Morgan Housel is one of my favorite finance writers who happened to make it to the mainstream with his massive hit book Psychology of Money. It’s a book I like to gift people even though I haven’t read it myself. That probably sounds weird, but I’ve read almost every blog post he’s written in the past 5 years and cite his writing in my newsletter constantly. I am just bad better at buying books than reading them. My nightstand has more than 50 books on it. That’s not a typo, it’s a problem (since I moved to CA I read about 5 books per year which is about 1/3 of what I used to back when I had an NYC subway commute).
Anyway, Morgan is great and his big-time interview with Ferriss is worth the 3 hour listen (transcript).
Here are 15 parts I felt like sharing. Bold is my own emphasis.
- 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 like long term average annual returns? It’s Jim Simons by a mile. And like it’s not even close. Warren Buffett’s long term average annual returns are about 21 percent per year. Jim Simons’ are like 66 percent 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 deca-billionaire himself. And to say like he’s not as rich sounds crazy, but to parse out the reason that Warren Buffett has earned one third of the returns, but he’s like 10 times as wealthy, is 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’s 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, and over the next 10 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, just like what’s the way that 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 could earn for the longest period of time, which usually aren’t the highest returns that are out there because 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 percent 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, but time is the exponent. 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 percent of annualized returns among professional investors.
- Investors Morgan admires besides Buffet
John Bogle, who started Vanguard, I think is probably the most admirable because it was so selfless what he did.
A lot of people don’t even know this, Vanguard is owned by the people who own Vanguard Mutual. There’s no Vanguard shareholders. There’s no profits. There’s no dividends that are played to the owners. Vanguard was made for the benefit of the people who own the ETFs, the people who own the mutual funds and John Bogle did not make that much money for himself because of that. And you could almost think that Vanguard’s low fees, all of that is — the amount that you saved in fees is money that could have gone to John Bogle and John Bogle’s estate that didn’t. He’s like this undercover philanthropist of finance that I really admire just because there’s so few other people like that.
And I think someone like James Simons, who we mentioned earlier. I think in every field, there’s only one person who’s claimed a fame, who’s competitive advantage is “I’m smarter than everyone else”. In tech, for 20 or 30 years, that person was Bill Gates, and I think in finance for the last 20 or 30 years, that person has been James Simons. The only person in the field who can say, if you ask them the question, “What is your competitive advantage?” They can say, “I’m just smarter than everyone else.” Only one person can say that, and it’s James Simons. If you look at what Renaissance Technology has done and just the results that they’ve accumulated and the consistency of what they’ve done, it’s like LeBron James times Michael Jordan times Tiger Woods to the power of Mikaela Shiffrin. It’s just such a different universe compared to what anyone else has done that it’s just, it’s astounding to watch.
- Admiration but not copying
So I think most of the people who I really admire as investors, it’s more that I admire just how they’ve lived their lives, and their general life philosophies, and their investing philosophies stems from that. That’s true for Buffett as well. Actually, there’s an interesting thing about Buffett, which is that it was so easy to admire him and still is. But when the book The Snowball came out, which is a biography written about Buffett by an author named Alice Schroeder, and it came out, I want to say 2009, something like that. It really makes clear the case that Buffett has not lived a perfect life by any means. And in a lot of instances, his family life has been a disaster. I think that’s the right word to use. It’s kind of rude to say that, but I think it’s really true. In some ways, it’s good to hear that, that like everyone puts their pants on one leg at a time in the morning. Everyone is human. Everyone deals with the ups and the downs of living a life. And that he’s a human.
And also that a lot of the reason that his family life was troubled at times is because he was, had a singular devotion in life, which was picking the best stocks and everything else came second to that. Everything from his family on down came second to that, in a way that a lot of people, including myself at one point said, “I want to be Warren Buffett. I want to be the next Warren Buffett.” But then you read about what it took to get there, and I’m like, “No, I want to stay 10 miles away from that.”
…In The Making of an American Capitalist, and I read this decades ago, but the story that really stuck out to me and I’m probably getting this wrong, but someone on the internet will correct me. I remember his meeting, Warren’s routine was to work at the office and then come home and basically just walk straight upstairs, and begin reading like S-1 filings or annual reports of one type or another, quarterly reports. And that was his routine.
