80 Years of Financial Knowledge in 53 Minutes | #422 (Bill Bernstein)

The reason why the word guru was so popular is because he was sharled and is too hard to spell. If I go to a fancy restaurant, I'm going out for dinner afterwards to feed myself. I remember him laughing and saying he never realized what a great marketing tool a terminal diagnosis was. And someone who can laugh about that is someone who has lived their life well. This is the rational reminder podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benchman Felix, Chief Investment Officer, and Cameron Passmore, Chief Executive Officer at PWL Capital. Welcome to episode 422. And Ben, this is a very special episode where we welcomed a past guest, William Bernstein. Bill Bernstein, many listeners know of his work, but he joined us to talk about a book that another guest wrote just before he recently passed away. And that's Jonathan Clemmence book called Money and Me. And there's a neat story there where early on in the podcast, this is eight years ago, pretty much now, Ben. We were coming up with the idea of having guests on and we both knew about Jonathan. So we reached out to him. He was in the New York City area. And we asked him, he would join us. We, I think we talked about this on a recent point. We logged our equipment to New York City. Well, of course, with the inter- with Barry Rittles and went to New York City with our equipment and interviewed Barry and John in this said, well, if you want to bury his office, I'll meet you there. I loved it. Have it interview with you guys. So he met us after we saw Barry and we interviewed John and the Clemmence and the Rittles office in Midtown Manhattan. And he was very kind, very gracious, so happy to see us. And it was a fabulous interview. And we were very early on in the podcast. I was episode 55 that Jonathan was on. 55. Yeah, so it's going to make it seven years ago. Regardless, it was a great interview. And it's a real treat to have Bill join us to talk about the memory and the legacy of Jonathan, which is highlighted in this book, Money in Me, How to Make Your Finance Work harder for you and your family. And Jonathan spent his whole professional life as a financial writer. He was at the Wall Street Journal for 20 years, spent six years at City Group, where he was the director of financial education for their wealth management arm. And then he ran his own blog website called Humble Dollar from 2016 until a few months before he passed away. And he wrote about his diagnosis, his terminal diagnosis on the blog and reflected on life and dying and pretty powerful stuff. He was so open about it as well and shared. He was on many interviews that I would listen to up to his death, where he was just so frank about it and wanted to have an impact right to his end. Yeah, what you did. And so he published his book post-humusly and Bill Bernstein, who's a new Jonathan for years, and he tells some stories about their relationship. Bill stepped in to do interviews like this on Jonathan's behalf, because he was so familiar with his writing and Bill, such a good speaker. Bill, who's, so he was on in episode 108, but again, pretty early on in the podcast. If people don't know who he is and listeners likely to do, but for anyone who doesn't, he's a neurologist. But also the co-founder of Efficient Frontier Advisors, which is an investment firm that approaches investments. I would say very similar to P.W.L. using Locust Index funds and stuff like that to build portfolios. He's also written a ton of books on finance, financial decision-making, economic history, and other topics. He's got some good peer-reviewed papers out there as well. But he's a brilliant, brilliant guy. Some of the best sort of practical writing on how do you take what we know from academic finance and make it useful to individuals making household financial decisions come from Bill's writing. He's one of the pioneers in sort of taking academic literature and making it practically useful in a way that's not too dumb to down, but is still accessible. And it comes from the scientific medical background. That's this foundation, right? I mean, his books were being part of convinced me to make this shift that I did 30 plus years or so ago. Yeah. The scientific background for sure, but his ability to communicate and make things practically relevant as opposed to abstract is unusual. It's special. Fantastic to have him on talking about what Jonathan had to say in his final book. Exactly. Okay. Should we get to the interview? Yep. Let's go ahead to our interview with Bill Bernstein on behalf of Jonathan Clements. Bill Bernstein, welcome back to the Rational Reminder podcast. We had to be here. Very excited to be talking to you about Jonathan Clements, who has unfortunately passed away. We're talking to you about a book that he wrote before he passed away. And you've been gracious enough to speak on his behalf about his writing, which is a, I think, an incredible thing for you to do in his memory. So to kick it off, Bill, why does success often contain the seeds of its own destruction? Well, if you're talking about success at the corporate level, obviously great success and a very high profitability and profit margin attracts competition. So that's number one. Number two, organizations that are successful grow to be large and they become unwieldy and sclerotic and difficult to manage. And they develop hubris. They think that they can do no wrong. And there's another factor which people don't think about enough, I think, which is that a lot of success has to do with luck. A lot of corporations wind up being in the right place at the right time. And then never that lucky. Again, I think that Facebook meta is a classic example of that Zuckerberg got very lucky at Harvard setting up his social media there. He was the right place at the right time. He took off. He was able to monetize that quite successfully in terms of advertising revenue. You know, meta is still a cash cow, but it's obvious that he's lost his touch. The metaverse that didn't work out so well, the odds that he's going to succeed at AI, they're not zero, but they're not high either. What constraints does our ability to help