‘We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance’) – The Psychology of Money; Morgan Housel
The quote above aptly captures why we need to reexamine the way we approach money because often times our behaviours towards money plays a greater role in financial successes than our intelligence. Within the book Housel looks into the drivers of our behaviour, the meaning of having money in our current society, and the thought process behind building wealth. The book feels like a compilation of all of the good advice we have heard in life, applied directly in Personal Finance which is honestly a refreshing take.
So here are my key takeaways from the book:
PS: This is just a short summary of the key messages that stood out to me. I still recommend reading the book because Housel really explains it very well, and in a flow that stacks on top of one another very nicely. And if you don’t want any spoilers, stop here!
1. Don’t risk what you have and need for what you don’t have and don’t need
The above quote was by Warren Buffet and aptly captures the hardest financial skill yet – how to get the goalpost to stop moving. This is the endemic of ‘Never Enough’.
The book shared a story of Rajat Gupta – a successful multimillionaire who wanted so badly to be part of the billionaire circle. So he engaged in insider trading – a decision that ultimately led him to prison.
This sheds light on the psychology of why one can have so much, but still lack a sense of enough: Social Comparison. Because we always compare with our peers but the ceiling of social comparison is so high that no one will ever hit it. The only way to ‘win’ is to not play.
2. There is a price of admission to investing
Imagine you want to go to Disneyland to go on all of the rides and watch the parade – to do so, you must first pay an admission fee. But you do so anyways, because you think it’s worth it.
It’s the same with successful long term investing. If we want to enjoy the benefits of compounding and our route to financial freedom, we must pay a price. Instead of dollars and cents, the price is volatility, fear, doubt, uncertainty and regret – these are all part and parcel of the process.
Because the price of investing success is not obvious like a physical price tag, when we see a dip in our portfolios, it feels more like a fine instead of a fee. A punishment for doing something wrong; perhaps the wrong strategy, the wrong timing – and it causes us so much anguish.
Our natural response to fines, is to avoid them or minimise its impact vs fees – where as long as we decide that the payoff is worth the fee, we’d stick with it regardless.
It’s a subtle but powerful mindset shift in investing that will make sure we stick around long enough for the investing gains to work in our favour.
3. The Man in the Car Paradox
For many, earning more money means splurging on a fancy car. We tend to think it displays a strong signal to others that we’ve made it. However the irony is, everytime you see someone driving a fancy car, do you think “Wow the guy is cool” or do you think “Wow, if I had that car people would think I’m cool“.
This to me, is the embodiment of the famous quote – We buy things we don’t need to impress people we don’t like. But the thing is – do others even care about our possessions as much as we do ? It’s worth thinking about what Money actually means to us, and that perhaps it’s more of a vehicle to gain respect and admiration from others even though it may bring less of it than we imagine.
4. The world is full of surprises
If you are new to finance, especially in technical analysis, you’d notice a strong emphasis on studying historical charts and patterns. And many investors tend to fall into the trap of ‘Historians are prophets’ fallacy. Hence why at one point we constantly hear – oh the market is going to crash, it’s a ten year bubble and the list goes on.
But unlike other subjects like hard science where historical data typically can be relied upon, investing is essentially a massive group of people making imperfect decisions with imperfect information and with often in an emotional state of mind. So, an overreliance of past data may lead to blind spots – missing out on outlier events that move the needle the most. Certainly no one ever saw this Covid 19 outbreak happening.
And because we never truly know, that’s why margin of safety is so important. It’s acknowledging that much of what happens is out of our control, so it’s better to carve out a good plan which has room for error.
The more you need specific elements of a plan to be true, the more fragile your financial plan becomes.
5. The difference between You & Me
If I asked you if you would buy Google’s stock at its current price today – chances are your answer will differ based on who you are.
Do you have a 30 year time horizon? Are you looking to cash out within 10 years? Are you looking to sell within a year? Are you a day trader?
There is no one price fits all because each investor have different goals and time horizons so their financial decisions may seem ludicrous to someone viewing their strategy from a different lens. The formation of bubbles sometimes isn’t so much of people irrationally participating in long term investing, it’s a greater number of people moving to short term investing to capture the momentum that is in place, hoping to make a quick buck.
So the next time you see a stock skyrocketing, be it the next Apple or Gamestop stock, realise that others may be playing a different game from you and take a step back to decide what your own investing strategy is before you decide to jump on the bandwagon.
So that wraps up my 5 takeaways from the book!
Hope you learnt a thing or two!