5-Minute Read
As humans, we crave certainty. It’s hard to turn away from those who make predictions, especially when they express their claims confidently or eloquently. We’re comforted by anything that makes an uncertain future feel more within our control.
But what if we have it backward? What if the best way to understand the future is to look back and study things that never change? One of my favorite authors, Morgan Housel, aimed to do this in his latest book, Same as Ever.
The book is a captivating guide to human behavior and psychology, filled with engaging stories that offer insights applicable to life and investing. In this piece, I share ten of my favorite quotes from the book, each accompanied by a brief commentary explaining why I find them particularly useful, mostly in the context of investing. I hope one or more of these quotes can inspire you to craft or refine your own investment philosophy!
“I’m often asked what’s going to change in the next ten years. I almost never get the question: ‘What’s NOT going to change in the next ten years?’. And I submit to you that the second question is actually the more important of the two” – Jeff Bezos
It’s tempting to focus on what will change in the world. However, there is such a complex chain of cause and effect that major changes often come as a surprise. Concentrating on behaviors that never change may give us a better-calibrated view of what to expect in the future.
“Risk is what’s left over after you’ve thought of everything.” – Carl Richards
If you can envision a specific risk in your life, you can prepare for it. You can accept, avoid, mitigate, or, in some cases, transfer the risk through insurance. But what do you do after you’ve prepared for all the risks you can imagine? What remains is arguably the true definition of risk.
“The first rule of a happy life is low expectations. If you have unrealistic expectations, you’re going to be miserable your whole life. You want to have reasonable expectations and take life’s results, good and bad, as they happen with a certain amount of stoicism.” – Charlie Munger
In this book and his earlier work, The Psychology of Money, Housel explains how our happiness hinges more on expectations than anything else. While it may not always be apparent, the world is improving for most people most of the time. However, happiness does not increase at the same rate or magnitude. This is largely because we are influenced not just by what we have but also by what others possess.
If this is a character flaw in humans, doesn’t being aware of it give us a better chance of finding happiness? As you reflect on that, I’ll share a bonus quote from Housel: “An important life skill is getting the goalpost to stop moving. It’s also one of the hardest.”
“Optimism and pessimism always have to overshoot what seems reasonable, because the only way to discover the limits of what’s possible is to venture a little way past those limits.” – Morgan Housel
This is from a chapter with the awesome title “Calm Plants the Seeds of Crazy.” There’s an interesting reference to Hyman Minksy’s Financial Instability Hypothesis. Sounds fancy, but it goes something like this:
- When an economy is stable, people get optimistic.
- When people get optimistic, they go into debt.
- When they go into debt, the economy becomes unstable.
The lesson here is that, from a macroeconomic perspective, you shouldn’t waste time wishing for or attempting to create a stable world. Stability merely plants the seeds of instability.
“The greatest shortcoming of the human race is our inability to understand the exponential function.” – Albert Bartlett (Physicist)
In the grand scheme of things, a single outstanding year of investment returns might not greatly affect your quality of life. The strength of compounding comes from time in the market, not from trying to time the market.
Imagine examining an investment strategy that appears mediocre in any single year. However, when you expand your perspective to, say, thirty years, you discover that the strategy has delivered superior returns relative to most of its peers. This outcome may seem counterintuitive, but it becomes clearer when you consider that most investment funds don’t last for thirty years! If your investment strategy can simply endure, you stand a better chance of witnessing the “magic” of compounding work in your favor.
In other words, unless you’re evaluated on short-term results, most people shouldn’t focus on pursuing the highest return. Instead, try to generate good returns for as long as possible. Simple but not easy.
“Save like a pessimist and invest like an optimist” – Morgan Housel
One of the key points here is that you shouldn’t go through life as a strict pessimist or an unyielding optimist. If you lean too much toward pessimism, you’ll end up miserable. If you lean too much toward optimism, you’ll set yourself up for significant disappointment. Avoid the extremes and strive to find a balance in between.
I love this quote because of its simplicity and power. Unfortunately, too many people do the opposite, often out of ignorance or necessity. Regardless of the reason, it’s difficult for them to achieve any financial traction.
“My only measure of success is how much time you have to kill” – Nassim Taleb.
The intriguing aspect of this quote is that having free time is not only a measure of success but also a crucial ingredient for true productivity. Curious wandering and uninterrupted thinking can greatly contribute to future success. Or consider it from another perspective: how often have your best ideas emerged while you were stuck in the office?
“Lie to people who want to be lied to, and you’ll get rich. Tell the truth to those who want the truth, and you’ll make a living. Tell the truth to those who want to be lied to, and you’ll go broke.” – Jason Zweig
Live long enough, and you’ll see some truly bizarre events unfold in the world and the investment markets. What seems unsustainable can often last much longer than what feels reasonable. Social and financial incentives lead people to postpone accepting reality for as long as possible. Outrageous incentives can trigger outrageous behavior. This reminds me of another saying when you’re tempted to time the market: “The market can stay irrational longer than you can stay solvent.”
It becomes a bit easier to understand the world (and teenagers, if you’re a parent) when you realize that the world operates on incentives. The next time you see someone act in a way you wouldn’t, can you think about what incentives that person faces? Housel poses a thought-provoking question to consider—assuming you can be completely honest: “Which of my current views would change if my incentives were different?”
“The purpose of the margin of safety is to render the forecast unnecessary.” – Benjamin Graham
We know that investing is a long-term endeavor. However, viewing the long term as a series of shorter time frames is essential. Referring back to the earlier compounding quote, a ten-year horizon may seem lengthy, right? Let’s assume that’s also the timeframe set for your planned retirement. That’s fantastic, but what happens if the economy and markets don’t favor you in year ten? It’s crucial to maintain some flexibility in your plans if you aim to build resilience. In this case, having a flexible end date for your goal could make all the difference.
“Simplicity is the hallmark of truth – we should know better, but complexity continues to have a morbid attraction. When you give an academic audience a lecture that is crystal clear, they feel cheated. The sore truth is that complexity sells better.”– Edsger Djikstra (Computer Scientist)
The simple answers are often correct but can also be boring and less intellectually stimulating. Preventing cancer by not smoking is simpler and more effective than any of the complex treatments available. By all means, seek out complexity and challenge your brain. However, try to return to core principles. That’s what theoretical physicists Richard Feynman and Stephen Hawking accomplished with their teachings, which likely contributed to their lasting fame.
Complexity often gives us the impression of greater control, but this can sometimes be misleading. To wrap things up: exercise caution when selecting an investment strategy; if there isn’t at least one logical (or better yet intuitive) reason why it should succeed in the future, reconsider your decision.
If you have comments or questions on this piece, please drop me a line at: [email protected]
References
- https://www.amazon.com/Same-Ever-Guide-Never-Changes/dp/0593332709
- https://www.amazon.com/Psychology-Money-Timeless-lessons-happiness/dp/0857197681
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