of crazy. I've been trying to think, are we in a period of calm or crazy? The economy is doing fine. We've had a couple of good years in the stock market. 2022 was not great at all. But really, over the span of the last 10-15 years, we've been pretty lucky. Maybe it's calm, but it could be creeping and crazy, especially when you factor in politics, which does affect the economy, but often not in the ways you would predict. What do you think? Are we calm? Getting crazy, where would you put us right now?

Morgan Housel: I think it's only obvious in hindsight. I've been investor for 20 years. People here have been investing for a lot longer than that. But at every single point in the last 20 years, you could have made a very reasonable, plausible argument that we were on the cusp of a bubble that things were unsustainable, that national debt was running out of control, that inflation was right around the corner. You could have made a very reasonable argument at every single one of those points. Over those 20 years, the S&P 500 is up fivefold. I think that is the course. That's the normal course of history, that over a long period of time, in any given moment, you can say, this is completely unsustainable. Here are the 20 things I'm worried about and you all right about those things. Over a 10 or 20 year period, despite all of that, you still end up doing phenomenal. I think that's the entire history of mess. Where would be today? I truly think it's only obvious in hindsight. The US housing market, fit every characteristic of a bubble by 2002, I kept on going for another six years. The first time Alan Greenspan used the phrase irrational exuberance, was I think 1994, and the market went up for another six years. Even when it looks crazy, it doesn't mean that things are going to change tomorrow. You could look at things today about what's happening in venture capital, what's happening with crypto, what's happening with AI and say, this checks every box of a crazy bubble. But that would have been true. That doesn't give any indication of what's going to happen even over the next five years. I would say, there's always a weird thing too where people say, the market's been so good and so calm for the last couple of years. Really? The market fell 22% in 2022. In 2020, it fell almost 50%. In the first couple months of 2020, by almost any metric, the economy was way worse off than it was in the Great Depression. If that's the calm market that people are used to, it's actually been pretty crazy for the last five years.

Robert Brokamp: Let's talk a little bit about finding the right balance between optimism and if not pessimism, realism. The dedication for your book was for the reasonable optimists, which I felt left out because I'm an afizer. I'm always in the back of my mind like, what's the worst case scenario? I think that comes part of being a certified financial plan, are always thinking about risks. Tom Gardner yesterday, talked about the book and motto of Andy Grove, co founder of Intel, only the paranoid survive. In your book, you highlighted a theory from a couple of psychologists called depressive realism, which found that depressed people actually often are the most accurate people because they have a good appreciation for how fragile things are. What is that balance between optimism and whatever else you want to call the other thing?

Morgan Housel: There's a good story. It's very well known now. It's called the Stockdale Paradox, which was the highest ranking POW in Vietnam was a guy named Jim Stockdale. He was an admiral in the Navy, and he was a POW for several years. When he got out, he was giving an interview and he said, do you know who did the worst psychologically as a POW? He said, it was the optimist. Because the optimists would say when they were prisoners, they would say, we're going home by Christmas. Then Christmas would come and go and they would be despondent. They couldn't handle it. He said, the people who did the best. He didn't use this phrase, but he described it as what I would consider the reasonable optimist, which was the POWs who said, we're definitely going home someday. You're going to see your wife and kids someday. This war is going to end, but we are not going home by Christmas. No way that's going to happen. Those are the ones who did the best. They were very optimistic about where they were going and very realistic about how hard it was going to be to get there. Obviously, the stakes are much lower, but I think that's the same in investing, very optimistic in where you're going and very realistic about how hard it's going to be to get there. I think it's hard for people to distinguish between those two. In every recession, every bear market, it seems reasonable to say the market or the economy is broken. It's worked up until now, and it doesn't work anymore. That's the general feeling every single time you have one of these. It's much harder to contextualize like no, this is a perfectly run of the mill average thing to experience on a very prosperous long term journey. It's hard to do that. A lot of times in every recession to, it seems like we're never going to get out of this. 2009, it was the banking crisis might be the end of capitalism. 2020 it was who knows what COVID is going to do next? It always seems like it's never going to end. Truth they told, there have been countries that really never escaped their economic downturns. It can happen to countries, but it's always hard to distinguish those two between I'm very optimistic on this time period and pretty pessimistic in this time period. One way I've phrased it is, save your money like a pessimist and invest your money like an optimist. If you save a pessimist, you can be prepared for whatever gets thrown at you. But if you're investing like an optimist, you can stick around long enough to actually take advantage of whatever's to come.

Robert Brokamp: I think it's one of the tragedies of history that when you look at the life of James Stockdale, what people mostly remember is that he was Ross Pro's vice presidential candidate. He didn't do so well in the debate. He only found out like the week ahead of time, he was going to be in there, and that's what people often remember him for, but he was such an impressive figure. In prison for 7.5 years, tortured, his legs broken twice. Big and to stoicism. I feel like I've heard you reference Ryan Holiday, who's an author talks a lot about stoicism. Have you been jumping on the stoicism bandwagon at all?

Morgan Housel: The philosophies are great. They're obviously similar to quoting Warren Buffett and investing. It's much easier to say it than it is to do it. A lot of people are very interested in stoicism because it seems like such a great and it would be such a great philosophy, but it's much harder to do it in real time. I asked Ryan Holiday, who's a author? He's the current stoic writer. He spent his whole career writing about the stoics. I said, do you think the stoics were happy people? He said, no, of course not. They were not happy at all.[laughs] I think this gets back to depressive realism. I think they were very realistic about how fragile life could be. Some of the stoic philosophies are terrible to think about. They used to visualize their children dying so they could be prepared for it when it actually happened. A lot of these things you don't want. It's not a happy life.

