in: Career & Wealth, Podcast, Wealth

• Last updated: March 4, 2022

Podcast #659: Do You Want to Be Rich or Wealthy? (And Why the Difference Matters)

When we think about finance, we typically think about numbers and math. My guest today, however, argues that doing well with money is less about what you can put on a spreadsheet and more about what goes on in your mind, and that if you want to master personal finance, you’ve got to understand how things like your own history, unique view of the world, and fear and pride influence how you think. 

His name is Morgan Housel, and he’s an investor, a financial journalist, and the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. Morgan kicks off our conversation by explaining how doing well with money is less about what you know and more about how you behave, and illustrates this point by comparing the true stories of a janitor who saved millions and a prominent Wall Streeter who went bankrupt. He then explains how the seemingly crazy decisions people make around money actually make a kind of sense. From there we get into why you need to know the financial game you’re playing and not play someone else’s. We then turn to why it’s hard to be satisfied with your position in life when your expectations keep rising and why not continually moving your goalposts is the most important skill in personal finance. We discuss how getting off the never-ending treadmill of wanting more requires seeing money not just as a way to buy stuff but to gain greater autonomy, keeping the “man in the car paradox” in mind, and understanding the distinction between being rich and being wealthy. We then talk about the underappreciated, mind-boggling power of compound interest, using the example of Warren Buffet, who made 99% of his wealth after the age of 50. We then discuss why you should view volatility in the stock market as a fee rather than a fine, why pessimistic financial opinions are strangely more appealing than optimistic ones, and why it’s best to split the difference and approach your money like a realistic optimist. We end our conversation with the two prongs of Morgan’s iron law for building wealth.

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Brett McKay: Brett McKay here, and welcome to another edition of The Art of Manliness podcast. When we think about finance, we typically think about numbers and math. My guest today, however, argues that doing well with money is less about what you can put on a spreadsheet and more about what goes on in your mind, and that if you want to master your personal finance, you’ve got to understand how things like your own history, unique view of the world, and fear and pride influence how you think. His name is Morgan Housel, and he’s an investor, a financial journalist, and the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. Morgan kicks off our conversation by explaining how doing well with money is less about what you know and more about how you behave, and illustrates this point by comparing the stories of a janitor who saved millions and a prominent Wall Streeter who went bankrupt. He then explains how the seemingly crazy decisions people make around money actually make a kind of sense, if you look into it a little more deeply. From there we get into why you need to know the financial game you’re playing and not play someone else’s.

We then turn to why it’s hard to be satisfied with your position in life when your expectations keep rising and why not continually moving your goalposts is the most important skill in personal finance. We discuss how getting off the never-ending treadmill of wanting more requires seeing money not just as a way to buy stuff but to gain greater autonomy, keeping the “man in the car paradox” in mind, and understanding the distinction between being rich and being wealthy. We then talk about the underappreciated, mind-boggling power of compound interest, using the example of Warren Buffet, who made 99% of his wealth after the age of 50. We then discuss why you should view volatility in the stock market as a fee rather than a fine, why pessimistic financial opinions are strangely more appealing than optimistic ones, and why it’s best to split the difference and approach your money like a realistic optimist. We end our conversation with the two prongs of Morgan’s iron law for building wealth. After the show’s over, check out our show notes at Alright, Morgan Housel, welcome to the show.

Morgan Housel: Thanks so much for having me.

Brett McKay: So you got a new book out, The Psychology of Money, where you basically encapsulate all your thinking about, you’ve done about money and investing, I mean, some big principles, and this is the culmination of sort of your work, your career. For those who aren’t familiar with your work, can you tell us a bit about your background and how it led up to this book?

Morgan Housel: Yeah, so my whole background has been a financial writer. I write about the history of finance, the history of investing in economics, and I’m interested in the psychology side of money, so not necessarily, what should we do with our money? Where should we invest it? I’m interested in what’s going on inside people’s heads when they make decisions with their money about what to spend, what to save, where to invest, what’s going through their heads? That’s what I’m interested in, the history of how people think about money. That’s always been my kind of beep. Now, this is what’s important, is that I kind of stumbled into writing in 2008. It was not part of my plan. I wanted to go into finance, work in private equity, be a big investor. I stumbled into writing kind of haphazardly because in 2008, the world was falling to pieces, I needed something to do, I just graduated college, there were not a lot of private equity jobs available, but I did find a job as a financial writer. I was writing for The Motley Fool at the time.

And so it was never part of my plan, but what was interesting is that obviously what happened in 2008 was a global financial crisis where the global economy fell to pieces. Now I spent my early years as a writer trying to answer the question of what happened? Why did people make the decisions that they did during the housing bubble during the financial crisis? What were people thinking? And have we learned our lesson? Will we do it again? There was no Aha moment, but I kind of realized, as the years went on, that the answers to those questions could not be found in any economics textbook or any finance textbook, but you could find subtle clues about why people behave the way that they did in a psychology textbook, and a sociology textbook, and a political science textbook, which just led me to the belief that I think we generally tend to think of finance as a math-based field, like it is charts and numbers and formulas and data, or like it’s something like physics, where two plus two equals four.

And that’s always been true, that will always be true. It’s very clean and very precise. And I just don’t think finance is actually that. Finance is much closer to something like psychology where it’s a soft mushy topic with a lot of nuance, where I will think about risk different than you will, different from someone else who’s listening. People in the United States think about money different from people who live in other parts of the world and vice versa. It’s a much more nuanced topic that has a lot to do with not necessarily the decisions that we do make with our money, but what’s happening inside of our heads. So that just led me to this belief that was really important in finance, it’s not what you know, it’s how you behave. It’s not how smart you are, it’s not where you went to school, it’s not how sophisticated you are, in terms of making financial decisions, it’s just about things like your relationship with greed and fear, and your ability to take a long-term mindset, and how gullible you are, who you trust. Those are not the typical ways that we think about finance, but I think those are the single most important parts of finance. So that just led me down this road of behavioral finance, and the book is written as 19 short stories that highlight the most important parts of behavioral finance in my view.

