Morgan Hausel about greed and fear, frugality and paranoia

Morgan Hausel’s much-anticipated new book, The psychology of money, Arthur Conan Doyle opens with a quote from Sherlock Holmes:

The world is full of obvious things that no one ever observes. ”

This is a fitting introduction to a work by Sherlock Holmes in financial writing.

Like the famous fictional detective, Hausel observes seemingly obvious things about human behavior. Only in his case, he applied these observations to solve the mystery of investment, not crime.

“Investment is not the study of money,” he explained in “The Psychology of Money,” in a recent CFA Institute webinar by Blair Duquisen, CFA. “Investment is the study of how people behave with money.”

Beware of greed and fear

Hausel’s fascination with understanding and applying human behavior to investing – what we now call behavioral economics – began when he first began writing about money in 2007. It was a happy time: global financial markets and the banking system were under extreme pressure. The following year, in September of 200, Lehman Brothers broke up and almost brought the global financial system with it.

The effects of the Global Financial Crisis (GFC) will be felt for many years to come and will raise many questions.

“Almost everything I wrote revolves around this idea: ‘Why did the 2008 financial crisis happen? What was the reason for this? Why did people behave that way? Have they learned their lesson? Why do they keep making the same mistake over and over again? Will they continue to make these mistakes in the future? ” Hausel said.

Hausel, now a partner in the collaborative fund, soon learned that the answers were not in any money or economics textbook. He had to look further away, at other branches.

He discovered that by studying psychology, sociology and other subjects he could find subtle clues about the source of events such as the financial crisis. “You can explain why policymakers have done so through the lens of politics and the theory of politics,” he said. “You can explain that people think about greed and fear through many other fields such as medicine and military history.”

Disciplines that have little to do with economics or investment on the surface can actually give valuable insights because they ask similar questions. “What is the relationship between greed and fear? Are people able to take a real long-term mindset? How stupid are you? Who do you trust? Who do you ask for information from? “These are the most important investment questions and they apply in many cases,” he said.

Hausel believes that the psychological aspect of investing is the most important.

“You can be the best stock picker in the world, you can be the best economist in the world, you can have analytical skills, you can have someone else’s academic credentials in the world,” he said. “But if you lose your cool, if you lose your temper, in March 2020, or in 2008, or in 1999, it doesn’t matter.”

Nothing, the other quote from the Hausel Epigraph is responsible for Napoleon: “A genius is a person who can do average work when everyone around him is losing his mind.”

The behavioral aspect of investing is so important that it can effectively short-circuit your analytical skills. If you do not master the behavioral aspect of investing, then all those analytical skills that take so long to develop are irrelevant.

Key steps: “Investment is not just about money,” he said. “Investment is our relationship with greed and fear.”

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Time is meaningless. Time is everything.

Hausel proposed a simple story about the ice age why compounding is so important and yet so often overlooked.

He noted that the planet has had five distinct ice ages in its very long history. Has turned every earth into a giant snowball. As long as people studied these phenomena, the reason for the tilt of the earth’s axis from the sun was thought to be. Winter was so cruel and extreme, the theory was that the planet would freeze for millennia. But that wasn’t the case at all: moderate cool summers were a problem.

Cold summer does not mean winter snow melts. When the ice does not melt, it reflects more heat from Earth, cools the planet, and causes more snowfall the following winter. And when it snowed in the winter, there was less snow in the summer. And went around and around it.

“It’s not intuitive to think that you start with something as gentle and tiny as a moderately cold summer that eventually covers the whole planet with ice, but that’s exactly what happened,” Hausel said. “You start with a normal planet, you have a cool summer, and long ago – thousands of years – the whole planet was covered in ice.”

Which is how compounds work.

“You start with something that is so meaningless and benign, and a change in circumstances that doesn’t seem to make any difference, it’s easy to ignore because it’s not intuitive,” he said. “But over time, that adds something really remarkable. And that’s certainly true of investing.”

Returning home, he noticed that Warren Buffett started investing at the age of 11 and continues to do so at the age of 90 today. About 96%. “If he started as a normal person at the age of 25 and retired at the age of 65,” Hausel said, his net worth would be 90 90 billion, not .7 11.7 million.

