The Psychology Of Money

Author: Morgan Housel

Genre: Self-Help, Money

Housel, a columnist at Wall Street Journal and The Motley Fool, has written an amazing book that should be a must-read to all youngsters. Madhavi Ravanan, my wonderful NIT Trichy batch-mate, reviews it here. [Adapted from her linkedin post, with her due consent]

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Loads of wisdom, all delivered in a non-preachy, easy flowing, light narrative. Reads like a series of blog posts. Well worth a read. Am sharing some of the excerpts I noted while reading. Turns out to be 25 of them:

#1 – Few people make financial decisions purely based on spreadsheets. They make them at the dinner table or in a company meeting. Your personal history, your view of the world, ego, pride, marketing and odd incentives influence your decision. Manage your money in such a way that helps you sleep at night.

#2 – Excerpt from a letter from the author to his son, ” Some people are born into families that encourage education, others are against it. Some are born into flourishing economies encouraging of entrepreneurship, others are born into war and destitution. I want you to be successful and I want you to earn it. But realise that not all success is due to hard-work and not all poverty is due to laziness. Keep this in mind while judging people, including yourself”.

#3 – When dealing with a financial failure, arrange your financial life in such a way that a bad investment here or a missed financial goal there won’t wipe you out and you can keep playing long enough for the odds to fall in your favor.

#4 – Good investing isn’t necessarily about earning the highest returns. Highest returns tend to be one off hits and can’t be repeated. It’s about earning pretty good returns that you can stick with for the longest period of time. If you want to do better as an investor, the single most important thing to do is to increase your time horizon.

#5 – Room for error or Margin of Safety is the most underappreciated force in finance.

#6 – An investing genius is the one who can do the average thing when all those around him/her are going crazy.

#7 – Warren Buffet @ Berkshire Hathway shareholder meeting – “I’ve owned 400-500 stocks in my life and made most money on 10 of them”. Charlie Munger – “If you remove just a few of Berkshire’s top investments, its long term track record is pretty average”

#8 – The ability to do what you want, when you want, with who you want, for as long as you want is priceless. It’s the highest dividend money pays. More than your salary, more than the size of your house, more than the prestige of your job, control over doing what you want, when you want to, with the people you want to is the broadest lifestyle variable that makes people happy

#9 – Independence, at any income level, is driven by your savings rate. Beyond a certain level of income, your savings rate is determined by your lifestyle expenses not escalating.

#10 – From the book, “30 lessons for living”, based on interviews with 1000 elderly Americans on most important life lessons they’ve learned from decades of life experience –

• Not a single one of them said that to be happy you should try to work as hard as you can to make money to buy the things you want
• Not a single one of them said, its important to be at least as wealthy as the people around you and if you have more than they do, then its real success
• Not a single one of them said, you should choose your work based on your desired future earning power
• What they did value were quality of friendships, being part of something bigger than themselves and spending quality unstructured time with their children

#11 – Excerpt from the letter the author wrote to his son after he was born – ” You might think you want an expensive car, a fancy watch and a huge house. But am telling you, you don’t. What you want is respect and admiration from people and you think having expensive stuff will bring it. It almost never does – especially from the people you want to respect and admire you. Humility, kindness and empathy will bring you more respect than horsepower will”. Rihanna sued her financial advisor when she went broke, citing bad advice. The advisor responded in court: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”

#12 – The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.

#13 – Whether an investment strategy will work, how long it will work, whether markets will cooperate are all uncertain. Personal savings and frugality are in your control and are 100% certain to be effective into the future as well.

#14 – Learning to be happy with less, creates a gap between what you have and what you want – this is similar to the gap you get from growing your paycheck, but easier and more in your control.

#15 – People with enduring personal finance success – not necessarily those with high incomes – tend to not give a damn what others think about them.

#16 – You don’t need a specific reason to save. Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.

#17 – Harry Markowitz (Nobel laureate known for his elaborate work on portfolio allocation), for his own investment uses a rather simple rule of the thumb – “I visualized my grief if the stock market went up and I wasn’t in it – or if it went down and I was completely in it. My intention was to minimise my future regret. So I split my contribution 50:50 between bonds and equities”. The point being that there are many things in high finance which sound right, but how people actually behave may be very different.

#18 – Things that never happened in the past happen all the time – true in economy and in markets. History of money is useful to understand people’s relationship to greed and fear. Specific trends, trades, sectors, causal relationships about markets and what people should with their money is an example of evolution in progress.

#19 – Can you survive a 30% decline in the value of your assets? On a spreadsheet may be yes, what about mentally? Assume returns from your investments will be 1/3rd less than the historic average. Save more for your goals. If in reality, returns are further below, your margin of safety is not a 100% guarantee but will at least let you sleep at night. If returns resemble the past then you’d be pleasantly surprised.

#20 – Most important part of every plan is planning on the plan not going according to the plan. Save for your specific goals, but also save for just the sake of it.

#21 – Aiming at every point of your work life to have moderate annual savings, moderate free time, no more than a moderate commute and at least moderate time with your family increases the odds of being able to stick with a plan and avoid regret, than if any of those things fall to extreme sides of the spectrum.

#22 – Thinking of market volatility as a fee rather than a fine will help you stick around long enough for investing gains to work in your favor. You should like risk because it pays off over time.

#23 – Understand your own time horizon and don’t be persuaded by the actions and behaviors of people playing a different game – you may be a long term investor and the other person could be a day trader.

#24 – Nassim Taleb – ” True success is exiting some rat race to modulate one’s activities for peace of mind”. Good decisions aren’t always rational. At some point you’ve to choose between being happy or being “right”.

#25 – There is little correlation between investment efforts and investment results.

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Why read the book: Everyone wants to be rich, and yet being rich is less about earning a lot, and much more about keeping a lot. The author in his blog shares how a $50,000 an year secretary left behind US$7m (steady investments compounded over a long life) and how the high earning celebrity singer Rihanna (and also a former Vice Chair in Merill Lynch) went bankrupt. “That’s because investing is not the study of finance. It’s the study of how people behave with money. And behavior is hard to teach, even to really smart people. You can’t sum up behavior with formulas to memorize or spreadsheet models to follow.” Become wise then by reading this contraian book!

Goodreads Links: The Psychology of Money by Morgan Housel | Goodreads