It has been 115 years since Alfred Binet and Theodore Simon crafted the first reasonably useful "intelligence test," but even Binet said publicly that it was a limited measure of just one type of intelligence among many. In the years since, smart individuals have classified those varied intelligences in a number of ways — noted developmental psychologist Howard Gardener described nine, for example.
Recently, Morgan Housel of venture capital firm The Collaborative Fund — and a former Motley Fool writer — took his own run at the idea when he blogged about five kinds of smarts that wise investors would do well to nurture in themselves. In this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp invited Morgan on the show to talk about those particular types of intelligence, the good they do us, and what goes wrong for our portfolios when we devalue them.
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But first, in their "What's Up, Bro?" segment, the co-hosts discuss the problems many public pensions still have — despite a 10-year bull market that you might expect to have solved the underfunding issues — plus how the way couples tend to divide up the household chores may be making one partner financially stupider, and the story of an NFL player who is teaching his fellow football players, and some Ivy Leaguers, the fundamentals of personal finance.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on April 16, 2019.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Well, hello!
Southwick: In this week's episode, Morgan Housel from the Collaborative Fund is back. You love him! We love him! Let's hear him talk about different ways to be smart in life and investing. All that and more on this week's episode of Motley Fool Answers.
So, Bro, what's up?
Brokamp: Well, Alison, guess what? I've got three things for you. First one — and this is a headline straight from The Wall Street Journal — "The Long Bull Market Has Failed to Fix Public Pensions."
We know we've been in this great bull market for stocks. You'd think that all these underfunded pensions, particularly public pensions — meaning those offered by states, counties, and cities — would be better off. It turns out that's not quite the case.
Here's a quote from the article: "Liabilities of major U.S. public pensions are up 64% since 2007 while assets are up only 30%." Why is that?
First of all, pensions are a mix of stocks and bonds. Stocks have done very well. Bonds have not. Bonds have underperformed their long-term average by about two percentage points over the last decade. Also, back before the last 20 years or so, assets grew much faster than liabilities, which made states, cities, and counties feel very generous, so they increased the benefits. Then what happened? Then came the .com crash and the Great Recession, so things have changed.
In addition, nowadays there are more retirees — people who need the benefits. The number of retirees has grown while the number of people paying into it — that is the employees — has stayed about flat. They used the example of Maine. They have had about the same number of employees since 2007, but the number of their retirees has grown 32%.
Also, because of the economic difficulties of the last 15 to 20 years or so, some states haven't been putting in the recommended amount of money. One example they gave was New Jersey, which from 2009 to 2012 only put in about 15% of what they were supposed to put in. Now they have only about one-third of the assets they need to cover, future liabilities.
Some states have tried to change the benefits, but that got shut down either in the courts or by protests. Maine, which has been doing a better job than many plans in terms of fixing things, was able to change the formula for benefits — basically the cost-of- living adjustment — which is, by the way, unique to public pensions. Most private pensions do not adjust for inflation. Most public pensions do, which increases your costs. But even that only cut down their deficit by about $2 billion and they're still $3 billion short of where they need to be.
It's a real problem for these governments and the taxpayers in these cities. Earlier last month Warren Buffett told CNBC in an interview that public pensions are "a disaster," and he said, "If I were relocating into some state that had a huge unfunded pension plan, I'm walking into liabilities." I say to myself, "Why do I want to build a plan that has to sit there for 30 or 40 years, because I'll be here for the life of the pension plan and they will come after corporations. They'll come after individuals. They'll have to raise a lot of money."
He's basically saying that if you see a state that is significantly underfunded in their pension don't go there, because the only way they're going to solve that is by raising taxes. The bottom line, here, is even if you're not a beneficiary of one of these pensions, but you live in one of these states, cities, or counties, you've got to know the situation and you've got to factor that into your long-term plan because they have to make up that money.
Southwick: And where do you learn about the situation of your individual state?
Brokamp: It depends on the municipality you live in. It could be a city or it could be a county, but each of these has some sort of department of treasury or something like that. Every state's different, but somewhere you'll be able to find the funding status of the local pensions. And if you are planning to retire when you're a teacher, a cop, or a fireman and you were hoping to rely on these, you've got to know that status because if it's significantly underfunded, you have to count on the fact that you're not going to get all that you're promised.
