Timeless Lessons on What Never Changes in Markets | Same as Ever w/ Morgan Housel (TIP602)

Lehman Brothers was hours away from being bought by Barclays before the deal fell through and it went bankrupt, creating an alternative history where the financial crisis might have been contained and the economy recovered without the cascade of failures that actually occurred.

“what really sent the financial crisis into hyperdrive was Leman Brothers going bankrupt but there's all these alternative histories of a lot of people forget that as Leman Brothers was going down Barclays was like hours away from buying it and that deal fell through and leing brothers went bankrupt but there's this alternative history of what if barklay had bought Leman brothers and we escaped all of that and the economy just zoomed to recovery after that”

In February 2020, Warren Buffett said he didn't know how he would invest in the next month but guaranteed he wasn't going to be selling, yet two weeks later he dumped all his airline stocks—this shows that even Buffett changed his positioning when new information about the crisis context became clear.

“in early February 2020 Warren Buffett went on CNBC and they're talking about hey there's all these rumbles about a virus like what what do you get like the Market's starting to fall what's going on and Buffett said I I don't want to I'm paraphrasing here so this is not a direct quote but he said I don't know how I'm going to invest in the next next month but I guarantee you I'm not going to be selling that's that's what he said like two weeks later he dumped every airline stock that he owned”

Sears from the 1970s to 1990s had one of the strongest competitive moats in capitalism history, comparable to Apple or Google today, yet Sears is now essentially nothing—this illustrates that even the strongest competitive advantages can decay completely.

“there are very few companies in the history of capitalism that had a mo stronger than Sears Sears uh from the 70s to the 90s was had a mode around it that you would equate today to like Apple or Google it was like nobody could compete with Sears and and now they're they're nothing it's zero it's not really a thing anymore to go from that strong to where they are is astounding”

Events compound in unimaginable ways, making the world fragile, and the most important strategy is to structure finances and portfolios in a way that is antifragile—positioned to benefit from or at minimum survive across many possible futures rather than optimizing for a single predicted scenario.

“events compound in unimaginable ways and it's a good reminder to set up our finances and set up our portfolios in a way that's antifragile”

There was a substantial change in John D. Rockefeller's inflation-adjusted net worth at approximately 400 billion dollars in the early 1900s, yet people today have a higher standard of living than he did despite technological advancement and inflation-adjustment of his wealth.

“you look at someone like John D Rockefeller in the early 1900s people today have a higher standard of living than he did Even though was inflation adjusted net worth at that time was 400 billion”

Tesla was weeks or days from bankruptcy in 2018, and if that had happened, the Model Y (which became the bestselling car in the world in 2023) would never have existed, illustrating how close we came to losing what is now the world's most successful car model.

“it's now accepted and this is not this is not just uh um you know guessing here that in 2018 Tesla was weeks if not days from bankruptcy uh and obviously they pulled through well in 2023 the model y was the bestselling car in the world of of any model and so like look now we have what is literally the bestselling car in the world was hanging by a thread by potentially hours from even from even existing at all not that long ago”

Between 1980 and 2014, almost 40% of all public companies lost all of their value—they didn't merge, they went out of business—showing that being a successful public company is not sufficient protection against failure.

“between 1980 and 2014 almost 40% of all public companies lost all of their value so how about you talk a little bit about Sears”

Morgan Housel invests the vast majority of his portfolio in Vanguard index funds rather than trying to beat the market because he believes in maximizing for endurance and longevity over raw returns, and he wants to devote his bandwidth to writing rather than portfolio management.

“you're pretty open about how you invest and where you allocate your money and to my knowledge the vast majority of your portfolio is just in Vanguard index funds”

George Soros was asked when he learned that he loved investing, and he replied 'I don't love investing at all, I'm just good at it'—this raises the question whether success requires love of the activity or whether being good at something can be enough.

“somebody asked George Soros they said uh George when when did you learn that you loved investing and he said love investing no I don't I don't love investing at all I'm just good at it”

We have never been able to forecast major future events like recessions, technologies, or elections accurately, but we know how people will respond to those events regardless of what they are, because human behaviors around risk, greed, fear, and uncertainty have remained enduring and constant across history.

“we don't know what is going to change in the future in terms of when's the next recession what's the next big technology who's going to win the next election we've never been able to get those right but the behaviors that have always been enduring and always been with us regardless of what happens in the future regardless of what is the next technology or the next recession we know how people are going to respond to it regardless of what it is”

A good life can be measured by comparing your actual outcomes to the 100 hypothetical versions of yourself based on different decisions you could have made—if your realized life falls in the top half of those possibilities, you're doing great, even if you could theoretically have done better.

