Transcript: Investment masterclass — The psychology of money

This is an audio transcript of the Money Clinic podcast episode: ‘Investment masterclass — The psychology of money’

Claer Barrett
Hi, it’s Claer here. You’re used to hearing me on Money Clinic, but now you can find me in your inbox, teaching you everything you need to know about money, with my new Sort Your Financial Life Out course. Over six weeks, I’ll help you to make smarter money decisions with tips on budgeting, tax breaks, property, pay rises and investing. In short, everything you wanted to know about managing your money, but were far too busy to ask. To find out more and sign up for the series, visit FT.com/moneycourse. That’s FT.com/moneycourse.

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As a regular listener of this podcast, you’ll know there are many aspects of the financial world that are confusing and some that simply don’t make sense. Like, why do we keep making the same mistakes? 

Morgan Housel
If you mix genius with bad financial behaviour, you’re gonna go to zero every single time. 

Claer Barrett
And how should we think differently about money and wealth creation? 

Morgan Housel
Wealth is the money that you did not spend on a house and a car or jewellery or clothes. It’s money that you saved. 

Claer Barrett
Welcome to Money Clinic, the weekly podcast about personal finance and investing from the Financial Times. I’m Claer Barrett, the FT’s consumer editor.

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A writer who does make sense of it all more than any other I know is Morgan Housel. His book, The Psychology of Money, has sold over 4mn copies around the world. And the sequel Same As Ever, released just a few weeks ago, expands that theme in new directions. And I’m delighted to say that Morgan is on the line to me now. Morgan, welcome to Money Clinic. 

Morgan Housel
Thank you so much for having me. I’m happy to be here. 

Claer Barrett
How would you like to introduce yourself to our listeners? 

Morgan Housel
I’ve been a financial writer for my entire career, and I think when I introduce myself, it’s easier for me to tell you what I am not. I am not a journalist. I’m not a financial adviser. I’m not a portfolio manager. I’m not an economist or a psychologist or a historian. I’m just somebody who happens to be very interested in money and finance, and who happens to write about what I observe in the world. And that’s what I’ve done for the last 17 years, whether it’s online in a blog, or in my two books. 

Claer Barrett
And where in the world are you speaking to us from today? 

Morgan Housel
I am in Seattle, Washington, where I live with my wife and kids. 

Claer Barrett
Well, every guest who comes on the show, we ask them, what was your earliest money memory? And I just have a feeling, Morgan, that you’re probably gonna have a really corking one. 

Morgan Housel
Here’s what’s interesting. I didn’t really know this at the time what I was doing, but I have memories of being, like, three years old, counting pennies. I used to love counting money. And look, I didn’t like counting blocks, I didn’t like counting seashells. I liked counting money. And I definitely remember that as, like an early, 12, 13 years old, I lived, I would just literally sit there and count money. And so maybe that was like how I was wired, just some sort of obsession with money that led me to this career. And I think it was a healthy obsession, I hope. But sometimes I think about that and it’s like, man, I was doing that when I was three years old. So if you want to talk about nature/nurture to how you got interested in money, interested in investing, I think for me and for a lot of people, it was less about what I learned when I was a teenager and more just maybe about how I was wired as a child, like how I was born. 

Claer Barrett
Now, one of the central themes in both of your recent books is the power of the story. And as a journalist, this is something I can really appreciate. But each short chapter in your books tells us a different story about money, often a story that we might tell ourselves about money, and, crucially, the lessons that we can take from this. Why do you think stories are so powerful? 

Morgan Housel
Well, I think a good analogy here is to talk about how you are typically taught in schools, in primary school and in university. It tends to be, no matter what your subject is, it is taught in an analytical way — here’s the formula for you to memorise and then regurgitate on the test. That’s how it tends to be taught. I had one class in college, in university, in which the teacher said, on the first day of class he said, no textbooks, I’m not gonna write anything on the chalkboard, all I’m gonna do is every class you come in, every lecture, I’m just gonna tell you a story about something that I’ve seen in the real world related to this topic. It was, uh, healthcare economics, and it was the best class I’ve ever taken. And I remember so much from that course because it was just stories.

