Clay Finck (02:33):
This reminds me of how people that lived through and experienced the difficulty of the Great Depression tend to save a lot more and be more frugal and conservative with their money. They know what it was like going through that time period of the Great Depression and they wanted to be prepared should it somehow happen again. Just the psychological effect of going through that I would imagine is significant.
Clay Finck (02:56):
Today you see many younger people taking extraordinary risks in the markets. I think a big reason for that is because for the most part, they haven’t seen a prolonged recession since 2008, like something similar to the Great Depression where people lost a lot of money. A lot of younger people are used to markets almost always going up at least until recently with many of the risk-on assets, like the ARK Funds is having a substantial pullback as of late.
Clay Finck (03:21):
In 2008, I was only 14 years old so I definitely don’t remember what it was like going through that period of time with the 2008 financial crisis. I guess the big takeaway from this is that many people make their financial decisions based on their own biases, which are driven by their own personal experiences, especially the experiences they had when they were young.
Clay Finck (03:42):
In the next chapter, Housel talks a lot about luck and risk and how some people’s outcomes end up being totally outside of one’s control, so it’s really hard to quantify luck when looking at success. Buying a stock that goes nowhere for a few years might have been a good idea, or it might have been a bad idea. We don’t know the actual probabilities. We only know the outcomes of such decisions. This makes risk and luck really hard to measure.
Clay Finck (04:10):
Benjamin Graham is known as one of the greatest investors of all time, and he is the father of value investing and an early mentor of Warren Buffett. However, the majority of his investing success was due to having a very large stake in GEICO’s stock, which even broke his own rule of diversification that he laid out in his own writings. Is Graham lucky to be considered one of the greatest or is he truly one of the greatest?
Clay Finck (04:36):
This is something you’ll find with many successful people. They often break the rules of society or think outside the box to achieve extraordinary success. It reminds me of how Warren Buffett recommends that people solely invest in the S&P 500, yet the man doesn’t even follow his own advice as essentially all of his money is invested in Berkshire Hathaway stock.
Clay Finck (04:55):
Oftentimes the difference between someone being courageously bold and totally reckless can be simply the outcome of taking on such a risk. The difference is only clear in hindsight. It’s difficult for us to determine the difference between luck and skill in investing. With this, Housel recommends studying broad patterns rather than specific individuals, because specific individuals might be total outliers in their field. What worked for them might not end up working for you.
Clay Finck (05:23):
If you study specific outliers, you might just be studying someone that got extremely lucky that is talented, but also happened to just be at the right place at the right time. The more broad the pattern, the more applicable it might be to your own life. This also reminds me of the stock market through 2020 and 2021. After the COVID crash, we saw an enormous run-up in the prices of riskier assets.
Clay Finck (05:46):
To take the ARK Fund, for example, pre-COVID, this fund traded just shy of $60 per share. In March 2020, it dropped very quickly to under $40 a share. Then practically went straight up and peaked in February 2021 at just shy of $160 per share. Many people at this time are saying that Buffett has lost it, he’s drastically underperformed ARK, these COVID winners are going to be the best stocks of the next decade, so on and so forth.
Clay Finck (06:11):
As we all know, these risk-on assets eventually corrected. Today, ARK trades back under $50 per share. I think the lesson here is that when you have crazy success in investing or in anything else, for a matter of fact, remember that much of that might be due to luck. I think I, myself, even learned that lesson over the past couple of years.
Clay Finck (06:33):
When the investment gains just felt so good, and you feel like a total genius, it might be time to maybe rebalance or decrease your risk when things seem to be pretty excessive. This is easy to say in hindsight, but a 4X increase in the price of the ARK Fund in less than a year seems just a little bit excessive.
Clay Finck (06:52):
Housel also hits on this idea that Americans live in this society that is very much driven by greed. Once someone makes a hundred thousand dollars per year, they want to start making 110,000. Once they make that, then they want to make even more because of all the additional things the money can buy them. At some point you have to decide what is enough for you.
Clay Finck (07:12):
He also recommends being careful comparing yourself to others. You might work in an environment where your colleagues make 200,000 per year, but you just started your career making a hundred thousand dollars. By society standards, you make roughly twice the median household income, which is pretty good.
Clay Finck (07:27):
But when you look at your environment, you might be destined to believe that you really aren’t that well off because you see all these cool things your colleagues are buying. Trying to keep up with others, or keep up with the Joneses, as they say, is ultimately a losing game because you’ll never have enough. It’s important to remain grounded and determine what is enough for you? What is it that truly matters to you?
Clay Finck (07:50):
Knowing when you have enough is such a valuable trait, because it’s so easy to get caught up in what others are doing, especially in the age of cheap debt and social media where other people’s lives might seem really good, but oftentimes underneath the surface, they aren’t near as good as they might seem.
