The finance types tend to focus on attributes like intelligence, math skills, and computer programming. But it turns out financial success is less about knowledge and more dependent on how you behave and make decisions than raw intelligence. How you behave with money matters more than what you know about money. I'm Barry Redults and on today's edition of At the Money, we're going to discuss how to make sure your behavior
is not getting in the way of your portfolio. To help us unpack all of this and what it means for your investments, let's bring in Morgan Housel. He is the author of The Psychology of Money. The book has received widespread acclaim for its insightful approach to personal finance and has sold six million copies worldwide. So Morgan, let's start with your main thesis. Financial decisions in the real world are influenced by our personal history, worldviews, ego, pride,
too many other factors to list. It's not just mathematical calculations, that's right, Barry.
I think one analogy here would be think about health and medicine. You can have a medical degree from Harvard and know everything about biology and have all that insight in that intelligence, but If you smoke and you don't need a good diet and you're not getting enough sleep, none of it matters. None of the intelligence matters unless the behavior actually clicks and is working. And finance is
the exact same. You can know everything about math and data and markets, but if you don't control your sense of greed and fear and you're managing uncertainty and your own behavior, none of it matters. So this is why finance is one of the few fields where people who do not have a lot of education and financial sophistication, but if they have the right behaviors can do very well over time.
Sounds like behavior over knowledge is the key. Why is it that how we behave matters so much more than what we know? Does financial knowledge? It all insulate us from poor decision making?
I think it can. Of course, there are lots of professional investors who are extremely good at what they do. But what is important is that behavior is the base of the pyramid. What I mean by that is, if you have not mastered behavior, none of the financial intelligence that lies on top of that matters. And this is why you have professionals who have all the great background and all the data, all the connections that the amateurs don't,
who still do very poorly. And it's so counterintuitive in investing that the harder you try, it's very often that the worse you do. And it's counterintuitive because there aren't many other areas in life that are like that. If you want to get better at sports, if you want to get better at a lot of different professions, you need to try harder. You need to work harder, you need more information, you need more into and investing it's
usually the opposite. It's the people who just leave it alone and go enjoy the rest of their lives and leave their portfolio alone to compound uninterrupted for years or decades tend to be the ones looking back who have done the best.
Don't just do something. Sit there, that's right. It seems obvious we should have a long term perspective in financial planning and investing, and yet we tend to get pulled into impulsive short term thinking. Why is this?
I think it's largely because there is so much information to do. So if the stock market were opened once a year, that would actually be fine. And you know, once a year that it was open, it would go up ten percent or down twenty percent whatever you would do, but it would just be once a year, whereas in investing we have literally all day, all day of information, stock tickers, it's always in your face. You're always going to hear about it immediately. That has always been the case.
That was true in the nineteen twenties, and today it is even more true because of social media and you're getting all this information bombarded at you, and think about the value of your house. Most people would not, you know, wake up and turn on CNBC and say, what are the analysts saying about the value of my house today? They just know that the house. You're like, like, look, I'm going to live here for five or ten years, whatever it might be, and I expect the value will
probably go up. Maybe it goes up a lot, maybe goes up a little. It's not that big of a deal. And because there's not a lot of information now, what's interesting is that Zillo, I think, has innocently changed that in the last decade or two, where now people can check every day and see if the value of the house went up yesterday on Zillo, like what's the essment of this? Oh, oh, we went down ten thousand dollars yesterday.
What's going on here? And so it's you know, the more information you have, the more temptations you have to pull the levers and fiddle with the knobs and try to figure out what the best portfolio solution is. The irony is that people paid less attention to what they're doing, they would probably do better over the long run.
Let's talk about the role of luck in financial outcomes. How important is it for investors to recognize the luence of serendipity.
Well, luck, in my description, is just things can happen in the world outside of your control that you have no influence over that have a bigger impact on outcomes than anything that you did intentionally. That's what luck is, and it plays a tremendous role in investing. We don't like to talk about it or admit it because if I say Barry, you got lucky, I look jealous and bitter. And if I look in the mirror and I say, Morgan, you just got lucky, that's hard to accept as well.
But to me, you know, there's lots of people who will push back on that and say they'll come up with quotes and say, oh, the harder I work, the luckier I get to me, that's just not what luck is. Luck is like, by definition, if you can work harder and do better at something, then it's not luck, it's skill. To me, the biggest elements of luck and investing are where, when, and to whom you were born, what generation are you from, what country were you born, and who are your parents.
You have no control over those things. Nothing you can do to influence that. But investors who you know, were born in the nineteen fifties started investing in a very different climate with different uppertunities, and investors who started who were born in nineteen seventy or nineteen eighty totally different and it's out of your control. And you know, Bill Growth is a great bond investor. I think he's been
on your program several times. He made this comment about his career perfectly aligned with a forty year collapse in interest rates, which if you're a bond investor, is pretty pretty darn good. Now, look, he did better than other bond investors, so it's not to say that was all luck. But he himself once mentioned he said, look, if he was born twenty years earlier or twenty years later, it would have been a very different career. That is what luck is in investing.
That's an amazing example. So, given the role of luck in our lives and how unpredictable things can be, let's talk about flexibility and adaptability. How important is it for us to be able to adjust our plans to changing circumstances.
Well, then give you one example. It's one thing to say I'm a long term investor. I'm investing for the next twenty years. That's great. But if you are saying I'm to retire in twenty years, even though that's a long term time horizon, basically what you're saying is I need the market to be in my favor in the year twenty forty four. That's what you're saying. If you have a twenty year time horizon, and maybe in twenty
forty four the market is great, maybe it's not. Maybe we're in the middle of the Second Great Depression by then. So rather than just a long term time horizon, what you want is a flexible time horizon. You want to say, look, I hope to retire in about twenty years, and maybe I'll be in a position to sell part of my portfolio. Then maybe I need to wait a couple years longer. Maybe I need to work a couple of years longer.
