WEBVTT - At the Money: Behavior Beats Intelligence (Podcast)

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<v Speaker 1>The finance types tend to focus on attributes like intelligence,

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<v Speaker 1>math skills, and computer programming. But it turns out financial

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<v Speaker 1>success is less about knowledge and more dependent on how

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<v Speaker 1>you behave and make decisions than raw intelligence. How you

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<v Speaker 1>behave with money matters more than what you know about money.

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<v Speaker 1>I'm Barry Redults and on today's edition of At the Money,

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<v Speaker 1>we're going to discuss how to make sure your behavior

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<v Speaker 1>is not getting in the way of your portfolio. To

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<v Speaker 1>help us unpack all of this and what it means

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<v Speaker 1>for your investments, let's bring in Morgan Housel. He is

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<v Speaker 1>the author of The Psychology of Money. The book has

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<v Speaker 1>received widespread acclaim for its insightful approach to personal finance

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<v Speaker 1>and has sold six million copies worldwide. So Morgan, let's

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<v Speaker 1>start with your main thesis. Financial decisions in the real

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<v Speaker 1>world are influenced by our personal history, worldviews, ego, pride,

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<v Speaker 1>too many other factors to list. It's not just mathematical calculations,

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<v Speaker 1>that's right, Barry.

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<v Speaker 2>I think one analogy here would be think about health

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<v Speaker 2>and medicine. You can have a medical degree from Harvard

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<v Speaker 2>and know everything about biology and have all that insight

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<v Speaker 2>in that intelligence, but If you smoke and you don't

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<v Speaker 2>need a good diet and you're not getting enough sleep,

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<v Speaker 2>none of it matters. None of the intelligence matters unless

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<v Speaker 2>the behavior actually clicks and is working. And finance is

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<v Speaker 2>the exact same. You can know everything about math and

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<v Speaker 2>data and markets, but if you don't control your sense

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<v Speaker 2>of greed and fear and you're managing uncertainty and your

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<v Speaker 2>own behavior, none of it matters. So this is why

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<v Speaker 2>finance is one of the few fields where people who

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<v Speaker 2>do not have a lot of education and financial sophistication,

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<v Speaker 2>but if they have the right behaviors can do very

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<v Speaker 2>well over time.

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<v Speaker 1>Sounds like behavior over knowledge is the key. Why is

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<v Speaker 1>it that how we behave matters so much more than

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<v Speaker 1>what we know? Does financial knowledge? It all insulate us

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<v Speaker 1>from poor decision making?

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<v Speaker 2>I think it can. Of course, there are lots of

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<v Speaker 2>professional investors who are extremely good at what they do.

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<v Speaker 2>But what is important is that behavior is the base

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<v Speaker 2>of the pyramid. What I mean by that is, if

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<v Speaker 2>you have not mastered behavior, none of the financial intelligence

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<v Speaker 2>that lies on top of that matters. And this is

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<v Speaker 2>why you have professionals who have all the great background

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<v Speaker 2>and all the data, all the connections that the amateurs don't,

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<v Speaker 2>who still do very poorly. And it's so counterintuitive in

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<v Speaker 2>investing that the harder you try, it's very often that

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<v Speaker 2>the worse you do. And it's counterintuitive because there aren't

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<v Speaker 2>many other areas in life that are like that. If

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<v Speaker 2>you want to get better at sports, if you want

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<v Speaker 2>to get better at a lot of different professions, you

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<v Speaker 2>need to try harder. You need to work harder, you

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<v Speaker 2>need more information, you need more into and investing it's

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<v Speaker 2>usually the opposite. It's the people who just leave it

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<v Speaker 2>alone and go enjoy the rest of their lives and

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<v Speaker 2>leave their portfolio alone to compound uninterrupted for years or

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<v Speaker 2>decades tend to be the ones looking back who have

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<v Speaker 2>done the best.

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<v Speaker 1>Don't just do something. Sit there, that's right. It seems

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<v Speaker 1>obvious we should have a long term perspective in financial

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<v Speaker 1>planning and investing, and yet we tend to get pulled

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<v Speaker 1>into impulsive short term thinking. Why is this?

