Today we're talking about money with the guy who's been studying money for like the last 10 years. He's the author who sold more books about money than pretty much anyone on earth. It's Morgan Housel. He wrote The Psychology of Money, The Same as Ever, The Art of Spending Money. And we talked to him about Warren Buffett, about the behaviors that drive people to either make money or lose a bunch of money, about spending money, about how much money is enough. It's just a good honest conversation between a bunch of dudes about money. What more do you want?
Morgan, you tweeted out something that broke my brain. In fact, I thought it was like an AI deep fake. It's like when Luka got traded and people were like, 'This must be fake news. There's no way this is possible.' You said that my favorite Buffett stat is that Berkshire Hathaway could lose 99% of its value tomorrow and still have outperformed the S&P 500 since Buffett took over.
And the truth is, I was understating it. It's actually like 99.6% or something like that that it could decline.
That is so... how is that even possible? Like, you know, we don't do public math here, but that sounds mathematically impossible.
And he only outperformed by seven points, right? It was like, or it like he's done like 20% annual versus...
It's about that. His was about 20 and I think the S&P nominal with dividends is probably like 11 or 12. So maybe it's eight or 9% outperformance, but he did that outperformance over 60 years. And so the cumulative performance, I'm pretty sure I'm saying this off the top of my head. If I'm getting this a little bit wrong, I'm sorry, but I think the S&P 500 is 35,000% since Buffett took over. And Berkshire's return was 5.5 million%. And so even if it's only quote unquote only 9% per year, over 60 years, it just gets...
Incredible, insane, preposterous. And you know, Buffett's current net worth is I think 130 billion, but he's given so much away to charity that if you count that in, it's something like 500 billion. If he hadn't given money away to charity, he'd be worth 500 billion.
He'd be the richest man alive by far.
And he started with 10,000 bucks and I mean and turned it into half a trillion. And so that's... but I think the biggest lesson here, and this is the most important for ordinary people, is that like look, you can't pick stocks like Buffett. You can't analyze businesses like Buffett. He's smarter than you and he operated in a different era than all of us. So don't try to emulate that. What you can emulate, especially for young people, of course, is the most important and powerful thing that he did is that he was a good investor for 80 years. And it's just the time that he was doing it for that made all the difference in the world. So, I pointed this out in my first book. If you look at his net worth, 99% of it came after his 60th birthday. 99% of his net worth was accumulated after his 60th birthday. So if he had retired when he was 60, when he was worth a couple hundred million bucks, like pretty good, you would have never heard of the guy. The whole reason he became so famous and so wealthy is that he started investing when he was 11 and he retired last week when he was 95.
You're very lucky that you get to talk to all these amazing successful people. And investors are really cool because it's not always about investing that you're interested in. It's about, like you said, behaviors. That's why Shaan and I love talking about two investors. We had Howard Marks on. It was one of our favorite things ever. We don't know anything about bonds with Buffett. Is that the attribute other than time and market? I mean, what other attributes separated him from the hundred, a thousand other people? Because there's definitely hundreds or maybe even thousands of equally probably smart people. What other attributes allowed him to be who he is versus the rest who are pretty good?
I think there's quite a bit. One is I think what Berkshire did, what Buffett did for 60 years is on one hand so unbelievably simple and on another hand almost impossible to replicate. And it's hard to kind of square those two. But what it required was an unbelievable amount of patience, an unbelievable amount of goodwill in terms of the trust that he had among all other businesses, among his investors, among regulators, because everybody around him just left him alone to do his thing because they trusted him. And I think that that's an overlooked part of this. Like any other hedge fund manager, private equity fund manager would not have the trust among their investors, among portfolio companies, anybody to let them do what Buffett did. That was huge.
Sorry. Explain that a little more. What's a thing that Buffett did that others might not have had the leash to do?
