Why People Have Biased and Flawed Financial Behaviors

In this episode of Motley Fool Money, Chris Hill chats with Motley Fool analysts Jason Moser and Ron Gross about the latest headlines from Wall Street. They discuss market valuations and how they are putting their money to work. Discover what events are on their radar for the upcoming holiday season, and what they think investors should be focusing on for the rest of 2020. They also make some predictions, share some stocks to put on your radar and much more.

Finally, Chris chats with Morgan Housel about his new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, which takes a closer look at how people save and invest their money.

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.

Chris Hill: Before we look ahead to the rest of the year, guys, we just wrapped up the best August for the market since 1984. [laughs] Ron Gross, let me start with you, how are you feeling in all this frothiness? And related to that, what are you doing with your money?

Ron Gross: I got to be honest, Chris -- I just got to be. I think the market is overvalued here. And I know people don't want to hear that, but I just think it is. I love seeing my account balances at all-time highs as much as the next guy, I'm telling you, probably more than the next guy, but I am just wary right here. I think we're gearing up for another correction or perhaps just a flat market, maybe even through 2021, so earnings can, kind of, catch up with stock prices, because it's just not sustainable, the valuations I'm seeing out there, especially from tech stocks and from the Nasdaq, but the S&P 500 as well.

The timing of a vaccine is a lot of the wild card here, because that will determine when earnings start to get back to a more normalized rate, but you know we can't really predict that. So, what am I doing? I'm not selling. I never do that based on trying to time the market. I continue to regularly contribute to my 401(k). I will buy stocks selectively, but I will be, again, to be honest, I'm not dying to pour money into the market at these levels.

Jason Moser: Am I the only one, when you said 1984 and I immediately went to Van Halen? I mean, what a year, what a great album, you know, I mean "you might as well jump," right? Just go ahead and jump on into the market. I do agree with Ron. I mean, it does feel like the market is overvalued. Now with that said, it feels like this could go one of two ways, you know, we get this question a lot. Where interest rates are today, it doesn't look like those are going to be changing anytime soon. Obviously, there is a [laughs] surplus of money in the system, which really is pushing up demand on stocks, because there's nowhere else, really, to invest that money. So, like Ron, I'm being extremely patient in this market, I am definitely not selling anything, buying selectively, continuing to regularly contribute to my 401(k), but I will say as it seems like the market is overvalued, I don't know that it's necessarily a reasonable expectation that we see some kind of a big pullback anytime soon.

I mean, there's a statistic out there that we were talking about last week, where short positions in U.S. stocks have dropped to the lowest level in more than a decade. And so that tells you, I mean, there really aren't very many folks that they're betting against this market right now. That'll obviously change at some point down the line, it is really nice to see [laughs] your account balances go up, but I think it's just one where you have to really just you have to be patient, you have to be selective. You know, pick and choose your spots, but most importantly, stay invested.

Hill: It's been an action-packed year so far, but we still got more to come. Later this month, we're going to get an event from Apple (AAPL 0.52%), Walmart (WMT 0.57%) is going to launch its new membership service. Tesla still has its goal of delivering 500,000 vehicles. Not to mention what could be the most crucial holiday retail season in more than a decade. Ron, what is something event-related that is on your radar for the rest of 2020?

Gross: All of those, but you nailed it at the end there [laughs]. I'm really curious to see how this holiday season shapes up. Are the malls, which we talk about so often, are they going to be busy? We all know we can shop online for most of the gifts we'll want to give, but will we have the money as a whole economy? Will we feel like celebrating? I imagine traveling for a vacation or to see loved ones is going to be much lower than in a typical holiday season. I do think the 2020 holiday season will be the determining factor of whether some retailers successfully emerge from bankruptcy and whether others actually file Chapter 11. A crucial, crucial holiday season.

Hill: Jason?

Moser: I am really excited about this Apple iPhone release. I think that it's going to be delayed a little bit, a few weeks maybe, but they've already got word to the suppliers, they're looking to build at least 75 million of these new 5G iPhones. We're talking a lot about this rollout of 5G networks. I mean, 5G is going to be something that happens over a longer period of time. That's something we're going to see really play out over the course of the next five, 10 years. But certainly, Apple is going to be one of the key players in that.