future generations face? I think what you're asking is the ability of individuals to endow their errors. I think that's what you're talking about. In other words, how can I establish or how can our listeners establish a family dynasty, their kids, their grandkids, educate them, make sure they're successful. And the answer is something that not only Jonathan's written about. I wrote about as well with Rob Arnot and Lillian Wu. And it's fortunately impossible to do for any number of reasons to establish that sort of diagnostic wealth and power. First of all, people breed like rabbits. You double the population of your errors every generation. So you're dividing by two once every generation. And then your errors tend not to be as ambitious and as hungry as you are. They tend not to be as good at managing money as you are. They have to pay taxes. They climb the hedonic treadmill and their material once explode. They fight with each other over inheritances. So history is full of cases of supposed diagnostic wealth that burned out very quickly. For example, there was a reunion of the Vanderbilt errors in 1970. There was not one million error among them. There are cases where families have managed to keep their wealth intact. I mean, I happen to be personally acquainted with someone who is the heir to a large manufacturing fortune. And he, I believe, is the fourth in his line. He was deemed able to take over the business. And by the way, he has 12 grandchildren. So you can see where that's headed. Interesting. There's a great book about the Vanderbilt wealth dynasty and how it ended up where it is now, which is a pretty interesting read. It burned out very quickly because there was one direct spend-thrift heir. And that really did a number on that particular inheritance. The story is the same throughout all unheredences. So if you think you're going to be endowing your great, great grandchildren with wealth and privilege, guess again. So interesting to think about the estate planning implications of that reality. Why do people spend as they do? The question is, is what's the most effective kind of spending? I tend to think of a spending hierarchy, the same way that I think of Maslow's pyramid. It's not really a question of hierarchy of needs. It's a question of hierarchy of adaptation. So what do we adapt to the fastest in terms of our consumption? What's material consumption? Get used to driving a beamer or flying first class. And the thrill very quickly fades. We adapt the fastest to material purchases. Next up is something that people talk a lot about these days, which is experiences. We don't adapt quite as quickly to experiences. But we still, we certainly do. We get used to the nice hotel. We get used to the travel. We get used to spending a lot of time with family. The third thing, the third step up from that, which we adapt to much more slowly, is autonomy. I think this is a podcast. I think I can use the term "beauty money." And that is one of the best purchases you can make is autonomy. There's still another level even above that, which is something that Jonathan wrote about in one of the columns or one of the chapters in the book, which, and it's something we don't think about. We think about the utility of purchases, but what we don't think about is the negative utility of money. What do I mean by that? Worrying about money. When you ask people, and particularly retirees, what they worry about, number one is their health, but then the next five or six items all boiled down to not having enough money to pay for rent, groceries, paying for medical expenses, for the travel they want to do, all that sort of thing. The biggest disutility of money is worrying about money. The nice thing about having a lot of money and probably the best thing about having a lot of money in my mind is simply not having to worry about it. I think this goes against the concept of dying with zero. If you die with zero, you're going to run out of money. The trick is you don't know when you're going to die. If you look, for example, at what's one of the major causes of and major depression, it's worried about money. I don't know anyone who ever committed because they were sad that they didn't go to Paris. I'm curious in your thoughts on something that I've observed, which is that people who save a lot because they worry about money never stop worrying about money, no matter how much they have. There are people who are like that. That's true. But I think that there may be a larger number of people who eventually at a certain age realize they have enough money and they stop worrying. And I think one of the ultimate disutilities of money is winding up in your ninth or tenth decade without enough money. To me, that's a disutility that overshadows all others. People worry about money. They never stop doing it. But that's not half as bad as an impersonal age. What are the main psychological traps that lead us to make spending decisions that we might later regret? Jonathan wrote quite a lot about that. We tend to think we know what's going to make us happy. And the classic thing, I think, Danny Coneman wrote about this. I think Jonathan picked up on this, which is the classic example is everybody thinks that moving to Hawaii is going to make them happy. And what they forget is that in Hawaii, you still have to drive through traffic to buy groceries. You still have to hassle with service reps. You still are going to squabble with your family. And you wind up spending 90% of your time in Hawaii doing exactly the same things you're going to be doing in Duluth. We're not very good at predicting what is going to make us happy. That's the major thing. And we don't understand that it's not material possessions and our material circumstances and surrounding it makes us happy. What makes us happy are the basic determinants of well-being, which are number one, your health. And then the three foundations of self-determination theory, which is connection, competence, and autonomy. If you're not connected to other people, you're not socially interacting. If you're not autonomous, you're not making your own decisions, you're not in command in your own life. And you are not doing things besides