Previous Great Quotes episodes have featured everyone from Shakespeare to Dr. Seuss. But in this episode of Rule Breaker Investing, we're pulling from one of the best contemporary financial writers of our time. So contemporary that he's here with us as a guest on the show! It's best-selling author and forever-Fool, Morgan Housel.

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.

10 stocks we like better than Microsoft
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Microsoft wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks


*Stock Advisor returns as of June 7, 2021


This video was recorded on June 1, 2021.

David Gardner: Great Quotes has been running on the Rule Breaker Investing podcast almost as long as my five stock samplers. The first episode in the series was December 2015. Over the years, I've covered a motley array of Great Quotes, from Shakespeare to Dr. Seuss. Well, this week it's Great Quotes, Volume 13. For this edition, I thought it would be wonderful to feature a set of five outstanding quotes from a living person, someone very much alive, not just on this Earth, but in the minds of many Fools. You may have grown up reading [email protected]. More recently, Morgan wrote the best selling book, The Psychology of Money and works for the Collaborative Fund. He also continues his long term affiliation with The Motley Fool, often speaking at our member events and well, this week's podcast is only the most recent cameo. Because I got to thinking, how notably quotable is Morgan on the subject of money and investing? And the answer is "Very." He's one of the great writers of our time on the subject. I'm honored and delighted to have Morgan Housel join me for his Rule Breaker Investing podcast debut, featuring five of his own best quotes. Great Quotes, Volume 13, the Morgan Housel edition, only on this week's Rule Breaker Investing.


Welcome back to Rule Breaker Investing. I think it's arguable that this might be the greatest month in this podcast's history. Hear me out here. Last week Telling Their Stories, Volume 3 with Aaron Bush and Tim Beyers. You've already heard that, I hope you loved it. This week, Morgan Housel joins me to go Great Quotes, Volume 13, five of his best most memorable and important quotes. Next week it's going to be my 30th five stock sampler. It's going to be my last five stock sampler. Then the week after the fourth week of June, The Market Cap Game Show with returning stars Aaron Bush and Emily Flippen. Well, I'm rubbing my hands together about the month of June 2021 for the Rule Breaker Investing podcast. Listeners, I hope you are too. Of course, it will all end with June 30th's June Mailbag. If you have any thoughts during or after my conversation with Morgan this week, I know we'd love to hear from you, our email address is [email protected]. You can always tweet us at @RBIpodcast on Twitter and maybe I'll feature you at the end of this month. Well, without further ado, I think a long time Fool, who really needs no introduction to the vast majority of the listeners of my podcast here, is Morgan Housel. Morgan, great to be with you this week.

Morgan Housel: David, good to see you, good to hear from you. It's been a while. I always love being here.

Gardner: Thank you very much and I'm so excited about the success of your book. I don't think anybody, at least anybody who knows you, or has seen your work at The Fool, at Collaborative Fund. Of course, all of the many columns that you've written and shared with the world, there is no one surprised by your success. I don't think, I assume. Maybe I'm going to ask you to be a modest briefly here, Morgan, but did you expect your book to be a success?

Housel: Well, I'll be more than just modest. I will be 100% honest. I will say every book is like a seed stage start-up. Even if you do everything right, and it's a great book, and the writing is Christmas good, 99%, literally 99% will not sell that well. Just like in the seed stage start-up, you can be a talented founder, have a great start-up idea, hire the best team, and it's probably not going to work. The odds are just stacked against you. You have to know that when you write a book going into it. This is true for social media posts and whatnot. That 90% of virality is luck. I really believe that to be true. Some people have a higher base on their Twitter account that their posts are going to get more attraction. But really getting something to take off has an element of luck behind it. Maybe luck is not the best word, but some element outside of your control. When I wrote this book, my target goal that I really wanted to get was 25,000 copies sold. My super-duper stretch goal, blowing out the doors will be 100,000 copies. I actually didn't think 100,000 would be possible, but we just crossed a half a million two weeks ago. It definitely did way more than I thought. It's cool to see, it's fun to see, but no, I definitely didn't see it rising to this level.

Gardner: I'm so excited for you and I'm excited for our world, because the world is learning. It's learning about the biases that we have sometimes in our heads, not just about money, but about life, but it connects with money. A lot of us may not have heard the best from our parents. Not every parent knows how to talk about money with their kids. A lot of us need some help thinking about thinking, especially thinking about thinking about money. Morgan, you're making the world smarter. You know that connects so much with us at The Motley Fool trying to make the world smarter, happier, and richer. That's what you and I are going to do this week, because I'm so excited for you to bring on five quotations. This is the Great Quotes series. On my very first Great Quotes series, I rocked Jerry Garcia and Antwan de Santa Tzu Perry. I did once do a full theme around Warren Buffett. Once before, I just had one person with his quotes, but Morgan, you are right in that very tradition. Here with Great Quotes, Volume 13, it's the all Morgan Housel edition. Without further ado, I say let's get started. Quote No. 1, shoot.

Housel: "Doing well with money is not about what you know, it's not about where you went to school or how smart you are, it's how you behave." This, I think, is really the basis of my book, that doing well with money is not about how smart you are. It's not about the sophistication of the forecasting models that you might use, how good you are at math, how good you are at economics, how good you are at finance. You can have a PhD in finance from MIT and know all the formulas, know everything there is to know about investing, but if you don't have control over your behavior, over your relationship with greed and fear, over your ability to take a long-term mindset, over how gullible you are and who you trust, who you seek information from, you're not going to do well at investing. That's crystal clear. On the flip side of that is that you can be someone without any formal financial education, no formal financial training, no connections, no background, no industry experience, and do very well at investing. If you master or have some grasp over the behavioral elements of investing, that really matters. There aren't many other fields that are like that. Like, it would be impossible to say that somebody who has no medical training, no medical experience, no backup could perform open heart surgery better than a Harvard trained cardiologist, that would never happen. But the equivalent of that does happen in investing. 