They’re fairly short chapters. I did that out of respect for readers. I’m a big reader myself, I’m sure lots of listeners are themselves, but I don’t finish a lot of books because I think most books do not require 300 pages of explanation to get your point across. So I wanted to write short chapters, each of which can kind of live on their own to make some of the most important parts about how we think about money, how we think about saving and investing, and how we can think about finance and risk in a more productive way.

Brett McKay: Alright, so let’s go back to when you said there… ’cause one of the main arguments in the book is that success in finances, success and money isn’t based so much on how much you know or your sophistication and knowledge of investing and things like that, but how you behave. Can you give us an example of someone who knows a lot about finances, money investing, monetary theory, but still doesn’t do very well with their money, and then someone like the opposite, someone who not very sophisticated when it comes to finances, but nonetheless, they make out pretty well with their finances?

Morgan Housel: So there’s two people that I profile in the introduction of the book, and these are both true stories. These are all real people. One is a guy named Ronald Read, and Ronald Read is about the humblest guy you can ever imagine, even if you’re cherry-picking, like central casting the most humble guy. He worked as a gas station attendant and a janitor his entire life. He was, by all accounts, from those who knew him, he was a lovely gentleman, but he just had a very down-to-earth demeanor. His friends who knew him said that the only hobby that he had was chopping firewood. He was the first person in his family to graduate from high school. Just one of these down-to-earth guys. And when he died, Ronald Read shocked everyone who knew him, who learned that he left, I think, $7 million to charity, to his local hospital, some local libraries. And everyone who knew him said, “Where did Ronald Read, this gas station attendant and janitor, gets $7 million? And they started digging through his papers, and they realized that there was no secret, there was no inheritance, there was no lottery winnings. It was nothing like that.

All he did was he saved what little he could as a janitor, and he invested it in blue chip stocks, just stocks in big large cap companies, and he left it alone for 50 years. And that compounded, that grew into this fortune that he left to charity. Now, one other person that I profiled in the story is a guy named Richard, and Richard had almost the exact opposite upbringing of Ronald Read. He was born to a wealthy family, he went to Harvard, he got his MBA from University of Chicago, he went to work on Wall Street in the 1980s, and he truly became one of the most important men in global finance. He was a vice chairman for Merrill Lynch. He retired in his 40s to pursue charitable activities. That’s just how successful he was. And what’s so interesting about where these two stories collide, these two men never knew each other, but shortly after Ronald Read died, Richard filed for personal bankruptcy. He told the bankruptcy judge that the financial crisis of 2008 completely wiped him out. He had no money left, no income, no assets, and I just think it is so fascinating. The juxtaposition of these two stories is fascinating because I don’t think there’s any other field where those stories are even possible. There’s no other field other than finance, where someone with no education, no background, no sophistication, no training, can massively outperform someone who has the best education, the best training, the best background.

I think what that really highlights, we were talking about earlier, is that Ronald Read, the humble gas station attendant, had the psychology side of money mastered. He was patient, he took a long-term perspective, he left his money alone, he saved diligently, and he just left his money alone, he wasn’t being too greedy, he just let it compound over time and built a fortune. And Richard was, I think, the opposite. He had all the resources in the world to do well financially, and he just swung for the fences too hard. He had a lot of debt, a lot of leverage, like way over his head with debt. He had several homes, each of which was more than 25,000 square feet, these massive, sprawling mansions, he had several of them, all had massive mortgages on them that he couldn’t keep up with during the financial crisis. So even though he had all the knowledge, the financial sophistication, the greed side, I think, just caught up with him. So I think those are extreme examples, but to me it’s just there are very few other industries where that’s the case. You can have all the financial sophistication in the world, but if you do not manage your relationship with greed and fear, it has the ability to neutralize all of the financial sophistication that you have. That’s true for everybody.

Brett McKay: Well, I think it goes to… I think a lot of people, when it comes to their finances, I know I went through a phase where I used to devour as many personal finance books as possible, or investing books as possible, and eventually you realize they all say the same thing. There’s nothing new here, and the trick is just like putting those really simple things into practice.

Morgan Housel: Yeah, I think what’s really important is that the most important stuff in finance is very basic and very boring. It’s not dissimilar to diet and exercise, where look, the key to health, not everything, but what moves the needle the most is eat a good diet, get some exercise, sleep eight hours a night, don’t smoke, don’t drink too much. That’s the key to success, but it’s very boring. If you are someone who has a PhD in Biology from MIT, you don’t wanna focus all your time on that stuff, you wanna be doing molecular biology stuff, you wanna do the really complicated, complex, intellectually stimulating stuff. So that’s where your attention goes, even if by paying attention to the complicated stuff, you start to ignore, to discount the basic stuff. I think it’s true in finance as well, where some of the smartest people… To tell them, “Hey, live below your means, save your money, by a diverse low-cost portfolio and be patient,” that’s like 90% of what you need to know to do well in investing over time. But it’s not exciting. It’s not intellectually stimulating. So if you are a very smart finance person, you are probably spending a lot of your time focusing on really complicated investments, deep into the weeds, trying to figure out what companies are doing the best, where industries are going next.

And it’s not that that’s bad, that you shouldn’t do that, but if doing that takes away any of your focus from the simple stuff like living below your means, making sure you can afford your debts, etcetera, that kind of stuff, then none of the complicated stuff that you’re doing is gonna matter, or the basics that you ignore will just neutralize it and overwhelm it, which is exactly what happened to Richard.

Brett McKay: Alright, so as you said, you organized this book into 18 or 19 big chapters, not big chapters, like they’re big ideas, but they’re small and concise and easy to read. And the first one is, no one is crazy. Now, in your introduction, you talk about what led you to start writing about finances. One of the things you explored was the meltdown that happened in 2008 that was driven, in big part, by the housing bubble. And we look at that back on that now, it’s been 12 years. I mean, well, that was just collective craziness, like people just went crazy. So how was that not… What was not crazy about the housing bubble of 2008?