And one day, he came home after work and I want to say his son, but one of his kids was like splayed out at the bottom of the stairs and had clearly like fallen down the stairs, and he just stepped over this child and walked up to his office to read reports. Like it didn’t even register to attend to his child.
That’s a really important insight to learn is that a lot of these people who you admire, the reason that you admire them is they’re so successful, and that success that they had had enormous costs associated with it that are easy to ignore. And when I look at that, it’s like, I can look at pieces of Buffett’s life that I admire and pieces of Jim Simons’ life that I admire, but I don’t want to be them. Because that mega success had so many costs attached to it that I want to avoid in my life. That’s been an important observation too, for me.
[Kris note: A reminder that geometric growth is N² and exponential growth is 2ᴺ…compounding deals with exponential growth. For example, if you grow at 10% per year for 30 years you end up with 1.10³⁰ = 17.4]
The math behind it is 99 percent of his wealth was accumulated after his 50th birthday and 97 percent came after his 65th birthday, which is a really obvious thing. If you think about how compounding works, like it’s always in the extreme later end of year, is that the numbers just start getting ridiculous. Compounding is just like, it’s just like, it starts slow and then it’s boring. And for 10 years it’s boring, for 20 years it starts to get pretty cool. And then 30 years you’re like, wow. And then 40, 50 years, it’s like, holy, like it just explodes into something incredible. There’s a friend of mine named Michael Batnick, who its explained compound growth, I think the most easy way to comprehend, which is, if I ask you: “What is eight plus eight plus eight plus eight?” you can figure that out in your head in three seconds, like anyone can do that.
That’s no problem. But if I say, “What is eight times eight times eight times eight times eight?” Like, your head’s going to explode trying to think about it. All compounding is never intuitive. And that’s why, if we look at someone like Buffett, we in the financial industry have spent so much time trying to answer the question: how has he done it? And we go into all this detail about how he thinks about moats and business models and market cycles and valuations, which are all important topics. But we know that literally 99 percent of the answer to the question, how has he accumulated this much wealth, is just that he’s been a good investor for 80 years. It’s just the time. And if Buffett had retired at age 60, like a normal person might, no one would’ve ever heard of him. He would’ve been like one of hundreds of people who retired with a couple hundred million bucks and like moved to Florida to play golf.
He never would’ve been a household name. He would’ve been a great investor, of course, but there’s a lot of great investors out there. The only reason he became a household name is just his endurance and his longevity, that’s it. And that’s why if you go back to like, even the late 1990s, not that long ago, Warren Buffett was known within circles. Like within investing circles, people knew who he was. He didn’t become a household name until the early and mid-2000s, which is that’s when the compounding took his net worth to become worth 20 billion, 50 billion, a hundred billion where he is right now. It’s just the amount of time he’s been doing it for.
- Tim describes the letter Morgan wrote to his son while the boy was still a child
“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does — especially from the people you want to respect and admire you.”
Here’s the paragraph that stuck out to me:
“When you see someone driving a nice car, you probably don’t think, ‘Wow, that person is cool.’ Instead, you think, ‘Wow, if I had that car people would think I’m cool.’ Do you see the irony? No one cares about the guy in the car. Have fun; buy some nice stuff. But realize that what people are really after is respect, and humility will ultimately gain you more of it than vanity.”
Now the last sentence has some counter examples maybe. But the point that we rarely look at the person in the cool car and say, “Wow, that person must be cool.” Rather, we apply it to ourselves is I think a very profound observation.
I was a valet at a high-end hotel in Los Angeles. So I was in my early 20s and there were people coming in in Ferraris and Lamborghinis and Rolls-Royces, like the whole thing. And it dawned on me one day that when those cars pulled in, that I had really admired, I’m a car guy, I love that. Never once did I look at the driver and say, “That guy is cool.” What I did is I imagined myself as a driver and I thought people would think I’m cool. And this was like, I was in my early 20s, but I’m just thinking like that was my first kind of light bulb into how wealth works, that everyone thinks that they want to be the driver, but no one actually is paying attention to the driver.
They’re imagining themselves. People think about themselves way more than they think about other people. But we all think that everyone’s looking at us, I think that’s like a universal thing. Everyone thinks like, oh, this person’s looking at me, they’re impressed with me. By and large they’re not, they’re thinking about themselves and how other people might want to be impressed with them.