I think the basis of The Motley Fool, the history of The Motley Fool is almost devoted to that idea that you don't need to be an industry expert in your high tower with all your expert connections, your insight information to do well in this field. I think again, that can be confusing for people because there aren't many other industries for which that is the case. Because that's the case, I think it's often left out when we're teaching investing at the academic level, at the professional level. If you're going out and getting your CFA, your chartered financial analysts, the gold standard credential in investing, it's very technically based. It's the formulas, the data. I'm not saying those aren't important. There's another element of investing, the behavioral side. How you think about greed and fear and risk is so much more important than anything that you can know or be taught or learn in school in the traditional sense.

Gardner: I'm going to read the quote again. In fact, I think I'm going to just reread each one, because I just want to pound this home for our listeners. "Doing well with money," Morgan writes, "is not about what you know, it's not about where you went to school or how smart you are, it's about how you behave." Reflecting on that quote, Morgan, it's funny for you to start with, it's not about what you know. You just pointed out a great example, you can't do open heart surgery without really knowing that, but isn't it interesting that it's not about what you know, it's about how you behave. Most of us would think that what you know does one-to-one lead to how you behave. Where is the disconnect?

Housel: I do think there is an element of this idea being ingrained in some people's personalities. My view, and I'm making these numbers up, but I feel like they're directionally right, is that 10% of people do not need any help with their investments. They can do it on their own without any training, they exited the womb understanding compound interest and how businesses work. They just get it intuitively. Another 10% of people cannot be helped. They're compulsive gamblers, no matter what you tell them, they are always going to want to day trade penny-stock and buy lottery tickets, etc. Then 80% of people want and need good advice. Again, I'm making those numbers up, but I feel like that's directionally right. Inherent in that is that there is an element of this as ingrained in some people's personalities about doing well at investing. Some people naturally get it, intuitively get it, and others don't. I do think there are some things that you can know and be taught that improve your investing behavior. For example, the history of market corrections, of market declines, the frequency and the magnitude of these declines is something that I think even professional investors often underestimate and don't fully appreciate. That is a type of historical data that if you are familiar with it and analyze it, then once you're comfortable with that data and you're familiar with it, you can say, "This is actually going to change how I think about declines." 

When the market falls 30%, when my portfolio falls 40%, maybe 50%, it's not fun. I don't enjoy it. I don't look forward to it. But if you have the historical context, you could say, this is actually pretty normal, this occurs, this does not preclude good long-term returns after, and this is actually the cost of admission that I need to be able to put up with to enjoy those long-term returns overtime. That's an example of something that you can be taught and learn, but it actually just improves your behavior. It's not necessarily an analytical skill to be patient and to react to these declines with a little bit more equanimity, that's a behavioral skill. It's just not something that you can really measure or summarize on a spreadsheet or with a formula.

Gardner: Well said, let me go with one additional angle before we head over to quotation No. 2. It's fascinating to me that when we talk about learning, investing, the schools that were falling back on having to talk about, you mentioned CFA, getting your CFA. The CFA Institute, multiple levels to that CFA. Another one that people often think of is the MBA, get your masters of Business Administration. Neither of those is actually investing. So far as I can tell, there is no investing school or investing degree. Now, I think that probably at a few colleges, there's a great investing teacher or investing department, but isn't it interesting that you can definitely specialize in med school, you can go to medical school and learn the pulmonary, I don't know, dark arts, you can study almost any aspect of human physiology within medical school. I wonder, Morgan, are you aware of investing degrees or an investing school out there?

Housel: No, and I'll tell you why. I think there's a really important reason why. It's because the skills that you'd need to be a good investor are not complicated. They're not even that difficult, but they're hard to teach, and they're hard to test for. In the school setting, if I'm a teacher and I have a semester-long class and I need to give my students a grade from A to F and I need a mid-term and a final exam, an exam with questions, the skills that you need to be a good investor are hard to summarize in that format. What they end up teaching in school are the formulas, the data, because you can test for those. It's easy to create an exam that I can grade and test for those. But how do you grade for, do you have a good relationship with greed and fear? Because that's what's important in investing, but how do you test for that? It's a really hard thing to do. This is why there's also all these other important life skills that don't get taught in college. How do you become a good parent? A good spouse? Those are the most important life skills that exist, but you'll never see those in college because you can't teach and test for them, so you end up learning about chemistry and physics that you can test for. I think that's why it doesn't exist, but what are the schools of good investing that exist? One is experience. I think that's the only good one that exists. Others are various media platforms, whether it is The Motley Fool or something like Twitter. Both of those are examples where over time, just being surrounded by a community of like-minded people who are going through the same things that you are, asking the same questions that you are, have a different view of the world that you do, so they can add different input that you hadn't thought about before. Though, you combine that with experience and that's the school of investing. It is not a credentialed organization that you have to pay $70,000 a year for, but that's where you actually learn how to invest.

Gardner: Great analysis, well said. Morgan, let's go on to quotation No. 2.