“on your deathbed you meet the 100 versions of yourself of what your life could have been if you had made different decisions and so you're like look like this is who you turned out to be but here's who you could have been in all these different hypotheticals and I think the definition of a good life is in that exercise you end up in the top half of what you could have been you're like look my life could have been better it it could have been a lot worse as well and I ended up in the top half”

The heuristic 'however fast something grows, that's the halflife in which it can be destroyed' (attributed to Shopify's Harley Finkelstein, though not a rigid law) applies to startups: if you grow 100x in one year, you can fall 50x in one year; it applies to investing as well—people trying to compress 8% annual S&P 500 returns into 12% by taking extra risk face a risk of ending up at 3%.

“I heard this quote from shth a couple years ago that I thought was so smart he said however fast something grows that's the halflife in which it can be destroyed...when a startup is like oh we're going to like Blitz scale we're going to you know grow 100x over the next year that's the halflife for how long it'll take you to be destroyed if you can grow 100x in one year you can fall 50x in one year as well”

If you assign probabilities to known risks that add up to 100%, you are implicitly claiming to know every possible outcome, which is a mistake—your known probabilities should only add up to around 80-90%, leaving 10-20% for unknown black swan events you cannot fathom.

“if you are making a decision tree or like a a list of probabilities and you say there's a 20% chance of this happening and a 30% chance of that happening if you're just going through you probabilities like that that seems like a smart thing to do but if all of your probabilities add up to 100 then you're doing it wrong because what you are implicitly saying is that you know every potential possible outcome that there's going to be so I think the best you can do in any of these is if your known probabilities that you can think of should add up to like 80 or something like that maybe it's 90 you should all you always have to leave a percentage chance for something could happen that I cannot even fathom”

Markets overshoot and create bubbles because when a major driver of returns is an intangible story about the future, nobody knows where the boundary of that story is or how much people will believe it, so the only way to find the boundary is to go past it, and you can only know you've reached the peak in hindsight.

“when a big part of what drives investing returns is this intangible story nobody knows what the boundary of that story can be and like where people's where like how like how much are people willing to believe the story and how much do they believe it the only way to find where the boundary is is to go a little bit beyond it the only way to know what the top PE ratio that this company can trade for is to go be is to go to such an extreme that people are like oh no no that was too far and you look back and you're like all right that was that was too high that was the boundary you can't know that boundary with any sort of foresight you have to go past it before you realize where where it was in hindsight”

When you see something that looks irrational and your answer is 'those people are idiots,' this is usually not a good explanation—most people are probably playing a different game than you, and there is usually a semi-rational component that explains the behavior.

“anytime in life not just investing anytime in life you see something that looks irrational and your answer for it is well those people are idiots it's probably not the case like most most people are maybe they're playing a different game than you but think there is a way to explain the boom bust mentality that markets go through without the cynicism of sometimes people just lose their minds even if that might be true there's usually some like semi-rational component that can explain why people are doing what they're doing”

The best way to increase your happiness is to lower your expectations—happiness is relative to expectations, not absolute conditions, making expectations management one of the highest-leverage ways to improve life satisfaction.

“linking happiness with your expectations the best way to increase your happiness is to lower your expectations”

As we age, 'the less and less the word we understand'—meaning our circle of competence shrinks and more of the world becomes unfamiliar—so we must be willing to value companies in the midst of uncertainty rather than only investing in what we fully understand.

“let's face it as we get older this less and less the word we understand so I think we've got to get past this discomfort of saying I don't know how that works and still be willing to try to Value companies in the midst of that uncertainty because if you don't do that more and more of the world is going to become out of your Universe you can't invest in those companies because you don't understand them”

Once you add context to why markets are falling, most people realize their actual risk tolerance is much lower than they theoretically thought; adding in health consequences, economic consequences, and industry-specific disruptions makes the psychological situation very different than a bare valuation opportunity.

“once you add in the context both the health consequences and the potential Economic Consequences it's it's it's much it's much different situation...once you add in the context of why why the Market's falling uh most people realize that their risk tolerance is actually much less than they thought”

A better anchor for success is non-cyclical metrics like health, happiness of your children, state of your relationships—these provide more stable measures of a good life compared to cyclical financial metrics.

“if you're measuring your success by your health your the happiness of your kids the state of your relationship like that this is a very different metric to Anchor yourself to rather than a number that's bound to be cyclical”

Housel writes for an audience of one (himself) rather than for readers, taking a leap of faith that if he finds something interesting, others might too—this approach makes writing fun rather than work and produces better quality writing.