[Kris note: I describe this effect as the “bad hair day”. The ratio of people noticing someone else’s hair is messy divided by people mentally derailed by their “bad hair day” is indistinguishable from zero]
- Purpose of wealth
I think if there is a universal trait of money that’s true for like not a hundred percent of people, but let’s say 90 percent of people, is that, what people really want in life is independence and autonomy. I think no matter where you’re from, what you do, your aspirations are, that’s a common denominator. That people just want to wake up every morning and do what they want to do on their own terms. And whether they’re able to do that, whether they can actually do that today, or that’s a goal. I think that’s a universal trait among people is just independence and autonomy. And so to the extent that we can use money to gain that, to gain independence and autonomy, that is, I think, as close as it comes to a universal want and thing that we can use money for. The interesting thing to me is that among huge numbers of people, educated people, financial professionals, the purpose of money is to buy stuff. It’s to accumulate more stuff, bigger house, nicer car, whatever it might be, which is great.
I love all that stuff too. But to me, the most powerful thing that money can do and the most universal benefit that it can bring us is systematically overlooked, like using it for independence and autonomy is so overlooked. And that to me has always been kind of a sad thing that we are so accustomed and attuned to just wanting to use our money, whatever money that we have, whatever savings that we have, to go out and buy more stuff when we could be using it for freedom and autonomy. And then when you come to a period like in March and April 2020, or October 2008, when millions of people lose their jobs and you see during those periods, like the early day of COVID, how many people are just on the razor’s edge of insolvency. And it does not take them much, one or two weeks of unemployment to be in a really bad financial spot, whether that’s for an individual or a small business, it does not take them much to be thrown over the edge.
And you realize how dependent so many people are on their jobs, their salaries, their theirs customers in a short period of time. And there’s just not a lot of room for error throughout most of the world. And I think for the huge majority of people, not everyone, but for the majority of people, there could be a lot more. And the reason that they don’t want to have more savings is because to them, the knee jerk reaction is “Why would I just keep my money in the bank or even invest it? Like, the purpose of money is to go out and buy more stuff to enjoy my life.”
I get that, I understand it, but it’s usually once every five or 10 years that people realize how important independence and autonomy is. And having that wealth that you have not spent, having the money that you haven’t spent that was just lying around doing nothing, becomes the most valuable thing in the world when it lets you gain control of your time and just wake up every morning and say, “I can do whatever the hell I want today.”
I want to wake up every morning and hang out with my kids and I want them to be happy and I want to do it on my own schedule. If it’s a Wednesday morning and I don’t want to work, then I’m going to sit on the couch all day and watch Netflix. And if it’s a Sunday and I got a good idea, I’m going to spend all day working. It’s all my own schedule on my own time, whatever I want to do. It’s that independence and autonomy.
Tim Ferriss: Can you not do that right now?
Morgan Housel: Yes. Yeah, I can. There was a point when I couldn’t and that’s why I feel like I’m pretty happy, and I feel like I’ve done a decent job of doing that. Now I do have, as a lot of people would, a tendency to be like, “Oh, what if I got that Porsche? What if we got the bigger house? What if we did this? What if we did that?” And it’s fun to think that because I love nice cars, I love all of that. It’s just so easy to realize. There was a great quote that I love that’s, “The grass is always greener on the side that’s fertilized with bullshit.” I think that’s really what it is. That’s the accurate phrasing of that well-known quote, and I think that’s really what it is. The idea that all that nicer stuff is going to make you necessarily happier, I think is just so easy to disprove.
Especially once you’ve experienced a little bit of it yourself and that actually what is going to make people happy is that independence and autonomy, that once I remind myself of that, I’m like, okay. And then the game of earning more just becomes a game, it’s less about like, oh, if I have more money, I’m going to be happier. No, if my net worth is 10 X what it is today, I’m not going to be any happier. That was not true at one point in my life, but I think it’s true today, it’s probably true for you right now, it’s true for a lot of people listening. And therefore you can admit that a game is fun and a game is fun to play, but just admit that it’s a game and it’s actually not going to make you happier.
- Risk is personal
The takeaway from that is most investing debates, where people are arguing with each other, is this a risk? Is that a risk? Should I buy this stock? Is the market going to go up next week? By and large, those debates are not actually debates. It’s people with different risk tolerances and different time horizons talking over each other, talking over one another. And that’s why. I think to me, the most important part about risk is that the definition is different for everyone. My definition’s going to be different from yours, which is different from anyone else who’s listening.
