I found the book Psychology of Money by Morgan Housel boring at first, boring in the sense that I did not find new information, but I persevered in listening to it (I do love my audible) thinking that 3 milion people cannot be wrong (Yes, it sold 3 mil copies!).
Now I can say it is worth it and below I will share with you my takeaways. I did expect it to be more finance oriented, but in the end it was more about mindset and systems and I love both.
So here are my 10 takeaways:
1 No One’s Crazy
“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.“
You can read what it was like to lose everything during, say, The Great Recession, but you will never bear the emotional scars of those who survived it and are now afraid to invest again. It’s important to remember, then, that until you’ve lived through a financial crisis and felt its consequences, you will never understand why people behave the way they do. “The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty. Some lessons have to be experienced before they can be understood.”
Understanding one’s own values and priorities is crucial for making wise financial decisions.
2 Respect the power of luck and risk
Nothing is as good or bad as it seems.
Every outcome is guided by forces other than individual effort. Bill Gates had a competitive advantage over millions of other students because he attended one of the only high schools in the world that had the cash and foresight to buy a computer. In finance, luck is as much a force as risk. “It’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.” But almost no one thinks that luck doesn’t play a role in financial success.
Manage your money in a way that helps you sleep well at night and ask yourself ” does this help me sleep well tonight?”.
More about risk and regret in an article here.
3 Never enough
There is no reason to risk what you have and need for what you don’t have and don’t need.
The concept of “enough” involves recognizing that there is a point beyond which more money does not necessarily lead to greater happiness or satisfaction.
“At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.” The only way to know how much you can eat is to eat until the point you are sick. Know what is enough and when to stop. “The ceiling of social comparison is so high that virtually no one will ever hit it.” You compare to person A who is earning higher than you, you reach there and compare to person B earning even higher.
“Modern capitalism is a pro at two things: generating wealth and generating envy. ” But life isn’t happy when ambition is faster than satisfaction.
4 Just Save
The only factor you can control generates one of the only things that matter. How wonderful!
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want, when I want, with who I want, for as long as I want.” This, more than your salary, more than the size of your hours, more than the prestige of your job, more than anything, is the highest dividend money pays.
“Wealth is created by suppressing what you could buy today in order to have more options in the future.” “Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.” It is a way to buy yourself freedom to be and to act.
5 Man in the car paradox
No-one is impressed with your possessions as much as you are.
If you drive an expensive car, people will be looking at the car driving by, not admiring you. Being rich and being wealthy — it’s not just semantics. Rich is your current income, the wealth you accumulate, and create. Wealth is what you don t see. Building wealth is not just about earning a high income or making savvy investments, but also about living below one’s means and saving diligently.
Be nicer and less flashy, you might think you want a nice car or a fancy watch, but what you really want is more respect and admiration and you re more likely to gain those things through kindness and humility, than horsepower and chrome.
6 Reasonable vs rational
Aiming to be mostly reasonable works better than being coldly rational.
“A rational investor makes decisions based on numeric facts. A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your own personal doubts. Investing has a social component that’s often ignored when viewed through a strictly financial lens”
Reasonable is more realistic, and you have a better chance of sticking with it for the long run, which is what matters most when managing money. You’re not a spreadsheet, remember. You’re a person.
History is the study of change ironically used as a map of the future.
“It is smart to have a deep appreciation for economic and investing history. History helps us calibrate our expectations, study where people tend to go wrong, and offers a rough guide of what tends to work. But it is not, in any way, a map of the future.”
“investing is not hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy, and paranoid.”
A trap many investors fall into is what Housel calls, “historians as prophets” fallacy: an overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress. Past performance is not indicative of future results—the world changes.
Moreover, you will also change. And long-term planning is harder than it seems because people’s goals and desires change over time.
8 Room for error
The most important part of every plan is planning on your plan, not going according to plan.
Increase the gap between what you think will happen and what could happen. “The purpose of the margin of safety is to render the forecast unnecessary.”
We cannot predict what will happen. Look at it as a gray area, pursue things that are possible outcomes. Be both risk loving and risk-averse. But when you take the risk, have this safety net that will not wipe you out and avoid a single point of failure.
Become ok with a lot of things going wrong and remember the 80/20 Pareto, that states that only 20% of the effort amounts to 80% of results.
9 The seduction of pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
“Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.”
People believe pessimism more than they buy optimism.
In finance, pessimism is paid more attention than optimism, and is, therefore, more persuasive. “It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent,” writes Housel. “Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.” True financial optimism, Housel posits, is to expect things to be bad and be surprised when they’re not.
2 more articles about optimism and pessimism.
10 Nothing is free
Everything has a price, but not all prices appear on labels.
Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of many things is not obvious until you’ve experienced it.
“Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real-time.
Like a nice car, you can pay this price, accepting volatility and upheaval. Or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand theft auto: Try to get the return while avoiding the volatility that comes along with it.
A last food for thought:
Ask yourself what do you own and why? What do you do with your own money? What makes sense and what feels right to you?
If I picked your curiosity, give it a try, it also has more technical details about compounding and other investing tips.
If you want to discover more books I am passionate about, here are a few examples:
- in English:
- in Romanian:
- 5 limbaje ale iubirii [5 love languages]
- Obiceiurile unui creier fericit [Habbits of a happy brain]
- Mindfulness la masa, [mindfulness at the table]
- Femei care aleargă cu lupii, pe care o găsești aici [women that run with the wolves]
- Stiluri de atașament pe care o găsești aici [attached]
- Lasă grijile, începe să trăiești. [how to stop worring and start living]