Motley Fool host Chris Hill recently talked with best-selling author Morgan Housel in front of a live audience about topics including:

• Why inflation is so personal and variable.
• Elon Musk's best product (hint: it's not a car).
• The power of incentives.
• The secret to 99% of Warren Buffett's success.
• Investing through bear markets.

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 video was recorded on September 24, 2022.

Morgan Housel: The vast majority of his net worth came in his elderly years. The takeaway from that for me is that look if Buffett had retired at age 60, like a normal person might, no one in this room would have ever heard of him. All of his success came in his 70s, 80s, and early 90s, and that's really important because we spend all this time talking about how he values companies. But the whole secret to his success is not that he's good at picking companies, it's not even that he's a good investor, it's that he's been a good investor for 80 years.

Chris Hill: I'm Chris Hill, and that's Morgan Housel, author of the international best-selling book, The Psychology of Money. When I interviewed Housel in front of a live audience, we talked about investing through bear markets, the power of incentives, and what he's working on for his next book. But I kicked off the conversation by asking about what he's encountered since writing The Psychology of Money.

I know that the number of copies that your book sold is surprising to you, so let's just put that aside. In terms of reaction to the book, whether it's from financial media, institutions, people you've met, what has surprised you the most in terms of the reaction?

Morgan Housel: One thing I think is interesting is a big theme of the book is that everyone's different and has different goals, and different risk tolerances, and different aspirations, different incomes, family situations, and because of that, no two people, even if you are the same age, same education, same information, are going to come to the same conclusion about what you should do with your money. How to invest your money, how to spend your money, there's no one right answer. It's not like Math where 2 plus 2 equals 4 for everybody, no matter who you are. Investing, it's a very individual pursuit. That's a big theme of the book. Now the last chapter of the book is called Confessions, and I lay out exactly, how my wife and I, what we do with our money. There's no numbers in there, but it's here's how we spend, here's how we save, here's how we invest, here's what's our goals are. Despite the book, up to that point, saying everyone's different, so many people were so offended by how I invest my money.

I really do think that there's this quote that I love, I'm going to butcher it, but it's when people spend more time on the Internet being exposed to other opinions, the anger they get that other opinions exist. I think it's true for investing too that even if you accept and know that everyone is different and comes to different conclusions, if somebody else's investing their money different from you are, it's very easy to view that as a slight on your own strategy. The number of readers who reached out and said, I like the book until that chapter, and now I can't take you seriously anymore, I thought was pretty interesting. It's pretty telling too that people take offense when others manage their money, spend their money, invest their money different than they do because they view it as a threat. I think they view as maybe an indication that maybe they're doing it wrong and that makes them anxious about it.

Chris Hill: I want to get to some things you've written recently, but first, a huge topic of conversation including, on the stage, yesterday's inflation. I'm curious about what is the piece of the inflation conversation that you find most interesting?

Morgan Housel: What I think is most interesting, the first thing is that there's no other variable in the economy that gets people as fired up, as angry, as inflation, and the number 1 thing you hear that a lot of you will agree with, I'm sure, is that the inflation number that is published every month does not reflect reality. That is a big narrative that's out there among millions and millions of people. What I think is interesting about how that could be true is because normally people will say that and then they will say because the number is not calculated properly, they're intentionally under-reporting what it is. But what I think is really interesting is that everyone spends their money differently. So no two people have the same inflation rate. There is no such thing as the inflation rate.

It's just your own individual household. If you have a 100 mile daily commute, then of course, you are more sensitive to gas prices than someone who just works from home all the time, or if you or your children are in college, then tuition prices mean everything to you. If you are not in college, you couldn't care less about what tuition prices are doing. So since everyone spends their money differently, everyone has their own individual inflation rate. I think right now, the published inflation rate is eight-and-a-half percent, something like that 8.7, whatever it is. I'm sure there are people whose personal inflation rate is zero, and there are people whose personal inflation rate is 30, 40 percent and everything in between. That's what's most interesting is that there's no the inflation rate, and that's not true for other data. There is one price of Apple stock for everybody, but inflation, there's such a huge variance of outcomes. That's why I think it's so controversial and why people get so uptight about it.

