Understanding the Stock Market Starts With Understanding Yourself

Morgan Housel, author of The Psychology of Money, joins Motley Fool co-founder Tom Gardner to discuss investing behavior and why it is the most fundamental piece of your investing success. They also talk about how you can think about your cash position and how to mentally prepare for down markets.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Jan. 29, 2022.

Morgan Housel: Most things in life have a short payback period, like I always use the example of if you go to the gym and do have a heavy workout, you’ll be sore tomorrow. There is a quick indication that you did something beneficial. In the stock market, sometimes it doesn’t work like that. You could be making great investing decisions that you will look back on as the best decisions you ever made, and you might not get any feedback from the market that was a good decision for years.

Chris Hill: I’m Chris Hill, and that was Morgan Housel, author of the international best-seller, The Psychology of Money. On this episode, Morgan joins Motley Fool CEO Tom Gardner to discuss investing behavior and why it’s the most fundamental piece of your long-term financial success. They discuss a range of topics including how to think about your cash position and whether you should change your investment approach if you had zero returns for five years.

Tom Gardner: Welcome to Motley Fool Money and the fourth and final class in our four-class series on how to invest successfully The Motley Fool way. Now we close up with Morgan Housel, the author of The Psychology of Money, with a conversation about mindset. Morgan, maybe just a sentence or two from you to begin on the growing interest over the last decade or 15 years in behavioral finance and what you think are the one or two biggest discoveries that we’ve had, as we’ve realized that you might have a great stock, you might even have a great game plan. But you might have that Mike Tyson-reality that everyone’s got a game plan till they get hit in the mouth, and the markets are obviously extremely volatile right now. What do you see as the top findings in terms of the importance of thinking about our mindset, the temperament that we bring to the public markets?

Morgan Housel: Tom, I think you have to look at, for most of the 20th century, all of the advancements in economics and in the investing field, the academic standpoint, were around analytics, and data, and formulas. It was really a math-based approach to investing. That was most of the 20th century, and it really wasn’t until the last 20 years or so that behavior came into it. Just the realization that you can be the best stock picker in the world, you can know exactly what companies are going to win, what industries are going to excel, but if you panic when the market goes through a big bout of volatility, if you panicked in 2008, if you panicked in 2020, if you panicked over the last two months with tech stocks, none of your stock-picking skill matters. None of it matters. I think if you think about the pyramid of investing skills, behavior is at the bottom, and until you master behavior, nothing that sits above that pyramid in terms of your intelligence, your analytical ability, none of it matters until you’ve really mastered your mindset. It’s not that behavior is all that matters. I just think that you have to master it first before the other investing skills can pay off.

Tom Gardner: I want to talk a little bit about the historical performance of stocks with you to get that context for everyone. We know that if you go back decades, you find that the S&P 500 delivers around 10 percent annualized returns. Some periods worse than others, and some years much worse. We’re much better than at 10 percent annualized return, but the average is somewhere around 10 percent. We’ll just agree to that as our baseline for understanding investment returns. But now let’s talk about what happens in a one-year period, in a five-year period, in a 10-year period. Right now we have the S&P 500 is down somewhere in the 10 percent range, and the Nasdaq is down somewhere in the 15 percent range. That’s what’s been happening here over the last couple of weeks. How can we put that into context, Morgan? A 10 percent annualized return, but what variety might we get within any given year, or a three-year period, or a 10-year period?

Morgan Housel: It always throws people off, Tom. It’s that, yes, the market returns, on average, 10 percent per year, but if you look at the data, it almost never returns 10 percent per year. It’ll either return 30 percent per year or negative 20 percent a year. That is more common than actually returning 10 percent per year. Big bouts of extreme gains, punctuated by moments of big declines. That’s the long-term history of the stock market. Now, even if you understand that and know the data, when you deal with it in real-time, it can be hard to accept. Because when you go through a five-year period, let’s say when the market goes up 25 percent per year, as we come pretty close doing over the last five years, it gets very easy during that time to say, “I’m smart. I’m a genius. This is how investing works.” You extrapolate those returns for the next 30 years, and it feels incredible. Then it’s equally easy too when you’re going through a period over the last couple of months when tech stocks or some of them are down 20, 30, 40, 50 percent to have the inverse reaction and think, “I have no idea what I’m doing. This is not working. The market is broken. The economy’s broken.”