Housel: "Controlling your time is the highest dividend that money pays. The ability to do what you want, when you want, with whom you want is priceless." Now, this is not necessarily about investing, this is about money, but this is, I think, really important in that the purpose of investing, the purpose of money is to give yourself a better life. That I think is pretty universal. What a good life is is different, from person to person, but if there's a common denominator, that's what it is. What people say is "Well, what's the purpose of money?" The snap judgment, the knee-jerk reaction, for 99% of people, is you're going to use money to buy stuff. You have more money, you can buy a nicer car, a bigger home, a fancy watch, nice vacations, etc. All of that is great and fine. I don't want to diminish that in the slightest because I like nice homes and nice cars as much as anyone else. But there's another thing that money does and I think is so easy to overlook. That actually brings more people, the greatest number of people, the greatest amount of lasting and enduring joy in life, which is using money to give yourself a sense of independence and autonomy and controlling your schedule. Just waking up every morning and being able to say, "I can do whatever I want today." Even if most of the time what you want to do is wake up and go to work. I'm not saying just because you're independent, you retire necessarily, but you're just doing what you want, when you want. If you can use your money to do that, I think that's something that will bring you a lasting level of joy because everyone knows.

It's cliche to say that people get used to the nice stuff. You buy a really nice car, it feels good for a month, and then you're looking at the next level up that you might be able to afford in the future. All the joy from materialism, it's not as bad, and it's not that you shouldn't chase it so to speak, it's just easy to overestimate. Whereas the joy from independence is easy to underestimate. I think there is a sense of even doing the same thing that you've always done, but doing it on your own terms, doing it because you want to do it, and not doing it because someone else is making you do it brings a lasting level of joy. 

There's a story that I'll tell about Franklin Roosevelt, who, when he was five years old, told his mom that he didn't like his life because he was dictated by rules, that every minute of his day was his mother and his teachers and his governors saying, "Franklin, it's seven o'clock, this is what you have to do. It's three o'clock, this is time to do this." He hated the rules, the structure. His mom told him, she said "Franklin, tomorrow you can do anything you want. You're on your own schedule, total independence, tomorrow is your day." His mom wrote in her diary the next day that FDR did the exact same routine that he normally would do, but he did it on his own terms. Just the fact that he was doing it on his own terms, because he wanted to do it, he did the same thing. He woke up and he went to school, and he did his chores, but he was doing them on his own terms. There wasn't someone else telling them that he had to do it. I think independence, even if you're doing the same thing, you're going to the same job, the fact that you're doing it because you want to do it makes all the difference in the world. This just gets to the idea that saving money, money that you don't spend, just money that you accumulate in savings and investments over time that you're not spending, and you might not even have a plan to spend it. What's the purpose of that? What's the use of that money if you're not going to spend it? That's a common question. The answer is that money, that wealth that you're building up and not spending, gives you independence and autonomy. That is, I think, one of the greatest joys that we can ask for in life.

Gardner: That's wonderful. My schoolboy study of science, specifically physics, ended somewhere in 7th grade. I opted out of it in high school and managed to not have to take any in college. But I do remember the concept of potential energy and kinetic energy. To apply that schoolboy understanding of physics to what we're discussing right now, Morgan, it seems to me that money is potential energy, and the more that you have, the more opportunity you have. You have an opportunity to put a kid through school, you have an opportunity to take a trip around the world with your three best friends, you have an opportunity to retire early, you have opportunities. When you give money away, you're giving away potential energy to somebody else or to an organization. I love that concept. I've always operated off of that ever since learning about potential energy and then translating potential energy, inevitably, into kinetic energy. Looking back over your quote, I want to say it again now, Morgan, "Controlling your time is the highest dividend money pays." The ability to do what you want when you want, with whom you want, is priceless. Then that particular quotation, just for the fun of it, I don't know how intentional the word was for you here, but you used the word dividend. That's a fun word to think about and to tease out in our conversation around this quotation. Because dividend is not something that I necessarily shoot for or have as an investor. I am glad when a company has enough profit that it can pay some additional out to me as a shareholder in the form of a dividend. As we get older, we probably appreciate income and dividends. Morgan, controlling your time, you didn't say is the highest benefit of money. You actually make it a dividend payment. Was that intentional and does thereby hang a tail?

Housel: It was intentional, yes. Because look, if you own stock in Microsoft, they pay a dividend every quarter. Basically, what they're saying is Mr. Shareholder, Mrs. Shareholder, thank you for your service, here's some money for sticking around. I think wealth, even that doesn't pay a quarterly cash dividend like that, is doing the same thing. It's just invisible. If you have money saved up, the money that's giving you independence. It may not be actually writing you a check every quarter that it's deposited in your bank account, but having that wealth is it's giving you options. It's giving you options to do other things with your life, to take away worry from your life, to be able to sleep better at night, to give you options about where you want to live, who you want to work with, what you want to do. That, I think, is a realistic dividend. Having options and choices is a hidden dividend. It's not tangible most of the time. It's not your quarterly dividend check, but it's definitely there. If you spend some time thinking about what you really want out of life, what makes you happy, I think that dividend might be the highest dividend yield that you have in your portfolio, just giving yourself options and choices to do what you want in life.

Gardner: I also want to point out, I think it was on a recent mailbag or maybe it's something I saw on Twitter, but one of my fellow Fools pointing out that when he started a portfolio for his kids at an age at which they could start to participate and understand, he intentionally selected it might have been Disney, but it was intentionally a company that paid a dividend. Now, that's a little bit counter-intuitive in that usually the great growers of our time, which I try to load up in a kid's account wouldn't pay dividends. But he did this intentionally because he wanted his child to get the sense that they're getting free money, real money, that's added to the account. A little bit more exciting whether the stock goes up or down, free money coming in. There was a great reminder for a lot of us of the benefits of dividends, especially changing a child's mind or making that kid-folio a little bit more exciting.

