Morgan Housel: Moment 208: The Dumbest Financial Advice Everyone Weirdly Follows That’s Keeping Them Poor!

00:00The thing I think about most, especially when I'm on the go but also when I'm sat here in the Diary of a CEO studio, is the Wi-Fi and internet that we have to work with. In fact, anytime I'm filming away from the studio, one of the first things I do when I arrive is open up an app and do a speed test to see how strong the signal is.

00:16The number of screenshots I've sent to my team about Wi-Fi signals at different locations is actually pretty crazy. It matters that much to me because it's such a competitive advantage to have fast Wi-Fi. On any given day, if I'm recording hours and hours of footage with a podcast guest, I then often have to have my team send that across to our London team who then do the edit.

00:36So, fast Wi-Fi and internet is not a nice-to-have; it is absolutely business mission-critical. When it came to finding the best provider who could supply internet and Wi-Fi to our new LA studio, we looked at every single option.

00:52Of all the providers, the one that came back with the steadiest connection, as well as being the cheapest, was today's sponsor, Spectrum Business. Spectrum Business keeps businesses of all sizes connected with fast, reliable internet, advanced Wi-Fi, phone, TV, and mobile services. Millions of business owners already rely on Spectrum to keep their operations connected. If you want to join them, head to spectrum.com/business to learn more. Restrictions apply. Service not available in all areas.

01:29I grew up skiing in Lake Tahoe, California, and I was a competitive ski racer. All throughout my childhood and teenage years, I skied six days a week, ten months a year, all over the world. It was great. There were about twelve of us on the Squaw Valley ski team; we had grown up together and spent our entire lives together.

01:49When I was 17, this was in February 2001, I was skiing with two of my best friends, Brendan Allen and Brian Richmond. We would ski out of bounds, which is illegal—you're not supposed to do it. We would duck under the rope that says "Do Not Cross" because that's where a lot of the good skiing is.

02:11When we would do this, it would spit us out on this back country road where we'd have to hitchhike back. There's no chairlift when you ski out of bounds. So we did it one morning in February 2001. When we did it, we triggered a very small avalanche.

02:26I remember it so clearly; I can still feel it 22 years later. It's the weirdest sensation I've ever had because when you get hit by an avalanche, rather than pushing on the snow to gain traction with your skis, the ground is pushing you. All of a sudden, you're skiing along with control and then, boom, you have no control anymore. The ground is pushing you around.

02:49It was a pretty small avalanche, maybe came up to our knees, ended pretty quickly, and we literally high-fived about it at the bottom and went about our day. We got back around to the base lodge, hitchhiked back, and Brendan and Brian said they wanted to do it again.

03:07For whatever reason, I just didn't want to do it. I said, "Hey, rather than hitchhiking back, why don't you guys go do it again and I'll drive my truck around and pick you up?" We made our plans and went our separate ways. They went skiing, and I went back around to take my boots off and jump in my truck.

03:26Twenty or thirty minutes later, I went to pick them up at the pickup spot, and they weren't there. I knew it only took us a minute to ski down the hill, so I knew they weren't coming. I was not worried; I figured they had already hitchhiked home. After waiting another twenty or thirty minutes, I just left and went back to the lodge.

03:47I expected them to be there, and they weren't. I still didn't really worry. We didn't have cell phones back then, and people were just comfortable being out of touch. If you didn't know where your buddy was, it wasn't that big of a deal.

04:02The day went on, and I started worrying a little bit. I stopped at Brendan's house and expected him to be there, but he wasn't. I remember calling and leaving a message on his voicemail. I ended the voicemail by saying, "I hope you're okay, man." Those were my last words.

04:19At about 4:00 or 5:00, Brian's mom called me. She said, "Brian never showed up for work today. Do you know where he is?" I told her what happened—that we skied the backside of Squaw, I was going to pick them up, but they never showed. I remember so clearly Brian's mom saying, "Oh my God," and hanging up the phone.

04:41Then we started getting worried. We called the police, but they didn't take it very seriously because they thought they were just out at a party or ran off with a girlfriend. But we finally got search and rescue involved. Rescuers with probe poles found Brendan and Brian buried under six feet of snow. They had been killed by a massive avalanche.

