After a brief discussion on the Debt Ceiling debacle, Episode 102 of Plan For Life Now is dedicated to what may be the number one book in “Steve’s Book Club “, The Psychology Of Money by Morgan Housel. There are two definite takeaways from this episode: 1) This book is a must for any successful long term investor and 2) Morgan Housel himself would be a more successful investor if he was #1 in Oprah’s Book Club, and not Steve’s.
Steve:
All right. Welcome to Plan for Life now, episode 1 0 2. Dave, before we started recording, you said you’re so glad to be past that 100th episode threshold.
Dave:
The pressure
Steve:
You felt the pressure building there. Gosh, that was unbearable, but, uh,
Dave:
That, that was basically in the clear until episode 200,
Steve:
200. Yeah. . I think we can, I think e even if we ramped up doing the podcast, which we’ve talked about, it’s still gonna be a little while before we get there.
Dave:
Yeah.
Steve:
So here we sit and as all of our listeners know, it’s always a couple days before we can get this out to you guys, cuz compliance has gotta listen, we gotta post it, all that stuff. So here we sit, May 31st and the news that came out over the past weekend, Memorial Day weekend. Hope everybody had a, a nice one. The news that came out was that McCarthy and Biden had gotten together and come to some agreements on raising the debt ceiling and we wouldn’t have to worry about this for two more years, but here we sit midweek and I don’t know all the details, but it’s gotta go through committees and it’s gotta go through, you know, all this stuff. And a few of the right wing Republicans might sabotage it cuz they don’t like whatever. But I’m guessing that by the time you all listen to this, it will be resolved. And I might eat my words , that might not happen. But I think that by the time you guys get this later this week, early next week, it’s going to be resolved. And you’ll say, yep, that’s ceiling not a big deal.
Dave:
Yeah, it sure looks that way. Um, I don’t know, it all just speaks to why you just don’t, or almost every case it makes sense not to foresee what is considered to be by the pundits of financial issue when it comes to your, your money and more importantly your money in stocks and make moves, uh, prematurely. Because even when it seems like, well, what, what’s the big deal if I just pull it out now and then when this thing’s over, it’ll be okay? Well, the big deal is you never know when it’s over. Exactly. Yeah. Like you today, it’s not officially resolved. It’s today the day you put your money back, if you took it out a few months ago, you already lost several percentage points, right. That you’re not getting back anyway. But you never really know when these things are over. Um, and then the, usually the pundits predictions and even in the, the way they talk is wrong is cuz it’s very hard to pre, in other words, this congress, this republican house was supposed to be absolutely unequivocally the worst house for negotiating anything in the history of houses. , these people are so hardcore and this guy is like, McCarthy is just, that’s why we’re gonna have a problem cuz there’ll be no negotiation whatsoever. You know what other administrations never had this negotiation where they sat down, Biden and McCarthy, they hammered something out, not good for everybody, and then they, they sort of went from there. Well, that’s so that the whole analysis was wrong. It was, in fact it was a polar opposite of what the analysis initially was.
Steve:
Well, that, that was my, the thing that made me feel best about the whole thing was that I, I saw over the weekend that both sides, the f you know, the far left and the far right, both sides were upset about it. And I said, well, that’s a great negotiation then. That’s, that’s good. That’s what we want. We want people on the far left and people on the far right to be upset about it because that means that there was some compromise involved there. And, and that’s probably where it should end up. And you know, hopefully, like I said, hopefully we’re looking at this next week and say, yep, we don’t have to worry about that for another two years. And, and we can go beyond that now,
Dave:
But there’ll be something to worry about . Well, of course,
Steve:
Um, you know, people will ask the larger question and, and I wish I knew the answer to this. I wish anybody knew the answer to this. But the larger question is, Hey, we’ve got a lot of debt as a country and we don’t seem to be slowing down our spending tremendously. I mean, I think it’s been a, a little bit more balanced, um, under Biden, but, you know, we’ve got a lot of debt out there. What does that mean for the long term? And I don’t have a great answer to that. Um, you know, we do know that as those so-called entitlement programs, the Medicare and social security start to take up a bigger and bigger portion of the federal, uh, budget, that’s gonna be an issue going forward. But the near term crisis, it looks like has probably been averted.
Dave:
Right. And we’ll see what happened. I mean, the only, again, the long term solutions for the debt all lead to basically what we end up doing for our clients. And that’s just, you know, things are gonna cost more in the future. Not a shock. How much more hard to predict as always, retirement ages will be pushed back as far as getting social security
Steve:
And benefit tax rates.