When you are forced to memorise formulas, most people will forget them 10 minutes after the test. It’s just in one, out the next. When somebody tells you a good story, you will remember it for life. And not only will you remember it, but it’s much easier to contextualise in your own life. How do you contextualise a formula into your own life? Very difficult to do. But if somebody tells you a story about people doing very well with money or very poorly with money, it’s much easier to say, oh, that reminds me of my own life and my family’s life and my friends’ lives. It’s also for myself as a writer — I think you can relate to this as well — so much easier at catching people’s attention, getting their attention. If you are a financial writer and all you ever write is, here’s what the Dow Jones did today, up 44 points, you’re not gonna survive in this world. There’s too many other people doing that exact same thing. If you can tell a good story, you will get people to line up and listen to you. 

Claer Barrett
If I had to pick one story that stayed with me, it’s the opening chapter of The Psychology of Money, and this tech executive that you met from the dotcom era when you were working as a valet in the swanky LA hotel. I’ll let you continue telling this story, Morgan, because you will tell it much better than I can. 

Morgan Housel
Yes. It was this incredible experience I had, and I was maybe 20 years old at the time, so I was fairly young, but I was a valet at this high-end hotel in Los Angeles, and it was really my first experience with wealthy people, seeing how they operate and how they go about their lives. It was incredible. And there was this one gentleman who I will never forget. He was extremely successful. He was a tech executive. He had founded several companies that went public. He was worth hundreds of millions of dollars. And his relationship with money was like nothing I’ve ever seen before — the first to kind of set the scene. This guy was always drunk and had a severe cocaine habit, which was apparent to everybody, and he would always carry around a stack of $100 bills in his pocket that was probably 3 or 4 inches thick. And whenever he would come in contact with anybody, including strangers, he would just peel off a chunk of $100 bills and throw it at people just to get their attention, just to watch the shock on their face. And he’s doing this while he is belligerently drunk. And one day — we as the valets, we always used to run errands for him, do little chores for him, and he paid us quite well for it, of course . . . 

Claer Barrett
Yeah, I can imagine that. 

Morgan Housel
One day, to one of my colleagues, he peeled off a big, thick chunk of $100 bills. And he told my colleague, he said, go down to the jewellery store down the street and buy me a bunch of gold coins, $1000 gold coins. My colleague went and did it. He came back with a handful of gold coins. And this guy, this tech executive, and his friends sat there skipping the gold coins like they were rocks into the Pacific Ocean . . .  

Claer Barrett
Oh my goodness. 

Morgan Housel
 . . . seeing whose $1000 coin could go the farthest. And they were just cackling like it was the funniest thing that they had ever seen. And then the punchline to this story, to me the most important part, is many years later. This is maybe 10 years later. I was sitting there one day and I thought, I was thinking to myself, whatever happened to that guy? Let me go look up what happened to his guy. And sure enough, he went bankrupt. And it was like, of course he did. Of course he did. Anybody could have seen this coming, given his relationship with money.

And so to me, I just use it as an example of, look, the amazing thing about this guy is he was so smart. He was an absolute genius. But if you mix genius with bad financial behaviour that he had, you’re gonna go to zero every single time. And maybe more important, the opposite is true. If you are just an ordinary country bumpkin with no education, but you have good financial behaviour, you can do very well over time. So that was just the stark example that I witnessed. 

Claer Barrett
Well, it’s a brilliant start to a brilliant book. But you would argue, Morgan, that the softer skills that we need to manage money, what you term the psychology of money, is much more important than the technical knowledge, the investment formulas, if you like. Why is this? 

Morgan Housel
You know, let me give you a different example. You can have a PhD in finance from Harvard or Oxford, have all of the financial education that exists in the world and you understand all the formulas, you understand all the data, but you also have no control over your own sense of greed and fear, or you are unable to take a long-term mindset. That person will fail every single time. Every single time, they will fail, no matter the education. So and I think that’s, look, when I state it like that, it’s so obvious. Of course that’s the case. But we tend to teach finance. And at a cultural level, we tend to think of finance as you need to be very educated, you need the right pedigree, you need to work on Wall Street, even if in the real world there are so many counterexamples to that intuition. 

Claer Barrett
Well, one big problem that people have is that they think you need to be rich to be an investor. You’ve got to sort of wait until the point that you’ve got thousands of pounds or thousands of dollars to invest, rather than just starting small. 

