NewRetirement Podcast: Morgan Housel on How Millennials and a $30 Trillion Wealth Transfer May Change Our Future

Episode 4 is an interview with Morgan Housel, award winning writer and venture capitalist with the Collaborative Fund.

Hosted by Steve Chen, founder of NewRetirement, the NewRetirement Podcast offers interviews about the wise use of both money and time in retirement. We explore ideas and insights so that you can achieve a secure and meaningful future.
Morgan Housel
Listen in to hear Morgan’s and Steve’s thoughts on how demographics, generational wealth transfer, transparency and the embrace of Socially Responsible Investing by Gen Z & Millennials will change the nature of our economy and society.

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Full Transcript of Steve Chen’s Interview with Morgan Housel

Steve: Welcome to the fourth podcast for New Retirement, today we’re going to be talking to Morgan Housel about where the world is going, how millennials and a $30 trillion wealth transfer may change our future. I’m really looking forward to this discussion because I’m a fan of Morgan’s writing and I think he brings a very unique perspective to our audience. Morgan is a 34-year-old award-winning writer and venture capitalist with the Collaborative Fund who’s broadly interested in finance, behavior, history, psychology, neurology and sociology. He’s written for the Wall Street Journal and the Motley Fool. I ran across his writing on Twitter and it’s clear that he’s a talented writer, insightful and well educated. He grew up in Lake Tahoe Skiing Squaw, where I was last week as a high-level ski racer.

All right, Morgan. Welcome to the show, I appreciate you coming on board.

Morgan: Thanks for having me.

Steve: So the broad theme of this podcast is your paper, You Can See Where This is Going, where progress comes from and how the next generation will invest their money that I read on your– I think it’s a 2017 paper, that was posted on Collaborative Fund. I was just wondering if you would give us a quick overview of your conclusions from that paper and what drove those conclusions.

Morgan: The broad idea and this really goes back as many generations as you can take it is that it tends to be the case that every generation gets a little bit more empathetic towards other people as time goes on. It’s a slow progression but if you look at the long augur of history there has been a pretty noticeable shift towards people becoming more empathetic, more understanding, more involved and more willing to cooperate with other people.

And this is really looking at the long arc of history over the last several hundred, several thousand years. And the themes for that, the explanation for that for sociologists and psychologists who’ve dug into this is basically the idea that as people gain access to more information, so whether that is the spread of tribes and travel, the spread of newspapers, the spread of books, the spread of the Internet. As people gain more information they just gain a little bit more perspective on how other people live and seeing how other people live, the conditions other people live in, trying to understand other people’s different views, so that strangers aren’t just a complete foreign body to you. They are someone who might have come from a different world and live a different lifestyle, but the more information you have on them the more you realize that we’re all humans, we’re all in the same bucket. So, that’s kind of the broad thesis.

And if you fast-forward to today what’s happening with millennials, and more to the point I think more than millennials, is Gen Z, which are the current cohort that are in their mid to late teens and what’s really happening with these generations is that millennials and Gen Z are the first generation who grew up with the Internet as being something that not something that was new that they had to learn about but something that they always had. It was always in front of them, for their entire life they’ve had a huge funnel of information. Not just about themselves and their own situation but information and exposure to how a huge number of groups of other people have lived.

And I think what that’s done and we have a lot of evidence for this is that in a pretty short period of time you have a shift in values towards being more empathetic and more open to other points of views than previous generations. Just because you have millennials that have grown up with Facebook, seeing how other people can live. And if you put this in a business perspective growing up with things like Yelp where they have so much information to how companies operate, seeing how companies treat their customers, seeing how companies treat their employers, where they source their food from and whatnot.

There’s just so many things that in previous generations people and companies and countries could hide behind this veil and that veil has now been pulled back. And it’s just made people a little bit more open and demanding to work with and partner with and spend their money on companies and partnerships whose values align with their own. And that’s really how we look at it from an investing standpoint is looking at this generational shift of consumers who — you know this has always been the case, but it really just started growing exponentially in the last 10 years and once millennials started coming into financial power and corporate power where they started becoming managers and whatnot — is this shift toward consumer consumption to companies that were driven by more than just a utility and profit goal. Companies that wanted to have a positive social mission for doing something beneficial in the world beyond just earning profit.

And that’s how we look at it from an investing standpoint is that there have always been companies that try to do good in the world and usually it’s been, well clap your hands good for you, hopefully you guys can sleep a little better at night, but our investment thesis is that those companies that are trying to do something good in the world, trying to really promote diversity and culture and just as stronger willingness to do good, those are the companies that will actually use that as a competitive advantage over the next generation. Those will be the companies that actually produce some of the greatest financial returns.

And I think a good example of this to just put this in concrete terms is what we’ve seen in the last year with Uber and Lyft. You have Uber and Lyft that have virtually the exact same product, nearly identical products that are indistinguishable. But in the last year you had the corporate culture and some of the behaviors of Uber that came into the spotlight and you had a lot of consumers that just looked at that at Uber had this one culture of trying to get ahead at any cost and step on toes if you have to do to get there versus Lyft, which is had a little bit nicer and more accepting and more empathetic corporate ethos and you had literally tens of millions of customers in the last year that looked at that and said, I’d rather be with Lyft. Lyft aligns more with my values and that’s what I want to do. So, I think that’s an example of the broad idea, the broad shift that we’re seeing taking place in consumer markets and an example of companies that are actually taking advantage of it in real time.