Dave:
You know, I mean, I’ve been
Steve:
Saying for years, you know, I think tax rates will have to go up. You know, I, I know that it seems like for both the left and of course the right, you know, raising taxes is, oh, that’s, that’s terrible. But I think at some point, and I don’t know if that’ll be five years from now, 10 years from now, 20 years from now, at some point we’ll say, okay, well we gotta pay a little bit more in taxes because , the debt has just gotten outta control there.
Dave:
Right. Which is why when we deal with, I think your predictions are good. Your, your long-term predictions have been pretty good. And we just sort of, as advisors stick with these things that make sense and try to do nuanced moves. Like we never, we didn’t really like to put people in long-term bond funds and stuff like that because we assume the interest rates were gonna go up. Yeah. They never ended up seemingly they’re not going up. They’re not going up, they’re not going up and then they shot up. Right. So that wasn’t a gradual thing, but making a move that made sense. That’s, you know, nuanced move years ago, ended up paying off. And, and then the, the, I looked at Roth conversion sort of in the same way. We don’t know what’s gonna happen with taxes, but you look at today’s tax rates and you look down the road, they’re gonna have to be higher. Yeah. Most likely. And sometimes if it makes sense for you consumer out there, you know, Roth conversions or the other kind of move that makes sense for some people looking out into the future of something that looks like it’s gonna have to happen at some point or another.
Steve:
Just one last thing on the debt ceiling, before we get off of this. I, I was listening to someone , I, I can’t tell who it was a podcast, A C N B C, whatever. I was listening to someone talking about the debt ceiling and they, they were making this point that I thought was interesting saying, you know, it’s, it’s usually not the things that we see coming, such as the debt ceiling that cause these big declines in the market. It’s usually the things that we don’t see coming, you know, coronavirus, stuff like that. So it’s, it’s usually not the things where the media spends months upon months saying, okay, this could be an issue. This is common here it is. Um, it’s usually not those things that, that cause the big problems. And of course that sort of makes sense because if we all know that that’s coming and that’s gonna a big problem, you know, the market is this, this big entity that takes the knowledge of everyone and sort of adapts and changes, you know, based on that information. So
Dave:
Right. The market, when things really go down, it would be things that, you know, covid a perfect example of a, you know, totally unexpected a market catastrophe
Steve:
Right
Dave:
Outta the blue. Nothing that could have been worked into the metrics and y you saw what the results were.
Steve:
All right. Let’s shift gears, Dave. And I’m really excited about this book that I just read. Um, and when I say read, I’m an audiobook guy. I think I’ve talked about this before. I like to listen to audiobooks. But this one I think I’m actually gonna buy the book because I enjoyed the audiobook so much. Um, and it was one of those things where I thought that I had already read this book I thought that I had, and then I realized when I was listening to this author, um, on a podcast, I realized I hadn’t. So the author is Morgan Housel. The book is the Psychology of Money. And I, I would even say, Dave, I’m gonna recommend you read this book. I
Dave:
I really to see, I could have an reading assignment, I could feel it
Steve:
Because you know, I I like a lot of these, you know, some of the nitty gritty type of books and they’ll, they’ll go into, uh, the creation of the Federal Reserve and the 19 fifteens and, you know, the fall of long-Term Capital Management. I’m not gonna recommend those for you, Dave. There’s, you’re not gonna enjoy those. Well, this one
Dave:
Speak for 95% of the people listening to this. It’s true. Interested in money. But go ahead.
Steve:
This one you’re really gonna like, because I think that it, it’s one of those things where if you’ve ever come across someone who articulates your thoughts and ideas better than you are able to articulate some of your thoughts and ideas and you go, yes, that’s what I was trying to say. But man, you just said it better than I could have said it. Um, so let me go through here. I had a couple of things. Some of this, I’m just, I’m just flat out gonna read from this book here. Um, but he, he talks about his philosophy and there’s a reason why it’s called the Psychology of Money. And even as I was listening to the author talk about what they put on the cover, they put a picture of a brain and he said, I didn’t want, you know, he said everybody was pushing him to put one of those classic covers for any stock market book.
And you can imagine it, it’s either the, the chart of the stock market going up and down over the long term or maybe an image of one of the trading pits on, uh, the New York Stock Exchange. The big board there where you’ve got all the guys shouting and you know, trying to, trying to trade there. He said, you know, all of his author or his, uh, editors wanted him to do that. No, no. He put a brain on there because he wanted it to be about the way we think about money and not just this pure technical type of book. So he starts things off just talking about, and this is really where I felt like this jived with a lot of what we were saying, we were saying have always said, um, to quote here, more than I want big returns. I want to be financially unbreakable.