“I found so the audience of one is me I write for myself and I really don't think about you the reader I I respect and I I I like you the reader but I'm not trying to Pander to you I'm writing I'm trying to write things that I think are interesting to me and I take a leap of faith that if I think it's interesting some other people might too not everybody but maybe somebody will as well”

The principle of audience-of-one extends beyond writing to any performance or work—if you perform for yourself it's fun, versus if you perform for others' expectations it's hard to live up to those expectations and you'll likely underperform.

“and I think you can apply that to many things in life of like if you're performing just for yourself it's a lot of fun versus if you're performing for other people it's hard to live up to other people's expectations and other people's like what they want out of you you're you're probably going to do a better job if you're just doing it for the fun of it”

Every valuation in investing is 'a number from today multiplied by a story about tomorrow'—the earnings per share is the number from today, and the P/E multiple is the story about what the company can accomplish in the future.

“every valuation in investing is a number from today multiplied by a story about tomorrow that's always what it is I mean the very simple terms you could say earnings per share that's the number from today PE the PE Ratio multiple that's the story about tomorrow it's a story of what you think this company can accomplish”

The advantage of investors like Warren Buffett and Tom Gainer is not primarily the superior annual returns they earn, but rather the fact that they have been investing for extremely long periods—Buffett for 80 years and Gainer for over 30 years at Markel—which gives them compounding advantages.

“people like Buffett and Gainer and people who have done it well so much of their advantage in investing is not necessarily the annual returns that they're going to earn their advantage is that they've been doing it for a very long period of time warm Buffett has been investing for 80 years Tom Gainer has been you know investing at marel for over 30 years and so it's just the endurance that they have that makes him so great”

It's very difficult to not anchor your expectations to either your own previous results or somebody else's previous results—even acknowledging this intellectually doesn't prevent it—and only someone like a 'legit monk' could fully escape this anchoring effect.

“even even going out of your way to manage your expectations it's hard not to Anchor to them it's it's very natural I don't know if anyone outside of like a legit monk can not anchor their expectations on either their own previous results or somebody else's previous results”

Morgan Housel's methodology is to think in expectations rather than specific forecasts: if he expects to participate in the economy for the next 50 years, he can statistically expect to experience roughly 10 recessions, about 5 of which will be very bad, and one of which will be devastating—this baseline expectation is useful even though no one can predict when.

“rather than a forecast of hey when do you think the next recession is going to occur oh I think it's going to occur in Q2 of 2025 that's that's the dangerous way to think about risk I think a better way to think about risk is expectations where you're like look if you look historically you know usually in any given decade there are about on average you know two recessions one of which is really bad that tends to be about how it's been historically so going forward that's at least my Baseline expectation is that I hope to be a participant in this economy for the next 50 years at least and therefore I know I'm probably going to experience at least 10 recessions if I'm lucky if I'm lucky to get to live that long and participate there's going to be at least five of which are going to be very bad and over the next 50 years one of which will be devastating something like the Great Depression or 2008”

Life is cyclical—if you measure success by any numerical metric (salary, investing returns, net worth), you are bound to be disappointed eventually because all life exhibits cyclicality no matter what you do.

“if you're measuring yourself your success by your salary or how much money you made last year or your investing returns last year or what your net worth was last year at some point you're bound to be disappointed because all life is cyclical no matter what you do there's going to be cyclicality to it”

Tesla stock's primary product is not Tesla cars or Falcon rockets, but rather 'the story' of what Tesla could become, which is why the company achieved such an unusual valuation that traditional automakers like Toyota, Honda, GM, and Ford could not duplicate.

“the best product he's ever made is not a Tesla car it's not a Falcon rocket it's Tesla stock the best product he's ever made is a ticker TSLA because what that is is literally one of the most incredible and captivating stories that anybody has ever told and that's why the valuation is what it is because he's told a story about what Tesla could be in the future that Toyota and Honda and GM and Ford could not do in a million years it's a storytelling component that millions of investors have latched down to”

Even when we correctly identify that a major crisis is likely (like recognizing economic fragility in 2005-2007), we are nearly always wrong about the specific mechanism—we predict the wrong cause, the wrong timing, or the wrong consequence—making accurate positioning impossible even for people with genuine foresight.

“what do you do in that situation where they saw trouble coming but it happened for the exact opposite reason than they saw it coming that they envisioned it's like there's all these weird nuances there where it's not black and white”

The famous Buffett quote 'be greedy when others are fearful and fearful when others are greedy' is much easier said than done because when stocks fall, there is usually a good reason for the fall, and the emotional context makes it psychologically difficult to act contrary to your fear.