And it’s not because we disagree with each other. It’s just because we’re different people, with different goals and different ages and different family situations, etc. And so, risk is a very personalized calculation for everyone whether that’s in investing or other areas of your life.
[Kris: I always say that if you need $1mm tomorrow, the biggest risk is not flying to Vegas and betting 500k on red]
- “Tails drive everything” demonstrated without math
Tim: Am I recalling correctly that a bulk of his career returns came from concentration in GEICO? Am I getting that right?
Morgan Housel: That’s true. The last page of Benjamin Graham’s book, The Intelligent Investor, tells us little tale about an investor who earned basically his entire career success off of one investment. And that one investment broke every rule that this investor had laid out. And then kind of in the last paragraph on the last page of his book, he says, “By the way, that investor is me.”
And if you look at Benjamin Graham’s track record, his career track record is incredibly good. And if you remove GEICO, it’s average. And like I mentioned, GEICO by Graham’s own saying, breaks every rule that he just laid out in that book to buy it. And so that’s a really interesting thing is like, not only was it one company, but it’s a one company that broke all the rules. So if you’re reading that book and looking for rules to follow, like by definition, you are not going to achieve Benjamin Graham’s success.
And so, I think that’s really telling, and I don’t know what the takeaway from that is. If you could say, “Well, then clearly he’s just lucky.” If all of the success was due to one company that broke the rules, you could say, he’s just lucky.
The other thing you could say is that’s just how capitalism works. And that’s true for Buffett. It’s true for a lot of people. That if they make a hundred investments, you’re going to make the huge majority of your money on probably five of them. That’s true for anyone. That’s even true if you’re investing in an index fund. That within the index, most of the games are going to come from five percent of the companies that you invest in. That’s always the case.
I think it just kind of changes how people view success though. Like if your view of success is that every stock that Warren Buffett or Chamath or Jim Chanos or all these big name investors, that every time they make an investment, then it’s clear that, that company’s going to be a winner.
And that’s just not how this success plays out at all. That even among the top names, the best investors over time, the majority of the picks that they make do not do very well. And the reason that they’re so successful is because one or two or maybe five investments they’ve made are ultra home runs. People associate that with venture capital. That’s how it works in NVC. But it’s actually true in all stages of investing.
The stat that I’ll share with you here is that if you look at the Russell 3000 index, which is an index of large public stocks in the United States, over time, from I think, 1980 to 2010, 40 percent of the stocks in this large cap, like mom-and-pop index, 40 percent of the companies went out of business, not merged, not BAPA, but they went bankrupt, 40 percent of them.
But the index did very well because seven percent of components were huge winners. It was like Amazon, Microsoft, Netflix, those companies. So even in a boring old index fund, almost half the companies are going to go out of business. But you’ll still do well because a few do very well. And so that was true. And I think the more successful you are, the more you see that.
Even at a company like Apple or whatnot, what percentage of Apple success is the iPhone? It’s enormous. But they’ve experimented with dozens of different products over time. Amazon has experimented with the Fire Phone, which is a total flop, and they’ve done things in music which were flops. They’ve done all these flops, but they’ve also done Prime and AWS, which matters more than anything else. So almost anywhere you look, you will see that a tiny number of activities, apply for the majority of success. And it’s so hard to wrap your head around that when you’re trying to emulate these people who you look up to and admire.
- Safety net vs fuel approach to inheritance
I’m quoting Buffett again, I don’t want to do this ad nauseam for the whole podcast, but he has a great quote on wealth where he says he wants to leave his kids enough money that they can do anything, but not so much money that they could do nothing — I think that’s really the key. And that’s how I think about my own kids who are very young, but when my wife and I think, how do we want to use whatever savings that we have to benefit them? Giving them a safety net, but not a fuel is a — that’s what my parents did for myself and my siblings, I always knew — when I was a teenager and in my early 20s, I always knew they would be there if I fell on my face and they would — I would never just completely fail, I’d never be homeless, I would never — they would always catch me, but they were never going to be a fuel. They’re never just going to give me money just to make my life better, that was never going to be the case.