golf that expand your competency and your skills, you're not going to be happy. And the trick is that people don't focus enough on those other three things. They obviously focus on their health, or at least they try to, not always successfully. But the things that truly provide us with well-being are not the material circumstances. What do you think are the important things about our purchase with money? Given that disconnect, what actually benefits people from a spending perspective and what they think, what do you think people can do to sort of pressure test large purchases against what is actually going to be optimal for their future self? That's a really good question. And I think you have to ask yourself, what are the downsides of this purchase? And that's another thing that Jonathan wrote about. So we all think that having a bigger house is going to make us happy. Well, bigger houses have bigger problems. I've learned in my impending senescence, the more real estate I own, the less happy I am, because the more problems I have, or buying the BMW. We don't realize that we're probably paying for the mechanics preschool fees and we'll be doing so out in finitum, or I guess, Range Rover is your famous for that. So we don't think about the downsides of our purchases. How much does the happiness we get from a purchase actually scale with its price? Not very well. This is something that Jonathan wrote about. One of the things that's memorable, I'm not sure he wrote about it in this book, but he spoke about it, which is that one of the great pleasures of his life was having quesants with his wife in the morning with coffee once or twice a week. That $5 per quesant buys a lot of happiness. Going out to dinner for $100 doesn't buy 20 times as much happiness. There's a scale. This is one of the few things where there isn't really a hedonic treadmill in terms of material purchases are consumer electronics. They've gotten to be very inexpensive. You're constantly climbing the hedonic treadmill for less and less money with electronic purchases because electronics get better and cheaper all the time. So it's the one place where you don't run out of hedonic red, you know, headroom. I like that. The croissant example is so good. I would generalize that as savoring small pleasures, which I think people don't do enough of. Another thing that Jonathan wrote about it and it's also been written about by well-being researchers is the importance of being thankful, stepping back and being thankful for all of the things you have. Look at how the rest of the world lives and look at how lucky you are. Every time I feel like griping about something, default back to that makes you feel better almost immediately. I like your house example. Looking at the downsides of a purchase, I think the house and the BMW. One of the tests that I like is asking how a purchase will affect how you spend your time because the house I agree with you, I have a house. One of the biggest costs of the house is the time I spend worrying about the house. We live in a very nice place, but half the time I think about how nice it would be just to rent an apartment and being able to call the super when the refrigerator dies. Yep. My microwave just broke. It's terrible. It's like a Bosch built-in microwave too, so it's not like I can just go get a new one. I'm going to bring the Bosch people in to come fix it anyway. We have one that's an absolute piece of junk. It's 25 years old. I hate looking at it, but it's never going to die. Maybe I need one of those. What are the four horsemen of the economic apocalypse? This was a booklet that I wrote called Deep Risk. Financial economists love to play this little parlor game. What is risk? Well, is it volatility? Well, shouldn't be volatility. We all know why that doesn't make sense. Should it be consumption and consumption failure? That makes a little more sense. But I like to step back and ask myself what are the things that are going to derail your financial future. It's not October 1987, which dating myself here rather badly. That's the day that the Dow fell by almost 25%, which anybody who lived through it will remember or for that matter, even the lost decade from 2000 to 2009. That can ruin your financial future and the financial markets are really bad things in financial history. The big one is deflation. There's deflation. There's confiscation by the government. And finally, there's destruction being in a war zone. All of those things can destroy your financial future. The last two you can't do a lot about. If you're in a war zone or the whole world turns into a war zone, your portfolio is the least of your problems. Reaction can be dealt with, but it's very hard and it's very expensive. And the cost is enormous. Do you really want to move to Malta and leave all of your friends and your family behind? It's very expensive. Not only that, but when you move your assets abroad, you're painting a target on your back for the IRS. A lot of good reasons not to do that. Deflation, rare, vanishingly rare in the era of fiat money. The big ones inflation. The nice thing about inflation is that no, you can't completely immunize yourself against it, but you can do a pretty good job. You can keep your bonds short. You can buy treasury inflation protected securities. You can own value stocks. You can own commodities producers. I'm not fond of commodities futures for a lot of different reasons, but own the shares of commodities producers. And occasionally you are very pleasantly survived as you were in 2022. And everything under the sun got creamed except for oil stocks, which gained something like 60% on the domestic market. None of those things are perfect, but you do all of those things and you are doing a tolerably good job of planting the damage of the forehorsement. Inflation is the one I focus on and I do those four things. Interesting. How do you justify optimism for a globally diverse, I poured folio with a long-term horizon? I take solace in the fact that even though foreign stocks, international stocks haven't done well to past 10 or 15 years, they're still relatively reasonably priced. If you think about it, what you're saying when you're pricing the