I went through 209 pages of financial wisdom so you don’t have to.
This book humanized money for me.
How so?
We look at money with cold, hard logic. Only, it isn’t. Money is interwoven with human needs, desires, and life history.
Morgan Housel’s book “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness” explains that. It helps us understand our psychology to make better financial decisions.
This 20-chapter book is jam-packed with life and money advice for both, amateurs and experienced. This is why it makes a perfect read for a beginner.
“Investing is not the study of finance; it’s the study of how people behave with money.”
Here are the most compelling takeaways from this book.
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We may not realize it, but our financial decisions could be terribly biased
Our unique life experiences unsuspectingly affect our choices.
When you see someone investing their life savings into crypto, you might think, ‘’he must have a screw loose!’’ But what might seem irrational to you, could make perfect sense to another person.
In fact, you’re the crazy one to him.
“No one’s crazy”, Housel says.
Every person on earth has gone through different circumstances and life experiences. What we go through in our formative years informs our financial choices in adulthood. Someone who was born into riches will have a different approach than someone who grew up worrying about food.
Our experiences and unique worldviews affect our financial decisions. Due to this, we will either be open to taking risks or averse to them.
People in the 1960s grew up with increased inflation during their teens and twenties. They have a more negative view of inflation. People born in the 70s saw a lot of growth in the S&P 500. Therefore, they are more inclined to invest.
Everyone is prone to bias. We think we know the whole picture. In reality, our knowledge of the world is greatly limited.
Due to this ‘’Bias,’’ Morgan warns us to be wary of one-size-fits-all financial advice. If someone gives such advice, there’s only one thing to do.
RUN.
This is because one-size-fits-all financial advice doesn’t exist. Even if it makes perfect sense to you, make sure to double-check yourself for biases before you take the advice.
Luck is the most important factor in monetary success
When things go haywire, blame fate.
Failure convinces us we were wrong even when we weren’t. Success convinces us we were right even when we weren’t.
You can do everything right and still fail. You can do everything wrong and still succeed. Why?
Because of luck.
“Nothing is as good or as bad as it seems.”
Luck is an important part of Bill Gates’ journey, who was the founder of Microsoft. He and his friend Paul Allen (Co-founders of Microsoft) were introduced to computers at Lakeside School. It happened when a teacher made efforts to introduce the Teletype Model 30.
At that time, computers were very rare.
Sure, Bill Gates is a talented and hard-working businessman. Still, if it wasn’t for that computer, it is hard to imagine that he’d reach where he is today.
Wait, there is more.
Gates had a class fellow. His name was Kent Evans. Sadly, he experienced the other side of luck. He died in a mountaineering accident before graduating high school. The odds of dying from mountaineering accidents in high school are one in a million.
What if he had lived? Who is to say he wouldn’t have been one of the co-founders of Microsoft?
It doesn’t matter whether you believe in a spiritual being up there, the universe, or the sheer randomness of the world. Luck is real. No one knows what will happen to them.
“…not all success is due to hard work, and not all poverty is due to laziness.”
Next time you are tempted to judge a poor person for not working hard enough. Just don’t.
Remember! Be cautious of only attributing your successes and failures to your actions.
Don’t kill the golden goose
Beware of greed creeping in, for it will ruin your life!
The advice Housel gives reminds me of the story of the golden goose. The goose laid one golden egg for his owner daily. The owner wanted all the eggs at once. He killed the goose and opened up his belly.
As you can guess, he ended up with nothing.
Even when we have enough of what we need to be happy, we aren’t satiated. We look forward to our next goal. We think achieving more will bring happiness. But it doesn’t.
Comparison kills joy
‘I want what he has.’
Sounds familiar? Kids always want what their fellows have. The same is true for adults. Despite reaching $100 million in net worth, Rajat Gupta, CEO of McKinsey, wanted to beat Warren Buffet. To do that, he committed insider trading and ended up in prison. Not a great deal, eh?
Comparison leads to envy. Envy pushes you to make bad decisions.
This reminds me of a quote from Mark Manson:
“Just because someone else is winning doesn’t mean you’re losing.”
It is okay to strive ahead. Just don’t put your current happiness, money, success, or relationships at risk.
Adopt an attitude of gratitude! Look at what you have. Enjoy and relish it. And don’t kill the golden goose.
Give time to your investments.
Rome wasn’t built in a day, neither can wealth.
Warren Buffet’s success shows us the power of time and compounding. His money has roughly compounded 22% annually. This is way less than Jim Simons. Simons has compounded money at 66% annually since 1998.
Here is the twist!
Simons’ net worth is $21 billion. Warren Buffet’s net worth stands at $84 billion.
Why?
The only difference is time.
Warren started at 10 years old. At 30, he had a net worth of $1 million. Almost half of his net worth came after he was 65 years old.
Simons started trading when he was forty.
“Growth is driven by compounding, which always takes time.”
Investment is not about earning high returns fast. It is about earning sustainable returns over a long time.