And we're looking at, yeah, I think one of the most important holiday seasons in a long time because of what's been going on all year. And, you know, Apple rolls out a new sharp-looking iPhone there, they're going to have, I think, four different models -- a couple of higher end, a couple of lower end. The Pro phones are going to actually have the LiDAR [Light Detection and Ranging] camera that they have on the iPad Pro, that's going to really bring more immersive technology, augmented reality apps into play, which I think is going to be exciting from a consumer's perspective in the things that they can do with that technology, so it's not just about the phones but what they can do with the phones. So, it's going to be a little bit of a delay, but I think it's going to be a really exciting rollout there. I know that my wife and I certainly are looking to upgrade. I think a lot of people will be. And I think that will be one of the big drivers for what will be, yeah, an interesting holiday season [laughs] to say the least.

Gross: Can you believe that Apple is almost a third of the way there to its next to trillion? We're about at $2.3 trillion right now. Stock is not as cheap as it used to be, that's for sure, but they do, obviously, produce gobs and gobs of cash flow, unlike some of these other stocks that I think are in bubble territory. But, my Lord! [laughs] $2.3 trillion, believable.

Hill: I don't know if you guys are aware of this, but there's actually a presidential election coming up in a couple of months. I don't know if you've heard anything about that. But in all seriousness, there are going to be a lot of distractions for investors for the rest of 2020. So, Jason, what is something you think might be under the radar that you think investors should be focusing on?

Moser: Well, you know -- I think, actually I was looking at this question a bit more from the angle of what investors shouldn't focus on. And I'll explain. We're seeing a lot this year, particularly on TikTok, these social networks are becoming really busy given that we have a lot of time on our hands this year. And so, you're seeing -- Twitter has always had a very robust finance community, [laughs] now you're seeing that, kind of, bleed over into TikTok. And some of it is really pretty hard to take seriously, because some of it really isn't meant to be taken seriously. And so I think for investors, I would just focus less on those networks, those things like TikTok and Twitter, focus more on learning and knowing what you're doing, learn and be content with your decisions, don't fall into the craziness that's developed on these networks, and that craziness is starting to pick up here with the election just around the corner.

And, listen, we're talking about gridlock central here in D.C. I mean, it really doesn't matter [laughs] who is elected. You know, there's only so much one person in power can do. And when you look at how the market has performed through the years with different administrations, there's pretty fascinating data out there to see. But regardless, I would encourage investors to really just focus on learning, develop your process, understand what you're doing and don't fall into the madness that you see on these social networks, because it's a really easy thing, it's a really easy trap to fall into if you don't watch it.

Hill: Ron?

Gross: I'll take the other side of something Jason said, where I think this election, more than most, does matter from a standpoint of one person pretty significantly. I think from a financial perspective, we can see impacts on taxes, healthcare, potentially Social Security, really wide-ranging issues. And perhaps the gridlock, as Jason said, will mitigate some of the extreme changes, but then the question is always around these cycles, these election times, what do you do, right? And you can't predict these things, and so, the boring answer is, you do what you always do: You stick to your knitting, you buy strong companies, you hold them for the long term. I'm going to keep an eye on the health of the economy, I'm going to keep an eye on the unemployment rate, I'll stay away from questionable sectors like retail until I have a better picture of what the future actually looks like. But you know, I'm going to just do the boring old thing and be a Foolish investor for the long term.

Hill: Real quick before we go to the break. Jason, give me one business prediction; it can be about a company, an executive, an industry, wherever you want to go.

Moser: Yeah, you know, I was thinking about this, and splits have been at the top of mind here for a lot of folks lately. And I'm going to go ahead and make -- that I think by the end of the year, I think Chipotle is going to split its stock probably something like a 10-for-1; I don't know. I mean, you're looking at $1,300 and $1,400 stock price at this point. I mean, the business is performing very well. But I feel like Brian Niccol would like to be able to open the interest up there to that millennial and that younger investor out there that maybe would find a bit of a hurdle there in buying a $1,300 share.

And I understand we have fractional shares as well, but I mean, listen, it's an easy thing to do, companies can split. We say, they don't create value, but then you look at what's happened with Apple and Tesla here over the last several days and it's hard to argue they don't create some type of value. It's maybe not economic value in the company, but there's an argument to be made that they create some sort of value [laughs] there in market valuation. So, I would not be surprised at all to see, by the end of the year, Chipotle splits their shares.