Housel: I think that's great. That's the benefit of an actual dividend, is that it's tangible. You can see it. It's money that you can see. But some of the biggest dividends in investing, whether it's a growth stock that's reinvesting the money or controlling your time, are a little bit less tangible. You have to go out of your way to think about them and find them.

Gardner: Yeah. Before we move on to quotation No. 3, Morgan, let me ask you a question. If it's too personal a question, please just dodge it. You'll be good at that, I'm sure, I'm good at that too. But the question is basically, are you at a point in your life now where you are financially independent? Are you exhibiting, are you feeling that autonomy? Are you near it, past it? If you've tasted it, could you tell us something about what it tastes like for you?

Housel: I would say independence exists on a spectrum. It's not just, do you have enough money to retire today? There's a huge spectrum of independence. Having enough money in the bank that you can work your way through a medical emergency, work your way through a job layoff and not have to take just the first job that comes your way, you can wait and take a good job that comes your way. That's a level of independence. Do my wife and I have independence? Yes, but it's on a spectrum. Some people are more independent, some people are less. The independence that we've gained over time that is greater today than it was five or 10 years ago, I genuinely think is one of the few things in my life that has led me to sleep a little bit better, made me a little bit less anxious. There aren't many of those things in life that are like that. If I compare myself today in 2021 to where it was in 2011, I think if I'm a little bit less anxious today, that's the reason. I have a little bit more financial independence than I did back then. It's one of the things that I value most.

Gardner: Well said. Let's move on to Morgan Housel's great quotation No. 3.

Housel: "The most important part of every plan is planning on your plan, not going according to plan." Now, I think I came up with that many years ago, I think when I was still at The Motley Fool full-time. But I think the last 18 months -- whatever we're calling it now -- of COVID-19, has really reinforced this. Because look at someone who is really interested in the economy and the mechanics of markets and the economy. People in my field, so to speak, spent the better part of the last decade debating, sometimes arguing, over what were the biggest risks to the economy. What was going to cause the next recession? That's what takes up all the oxygen in the economics industry. We tend to personify the risks that are out there. People asked, what's the biggest risk to the economy, was it Barack Obama? Was it the tax hikes, the stimulus packages? Was that the biggest risk? Was it Ben Bernanke? Was it all the money printing after the financial crisis? Was that the biggest risk? Was it Donald Trump? Was he the biggest risk? That's what took up all the oxygen in the industry. It's almost comical to think about that now because now we know in hindsight that the biggest risk to the economy by an order of magnitude in a completely different universe was a virus that nobody was talking about. It was not on any economic forecast, no analyst conference call. No one was talking about it until the moment it arrived and it started wreaking havoc that did the most economic damage of anything since the Great Depression. 

I think that idea that the biggest risk is what no one's talking about, the biggest risk is what no one sees coming, is always the case in economics. Whether it was Lehman Brothers, who couldn't find a buyer in 2008 that started their financial crisis, or September the 11th or Pearl Harbor, even the Great Depression itself is something that a lot of historians have pointed out effectively no one saw coming. Did they see excess? Yeah. Did they see a depression coming? No. It's always the case that the biggest risk is what you don't see. Inherent in that is when we're at the individual level, when we're making our budgets for our family, a budget for the companies that we work at, thinking about our asset allocation, realizing that the biggest risk of your future, of all of our futures, is something that you David and myself and everyone else cannot see coming. We cannot even think about it right now. I mean, if you and I were talking in 1998 and we're talking about the biggest economic risks of the next decade, no one would have said a terrorist attack in 2001. That's always the case. Carl Richards, a financial advisor, has this quote that I love where he says, "Risk is what's left when you think you've thought of everything." I always really appreciate that at the personal financial, family financial planning level when thinking about our own budgets and our own asset allocation, that I can think about the future in my planning when I'm planning for retirement or whatnot and think about, OK, here are the biggest risks. What's inflation going to be in the future? I can think about risks, but the biggest risk is what no one's talking about. If you grasp that, then the takeaway is, having a little bit more room for error in your individual financial planning. 

Realizing that if you realize that you can't see all the risks that are in front of you, you need to prepare for risks that you're not even thinking about, that you can't even contemplate. Most of the time, when the economy is going well, the stock market is doing well, most people will say, "I don't want to hold cash because that's a burden on my growth. That's taking away from the growth that I would have." I think for most people, once they hit the once in a decade period where the world falls apart and surprises them, like last March let's say, they realize that actually the value of holding a reasonable, appropriate level of cash, that they were actually earning a higher "Return on that money" than they realized because when they needed it and they had the options that came from it, it was the most valuable asset that they had. If you fool yourself into thinking that you can see all the risks that are coming, you're never going to have enough room for error in your financial plan to deal with those surprises in life.

Gardner: I've seen Nicolas Taleb popularize the notion of black swans. The idea that you can't really plan for everything. In a world of white swans, there's always going to be that black swan that pops up, whether it's COVID, whether it's 9/11. But assuming you generally agree with that, Morgan, it seems to me what you've just said is while COVID might be a black swan and 9/11 might be a black swan, the concept of a black swan recurring from one context to another is regular enough that they're actually in a way white swans.