Steve: Wow, that’s awesome. Yeah, it’s pretty interesting to get your perspective, I mean, I have a couple of teenagers in the house here and I would say, and also when I talk to them, kind of millennial’s, I mean, definitely they’ve got a finely tuned kind of BS detector. And I think when they look at companies they’re saying, where are they coming from, are they authentic, is the messaging authentic. Why are they doing what they’re doing? It would be interesting to look at data about how much of an impact this is having on these companies bottom line. I don’t know if anyone’s done any looking at like Uber but how much market share did they lose because of what happened with their culture getting exposed.

Morgan: Yeah, what’s hard obviously is that we can’t pinpoint exactly how much of Lyft’s market share gain in the last year was due to the fault of Uber, but I can tell you in the last year if you look at nationwide Lyft’s market share went from about 20% to 33%. And that’s a big market so gaining 13 percentage points of market share in one year is huge and I think just for a measurement standpoint it’s such a perfect comparison because again their products are as identical as you can get. They are more identical than Coke and Pepsi. Coke and Pepsi have some differences in flavoring or whatnot but if the difference between Uber and Lyft is nothing, it’s the same drivers and the same cars going to the same locations for virtually the same price. So the fact that Lyft has gained so tremendously over Uber I think definitely points towards the direction of consumers just doing this because they think Lyft is more reflective of their own values that they want to associate with.

Steve: Yeah, that’s pretty interesting. I mean, I’ll say it’s definitely interesting also seeing people get more activist on Twitter, so recently we had the whole shooting in Florida and then there are a lot of call outs on Twitter about hey look, here’s the companies that are giving NRA discounts and do you want to associate yourself with that. And then watching these companies very quickly in a matter of 24 – 48 hours saying you know what, we’re canceling those discounts, we don’t want to necessarily be associated with that.

Morgan: Yeah, and you know what’s important to point out here too because I can imagine a lot of people who listen to this or read about it think that it’s a very self-centered view of millennials to think oh, now that we’re here we’re better, we have better values than our parents did. So, I think it’s important to emphasize that this shift happens every generation as it happened with baby boomers, it happened with the greatest generation. Every generation gets a little bit more empathetic and with baby boomers for example, it was pushing back against the hard-line social norms of their parents particularly around women in the workforce where you had pre-baby boomers, it was just culturally accepted that women were either not accepted or were inferior throughout most of the labor force. And it was really baby boomers who took the torch with that and said no, that’s not a value that we share and we’re going to push for something to be different.

So this is not a millennial specific trend. I think, it’s something that’s always happened but I think it’s especially pronounced with millennials because the dawning of the Internet and the power of the Internet happened so quickly, I mean, in just in a course of five or ten years it went from something that was mostly irrelevant to something that was completely dictating the entire social and commercial lives of most people.

Steve: Yeah, I think it’s interesting when you look back in the fullness of time, if you will, about what’s happened, so I was watching, you were talking about women’s rights and the boomers and I was watching, sitting there with my nine-year-old and we had the history Channel on and there was this thing on civil rights. I had to explain to him, well, literally fifty years ago in this country there were parts, there were restaurants and there were bathrooms and these different things for non-whites and for white people. And that was kind of like, huh. Just kind of explained that to him, like now it’s well, that’s a crazy idea. Right? But back in the day that was accepted.

Morgan: What’s interesting about that too is that people say back in the day and when you’re explaining it to your son it might seem like ancient history, but we’re talking about the 1960s here. That’s not that long ago it all, which I think just highlights how quickly these things change and I think when you think about companies having a social mission today. Even today in 2018 I think for a lot of people it’s like oh, that’s cute, that’s marketing that something you are just kind of doing to get some attention. But I truly think in another ten or twenty years that will be kind of a core principle and core philosophy for companies. It’s like, what is our social meaning to exist? And their social mission driving not just being part of their corporate strategy, but being the foundation of it.

Steve: Right, well I know that socially aware investing has become a much bigger deal and now there are tools when investors can go out and say hey listen, I want to layer in to the companies I’m investing in align with what I believe and whether it’s like, I don’t want to support cigarette companies or I don’t want to support gun companies or I do want to support this or that. Do you have any data on just how quickly that’s getting adapted out there in the market?

Morgan: It’s different for every industry but I think what’s important to point out is it’s so segmented by generation. So if we’re talking about things like support for marijuana, or support for gay marriage, or support for guns rights or something, most of that when it’s reported and do Americans support gay marriage or not, it’s usually supported, it’s usually reported overall, but if you segment that out by generation there are just massive skews between Gen Z and millennials and let’s say, their grandparents. And this too is something that’s always been the case, these generational shifts in values and what happens is it’s more or less like a conveyor belt. As one generation starts dying off the other generation that has very different values not only becomes more dominant but they become older so they gain financial clout and they gain corporate management clout and they gain political clout as they start running for office and that’s really when things start taking over.