Hill: Ron?

Gross: I think Tesla's stock has to have a meaningful correction at some point. The fundamentals just do not support a $460 billion market cap. I'm not saying you should go out and short it on valuation. Going against momentum is very dangerous, they could be added to the S&P 500, which will give them a boost. They're doing some good things. I think announcing a $5 billion stock offering this week was smart. We do have Battery Day; it could create a 1-million-mile battery over a lifetime. I don't know if that's going to be impactful, I don't know if it's going to be a catalyst, I don't know if it's going to be a disappointment. But $460 billion puts it the seventh largest company in the S&P 500.

Hill: What is a stock that you think should be on a short leash right now? And at the other end of the spectrum, what is a stock you're actually more bullish on then you were say, at the start of the year?

Moser: So, the stock on a short leash. Now, I'll actually give you two, [laughs] because they're basically one and the same. It's Uber (UBER -0.07%)/Lyft (LYFT -1.65%). I think two businesses that are very much in a state of uncertainty here given the regulatory environment. So, it's very fascinating to watch these businesses that have formed the sharing economy developer scene, that maybe while they are compelling services for consumers, they're not really shaping up to be really ideal investment ideas. I mean, they lose a phenomenal amount of money still.

And I think, given the situation today with the pandemic and given the employment situation, it's going to be more difficult for them to argue that their employees -- or excuse me, their contractors -- should be in fact contractors. I mean, employees, for most companies, are long-term investments, and contractors much less so. Of course, you're not having to invest the same cost, and that really is what makes these businesses work today.

So, I think that depending on how that regulatory environment shakes out, they'll be able to make a way forward, but if they are unable to get through this and they have declare their contractors actual employees, that's really going to impact their cost structure, which is going to be [laughs] just detrimental to their business, which is already very difficult. I mean, we've seen the amount of money that they lose, and that doesn't look like it's going to be changing anytime real soon. So, yeah, I'd be keeping a close look on both of those businesses because I don't know that the future, at least in the near-term, looks all that attractive for them.

If we're talking about a stock that I'm more bullish on; well, you know, listen, Teladoc Health, I know I talk about it a lot on the show, but the fact of the matter is, since January, the story has changed significantly. I mean, it's been a big year for the stock on its own. The shares are up better than 160% for the year so far, but clearly the Livongo merger is going to make a big difference here. Size, in many cases, is a competitive advantage. And this is going to really bring two very powerful modern-day healthcare companies together. They utilize technology and valuable networks. There's really only about a 25% overlap in the actual businesses themselves. So, that's a very complementary acquisition. And the data regarding chronic conditions, which is what Livongo specializes in, I mean, that data is staggering. I mean, there are a lot of people out there suffering from chronic conditions, and many suffering from multiple chronic conditions. And that is something that needs to be tracked on an ongoing basis. So, I think when that merger seals sometime later this year, we're really going to have a very powerful force in the healthcare space, and I'm going to continue to hold those Teladoc shares for the long haul.

Hill: Ron Gross, what do you got?

Gross: Short leash, Chris. I hate to say it, because I know we both own it, but we got to watch Bed Bath & Beyond (BBBY) very closely. [laughs] I bought it earlier this year based on my belief that the company could be saved, that former Target executive Mark Tritton was the right guy to turn it around. Just last week the company announced another reorg, including a workforce reduction of 2,800 roles, it'll save $150 million annually. Tritton has already shaken up the executive suite quite a bit. So, I'm sticking with this one and I believe the turnaround is possible, but this could go badly quickly. And Chapter 11 is by no means out of the question. So, I'm going to keep an eye on it for both of us, Chris.

A stock I'm more bullish on. I continue to be bullish on Target, more so now than really the beginning of the year. They really impressed me during the pandemic. They've done a great job with delivery, curbside, in-store pickup, strength across all categories, including grocery and apparel. Shares are up about 18% this year, but still trading at a very reasonable 21X versus Walmart 26X.

Hill: All right, let's bring in our man behind the glass, Dan Boyd, get to the stocks on our radar. Jason, you're up first, what are you looking at?

