#8 – Walmart, Capital One, Nvidia, Dow Jones, Airline Thought Experiment, The FED, and The Psychology of Money

Wes Moss [00:00:53]:
Welcome to the studio. Jeff Lloyd just makes things more fun here when you’re here.

Jeff Lloyd [00:00:58]:
No, I appreciate it. Thanks for having me back.

Wes Moss [00:01:00]:
Always. This is a dichotomous week, at least in my head. I’ve got two completely different things to talk about. One is all of the activity we saw this week on Wall Street. Nvidia, the biggest earnings. People are saying that this could potentially be the biggest earnings report from any company in the history of the stock market. Jeff Lloyd, take that. Take the fact that something I thought I would never see, Amazon joins the Dow or is joining the Dow, which is the techiest of tech companies, still doesn’t pay a dividend.

Wes Moss [00:01:33]:
I think they’re going to still be one of only three out of 30 Dow companies that still doesn’t pay a dividend. And getting added and having a shuffle within the Dow is not, feels like it happens usually once a year. But if you look at the numbers since the 18 hundreds, it’s only been something like 60 times.

Jeff Lloyd [00:01:51]:
Yeah, about 60 times. There have been changes to the Dow components and the last one happened in August of 2020. So it’s been about three and a half years since the last change to the Dow components.

Wes Moss [00:02:03]:
Feels like it was just yesterday. But we have that. Then we have the Nike, the japanese stock market finally getting back to where it was back at its old high. Something, what, 8300 days it took to get back to its old high.

Jeff Lloyd [00:02:16]:
Yeah, almost 30. It’s been almost 35 years since it reached an all time high.

Wes Moss [00:02:22]:
And then we have merger deals, Capital one buying discover. We’ve got Walmart with earnings, which, by the way, who knows if the FTC will approve that merger. It’s funny, I was traveling this week just a little bit and with one of my kids and he asked, what did he say? He said, why don’t, was it the airlines? He said, why don’t the airlines just buy each other? Why doesn’t Delta just merge with the other big airlines. Why is it there just one airline? And it reminded me as soon as I heard this news, I said, we can’t have one company. Part of antitrust law in the United States is that you don’t want, hey, how would you like it if you just had one airline to choose from? You think airlines are bad now? Wait till you have one airline.

Jeff Lloyd [00:03:13]:
Can you imagine an airline monopoly? And you just had one choice. And I saw on the news, I think it was this week, maybe it was at the end of last week. I think this week, though, American Airlines was announcing new baggage fees. I think they’re going up to like $40 or something. But can you imagine if there was only one airline, what, your baggage, it’d.

Wes Moss [00:03:31]:
Be $100 to put a bag on the plane.

Jeff Lloyd [00:03:34]:
Yeah, they charge. Can you go, they charge you by the pound.

Wes Moss [00:03:37]:
So that’s the reality here, is that we do have something that in us business law, we have something that we’ve seen over the course of history called monopolies and oligopolies, and we don’t love monopolies. If you’ve got one railroad to choose from, imagine how bad the railroad can be having a monopoly and imagine how expensive it would be. So I think of all of is there are a lot of interesting stories that happened this week. Earnings, fed minutes. We had fed minutes this week. And it all reminds me of the swirl and the cross currents of all of this. And it captures my attention, captures your attention. All of our attention said, maybe not everyone, we’re probably a little bit different because we do tend to watch CNBC.

Wes Moss [00:04:25]:
It’s on all day during the week in the office. I listen to it in the car. I read Bloomberg, the Wall Street Journal, CNBC, our other research partners. I’m maybe even more immersed in this, but it reminds me, and this is a book that they’ve recently read that I wanted to cover today here that has some really powerful lessons, and it’s called the Psychology of money by Morgan Housel. And he really gives about 20, he calls them lessons throughout. I don’t know if 100% of them. We don’t need to talk about all 20. I spent a lot of time reading this and trying to condense the book down to what really matters.

Wes Moss [00:05:05]:
But as I sit here and we’re starting money matters, I’m so tempted to talk about everything that happened this week. And it seems like it’s so important today, and we need to be making decisions on what happened this week. Biggest companies in the world reporting amazing financial results and the Fed and what they’re going to do with interest rates. And Morgan Housel would tell you to just stop for a minute and realize that the market is pulling you and pushing you. And it’s the very reason that it makes good long term investing so hard. So I have these two thoughts going through my head here this morning. I think it’s really important is that we’re pushed and pulled and we’re tugged constantly. Maybe it’s a better analogy.

Wes Moss [00:05:51]:
Our heads are in a vice grip and it’s getting tighter and tighter, the pressure of what’s happening around us when the reality is we need to just take a step back and think through some of the lessons that I’m going to cover here today from the psychology of money. And this is why I wanted to cover Morgan Housel. My take on this is that, first of all, the guy has sold almost 5 million copies. And psychology of money, I think, is the big seller in all of this. He’s got tons of accolades, and yeah, he’s one of the most influential people in markets, but that’s not why I wanted to cover it. I’m covering this because Morgan Housel was perhaps the best person or writer to approach and give credit to the psychological side of money and investing. There are a lot of books out there, and we were joking. I don’t know if it was you or Connor Miller here on the show.