Morgan Housel
And one of the things about it is that that used to be the case not even that long ago. If you go back to 20 years ago, not that long ago, that was true that if you wanted to invest, you needed to go to a broker or financial adviser. And by and large, that broker was not gonna talk to you unless you came to them with tens or hundreds of thousands of pounds or dollars. Now, the biggest benefit to ordinary people over the last 20 years has been the rise in low-cost investing options and being able to do it yourself online in an online broker. But I think culturally, we still have that idea that the odds are stacked against the little guy, that only when you become rich do you have access to the great sophisticated financial products. And I think by and large, it’s not true whatsoever. In fact, it might even be the opposite, that some of the most dangerous financial products that are gonna get you in the most trouble are the ones that are still only reserved for the rich people in terms of different hedge fund strategies and private equity strategies. Those are the ones that have the highest fees, the highest odds of going to zero, and those still are reserved for the sophisticated investors. The average ordinary investor who can start an account with $100, £100 can have access to very low-cost, very diversified investing products that is some of the best, you know, odds of success for your money over the long term. 

Claer Barrett
If anybody came up to me in the street and said, would you like to be rich? I’m sure most people would say, yes. But you exposed the downsides, if you like, of being rich. And the chapter Never Enough in your first book is another story that often pops into my head. Could you share that one with us? 

Morgan Housel
Well, there are so many examples of people who have all the money that they could ever spend. They have enough money to make their great grandchildren rich, and they still take so much risk that they end up going broke themselves. And so I use the example of Bernie Madoff, very well known, the biggest financial scammer of all time. He ran a $25bn Ponzi scheme that unwound in 2008. And to me, the most fascinating thing about the Madoff story is that if you go back to the early 1980s, before his Ponzi scheme began, Madoff was earning, by some accounts, $25mn a year from the legitimate side of his business. And what is astounding to me about that is that despite that success, despite legitimately being one of the most successful businessmen in the world, he wanted more money so badly that he was willing to start this Ponzi scheme that ruined everything, just ruined everything. And I think Madoff . . . look, I think he was also a sociopath. There’s much more going on here. But I think a lot of people, in an innocent way, have some version of this where, if we are lucky enough to have a rising net worth or rising salary, but our aspiration for more goes up by just as much, then it’s never gonna feel like it’s enough. And a lot of these people are gonna take more risk, more risk, more risk, or have more career ambition, work longer hours until it’s too late. And it kind of comes back to bite them. And they look back at their career, look back at their life and said, I should have just been content with what I had. 

Claer Barrett
Now you also have a way of thinking about wealth that I really like. You argue that true wealth is in fact invisible. Why is that?

Morgan Housel
Well, I just made this point that wealth is what you don’t see. Wealth is the money that you did not spend on a house. It’s money that you did not spend on a car or jewellery or clothes. It’s money that you saved. It’s in your bank account or your brokerage account or the businesses that you’ve invested in. And because of that, money is invisible. If you see somebody driving a $100,000 car, the only thing that you know about them financially is that they have 100,000 fewer dollars than they did before they bought the car, or $100,000 more in debt, well, before they bought the car, whatever (inaudible) . . . 

Claer Barrett
Well, yes, much more likely.

Morgan Housel
So that’s the only thing that you know about them. And then the reverse is true. You can also meet people who are very wealthy, who are driving around in Hondas and Toyotas. And so, that’s again, like, wealth is invisible. And I think because of that, it’s hard, particularly for young people to know who to admire, to look up to, because most people, I think, they want wealth, they want the hidden wealth because what’s that’s gonna give them is independence and autonomy. Just let them do what they want to do. That’s what hidden wealth, invested money does for you. But we are more attracted to the visible wealth because we can wrap our head around it. We’re attracted to the people who live in mansions and drive fancy cars. And so it’s just a very . . . it’s interesting that wealth is what you don’t see. And I think that’s another thing that when you explain it, you’re like, of course that’s the case, how could it be any, how could it be otherwise? But we are so programmed by society to be attracted and to associate wealth with what we do see. 

Claer Barrett
Hmm. Now, you argued that we should all learn to be happy with less money. Do you wanna try and convince all the people listening to this show that this should be their aim? 

Morgan Housel
Well, I think I would phrase it a little differently, in terms of, look, I think you can use money to live a better life. Money can be an incredible tool for living a better life. I want more money because I think it can be used as a tool to make my life and my wife and kids’ lives better. So I am not anti-money in the slightest. I’m the opposite.

