The Investment Strategy To Build Generational Wealth (ft. Morgan Housel)

0:00What matters is not necessarily what are the best returns you can earn this year. That's what everyone chases, but that's not what matters. What matters is what are the best returns that you can sustain for the longest period of time?

0:20Let's just get right into it. Morgan, what's going on, man? I'm happy you're here. I'm happy to be here. Thanks for having me, guys. I read the book, your first big hit, Psychology of Money, a while ago. Was that four years ago? About, yep. Yeah. And then this new one just came out. Was it called Same as Ever? That's right. Yeah, man. And the Goodreads reviews are higher on the most recent one, I think, than the first one. So congratulations. No, thanks. I think with all books and all articles, this is probably true for podcasts too, you really never know what's going to work and what's not. And even I've been a writer for 17 years, and I still really don't know when I publish something, a blog or a book, how it's going to be received.

0:59And maybe you get a little bit better around the edges, but it's always like you just have to birth into the world and then just step back and watch. It's going to do whatever it's going to do. Well, you told me that the first version of Psychology of Money, you said that the first print run was, I think, 5 ,000 copies. Is that right? So you guys, you thought 5 ,000 copies is the right amount. You sold over 4 million. So I think that proves your point of you don't really know till you know. But that number is kind of amazing, dude. Over 4 million books sold, your, I don't know, in the top 0.01 % or something of authors.

1:37I don't know how much you make per book, but I think that means you've made like over$10 million as an author on a successful book. That's so hard to do. That's so rare. And congrats to you for doing that. Thanks, Sean. Yeah. I mean, I was telling someone the other day, I think the closest analogy to the book industry is probably professional sports, where 99.9 % of high school basketball players will never make the NBA. I don't know, 99.999, whatever it is. But then you have a couple of LeBron James and Michael Jordans who go on to make a billion dollars doing it. And I don't know this to be 100 % sure, but adding it up in my head, I'm pretty sure there are more billionaire authors than there are billionaire athletes, even in a world in which 99.9 % of books will sell a couple thousand copies or less, if that.

2:24But then you have J.K. Rowling and Dave Plinke and James Patterson who have made over a billion dollars writing books. So it's just like extremely tail driven in the success. I want to ask you about one of your philosophies because you're very interested to me. You have a philosophy. It's very easy to sell a philosophy of more, right? People do that all the time. And in fact, even our podcast, I would say falls into the bucket of the philosophy of more many times when we say no small boy stuff, right? We're saying think big, play big, go for it. Don't sit around and wait. Don't be fearful, right?

2:56So more action, more ambition, more or whatever. That's one philosophy a lot of people fall into. And some people go even crazy, right? David Goggins is like, work harder. Gary Vee, Alex Mosey, these guys are like, just grind harder. So people often have the philosophy of more. And some people, Marie Kondo and others have the philosophy of way less. You need less. Minimalism, you know, escapism, just become a sort of a zen person. Go, whatever, get those vans and just like travel around the world, right? So it's like there's the philosophy of less. And you're in the middle, which usually is the dead zone for content.

3:30You're in the middle where you're like, no, just have enough, right? Moderation. And I can't believe you've got moderation to sell. I'm going to read you a quote and then I want you to talk about this. So he said, more than I want big returns, I want to be financially unbreakable. If I'm unbreakable, I think I'll actually get the biggest returns because I'll be able to stick around long enough for the compounding to work wonders. I loved that quote. And in general, I find this moderation thing interesting. Tell me This is where moderation in finance is actually going to lead to the biggest returns.

4:00Because what matters is not necessarily what are the best returns that you can earn this year. That's what everyone chases, but that's not what matters. What matters is what are the best returns that you can sustain for the longest period of time. And so this is why on an annual basis, I strive for average returns in my index funds by design. Why do I do it? Because that's going to give me the endurance to hold them for 50 years. And if you can earn average returns for 50 years, you're going to end up in the top 1 % of all investors and you do it with zero effort. What's average? In the US stock market, 6 % real, 6.5 % real after inflation is what's been.

