55 Morgan Housel, Teaching Finance through History and Psychology

1/14/2016

Connect with Morgan Housel

Morgan Housel came on the podcast to talk cognitive biases, personal finance, and writing. He took an interesting path to his current career and uses that to his advantage when teaching through his writing.

Today, Morgan is a partner at Collaborative Fund and a former columnist at the Motley Fool and The Wall Street Journal.

He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers and was selected by the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013 he was a finalist for the Gerald Loeb Award and Scripps Howard Award.

Morgan’s Book Recommendations
The Intelligent Investor by Ben Graham
Confessions of a Street Addict by Jim Cramer

Morgan’s Writing
Financial Advice for My New Son
122 Things Everyone Should Know About Investing and the Economy
Why I’m an Optimist

Twitter
LinkedIn
Website

Morgan’s Challenge; Go out and read things that you know you are going to disagree with to round out your view of the world.

Underwritten by Piper Creative
Piper Creative creates podcasts, vlogs, and videos for companies.

Our clients become better storytellers.

How? Click here and Learn more.

We work with Fortune 500s, medium-sized companies, and entrepreneurs.

Sign up for one of Piper’s weekly newsletters. We curate links to Expand your Mind, Fill your Heart, and Grow your Tribe.

Follow Piper as we grow
YouTube
Instagram

Subscribe on iTunes | Stitcher | Overcast | PodBay

Watson: Morgan, thank you so much for coming on my podcast. I'm really excited about this.

Morgan Housel: Thanks for having me here. Good to be here.

Watson: There's so much I want to talk to you about, but I want to start off by just hearing the story of how you decided that you wanted to become a writer and maybe, more specifically, that you went to write about business and finance.

It's not necessarily a traditional path that people would take. I know that you studied Economics at the University of Southern California, but you really had kind of a, I don't know if you'd be comfortable with me saying this, but a meteoric rise in the world of business and finance writing. You're still relatively young, you contribute to the Wall Street Journal, you work at the Motley Fool. You do a lot of cool things. How did you get interested in all this?

Morgan Housel: Well, I think when I look back, there was really no decision. I think it just kind of happened slowly, and to take you back, I think when I was fairly young in my teens, I knew I wanted to focus my career around investing. I didn't exactly know why, but I think it's a popular and attractive field to a lot of people just because it's numbers, and it looks exciting and fast-moving.

It really caught my attention, and all throughout college, my idea was to go into investment banking. That too is a pretty popular choice. I think for a lot of young people who are planning out their careers in finance, because from the outside, it looks exciting and fast moving and it looks like there's a lot of prestige and a lot of money, and you can become big and successful.
That's kind of the outside view of investment banking.

I think it was my Junior year in college when I started interning at an investment bank. You know, this has been my dream for years. So, to actually be doing this and to walk into a bank and like, ‘Oh my gosh, we're actually doing this.’ It was so exciting for me.

Then, it was like this colossal crashing down disappointment of almost instantly like the first day realizing I don't want to do this. I think investment banking is less well known today, but definitely 10 years ago, this was a case where you could make the most money, and finance was investment banking.

There's a reason for that, and the reason is one that most young students, I don't think paid that much attention to, is that because when you work in investment banking, your life is objectively miserable. They had had this saying at the bank I worked at, which was, ‘if you don't come in on Saturday, don't bother showing up on Sunday.’

It wasn't even the hours- the culture of investment banking really turned me off. It was just so ferociously competitive, and some people would thrive in that environment. They do thrive in that environment. I think my personality was much more geared towards slowing down and trying to take a step back and looking at the world of investing.

So very quickly, I realized investment banking wasn't going to work. Then I had an internship in private equity, and that I really liked because that was sort of like investment banking. You kind of take a step back, and the tone and pace is much more removed and lower than it is in investment banking. The focus is on investing rather than deal-making. It was about long-term investing in good companies that you wanted to buy. That was really appealing to me. That was the summer of 2007, which of course, soon after that, the financial system imploded. If you are working in a private equity company that relies on borrowing lots of money to make your investments, things got pretty itchy around that office.

Then it was clear to me. I was a senior in college, I guess, at this point. It was clear I needed to find something else to do in investing. I didn't know what it was going to be, a hedge fund or work in a mutual fund, something. I really didn't know. I was kind of adrift at that point.