Wes Moss [00:06:52]:
We’re talking about behavioral finance. B fi. B fi. That was you?

Jeff Lloyd [00:06:55]:
That was me, yes.

Wes Moss [00:06:57]:
We were talking about behavioral finance. And to some extent, behavioral finance has to do with the psychology around money. But there are a whole lot of books around behavioral finance, how you behave when it comes to your money. And these books will identify all of the human missteps. And it gives a name to these hedonic thinking and extrapolation and loss aversion. You’ve got all these psychological terms around money, and it attempts to tell you to go fix them. And many books that I’ve read around behavioral finance are kind of scoldy. I’m scolding you as a human because you have these human tendencies.

Wes Moss [00:07:36]:
So know them and fight against them. And that’s the whole field of behavioral finance. And I think it has some merit to hopefully make you a little bit better of an investor. But I think Hausel does this in a different way. He comes right out and he just says, look, we think about money as what is it most like and what’s the most important component of figuring out your finances and money, you automatically think, what? Well, it’s more like math or more like physics. If you had to choose a topic in college, like, what is the one class that can really help me with my money? Perhaps it’s a class on personal finance, and that would make sense, except Morgan Housel, and I’ve never interviewed him. I think he would say the number one class that can really help you with money long term is none of those. It’s not math, it’s not physics, it’s not personal finance, it’s psychology.

Wes Moss [00:08:32]:
And it’s the psychology around money and how we think about money that often leads us astray. And if we learn a couple of these lessons, it can take us a really long way. It can really help us get to where we’re all trying to get to. One of his chapters, by the way, is freedom. I love how he talks about freedom. That’s the chapter title. So he recognizes that you’ve got this, the push and the pull of all the things that we mentioned today already, earnings and the Fed and interest rates and the economy and mergers and acquisitions and international stock markets, and they all come into play. But those are the pushes and the pulls that we’re typically reacting to when it comes to our money decisions.

Wes Moss [00:09:20]:
But if we’re identifying the human nature side of this, the psychology side of it, that’s what really should impact our financial journey and has the ability to impact our financial journey as opposed to all the things that are literally happening today, this week, this month. So they’re really powerful lessons and I think they’re more helpful. Not that we’re not going to talk about Nvidia. And by the way, Nvidia grew how much this week? In one day? It was what, two weeks ago we talked about Facebook added an entire multibillion dollar company in a day, and it was the most ever. And then Nvidia just blew that out of the water.

Jeff Lloyd [00:09:55]:
And then a couple of weeks later, Nvidia, it grew by over 200 something billion in just one day, in just a few hours of trading.

Wes Moss [00:10:04]:
So we’ve got both sides of the coin. So maybe the sizzle is all of the headlines that we want to talk about, but the stake is really Morgan Housel and the psychology and the lessons that he’s teaching us around how to be better investors over time. And we’re going to go through those today. We’ll do both. Jeff Lloyd, how about we just do both? We’ll do sizzle and stake.

Jeff Lloyd [00:10:26]:
Let’s do. And I think Morgan Housel does a good job of. Yes, this morning we were talking about. Hey, we’re talking about minutes, right? We’re talking about days in the stock market, weeks. We’re talking about quarterly reports. But he does a good job of putting all those things in perspective. And what that means, kind of in a longer term view.

Wes Moss [00:10:46]:
Here are a few of these. I’ll give you a preview, and then we’ll talk these through. The first one is that no one’s crazy when it comes to money. No one’s crazy when it comes to their own money. Number two, freedom. Maybe one of the best lines is this. Perhaps the most significant dividend money can pay is freedom of choice. That’s the most significant dividend money can pay, is your own freedom, your own choice, your own autonomy.

Wes Moss [00:11:15]:
That’s what leads to happiness, isn’t it? Luck and risk. We’ll talk about luck, the role of luck. Nobody wants to talk about luck when it comes to success. Nobody would ever say, warren Buffett. Did he get lucky?

Jeff Lloyd [00:11:30]:
No.

Wes Moss [00:11:30]:
It’s all skill. It’s all hard work. It’s all perseverance.

Jeff Lloyd [00:11:34]:
What about Bill Gates? Did Bill Gates get lucky?

Wes Moss [00:11:37]:
You can’t say that Bill Gates didn’t get lucky. He’s a genius.

Jeff Lloyd [00:11:42]:
There’s another train of thought that says Bill Gates. And the way that he grew up and his access to computers that millions of other Americans didn’t have at the time was partly because of luck.

Wes Moss [00:11:55]:
How about this? Knowing your enough. When is it enough? We moved the goalposts. We’re Americans. It’s part of America. I did great. I did well. But isn’t part of America to say, well, I’m going to do even better? That’s okay. That’s okay in business, it’s okay in life.