If I’m unbreakable, I think I’ll get good returns, but I’ll be able to stick with my plan long enough for compounding to work. Its wonders. I mean, isn’t that Isn’t that what we’ve, you know, always said is maybe not, like I said in those words, maybe not quite that eloquently, but the whole idea is we know stocks, the risk-based part of your portfolio is gonna go up and down. I, I can’t control that. You can’t control that. Um, we think it’ll do fine long term, but I don’t know what’s gonna happen in the short term. But we need to be able to stick with the plan, otherwise you don’t get the benefits of that, the long-term growth in stocks there. Right. And uh, his number two point here, planning is important, but the most important part of every plan is that the plan will not go according to plan. Once again,
Dave:
, it sounds like, uh, most podcasts that we do. Yeah.
Steve:
, I mean
Dave:
Including the beginning of this one
Steve:
. But I mean that, that’s totally what we talk about is, you know, I often say that, you know, we try to put a plan together and then poke holes in that plan. What can go wrong here? Right. Right. Okay. You’ve got a nice big pension, but what if a husband or wife, one of you needs long-term care insurance or long-term care that could go wrong? Um, you know, you’ve got a young worker, uh, kids that a wife stays at home, they need life insurance. Um, you don’t have a pension, you’ve got a lot of money invested in the, the stock market. Well, you need to have certain guarantees. You need to have a bigger buffer of cash and safe assets. So, you know that, that’s always been a core belief in our philosophy.
Dave:
Yeah, that was, that was a big part of this. A huge part of you and me doing what we do circa right after 2008. Yeah. You know, look at the psychology of what happened. I mean, it’s very hard to look back cuz our brains aren’t geared to know how you felt in 2009 or what, but the market had really crashed in the great recession. There was this need for clients’ growth, but you had to have something there. You had to have a feeling of protection. The growth was needed to have enough retirement income. Ultimately there had to be something in there that was, that would tell your brain, Hey, , you know, if things go down again, I’ve got some sort of protection for income. And that’s why we did some annuity planning Yeah. With a lot of clients who didn’t have pensions. Um, and, but it, it’s so right on track with what you’re talking about in this book.
Steve:
Mm-hmm. . And then th this third kind of main point that he lays out here and, and this kind of, I think is sort of similar to the, the other ones, but, um, a barbelled approach or a barbelled personality optimistic about the long term. Right. So, uh, you know, this is something that I’ve said, you know, I am a long term bull, right? I, I think that if I’m gonna be Rip Van Winkle and go to sleep and come wake up 30 years from now, I think there will be growth in the stock market. So I am definitely a long-term bull, but paranoid about all the short-term things that could prevent you from getting there. And you know, that’s where, where having that buffer or that moat of cash or just real conservative assets, you know, whether it’s cash, short-term bonds, annuities, whatever, you know, you’ve gotta have that moat there to prevent you from screwing up the long-term stuff because it’s real easy to do that.
You know, it’s real easy to have this long-term money, um, you know, coronavirus hits. You can easily make a case that this has never happened before. I’m gonna get out of the market to prevent more bad things from happening. Well, you know, right there you might’ve just wiped out 20% of your portfolio, um, you know, if not more and you got no chance of recovering that. So optimistic about the long term, but paranoid or cautious, whatever word you want to use about the short term. Um, going through here, things that I had written down and bookmark, um, you know, I, this is, this also goes with the psychology of money here is just taking a step back and talking about, you know, what do we really want from more money? And, and I would think a lot of our clients fall in this category. Um, you know, I know a lot of people out there, they want more money to buy more nice things because they gotta have the latest car and this and that. I don’t think that’s most of our clients, I dunno, tell me if you disagree, but
Dave:
Oh, I, the vast majority, vast majority, I I would say like 97% of our clients are not out there to buy more things. That’s not their goal right
Steve:
Now. What their goal is right here. I is having that sense of control and comfort and that ability to say, I can wake up today. I can do whatever I want. Right. Right. I don’t have to go to work, I don’t have to continue to do something that I don’t enjoy. Maybe I decide to anyway, but I don’t have to. Right. Um, and quite
Dave:
Frankly, for the clients who are still working, remember we have, you know, we might be capital retirement strategies, we solve clients who work
Steve:
Yeah.
