Welcome back to the podcast. This is episode 13. This episode is all about
expectations and how they impact your happiness and your performance and how
well you're doing in life. I live in Seattle and Amazon is of course our
giant employer about a third of my neighborhood I think works for the
company that's not an exaggeration and when Amazon was on top of the world in
2021 when its reputation was gleaming and its stock price was booming you
could feel that pride and prosperity in our neighborhood you could practically
smell it. I once heard the saying that 90% of corporate culture is just
winning. When a company is winning everyone is happy and they are becoming
rich and they're getting promoted and they see their work as contributing to
something bigger than themselves that's what Amazon was in 2021 and then of
course things changed. Jeff Bezos left the company the stock price fell 50%
20,000 employees were laid off and hundreds of thousands of more feared that
they're next and now that is the scent that is crawling around my
neighborhood and it is so clear it is so obvious that the mood around Amazon
has shifted. So here's the question. What do you call that top of the world
status that Amazon had in 2021? Was it a gift? What is it a reward for hard work?
Was it the natural swings of capitalism? Yes, it was all of those things but
there's another way to look at what it was and that is in expectations debt.
Expectations for Amazon were so high in 2021 that investors and employees
had to achieve extraordinary things just to break even and when the results were
merely just good that felt terrible and it felt like you were losing.
Expectations are like a debt that must be repaid before you get any joy out of
what you're doing. That's true not just for Amazon but for individuals it's true
for everything you do in life. The hard thing is that every company and every
employee wants to have what Amazon had in 2021. They want to win, they want
wealth and prestige and a good reputation but look at what it led to now
after the expectations debt was repaid and so then you ask was it worth it? Was
that boom in 2021? Was it worth it? It's hard to say. The Nikkei which is the
Japanese stock market equivalent of the Dow Jones industrial average recently
closed at its highest level since 1990. Now there are two ways to look at that.
One you could say it's a win that it's back at all time high or two you could
say it's an example of one of the worst performing stock markets of modern
times that it took 33 years to get back to its new high but here's what's
most interesting about the Japanese stock market and it has to do with
expectations. Returns over the last 33 years were terrible they were 0% over an
entire generation but returns before that the returns from 1965 to 1990 were
extraordinary they were off the charts. Now if you look at the last 60 years a
much longer period the Nikkei and the S&P 500 in the United States have very
similar returns they're just about the same but the Nikkei earned all of those
returns during this one massive 25 year surge in the 60s 70s and 80s while the
S&P 500 in the United States has been comparatively more even over time. From
1965 to 1990 the Nikkei returned about 14% per year and the S&P 500 returned
about 5% per year but since 1990 to 2022 the Nikkei is returned 0% and the S&P 500
has returned about 8% per year. So look I don't think it's fair to say the
Japanese stock market stagnated over the last 33 years. What really happened is
that 50 years of returns were stuffed into this 125 year period in the late
20th century and the past three decades of misery has just been repaying that
excess. So here again the high expectations of 1990 were like a debt that had to
be repaid before investors could get any benefit. No one got a statement for
that debt it didn't show up on anyone's balance sheet no one knew what the
interest rate on that debt would be but it was a very real debt that anchored
investors down and destroyed wealth and took a third of a century to pay off.
One way to think about this is that an asset that you don't deserve can quickly
become a liability. Maybe your stock portfolio surge during a bubble or your
company hit a monster valuation or you negotiated a salary that exceeds your
ability. Although things can feel great at the time but reality eventually
catches up and it demands repayment in equal proportion to your delusion. Plus
interest. These debts are easy to ignore because they are often repaid in the
form of self doubt and crushed morale in the case of Amazon but they are very
real and when you understand their power you become more careful about what you
wish for. Companies should want a valuation that they deserve and not a penny
more. Workers should want a salary that matches their skill and not a penny
more. Families should want a lifestyle that they could sustain and nothing
higher. None of those things that I just mentioned are about settling or giving
up. It's about avoiding a certain kind of psychological debt that comes do when
reality catches up. There's a stoic saying it says quote,
Miss Fortune weighs most heavily on those who expect nothing but good fortune. Expecting
nothing but good news feels like such a good mindset because you're optimistic
and you're happy and you're winning but whether you know it or not you are very
likely piling up a hidden debt that must eventually be repaid. I heard the
story not too long ago that I thought it was great. Elon Musk said that he had
lunch with Charlie Munger in 2009 and Munger allegedly told the whole table at
this lunch all the ways that Tesla would fail. Musk said it made me quite sad but
he said I told him Munger that I agreed with all of those reasons and that we
would probably die but it was worth trying anyways. That is both sad but also
kind of inspiring because of course Tesla made it but it's also I think this is
more complicated than it looks. Munger was recently asked an unrelated question
that adds a layer to Musk's point here. When he was asked you seem extremely
happy and content what is your secret to living a happy life. Charlie Munger replied
quote, the first rule of a happy life is low expectations. If you have unrealistic
expectations you're going to be miserable your whole life. You want to have
reasonable expectations and take life's results good and bad as they happen
with a certain amount of stoicism. Now I think these two guys Musk and Munger are
actually making the exact same point here and I think it's a really important
point. Musk is right that some things that will probably fail are worth trying
anyways. That's true for almost everybody in all areas of life because we live
in a tail-driven world where a few events drive the majority of outcomes. It's
a world that demands that you become comfortable with a lot of things not
working and a lot of things failing and a constant chain of disappointment because
success means that you tried ten things and eight of them failed miserably but two
of them might change your life. That's what winning actually looks like. Munger
too though is right that unrealistic expectations assure misery for two
reasons. One is that the world is fragile and volatile and a complicated place
and the only way to avoid disappointment is to expect it. The second is that
progress tends to move the goalpost. So the only way to enjoy the modern world is
if your expectations rise slower than its progress. Now the common denominator
between both of those guys is the superpower of having low expectations and
that is not intuitive because low expectations makes you think of a
moat pessimist who is like accomplished nothing but I want to convince you that
it's actually just the opposite. Several years ago Elon Musk was asked about one
of the hardest problems that he was dealing with at SpaceX. Its massive starship
had to cut weight everywhere it could so that the cost of each launch could
become low enough that it could launch the thing all day long. Step one to
cutting weight was cutting out the landing gear. So now rather than the rocket
returning to earth and landing on its own the new design means that it comes down
to earth with its bottom exposed and it aims itself at a giant tower on the
ground. And just before hitting the ground this tower shoots out two enormous
rods that grabbed the rocket like a parent that's catching a falling child.