Clay Finck (08:07):
Chapter four, Housel talked all about compound interest. He explains that good investing isn’t about achieving high returns. I think a lot of people really just go about investing, trying to achieve the highest possible returns. But good returns for a long period of time can get you to an extraordinary place.
Clay Finck (08:25):
A lot of people put focus on how they can achieve high returns in the short term and don’t put enough emphasis on earning sustainable returns over a long period of time, which is much more manageable for your typical investor and is a much more practical strategy. Warren Buffett is often touted as one of the greatest investors to ever live.
Clay Finck (08:44):
Yes, he was an extraordinary investor over the course of his lifetime, but one of his secret weapons is that he has invested for so many decades. Over 99% of Warren’s wealth was accumulated after his 50th birthday. 96% of his wealth came after he qualified for social security in his mid-60s. Had he retired at the age of 60 to relax and just quit investing, he’d only be worth about $12 million.
Clay Finck (09:12):
The big takeaway here is that compound interest is extremely powerful when you give it a lot of time to let it do its work. That’s just something really important to keep in mind as many of the listeners of this show are younger and likely have many decades ahead to stay invested in the markets.
Clay Finck (09:30):
Chapter five was one of my favorite chapters from the book. This chapter is titled Getting Wealthy Versus Staying Wealthy. Housel tells the story of Jesse Livermore. Jesse was born in 1877 and was the greatest stock market trader during his time period. At the age of 30, he was worth an inflation adjusted a hundred million. In 1929, the Great Depression hit and his family was extremely worried about him.
Clay Finck (09:57):
In one week in October 1929, the stock market lost over one-third of its value. His family assumed that Jesse had just gotten totally wiped out in the market, just like everybody else did. But Jesse was actually on the winning side of the trade as he made an inflation adjusted $3 billion on one of the days of that week, which is pretty mind-blowing. I wonder if that is one of the best days for a trader his size in the history of the markets.
Clay Finck (10:27):
He became one of the richest men in the world in one of the worst months in stock market history. Here’s the problem that Jesse Livermore had though. He was very greedy and would continue to bet the farm on the bets he made going forward. His past successes gave him irrational confidence that he couldn’t be wrong and that he could continually outsmart the market.
Clay Finck (10:50):
He ended up taking on ever-increasing levels of debt to bet even more on his trades. Eventually he lost everything he had trading stocks. As a result, he ended up taking his own life because of it. The lesson that Housel pulls from this unfortunate story is that Livermore, like many other good investors, was really good at getting wealthy, but he wasn’t good at staying wealthy, which are two completely different things.
Clay Finck (11:15):
Once you build wealth, you’re going to have to figure out how to keep that wealth. Getting wealthy requires taking some risks, being calculated and patient, but keeping your wealth requires some level of conservatism. You have to avoid spending too much of it. You have to avoid excess levels of debt. You have to avoid getting greedy and taking excess risk.
Clay Finck (11:35):
You have to think long term and be able to hold out through temporary downturns in the market. It requires the humility to recognize that part of your wealth might have been due to luck. No one can get lucky consistently year after year after year, using Jesse Livermore as a prime example of this. Another point that Housel made I just loved, was that in planning for your financial future, plan for things to possibly not go according to plan.
Clay Finck (12:02):
Things like 9/11, the great financial crisis, the coronavirus. All these things are things that no one really expected. You’re going to have to plan for things to eventually not go well at some point. The more you need specific elements of a plan to be true, the more fragile your life becomes.
Clay Finck (12:20):
You might project 8% returns over the next 30 years, but maybe you should consider the possibility of your portfolio only returning 4% over the next 30 years. You might want to ask yourself if you’d be okay with your portfolio returning 4%, or if you should consider upping your contributions or adjusting your strategy because of that possibility.
Clay Finck (12:39):
In chapter seven, Housel talks all about freedom, which is a recurring theme he hits on throughout the book, as freedom is a pretty big priority for him. Here’s a quote from the book I pulled that I like to share. I quote, “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.’ People want to become wealthier to make them happier.
Clay Finck (13:01):
Happiness is a complicated subject because everyone’s different. If there’s a common denominator in happiness, a universal fuel of joy, it’s that people want to control their lives. The ability to do what you want when you want with who you want for as long as you want is priceless. It is the highest dividend that money pays.”
Clay Finck (13:21):
The takeaway here is that what makes people happy is having a strong sense of control over their life. Despite massive increases in the standard of living in the U.S. since 1950, people aren’t happier today than back then because they have given up control of their time.
Clay Finck (13:37):
Many people work a stressful job and buy the next expensive item with money they don’t have, meaning they need to go back to work and try and earn more money and try and get that promotion so they can pay for these items they keep financing. I’d encourage listeners to think about how money can buy you more than just nice things. It also gives you the power to buy your freedom or buy your time back.