05:14Virtually everyone listening to this has lost somebody close to them, somebody that they love. So I know the experience was not unique in that way. But it was the first time that I had experienced loss and the first bad thing that had ever happened to me in my life. It had a big impact on me.

05:33As I got older and looked back, I put together realizations of what that did to me and how it changed me. One lesson I talk about in the book is my decision to not go with them on that second run. It was a completely brainless decision. I put no thought into it.

05:54It was not a cost-benefit analysis. But it's the most important decision I've ever made in my life. There is a 100% chance if I was with them, I would have died. I had skied literally thousands of runs with Brendan and Brian. How many times did I deny a second run? Almost never. The one time I did, it saved my life.

06:17You really realize that the world hangs by a thread. Everybody thinks you're going to put a lot of thought into your big decisions to make sure you're successful—where you go to college, who you marry. That's all great, but the world hangs by a thread of tiny, "no-nothing" decisions.

06:36Maybe it was when to cross the street or when to leave in your car that can utterly change the course of your life. Once you accept how much the world hangs by a thread, you become much more humble with your willingness to make forecasts about the future.

06:53We have no clue what's going to happen because we cannot piece together the chaos theory of "I got in my car at the wrong time" or "I decided not to take a second run." We cannot forecast the impact of those things.

07:05And this comes right back to investing, doesn't it? Because most people that consider themselves to be investors engage in that idea that they can predict the future. This is where it appears that most money is lost.

07:22Think about the biggest risk to the US economy over the last two generations.

07:27COVID?

07:28That's one. The others would be Pearl Harbor, 9/11, COVID, and maybe Lehman Brothers couldn't find a buyer in 2008 which sparked the financial crisis. The common denominator of every one of those stories is that nobody saw them coming.

07:44They were not in any newspaper before they happened. They were not in any economic outlook. Nobody was on TV warning you. The common denominator is they did all of their damage in two seconds.

08:00You can guarantee that the biggest news story and biggest risk over the next year or ten years is something that nobody's talking about today. You and I can't even fathom it because it's always been like that.

08:14There's a great quote from a financial advisor I really admire named Carl Richards. He says, "Risk is what's left over when you think you've thought of everything."

08:29You can go out of your way to think about all the risks in your life, and that's a good thing to do. But when you're done with that exercise, what's left over that you're NOT thinking about is what risk actually is. By definition, we can never plan for or even imagine what the biggest risks in our lives are going to be.

08:48You say that in *Same as Ever*. You say the chapter title is "Risk is the things you can't see."

08:54Risk is what you don't see. Sometimes you can phrase it as terrifying, but it's also kind of relieving. Why are you going to put so much effort into trying to predict what the stock market or the economy is going to do next?

09:12How could you ever predict 9/11 or COVID? Even with COVID, there's a 2015 Bill Gates TED Talk where he talks about the biggest risk to society being a viral pandemic. So it's not that nobody saw that thing coming, but the specifics of when it's going to happen and how bad it's going to be is completely impossible.

09:37But there's also lots of other TED Talks that say everything's going to be great. So on balance, the world had no idea.

09:47On average, once per decade, everything that you thought about risk, uncertainty, and stability goes to shit.

09:58So how do I prepare if risk is what I don't see?

10:04There's another great quote from Nassim Taleb: "Invest in preparedness, not in prediction." Rather than trying to be like, "Here's what I think is going to happen in crypto," just make sure you have a big enough buffer in your finances.

10:19Cash, liquidity, being scared of debt—so that no matter what happens, you at least have a fighting chance of enduring it. One thing I've often thought about is that you should have enough cash in your investing portfolio that the amount feels like it's too much. It should make you wince a little bit.

10:41Because if you only have enough cash to put up with the risks that you can envision, you're going to miss the surprise every single time. But if you feel like you have too much cash, then at least you have a fighting chance of putting up with the 9/11, the COVID, the Pearl Harbor.

10:58When people look at my asset allocation, a lot of people say, "You seem really conservative. Why do you have this much cash? What are you saving for?" And my answer is always: "I don't know."

11:12Who are we to assume that we can predict the risks that are going to be in our own personal lives and throughout the broader world? The only way to prepare for it is to have what feels like too much safety.

11:25What is your capital allocation strategy? How do you invest your money? This is the thing people want to know most about you.

