‘Psychology of Money’ Author Morgan Housel on the Secret to Good Investing

As Morgan Housel tells it, his interest in investing started in his late teens when his grandparents gave him $1,000 and he put the money in a short-term certificate of deposit. When he checked the account the next day, he was stunned to see he had earned three cents of interest without having to do anything.

Fast forward to today: Housel is arguably the most popular writer on investor behavior, thanks to his knack for aphorisms and making the complicated simple.

In 2007, he joined the Motley Fool and parlayed his interest in investing behavior into a successful career as a blogger. But it was his 2020 best-selling book, The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness, that catapulted him to wider fame. The book has sold nearly four million copies and been translated into more than 50 languages. He is now a partner at the Collaborative Fund, a venture-capital firm, where he writes on the fund’s blog. He also serves on the board of Markel Group, a diversified financial holding company.

Barron’s spoke with Housel in late July about investors’ mistakes, his views on risk, how he invests his money, and his forthcoming book, Same as Ever: A Guide to What Never Changes, which will be published in November. An edited version of the conversation follows.

Barron’s: Blogger. Best-selling author. Investor. Podcaster. How do you define your work?

Morgan Housel: I’m not an investor. And I’m not a journalist. I’m just someone who is very interested in finance, who happens to write. I’m not an investor because I’m not a fund manager, and I’m not a financial advisor. And I’m not a journalist because I don’t have sources. I don’t have editors. I sit back and observe what’s going on in the world and try to piece together a couple of thoughts and put those out there. I think the fact that I’ve sat in this no man’s land has been great because I don’t have the insider’s perspective, and I don’t have the insider’s bias, either. I’m just kind of sitting on the porch trying to figure out what’s happening in the world.

You think a lot about mental and emotional pitfalls. What is the biggest mistake investors make?

Not being introspective enough about what your goals and risk tolerances are. A lot of people think of investing in the same way they would think of math, where there’s one right answer for everyone. Like it doesn’t matter how old you are, where you are from, two plus two is always four for everybody. There’s no black and white law that’s like that, and a risk that is good for you to take might be terrible for me to take and vice versa.

The biggest thing is realizing that there are a million different games to play and you have to figure out the game that works for you. A lot of investors get tripped up because they start to emulate maybe somebody on TV, maybe somebody on Twitter, maybe someone in their own household, and they start playing a game that is the wrong game for them.

You had a near-death experience that shaped how you think about risk. What happened?

I grew up as a ski racer in Lake Tahoe [Calif.], and in 2001, two of my best friends—we were 17 years old—were skiing at Squaw Valley [now Palisades Tahoe], and were killed in an avalanche and I was effectively with them for the whole day, right up till before that. I had broken off from them minutes before they chose to do another run, and that’s when the avalanche occurred that killed them.

Life can just hang by an absolute thread. I didn’t make a conscious decision to skip that last run with them. I didn’t weigh the pros and cons in my head. It was just a completely random fluke of luck. And when you think of risk in that sense, you realize how fragile everything is and that everything at the personal level, at the economy level, everything can change in a snap of your fingers.

What does that mean for investors?

In finance, we think about average risks, like the risk that the Fed’s going to raise interest rates by 25 basis points [a quarter percent]. That doesn’t matter. The risks that move the needle are things like 9/11 and when Lehman Brothers couldn’t find a buyer in 2008, and Covid. That’s what you need to worry about. It’s the extreme things. But I feel like we don’t, especially in finance, we get obsessed with average risks, when tail risks are all that matter over the long term.

You’ve said before that the biggest risk is the one no one’s talking about.

Think about things like Pearl Harbor, Sept. 11, the things that really, really mattered in the economy. The common denominator of those kinds of events was that nobody saw them coming. Same with Covid.

You can almost guarantee that the biggest financial risk today is something that you and I and every newspaper and every Twitter account aren’t talking about. I think you can say that confidently because it has always been like that.

So, how does an investor prepare for risks that are unknowable?

