Morgan Housel avatar
Morgan Housel
Hey there — I’m Morgan Housel, author of the book The Psychology of Money and Partner at the venture capital firm Collaborative Fund. I’m excited to answer any questions you have around how people approach market volatility, set their investing strategies, and make important financial decisions. Submit them to me here, and tune in as I answer them live on Friday, December 17 at 1 PM ET.
Town Hall
23 questions answered
Chris avatar
Where at in the economic cycle do you see the U.S., currently? Given that we are still "re-opening" and now have new infrastructure spending in the pipeline, is it reasonable, in your view to see this still as the early stages of a new cycle? Or do asset values suggest we're further along than that, with so much growth already "priced in?" Thank you!
Morgan Housel avatar
The crazy thing is, we had one of the worst recessions ever less than you two years ago. So in that sense, are we early on in the recovery? Maybe! On the other hand it wasn’t a normal recession -- it was all virus related, but businesses and consumers were actually in good shape (and still are). Then there’s all the liquidity and stimulus flooded into the economy. That’s so unprecedented, and I don’t think we have any idea what it means going forward. One thing is for sure: It totally changes how governments fight recessions in the future. It’s one thing if people think policymakers don’t have the tools to fight a recession. But now that everyone knows how powerful the tools can be, no politician can say, “There’s nothing we could do.” They can only say, “We chose not to do it.” Which few politicians – on either side – wants to say when people are losing jobs. It probably doesn’t mean we’ll avoid future downturns. It might make them deeper, as bankers and investors who (rightly) know there’s a safety net take more risk. Calm plants the seeds of crazy. But maybe it means those sharp, hard, downturns will be shorter-lived than before. That’s been the case this year, as the speed of the rebound has taken nearly everyone off guard. Another thing to think about is that regardless of where you think we are in the cycle, something out of the blue that no one saw coming can send the economy tumbling. That’s probably the biggest lesson from Covid.
Darryl Jackson Jr avatar
How do you create your investing strategies?
Morgan Housel avatar
Mine are so simple. I want to be a long-term owner of stocks for the next 50+ years. So I’m a passive investor because I’ll have the highest odds of actually holding the stocks I own for 50+ years if the strategy is super simple, hands off, and requires as few decisions as possible. If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And for myself, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success. That doesn’t mean it’s the best for everyone. I’m not recommending it to you. And I have a lot of admiration and confidence in some active investors. Everyone’s goals, risk tolerances, etc. are different. But over the years I came around to the view that I’ll have a high chance of meeting all of my family’s financial goals if we consistently invest money passively for decades on end, leaving the money alone to compound. No matter how hard you try at investing you won’t do well if you miss the two or three things that move the needle in your strategy. The reverse is true. Simple investment strategies can work great as long as they capture the few things that are important to that strategy’s success. My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things -- especially the first two, which I can control.
Valeria Esparza avatar
How frequent should you assess your porfolio? How do you decide which stocks to sell?
Morgan Housel avatar
I think the answer is “as infrequently as you can to prevent you from making rash decisions.” An annual assessment of your goals is probably about right for most people. If you’re making changes to your portfolio more than once a quarter, if that, you should assess whether you’re becoming too emotional about the market’s ups and downs, chasing greed and panicking from fear.
Sergio Leal avatar
Dude! Loved your book. Q: do you think the market has a memory?
Morgan Housel avatar
I think generations of investors have memories. Baby boomers remember the 1990s boom and bust, millennials were especially scarred by the 2008 crash, Gen Z game into the market during the huge run of the last year. All of those events leave a mark on a generation and impact how they’ll invest for the rest of their lives. But in general, no, the market doesn’t remember. So much of what’s going on today is stuff that happened in the late 1990s, which of course ended terribly. And we’ll be doing the same thing 20 years from now. I like Voltaire’s saying -- history never repeats itself but man always does. We’ll be making the same mistakes 100 years from now that we were making 100 years ago.
Neil avatar
Hi Morgan! I am a huge fan of your work and have re-read “Psychology of Money” a lot times these last two years. What were your foundational books that got you interested in finance/investing?