“you talk about in your book how this is much easier said than done and it's just so hard to put ourselves mentally fast forward in that type of situation when stocks have falling it's the time to buy and another problem is that when stocks fall there's usually a good reason why they're falling”

To properly evaluate a probabilistic forecaster like Nate Silver, you would need to observe their predictions across 50 different election cycles to see if they were right 25% of the time when they predicted 25%, but since that data does not exist, people resort to judging predictions in binary terms, which leads to constant misunderstanding.

“somebody like net silver who who very rightly and wisely thinks in probabilities the only way to judge whether he's right or wrong is to look at how he's done over the last 50 presidential election Cycles which obviously we don't have that information that doesn't exist but you know if over 50 elections hypothetically if he said this candidate is going to win 25% this can has 25% chance of winning you could only judge him if you looked over 50 elections and saw that he was right 25% of the time”

The biggest risks and most important news stories of the next 10 years will be something nobody is talking about today, no matter what year you're reading the book in—this truth remains constant across time.

“you state the biggest risk in the most important news story of the next 10 years will be something nobody's talking about today no matter what year you're reading this book that truth will remain”

Housel's investing strategy is to 'be average for an above average period of time'—to earn Vanguard returns (average market returns) for 50 years, which would put him in the top 1% of all investors who have ever lived because most investors cannot maintain discipline and consistency.

“the the way that I invest and like my strategy is to be average for an above average period of time and I think if I can do that if I can earn a Vanguard return for 50 years I'll probably GNA end up in the top maybe 1% of all investors who who've done it um and so it's just trying to maximize for a different variable than other investors might be and I think for me at least maximizing for endurance and Longevity is more realistic and I would even say easier than maximizing for returns”

The market is almost never at its mean valuation level (mean reversion); rather, it spends approximately 95% of the time in either irrational boom or bust conditions, so waiting for the market to look 'reasonable and rational' at the mean means you will wait forever and never invest.

“you know this is one thing with like reversion to the mean it's a very important powerful concept that you need to understand in investing but you also need to understand that the market almost never spends any time at that meat at at that level the market is always in some sort of irrational boom or bust and almost you know I would venture to say 95% of the time historically in markets the market looks either overvalued or undervalued so if you're the kind of person you're like I'm going to wait until it looks reasonable and rational you're going to wait forever you're never going to get to that part”

Everything feels unprecedented when you haven't engaged with history—understanding that statistically crazy events are bound to happen constantly helps you contextualize sensational news as normal variation rather than unique crisis.

“Everything feels unprecedented when you haven't engaged with history I just thought it was a really brilliant point there so much of this is just realizing that we live in a world of eight billion people”

The person with the right answer does not necessarily succeed; the person with the best story does—this applies broadly across investing, politics, and business.

“the person with the right answer does necessarily get ahead the person with the best story does you see that in business and investing all the time”

During the March 2020 COVID crash, Housel had smart people telling him that the entire banking sector's $2 trillion capital would be wiped out, and these scenarios actually made sense given the assumption that the economy would be shut down for extended periods—his point is that reasonable people reached unreasonable conclusions from incomplete information.

“I had some of the smartest people who I knew in March and April of 2020 some of the I remember two specific conversations one was somebody who said hey look there's about 2 trillion of capital in the entire banking industry you do not need to be creative to imagine how all of that's going to be wiped out the entire capital of the entire banking industry is goingon to be wiped out I remember thinking that and being like yeah no you don't if if the entire economy is shut down for three months all that capital is gone the entire banking sector is insolvent obviously that did not happen but when I heard that I was like no that actually makes sense”

Serendipitous meetings and chance encounters between founders—like Steve Jobs and Steve Wozniak, or Bill Gates and his first partner Ken Evans—have led to technologies and companies that changed the world, and if those chance meetings had not occurred, the world would be substantially worse off.

“there's all these situations where it's like if there wasn't that Serendipity the entire world would have been worse off than it actually is so just realizing how fragile the world is is uh yeah it's it's extremely important”

Housel doesn't have an editor for his blog and is a 'one man band,' but even for his books where the publisher reviews the manuscript, he sometimes resists editorial suggestions to explain things more for readers, responding that he's writing for himself not for readers.

“for you know for the blog I don't have an editor I'm just a oneman band for the book you know the publisher goes through it and sometimes the publisher would say oh you might want to explain this paragraph better for the reader and my response is always like the the who the read like what some saying somebody's gonna read this like no I'm just writing this for me”