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At the Money: Behavior Beats Intelligence (Podcast) · Masters in Business

• 0:00
  Speaker 1: The finance types tend to focus on attributes like intelligence,
• 0:16
  Speaker 1: math skills, and computer programming. But it turns out financial
• 0:19
  Speaker 1: success is less about knowledge and more dependent on how
• 0:24
  Speaker 1: you behave and make decisions than raw intelligence. How you
• 0:29
  Speaker 1: behave with money matters more than what you know about money.
• 0:33
  Speaker 1: I'm Barry Redults and on today's edition of At the Money,
• 0:37
  Speaker 1: we're going to discuss how to make sure your behavior
• 0:40
  Speaker 1: is not getting in the way of your portfolio. To
• 0:44
  Speaker 1: help us unpack all of this and what it means
• 0:46
  Speaker 1: for your investments, let's bring in Morgan Housel. He is
• 0:49
  Speaker 1: the author of The Psychology of Money. The book has
• 0:53
  Speaker 1: received widespread acclaim for its insightful approach to personal finance
• 0:58
  Speaker 1: and has sold six million copies worldwide. So Morgan, let's
• 1:03
  Speaker 1: start with your main thesis. Financial decisions in the real
• 1:06
  Speaker 1: world are influenced by our personal history, worldviews, ego, pride,
• 1:13
  Speaker 1: too many other factors to list. It's not just mathematical calculations,
• 1:18
  Speaker 1: that's right, Barry.
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  Speaker 2: I think one analogy here would be think about health
• 1:22
  Speaker 2: and medicine. You can have a medical degree from Harvard
• 1:26
  Speaker 2: and know everything about biology and have all that insight
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  Speaker 2: in that intelligence, but If you smoke and you don't
• 1:33
  Speaker 2: need a good diet and you're not getting enough sleep,
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  Speaker 2: none of it matters. None of the intelligence matters unless
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  Speaker 2: the behavior actually clicks and is working. And finance is
• 1:40
  Speaker 2: the exact same. You can know everything about math and
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  Speaker 2: data and markets, but if you don't control your sense
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  Speaker 2: of greed and fear and you're managing uncertainty and your
• 1:50
  Speaker 2: own behavior, none of it matters. So this is why
• 1:53
  Speaker 2: finance is one of the few fields where people who
• 1:56
  Speaker 2: do not have a lot of education and financial sophistication,
• 1:59
  Speaker 2: but if they have the right behaviors can do very
• 2:02
  Speaker 2: well over time.
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  Speaker 1: Sounds like behavior over knowledge is the key. Why is
• 2:07
  Speaker 1: it that how we behave matters so much more than
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  Speaker 1: what we know? Does financial knowledge? It all insulate us
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  Speaker 1: from poor decision making?
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  Speaker 2: I think it can. Of course, there are lots of
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  Speaker 2: professional investors who are extremely good at what they do.
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  Speaker 2: But what is important is that behavior is the base
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  Speaker 2: of the pyramid. What I mean by that is, if
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  Speaker 2: you have not mastered behavior, none of the financial intelligence
• 2:30
  Speaker 2: that lies on top of that matters. And this is
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  Speaker 2: why you have professionals who have all the great background
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  Speaker 2: and all the data, all the connections that the amateurs don't,
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  Speaker 2: who still do very poorly. And it's so counterintuitive in
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  Speaker 2: investing that the harder you try, it's very often that
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  Speaker 2: the worse you do. And it's counterintuitive because there aren't
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  Speaker 2: many other areas in life that are like that. If
• 2:52
  Speaker 2: you want to get better at sports, if you want
• 2:54
  Speaker 2: to get better at a lot of different professions, you
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  Speaker 2: need to try harder. You need to work harder, you
• 2:58
  Speaker 2: need more information, you need more into and investing it's
• 3:01
  Speaker 2: usually the opposite. It's the people who just leave it
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  Speaker 2: alone and go enjoy the rest of their lives and
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  Speaker 2: leave their portfolio alone to compound uninterrupted for years or
• 3:08
  Speaker 2: decades tend to be the ones looking back who have
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  Speaker 2: done the best.