I had a friend who was a writer at the Motley Fool, and I kind of stumbled upon some of his work. It was just awesome to me that he was just writing about stocks that he owned, and he liked giving his opinion and had kind of a platform to share his views with the world. I thought that was really neat.

I applied and they let me start writing.I guess that was, you know, nine years ago and I'm still here. There's really no decision. I didn't think of becoming a financial writer. It was something I just kind of stumbled upon by accident, I guess. I can't believe it's been nine years now, but here we are.

Watson: Gotcha. I want to go back to you. You said you found this interest while you're still in your teens. Was there a family member or someone that exposed you to that world when you were young? I'm a similar experience, and my mom has pictures of me sitting on the couch with my dad watching Louis Ruekeyser’s Wall Street Week show when I was maybe 8. I barely understood a single word that they were saying, but there's probably some subconscious memory of that ingrained in my brain that led me to an interest in finance. Was there anything like that, that you felt like set that base?

Morgan Housel: Well, nothing quite that similar. My grandfather owned a small bank in upstate New York, a very small bank, so I guess there was finance in the family, but I was so disconnected and removed from it, and never really talked to him about it. I think one thing that stands out was I was probably 16 or 17, and I scrounged up a thousand bucks. I think it was just from jobs that I had been working at. I can't recall how it came about, but I put it in a CD certificate of deposit, and I must have intuitively known how interest works and why I was putting money in a CD, like here's how they're going to pay you interest and you get paid a certain amount. I must have intuitively known how it works, but I vividly remember logging into my account and the balance had gone from $1,000 to $1,000 and 3 cents. I just remember it was like, it was the most astounding thing I'd ever seen.

It was only 3 cents. It just took me aback that somebody paid you to do nothing. I sat back and went about my day and someone paid you to do that, and even though it was such a tiny amount, it was just seeing it actually occur, kind of set the investing edge that this is a really cool thing that you can do. You can make investments in various securities, various companies or stocks or bonds or CDs like that and get paid for it. It was like this side job that you can make money without working. Of course there is work that you need to do, and investing quite a bit of it, but just the concept of getting paid for investing in something really took me pretty quick.

It was clear to me, I think from that moment that I wanted to be involved in investing. So, after that is when I started learning about it as much as I could, and I was reading as many books about it as I could.

Watson: Gotcha. Any books in particular that stand out as your favorites or were particularly impactful for you?

Morgan Housel: The first investing book that I think I read was Jim Kramer's book called “Confessions of a Street Addict.” I thought that was really good. I really think that before his TV days. Before his shtick kind of became zany and, you know, having these loud buttons that he pushes, he really was, and still is a very smart guy with a fascinating career. So, that book I found really interesting. Of course that was from the perspective of a stock trader, which I never got interested in, and still don't have any interest in, it’s kind of a lower view in the investing realm. But hearing his story, it's a very well written book. So hearing that story was pretty interesting.

That was the first time that I really started reading about what the investing industry is like. If you start searching around, ‘I'm new to investing, what book should I read?’ You're inevitably going to come across, well you should read, Ben Graham's “The Intelligent Investor.’ I did, but I think I read it so early that a lot of it was over my head. I think there were points, conceptually that I took away from the value investing philosophy, but a lot of that book, even if it's written in a fairly low key way, if you're brand new to investing, it can be a little intimidating.

Watson: So, once you set about on this new job with the Motley Fool and your job now, having experienced the investment banking world, you've experienced the private equity world, and now you're tasked with basically informing and educating the public about stocks and about personal finance about this world.

How do you go about, or do you have a process by which you decide what you want to explain, how you find topics to discuss, maybe your writing process itself? Do you have like a time every day that you set aside for writing? Anything like that as far as your process?

Morgan Housel: One thing that a lot of writers will come across is that most professions get easier over time. You get experience, and you get a process of doing things, and it becomes easier. If you're a doctor with 30 years experience, seeing a patient is probably much easier than it was when you were just out of medical school.

Writing, I think might be the opposite because you start running out of things to say, and as time goes on, you've really picked the low hanging fruit, and it becomes much more difficult with every passing year to think of something new to say.