Moser: Yeah, a company a lot of Foolish investors out there, a lot of listeners know about, DocuSign (DOCU 0.10%). Catching maybe a little bit of that Zoom draft with Zoom's spectacular quarter. And listen, DocuSign continues to impress quarter in and quarter out. The most recent quarter they reported 661,000 total customers, 89,000 enterprise and commercial customers. I mean, this is a business, to me, while these are companies the shares are pulling forward a ton of success today, they're also two of the companies that are really shaping the way we're going to do so much in the coming years. Whether it's business or personal lives, these are businesses that are going to be very relevant in our lives for many years to come. So, I do get the optimism, and I think that DocuSign, a stock that I continue to own, it's had a tremendous year. And I suspect that will continue into 2021 regardless of the pandemic situation.

Hill: Dan, question about DocuSign?

Dan Boyd: Certainly, Chris. Jason, I'm kind of bored of DocuSign having great quarters and great years, when is this business really going to blow up is what I want to know?

Moser: Well, I mean, Dan, do you get bored making money? That's really, God! I don't quite understand that perspective. But what's going to make this business blow up? I don't know. Maybe they get into gaming or maybe they start making burritos; they do something completely just a different direction, that I think would really shake things up. One day we thought it could have been an acquisition target, no longer anymore, the company is too big, I think it's going to continue to impress all on its own.

Hill: Ron Gross, what are you looking at?

Gross: I discussed Target, let's pivot to Walmart, WMT. Specifically interested to watch the rollout of Walmart+ on Sept. 15 -- annual subscription offering, $98 a year or $12.95 a month, gives members unlimited free delivery from stores, fuel discounts, the ability to use Scan & Go app while they're in the stores. Obviously, going after Amazon a bit here, but not apples to apples. Amazon Prime more expensive at $119 a year, comes with Prime Music and video streaming in addition to the free shipping. And Walmart+, this is important to note, only has free shipping for orders of $35 or more.

Hill: Dan, question about Walmart?

Boyd: Absolutely, Chris. I'm a huge fan of stealing good ideas and using them for my own personal gain, just like Walmart is doing with their Walmart Pri... I mean, plus. Ron, what do you think, what's this plus going to look like in one year?

Gross: I think they're executing very well. I think Walmart+ is going to have a lot of members. They already have something similar, they'll transfer those over to Walmart+. I think the stock looks good from here.

Hill: What do you want to add to your watch list, Dan?

Boyd: I'm in the middle of refinancing my house and I've been using DocuSign quite a bit, Chris. So, I'm going to go with DocuSign.

Hill: Earlier this week, I caught up with Morgan to talk about his new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.

We talked about how investors take cues from other investors and the importance of building in a margin for error, but I started by asking Morgan about the genesis of this book.

[...]

So, 2018, you write this long essay called The Psychology of Money, it outlines biases and flawed behaviors that affect how people deal with money, and the response online was huge. I remember seeing that and thinking, even for you, that was [laughs] pretty overwhelming response. Is that the moment when you start to think to yourself as a writer, I think there might be a book here?

Morgan Housel: It was. The genesis of that post was taking together the biggest lessons that I had learned over, at that point, 12 or 13 years of writing about the psychology of investing, behavioral investing, and the history of investing. And just trying to sit down and say, what are the 10 or 20 biggest points that I've learned and how can I summarize each one of those points with a little bit of depth, but pretty succinctly? You know, how can I get into each one of those points in 500 words or something like that. So, that was, kind of, the genesis of that.

And once that did really well, over one million people read that post, then it was, OK, I think I got something here, I think I've been writing about this topic for long enough, thinking about it for long enough, over the last 10 years, that maybe there's a way to summarize all these points that make a lot of sense to me. And it was especially true because that post, The Psychology of Money, was 9,000 words. And if you're not familiar with length, a normal blog post is maybe 800 words, a book is about 50,000 words. That post was 9,000; somewhere in the middle. But as I was writing it, there was so much that I wanted to include, but I didn't because it's a blog post, you can't make it too long or else it just gets unwieldy. So, I knew there was a lot of room to expand upon that. And if for every one of those points I could tell a deeper story with more research and more information, than I could pretty easily turn this into a book.

Now, writing a book is never easy, it's never easy to write 60,000 words without just rambling on and on and on, but it felt like, yeah, that post was this "aha!" moment of, OK, there's enough here that I could do something with.