Wes Moss [00:12:13]:
Maybe it’s okay in life. But maybe there’s an issue when it comes to investing, if it’s never enough, are we moving and moving and moving the goalposts? How about this chapter, the power of compounding. We all know this one, but the perspective here we’ll share today is around this little change, just a subtle change. But if you do it over and over and over and over again, that can literally build continents. We’re talking about continents here. Getting wealthy versus staying wealthy. My favorite of all lessons, tails. Tails, as in heads or tails? Tails.

Wes Moss [00:12:50]:
You win. Wonder what that means. I think we’ll talk about it today. There was an interesting take this week we saw on inflation. Jeff Lloyd. The Fed’s still charging down, trying to get into the end zone. The end zone is 2% inflation. The Fed wants inflation, the rate of inflation, to come down to 2%.

Wes Moss [00:13:14]:
We’re getting close. We’re almost at three. That last quote mile is proving pretty tough, but maybe it’s further away than that than most people think.

Jeff Lloyd [00:13:24]:
Yeah, I think getting down to that 2% target might even take a little bit longer than getting from nine down into the threes that last mile. So getting from 3133 down into the low two, I don’t think we have to get right to 2.0%, but kind of in that lower two range could take a little while.

Wes Moss [00:13:45]:
It doesn’t seem like the Fed has a Ulysses contract with 2%. They just want to get close. But if we looked at something this week called one of our research partners calls this common man inflation, I don’t know where they came up with this, except for this is, I would have called it just everyday american inflation and looked at rising wages, rising discretionary spending. So the things we choose to either we can spend or not spend, but really, the quote common man inflation is just about the things we really need, as opposed to all these inflation numbers that exclude things like food, they exclude energy. You and I, we need food and we need energy. So what is the common man?

Jeff Lloyd [00:14:29]:
Yeah, this includes food, energy, shelter, clothing, utilities, and then insurance.

Wes Moss [00:14:35]:
Oh, I need those.

Jeff Lloyd [00:14:36]:
You got to have insurance, too.

Wes Moss [00:14:39]:
It’s almost necessity inflation. You can cut out airfares, you don’t have to travel, but you really can’t go without food, you can’t go without fuel, and you can’t go without insurance or utilities. So what does that look like?

Jeff Lloyd [00:14:54]:
So what the data really shows is that over the last five years, that common man CPI has outpaced wage growth. So common man inflation is up about 26% over the last five years, and wages are up, call it almost 20.

Wes Moss [00:15:11]:
It’s way outpaced inflation for all the things we really need. And that would translate to some higher CPI numbers than the Fed is really even looking at at this point. So we’ve got some work to do before the fed hits their goal and they can start maybe lowering interest rates. So we’ve got all of these headlines that we think about, we tend to worry about, we fixate on, and I think it’s fine because we want to understand what’s happening today. And it’s interesting to know what’s happening today, particularly the week to week iterations of what’s happening with the Fed. That’s a big deal because they have such a sway over the economy and how markets react. If you go back to late last year, the market had gone back into the doldrums. And then the Fed came out and Janet Yellen came out at the treasury and said, well, they’re starting to hint towards maybe we start cutting rates.

Wes Moss [00:16:06]:
And then that’s the Fed on the Fed side. Then the treasury says, maybe we’ll issue a certain kind of debt that gives more liquidity to the system. And what happened? Huge stock market rally at the end of the year. So what the Fed says, and the treasury says it does have a really big impact. But what we wanted to focus in today as well, and not just the sizzle of what’s happening in markets, it’s really these fundamental psychological behaviors that can have a bigger impact than any sort of fixation that happens to do with the Fed or the treasury or a merger or earnings of any one given company. And that’s going back to one of my favorite books in a really long time. And that’s the psychology of money by Morgan Housel. This is a guy that sold almost 5 million books, just a really good writer.

Wes Moss [00:16:56]:
And every once in a while, a writer comes along and captures a topic that’s been written about and talked about. Behavioral finance gets talked about and written about all the time, but does it in a way that’s unique enough that gets us to rethink. And it got me to rethink of just how helpful the lessons in the psychology of money really are. And one thing I can tell you without even, wasn’t even a chapter in the book is that Morgan housel and thinking about how you think through money, it’s not about what happened today. It’s not about what happened this week. It’s how you behave to some extent and how you think about money and finances and investing over your entire lifetime. And that, I think, is really helpful and why I wanted to cover it. So we’ll go through a couple of these lessons in just a second.

Wes Moss [00:17:43]:
But the overview is this. If you think about different industries, medicine is one of the examples. You’ve seen these great strides in medicine, really every year. You don’t have to even look at a decade. You can look at year to year. And we have tremendous leaps and bounds in medicine. We’ve seen that in life expectancy. So life expectancy has grown tremendously over the last century.

Wes Moss [00:18:07]:
So you’ve got lots of innovation, and we’ve gotten better and better. What’s interesting is, though, even though we have bigger computers and data centers and artificial intelligence and teams from MIT that are, again, infinitely more efficient, infinitely smarter, more horsepower today than call it 50 years ago and 100 years ago. It hasn’t made investing any easier. It’s one of the industries with all this innovation, but it still hasn’t really helped the individual be a better investor, accumulate more money. We still have a retirement problem in the United States. A very small percentage of people in the United States are able to comfortably retire and have as much money all throughout retirement as they did in their working years. Well, if we’re so much smarter and so much better, and we have so much more access, why is that the case? The math should work. The technology is better.