This is where I think financial media in general might have a problem because when you have nothing new to say, there are two options, basically. You can repeat yourself or you can make something up. Ofter, it goes to the later. I think a lot of people who read financial news can relate with that.

A lot of times, that’s what we would call noise. Just information that is not relevant or is pandering to whatever the market did today. Did you really try to stay away from that? You are forced to kind of repeat yourself, and there's a financial writer named Jonathan Clements, who has said, ‘there's really only about 20 articles to write in finance.’

If you're a finance writer, they're really only 20 unique things that you can say that are unique, important topics, and everything after that, you're just kind of saying the same thing in a different context. That's something I can definitely relate to. For the last several years, I feel like I've been saying the exact same thing, but trying to put it in a different context, and how I try to put it in a different context is kind of relating the basic investing philosophies to other fields and other industries.

The only way to do that is to be constantly reading about other fields and other industries, reading about history, psychology, sociology, or physics, or biology, or something- just reading about other topics and seeing how you can interrelate finance and investing to other fields. A lot of my day in terms of the writing process is just what I would just call casual reading, I guess. Reading biographies, reading books, reading newspapers, reading other financial writers, and you just try to put pieces together until something sticks.

A lot of times they don't stick. It gets difficult to try to find something new, and a lot of financial writers that I've talked to, some of the best financial writers would say, look, ‘if they write 30 articles per year, there's only two of them that they are really, really proud of.’

I think that ratio is probably pretty consistent among financial writers. It's difficult to really say something unique. There's something truly insightful day after day, week after a week. But if you're casually reading and just trying to put the pieces together of how the world works, you'll stumble across some insights once in a while that you feel help the world and help your readers figure out the world of investing a little bit better and think differently than they would have otherwise.

Watson: Outside of this regular casual reading that you're doing, are you setting aside a specific day of the week or time of day or anything like that to bang out the writing or is it more of a, you know, you're casually reading and then you hit that ‘well, there is something I can write about.’ Then you jump to the page or you make your notes so that when it's time to write, you're able to recall?

Morgan Housel: I think most writers have some sort of quota that they need to hit. There is some professional pressure that you need to submit something by this date and time, and I have those pressures. So there's not pure flexibility to be casual when you're going to write it. Something, I would say to that though, is when I started an article office, sometimes I really have no idea where it's going to end. I found that similar when talking to other writers, that it's kind of the same. You start with an idea and you start writing it down, and then as you're writing it down, other things come to you or it becomes clear what you're trying to say. I think that speaks to one of the neat things about writing, which is that it's just a really great way to clarify your thoughts. Once you put them on paper and start writing about them, you think of them in different ways than you would have if you were just thinking about it in your head. So, a lot of times, it just starts with one, one idea that comes to you, and you start writing it. Then it just kind of spills out from there.

Something that I really try to do with the writing process is go back and delete as much as possible. The best writing I think is when you can explain something in the fewest words possible. So after I've written a draft, I try to go back and pretty viciously delete sentences, delete whole paragraphs, and even entire topics in there to try to cut it down and make it as clean and as possible.

In terms of, you know, the day to day writing process, when I wake up in the morning, I do my reading. Most writers,there've been studies on this, are most creative in the morning. Right when they wake up, that's their peak creativity for the day, because their mind is fresh.

They don't have buckets of emails that they had just responded to, or they didn't have a meeting that they just got out of. They wake up with a fresh brain, and that's when they're most creative. I've never been really able to do that. So, I wake up and I'm pretty much useless before I've had a pot of coffee, and that's when I wake up and read for several hours, and I have meetings and talk to some people. Then, I do most of my writing in the evening.

Watson: Gotcha. Well, thank you for sharing that. That's very insightful. Kind of getting into the actual content of the advice that you're giving, and these 20 to 30 articles that every finance writer writes, one of the things that goes under appreciated sometimes, or maybe to someone who hasn't had the experience of studying finance or business is that it's not just pure numbers.

It's not. Well, some would argue accounting isn't even pure numbers. But as you mentioned, these histories, these books/biographies, the study of psychology and sociology really go deeply into managing your finances and making sound financial decisions. Cognitive biases are a huge part of the self-reflection part when making sound financial decisions- why do you think that? It isn't always realized that this plays such a large role in the realm of finance?