Morgan Housel: I mean, look, I think one of the takeaways is that people do crazy things with their money all the time. They make terrible decisions with their money. They make just bone-headed decisions, they blow money, they make terrible investments, but no one is actually crazy. What I mean by that is when everyone makes a decision with their money in real time, it is checking all the boxes that they need to in their head in that given moment. And look, in hindsight or to another person, those ideas might look crazy, but to you in any given moment, it makes sense to you. And something that’s really important about this is that all of us have had very different backgrounds, we come from different upbringings, different generations. Some of us were born in different countries, live in different countries. Our parents raised us with different values, we’ve had different amounts of luck, whether it’s good luck or bad luck in our life, that has given us a different view of the world. And so we all have a different view, a different model in our head of how the world works. The assumptions that I have about how the economy works and how the stock market works are different from those that you have, different from those that everyone has.

We all have different views. I mean, one really simple way to frame this is, look, if you were born in the United States in 1950, then during your teens and 20s, your young, impressionable years, the stock market went nowhere, adjusted for inflation, zero percent return during your teens and 20s. Your introductory experience to the stock market is, this is a joke where you don’t earn any money at all. If, by contrast, you were born in 1970, then during your teens and 20, the market went up 10-fold during your teens and 20s. So just as you were born 20 years apart, in your early years, you got a completely different view about how the stock market works, and that will stick with you for the rest of your life, shape your expectations, shape your views of risk. And it’s not that one generation is smarter or has better information than the other generation, it’s just that they grew up seeing something different. They see the world through a slightly different lens that shapes how they think about risk, and that is why people can make decisions that makes sense to them, but are crazy for other people, that look crazy for other people. I mean, one more recent example of this is after the 2008 financial crisis, gold, as an investment, became very popular. When the Central Bank was printing a lot of money after the financial crisis, the generation that gold was most appealing to during that period was baby boomers.

If you look at the baby boomers’ children, they’d never experienced inflation in their life. If you are a millennial, you’ve never experienced any amount of significant inflation in your entire life. But if you are a baby boomer and you came of age in the ’70s and ’80s, you remember when inflation was off the charts, and you remember gas lines, and you remember watching your paycheck disintegrate to inflation week after week. That stuck with you for the rest of their life, and that was why, even in 2008, gold was most appealing to one generation and had almost no appeal whatsoever to a younger generation. They had just seen the world through a different lens, and it would be easy for a millennial to criticize a baby boomer for wanting to own so much gold after 2008. And that is why the decision to the money may have looked crazy. To the baby boomer, who has the emotional scars left over from experiencing inflation, it’s not different whatsoever. I’ll give you one more example that I think is maybe the most powerful that I use in the book. If you look at who buys lottery tickets, what group of Americans buys the most lottery tickets, and by far the most lottery tickets? It is the poorest Americans, the lowest decile of Americans based by income, buy the majority of lottery tickets. They spend an average of $400 per year on lottery tickets.

It would be very easy for myself or you or a lot of people listening to this to hear that statistic and say, “Well, that’s crazy. They’re making a bad decision. If you are so poor that you can barely afford to pay your bills, but you’re spending $400 a year on lottery tickets, that’s crazy.” And maybe that is the right answer. Maybe we could just end there and move on. But I think if other people try to put themselves in the shoes of someone who is consistently in the lowest decile of income, then maybe their explanation for why they buy a lottery tickets would be something like this. They would say that they do not feel like they have the opportunity to advance in their career, to save their money, to invest their money like other people with higher incomes do, and therefore buying a lottery ticket is the only time in their life where they feel like they have a little bit of hope to get to the other financial side, to have the things… To have more security, to be able to buy what they want.

The only time that they have the possibility of that is not dreaming about getting a big promotion or making a great investment, the only time that they can feel that joy is by buying a lottery ticket. So even if it doesn’t make any sense to me or you, it might make perfect sense to them. And I think just that idea that equally intelligent people can come to very different conclusions, based off of their life experience, explains a lot about why we do what we do with our money.

Brett McKay: Last example, another thing I’ve heard too… Explanation of why poor people typically buy a lot of lottery tickets is that they don’t have a sense of agency because they got a bad draw when they were born, and like something just happened. So they get the idea that, well, the only way you can become successful, it’s just all luck. You have no control, so you might as well… And if you came from a middle class affluent family, you can see it by your actions, you can actually do things with your life and advance your life. But if you’re poor, that’s harder to do sometimes, harder to see.

Morgan Housel: Right. And it would be so easy to say like, should you or should you not buy a lottery ticket? That sounds like a math-based topic, you just calculate the odds of winning and it should tell you whether you should do it or not. But that’s not how people think about risk with their finances. It’s heavily tied to the generation you were born into, the country you live in, and your social economic status throughout the course of your life, so people come to very different conclusions about these topics.

Brett McKay: So what’s the big take-away from that, from that principle? It’s just like whenever you’re looking at your own money or how other people treat their money, just understand that everyone’s playing a different game, maybe?

Morgan Housel: We’re all playing a different game. Particularly, if you look at something like investing, there is one stock market, there is one Apple stock, there’s one Tesla stock that we all buy. We’re all in the same… We’re all playing in the same field. But people play very different games ’cause you… Just in the stock market, you have everything from day traders to endowments who are investing for the next century. And it would be crazy to think that a decision or information would be relevant to both of those groups. So you have the information that is very relevant to a day trader, that is not relevant whatsoever to a long-term investor. Now, this is really important if we’re talking about watching CNBC or reading the newspaper, where very often you will have a market pundit who comes on and says, making this up, “You should buy a Netflix stock.” They’ll say something like that. And the question I always wanna ask is, “Well, who is you? Are you talking to a 17-year-old day trader? Are you talking to a 97-year-old widow?” Because the decision whether you should buy a Netflix stock is gonna be completely different based off who you’re talking to. So again, this is an area where it is easy to view finance like physics. There’s one right answer.

And two plus two always equals four. But in finance, it’s just so much more nuance. There’s a financial advisor named Tim Maurer, who has a great quote that I love, and he says, “Personal finance is much more personal than it is finance.” And I think that explains so much of what happens in this field where there is no one right answer. I deal with this a lot. If you’re doing podcasts like this or media or whatnot, and people should say… Will say something like, “What should people do with their money? What should… ” And the answer that no one wants to hear, but it is always the best answer is, it depends on who you are. There are things that I do with my money that I honestly can’t explain on a spreadsheet, they don’t make a lot of analytical sense, and I would not recommend other people do, but they work for me. They work for my wife. It’s what we wanna do. And I think that’s a really important thing, just realizing that this is a very personal endeavor, and people have to be really introspective about who they are, what their skills are, what their weaknesses are, what they want out of life, what their goals are, and find a financial plan, a situation that works for them, even if it doesn’t work for other people, or even if they can’t necessarily even explain it on a spreadsheet.