US market at 30 times trailing earnings, and foreign markets, they used to be at 15 times trailing earnings, now they're up to about 20, what you're saying is that US companies are going to grow their earnings much, much, much faster for a much longer period of time than foreign stocks will. And one of the things you learn from both financial history as well as econometrics is that people tend to grossly overestimate growth rates. When you look at the discount rates get applied to growth stocks, they turn out in retrospect to have been way too high. What we're starting to see play out is that happening with the hyperscalers. They used to be cashcals. They are cashcals no more. They are consumers of cash. And they're piling enormous amounts of catbacks into infrastructure that may have the lifespan of a head of pickled cabbage. And I'm talking about chips that are going to obsolete themselves very rapidly. So we're starting to see that play out already, I think. Does pickled cabbage last longer than regular cabbage? I would think so, yes. I would have gone with just regular cabbage, I don't know. I have to admit I'm out of my deaf theory, terms of culinary survival ability. What can investors learn from Jonathan Clements' investment sin? He's basically channeling, even though he doesn't mention him, Clefazness is concept of sinning a little, which is that no, you don't time the market. But if you're going to rebalance, and most people rebalance, why not overbalance a little bit? If your spreadsheet tells you to buy X amount of asset Y at Z percent, why not up Z percent? Okay. Rebalancing vacation, let's say to far and stocks, is 30% of your equity and they've done poorly, why not up to 35%, which means you are buying a truckload more of it. That's not something you get for free. Rebalancing occasionally bites you. Occasionally the return, the rebalancing bonus, which is a term that I hesitate to use, that bonus is occasionally negative. And so if you're doubling down on that rebalancing by sinning a little, which is what he's talking about, then you can get burned even more. Something said that I do that myself and have been reasonably pleased with the results over the years. What does it mean to have won the game financially? It can mean one of several things. In the loosest and most forgiving sense, it means that you've paid for your groceries and your mortgage, your very basic needs for the duration of your retirement. So let's just say for the sake of argument that your living expenses are $70,000, your basic living expenses are $70,000 a year and you're getting 30 from social insurance, social security in the US. So you've got $40,000 to meet your basic living expenses, including your taxes. You should have about 25 times that's a million dollars. You've won the game in that sense. So that's the loosest sense of winning the game. I think that you can also define winning the game as paying not only for your needs, which is what I was just talking about, but as well as your wants, visiting the grandkids, the first class seats that you might want to buy, taking that Viking river cruise in Europe, that you can also include. And so maybe you need another $40,000 a year to do that. So now you need to have really won the game $2 million. Most people aren't able to do that. When you win the game, you defuse those expenses, whether they're your basic expenses, but also on top of that, let's say your wants with a risk-free asset. Well, what's a risk-free asset? The risk-free asset for consumption over 30 years is a 30-year tips ladder. And as soon as you bring that up, people throw up their hands and they say, well, I can't afford that, which is true. Most people cannot afford to pay for the retirement without getting higher returns than a tips ladder. So they have to take risk. And with that risk comes the possibility that you might not do well and analogize the person who's won whatever game they're going to talk about with a risk-free asset. And they say, well, but I can make a better return than a 2.5% return on a tips ladder. Okay. And the answer is you probably can. It's also true that five out of six times you play Russian roulette, you win. And when you depart from a risk-free asset and you invest in risky assets to pay for your expenses, you are playing Russian roulette with your future. Five chances out of six, you'll do fine. But do you really want to take that risk? I can easily conceive of a world in which you might not get a 2.5% real return over the next 30 years. So do you think people who have won the game to a level of their satisfaction should be creating that tips ladder liability matching portfolio? The tips ladder, I'm not overly opposed to annuities as well. The trouble with annuities is they're nominal. So you have to be very careful. If you are going to defuse your expenses with a nominal annuity, you better be banking a fair chunk of your first several years of monthly payments to account for inflation in later years. I've relatively little problem with annuities as well. But you should be defusing your expenses with one of those two things. And if you can't do it because those are having enough returns, then realize, yeah, you're going to have to take risk with your portfolio, but realize that risk occasionally shows up. What explains the gap between what the math permits and what even a rational investor actually does? What's all the stuff that Connemon and Versky wrote about, which is the endowment effect, the fact that you should be selling. If you're have a taxable account, you should be selling their losers and harvesting tax losses. You can't predict what will make you happy. And we don't pay enough attention to the things that do make us happy. We should be keeping our portfolios very simple. Do I do that? My portfolio is not as simple as it should be. Has a few more moving parts than it's probably necessary. We don't do the things that the math tells us to do because we are human beings. I get a little frustrated. I have to admit by people who are very enthusiastic about sophisticated retirement calculators, as if there are everybody's a Vulcan and will be able to vary their consumption with their portfolio value, which