The more that you need the market in the world to align with your specific goals, the more you are relying on bucking chance, and the more that you can be adaptable and flexible to what the market's doing, what the economy is doing. The better you have, the better chance you have of putting the odds of success in your favor.
So it's not just that we have to leave room for error. We also have to leave room for chance when making long term plans.
Yeah, imagine if you are someone you are an investor in the nineteen eighties, and you said going to I have a long term time horizon. I'm going to retire in March of twenty twenty. That's my retirement date. And in March of twenty twenty, I'm going to liquidate half my portfolio whatever it might be. If you said that in the nineteen eighties, I was like, oh, great, you have a thirty or forty year time horizon in front
of you. What happened in March of twenty twenty. The world's melting down with COVID, the lockdown's market falls forty five percent whatever it was, and so that's why you need to have a level of flexibility and adaptability. It's not just what the economy is doing and what the market's doing. It's you trying to align your specific time horizon to a market and an economy that does not know or care what your goals are.
So let me ask you a simple question that you talk about throughout the book. Does money by happiness?
I think there's two answers to that question. One is, if you are already a happy person, and you have a good marriage, good health, good friends, good disposition, then it can. Absolutely you can use money as a tool to leverage your already happy life. If you are someone who is already depressed and in poor health and don't have good fred connections and hate your job, then by
and large it will not. And not only will it not, it can actually lead to a source of hopelessness, because when you are poor, you might say, if only I had money, all my problems would go away. And then when you might gain money, you gain some wealth, you realize that it doesn't and then you lose your sense of hope. And so that's one part of it. The other answer is does it lead to happiness? The answer is probably not. Does it lead to contentment? The answer
is probably yes. Now, contentment is a positive emotion, it's a great thing, but it's not happiness. Happiness is waking up grinning ear to ear. That's by and large not what money does to people. If you're a very wealthy person, Bill Gates, Elon Musk, Jeff Bezos, do not wake up laughing, smiling. It's just not how it works. But can it lead to a sense of contentment of Look, I've achieved a lot of my goals. I'm really proud of the work that I did, and I'm content that I can now
live the rest of my days with a sense of independence. Yes, that's not happiness, but it's a positive emotion that I think we should strive for.
So let's talk about other aspects of money. How should investors think about saving and spending? What kind of practical advice can you give there?
Daniel Kannoman, the great psychologist who passed away not too long ago, He said, the best definition of risk is a well calibrated sense of your future regret. You need to be understand what you're going to regret ten twenty thirty years in the future, and that's that should you know, may you know lead to the amount of risks that you're going to take. I think it's the same for
spending and saving. When you're thinking about should I spend money today the kind of like Yolo philosophy, or should I save for tomorrow, save for the rainy day and let my money compound. What you need to understand is what you're going to regret in the future. Are you going to be on your deathbed and look back and say, I saved all this money and look at all the vacations that I didn't take, look at all the all the cool cars that I didn't buy. That's a sense
of regret. You also might live for today and spend all your money, and now now you're suddenly you're eighty years old and you don't have any money, and you regret that you didn't save. It's different for everybody, and you need to have a well calibrated sense of regret. I'll give you my personal example right now. I have two young children and I've been a heavy saver for
my entire life. If Heaven forbid, I were on my deathbed tomorrow, I would not regret in the slightest that I have saved all this money because I would take so much pleasure knowing that my wife and kids will be taken care of because I saved. Now, Will I still think that when I'm eighty years old and hopefully my kids are established and earning their own money. Of course I might. At that point, I might regret that I'm eighty years old and saved all this money that
I could have spent otherwise. So it changes throughout your own individual life as well.
So it's kind of surprising to me. We're ninety percent through this discussion and we really haven't talked about investing very much. What are the keys to being a successful long term investor?
I think a lot of it is understanding how common and normal and unavoidable volatility is. It's so common that even professional investors when the market falls ten twenty thirty percent have a sense they respond to it with the idea that the market is broken, that like, this is the equivalent of a car accident or a plane falling out of the sky, and you need to take a critical action right now because you know it's bad. And
by and large that's not the case. The vast majority of even severe volatility is completely normal and unavoidable, and if you're a student of market history, it happens way more often than people like to think. And so what you're getting paid for as an investor is the ability to put up with and endure uncertainty and volatility. That's
the cost of admission. And when you view it like that, then when you do have a big bat of volatility, even that might last for years, it's not fun, you don't enjoy it, but you say to yourself, this is the cost of admission for earning higher returns that I could earn in bonds or cash over the long run.
And our final question, why is it that getting wealthy and staying wealthy are such different skill sets?
Getting wealthy, I think requires being an optimist, optimistic about yourself, optimistic about the economy, taking a risk. Staying wealthy is like the exact opposite. You need to be a little bit pessimistic and paranoid, and you need to admit to yourself and acknowledge that all of economic history is a constant chain of setbacks and surprises and recessions and bear markets and pandemics that you need to be able to endure for your long term optimism to actually pay off in the end.
So to wrap up, to succeed in markets as an investor, you have to understand the psychology of money. You have to understand why it's not just about knowledge or math or even computer programming, but highly dependent on your behavior. Get your behavior in the control and you're ninety percent of the way there. I'm Barry Rdults. You've been listening to At the Money on Bloomberg Radio. Knowledge of the Hodge round Round