Southwick: No. 2.
Brokamp: No. 2 is couples and the divvying up of financial chores. This comes from a recent study by Professors Adrian Ward and John Lynch. They looked at how couples decide who does the financial tasks and what the future outcomes are due to those decisions.
First of all, the evidence is clear that most couples divvy up the tasks. One person is what these guys called the "family CFO." There's a CFO and non-CFO. How do you decide that?
They actually found out that most couples don't decide based on financial literacy or financial skills. It's basically other factors like who has the time to do it. But over time, the financial literacy of the two people in the couple changes, so the person who is the family CFO becomes smarter and smarter, and the person who's the non-CFO actually starts to lose financial intelligence to the point where the longer you've been together, it's a pretty significant gap.
Now as long as both partners are around, this is actually efficient. They used some very non-romantic language to discuss how members of a couple use each other as external hard drives, which they called "transactive memory systems." They said these systems involve both the individual memory systems of each partner and the interpersonal transactive processes that coordinate the encoding, storage, retrieval, and use of information between partners.
Southwick: Aw! Baby Schmoopy!
Brokamp: So put that on your Match.com profile and see how many dates you get. So they looked at the outcomes of this and said it makes a lot of sense. It falls apart when the CFO is no longer able to do the job either temporarily or eternally. That leaves the other person to try to figure out what to do. And what they found out is that not only do these people who have not scored very high on financial literacy not know how to make the decisions, but they don't even know enough to know where to go to get the information.
They often turn to financial advisors, but it takes a certain amount of financial literacy to choose a good financial advisor and not get scammed.
Obviously the lesson, here, is it's perfectly fine to divvy up the tasks — actually very efficient — but you've got to have a plan for what you're going to do when the family CFO can't do that job. And it's particularly important for women, according to the study, because they pointed out that in 75% of the times when some member of the couple dies, it's the husband who dies. Most widows are women and they're widowed for about nine years. They are not the family CFO. They're left in the lurch.
Southwick: This seems like a good time to once again plug the Letter From Your Dead Husband.
Brokamp: From our good friend, Bob Hassmiller, who did pass away, but before he passed away, every year he updated a Letter From Your Dead Husband which was a document that his wife could look at if something happened to him so she would know exactly where everything was and who to turn to for help.
Then finally No. 3, a linebacker tackles financial illiteracy.
Brokamp: Hey! You may have heard the stat from the 2009 Sports Illustrated article that said that 78% of former NFL players have gone bankrupt or are under financial stress because of joblessness or divorce within two years of retirement.
Southwick: Two years. Wow!
Brokamp: Well, one player who hopes to avoid that fate is linebacker Brandon Cope. He grew up in a middle-class household in Baltimore. He played high school football. Fortunately his football coach was a hedge fund manager, so he was able to work for the hedge fund while in high school.
He goes to the University of Pennsylvania. Does some work as a nighttime stock boy at Walmart. He graduates, does not get drafted, but he is a walk-on free agent on the practice squad, I think starting with Baltimore. But over the next five years he plays for five teams, so he's a scrappy dude.
Last year he had a breakout season. Had five sacks and interestingly he's only the fifth player since 1982 to be an Ivy League grad and record five or more sacks in one season.
Southwick: There's a stat for everything.
Brokamp: There is.
Southwick: For everything.
Brokamp: So he just gets re-signed by the Jets with a $1.75 million contract. What's he going to do with that money? He's going to invest 85%-90% of it in stocks and real estate, as he's been doing pretty much throughout his career.
And then it occurred to him — a couple of years ago when he was playing for Detroit — when he and a few players would drive around looking for real estate to buy. They're all talking about how they learned this stuff. No one taught them this stuff. It would have saved them a lot of hassle and a lot of lost money if they had known this stuff coming out of college. So he thought, "There should be a class for this, and I can be the one who teaches it."
So now this offseason he's back at his college alma mater as the co-professor of URBS 140, An Equity and Empowerment Urban Financial Literacy, along with Dr. Brian Peterson, the director of Makuu, which is Penn's black cultural center. He's teaching what he calls, Life 101.