Neither of those two feelings tends to be accurate. It’s somewhere in the middle. Most industries right now were not as smart as they thought they were a year ago, and you’re not as dumb as you feel today. That’s really how you should really feel about this. Although that just comes down to how that gets smoothed out over time, it’s just over a very long period of time after you average out the incredible years with the terrible years. Long-term investors in a diversified S&P 500 index fund will probably earn 5-10 percent per year, which compounded over a couple of decades is extraordinary. But during that period, you’re going to have so many gut-wrenching ups and downs. This is especially true if we’re talking individual stocks. Netflix, which as you and I record this, Tom, is down about 25 percent. It’s one of the best stocks you could possibly own over the last 20 years.

You make something like 500 times your money, just like a ridiculous return. But if you look at what happened during those 20 years, it’s a mess. It’s a total disaster. There’s five separate times that Netflix has lost more than 40 percent of its value. It lost 70 percent of its value once. It’s constantly going through these declines where you lose 50 percent of your money, something like that. That’s for the cherry-picked best stock you could have owned over the last 25 years. Any other big successful company that you look at, Monster Beverage, Apple, even Microsoft, all these companies have gone through enormous drawdowns. I think that’s just the cost of admission to investing over time. It can be hard to accept that in real-time because we’re so hardwired to extrapolate whatever happened over the last couple of months into the indefinite future.

Tom Gardner: You’ve made it clear in your writing and in all of the presentations, talks, and interviews that you’re an index fund investor and that’s your focus when you get to the equity markets. I’d like to hear first about what you expect your journey to be like as an index fund investor. How often do you think you’ll be down 10 percent? How often will you be down 30 percent? How often will you be down 50 percent? We often think, and I’d say in our 25 plus-year history at The Motley Fool, we are really outcome-focused because we believe if we can get everyone investing for life, the tough periods, they get washed out. You look at that graph of the Dow Jones over the last 75 years, and it’s just a mountain climb up. The declines don’t even really register on that chart. That’s a lot of the approach to the Motley Fool, but there’s a tough journey there along the way. There are some really difficult times to get through, so we probably both agree that index investing is the simplest, most tax-efficient.

Tom Gardner: A very low cost approach to getting exposure to the stock market. It’s still going to have volatility as you’ve just said. But as an index fund investor, how frequently do you expect to be down, and how much do you expect to be down by how often in the years and decades to come?

Morgan Housel: If I just look at the last 100 years of history and assume that that’s a decent guideline of the next 100 years, which may or may not be the right way to do it, but let’s just use that as the best guideposts that we have. I would expect my portfolio to be down 10 percent, at least once a year, and down 20 percent every three years, and down 50 percent once or twice during my investing lifetime, something like that. Now, particularly the big declines are usually triggered by a very specific event, like a terrorist attack, or a banking crisis, something like that, or the Great Depression, a world war. That’s what triggers the big ones. Just by their nature, of course, those are impossible to predict. You can’t say, on average, there’s a world war every 30 years. It just doesn’t work like that. The big declines are harder to predict, and for me, more than the percentage drawdown, I tend to think about how long could I go with negative returns? If you look at the S&P 500, there was a period in the 1970s to early 1980s, where adjusted for inflation, you went 15-20 years without making any money. That was true from 2000 to 2010. You didn’t make any money adjusted for inflation in the stock market. That’s normal. That’s the historic norm during this period when you did so well in the stock market. It’s to go a decade with no returns adjusted for inflation.

When you think that is the norm, it’s like so much of investing is just adjusting your expectations and becoming aware of that. Since that happened in the past, it’s very likely to happen in the future. When it happens, it’s going to be so tempting to think that the market is broken, and this is never going to end. That to me is the ultimate challenge of investing. I’ll tell you too, Tom, that one of the reasons I am an index investor, I wouldn’t go through some of the other reasons, but one of the reasons is because, since I don’t have to focus on picking the right stocks at the right sector, I can focus all of my effort, all of my bandwidth, into trying to think about my mindset as an investor and trying to put volatility into context, think about the bigger picture, think about the long term. That’s 100 percent of what I do as investing because all of the stock selection is done, and it’s indexed. It’s basic. I just buy one thing, and I’m done. That to me is where I spend virtually all of my time as an investor. It’s just thinking about risk, and volatility, and opportunity, and time horizon in a different way with deeper context.