Clay Finck (13:59):
Moving on to chapter 10, it’s titled Save Money. This chapter hit on the theme I hit on in the previous episode I did, which was episode 168, titled How to Build Wealth. Bringing in the psychology piece of the book, wealth is built by saving and investing over long periods of time. The way to create savings is to spend less than you make. Your spending is driven by your desires, meaning that if you desire less, then you can spend less.
Clay Finck (14:28):
If you care less about what others think about you, then you’ll be able to spend less on things that don’t matter and more on things that do matter. You can spend less on the flashy things to impress others and put more towards savings later and can have more free time to pursue things you enjoy or have more time to spend with friends and family. Every time you save money, you’re giving future you more options.
Clay Finck (14:51):
Say in a few years, you might have the opportunity of a lifetime to take the job of your dreams, but it requires a pay cut. Well, if you have a lot of extra money saved up, maybe that transition will be possible for you. Or, if you’re debt-free, you’re accustomed to not spending too much, then that makes taking a pay cut really easy because you might not need to cut your lifestyle at all.
Clay Finck (15:12):
The return on extra savings that allows you to change careers, retire early or give you the extra piece of mind is incalculable. I think a lot of people underestimate the power that money can actually give you.
Clay Finck (15:25):
Now, chapter 12, Housel hits on market predictions. History can be a good indicator of the future in many areas like the hard sciences, but investing is not a hard science. It’s a massive group of people making imperfect decisions based on limited information. It’s like trying to predict how protons and electrons work if they had feelings.
Clay Finck (15:47):
I’d encourage the listeners to be wary of anyone that thinks they can make predictions in the future because really anything can happen. One person might have a strong case we go into a recession worse than the 2008 financial crisis. Another person might have an equally compelling case that stocks will do very well over the next year.
Clay Finck (16:05):
The thing is that the future is uncertain and there’s probably a chance that either could happen and acting like you can consistently predict these short-term movements with a high level of accuracy is probably a fool’s errand. I think COVID is a perfect example of this.
Clay Finck (16:20):
Say in February 2020, somebody might have been researching whatever was going on in China and said to themselves, “I think this is going to shut down the economy. I better get out of the stock market because we’re going to enter a recession.” Well, that person was actually right, that COVID had a massive impact on our economy. However, what they didn’t factor in was the fiscal response by the government.
Clay Finck (16:41):
In mid-February 2020, the S&P 500 peaked around $3,400 and in March 2020 it bottomed around 2300. If someone had predicted a crash, they would’ve felt like a genius at that time to not only realize that the index would rally all the way to 3750 by the end of the year. In 2020 alone, the overall increase in the S&P 500 was up 16% on the year.
Clay Finck (17:06):
Had you told someone at the beginning of the year that the global pandemic would shut down the economy, I doubt too many people would say that stocks would be up on the year. Not only is the future difficult to predict, it’s also difficult to predict the effect of all of the different unforeseen circumstances we might encounter.
Clay Finck (17:24):
Related to this idea that the future is uncertain, Housel also has a chapter about margin of safety. When projecting future returns, you might want to account for the possibility that future returns are potentially less than past returns. The U.S. stock market has returned 6.8% after inflation since the 1870s.
Clay Finck (17:43):
Housel himself mentions that he assumes that future returns will be one-third less than what they were in the past. This gives him a margin of safety to ensure that it’s likely he will have more than enough to retire should future returns be lower or something like a recession hits just after he retires to give him more of a cushion, should something unexpected happen.
Clay Finck (18:03):
Yet another idea related to this is that in order to get ahead and build wealth, you’re going to have to take some risk. But if you take too much risk, then you have the potential to be completely wiped out, which goes back to our example of Jesse Livermore. He loved taking risks, but he let that get the best of him. He ended up taking excess risk and it hurt him very badly as he lost everything.
Clay Finck (18:25):
Investors have to find some sort of balance with how much risk they should take to ensure they don’t get totally knocked out of the game of investing. Housel states that no risk that can wipe you out is ever worth taking. I think that part of this room for error is having conservative finances. Personally, I see that there is a lot of uncertainty in the markets. We have rising rates, high inflation and unstable global tensions.
Clay Finck (18:51):
With that, I like to have a little bit more cash on hand. History might tell me that you shouldn’t try to time the market, but having that extra cash helps me sleep better at night and gives me the potential opportunity to buy some fantastic deals for pennies on the dollar should we see a brutal market correction. You never know what could happen.
Clay Finck (19:11):
Maybe something completely unforeseen comes into my life and I could use the extra cash. You just never know. Remember that a lot of personal finance is psychological and behavioral and not based on what numbers say in a spreadsheet you should do. With that, try and manage your money in a way that helps you sleep well at night.