Again, I think for the baby boomers and things it’s something like civil rights and women’s rights and this was something that was hard fought in the 40s, 50s and 60s but as baby boomers started taking over into financial power and managerial power and political power, so it’s in the 80s and 90s it not only became accepted but became something that predominantly, with exceptions of course, became something that most Americans would consider as something that would be even crazy to not think about.

Steve: I mean, you’re touching on a lot of the stuff you covered in this paper on Gen Z and millennials and how they’re embracing socially responsible investing and I saw one call out in there that in 2008, Lehman and pretty much everybody else at that time frame, they talked about maximizing shareholder value. I mean, I remember that. That was like the term that was thrown around. That was like hey, this is what we’re here to do. We’re here only to drive up the share price and that’s basically it. And then you contrast that with what Jeff Bezos is saying, which is look, there’s a lot more information available, the balance of power is shifting towards consumers and away from companies and the right way for companies to respond is to focus on building killer products versus doing marketing and shouting about what they have whether– kind of interesting to hear you call that out and I wanted to see if you had any color on that.

Morgan: Yeah, one way to think about it is to think about business as do you think business in zero-sum or do you think it’s positive sum. So do you think of business as if we win someone else has to lose or do you view it as if we create something that’s great then everyone can win. And I think if you think about business from the point of say, Lehman Brothers in 2008 saying our goal is to increase shareholder returns, period.

That seems like a very zero-sum philosophy of we’re just here to make our shareholders rich and we’re going to cut everyone else down to the bone in able to do that versus I think Jeff Bezos looks at business as a much more positive sum game of hey, if we take care of everybody, if we take care of our employees, they’re going to stick around and be happy, if we take care of our customers, they’re going to keep coming back, if we take care of our community, they’re going to support us. If we think about all of our stakeholders then guess what? Our shareholders are going to benefit to because by taking care of everyone else we’re just creating this great business machine that’s going to keep compounding for generations. So it’s just a more positive some view over what your goal as a business is.

And I think for decades a lot of this was driven by a lot of academic research that took place in the 60s and 70s but there were several decades, I would say predominantly from the 1980s through probably the financial crisis where the prevailing view of what business was is something that was zero-sum, that the goal of the business was to increase profits and its mission was to do whatever it needed to do to get there. So whether that was paying employees absolute rock-bottom wages or treating your customers like dirt or treating your community like dirt. And that’s a harsh way to say it because I think most businesses were good-hearted people doing this, so I’m being a little dramatic by saying that. But I think that was the general ethos, was that our sole goal is to increase profit without looking at it as something that hey, you know what, there’s actually a better way to truly maximize profit over the long-term and that’s by thinking about the well-being of all your stakeholders in the short and medium-term.

That’s actually how you leverage and stick around and create sustainable long-term value versus what you think is maximizing short-term value, which is actually in practice turns out to be just maximizing short-term value at the cost of probably going out of business in the medium or long run.

Steve: Yeah, that’s pretty interesting. I mean, I think that you’re right that we’re definitely pendulum swinging towards taking a look at the total cost of ownership right, not just the total cost of something so if you look at cigarettes or oil, you’re kind of like hey, we can make a lot of money selling cigarettes and today but then if you look forward in time, or if it’s unhealthy foods are lots of sodas or something like that, but if you look over someone’s life span there are these massive health care costs that actually get socialized and put on to everybody else through government health programs and whatnot that end up not being factored into the economics of the initial sale of the single unit of that product if it’s oil or if it’s cigarettes or if it’s sodas and things like that.

Morgan: Right, exactly. One example of that is the percentage of workers who work full-time for minimum wage, the percentage of those workers who are on food stamps, I don’t know it off the top of my head but it’s a double-digit percentage. And you can look at that as you know, look, companies aren’t paying these workers enough to feed themselves and therefore the government has to step in to provide them food stamps and therefore that food stamp is more or less a direct subsidy to the company because if you take that away the companies would have to pay their employees enough to sufficiently feed themselves. Now this is a different argument of politics and morality that’s kind of out of my pay grade but there’s … But just to get back to your point there’s all these costs that I think get shifted around and moved around in the name of making something zero-sum when in reality if you think as business more as a positive sum, it’s like these costs are going to be paid by someone, it’s just a matter of who’s going to pay them and what the distribution.

Steve: Right. Yeah, and listen I don’t want to be, come across as I’m down on capitalism because I think it’s definitely by far the best system out there and we do have to provide people incentives and I do believe in the animal spirits, like hey, people have to want to build things, they have to be incentivized to build things and we do create a lot of, and we have created a ton of value, a ton of productivity improvements, which has led to higher quality of life across the world so I think there’s definitely a lot of awesome things about capitalism and what we’re doing here and it’s being thoughtful about what is the total cost and it’s kind of interesting having this conversation and seeing that yeah, future generations, these rising generation are really taking that perspective.

Just real quick before we move on here I’d love to get your thoughts on one thing that I see out there’s that there’s this massive wealth inequality out there driven by “hey, capitalism does work” although in today’s more information based economy there are these massive winners that are just crushing it and then there’s a lot of people that are doing, some people are doing okay and there’s a lot of people that aren’t doing that great and if they don’t feel that they can succeed, they can achieve greatness, then how does that affect their thinking and therefore their willingness to work hard going forward.

