What will be relevant 100 years from now? Or even 10 years from now. With so much change in the world – environmental, political, social, technological – that seems like an impossible question.
But there is an obvious answer: Those things that do not change. Exploring what those timeless things might be is the subject of Morgan Housel’s latest book, Same as Ever: A Guide to What Never Changes. An award-winning author and engaging speaker, Morgan joined us just after Labor Day for an LNW client webinar centered on risk analysis and human behavior.
Morgan started by quoting Voltaire: “History does not always repeat itself but man always does.” People’s interaction with money is cyclical, Morgan pointed out. Each generation has to learn lessons about money first-hand, unlike in the fields of medicine or technology where knowledge is cumulative.
What are some timeless lessons we should apply when it comes to money? Morgan highlighted three, illustrated through stories and anecdotes. As Morgan spoke, it became clear that the truisms he spoke about align with LNW’s philosophy on investment management.
Interestingly, his stories centered on the concept of benchmarks – the posts we humans set up or are set up for us to hit throughout our lives.
Benchmarks are certainly a core part of investing. But there are all sort of other benchmarks we use to measure our level of success in life. Especially for people and families with significant wealth, the goal of outdoing the benchmark in this or that endeavor can become an obsession. So here are some things Morgan had to say about that.
The key variable in investing is not [asset] growth but durability and endurance.
If you aim to get above-average returns year after year – i.e. beat the benchmarks — you are likely to be disappointed and may end up taking on more investment risk than is necessary.
As Morgan noted (and with which we agree), the key question is not “How can I earn the highest returns?” It is: “What are the best returns I can sustain for the longest period of time?” Little changes compounded for a long time create extraordinary changes.
In other words, the best way to preserve and grow wealth is to go slow. Morgan pointed out there are many analogies in nature. Most trees start out as saplings deprived of full sun and crowded by other trees. Their growth trajectory is slow but that is precisely what allows them to grow both tall and sturdy. A tree planted in direct sun with plenty of space will grow perhaps four or five times faster, but it is likely to remain skinny and vulnerable to fungus.
The highest risk is not something you can know or can benchmark.
“Risk is what is left over after you have thought of everything.” Morgan’s point on risk is that there are levels of risk and uncertainty, and most are to a certain extent foreseeable. We know for instance that there tend to be two recessions or bear markets each decade. So if a recession does happen, it is to a certain extend to be expected.
He defined the three levels of risk as:
- The odds that you will get hit
- Average consequences of getting hit
- The tail-end consequences of getting hit – the extremes (death or grievous injury, getting wiped out financially, etc.)
It is only the third type of risk that really matters, opined Morgan. Yet when it comes to investing, most everyone – the public, asset managers, the media – tend to focus on the first two. But it’s the tail-end risk that can change lives and fortunes. And it’s the tail risks that are not ever predictable, that catch almost everyone by surprise, even the specialists whose job is to pin down every risk.
How do you protect against the totally unexpected, what the investment team here at LNW calls the unknown unknowns? By acknowledging certain risks remain unknowable, and acting accordingly. While getting rich takes a certain amount of optimism and can-do attitude, Morgan opined, preserving and growing wealth requires a bit of pessimism and conservatism. We would also add humility to the list. Admitting that tail risk is not knowable or controllable while focusing on what we can control and what we know works to reduce risk, including well-calibrated diversification, sustainable cash flow and the addition of investments that can act as a buffer.
Use money to do what makes you happy, not to keep up with a benchmark.
Morgan’s story in this case centered on the first non-stop solo sailing race around the world. The man thought to be the frontrunner cheated and dropped out, using an external benchmark – public opinion – to drive his decisions.
The more interesting story was that of seasoned world sailor Bernard Moitessier, a front-runner and likely winner, who turned back toward Tahiti to lead a long, fulfilled life away from the commercialization of modern life that he so dreaded. Moitessier’s book, The Long Way, tells the story of his voyage as a spiritual journey as much as a sailing adventure.
The point: We have a choice about whether to use money as a tool for a better life or as a yardstick, constantly comparing ourselves to others, especially in the age of social media. The houses, clothes, planes. Does all this make you happier or are you doing some of it to keep up with the proverbial Joneses?
Morgan suggested viewing every financial decision through that lens: Am I paying for this or investing in that to measure up to some benchmark, or because it takes my life in a direction I want to go and believe in?