He had the track record and the narrative that if you sell your business to Berkshire, it is not going to molest it and rip it apart and sell it for parts. It's going to nurture it and let it grow forever. And I think that was... and if you compare that to Blackstone, KKR, all the other private equity shops, their stated purpose, and I'm not saying this is wrong, but their stated purpose is we're going to maximize IRR and we're going to do whatever is necessary to get there. Whereas Berkshire was, we are intentionally not going to maximize returns. We could easily flip this company next year for more than we paid for it. We could easily lay off half the staff and squeeze more net income out of it. We're not going to do that. We're going to keep this as it is and do it. And because of that, you had businesses that would sell their company to Berkshire for less than they could have gotten from Blackstone or KKR because if you were particularly a family business who built your business up over the years and this was your baby, did you want to sell it to Blackstone for an extra 10 million bucks and have them rip it to shreds or sell it to Berkshire for a little bit less and know that he was going to nurture it for several generations?
A common thread I think of the people that I've grown to admire is that they're stewards. So I've loved reading about George Washington. He was one of the only presidents ever in our 50 years of, you know, 50 plus presidents or so where he had unilateral support from both sides of the aisle, which that still existed back then. And when people interviewed, they said, 'Why do you trust George Washington?' And they go, 'Because I know that he is willing to put the union in front of himself.' For example, the idea of a two-term president, George Washington created that. That was so crazy when he had been president for two terms and he was like, 'I'm now done. It's better off that someone else does it.' Or the US Constitution, which he helped formulate. It was one of the very first self-amending rule books where we acknowledge that the rules might be wrong, but we are going to work together to fix them as we go. And it was modeled in part because of George Washington's attitude of being a steward. And that's really interesting that you're talking about Buffett that way. You're saying he was basically like a steward of goodwill.
I think that's true. And a lot of it was not altruism. It was he knew that he would be able to get the best terms and the best deals if he had that level of trust. And so a lot of it was morals of just doing the right thing. But a lot of it was this was going to accrue to him personally and to Berkshire over time.
And I think but that's where you get the best results when it's like everybody's winning here. The companies that would sell to him were like, 'This is where we want our baby to go.' And Buffett himself was going to get it at better terms and have better flow than anyone else doing it.
Also important to point out, this should not take away from any of his success, but it's important to point something like this out. Buffett once pointed out that over the course of his career he has purchased 500 stocks and he made the vast majority of his returns on 10 of them. And Munger once pointed out that if you look at all of Berkshire's deals over the 50, 60 years that it was doing it, if you remove the top five, its returns fall to average. And so this is true for almost any endeavor that you look at, the vast majority of Berkshire's returns. And whether it was Berkshire buying whole companies or Buffett as basically a hedge fund manager back in the day, the huge majority of the success comes from a very small minority of what he did.
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How do you action that power law, the observation that man, it's all about these power laws that a few things will account for the majority of your success, your returns?
I think there's probably two takeaways from it. One is the idea that if you're in a game like that where you don't have a perfect success rate, like if you're a pilot, you should have a perfect success rate. Every flight should land. It should be 100% every time. If you're an investor and it's not like that, you have to be very comfortable with a lot of things not working. And a lot of investors are not. A lot of investors, it will destroy their ego, their soul, or the trust among their investors if they're like, 'Hey, we picked 10 stocks and three of them went bankrupt and four of them did okay, but one did really well.' Even if on average it works out, a lot of people just can't handle that kind of volatility. So coming to terms with the idea that it's always going to be a tail-driven business. Just the psychology of that is important. The other I think more important takeaway though is the humility of how hard it is to emulate this. It would be one thing to learn how to be a pilot and learn the mechanics of an airplane and of aerodynamics and to figure out how you can land the plane every time and you can teach that skill. It's another to be like, man, if you're a great investor and you're so smart and you know everything, you're right five and a half times out of 10. And that's if you're good. And that's like, it's a very humbling statistic just to put people in their place, I think, in a good way of how difficult this business can be.