Wes Moss [00:18:59]:
But perhaps it’s because we’re the same humans we’ve been for decades and really centuries. That hasn’t changed. So the ability to accumulate wealth and get to a point of financial freedom really hasn’t gotten a lot easier. That’s the bad news. The good news is there is real parity in investing. You do not need to be an MIT genius to end up financially secure. One of the great stories in the book compares the CEO of a big Wall street firm who at some point was making $5 million a year, and a janitor who was working at JCPenney and was a car mechanic, and he passed away when he was 90, in his early 90s, with eight and a half million dollars, while the CEO, who was making $5 million plus a year, who had an 18,000 square foot home in Greenwich, Connecticut, had his house repossessed and ended up going under. So someone with no real formal education versus someone running a Wall street firm.

Wes Moss [00:20:00]:
One ended up with almost $10 million, and one ended up with virtually zero. The good news is for everybody, is you do not need to have a data center running an algorithm to have parity. You can do as well or better financially than anyone in the United States if we think about money in the right way. So I think that’s an initial preview to this, is that you do not have to be a genius to accumulate wealth. Regular folks can get rich, too. Education doesn’t guarantee wealth, and a lack of education doesn’t guarantee that we don’t end up accumulating wealth. A couple of my favorites. Well, and again, there’s 20 or so in the psychology of money with Morgan household.

Wes Moss [00:20:46]:
I tried to boil this down to ten, and then I couldn’t really fit it into ten, so we’ll do. I think I cold the list down to 14. So it’s not the cliff notes that we all maybe wanted, but it’s at least shorter than a seven or eight hour audiobook from Amazon. First one is this, no one’s crazy. Second one is freedoms. Third one is luck and risk. The fourth, knowing when is enough. The fifth, the power of compounding.

Wes Moss [00:21:16]:
The 6th, getting wealthy versus staying wealthy. Seven tales, you win. Eight, the simple act of saving. Number nine, reasonable is greater or better than rational. What does that mean? Number ten, surprise, surprise. Number eleven, the cost of everything. Or number twelve, the seduction of pessimism. Next, you and me, I’ll explain that.

Wes Moss [00:21:46]:
And then you’ll change. Or you will change. So let’s start this out by saying what is no one is crazy. Jeff Lloyd that just means that we all think about money because we were born in a certain year. The economic environment was that environment. Our parents were how they were around money and that’s how they presented to us. So we all grow up with a totally different set of variables on how we think about money. Some people are risk takers.

Wes Moss [00:22:18]:
Some people are super conservative. Some people are frugal, some people aren’t. But it all comes from almost our learned behavior and our dna growing up. So how we think about money is correct, but we all think about it differently. None of us are crazy. We all have just learned about it with a different set of variables.

Jeff Lloyd [00:22:39]:
What about the story that you’ve told of, you see one family that spends a lot of money on cars, and your family is like, well, I would never spend my money on that. That’s crazy. Then another family is spending their money on horses. Yes, and people think that’s crazy. But which one in that situation is wrong or crazy?

Wes Moss [00:23:02]:
Neither.

Jeff Lloyd [00:23:03]:
Who’s crazy in that situation?

Wes Moss [00:23:05]:
I’ve come to learn. And I think that’s why I was so excited to read this book, because it’s the one answer to this perennial issue I’ve had for so many years of people judging how other people are spending money. I’ve seen that my entire life. How could you spend so much money on cars? I don’t need fancy cars. Well, wait a minute. Well, how could you spend so much money on horses? I don’t need fancy horses. Well, horses aren’t flashy. So what if cars are? Neither are crazy.

Wes Moss [00:23:33]:
No one is crazy when it comes to how they think about money. We’re just individuals. We’re all different. And that’s fine. And it’s important to understand. That’s part of one of our lessons, the psychology behind money. Number two, freedom. What is freedom? And this one struck me too, because really, we’re talking about happiness.

Wes Moss [00:23:54]:
And this is a topic I’ve written on for many years. It’s hard to argue with the thought. And this has happened in empirical, long range studies as well. When you’re studying well being and happiness, has found over and over again that the leading factor in happiness, it’s not money, it’s not career, it’s not even number of core pursuits like I write about in my book. It is the fundamental ability for choice, autonomy and freedom. Now, that, of course, allows you to go do whatever corporate pursuit you’d like to do. But the fundamental backdrop of what we’re looking for here from our finances, really is just freedom. And perhaps the number one dividend, or the most important dividend money can provide is that freedom, is that choice? Is that autonomy.

Wes Moss [00:24:47]:
Humans in general seek that autonomy, and that’s what money is trying to do for us. Number three, luck and risk. Success often involves an element of risk and a much bigger element than we give credit for. If we can just acknowledge that, it can lead us to more humility and better decision making. The next one on this list know when enough is enough. We move the goalposts in America all the time. We want to get to a million. No, I want to get to two.