Brett McKay: Yeah, that idea of knowing the game you’re playing and don’t play someone else’s game, that goes back to the… You talk about this, you make this connection in the book to the financial bubble, the housing bubble, the housing bubble that a lot of it was driven by people who were flipping houses, and for them it made sense to do that ’cause they weren’t planning on owning their home for very long, they’re just gonna fix it up and then flip it and sell it for a profit. But then other people saw that you could get really cheap loans and they thought, Well, I can just get a really cheap loan and get a really big house, but these people weren’t planning on flipping their house, they were planning on just staying there for 10-15 years, and they ended up just buying too much house than they could afford and everything just fell apart. Because, people were playing the wrong game, they weren’t playing the game… They were playing someone else’s game, basically.

Morgan Housel: Right. And what really happened here was you had the flippers who were just, oh you know, buying a condo and selling it the next month. That was one game. And then you had everyone else; the classic Americans buying a home for their family and to want stability. And the real issue with the housing bubble happened when the people who wanted a long-term house started taking their cues from the flippers who were playing a different game. Just like you said, once people said, “Oh look, home prices are going up, so we should buy. We can get a cheap loan.”

They got that information, they took those cues from the flippers who were driving the market, who were driving the prices up. Now, that’s when the damage happens. Bubbles cause their damage when people who are playing a long-term game take their cues from people who are rationally playing a short-term game. You can’t necessarily blame the speculators in the real estate bubbles, it was the flippers in a stock market bubble, it’s the day traders; I don’t blame those people at all because they’re playing a rational game for themselves. If you are a day trader in the stock market, and I don’t necessarily recommend that, but if you are then, if you were to ask the question, “Is Tesla over valued?” To a day trader it doesn’t matter. It doesn’t matter how the business is doing, it doesn’t matter what the valuation is, it doesn’t matter whether they’re gonna pay a dividend or whether Elon Musk is gonna get sued by the SEC.

None of that matters. All that matters to the day trader is, “Is the stock gonna go up in the next hour?” That’s it. That’s all that matters. But if you are a long-term investor, then all these statistics about how the business is doing, the fundamentals are doing, that is all that matters to them. So a price that is rational to one person can be irrational to another. Which is not something that is very intuitive in the stock market, we tend to just view it as, “Is Tesla a good buy, yes or no?” So I just think everyone needs to understand the game that they are playing. Their own time horizon, their own risks, what they all want out of their money, and just make sure that you are only taking your cues, getting your information, taking your advice from people who are also playing a similar game that you are. And go out of your way to actively ignore, not pay any attention, to people who are sending out cues but are playing a different game than you are.

Brett McKay: Well, so if individual case studies aren’t useful, you can’t like, Well… If you think, “Should I invest like Warren Buffet?” Well, you’re not Warren Buffet, so that’s not gonna be useful to you. How do you figure out overarching principles that everyone should follow, like how do you… Are there overarching principles that people should follow or is it just gonna be case by case?

Morgan Housel: I think as you’re talking about specific people, the big thing that’s important to realize here is that we tend to look up to and idolize and try to emulate the massive successes. We try to emulate the Warren Buffets, the Bill Gates, the Elon Musks, the Jeff Bezos, the LeBron James. The huge successes are the people who we admire. And it’s really important just as a rule of thumb, but a really strong rule of thumb, is that the greater degree of success, we’re talking about extreme success, the more luck played a role. That’s not to say it’s all luck. Warren Buffet, Jeff Bezos, all the guys, it’s not just luck, those guys and women are very skilled, very talented, put in a lot of effort, took the risk, did the right things, made the right decisions, of course, full stop. But in any degree of that level of success, there is an element of luck that is impossible to emulate. One example that I give in the book is that Bill Gates went to the only school in the United States that had a computer. So you could ask the question, Is Bill Gates skilled? Is he talented? Is he hard-working? Oh my gosh, yes.

He’s one of the most smartest, hardest-working businessmen of our time. But is he lucky? Yes, of course he is. He went to the only school in the United States that had a computer, that was his introduction to computers. He mentioned this in a speech he did several years ago, where he said, “If there was no Lakeside School,” which is where he went to school, “there would be no Microsoft.” I mean, that was how closely he tied it to his success. So if you are a young entrepreneur looking up to Bill Gates, which is great, you should realize that you cannot emulate that luck that he had, it was just a dumb luck thing. So the skills that you should be looking to emulate from him is his hard work, his business decisions, like, some of the big broad aspects of what he did. But you should not think that if you were to work as hard as he did and be as smart as he was, as analytical as he was, that you will achieve the same amount of success. Because you can’t emulate the luck that he had. This is true for almost any one of those major successes that you go down. It’s that… This is a hard topic, because whenever someone points to someone who is successful and says the word luck, it is very easy to just assume that that person is jealous or bitter or just kind of being a jerk.

If I say Bill Gates was lucky, I look like I’m jealous and I’m just kinda mean. So people don’t tend to do it, they don’t tend to ascribe luck to other successful people because it makes them look bad. And I don’t wanna subscribe luck to myself. Because if I look at the things that I am proud of in life and I just say, “Oh, Morgan, you just got lucky,” that’s a hard pill to swallow too. I don’t wanna say that, I wanna believe that the things I am proud of I did on my own. So it is very easy to sweep luck under the rug and just pretend it doesn’t exist, even if we know it exists, we know it’s a big factor in the world, it’s just easy to ignore. And this just makes it so that the big takeaways… And when we’re looking at other people, either from their successes or their failures, rather than getting really hyper-specific about what they did and trying to do that or trying to avoid what they did, we should take the biggest broadest takeaways that apply to lots of different people in lots of different fields.

And the things that sort of connect the dots, the common denominators across various people that we’re looking at, are the things that we should spend most of our time paying attention to, when we’re trying to learn lessons from other people.