So he's starting with the basics — budgeting, living below your means, good debt vs. bad debt, renting or buying, the magic of compound interest — and he told ESPN, "You need to attack your financial health, your financial well-being, and get to work on creating a better future for yourself." It's pretty cool that this guy who's now a pretty good NFL football player spends his off-season teaching kids about money. He said the biggest financial lesson he's learned is that classic, "Don't keep up with the Joneses." He said, "If that's not something of value to you, then don't chase it." And that, Alison, is what's up!
Southwick: Well, Morgan Housel is back!
Morgan Housel: I'm here!
Southwick: Thank you, again, for coming on the show! We appreciate you coming in and giving us your time and letting your parking meter expire and still going with it.
Housel: We're talking, my meter's expired, but I told you I'm a risk-taker so we're going to cross our fingers and hope this works.
Southwick: See, I feel like I know you enough to know that you're not a risk-taker.
Housel: That's true!
Southwick: So this is killing you!
Brokamp: Weren't you like a skiing prodigy or something like that?
Housel: A slight exaggeration, but I've skied before.
Brokamp: Didn't you skip high school to ski?
Housel: That's true, yes.
Southwick: Well, that's on your parents. I don't know what that was all about. And look how you turned out. Went to the school of gnarly. Whatever people you used to say in the '90s when they were skiing.
Housel: Whatever it was. Yes.
Brokamp: "I want my two dollars." That's the '80s. You know what that's from, right?
Southwick: Yes, I was trying to channel "not you kind of brotha" from the '90s.
Southwick: Like, hey, yeah. We're going to like throw down a whatever with the sweet pearl down.
Southwick: I was literally so boring in the '90s and I cannot pretend to talk like that anymore.
Anyway, whatever, you are here today to help us talk about different kinds of smart. Should we start with this Jeff Bezos quote?
Housel: Yes, do it.
Southwick: I don't know if this inspired you to write this story.
Housel: It did, yes.
Southwick: Then let's start with the inspiration. It's a little photo that Jeff Bezos took that… no, I'm kidding. That's not the inspiration for the article you wrote. And Morgan writes over at the CollaborativeFund.com, so if you want to read more, he's an awesome writer and I would say that even if you weren't.
The inspirational quote we have for you today comes from Jeff Bezos. "The older I get the more I realize how many kinds of smart there are. There are a lot of kinds of smart. There are a lot of kinds of stupid, too." So today we're going to talk about five different kinds of smart. You're like yes, let's do this. The first one is accepting that your field is no more important or influential to other people's decisions than dozens of other fields, pushing you to spend your time connecting the dots between your expertise and other disciplines.
Housel: I think this is especially true in investing, where the core of investing is not necessarily whether you can become a master of finance. Can you memorize all the formulas? Investing is the study of how people behave with money. And since it's a study about behavior, there's all these other fields out there that have nothing to do with investing that are critically important to learning those fields that help you become a better investor.
Psychology, sociology, history, and all these things that you might think, "Why would I study sociology to help me become a better investor?" There's a lot of lessons in there that teach you how people think about risk. How they think about opportunity. How people run with the herd and don't want to be left out of the herd.
Those are all very relevant topics to investing, so I think if you take a more multidisciplinary approach to your learning; it's true in, I think, most fields but I definitely think it's very meaningful in investing.
Southwick: It's a liberal arts degree approach to investing.
Housel: I think that's right. And you'll see this a lot. A lot of the best investors — Warren Buffett, Howard Marks, Charlie Munger is probably the most common example — even when they're writing and speaking about investing, they're very often doing it through the lens of something completely unrelated, because their skill that's made them great investors is they understand how people make decisions around risk and opportunity, and that's what investing is. And a lot of those skills have nothing to do with finance, per se.
Southwick: You can see that a lot just in Warren Buffett's writing. He's always using analogies and metaphors…
Housel: Something totally different.
Southwick: Often Munger's are special-hug related, but you see that a lot in their writing. Good writing is telling stories. Whenever I nail a metaphor or come up with a good connection to help me explain something, there's like a little spark of joy in my brain where I'm like yes!
Housel: You start connecting the dots.
Southwick: I connected some dots. This is going to help me understand this better because it's totally different but it makes sense.
Housel: It starts to make sense.