Hill: Let's get into some of the stuff in the book, because having read it, I feel like there are parts of the book that are warnings, but there are [laughs] also parts of the book that are reassurances, you know, things like, the idea that no one is crazy. And even -- and this is something you delve into -- just the history of dealing with money with a goal of saving for retirement, you're very good about making the point that we haven't been doing this as human beings for very long, so cut yourself a little slack.

Housel: Right. I mean, if you think about something basic like cooking. Like, how to cook, how to cook for yourself, how to cook for your family, that generally has been passed along for generations; your parents taught you, your grandparents taught them, and so on. There's this generational knowledge transfer that takes place. But saving for retirement, which is what the vast majority of the financial industry is, that wealth knowledge [transfer] has not taken place, because look, something like the 401(k) has really only existed for about 30 years. The Roth IRA is only 22 years old; that's when it came into existence. So, we just don't have a lot of knowledge or a lot of background of doing this. And we pretend like we've got it all figured out, like we know how to invest, we know how to save, we know what we're doing, but we have such a limited history of doing this.

So, when I say "us," I mean everyone, the entire industry, everyone. We don't have that kind of long history where it's like, OK, well, when the economy does this, here's what happens to people's retirement accounts. It's still a limited history that we're all just kind of figuring this out as we go. I think the point in the book, that, you know, dogs were domesticated 10,000 years ago and they still retain some of the behaviors of their ancient ancestors. But here we are with 20 years or maybe 30 years of experience in the modern financial system, and we're pretending like we have it all figured out, we know what we're doing. So, that's why a lot of people make decisions with their money that are easy for others to criticize, look at it and say, why are you doing that, why don't people take advantage of their 401(k), why don't they save enough for retirement? I think at least one of the answers to that is that, all of us are still just trying to figure this out, we're still in the first inning of this.

Hill: Although I feel like we're getting better. It does seem like each generation is talking more about money than the previous generation. I think about when I was growing up, we didn't really talk about money all that much. And I know it's something that I talk about with my kids a lot more than I had growing up.

Housel: I read this quote recently from Lyndon Johnson, who grew up very poor, and he said poverty was so common when I was a kid that we didn't think it had a name, it was just what people were. So, you're right that, like, as the country in aggregate gets richer, it becomes a bigger part of the conversation. Another statistic that you remind me of, is that in 1929, when there was a big stock market boom just before it crashed, leading into the Great Depression, only 5% of Americans owned stocks in 1929. So, even though it was this major stock crash that pulled the economy into the Great Depression, it was still only impacting a very small minority of people, whereas today roughly half of Americans own stocks either directly or indirectly, it's much more common for what we're doing.

One other thing that's a major point that you hint at is that, student loans, which is, of course, one of the biggest and most pressing news stories of my generation. I feel like there was this kind of bubble, where for my parent's generation college was much more affordable than it is today. So, the discussion over how we are going to pay for college wasn't as big of an issue, and fewer people went to college. So, that topic just was not on the front of people's minds. And then around my generation, it got very expensive, but our parents, by and large, had not saved for us to go to college, because they were still in the mindset of when they grew up where it wasn't that expensive, not a lot of people went. Now, I feel like my generation, as we are having children, are much more keenly aware of the cost of education and don't want to put that burden on our own children. So, the level of savings in 529 Plans, for example, that my generation is doing for their young children or yet to be born children is much, much greater than it was for our parents' generation.

So, that's just another example of we are so early in this idea that, you know, the vast majority of people might have an ambition at least to go to college. That's such a new concept and a new idea that my parents' generation, the baby boomers, didn't have that generational knowledge transfer. Their parents did not teach them to open a 529 account and start saving for your kids' college when they were born. That kind of concept didn't exist, but my generation does. So, that's another example of, yeah, we're getting better over time. And each generation that goes through this maybe gets marginally better, but we're also just so new to this.

Hill: One of the chapters late in the book is entitled "You and Me." And the striking thing for me in that chapter is, how we as investors unconsciously take cues from other investors at a time when we probably shouldn't, because particularly if you are investing for the long term, a lot of the cues that are out there on a day-to-day basis that may inform whether or not you're going to buy shares of a stock, those cues are coming from short-term traders.