Brett McKay: Alright, so one of the big principles that can lead to financial success, high level, is learning how to be satisfied with enough. And going back to that one guy you talked about, the example who’s the finance guy, knew lots of stuff, went bankrupt. That was an example of a guy who was like, he was never satisfied with just enough, he always wanted more. More money, more… Why is it? Why is it even when you are successful, you have enough where you didn’t have to work ever again, you still want more. What is going on there?

Morgan Housel: I think the big thing here is that probably the hardest but most important financial skill is getting the goalpost to stop moving. And here’s one way to summarize this. The median American income, household income adjusted for inflation, in 2020, is twice as high as it was in the 1950s. The median household adjusted for inflation is twice as rich today as they were in the 1950s. But we tend to look at the 1950s as the golden age of middle-class prosperity; that was when the middle-class family, you got a good job, have a good dignified life. But we are twice as wealthy today. So why do we have this nostalgia for what it was back then? I think the reason why, by and large, is that our expectations have grown more than our incomes have over that period.

The median family’s income grew by 100%, if it doubled, our expectations have increased by 120, 130%. You can actually quantify this. If you look at something like the median square footage of a new American home, in the 1950s it was about 900 square feet, today it’s about 2400 square feet. So our expectations of what is average, of what we expect in life, has inflated over time. And if you are someone who is lucky enough to have a rising income, a rising net worth, and your expectations rise at lock step with your wealth, with your money, you’re not gonna feel better off.

Very simple, obvious statement, but it is so incredibly powerful. And it’s important to realize that, look, we spend so much time focusing on how to increase your income, how to increase your wealth, and I think it is just important to spend time on trying to manage your expectations and keeping your expectations from growing faster than your income. ‘Cause it doesn’t matter how wealthy you are, if your expectations are rising with your income, you’re not gonna feel any better off. That’s a really important part. The second important part is that a conversation about what money is for and what we use money for. Like, what is the purpose of money? It seems like a silly philosophical question, but obviously I think there’s two main things to do with it. One is what the majority of people would consider, which is you use money to buy stuff, which is great; go out and buy a nice house, a nice car, nicer clothes, whatever it is, go on a nice vacation, use it to buy stuff. To me, the second part of money that I think is way more important and powerful for people but it’s so easy to ignore, is using money to control your time. Using money to give yourself a level of autonomy and independence where you don’t have to rely on the whims of other people to control your time, to control your schedule.

To be able to wake up every morning and say, “I can do whatever I want today.” That is the thing, the other thing that you can do with money besides buying stuff, that is so important. And I think it’s easy to ignore that, and it’s easy to just focus on “the money is to buy stuff” aspect of money. That’s what you use it for, so no matter how much money you gain, it’s always, “Well, I bought a Honda but now I have more so I’ll buy a BMW now. I bought a BMW but now I have more money so maybe I’ll get the Mercedes. Now I got the Mercedes, maybe I’ll get the Ferrari.” And you just… That game never ever ends. And so if the game never ends, I think it’s just… The only way that you can beat a game that never ends is to not play it, and go out of your way to keep the goalpost from moving. And a lot of people would say, “Okay, if I’m gonna earn more money but not spend it, what is the purpose?” And that’s where it gets back to using that money, using that savings to build wealth to gain independence and autonomy and control your time, and that is something that I think people will never necessarily get used to or get accustomed to.

If you buy a nice house or a nice car, the evidence shows, I think everyone knows, it’s not that it won’t bring you joy, it’s that you will get accustomed to that joy fairly quickly. But controlling your time, waking up every morning and saying, “I can do whatever I want today,” that is a level of happiness, a level of joy that you will probably never get accustomed to. Doing that, waking up every morning with autonomy and independence is something that will bring a smile to your face every day. And so that is I think the purpose of money that is so easy to ignore, and why a lot of people with a lot of money still don’t feel that happy with their money, that all of us can think about as a way in order to be happier with our money that we do have.

Brett McKay: So how do you do that? How do you prevent the goalpost from moving?

Morgan Housel: It’s a hard thing to do. I think, there’s one story that I use in the book called, Man in the Car Paradox. And it came from when I was in college, I was a valet at a very nice hotel in Los Angeles. And so all kinds of incredible cars would come in, Ferraris, Lamborghinis, Bentleys, the whole fleet. And I started realizing when I was a valet that when a Ferrari came into the hotel, I did not care about the driver. I never thought about the driver, I didn’t look at the driver. I cared about the car. Now, when the driver came in, he probably… As he’s pulling into the hotel, he’s probably thinking to himself, “Everyone’s looking at me. Everyone thinks I’m cool. Everyone’s impressed with me. Everyone wants to be me.” But the reality was, no, I didn’t care about him. I pictured myself in the driver’s seat and I thought to myself, “If I was driving, people would think I’m cool.” I didn’t think he was cool, I thought if I was driving people would think I’m cool. And this was this irony about, no one is more impressed with your stuff than you are.

And once you realize that no one is more impressed with your stuff than you are, it takes a lot of the pressure off of the social treadmill, the rat race of having new stuff, and having fancy stuff that serves no other purpose than sending a social signal. Look, I like, I admire beautiful cars and nice homes as much as anyone else, but I think if you really try hard to think about how little people are impressed with your stuff, or your ability to overestimate how impressed people are with your stuff, it takes a lot of the pressure away from that. But what does bring me a lot of joy and happiness, hopefully for other people, for people who I admire, the skills, the traits that I admire in them, is people who have control over their time, control over their lives, who aren’t relying on other people to work when someone else wants them to work, on a project that someone else wants them to do. People who control their destiny and control their time is what makes me happy and it’s what I admire. So I think it’s just a subtle shift in mindset about what you want in life and what other people are thinking about you, that can go a long ways.

But the most important thing about this though, is that getting the goalpost to stop moving, while it’s the most important financial skill, it is not easy. It’s a very difficult thing to do. There’s no easy answers to this. But I think it is so powerful, so impactful on finance, that we need to be spending a lot more time thinking about how we can control our own goalpost, rather than just letting it grow with our success over time.