I asked the same question to Mohnish Pabrai, who is a value investor. He was a kind of Buffett disciple, friends with Charlie Munger type of thing. And I said, 'What's the takeaway from that stat that he, you know, Buffett himself admits it's a dozen decisions out of 500 that really charted, you know, the difference between them being who they were versus being average.' And he said, 'You can't control which, you don't know upfront which of those decisions is going to be the big winning decisions.' But he said Buffett was able to circle the wagons, meaning once he bought one of those companies that was the long-term compounder that was just going to keep paying dividends out for them, he didn't sell too early. He held them for the long term. He circled the wagons around those core assets. He just never let anything attack those core assets. And Buffett is famous for having called I think Peter Lynch once and he said like, 'Hey, I love this phrase you said. Can I steal it for my annual letter?' And Lynch was like, 'Yeah, what did I say? I don't even remember.' And he goes, 'You said don't cut your flowers and water your weeds.' Meaning, don't sell your winners to take profits and then take those and put them into less good investments because that is like, you know, that's going to destroy your ability to get returns. It's so hard to find these winners. When you find them, you got to circle the wagons around them.
And I think that's the only thing you can do after you've made the good decision is let your winners ride for a longer period of time.
Yeah. And this might get back to a little bit what we said earlier of, you know, so I joined the fund in 2016, but I'm not an investor. But I've been able to watch and observe a top tier venture capital fund operate. And what's very interesting to me is true to all venture capital companies, a small minority of the companies we've invested in account for the vast majority, virtually all of the returns.
Who are the big winners for Collab?
Lyft, Beyond Meat, Impossible Foods, Upstart. Those what I just named are the vast majority of returns. That's probably right. And what's interesting about it is if you go back to 2016 when I joined, the companies that were going to be our obvious winners weren't and most of them don't exist anymore. And the companies that did just explode, Upstart and those were companies that were like, 'Oh, that's a cool company. They're doing some cool things.' But never in a million years would we have thought this was going to be it. So, not only is it a small minority of companies that are your winners, but similar to what Mohnish said, you don't even know which ones those are going to be. It's very difficult to know in real time.
Well, that was the case with your book. I think you said you printed 5,000 copies of The Psychology of Money. You've sold 10 million. I'm not sure how many books have sold 10 million, but like, you know, you are in the freaks amongst the freaks in terms of numbers.
And nobody saw that coming. I didn't see it coming. The publishers didn't see it coming. I've said this a million times before, but every US publisher turned it down. Every single US publisher rejected it. And I don't fault them. Like it's impossible to know what's going to work before it comes out.
About how many non-fiction authors have sold 10 million copies of a book? Could you guys book a table at a restaurant? Like I kind of feel like it's got to be like a dozen.
Yeah, it's hard to know because there's not a lot of... if you're looking at the last 10 or 15 years, there's pretty good industry data that you can compare across time. But if you go back a hundred years, you're dealing with like the data sources are so all over the place.
Okay. Well, how many in the last 15 years?
Not many. I don't know. Probably five, something like that.
No [__]. How cool is that, man? Five people plus one to the dinner.
Well, isn't that interesting? You said you wrote, I think you said 8,000 blog posts. You've written three books now that have been huge hits. And yet you are telling me that predicting what will be popular in terms of content, particularly in writing, is impossible. I don't like that as someone who's making content, right?
No, I think I'm being very honest. And of the 4,000 blog posts that I wrote, there's like three or four that stood out that were, you know, an order of magnitude bigger than the others. And all four of those before I hit publish, I was like, should I... I don't... this is crazy.
This is insane. Like, I don't even know if I want... this is crazy.
And there's literally one of them that I published it, but I hid it from our blog's feed because I was like, I just want to have a link that I can show some people, but I don't know if I want people to see this yet. And so if there is any metric that you know or have some feel, it's that before you publish it, you're like, 'This is the craziest [__] I've ever said in my life.' And I'm embarrassed to hit publish. But I think almost that's what you need to make it work. And so when we pitched Psychology of Money to all the big publishers, a lot of it wasn't just basic rejection. A lot of it was like there's no way that that would ever work because it was a weird idea. I was like, 'Look, there's no central thesis to this book. It's just 19 random essays.' And like they kind of... they're all about behavioral finance-ish, but there's no other cohesive theme that is so antithetical to what a publisher wants. A publisher wants one big idea weaving its way throughout the entire book. And I'm like, 'No, I don't have that. Sorry.' And so it wasn't just that they didn't believe me as a writer. The whole structure of the book was the opposite of what they were looking for. But I think you need that in order to stick out. And like how could it be any other way that in order to have a non-normal result, you have to have a non-normal idea. That's true for entrepreneurs. It's true for any endeavor that you take that you have to be an oddball in order to stick out.