Chris Hill: Let me tee you up with a couple of things that you had written recently that I found particularly interesting and I think apply to investing and, in particular, looking at different stocks. But just from an investing standpoint, you recently wrote, "Sitting still feels reckless in a fast moving world." Which I immediately identified with because there have certainly been times when the market is dropping, where my gut instinct is, what do I do? I really should do something.

Morgan Housel: One of the biggest innovations in the last 20 or 30 years, even just last 10 years, is that it's so much easier and cheaper to make a financial transaction to buy and sell securities. It used to be not that long ago and definitely 20, 30 years ago that to buy or sell stock, it was a phone call to your broker, and it would cost you a 100 bucks each way, in and out. So the barrier to entry to make a decision was higher. You thought twice, about whether you need to do it. It's not like that anymore. It's free. You go on your phone, boom, click, and you're done. I think it's just made it easier to pull the levers and twist the knobs. When the world is falling apart, and things are uncertain, and the headlines seem scary, it's so easy to pull those levers these days, even if you know it's the wrong thing to do, but it often feels like the right thing to do because if you see everything falling apart around you, and your reaction is to shrug your shoulders and say, well, let's see what happens here.

That probably is the right thing to do, but it feels reckless. There's no other situation in your life where you think there is a big existential threat to your well-being, and the right thing to do is nothing. If your house is on fire, you should do something about it. There's an action you should take. I think that's just a quirk about investing is that since it is a long-term game that should be measured in years, if not decades, we know that the right thing to do the huge majority of the time is nothing. But it feels reckless. It feels like you are just being ignorant of the risks that are out there, if you do nothing, even if it's right thing.

Chris Hill: "No one's success is proven until they've survived a calamity," which I'm assuming you wrote about individual accomplishments and possibly businesses as well, having to deal with their own crisis. But I'm wondering if you think that applies to individual investors, particularly when they're starting out?

Morgan Housel: I think it's mostly investors. There are many other fields where you have the potential to not only do well, but very well, based on dumb luck. They're not many other fields like that, you can't be a top NBA player based on luck. It's just impossible. But in investing you can. There exists the possibility that your success is due to luck. I'm not saying everyone's is, but the possibility exists. For a subset of investors, that's definitely what it has been particularly over the last couple of years when there was a subset of tech stocks that were just going bananas and doing so well. Because of that, I think the only way that you can really separate luck from skill is surviving a calamity and seeing who's around after that, not just individual investors, but every single cycle there are hedge fund managers, private equity fund managers, businesses, CEOs, who are the shining stars. Then the tide goes out and you realize, their skill was good for that particular moment, but there was no sense of endurance or longevity attached to it.

I think if you were to look at someone like Warren Buffett, or George Soros, or someone like that, people who've been investing for 50, 60 years and have succeeded in every possible climate, have survived every possible calamity that they've been through, that's when you know that there's actual real skill there. The hard part about it is that sometimes the economic cycles take a decade. It might take a while. You can be crowned as the star fund manager of the decade, and then the tide goes out, and it's all washed away. There were a lot of people like that. Who was it? The fund manager of the decade in the early 2000 was a guy named Ken Huebner. Amazing returns from 2000-2008, and then the tide went out and that was effectively it. If you view investing is like I want to stick around for decades, I'm thinking about like building generational money, then you need to be able to survive and thrive in multiple different cycles. I think it's just the only way to separate skill from luck.

Chris Hill: Taking that one step further because part of what we've talked about, including David Gardner yesterday, his work with the Fool Foundation and really trying to encourage younger people to invest, all that thing, it almost seems we need to prepare people for the inevitable downfall or just bear market, that thing. Because it's almost like, "Hey, we're not going to give you a gold star." It's great to succeed in investing, but we're not really considering you an investor until you can show us the scars of you've invested through a bear market.

