3052: [Part 2] Stocks - Part XIX: How to Think about Money by JL Collins

Summary

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Podcast Summary: Optimal Finance Daily

Episode 3052: [Part 2] Stocks - Part XIX: How to Think about Money by JL Collins
Host: Diania Merriam
Original Author: JL Collins (JLCollinsNH.com)
Date: February 24, 2025

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Episode Overview

This episode, hosted by Diania Merriam, continues the reading of JL Collins’ influential series on stocks and financial mindset, specifically focusing on how to think about money and investments. It digs into Warren Buffett’s wisdom, market volatility, and the true nature of owning stocks through index funds like VTSAX. The episode aims to shift listeners’ perspectives from short-term price fluctuations to long-term ownership and wealth building.

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Key Discussion Points & Insights

The Buffett Wisdom: Never Lose Money

• Quote and Reality Check:
  • “Rule number one: never lose money. Rule number two: never forget rule number one.” (JL Collins quoting Warren Buffett, 00:47)
  • Collins highlights that some investors misinterpret this as avoiding all losses, pointing out that even Buffett incurred huge paper losses during downturns but didn’t panic sell.
• Crash of 2008–2009 Example:
  • Buffett lost $25 billion on paper (from $62B down to $37B) but remained invested, later recovering as markets rebounded (01:25).
• Emotional Detachment:
  • “What Buffett didn’t do is panic and sell. In fact, he continued to invest as the sharp decline offered new opportunities.” (JL Collins, 01:38)

How to Think about Investment Ownership

• Business Owner Mindset:
  • Buffett’s approach is to think like a business owner, not merely a holder of numbers on a screen.
  • “When the share price of one of his businesses drops, what he knows on a deep emotional level is that he still owns precisely the same amount of that company.” (JL Collins, 02:15)
• VTSAX Example – What You Really Own:
  • Transaction math: $10,000 into VTSAX at $41.16/share = 242.95 shares (02:50).
  • The value may fluctuate, but “at $43 per share, or at $40, you still own the same 242.9543244 shares.” (JL Collins, 03:39)
  • Behind those shares: a tiny stake in over 3,000 US companies—“virtually every publicly traded company in the US.” (JL Collins, 03:50)

The True Nature of Index Funds (Self-Cleansing Investing)

• Built-In Strength:
  • Companies within the index rise and fall. Failing companies get dropped, and rising stars are added—keeping the index strong over time.
  • “This is what makes the index, and by extension VTSAX, self-cleansing.” (JL Collins, 04:45)
• Long-Term Confidence:
  • Collins claims if he sought “absolute security,” he’d pick 100% VTSAX and spend the dividend, calling it “the surer bet.” (JL Collins, 05:07)
  • Quote: “Nothing is sure, but I can’t think of a surer bet than this.” (JL Collins, 05:21)

Mindset and Perspective Shifts

• Don’t Fear Volatility:
  • “People say they lost XYZ amount with market fluctuations, but if you haven’t sold, you haven’t lost.” (Diania Merriam, 08:16)
• Buy and Hold Strategy:
  • “Buy and hold, my friends. Buy and hold. You still own the same amount of shares…” (Diania Merriam, 08:27)
• Measuring Returns:
  • Look at total growth over time instead of losses from a recent peak.
  • “Where would you be if you never invested that money and just held it in a savings account? Most likely you’d be far worse off.” (Diania Merriam, 08:46)

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Notable Quotes & Memorable Moments

• Warren Buffett Wisdom:
  • “Rule number one: never lose money. Rule number two: never forget rule number one.” (00:47)
• On Riding Out Market Downturns:
  • “I only wish I could have lost $25 billion.” (JL Collins, referencing Buffett’s losses, 01:25)
• Perspective on Ownership:
  • “At $43 per share or at $40, you still own the same 242.9543244 shares of VTSAX.” (03:39)
• On Index Funds:
  • “As some stars fade, new ones are always on the rise.” (JL Collins, 04:40)
• Diania's Key Reminder:
  • “You only lose money if you sell. So what’s the solution here? Buy and hold, my friends. Buy and hold.” (Diania Merriam, 08:27)

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Important Timestamps

• 00:47: JL Collins begins reading “How to Think About Money (Part 2)” and discusses Buffett’s famous advice.
• 01:25: Illustration of Warren Buffett’s paper losses and subsequent recovery.
• 02:15: How Buffett (and listeners) should emotionally think about stock market downturns.
• 02:50: VTSAX practical investment math.
• 03:39: Explanation of actual share ownership versus day-to-day value.
• 04:40–05:21: The index fund’s self-cleansing nature and why Collins considers it the most secure investment.
• 08:16: Diania Merriam’s closing thoughts on loss, volatility, and reframing investment performance.
• 08:27: Diania’s actionable takeaway—buy and hold, stay the course.

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Episode Tone and Closing

The episode is both reassuring and practical, blending JL Collins’ calm, logical approach (“Nothing is sure, but I can’t think of a surer bet than this”) with Diania Merriam’s encouraging and relatable commentary. The consistent message is to stay the course, embrace the long-term view, and not let market swings dictate one’s emotions or investment decisions.

Final Takeaway:
Buy and hold quality broad-based index funds. Reacting emotionally to the market’s ups and downs leads to losses; understanding what you own and why you own it is the path to financial independence.