Brett McKay: Yeah, philosophers and religions have been battling, have been trying to figure that out for thousands of years, how to be satisfied with what you got instead of wanting more.

Morgan Housel: It’s not an easy thing. And I think it’s different at various stages in your life. If you are a person who is looking for a spouse, looking for a mate, looking for a boyfriend, looking for a girlfriend, your ability to social signal that you are successful, to put out your peacock feathers, is very important. To have nice clothes, to drive a nice car, that’s an important thing if you’re trying to signal to a mate, that’s a real thing. That was me in my early 20s, for sure. If you are happily married in a stable relationship, it is significantly less important. Or if you are in a field where your outward appearance is really important, you’re a high-powered lawyer, whatever it is, you need to show your clients that you’re dressing well, then it’s important. I work from home and I’m a writer, it’s a lot less important for me. So it’s different for everyone and at different phases of your life.

Brett McKay: And another point that is related to this that you make in the book, is you have to understand the distinction between being rich and being wealthy. I think most people, particularly young people, they focus on being rich. What’s the distinction between the two?

Morgan Housel: Rich I would define as, you have enough money to go out and buy stuff; you have enough money in your checking account today to go out and buy something. And you use that money to go out and buy stuff. You have a nice car, you have nice clothes, you have a nice house, you’ve used money to buy stuff. Wealth, I think is almost the opposite. Wealth is what you don’t see. Wealth is the money that you have not spent. It’s the cars you didn’t purchase, it’s the house you didn’t purchase, it’s the first-class upgrades that you didn’t buy, it’s money in the bank or invested that you have not spent yet. And what’s important about this is that wealth is invisible, you don’t see it. You can see people’s cars, you can see their house, you can see what kind of clothes they wear. By and large you cannot see their bank account, you can’t see their brokerage statement, so you can’t see their wealth. You can see people’s richness or lack of richness, you cannot see their wealth though. This is a big problem, I think, because I mean think about something like physical exercise. If someone is in very good shape or in very poor shape, you can see it. You can see their muscles, you can see if they’re obese, it’s visible, it’s right in front of you clear as day. So it’s easy to say, and I think we all do this, “Oh, I would like to look like this person, I don’t wanna look like that person.” It’s easy to see, “Okay, I should do this, I should not do that.”

Wealth is not that though. Who do we look up to as someone who we admire if we can’t see their wealth, if it’s invisible to us? And of course, like we said earlier, there are people who have no outward appearance of wealth but are very wealthy. And people like Richard, who have a huge outward appearance of wealth, 25,000 square foot mansions, and they’re actually broke. This is something else I learned as a valet in Los Angeles; people would come in to the hotel in very fancy cars, and over time I got to know some of them, and I would talk about, What do you do? What business are you in? Where do you work? And I learned that some of these people who were driving very expensive six-figure cars were not that successful.

They were mediocre successes who spent most of their income on a car lease. And this is the thing, the car was their richness, but I couldn’t see their wealth, and once you get to know them and you get a better sense of their actual wealth, you realize there’s not much there. It’s just the classic fake it til you make it. There’s this great quote that I love in the book from several years ago; Rihanna, the singer almost went bankrupt, and she sued her financial advisor, and the financial advisor has this quote that I love, where he said, “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?” And I think that’s a quote that applies to so many of us, that if you’re spending money on things you’re gonna end up without the money.

That’s what it is. So it just depends on like, What do you want? Do you want things or do you want wealth? Like, I want wealth to have a level of independence, that’s what I want, so things take a back seat to my wealth, even if it’s money that I have not spent and I might never spend it. I want the wealth there to give me independence. So it’s just a subtle way of looking at what we want out of the world and realizing that so much of what we’re trying to learn about is not visible to us, so we have to go out of our way to learn about it, about how other people are doing it, and what our own situation is since it’s not outwardly apparent and visible to us in the world.

Brett McKay: So one way to develop wealth is you wanna hold onto your money, but you wanna invest it for the long term, because that’s when the power of compound interest comes into effect. And I think people have heard of compounding, but it can still be hard to wrap your mind around. And you gave some great examples to really put it into perspective, like one was Warren Buffet. Most of the money that he has today, his billions of dollars, wasn’t made til after his 60s, and it’s all because of compounding.

Morgan Housel: Yeah. We’re gonna look at Warren Buffet’s net worth. He’s worth something like $90 billion, he’s 90 years old. But if you look at the course of his life, 99% of his net worth came after his 50th birthday, and something like 97% came after his 65th birthday. That’s just how compounding works. Compounding is not something where the big returns come in a year or in a decade, it’s something that takes place over the course of a lifetime. And it’s important for someone like Warren Buffet to say, Look, he’s 90 years old, he’s been investing full-time since he’s been 10 years old. So he’s been investing for 80 years. Now, what’s really important is that the math on this is very simple. You can hypothetically say, Okay, if Warren Buffet did not start investing when he was 10, let’s say hypothetically he started investing when he was 25, like a normal person. And let’s say hypothetically he did not keep investing through age 90 like he has, let’s say hypothetically he retired at age 65, like a normal person. And let’s say he was just as successful an investor during that period that he was investing and he earned the same average annual returns.

What would his net worth be today, if he started investing at 25 and retired at 65? The answer is about $12 million, not 90 billion, 12 million. So we know that 99.9% of his net worth can be tied to just the amount of time he has been investing for it. That’s how compounding works. It is so incredibly powerful, but it is rarely intuitive. Even if you understand the math behind compounding, it’s almost never intuitive how powerful it can be. Now, this is important, because if you look at someone like Warren Buffet, there are like 2000 books on Amazon that are devoted to answering the question, How did he do it? How did he build this fortune? How did he become the world’s greatest investor? And they go into grand detail about how Buffet thinks about valuing businesses, and business models, and valuation, and market cycles, even if we know that 99% of his success can just be tied to the fact that he’s been investing for 80 years. And then if you wanna have any sort of ability to emulate what he’s done, the single most important thing that you can do is just increase your time horizon. It’s not what industry should you buy this year, what stocks you should buy this year, it’s how can you be a little bit more patient to let your money compound for the longest period of time. Like is Buffet a good investor?

