Book: The Psychology of Money
Rating (1-10) – 6.5
Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.
Money―investing, personal finance, and business decisions―is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.
In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.
Book Review – It was a decent book. I felt this book was filled with a lot of filler information just to make simple points. I think you could just read Chapter 19 and you’ll be good. But I understand you need to tell stories to convince people about simple points.
Notes:
Chapter 1 – No One’s Crazy
Everyone has a different take on money based on their environment in which they formed majority of their conceptions about finances. The person living through WWII will invest and see money differently from a millennial that has never experienced a WWII world view.
People aren’t crazy about how they spend their money. Their world view determines a lot of our spending habits and investment thesis.
Chapter 2 – Luck and Risk
Luck and risk can happen to anyone. To purely attribute success or failure to ones own ability is missing a big piece to the puzzle. Luck coincides with success and risk with failure.
Chapter 3 – Never Enough
Most people never know when enough is enough.
Chapter 4 – Confounding Compounding
Compounding is often overlooked at the reason for massive change from little change consistently. I.e. Warrens Buffet’s majority wealth came after he was 65 years old even though he was investing since 10 years old.
Chapter 5 – Getting Wealthy vs Staying Wealthy
Getting wealthy and staying wealthy are two different skill sets. One is about taking risk and pushing forward. The other is about frugality and reducing risk.
Staying wealthy is focused on a bit of paranoia around losing your wealth. How can you continue to protect and compound your wealth versus losing it all on risky bets. Survival mentality.
The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference. This should be the cornerstone of your strategy, whether it’s in investing or your career or a business you own.
You need to avoid ruin at all costs.
DON’T GET A BIG HEAD JUST BECAUSE YOU WERE SUCCESSFUL AT SOME BUSINESSES OR INVESTMENTS. THEY CAN EASILY GO SOUTH IF YOU ARE BIG HEADED AND MAKE STUPID DECISIONS.
Chapter 6 – Tails, You Win
Housel tells a story about a prominent art dealer that ends up stupendously wealthy by holding onto works of art that later sell of ridiculous sums of money. How was this dealer able to find such winners?
Housel believes it’s because Berggruen (art dealer) bought loads of different art pieces and just held onto them. He says it’s similar to business and investments, like index funds.
I agree but there is more than simply just buying random stuff hoping you’re diversified enough. I believe the best investors and businessmen know their field enough to make educated decisions on what they should have in their basket of assets.
Most success happens on tail end of a distribution.
VC firms make most of their money from the 1-3 percent big winners even though 65% of companies they invest in will lose money. The same goes for index funds.
Business, investing, and finance don’t require that you’re right every time. You will be wrong. The fact that you’re able to take risks, experiment, and find winners will be what matter. Amazon and Apple fail all the time but they are taking calculated risks that have tail end pay offs. It just takes a couple of big wins in the mist of failures and small ones.
If you build a system that allows you to take risks, fail, and keep seeking for big winners, you’ll eventually win. -Steven Lien
A system will include:
- An ability to fail and keep going (resources).
- A way to generate ideas
- A way to execute on the ideas
- A way to iterate on the idea
- A way to know when to quit or double down
- A built in feedback loop that makes your cycle better.
Chapter 7 – Freedom
The freedom to choose to do whatever you want each day has the highest correlation to happiness.
Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.
People like to feel in control. When you tell them to do something versus having them come to their own conclusion of wanting to do it, you’ll face resistance.
Chapter 8 – Man in the Car Paradox
The letter I wrote after my son was born said, “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other 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.”
People think having the nice stuff will give them admiration they want. The ironic part is that you rarely remember or even look at the person that owns the stuff. You mostly admire the item and the supposed respect you would get if you had them.
Chapter 9 – What is What You Don’t See
There is a difference between being rich and being wealthy. Rich is being able to afford the nice things. You obviously make enough money to pay the monthly payments on a nice house or car. But wealth is hidden. It’s money that you haven’t spent. Wealth is money not spent or at least stored in assets that either provide asset price stability or appreciation.
Wealth provides you the OPTION to buy something or go somewhere that you haven’t used yet.
Chapter 10 – Save Money
Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.
With humility, you feel less of a need to show off and buy the nice stuff.
Chapter 11 – Reasonable > Rational
Annoying chapter. Confusing and trying to use anecdotes to convey his point but it feels like he’s trying to fit a square peg in a round hole.
Chapter 12 – Surprise
History doesn’t predict the future. Random things that have never happened before happy all the time.
We get too confident in historical data, trying to use it to accurately predict the future. We can get into trouble with overconfidence based on using history to predict the future.
Chapter 13 – Room for Error
There is always a possibility for error. In Blackjack, card counters tilt the odds in their favor but it still doesn’t mean they will win every time. Generally, bet more when your odds are in your favor and less when they aren’t.
Typically you want to have 100 attempts at blackjack. If you have $10,000, bet in $100 increments. This gives you an opportunity to see your win percentage.
You won’t always win. Factor that in and don’t get wiped out where you can’t keep taking bets.
A god rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.
Chapter 14 – You’ll Change
We change over time as people. What we want changes. Who we are changes. Learn to adapt to the changes.
Sunk costs — anchoring decisions to past efforts that can’t be refunded — are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.
Don’t let sunk costs allow you to stay in a bad decision.
Chapter 15 – Nothing’s Free
Long winded chapter to just say that the stock market is volatile. If you want the gains from stocks you have to endure the volatility that comes with it. Play the long game and endure the downs so you can get the upside.
Chapter 16 – You & Me
Don’t make decisions based off of other people. They have different objectives and strategies to get what they want.
If you’re a long term investor but you see day traders buying and selling daily, you might be tempted to play their game.
Lawyers might need to play the part by buying nice suits and cars. If you work from home, you don’t need to buy all the nice stuff to try to become a partner at a law firm.
Know the game you’re playing and stick with it.
Chapter 17 – The Seduction of Pessimism
Things are more optimistic than we believe. Good things typically compound slowly over time. Bad things happen instantly and garner more attention. We tend to like pessimism over optimism. Being optimistic is better than pessimistic.