Morgan: Yeah, I think that last point that you brought up is probably the key of it, it’s like the psychosis of all of this is just not necessarily what does it do to tangible opportunity but what does it do to people’s drive and motivation. I think that’s a really important point.

But I think there are a few other points to make here is that one is that in every capitalist system inequality is always the natural progression unless there’s intervention. So inequality isn’t something that I think necessarily happens because of certain policies, it can be accentuated by certain policies, but inequality’s always going to be the natural progression of where things go in a free market.
And two, has that been accentuated? In the last fifty years, not necessarily with computers and the internet but just with more overall connectivity, which may be started with the telegram and the radio if you want to go way back. I think it certainly does, I think Warren Buffett has brought up a good example for this, which is that if you go back one hundred years ago every small town in America had its own opera singer. The town would come out and hear the opera singer and a lot of those opera singers in the small towns were not that good but they were the only opera singer in town so people would still come out and pay to listen to it because there was no one else to do it.

And then once radio comes along it completely shifts the dynamic because you can have just one opera singer in the entire nation who is the best, who can now be broadcast into the homes of every American across the country. So then at that point you have all these mediocre opera singers who were making a livable wage before this who are now suddenly, they go from the best opera singer in their town to not even notable, not even notable or noticeable on the national stage.
And I think that happens to a lot of professions where there’s just a much more, I think, natural winner-take-all dynamic of things in the economy. We’re seeing that today with newspapers where it used to be the small-town newspaper again, it was the only newspaper in town so everyone bought it and now you have a national influence of Wall Street Journal, New York Times, Washington Post, Bloomberg, Financial Times, The Economist, that have more or less taken a winner-take-all mentality to things.

So I think that’s a natural approach to things and what we should do about it is again, something that I think is above my pay grade. I think it’s probably a topic that everyone has their own opinions on but the opinions are largely rooted in politics, which is just a kind of messy way to think about things and leads people towards argument over finding solutions. But I think the point that you originally brought up is probably the best in terms of, what does this do to people’s psychology?

And there’s a lot of evidence that people that face significant financial hardship have a very hard time ever getting out of it. The best research that I’ve seen on this is a study that looked at people whose careers started during recessions versus people whose careers started when the economy was strong. And they track these people throughout their entire lives. They started tracking them when just when they graduated college and they tracked them through their entire careers. And it was a very noticeable difference in that people who started their careers during a recession when unemployment was high, that stuck with them through their entire career and they earned lower wages, they had less progression throughout their career. And then people who started their careers when the economy was booming and started out with better job opportunities, higher wages had more confidence in their ability to produce value in the workplace.

So it’s something that is not just a problem at a point in time but I think truly sticks with people throughout their lifetimes and throughout generations. We kind of saw this with the greatest generation that many of whom came of age during the Great Depression. That stuck with them through their entire lives. It stuck with them in terms of how they invested, how they spent their money, how they thought about the stock market, how they thought about risk. That stayed with them forever. It’s a serious topic that since it’s rooted in politics is not something that I am confident we’ll ever find a good solution for.

Steve: In recent history when we had the 2008 – 2009 downturn a lot of folks got out of the market, went to cash and they stayed in cash and that’s affected a lot of people. And I know that for instance, older boomers are actually in a much better situation financially, while the silent generation and older boomers they’ve been kind of saving and investing, not carrying around a lot of debt but then some of the younger boomers, they’re actually more comfortable with that, and they’re potentially in a less secure place as they approach retirement.

Morgan: Yeah, I think those generational differences between what different generations experienced during their coming of age years is something that we probably don’t pay enough attention to and that we kind of think of that– myself and my parents and my grandparents will think about the economy in similar ways, but we don’t. We’re all very much influenced and tied back to our own personal history.

Steve: Yeah, totally. So on this note as you see the economy with better productivity and more automation out there, what would you tell your own parents about how they should position themselves as they go into retirement?

Morgan: I think what’s true again and not to keep repeating myself but this is not just true today but it’s always been the case is that does technology and automation create unemployment? I think the answer if you look at back in history is for one generation, yes. But if you look at overall the answer is no. But there’s always going to be a generation that developed their skills and developed their careers, developed their networks in an industry that gets disrupted by technology during their lifetime. And that generation will have a very hard time because it’s incredibly hard if you’ve worked in a factory for your entire life to at age 57 go back to school and learn computer programming. Of course, some people can do it but it’s very, very difficult to do that. And if you went back 100 years we would say the same thing about people who grew up their entire lives as farmers who are now trying to find industrial jobs in factories.

Those are different skills and if you worked on a farm your entire life, and you try to get a factory job in your 50s or 60s when you had all these younger workers who were more familiar with machinery, had stronger backs than you, that was a big problem back in the day. So it’s always been the case, and it’s true today with technology.