4:37If you can earn 6.5 % returns after inflation for 50 years, I mean, you can run the calculations of it. It's going to achieve every, it's dynastic wealth. It'll make your great grandchildren wealthy. And you can do that with zero effort. Now look, past performance, not a negative, there's a nuclear war, et cetera. You can come up with all these scenarios in which it's not going to work out. You can come up with scenarios in which the economic conditions of the last 100 years are not going to replicate for the next 100 years. Okay, all those aside, earning average returns for an above average period of time is way more lucrative than trying to earn superior returns for a shorter period of time.

5:13Like as always, and I think it's so counterintuitive, the intuition for everyone, including educated professional investors is, how do I earn the highest returns this year? And it's like, of course. It's like, how could that be wrong? It's like, no, if you just average for a long period of time, that's the winner. PIMCO, the big bond fund, they had this phrase that I love. They called it strategic mediocrity, where in any given year, they were never going to be in the top half against their peers. But in every decade, they'd always be in the top decile because the peers that beat them in any given year get washed out.

5:43And I think it applies to a lot of things. It applies to a lot of businesses. It applies to relationships and marriages of like, you don't need to be a superhero. If you're just good for a long period of time, that's how compounding works its magic. That thing you just said was excellent. I love that. So you said, I want average returns for an above average number of years rather than superior returns for a short period of time. Or in any given year, I'm not trying to be in the top. I'm trying to be, you know, sort of 50%. But if I do that for 30 years, I'll be in the top 10%. It's so true in the kind of like slow and steady wins the race.

6:22I think you had a stat that like, if Warren Buffett has, I don't know what it is, like, let's say$85 billion net worth, like 81 billion of those 85 came after his 65th birthday. Right. And I think he said something like, if Warren had just retired when he was 60, nobody would even talk about him because the contact. Like, obviously he is a great investor, of course. But the whole secret, what's literally 99 % of his wealth is that he's been a great investor for 80 years. That's why he started investing when he was 11 and he's 93 today, still going as hard as ever. And that's where all the money comes from.

6:57And yes, so his average returns are 20 % per year, which is phenomenal, of course. But if you earn 20 % per year for 20 years, it's really good. You earn 20 % a year for 40 years, it's great. you're in 20 % a year for 80 years, you're worth$100 billion. That's where all the returns come from. Did you hear this, Sam? They're giving that shirt away. Buffett's giving it away this year at the Berkshire Conference. Just hard as ever. Still going hard as ever. Is that real? Are you being serious? Oh, because that would be hilarious. Dude, but we joke about Warren Buffett where he talks about, I forget how he phrases it, but he talks about, it's all about the future.

7:37It's all about the future. And we were like, dude, you're 93. There is no future. Bail and enjoy life. And you could argue, well, he likes what he does. So it's cool. He's enjoying life. But I've always... When I think about long-term stuff, I'll map out my life. And I'm like, man, if I only live to be 80, I only have 40 or something summers left. I don't know if I want to be... I'm not willing to pay the price if that's what's considered great is doing 30 or 20 % returns for 80 years. I'm not willing to pay that price because life's too short. And when I think about what it requires to be one of one, to be one of the greats, that's what freaks me out is I don't want to be that old and not have enjoyed it.

8:22That's why it's like the converse to all this is Bill Perkins' book, Die With Zero, of like, spend it while you're here. Enjoy it while you're here. Because when you're gone, it's pointless. You know what I mean? Yeah, yeah. Now, I think there's a couple. I think I agree with every word you said, particularly for ordinary people like us. I do think Buffett's DNA is just, he gets more pleasure from anything in life. The most pleasure he gets is from compounding. There's nothing that makes him happier. The other thing is, even though he's worth$100 billion today, he's given away$100 billion already.

8:55And with the rest of his net worth, the fact that you go into the Bill and Melinda Gates Foundation, I imagine, I don't know this to be true, But I imagine when he lays in bed pondering his life, he's like, I put my skill to use and I'm going to give away a quarter of a trillion dollars for the betterment of society. I was just in Omaha a couple of months ago where he's lived his entire life. And in downtown Omaha, one of the tallest buildings says the Buffett Center for Cancer Research or something like that. I imagine when he drives past that, and this is the building that he drove past when he was five years old, it gives him a ridiculous amount of pride and pleasure.

