The Psychology of Money by Morgan Housel | with guest Luke Tobin

0:01Welcome to Business Book Club, where top entrepreneurs break down the most powerful insights from the world's best business books. I'm your host Sam Brown and today we're talking about the psychology of money.

0:16What if building massive wealth had nothing to do with your IQ and everything to do with your behavior? Today's author Morgan Housel proves that managing cash is a soft skill, not a maths problem. This book isn't just for stock investors, it's mandatory reading for founders of all types. Your relationship with risk, your runway, and your ego will literally make or break your business. And today, bringing the three biggest lessons from the book is Luke Tobin. Over the last 15 years, Luke has built, scaled, and successfully exited three different companies. Today, he sits on the other side of the table as the founder of Tobin Capital and Unusual Group, where he's invested in over 40 high-growth businesses.

1:00He sees exactly how founders are either building lasting empires or burning their cash. In this episode, we dive into why simply surviving is your ultimate growth strategy, how to control your behavior to stop chasing trends, and the invisible difference between getting rich and staying wealthy. Luke, why did you choose The Psychology of Money as the most important book you've ever read. After my last exit, I decided to manage my own cash. And I've been making my own decisions on where and how and what to invest in. I would say early in my investing journey, I made a lot of irrational mistakes.

1:40And I think it's very typical for all of us. If you start dabbling in the stock market, or you are trying to make business decisions, or you're thinking about debt or equity financing in a business, like you go through this strange relationship journey with money. What the book taught me was that actually it's a tool and you need to remove emotion from the situation and teach yourself to remain rational whilst other people often do the opposite. It gave me a lot of strength in how to approach managing money. What is lesson number one? Power of compounding. There is a really great example that he uses in the book, which is Warren Buffett.

2:20He shows how 81.5 billion of Warren Buffett's 84.5 billion net worth came after his 65th birthday. And none of the books about him are really about his real secret, which was good returns, not the best returns, but really good returns and also surviving in the game for three quarters of a century. So his longevity. I'd love to know how you relate this to business building. One of the massive takeaways for me was that positioning yourself to be able to survive the downtimes beats intensity and the one-shot wonders over the long run. Definitely. I think it comes down to one word for me and it's resilience.

3:01And in business, one of the biggest traits that any entrepreneur can have is that resilient trait. And you can prepare for good days and you can prepare for bad days, but it's what you do in the bad days that define how successful you'll be in the long term. And I think that's really what the message of the book is as well. If you act fearfully and you make irrational decisions at those times, it will affect the upside as well. So in a business context, it's about being able to weather those storms and be resilient through them. And I think there's lots of ways in my own journey that I've learned to do that, whether it was challenges with COVID or team turnovers or issues with clients that wanted to leave at different times, there's always going to be these challenges.

3:41But if you stay consistent day in, day out, and keep trying to be marginally better week over week, over time, that compounds really strongly into output and can separate you from the competition. If they're off their game, you don't need to be 10x every day. But if you're just 1 % a day better, and that compounds over time, that's 365 % better every year. That's pretty good. This understanding of compounding, he talks about it in the book, it doesn't compute naturally in people's minds. I think the example he gives is eight plus eight plus eight plus eight plus eight. You can kind of work out in a few seconds.

4:14Eight times eight times eight times eight times eight ends up in the millions very quickly and we just can't do that kind of mental maths. No. I think the biggest problem with humans these days is we all want instant gratification and there's lots of reasons for that. Social media, it's the lifestyles we live, it's the digital connectivity, everything else. We want instant feedback. And the problem with compounding in whatever sense you talk about is it needs time to play out. And the biggest gains come at the back end of it. And that's the thing that people don't tend to focus on. So you do a lot of advising founders now with your role as investing in a lot of the companies.

4:53How do you go about convincing or mentoring the impatient and ambitious founders to really trust this boring maths of compounding? I think what it comes down to is you can see a big difference between a founder that's trying to build to make money or a founder that's trying to build to solve a problem. So I like to invest in people that have got purpose, that are trying to fix something. And if they're trying to fix something, they don't focus too much on the result. They focus on getting the thing done and actually working out how to fix and solve that problem for their customers or their product or whatever it might be.

5:24And the catalyst and the success of that work, the compounding effect of that work over time is that you make money. I very much try to find those that are focused on a real drive of purpose because that will compound, because they will have the resilience and have the stay power to push through the hard times because they've got a really clear objective. So that's the key. How do you do that in the conversations? What do you ask them? How do you know if they're in it for the mission or if they're trying to grab a quick buck? There's a few things you can do. You could ask them if they had 5 million tomorrow, how they would spend it.

5:57And if they've got the answer, they've been thinking too much about the money. You can ask them questions around problems they're trying to solve, purpose, why it's important to them, what their beliefs are. There's a lot of ways you can unpack that. But also, I'm a big believer that to invest successfully, you need to spend enough time with those founders and those individuals. So my courting process to make an investment is often two, three months, which is quite long, really. I like to actually get in person with them. I like to spend time. And more often than not, we actually invest and do strategy.

6:26So we do an element of support. We don't just invest as a kind of passive investor. Obviously, I do do some passive investing in the markets and whatever else. But day to day with those key investments, I try to be strategically involved so I can add some purpose, but also understand what drives them. And that's a big deciding factor. I mean, There's a lot of entrepreneurs out there. I would say 95 % are average. There's 5 % that are great, or let's say have the potential to be great. And there's 1 % or 2 % that can be exceptional. And it's trying to find those 5 % and then take them from being great to exceptional is the key.

7:02In this business mentor space, I imagine the topic of compounding comes up, not just like financial compounding. I'd like to know what other non-financial assets like relationships or skills that you see kind of coming up and compounding the fastest? One of the biggest ones, which a lot of founders are often undervalue is team, is people. You bring in good people, you invest in their training and in their development. Over time that compounds and you get a stronger employee. I see so many businesses that don't have training plans in place for their team members. They don't invest or put budgets together for team members.

7:40That's a big weakness. You get them day one. And if you don't progress them, they stay the same and your business then plateaus. I think one of the biggest jobs a founder has is to nail hiring. If I could have a tenner for the amount of time someone said to me, oh yeah, but what if I go and pay five grand for this training course for them and they leave in 12 months time? Yeah, but what if you don't? And then you don't have the skillset in the business. And what's that worth? You've built and exited three companies over the last 15 years. Did you go into this company building with a long-term, long-time horizon view, the same as you are looking for in founders now, or have you kind of developed this over time?

8:17If I'm being really honest, I think it's developed over time. I think hindsight and being able to look back and meditate on good and bad decisions helps a lot. I'm 40 now and I take a lot of time to try and reflect and think on what I did well, and I've done lots of things really poorly as well. Obviously, you've learned probably more from that. Those first businesses, I think I was just trying to prove to myself that I could do it. I was figuring it out in real time. I didn't have business mentors around me. I didn't have the experience or the gray hair. So all of those things were a lot more reactive.

8:46So I would say, yeah, look, each exit I've had has been bigger than the last. Each one has been more complex than the last. I've just launched Unusual Group in October, just launched a brokerage as well under the brand Succeed. This year, I'm involved in five of my own businesses. And the key for me now is building great teams in those businesses from day one that can operate them so that I can remain quite strategic. But in my early businesses, I was the center of everything, which was a nightmare. So that's probably the key lesson I've learned is recruit and hire well early, invest early, even if that means that the profits and the stability of the business come a bit later.

9:21And obviously, I appreciate I'm in a fortunate position to be able to do that. Not everyone can. But for me, it's critical. The only way you can manage multiple assets and multiple businesses is by having great people. So that's the focus now. But that's a gift of hindsight, not a gift of the original doing. Something that comes to mind is something that Morgan Housel said in the book, which was that progress happens too slowly to notice, but setbacks happen too quickly to ignore. I've been thinking a lot about building company culture recently. This is one of those things that takes so long to build and embed, and then you can ruin it with a couple of toxic senior hires.

9:58Have you got any tips on building company culture or avoiding the big setbacks that you can have by making a few mistakes. Yeah, one of the biggest things, if you're bringing a senior person in, especially similar to the investments, I like to court them for a while. So I see it as very much a two-sided thing. So I'd get them to come and spend time with me, shadow me for a couple of days, spend time with the leadership, maybe join a board meeting and actually embed into the ecosystem. And we pressure test them, but they also are testing us. It goes both ways. We pay them for their time, of course, but we ask them to come and spend a few days.

10:30sometimes it's been a couple of weeks actually in the business, paid consultancy, figure out whether it works. Obviously, it's always a bit challenging if they've got other jobs and they need to take it as a week's holiday to come and do it or whatever. You need to kind of navigate that. But I think it's critical until you spend time with somebody. Doing a few interviews virtual these days most of the time isn't enough to know somebody and know whether it's going to be right. And you're taking such a chance on bringing somebody into a business. Treat it for what it is. You're going into bed, into a relationship with these people.

10:57It's really, really critical. So many people just go, right, I've got a need, I've got a gap, I need a certain skill set. This person seems to tick some of the boxes or most of the boxes. Let's hire them. Until you know them, be really careful. The hiring process can often feel very long when you're going through the hiring process, but can't really be long enough when you're on the company side of the table. I think the key is to be honest and transparent from the beginning, right? So whenever we're interviewing somebody, we're like, look, our interview process is not usual. It's not normal. Hence the unusual group name at the moment.

11:28we try to do things differently. This process is going to take a month or two, but at the end of it, you'll know you're aligned to us. We'll know we're aligned to you. The time we ask of you, we'll pay you for. Are you up for it? And it's very quick in that first 15 minute show and tell, they're like, absolutely not. I need a job in the next two weeks or actually this is really intriguing. Let's go. There's one last thing I want to touch on compounding recurring revenue. I focus on long-term investments and recurring revenue. And I'd just like to kind of double click on why you heavily prioritize recurring revenue models.

12:00Can you just tell me a little bit more about that? The last two businesses I built were agencies, marketing-led agencies. And for me, the recurring nature of that revenue became really predictable and gave me a really solid bias to be able to then make decisions on everything else. So for me, I understand those business models really well. They feel sustainable for me. I've always liked SaaS and technology companies because it's similar. So yeah, alongside the compounding effects of the way that we operate and the types of investments or the types of way that we generate money, if you've got a compounding way of generating revenue, again, in each month, you're adding a bit more to it, you're bringing a new client or whatever.

12:38It's the same principle, isn't it? It's just done slightly through a business sense. It's something that mirrors this book, Psychology, really well. Let's move on to your second big lesson. Control your behavior. Right at the start, he compares this brilliant, well-educated finance exec who ended up going bankrupt to a janitor who died with$8 million in the bank and gave it to charity and his kids. The thing that made this hit home is that this only happens in finance. It doesn't happen in other highly skilled professions. You can't imagine a janitor performing surgery better than any surgeon or designing a car better than a Mercedes engineer.

13:17It just doesn't happen. But in finance, the janitor can outperform a seasoned finance exec simply by controlling their behavior and looking at lesson number one, letting the compounding work for them. How do you see this working in like a company building scenario? Can a scrappy, disciplined, first-time founder outcompete a serial entrepreneur with clever strategies just by managing their emotions and their behavior around their decision making? Absolutely, they can. I think what it comes down to is founders quite often are kind of visionary type individuals. And one of the things I see go wrong a lot in business is that those founders start to build momentum on something that's working.

13:59And then they start to try and launch a new product or bring in new services too quickly or see a shiny object over here and say, I'm going to go and do that now, or try and pull themselves out of the business too quickly or replace themselves from sales or whatever it might be. And if they just double down on that for longer and just done what was already working embedded in and repeated that and repeated that and repeated that over time, it would have stacked well because it was already a proven model. Quite often if they deviate resources, spread people's attention internally too wide and splinter themselves, they will fall backwards.

14:33And actually some of what was working in that momentum is lost. So absolutely, if you get some momentum and it's working, just double down on it. You don't always need to do the new sexy thing that you see a competitor doing if what you're doing is working and you're growing. I wanted to ask you about trends. You said in the document that I used to put together that you try not to chase trends, that you have a plan. How do you stop yourself doing this, especially as an investor? For example, I read this recently about 11 Labs. The early investors in 11 labs, they're going to be getting like a 700 extra turn in like two or three years because they saw the future.

15:14AI voice to me might have seemed a bit like a trend a few years ago. Obviously to the investors, they chased this thing that could have been perceived as a trend. Like how do you tell apart what's the trend and what's value? So it's difficult, isn't it? Because there's always going to be outliers in every thesis or every industry. So look, 11 labs have smashed it out the park, so lovable, so lots that we could talk about. However, there's also about 95 or 98 % of AI startups that come to nothing. So it goes back to that thesis that I spoke about earlier, which is that they would be driven by a really clear purpose.

15:49I haven't had the pleasure, but if I'd had the chance to meet the 11 lab founders, I'm pretty sure they wanted to literally figure this out. They wanted to make it so perfect and accurate that actually they become the market leaders and the best in the world at doing that thing. So actually it was less about jumping on a hype. There is probably about 300 competitors to 11 labs, by the way, and all of them have jumped on the back of 11 labs doing such a great job. So they are a trend and that's okay. Don't get me wrong. There's room in every market for competition, but for me, I would have stuck to the same thesis.

16:21If I'd had the chance to speak to them and looked at it, it would have been like, are they really clear on what they're trying to do and why? And if so, and it feels like the right of thing, then it would be investable to me. So it's sticking to those principles I've already set. How do you personally build a plan that is worth sticking to? You have access to a lot of different companies now. How do you notice what the characteristics of a really good plan that's worth sticking to are for the individual businesses that you might invest in? A lot of changes in almost real time these days, right?

16:50Things are moving so fast, especially with that AI world. So every year I do what I call a reflection week. And I stole this from Bill Gates, actually, So I go away for a week, have a week on my own, no digital devices, just books and a notepad. And I think about a thesis and I think about the way that I want to operate. And I think about industries that are interesting to me and problems that are interesting. And then I basically go out into the world that year and I try and find them. I've got one at the moment focusing on loneliness and supporting people with overcoming loneliness. But I just haven't found a company yet that I think is doing it well enough.