- Against optimization
Even if you look at the periods that in hindsight we think were the greatest that existed, which for most Americans is the 1950s and the 1990s, that’s what we remember as the golden age of prosperity and happiness and peace. Even if you look at those periods, like in the 1950 people were high, kids were doing nuclear bomb drills under their desks, and there was a lot of pessimism and negativity. Even if we know in hindsight, it was great at the time, by and large, they did not know that maybe it was good economically, but there was a lot to be worried about in the 1950s. Same in the 1990s, which we today it’s like, oh, the booming 1990s, the bull market. But even people forget in 1994 there was a big interest rate calamity where a bunch of bond interest rates rose and then the stock market crashed.
And then in 1998 a big hedge fund went out of business and almost took the whole global economy down with it. There was a lot to worry about during these periods, so how do you protect yourself from that? How do you actually become buy and hold? I think there’s one thing to do here, there’s a friend of mine named Carl Richards, who’s a financial advisor, and he has a quote where he says, “Risk is what is left over when you think you’ve thought of everything.” And I think that’s the definition of risk is whenever we’re done planning and forecasting, everything that’s left over that we haven’t thought about, that’s what risk actually is. And the takeaway from that, the actual practical takeaway is that if you are only planning for risks that you can think about and you can envision and you can imagine, then 10 times out of 10, you’re going to miss the biggest risk that actually hits you.
The biggest risk is always something that nobody sees coming, including something like COVID where it’s actually not fair to say no one saw it coming, but by and large — it’s like in financial circles, not a single investor in 2019 in their economic outlook had a viral pandemic as something that they were worried about, not a single one, or 9/11, or Lehman Brothers going bankrupt, all the big events that actually mattered, it’s pretty much true to say no one saw them coming. I think that’s generally true. And therefore, the takeaway is you have to have a level of savings in your asset allocation that doesn’t make sense. You have to have a level of conservatism that seems like it’s a little bit too much. That’s the only time that you know that you are prepared for risks that you cannot envision.
And if you are only prepared for what you can imagine, again, you’re going to miss the biggest risk every single time. Whenever people look at my asset allocation, if I share that with them, it looks a little bit too conservative and they say, “Ah, you could be taking a little bit more risk,” and they’re right. I probably could, but I want to be prepared for the risks that I can’t imagine, or the risk that is possible but I don’t want to even think about it, it’s too painful to think about. That’s the only time that you can be prepared for the surprises in life. And I think most people, not all investors, but the majority of investors are not conservative enough. And I know whenever I say that they shake their head like, “Come on. Why don’t you want to take risk?” And once a decade you learn why, once a decade. Whether it’s COVID, or 9/11, or 2008, once per decade, you’re like, “Oh, okay, I get it now. I didn’t see this coming. It was a calamity and I either ground myself into the floor and I got wiped out, or I had a little bit of extra savings that got me through.” So that’s how I think about how to stay in the game in a long term history where history is a constant chain of surprises. That’s the only way to do it.
- Framing: Understanding when volatility or pain is a “fee or a fine”
The way that I’ve phrased it in the book was “understanding the difference between a fee and a fine,” which seems like they’re really similar but there’s a very important difference which is, a fine means you did something wrong like, “Shame on you, here’s your speeding ticket. Don’t do it ever again, you’re in trouble.” And a fee is just a price of admission that you paid to get something better on the other side. Like you go to Disneyland, you pay the fee, and then you get to enjoy the theme park. You didn’t do anything wrong, it’s just that’s the fee.
I think if you could situate your life to where you view a lot of the ups and downs, not all of it, but a lot of the volatility in investing, a lot of the volatility in your career, as a fee instead of a fine, then it just becomes a little bit more palatable. And when the market falls 30 percent, it’s not that you enjoy it, you don’t think it’s fun, but you’re like, “Okay, I understand this is the fee that I have to be willing to pay in order to do well over a long period of time.” Most investors don’t do that. When their portfolio falls 30 percent, they say, “I fucked up. I did something wrong. I clearly made a mistake. And how can I make sure this never happens again?” And that’s the wrong way to think about it. And I think if you view it as a fee instead of a fine, it’s just much more enjoyable. It’s much more realistic to deal with.
Now, I said earlier that there are some areas in life where it’s like that. If you’re talking about a death in the family, a divorce, there’s things that’s like, “No, that’s not — that’s just a straight negative.” Like no silver lining to some of these things in life so I want to be careful at parsing that. But particularly investing, the huge majority of the pain that people go through and put themselves through is just the fee for earning superior returns over time. And if you’re not willing to pay that, then you’re probably not going to get the reward on the other side. And that’s why you can see so many people who at the first experience with being uncomfortable in investing with a loss, they view it as they screwed up and then they want out. They want to move on to something else.