Nothing comes fast and easy.
If you want to become a billionaire, take Housel’s advice.
Don’t focus on short-term gains. Understand and leverage the power of compounding to become a successful investor.
Rich vs Wealthy
Hint: You don’t see wealth.
Being rich and being wealthy are two different things.
Wealth is the money that can’t be seen. It allows you to buy something at a future time. Getting money and keeping money requires two different skill sets. Earning money requires risk-taking and optimism. Keeping money requires humility, restraint, and pessimism.
Learn how to keep money.
Humility can help you save money.
Why do we spend money on luxury things?
Because we want people to admire and respect us.
Fancy cars and high-end clothes are the wrong tools for gaining respect. They give you the illusion that you are being respected. Instead when people look at you, they are too busy imagining themselves at your place.
“Spending money to show people how much money you have is the fastest way to have less money.”
Charm people through your kindness, empathy, and warm nature. Showing off wealth is an ego boost. It hurts you in the long run.
“Saving money is the gap between your ego and your income”.
Focus on building true wealth, instead of just appearing rich.
Find the winner.
Knock on many stones to find the diamond.
Out of 500 stocks that Warren Buffet picked, only 10 gave him most of his wealth. ‘Tail events’ are the outlier events that drive most of the profit. Amazon had many failures like the Fire phone. Amazon Prime and web services were the tail events that made it a success.
When we look at the successes in the stock market or business, we are looking at the tail events. We fail to notice many losses and failures behind them.
Housel gives an example of a stand-up comedian. When we see a comedian doing a Netflix special, we are looking at a ‘tail event’.
What are we missing?
Before this, that stand-up comedian made a lot of mediocre jokes at bars around the country. Those make up the most of his career. His big break is the outlier. If it doesn’t work the first time, don’t give up! Try again and again and again. You have to find your ‘tail event’.
Can money buy happiness?
What is the biggest gift money can buy?
“Controlling your time is the highest dividend money pays.”
Angus Campbell, a psychologist, researched what made people happier. It was not income, education, career, or size of their house. Having control over their time was what made people happier.
Unspent assets give you independence and autonomy.
If you have some savings, you can take a sick day without stress. If you have 6 months of savings, you’ll be less afraid of your boss. Having a cushion while you are in between jobs will allow you freedom of choice. You don’t have to pick the first lousy offer.
Instead, you can wait for a better one.
This is the highest value item money gets us; freedom. Freedom of choice! We give up control of our time in pursuit of bigger and better things. Don’t make that mistake.
Key takeaway: Use money to take control of your time.
Everyone looks up from their desks when the stock market crashes
Quick sudden losses garner more attention.
Humans are prone to remember the bad, more than the good. Such is the case with accidents and natural disasters.
Good things take time.
The same is the case with investing.
People are more likely to pay attention to a financial setback. Long times of growth go largely unnoticed.
Don’t let pessimism cloud your judgment.
“A mindset that can be paranoid and optimistic at the same time is hard to maintain because seeing things as black or white takes less effort than accepting nuance.”
Iron law of Economics: Extremely good and extremely bad circumstances rarely stay that way for long.
Optimism is the belief that despite setbacks, good will emerge over time.
Keep a reality-based optimistic approach when dealing with investments. This will help you find opportunities in the long run. On the contrary, ‘seductive’ pessimism will make you overlook valuable chances.
Embrace the economic uncertainty
20 years from now, you’ll meet a brand new you.
You think you won’t change. But you will. Your goals and aspirations won’t stay the same.
The same is true for the market trends. Don’t rely too much on financial history. Events will happen that you never anticipated.
The only constant in this world is ‘change’.
Make ‘balance’ your best friend.
Accept the reality of a changing world. Keep room for errors, uncertainties, and change in your financial decisions.
An important question…
Housel ends the book with a summary of what has been discussed and his confessions. He leaves us with an important question to ponder. A question that billionaire Sandy Gottesman asks his candidates.
“What do you own, and why?”
From now on, think twice before investing in an asset.
Conclusion
Put overnight success dreams to rest.
Instead, welcome the chaos and mystery. Be grateful for what is on your plate while trying to reach the stars.
The best thing about this book is the way it accepts the complexity of this world. The reader isn’t blamed for his failures and misadventures.
Housel offers us age-old wisdom backed by contemporary examples.
In many ways, this book took me back to my childhood. My parents might not be investment gurus but they taught me the same things. Good things come to those who wait. Be grateful. Be kind. Stay away from envy, comparison, and greed.
After coming across this book, the blindfold has come off. I am looking at my financial situation with a fresh perspective.
I have done many jobs. I also tried my entrepreneurial luck multiple times. Despite my efforts, my financial situation is modest.
Due to this book, I am calm yet ready to try even harder. I cannot recommend this book enough to anyone who is stuck like me.
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If you enjoyed these book recommendations, check out the rest of my book lists on my blog- https://www.honbasicbooks.com/blog