is what these software packages tell you to do. They don't take into account the prospect theory, which is that people don't like seeing their income reduced when their portfolio falls in value, which is what a lot of these calculators tell you to do. I think that a lot of people make the engineers a mistake, which is they think that finances all about the math and they don't take into account millions and millions of years of evolutionary psychology. Everybody thinks they're going to buy at the bottom. The rational thing to do is to optimize your stock allocation. And these days, everybody is on that bandwagon. Let me tell you, I was around in 1982. I was also around in 2002 and 2009. I don't remember a lot of people back then bragging about how they were 100% in stocks, which is what the math tells you to do. Yep. We see that with geographic allocations too. A lot of Canadian investors at the moment are pretty enthusiastic about US stocks. But during that last decade, Canadian stocks actually did quite well. US stocks did even worse than Canadian dollars and they did in US dollars. There weren't a whole lot of Canadians back then talking about wanting to even invest outside of Canada at that time. I love the lost decade because these days, everybody trashes value investing and foreign investing and small stocks. Take a look at the returns when those asset classes from 2000 to 2009. It will knock your socks off. One of my favorite concepts is Auntie Elmann and's definition of risk, which is they're not just bad returns. It's bad returns in bad times. That's really why you diversify. Your point on variable spending is really good, too. We've had a bunch of guests on to talk about the lifecycle model and how your spending should be variable through time. In practice, people are a little bit okay with that. One of the examples we've given is that they might go on a less fancy cruise that year, but people's spending is generally very inelastic. We've tried to show clients, "Hey, we've got this new," like you said, this new calculator that lets us model variable spending. It needs you to spend more throughout your lifetime. They're like, "Well, no, I don't want my spending to vary." All you have to do is pick whether you're not going to visit the grandkids or you're going to put the dog down. All you have to do is pick between those two things. It's easy. The cruise example is good. You can go on a less nice cruise. I think people are comfortable with that level of variation. I think it is pretty inelastic. I don't want to get too caddy here or name too many names, but the lifecycle model is very, very elegant. The analogy to that model and the man who invented it would be, "Let's imagine that you've got a textbook of bridge construction, and it's the most famous textbook on bridge construction ever been written bit and bit and by the most famous bridge engineer." Then you find out that 20 years later that the bridge that man designed collapsed. You might be a little reticent about using that person's model. Good theory, maybe not so good in practice. Exactly. Evan says retire is a verb. What does he mean? I'd like to put it slightly differently, but I think this is what he's talking about, which is that when it comes to retirement, golf is a four-letter word. If you think that you're going to go to the beach and play golf, you're going to be very, very disappointed because you've spent your whole life hopefully developing a professional craft that gave meaning to your life and having the avocational activity. that gave meaning to your life as well. And the idea that you're going to suddenly stop doing that and be happy is ludicrous. People get very bored on the beach. And I can't tell you how many doctors I knew who thought they were going to be happy in retirement who went back at least to working part time just to give their lives some meaning. What three factors are crucial to happiness, retired or not retired? I've used the term, self-determination theory, which I'll expand upon a little bit. It's formulated by two psychologists, Desi and Ryan. Basically, it just talks about the three things that give meaning to your life. It's connection with other people, social connection. That's number one. And then next is competency. It's doing something and feeling good about it. Let me give you a silly example from my own personal experience. One of the things that I enjoy doing is just playing with obsolete, clapped out computers and getting them running again on Linux. And I had one that is notoriously difficult to convert to Linux. But it's very lightweight. It's very easy to travel with. And it took me two or three days of working on it to finally get Linux installed on it. It was very frustrating in the moment, but God, I drive the enormous amount of satisfaction. So having a sequence of tasks that you do that you accomplish learning a piano piece, working with carpentry. Those are the sorts of things that make people happy. And then finally, there's autonomy. And that tends to be a negative thing for most people. A lot of people wind up at age 50 just despising the cubicle they work in and the head down coding they have to do and the abuse of their bosses. The ability to say goodbye to that is also extremely important as well as being your own boss. I've been my own boss for the past 40 years. And I could not conceive of working under anybody else, especially in my age. I just couldn't conceive of doing it. Even 20 years ago, I couldn't conceive of doing it. Once you've gotten used to working for yourself, you never go back. I like the Linux. The Linux comment. I do that too. Maybe not reviving dead computers, but whenever I have a computer in my household that has become too slow to run windows or just whatever it's not working anymore. It gets wiped and it gets Linux on it. I got a bunch of random Linux computers sitting around the house. My granddaughter makes fun of me. I have a whole shell full of them. What are some assumptions that investors should not make? You're talking about a chapter in the book and Jonathan had a list, some enormously long list of them. And of them, I picked out what I thought were the most important things. Number