Tom Gardner: If you knew that for the next five years you would get zero returns in your index funds, would you change your approach?

Morgan Housel: No, I don’t think I would. A part of that is because you would have to ask, where are you going to put the money? If we are in a period where the market goes nowhere for five years, you’re probably also not going to earn any money in bonds, or gold, or anything else like that. In those periods when the stock market is going nowhere, there’s probably not going to be that many great alternatives. But the more important answer is, if I knew the stock market were not going to go anywhere for five years, it’s going to rebound eventually. That is also something that you have no idea when it’s going to occur. So the idea of, “I’ll sell today,” then the question is, and then what, and then what are you going to do after that? Are you going to wait until the market is fully recovered and is midway through the next bull market before you buy back in, because that’s a terrible thing to do. The idea that you can get out and then get back in at the right time, I think, is doubly hard. It’s exponentially harder to get back in. Rather than trying to time when to get out and when they get in, I just accept the lumps as they come and accept the volatility as it comes. That’s just dealing with that and enduring that is a way better approach, in my view, for me than trying to think or fool myself into thinking that I could actually predict those things pre-emptively.

Tom Gardner: I’m going to restate what you said, Morgan, and I’m going to claim that it is one of the most important principles of successful investing ever stated, and it happened in our fourth classroom. That is, if an investor in the equities markets cannot withstand five years of zero returns, they’re not set up for success. Do you agree with that?

Morgan Housel: I definitely agree with that because I think that’s not even like we might be forecasting that this might happen. It’s definitely going to happen eventually. I don’t know if that’s starting now or if it’s starting last month, or starting five years from now. I don’t know when it will occur, but I plan to be an investor for the next 50 years, I hope. During those 50 years, I know with nearly 100 percent certainty that there will be five-year periods when I lose money. To me, it’s just inevitable. It’s almost like you live in Florida, and you say, are there going to be hurricanes? Yes. I don’t know when or how powerful it is going to be, but yes, of course, there will be. Rather than trying to think that I can avoid those, it’s just like, let’s build a house that can withstand it. That’s the better way to go about it.

Tom Gardner: Morgan, I’m going to ask you to speak to either a newcomer to the stock market or a newcomer to the idea that you would not be troubled by five years of zero returns, or even maybe some marginal losses over a five-year term that it wouldn’t change your plan. What I want you to do is I want you to speak to that new investor who’s seeking short-term validation. They’re looking at their stock investments like they look at their favorite sport teams and the games that are being played. Every basketball game or every baseball pitch, they’re following it with rapt attention in the short-term. I’m going to ask you to do your best to persuade them, maybe not to turn that off but to put that in its proper context. How could you convince somebody who is going to come into the stock market or is already investing in stocks and is seeking validation for good decision-making in the next week, the next month, or the next six months at most?

Morgan Housel: I think I would frame this as to say, look, just like anything else in life, if you want a big reward, if you want a lot of success, you have to deserve it. You have to earn it. That’s true for everything in life, including the sports team where the players are working out seven days a week for years on end to become as good as they are. It’s the same as the stock market. If you want big returns, you have to earn them. You have to deserve them. You have to give something up in order to achieve that big success overtime. Now that shouldn’t be scary because what you generally need to give up in the stock market, the price you need to pay is patience and endurance. That’s what you need to give. Now, we have been in a period for the last couple of years, where by and large, a lot of investors did not need to pay that price. They could just go out and buy a handful of tech stocks and watch them double in a year, and it felt great. I think it’s just important to know that that is not necessarily normal. It’s not bad. It’s not necessarily dangerous. But there is always a price that needs to be paid in investing, and that bill will eventually come due. Again, this is all fine.