Housel: I think that's right. I think if you look historically about every 10 years, not exactly every 10 years, but roughly once per decade, the world breaks in a way that almost no one saw coming. COVID-19 was definitely that, September 11th was that, you could say the fall of the Soviet Union was that. World War II, the Great Depression, there's all these events that very smart people by and large didn't see coming that changed everything when they occurred. I think it's maybe tempting, it's comforting to think that those events like 9/11 and COVID are hopefully a thing of the past and in many ways maybe those specific events might be a thing of the past. Are we ever going to have a terrorist attack that mimics 9/11 in the United States? Maybe, but probably not. But we're going to have surprises. We're going to have national security threats in the United States. They're just going to take a different form. There's a great quote that I love from Daniel Kahneman, who's a psychologist who won the Nobel Prize in Economics, where he said, I'm paraphrasing here, he said "When you are surprised, the correct takeaway is to learn that the world is surprising." It's not to look back and say, I was surprised by this event, so how can I update my view of the world to make sure I'm not surprised by that event again? When you are surprised the correct takeaway is to say, there are things that can happen in the world that I never saw coming that are going to have a big impact on my life and other people's lives. Again, if you grasp that notion, it just pushes you toward having more room for error in your financial planning.

Gardner: Boy, does that ever make sense to me. Here's the notable quotable. I'm just going to rock spontaneously in this conversation, the next black swan is a white swan.

Housel: That's good. I like that.

Gardner: Thank you. One other angle, and let me reread quote No. 3 once again, the most important part of every plan is planning on your plan not going according to plan, which again, feels like black swans and white swans to me, but I was thinking about that word "Plan" which of course you repeat, I believe, four times in that one sentence. When I announced my own transition a few weeks ago, I said, the plan is, there is no plan. I feel as if this is a Rule Breaker mentality. Maybe we're more improvisational musicians. We don't actually have a score that we're following. It's not classical, it's not rock, and maybe it's not just Rule Breakers. Maybe it's all of humanity. The better we're ready to improvise and evolve, the better we're likely to adapt and survive. I'm thinking, Morgan, especially with money, back to our key subject, your wonderful book, The Psychology of Money, I'm thinking again with you that these are all great reasons to have an emergency fund, to have money set aside six months worth of living expenses. One of the default personal finance 101 suggestions that we have made and anybody really who studies or advises around personal finance makes that six-month emergency fund because whether you ever use it or not, it's actually the principle of the matter.

Housel: That's right. Here's the psychology of an emergency fund. If you are gainfully employed and you feel like you have a lot of job security and the market is rocking, your portfolio is rocking, the natural reaction is to say, why do I need this emergency fund? It's an anchor on my net worth, it's an anchor on my compounding, I should be investing this money, putting it to better use. That's the mentality that pulls off everyone when things are going well. Then when things don't go well, which is going to be the case for everyone at some point, you're going to realize that that fund is actually the most valuable asset you own by far and I'll tell you why. We can get it into this next quote. I don't want to give away too much here. But the reason it's so valuable is that if you can make sure that you never have to sell the stocks that you do own, you're never forced to sell the stocks that you do own, that's when they're going to compound. The purpose of your emergency fund is to make sure that you never have to sell the stocks that you own.

Housel: When you realize that, that actually the "return" that you're earning on your cash it's actually huge. It's hidden. It's a little bit nebulous, but it's actually big. Because if by owning that cash that earns 0% prevents you from having to sell your stocks in March of 2020 then the actual return on that cash is like, maybe 10% or 20% in kind of theoretical terms, but in a very real sense as well.

Gardner: That is such an important insight. Thank you for sharing that. That's wonderful, and you're right. Quotation No. 4, which I'm looking for because you were kind enough to send them to me ahead of time so I know where we're heading, and it's almost like we set this transition up. Morgan, what is great quotation No. 4?

Housel: "Save like a pessimist and invest like an optimist."

Gardner: Love it.

Housel: This I think is really important because a lot of people would view optimism or pessimism as black and white. You have to be one or the other. There are obvious pessimists in the world, everyone knows who they are, there are pure optimists in the world, and I think there is a kind of internal mental struggle of people to be like, which one of those I am? I think most people will, maybe not most, but a lot of people listening to this will lean toward the optimist, and that's me, I know that's David, I think that's wonderful. I don't think though that being an optimist precludes having a pessimistic side of your personality. I think you need to learn how to straddle both. I'll give you an example of this at the business level. When Bill Gates started Microsoft in the 1970s, '74 I think it was, whenever, he was making probably the most optimistic bet that any founder, any CEO has ever made. In the 1970s, he said, "Everyone in the world should have a computer on their desk." That was the most swing for the fences optimistic bet that anyone has ever made. But at the same time, Bill Gates said at the time, he kept to this through his entire tenure as CEO. That he always wanted to have enough cash in the bank to keep the company running for 12 months with no revenue. Which is like the most pessimistic way to run a company. He was doing that because he knew that he was going to face huge competition, huge challenges, huge times when he'd have to pivot his entire product line. 

At the same moment that he was so optimistic about computers, he was so pessimistic about the realities of running a business in the real world. I think being able to get those two to coexist, to get optimism and pessimism to coexist, is so important to sustaining overtime. Charlie Munger has this great quote where he says, "The first rule of compounding is to never interrupt it unnecessarily." I think the only way that you can do that as an investor is like we said earlier, to make sure that the stocks you do own, you are never under any circumstances forced to sell them at an inopportune time. The only way that you can do that is if you have enough cash and have pessimism to where you are acknowledging that the short-term of everyone's life could be a constant chain of setbacks and disappointments, and regrets and recessions and bear markets and pandemics that you need to be able to survive financially, to stick around long enough for your long-term bets to actually work and actually pay off. Like we said earlier, when you hold that cash and everything is going well it feels like a burden saying, why am I doing this? Then once every 10 years or so, you'll say, "Oh, now I get it. Now I see why that was so valuable." I think that's why it's so important to learn how to get optimism and pessimism to coexist. You'll realize that there's a time and a place for both. Usually the difference between the two is pessimism in the short run, optimism in the long run. I think that's a healthy way to think about how the world works. I think once you can realize that those two are not mutually exclusive, but those two can and should live together, it opens up just a more realistic view of how the world works.