In terms of what I would tell my parents, it’s different for everyone because I think a lot of baby boomers did and do have skills that are incredibly relevant to today. I think that there’s one thing that I see that I understand, and I don’t blame people for doing this, but it’s something that I wish were not the case, and I would caution against, are the number of people in industries that are clearly objectively either in decline or near extinction, that are clinging to those fields as something that they don’t believe or don’t think is going to go away. And I think it’s hard to watch that and it’s hard to watch policies being put in place to prop up and support industries that are clearly being disrupted and taken over.

But I think embracing reality with both hands about where the economy is not only going, but where it is today is vital to making the quickest decision in terms of what you’re going to do next with your career.

Steve: Right. I have one interesting thing that, I was talking to a guy, Ken Goldberg, he’s a professor at Berkeley, he also lives here where I live in Mill Valley, and I went to a talk that he did about robotics and he said, he told me something I’d never heard before which is, I think it was in the first half of the 20th century basically as we pretty quickly shifted a lot of workers from … this was leading into this, but basically there was a lot of workers that shifted from farming to an industrial economy.
He was like, there was something called the high school movement, the high school graduation rate in the early 1900s was 20% or 30%. It was really low, in terms of the population and then there was a decade period, where everyone was like, all right, you know what, we’re going to build high schools everywhere. And then the high school graduation rate jumped to 70% or 80% in this country in a very short period of time.

So I never knew this happened but basically that was brought about because of this cultural and economic shift that was happening where we were like, okay, we’ve got all these people, we don’t need all this labor on farms and people aren’t going to go off and work on farms when they’re twelve years old, they’re going to have more time and so boom, we’re putting high schools and will have a much more well-educated population. I just wonder if we’re going to see a similar thing where we’ve got increasing longevity, we’ve got new jobs that require different skills. Are we going to have a different way of educating the population that emerges because it needs to get created?

Morgan: Yeah, that’s a great point, I think we have seen that for better or worse particularly in the last ten or fifteen years with the rapid increase in the number of people who are pursuing and obtaining college degrees. And I say for better or worse because there are so many people in that category that have pursued subpar credentials from less than ethical universities and end up getting very in debt, so there’s of course, a downside for it. But I think there’s definitely as we clearly are now in the full-fledged knowledge economy and you would expect, and we’re seeing a huge uptick in the number of people who view colleges, you know it’s kind of cliché to say, but it’s like today the bachelor’s degree is equivalent of what a high school diploma was probably twenty-five or thirty years ago. And it’s probably reasonable to say that the graduate degree, the MBA or the equivalent might be the equivalent of the bachelors degree fifteen or twenty years from now.

Steve: Yep. I think I’ve definitely seen investors out here are saying hey, higher education is ripe for disruption. Historically, costs there have gone up 7% a year, it’s much faster than inflation, and I think now, and I’m basing this, it’s like $60,000 a year roughly for private school, private college per year.
So it’s tremendously expensive. And it’s not really sustainable, I think also you’re going to have the students, consumers themselves saying, well, is this a good return on my investment, do I want to graduate with $200,000, I mean, I was at this conference once, I met this guy, he was like 25 years old, and he was like yeah, I went to this art school, da, da, da, he’s like I have $150,000 in debt. I was like dude, I just can’t imagine. He’s like, I’m working two jobs trying to pay this down and I’m like, I can’t imagine starting life and being that much in debt having to dig out of that hole before I could start pursuing things like buying a house or whatever it was.

Morgan: Yeah, and I think what’s interesting too is that we haven’t really seen that full lifecycle progression yet because that story that you just talked about of people who find themselves in their earlier mid-20s with six figures in debt. That didn’t happen a generation ago. We’re just kind of seeing that in big numbers in the last 10 or 20 years. So it’s to be determined what happens to those people as they reach their 40s, 50s, 60s and for someone who spends their prime working years, let’s say in their 30s, 40s and 50s, paying off student loans rather than paying off their mortgage, saving for retirement, all these other things that have been a more traditional thing to do with your finances.

We don’t fully understand what’s gonna happen to those people as they go throughout their lifecycle.

Steve: Yeah, it will be interesting to see what happens. Alright well that was awesome, so I wanted to shift gears a little bit I was just curious for you personally, how you invest your own savings. I saw this little bit on a podcast, but I’m kind of curious to hear it from you directly.

Morgan: Yeah, there’s definitely been progression of how I think about and invest my own money. I started my career as a diehard stock picker, bottoms up, reading 10K’s, value investor, concentrated portfolio, that was really what I was passionate about and most of my financial training and education was centered around and that’s still something I find fascinating and I appreciate people who do it and take the amount of time that is necessary to put into it being it was a tremendous amount of time. For me my progression was in 2008, 2009 with the financial crisis it just became readily apparent to me that the single most important variable in your success as an investor is not necessarily your allocation, it’s not necessarily your ability to pick winning stocks, it’s your ability to maintain control over your emotions over time so that you can endure bear markets and so that you can actually truly be a long-term investor who can invest who can invest in compounding work over 30, 40 or 50 years.

So when I started thinking about behavior as the fundamental base of the pyramid of investing I had the shift of well, that’s where I want to spend all of my time and focus is making sure that I have control and proper context of my emotions so that I can truly be a long-term investor. Because if I spend all of my time going through balance sheets and 10K’s and trying to pick winning stocks, none of it’s going to matter if I get scared out of the market and scared out of my portfolio during the next bear market. You can pick the next Google or the next Facebook all day long, but if you get scared out of them during a 20% correction, it doesn’t matter.