one, obviously, is great company rate stock. I think we all know that, which is the reason why most amateurs will buy a stock. They think that X company XYZ is a great company. It's going to be a great stock. And we all know from the academic literature that that is simply not true. The other thing on his list that really resonated with me is not to listen to talking heads in the media. And I would refine that even further. Most people tend to listen to the media. They listen to this podcast. Certainly you guys are smart enough not to listen to market gurus. You know, as we all know that the reason why the word guru is so popular is because Charles and his two hard to spell. But there's a refinement of that, which took me decades to realize, which is that eloquence correlates inversely with forecasting ability. The more eloquent people are the worse they are actually are at forecasting. And so until relatively recently, I would listen to somebody and I would say, gosh, they're really smart. That makes sense. I would should pay attention to this. And now it brings an alarm bill. It is agreeing an alarm bill for me. Well, first of all, let's take the positive example. The people who I respect the most, whose opinions I respect the most tend to be awful public speakers. Think about the most famous names and financial economics and then listen to them speak. They're not good speakers. And yet I respect their analytical ability and their opinions above all else. And so the other hand, contrary wise, the worst charlons, the worst crooks tend to have silver tongues. Why is that? Well, the reason why there's this inverse correlation is because if you are rhetorically skilled, it enables you to cover up your analytical sloppiness and to intimidate other people. And there is nothing that amplifies that than an English accent, particularly if you're an American. And when I find myself being very impressed with somebody, particularly if they have an English accent, immediately all the alarm bells go off. What is the three-pronged strategy to get more out of your money? That was one of his columns. The biggest point there is waiting before you hit the send button, those literally and metaphorically, don't make important decisions rashly. And the most frustrating mistakes get made is you didn't reflect enough. You didn't look at it twice. You didn't measure twice and cut once. Yeah, I probably implies to investment decisions and consumption too. I love the house example you gave earlier where it's like you think you want a bigger house, but you don't think about how it's going to affect how you spend your time. You imagine this big nice house with marble floors or whatever, but you don't imagine all the time you're going to spend dealing with it and worrying about it. Good time to reflect on those things before pulling the trigger. What decisions can people make today that will improve their happiness? We've covered the ground on that, which is that you want to look ahead to your future life and ask what are the things that make me happiest? What material possessions have I purchased that made me happy to basically do an audit? What are the things that made you happy? And the odds are that buying a new car didn't make you happy six months later. The odds are that eating a $300 meal out didn't make you happy. If you're going to spend big money eating out, then take out your whole family. Take out your kids, your grandkids, your friends. If you're going to spend big money on food, don't spend big money on a fancy restaurant, spend it on a mediocre restaurant or a good restaurant that you invited the 20 most important people in your life too. I'm glad you followed up with that. I have definitely spent $300 taking my whole family out to a not fancy restaurant, but some of our best memories of those dinners. But yeah, maybe that's the best example, the most extreme example, a very fancy restaurant by yourself versus a modest restaurant with your whole family. I mean, one of the hedonic things about eating out, especially these days, is that a lot of places that have superb food tend to be very crowded and very loud and you can't enjoy your company in that environment. I find that I would much rather have a meal out with two or four other people where there's mediocre food and it's relatively quiet, then eat it in noisy place that has fabulous food. That is so true. The last very fancy restaurant that I went to was so incredibly loud, I could barely had a conversation. Where do you get to be my age? And the portions are tiny, like I don't know. I knew that was coming. I like to eat. I'm a large human, larger than the average person. I need a lot of calories. That's one of my hot Biden items too is I'm really offended when I spend $50 for a plate of food you can barely say. Bill, what are the two kinds of happiness? The Greeks recognized two kinds of happiness. There was hedonic happiness, which is the nice slice of pizza, the great piece of music, the rave at the concert, the jumping up and down joy. And then there's eutomonic happiness, which is life satisfaction. The point that Jonathan made over and over again, which is blindingly valid is that hedonic happiness adapts very quickly and fades very quickly. The best happiness in the world is eutomonic happiness. It's looking back on your life, looking at the things that you've done, looking at the time you've spent with other people, looking at the people you've helped, looking at the things you've accomplished saying, yes, I've let a good life. That's the second kind of happiness. And that's obviously the best kind of happiness. That's interesting. I always talked about, I think eutomonic for sure at a moment in time when you're looking back, that's paramount. But I've always talked about having some kind of balance between the two because you can have eutomonic happiness where you look at your life and you're like, wow, yeah, look at all the things that have accomplished and how great my family is and all this stuff, but you could spend every day being miserable because whatever you're traveling for work or doing something that you don't like. And you can go the other way too. I like to use the example of you