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<v Speaker 2>I think it's largely because there is so much information

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<v Speaker 2>to do. So if the stock market were opened once

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<v Speaker 2>a year, that would actually be fine. And you know,

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<v Speaker 2>once a year that it was open, it would go

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<v Speaker 2>up ten percent or down twenty percent whatever you would do,

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<v Speaker 2>but it would just be once a year, whereas in

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<v Speaker 2>investing we have literally all day, all day of information,

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<v Speaker 2>stock tickers, it's always in your face. You're always going

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<v Speaker 2>to hear about it immediately. That has always been the case.

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<v Speaker 2>That was true in the nineteen twenties, and today it

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<v Speaker 2>is even more true because of social media and you're

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<v Speaker 2>getting all this information bombarded at you, and think about

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<v Speaker 2>the value of your house. Most people would not, you know,

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<v Speaker 2>wake up and turn on CNBC and say, what are

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<v Speaker 2>the analysts saying about the value of my house today?

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<v Speaker 2>They just know that the house. You're like, like, look,

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<v Speaker 2>I'm going to live here for five or ten years,

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<v Speaker 2>whatever it might be, and I expect the value will

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<v Speaker 2>probably go up. Maybe it goes up a lot, maybe

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<v Speaker 2>goes up a little. It's not that big of a deal.

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<v Speaker 2>And because there's not a lot of information now, what's

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<v Speaker 2>interesting is that Zillo, I think, has innocently changed that

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<v Speaker 2>in the last decade or two, where now people can

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<v Speaker 2>check every day and see if the value of the

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<v Speaker 2>house went up yesterday on Zillo, like what's the essment

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<v Speaker 2>of this? Oh, oh, we went down ten thousand dollars yesterday.

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<v Speaker 2>What's going on here? And so it's you know, the

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<v Speaker 2>more information you have, the more temptations you have to

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<v Speaker 2>pull the levers and fiddle with the knobs and try

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<v Speaker 2>to figure out what the best portfolio solution is. The

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<v Speaker 2>irony is that people paid less attention to what they're doing,

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<v Speaker 2>they would probably do better over the long run.

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<v Speaker 1>Let's talk about the role of luck in financial outcomes.

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<v Speaker 1>How important is it for investors to recognize the luence

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<v Speaker 1>of serendipity.

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<v Speaker 2>Well, luck, in my description, is just things can happen

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<v Speaker 2>in the world outside of your control that you have

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<v Speaker 2>no influence over that have a bigger impact on outcomes

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<v Speaker 2>than anything that you did intentionally. That's what luck is,

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<v Speaker 2>and it plays a tremendous role in investing. We don't

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<v Speaker 2>like to talk about it or admit it because if

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<v Speaker 2>I say Barry, you got lucky, I look jealous and bitter.

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<v Speaker 2>And if I look in the mirror and I say, Morgan,

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<v Speaker 2>you just got lucky, that's hard to accept as well.

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<v Speaker 2>But to me, you know, there's lots of people who

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<v Speaker 2>will push back on that and say they'll come up

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<v Speaker 2>with quotes and say, oh, the harder I work, the

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<v Speaker 2>luckier I get to me, that's just not what luck is.

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<v Speaker 2>Luck is like, by definition, if you can work harder

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<v Speaker 2>and do better at something, then it's not luck, it's skill.

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<v Speaker 2>To me, the biggest elements of luck and investing are where, when,

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<v Speaker 2>and to whom you were born, what generation are you from,

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<v Speaker 2>what country were you born, and who are your parents.

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<v Speaker 2>You have no control over those things. Nothing you can

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<v Speaker 2>do to influence that. But investors who you know, were

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<v Speaker 2>born in the nineteen fifties started investing in a very

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<v Speaker 2>different climate with different uppertunities, and investors who started who

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<v Speaker 2>were born in nineteen seventy or nineteen eighty totally different

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<v Speaker 2>and it's out of your control. And you know, Bill

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<v Speaker 2>Growth is a great bond investor. I think he's been

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<v Speaker 2>on your program several times. He made this comment about

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<v Speaker 2>his career perfectly aligned with a forty year collapse in

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<v Speaker 2>interest rates, which if you're a bond investor, is pretty

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<v Speaker 2>pretty darn good. Now, look, he did better than other

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<v Speaker 2>bond investors, so it's not to say that was all luck.

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<v Speaker 2>But he himself once mentioned he said, look, if he

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<v Speaker 2>was born twenty years earlier or twenty years later, it

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<v Speaker 2>would have been a very different career. That is what

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<v Speaker 2>luck is in investing.