Morgan Housel: Here's one example. I've used this example before, and it's from an investor named Dean Williams, who first gave this analogy. There are two types of physics. There's classical physics, which teaches you know, I have a ball and here's a ramp, and you can measure precisely, how fast, how far that ball is going to roll down the ramp. It's very clean and very clear. Then, there is nuclear physics, which teaches you that the world is much more uncertain and messy and things don't always work in the way that you think they would work. So you have Heisenberg's Uncertainty Principle, which teaches you that, when you're looking at atoms and neutrons and whatnot, we'll even know exactly what we're looking at because we don't know if the act of looking at something is going to change what we're looking at. It’s much harder to measure what's going on in that world.

The analogy is that investing as much is not like classical physics. It's much more like a world where things are messy and uncertain, and the forces that move financial markets and become important in investing are counterintuitive and move in ways that we don't think that they should.

So on paper, if you think of investing like classical physics like it's something clean that we can measure with precise precision, then you might think that you can just focus on the numbers and tear apart a company's balance sheet and plug it into some formulas and come up with data that's going to tell you exactly how the economy and the stock market should move in theory, but that's not how it works. The economy and the stock market are moved by these crazy messy, counterintuitive forces of human behavior. So I think from one point of view, a really common point of view is really that finance should be able to work because finance is a math based subject, that it's accounting and numbers- that if we grab ahold of the numbers and have enough data and plug them into enough formulas, that we can kind of grab capitalism by the horns and figure out what the stock market and the economy are going to do next.

I just think there's so much evidence proving that doesn't work, and it's not that math and data and numbers and formulas aren't important. They absolutely are. I think there's so much evidence that it's the messy, uncertain, counterintuitive forces of human behavior and the biases that we all fall to that moved markets over time, and that caused recessions.

It caused bull markets and bear markets. That's kind of what I've tried to focus on in investing, or what are these biases and human behaviors that we all fall for, and in some ways I think are impossible to control and that move markets over time, because that's where I think investors can find an edge. It’s what's important to markets and investing over time.

Watson: Gotcha. When you mentioned the cognitive biases, you've written about some of these in articles of yours. It is a component of the education that you're trying to share with readers. Is there any way that learning about cognitive biases or just digging deeper into that realm has affected your personal life, maybe outside of finance writing itself, like recognizing that you are commonly committing the similar cognitive errors or anything like that?

Morgan Housel: Oh, definitely. I think one of the biggest problems when you're reading about cognitive biases is that there's such a tendency to assume that these flaws that you're reading about apply to other people, but not yourself. It's difficult sometimes to take a step back and admit that you are just as susceptible to these problems as anybody else.

I think if you can come to that admission, it's humbling, and you start to take your own ideas and your own beliefs and your own outlooks less seriously. I think if there's one big impact on my personal life, it has made me more skeptical of things that I believe myself, and I'm much less certain about things that I was in the past.

I'm much more open to the idea that things rarely go according to plan and your outlooks are really just ways that you fool yourself, and your beliefs in the market are incomplete because everyone's beliefs about not just investing, but most things, most beliefs we have about religion or politics or economics are really just reflections of the experiences we've had in life and the people that we've met in life.

Both of those things are largely outside of your own control. I think if you look at it in that way, there's so much out there in the world that you don't see and haven't experienced that if you did see and experience, you would think much differently about these things than you currently do.
That can be a humbling and kind of disappointing realization to make, but it's made me much more skeptical and maybe a little passive about how I go about investing.

Watson: Gotcha. Definitely humbling, and I think it also made me take a more positive view as it really allows you to kind of let things go. If something unpredictable comes up, not that you can predict the unpredictable, but it allows you to say, ‘well, this type of stuff happens,’ and you aren't necessarily just completely thrown off your rocker by this type of day to day event.

Morgan Housel: Yeah. You know, there's a great quote from Benjamin Graham where he says, ‘the purpose of the margin of safety is to render the forecast unnecessary.’ What he means by that is that if you have room for error in what you're doing, your forecasts don't need to be accurate because then you can get to a situation where you say ‘is the stock market going to rise this year? Well I have no idea, but I don't need it to rise this year to meet my goals. I don't need the market to rise this year to pay my bills this year.