could spend all day in a hot tub drinking beer, which I actually wouldn't enjoy that much, but some people might and you feel really good, you're enjoying it, you get the hedonic happiness, but you look back on your life and you're like, wow, I've done nothing. You got to have something in between those two. People say things to you that you keep with you for the rest of your life and we had a client who one day said to us, I wake up every morning and I tell myself that this is a good day to die and I have more than I need. You can say those two things you've done about as good a job with your well being as is possible. How do you think people can pursue eutomonic happiness as they go through each stage of their life? It becomes easier the older you get because hopefully you've lived that life. If you've not gathered together and built upon that eutomonic happiness, then it's hard to figure out how to do and you're 20 years old. You have all these material goals and the mistake that a lot of people making is thinking that if they meet the material goals, they'll achieve eutomonic happiness. And no, they won't. One of the points that my co-author with the book that we currently have in process, Guy, you know, by Dave. Ed McQuerry, who's done a lot of good historical work, he likes to make the point. He actually does an excellent job of quantifying this with social security calculations and life cycle investment calculations that you are far better off having a job that has a salary that's 20 or 30 percent less than an optimal salary if you enjoy the work because you will be able to work at that job far longer, enjoy your life more. At the end of the day, you won't burn out at age 55. You'll be able to work until you're 70 or 75. At the end of the day, you'll wind up in a much better place, both psychologically as well as financially, because you'll be able to work that extra 15 years, which is we all know is the difference between a happy and an unhappy retirement. I love that point. I've always felt like that's what people should strive for to find work that they enjoy. There are a lot of people out there who get really upset when I say that because they feel like it's impossible for them to find work that they actually enjoy, which leads them to pursue very aggressive retirement goals like the financial independence retire early approach. But it's an interesting dynamic there where I think people can find work like that, but there are a lot of people out there who don't believe that they can and therefore take these extreme saving approaches. The more exposed I get to fire in the people who practice it, the more impressed I am. These are not people, a few of them are like this, but very few of them want to go to the beach at age 40. Most of the fire people who I talk to simply want to earn less, they want to make less money at things they enjoy doing so they can work longer and enjoy their lives. I think that the fire movement is rather misunderstood that people who just respect it and who criticize it aren't talking to enough of its practitioners. Interesting. We'll move on from happiness and shift to what's your thinking behind giving money away now rather than be queating it? Be queating it allows the idea. It's a terrible way to leave an inheritance because the median life expectancy at my age, my joint life expectancy is somewhere in the low 90s, which means that if we bequeathed when we pass we're going to be giving money to our kids at age 60 and 65. That's not when they need the money. That's not when they can use the money. So you give away money as my mother used to say with warm hands. So when the kids can use it for that down payment, they can simply have that money there for an emergency so they can lose their job temporarily and not have to live in their car. That's what the money is really for and you better be giving that money to them in their 30s and 40s, assuming they're responsible enough to handle it, which is a very big if. Well, that's my next question. Do you worry about potential unintended consequences? Sure. You have to. I get asked all the time, how do you teach your kids not just to invest well but to spend well? And the answer is you can't do it didactically. Your kids learn how to save and invest and to spend by watching you and you can give them all the lectures you want about the importance of saving money and being prudent. But if you live in a McMansion and you've been flying the first class since the time they were five years old, you haven't done them any favors. They're not going to listen to you. You probably ruin their lives financially if you're doing that. You can basically avoid that problem by practicing what you teach by teaching your kids the joy of being able to save money. I think I'm going to jump the gun here and you already told me what your last questions were going to be, which is what were the things that you remember most about Jonathan. One of them was he came to visit me once here in Portland. It just tickled his fancy that he was able to get into town from the airport on the max train for $2 and his kids grew up watching him practice that. That's how you teach kids about money and his kids are 10 years younger than mine. But I remember reading one of his columns and just slapping my head and saying why didn't I think of that? Which is whenever he took them to a restaurant and the kids asked for a soda, he would say, "I'll buy you a soda but I'll tell you what, I'll give you a dollar if you just drink the ice water." And I think to myself, why didn't I figure that one out? That's how you avoid the problem that you're talking about is by practicing what you teaching, having your kids watch how you spend money. I like that. I'm definitely going to try that one with my kids next time we're out for dinner. Here's the other trick that you wrote about in the column, which was also a beautiful trick, which is what it comes to their allowance or when they ask you for, you know, the bank of mom and dad for $5 or $10 bill from your wallet for something as soon as they can qualify for it at age 10 or 11 or 12, get them an ATM card and put $50 into it every month. And that's their money. When the