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Transcript

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[JL Collins]

Daily Stocks Part 19 how to Think About Money Part 2 by J.L. collins of JLCollinsNH.com Level 3 How to Think about your investments Warren Buffett is rather famously quoted as saying, rule number one Never lose money. Rule number two Never forget rule number one. Unfortunately, too many people take this at face value and then leap to the conclusion that Mr. Buffett has found a magical way to dance in and out of the market, avoiding the drops. Not true. In an interview linked in this post, you can listen to exactly what he says about can't successfully dance in and out of the market. My favorite line appears at around the 1 minute 34 second mark. The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out. The truth is, during the crash of 2008 2009, Buffett lost about $25 billion, cutting his fortune from 62 billion to 37 billion. That leftover 37 billion being the reason I was wandering around at the time, irritating my friends by saying, gee, I only wish I could have lost 25 billion. What Buffett didn't do is panic and sell. In fact, he continued to invest as the sharp decline offered new opportunities. As the market recovered, as it always does, so did his fortune. So did the fortunes of all who stayed the course. Now, there are likely many reasons Mr. Buffett didn't panic, as that $25 billion and all the potential it represented slipped away. Having 37 billion left surely helped, but another key is probably how he thinks about the money in his investments. Also, rather famously, Mr. Buffett talks in terms of owning the businesses in which he invests, sometimes in part as shares and sometimes in their entirety. When the share price of one of his businesses drops, what he knows on a deep emotional level is that he still owns precisely the same amount of that company. As long as the company is sound, the fluctuations in its stock price are fairly inconsequential. They will rise and fall in the short term. But good companies earn money along the way, and in doing so, their value rises relentlessly. Over time, we can learn to think in this same way again. Let's use vtsax in exploring this idea. Suppose yesterday you said, huh? This idea of owning vtsax makes sense to me. I'm gonna get me some. And having said that, you sent Vanguard a check for $10,000. At yesterday's close, the price of VTSAX was $41.16. Your 10K bought you 242.9543244 shares. If a week from now VTSAX shares are trading at $43, you might say, hmm, my 10K is now 10,447. Yippee. That J.L. collins sure is smart. If a week from now the shares are trading at $40, you might say, my 10k is now only 9. That JL Collins is a bum. That's the typical way average investors look at their holdings. As little slips of paper, or more accurately in this day and age, little bits of data that go up or down in value, if that's all they are, drops in the price other people will pay you for them on any given day can be very, very scary. But there's another, better, more accurate and more profitable way. Take a few moments to understand what you really own. At $43 per share, or at $40, you still own the same 242.9543244 shares of VTSAX. That in turn means you own a piece of virtually every publicly traded company in the US 3317 last time I checked. Once you truly understand this, you'll begin to realize that in owning vtsax, you are tying your financial future to that of virtually every publicly traded company based in the most powerful, wealthiest and most influential country on the planet. Companies filled with hardworking people focused every day on prospering in the changing world around them and dealing with all the uncertainties it can create. Some will fail, losing 100% of their value. Actually, they don't even have to fail and lose all of their value to fall off the index. Just dropping below a certain size or what's called market cap will be enough. Those will fall away and be replaced by other newer and more vital firms. Some will succeed in a spectacular fashion, growing 2003-001000-10000% or more. There is no upside limit. As some stars fade, new ones are always on the rise. This is what makes the index, and by extension vtsax, self cleansing. If I were to seek absolute security, a very different thing than the smooth ride most mistake for safety, I'd hold 100% in VTSAX and spend only the 2% dividend it throws out. Or maybe a variation like the last portfolio option I described in Part six. Nothing is sure, but I can't think of a surer bet than this. In closing, we live in a complex world and the most useful and powerful tool for navigating it is money. It is essential to learn to use it, and that starts with learning how to think about it. It's never too late. Oh, and somebody please send Mr. Tyson a link to this site. It's not too late for him either. You just listened to Part 2 of the post titled Stocks Part 19 how to Think About Money by J.L. collins of JLCollinsNH.com this message is brought to you by Apple Card. Does this sound familiar? You're in line at checkout cart full of items, your toddler is screaming for a treat and you left your wallet in the car. Or was it at home? No need to panic. With your iPhone in hand, you can tap to pay using Apple Card with Apple Pay and you'll earn 2% daily cash back when you do so. If your credit card is an Apple card, maybe it should be subject to credit approval. Apple Card issued by Goldman Sachs Bank USA Salt Lake City Branch terms and more at applecard.com Abercrombie Kids is bringing.

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And I hope you enjoyed finishing up this post with JL Collins as much as I did. I'm reminded here how often people will say that they lost XYZ amount of money in the fluctuating stock market. They are watching volatility and interpreting it to mean that they are winning or losing based on what the market is doing. But I think it's important to remember here that if the market is down, you haven't lost any money unless you sell those investments. Let's say that louder for the people in the back. You only lose money if you sell. So what's the solution here? Buy and hold my friends. Buy and hold. You still own the same amount of shares as JL so beautifully demonstrated in this post. So when the market inevitably rises again, you'll be there for the ride. And in a similar fashion, let's say that your portfolio is down from an all time high that you had at some point in your accumulation phase at the time that you plan to tap into it. Rather than looking at how much you're down from a peak, look at how much you're up over the lifetime of your investments. Where would you be if you never invested that money and just held it in a savings account? Most likely you'd be far worse off. And that's a wrap for another Monday show. Have a great rest of your day and I'll be back tomorrow where your optimal life awaits.