It's the wildest thing you'll ever see. Elon Musk wants to explain he said
quote we are talking about catching the largest flying object ever made on a
giant tower with chopstick arms. It's like karate kid with the fly but much
bigger. He then laughed and he added the most important line he said quote this
probably won't work the first time. He says something along those lines about
almost all of his endeavors. When a rocket failed to land five years ago he said
quote I didn't expect this one to work but next flight has a good chance. When
talking about the starships challenges a couple months ago he said quote
success is one of the possible outcomes. Three years ago he tweeted quote to be
frank in the early days I thought there was a 90% chance that both SpaceX and
Tesla would be worth zero. The press and the aerospace and the automotive
industry at the time correctly agreed with me. I don't think any of that is
casual irreverence towards cocky wrist taking. I think it is purposely low
expectations and it is the only way to survive in a world that is not kind enough
to reward every ambitious person with success. When people say that higher risk
equals higher return what they should actually be saying is that higher risk
means I will probably earn lower returns most of the time but there is a small
chance that I'll earn very good returns that make up for it. That's the
distinguishing factor of higher risk. It's the greater prevalence of failure not
the smaller chance that it has a potential to offset that failure. The key part
here is that low expectations and accepting frequent losses increases the odds
of sticking around long enough to eventually be right enough to make up for it
and then some. And that applies to ordinary people like me and you not just
maniacs like Elon Musk. In a boring index fund of 500 stocks like the S&P 500
fewer than 20 make up most of the returns in any given year. Sometimes it's
fewer than five companies make up the majority of the return and the rest of
the companies in the index literally 80% or more of companies in the index their
returns usually range from okay to disastrous. So if you track every individual
company make sure you have very low expectations because that's how the world
works. Charlie Munger was born in 1924. The richest man in the world that year was
John DeRoccafeller who is net worth equaled about 3% of GDP. Now today 3% of
GDP would equal something like 700 billion dollars. 700 billion dollars is the
equivalent of what John DeRoccafeller was worth. It's just a you can't even
wrap your head around that kind of number. But let's make just a short list of
things that did not exist when John DeRoccafeller had that kind of money. He
didn't have sunscreen, Advil, Tylenol, antibiotics, chemotherapy, flu and
tetanus and measles and smallpox vaccines. He didn't have insulin for diabetes. He
didn't have blood pressure medication. He didn't have fresh produce in the
winner. He didn't have TVs. He didn't have microwaves. There were no
overseen's phone calls. There were no jets to say nothing of computers or
iPhones or Google Maps. Now I think if you're honest with yourself I don't
think you or anyone else listening to this would trade Rockefeller 700
billion dollars in the early 1900s for an average life and an average wage in
2023. The average person is just so much better off today with the things that
they can enjoy in life than Rockefeller had access to with his fortune back in
his day. But I think that is hard to admit because all the insane luxuries
that Rockefeller didn't have are now considered basic necessities. And
everything works like that. All luxuries become necessities in due time. It's
why Louis CK the comedian once said everything is amazing and nobody is happy.
The only way to counter that truth is to go through life with purposely low
expectations. Don't expect a lot of economic growth. Don't expect great
investing returns. Don't expect a ton of innovation. Don't expect politics to
improve. Be okay with things staying roughly the way they are right now or
even getting a little bit worse. Because for most people the way things are
right now is indistinguishable from magic relative to how things used to be.
And then if you do that any little improvement that happens to come along feels
incredible. You appreciate it more. Low expectations don't make you depressed.
They do the opposite. They make a little gain feel amazing while bad news tends
to feel normal. That's not easy because the knee jerk way to set expectations
is to anchor to what everyone else has right now. But imagine the tragedy of
there being unbelievable progress throughout your life and you enjoy none of
it because you expected all of it. My friend Brent Beeshore has a theory about
marriage. He says it only works when both people want to help their spouse while
expecting nothing in return. And if you both do that you are both pleasantly
surprised. That's a good model for a lot of things. Thanks so much for listening.
We'll see you next time.