Housel: Right. And it's obvious if I say it, but I think it's so easy to overlook this, that investors play different games. There are short-term day traders, there are high-frequency computer traders, there are fund managers that want to hold stocks for a month or three months, there are index fund investors, there are long-term buy-and-hold investors -- we're all playing totally different games. It's not that there's just marginal differences, it's like, one person is playing badminton and the other is playing football -- completely different games. But we're all playing on the same court. There's only one stock market, there's only one price, there's only one daily movement, we're all looking at that same price. And it is so important for investors to make sure that when there is changes in daily prices or monthly or even annual prices, that you are only taking cues from those signals in terms of it changing your behavior, changing your decisions, if those cues are coming from people who are playing the same game from you are.

So, look, if Apple stock is down this morning, that might be very relevant information if you are a day trader. If you're a day trader, that might be the most important rational information for you to pay attention to. If you are a long-term buy-and-hold investor, that information is not relevant to you at all. It's not part of the game that you're playing, you're playing a completely different game. And where this becomes a problem, I think, is when you have, particularly during bubbles, when part of the impetus for bubbles, where they come from, is when short-term traders start chasing momentum. There's momentum in the stock market, they're going to go get it, they're going to jump into the stock market and get that in a rational way, because that's the game that they're playing. They're playing the short-term trading game. So, if Apple stock is going to go up this week, they're going to buy into it and get into it, that pushes stocks up even more. And then long-term investors start taking their cues from that. And they say, hey, Apple stock or Tesla stock, whatever it is, has gone up a lot in the last month, maybe people know something that I don't, because they're buying, so maybe I should be buying too. And then you, as a long-term investor get in, because you're taking your cues from these short-term traders, even though they're doing something completely different than you are. So, that's where a lot of people get really hurt.

One other example I would use from this is during the housing bubble in the mid-2000s. A large percentage of real estate, of condos in Miami that were sold in 2006 were flipped within 60 days. A meaningful percentage of that. So, when the prices of Miami condos were surging, that made sense if you were a short-term condo trader, which is effectively what they were at the time. So, if you are someone who is looking for a condo in Miami to buy for the next five or eight years and you're looking at what prices were doing in the short run, it looked really appealing to you, you're saying, look, prices are going up, people know something we don't about the value of Miami real estate, let's get in, let's go in with both feet. Those are the people who end up getting burned, because the short-term traders, who were giving the signals to the market, who were moving the market prices, by and large when the bubble burst, they're out, they're gone, because they're short-term traders. So, they weren't really affected. They won the game that they were playing, but because you, the long-term investor, took your signals from them, your cues from them, you end up getting burned because you were taking your signals from someone who was playing a different game than you were.

And that's why it's just so incredibly important for investors to understand what game you're playing, understand what your goals are, and not necessarily take information from the market, from the economy that is relevant to people who are playing a different game than you are.

Hill: And part of that -- and this is another thing you get into in the book -- is building in a margin of safety, because as you very eloquently point out, you're going to be surprised. We've all certainly [laughs] been surprised over the last 12 months by the rise of this pandemic. Obviously, that's a global health event, but there are plenty of financial surprises that come and all the more reason to build in that margin of safety.

Housel: Yeah. And not just the pandemic that we've been surprised with this year, but the rally that came after that, since March, and now we are back at all-time highs. My friend, Ben Carlson, who's a great investor, he tweeted a joke in April, and he meant this 100% tongue-in-cheek, he said, we're all going to be surprised when the market hits new all-time highs this summer, and he was 100% joking back in April, but that's exactly what happened. So, the surprise is on both ends, both the pandemic that hit us and the rally afterwards. Like, if that doesn't humble you as someone trying to make sense of looking ahead at the economy or the stock market, trying to figure out what's going to go, what's going to happen next, then I think nothing will.

But I guess the takeaway from what, like, what is the big broad lesson from 2020, is that, we need humility and therefore room for error in our finances, because if everyone knew exactly what the economy and the stock market was going to do next, which is broadly what it was going to do next, we could be able to have, you know, quite a bit of leverage in our finances in terms of we would have most of our assets in stocks, we would know when to get in, when to get out. But we don't, and no one does and no one ever will.

The most important events that move the stock market or the economy are always the things that no one can see coming. It's not that they didn't see it coming because they weren't smart enough, it's that things that are just literally impossible to see coming, like, say, the timing of a pandemic or things like September 11th, like, the timing of the financial crisis in 2008, no one could have known when those things were going to come, and therefore, it's just so important to have room for error.

