The Psychology of Money by Morgan Housel

  • How much I’d Recommend: 9/10
  • Date finished: 7/29/21
  • The Psychology of Money, recommend borrowing from your local library

Wow. It was a beyond fantastic book about wealth and greed. My favorite part of the book was the postscript on “a brief history of why the U.S. consumer thinks the way they do” which I quoted at the very bottom of this post the ending of that history to present time. Housel really boiled the truth down to very simple observations. It is fascinating to read.

  1. We all do crazy stuff with money because we’re all relatively new to this game and what looks crazy to you might make sense to me. But no one is crazy — we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.
  2. Your personal experiences with money make up maybe 0.000000001% of what’s happened in the world, but maybe 80% of how you think the world works.
  3. Bill Gates experienced one in a million luck by ending up at Lakeside Highschool (a U.S. high school that has a computer curriculum in 1968). If you give luck and risk their proper respect, you realize that when judging people’s financial success—both your own and others’—it’s never as good or as bad as it seems.
  4. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging entrepreneurship; others are born into war and destitution. I want you to be successful and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself. Therefore focus less on specific individuals and case studies and more on broad patterns.
  5. The hardest financial skill is getting the goalpost to stop moving. Know when it is enough.
  6. Social comparison is the problem that makes you want more.
  7. Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.
  8. Getting wealthy vs. staying wealthy: money is about survival. You will get the biggest return if you are able to stick around long enough for compounding to work wonders. Optimistic about the future, but paranoid about what will prevent you from getting to the future – is vital.
  9. You can be wrong half of the time and still make a fortune:
  • You could invest $1 a month from 1900 to 2019 regardless of market – you will end up with $435,551
  • You could invest $1 in the stock market when the economy is not in a recession, and save your monthly dollar in cash, and invest everything back into the stock market when the recession ends – you will end up with $257,386
  • Or it takes a few months for a recession to scare you out, and then it takes a while to regain confidence before you get back in. You invest $1 in stock when there’s no recession, sell six months after a recession begins, and invest back in six months after a recession ends. You will end up with $234,476.

The moral to the story, don’t time the market.

  1. Controlling your time is the highest dividend money pays. Money’s greatest intrinsic value – and this can’t be overstated – is its ability to give you control over your time. 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. More than your salary, more than the size of your house, more than the prestige of your job.
  2. No one is impressed with your possessions as much as you are. You might think you want an expensive car, a fancy watch, and a huge house. But you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost ever does — especially from the people you want to respect and admire you.
  3. Spending money to show people how much money you have is the fastest way to have less money.
  4. Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. The value of wealth is relative to what you need. You can save just for saving’s sake. And indeed you should. That flexibility and control over your time is an unseen return on wealth.
  5. Reasonable > Rational: Aiming to be mostly reasonable works better than trying to be coldly rational.
  6. History is the study of change, ironically used as a map of the future. The most important part of every plan is planning on your plan not going according to plan. Harvard psychologist Max Bazerman once showed that when analyzing other people’s home renovation plans, most people estimate the project will run 25% – 50% over budget. But when it comes to their own projects, people estimate that renovations will be completed on time and at budget. Oh, the eventual disappointment.
  • The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.
  1. Long-term planning is harder than it seems because people’s goals and desires change over time. We should come to accept the reality of changing our minds. The trick is to accept the reality of change and move on as soon as possible.
  2. Everything has a price, but not all prices appear on labels. Every job looks easy when you’re not the one doing it because the challenges faced by someone in the arena are often invisible to those in the crowd. We are not good at identifying what the price of success is, which prevents us from being able to pay it.
  3. Beware taking financial cues from people playing a different game than you are. When a commentator on CNBC says, “you should buy this stock,” keep in mind that they don’t know who you are. Are you a teenager trading for fun? An elderly widow on a limited budget? A hedge fund manager trying to shore up your books before the quarter ends? Are we supposed to think those three people have the same priorities, and that whatever level a particular stock is trading at is right for all three of them?
  4. Forecasts of outrageous optimism are rarely taken as seriously as the prophets of doom. Pessimism just sounds smarter and more plausible than optimism.
  5. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

The summarized notes on Money

  1. Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
  2. Less ego, more wealth – saving money is the gap between your ego and your income, and wealth is what you don’t see.
  3. Manage your money in a way that helps you sleep at night.
  4. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
  5. Become ok with a lot of things going wrong. You can be wrong half the time and still make a fortune.
  6. Use money to gain control over your time.
  7. Be nicer and less flashy.
  8. Save, just save. You don’t need a specific reason to save.
  9. Define the cost of success and be ready to pay it.
  10. Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.
  11. Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.
  12. You should like risk because it pays off every time.
  13. Define the game you are playing.
  14. Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.
  • Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.
  • 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 have to choose between being happy or being “right.”
  • How Morgan Housel invests: we invest money from every paycheck into these index funds—a combination of U.S. and international stocks. There’s no set goal—it’s just whatever is left over after we spend. We max out retirement accounts in the same funds and contribute to our kids’ 529 college savings plans. Effectively all of our net worth is a house, a checking account, and some Vanguard index funds.
  • one of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. My investing strategy doesn’t rely on picking the right sector or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades. I spend virtually all of my investing effort thinking about those three things—especially the first two, which I can control.
  • You can scoff at linking the rise of Trump to income inequality alone. And you should. These things are always layers of complexity deep. But it’s a key part of what drives people to think “I don’t live in the world I expected. That pisses me off. So screw this. And screw you! I’m going to fight for something totally different, because this—whatever it is—isn’t working.”

Housel’s summary on most recent events, Trump, and the future.

The unemployment rate is now the lowest it’s been in decades. Wages are now actually growing faster for low-income workers than for the rich. College costs, by and large, stopped growing once grants are factored in. If everyone studied advances in healthcare, communication, transportation, and civil rights since the Glorious 1950s, my guess is most wouldn’t want to go back.

But a central theme of this story is that expectations move slower than reality on the ground. That was true when people clung to 1950s expectations as the economy changed over the next 35 years. And even if a middle-class boom began today, expectations that the odds are stacked against everyone but those at the top may stick around.

So the era of “This isn’t working” may stick around.

And the era of “We need something radically new, right now, whatever it is” may stick around.

Which, in a way, is part of what starts events that led to things like World War II, where this story began.

History is just one damned thing after another.

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