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<v Speaker 1>That's an amazing example. So, given the role of luck

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<v Speaker 1>in our lives and how unpredictable things can be, let's

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<v Speaker 1>talk about flexibility and adaptability. How important is it for

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<v Speaker 1>us to be able to adjust our plans to changing circumstances.

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<v Speaker 2>Well, then give you one example. It's one thing to

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<v Speaker 2>say I'm a long term investor. I'm investing for the

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<v Speaker 2>next twenty years. That's great. But if you are saying

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<v Speaker 2>I'm to retire in twenty years, even though that's a

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<v Speaker 2>long term time horizon, basically what you're saying is I

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<v Speaker 2>need the market to be in my favor in the

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<v Speaker 2>year twenty forty four. That's what you're saying. If you

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<v Speaker 2>have a twenty year time horizon, and maybe in twenty

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<v Speaker 2>forty four the market is great, maybe it's not. Maybe

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<v Speaker 2>we're in the middle of the Second Great Depression by then.

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<v Speaker 2>So rather than just a long term time horizon, what

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<v Speaker 2>you want is a flexible time horizon. You want to say, look,

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<v Speaker 2>I hope to retire in about twenty years, and maybe

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<v Speaker 2>I'll be in a position to sell part of my portfolio.

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<v Speaker 2>Then maybe I need to wait a couple years longer.

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<v Speaker 2>Maybe I need to work a couple of years longer.

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<v Speaker 2>The more that you need the market in the world

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<v Speaker 2>to align with your specific goals, the more you are

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<v Speaker 2>relying on bucking chance, and the more that you can

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<v Speaker 2>be adaptable and flexible to what the market's doing, what

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<v Speaker 2>the economy is doing. The better you have, the better

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<v Speaker 2>chance you have of putting the odds of success in

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<v Speaker 2>your favor.

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<v Speaker 1>So it's not just that we have to leave room

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<v Speaker 1>for error. We also have to leave room for chance

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<v Speaker 1>when making long term plans.

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<v Speaker 2>Yeah, imagine if you are someone you are an investor

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<v Speaker 2>in the nineteen eighties, and you said going to I

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<v Speaker 2>have a long term time horizon. I'm going to retire

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<v Speaker 2>in March of twenty twenty. That's my retirement date. And

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<v Speaker 2>in March of twenty twenty, I'm going to liquidate half

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<v Speaker 2>my portfolio whatever it might be. If you said that

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<v Speaker 2>in the nineteen eighties, I was like, oh, great, you

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<v Speaker 2>have a thirty or forty year time horizon in front

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<v Speaker 2>of you. What happened in March of twenty twenty. The

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<v Speaker 2>world's melting down with COVID, the lockdown's market falls forty

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<v Speaker 2>five percent whatever it was, and so that's why you

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<v Speaker 2>need to have a level of flexibility and adaptability. It's

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<v Speaker 2>not just what the economy is doing and what the

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<v Speaker 2>market's doing. It's you trying to align your specific time

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<v Speaker 2>horizon to a market and an economy that does not

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<v Speaker 2>know or care what your goals are.

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<v Speaker 1>So let me ask you a simple question that you

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<v Speaker 1>talk about throughout the book. Does money by happiness?

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<v Speaker 2>I think there's two answers to that question. One is,

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<v Speaker 2>if you are already a happy person, and you have

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<v Speaker 2>a good marriage, good health, good friends, good disposition, then

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<v Speaker 2>it can. Absolutely you can use money as a tool

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<v Speaker 2>to leverage your already happy life. If you are someone

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<v Speaker 2>who is already depressed and in poor health and don't

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<v Speaker 2>have good fred connections and hate your job, then by

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<v Speaker 2>and large it will not. And not only will it not,

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<v Speaker 2>it can actually lead to a source of hopelessness, because

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<v Speaker 2>when you are poor, you might say, if only I

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<v Speaker 2>had money, all my problems would go away. And then

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<v Speaker 2>when you might gain money, you gain some wealth, you

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<v Speaker 2>realize that it doesn't and then you lose your sense

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<v Speaker 2>of hope. And so that's one part of it. The

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<v Speaker 2>other answer is does it lead to happiness? The answer

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<v Speaker 2>is probably not. Does it lead to contentment? The answer

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<v Speaker 2>is probably yes. Now, contentment is a positive emotion, it's

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<v Speaker 2>a great thing, but it's not happiness. Happiness is waking

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<v Speaker 2>up grinning ear to ear. That's by and large not

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<v Speaker 2>what money does to people. If you're a very wealthy person,

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<v Speaker 2>Bill Gates, Elon Musk, Jeff Bezos, do not wake up laughing, smiling.