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  Speaker 1: Don't just do something. Sit there, that's right. It seems
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  Speaker 1: obvious we should have a long term perspective in financial
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  Speaker 1: planning and investing, and yet we tend to get pulled
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  Speaker 1: into impulsive short term thinking. Why is this?
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  Speaker 2: I think it's largely because there is so much information
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  Speaker 2: to do. So if the stock market were opened once
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  Speaker 2: a year, that would actually be fine. And you know,
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  Speaker 2: once a year that it was open, it would go
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  Speaker 2: up ten percent or down twenty percent whatever you would do,
• 3:41
  Speaker 2: but it would just be once a year, whereas in
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  Speaker 2: investing we have literally all day, all day of information,
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  Speaker 2: stock tickers, it's always in your face. You're always going
• 3:49
  Speaker 2: to hear about it immediately. That has always been the case.
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  Speaker 2: That was true in the nineteen twenties, and today it
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  Speaker 2: is even more true because of social media and you're
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  Speaker 2: getting all this information bombarded at you, and think about
• 4:00
  Speaker 2: the value of your house. Most people would not, you know,
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  Speaker 2: wake up and turn on CNBC and say, what are
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  Speaker 2: the analysts saying about the value of my house today?
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  Speaker 2: They just know that the house. You're like, like, look,
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  Speaker 2: I'm going to live here for five or ten years,
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  Speaker 2: whatever it might be, and I expect the value will
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  Speaker 2: probably go up. Maybe it goes up a lot, maybe
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  Speaker 2: goes up a little. It's not that big of a deal.
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  Speaker 2: And because there's not a lot of information now, what's
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  Speaker 2: interesting is that Zillo, I think, has innocently changed that
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  Speaker 2: in the last decade or two, where now people can
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  Speaker 2: check every day and see if the value of the
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  Speaker 2: house went up yesterday on Zillo, like what's the essment
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  Speaker 2: of this? Oh, oh, we went down ten thousand dollars yesterday.
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  Speaker 2: What's going on here? And so it's you know, the
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  Speaker 2: more information you have, the more temptations you have to
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  Speaker 2: pull the levers and fiddle with the knobs and try
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  Speaker 2: to figure out what the best portfolio solution is. The
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  Speaker 2: irony is that people paid less attention to what they're doing,
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  Speaker 2: they would probably do better over the long run.
• 4:51
  Speaker 1: Let's talk about the role of luck in financial outcomes.
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  Speaker 1: How important is it for investors to recognize the luence
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  Speaker 1: of serendipity.
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  Speaker 2: Well, luck, in my description, is just things can happen
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  Speaker 2: in the world outside of your control that you have
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  Speaker 2: no influence over that have a bigger impact on outcomes
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  Speaker 2: than anything that you did intentionally. That's what luck is,
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  Speaker 2: and it plays a tremendous role in investing. We don't
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  Speaker 2: like to talk about it or admit it because if
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  Speaker 2: I say Barry, you got lucky, I look jealous and bitter.
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  Speaker 2: And if I look in the mirror and I say, Morgan,
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  Speaker 2: you just got lucky, that's hard to accept as well.
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  Speaker 2: But to me, you know, there's lots of people who
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  Speaker 2: will push back on that and say they'll come up
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  Speaker 2: with quotes and say, oh, the harder I work, the
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  Speaker 2: luckier I get to me, that's just not what luck is.
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  Speaker 2: Luck is like, by definition, if you can work harder
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  Speaker 2: and do better at something, then it's not luck, it's skill.
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  Speaker 2: To me, the biggest elements of luck and investing are where, when,
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  Speaker 2: and to whom you were born, what generation are you from,
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  Speaker 2: what country were you born, and who are your parents.