Can I give you a couple of quotes from your book that I've loved that I just have in my Kindle highlights and I just kind of want you to talk about them? I'm just going to throw them at you.
Okay. The first one is a useful one and then I have a fun one right after that. All right. So the useful one is this. You said something like there are two ways to use money. Number one, money as a tool to improve the quality of your life and number two, money as a measuring stick to measure the sort of your self-worth. That one hit me hard and I now can't unsee that. Whenever I see anybody, whether they come on this podcast or just somebody in real life, it's so black and white to me to understand kind of like who's using money in which way.
No, it's tough. And I think I've always wanted to write things about problems I have in my own life. So, a lot of this was just kind of looking in the mirror and being like, what is my desire for more money? Am I using it as a tool to make my life better and my wife and kids' lives better or is it just a measuring stick of how well am I doing in life and where do I sit on the social hierarchy? And if I was honest with myself, it was a lot of the latter. And I think we've done a pretty good job spending money on the things that we like and whatnot, but a lot of the desire was just like what's the scorecard look like? And maybe that's not bad because like I enjoy that game.
Yeah. Why is that bad? Because like for example, you've sold 10 million books. We just use that as a measuring stick and 10 million books correlates exactly to money. Like that to me that means your ideas are impacting so many people for the better and I want you to measure your life by getting to 20 million books because I think your book helps people. I think you're right there.
But here's where it can really go astray. Money is so quantifiable and book sales are so quantifiable that they become like we overestimate their importance. And what I mean by that, if you said like what's important in life, I want to be a good husband, a good dad, a good friend, a good citizen. I want to be funny, I want to be healthy. All those things are so important and they're very hard to quantify. How do I quantify whether I'm a good dad or not? I don't know. It's potentially the most important thing to me in the world. And there's no score. And so it means everything to me, but it's easy to kind of ignore because it's this mushy topic. But what is my net worth? How much did my income go up last year? What are my returns versus the S&P 500? You can measure those down to the millionth of a basis point. And so because they're so easy to track and it's apples to apples, my net worth versus yours, how do I compare my social citizen score or my dad score or husband score from me to you? You can't. There's nothing. And but income, we can sit here and compare our net worth all day. And so I think the using it as a scorecard metric is both really good and can be a lot of fun and used for good. And I love that game. I've been playing that game since I was a teenager and I'll keep playing it the rest of my life. But you have to understand the limitations of it and how much power there is towards it just because you can quantify it, not because it's necessarily going to give you a better life. And I think there are a lot of people who because it's so easy to quantify, chase it as the ultimate metric to all of their problems, the solution to everything in your life and everything else, your friendships, your relationships, your health that are more important, take a backseat just because you can't measure them.
Let me give you an example of this because I think usually when we talk about like well you got to think about money is not going to make you so happy or money could be a tool to improve your life or a measuring stick. This is usually like rich guy problems. So it's like you already have money and you keep chasing more money and you're facing this existential, you know, what is enough, right? You've talked about this word enough. Sam, I know you've talked about like enough is just twice what I have always, right? Our buddy Andrew Wilkinson wrote a book called Never Enough and like I kind of reject the premise and I'll give you an opposite example. So when I was 21 years old I graduated from college, I graduated from a good school, I went to Duke. And when you go to a good school everybody you know goes and gets a job in finance or consulting or they go become a lawyer or a doctor or whatever. But the people who get jobs, they go get high paying jobs at companies you've heard of and that sounds really good. And so, you know, I would see one friend gets 100K, one friend gets 120K, one guy got $200,000 straight out of college. That is incredible. And I faced that problem you were just talking about, Morgan, which is like that's a number that I can compare myself on. And I made a decision because we were trying to start a startup, so nobody was going to pay me any money. And the company was a company nobody's ever heard of because we just created it like three days ago when we filed the LLC. Okay. So, what am I going to do? And what I did was I tried to think about money as a tool to improve my life. Specifically, I said, 'What is the minimum amount of money I need to make this year so that I can live and have the maximum of time to go pursue this project and travel and like do these other things?' And so, I calculated what I called the freedom number. And I don't remember what it was exactly. I think it was something like $15,000 or something like that. It was like a very low number. Like it's less than minimum wage if you just work like in a McDonald's or whatever.