Morgan Housel avatar
Dan Gardner’s book The Science of Fear was one that really stuck with me. The book The Great Depression: A Diary got me excited about economics. Joel Greenblat’s You Can Be a Stock Market Genius had a big impact on me. But I think mostly it was blogs that got me hooked. Just daily reading.
If you could choose to know one thing back then, that you now know but didn’t know then about investing. What would it be?
Morgan Housel avatar
I’d just tell myself that everything is going to be ok. Not perfect, not easy, not stress free. But things worked out. I spent so much of my youth worrying. Maybe that was good because it kept me motivated. But now I look back and wish I had enjoyed each day a little more.
What is the biggest and most common mistake people make when it comes to investing?
Morgan Housel avatar
Not understanding or even thinking about their own individual personality, risk tolerance, goals, and aspirations. Everyone is different. A big problem in investing is that we treat it like it’s math, where 2+2=4 for me and you and everyone – there’s one right answer. But I think it’s actually something closer to sports, where equally smart and talented people do things completely differently depending on what game they’re playing. What you want might not be what I want. What’s fun to you might be miserable to me. Your family’s different from mine. Your job’s different from mine. You have different life experiences than I do, different role models, different risk tolerances and goals and social ambitions, work-life balance targets, career incentives, on and on. So of course we don’t always agree on what’s the best thing to do with our money. There’s no world in which we should. You just have to figure out what works for you.
Kurt Chessman avatar
What’s your view of the behavioral mechanisms that are driving decision making in the fed right now? Do you think they are acting irrationally?
Morgan Housel avatar
In a lot of ways I think it’s a damned if you do, damned if you don’t position. If the Fed floods the economy with money, people get mad at them. If they left the economy alone to crash and reset, people would get mad at them. If there’s inflation, people get mad. If there’s deflation, people get mad. No matter what they do, a large portion of investors will criticize them. I don’t envy their role.
Errol Bailey avatar
I am only able to invest a very little. Is it worth it?
Morgan Housel avatar
Yes. It’s so easy to underestimate the role of compounding over time. $100 invested for 30 years at an 8% return turns into $1,000 dollars. There aren’t many areas in life you can 10x your money without a ton of effort.
Hi Morgan! I know you’ve mentioned that you don’t try to beat the market and prefer to invest predominantly in passively, low cost index funds, but have you or would you consider selling some % of those holdings to try to preserve your capital during some market exuberance, and if so what did/would it take to convince you to do so?
Morgan Housel avatar
I’ve never sold anything meaningful. Maybe that will change one day, but I doubt it. I just want to compound as long as I can. An important point here is that I always have cash to ensure I don’t need to sell stocks when there’s a decline. If anything, that’s when I buy more. I think the the only thing that might tempt me is if we had a bubble that was absurd that I thought future returns would be ~0%. But we've never been close to that.
Michael avatar
Hi Morgan, I just finished your book, excellent read! Amid the gamification of investing, how do you view the current appetite of risk for investors?
Morgan Housel avatar
Everything that we know about investing shows that the more knobs you fiddle with and levers you pull the worse you’re going to perform. More trading = worse results. Maybe not in a given month or given year but over time, that’s one of the strongest correlations that exists in investing. So the gamification of investing is, I think, a tough thing to watch. On one hand I love that tens of millions of young people are getting interested in investing. On the other ... you know how daytrading bankrupt stocks is going to end. You don’t know when it’s going to end, but you know it’ll end terribly for so many people.
Tricia avatar
psychology of money is a fascinating idea. if you could only give one piece of advice about that, what would it be?
Morgan Housel avatar
Here’s how I’ve put it: You can be the smartest doctor in the world, but if you eat a crap diet and smoke and drink too much and don’t sleep enough, you won’t be healthy. Same with money. You can have a PhD in finance and be a partner at Goldman Sachs. But if you panic when the market falls, or if you’re obsessed with showing off how rich you are, or you’re gullible ... none of it matters. You’ll do poorly. Behavior > all else.
