In this episode of Motley Fool Money: Thanksgiving Special, Chris Hill chats with Motley Fool analysts Jason Moser and Ron Gross about stocks they are thankful for this year, some stock market turkey investors must avoid, and how they had to eat humble pie on some stock predictions they made earlier in the year.

Also, Chris revisits a conversation he had with Morgan Housel last fall about his best-selling book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.

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.

This podcast was recorded on Nov. 27, 2020.

Chris Hill: It is our Thanksgiving Special. We're going to give thanks for some stocks, we're going to call out a few turkeys, we're going to revisit a conversation with our friend Morgan Housel. But it's our Thanksgiving Special, guys, it's an annual tradition, and that means one thing and one thing only... [gobbling sound]

Jason Moser: Ah! The sweet sound.

Hill: Ah! The one show per year where we spend money on a special effect. [laughs]

Ron Gross: Favorite show of the year.

Hill: Let's start with the serving of humble pie. Ron, I'm going to start with you. As you look back on 2020, what is a stock or a business story that you got wrong?

Gross: Well, I have been very wrong, so far, about Tesla, but that's almost cliche to say at this point, so I'm going to go with Zillow. I have forever said, I didn't think Zillow made sense from an investment perspective, I didn't think top agents would use the platform, I didn't like its advertising model, I thought the Zestimate was wrong and a little silly, to be honest with you, and I definitely didn't like their new foray into buying and flipping homes and I thought it was doomed to fail. So, Chris, what's happened?

Shares are up 175% over the last year, up 340% over the last five years, and, oh, by the way, the company is still not profitable, so not only is my pie humble, it's just a little bit bitter ...

Moser: [laughs] ... it's still not profitable.

Hill: God! Just imagine what's going to happen to that stock if they actually start making money.

Gross: $3.5 billion in revenue; can't bring a dime to the bottom-line.

Hill: Jason, what about you?

Moser: Yeah, you know, that is impressive, Ron, I can't ... Zillow stands out to me as the best app out there in the space too. That's just phenomenal, they still can't bring to the bottom-line. I am going to eat a little humble pie. So far this year, EPR Properties (NYSE:EPR) has been a... let's just call it less than stellar recommendation. It's one that we were examining earlier in the year, and by "earlier" I mean pre-COVID, as an opportunity for investors to play in the entertainment space, sort of, a lower risk way, because EPR is a Real Estate Investment Trust, a REIT as we call them.

And everything was fine and dandy, Chris, and then, obviously, we sort of ran into a little bit of a brick wall here with COVID-19, the pandemic economy so to speak, and because EPR Properties is focused on entertainment properties, physical entertainment properties, the stock clearly has fallen off a cliff since then. You know, this was something. it was a little bit out of our control, obviously, the majority of the company's properties are entertainment-based or in the recreation industry. I mean, they have ski parks, golf attractions. About 10% of their portfolio consists of educational properties, you're talking about eat-and-play venues, places like Topgolf. Casinos, fitness, you name it, if it's entertainment and it requires a physical presence, EPR [laughs] was a leader in that space until this year. COVID knocked it on its posterior, the stock is down 55% or so for the year so far; and it was worse. They did suspend their monthly dividend earlier in the year. They are continuing to pay out the preferred, a noteworthy factoid there.

But again, I do think in normal times this is a good business, I see the case for it, it clearly is one that has run into tougher times here this year. And it's going to be difficult to, really, ascertain how quickly that demand bounces back, because it does require people going to these places, and I think that behavior is going to be at least somewhat altered for the time being.

Hill: For my money, guys, I just think back to March when the market was tanking, and I was saying on this show mergers and acquisitions are dead in 2020, there isn't going to be any deal-making for the rest of the year, we're not going to have any IPOs. And of course, what happened, we had the Snowflake IPO, probably before the end of the year we're going to have the Airbnb IPO. So, yeah, just one of the many things I was wrong about.

But let's flip it around, Ron, it's a time to be thankful. What's a stock you are thankful for?