Southwick: The next one. A barbell personality with confidence on one side and paranoia on the other is willing to make bold moves, but always within the context of making survival the top priority.
Housel: This is like the difference between getting rich and staying rich like we were talking about earlier. To get rich you need to be able to swing for the fences, take risk, and do something different. Step away from the herd. But staying rich requires conservatism and a level of pessimism and a level of not wanting to take a risk so that you can keep what you've gained.
And that conflicting or barbell personality is rare. This is where you have a lot of, particularly, traders who will make a huge fortune and then lose it all at some other time because they have the personality that will let them get rich, but not the personality that will let them stay rich.
If you become a billionaire in investing or your businesses, those people by and large don't have the personality that's going to let them say, "OK, now that I've made $1 billion I'm going to put it all in Treasury bonds."
Southwick: [laughs] This is so exciting!
Housel: If they had that mentality, they would not have become a billionaire in the first place and that's why there's so much turnover on the Forbes Richest Americans list. The kind of personality that helps you get to the billionaire list is also the kind of personality that's going to push you off it very quickly.
Southwick: No. 3 is understanding that Ken Burns is more popular than history textbooks because facts don't have any meaning unless people pay attention to them and people pay attention to and remember good stories.
Housel: It's obvious that there are people in your workplace or that you know who have the right answers and have great ideas but can't articulate them very well. And because of that, people in the workplace don't pay as much attention to them as people who may not have an answer that's as good as the others, but if they can articulate it very well and tell a great story about it, that's what people cling to.
Something I realized a couple of years ago is that basically every job, no matter what you do, is sales. Because even if you're not a salesman, per se, you're trying to convince your co-workers, clients, customers, and your boss that your decision was right. That requires a level of storytelling and just being clear and crisp about what you're saying.
I think this often goes unnoticed by people who think that because they have the common type of smarts — high IQ, high SAT scores — that they can calculate the right answer and because it's the right answer, people will pay attention to it; whereas, you have to be able to communicate that in a way that people find interesting and will cling to.
Brokamp: I enjoy reading about history, so I've read about the Civil War. We live in Virginia, so you can go to all kinds of Civil War sites, but I think 90% of what I remember about the Civil War is from the Ken Burns series.
Housel: It's so good!
Brokamp: It's so good and it's so true! It just burns it into your brain, no pun intended.
Southwick: Here at The Motley Fool my other job is doing PR and often helping train Fools to do interviews. I have a series that I put people through and most of that series is about how to be a compelling person on TV, or on camera, or up front speaking. Just tell stories. Just tell one story after another.
Tom and David Gardner, founders of The Motley Fool, are great public speakers.
Housel: They're masters, yes.
Southwick: And if you listen to them, all they do is tell the same 50 stories over and over again. And they're great stories. One time I talked to David Gardner — and this is so David — and he said, "It would be fun if sometimes I had every one of my stories," because he keeps them secure somewhere, "and I numbered every one of them and I just went and spoke publicly and I told them to just pick three numbers and then I would tell whatever those random stories were." He said, "And it would probably make a pretty good speech. It would probably work."
Housel: Just roll the dice. Which one is it today?
Brokamp: Actually, I did this the other day. David loves these little randomized things, so he'll randomize his to-do list. So I enumerated my to-do list and rolled the dice to figure out which thing on my list I should do. A thing I got from David.
Southwick: He said, "I should randomize a speech one day." But it's true. Often when you have people who tell these moving stories, stories help because they have emotion. They make you emotional and as much as we like to tell ourselves we make decisions based on logic, we really make decisions based on emotion and then spend our time trying to back it up with logic. But I am a firm believer that storytelling is one of the most important things you can do.
And it's easier to create a PowerPoint slide that's got four bullet points. It's easier to be like, "This is what I want you to know." But people will walk away not remembering.
Housel: People are not interested in that. They're going to remember the story.
Southwick: They won't feel moved. I'm a firm believer in the power of storytelling. The next way you can be smart — humility! — not in the idea that you could be wrong, but given how little of the world you've experienced, you are likely wrong, especially in knowing how other people think and make decisions.