And so I just started getting this interest in I would say, the intersection of investing history and behavioral finance and thinking about how to think about risk, how to think about being a long-term investor and with that just putting all of my effort into that and not wanting to spend any mental bandwidth on security selection or more or less asset allocation. I gravitated naturally towards a much more passive approach to investing, to where now all of my public equities are basically index funds and Berkshire Hathaway, which is effectively an index fund, more or less.

So I just become much more passive over time and I have a very simple allocation and portfolio and I do that, not necessarily because I don’t think people can’t beat the market, even though the evidence shows it’s incredibly hard, but can smart devoted people do it? Yes, I generally believe that. But for me I just want to spend all of my focus and bandwidth on thinking about risk and psychology and the best way for me to do that is to come up with just the simplest asset allocation I could think of.

Steve: Yeah, no, I think that’s pretty interesting. I think there’s obviously a lot of data that shows that many people agree with you and that’s kind of where the world’s going, I mean at Vanguard they’re winning $8 billion a day in terms of assets, so people are like hey, let’s go passive, let’s go low cost, what can we control, let’s buy the market, right, so.

I think that’s definitely happening and I saw that you wrote a little bit about how important a well-diversified portfolio is one of the things that jumped out was J.P. Morgan did a study and basically said between 1980 and 2014, 64% of stocks underperform the overall index. And basically a third were reasonable winners and 7% crushed it. So basically, if you owned, if you are lucky enough to pick one of those winners, yeah, you killed it. But if you picked one of the 64% that underperformed then you are a loser, so the only way to effectively manage risk is to buy everything and assume you are going to own the winners in there and then those winners are going to massively outweigh the losers because that was the big thing, is that how much those 7% winners, how much they outperformed everything else and drove the overall index.

Morgan: That’s right. For me there’s been this interesting dichotomy of I spent most of my career on the public equity side and now I work in venture capital, and the common comment that I get is oh, you know, venture capital that is such a tail driven business in terms of you might invest in 50 startups, and half of them go out of business, maybe 20 of them do okay, you can give them one extra turn and maybe one or two go on to do really well. And that’s true. That is how venture capital works. I think what most people don’t realize is that’s how public equities work too. That’s how the S&P 500 works. And just like those stats that you just brought up, even if you look at large cap public equities, like blue-chip billion-dollar companies over a period of 20 to 30 years the majority of them will not only do poorly but will do incredibly poorly. I think the stat was from that report is that 40% of large cap companies effectively lose all of their value over a 25-year period, I think it was.

The difference is that in venture capital that cycle happens much faster so that shakeout can happen in two or three years whereas in public markets it might take 10 or 20 years. But the dynamics are more or less the same. Like it’s always going to be the case in capitalism that a very small percentage of both companies and I would say people, if we were just thinking about careers, are going to drive the majority of value and most people will do not only okay but just kind of grinding along at a rate that I think most people would be pretty dissatisfied with.

Steve: Right, that’s pretty interesting. So I want to ask you your quick opinion on your view on financial advice and whether or not people should use advisors and just a little background, here folks, I originally reached out to Morgan months ago about what we were doing in our business because I had heard him, and I actually read an analysis that Ben Carson wrote about a podcast that you and Jason Zweig did where you were kind of talking about democratizing access to financial advice. I thought that was pretty interesting, it’s part of what we’re trying to do here, and anyway, Ben’s view, who I think is a friend of yours, right? Is that financial advice is so personalized that it can’t really be scaled, or it’s really hard scale.

And I was kind of curious what your view on that is and what you think the future of that might look … Well, is it valuable and do people need it and do you think it can be scaled?

Morgan: Well, I think Ben’s exactly right, that’s why we have Betterment for financial investing advice where you can give an automated asset allocation to people. But we don’t really have a scalable automated financial planning platform, because just like Ben said personal-finance is very personal. And for the same reason I don’t think you could have an automated doctor, you need a doctor that really knows you and knows your background and knows your family history and your desires and how you want to think about treatment. It’s a very personalized thing to go through and that’s why financial planning I think is always going to be done at the skilled face-to-face level without a lot of automation. There are some firms like Vanguard has situations where if you have I think more than $1 million at Vanguard they give you access to a certified financial planner every year.

So that’s the way that a company has scaled it to some degree but it’s still it’s not accessible a large percentage of their clients and still at the end of the day it’s speaking face-to-face with a qualified financial advisor. But your point of is a financial advisor and financial planning important? Absolutely. There are different ways to look at this but for me since again, I really think about investing as a behavioral and psychology game.

I think just having a financial advisor who is not as emotional about your money as you are is critical because your financial advisor is not the one who’s had to work 40 hours a week, 60 hours a week for the last 30 years to build up the savings were as you are in that, just by that fact alone, the fact that you have so much skin in the game and your savings represents your ability to retire and your ability to put your kids through college. That fact alone is going to make you very emotional about your money particularly when there’s a bear market and you see your portfolio go down 30%. And that freaks you out because you spent so much blood, sweat and tears building this money, building the savings. So I think it’s really important to have a financial advisor who is not only qualified and has the technical skills that you might not have, but just as someone who can think about your finances in a little bit clearer and more calm way then you might be able to.