Gross: So, both, personally and professionally, I am thankful for Nike (NYSE:NKE). I personally owned it since 2015, more importantly, it's the second biggest winner on the Total Income scorecard with Apple (NASDAQ:AAPL) being the first. We recommended Nike back in 2017 October, since then it's up 170%, beating the market by 120%. And I still love it for all the same reasons we recommended it. It's a global marketing machine, generates more than 50% of its sales internationally; that space is growing quite a bit. Athleisure, I hate that word, but it still remains a huge trend. The previous CEO, Mark Parker's move into multi- or omnichannel, sometimes we call it, distribution has been really successful. John Donahoe is continuing to strengthen that distribution, including really solid digital growth, especially during the pandemic. Last quarter digital sales were up 82%. I don't expect that to continue, but still they've done a really fine job.

Interestingly, we were just talking about dividends, 18 consecutive years of increasing its dividend, including in 2020, which is very impressive, when lots of folks are cutting or suspending their dividend.

Hill: Jason, what about you?

Moser: Yeah, when we talked about on the show here over the year, and I think it was actually my radar stock last week, Chris, but Cerence. You know, this is a stock, I'm very thankful for what they've been able to do for our members this year so far. Cerence, if you recall, it's the conversational- and visual-based AI, artificial intelligence for the automobile, that's the market they pursue. And the company was spun-out of Nuance Communications back in October of 2019 left to kind of go on their own, because they focus on such a specific market there.

And the stock is up over 270% this year, it's the second-best performer in our Next-Gen Supercycle service so far, it's one of our top performers in our Augmented Reality service. Really, really happy that we were able to get it into those services and our members have been able to benefit, because I really do feel like the automobile, with the proliferation of technology and 5G, and you know, there's all of this talk of self-driving cars, I mean, this conversational- and visual-based AI is going to become more important as time goes on, and Cerence is really leading the way. I mean, it's got big relationships with all of the majors out there in the automobile market. They just recorded another great quarter. Record bookings backlog of more than $1.8 billion. Grew revenue for the quarter, up 21% from the previous quarter. I think sequential growth is worth noting this year, in particular, given the state of the economy with COVID and everything.

But one of the points I've been keeping an eye on with Cerence, because they do a good job of selling that technology into the car, and that's a bit more of a one-time sort of revenue boost, but they were looking to sort of extend that, create a bit more of a recurring revenue with some sort of SaaS based models, and they've proven that they can do that through their Cerence connected services, they're finding more and more of these big automakers that are signing on for a continued relationship with services provided by Cerence.

So, the stock has done really well. I think there are still plenty of opportunities, it's still a small company, and obviously a very big market. So, very thankful for Cerence this year.

Hill: Well, Jason, since you created the War on Cash basket a few years ago, I know you'll appreciate the fact that the stock I'm thankful for is PayPal. With the acceleration, shall we say, we've seen this year toward digital payment systems, probably not a surprise, but still pretty great that shares of PayPal up 80% so far in 2020, and it's hard to see this trend reversing.

Moser: I couldn't agree more.

Hill: We are thankful to the radio stations across America that broadcast our show every week. We are also thankful for the man behind the glass, Steve Broido. Let's just bring him in real quick here.

Steve, every year we do the show, it's the one show where we have a sound effect. [gobbling sound] I don't want to talk out of school, but I'm assuming the budget is pretty high for the turkey sound effect.

Steve Broido: Incredibly high. Yes, incredibly high. I can't even tell you how high.

Hill: [laughs] All right. Let's get back to the theme of the week. Ron Gross, turkey stocks. These don't have to be stocks that you own, these just have to be stocks that are such turkeys, you go out of your way to tell someone, no, really, you want to avoid this one.

Gross: So, so many to choose from, but I'm going to go with Blue Apron Holdings, [gobbling sound] one of many meal kit delivery services. Now, the pandemic certainly has helped their business as we're all home cooking for ourselves, we're ordering in. So, business has been relatively good, but that's not saying much.

In the third quarter, revenue was up 13%, still not able to turn a profit. Orders and customers actually fell 10% sequentially; that's from the previous quarter. In its defense, it did generate a whopping $1 million of profit in the second quarter, but since then, into the third quarter, results have deteriorated. In August, they did a follow-on public offering, raised $33 million to shore up their balance sheet. It was very necessary that they got that done.