9:30And so I actually think if he were on his deathbed tomorrow, Charlie Munger just died last month, I think he would look back and say, I lived the best life that I could have. It wasn't perfect by any means. But I think there is a difference between the Bill Perkins philosophy, which is true for 99 % of people. And then there's 1 % of people who actually get so much pleasure out of compounding and thinking about what that money is going to do to society after they die. Dude, there's this crazy story about Buffett where his daughter had just had a baby and And she's living in a shit apartment. And a mutual friend of Warren and the daughter went...

10:03It was actually the CEO of Washington Post. Went to the house and was like, Warren, her kitchen sucks, man. And so the daughter eventually goes to Warren and goes, Hey, can I get a$20 ,000 loan in order to redo my kitchen? And he was like, Yeah, just go to the bank. And so she eventually goes to the bank. And then a few months later, the CEO of Washington Post goes back to her house. And the daughter's sitting in bed, but she has a really small TV where she would sit and nurse her child in front of... And Washington Post lady goes to Warren. She goes, Warren, give her$500 for a new TV, man. She could barely see this TV and she's in bed like eight hours a day.

10:36Can you just give her a new TV? And Warren was like, no, compounding is more important for that$500 TV. I can't... I'm not going to take the money out. And so Catherine, the CEO of Washington Post, ended up buying her a$500 TV. But that's how tight this guy was about following his code, which I guess I appreciate that someone has a code. But that ain't my code. Wait, so Warren Buffett is just an asshole? Is that the story? Is this a real story? Because I hate Warren Buffett. Well, yeah. So Warren Buffett gets, he gets a pass for having this all shucks attitude, but he's definitely an asshole. He's definitely an asshole.

11:07Depending on how you define asshole, I would define him as a wonderful, what do I say? All great men are also bad men. The way he handled his family, I think was not wonderful. The way he handled business associates was wonderful. So, you know, like there's trade-offs to being great. I think as someone like, I have so much respect and admiration and reverence for him. But I would also put him in the camp as someone who was like, I'm so glad he exists, but I don't think I would want that for my own life, which is not a criticism against his life. It's just like to each their own. And let's not pretend that everyone should want the life of the five standard deviation success.

11:43It's like, there's a cost to all of that. I was just trying to imagine his daughter just at the bus stop trying to get a bus ride to wherever she's going. Looking up at the Buffett Cancer Research Center and just being like, God damn it. There's some other parts of the story. Buffett's first wife, Susie, had billions of dollars of her own, and she was much more freewheeling with money. So I think the Buffett children, and they did just fine. But yeah, there's plenty of stories about Warren. He always described it as he was like, capital is my tool. I'm not going to give, like, these are the tools of my business.

12:14This is how I make money. I'm not going to be willy-nilly with it. And even when Buffett was in his 20s, when he was a kid, this is back in the 50s, he was already worth tens of millions of dollars when that was real money in the 50s. And you could easily imagine a world in which he's worth the equivalent of$100 million when he's 30 years old or whatever it was. And everyone would be like, dude, you need to give all this away. You're never going to be able to spend this. And his philosophy was like, his philosophy has always been people in the future will be just as needy as people are today. So if I have an above average ability to compound it, it actually makes sense for me to hold onto this money for as long as I can before I give it away, which I think is actually pretty rational.

12:50You said a few things that I thought were contradictory in different interviews that I watch. And I think in the book, I forget, I'm mixing up the book and interviews that I watch. But you talk about financial goals. And you're like, I don't look at my portfolio. I think you said, I don't set goals, or at least that's the vibe that I got in an interview. But then I've also read a little bit where you do have some type of goals. so for financial goals do you like have a number in your oh sorry I remember what it was you said whenever you hit your goal you're always going to double it therefore I don't have goals I think that's what you said it's such a the reason it's hard for me to answer that is I'm sure I've said things that are contradictory because I like everyone else it's like it depends yeah I'm not trying to call you out no no no depends on probably the mood that I'm in that day do I if I'm sitting here today and I think do my wife and I have financial goals not really it's not like oh we're trying to hit X.

