Every investor wants to predict the future, but it rarely works.

In this episode, Mark and Shani break down why focusing on things that don’t change is far more powerful, using insights from Morgan Housel’s book Same as Ever.

From Jeff Bezos’ Amazon strategy to the role of moats, permanent information, and human behaviour, they explore how patience and perspective beat crystal-ball predictions.

You can find the transcript for the episode below:

Shani Jayamanne: For the past five years, we’ve released a weekly podcast to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis backed by the work of hundreds of researchers and professionals at Morningstar.

Mark LaMonica: We’ve shared our journeys and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey, Invest Your Way. Invest Your Way is a book that focuses on the investor instead of the investments. It’s a guide to successful investing with actionable insights and practical applications.

Jayamanne: You’re able to pre-order the book through the links in the episode description.

LaMonica: Thank you for your continued support and we look forward to helping you invest your way.

Jayamanne: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances or needs.

LaMonica: Shani, you had an exciting commute this morning.

Jayamanne: I did, yeah.

LaMonica: You met a... Well, you can tell the story.

Jayamanne: You tell the story. I want to hear it from your...

LaMonica: Well, somebody came up to you and stopped you on the street while you were listening to God knows what and asked if you were Shani from Morningstar and he said he was a fan of Investing Compass.

Jayamanne: Yeah. It was great. And he pulled out his phone and he was already listening to our podcast. It was great. And we took a photo together.

LaMonica: Exciting stuff.

Jayamanne: I didn’t get his name though.

LaMonica: Well, it’s not very friendly of you. And we met some people that listened to the podcast this week. We went to the Gold Coast, to the Australian Shareholders Association Conference to run a workshop. And we met lots of people that listened.

Jayamanne: We did, which was great.

LaMonica: Which was very nice. And the funny thing about the ASA, that’s the Australian Shareholders Association, is they took a picture of the two of us when we were presenting and they put it on their Twitter feed. And you are standing at the podium looking nice. And I was gesturing towards something on the large screen. And it looks like I’m welcoming Hitler to Vienna in 1938. So, yeah. So that’s out there.

Jayamanne: So if you’d like to see that, the Australian Shareholders Association X account has a picture of us. So you can find it there. What are we talking about today, Mark?

LaMonica: There we go. We’re going to talk about predicting the future, Shani. And I know that you were into this because you went to a psychic once.

Jayamanne: I wouldn’t say I’m into it. There was a psychic at a bar. And I went to the psychic after a few drinks.

LaMonica: Yeah. It’s actually a pretty famous, called Employees Only.

Jayamanne: It is.

LaMonica: It’s a bar in New York that opened in Sydney. And...

Jayamanne: Along with very expensive drinks.

LaMonica: Yeah. It’s like outrageous.

Jayamanne: It is. But they’ve also got a psychic.

LaMonica: So tell me about your experience with the psychic.

Jayamanne: I mean, it was okay. I mean, the thing is in Sri Lanka, when you’re born, you get a book and it’s got your horoscope in it. And it tells you basically your whole life story. And the...

LaMonica: Why are you so anxious if you know what’s coming?

Jayamanne: Well, I don’t because the whole thing is in Sinhala. And I can speak Sinhala, but I can’t read it. And so every time I ask my mom what is in the book, she’ll just tell me something based on what she wants. So like when I was younger, it was, it says to stay away from boys. It says to take your mom to lunch. Like she just uses it to her advantage, which good on her.

LaMonica: If anyone out there can read Sinhala, you take the book? And then we’ll get the true translation. But there’s a point about this whole discussion about psychics. Investors are also constantly trying to predict the future. And of course, the challenge with investing is the future is unpredictable, but people keep trying to figure out what types of investments will perform well.

Jayamanne: And as Mark said, we ran a workshop at the Australian Shareholders Association conference in the Gold Coast, actually. And we were asking people to describe their investment strategy. And one woman there said she was trying to look at different data to make an educated guess about investment.

LaMonica: She seemed kind of embarrassed. She’s seemed embarrassed while saying that.

Jayamanne: She did. But that’s what investing is. And investing is often portrayed as being mathematical. And yes, there is maths and things like a discounted cash flow model. But when it comes down to it all, investors are just making educated guess about the future.

LaMonica: Yeah. And the two of us both read a book by Morgan Housel called Same as Ever. And we thought that we would share. I think we both liked the book a lot. And so we thought we would both share some things that we thought were interesting. And that are related to this investor obsession with the future.

Jayamanne: And one story that was interesting was about Amazon founder Jeff Bezos. Unsurprisingly, Bezos is asked a lot about what changes are coming in the future. But according to Housel, he was surprised that nobody asks him about what won’t change.

LaMonica: And the reason that he was surprised about this is because he built Amazon on this notion. And so the foundation of Amazon is I think a fairly simple notion that people who always want to easily buy things for low prices and get them fast. And that seems really simplistic. But sometimes we lose sight of the obvious among all these predictions about what’s going to happen in the future and all the excitement about change.

Jayamanne: And Amazon began by selling books. But Jeff Bezos didn’t care about books. He made a list of 20 different products and chose books because there was such a wide selection that he could create something unique. There was a limit to the inventory a bricks and mortar bookstore could hold and his internet store had no limit. Books were also easy to deliver and generally weren’t urgently needed.

LaMonica: And what he started doing is Bezos started investing in the infrastructure needed for customers to easily buy books and get them fast. And so as Amazon grew, he used the benefits of scale to lower prices instead of increasing profits. And the fact that Amazon sold books was fairly irrelevant. So the important thing was the infrastructure that he built for Amazon to sell books meant that he could sell anything. And now of course, Amazon sells everything.