Two things. There’s this great quote from [psychologist] Daniel Kahneman where he says, when you are surprised, the correct lesson is that the world is surprising. The lesson is there are things out there in the world that I am not thinking about that are going to throw me off guard. That’s the first, philosophical one. The practical takeaway is: If you are only saving for the risks that you can envision, then by definition, you’re going to miss a surprise 10 times out of 10.

I think people’s savings need to feel excessive. Once the amount of cash and liquidity that you have feels like it’s too much, then at least you have a fighting chance to deal with the risks that you cannot even imagine.

How are you thinking of financial risks in your own life?

I have a pretty high percentage of my net worth in cash. To the extent that I do think about financial risk for myself personally, it’s medical illness, it is economic catastrophe. It’s definitely not “Is the Fed gonna raise interest rates?” It’s definitely not “Is value gonna go out of style?” It’s none of those things. It’s more like the catastrophe, my wife or myself gets cancer, or heaven forbid one of us passes away. That’s the risk that I prepare for, rather than the little stuff.

How high is that “high” percentage in cash?

It’s probably something like 20%. And it has been like that for a long time. So, even as my net worth has grown, I’ve kept that percentage pretty stable over time.

Where do you park your cash?

A lot of it is in high-yield online savings. A lot of it is in short-term Treasuries, and a portion of it is in brokered certificates of deposit.

I understand that you check your brokerage account every day. And yet you’re not tempted to make changes. How so?

I dollar-cost-average [the strategy of investing in stocks or funds at regular intervals] into index funds and I hope to own them for the next 50 or 70 years, or however long I’m around for.

I do check my account every day. I bombard myself with financial news. But it never sways my actions. I never read the financial news and say, “I’m now therefore going to buy this and sell that.” I do it because I think it’s fascinating. I just love how markets work. I love how they mirror human behavior. I love how the economy works. I just think it’s intellectually fascinating, even if I don’t make any changes.

You often say that the point of investing is freedom, independence.

It’s a very deep-seated human desire to want to be independent—to just want to do your thing without other people telling you what to do or when to do it. There’s a classic [Berkshire Hathaway vice chairman] Charlie Munger quote where he says, “I did not intend to get rich. I wanted to get independent. I just overshot!” You need to distinguish between those two things—rich is: “Oh, I got all this money so I can spend it on stuff,” and independent is: “I have a lot of savings and that savings affords me the opportunity to do whatever the hell I want, whenever I want to do it.” That, to me, is the ultimate goal.

You’ve owned Markel stock since long before you joined the board. It’s not a household name. Why did you buy the shares?

You’re right, it’s not a household name. The reason why is: I’ve always been obsessed with Berkshire Hathaway [BRK.B] and Warren Buffett. So much of the question around Berkshire over the past 20 years is: Why hasn’t anyone been able to copy what they did?

The one company that has come closest, I think—no one will ever be able to do exactly what Buffett did—but the company that has come the closest culturally, and has a performance to back it up, is Markel, a large insurance company that uses the proceeds of that insurance to buy good businesses that it’s going to hold forever—both equities and businesses as a whole, just like Berkshire.

You own Markel shares. Do you hold any other individual stocks?

I also own Berkshire Hathaway, which I bought in 2004. That’s it for individual stocks. Other than that, it’s all index exchange-traded funds.

Which idea in The Psychology of Money resonated most with readers?

The idea that you should not aim to be rational, because people are not rational. The best you should want to be with your money is reasonable. People aren’t spreadsheets, and they don’t make decisions on spreadsheets. They make decisions at the dinner table where there are so many different personal, emotional, household, political elements coming into play.

Your next book comes out in November. What’s it about?

It’s about behaviors and facts of life and trends that never change. There’s so much focus and attention on what’s going to change. What’s the next big industry? The next big company? What’s the stock market going to do next? Who’s going to win the next election? Everything is about what’s going to change. And not only are we really bad at predicting that, but I think it actually matters a lot less than focusing on what is never going to change. So, how do people think about greed and fear? That has never changed.

Thanks, Morgan.