And what I mean by that is just, by and large, a sufficient level of cash and bonds in your portfolio. So that when the market does go through something like this, when the market falls 35% in a month like it did in March, that you are reducing the odds as low as you can of having to sell stocks at an inopportune time. That single thing, I think, is the most important variable for how you would do as an investor over the course of your lifetime, is how low can you keep the odds that you'll ever be forced to sell the stocks you own to as low as possible.

Charlie Munger has a great quote that I love about this, he says, the first rule of compounding is to never interrupt it unnecessarily. And that's what I think this is all about. It's like, you want room for error in your finances. And, yes, the cash and the bonds that you own are going to earn a lower return than stocks that you own most of the time. But if those cash and bonds can prevent you from being forced to sell in inopportune times, whether that is a job loss or a medical emergency or you just get scared during a recession or during a pandemic, then that is going to allow the stocks that you do own to compound over time to the greatest degree.

So, that's when you get into like this barbell personality of, I want to be a pessimist in the short run, but an optimist in the long run. And it seems like it's a contradiction, but it's not. I want to be so pessimistic about the short run that I have cash and room for error that is going to make sure, and it's going to allow me to be an optimist in the long run and never be forced to sell the stocks that I do own.

Hill: What surprised you the most when you were working on the book?

Housel: What's great about a book relative to a blog post that I've been writing for, you know, 14 years now, is that a book lets you go deeper and lets you expand, lets you tell a broader story. So, that part is great, that's the value in it and that's a lot of fun as a writer. But you have to be so careful to make sure that you don't ramble. Now that you're giving yourself the runway, the freedom to tell a deeper story, you really have to keep the respect for your readers in mind and say, look, I have the freedom to go long here, but I still want to keep this tight and succinct and not waste anyone's time. It's always a hard balance to find, but I found it more difficult than I thought I would during this book.

What's also interesting about a book is just the stakes are higher. If you're writing a blog post and it takes you, you know, a day to write it, and you can write another one this week or next week, that if you write a blog post that's not very good, hey, not that big a deal, just move on to the next one. But when you write a book and you're putting it out there and you can't edit it once it's done, once it goes to print, that's what people are going to read, and the stakes are so much higher that it was the most nervous I had been as a writer, which as someone who has written every day for 14 years, I don't get nervous writing anymore. But for the book, it just felt like I was doing something very different.

Hill: Speaking of rambling, when it came to finding someone to narrate the audiobook, how many people turned you down before you came to me?

Housel: Well, [laughs] see, most authors do it themselves, and I didn't think that that was wise, because there's no reason to think that if an author is a good writer that they might also be a good speaker, those are very different skills. And it's funny that you're interviewing me about the book, because I have not read the book cover to cover. I mean, I wrote it, so there's that. But you read it out loud, cover to cover, like, multiple times, right?

Hill: I've read the book several times, and so ...

Housel: So, I should be interviewing you. Back to like, surprise of writing it, I gave myself one year to write it from the time I signed the contract to the publisher, I told them, OK, I'll have your manuscript in one year. And then I chipped away at it so slowly to the point where after about nine months, nine months later, I had gotten virtually nothing done. I had, like, one-and-a-half chapters, one of which didn't even make it into the final book. Like, I had done nothing. And then, so, I finally just cleared my calendar and did absolutely nothing but write the book over the course of about 4 weeks and just got it done.

So, that was another surprise, I thought it would be feasible to chip away at it over time, but I eventually just had to, you know, have the tight deadline and force myself to get it done in a short period of time.

Jason Zweig of The Wall Street Journal calls The Psychology of Money one of the best and most original finance books in years. The book comes out on Sept. 8, but it is already an Amazon best-seller, so pick up a copy before they run out of them.

Morgan Housel, congratulations, my friend, it's a great book that you've put together.

Housel: Thanks, Chris, and thanks for being a part of it with the audiobook and thanks for having me today.

Hill: Just a quick reminder, the market is closed on Monday for the Labor Day holiday, so from everyone at The Motley Fool, have a safe and relaxing long weekend.

As always, people on the program may have interests 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.

That's going to do it for this week's edition of Motley Fool Money, the show is mixed by Dan Boyd, our producer is Mac Greer, I'm Chris Hill, thanks for listening, we'll see you next week.