There is a financial advisor named Carl Richards who says the purpose of a financial advisor is to put a gap between you and stupid. And I think that’s just a great way of thinking about it. That should be one of the main goals for financial advisors is to act as a guard between yourself and gut based emotional financial decisions that you might make on your own.

Steve: You know, just like medicine and healthcare, a lot of people are starting online and doing a lot of research on their own but then at a certain point you’re kind of like hey, I’m not going to heal myself, I do need to talk to someone and you want to kind of have easy and accessible and I think, low cost or efficiently priced services out there. One of the things that we see out there as potential misalignment is that most financial advice is indirectly priced, so you kind of pay on the backend, either fund fees or asset management fees to the advisor that are geared towards how much money you have versus the service being provided and I think that is going to change. And it’s starting to change, I mean, you’re starting to see networks of advisors coming out that are like flat fee, or I’ll do it per hour, more like a CPA or a lawyer. Or I’ll do a flat annual amount and I think consumers are waking up to that and saying, well, I have a million bucks, I’m paying an advisor 1%, that’s $10,000 a year.

I mean, they’re definitely providing value but can I get a similar thing for 2500 bucks a year. I think you’re going to see that kind of stuff emerge going forward.

Morgan: Yeah, there’s so much opportunity to disrupt the space because it’s so important and it’s so fragmented right now but I’m genuinely curious to see where it goes because I have a hard time seeing it moving past the face to face interaction.

Steve: Yeah, well, keep an eye on us. I don’t want to make this about us but it is something that we’re working on, you know, we’re definitely trying to support that.

Morgan: No I get it it’s not something that I bearish on it’s just something that I don’t understand so I’m excited to watch people like yourselves who are really running after the problem.

Steve: Yeah, it’ll be interesting. All right, well let’s shift gears to Collaborative Fund. I think it’s pretty interesting that you guys can invest broadly in cities, money, consumers, kids and health. I think those are great themes and I was just curious to get your perspective on how you chose those things and if you have any really exciting companies that you’re investing in and you think are going to change the world going forward.

Morgan: Yeah, the basis for those groups that we invest in is just where do we see the biggest change right now, so you mentioned cities, there’s a big migration from the suburbs back into the cities and for the first time in human history more and more people live in cities than live in suburbs and rural areas. So just looking at companies that use technology and information networks to make urban living more convenient is something that were interested in. So Lyft is a good example of that, of the company that’s precisely what they’re doing, they’re using technology and social networks to make urban living, particularly in cities that are so dense that car ownership is low or limited, is now substantially more convenient for people. So that’s the basis for cities. For something like kids, you have a group of technologists and entrepreneurs who drove Internet 2.0 in the 2000 and they were in their 20s and early 30s as they were developing an understanding and building the current technology framework and now that group of entrepreneurs and group of technologists and engineers are in their peak childbearing ages.

And we’ve definitely seen this shift over the last, let’s say, five years of a lot of entrepreneurs who 10 years ago could not have cared less about kid’s companies because the last thing they were thinking about were kids. And now those people are parents and they’re thinking how can I use the skills that I’ve developed over the last 10 or 15 years during my 20s to now build something in the kid’s space. So kids was an area that I think was more or less neglected by the technology revolution that took place in the 90s and 2000s but we’re really starting to see a lot of movement in that sector.

I think it’s for something like Money or Fintech, it’s just the idea that financial services as well have not been affected that much by technology. You have mobile banking and you have ATMs and you have mobile check deposits but it still more or less run on the same network of pipes run by the same banks and it’s been very difficult for startups and technologies to break the incumbency of those banks.
But here again to is just an area where there’s this tremendous potential to do something different and again, it’s been really difficult for fintech starts to do it but there’s so much opportunity in that space.
And consumers that gets back to what we were talking about earlier of just this kind of shift in values where consumers want to spend their money on products and with companies whose values align with their own. So companies that are coming out with products that are just a little bit more genuine, not as flashy marketing, have ingredients that are more transparent and more understandable. It’s something that’s really valuable to consumers, we see a lot of money shifting in that direction. Not just from investors but from consumers’ wallets themselves,

So that’s the broad basis of how we see the world going and I would say those ideas are something that guide us but it’s not something that we’re handcuffed to. Those are just rough rules of where we see the world going that kind of guide us in certain directions. But in terms of how venture capitalists invest it’s always deal by deal, entrepreneur by entrepreneur and it still, it always has been and will be a very messy process at an early stage.

Steve: You wrote an interesting piece on bubbles that I’ve actually shared several times. I think it was mostly because of what was happening with bitcoin but would love to get your quick summary of that because I think it’s really instructive for people to listen to this. Because I think bubbles drive a lot of bad outcomes for people. And I saw it myself on the dotcom boom, right, you saw these insane valuations and people then losing everything and driving mass amount of unemployment and also saw it in the housing market here in California and around the US and leading into 2008 where people got crushed, lost their houses, lost all their savings and everything else. And maybe we’re seeing it in bitcoin, which has gone from 20,000 to something cut in half.