Dave:
In retirement age also. And that’s part of that freedom is I can work with a, not in the scenario of worrying about a boss, worrying about what I do. I I’m gonna do what’s right, um, in my job and not have to worry about that. It’s just, it’s we all, I use the word freedom. I call the, the key. What we try to do is give you financial freedom. Yeah. The freedom to live life. That’s what money’s there for. It’s to not have you be a slave of the job or other situations like you just said, that you know, that you’re not interested in traffic
Steve:
. Yeah. Uh, you know, but this is, this is what money gives to you. It’s, it’s not, you know, it’s not the ability to buy all these nice things, which, you know, I mean a few nice things here and there, but it’s that control. It gives you that control to do what you want. Um, and there’s been psychological research done that shows the correlation is much stronger to, if you have control of your life, control over what you need to do. That happiness is much more tied to that than it is tied to how big of a salary is. How big your jo your house, the prestige at your job. Having that control, that’s really what’s important to people. Um, and I, once again, I, I feel like I knew this, see this all the time, but you know, to have it stated like this, I jump up and go, yes, that’s totally it. That’s totally what what we see in real life. Um, I’m going through all the notes that I have here of just, I probably could do several podcasts all about this. But, um, you know, one of the things, you know, that, that I mentioned earlier is, you know, things that have never happened before in the financial world happen all the time.
Dave:
That is a tough one. Psychology of Money. Boy, that is a good one. The author hit , hit one there. Cuz that’s what we hear a lot from, from clients who are worried or just people out there worrying. They’re not my clients, just friends and stuff I talk to. This has never happened before. Yeah, yeah, yeah, I know that. But this has never happened before.
Steve:
Yeah. And I mean, you’re, you are a history major, right, Dave? You uh, I, yeah.
Dave:
And I just like history in general.
Steve:
Yeah. I mean, and it’s, it’s important to understand history, but I do think there is this overreliance sometimes on people saying, okay, this is what’s happened in history. This gives me a range of what can happen in the future. Um, no, not necessarily . Um, that’s, it’s good to see that that’s happened before, but the situation is always different and there’s always things happening that have never happened before. And there’s a statistical term for this, you know, something that they call a Six Sigma event, um, . And this is one of those things where I’m sure we’ve got statisticians listening who are gonna correct me on the details of this. But if you look at something and you say, you know, it’s one Sigma, two sigma, three sigma, okay. 99% of the time something won’t happen. You know, if it’s a three Sigma event, you go out to Six Sigma. I don’t even know what the numbers are, but it’s 99.999% of the time this shouldn’t happen. Right. But basically this should only happen once every a hundred thousand years. But they keep happening. , there’s way more of those than there should be.
Dave:
Yeah. But on the same, the other problem with the brain though is something happens like, go back to the great recession. Oh my. Now you are worried. I just talked about the kind of planning we had to do after, because this can happen again and yet it can happen again. But let’s face it, the Great Depression was 1930 and the Great recession was 2008. That was a 78 year difference. The, the whatever the, the pandemic they had in 1917 or 18 or whatever the hell that was, that pandemic we had another one. Yeah. It happened in 2020, about a hundred years later. Yeah. So things happen they could repeat, but of that nature, statistically, you know, it’s it’s generations later. Doesn’t mean it can’t happen again. It’s just how your brain’s working versus statistical fact.
Steve:
So the natural response that a lot of people will have when I say something like that, you know, things that don’t happen or shouldn’t happen, happen all the time is, okay, how do we deal with that? And I, I think the, the answer to that is remarkably simple. But because it’s so simple, I feel like it’s unsatisfying for some people, they want something more precise. But the, the remarkably simple answer is have a margin for error. You know, have this plan where, okay, I think I’m going to get 6% rate of return, but you know, what if I only get 4%, I’m still okay. You know, would I prefer to have 6%? Yeah, I’d prefer to have that. That’s much better. More assets for me, for my kids, whoever. But I’m still okay if I only get four or I think I’m gonna need $10,000 a month, but you know what, I’ve got a plan where I could, I could generate 12,000 a month if I needed to. Um, you know, I I think you’ve gotta build in that margin for error because of the uncertainty. And it could be healthcare costs, it could be, I mean, it could be a whole wide variety of things. You know, oil prices, debt ceilings, all that kind of stuff.
Dave:
Yeah. Hey, ran into somebody, you know, um, hey, mid seventies all in stocks and, you know, reaching out because basically that had some financial issues needed, way more income than social security is paying. And the all in stocks didn’t do so good in 2022, and there’s no moat there. Obviously this person’s reaching out, they haven’t worked with her. There’s no moat there, there’s no, there’s panic. There’s the emotional distress. Why? Because what seemingly was, okay, now what happens if it goes down again? I don’t have what you just said. We feel every client needs, and that is a moat built around the, uh, let’s say the, the real and emotional problems that, that the short term brings with your stocks.
