#576: Morgan Housel — The Psychology of Money, Picking the Right Game, and the $6 Million Janitor
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At this altitude, I can run flat out for a half mile before my hands start shaking.
Can I ask you a personal question? Now, it has been appropriate time. What if I did the opposite? I'm a cybernetic organism. Living tissue over metal endoskeleton show. Hello, boys and girls, ladies and germs, this is Tim Ferriss. And welcome to another episode of the Tim Ferriss show. I've been looking forward to this episode for a while. My guest today is Morgan Housel Housel. You can find him on twitter at morganhausel. He is a partner at the collaborative fund and a former columnist at the Motley fool in the Wall Street Journal. He serves on the board of directors at Markel Corporation. He is a two time winner of the best in business award from the Society of American Business Editors and Writers, winner of the New York Times Sydney Award, and a two time finalist for the Gerald Loeb Award for distinguished business and financial journalism. His book, the Psychology of Money has sold more than 1 million copies and has been translated into more than 30 languages. Morgan, welcome to the show.
Thanks so much for having me, Tim. Happy to be here.
So I have just an embarrassment of riches in front of me in the form of tabs open in this browser, and one of them is a Google Document that contains my Kindle highlights from your book and that is the psychology of money. And I have 18 pages of Kindle highlights. I wanted to share that because that's a whole book.
It's a whole book.
Your book was recommended to me several times, and I'm not going to lie, the psychology of money as the title, I thought would be different in terms of content than it ended up being. So the subtitle timeless lessons on wealth, greed and happiness, which is a great subtitle. I had read books before, I think, attempting to explore certain facets of psychology as related to money. And the conclusion usually was spend money on experiences, not possessions. And I was like, okay, after the 17th round on that, I get it. I understand the takeaway, and I was extremely impressed with how many not just anecdotes, but reframes in the book caught me off guard or were totally unknown to me or were hiding in plain sight, as I'm sure we could explore in multiple examples. So I thought we would begin, and this is actually not where I was planning on starting, but since I'm blathering on, I'll just go there. Could you speak to comparing Warren Buffett and Jim Simons and just give a little context on who Jim Simons is? Most people will recognize Warren Buffett, but my brother and I were speaking about this because I recommended your book to him, which is a huge reputational risk on my part. He is, for all intents and purposes, a quant phd in statistics, also very literary, high bar for books, and he also very much enjoyed your book. And this is one of the illustrations that stood out to both of us. So if you wouldn't mind just kind of filling in the color on this, and then we're going to bounce all over the place.
Well, Tim, it starts with a question which seems like a really straightforward question of just asking who's the greatest investor of all time? It doesn't seem like a hard question to answer. It should be an analytic answer. It's just like a number who's had the best performance. But then you can split this different ways. So who is the wealthiest investor of all time? That answer is Warren Buffett. Who's the greatest investor of all time? In terms of long term average annual returns? It's Jim Simons by a mile, and it's not even close. Warren Buffett's long term average annual returns are about 21% per year. Jim Simons are, like 66% per year after his ridiculous fees. He's, like, in a different universe. But Warren Buffett is, like, way wealthier. And Jim Simons is, like a deck, a billionaire himself. And this is, like, a crazy to say, like, he's not as rich. Sounds crazy. But to parse that out, the reason that Warren Buffett has earned one third of the returns, but he's, like, ten times as wealthy, because Warren Buffett has been investing for 80 years. And so even though he's not the greatest investor of all time in annual returns, he has so much endurance in terms of what he's done, that by a mile, he is the wealthiest, which to me, that gets into a really interesting point, which is, how do you become a great investor? And most people, when they hear that what they think of is like, how can I earn the highest returns? What are the highest returns that I can earn this year and over the next five years? Over the next ten years? And that's not bad. That can be a great thing to do. But to me, if the goal is to maximize the dollars that you have, what's a way that I can maximize the amount of dollars I accumulate over the course of my life? Then the answer to that question, the huge majority of the time, is not earning the highest returns. It's, what are the best returns that you can earn for the longest period of time? Which usually aren't the highest returns that are out there? Because maybe you can earn. Maybe you can double your money this year, but can you do that for 50 years in a row? Like, probably not. But could you earn 10% annual returns for 50 years? Yeah, you can totally do that and generate an enormous sum of wealth. All compounding is. Is returns to the power of time. Time is the exponent and so that's, to me, what you want to maximize. And that's why Warren Buffett is, in my mind, and it seems like an easy answer, the greatest investor of all time, even though his returns are probably not even in the top 20% of annualized returns among professional investors.
And for people who want to explore Jim Simons further, I mean, he's a mathematician by trade, so to speak, but fascinating character. There's a book about him, I think the title is the man who solved the market, which covers renaissance technologies
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