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  Speaker 2: You have no control over those things. Nothing you can
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  Speaker 2: do to influence that. But investors who you know, were
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  Speaker 2: born in the nineteen fifties started investing in a very
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  Speaker 2: different climate with different uppertunities, and investors who started who
• 6:01
  Speaker 2: were born in nineteen seventy or nineteen eighty totally different
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  Speaker 2: and it's out of your control. And you know, Bill
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  Speaker 2: Growth is a great bond investor. I think he's been
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  Speaker 2: on your program several times. He made this comment about
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  Speaker 2: his career perfectly aligned with a forty year collapse in
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  Speaker 2: interest rates, which if you're a bond investor, is pretty
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  Speaker 2: pretty darn good. Now, look, he did better than other
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  Speaker 2: bond investors, so it's not to say that was all luck.
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  Speaker 2: But he himself once mentioned he said, look, if he
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  Speaker 2: was born twenty years earlier or twenty years later, it
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  Speaker 2: would have been a very different career. That is what
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  Speaker 2: luck is in investing.
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  Speaker 1: That's an amazing example. So, given the role of luck
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  Speaker 1: in our lives and how unpredictable things can be, let's
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  Speaker 1: talk about flexibility and adaptability. How important is it for
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  Speaker 1: us to be able to adjust our plans to changing circumstances.
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  Speaker 2: Well, then give you one example. It's one thing to
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  Speaker 2: say I'm a long term investor. I'm investing for the
• 6:57
  Speaker 2: next twenty years. That's great. But if you are saying
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  Speaker 2: I'm to retire in twenty years, even though that's a
• 7:01
  Speaker 2: long term time horizon, basically what you're saying is I
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  Speaker 2: need the market to be in my favor in the
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  Speaker 2: year twenty forty four. That's what you're saying. If you
• 7:09
  Speaker 2: have a twenty year time horizon, and maybe in twenty
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  Speaker 2: forty four the market is great, maybe it's not. Maybe
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  Speaker 2: we're in the middle of the Second Great Depression by then.
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  Speaker 2: So rather than just a long term time horizon, what
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  Speaker 2: you want is a flexible time horizon. You want to say, look,
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  Speaker 2: I hope to retire in about twenty years, and maybe
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  Speaker 2: I'll be in a position to sell part of my portfolio.
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  Speaker 2: Then maybe I need to wait a couple years longer.
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  Speaker 2: Maybe I need to work a couple of years longer.
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  Speaker 2: The more that you need the market in the world
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  Speaker 2: to align with your specific goals, the more you are
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  Speaker 2: relying on bucking chance, and the more that you can
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  Speaker 2: be adaptable and flexible to what the market's doing, what
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  Speaker 2: the economy is doing. The better you have, the better
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  Speaker 2: chance you have of putting the odds of success in
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  Speaker 2: your favor.
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  Speaker 1: So it's not just that we have to leave room
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  Speaker 1: for error. We also have to leave room for chance
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  Speaker 1: when making long term plans.
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  Speaker 2: Yeah, imagine if you are someone you are an investor
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  Speaker 2: in the nineteen eighties, and you said going to I
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  Speaker 2: have a long term time horizon. I'm going to retire
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  Speaker 2: in March of twenty twenty. That's my retirement date. And
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  Speaker 2: in March of twenty twenty, I'm going to liquidate half
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  Speaker 2: my portfolio whatever it might be. If you said that
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  Speaker 2: in the nineteen eighties, I was like, oh, great, you
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  Speaker 2: have a thirty or forty year time horizon in front
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  Speaker 2: of you. What happened in March of twenty twenty. The
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  Speaker 2: world's melting down with COVID, the lockdown's market falls forty
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  Speaker 2: five percent whatever it was, and so that's why you
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  Speaker 2: need to have a level of flexibility and adaptability. It's
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  Speaker 2: not just what the economy is doing and what the
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  Speaker 2: market's doing. It's you trying to align your specific time
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  Speaker 2: horizon to a market and an economy that does not
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  Speaker 2: know or care what your goals are.