This is not saying you did anything wrong. This is not saying people made a mistake. You just need to be willing to pay the price. They need to be adamant that they deserve the returns that they earn over a very long period of time. The other thing I would say is that most things in life have a short payback period. I always use the example of if you go to the gym and do have a heavy workout, you’ll be sore tomorrow. There is a quick indication that you did something beneficial. In the stock market, sometimes it doesn’t work like that. You could be making great investing decisions that you will look back on as the best decisions you ever made, and you might not get any feedback from the market that that was a good decision for years and years. One example is Shopify, which I think pretty sure you invested or you recommended, Tom, in 2016. I might be getting some of these details wrong, but if memory serves, after you recommended it, it didn’t do anything for like a year, maybe two years, and then it just exploded. I think that is much closer to normal to how these work. In that situation, you, Tom, and the investors who followed the recommendation did put in a price. They paid a price. They do deserve those rewards because they put up with a year or two of getting nothing out of it. I think that, over the very long period of time, all the big returns have to be earned. You’re going to pay for that price. You’re going to earn that by putting up with uncertainty and unknowns and periods of no returns.

Tom Gardner: If you were coaching somebody in their investing life, or if you were advising an entire population of investors, and you had one of two outcomes to pick for their first year as an investor. This was the only factor you could go on, and you would base whether or not they would succeed over the long term on this single factor. Group 1 got a 25 percent gain in their first year. Group 2 got a 25 percent loss in their first year. Who do you think has a better chance of succeeding for the rest of their life as an investor? Both have challenges, but which would you prefer, and why?

Morgan Housel: My knee-jerk was going to say Group 2. There’s this quote that I like from Bill Miller, a great legendary investor who says if you start investing, and you have a big gain, that’s actually a bad beginning because it can influence your view into thinking you really know what you’re doing and that this is how investing works. You extrapolate that forever, and that’s dangerous. Actually, I don’t know if I agree with that because there’s actually a lot of evidence too that if people start investing and they lose a lot of money, they’ll be scared out of it for life. The best example of this that’s so well-documented among academics is the generation who grew up during the great depression. By and large, that generation did not invest for the rest of their life.

They put their money under mattresses or bought government bonds because they were so scarred by what happened. I think that is more dangerous than the investor who begins their investing career with inflated expectations because, if you have inflated expectations, maybe you are going to be disappointed, but you’re probably going to remain an investor because you remember how great it felt to make that much money. But if you start investing with this idea of investing is just where you go to lose your money, you might not ever come back in. Since all investing success is really going to hinge on, can you just stay invested for a long period of time? Can you just remain playing in the game? The people who have inflated expectations but can remain in the game are probably going to do better than the people who never played the game, to begin with.

Tom Gardner: Great. Thank you for taking that extreme hypothetical. Now I am going to narrow it. Which of these two populations would you bet on? The one that got a 25 percent return in their first year or the one that got a five percent return in their first year?

Morgan Housel: Five percent because I do think there are people who will earn a 25 percent return in the first year. Then in the next year, if maybe they lose money, maybe it goes up five percent, and the degree to which they are disconnected from reality, the degree to which their expectations are inflated will either cause them to take much more risk. They’ll say, “I only earned five percent last year. I need to go get some margin loans. I need to go buy more penny stocks.” That can lead to a really regrettable outcome. Or there’s a lot of people who will, after getting 25 percent, when you earn it that fast, those portfolios tend to be unstable. When the gains come very quickly, when the gains aren’t earned, so to speak, those can be undone very quickly. That short loss might also, to a certain subset of people, scare them off for a long period of time. There were a lot of people who during the dotcom bust in the late ’90s, early 2000s, were scared out of the market for years, if not ever, or a lot of those people didn’t come back into the market until the market had rebounded substantially, and the biggest gains were already behind them.

Tom Gardner: I’m thinking it’s almost a quotable from a philosopher like Seneca applied to this scenario might be, “For my friends, I wish a five percent first-year return. For my enemies, I wish a 25 percent first-year return.”

Morgan Housel: You should make a poster of that in The Motley Fool offices and quote it from Seneca. That would be good. I like it.

Tom Gardner: We’re always looking for the unconventional thinking, and we always get it from you, Morgan. Now I want to talk just directly about anxiety and how to address it, I would say matching anxiety up with volatility of pricing, whether you’re investing in the beginning of your career and you encounter volatility, or obviously the more years and decades you have under your belt, the more you know how markets work. But certainly for investors that are in their ’70s and their ’80s to see a steep decline, how would you address anxiety before the volatility? How would you address it during the volatility?