13:44And once we hit X, we're going to go buy Y. Not really. But I, like everyone else, think about like, oh, if my income stays the same, we'll have this much money. What kind of life could we live with that much money? And one thing too, we have two young kids and we are pretty hell-bent on not spoiling them. They live an amazing life and we live in a great house. They'll have a great education. They'll live the top 0.01 % of lives, but we don't want to raise spoiled little pricks. And because of that, we often, when we have goals, it's not like, oh, how can we buy a bigger house, another house, nicer cars?

14:17It's kind of like we want to live a good but not extravagant life because we don't want to spoil our kids. But even that, sometimes I can talk to other people who are like, no, actually you can live the big high life without spoiling your kids. Here's how to do it. So I feel like I say, I think a lot of the contradictions come from humility of just like, I haven't really figured it out yet for myself. I tend to not have goals. For years, I had a goal of once my net worth is X, I'm not going to work much anymore because I could easily live for the rest of my life off of that net worth. And I've exceeded that number and I'm working harder than ever.

14:50But I don't regret that at all. Maybe that is some version of moving the goalpost. But I think more of it is after I hit some level of financial independence, after I wrote books, it was like, okay, I'm only going to do the work that I enjoy now. And it's not really work. It's just like, I really enjoy writing these books. I only speak of conferences in cities that I want to go to. It doesn't feel like work. And I don't think I really understood that 10 years ago. 10 years ago, work was by and large a means to an ends. I need to do this to feed my family. And now that I've reached the artistic level, I'm like, oh, I want to keep doing this forever.

15:22And in that world, goals go out the window. Well, we've interviewed a bunch of... I mean, we have a bunch of wealthy friends. We've had a bunch of people on here. You're a financial historian. So you've read about all these people. You also know a lot of them and you've written about them and you probably run in even a more elite circle than we do. But a question that I've always wondered is, is there a threshold where I'm not going to worry anymore? So far, I've not found that threshold. And we had Scott Galloway on here recently and he was like, I'm worth like over 100 million liquid and I still freak out.

15:51Have you found any type of thresholds to where the average person changes, where they feel more relief? I don't know. I don't know if the average person, I can tell you myself though. that number that I was talking about before where for years it was like, once I hit this number, I'm not going to work anymore. Once I hit that number, I still work. Can you say that number? I don't know. I don't know if I want to get too, too into details. Maybe I'll tell you off camera. It's not, it's not, it's not a ridiculous number. Cause some people don't know how, what, how should I think about what that number is?

16:19For me, for example, I was like, oh, if my life annual burn rate was X and I wanted a certain amount of money where, you know, 4 % or 5 % withdrawals of that would mean I'm sort of saying neutral. Let's assume I'm getting 6 % real returns in the market. If I was to withdraw 4 % out to pay for lifestyle, that number of the bank account is never going to go down. It's only going to go up. That's literally exactly how I calculated. Years ago, Sean, you said yours was$6 million. But if I had to guess, that has changed as you've had a family. Yeah. No, to be honest, can I say the honest answer is kind of ridiculous sounding.

16:57But it's not that, oh, I had kids. and oh man, I really underwrest. These diapers are expensive. That's not actually what happened. I literally, I remember one day I was like, okay, so I've done this. I was like, I kind of feel like a guy who should have a hundred million dollars. And I was like, I think I'm, I think I'm worth that. I think I should be like, you know, I don't have to have it, but like if I didn't have it, something would feel amiss. Something would feel a little wrong. And then I was like, okay, cool. I think I should do that. I didn't become my like North star of like, I'm going to do this.

17:29But what I did do was I made sure that I would only work on things that either I was doing purely for the joy of it. It didn't have to bring in any dollars. Or if I was doing it because I thought it was going to be financially rewarding, the financial reward had to be big enough to make it to be like on that path, not a path, not a smaller path. Yeah. Doesn't that sound like... I came up with my number exactly as you did, Sean. It was like, if I have a 4 % withdrawal rate, what is the annual income that I know is going to be like easily, comfortably all that we're ever going to want to spend? and I just backed into the number.

18:00And Sam, to answer your question, once I hit that level, A, I kept working as I am now and I don't think I was any happier, but I have less financial stress, less career stress. But that's happiness, dude. That's happiness. It's such a cop out. I hate when people say money doesn't make you happier, but it just gets rid of money problems. And I'm like, yeah, when I worried about rent, I was unhappy. Now I know I'm more happy. I'm not necessarily happy, but I'm happier. I think we probably agree. This is like arguing over the definition of words, but I would say there's a big difference between happiness and a reduction of anxiety.