Morgan Housel: I think that's right. Since it might only happen, what were the big bear markets of the last generation? It was 2000, 2008, and maybe March of 2020, but that lasted a month before it was basically over. It's really only been two real cycles in the last 25 years or 30 years, only two big cycles. Even in your entire investing lifetime, you might only go through two or three of these cycles. Maybe you'll go through more, since they happen so infrequently, it's easy to become lulled into the idea that they don't exist or that you are immune to them or that your skill was actually just serendipity masquerading as skill. You thought that your investing returns were because of your intelligence and your skill, and then the tide goes out in your eyes, it's very different. The Warren Buffett quote is you only realize who's swimming naked when the tide goes out.

Chris Hill: What are the odds that there were people who started investing in early 2020, made it through that bear market and thought, "Oh, this is fine. Bear markets don't last that long."

Morgan Housel: I think it's next to none. But if you look at just Robinhood, which was predominantly going after young men aged 18-25, that's by far and away their core. They added 10 million new accounts in 2020, incredible. So many people came into the market and by and large because it was in Robinhood, they were being incentivized. They were being led to trade and trade the most obnoxious bankrupt penny stocks you can think of. That was the whole game. That's Robinhood's business model is to not get you to invest for the long term in good company, it was just get you to keep pulling the lever. That worked amazing for about a year. I remember in late 2020, a young guy came to me and said, "If you can't double your money every year, you have no idea what you're doing as an investor."

I remember being, like, all right. We know what's happened to all those people over the last six or nine months. The tide went out, so to speak. Just from watching Robinhood results, it's not pretty. In one way, I think it's almost a benefit if you learn what risk is when you're 19 versus 45 and putting your kids through college, maybe it's good that you learn that lesson early on, but it's also tough to watch a whole generation of investors being pushed into the gambling quarter of investing because now it leaves a taste in their mouth of now that everything is washed out like, "Oh, the odds are stacked against me. It's all gambling. It's a joke." Will that stick with them for the next 10 or 20 years, and they don't become good investors? I think that's a risk too.

Chris Hill: One other thing you wrote recently is, "Incentives are the strongest force in the world." That's a pretty absolute type of statement. When I read it, it immediately got me in the mindset of using incentives as a lens through which to view businesses.

Morgan Housel: Yeah.

Chris Hill: Is that how you intended it, and should we be doing that? 

Morgan Housel: I started to really think about this after the financial crisis of 2008, when there was so much criticism, rightful criticism of the greedy Wall Street bankers, accurate criticism. The part that I disagreed with is people who don't understand that if they were a 25-year-old who was told package these subprime mortgages, and we'll give you a $3 million bonus, you would've done it too. People really underestimated what they would be capable of if the incentives were correct. It's not to absolve anyone who did terrible things, but people underestimate what they are willing to do if the incentives are appropriate, and I think you see this at the CEO level, you see at the company level, you see it among fund managers. I think there is a tremendous amount of misbehavior in the investing industry, but the huge majority of those people are good, honest, well-meaning people. They just exist in an industry where the incentives can be so twisted, and incentives can be so enormous, and people who can make millions of dollars a year if they're willing to close their eyes and look the other way. The number of people who are willing to do it that I've seen in the industry is pretty high. I think that was where that came from.

Chris Hill: Let's stick with the CEOs for a second because there are CEOs who are paid tens of millions of dollars a year just in their salary, and then there are CEOs who do the whole like, "I'm just going to take a dollar and I'm going to take it in stock options." But of course, then their incentive is tied to the price of the stock. Do you view one as being better than the other?