Morgan Housel: The hardest thing with investing is that it’s thinking about what it’s going to feel like to be in a market crash pre-emptively, thinking about, in the future, how it’s going to feel? It’s so different from when it actually happens. Some of that is because the details of what makes the market decline are unknowable. In 2019, if I said, Tom, how would you feel if the market fell 30 percent? You and everyone else may have said, oh, that would be an opportunity to buy, which was the right mindset. But then in March of 2020, the market does fall 30 percent. But it’s falling 30 percent because there’s a virus that might kill you and your children. The school is closed, and the company is closed, the offices are closed, the restaurants are closed. In that context, then all the sudden, maybe the world doesn’t look like a great buying opportunity anymore. Without knowing the context of why the market drops, it’s really difficult to know how you are going to feel when it does drop. For me, it’s not crazy conservative, but I tend to have more cash as a percentage of my net worth than some other investors. This is a great quote from Nassim Taleb who wrote The Black Swan.

He says, “It is much easier to measure how fragile something is than it is to predict the occurrence of what might damage that thing.” I have no idea what the next recession is going to be, what the next bear market is going to be triggered by, but I can look at Swan’s net worth and their asset allocation and be like, “This is fragile. You’ve got a lot of debt, and you’re on margin, and you have no cash. I don’t know what the next recession is going to be, but whatever it is, it’s going to hurt you.” I think you can measure fragility, but you can’t measure shocks. I just try to focus on, is my net worth durable? Is it reasonably durable? Do I have a good margin of safety? Do I have enough liquidity, enough cash? Do I have enough room for error? That’s all that I can focus on. I don’t spend any time trying to predict what’s going to cause the next recession because I don’t think anyone can do that. No one in 2019 could’ve known that a virus originating in China was going to shut the world economy down for going on two years now. No one could have known that.

So rather than predicting what’s next, I try to focus on what I can control, which is the stability of my net worth, the endurance of my net worth. That’s it. Once you accept that, that that’s all that I can do, I think it takes a lot of the anxiety out. But I say that with the asterisks off, I was scared in March of 2020. I didn’t sell. But I remember thinking about the global economy, and having phone calls with some of my smartest friends, and shaking my head and going, this is really bad. Even if you do keep your head on straight, these things are not fun to deal with. But again, that’s the cost of admission, is dealing with that uncertainty and accepting that uncertainty over time.

Tom Gardner: It’s different for everyone, of course. But I want the blended average of all stock investors, those who’ve been investing for 72 hours, those who’ve been investing for 72 years, those who are highly emotional in volatile situations, those who have extreme composure, and every other factor you can blend as meaningful in providing this answer. Take all stock investors and tell me what their average cash position should be as a percentage of their total portfolio.

Morgan Housel: This is a trick question because my answer would be, it depends. I think for most investors, [laughs] I keep coming back to it, it depends.

Tom Gardner: I want to know what gets them beyond fragility for you, the average cash position, not knowing when the next recession is going to come, having a good sense of the cycles of markets and the frequency with which you get to a 10 percent decline, a 20 percent, a 40 percent decline. Blend all of those together, and what’s a single midpoint cash position you recommend?

Morgan Housel: Here’s how I would frame this. The average financial advisor will probably tell you that you need 3-6 months of cash in your emergency fund, enough cash to cover your living expenses for three to six months. That makes sense, and for a lot of people, that’s a big number to save to. During the 2008 financial crisis and the aftermath of that, the average duration of unemployment was ten months. So your financial advisor says, “You have 3-6 months, you’re doing great,” and then the average unemployment is ten months. There can be a big gap between what seems right and what actually happens in the real world. I think for most people, 6-12 months of living expenses, that seems extreme. For a lot of people, they say, “That’s a lot of money for me to save.” But if you look at what has happened, even in recent history, it’s not extreme in the slightest. The other statistic I think about is that, in March of 2020, the average restaurant in America had enough cash on the books to survive for 12 days. Then these restaurants were shutting down for months, and a lot of them either went out of business or are they needed the government stimulus packages to stay around.