Morgan: The main thing I think about bubbles is that they’re generally viewed as something that is irrational and driven by crazy people making crazy decisions and I think if you really drilled down to what’s happening in a bubble they’re actually a lot more rational and make sense then people tend to think.

The first is the idea that if markets never crashed and there was no volatility, then what would happen in that situation? If I guaranteed you do that the stock market would never crash, what would happen tomorrow is that people would bid the price up exponentially because there’s no more risk. So why would you let a company yield, you know, have a 3% dividend yield and there’s no risk in that. In that world why would I put money in a savings account that yielded 1%. You wouldn’t. So you would bid up stock prices so high the valuations would get so high and once valuations get that high and there’s no room for error, that’s what triggers the next decline when how the world works in terms of uncertainty and risk and people making bad decisions.

So if there were never any bubbles, if there were never any crashes, the first thing that would happen is that markets would get so expensive that they were guaranteed to crash. And that’s step one in terms of why we keep having bubbles, why we have this process. It’s actually a lot more rational than people think.

And in the second point is to highlight that, it’s often viewed as people who are participating in bubbles, whether they’re day traders in 1999 or people flipping condos in Miami in 2006 that those people are making really bad uninformed risky decisions. And that too is something I think we can push back on because if you are a day trader in 1999, or if you are flipping condos in 2006, those behaviors and activities look reckless if you are a long-term stock investor, or if you are someone who looks at real estate as something that you should raise or that looks at a home as something that you should raise your children in, then those behaviors look very risky but the people who are day trading in 1999 and the people who are flipping condos in 2006, those are not people who are thinking about long-term returns.

They are rationally thinking about short-term returns because there’s opportunity on the table that people aren’t going to give up and then so what happens, what gets really dangerous with bubbles is when those people who are rationally playing short-term games to take advantage of short-term opportunity, once their behavior starts influencing the behavior of long-term investors, the people who are thinking about homes as a place to raise your kid.

Once the short-term price activities start influencing the behavior of long-term investors, that’s when you get really dangerous. And I think you have to look at short-term investing or as it’s called short-term trading and long-term investing are two completely different games that are played on the same field and once those players start colliding with themselves and playing different games it gets really dangerous.

And that’s why I think that’s where the danger in bubbles come from. It’s not necessarily that people are acting irrational or that people are acting reckless. It’s that someone playing one game starts influencing and colliding with someone who’s playing a completely different game and that’s really where the danger comes from. To some all that up it’s a. Recognizing that I think we’re always going to have bubbles, they’re completely unavoidable and they’re unavoidable because they’re not something that is as irrational as people think and in the second part is just recognizing as an investor what game you are playing and making sure that you only take your cues and your influence from people who are playing that same game.

So I wrote a long paper kind of summarizing all that, that’s the general idea of bubbles.

Steve: Yeah, no I think it’s interesting to really and super helpful for people to understand the psychology behind it and how people behave and why they behave and I think you’re right that it’s interesting how the behavior drags other people into it. It’s like when you see bitcoin and you’re like it’s at a thousand or it’s at 5000, it’s a 10,000, 15,000, 20,000. People start to think, God, I’m going to miss out on this I really need to do it. It’s going straight up and then it’s like people are like oh, it’s going to go to a million and so it starts to drag folks into it and that’s when people get crushed it’s because I thought your point in the paper about the late investors are just being dragged in almost by momentum and then liquidity can leave quickly and then they get hammered.

Morgan: Yeah, they’re the ones. And that again is just people getting dragged into the market but they think they’re playing one game but they’re being dragged into it being based off of cues that are being created by people who are playing a completely different game.

Steve: Yeah, exactly. Before we go any one in terms of big influencers for you that you think our audience might appreciate following or hearing about?

Morgan: Yeah, I mean a few people, you’ve already mentioned one of them, Ben Carlson who I think is phenomenal and some people also who they all work in the same firm, Josh Brown, Michael Batnick, Barry Ritholz, they all work at the same firm and I think those are … It’s a firm that’s put together an incredible group of investors that see the world through a similar lens and it’s a lens that I think is both rare and undervalued. They really think about investing and think about risk in general just in terms of behavior and psychology rather than something that can really be tamed with formulas and spreadsheets. So they just provide a ton of value to the investment world and they’re all great writers and great communicators as well.

Steve: Yeah, I think it’s interesting how I’ve come to through Twitter, kind of see how they’re all related but I think they were demonstrating the power of writing and getting your ideas out there and just how those ideas can spread and you can get so much traction. I think Josh Brown passed a million followers on Twitter and it was kind of crazy to see. But yeah, no, it’s the power of ideas, it’s pretty interesting to watch that Morgan, thanks for being on her show this was really great and really informative and definitely lived up to my expectations in terms of getting your perspective on these ideas and sharing it with our audience.

I want to just thank Davorin Robison for being our sound engineer and anyone listening, thanks for listening, hopefully you found this useful. Our goal at new retirement is to anyone plan and manage their retirement so that they can make the most of their money in time. We offer a powerful retirement planning tool and educational content that you can access at We’ve been recognized as Best of the Web by groups like the American Association of Individual Investors.

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