11:32I keep it as painfully simple as I possibly can. Literally, my entire net worth is cash, a house, and index funds, plus some shares of Markel where I'm on the board of directors. That's it. I can summarize everything so easily and cleanly.

11:55Why index funds? After reading your book, I stopped trying to pick stocks and I invested all of my available capital into index funds outside of investing in startup companies. I'm a shareholder in 60 or 70 companies, but all my other available capital is in index funds and a long-standing large position in Ethereum.

12:31My Ethereum investment is based on the fact that I run a software business in blockchain, and I could see that developers are building on top of Ethereum more than any other blockchain. That insight was really beneficial to me.

12:44And six years—so even with the big fall of the last two years, you're still up a lot.

12:51Yeah. I think your book taught me that successful investing is when you lose the password to your investment account. When I lose the password, I'm so proud of myself because it means I haven't checked it in forever. I thought, "Oh yeah, I have all this money in these index funds, I'll check it," and I thought, "Fuck, I don't know the password."

13:14Good! That's why you're going to do okay. What's important is that I am not one of the people who says nobody can beat the market. I think it's extremely hard to beat the market, and very few people will do it, but there are really smart people who can.

13:33The reason I don't isn't because I don't believe it can be done; it's because the variable that I want to maximize for in my investments is endurance. If I can just earn average returns for an above-average period of time, it's going to lead to an amount of success that will literally put you in the top 5% of investors.

13:51My parents are a great example of this. They have minimal financial interest, but they have dollar-cost averaged into index funds for going on forty years now. They've never sold anything, ever. If you look at their returns, they'd probably be in the top 3% of professional investors.

14:11For anyone that doesn't know, what is dollar-cost averaging and what is an index fund?

14:15Dollar-cost averaging means you buy the same dollar amount of investments every single month, come hell or high water. Recession, boom, bust—you say, "I'm going to put $100 in the stock market on the first of every month." Most people with a 401k are doing this whether they know it or not.

14:41The contrast to that would be, "I'm going to buy and sell based off of how I feel in the stock market." An index fund is just a single fund that owns hundreds or thousands of stocks within it. Really what you're doing is you're owning a slice of capitalism.

15:10If I was your son and I said, "Dad, prove to me that that's a better long-term wealth creation strategy than buying crypto or buying companies I like," how would you explain that?

15:23Your ability to do well over the next one year or five years is going to have no role whatsoever on your lifetime ability to generate wealth. All that's going to matter is what are the returns that you can sustain for the longest period of time. It doesn't matter if you can double your money this year; can you stick and keep it going for 50 years? That's where compounding comes from.

15:52All of the heavy lifting comes from the exponent. Because that's how exponential growth works.

16:11Here's one way to explain it: 99% of Warren Buffett's net worth was accumulated after his 60th birthday. 99% of his wealth! Because the longer you hold that for, the crazier the numbers get.

16:30When he was 60, I think he was worth about $3 billion. Multi-billionaire, but now that he's 90, he's worth over $100 billion and he's given like $100 billion away. Since he's been 60, his net worth went from $3 billion to effectively $200 billion. The real secret to his success is that he's been a great investor for 80 years.

17:26Patience. It also reminds me of the story about the janitor, Ronald James Read. When he died in 2014 aged 92, he had a net worth of over $8 million. And he was a janitor. How did he do that?

17:43He took what very little money he could save from his job mopping floors at the gas station, he put it in stocks, and he left it alone for 70 years. That's it. If you have endurance in your investing, you don't need to be a genius stock picker.

18:12Picking the right stocks is hard. It's supposed to be hard. But having endurance is largely in your control. It's so much easier to just be patient than it is to pick the right stocks every single day.

19:22You've spoken about some of the skills required for making money: endurance, patience, lose your password. I remember reading somewhere that Warren Buffett would go like five years without allocating capital, and he said the hardest thing to be a great investor is to be able to sit on your hands and do nothing.

20:03"Sit on your ass and do nothing," that's a Charlie Munger quote. Berkshire Hathaway has like $150 billion of cash right now. Their entire 60-year history is build up a shitload of cash, wait ten years for an opportunity, deploy it all, and then go back to waiting. Good opportunities are rare.

