Episode 8Saving is as Important as Investing.
Avoiding "lifestyle bloat" can be as important as generating good returns when building wealth.
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|Morgan Housel||00:00||There's this great book by Daniel Yergin, who is an energy historian, his book is called The Prize, and he makes this point that I thought was really interesting, that there is a hidden source of energy in the world that we never really think about, which is conservation. We always think about, when we're looking for a new energy source, where are we going to find more oil? Can we use green energy? And he's like the biggest source by far is conservation. The stat that I love is that a Ford Expedition, giant hulking SUV today has better gas mileage than a Ford Taurus little sedan got in the 1980s. Like there's been such a push towards just becoming more energy efficient throughout the entire economy, and that has made all the difference in the world in terms of finding new energy. You don't think of that as a new source of energy, but it absolutely is.|
|00:46||I think the personal finance equivalent of that is that we spend so much time, rightly as we should, thinking about how can we become wealthier? How can we earn higher returns in the market? But there is another source of wealth that is out there is just being a little bit more efficient with your money. The way that I framed it is like, look, if you can earn 12% annual returns and I can only earn 10% annual returns, but you need more money to be happy than I do because, not you personally, if you need more money than I do to live a life, you have much higher lifestyle expectations, I might be better off than you even if I am earning lower returns.|
|01:18||I was always thought it was interesting that there are so many people in this industry, in the investing industry, who will move heaven and earth to increase their investing returns by 50 basis points where there might be five full percentage points of lifestyle bloat in their finances that could be removed with so much less effort than it would take to outperform the market. It's not to say that outperforming the market is not a worthwhile endeavor, but we have so much emphasis on things that we cannot control when maybe the only thing that is in our control, which is how we're spending our own money, is right there in front of us.|
|01:54||I think a lot of this too comes down to a mistake that people make over how much credit they're going to get for having nice things in their life. I was a valet during college at a very fancy hotel in Los Angeles. And I noticed something that really shocked me at the time, which is that when someone would drive in a Rolls-Royce or a Bentley or a Lamborghini, never once did I look at the driver and say, wow, that guy's cool. Never once. What I would do though is I would imagine myself as the driver and I would think people would think I was cool if I was a driver. And that irony that I didn't care about the driver, but I wanted to be the driver so someone would care about me was really powerful, because it just emphasized this idea that no one is thinking about you as much as you are. No one is thinking about your stuff as much as you are.|
|02:42||It's not that nice things don't matter, again I like nice stuff too, but people overestimate how much social credit they're going to get for it. And once you realize that, then I think it makes saving money a little bit easier. When it's like, look, I want more wealth, not so I can impress other people per se. I want wealth so that I can have independence. I want to build it up and not spend it so I can have total independence and autonomy in my own life. That's how savings money has been really important to me.|
|Chris Davis||03:09||And you think about reducing costs from a corporate setting, there was a terrific book of memos written by Ace Greenberg, who was an incredible CEO and an incredible trader at Bear Stearns in its glory days. And one of his memos talked about saving paperclips. And he said, here we are at this fancy investment bank and I'm writing all of the employees to tell you why are we buying paperclips? You receive packages all the time with paperclips on. And he made an interesting point where he said being in a cyclical business like they were, they said in good times, every point of margin that we can get by being tight on cost, by reducing bloated headcount, every point of margin on that high revenue base is worth so many more dollars than if we decide to cut costs in a down cycle. He said, yet the tendency in Wall Street or any cyclical business is, oh, now it's a time to tighten our belts. Business is down, we better start laying people. He said, you're laying people off. There're no jobs available for them. You're cutting costs when revenue is low, but a point of margin doesn't really matter. He said, if you can get the mindset to save in the good times, he said, those points of margins are a multiplier.|
|04:31||And John Malone, all of his obsession with taxes, everybody loves to tease about how much he thinks about tax strategy. But he would say adding a point to the IRR of their business is really hard. You've got to, in the old days, dig up more streets and cable and get more subscribers and acquire customers and programming. And yet, if you could get a point more to your bottom line by being really smart about taxes, that was within their control, hugely valuable. And so that idea of... Who was it who said, I make myself rich by making my needs few. I loved that and I can't remember who it was. But you also quoted the author of Catch 22. So tell that story because I thought that quote was so [inaudible 00:05:20]-|
|Morgan Housel||05:20||Kurt Vonnegut And Joseph Heller who wrote Catch 22 were having lunch at the house of a famous hedge fund manager in the Hamptons. And Kurt Vonnegut turned to Joseph Heller and he said, Joseph, do you know the owner of this house, the hedge fund manager, makes more money per month than you have ever earned in your entire life. And Joseph Heller said, that might be true but I have something that the hedge fund manager does not have, and that is enough money. I think that's the whole basis of personal finance that matters more than anything. And having some sense of enough does not mean you have no aspiration for more. I think that's the wrong message because most people will react negatively to that message to say, you should never want any more money. That's not what it is.|
|06:00||I think it's getting your expectations to rise slower than your reality. If your expectations rise faster than your income, it's never going to feel like enough. It will never feel like it's enough. If you're expectations are rising, but not as fast as your income, it's just at a lower level. The gap between your expectations and your reality is what's going to make you happy. This is going to make you surprised.|
|06:23||A great story to end this with Stephen Hawking, the great physicist who was honestly one of those smartest men to walk this planet in the last 100 years. And he had a quirk about him, of course, he had a motor neuron disease. He was paralyzed from head to toe, no control over his body whatsoever. And he wasn't born like that, he was a perfectly healthy young boy. He was an athlete. He rode crew at Cambridge and at age 21 is when he became afflicted with this disease and he lost control over his body after that. A few years before he died, he did an interview with the New York Times. And during the interview, he starts talking about how happy he is and how amazing his life is and how he's so lucky to get to be here doing this research. The New York Times they said, are you always this happy? For a guy who's in a terrible situation with his health. And Steven Hawking said, my expectations were reduced to zero when I was 21, everything else since then has been a bonus.|
|07:17||I think that idea that even this person who's in a terrible, terrible situation, but the gap between his expectations and his reality was so vast that he was like this joyous, happy person. I think that's an extreme example that could apply to a lot of us. That it's not necessarily how much you have, it's just the gap between what you have and what you expect that makes all the difference in the world.|
Chris & Morgan Bios
Chris is Chairman of Davis Advisors, an independent investment management firm founded in 1969 with $20 billion in AUM. He’s co-portfolio manager of the Davis NY Venture Fund as well as other portfolios focused on Large Cap and Financial companies across mutual funds, SMAs and ETFs. Chris has over three decades of experience in investment management and securities research, was recognized as a Morningstar Manager of the Year and was recently named to the Board of Directors for Berkshire Hathaway.
Morgan is a partner at The Collaborative Fund and serves on the board of directors at Markel Corp. His book The Psychology of Money has sold over two million copies and has been translated into 49 languages. He’s won multiple awards and accolades for his writing and insights from the Society of American Business Editors and Writers, the New York Times, and other industry organizations. Morgan has presented at more than 100 conferences in a dozen countries.