The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
by Morgan Housel
Financial success is a soft skill, writes Morgan Housel, “where how you behave is more important than what you know.” This is a book about developing the mindset of a long-term investor, with a realistic attitude towards risk and reward. The book is conspicuously free of financial jargon and math. Here are some key points.
LUCK AND RISK. “Luck and risk are both… driven by the same thing: You are one person in a game with several billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.”
The author quotes Carl Richards: “Risk is what’s left over when you think you’ve thought of everything.”
GETTING WEALTHY VS. STAYING WEALTHY. “Getting money and keeping money are two different skills… Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
“Sensible optimism [means] you can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.”
WINNERS AND LOSERS. “No matter what you’re doing with your money you should be comfortable with a lot of stuff not working. That’s just how the world is. So you should always measure how you’ve done by looking at your full portfolio, rather than individual investments… It’s fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario. Judging how you’ve done by focusing on individual investments makes winners look more brilliant than they were, and losers appear more regrettable than they should.”
“The distribution of success among large public stocks over time is not much different than it is in venture capital. Most public companies are duds, a few do well, and a handful become extraordinary winners that account for the majority of the stock market’s returns.”
SAVINGS RATE. “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more… When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little.”
SURPRISES. “The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next… 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.”
“Stanford [political science] professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: ‘Things that have never happened before happen all the time.’”
MARGIN OF SAFETY. “A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality. A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes.”
“The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong… Nassim Taleb says, ‘You can be risk loving and yet completely averse to ruin.’ And indeed you should.”
“Room for error does more than just widen the target around what you think might happen. It also helps protect you from things you’d never imagine, which can be the most troublesome events we face… Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.”
“Leverage is the devil here. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin.”
NO FREE LUNCH. “Everything has a price, but not all prices appear on labels… It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favor… You can pay this price, accepting volatility and upheavel. Or you can find an asset with less uncertainty and a lower payoff.”
A LIKELY STORY. “In 2007, we told a story about the stability of housing prices, the prudence of bankers, and the ability of financial markets to accurately price risk. In 2009 we stopped believing that story. That’s the only thing that changed. But it made all the difference in the world.”
“This is different from say, Germany in 1945, whose manufacturing base had been obliterated. Or Japan in the 2000s, whose working-age population was shrinking. That’s tangible economic damage. In 2009 we inflicted narrative damage on ourselves, and it was vicious. It’s one of the most potent economic forces that exists.”
“Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.”
COMPOUNDING. “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… Time is the most powerful force in investing.”
IRRATIONAL EXUBERANCE. “Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another… A good definition of investing genius is the man or woman who can do the average thing when all those around them are going crazy.”
BE REASONABLE. “Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. 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.”
ENOUGH. “Life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.”
FREEDOM. “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time… Doing something you love on a schedule you can’t control can feel the same as doing something you hate… Cash is the oxygen of independence.”
WALK THE TALK. Housel invests his money in a low-cost index fund. “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.” Everything that is unrelated to that approach—“what the market did this year, or whether we’ll have a recession next year—is part of a game I’m not playing. So I don’t pay attention to it, and am in no danger of being persuaded by it.”
Housel, Morgan. The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. Harriman House, 2020. Buy from Amazon.com
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Selected books mentioned:
30 Lessons for Living: Tried and True Advice from the Wisest Americans by Karl Pillemer
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Taleb
Bringing Down the House: The Inside Story of Six M.I.T. Students Who Took Vegas for Millions by Ben Mezrich
Thinking Fast and Slow by Daniel Kahneman
Bull: A History of the Boom and Bust, 1982-2004 by Maggie Mahar
The Rational Optimist: How Prosperity Evolves by Matt Ridley
Factfulness: Ten Reasons We’re Wrong About the World–and Why Things Are Better Than You Think by Hans Rosling
Why Don’t We Learn from History by B.H. Liddell Hart
The Big Change: America Transforms Itself, 1900–1950 by Frederick Lewis Allen
The Fifties by David Halberstam
The Key Point 