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<v Speaker 2>It's just not how it works. But can it lead

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<v Speaker 2>to a sense of contentment of Look, I've achieved a

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<v Speaker 2>lot of my goals. I'm really proud of the work

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<v Speaker 2>that I did, and I'm content that I can now

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<v Speaker 2>live the rest of my days with a sense of independence. Yes,

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<v Speaker 2>that's not happiness, but it's a positive emotion that I

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<v Speaker 2>think we should strive for.

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<v Speaker 1>So let's talk about other aspects of money. How should

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<v Speaker 1>investors think about saving and spending? What kind of practical

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<v Speaker 1>advice can you give there?

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<v Speaker 2>Daniel Kannoman, the great psychologist who passed away not too

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<v Speaker 2>long ago, He said, the best definition of risk is

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<v Speaker 2>a well calibrated sense of your future regret. You need

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<v Speaker 2>to be understand what you're going to regret ten twenty

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<v Speaker 2>thirty years in the future, and that's that should you know,

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<v Speaker 2>may you know lead to the amount of risks that

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<v Speaker 2>you're going to take. I think it's the same for

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<v Speaker 2>spending and saving. When you're thinking about should I spend

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<v Speaker 2>money today the kind of like Yolo philosophy, or should

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<v Speaker 2>I save for tomorrow, save for the rainy day and

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<v Speaker 2>let my money compound. What you need to understand is

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<v Speaker 2>what you're going to regret in the future. Are you

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<v Speaker 2>going to be on your deathbed and look back and say,

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<v Speaker 2>I saved all this money and look at all the

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<v Speaker 2>vacations that I didn't take, look at all the all

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<v Speaker 2>the cool cars that I didn't buy. That's a sense

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<v Speaker 2>of regret. You also might live for today and spend

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<v Speaker 2>all your money, and now now you're suddenly you're eighty

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<v Speaker 2>years old and you don't have any money, and you

0:10:58.400 --> 0:11:01.440
<v Speaker 2>regret that you didn't save. It's different for everybody, and

0:11:01.480 --> 0:11:03.480
<v Speaker 2>you need to have a well calibrated sense of regret.

0:11:03.800 --> 0:11:06.560
<v Speaker 2>I'll give you my personal example right now. I have

0:11:06.840 --> 0:11:09.439
<v Speaker 2>two young children and I've been a heavy saver for

0:11:09.520 --> 0:11:12.200
<v Speaker 2>my entire life. If Heaven forbid, I were on my

0:11:12.280 --> 0:11:15.880
<v Speaker 2>deathbed tomorrow, I would not regret in the slightest that

0:11:15.920 --> 0:11:18.440
<v Speaker 2>I have saved all this money because I would take

0:11:18.480 --> 0:11:20.600
<v Speaker 2>so much pleasure knowing that my wife and kids will

0:11:20.640 --> 0:11:23.160
<v Speaker 2>be taken care of because I saved. Now, Will I

0:11:23.200 --> 0:11:25.520
<v Speaker 2>still think that when I'm eighty years old and hopefully

0:11:25.520 --> 0:11:27.640
<v Speaker 2>my kids are established and earning their own money. Of

0:11:27.679 --> 0:11:30.920
<v Speaker 2>course I might. At that point, I might regret that

0:11:30.960 --> 0:11:32.840
<v Speaker 2>I'm eighty years old and saved all this money that

0:11:32.880 --> 0:11:35.360
<v Speaker 2>I could have spent otherwise. So it changes throughout your

0:11:35.360 --> 0:11:37.560
<v Speaker 2>own individual life as well.

0:11:37.760 --> 0:11:40.600
<v Speaker 1>So it's kind of surprising to me. We're ninety percent

0:11:40.640 --> 0:11:44.520
<v Speaker 1>through this discussion and we really haven't talked about investing

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<v Speaker 1>very much. What are the keys to being a successful

0:11:48.440 --> 0:11:49.559
<v Speaker 1>long term investor?