Morgan Housel: When Collaborative Fund was founded in 2010, I was not there. But when Craig Shapiro started it, when he's starting a brand new venture capital fund, he thought it would be great to tell investors, "Hey, I'm not going to charge you a management fee. This is my first fund. I only need to prove myself. No fee." He thought that would be great, that the investors would be, like, "Amazing. We love this." Every single investor to a T told him, we cannot invest in your fund if you don't have a management fee because you don't have any incentive. It's just not a viable, enduring organization that can work. I know most of the CEOs who take a one-dollar salary are deca-billionaires, so whatever salary you're going to give them makes no difference: Jeff Bezos, Mark Zuckerberg, the [Alphabet's] Google guys, whatnot. It makes no difference to them whatsoever. It's an interesting situation when you have a CEO compensation structure like Elon Musk had.

I forget when it was granted, maybe 2016, 2017, basically it was, if you turn Tesla into a trillion-dollar company, we will give you $20 billion. I'm not 100 percent accurate, but it was something close to that, and he did. He turned it into a trillion-dollar company and then he was paid something like $20 billion as his compensation. That's not like his original investment when he's founded the company. That was just his paycheck. It was $20 billion. It's always the case in CEO compensation that it just ratchets to whoever the next guy was. Now you're going to have all these other CEOs from other industries who are, like, Elon Musk got $20 billion. That's now my baseline to do. It just keeps ratcheting up, and so many of the compensation structures, they're not tied to results. They're tied to share price, which is by and large outside of the CEO's control. They got a lot of really twisted incentives, and it's all tied to your competitors. It's almost similar to in the real estate market when the price is based on comps.

The prices keep going up because your sales price, it wants to be 5 percent higher than whatever the last guy, just keeps going up and up. I think it's really similar for CEO comp too. There are a handful of CEOs now who make over $100 million a year. Every single one of those people, I think almost to a T, the share price performance does not back it up. There have been some studies actually that there was a negative correlation between CEO comp and shareholder returns, It's a negative correlation. The higher it gets, the worse shareholder returns ultimately are after that. The reason really simply is just because you have a CEO in that situation whose only goal is to enrich themselves. It's not to build the business for the long term. It's not to take care of customers. The whole goal, when they wake up in the morning is like, "How can I make my targets to get my bonus?"

Chris Hill: I'm following you on Twitter, like a lot of people, and I appreciate that you don't tweet very often. So thank you. People are just mass tweeting. That's too much. You tweeted something recently. "Every great investment was once mocked by the crowd. The crowd is usually right." Would you care to unpack that?

Morgan Housel: Of course. To have a standout company or to be a standout investor, it's rare. Of course, it's rare. It has to be rare. It has to be a one in 100, one in a 1,000 thing. So it's always the case whenever there's a new technology, a new up-and-coming business, a new investing strategy that the crowd mocks them always the case. It has always been the case, always will be the case. But the crowd is usually right. They are usually right to be mocked. It usually ends up not working. I think a lot of that particularly in early stage companies, venture capital where it's like, it's not supposed to work. If a venture capital fund invest in 100 businesses, you know your baseline expectation is that at least half of them are going to be out of business within two years.

That's the baseline expectation. Of course, success is always very rare. I brought it up because there's always a case with new investments and new companies where there is a lot of criticism of those companies and, a lot of times the investors will say, you also criticize Google, you also criticize [Meta's] Facebook. They use the criticism of the crowd as an indication that they are right. To be successful, you need to be a contrarian. But most contrarianism is just cynicism. It's not actually real contrarianism. That's the court to it. I think a lot of investing is like it's supposed to be hard. It's not supposed to be easy, and there should exist no world when every company or every investor who's trying to be better than everyone else is successful at doing it. It's always going to be the case that 90 percent of companies and 90 percent of investors do not meet the objectives that they set out to.

Chris Hill: Part of that process ties into something else you've talked about in terms of the story that companies tell, and the idea that the best story wins because the truly transcending companies are telling a story that is different. They're doing things in a different way. On the flip side, we can't count the number of businesses that have either said about themselves or others have said about them. This is the next Apple.

Morgan Housel: Yeah.

Chris Hill: This is the next Google.