Now, are we going to have a recession this year? Well, I have no idea. If we do, I'll be okay because I have an emergency fund, and we'll be able to weather the storm. That's where I think people add value to their own financial lives is when you start just building in margins of safety in your portion of portfolios and your professional life, because that's when you start admitting that most of the outcomes are out of your control and that's how you deal with it.

It's not about perfectly forecasting what's going to happen next. It's about being prepared for a variety of things that could happen next.

Watson: Despite your acknowledgement of that there, do you often get asked to make forecasts or predictions, or have you maybe trained your audience or the people around you to not really try that?

Morgan Housel: I hope I've trained the audience because I never make forecasts, and if I do, I try to couch it in a way that makes it clear that I don't take my own forecasts very seriously. One story about that was a radio show probably four or five years ago. Before they started talking with the producers, they said, ‘we're going to watch your six month market forecast.’

I said, ‘Oh, I don't do that. I don't have one.’ They said, ‘Oh, well, we're not going on for another 10 or 20 minutes before we start recording, so you have time to come up with one.’ To me, they're nice, good meaning people. But, I think that too is a problem with the media, that we take something as complex as the stock market or the global economy where there are literally billions of moving parts if not trillions. You think you can just tame it in your head in the next 10 minutes, and you try to come up with a forecast of what it's going to do next. That's a common view.

If you watch financial TV, you really do get the impression that these people are just making a forecast off the top of their head, because they effectively are. I think if you look at the history of forecasts and the accuracy of these forecasts, you'll realize that when you make up a forecast off the top of your head, you're getting what you pay for.

Watson: Absolutely. Do you think that the realm of finance and personal finance in general is something that could be better taught at a lower education level? So there's opportunities to go find your own education out there on the internet. If you're in college, there may be classes or maybe something like the very last year of high school that's optional.

Do you think that that's something that we potentially underserve the next generation by not incorporating that to a higher degree in the classroom?

Morgan Housel: Let me give you two answers. I think, yes, we absolutely don't teach it enough because finance is one of the few things that every single person, no matter what you do, no matter what your career path, no matter if you go to college or if you win the Nobel Prize, no matter what you do, finance is going to impact your life.

You know, we're all going to need to budget and pay bills. That's something that affects everybody, but we don't teach it like that's the case. When you're going through high school, everyone has to take math and science and chemistry, which is great. That's how it should be. A lot of those topics aren't going to directly impact people's lives in the way that finance will, and everyone's lives will be impacted on finance, but we teach it as an optional thing that maybe if you're interested in it, here's a way to learn about it.

In that sense, I think it's wrong. When we teach finance, I think we can go about it wrong, and there's some really interesting studies that are counterintuitive and shocking to people that financial classes, the people who take those classes, whether it's a personal finance class or an introduction to investing class, the outcomes of people who take those classes can sometimes be on average, worse than the people who didn't take the classes.

You ask why that could be. When the researchers have dug into this, there's some really, there's some fascinating research by a professor named Lauren Willis at Loyola Law School. One of her big thesis is because, especially with financial education, it can increase confidence faster than ability. So, people come and take a basic finance course, and then they think they're George Soros and then they can go start day trading their 401k because they took a quick online introduction to investing course, and it increases your confidence faster than ability. So, on one hand, yes, we should be teaching finance more than we do, but we need to be careful about how it's taught.

I definitely think rather than teaching the analytical basics of finance, we should teach finance from a history and psychology point of view because if you teach someone about the basics of a stock, and here's what the PE ratio is, and here's how shares outstanding work, you teach them these basic things. They're probably not going to learn as much practical skills about the stocks. They're not gonna learn as many practical skills about the stock market then if you taught them the history of the stock market, and here's how compound interest works, and here's the value of long-term investing. Those are the kinds of things that I think are valuable to teach people, but we often don't worry. They're not teaching people at all or we're teaching them the wrong thing.

Watson: Absolutely. I think that's a great note to start wrapping up on. Before we tell listeners how to connect with you and you issue a personal challenge to the audience, is there anything that I didn't give you a chance to say, Morgan?