Jayamanne: And Bezos figured that if you ordered a book over the internet and it was cheap and quickly delivered, you would start to be conditioned to order other things over the internet.

LaMonica: And I think one thing that maybe we should pause and point out is one book you can order.

Jayamanne: is Invest Your Way: How To Grow Wealth On Your Terms.

LaMonica: Exactly. Because this episode is coming out three days before the book comes out.

Jayamanne: It’s very exciting. What do you think we’re going to be doing?

LaMonica: I know what we’re going to Booktopia and we’re going to -- an Amazon rival and we’ll be…

Jayamanne: We’re signing 500 books.

LaMonica: Signing 500 books in some warehouse in Stratfield. So that’s what we’ll be doing. But let’s get back to Booktopia competitor Amazon. And if we look at Amazon today and we look back at that foundational concept and everything Bezos was trying to do, we can see how this simple concept gave the company such an advantage over competitors. So what he was really building was a moat. So all that tedium of building warehouses and managing logistics was creating a cost advantage for Amazon. That huge customer base that he got by lowering prices. Well, that has enabled switching costs and network effects. And all the data that Amazon collects from all those customers. That’s also an intangible asset for the company.

Jayamanne: And moats are about the future. It is a sustainability of the competitive advantage. And that is the important part. But a moat is really a bet on things not changing. Find a company that currently has a competitive advantage reflected in higher returns on invested capital and higher margins, then figure out whether it will continue.

LaMonica: And moats are never going to be that exciting. They typically take some time to develop. So in those exciting days of startups and new technology, they often don’t exist. But finding a moat is the key to long term success. And while moat may be boring, investing is not actually supposed to be that exciting.

Jayamanne: So let’s pivot to another thing that Housel talks about in his book. He talks about permanent and expiring information. This is all in line with the theme that focusing on the things that don’t change is more valuable than spending all your time trying to predict an unpredictable future.

LaMonica: And this is really, really applicable to investing. So there is an obsession with short term results for companies. A lot of time and effort goes into trying to predict what CBA will report in their next earnings release. Analysts and traders are fixated on this. But for a long term investor, which is the easiest way to be a successful investor, that information is irrelevant. It is expiring information because a few days after it comes out, it is completely inconsequential for anyone, including anyone holding CBA shares.

Jayamanne: And permanent information consists of things that never change. As Housel puts it, this is knowledge found in books and not in the churn of the news cycle. And as investors, there are many foundational concepts that will never change.

LaMonica: And I think most of those are human traits. And we can see those same human traits way back to the beginning of recorded history. So humans are greedy. Humans get scared. And that means we’re always going to have bubbles and we’re always going to have bear markets. And we hear a lot and I hear from people that the business and investment cycle, this boom and bust cycle is over. And that’s fine for people to say that they always have their rationale. But I think my view and Housel’s view and lots of people’s view is that these core human emotions that drive decision making means that this will never actually go away.

Jayamanne: And I think another piece of permanent information is that humans are impatient. And that means that most investors are focused on the short term. They trade too much constantly search for catalysts that will play out quickly and chase performance. As a result, most investors achieve poor results. So if most people are impatient, you can achieve better results simply by being patient.

LaMonica: Yeah. And I think that’s a that’s a great one, Shani. So the challenge is being able to overcome those human emotions because they are part of our nature. So that isn’t easy. But I think one way to train your mind for this is being really picky about the content you consume. Read more books, read less news. When you get some advice, try to categorize that advice. Is it expiring information or is it permanent information? And once you’ve gotten in that habit, hopefully you can avoid expiring information.

Jayamanne: So why don’t we do one more? And I know this was one of your favorite concepts in the book.

LaMonica: That is true, Shani. So Housel said that pessimism and optimism both need to coexist for human progress. And I really love the way that he applied that to investing. He said that you should save like a pessimist and invest like an optimist. And it’s maybe think of that Martin Luther King quote. And he said the arc of the moral universe is long, but it bends towards justice. And the point is that the short term can seem chaotic and ugly and hard, but over the long term, it pays to be optimistic about where we’re going.

Jayamanne: And from an investing standpoint, that means that you need to save because there are going to be unexpected expenses and financial setbacks. But you need to invest because economic progress has been reflected in rising markets over the long term.

LaMonica: And I think also it means that cash is far more valuable than it’s often given credit for. It is the lowest returning asset class. It barely beats inflation, but it can be really helpful.

Jayamanne: And this is why an emergency fund is so important.

LaMonica: Exactly. And I think this notion links in with people being impatient. It is important to realize that success ultimately is rarely handed to you. It’s about overcoming setbacks. It’s about hard work. And it may seem bad day to day, but over the long term, really good things can happen. That is obvious parallels to investing. There’s always something to worry about. There are always reasons not to invest and hide until things get better. Your perception is that things are better, but it’s getting through that worry, which provides strong long term results.

Jayamanne: And that sounds like a good place to end this. We hope you enjoyed some of the insights that we pulled out of Housel’s book. We both really enjoyed it, I think. So there’s a lot more great material in the book if you wanted to read it.

LaMonica: And while you are going to your local bookstore or ordering Housel’s book.

Jayamanne: Pop ours in the cart too.

LaMonica: Exactly. Thank you very much for listening.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

A message from Mark and Shani

For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

The book is currently in presale which is an important time to build momentum. If anyone would like to support this project you can buy the book now. Thanks in advance!

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