Robert Brokamp: We're not recommending that either.

Morgan Housel: We recommending this. But they were very realistic about how fragile life could be. But when I think about that, would I rather be that or blissfully unaware? It's probably somewhere in between about cognizant of how fragile the world can be, but I think they were born. They wanted to be depressed about how fragile the world was.

Robert Brokamp: Since you talked about happiness, I'm going to read what I think is one of my favorite quotes from your book. Was money buys happiness in the same way drugs bring pleasure. Incredible, if done right, dangerous, if used to mask a weakness, and disastrous when no amount is enough. What drugs do you recommend for that incredible part. I'll try the incredible. Just kidding. I don't do drugs.

Morgan Housel: But to that point, there's a great quote from Taleb who says the world is split evenly between people who don't know how to start spending money and people who don't know when to stop spending money. It's all just a balance of how much is too much and how much is not. There's no formula for that. But you see that you see it a lot with people who have just entering retirement, who have saved up a really nice nest egg, and they can afford to reasonably spend a decent amount of money, and they can't do it because their financial identity is I'm a saver. The number will only go up, and the idea of drawing down their account is so antithetical to everything they've ever done their entire life that they can't do it. I think that is the tal quote, that's similar to a lot of things in life. It's really difficult to find the balance between what is too much and what is not enough? There's no formula for that. Everyone in finance wants to go to their advisor and say, show me the spread, show me the formula. Some people might be able to do that, but I think this is all psychology. It's not something you can figure out on the spreadsheet.

Robert Brokamp: One of the best books that I've read over the past years besides yours, of course, Morgan. I was a book called The Comfort Crisis by Michael Eastern. It was basically about how we as humans have really evolved to thrive under challenges. We're not meant to sit on our couch and watch TV and just eat chados all day. Like we thrive physically and intellectually by engaging in something that might be hard, and you wrote in your book about the value of sometimes embracing the pain of something you have to do.

Morgan Housel: This is not fun. One of those fascinating stories that I've read in recent times. There was this little girl. At the time her story came out, I think she was ten or something like that. Her name is Gabby Grings, and she was born with an incredibly rare genetic condition in which she was incapable of feeling pain at all. She had perfect touch. She could feel things, but she had no sense of pain whatsoever. When you read that story at first, you think, that's like a superpower. That's amazing. It must have been incredible. Her life was an absolute disaster because she never learned what not to do. It was so tragic. She would put her hand on hot stoves. She chewed through her tongue. There's all these her life. It starts off thinking that would be amazing. She never feels pain. It's the worst life you could possibly imagine. I think for that for a lot of things, for business, for economies, the pain is what keeps everybody in appropriate amount of check. It's actually a really good thing that once in a while you do something and say, I shouldn't have done that. I think it's true in investing as well. I think so many young people, teenagers, started investing in 2021, which was this unique time, the meme stock economy where you had all these 19-year-olds who thought it was completely normal to double your money every six weeks in options. That became their baseline measure of success. I was like, how quickly can you double your money per month? I think if there's one upside to that, now that that is unwound and a lot of those people lost literally all their money, it's better to learn about risk when you're 19, than it is when you're 48 and trying to put your kids through college or something like that. If you want a good path in investing, you want to start off learning about risk very quickly. It seems counterintuitive, but the people who start their investing journey at the beginning of a bull market are probably going to end up with some of the worst lifetime returns because it increases your confidence more than your ability. Dealing with that downside, hopefully early, it seems like weird, why would you want that? I actually think it's a very healthy thing to go through.

Robert Brokamp: We talked a lot about here the Motley Fool and when you're evaluating a company evaluating leadership. You had a chapter in your book titled Wild Minds. In the sense that some people who are abnormally successful are also kind of abnormal. How do you tell the difference between like a good crazy and just crazy?

Morgan Housel: The most obvious example of this is Elon Musk.

Robert Brokamp: I might have thought about bringing that guy and I'm a Tesla shareholder.

Morgan Housel: In the last couple of years, people say, I don't like his politics. I don't like how he speaks. He's rude onto it. Of course, he doesn't follow the rules of corporate decorum. He tried to go to Mars when he was 30. He took on General Motors, he took on NASA and succeeded. Of course, he doesn't think the rules apply to him. You can't say I want you to think out of the box and be a crazy out-of-the-box thinker and also be a very nice, appropriate, polite person. It just usually doesn't happen that way. I think the closest that we've come to a crazy out of the box thinker who also looked and dressed like a normal CEO is Bill Gates. But so many of the other, Steve Jobs, like visionary of a generation and also a monster of a boss who you would never want to work for. Walter Isaacson in his biography, talked about the Steve Jobs reality force field, I think he called it, where Steve Jobs just didn't think any rules of the world applied to him. There was a part of that that we all benefit from. We all get the great technology that he created because he didn't think any of the rules applied to him. The other side was he was a jerk. He was just a terrible person to work for. He was rude to everyone. He was inconsiderate. I think you have to accept both of those as the same person. You can't say I like this side, and I don't like that side. The part that made him crazy good also came with this crazy bat, and you have to accept that as a full package. It's like that with almost every visionary CEO, visionary entrepreneur. There's going to be sides about them that you don't like or that you find inconsiderate, whatever it might be. That's part of the full package of what also makes him great.

Mary Long: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.