So like was that $1,200 or $1,500 a month.
Yeah. I remember like we were splitting a two-bedroom apartment, three friends. And we slept on air mattresses. We got all our sofas for free off Craigslist. And like, you know, we ate the minimum stuff at home. Like we didn't go and we drank at home and then we would go out. We didn't buy drinks at the bar. Like little stuff. And I realized I could make that number if I just... I was tutoring like three or four college kids in statistics which I wasn't even good at. I had a C in statistics but they had an F. So, you know, in the land of the blind, the one-eyed man is king. And then I coached a basketball team of middle schoolers at a school for autistic children. And like that was my job. So I was like two basketball practices a week, two or three kids. And I had all this free time that none of my friends who had like hedge fund jobs or banking jobs in New York had. And it was the first time I got a taste of this concept you're doing, which is like you need to create your own scoreboard and your own metrics.
If you want to live life on your own terms, if you just take the metrics life hands you, you're going to live the life that those algorithms want you to have or society wants you to have, and you're not really going to have life on your own terms. The only thing I ever wanted out of money was independence. I just wanted to live life on my terms and do what I wanted to do. And I've known this about myself for a long time that I can do good work, but I'm not a good worker. I'm not a good employee. I'm not good at all when a boss says, 'Here's what I want you to do. Here's how I want you to do it and when I want you to do it.' I'm a [__] worker under those terms. But if I'm left to my own devices and somebody says just go do your thing, then I can really accomplish something. And so I just wanted to be fiercely independent in everything that I do. And I think every single person has unbelievable talents if they can be left to their own devices. But a lot of people once they're under the pressure of other people's goals, other people's ideas, other people's financial incentives, you know, are pushed down a notch. And then it's unavoidable. I'm not saying everybody should go be an entrepreneur, of course, but I think if you can use financial independence to work at the company that you want, to live where you want, to live in an area that gives you a lower commute, to retire when you want, whatever it might be. That to me, I'm not anti-materialistic at all. I love nice things, but using your money for that is, I think, the highest ROI by far. If you can use it for independence rather than as a material, you know, social peacock showing other people, look how successful I am. Using it more inward to just be like, I just want to wake up every morning and say, I can do whatever I want today. That to me was always the ultimate goal.
We should talk about spending in a second, but Shaan, what are the rest of your quotes?
Well, one of them was this story. Speaking of like money for using money for status, it was the story about the Koch brothers wine collection.
Can you just tell the story? Sam, have you heard the story? I think it's awesome.
There was, I mean one of the Koch brothers is an unbelievable wine collector and has not like tens of thousands of bottles and the rarest most amazing wine that's ever existed. And he had two or three bottles that he purchased. I forget the exact price. It's in the book, but an unbelievable amount of money. And they were Thomas Jefferson's wines from his estate that he bottled from his estate in Virginia and whatnot. And he bought, you know, paid.
I'd break 10 years of sobriety to drink that.
Well, this is where the story gets good. They were fake. They were forged.
He hired a private investigator to like audit his entire wine collection and be like, 'Give me a rough estimate of how much of what I'd bought over the years is fake.' And this is a multi-million dollar wine collection, right? Like how much roughly was the wine collection?
I mean, I forget the exact numbers of what they were, but it was a very uncomfortable percentage of what he had purchased for tens of millions of dollars was all forgery. And once you dig into it, the wine forgery business is off the charts because you have very rich collectors and no way to authenticate what's there. It's sort of like the dog vitamin business. It's like, does it work?
One of the tells of what they were doing when they were investigating this was like literally this Thomas Jefferson wine, the label was on there or there was... for some of these wines, the label would be stuck on with...
Elmer's glue that was invented 50 years ago, kind of thing.
And so, but even when you open the bottle,
They're like, "Turns out Thomas Jefferson didn't even bottle."
