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[Book Review] Morgan Housel's 'The Psychology of Money'

Night Owl Score - 5/5 Hoots

Genre - Non-fiction

Themes - Life advice, personal finance, human behavior

The book in 3 sentences: a 30-second summary

  • It offers great psychological advice to think about when confronted with financial dilemmas and desires.

  • It has riveting insights into human behavior and decision-making as it relates to stock market investing and other financial decisions.

  • It offers ideologies that will help one live a fuller life.

I discovered this book on a trip to the historic Chandi Chowk in Old Delhi, India. This erstwhile magnificent avenue in the heart of Mughal Delhi was the envy of the Europeans when they first visited the country. Now it is reduced to shambles. Here, pirated books are sold next to nothing and I managed to pick up 5 books for Rs 500 which was a solid deal.

This is a great read for young graduates who are earning a serious income for the first time. It can be disorienting to have so much money, so suddenly. Hence, it is important that we effectively control our money and not let it control us.

Chapter Highlights & Quotes

  • Introduction

"To understand why people sell at the bottom of the bear market, you don't need the math of expected future returns. You need to understand the agony of looking at one's family and realizing the jeopardy of their future."

Financial success comes from inculcating good habits around money that take into account the emotions involved in personal finance.

  • No One is Crazy

"Your personal experiences with money make 0.0000001% of what's happened in the world, but maybe 80% of how you think the world works."

The impressions of your early teens and 20s drive a lot of your financial behaviour. People who grew up in the decades after the 1929 Depression have a very different approach to stock market investing than folks like me who saw record-breaking stock market performance just after Covid.

  • Luck & Risk

"Nothing is as good or bad as it seems."

100% of our actions will never dictate 100% of our outcomes. Because of the inherent risk in financial decisions, a failed outcome does not necessarily reflect an incorrect thought process. Keep this in mind while judging your efforts and the efforts of others. Focus less on individual success or failure stories but more on broader patterns.

  • Never Enough

“At a party, Kurt Vonnegut says to Joseph Heller, “The hedge fund manager organizing the party earns more a day than you earned from your novel Catch-22.", to which Heller replies, "Yes but I have something he will never have....enough".

"Enough" might seem conservative, but it is the realization that an insatiable appetite for more will push you to the point of regret. There are some things that aren’t worth risking :

  1. Reputation

  2. Freedom and independence

  3. Family and friends

  4. Being loved by those who you want to love

  5. Peace of mind

  • Confounding Compounding

"$81.5 Billion of Warren Buffet's $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities."

Good investing is not about making one-off great returns but about staying in the game long enough to let your money compound over time. The power of compounding is insane and we can’t grapple with it because linear thinking is intuitive whereas exponential thinking is not. Compounding is exponential.

  • Getting wealthy vs staying wealthy

“Getting rich is one thing. Staying rich is another”

Keeping money is hard because it requires the opposite of risk-taking, which is how money is often accumulated in the first place. It requires humility and acceptance that there was some degree of luck involved in your success and hence the process cannot be expected to be repeated indefinitely.

Appreciate the Margin of Safety. It could be a frugal budget, a loose timeline, or flexible thinking. A higher margin of safety lets you raise your long-term odds of success by ensuring survivability, allowing compounding to work its magic.

  • Tails, you Win

“We underestimate how normal it is for a lot of things to fail which causes us to overreact when they do.”

Anything that is huge, profitable, or famous is a result of a tail event, an outlier. Since most of our attention goes to such events, we underestimate how rare they are. On the converse, normalizing such events instills a belief that failures are rare which makes us overreact to them.

  • Freedom

“Controlling your time is the highest dividend money pays.”

The ability to do what you want, with who you want, when you want, and for how long, is the ultimate thing money can buy. Doing a job you love can feel like doing something you hate if there is no autonomy or control.

  • Man in the Car Paradox

“No one is as impressed by your possessions as much as you are.”

We hold wealth as a proxy for happiness, admiration, and respect, but money seldom brings that, especially from the people you most want it from. Humility, kindness, and empathy will bring you more respect and admiration than money ever will.

  • Wealth is what you don't see

“Spending money to show people how much money you have is the fastest way to have less money.”

True wealth are the financial assets that haven’t yet been converted into materialistic fluff. The world is full of people who look modest but are actually wealthy, and people who look rich but are actually razor's edge close to insolvency.

  • Save Money

“One of the most powerful ways to increase your wealth is not increase your income. It is to increase your humility”

We often think increasing our income is the best way to have more money but something much simpler (and far more in our control) is to save more of our current paycheck. We save more by spending less. We spend less by desiring less and we desire less when we think less of what others think about us.

  • Reasonable > Rational

“Commitment to your strategy during the lean years of the market is the financial variable that most correlates to your eventual outcome.”

Mathematically optimal investing strategies seldom work in the real world because people don’t factor in the emotional roller coasters that come with investing. Sticking to an investing strategy allows the magic of compounding to work, and people stick to those strategies that let them sleep peacefully at night.

  • Surprise!

“History is the study of the change, ironically used as a map of the future.”

We fool ourselves by over-admiring people who've "been there, done that" when it comes to money. Experiencing certain events does not necessarily qualify you to know what will happen next. In fact, it rarely does, because experience leads to overconfidence more than forecasting ability.

  • Room for Error

“The most important part of a plan is to plan for the plan not going according to plan.”

In investing and many other aspects of life, we’re playing a game of odds, not certainties. Hence should be wary of believing anyone who says he knows what the future holds just because we are uncomfortable with the truth that nobody does. The purpose of 'room for error' then is to render forecasting unnecessary in a game of uncertainties.

  • You'll change

“We are bad forecasters of our future selves.”

Long-term financial planning is hard because we tend to be keenly aware of how much we’ve changed over the past, but underestimate how much we’d change in the future. As we continuously change, sunk costs — anchoring decisions to past efforts that can't be refunded — make our future selves slaves to our different, past selves. It's like a stranger making decisions for you.

  • Nothing’s Free

“Everything has a price, but not all prices appear on labels.”

The price of successful investing is emotional upheaval, doubt, uncertainty, and regret. For 95% of the days, the outperforming stocks stay below their erstwhile all-time highs.

  • You & Me

“Beware taking financial cues from people who are playing a different game than you are.”

Imitating others’ financial decisions is unwise because different people have different goals over varying time horizons. There is no single piece of advice that works for all. What makes sense to day traders might not make sense to long-term, value investors. Don’t blindly believe what you hear on TV, Twitter, or other social media.

  • The Seduction of Pessimism

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.”

Because humans are so risk-averse, we tend to take notice of pessimists proportionally more than optimists. But, real optimists don't believe everything will be great. That's complacency. Optimism is the belief that over time things will be in your favor even if there will be setbacks along the way.

  • When You'll Believe Anything

“The more you want something to be true, the more you're likely to believe the story that overestimates the odds of it being true.”

We like to believe we live in a predictable world so we turn to authoritative-sounding people who promise to satisfy that need. Indeed, the illusion of control is more comforting than the reality of uncertainty.

Raghav is a senior at Cornell University and is graduating with a Bachelors in Electrical and Computer Engineering. An avid reader, he is interested in figuring out what constitutes a happy and meaningful life; be it through practicing meditation, having deep life chats with friends, or penning his thoughts down on paper, you can often find him trying to quieten the endless chatter of his mind.

1 comment

1 Comment

Aditya Kundu
Aditya Kundu
Nov 26, 2021

Great book....

I too read it and my finances have been growing steadily since then....

Great work by Raghav....

Keep it up TheNightOwl team....

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