Yes, of course he is, but his real secret is that he’s been a good investor for 80 years, that’s the takeaway that we should learn from him is that time is really what drives all big success over time, people don’t wanna hear that answer because people wanna get rich today, but they want advice about where they should put their money tomorrow, but we know from a lot of these cases, not just Buffet, but almost any big success that you look at, that the common denominator is that people have made good decisions for a very long period of time, not a great decision in any given year per se, but good decisions that compound for years or decades over time, that’s where the big results come from.

Brett McKay: And why despite knowing that people can understand that intellectually, again, as you’ve said, to bring the argument in your book, you can know something but still be a failure in money, why despite knowing that we have such a hard time, you’re putting that into practice, like keeping our money in the market, even when you see the market going down. Just drop…

Morgan Housel: I think any time people say like the skill that you need to do well is patience… It’s not what people wanna hear. Most people are just naturally not very patient. It’s a hard thing to do. A lot of it is because if I tell you, “Hey, invest your money in this fund in this stock and leave it alone for 20 years”, How do you know… And then let’s say it drops over the next year, how do you know whether I was wrong or you just need to be more patient, it’s hard to tell it in real time whether someone was wrong or patient… It’s much easier if you have a lot of feedback of quick feedback where you can easily determine whether advice you got was wrong or you just need to be a little bit more patient, very hard to do if you’re talking about a long period of time, it’s also just the math of compounding is never intuitive, like if I ask you what is 8 plus 8 plus 8 plus 8, you could probably figure it out in five seconds, it’s not very difficult, but if I ask you what is eight times eight times eight times, eight times eight… Even if you’re very smart, you’re gonna struggle with that answer, it’s the difference between linear thinking and exponential thinking is absurd, and particularly if you’re talking about something like investing for 80 years, like a long period of time, it just gets completely out of whack, it’s never intuitive, how powerful it can be.

So that’s why the combination of it just being a skill that is very difficult for people to be actually be patient, combined with the counter-intuitiveness of compounding is why it’s so easy to overlook, I also think… Tying this back to what we discussed earlier. If you are someone who is very smart, if you have a degree from Harvard or MIT and you’re very analytically smart, you do not wanna hear that the explanation for Warren Buffet’s net worth is patience. You don’t wanna hear that. It’s too simple. It’s too boring for you, you wanna dive into the weeds about how he valued companies, about how he thinks about economic cycles, that’s what you wanna put your big brain to work at, you don’t wanna hear the simple answer, even if we know as this is a simple matter of arithmetic, that it’s a simple answer, that it’s his time horizon that led to the dollar amount of his net worth is the right answer.

Brett McKay: And have you found any practical tips on helping people to become more patient with their money?

Morgan Housel: I think the most important thing that any investor can do is be more familiar with the history of market volatility, become more familiar with how often and how normal it is for the market to fall 10%, 20%, 30%. Because if you look over the last 100 years, for example, the market has declined on average 10% on average every 11 months, that’s been the average duration between 10% of clients, it’s fallen more than 20% on average every three years, more than 30% on average, at least once per decade, if you become familiar with those statistics, then when the market does fall 10%, it’s not that it’s fun, but it’s much easier to say, “Okay, I know this happens. This happens all the time. It’ll come back, it’s okay.” And even when the market falls 30%, you say, “Gosh, this hurts, this sucks. This is a gut punch, but I know this happens historically, this is the normal path of success, normal dynamic of success that I need to put up with.”

I think it makes you realize that volatility is the cost of admission to market returns, that you can do very well over a long period of time in investing, but you have to give something up for that, like anything else in life there’s a price, and the price you have to pay is putting up with volatility and uncertainty, once you view volatility as the cost of admission, the worthwhile cost of admission, then you realize that when the market is declining you just say, “Look, the bill’s coming do I have to pay this fee?” Just like if I wanna… If I wanna go on a trip to Hawaii, I have to pay the airlines a fee to get on the plane. It’s the same thing in investing. This is the fee that you have to pay. I think it’s much more common though to view volatility, like it’s a fine, and the difference between a fee and a fine is this, a fine is something you are not supposed to pay if you get a fine, you got in trouble, you got a speeding ticket, you’ve been a bad boy, don’t do that ever again, you need to learn your lesson, so if you view a 10% market decline as a fine, then you say, “Oh, my portfolio lost 10%, what do I have to learn here? I made a mistake, I gotta make sure I never do this again.”

Now listen that’s not the right way, it’s not conducive to patience, if you view it as a fee and you say, “Look, my portfolio fell 10%, but this is just what happens. I put up with this, I’m patient over time.” I think just understanding that history of volatility and the meaning of what volatility is, is probably the only way in investing at least, that you can push people to more of a long-term mindset.

Brett McKay: Also this idea of looking at the volatility in the stock market is either a fine, which is like a negative way or a fee, which is more of a positive way to look at it, one thing you tackle in your book is being a pessimist or an optimist when it comes to investing on your money, and you make this case that it’s really easy to be overly pessimistic about money. Why do you think it is? Why do we like to read the articles from people saying, “Oh yeah, the next depression is here, you’re gonna need to stock up on food,” but we don’t tend to think about, well, maybe it’s gonna be bad, but it’s gonna get better eventually.

Morgan Housel: I think it’s always the case that pessimism sound smarter than optimism, it’s always a case of we’re gonna pay more attention to pessimistic headlines than we will optimistic headlines, even if we know that historically, optimism has been by far the correct mindset. If you just look at the growth of human achievement over time of living standards and expectations, you should definitely be a long-term optimist, but pessimism sounds smarter… I think one of the reasons is that it’s very easy for pessimism to sound like someone trying to help you, “Hey, there’s a risk in front of you, I’m trying to help you, I’m trying to get you out of the way,” it sounds like someone’s trying to help you. Optimism, I think often also sounds like a sales pitch. Like, “Hey, I’ve got an opportunity for you to make a lot of money. Do you wanna see it?” It sounds like a sales pitch. So it’s easy to overlook in that sense, one other reason that pessimism is always more appealing than optimism is that the good things in the economy, and then a lot of things in life happen slowly, whereas the set backs, the bad things happen very quickly.