Matty Tang avatar
If you had a time machine and could travel back to your 18 year old self, what advice would you give?
Morgan Housel avatar
I think I’d just press how young 18 is. When I was 18 I felt like an adult and that I needed to make adult decisions. Now I view 18 as still a child. Not in a bad way, but I wish I could say, “Relax, you have a lot of time to figure this out."
Jorge Zamora avatar
Hi Morgan I was wondering what your thoughts were on whether one should stay out of the market during volatile times or change their trading strategy in order to adapt to the times ?
Morgan Housel avatar
In general I think that’s a bad idea. A better strategy is usually putting up with and dealing with volatility rather than assuming you can avoid it. Here’s a way to think about volatility: fees vs. fines. Fees are something you pay for admission to get something worthwhile in return. Fines are punishment for doing something wrong. It sounds trivial, but thinking of volatility as a fee instead of a fine is an important part of developing the kind of mindset that lets you stick around long enough for compounding to work. Few investors have the disposition to say, “I’m actually fine if I lose 20% or more of my money.” This is doubly true for new investors who haven’t experienced a 20% decline. But a reason declines hurt and scare so many investors off is because they think of them as fines. You’re not supposed to get fined. You’re supposed to make decisions that preempt and avoid fines. Traffic fines and IRS fines mean you did something wrong and deserve to be punished. The natural response for anyone who watches their wealth decline and views that drop as a fine is to avoid future fines. But if you view volatility as a fee, things look different. Disneyland tickets cost $100. But you get an awesome day with your kids you’ll never forget. Millions of people happily pay it. No one thinks of it as a punishment or a fine. The worthwhile tradeoff of fees is obvious when it’s clear you’re paying one. Same with investing, where volatility is almost always a fee, not a fine.
Zeus avatar
Why do investors purchase securities when they're at all time highs rather than purchasing them when they're at their lows?
Morgan Housel avatar
It’s so easy to extrapolate what just happened into the future. So chasing whatever just went up is an easy form of analysis. I can work for a time. Sometimes momentum is real. The big question is -- do you know why you own a stock? Are you just owning it because it went up last month, last year? All good investing comes down to whether you can keep holding something when it’s performing poorly, which every stock will at some point in the future.
TIM⚡️2030 avatar
What can I do to prevent panic selling?
Morgan Housel avatar
Two things: One, have enough cash so that you can withstand a 30%+ market drop without needing to sell. That's most important. Two, realize that volatility is a completely normal part of investing. A big decline doesn't necessarily mean a stock is broken -- it’s an inevitable part of long-term growth, just like Hawaii has amazing weather but it still rains a few days a week.
Kali avatar
How do everyday emotions tie into investing behavior? Are people more likely to make riskier investment decisions while in a particular emotional state? Is there an “ideal” emotional state that people should consider when making investment or financial decisions?
Morgan Housel avatar
I think during 2020 this happened a lot -- people were scared of a virus, worried about how they could work from home, whether their kids could go to school, whether the store was out of food, etc. and that directly impacted how they invested because they were overcome with fear. In terms of an ideal emotional state, I think a good trick is just AT LEAST sleeping a night on an investment decision, if not a week or more. If the opportunity is gone in a day, it probably wasn’t an opportunity to begin with. But I bet you’ll change your mind on half of your actions after sleeping on them, which is a sign the decisions were emotional to begin with.
Kali avatar
What sparked your interest in this kind of research? Curious if it was a personal experience you had or something else!
Morgan Housel avatar
When I was 18 I cobbled together $2,000. I remember feeling like I should do something productive with it. I knew nothing about investing. So I went to Bank of America and asked to transfer the money into a certificate of deposit. There is no way I had any idea what this was. I probably heard my dad mention CDs and figured it was smart. The banker laughed when I asked to put $250 into a one-month CD. She said the minimum was $1,000. I said fine. It was my first investment. I must have known what interest was, theoretically at least. But a month later I was shocked -- totally blown away -- when I logged into my account and saw my balance at $1,000.83. I vividly remember this experience. I made $0.83 for doing nothing. I thought this was the coolest thing I had ever seen. I was hooked on finance after that. After 2008 I really became interestsd in the behavioral side of finance because it was so clear that what caused the crisis wasn't that people were dumb, but persuaded by greed and fear. It's hooked me ever since :)
What was your very first investment & why? Just curious!