Wes Moss [00:25:21]:
We get to 2 million. No, I want to get to four. We get to 4 million. No, I’d like to get to ten. If we are always moving the goalposts, then enough is never enough. That ends up leading to bad decisions. And that is how we think about money. And if we can stop doing that and learn from this, I think it’s a really powerful lesson.

Wes Moss [00:25:41]:
More money matters straight ahead. How does setting the goal to have income for a lifetime sound? It’s not a trick question. Many happy retirees create income for a lifetime, and it’s something that’s called income investing. It’s a way to harness the power of many different forms of cash flow, including rent, royalties, dividends, distributions, and interest. If you’d like help with income investing, you can reach capitalinvestmentadvisors@yourwealth.com. That’s your wealth. When it comes to investing, it’s much more about how we think about money over time that will lead us to the promised land and lead us to a place that where we want to go. There is the thought around.

Wes Moss [00:26:30]:
There’s the math side. So we think about Morgan Howell in his book the Psychology of Money and where he gives 20 lessons on how we should be rethinking about our finances, our investing. How do we get to a point of freedom? One of his chapters is just called freedom, and he essentially says, and we’ve talked about this here on money matters, but having control over one’s life is the strongest predictor of happiness, period. And now there’s other. The Harvard study, the longitudinal study, says that it’s social connectedness. This study, there’s another study that said it’s about freedom and freedom of choice and being able to do the and have autonomy in our world. But a sense of autonomy and the ability to make choices about how we live is perhaps the most significant dividend money can pay. We’ve covered knowing when enough is enough.

Wes Moss [00:27:23]:
We tend to move the goalposts in America. I think that could be, to some extent, it’s a good thing for business. We’ve had success. Let’s keep going. We’re growing. Well, let’s keep growing. When it comes to our own finances, it is really helpful to know when you have enough to get to the point of economic freedom and you don’t necessarily have to really continue to push the limit and continue to take undue risk or more risk than makes sense in order to achieve a goal where the goalpost kept moving, the goal post kept moving, the power of compounding. This is an interesting story around, let’s just call it, and I’m editorializing this, the formation of Iceland.

Wes Moss [00:28:08]:
So this is a story about Iceland. Evidently, over the course of history, we’ve found that there are five different ice ages. If you drill down and you bore down for the country of Iceland. But evidently, what happened during those periods of time, those ice ages, it was just a small change in what happened in the summers with our planet in formation. And that during a period of time, it was the difference of the snow completely melting in. Let’s call it July, August, or just having a little bit of snow left to start now, the cold season. So a shift of a half a degree, if you go back into, let’s call it prehistoric land development on the planet, is that we went through periods of time where just a tiny bit, a little less warm in the summer, so a little bit of ice stayed around to then lead to the next winter, which started to compound how much snow was building on top of the base had never quite melted, hence forming. So this little tiny change compounded into an entire continent over these ice ages.

Wes Moss [00:29:19]:
And that’s how Morgan housewell talks about compounding. It may just be a little change. It’s just 1% a year, it’s just a half a percent a year, or it’s just 2% a year. But you start looking at that over the period of time. It is tremendous. And that’s the power of compounding. He also talked about how, again, now this maybe isn’t in the same vein as luck, but one of the ideas around Warren Buffett and his success that doesn’t get talked about as much as his genius ability to find the right companies. Well, Warren Buffett has essentially been an investor for three quarters of a century because he had about a million dollars when he was 30 and he got going.

Wes Moss [00:30:01]:
Start compounding that not just over 20, 30, 40 years, but 60, 75 plus years. And you see this massive creation. All of a sudden it was a tiny island. Today it’s the size of Iceland. I still haven’t even looked at Iceland on the map. I don’t know what I was thinking about a continent or a country. It’s still a lot of land. What’s the size of Iceland? I think that’s a chat.

Wes Moss [00:30:29]:
GPT question how big really is?

Jeff Lloyd [00:30:31]:
Let me look it up. I’ll report back.

Wes Moss [00:30:33]:
Getting wealthy versus staying wealthy. So again, we’ve got to navigate this really complex journey over time of wealth. And you need a mix of what Morgan Owlsl says is short term paranoia to ensure survival and then long term optimism to make sure we’re growing. And the thought around getting versus staying wealthy is that it’s kind of a dual approach. And if we’re able to have just a little bit of paranoia, so let’s say that means cash in our accounts and it’s money that’s totally safe and it’s not in the market. If that allows you to have the rest of your money invested, guess what? You have that much more that gets that powerful force of compounding. So a little bit of paranoia. We call it dry powder here on the show.

Wes Moss [00:31:24]:
Safety money allows you to stay invested for as much as that you can sleep well at night with. And I think that’s a really powerful thought. Is this getting wealthy versus staying wealthy? A little bit of paranoia mixed with long term optimism is a really healthy way to think about it.

Jeff Lloyd [00:31:40]:
Yeah. And that cash balance could be different for different people.

Wes Moss [00:31:45]:
Absolutely.