Morgan Housel: In terms of telling stories why not someone brought out this point recently that I really liked, and they said Elon Musk's best product is not a car, it's not a spaceship, it's Tesla's stock. That is most amazing because he's told such a good story and got so many people to nod their heads to that story. Ford is multiple times the size of Tesla in terms of the cars they produce, in revenue and profits, and Tesla is worth 50 times as much, 20 times as much, whatever it is. All that is just because Musk has done such a good job telling the story. I think any successful company that you look at, the leader's ability to tell a story about that company exceeds even the success of that company's products.

Chris Hill: You mentioned Warren Buffett earlier. Today is his birthday. He is 92 years old. I don't know how many books have been written about him and how many articles, but among, if not the most examined life in the world of investing, is there any part of Buffett and his investing that you think gets less attention than other parts?

Morgan Housel: What is interesting is that, God knows how many books had been written about him, they all go into so much detail about how Buffett thinks about moats, and business models, and valuation, and management teams. How does he analyze companies? That's 99 percent of the analysis of his success. Those are all really important. That's an important topic. But if you look at the trajectory of his life, 99 percent of his net worth was accumulated after his 50th birthday. Ninety-eight percent came after his 65th birthday. The vast majority of his net worth came in his elderly years. The takeaway from that for me is that, look, if Buffett had retired at age 60, like a normal person might, no one in this room would have ever heard of him.

All of his success came in his 70s, 80s, and early 90s. That's really important because we spend all this time talking about how he values companies. But the whole secret to his success is not that he's good at picking companies. It's not even that he's a good investor. It's that he's been a good investor for 80 years. That makes all the difference in the world. That's 99 percent of the success. So if you wonder, like, what is the takeaway from Buffett success? It's not how he values companies, it's not how he thinks about management, it's his endurance and longevity that is 99 percent of that success, and that is very often overlooked. I think, that answer, that all of his success is just the fact that he's been investing full time since he was 11 years old, and now he's 92, it's too simple for people to take seriously.

It's too boring. They want to dig deep into how he digs into balance sheets and income statements. Also it seems too hard, like, if the answer is, just wait another half-century, and you'll accumulate some wealth too, no one wants to hear that answer. They want the answer that you can put to use today. They want the pill, so to speak. It's similar in medicine. If the doctor says, you need to sleep more, and diet, and exercise, you'll be, like, no, I want the pill. Give me the pill. It's going to make it better. I think it's similar in investing. That's the part that I think is overlooked about what he's done.

Chris Hill: We got a minute left. Let me close with a question that I know is on the minds of a lot of people, particularly those who have read your book, which is, is there another book in the works?

Morgan Housel: The question is, are you going to do the audio book version of it again?

Chris Hill: That's my follow-up question.

Morgan Housel: Yeah, I'm writing another book right now. I think it'll probably be out next spring or summer. It's about the behaviours that never change over time in business and investing, but also other areas in life. What were people doing 100 years ago that they'll be doing 100 years from now. I think there's so much focus and emphasis on what's going to change, what industries are going to change, what technology is going to change, which is cool and important, but it's the things that never change that I think move the needle the most, the behaviors of greed and fear and how people respond to surprise. Those things never change. I'll tell you a quick story where I got this from. There is a book called The Great Depression, A Diary. It was written by a lawyer named Benjamin Roth, who was a lawyer during The Great Depression.

He kept a very intricate diary of what was going on in the economy. His son published it in 2010, and I think it's the best economic book ever written because there's no hindsight bias in the book. He was writing all this in real-time in the 1930s. There's an entry in there where I was reading it and I thought this is exactly verbatim what somebody would have said in 2008, during the financial crisis. When he was writing in 1932, it's exactly what you would have said in 2008. His next entry, he's writing, and he says, what's going on in 1932 reminds me exactly of what happened in 1907. What happened in 1907 is exactly what happened in 1876. These things never ever change. It's the same story over and over again. So I think just understanding those behaviors that never change, that's what I'm digging into in this book.

Chris Hill: As always, people on the program may have interest 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.