So there again, there’s just a big gap between what seems like, “I’ve got a little cushion,” and then the shock that exists in the real world and reality is totally different. One way to think about this too is that all the big shocks in markets and the economy are unknown, 9-11, Lehman Brothers going bankrupt, COVID-19. The common denominator is you could not predict them before they occur. Therefore, if you are thinking about your cash position, and you are only thinking about the risk that makes sense to you, and that you can foresee, and that are predictable, by definition, you are missing all of the risks that you cannot see coming, and those are the ones that always do the most damage. It always makes sense to have a little bit more cash than seems reasonable to you. That’s when you know you are preparing for the risk that you cannot foresee. You nail me down for a specific number, I think probably 6-12 months for most people is closer to realistic.

Tom Gardner: I like it. I’m going to go at a different angle. [inaudible 00:26:26] is we’re coming to the close of our time in this class, but I want to make sure that we hear this answer from you as well. I like answer number one, 6-12 months emergency fund. But what about for you? I’m assuming your cash position is beyond the 6-12 months. It’s more maybe to, as the great investor at The Motley Fool, Jeff Fischer, says, to set your portfolio up so that you can take advantage of downturns, so that they aren’t emotionally crippling. They are almost liberating. You’re actually excited. So answer one, I like 6-12 months emergency fund. Now, think about a portfolio that’s beyond that, but you want to help that person’s mindset move beyond fragility. What would you say the average cash position should be for an equity investor there?

Morgan Housel: For my part, I will tell you what I do with my personal money, which is that my cash balance, rather than thinking about it as a percentage of my net worth portfolio, I just think about it in dollar terms. I want X dollars of cash, and I always want to X dollars. Once I get there, I stop contributing to cash, and then everything else goes to stocks because the market has risen and because that cash balance has already been fulfilled. It’s a dwindling percentage of the total pot, if that makes sense. That’s how I think about it. During a big market decline, I did this in April 2020 or maybe late March 2020, you could start putting some in. Now, it’s always easier pre-emptively to say, “I am going to go all-in,” because, in March of 2020, like a lot of other people, I did not know what was going to happen to the global economy. So I put some in, but not as much as I wish I could have, in hindsight. That’s always how it’s going to be. But I don’t think it’s bad.

Look at Berkshire Hathaway right now, Warren Buffett’s company that has $150 billion of cash, which even has a percentage of its total assets, it’s probably something like 30 percent. I mean it’s not crazy. If you look at a lot of the world’s greatest investors, they have gone through periods when 30-50 percent of their portfolio was cash. That’s not an exaggeration, definitely 20 percent, 30 percent, sometimes 50 percent. The reason they do that is because they know that at some point in the future, they don’t know when, but at some point over the subsequent five or 10 years, there’s going to be a wash-out, and during that wash-out, if you can have a lot of cash when everyone else is desperate to sell, those are one of the opportunities that will change your lifetime returns come from. So it always seems like when you’re holding this cash, you’re like, “I’m earning a low return, but it’s only paying 0.5 percent.” But then when the market washes out, and you can buy stocks for 70 percent less than they cost a year before, that’s when the return on that cash comes from. You earn the return on that cash balance once every five or 10 years, rather than being paid monthly in the interest rate in your savings account. You’ll earn it in big chunks at some unknown time in the future.

Tom Gardner: Two remaining questions, and in this question, I’m going to buy a little bit of time by answering it myself as well. The penultimate question is that, I will go first, I would like you to give three pieces of advice that you believe could be most beneficial to somebody investing in the stock market. My three will be: only invest capital that you will keep invested for five years or more, that’s number one; number two, buy 25 or more companies as the base of your investment portfolio; and number three, maintain an average over 10 percent cash position so that, in downmarkets, you could go a little bit lower than that, and in upmarkets, you might build that cash position up. Those will be my three.

Morgan Housel: Okay.

Tom Gardner: Five-plus years, 25-plus investments, and an average throughout your life of around the 10 percent cash position. What are your three?