18:39I think those are very different things. Happiness is like you wake up grinning ear to ear, or it's like if you're watching the funniest comedy you've ever seen and you're just like laughing on the floor, that's a happy moment, but it's always fleeting. But to me, the reduction of anxiety or contentment, that is something that money can buy and that is worth chasing. It's great. So when people say money can't buy happiness, what they're implicitly saying is it's not worth chasing. I think it absolutely is worth chasing, but it's not going to give you happiness per se. It's going to give you contentment and a reduction of anxiety, which is wonderful.

19:08It's a massive increase in the quality of your life. But in my definition, it's not necessarily happiness. But I feel like I hit that. I feel like my wife and I were talking about this last night. I feel like I'm in a better mental state of less anxiety than I've had relative to five or 10 years ago, which is great. You wrote The Psychology of Money. You've studied this a lot. I want to ask you, what are the biggest or maybe the most common leak? Instead of most common, I would say the most impactful psychological leak, meaning a psychological trap or mistake people make around money. And I want you to answer it for somebody who is kind of on the come up.

19:50So somebody who isn't totally financially independent yet. And then for rich people who still have a bunch of weird psychology and weird relationship with money I want you to tell me what you've seen or what you believe is kind of maybe the biggest Psychological mistake people have around money in each of those buckets I think there's there's two i'll start with one that's probably the biggest which is social comparison Which is always sean you just mentioned, you know, you want to be a guy You should be a guy with a hundred million dollars i'm willing to bet if you told 17 year old sean that figure You would faint but it doesn't seem that ridiculous to you now because I bet you know people who are worth$100 million.

20:24And so who you compared yourself to when you were 17 or 25 is different now. And I think there's no end to that. If, and I hope you are worth$100 million someday, I guarantee you, you're going to start comparing yourself to people who are worth 200, 500, a billion. And that never ends. Never, ever ends. The point I always make is like, the minimum wage in the MLB is like 500 ,000 a year, whatever it is, 400, whatever it is. a shitload of money by any definition if you're making half a million dollars a year. And I guarantee you there's not a single minimum wage professional baseball player who thinks they're doing well because they're comparing themselves to their teammates who are making 10 million a year.

20:58And so there's no end to that. But you always think there is, which is why I, for myself, had this idea, once my net worth is X, I'm never going to work ever again. But now that I'm here, maybe it is because I'm comparing myself to other people, other authors. Maybe that's at least part of it. So I think even if I can write these philosophies and made a living talking about these. I'm still susceptible to that as anyone else. I think everybody is. So I think it's such a natural thing. I mean, in all of evolution, what matters is not how much success you have. It matters that you have more success than the other person.

21:30Because in a competition for resources, that's all that matters. It doesn't matter if you're worth a billion dollars. If somebody else is worth a billion and one, they have more resources than you. And from an evolutionary perspective, they're going to win and you're going to lose. So that always chasing, no matter how much you have, is a big psychological underpinning to people's anxiety. The second that I would mention that's probably equally as important is realizing that there is not one right answer for everybody. And everyone in finance is always seeking the right answer, like quote unquote, the right.

21:59It doesn't exist. I think it's much closer to like your taste in music of like, there's no such thing as the best music. You like this. I like that to each their own. And a lot of times when you have a financial debate of people are like, I can't believe you manage your money like that. Why don't you do it like me? You're not actually debating. It's people with a different risk tolerance, different social aspirations, different family dynamics who are talking over each other. And I think it's like, it's hard for people to come to terms of like, look, that works for you. This works for me. To each our own.

22:27People don't want to settle on that because it's easier to think that there should be a right answer like there is in math. You had this quote, I think it was from the book, but it could have been from a blog post that you wrote where he said, the biggest risk and important news story of the next 10 years will be something nobody is talking about today. But you're in this weird position where you work at a VC where you actually do have to predict the future a bit, or at least you're around people who are trying to predict the future. What do you think? Are there any trends or topics today that you think in 10 years are going to be a lot more common and popular?