Steve:
Absolutely. So there is a whole chapter in this book, another one where I, I jumped up and said, yes, totally. There’s a whole chapter in this book, it’s called The Seduction of Pessimism. And I’ve heard this many times before, when you talk about, uh, financial pundits and people talking heads on tv, that you always sound smarter being a pessimist than you do, being an optimist that people who go on these financial shows and say, well, you know, I don’t know, stock market should have kind of average returns and, you know, maybe it’s got some room to run there. Eh, that’s boring, that’s not , that’s not really interesting. And it, you know, at worst it sounds kind of naive and Pollyanna, oh yeah, you really think the market’s gonna go up. What about inflation and the debt ceiling and this and that. People tune in and listen to pessimism much more than they do to optimism.
And there’s a whole, like I said, a whole chapter all about this going through, you know, the, the details here of why that is. Um, in fact they go back essentially an evolutionary explanation. You know, I don’t know how much this has really been explored, but from an evolutionary perspective, um, you know, it was much more important for me, Dave, to take you seriously. If you told me, Hey, there’s a lion coming for me. Okay, well, if I don’t believe you, if I just ignore you and there really is a lion coming for me, I’m toast. Right? , right. Uh, so you know, the downside of me believing that, eh, you know, wasn’t that bad there. Um, but you know, people believe that the, the pessimism so much more. It just, it sounds smarter there. And one of the examples that they gave, I don’t remember this, and believe me, I’ve read a lot of stuff and listened to a lot of stuff about the financial crisis in 2008.
Dave, tell me if you remember reading this or hearing about this, there was an article, this was December 29th, 2008, front page of the Wall Street Journal. So we’re talking about, you know, one of the most, if not the most respected financial publications in the world front page article, uh, from a Russian professor that was predicting what was going to happen. Because remember, 2008, we’ve just come through the fall of Lehman Brothers, aig, Fannie Mae, Freddie Mac, all that kind of stuff. Um, and this guy predict, he says around, I’m gonna read this paragraph here. Around the end of 2010 and early July, the US will break into six pieces. Alaska will revert to Russian control. California will form the nucleus of what’s called the California Republic and be under Chinese control. Texas will be the heart of the Texas Republic, a cluster of states that will go to Mexico and fall under Mexican influence.
Washington DC and New York will be part of Atlantic America and will join the European Union. Canada will grab a few northern states and be part of the central North American Republic. Hawaii will be a protectorate of Japan or China. And like we said, Russia will be, uh, will take Alaska. You know, this is just one example of this is on the front page of the Wall Street Journal not being put out there as satire. And this is not the onion, this is not a joke. This was, you know, hey, this might happen. Um, you know, there were not things being published on there saying, Hey, over the next decade the stock market will rise 300% and we’ll experience some of the lowest unemployment we’ve ever seen, blah, blah, blah. It just that the, the pessimism gets ahead. Oh,
Dave:
While that was happening, Warren Buffet was out buying all these stocks that were like , right. Pays on the, that turned out to be, you know, these are all solid companies. GE comes to mind when did that happened? But so someone else opinion would be, basically everything’s on sale right now, big time. And I’m not betting on the split into six pieces, United States theory. Right. But just more back to the psychology of money book theory.
Steve:
Yeah. And, and I mean, the thing, you know, another point in the book was just talking about how bad things often happen in big catastrophic type of events, big newsworthy events, but progress, progress is, it can be very slow. You know, it can be very incremental. And, you know, I think a good example of this is how long ago Dave was it that we saw news about nuclear, nuclear fusion and, you know, they were able to sustain it for the first time in a long time, first time ever, you know, for a couple of seconds. That doesn’t mean the nuclear fusion is going to be economically viable tomorrow or next year. I mean, it might be another decade, two decades, who knows? But that stuff happens very slowly versus the negative stuff, you know, tends to be a, a big event there.
Dave:
Right.
Steve:
So I cannot more highly recommend this book, um, I’ll even put a link to it here right below the, uh, the podcast. I, I think it’s really, it’s a good way to, to reframe your thinking, right? It’s not gonna tell you the nuts and bolts of how to put together a portfolio and this and that, but frankly, a lot of people don’t want that. You know? But it, it is good for reframing your thinking around how I think about money, how I think about the risk that I’m taking there.
Dave:
Yeah. Sounds good. I am gonna read it actually. You’ve sold it. All right.
Steve:
Good. I hope I sold a few other people on it as well. Uh, thank you all for joining us. I hope when you’re listening to this, the debt ceiling is in the rear view mirror. We don’t have to worry about that. And everybody’s getting off to a good summer. Good start to their summer. All right. Thanks for listening. We’ll check in again soon.