Clay Finck (19:31):
Skipping ahead, a bit to chapter 19, this is the second-to-last chapter, Housel takes the book and summarizes some of the key takeaways for readers. Here are some of my favorites. Number one, less ego, more wealth. Saving money is the gap between your ego and your income. Wealth is created by suppressing what you could buy today in order to have more stuff and more options in the future.
Clay Finck (19:55):
Number two, manage your money in a way that helps you sleep well at night. Some people sleep well trying to achieve the highest returns, others sleep well being conservatively invested. Some want to be more concentrated while others try and be more diversified and so on and so forth.
Clay Finck (20:12):
Number three, if you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.
Clay Finck (20:22):
Number four, use money to gain control of your time because not having control of your time is such a powerful and universal drag on happiness.
Clay Finck (20:31):
Number five, you don’t need a specific reason to save. It’s great to save for a down payment for a car or a medical emergency, but saving for things that are impossible to predict or define is one of the best reasons to save.
Clay Finck (20:45):
Number six, give yourself room for error. Give yourself a financial cushion, so to speak, and be prepared for a wide variety of outcomes. That means if you’re highly concentrated on a particular asset class or individual stock, then be prepared for that position to perform potentially not quite as well as you might expect.
Clay Finck (21:03):
Number seven, define the game you are playing and make sure your actions are not being influenced by people playing a different game. There are a ton of ways to make money in investing and in markets. Make sure you know the game you are playing and be sure you are well equipped to win at that game.
Clay Finck (21:21):
Then Housel closes out the book with chapter 20 called Confessions. I loved this chapter because he goes further into his own finances and how he himself thinks about and uses money. His primary goal is to be financially independent. Over the years, he and his wife’s incomes have gone up while they’ve kept their lifestyle fairly stable.
Clay Finck (21:42):
They knew they liked many of the nicer things in life, but being financially independent and secure was much more important to them. Part of this attitude about money was driven by his father. His dad became an ER doctor at the age of 40 and had three children. Since he wasn’t rich growing up and until that point didn’t have a high salary, he was used to living a more frugal lifestyle.
Clay Finck (22:04):
Being an ER doctor was a very stressful career and after two decades, his father decided he had had enough. He just dropped his job and moved on to the next phase of his life. That had a huge impact on Morgan Housel. I love this quote that Housel had in this chapter. He goes, “Independence to me doesn’t mean you’ll stop working. It means you only do the work you like with the people you like at the times you want for as long as you want.”
Clay Finck (22:31):
I think this quote is just so powerful, especially when thinking about the number of people in society that just show up to a job solely because that job is used to pay their bills, so they essentially have to show up to work every day. They don’t have the option to take a lower-paying job or quit entirely and do something that they truly want to do in life.
Clay Finck (22:50):
Now, since Housel prioritizes independence, he talks about how he and his wife chose to pay off the low interest rate mortgage on their house. Financially it was a poor decision, but they didn’t make that decision based on what a spreadsheet told them to do. They knew they might be able to achieve higher returns by investing those extra payments in the stock market. But paying off the home gives them a higher level of independence and freedom as they no longer have a mortgage payment.
Clay Finck (23:18):
Another thing that Housel does that goes against conventional wisdom is hold a lot of cash. He holds 20% of his assets in cash, which just seems totally absurd to me, but that’s what he chose to do for himself to give himself a higher level of independence and freedom. Him and I just have different financial goals and different perspectives on what helps us sleep well at night.
Clay Finck (23:38):
One person might sleep well with ample cash as they know their bills will always be paid, at least as long as that money’s around. Another person might sleep well at night with lower amounts of cash, because they know that will put them on the path to accumulating more wealth in the long run. Both are the right decision for each individual.
Clay Finck (23:57):
As for investing in stocks, Housel purely invests in low-cost index funds because he believes that maximizes his chances for long-term success. Effectively, all he owns for assets is what’s in his checking account, his home and his Vanguard index funds. Housel believes that there really isn’t that much correlation between investment effort and investment results.
Clay Finck (24:18):
Meaning that many people spend countless hours researching stocks and investments, and can’t even beat someone who’s simply invested in the index funds. Instead, Housel will focus on three things he knows he can control, which is having a high savings rate, high patience and being optimistic.
Clay Finck (24:36):
All right, guys, those were all my takeaways from the book, The Psychology of Money. I hope you enjoyed today’s episode. I loved going back through this book and had a lot of takeaways personally from it. If you’re interested in the book, I’ll be sure to link it in the show notes if you guys are interested.
Clay Finck (24:51):
Again, feel free to reach out to me if there are any topics you’d like me to discuss in the future. Thanks a lot for listening and tuning in and we’ll see you again next time.
Outro (25:00):
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