This is true for economic growth, where over the course of time, we’ve grown so much economically, we’re so much richer, wealthier on average, in aggregate, way wealthier than we were 100 years ago, but the growth took place slowly, like in any given year, the average economic growth has been about 2%, it’s easy to ignore in any given year, but the set backs, and the declines come very quickly, you have things like with COVID 19 in March of this year, where everything just collapsed over the course of about two or three weeks, the whole economy just collapsed virtually overnight. There’s nothing in terms of growth that happens overnight, there are no overnight miracles, but there are lots of overnight tragedies, and that is why it is so much easier to pay attention to the overnight tragedies, things like COVID 19 or September 11th that literally happened in the blink of an eye, whereas the growth that is more powerful over time, it’s just so much easier to ignore because it compounds very slowly over time.

Brett McKay: Then how do you… Okay, so you wanna be optimistic, but you also… You don’t wanna be overly optimistic, what is like… How can over-optimism get you in trouble?

Morgan Housel: I think I like this idea of what I’ve called realistic optimism, which is simply this, If you are someone who believes that everything will be okay in the future, you’re actually not an optimist, you are a complacent if you think everything is gonna be good, nothing bad is gonna happen, you’re just being complacent about how the world works, a realistic optimist, I think is someone who thinks that the future over the long run will work out and things will improve over the long run, but the short term is gonna be a constant never-ending chain of disappointment and setback and crash and decline and recession and bear market and pandemic all the time, and never-ending chain of bad news, even if that does not preclude long-term progress, that’s what I think a realistic optimist is.

So I think for money, I’ve often said people should save like a pessimist and invest like an optimist, you wanna save like a pessimist knowing that the short term is gonna be filled with lots of bad news, there’s gonna be recessions and bear markets and job losses and medical emergencies all the time it never ends, so you have to save, you always have to be paranoid about the short run so that you can survive setbacks, but you should invest like an optimist, you should invest like an optimist with the idea that people are gonna solve problems, and we’re gonna become more productive over time, and that the productivity is gonna increase profits and accrue to shareholders, we’re gonna get much better over time, but we have to be able to survive and endure the short run in order to get there.

So I think that’s how you can avoid being a complacent optimist is just marrying your long-term optimism with short-term pessimism, if not paranoia.

Brett McKay: It sounds a lot like Nassim Taleb’s like a Barbell strategy, you have a whole bunch of cash, maybe just something really safe, but then you invest it in something a little more risky and you can afford the loss ’cause you got that reservoir of cash that you can fall back to.

Morgan Housel: Yeah, there’s some investors, I won’t recommend this particularly for most people, but there’s some investors who will put 95% of their money and in cash or US Treasury Bonds and then 5% in super risky options, and that’s like their barbell strategy, they’re pessimistic on one end and very optimistic on the other end, and swing for the fences on the other end, I think that’s not a bad… In theory, that’s not… It’s much more difficult for individuals to pull off that specific strategy, but I love the concept of it of marrying optimism and pessimism, and that seems like it’s contradictory. So it’s not very common people… One or the other, are you optimistic or are you pessimistic? They view it as black or white, I think you need to marry the two at the same time, and realizing that optimism and pessimism can co-exist and they should co-exist in various parts of your life, and they’re two different skills that you need to nurture separately to be optimistic about the long run and pessimistic about your short run, because it’s your ability to survive the inevitable setbacks in the short run that are gonna give you the ability to compound and enjoy and benefit from the long run.

Brett McKay: Sort of like a modified Barbell strategy, be like, have an emergency fund, six months emergency fund maybe, and then just invest regularly in some sort of fund, an index fund of some sort.”

Morgan Housel: Yeah, so you’re investing for the long term, but you have enough cash and a lack of debt to survive anything that could well be thrown at you during the short run.

Brett McKay: Gotcha, so we’ve been talking some high-level principles, what do you think this… How does it translate into concrete action, and again, we have to remember that everyone’s different, everyone’s playing a different game, but like a high level, what do you think people can start doing today to start implementing some of the things we’ve been talking about concretely.

Morgan Housel: It is different for everyone. I think that’s a really important point, that there are no one-size-fits-all, here’s what you can do. If there is a golden rule of finance, and again, this is very simple, but it’s the fact that it’s simple makes it so that so many smart people ignore it, the golden rule of finance is live within your means and be patient, if you can do that, you don’t need to know that much more about finance to do well over a long period of time. Look, I didn’t tell you what stocks to buy or what the market’s gonna do next, I don’t think any… Because those are things where I think people either people don’t know or they’re different from person to person, I think the common denominator, though is just live within your means and be patient, which again is living within your means, which is savings, that’s your pessimism about the short run and be patient invest for the long run, that’s your optimism about the long run, if you could do those two things, I think that is probably one of the only common denominators of success across people across various stages of their lives, various backgrounds, various goals that is something that is kind of like the iron rule of finance, the iron law of finance in a field where there are very few laws because everything’s different and everything evolves over time.

Brett McKay: That sounds like you just gotta be mostly reasonable for most of the time. You’re probably gonna be okay.

Morgan Housel: I mean, one of the things in finance is that you don’t need to make many great decisions to do well over time, you just have to consistently not screw up, if you consistently avoid screwing up, you’ll probably do not just, okay, but phenomenal over time, so that… Most people, when they talk about it, they wanna know, what’s the next great decision that I should make? And to me, it’s just been like, “No, there. If you just get a good return for a long period of time without screwing up, you’re probably gonna do phenomenal.”

Brett McKay: Well, Morgan, this has been a great conversation where can people go to learn more about the book and your work?

Morgan Housel: The book is all over the place, obviously, Amazon, with so many bookstores shut down right now, Amazon is the majority of it. I spend a lot of my time and all my writing and my thoughts on Twitter, my handle is Morgan Housel. My first and last name.

Brett McKay: Alright Morgan Housel, thanks for your time, it’s been a pleasure.

Morgan Housel: Thanks so much for having me.

Brett McKay: My guest here today is Morgan Housel, he’s the author of the book, The Psychology of money, it’s available on and book stores everywhere, you’ll find out more information about his work at his website,, also check out our show notes at, where you can find links to resources where you can delve deeper into this topic.

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