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  Speaker 1: So let me ask you a simple question that you
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  Speaker 1: talk about throughout the book. Does money by happiness?
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  Speaker 2: I think there's two answers to that question. One is,
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  Speaker 2: if you are already a happy person, and you have
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  Speaker 2: a good marriage, good health, good friends, good disposition, then
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  Speaker 2: it can. Absolutely you can use money as a tool
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  Speaker 2: to leverage your already happy life. If you are someone
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  Speaker 2: who is already depressed and in poor health and don't
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  Speaker 2: have good fred connections and hate your job, then by
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  Speaker 2: and large it will not. And not only will it not,
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  Speaker 2: it can actually lead to a source of hopelessness, because
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  Speaker 2: when you are poor, you might say, if only I
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  Speaker 2: had money, all my problems would go away. And then
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  Speaker 2: when you might gain money, you gain some wealth, you
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  Speaker 2: realize that it doesn't and then you lose your sense
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  Speaker 2: of hope. And so that's one part of it. The
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  Speaker 2: other answer is does it lead to happiness? The answer
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  Speaker 2: is probably not. Does it lead to contentment? The answer
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  Speaker 2: is probably yes. Now, contentment is a positive emotion, it's
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  Speaker 2: a great thing, but it's not happiness. Happiness is waking
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  Speaker 2: up grinning ear to ear. That's by and large not
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  Speaker 2: what money does to people. If you're a very wealthy person,
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  Speaker 2: Bill Gates, Elon Musk, Jeff Bezos, do not wake up laughing, smiling.
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  Speaker 2: It's just not how it works. But can it lead
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  Speaker 2: to a sense of contentment of Look, I've achieved a
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  Speaker 2: lot of my goals. I'm really proud of the work
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  Speaker 2: that I did, and I'm content that I can now
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  Speaker 2: live the rest of my days with a sense of independence. Yes,
• 9:56
  Speaker 2: that's not happiness, but it's a positive emotion that I
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  Speaker 2: think we should strive for.
• 10:01
  Speaker 1: So let's talk about other aspects of money. How should
• 10:04
  Speaker 1: investors think about saving and spending? What kind of practical
• 10:08
  Speaker 1: advice can you give there?
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  Speaker 2: Daniel Kannoman, the great psychologist who passed away not too
• 10:13
  Speaker 2: long ago, He said, the best definition of risk is
• 10:17
  Speaker 2: a well calibrated sense of your future regret. You need
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  Speaker 2: to be understand what you're going to regret ten twenty
• 10:22
  Speaker 2: thirty years in the future, and that's that should you know,
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  Speaker 2: may you know lead to the amount of risks that
• 10:28
  Speaker 2: you're going to take. I think it's the same for
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  Speaker 2: spending and saving. When you're thinking about should I spend
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  Speaker 2: money today the kind of like Yolo philosophy, or should
• 10:35
  Speaker 2: I save for tomorrow, save for the rainy day and
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  Speaker 2: let my money compound. What you need to understand is
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  Speaker 2: what you're going to regret in the future. Are you
• 10:42
  Speaker 2: going to be on your deathbed and look back and say,
• 10:44
  Speaker 2: I saved all this money and look at all the
• 10:46
  Speaker 2: vacations that I didn't take, look at all the all
• 10:48
  Speaker 2: the cool cars that I didn't buy. That's a sense
• 10:51
  Speaker 2: of regret. You also might live for today and spend
• 10:54
  Speaker 2: all your money, and now now you're suddenly you're eighty
• 10:56
  Speaker 2: years old and you don't have any money, and you
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  Speaker 2: regret that you didn't save. It's different for everybody, and
• 11:01
  Speaker 2: you need to have a well calibrated sense of regret.
