Morgan Housel on Frugality, Forecasts & Expectations

Investor takeaways #4

Disclaimer: This article is for informational and educational purposes only. Do not interpret anything below as financial advice. Always do your own research & speak to a financial professional before making investment decisions.

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Here are some thoughts from a recent Morningstar podcast with Morgan Housel podcast. Housel is the author of the book The Psychology of Money.

Source: Spotify

Frugality

As a teenager, Housel knew how much his parents earned/spent and couldn’t understand why they saved so ferociously during his upbringing.

Fast forward 10 years and his father retired on his terms after a stressful and demanding career as a doctor. Financially comfortable and without the need to continue working unlike some of his colleagues.

Then the penny dropped for Housel: his parents were being frugal all this time because they wanted to gain control of their time.

Following a frugal lifestyle, maintaining a high savings rate and living within your means during employment can help you retire on your own terms and gain full control of your time.

Takeaway: Avoid lifestyle creep every time you get a payrise to control your time.

Forecasts

Even the most respected financial thinkers are oblivious to economic risks that shake the markets the most.

In early 2020 nobody was talking about COVID-19. Likewise, in early 2022 nobody talking about Russia, Ukraine or the energy markets.

Takeaway: Our inability to forecast is humbling and enables us to focus on things we can semi-predict: bear markets, volatility, recessions etc.

“If your expectations grow faster than your income, you will never be happy with your money.”

Expectations

It is unrealistic to assume we can emulate exactly the same business or investing success as our role models.

This is usually because most if not all of their outperformance usually comes from a miniscule fraction of the actions taken.

Ben Graham would have had an average performance if it weren’t for the investment he made in GEICO, one which broke many of the valuation rules he laid out in The Intelligent Investor. Similarly, Apple and Amazon gained most of their success from iPhone, AWS and Prime.

Takeaway: Investors should focus on things they can replicate such as time horizon or temperament.

More money more problems

We shouldn’t assume money brings happiness.

The social liability of money can also increase with your net worth. This sounds contradictory, since money by its very nature is an asset.

People might expect more from you knowing you have more money. Raising ambitious, unspoiled children may also pose issues.

Takeaway: Having too much money can be a psychological liability that detracts from the potential benefits it provides.