Morgan Housel: No. I really only have a few things that I write about anyways, getting back to what we talked about. So, there are only a few points. One thing that I think is important in investing, and this might seem obvious, but a lot of people, I think overlook it, is that to get ahead in investing, you have to either do something that other people can't or do something that other people are not willing to do.

It has to be one of those two things. That's how you compete because there are so many competitors out there with you and investing. Hedge funds and banks and mutual funds that you are effectively competing against. If you want to get ahead of them, you have to either be smarter than them or do something that they're not willing to do.

To say that you're going to be smarter than everyone else out there, is a pretty big stretch. That's the odds that you will be smarter than everyone else, then the collective wisdom of all of their investors is pretty low. Where I think investors, most investors can find an edge is by doing something that other people are not willing to do.

The biggest thing they can do with that is take a longer view of investing than most people will. The overwhelming majority of professional investors are really focused on about a 3 to 12 month view of the markets. If you, as an investor can just lengthen that and say, you're only going to be concerned with what the market does over the next 5 or 10 years, then you have a very powerful edge over the competition. It's not that other investors can't take that view, it's that they're not willing to do it because they have these pressures in their job that forced them to focus on the next 90 days or the next 6 months. If you're willing to overlook that and really be a long-term investor, that's where I think investors can find the biggest edge over their competitors.

Watson: I like it. Morgan, thank you so much for coming on the show. If people want to connect with you, learn more about you, read some of your writing, where is the best place to find you in the digital world?

Morgan Housel: Yeah, the best place is probably on Twitter. My handle is @tmfhousel. That's my Twitter handle. That's where I spend half of my day. It's probably the best way to get a hold of me.

Watson: Cool. That will be linked to in the show notes as always at goingdeepwithaaron.com/podcast. We will wrap things up by giving Morgan the mic one last time to issue a personal challenge.

Morgan Housel: My personal challenge, it's difficult to do, but I think it's the best way to learn is to go out of your way to read things that you know you're going to disagree with. There's so much confirmation bias in investing because there's so much financial content out there that you can find data and information and opinions on virtually anything you want to.
When people start with belief about where the stock market's going next, or how they feel about the economy, and then they go out and seek opinions that confirm those views, you're just doing yourself a giant disfavor.

My challenge to people would be to think about how you feel about investing or politics or this year's election and different presidential candidates, and really challenge yourself to read views that you disagree with because that's how you learn. I think the best case scenario that I think you will often find with that is that if you can read different opinions with an open mind, you might say to yourself, ‘Oh, there's a point that I never thought of. I didn't think of it that way.’ Then, you've gained some knowledge. The worst case scenario is that you read those different views and then you still come to the opinion that your original views were correct.

But, if you spend all of your day reading stuff, that confirms what you already believe, not only are you not gonna learn anything, but you start rolling down this dangerous path of just confirming what you already believe. This makes you much less open-minded and much less able to learn new things.

Watson: Absolutely. I actually have a friend who is the master of playing the devil's advocate, so he does exactly what you said. He's very well read across both sides of the aisle, across all sorts of different views on things, and the way he exercises that is through arguing the opposite of it. If he finds out someone has a strong opinion in one direction, he'll just argue the opposite side because he knows that side and he understands it. Even if he doesn't necessarily feel that way, he'll flex that muscle that way. Truthfully, he is one of the most, no one's unbiased, but you know, not terribly biased, even-keeled people.

I think that's great advice. Thank you so much for that, Morgan. We just went deep with Morgan Housel. I hope everyone out there has a great day.

1 Comment

Going Deep with Aaron Watson

60 Mike Gable, The Building Material Reuse Revolutionary

59 Aaron Walker, Coaching Entrepreneurs to Live a Life of Significance

58 Jim Jen, Founding & Running One of the Top Accelerators in the World

57 Eric Brown, Raising Palestinian-Israeli Awareness with Impact Games

56 Talking Kickstarter, Thank Yous, and Facing Your Fears

55 Morgan Housel, Teaching Finance through History and Psychology

Connect with Morgan Housel

54 Patrick van der Valk, Beach Ultimate Trailblazer and Executive Consultant

Show Notes

Archives

Subscribe

Details

LOGISTICS