And of course, they’re not going to get the rewards over time. Nothing in life is going to give you those rewards for free. There’s a cost to everything. And just identifying what the cost is then realizing that the cost is not on a price tag, you’re going to pay for it with stress and anxiety, and dopamine, and cortisol, like that’s how you pay for these things, I think that’s the only way to deal with those big ups and downs.
- The optimal amount of bullshit
You had Stephen Pressfield on your show, and he was talking about a time when he lived in a mental institution. He was not a patient himself, but he lived there and he starts talking to all these people. And he made this comment that a lot of the common denominators of these people who lived in a mental institution was they were not crazy, they just could not handle or put up with the bullshit of life. They just couldn’t deal with it. And that was kind of why they ended up in the mental institution. And he said all these people were the smartest, most creative people who he had ever met, but they couldn’t put up, they had no tolerance for the bullshit of the real world. And that to me, just brought this idea that there’s actually an optimal amount of bullshit to deal with in life. If your tolerance for bullshit is zero, you’re not going to make it at all in life…
I listened to that [interview] and it was like, “Oh, see, these people could not function in the real world because they had no tolerance for bullshit.” The second step from that is, there is an optimal amount of bullshit to put up within life. And that was where this article, “The Optimal Amount of Hassle,” came from.
And I remembered I was on a flight many years ago and there was this guy in a pinstripe suit who let everyone know that he was a CEO of some company, and the flight was like two hours delayed, and he completely lost his mind. He was dropping F bombs to the gate agents and just completely making an ass of himself because the flight was delayed. And I remember thinking like, “How could you make it this far in life and have no tolerance for petty annoyance, like a delayed flight?”
And I just think like there’s a big skill in life in terms of just being able to deal with some level of bullshit, and a lot of people don’t have that. There’s another great quote that I love from FDR, who of course was paralyzed and in a wheelchair. And he said, “When you’re in a wheelchair and you want milk but they bring you orange juice instead, you learn to say, ‘That’s all right.’ and just drink it.” And I think that just having the ability to put up with that kind of stuff is, I think, really important and often lost in this age where we want perfection. We want everything to be perfect, and it never is.
[Kris: I have a good friend who is insanely smart and well-traveled (top 1% in both categories of everyone I know). He has a brother who is not conventionally successful and I’ve asked him about what that brother is like. His brother is also very well-traveled in part to choosing a life in the armed forces. But my friend has also described is brother as also extremely smart. But he’s incapable of tolerating the b.s. that defines the ladder-climbing world. The military life is simple in the ways he prefers. It has always stayed with me, that my friend quite explicitly described his brother as being unwilling to suffer bullshit. I really think about this a lot (too much if I’m being honest), since I often feel that “getting ahead” is really just climbing sedimentary layers of compressed bullshit.]
- The durability of value investing with a lower case “v”, not the investment category
Value investing will always work in terms of, if you buy an asset for less than it’s worth, you’ll probably do pretty well over time. But the actual formulas that you use to determine value, those have always evolved and always changed. And formulas that people use, whether it’s price to book value, the P/E ratio. Whatever formula it is that may have worked at one period of time, those always evolve. That’s always been the case. I think it always will be the case that there will be people that will be stubbornly attached to the metrics and the formulas and the valuation techniques that worked perfectly in the previous era that now outdated and outmoded.
If I was selling products by commission, if I was a financial advisor selling by commission, I would probably be much more into active investing and active strategies than I am right now. I think because I’m not a financial advisor, I’m not giving people advice, I can just view it as an outsider and be like, well, this is what makes sense to me so that’s what I’m going to do.
Whereas I know that if I was in the trenches so to speak and had to make a living doing this, I know I would’ve very different views about what strategies you should pursue. And I know that the strategies that I would lead towards would be higher fee higher commission. I just think that’s the reality of it. Most people who work in finance are good, honest, noble people. Not all of them, but most of them are. But to the extent that is bad advice that gets perpetuated, I really just think it comes down to the incentives that are in the industry. The perfect example of this is that the only firm that’s really been able to make a good business out of selling passive funds is Vanguard and they’ve done it by becoming a nonprofit. That’s the only way that you can do it. You can’t make a good business out of selling the lowest fee funds that are out there. You just can’t do it. So I know that if I had a different compensation structure, I would think differently as an investor.
