Team Favorite At the Money: What Never Changes with Money

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1:06indexing, massive technology concentration, the rise of AI. it's a brave new world, or is it? As much as our era seems to be unprecedented, a lot more is the same as ever. Human behavior, risk, opportunity, even living the good life all tends to be, well, if not eternal, pretty close. We tend to focus on what's different while ignoring all the things that remain the same. I'm Barry Ritholtz, and on today's edition of At The Money, we're going to discuss why you should pay attention to the unchanging nature of money and human behavior. To help us unpack all of this and what it means for your assets, let's bring in Morgan Housel.

1:55He is the author of Same As Ever, A Guide to What Never Changes. The book has received widespread acclaim for its insightful approach to thinking about risk and human nature. So Morgan, let's start with your central premise. How consistent is human behavior across the millennia? Well, Barry, this is a great quote from Voltaire who said, history never repeats itself, but man always does. And I think that is such a good way to summarize history, that the events never repeat themselves. The recessions, the wars, they're different every single time. And that's what makes them so difficult to predict.

2:31But the behavior, how people respond to recessions or bear markets, whatever it might be, is very stable throughout history. How people responded to the risk and the surprise of the Great Depression in the 1930s is exactly how they responded to the financial crisis of 2008 or the panic of March 2020. No different whatsoever. And that is important because we cannot predict when the next recession is going to occur, when the next bear market might occur. Nobody can do it. But if you understand that the behaviors are stable over time, then you can say, I have no idea when the next recession is going to come, but I know exactly how people will respond to it when it does come.

3:06So it's putting your faith in forecasting the future in something that is repeatable and predictable versus fooling yourself into trying to predict something that you can't. It sounds like the focus is less on predicting events and more on understanding our own behaviors. That's right. That's exactly right. And you're doing that because one is stable and predictable over time and one is not. So let's discuss the power of narratives. Why is it that stories are so much more influential than data and reasoning when it comes to us thinking about things like money? I think it's always been the case that the best story wins, not the person who has the right answer or the best answer or the answer that makes the most sense.

3:50It's always the best story that wins. People see that very often in politics when it's almost always the case for generations that the person who wins the presidency is not the most competent or has the best policies. It's a person who tells the best story. That has always been the case and I think always will be. People don't have enough bandwidth, whether it's in investing or politics or anything else, to truly parse all the data and sift through all the data to find the best answer. They need a quick soundbite. They need a quick story. They need the best story to make sense of what's going on in the world.

4:21So if you're talking about the economy or the stock market, going through all that data, I mean, that's an incredibly difficult thing to do. But if you could tell someone a quick story, here's a story about NVIDIA. Here's a story about the US economy. They can wrap their head around that in three seconds. And it's much more compelling because it takes less effort to do. Every stock valuation is a number from today multiplied by a story about tomorrow. You take a number from today, like earnings per share, and you multiply it by a story about tomorrow. That's the multiple that you're slapping to it.

4:51But what's so important to there is that the stories that people tell about what tomorrow might be are so much more powerful and also fickle, changing, than the number from today. And this is why there's so much madness and chaos in the history of markets. It's all just people clinging to and adapting to and telling new stories about what the future might hold. So a number from today multiplied by a story about tomorrow. That could be growth rate. That could be earnings. That could be market share. It could be any sort of story. but that's a total unknown. Is that the power of narrative? Yeah.

5:26I mean, if you were to say, just making this up, that Netflix stock will be trading at X dollars per share in three years, that sounds like a reasonable thing to try to predict. But what you are really saying is you know what story investors are going to believe about Netflix three years from now. You know what kind of mood investors are going to be in three years from now. And when you frame it like that, it's absurd. How could anyone possibly know what people are going to believe about the future three years from now. Most people don't really understand what people believe about the future today, let alone what they're going to think about it three years from now.

5:57And so when you realize that it's all narratives driving, it's whatever people want to believe. The meme stock revolution, if you want to call it that, over the last couple of years has been the perfect example of that, where the number from today was almost meaningless, or there was no number from today, but the story about what it could turn into tomorrow was extraordinary. And this is one of those things that has always been the case. That was true 100 years ago. It is so much more powerful today when social media allows the number of stories and the power of those stories to proliferate in a way that we've never seen.

6:29Really fascinating. So let's talk about the nature of risk. Why is it that we really don't understand it? And why do we always seem to be so surprised when a low probability event occurs? I think, look, if there is a 1 % chance of a very bad recession in the next year, and a 1 % chance of a very bad pandemic and a 1 % chance of a war and a 1 % chance of a natural disaster, going down the list, well, the odds that any one of those will occur are very low, but the odds that at least one of them will occur are pretty good. And so if you have a once in a century event, but there are hundreds of possibilities, a one in a century recession, once in a century bear market, whatever it is, the odds that one of them are going to occur this year or in the next five or 10 years are very good.

7:15So this is why we are constantly surprised when there are big risks. So I've been an investor for 20 years. You've been investing for longer than that, but what's happened in the last 20 years? Well, it was the aftermath of 9-11 and the war in Iraq and then Lehman Brothers, now COVID. In 20 years, you've had like five once in a century events. And I think that'll be the case going forward as well over the next 20 years. I think we'll have five or 10 or maybe more events that are easy to call once in a century events. But since there are so many different versions of it, they tend to happen much more frequently than we'd like to believe.

7:44We need a new name for these once-in-a-century events that we get every five to 10 years, to say the least. So I'm glad you're putting this into a historical context. How can we better understand history to both comprehend what's going on today and to conceptualize what might happen tomorrow? This is a great quote that I love that says, everything feels unprecedented when you haven't engaged with history. So if you're not a student of history, then every morning you wake up and read the news and it feels like this is the first time it's happening. This is the first bear market. This is the first recession.

8:19This is the first presidential assassination attempt, whatever it might be. If you're a student of history, you know that there have been a million different flavors of virtually everything that's going on today. And it's the same movie over and over again. It's a different cast of characters. It's a slightly different script, but it's the same movie again and again and again. That doesn't necessarily make things more comfortable because you deal with things that are painful in your own life, painful for other people, but you realize that it's not unprecedented, but this is the same thing. And that really pushes you too towards understanding the behaviors of how people respond to these things versus trying to predict exactly what's going to happen next.

8:51If you understand how people respond to what's always occurred, then you have a good sense of how they're going to respond next time. So one of the things that has always occurred is that we tend to go through these cycles of calm and chaos. Why is it that during the good times, we seem to plant the seeds for the chaos that invariably seems to follow? Well, look, when things are good in the economy or the stock market, people naturally, normally, rationally take more risk. If the economy is really strong, you feel better going into debt in your business and building a new factory. Or if the stock market looks really strong, you feel better allocating more assets to there.

9:32It's a very rational thing to do. But when you do that, you, as one of hundreds of millions of actors in the US economy, have planted the seeds for the next decline. The more risk you're taking in your business, the more risk you're taking in your portfolio makes the market more fragile, more vulnerable. And so the irony is that if we never had a recession, people would very rationally take a lot of risk in their business, go into debt if we're never going to have recessions. And the fact that they're going into debt is what makes the economy fragile. And the fact that the economy becomes fragile is what causes the next recession.

10:03So it's this irony of if we never had recessions, you would guarantee that you're going to have a very bad recession in the future. And it's the same in the stock market. The lack of volatility is what plants the seeds for future volatility because you get complacency and people take on more risk. And so when you view it like that, you view volatility as completely unavoidable. When the lack of recessions plants the seeds for the next recession, it's guaranteed that we're going to have future recessions, future bear markets. You view it as much more inevitable rather than something that requires the economy to break or for policymakers to make a mistake for it to occur.

10:35So we've been talking about how history sets our expectations for what might occur in the future. Let's talk about the gap between expectations and reality. What happens when that gap gets to be too large? It's always been the case in the US economy that if you look over a multi-generation period, there's economic growth. And it's usually substantial economic growth. If you look at how we are living relative to our grandparents and their grandparents, we've grown so much. It has also always been the case that people look back and say, look, it's not as good as it used to be. There are things that were different in the past.

11:11And I think what so often happens is that people's incomes grow, but their expectations grow by even more. The average middle-class American today is living a life that John D. Rockefeller could not fathom. They have technologies and medicines that Rockefeller, the richest man in the world in his day could not fathom. But you cannot say that the average American should feel richer than Rockefeller because that's not how people's brains work. All wealth is just relative to what other people have around you. So you measure your life relative to your neighbors and your coworkers and everybody else.

11:39And in that situation, you can have a world where people's incomes grow, their assets grow, and they live a longer life. But if everyone else is doing the same, you don't feel any better off. And you can also imagine a world in which our grandkids are living way better than us. They're richer and they're healthier, but they're no happier for it because everyone else is going to be living that too. They're all going to have the same cancer medicines and they're all going to have the same high incomes. And so by comparison, they don't feel like they're that much better off. When you realize that all wealth and happiness is just comparison to other people, you realize that the gap between your expectations and reality is really what you want to go for to gain some sort of happiness and contentment out of your money.

12:17And perhaps that's why social media has become so toxic. All it does is raise people's expectations and their comparisons rather than appreciating what they have. Yeah. Because I mean, it used to be that you compared yourself to your neighbors and your coworkers. Now you compare yourself to a curated highlight reel of a bunch of strangers, fake performative lives. And so no matter how well you're doing, you can open up Instagram and be bombarded with hundreds of people who appear to be doing better and look better and look happier than you are, even if it's all BS. And so even though the comparison game has always been the case, it is so much more potent today than it's ever been.

12:55What we see on Instagram is the car or the house, but we don't see the monthly payments. And you don't see the person bickering with their spouse or dealing with their health problems or whatnot. It's all the highlight reel. And sometimes it's the fake highlight reel. And it leads people to think that everyone else is happier than you are. There's this great quote from Montesquieu who said this 300 years ago. He said, if you only wish to be happy, that is very simple to do, but people want to be happier than other people. And that is very difficult because we overestimate how happy those other people are.

13:28And he said that 300 years ago, well before social media. If you were around today, I think he would look at that statement and say it is 10 times truer today than it's ever been. And our final question, how can we balance optimism and pessimism in our own lives? With money, I've always phrased it as you want to save like a pessimist and invest like an optimist. You want to be very confident in where we're going for your investments, but you want to be very realistic about how hard it's going to be to get there. I hope to be an investor for another 30 or 50 years. And I'm very confident that 50 years from now, the market's going to be extraordinarily higher than it is today.

14:05I'm equally confident that it's going to be a very painful slog to get there. It's going to be a nonstop chain of surprises and setbacks and recessions and pandemics, on and on and on. And so I think that's how you balance it too. Very optimistic on where you're going in the long run, and very realistic about how difficult it's going to be to get there. So to wrap up, the world is changing faster than ever, and we tend to focus on each incremental, unprecedented action that takes place. we really should be focusing on all the things that are the same as they've ever been. I'm Barry Ritholtz. You're listening to Bloomberg's At The Money.

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