Jeff Lloyd [00:31:46]:
Three, six. Some people like one to two years. Also, I followed up on Iceland size, and it’s about the size of Ohio, relating it to a us state, it’s about Ohio.

Wes Moss [00:31:58]:
So just a small temperature degree, ice didn’t fully melt. The next thing you know, a couple thousand years later, we have a country the size of Ohio. Number seven on my list. Tails you win. As in heads or tails? Is it what? What do we say, Jeff? Heads you lose, tails you win. And it’s the power of tail events. What’s a tail event? If you draw out the bell curve, it’s not the average event that happens most of the time. It’s one way out on the right or the left side of the tail.

Wes Moss [00:32:31]:
It’s the two, three, four standard deviation event. It just happens one in a blue moon, but can be really powerful. And we think of that as big issues with tail event. That is, all of a sudden, a new virus becomes a pandemic. It’s a tail event, but it also works to the positive. And if we have. And there’s a story about a german art collector who was born in the 1930s. By the time he passed away in his 90s, he donated his art collection to a history museum in Germany.

Wes Moss [00:33:06]:
At the time of his donation, his collective works of art were worth a billion dollars.

Jeff Lloyd [00:33:12]:
And when the donation that he gave to the german government, or whoever it was, that they valued it at only like 100 million for like, a tax write off or whatever. But it was worth over a billion, right? Over a billion dollars, yes, over a billion.

Wes Moss [00:33:25]:
And the question is, how does one guy, as a living, this is what he does. He’s buying art, buying, selling art, as you would think of an art dealer, how did he amass a billion dollar portfolio? The best eye.

Jeff Lloyd [00:33:40]:
He bought a lot of art.

Wes Moss [00:33:42]:
Well, was he the best art picker?

Jeff Lloyd [00:33:45]:
Probably not.

Wes Moss [00:33:46]:
Well, that’s what, when you’re reading about this, you think, well, this guy probably.

Jeff Lloyd [00:33:50]:
Really good at art.

Wes Moss [00:33:51]:
This is going to be worth a lot one day. And it wasn’t that at all, essentially. And I’m looking at my 40 pages of notes. So I have the book report I did on this, and I’m going to say his name is. Is it Hans Gruber Bergruin?

Jeff Lloyd [00:34:08]:
Hans.

Wes Moss [00:34:08]:
Hans Gruber Anderson? Oh, yeah, it was Heinz Bergruin. And instead of buying a few pieces of art, he thought eventually would be worth a lot. He became a portfolio buyer. So he would buy 30 paintings at a time, 50 paintings at a time, and they weren’t necessarily worth all that much. So he amassed hundreds and hundreds of pieces of art over the years, many of them, most of them relatively worthless, not worth a whole lot. But guess what he also stumbled upon. A couple of those turned out to be Picasso’s, and a couple of them turned out to be top five famous artists in the history of the world, worth tens of millions of dollars per painting. Winners emerge, and it only takes a few of those.

Wes Moss [00:35:03]:
One in a 501, in 1001, in 100,000 winners. That can really drive your returns. And that’s exactly how some of the indexes in the United States are built. Market cap weighted indexes, hundreds and hundreds of companies. It only takes a few to emerge to really drive the day. Now, we’ve seen that maybe too much so and lopsidedly so over the last couple of years, but we can have these tail events that work in our favor and drive our returns. Rather than buying the Picasso, we may need to buy an awful lot of artwork to let the winners run, to ultimately ensure we’ve got some real winners that can eventually emerge. And broad diversification can help us do that.

Wes Moss [00:35:49]:
More money matters straight ahead. So, so much is happening in the market, in the world, in the economy and government, let alone said election year. We haven’t even talked about that yet because that’s going to heat up, obviously, over the next several months. And all of these things capture our attention and our mind share, and they are all important. They can change the trajectory of the world. However, the reality is that how we think about our money and those money habits have a much bigger impact over our long term success as investors in getting to where we want to be. They’re just not as topical and they’re not as headlining as we’re faced with in any given day. So we’re bringing light to that today.

Wes Moss [00:36:36]:
The author, Morgan Housel wrote a wonderful book called the Psychology of Money. And there are 20 lessons around how we think around money. And I really thought, not because it’s a best selling book and not because he’s a great writer, as I’m reading through this over the past couple of weeks and then thinking about a week of how dramatic all the news has been, wanting to talk about that here today on the show and all the news that happens, of course, we’re mentioning, we’re talking through earnings and headlines from this week, but then at the same time thinking, these are the distractions, these are really the distractions. And I wanted to bring to light the thinking that Morgan Housel brings to light in his book. So we started out.

Jeff Lloyd [00:37:19]:
Jeff LLoYD oh, I’m just saying, like you said, all these headlines and news stories that come across, there’s so many different ways that you can get them. You can get them on your phone, computer, on your just, it’s a constant barrage, even if you don’t want them, of news. You know, not saying all are not important or all are important, but it’s just sometimes the constant barrage can be paralyzing to an investor. It’s like, well, this earnings report came out. This economic data came out from the Fed. Like, what do I do with that data? How do I digest it? And do I need to make decisions based on the second, minute or day that it comes out? Or as Morgan Housel and the psychology of money would tell you, take a step back and let’s think about this from a longer term standpoint.