17:21But that was one that I came into at the start of this year of my reflection week. So I come with a very clear goal of what are the types of businesses or problems that I would like to find a business that's trying to solve. I can't operate all the businesses under the sun, but I'm fortunate enough that hopefully I can add some value to the ones that have got the potential to solve those problems. And that's how I do it. And then I stay very strict to that. So anything else that's a distraction or comes in, looks shiny. I might give it a little bit of time to have a look if it seems interesting.

17:49But most of the time, if it's not in that thesis for the year, I just say no to it and I move on. And don't get me wrong, I haven't always got this right. This is again, learned behavior. If I don't do this, I get sidetracked and then I'm all over the place and then it's messy. And actually what I've learned is the returns and the success of those things end up being massively reduced compared to if I just stay laser focused. With your week that you spend by yourself thinking, what do I really believe myself? And then you want to try and chase those. Those are going to be the things that are the most important.

18:20And then when the shiny, distracting things come across your plate, you have the framework to be able to say no to them because everything that you're saying yes to, you're saying no to something else. So it's about focus. And Warren Buffett said, the difference between successful people and really successful people is that really successful people say no to almost everything. And I remind myself about every day because I get literally hundreds of requests for my time, for me to look at investment decks for whatever. And if it isn't in my thesis I set for the year. My assistant knows it's a hard no.

18:51We'll collect the data. We've got lovely templated messages to wish them well and make some further introductions and offer support. Absolutely. But it's not for us. Switching gears a little bit, I'm interested in when you've seen businesses going under or not doing well or a founder getting ousted. How much of it do you think is due to bad product or bad product market fit versus the founder losing control of their behavior and their decision making? It's difficult because I would say it's more likely the latter, a people thing. Although if they haven't done their research and product market fit early on and they've just developed a thing.

19:30So there's a lot of really good engineers out there right now, for example, they're not commercially mining at all. They've got no idea how they're going to get to market, no idea how they're going to sell the thing, but they're just going to build the thing first and over-engineer. So that's a problem. So they're both problems in their own right. It's a hard, hard question. I think from my experience, if founders lose their way or don't stay focused, the chances of success cut in half, if not twofold. If they stay focused and they have a clear objective and a really clear value proposition, and they have a clear go-to market and how they're going to sell the thing, they'll do well.

20:04I really like how Morgan Housel in the book, he has this kind of nothing is free maxim. He's talking about this in the context of investing. Even if you're really successful, it still has the price of volatility, fear, doubt, uncertainty. And this is something that kind of is mirrored in entrepreneurship. Entrepreneurship has this emotional toll on all founders, which come with sleepless nights and working till midnight to solve issues and worrying about payroll and that sort of thing. Could you talk a little bit more about how you screen for passion and perseverance in the investments that you make?

20:39yeah i think it goes down to that saying of hire for attitude and trade for skill you know that kind of thing and it's the same kind of principle isn't it if you're looking for a founder like hire for the right mindset or invest in the right mindset and then the rest of it you can kind of figure out on the way when you start a business over planning doesn't really help you at all it's the execution it's how you deal with the challenges and problems along the way i always think about businesses very much solving problems that's literally what it is to be a founder it's what problems, finding great people to put into those fires that can douse them, control them, harness them, whatever you want to say.

21:15So one of the kind of ways that I try and approach that is a bit like I was talking about earlier. It's about asking the right questions and really getting to the heart of what somebody's passion and real, real true drivers are of their own personality. Because those that will break along the way are in it for the wrong reasons. Those that will figure it out and no matter what the cost will find a way to break through it are the ones that you want. It's hard. 95 % of entrepreneurs are average. They are. There's a lot of crap entrepreneurs out there, unfortunately. And it's not their fault. It's just they're not doing the thing that actually they would die on the sword for.

21:51And that's the thing. They're trying to get rich rather than trying to fix problems. And that's the big differentiator. What have you got for the third lesson today? Wealth is what you don't see. I think this is brilliant because it's the rich person versus wealthy person question and point that Morgan Housel speaks about a lot in the book, where the rich person might be driving this$100 ,000 car and the wealthy person, you can't see, they've not bought the$100 ,000 car. They've actually kept that in the bank. But what that has done is it's allowed them freedom and peace of mind so they can do things like paying payroll without laying anyone off when things go sideways for a couple of months, not to work to midnight so that you can spend an evening with your kids.

22:32The big problem here is that the rich way of acting is visible. And because it's visible, it's used as a status symbol. It's what people kind of aspire to be because it is visible. Whereas wealth is kind of harder because it's often invisible. And it's really hard to follow that person if they are being a little bit more frugal, because you don't know, you can't see beyond their modest car and you can't see that they're happily sat on a big fat bank account that allows them the freedom to choose what they want to do with their time. With this kind of framing, what are the invisible metrics that we should be tracking?