Gardner: Well, it's an integrated view and I really appreciate that. In my own experience, Morgan, I'll say, I think part of why I love my company and I think we're a great company, even though we're a private company that nobody has really invested in other than our employees, is because if you ever hangout around our finance department, you're going to be surrounded by very conservative, hyper vigilant accountant types who are like our Chief Financial Officer, Kerra McDonough or Ollen Douglass before her. All of our finance team is, even though they're lovely people and there's a lot of optimism in them, they're hyper vigilant. The investors at our company, those picking stocks, those helping run the services most prominently today, my brother Tom, and the many people who work right alongside him, are in fact optimists, they coexist at the same company, but they're basically an integrated right and left side of the brain all working together and it's just a smarter way to go. I'm a big fan of very hyper vigilant accounted types in your finance department and real opportunity takers, in our case, among investors, but for other people who might be in sales or biz-dev.

Housel: In one way to think about that is, Kerra, Chief Financial Officer, is ensuring that The Motley Fool will stick around long enough for Tom's optimistic stock bets to pay off.

Gardner: Really well put. One of the things I love to do as a fellow Fool is I love to reverse things and just see what it sounds like or feels like so, invert. Let's have fun briefly, Morgan and invert, great quotation No. 4. Save like an optimist, invest like a pessimist. Could you describe for me the movie that you see as I give you that one line plot, save like an optimist, invest like a pessimist. What happens?

Housel: I see someone who goes bankrupt and is bitter about it because they didn't have any fun going bankrupt. They eventually ran out of money, and in the process of running out of money, they didn't have any fun because there were pessimists to begin with, which is the worst of both worlds.

Gardner: In inverting that quote therefore, and seeing the dystopia that results, we can clearly see the truth of the quote as Morgan has presented it, and I love that line. One more angle before we move to our final quotation, Morgan, thinking about investing like an optimist. I do that and I support that. But I also want to talk briefly about how some people are playing with the stock market today, a game, if you will, that I hope will stop sometime soon. The Motley Fool really got its initial break by making up a penny stock that didn't exist and hyping it with a made-up online account and trying to prove a point that pump and dump penny stocks are not a real way to invest in any sustainable way, and while we did that almost 30 years ago as an April Fool's drug that got picked up by the Wall Street Journal and Forbes. These days I'm starting to see stocks that aren't just penny stocks being pumped and dumped. GameStop, AMC this week, most recently, Clover Health. I'll even say Wendy's, one of the people I follow on Twitter, Thomas Kaede @Thomas_K-A-E-D-E. I love this tweet from him today, Morgan, he said, "Almost made a big move on Wendy's today. But then my wife decided she preferred to eat somewhere else for lunch. Maybe tomorrow."

Gardner: Morgan Housel, what is your take on what's happening with the market and the games that I wish would stop?

Housel: I would first say, crazy speculation has always existed in the stock market. You can go back to the 1800s and find stories of crazy, sometimes fraudulent speculation occurring that pushed up the value of a nearly worthless stock overnight. That stuff has existed literally for hundreds of years. If there is something that is different now, it's that I think the barriers to entry to crazy behavior have been diminished. There's two things that caused it. One was the removal of trading cost of trading commissions that occurred at almost every brokerage account in the last two years. By and large a great thing because it made it easier for small investors to invest without having a lot of friction in their way. That's a good thing. It also made it much easier for people who are trading and speculating and not investing in companies, but they're just trading to sit there and hit buy and sell on their phone all day long. 

You see these stories, I remember last summer seeing a story that there was a robin hood trader, I think he was 19 years old that the Wall Street Journal profiled, who had traded, I think 19,000 times in one month. You do the math on what his day must be like, and it's just constantly pecking, buy-sell, buy-sell, and you can do that now because there's no trading fees. Even 10 years ago, you couldn't do that, or if you did that, you'd be racking up so many fees that it stood in your way. Now that that's gone, the barriers to speculation are lower. The other thing, of course, is social media and things like Reddit and the WallStreetBets forum. By and large, I am totally pro those kinds of endeavors. Motley Fool is in many ways that kind of endeavor as well. But it has opened the door toward those kinds of endeavors that are specifically designed toward speculation. The Motley Fool when it was founded and still to this day is one of those meeting areas, those chat rooms, if you want to call it, that's a bad word for it, but an area where investors can come together and discuss their investments. They're long-term investments. Once you create a Motley Fool of sorts for trading, and those exist for pure speculation, that's a different animal. Once you create one of those for something that is borderline fraudulent, or just intentionally creating a short squeeze on these stocks so that you can stick it to a hedge fund manager, that's a completely different animal that didn't exist even five years ago. This is a very new thing that we're dealing with, even if the idea of crazy behavior in the stock market has existed for as long as there has been a stock market.

