Page 21 - Investment Advisor - December 2023

occurred roughly every three years.” investing for the next 20 years, you IA: “the one thing you cannot measure
Housel, the bestselling author of “The should expect that to occur many, or predict is the most powerful force in
Psychology of Money” (2020), discusses many times. all of business and investing,” you say.
these phenomena too: When investors Then, when it actually happens, it’s a Why is that true?
think the markets are “guaranteed not little bit more palatable, and you don’t MH: These can be things that complete-
to crash, that’s when they are more see it as “Oh, the market is broken; the ly and utterly change the course of his-
likely to crash”; stories that investors economy is broken.” You see it as “This tory, such as two of the biggest financial
tell themselves about the future and is normal for the market.” and economic events of the last 20 or
how those affect stock valuations; “the You write that when people think 25 years: 9/11 and the Lehman Bros.
one thing you can’t measure or predict “the markets are guaranteed not to [collapse] in 2008.
[that’s] the most powerful in all of busi- crash, that’s when they are more likely The common denominator of those
ness and investing” — and more. to crash.” Please explain why. events is that nobody saw them coming
A former columnist for The Wall until they happened. They weren’t on
Street Journal and Motley Fool, Housel IA: High valuations actually trigger the any analysts’ forecasts or in economists’
joined The Collaborative Fund in eventual crash. so people plant seeds of outlooks. That of course should limit
2016. It invests in startups, such as their own destruction. your confidence in specific economic
Kickstarter, Lyft, Sweetgreen and The MH: You write, “The higher stock and market forecasts that we have in
Farmer’s Dog. valuations become, the more sensi- the industry.
In the recent phone interview with tive markets are to being caught off-
Housel, who was speaking from his base guard by life’s ability to surprise you in IA: You quote Charlie Munger, 99,
in Seattle, the conversation touches on ways you never imagined.” Why does Warren Buffett’s partner in Berkshire
“the first rule of a happy life” accord- that happen? Hathaway, as saying: “the first rule of a
ing to Warren Buffett’s partner Charlie The higher the valuation, when you happy life is low expectations.” Can that
Munger and what Housel invests in experience something like 9/11 or the apply to investing?
almost exclusively. Here are excerpts Lehman Bros. [bankruptcy and collapse] MH: Absolutely. Historically, after
from our interview: or COVID-19, the more sensitive to that inflation the stock market returns
event the market is going to be. about 6.5% per year. In my own retire-
Investment Advisor: You write, “At ment plan, it’s going to be a little lower
the first sign of trouble, the reason IA: In the stock market, “the valuation than that. If it’s higher, great! That’s
customers flee is often because of every company is simply the number a bonus.
investors [financial advisors] have done from today multiplied by a story about But with too many people, the cause
a poor job communicating how investing tomorrow,” you state. What do you of their economic anxiety and invest-
works, what they should expect … mean by “story”? ing problems is that their expecta-
and how to deal with volatility and MH: The stories are, effectively, how tions are way too high. If the market
cyclicality.” Please elaborate. people think the future is going to play is returning 6% historically and they
Morgan Housel: If you were a really out, and the variance in the stories can expect to earn 10% or 15%, the gap
honest money manager, you would tell be enormous. When they’re pessimistic between their expectations and the
your clients to make sure to expect to about the market, their stories are pessi- circumstances — whether it’s invest-
lose a third or more of their money mistic. If they’re optimistic, you get very ing or relationships, or anything — is
several times in a decade. That’s the high prices. You need to recognize that too [wide].
normal course of the market. But for individual stocks or for the market
there’s a disconnect of what clients are as a whole. IA: You mentioned your retirement
told to expect and the historical norm If you take current earnings and plan. Are you still investing exclusively
of the market’s volatility. multiple them by a story about tomor- in index funds, as you were when we
The most important information row, you get a better sense of how the talked in september 2020?
that any financial advisor can give markets work. When you realize how MH: Almost exclusively. I’ll own them
their clients is that there are histori- the story-telling element [affects] valu- for the next 50 years, if I can pull that
cal precedents of volatility. A market ations, some of the crazy events that we off. It’s making a bet on global capitalism
fall of 20% has historically occurred have, and booms and busts, can start to rather than any company or industry.
roughly every three years. So if you’re make a lot more sense. —Jane Wollman rusoff

December 2023 Investment AdvIsor 19