money runs out, it runs out. We had a guest a while ago who talked you about doing that with cash as opposed to a card because then it's like, you got to hold it. Now those are good tips. Why do you think people hold on to money that they could safely spend? Well, because they're afraid of running out of money and sometimes we sort of bad at this around between the two of us. It can be irrational. Again, Ed McQuarrie and I came up with a concept. We call Omega. Omega is the last letter in the Greek alphabet. So at an omega of zero, you're yellow. Spend the money today. Who cares about tomorrow? And that's pathologic. But an omega of 1.0, which is the other side of it, which is the Uncle Scrooge who never spends their money and dies the richest person in the graveyard. That's also pathologic. I tend to want to be closer to an omega of 1.0 than zero because I know too much financial history. I've seen what can happen to societies and what can happen to financial markets and institutions. So an omega of somewhere between 0.7 and 0.8 is optimal. But yeah, you can go overboard without a doubt. That's an interesting measure. Do you guys quantify it? Oh no. Do we formalize it in a model with differential equations and continuous time calculus? No, we don't do that. That's a rhetorical tool. I still love the concept. That's very cool. Do you guys agree on where people should be or degree that you should be between 0.7 and 0.8? Edward is about a point four. Interesting. Yeah, I'm about a point eight or a point nine. We have lots of interesting discussions. Edward's a happy guy. He enjoys his life. Do you guys write about that in the bucket doing together? Yes. Oof. Yeah, we're going to have to have you back on to talk about that one. You and him together. How do others influence our spending and you and often without us realizing it? Well, that's one thing we haven't talked about, which is the eastern paradox, which is as nations become wealthier. They don't become happier. We should be lots happier than we were in the year 1900. We don't have to risk our lives going across country. We're not going to lose half of our kids to infectious disease by the time they're 10 years old. Our quality of our lives is much better. But guess what? People aren't any happier now in the United States than they were in the year 1950 when our material circumstances were much worse. We first started measuring it. We're probably not any happier than we were in the year 1900 either. Why is that? Well, it's the essential equation of happiness or the equation of happiness, which is happiness equals reality minus expectations. That was probably an invention, I think, of the Maliatsi brothers on Car Talk, although they were written about before that. What effects are expectations? Well, our expectations are driven by our current consumption. If you get used to flying first class, you're not going to be happy in cattle class. But also, it's affected by the people around us. And the example I like to give is, for example, the person who's in interest or a practicing physician in a poor rural community is a person who's going to be a lot happier than the person who's practicing internal medicine on the upper east side of Manhattan. Because in the poor rural community, that doctor is a respected member of the community. He's making a lot more money than the people around him. And he's not constantly looking over his shoulder trying to keep up with the Joneses. On the other hand, if you are practicing internal medicine, the upper east side of Manhattan, you are a half step above being an Uber driver. You are not treated with respect by your neighbors. Basically, we are affected by the people around us. I'm trying to remember where I came across this. I read this somewhere, the description of somebody who was very successful in their profession, but they lived in a building in Manhattan where they were constantly, you know, on the elevator with billionaire Netbo babies. And it just made their life miserable. There's lots of interesting research on that too about people living in not so nice neighborhoods, but having a relatively nice house in that neighborhood. We had Robert Frank on this podcast a while ago and he talks about consumption cascades, how people are always spending up to the next income level that's just above theirs. Because that's what they compare themselves to, but it causes people to overspend. When you ask people how much income would make you happy? The answer is always one for letter word, which is more. Just a little more will make me happy. Even the wealthiest households, it's fascinating. Why do rising markets lead people to take on more risk, which is maybe a better time to be cautious? And everything gets back to common in Thursky. It's the availability, heuristic or to use a much more down the earth term, its recency. I can remember being around during late 70s. No one thought that inflation was ever going to end. Stocks were from morons. You know, in the late 70s by 1979, 1982, only stupid old users invested in stocks. And that famous piece of the death echoities that wrote about that. And I was around men. I mean, stocks were for idiots. Bonds, bonds, bonds were a sort of typical subcompensation. - Amazing. - Yeah, that's fascinating. - Before we let you go, Bill, we have to ask you if you have any other favorite memories of Jonathan. - Jonathan wasn't a glass half full kind of guy. He was in glass 90% full kind of guy. Everything made him laugh. Everything made him happy. He writes two books under the gun of a terminal diagnosis and he was just getting all kinds of publicity, the kind of publicity that any author would kill to get. I remember him laughing and saying, he never realized what a great marketing tool a terminal diagnosis was. - That's a great story. Bill has been great. We really appreciate you coming on to talk about Jonathan's book and Jonathan's obviously not here for us to thank, but we appreciate his writing very much. It was my pleasure, I can assure you. - Great to see you again, Bill. Thank you. - Hey everyone, it's producer Matt. Thank you so much for tuning in to this week's episode. 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