Gardner: It has been pretty weird, in a lot of ways, maybe it was inevitable, but over time, it started out as trying to stick it to the man, I think. It was all about those hedge funds that are "evil". I'm not a big fan of most hedge funds. But let's drive them out of their short positions and let's use call options and things to accelerate driving them out of their short positions covering, and creating short squeezes to drive up stocks. It's been weird, but Morgan, it might be about to get weird or weirder when, since these are real world companies and these are real world dollars, even as ephemeral as a 60% daily move might be, some of these companies, launching secondary offerings, cashing in, some of the executives cashing out thanks to the great fortune and I'll assume it's not coordinated. I'm not sure that's the right assumption, but I will assume that this is just happenstance. This is just something funny that's happening out there on the Reddit discussion boards. It's not being manipulated, but maybe that's not the right assumption. But regardless, the real world effects that are coming potentially out of this could make the world yeah, even weirder. I have often said, make your portfolio reflect your best vision for our future and the wag at this point might wonder, "Is our best vision of the future more mall game retailers, and hanging out at movie theaters, paying $10 for popcorn?"

Housel: That's a great point. There is totally in alternative world in which GameStop and AMC are either out of business, or nearly out of business. But I think both those companies have raised money in the stock market, have raised capital because their stock prices have been so inflated by these meme investors. They're taking advantage of it and you can't blame them for that. But in a way, that's going to give those companies, maybe breath more life into them that keeps them in business. Not because they are justified from a customer standpoint they deserve to stay in business just because they've been able to raise so much money from the craziness that exists in the stock market.

Gardner: Investing like an optimist can mean a lot of different things. For me personally, I think for us at The Motley Fool, it is a beautiful word, invest. It comes from the Latin investire, that means to wear the clothes, to put on the clothes of like priestly vestments, the same Latin root. It's really like wearing the home team jersey to your game this weekend. Whether your team wins or loses, you're going to keep that jersey on, not just through a bad game or a bad season, but for years and years. That's for me what investing means. I do think that the opposite of investing, I guess, technically is not investing using logic. But for me the opposite of investing is trading. I don't think trading really relates ultimately to pessimism or optimism, it relates to speculation. When it is in such a hyper short-term focused context, it loses all meaning, and I tend to just tune it out, which is what I'm trying to do with the whole meme stock thing.

Housel: There's almost a sense of what trading is, is like hyper optimism of when I buy a stock or when you buy a stock, I think we're saying, "I'm pretty confident that over the next five, or 10, or 30 years, the odds of success fall in my favor." But if you're trading, you're saying, "I am very confident that the odds of success will fall in my favor over the next 30 minutes." That's not something that I [...] it's almost like extreme optimism that is so intense that it just pushes you over the edge.

Gardner: Really well said. I'm thinking about the NFTs and I'm thinking about other forms of cryptocurrencies. The ones that I like are the ones that feel real and real world and are going to matter 10 years from now. A lot of the things that I don't like, which is probably the majority of that sort of thing today are things where I think somebody is excited about because they think they can sell it to somebody else shortly for more. That's it.

Housel: It's just the greater fool theory of investing.

Gardner: Thank you, sir. Well said, I'm so glad we had that exchange. I was curious about your take on what's happening out there in the markets. Speaking of the market, what's the great quotation No. 5 from Morgan Housel?

Housel: "If markets never fell, they wouldn't be risky, and if they weren't risky, they'd get really expensive, and when they get really expensive, they fall." Now this, David, I think, is something that you and I might have a back and forth on this, because I think there might be a tinge of this that you have a different point of view on. But for me the real takeaway from this quote is saying, if the market falls, and it does, every stock will fall and fall big overtime.

Housel: It doesn't mean the market is broken, it doesn't mean something bad happened, it doesn't mean you screwed up, it doesn't mean you made a mistake, it doesn't mean that someone is to blame; it's a completely natural, normal, unavoidable part of how markets work. The entire reason that you can earn good returns in the stock market over a long period of time is because they are volatile in the short run. That's the cost of admission that you have to be willing to pay to do well over time. If markets were never volatile, if you didn't have to give anything up, if you didn't have to pay any cost of admission, why would they be so lucrative over time? I think when you view it that way, then again, when you have these big declines, like we all deal with from time to time, it makes it a little bit more palatable to put up with. Now, I think if there is an element, David, and I want your point of view on this is the idea that I use the word expensive, and that expensive does not preclude a great investment, if anything, it might be the indication that you're onto something and that a company is worth being valued that much. Maybe that word could be skewed differently, but to me, the big takeaway from this is realizing how normal and natural and inevitable big volatility is over the course of your career as a long-term investor.

Gardner: Well, and I think this is a great quotation, Morgan and I appreciate, and I love all of your quotations and what you've contributed this week. For me, it's as simple as one year out of every three, the market drops. That's been historically true for a century or more. Yeah, one year out of every three the market actually drops. Sometimes I've thought, oh, what a bad business model we have at The Motley Fool because for one third of the time, people are paying us money for us to give them advice and it's going to lose their money, one year out of every three. That doesn't feel good, that doesn't happen even for many cyclical industries, they don't have a situation upside-down where you're paying them and literally losing money as you pay them. But I think the good news for The Motley Fool and for any investor, and I'm not talking to the traders here this week, I'm talking to investors, is that two years out of every three the market rises, and three years out of every three on-average, they rise around 10% annualized. That is why in my [...], Morgan, I've made a lifetime commitment to the stock market. It doesn't really matter to me how we do in 1991 or 2008 or 1997 or 2015 because I'm in it to win it for my entire life. I have been from the start, I will be to the very end. That's another wonderful way, I think, to achieve serenity and not get so caught up in the movement of the markets, which as you point out with this quote, will sometimes get expensive and will inevitably fall.