Wes Moss [00:38:09]:
So number one, no one is crazy, simply means we’re going to all think about money, how we think about money, and it’s not going to really change. And we just have to recognize how that is. There’s no right or wrong way to think about it. It is how you were brought up and the environment that you were in, the economic environment at the time. And it’s different for everyone. We’re investing because ultimately, happiness, what drives happiness is freedom and the ability to choose that Morgan Housel talks about. And these are Housel’s lessons that I’m kind of editorializing to some extent. There’s a lot of luck when it comes to investing.

Wes Moss [00:38:46]:
In addition to the risks that we know about, I think the bigger picture here is investing is less like physics and math and more like psychology. Hence the title of his book, knowing when enough is enough. The power of compounding, which we’ve talked about many times here on the show, getting wealthy versus staying wealthy, having that little bit of paranoia and making sure you’ve got a safety net, as opposed to worrying about being missing out if things go really well. The paranoia around having, we call this dry powder on money matters, allows you to be invested and gives you time and a longer time horizon. If you have a security, if you have a bucket of security as well, the tails you win is really about how winners can emerge over time. And tails, as in tail risk. Tail risk, you think, oh, something really, really bad can happen. Out of the blue 100 event, he talks about how the Russell 3000, which is essentially the entire us stock market, or most stocks in the US market, how 40 some percent of them ultimately go bankrupt or go out of business, and that over the course of time, we’ve seen this strong compounding, 1011 percent a year.

Wes Moss [00:40:02]:
Over time, it’s all driven by only 7% of those companies. So think of just a tiny handful of companies drove all the returns for that broad index, essentially letting the Picassos emerge. The companies that did well, ultimately carried the day. He makes another really interesting example around tail events. Walt Disney. If you go back into the 1930s, Walt Disney, in their early days, making cartoons, making short form animation, and they were really expensive and they didn’t make any money. In fact, they went bankrupt at one point. Then they restarted.

Wes Moss [00:40:38]:
They kept making movies, short term animation, and it wasn’t until, and this is after movie 400 or project number 400 or 500, that one hit emerged, Snow White and the seven Dwarves. And in short order, Disney went from having all this debt, losing money to making $8 million back then. That was an absolute ton of money and being able to pay off all their debts. Everyone got bonuses that year and it really put them on the map. To some extent, that’s an example of a magical hit emerging and really creating what now has become a great legacy. We even see tail events within particular companies. Amazon, who again, getting added to the Dow coming up this week. What has made that company so amazingly profitable? They’ve worked on so many different projects.

Wes Moss [00:41:35]:
If you can think about the fire.

Jeff Lloyd [00:41:37]:
It was the Amazon fire phone that was a huge, and many analysts and Wall street opinions was a huge flop for Amazon. But that wasn’t going to distract them from continuing to come up with new products and services. Right.

Wes Moss [00:41:53]:
I think the quote that Bezos said after analysts asked him about the Amazon fire phone failing, he goes, oh, we’re working on much bigger failures than that.

Jeff Lloyd [00:42:02]:
You just wait and see.

Wes Moss [00:42:04]:
And then what happened? Well, what emerged is in all of these different projects that they were working on, Amazon Web services emerged. And between Amazon Web Services and Amazon prime, that’s what creates the multi billions of dollars in revenue that has driven this company. So even within companies, you have lots of attempts, lots of songs, and it only takes one or two hits to really emerge to put these companies on the map. But they have to be big and that’s why they’re called tail events. They’re way out at the end of the bell curve and they can really drive the day much more than people give them credit for. So that’s number seven on my list. Tails, you win. Number eight, the simple act of saving.

Wes Moss [00:42:48]:
I almost didn’t put that on the list because it’s so obvious. But I combine this with a couple others. Another one of his is wealth is what you don’t see. So wealth is not the car that you buy. Wealth is not the red Porsche or BMW that you buy. Wealth is really the car that you don’t buy because that’s wealth that you’ve kept. And that’s not wealth that goes out the door. So it’s this lack of spending is an interesting way to think about wealth.

Wes Moss [00:43:17]:
The problem with that is that it’s hard to find. Wealth is very often hidden. So it’s hard to find a wealth mentor a lot of times, and this.

Jeff Lloyd [00:43:26]:
Kind of goes back to the story you told about the 92 year old janitor he saved throughout relied on the power of compounding and what he ended up with, 8.8 point something million dollars when he was 92. Compared to the banking executive that threw.

Wes Moss [00:43:45]:
Away everything at the 18,000 square foot house in Greenwich. Exactly. We didn’t see Ronald Reed’s wealth because he’s a mechanic. Wait a minute, he was janitor. We didn’t expect him to be this wealthy guy. Nobody’s going to Ronald Breed for advice. He ended up amassing an incredible amount of wealth. Next up, reasonable is greater or more valuable than rational.

