Original interview: Vishal Khandelwal
Morgan Housel is just so readable. A full interview with him is linked above but I post some of the lessons here.
On his own investing - "My entire net worth is a house, a checking account, and the Vanguard Total Stock Market Index. I don’t think investing needs to be complicated so I keep it as simple as I possibly can. The fewer knobs you have to fiddle with the fewer opportunities you have to screw up over time."
On investors in general - "My broad philosophy is that investors are their own worst enemies, and the real key to good investing over time has little to do with the investments you pick and lots to do with how you manage your behavior.
Financial journalists spend years quibbling over investing strategies that might improve your returns by, say, 50 basis points a year, and then a financial crisis hits, people are forced to sell stocks to pay their bills or keep their sanity, which ends up costing them 400+ basis points a year. It’s so clear which one matters more.
If you spend 10% of your investing energy on picking a portfolio and the other 90% on focusing on keeping your emotions in check, putting market volatility into proper context and doing everything you can to take a long-term view, you’ll end up doing better than the majority of investors."
On investor emotional mistakes - "Overconfidence. That’s true for most people and I was no different. At various points in my career, I thought I was cleverer than I was or had more insight than I did. The few times it “worked” was likely due to luck. More often it just didn’t work.
Some people are very good at certain segments of active investing. But everyone, no matter how they invest, must fight overconfidence. It’s pervasive and is probably the second-largest cause of investing regret, after ignorance."
On minimising behavioural biases - "In 2008 and 2009 I remember having a feeling, thinking about all the people who at that very moment were taking actions that would affect them for the rest of their lives — selling when stocks were cheap in a way that would almost certainly impact their ability to ever retire. It felt strange. That’s when I started getting really interested in the behavioral side of investing. I see about 80% of investing as a psychology game.
The big takeaway from 2008 and 2009 was how quickly your own actions could harm the rest of your financial life. It really came down to understanding your own risk tolerance and how that fit into your time horizon. Panic selling is the most common behavioral mistake in investing.
For me, fighting it has been a combination of holding a lot of cash and studying market history. But there’s no easy solution to behavioral biases. These things have millions of years of evolution backing them up. The best you can do is be honest with yourself about your goals and your tolerance for decline."
On investing fees, whether advisor or management - "How people think about fees is probably the least-noticed bias. Most investors don’t actually write a cheque for their fees. They’re deducted from your fund or investment account automatically. When something is so out of sight, out of mind, you don’t pay rational attention to them in the same way you do, say, the price of a litre of petrol.
The result is that investment fees may be one of the largest — if not the largest — annual expenses for upper-middle-class households. A couple nearing retirement with $800,000 in a super account could easily pay 1% in fund fees, 1% to a financial advisor, and 0.5% in trading and other costs. The customer never actually sees or pays an actual bill.
On financial advisors - "A lot of financial advisors earn their fees, especially if they can manage a client’s emotions and endurance. But the way investment fees are structured means people end up paying way more than they would for other service-based products."
On improving decision making - "Most medical doctors still go to a doctor to get their own check-up. Investors should do the same. Even if you don’t have a financial advisor I think it’s important for all investors to bounce their ideas off trusted advisors — friends, mentors, family, whatever.
Robert Shiller once said, “You have to understand that your own thoughts are not really your own thoughts.” Everything you know is a product of the people you’ve met and the experiences you’ve had, most of which were out of your control. That’s always stuck with me. It’s a reminder of how hard independent thinking is, and how important it is to hear out the views and thoughts of a diverse group of outside experts.
On unsolicited advice - "When someone on TV says (or a journalist writes), “You should do X with your money,” stop and think: How do you know me? How do you know my goals? How do you know my short-term spending needs? How do you know my risk tolerance? Of course, they don’t. Which means you shouldn’t pay much attention to it. Personal finance is very personal, which means broad, general, advice can be dangerous."
On risk in investing - "I have two definitions of risk –
- Risk is the odds that you won’t be able to do something in the future that you reasonably need to do to keep yourself happy.
- From Carl Richards: “Risk is what’s left over when you think you’ve thought of everything else.”
The first is a reminder that risk is different for everyone, and is highly dependent on your time horizon.
The second is a reminder of how hard risk is to think about. Risk is, almost by definition, the stuff we aren’t thinking about."
One simple investing lesson - "Keep it simple. Don’t try to be a hero. Compounding takes a lot of time. Volatility is the cost of admission for high long-term returns. That’s the message I’d get across. It’s simple but encompasses the majority of what you need to know."
On investor qualities - "I think it’s a combination of humility and a fine-tuned bullshit detector.
You need humility to prevent yourself from overcomplicating investing more than it needs to be and taking risks greater than you’re able to handle.
And you need a fine-tuned bullshit detector to protect yourself from the swarms of sales pitches and get-rich-quick schemes that plague the industry.
There are other things — a good grasp of basic arithmetic, delayed gratification, the ability to live below your means. But those first two are most important."
On staying humble - "Lack of humility always catches up to you. Most people who try to front-load market returns into shorter periods of time will cough up whatever excess short-term returns they earn down the road — reversion to the mean. It’s very similar with humility. Most ego you have today will be balanced out with humiliation down the road.
All super successful investors have an incredible mix of insight and humility that is incredibly rare. They’re also just great people."