20:31What are the other skills then, besides endurance and patience, to get money?

20:38For the ordinary person, endurance and patience is 99% of what you need as an investor. You can do that from your phone now. That was not always the case. Twenty years ago, the only people who could invest were people who had a lot of money and could afford a broker. You had to know a guy and pay a ridiculous fee.

21:19You talk about the skill of keeping money, which is different from the skill of getting money, being predicated on survival.

21:26Financial survival and just putting up with all the unpredictable nonsense that's going to happen. Gaining money is like being an optimist and taking a risk. Staying rich is like the exact opposite. You need a level of being conservative and being scared. You need both of those skills at the same time to do well.

22:13So your kid is 20 years old. He's broke. Do you tell him to go and take huge outsized risks? He's not got a family, he's not got a mortgage. What advice do you give him at that age to create wealth?

22:25When somebody is young, you think you would say, "You've got 50 years in front of you, go for it." It's also when your life is the most fragile. It's when you're most likely to be laid off or change your career. You need quite a bit of financial flexibility—just cash and liquidity.

22:53For careers, some of the best career advice: when you graduate college, don't take the safe job, which is usually the big blue-chip company. Go for the weird company. Go for something crazy. Because when you're older and have kids and a mortgage, you're not going to want to take the weird job.

23:23When you're 22 and not tied down, go for the weird startup. In the weird startup, you're going to be so close to the failure, and failure is where you're going to learn so much more.

23:41So many people take the blue-chip job and it puts them on a very predictable track—analyst for two years, then senior analyst. It's very linear. You're capping all of your upside. If you go for the weird company, it's either going to fail and you'll learn from that, or it's going to take off. Then maybe when you're 40, you want the stable job.

24:57You introduced this concept of "tails," long tails. You talk about the example of venture capital where for every 50 investments, statistically half will completely fail, 10 will do okay, and one or two will make huge profits that drive 100% of the fund's returns.

25:28Tails are where just a couple of things that happen explain 90% or 99% of what matters. In the US, there are thousands of public companies, but the huge majority of the value is in like ten companies: Apple, Tesla, Microsoft. Ten of them are the ones that really matter.

25:56All of this is a case for humility. You're expecting to walk away with all these special tips and tricks to make more money, but what I came away with is this one important lesson: "I don't know."

26:30Not only do I not know, but nobody else knows either. Everyone else is bullshitting their way through the investing market too.

26:38I'm in this crypto chat where one of my friends is always posting the forecast graphs. It's always up and to the right. It's kind of like "male horoscopes."

27:01I think what's closest to investing is something like the horoscope where, even if you know it's bullshit, you want to read it because it's comforting. What people want is to reduce the uncertainty that's giving them stress. Everyone intuitively knows the future is unknowable, but that hurts. So you try to reduce that stress by finding someone who says, "I do know what's going to happen."

27:29The thing I think about most, especially when I'm on the go but also when I'm sat here in the Diary of a CEO studio, is the Wi-Fi and internet that we have to work with. In fact, anytime I'm filming away from the studio, one of the first things I do when I arrive is open up an app and do a speed test to see how strong the signal is.

27:46The number of screenshots I've sent to my team about Wi-Fi signals at different locations is actually pretty crazy. It matters that much to me because it's such a competitive advantage to have fast Wi-Fi. Fast Wi-Fi and internet is not a nice-to-have; it is absolutely business mission-critical.

28:10When it came to finding the best provider who could supply internet and Wi-Fi to our new LA studio, the one that came back with the steadiest connection, as well as being the cheapest, was today's sponsor, Spectrum Business. Spectrum Business keeps businesses of all sizes connected with fast, reliable internet, advanced Wi-Fi, phone, TV, and mobile services. Head to spectrum.com/business to learn more. Restrictions apply. Service not available in all areas.

28:46The Diary of a CEO is brought to you by Progressive Insurance. Do you ever think about switching insurance companies to see if you can save some cash? Progressive makes it easy. Just drop in some details about yourself and see if you're eligible to save money when you bundle your home and auto policies. The process only takes minutes and it could mean hundreds more in your pocket. Visit progressive.com after this episode to see if you could save. Progressive Casualty Insurance Company and affiliates. Potential savings will vary, not available in all states.