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  Speaker 2: I'll give you my personal example right now. I have
• 11:06
  Speaker 2: two young children and I've been a heavy saver for
• 11:09
  Speaker 2: my entire life. If Heaven forbid, I were on my
• 11:12
  Speaker 2: deathbed tomorrow, I would not regret in the slightest that
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  Speaker 2: I have saved all this money because I would take
• 11:18
  Speaker 2: so much pleasure knowing that my wife and kids will
• 11:20
  Speaker 2: be taken care of because I saved. Now, Will I
• 11:23
  Speaker 2: still think that when I'm eighty years old and hopefully
• 11:25
  Speaker 2: my kids are established and earning their own money. Of
• 11:27
  Speaker 2: course I might. At that point, I might regret that
• 11:30
  Speaker 2: I'm eighty years old and saved all this money that
• 11:32
  Speaker 2: I could have spent otherwise. So it changes throughout your
• 11:35
  Speaker 2: own individual life as well.
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  Speaker 1: So it's kind of surprising to me. We're ninety percent
• 11:40
  Speaker 1: through this discussion and we really haven't talked about investing
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  Speaker 1: very much. What are the keys to being a successful
• 11:48
  Speaker 1: long term investor?
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  Speaker 2: I think a lot of it is understanding how common
• 11:52
  Speaker 2: and normal and unavoidable volatility is. It's so common that
• 11:56
  Speaker 2: even professional investors when the market falls ten twenty thirty
• 11:59
  Speaker 2: percent have a sense they respond to it with the
• 12:03
  Speaker 2: idea that the market is broken, that like, this is
• 12:05
  Speaker 2: the equivalent of a car accident or a plane falling
• 12:07
  Speaker 2: out of the sky, and you need to take a
• 12:09
  Speaker 2: critical action right now because you know it's bad. And
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  Speaker 2: by and large that's not the case. The vast majority
• 12:16
  Speaker 2: of even severe volatility is completely normal and unavoidable, and
• 12:20
  Speaker 2: if you're a student of market history, it happens way
• 12:22
  Speaker 2: more often than people like to think. And so what
• 12:25
  Speaker 2: you're getting paid for as an investor is the ability
• 12:27
  Speaker 2: to put up with and endure uncertainty and volatility. That's
• 12:30
  Speaker 2: the cost of admission. And when you view it like that,
• 12:32
  Speaker 2: then when you do have a big bat of volatility,
• 12:35
  Speaker 2: even that might last for years, it's not fun, you
• 12:38
  Speaker 2: don't enjoy it, but you say to yourself, this is
• 12:40
  Speaker 2: the cost of admission for earning higher returns that I
• 12:43
  Speaker 2: could earn in bonds or cash over the long run.
• 12:46
  Speaker 1: And our final question, why is it that getting wealthy
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  Speaker 1: and staying wealthy are such different skill sets?
• 12:55
  Speaker 2: Getting wealthy, I think requires being an optimist, optimistic about yourself,
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  Speaker 2: optimistic about the economy, taking a risk. Staying wealthy is
• 13:02
  Speaker 2: like the exact opposite. You need to be a little
• 13:04
  Speaker 2: bit pessimistic and paranoid, and you need to admit to
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  Speaker 2: yourself and acknowledge that all of economic history is a
• 13:12
  Speaker 2: constant chain of setbacks and surprises and recessions and bear
• 13:16
  Speaker 2: markets and pandemics that you need to be able to
• 13:18
  Speaker 2: endure for your long term optimism to actually pay off
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  Speaker 2: in the end.
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  Speaker 1: So to wrap up, to succeed in markets as an investor,
• 13:26
  Speaker 1: you have to understand the psychology of money. You have
• 13:30
  Speaker 1: to understand why it's not just about knowledge or math
• 13:34
  Speaker 1: or even computer programming, but highly dependent on your behavior.
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  Speaker 1: Get your behavior in the control and you're ninety percent
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  Speaker 1: of the way there. I'm Barry Rdults. You've been listening
• 13:47
  Speaker 1: to At the Money on Bloomberg Radio. Knowledge of the
• 14:01
  Speaker 1: Hodge round Round