Hausel said most investment mistakes come from the question: “What happens next?” Although most investment fortunes come from this question: “How long can I invest?”

He says there are 2,000 books on Amazon to answer how Buffett became so successful, but never just told him: “The reason he’s so successful is because he’s been investing for three-quarters of a century.”

Explaining 99.9% of how Buffett got to where he is now, Hausel said. “This answer is not intuitive and it is very easy for smart people to take it very seriously, and so it can be ignored.”

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Risks that you may not see.

“The biggest economic risk is one that no one is talking about, because if someone doesn’t talk about it, no one is ready for it, and if someone isn’t ready for it, the damage will increase when it arrives,” Hausel said.

In recent years, for example, the risks that people have talked about include trade wars, next-quarter earnings, budget deficit forecasts, and elections. “It’s not that these things aren’t risky,” he said. “It’s that we see them coming, we talk about them, and we can prepare for them.” The risk that no one was talking about or paying attention to was the global coronavirus epidemic.

So how do you deal with that as an investor?

“Think of the risks the way California thinks about earthquakes,” Hausel said. “If you live in California, you know there are going to be big earthquakes in the future but you don’t know when or where. . . But you have an expectation. . . You are always ready for it. “

Hausel said it is also important to give yourself a wide space, including the wrong place, and to realize that there is a difference between being rich and being rich.

“To be rich you need to swing for the fence, take risks, be optimistic,” he said. “Being rich requires a form of frustration, being short-sighted for a short time, and the ability to survive whatever happens, which can get in your way.”

Today we are not talking about any risk? A banner 2021.

“I think something that people are giving up and not thinking enough about, and that’s not my baseline forecast, the economy is likely to do extremely well next year,” Hausel said.

What if a vaccine arrives in early 2021 and everyone is vaccinated soon? Life can return to normal. This will reveal a lot of paint up demand.

“Then you combine it with three things,” he said: “The amount of Federal Reserve stimulus across the economy, the amount of stimulus from Congress to pay that stimulus this year, and the amount of savings Americans have made this year.”

Put it all together: paint up demand, savings, and unprecedented financial and financial stimulus.

“If these two things collide together,” Hausel said, “2021 could be a better year than the economy we’ve seen in our lives. “

Of course, the counter-argument is that if we don’t get good vaccine news and stimulus measures fail, 2021 could be the worst year for the economy.

“I think these two extremes now seem almost equally possible,” he said. “But I think we’re leaving a particularly optimistic direction, when things were as bad as 2020, when 40 million of you lost their jobs. . ”

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Thrift and paranoia

According to Hausel, “a combination of thrift and paranoia” is needed to save resources.

He said creating wealth and conserving wealth are two different skills.

“When you think about creating wealth through a lens, you miss that it’s really a two-way equation,” Hausel said. “You need this barbell personality of your optimism to solve long-term problems in the market and create productivity and generate profitable profits for shareholders.”

But that’s just one aspect of the equation.

“You also need to be frustrated in the short term about being able to survive long enough to benefit in the long run,” he said. “I have often said, ‘Save like a pessimist and invest like a pessimist.’ You need both and they seem contradictory: long-term optimism and short-term pessimism, if not paranoia.

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So how does Hausel define optimism?

“A true optimist is someone who knows that the short and medium run will be full of constant pitfalls and delays and crises and tragedies but things that do not hinder long-term growth and long-term optimism,” he said. .

“If someone says they think all will be well all the time, it’s not optimistic. It’s a complacent, though a real optimist who realizes that the short term is always going to be a noise, always going to be a disaster, for both you and other people, constantly running into problems, pushing, but those things won’t stop long-term growth . And that is the real hope for me. ”

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / Eminavon

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Lauren Foster

Lauren Foster is a content director at the CFA Institute’s professional education team and host of the Tech15 podcast. He is its former managing editor Entrepreneurial investors And co-led the CFA Institute’s Women in Investment Management Initiative. Lauren has spent almost a decade on staff Financial times As a reporter and editor based in the New York Bureau, freelance writing for this Baron And FT. Lauren holds a BA in Political Science from the University of Cape Town and an MS in Journalism from Columbia University.

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