Wes Moss [00:44:17]:
And this one’s interesting, is that financial decisions that are reasonable take into account our personal biases and our limitations, and they can be more beneficial than just rational ones. So I think rational. Well, rational is this. Stocks go up over time. That’s the stocks are the asset class that go up the most over time. So it’d be rational for me to have 100% of my money in stocks all the time. However, I’m a nervous Nelly and if I do that, I’m not going to sleep well at night. I’m going to be nervous and paranoid all the time.

Wes Moss [00:44:52]:
I’m probably going to sell out every time the market takes a hiccup. So I’m not going to really make any money anyway. So even though it’s rational to have all my money in invested in stocks, it’s not really reasonable for Miss nervous Nelly. So whatever is reasonable is really what works. It’s not about what’s the perfect strategy or the best strategy. It really goes back to number one. No one’s crazy. Everyone has their own money DNA and their own fingerprint, and you’ve got to manage your investments to that.

Wes Moss [00:45:22]:
That is talked about in our industry as risk tolerance and asset allocation and diversification and all those things. Yes, to make sense. But I like this thought around. I want to have a portfolio. You, we, all of us individually, we want to have a portfolio that is just reasonable for us. Doesn’t have to be perfectly market rational, but reasonable so that we’re able to stick with it. And that long haul, of course, is what allows us to get to the Greenland. Not Greenland, the Iceland of compounding for some reason, by the way, on the map, and I don’t know what it is geographically, but on the map, because of the way the globe is, doesn’t Greenland look bigger than it really is? Or maybe on the map.

Wes Moss [00:46:03]:
It does.

Jeff Lloyd [00:46:04]:
No, it does on the map. And it’s always funny when you’re talking about Greenland and Iceland. You always think of Greenland as being green, but it’s actually ice, just white. Iceland is more green than ice.

Wes Moss [00:46:13]:
I don’t know if I can sum it up here as we wrap, but I’m going to try. And we didn’t get to all of these. Surprise was one of the lessons. The cost of everything, the seduction of pessimism, which we’ve talked about, you and me, in Morgan Housel’s book, really is very much about don’t invest like me, invest like you. So we were always looking around what other people are doing, but our investment strategy should be about us, not them. And then you’ll change. We’ll change over time. So, to sum it all up, no one’s crazy.

Wes Moss [00:46:47]:
It’s your money. And how you feel about it is correct. Freedom comes from autonomy. And that’s why we’re saving and investing to begin with, as choice and freedom. That’s the most significant dividend money can pay. However, everything has a cost, meaning that markets don’t give you ten or 11% a year for free. It takes the cost of temporary loss and anxiety to win. And we look at that.

Wes Moss [00:47:12]:
You should look at that cost as a fee, not a fine, it’s not a ticket. And guess what? There’s as much luck in the game of investing as there is risk. So when you start, when you finish what the world looks like at any given time, the only way to increase your luck is through time and participation. The game we’re playing is about the power of compounding, which is the most powerful force we’re dealing with. So just surviving the game as long as you can, to capture the tailwind of compounding is the key. Just save. The only way we can start compounding is to start that process. Tails drive the market, meaning that there will be a few trends and a few companies that ultimately carry the day, the exponential winners.

Wes Moss [00:48:00]:
And if you can be there to allow them to emerge, and 501,000 pieces of art, a couple of Picassos emerge, then you’ll likely amass a collection that’s worth an awful lot of money, just like owning a broad index can potentially do. Know you’re enough, as opposed to allowing somebody else to influence you. Investing is about you and not me. So make sure you have an eye on what your money goals need to be. Don’t keep moving the goalposts and ignore what everyone else is doing with their investments and their retirement there will always be surprises in the world, the economy, your life, investing, and we just have to accept that. And don’t get seduced by pessimism. Choose optimism over pessimism, which ultimately wins over time, and that’s what carries the day. Yes, everything will change, but most importantly, you will change.

Wes Moss [00:48:59]:
Know this too, and be okay with how you evolve and your evolving self might change and your investment plans might change. Frugality not only do we have to get wealth, we have to stay wealthy, then what we spend plays a massive role here, even perhaps even more than how much we amass. And above all, I think this might sum up the entire book of lessons. Remember that any strategy should be more reasonable than it is rational, and any strategy that allows you to stay in the game the longest and sleep well at night is the right strategy for you. For me, that’s mostly dividend stocks, broad equity etfs. For families that we typically work with, it may be only 60 or 70% in stocks and the rest in bonds or alternative areas to pay out income. Whatever balance is right for you is the right balance, because when it comes to money, no one’s crazy. Jeff Lloyd I think that’s a lot to take in.

Jeff Lloyd [00:50:04]:
Enjoyed it.

Wes Moss [00:50:05]:
So good. Thank you for being here. You can find me and Jeff easy to do so@yourwealth.com. That’s your yourwealth.com. Have a wonderful rest of your day.

Mallory Boggs [00:50:21]:
This is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. The information provided is strictly an opinion and for informational purposes only, and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

Mallory Boggs [00:51:09]:
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