Now, they had been undertaking a strategic review, with most investors thinking either a sale or a merger was coming, but now with the stronger balance sheet, they've completed the review and they've taken no action whatsoever. So, it looks like they're going it alone. At least for now, I wouldn't touch it.

Broido: Ron, haven't people been eating from home recently, am I missing something?

Gross: [laughs] Yes, business is up, revenue is up 13% in the last quarter; that's as good as they're going to do.

Hill: [laughs] Jason, what about you?

Moser: Ron is calling a top. That's funny. I actually, I had considered looking at Blue Apron. I am going to go one, this might be a little bit more, I don't want to say "controversial" but it feels like to me, with Slack (NYSE:WORK), golly! with Slack, it really feels like this is a Twitter story unfolding here. [laughs] I mean, one way you could see the potential, and you can see how it can be helpful, and you can also see how they continue to spin their wheels, and ultimately not do right, I think, by users. The platform, as they try to change it, becomes better, it seems to become more cluttered and confusing, and it's just not as productive as it could be.

And, you know, I was kind of astounded to see this. And we're going to go ahead we're going to talk a little bit about Microsoft Teams, because I think that's going to be one of Slack's concerns. But Microsoft has actually outperformed Slack this year, and that's kind of astounding to think about when you think about where we are in our workforce today. I mean, Slack should be one of those companies that's having its Zoom moment and it's just not.

And I will say, having tried out the Microsoft Teams product myself, I personally think Microsoft Teams is just a far better product. If I had to rank Microsoft, Zoom and Slack, Slack would come in last every time. And I think that's disappointing, because it could be so much more. Perhaps they get their house in order, and perhaps they become a little bit more innovative and streamline the platform and make it a little bit easier to use, but I mean, it's just, there are plenty of businesses out there using Teams, which is becoming a concern. I saw in the most recent Microsoft call, Teams now has more than 115 million daily active users. And the real problem for Slack, I think, is that Microsoft Teams is something that all of the really, the big companies are really going all-in on.

And so, it's just, you know, it feels like Slack could do so much more. Maybe they do, and maybe this turns out to be a bad call here, but it's not a company that I would feel comfortable investing with today. The growth is slowing down, they still aren't bringing anything down to the bottom-line, and from a user's perspective I just find it less than stellar.

Hill: I thought you were going to say, the real problem for Slack, when it comes to Microsoft Teams, is that Microsoft is basically giving it to people for free.

Moser: Well, that too, Chris. I mean we could go on and on and on, but we only have so much time for the show, right.

Hill: I feel bad for the turkey stock [laughs] I'm about to mention, because it is a business that has been linked with the Thanksgiving holiday in American culture for decades, but Macy's, [gobbling sound] to quote our friend and colleague Bill Mann, as he mentioned on a [laughs] recent podcast, Macy's is lost.

In 2020, we've seen big, established bricks-and-mortar retailers do an amazing job, and I'm thinking primarily of Walmart and Target, they've done an amazing job of ramping up delivery and curbside pickup, and Macy's just hasn't pivoted. And it's not to say that they're going out of business immediately, but I just think until they can figure out what the future looks like for them, that is a stock I would avoid completely.

A couple of years ago we started doing a new segment on our Thanksgiving Special, a little thing I like to call, not at the table please. You know, sometimes you get together with extended family and there are just certain topics, it's like, can we not talk about that, just not at the table. So, keeping this to business and investing, Ron, what is a topic you just don't want to talk about at the table this holiday season?

Gross: If I hear the words "stock split" I'm going to get up from the table. I don't want to hear [laughs] one person say how excited they get when a stock they own splits or that they're hoping a stock they own splits. Stock splits are a bunch of nothing, they only seem great lately, because people don't understand them and people dive into the stocks, sending the stock higher. Stock splits don't change the company, they don't change the market cap, they theoretically increase liquidity, but the stocks that have split lately were plenty liquid beforehand. And finally, with more and more brokers offering fractional share trading, stock splits are not needed to make high priced stocks like Apple more affordable.