But I do think there is a point to make that the majority of your happiness in life will not be influenced by how much money you have. It’s not that money cannot make you happier, because it can for almost everybody. It’s just that if you were to make a list of the things in your life that are gonna contribute to your happiness, money might be like the 10th or 20th thing on that list and everything else that comes above it. But I think the problem is that so many people associate it as that’s gonna be the solution to their problems. They consider money as, like, the number one thing to pursue if you want to be happier. Another way to think about this is that I think all humans are wired to pursue status and success, but not happiness. They want to be happier, of course, but what their evolution, what their DNA tells them to do is to seek status by working harder, by showing off how much money you have, even if that is not necessarily a contributor to how happy you’re gonna be. 

Claer Barrett
Now, saving money is something that you touch on a lot in both books. Now, you would argue that even if you don’t have a reason to save, even if you’ve already done the wedding, you’ve done the holiday, you should still be putting money aside and striving to live below your means, because this will give you a greater chance of achieving financial independence in the future. 

Morgan Housel
And there’s two reasons for that. The first is that if you are only saving for the spending targets that you can envision, you’re only saving for the wedding, only saving for the holiday, then by definition, you are gonna miss the risks that you cannot envision every single time. And so saving for a risk that you cannot envision, I think, is the best, safest, most appropriate way to think about risk.

The other reason to just save without any target spending in mind is that what savings that you’re not spending does for you is it gives you independence. It gives you a level of freedom where, maybe at some level of savings, you can work for the company that you want rather than the company that you need to work for to pay your bills, or you can live in an area that gives you a shorter commute. At some level, you can retire on your own terms, like, just that level of independence in life is, I think, a major contributor to most people’s happiness. 

Claer Barrett
And another argument that you make very strongly is that time is one of the most valuable commodities that an investor can possess. 

Morgan Housel
You know, for most people the question that they want to answer as an investor is not: how can I earn the highest returns? It seems like the knee-jerk question that’s most important, but actually the most important question that you want to answer is: what are the best returns that I can sustain for the longest period of time? And the secret in investing is that average returns, even below-average returns sustained for an above-average period of time can lead to an extraordinary result. So I am a basic, plain-vanilla index fund investor. And that’s not my recommendation for others, but that’s how I invest. And one of the reasons that I do it is that if I can earn average index market returns for 50 years for an above-average period of time, the results will be incredible. The results will be astronomical. That’ll put me in the top probably 2 per cent of all investors by doing nothing.

Pimco, the big bond fund, had this phrase many, many decades ago. They called it strategic mediocrity, where they said, in any given year, they’re never gonna be in the top half, rated against their peers. But in any 10-year period, they’ll always be in the top decile. And I think that’s just a great way to think about how money compounds over time. You don’t want to maximise for returns per se, but you might want to maximise for are the returns that you can sustain for a very long period of time. 

Claer Barrett
You also make the point in Same As Ever that the biggest news story of the next 10 years is likely to be the thing that nobody’s really talking about today. And it did got me thinking about what that might be. And although AI is something that we are very much talking about today, I wondered what your views were on how that could potentially change the world of work and the world of investing. 

Morgan Housel
To me, what’s so interesting about AI is that if you look at the long history of world-changing technologies — the automobile, the aeroplane, the computer, the internet — all of these, what’s so interesting is that if you go back and look at how they were perceived, even the people who invented these things, the early forerunners of promoting these technologies had no clue where they were gonna go or where they were gonna end up. The people who were kind of the early forerunners of the internet in the early 1990s, I think most of them could not have envisioned the fact that you and I would be recording a podcast on opposite sides of the planet, talking in real time. 

Claer Barrett
Yeah. We just take these things for granted. 

Morgan Housel
And so . . . You take it for granted . . . But even the wildest optimists could not have seen this coming. And so when you look at AI today, it’s obvious that it is gonna be something big and incredible. That’s obvious from the first time that you use ChatGPT. But I think if history is any guide, and of course it should be, then even the wildest AI optimist I think cannot envision where it’s gonna go 20 years from now, 30 or 40 years from now. And that to me is actually, like, really exciting. That doesn’t mean it’s necessarily gonna be bigger than you think, or more transformational than you think. It’s just gonna impact your lives in ways that are very hard to foresee, which I just think is a really exciting thing about technology, is that asking people, where is this gonna go in 20 years? If you’re a student of history, the only reasonable response is nobody has any idea. 

Claer Barrett
Yeah. And for good or for bad as well. Lots of worries about what it could do to people’s jobs.

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Well, finally, finance is often a very fraught topic within families, for couples, within our relationships. Have you got any insights in your books into how we can stop arguing about money? 