Housel: I think if there's one thing that separates great investors from investors who do OK or do poorly over time is understanding that. It is understanding that volatility in the short run does not prevent or preclude long-term returns, even extremely good, successful long-term returns over time. I think that it's not complicated, it's not complex, but it's the single most important thing that matters to long-term investing success.

Gardner: I will say that word, "expensive," you're right. That does trigger me a little bit in this quote, and you would already understand why, and I think anybody who had listened to this podcast for a few weeks, let alone a few years, would understand that as a Rule Breaker, I specifically think that one of the great market blind spots that enables us as mom-and-pop individual investors to beat the averages are that a lot of professional people, going back to quote No. 1, Morgan, a lot of people who went to a great school and are very smart and yet aren't very good investors, it's because they pay too much attention to a traditional understanding of "Expensive." As it turns out, one of the truisms of my lifetime, anyway, has been the stocks that have looked expensive, ironically, fortunately, I figured this out early in life, ironically, are often not just winners, they're often the very best stocks of the generation. For me, as a Rule Breaker, I do admittedly look for expensive, now, not expensive markets per se, but specifically expensive stocks, and not just any expensive stock, but one that fits pattern recognition around where are the winners and where is innovation happening, and those things in my experience always look expensive.

Housel: I don't think there's ever been a super successful company that looked cheap during its entire run-up? It never existed. This is the point, David, I'm not ashamed to admit this, that 10 years ago, I didn't understand that view. I didn't disagree with it, but whenever I heard you say that, I would cork my head and say, "Why?" It went against everything that I have been taught, being most interested in value investing. I get it now, it makes sense. It does not mean that those stocks won't be volatile, it doesn't mean that at all. It might be that they are more volatile. If there's one thing that's changed in how I view investing over the last decade, it's probably something close to that; that it's impossible to invest successfully over time if you're just going to say, "What's stocks trade at under a 12 P/E ratio, those are the winners." It's just so much more complicated than that, there's so much more of a social aspect of why these companies are successful, why they deserve to be valued at this way. Especially, if you view the distribution of the economy as tail driven, a small number of companies, a small number of industries account for most of the gain, most of the improvement, then, of course, those are small subset of companies deserve to trade at premium valuations, those are the companies that are going to do well over time.

Gardner: Well, thank you for that, Morgan, and that was very kind of you to say. I do want to give too quick disclaimers, and again, for anybody who's a regular listener, you already know this. If you've been a Rule Breaker of vintage measured in years, you already know what I'm about to say, but two quick disclaimers: One is, if you take this approach saying expensive is actually a buy signal, it's not a reason to avoid, you have to be a, willing to lose and lose horribly and lose somewhat consistently, you have to be willing to be wrong. I have a lot of vagueness on my face that almost every five-year era, all the way through bear markets and bull at, I think I had more bad stock picks and more bad stock picks than anyone in Fool history. That willingness to lose, you have to have. The good news, the math of it, is you know Morgan, is the most you can ever lose is 100%. I've still never done that. But the most you can make is infinite. A few great winners wipe out, not just one bad loser, they wipe out all your losers and leave money on the table. So a, you have to be willing to lose many or not, and then b, my second disclaimer is that not every expensive stock is attractive, it is specifically to really fast review the five other traits that you went from a Rule Breaker before you get to the 6th, which is that you want people to think it's overvalued. We're only talking about top dogs and first movers in important emerging industries that have sustainable competitive advantages, excellent past price appreciation, good management, and smart backing, and a strong brand. If you find those five traits and everybody thinks that's expensive, that's where you should get excited. You shouldn't get excited about movie theaters, in my experience.

Housel: What's so interesting about that to me is that the math behind, if you make 100 stock picks, 80 of them can be really poor. The math behind that is so simple, it's just not intuitive to most people. I think that's why it's so overlooked. It's actually a really simple concept. But at the moment, in the trenches, so to speak, it's not intuitive to think that if you make 100 stock picks, you're going to lose most of your money on 80 of them or whatever the math might be.

Gardner: Right. I agree. I do want to make it clear in closing that I've never thought of it as just like let's roll the dice and a couple of these will win and everything else doesn't matter. Truly, every pick that I've made and every stock that any of our listeners might buy, I sure hope that you think it's going to win and you're aiming high to be right 60% of the time, as I've often said, even if you can't approach that, it's the right mentality. Even though it is true that minority of our picks will typically carry a whole portfolio if it's invested over the long term, the only term that counts, I still think you should always go in not thinking you're a crazy riverboat gambler who's going to roll double sixes three times in a row, at some point that's going to be what wins it for you. It's really much more the quiet, measured pace of just trying to find excellence; buy it, add to it over time, sell mediocrity, that's how we invest. 

Well, Morgan, it has been a few years since I started this podcast, this is the first time we've been together on it. I trust that we won't even let years pass, maybe months past before, maybe you'd agree to come back on. It was a delight to share this together.

Housel: This is always fun, David. I so appreciate our conversation. Would love to come back again.

Gardner: Thank you, Morgan, Fool on! Well, I hope you had half as much fun as I did. If you did, you had a great time this week. Thanks again to Morgan and those five wonderful quotations. It's really just wonderful thoughts, and each of them, more than one thought. I loved teasing out the conversation around each of those lines with my talented guest star. Well, next week it's going to be my 30th Five Stock Sampler. I'm not sure yet exactly what the five stocks will be or what the theme is, but one thing is for sure, it's my 30th, which is a big round number and it's very likely my last for reasons that anybody who's been paying attention over the last month would fully understand. My 30th Five Stock Sampler next week. In the meantime, have a great week. Stay Foolish out there, Fool on!