When making investment decisions, investors need not worry about impressing other people, but only about achieving their own happiness, said Morgan Housel, a partner with Collaborative Fund and a former columnist at the Wall Street Journal.
Speaking Tuesday during the second day of eMoney Advisor's Summit, which was held virtually, Housel, a former analyst with The Motley Fool, highlighted the psychology of money. He discussed how many financial decisions are made having very little to do with finance and more to do with psychology.
He offered four suggestions on how investors and advisors should handle their finances. The first is that the most valuable financial asset is not looking to impress anyone.
To illustrate his point, Housel told the story of a 1968 boat race around the world that started in England. One participant, Donald Crowhurst, attempted to pretend to sail around the world, but when he feared scrutiny, he is believed to have committed suicide before returning to England, Housel said.
Another participant, Bernard Moitessier, was an avid sailor and was leading but withdrew from the race when he realized winning would draw unwanted attention to himself. Crowhurst did everything for others’ attention while Moitessier did things for himself. The two men demonstrate two different ways of handling money, Housel explained.
“All of us, when we make decisions with our money … fall into one of those two buckets," he said. “Are we spending money because it’s something that is going to make us happy because it makes our life better and more pleasant or are we doing it because we want the attention and admiration and respect of strangers and other people.”
While most investors strive to be like Moitessier, most are like Crowhurst, he said. Those who look to accumulate money to satisfy their own needs and aspirations will live happier than those trying to flaunt their wealth to others, Housel told the audience.
“If you are living a life to impress other people that is a game that is almost impossible to play,” he said. “If you’re using money as a tool to make your life happier, and give yourself independence and autonomy, that’s actually a very easy game to play and one of the most important distinctions to make in finance.”
That led to his second point, which was how people should manage their expectations. He highlighted the 1950s as a time that many consider to be the greatest period of economic prosperity the U.S. has ever seen. However, counting for inflation, medium household incomes have more than doubled since the 1950s.
The reason people look back at that period so fondly, according to Housel, is because there was little wealth inequality in America at the time. Everyone was making about the same and there was no one to negatively compare wealth to. Nowadays, that has all changed as people tend to want more.
“Our incomes may have doubled but our expectations have more than doubled,” he said. “Even though we are much better off today than we were in the 50s, it doesn’t feel like that because our expectations have grown so much.”
With this lesson he spoke about Bernie Madoff, the architect behind the world’s largest Ponzi scheme. Prior to his fraud, in the 80s, Madoff was reportedly making about $30 million a year, according to Housel. He perpetuated such a huge fraud while he was legitimately making significant sums of money. Housel found that fact fascinating.
Everyone is capable of such misguided ambition, even if I may not be on the same scale as Madoff, he explained.
“What happens to people when it never feels like enough is enough?” he asked. “They wind up taking on more risk and more risk and more risk until it blows up in their face.”
The other alternative is a person continues to put in longer hours to make more money and they eventually alienate and lose their family and friends.
His fourth lesson dealt with patience as he urged investors and their advisors not to find quick paths toward wealth. He likened it to athletes who do not train with high intensity every day for fear of injury or fatigue. They pace themselves.
Investors should not be asking what are the highest returns they can earn over time, according to Housel. They should be asking what are the best returns they can sustain for the longest period.
Finally, Housel addressed risk, which he described as what is left over when a person has thought of everything else. In most instances, the greatest risk will be those things that no one has ever considered.
“I can guarantee you that the biggest risk in the stock market and in the global economy over the next year – over the next five years – is something that nobody is talking about today,” he said.
He closed by telling the audience that while there are several outside factors that can cause risk to a portfolio, the best way to look at risk is what investors do to themselves. How their own biases and impatience and other quirks could cause more damage than outside economic forces, according to Housel.
“You have no control over what the stock market is going to do next [and] you have no control over what the economy is going to do next,” he said. “The only thing you have control of with money is your own behavior and when you realize how important behavior is to long-term success, that’s pretty optimistic.”