Hill: But more is better, Ron.

Gross: I said don't say it. [laughs] Don't make me get up.

Hill: I'm not saying the "two word" phrase, I'm just saying, don't you agree that more is better?

Gross: More is always better. And I do have a bone that's not at the table, if we have time, but let's see what Jason has got.

Hill: All right. Go for it, Jason. [laughs]

Moser: Well, OK, so I will say, let's go ahead and put stay-at-home stocks to rest, OK. I mean, it's been fun, we've had some good times during a tough year, folks, OK, but I think its time is over. And listen, stay-at-home stocks, it's not you, it's me. I love you, but I'm just focused on the big picture here, and it's getting a little bit annoying how the financial media will, sort of, ebb-and-flow with this stay-at-home stock narrative based on the vaccine news on any given day. Let's talk about the stocks that are going to serve us well when we're at home and the stocks that will serve us well as we, you know, move forward post-pandemic.

And folks may remember, I had put together a stay-at-home stop basket earlier in the year for one of our Fool events. And, listen, we had a lot of fun doing it. It was PayPal, Microsoft, Domino's Pizza, Teladoc Health, Etsy, and Spotify, they're all doing wonderfully, the basket is returning 33% versus the market's 16% or so. But the key thing that all of these businesses have in common is that they're wonderful businesses even post-pandemic. Once all of this stuff is over, I would still be happy owning any one of these six businesses. So, let's not focus so much on the stay-at-home stocks, let's find those stocks that are going to serve us well staying at home and also serving us well post-pandemic as we move forward.

Hill: I think every four years this is what I don't want to talk about at the table, and it is the next administration. Please don't ask me about stocks that are going to do well in a Biden Administration. Just like four years ago, I didn't want to talk about stocks that are going to do well in a Trump Administration. Let's avoid that conversation. Let's avoid those articles, because there will be those articles. And you know, it's kind of like a cousin of what you just said, Jason, like, no, the businesses that are going to do well regardless of who is President, those are the businesses you want to be invested in.

Ron, we got a minute left, you want to give a bonus -- not at the table please?

Gross: I would love to, Chris. I don't want to hear one person talk about how easy it is to day trade on the Robinhood brokerage platform. Because you know what, [laughs] it gets me really riled up. I love that people are investing, especially the millennials on Robinhood, but I think they're learning some very dangerous lessons, and let's just cut it out.

Hill: Ron bringin' the heat this year. I mean, is it just me, Jason?

Moser: No, I think he's right. I think in conjunction with that, we ought to introduce, perhaps, a sports betting segment, right? I mean, we got a few weeks left in the NFL and sports betting is becoming legal everywhere, let's share with the rest of the world our bets. Because if they want to day trade, listen, I'm telling you betting on games is a lot more fun and you'll probably have a better success rate.

Broido: Ron, I think Kevin Costner did great in that movie. [laughs]

Hill: The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. It's made The Wall Street Journal best-seller list for nonfiction, and it's already been translated into more than 20 languages. When we talked earlier this Fall, I started my conversation with Morgan by asking him about the genesis of the book.


Hill: 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 mean, I remember seeing that and thinking, even for you, that was [laughs] a 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. I mean, for me, that 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 try and 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? How can I get into each one of those points in 500 words, something like that? So, that was, kind of, the genesis of that.

And once that did really well, over a 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, they 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, like 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 also [laughs] 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 in generations for generations. Your parents taught you, your grandparents taught them, and so on. There's this generational knowledge transfer that takes place. But for saving for retirement, which is what the vast majority of the financial industry is, that wealth knowledge 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. And 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 such 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 the ...

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 and 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 parent's 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 parent's 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 that we as entire generations are still trying to figure it out as we go.

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 trader 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 Sept. 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 than 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 that 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, it 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 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, you know, 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 four 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 September 8th, 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: Since we recorded that interview the book is now an international best-seller. If you're looking for a gift this holiday season that will pay dividends for years to come, wrap up a copy of The Psychology of Money.

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 Steve Broido, our Producer is Mac Greer. I'm Chris Hill, thanks for listening, we'll see you next week.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.