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This is audio podcast number #518 with Mihir Desai

Make sure to leave a comment below and share this with your friends!

Mihir A. Desai is the Mizuho Financial Group Professor of Finance at Harvard Business School and a Professor of Law at Harvard Law School. He received his Ph.D. in political economy from Harvard University; his MBA as a Baker Scholar from Harvard Business School; and a bachelor's degree in history and economics from Brown University. In 1994, he was a Fulbright Scholar to India.  
http://www.mihirdesai.org/

Show notes available here:
http://lewishowes.com/518

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Lewis Howes is NY Times Bestselling author, entrepreneur, and former professional Arena League football player. He hosts The School of Greatness, a talk show distributed as a podcast. Learn and hear the stories from various successful people around the world, become inspired, motivated and educated with the SCHOOL OF GREATNESS. lewishowes.com/book
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So if you're a poor person and you want to access opportunities you couldn't access otherwise, there's only 1 way to do that, through borrowing.

You want to live in a house you don't have any right to live in, how do you do it?

You want to invest in education, you don't have the resources, how do you do it?

So people don't understand that piece of it, and then they don't understand the dangers.

All right, welcome back everyone to the School of Greatness podcast.

We have a Harvard professor in the house today.

Good to see you, thank you so much for being here.

We got connected through, I guess Eric Barker mentioned coming on the show.

I always vet it with Christine, and I'm like, see if this guy's legit and if this would be interesting.

And you passed the test for it to be interesting enough.

The Christine test, very good, excellent.

You've got this book called The Wisdom of Finance, Discovering Humanity in the World of Risk and Return.

And you've been teaching finance, entrepreneurship, business.

You teach at the entrepreneurship program and the law school at Harvard,

You've been writing journal papers for 18 years, right?

And teaching and kind of in the weeds and the thick of it with your students.

And so why did you decide to do this book and why is this topic so important?

I was a totally traditional economist writing academic papers.

And then basically over the last 5 years, I wanted new challenges.

So the thing about academia that's crazy is you can look at your life 20 years forward once you get tenure and you know exactly what it is.

So I started an online course, I started teaching at the law school and then I wanted to write a book.

When you write in academia, you write totally tight.

You've got to really, really, really be tight.

And so it was a massive challenge for me.

What I really wanted to do with the book though is 1, challenge myself, but then B, I teach finance and finance has got some serious problems.

And really the 2 big problems I wanted to address is 1, I wanna demystify finance Because I think it's way too important for people not to understand.

And a lot of people demonize it for the wrong reasons.

And then the second thing is chunks of finance are broken.

Right, we live through this massive financial crisis.

And so this book is an effort to say, look, there's nobility in finance, and you should feel proud of that, and you gotta live up to it.

You can't just kind of behave in a bad way.

Yeah, how come we're never taught these things growing up in elementary school, high school, college?

How come these things are never really taught until you get to college, unless you take those classes.

And then we're just kind of illiterate with finance and we're broke and don't know what to do with the rest of our lives.

like you think about student debt, or you think about credit card debt, even as an example, I know doctors who come out, they start a private practice, they have no clue what they're doing financially.

In fact, the level of financial literacy is so low.

the mistakes people are making, like the terrible mistakes they make with debt,

In fact, that's 1 of the, I was joking with my daughters, I have 3 daughters, and 1 of

my girls was telling me the next project should be the kids' book version.

It kind of struck me as crazy, but these ideas, you gotta get them to kids.

you don't get them to kids, they'll never learn it.

So is this like the advanced version of Rich Dad Poor Dad then?

Is this kind of like, because that's the story of like, a rich dad and a poor dad and what they did and how they bought and how they whatever.

Yeah, you know it's funny because that book, it's kind of in a way it might

be easy to ridicule but it has had an amazing impact.

And opening them up and be like, oh if I just invest this way on something I make more money than just.

Well you know so it's funny as an academic you tend to look down on that kind of stuff, right?

You look down on it, you're like, whatever.

is- You're more pissed that he's just created such an empire around a simple concept, right?

Right, but you kind of look down on it, frankly.

And I don't want to write that book, but I want to speak to those people.

And so, yeah, you're right, I'd like to think about this as a more elevated or advanced version of that.

I think if we get this into schools and we get these ideas out there, people want to know finance.

They want to learn it because they know how important it is.

It's really interesting, on Rich Dad Poor Dad, that thing has been on the bestseller list for like 25 years.

It's crazy, it just keeps selling and selling.

You look at the bestsellers in finance and investing, they're the same books for like the last 20 years.

And Ben Graham, intelligent investor, rich dad, poor dad.

Which makes you realize there's a ton of demand and there's not enough supply.

Which is trying to say, well look, let's try to speak about finance in a clear way.

Yeah, so what are the things that we're confused about the most with finance in general as a world?

I think people either think it's terrible, which is wrong.

Having debt, I mean, the thing what people don't realize is, and it's always been demonized through history, right?

Like, so Socrates said it was immoral to charge interest.

And religions, a lot of religions don't allow payment of interest, but they don't realize that actually debt is fantastic.