- I couldn’t help mentioning this section. Do what you will with it
Tim Ferriss: Yeah. I am going to try to find this. There it is. It is a tweet from Jason. So a few years ago, Naval Ravikant and I were having a conversation on the podcast and he talked about the asymmetric costs of offense and defense in a world where drones are weaponized. Meaning if you have a drone or a bunch of tiny drones that are weaponized, and this is being developed all over the world, of course. You have sophisticated attacks where they can be coordinated with software to say all land on a given tank and explode at once. They can be used in more ad hoc, improvised ways.
But I’ve been tracking this space because a number of my friends are involved. Some of them design and manufacture predator drones, for instance. So a drone that would kill or capture other drones, and they use netting that is shot out like Spider-Man to catch drones and they’re used by different major league sports franchises, because that’s a non-trivial threat to say an arena would be drone attacks. And Jason has a tweet, this is from December 7th, 2021. “Saudi Arabia is running out of the ammunition to defend against drone and missile attacks from rebels in Yemen…” I can’t pronounce, the Houthi it might be, I’m sure I’m pronouncing that incorrectly, ” …rebels in Yemen is appealing to the US and its Gulf and European allies for a re-supply.” This is in The Wall Street Journal and the lead, or at least the teaser sentence that I see presented by Wall Street Journal, is, “Saudi Arabia’s defense against the rebels’ drones pits $1 million missiles against $10,000 ‘flying lawn mowers.’” In quotation marks.
Morgan Housel: I remember that. Yeah. That’s a great way to phrase the problem that you’re dealing with and who has the edge here? It’s crazy.
Tim Ferriss: Yeah. The future of warfare is here. Not to beat poor William Gibson’s quote to death, but the future’s already here, it’s just not evenly distributed. But this is something that I’ve been watching very closely because the potential consequences and the implications are so terrifying. So not to end on that, but I only saw that tweet today from Jason and it served as a reminder to me that I think in a year, particularly with the technological development cycles that we’re seeing, how compressed they are, and the innovations that we’re seeing from drone manufacturers. I recently had some interactions with the newer drones and drones with flir technology and infrared tracking capabilities. It is incredibly impressive. Compared to drones from even 18 months ago, they are worlds apart. It is shockingly impressive.
Morgan Housel: Here’s what’s scary to me about that too, is that when the nuclear bomb came about, there was obviously fear that this is the future of war and knock on wood, fingers crossed, it has not since 1945. Because the consequences of a nuclear war are so catastrophic, that everyone who has them up until this point has said it’s not worth using them because the consequences are so severe. I almost think drone war is the opposite where it’s like there’s no skin in the game, you’re not sacrificing any soldier’s lives. You’re sacrificing civilian lives, of course, on the other side. But there’s so little skin in the game and it’s so easy to just flip these things up in the air and go for it, that it makes starting a war, progressing a war so much easier than it’s ever been. It’s the opposite of what happened with nuclear war over for the last 80 years.
Tim Ferriss: Yeah. If people want to make an attempt at looking around some corners, also from a technical perspective with respect to AI and cyber warfare, highly recommend listening to my recent podcast with Eric Schmidt, it is mind-boggling. What else? I think that within a year we will have things like GPT-3 at a point where we can generate probably, I would say within a year might be aggressive, but within 18 months, with figures who have enough audio on online that you can really deep fake effectively. You’ll have synthetic interviews with people alive and dead that are convincing enough that they can’t be distinguished from live interview. I could see that being graspable in the next 12 to 18 months.
Morgan Housel: And that just torpedoes trust even more than it’s ever been. You hear a quote from Tim Ferriss, and you’re like, “That’s probably not even Tim, so I don’t even take it serious anymore.” There’s no trust anywhere.
Tim Ferriss: Election cycle 2022. It’s going to be exciting.
Morgan Housel: I got my son in Oculus for Christmas and there’s a thing where you can do a tour of the White House with Barack and Michelle. It was filmed back then. And just sitting at a table in VR, having a conversation with Barack Obama, it was so shockingly realistic. And you know where that’s going, the VR headsets that we have 10 years from now are going to make this look like a complete joke. If you mix that with the ability to deep fake, we’re heading into a world that’s going to be so wild.
Kris: As I was pulling insights from the transcript this was a timley news event: