Morgan Housel: To See Crashes Coming, Look Backward


Many big events are repeated over time.

“The lack of bear markets is actually what plants the seeds for the next bear market,” Morgan Housel, financial writer and partner in The Collaborative Fund, argues in an interview with ThinkAdvisor.

In his new book, “Same as Ever: A Guide to What Never Changes,” Housel maintains that to determine what’s ahead, delve deeply into the past.

Based on that, he says, in the interview: “If you were a really honest money manager, you would tell your clients to make sure to expect to lose a third or more of their money several times in a decade. … A market fall of 20% has historically occurred roughly every three years.”

Housel, the bestselling author of “The Psychology of Money” (2020), discusses these phenomena too: When investors think the markets are “guaranteed not to crash, that’s when they are more likely to crash”; stories that investors tell themselves about the future and how those affect stock valuations; “the one thing you can’t measure or predict [that’s] the most powerful in all of business and investing” — and more.

A former columnist for The Wall Street Journal and Motley Fool, Housel joined The Collaborative Fund in 2016. It invests in startups, such as Kickstarter, Lyft, Sweetgreen and The Farmer’s Dog.

In the recent phone interview with Housel, who was speaking from his base in Seattle, the conversation touches on “the first rule of a happy life” according to Warren Buffett’s partner Charlie Munger and what Housel invests in almost exclusively.

Here are excerpts from our interview: 

THINKADVISOR: You write, “At the first sign of trouble, the reason customers flee is often because investors [financial advisors] have done a poor job communicating how investing works, what they should expect … and how to deal with volatility and cyclicality.” Please elaborate.

MORGAN HOUSEL: If you were a really honest money manager, you would tell your clients to make sure to expect to lose a third or more of their money several times in a decade. That’s the normal course of the market. 

But there’s a disconnect of what clients are told to expect and the historical norm of the market’s volatility.

The most important information that any financial advisor can give their clients is that there are historical precedents of volatility.

A market fall of 20% has historically occurred roughly every three years. So if you’re investing for the next 20 years, you should expect that to occur many, many times.

Then, when it actually happens, it’s a little bit more palatable, and you don’t see it as “Oh, the market is broken; the economy is broken.” You see it as “This is normal for the market.”

You write that when people think “the markets are guaranteed not to crash, that’s when they are more likely to crash.” Please explain why.

High valuations actually trigger the eventual crash.

So people plant seeds of their own destruction.

You write, “The higher stock valuations become, the more sensitive markets are to being caught off-guard by life’s ability to surprise you in ways you never imagined.” Why does that happen?

The higher the valuation, when you experience something like 9/11 or the Lehman Bros. [bankruptcy and collapse] or COVID-19, the more sensitive to that event the market is going to be.

In the stock market, “the valuation of every company is simply the number from today multiplied by a story about tomorrow,” you state. What do you mean by “story”?

The stories are, effectively, how people think the future is going to play out, and the variance in the stories can be enormous. 

When they’re pessimistic about the market, their stories are pessimistic. If they’re optimistic, you get very high prices.

You need to recognize that for individual stocks or for the market as a whole.

If you take current earnings and multiple them by a story about tomorrow, you get a better sense of how the markets work. 

When you realize how the story-telling element [affects] valuations, some of the crazy events that we have, and booms and busts, can start to make a lot more sense.

“The one thing you cannot measure or predict is the most powerful force in all of business and investing,” you say. Why is that true?

These can be things that completely and utterly change the course of history, such as two of the biggest financial and economic events of the last 20 or 25 years: 9/11 and the Lehman Bros. [collapse] in 2008. 

The common denominator of those events is that nobody saw them coming until they happened. They weren’t on any analysts’ forecasts or in economists’ outlooks.

That of course should limit your confidence in specific economic and market forecasts that we have in the industry.

You quote Charlie Munger, 99, Warren Buffett’s partner in Berkshire Hathaway, as saying: “The first rule of a happy life is low expectations.” Can that apply to investing?

Absolutely. Historically, after inflation the stock market returns about 6.5% per year. In my own retirement plan, it’s going to be a little lower than that. If it’s higher, great! That’s a bonus.

But with too many people, the cause of their economic anxiety and investing problems is that their expectations are way too high.

If the market is returning 6% historically and they expect to earn 10% or 15%, the gap between their expectations and the circumstances — whether it’s investing or relationships, or anything — is too [wide]. 

You mentioned your retirement plan. Are you still investing exclusively in index funds, as you were when we talked in September 2020?

Almost exclusively. I’ll own them for the next 50 years, if I can pull that off.

It’s making a bet on global capitalism rather than any company or industry.

You write about Denzel Washington’s coming up to Will Smith after Smith slapped Chris Rock at the 2022 Oscars. Washington told him: “When you’re at your highest moment, be careful. That’s when the devil comes for you.” Is that so with investing too?

Yes. It’s true for investors: When everything feels the best, that’s when you should be the most cautious.

Look back: When was the market the most dangerous? In 1999, 2007, 2019. That’s when it was on the precipice of massive decline.

But between those periods, everything felt great and amazing. 

When was the best opportunity? 2002, 2009, 2020. In hindsight, we know that was when everybody was scared out of their minds.

So go out of your way to recognize that when you feel you’re at your peak, that’s when the devil can get you. 

When you feel like everything is going great in life, that’s when you’ve got to watch out. 

“Lack of recessions plants the seeds of the next recession, which is why we can never get rid of them,” you state. Please explain.

Back in the 1960s, economist Hyman Minsky came up with the financial instability hypothesis: When an economy is strong, people become optimistic; and they go into debt. Then, eventually, you have a recession.

So the lack of recessions is what causes recessions, and that’s why you can never get rid of them.

The same with the stock market: When the market is calm, people get optimistic. When they get optimistic, valuations, prices go up. That’s when the economy becomes unstable.

So you’re always going to have bear markets because the lack of bear markets is actually what plants the seeds for the next bear market.

You write that the 1930s, when the Great Depression occurred, was “by far the most productive and technologically progressive decade in U.S. history.” How could that be?

Because during the 1930s, every business in America was struggling. People were saying, “We need to figure out how to get more efficient today for tomorrow.” Those were the stakes.

It wasn’t that they needed to get efficient so they could raise earnings per share by 5%. It was: If we don’t get more efficient, we’re going to go out of business.

The innovation that took place in the 1930s was extraordinary because it was forced by the threat of extinction.

Innovation came out of World War II also, whether it was nuclear energy, rockets, jets or penicillin. It was off the charts.

It’s hard to say there was a silver lining to the Great Depression or World War II. But in periods when the world is on fire, so to speak, we tend to get the panic-induced innovation that benefits everybody.


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