Housel: It's just this idea that people's view of the world is heavily influenced and guided by their own unique personal past. The generation that they're born into. The country that they were raised in. Where they went to school. A lot of these things are completely outside of your control and are completely different from person to person.
And what I've experienced as someone my age in the United States — as an investor, let's say — is completely different than someone who grew up in Germany in the 1940s. Do you think we're going to have the same view about how the stock market works, or how the economy works? It's completely different.
One of the areas we saw this in was the last decade when gold, as an investment, became very popular. As the Central Bank was pulling a lot of money after the financial crisis, the generation it was most popular with, by far, was the baby boomers. And I think a lot of the reason that was is because baby boomers came of age in the 1970s and 1980s, when inflation was double digits.
My generation has never experienced significant inflation, ever. So we were looking at the baby boomers panicking about this coming inflation, and I think my generation couldn't really understand why they were so worried. But if you are a baby boomer who remembers gas lines and remembers 50% inflation, you just had a different life experience than other generations who didn't experience that couldn't really understand. I think that idea, that example, applies to millions of different things. Like everyone's definition of risk is just rooted in what they've experienced.
So if you can realize that your personal experiences are just a tiny fraction of what else has happened and what other people have experienced, and what is going to influence the decisions of other people, I think that's a really important thing to do, but it's incredibly hard to do.
Southwick: You can't imagine anything outside of your own experience unless you are open to listening to what other people have gone through. It can be easy to dismiss other people's experiences.
The fifth and final way that people can be smart is convincing yourself and others to forego instant gratification, often through strategic distraction.
Housel: Especially in investing, but also in a lot of things. If you think your competitive advantage is, "I'm smarter than everyone else," particularly in investing the answer is almost always, "No, you're not." Especially the combined average intelligence of millions of other people: They're always going to be smarter than you.
Then it's like what your competitive advantage is. And I truly think that the only one that individual investors can practice in real time as a competitive advantage is to have a longer time horizon than other people. It's not easy — it's still incredibly difficult — but I think if you can use patience as your competitive advantage.
And, like I said in the article, have ways to distract yourself — not looking at your portfolio — to set up your situation as an investor to keep yourself distracted from being tempted to make short-term decisions. I think that's one of the only ways that people can have an advantage over the average investor. And if you want to call that "smarts", then that's what it is.
Brokamp: When I was looking at that, my first thought was not investing as much as saving.
Brokamp: Not spending as much, because you've got to get something in your account before you can worry about investing it. And in your article you brought up the classic marshmallow test, which we've all heard of. The example of how the kids would come up with all kinds of ways to distract themselves from the marshmallows so they wouldn't eat them.
Housel: The kids in the famous marshmallow test were the kids who could delay their gratification and not eat the marshmallow. They ended up doing better in life than the kids who just took it right away. And the kids who didn't take the marshmallow right away — it's wasn't that they sat there staring at the marshmallow and exercised self-control. They played with their shoelaces, and some hid under the table. They were distracting themselves.
And it's very difficult if you're a child or an adult staring at the marshmallow. Staring at your brokerage account following the market all day. And the sooner that you're going to stare at it and still exercise self-control is very difficult to do. Much easier to just not buy the cookies and not have them on your counter than it is to stare at the cookies and assume that you're not going to take them.
Southwick: Get a hobby to distract you!
Housel: Get a hobby!
Southwick: Get a good hobby!
Housel: Go hang out! Go for a walk! Play with your family!
Southwick: All right, Morgan. Do you have any closing thoughts for our listeners about how to be smart?
Housel: Just be smarter!
Southwick: Just do it! Yes, that's a dumb question. I'm just looking for you to put an end on this.
Housel: Just don't be so stupid!
Southwick: Morgan, thanks so much for joining us today!
Housel: Thanks for having me!
Southwick: And for those of you who want more of Morgan — and who doesn't want more of Morgan…
Brokamp: And who doesn't?
Southwick: You can head to the CollaborativeFund.com/blog. That's where Morgan writes. You can also follow him on Twitter. He writes things on Twitter.
Housel: I tweet.
Southwick: You tweet. Morgan, thanks again!
Southwick: Well, that's the show! It's edited cleverly by Rick Engdahl. Our email is [email protected]. Drop us a line! Ask us a question! There's always a Mailbag episode around the corner. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
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