Morgan Housel
I do think, and maybe this is the answer that people do not want to hear. But look, I’m not the first person to say, people are saying this for literally centuries, that the three topics that are so fundamental to your relationship are religion, kids, and money. If you and your spouse do not agree on those things, it’s gonna be really difficult to keep things going. So I think when you have a lot of couples who are like, we really disagree on money, that’s a very tough problem to solve versus going into the relationship. It’s like, make sure you agree on that before you tie the knot.

Again, that might be hard for people to hear. But I think that’s really true because for a lot of people, spending money or their relationship with money is critical to their identity of who they are. And if your identity is, I need to spend or I need to save, and your spouse disagrees with that, it’s really difficult to come to some sort of agreement, just like it would be with religion. If one person in your household is an evangelical Christian and the other is an atheist, very difficult to come to some sort of agreement on how you’re gonna bridge that gap. Very, very difficult. Not impossible, but very difficult. And I think for a lot of couples, there is some analogy to that with money.

And so this is where maybe like the stark advice is not on how to fix it, but it’s the advice to younger couples of like, make sure that you come to some sort of an agreement or that you see eye to eye early in your relationship, knowing how difficult it’s gonna be to bridge those differences later on. 

Claer Barrett
Well, yeah, exactly. If you have a dispute over a restaurant bill on an early date, imagine what it’s gonna be like owning a house with that person. 

Morgan Housel
(Laughter) It’s such a good analogy, yes. 

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Claer Barrett
The new year is traditionally a time that we look at our money habits, and obviously reading your book will give people much greater insight into those. But do you have any advice for listeners as the new year approaches about how they could approach making changes? 

Morgan Housel
I think what’s true for everyone is that what I want out of money and my money goals and my investing strategies might not work for you. And it’s true for everyone. I think your relationship with money is similar to your relationship with music, where if I like classical music and you like pop, one of us is not right or wrong. It’s just a different taste. So for music or your taste in food, people understand that. But with money, for some reason people want to say, what is the best right answer? What is the thing to do? And I think you really have to understand yourself a little bit and to kind of look in the mirror and ask, like, what are your goals, even if those goals are different from your friends and your peers. You just kind of figure it out for yourself. That’s something that I always try to do at every phase of my life is just be like, what do I want out of life? Not what is the best thing to do on the spreadsheet, but like, what’s the life that I want to live, and kind of base my financial goals and strategies around that, making it much more individualistic, versus trying to find the right answer in a textbook. 

Claer Barrett
I think one of the reasons that so many people have bought your book is because you talk so clearly, you articulate these feelings, these emotions that we have about money. But talking to you on the show today, one thing that strikes me is that you do sound so, so certain and so, so confident about everything, which is wonderful. But do you ever have moments, Morgan, when you feel more uncertain or worried about finances? 

Morgan Housel
I don’t know if I would say worried, but the word I think would be humble. Not only do I not know what the market or the economy is gonna do next. I don’t know who I’m gonna be in five years. I know I’ll be a different person. My kids will be older. My career will be in a different spot. So the humility of not only how the world works, but the humility of what I’m going to want. One of the chapters in The Psychology of Money is called You’ll Change, because you will change, I will change. And it can be sometimes hard to create a long-term strategy if you, as an individual, are gonna be a different person in the future. So I think my main financial philosophy is humility, both at the individual level and at the broader macro societal level of just saying, like, look, the best we can do is to kind of roll with the punches and understand that things are gonna change and to have some guiding philosophies and guiding principles, but never being wedded too firmly to one thing. 

Claer Barrett
Well, a great way to round off the show today. Morgan Housel, thank you so much for joining us on Money Clinic today. 

Morgan Housel
This has been so much fun. Thank you for having me. 

Claer Barrett
And listeners, if you would like to read more, Morgan’s books, The Psychology of Money and the new one, Same As Ever, are both published in the UK with Harriman House.

That’s it for Money Clinic this week and we hope you liked what we heard. We’re always looking to chat with people about their money issues on the show. So if you’re interested in being part of a future episode, then email us. Our address is money@FT.com. You could also take a peek at our website FT.com/money, grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB.

Money Clinic was produced in London by Philippa Goodrich. Our sound design is by Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music, and Cheryl Brumley is the FT’s global head of audio.

And finally, our usual disclaimer: Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. See you back here next week. Goodbye.