So if you're a poor person and you wanna access opportunities you couldn't access otherwise, there's only 1 way to do that, just through borrowing.

You wanna live in a house, you don't have any right to live in, how do you do it?

You wanna invest in education, you don't have the resources, how do you do it?

They don't understand the dangers, which is, once you do that, It is a really, really serious commitment.

And you can find yourself in a world, and I tell the story of what's called debt overhang, which is this finance idea, which you have so much debt that you can't actually do the best things for yourself, because it's like looming over you.

So they kind of either ignore the real virtues of it or they kind of just say, well it's great and I'll just do it, it's not a big deal.

So that I think is 1 big piece on the personal side.

How do we make a decision of knowing like, okay, I'm stuck in this rut and if I go to this school that costs me 50 grand a year, I don't know what Harvard is, maybe it's 80 grand a year now, then I'm gonna get the opportunities and the insights that will help me for the rest of my life, but I'll have a half a million in debt from 4 years.

That's gonna take me the rest of my life to pay off.

and the short version is, so you gotta really think hard about what the upfront investment is.

then the hard part for people is you gotta think about the incremental wages.

Not how much am I gonna make, but how much more am I gonna make because of this investment?

How much better is my lifestyle gonna be, right?

And there's also, you know, the truth about education, and I'm not just saying this because it's my business, I'm not just talking my own book, but the truth is, on average, it's a great investment.

That doesn't mean it's always a good investment.

There's a lot of crappy investments out there.

There's a lot of really bad investments out there.

What you gotta think about is, there's a labor market out there, and You gotta have skills that are gonna be valued.

You don't develop the skills that are valued, then you're not gonna be able to make money.

And then you have to ask yourself, if you wanna do a degree and you wanna do something that's not really valued in the labor market, you know, whatever it might be.

Let's say you wanna go to cooking school, just to learn cooking.

You should understand that's basically consumption.

And if you want to do that, you go do that.

But don't kid yourself and think you're gonna get it paid off.

That's just you having fun, like you go on the Super Bowl or some big thing you want to go do.

So people have, I think that's what's confusing about a lot of these things.

It's a big investment, but you live in it and you consume it all the time, right?

And so it's got these, there are these things that are weirdly both.

There's stuff you invest in and there's stuff you like, really, really enjoy.

Not like stocks, which are an investment, and not like food, which is consumption.

These things are actually in between, and that makes it really confusing, I think, for people.

What are the other big things that we do?

So I think The other big thing that people struggle with in finance and outside of finance is they think there's a lot of skill in finance.

In managing money and investing money and when they get good results, they think it's their skill.

So the lesson of finance is it's almost impossible to tell the difference between luck and skill, other than over the long run.

Right, so you got a buddy, I got a buddy, and that buddy says, you know what, I beat the stock market like 3 years in a row, 5 years in a row, I'm awesome.

And the answer is, I have no idea if you're awesome.

you just got in at the right time and whatever.

And in fact, there's this old coin tossing trick, which is you get 80 people in a room, you toss a coin 10 times, and you kind of go through it.

You're pretty much guaranteed to get somebody in that room get 10 heads.

And then you ask that person, how did you do it?

And the person, of course, will usually answer honestly, which is, it was luck.

But when you're a mutual fund manager and you beat the market 10 years in a row.

And so I think people think there's a lot of skill and the truth is it's really almost very, very hard to beat the market persistently.

There may be a few people out there who can do it well over the long run, I don't know who they are, you don't know who they are, don't believe the hype.

So for example, as you may know, there's this massive rise in indexation, right?

So like people basically just buying exchange-traded funds or index funds, and that's because people have figured out.

Just invest in the index fund, and in 30 years, you're gonna make more than if you try to play-

You try to play the game yourself, or frankly, if you try to pay somebody who tells you they know how to play the game.

Well, so Buffett is like a guy who's, Buffett's super interesting, right?

Because he actually, people think he's beaten the market for a long period of time, and he may have.

But he also doesn't believe in a lot of these things, right?

He doesn't believe you can just kind of be successful, no problem.

And in fact, the way he works now, it's so interesting about Buffett, he basically monetizes his halo, right?

So when he invests in a company, people rush in.

He kind of like, during the financial crisis, He bought preferred stock at Goldman and GE.

He got terms that you and I could not get.

Yeah, and he gets like, he got terms I would never get in the market if I went to go buy that stock.

I think that's 1 of the big problems in finance, is we think that there are these super skillful people out there and they're super smart.

Reality is, some of them may be, but you don't know who they

What should we be doing with our money then?

So it kind of depends on who you are, right?

So let's think about a typical kind of person.

Let's say working and they have an income stream, maybe they have a family.

So in terms of savings, the first thing is, save.

Over-saving means I'm depriving myself today so that when I retire I have more.

Like 98% of people are making the mistake of not depriving themselves today so they can have more later.

So for almost all people it is, save more than you're doing now.

And at some point you're gonna be saying to yourself, you know, I'm skimping too much.

I'm making myself unhappy because I'm living in a shack and I'm like, I don't need to live in a

Yeah, and at some point you know, like you have to kind of get a little bit better

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