Morgan Housel: You were wise to go first because those are probably my three as well, so now I have to reach for some different ones, but I would say the first is know yourself and understand that your past behavior is a pretty good indication of your future behavior. If you panicked and sold during various bear markets in the past, you’re probably going to do that again in the future. That’s OK. Just accept that that’s who you are and maybe you need a little bit less aggressive asset allocation. That’s the first one. The second one is just a plea for humility and just plea to observe that the biggest economic shocks for the last 20 years, which were 9-11, Lehman Brothers going bankrupt, and COVID, were unforeseeable. That’s going to be the case over the next 20 years. The best economists with the best information have no idea what’s going to cause the next recession.

I can say that with confidence because it’s always been true. I think it will always be true, so that plea for humility. The second thing is that, or the third thing I should say, is focus on what you can control because you have no control what the market is going to do next or what the economy is going to do next. The only thing you can control in investing is your savings rate and your behavior. That’s what you have control over. That’s actually pretty optimistic for you to realize that those two things, how much you save and what your behavior is, matter more than anything else to your lifetime investing success. There’s so much focus among investors on, “What did the market do today? What would the market do this year? You have no control over that stuff. So spend more of your time focusing on the levers that you can actually pull, the knobs you can actually twist. Those are my three.

Tom Gardner: Thank you. We’re going to close out this fourth and final class in Motley Fool Money. We began with David Gardner talking about why and how to invest, Amanda Kish got us a financial game plan organized, Ayal Cusner laid out the basic data that we need to know to set ourselves up for long-term success, and Morgan Housel has given us a combination of the history of market performance and how to establish a mindset that will help us succeed for the long term. Morgan, I’d like you to close it all out with a reminder to us about the purpose, the value of money, what money represents in our lives and how we should think about using it as a tool, how it could use us if we don’t set up a good philosophical approach to the role that money plays in our lives. How do you think about that in your life, and what would you suggest to the rest of us?

Morgan Housel: It sounds trivial, but I think it’s easy to forget that the purpose of money is to give yourself a better life. It’s not to maximize your returns. It’s not to make the spreadsheets happy. It’s not to earn better returns than your neighbor. It’s to give you and your family a better, happier life. What’s important about that is, what’s going to make me happy, Tom, might be different from what makes you happy. We’re all very different. We all have different lives, different family structures, different risk tolerances, different goals, different aspirations. So you really just have to become more introspective and figure out what you want, rather than trying to make all the numbers add up, make the spreadsheets add up perfectly. What makes you happy? Just do that. Again, it sounds trivial, but I think it’s so easy to forget and overlook that that’s what we’re all trying to do here. It’s just use whatever resources we have and invest our money in a way that gives us a better life.

Tom Gardner: Morgan Housel, the author of the best-seller and very highly rated and regarded book, The Psychology of Money, thank you so much, Morgan, for being here. To all of our Fool listeners, thank you for attending these four classes. Please let us know, you could drop me a note in my Twitter account, what the experience was like for you with these four class periods because if you liked it, we can continue it and explore other concepts like this. But I want you to know how much I’ve learned in these four classes and how thankful I am. It turns out, and the data shows that we learn at one rate when we sit quietly and listen to a lecture. We learn at a much higher rate when we are interactive. It’s a conversation. We take notes. We’re active. But we learn at the highest rate when we try to teach.

That’s what we attempted to do in these four class periods. So you helped me, Fool listeners around the world. I learned at a much faster rate over these last four 30-minute class periods. Again, Morgan and Ayal and Amanda and David, thank you all for your participation as great teachers in this experience. Morgan, I’m sure we will see you again soon, and thank you so much for being a part of this episode.

Morgan Housel: Thanks, Tom.

Tom Gardner: Fool on.

Chris Hill: That’s all for today, but coming up tomorrow, my conversation with best-selling author Dan Pink about his new book, The Power Of Regret. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Morgan Housel owns shares of Berkshire Hathaway. Chris Hill owns Apple, Microsoft, and Shopify. Tom Gardner owns Netflix and Shopify. The Motley Fool owns and recommends Apple, Berkshire Hathaway (B shares), Microsoft, Monster Beverage, Netflix, and Shopify. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify, long January 2023 $200 calls on Berkshire Hathaway (B shares), long March 2023 $120 calls on Apple, short January 2023 $1,160 calls on Shopify, short January 2023 $200 puts on Berkshire Hathaway (B shares), short January 2023 $265 calls on Berkshire Hathaway (B shares), and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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