Morgan Housel avatar
Some Chinese steel company. I forget the name. I had no idea what I was doing. I sold it a week later at a loss.
Oscar Williamson avatar
What’s the best way to break out of the trap of always feeling like you don’t have enough money?
Morgan Housel avatar
There are two ways to measure how you’re doing: Against yourself and against others. Internal vs. external benchmarks. There’s a time and a place for both, but I’ve come to appreciate how much happier you can be if you know when internal benchmarks should get the spotlight. If you measure your wealth and career solely relative to others – the external benchmark – you’re on the neverending path of feeling inadequate, incompetent, and poor. Nothing you do will ever feel that great because someone is always smarter than you, more popular than you, better looking than you, getting richer faster than you, and making sure you know about it. It’s not until you focus on internal benchmarks and see how far you’ve come, relative to where you began that you have a good view of where you stand and what you’ve accomplished. One important point here: Those internal benchmarks are only possible when you value and focus on independence vs. material goods. The only way to consistently do what you want, when you want, with whom you want, for as long as you want, is to detach from other peoples’ benchmarks and judge everything simply by whether you’re happy and fulfilled, which varies person to person. I recently had dinner with a financial advisor who has a client that gets angry when hearing about portfolio returns or benchmarks. None of that matters to the client; All he cares about is whether he has enough money to keep traveling with his wife. That’s his sole benchmark. “Everyone else can stress out about outperforming each other,” he says. “I just like Europe.” Man, I love that. I also often remind myself that no one is thinking about you as much as you are. That’s true for everyone. So at some point you just have to stop chasing what others have and focus on what actually makes you happy.
Scott Hogberg avatar
Do you think market volatility can actually be a good thing?
Morgan Housel avatar
Whether it’s good or bad -- I just think it’s inevitable. It’s the cost of admission to earning high returns over time. It can be a good thing if you’re taking advantage of it, buying at lower prices. And even if you’re dollar cost averaging, buying the same amount every month, you get the benefit of when prices are lower.
Agustin Encinia avatar
To give some context to my question: Looking back in March of 2020, there were so many buying opportunities in both the stock market and crypto market that could’ve resulted in massive gains about a year later (2021). Two quick examples would be Tesla and Ethereum. Tesla, which was under $100 per share during March of 2020, is now worth up to $900 a share. Ethereum on the other hand, was under $150 a coin, now it’s worth over $4000. So far, have you seen any differences in how people react to market volatility pre-COVID era (before 2020) vs COVID era (2020-present day)? Do more people now view high volatility as a buying opportunity rather than selling off their assets?
Morgan Housel avatar
I think that's probably right, at least for now, because people were rewarded so highly for buying volatility in 2020. It was totally different in 2008, when it took ~4 years for the market to recover. Or think about the Great Depression -- it took ~20 years for the market to fully recover. So for now, yes, I think there's a different mentality that a big decline = an instant buying opportunity. But we know historically that things can so go the other way. Given the range of likely outcomes, I think how the market responded over the last 18 months is as good as anyone could possiblly hope for and it'll likely have a misleading impact on people who think this is always how markets work in the long run.
Nadia Vanderhall avatar
One of the biggest comments that I see not only within the Public Community, but collectively — is that investors feel they will mess up. With “leaving room for error”, how can investors continue to push through even when the markets get painful.
Morgan Housel avatar
Room for error is really the key here -- it lets you "mess up" without it being a catastrophe. If you have 100% of your money in stocks and there's a 30% decline, you might be forced to sell just to pay your bills. That's a catastrophe in investing. If you have enough cash to ride it out, then you're just delaing with the psychology of watching your money decline. The other thing here is that most of what investors consider "messing up" is just experiencing normal volatility -- it's not an indication that they made a mistake.