0:11:50.080 --> 0:11:52.480
<v Speaker 2>I think a lot of it is understanding how common

0:11:52.559 --> 0:11:55.960
<v Speaker 2>and normal and unavoidable volatility is. It's so common that

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<v Speaker 2>even professional investors when the market falls ten twenty thirty

0:11:59.720 --> 0:12:03.320
<v Speaker 2>percent have a sense they respond to it with the

0:12:03.360 --> 0:12:05.440
<v Speaker 2>idea that the market is broken, that like, this is

0:12:05.440 --> 0:12:07.600
<v Speaker 2>the equivalent of a car accident or a plane falling

0:12:07.600 --> 0:12:09.320
<v Speaker 2>out of the sky, and you need to take a

0:12:09.400 --> 0:12:13.400
<v Speaker 2>critical action right now because you know it's bad. And

0:12:13.480 --> 0:12:16.480
<v Speaker 2>by and large that's not the case. The vast majority

0:12:16.480 --> 0:12:20.079
<v Speaker 2>of even severe volatility is completely normal and unavoidable, and

0:12:20.120 --> 0:12:22.160
<v Speaker 2>if you're a student of market history, it happens way

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<v Speaker 2>more often than people like to think. And so what

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<v Speaker 2>you're getting paid for as an investor is the ability

0:12:27.640 --> 0:12:30.480
<v Speaker 2>to put up with and endure uncertainty and volatility. That's

0:12:30.520 --> 0:12:32.760
<v Speaker 2>the cost of admission. And when you view it like that,

0:12:32.840 --> 0:12:35.520
<v Speaker 2>then when you do have a big bat of volatility,

0:12:35.760 --> 0:12:38.480
<v Speaker 2>even that might last for years, it's not fun, you

0:12:38.480 --> 0:12:40.880
<v Speaker 2>don't enjoy it, but you say to yourself, this is

0:12:40.920 --> 0:12:43.040
<v Speaker 2>the cost of admission for earning higher returns that I

0:12:43.080 --> 0:12:45.240
<v Speaker 2>could earn in bonds or cash over the long run.

0:12:46.040 --> 0:12:49.760
<v Speaker 1>And our final question, why is it that getting wealthy

0:12:50.440 --> 0:12:54.640
<v Speaker 1>and staying wealthy are such different skill sets?

0:12:55.840 --> 0:12:59.079
<v Speaker 2>Getting wealthy, I think requires being an optimist, optimistic about yourself,

0:12:59.120 --> 0:13:02.400
<v Speaker 2>optimistic about the economy, taking a risk. Staying wealthy is

0:13:02.400 --> 0:13:04.760
<v Speaker 2>like the exact opposite. You need to be a little

0:13:04.760 --> 0:13:09.240
<v Speaker 2>bit pessimistic and paranoid, and you need to admit to

0:13:09.280 --> 0:13:12.320
<v Speaker 2>yourself and acknowledge that all of economic history is a

0:13:12.360 --> 0:13:16.240
<v Speaker 2>constant chain of setbacks and surprises and recessions and bear

0:13:16.360 --> 0:13:18.679
<v Speaker 2>markets and pandemics that you need to be able to

0:13:18.760 --> 0:13:21.880
<v Speaker 2>endure for your long term optimism to actually pay off

0:13:21.920 --> 0:13:22.280
<v Speaker 2>in the end.

0:13:23.120 --> 0:13:26.640
<v Speaker 1>So to wrap up, to succeed in markets as an investor,

0:13:26.960 --> 0:13:30.800
<v Speaker 1>you have to understand the psychology of money. You have

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<v Speaker 1>to understand why it's not just about knowledge or math

0:13:34.559 --> 0:13:40.200
<v Speaker 1>or even computer programming, but highly dependent on your behavior.

0:13:40.640 --> 0:13:43.600
<v Speaker 1>Get your behavior in the control and you're ninety percent

0:13:43.600 --> 0:13:46.960
<v Speaker 1>of the way there. I'm Barry Rdults. You've been listening

0:13:47.320 --> 0:13:59.079
<v Speaker 1>to At the Money on Bloomberg Radio. Knowledge of the

0:14:01.320 --> 0:14:05.760
<v Speaker 1>Hodge round Round