The Psychology of Money - Morgan Housel
An incredible book about the importance that emotions and psychology have when making decisions around money.
🚀 The Book in 3 Sentences
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Money is far more psychological than it is financial.
2. Financial independence is far more valuable than material possessions.
3. Comparing yourself to others is a way to always make you feel as if you don’t have enough.
🎨 Impressions
Decisions made around money are not always rational, they are what makes most sense to a person at the time.
Who Should Read It?
Anyone who wants to understand how people’s emotions and psychology impact the decisions that people make around money.
☘️ How the Book Changed Me
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I have learnt that the decisions I make around money are based off of my own experiences. They make sense to me, however, they might not make sense to others and vice versa. Of course there are optimal ways to make decisions around money but the most important thing is that everyone has a plan which works for them and that they stick to.
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I do not need a reason to save money. The future is unpredictable and I can give myself the most options available by having a pot of money which I can draw from at any time.
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Lifestyle creep is something to be conscious of. Earning 6 figures a year might sound great but if you have 6 figure expenses you can be a slave to money. Don’t let this happen by being careful what you choose to spend more money on as your income increases.
✍️ My Top 3 Quotes
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The hardest financial skill is getting the goalposts to stop moving.
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Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.
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Money’s greatest intrinsic value is its ability to give you control over your time. Using your money to buy time and options has a lifestyle benefit that few luxury goods can compete with.
📒 Summary + Notes
1. No One’s Crazy
Where and when you grew up shapes how YOU see the world.
Your personal experiences with money make up 0.00000001% of what’s happened in the world but 80% of how you view it.
Some lessons have to be experienced before they can be understood.
If you happened to grow up when the stock market was strong you are likely to invest more into the stock market in later life.
We all make decisions based off of our own experiences that make sense to us in a given moment.
2. Luck and Risk
Bill Gates went to one of the only high schools in the world that had a computer at the time. About a 1 in a million chance. His best friend died in a mountaineering accident in school, which is also a 1 in a million chance. For every Bill Gates there is a Kent Evans (luck roulette).
Success is not a good teacher and it can make people think that they are invincible.
3. Never Enough
Hardest financial skill is getting the goal posts to stop moving.
Happiness = Results - Expectations
You can never win in trying to keep up with the levels of other peoples wealth because the people you compare yourselves with are likely to always be above you. As a dealer from last vegas said the only way to win is to exit as soon as you enter the building.
4. Confounding Compounding
Key to Warren buffets success is that he has been a phenomenal investor for 3/4 of a century. If he has started investing in his 30s and stopped in his 60s no one would have heard of him. His skill is investing but his secret is time.
"$81.5 billion of Warren Buffet's $84.5 billion net worth came after his 65th birthday".
5. Getting Wealthy vs Staying Wealth
Skills to getting wealthy are incredibly different to the skills to keep you wealthy.
Obtaining money requires taking risks however, keeping money requires the opposite.
6. Tails You Win
Only a few companies drive stock market returns.
In business you don’t need to be right all of the time. Amazon’s fire phone was a huge failure but this is more than offset by Amazon web services which generates tons of revenue.
Warren buffet has owned 400-500 stocks during his lifetime and has made most of his money from 10 of them.
7. Freedom
Controlling what you do and when you do it with the people you want to is one of the biggest lifestyle variables that can make you happy. Money facilitates this. More then your salary and the size of your house.
Money gives you control over your time and the ability to deal with problems that do not kill your freedom.
Little evidence that Americans in the 1950s are any happier than Americans today. Although we might be wealthier from a material perspective (bigger home, better tv) we haven’t got wealthier from a time perspective.
Shutting off from work has become harder as majority of the labour force are knowledge workers whereas in the past it was more factory type manual labour jobs. When a knowledge worker clocks out from work their mind may struggle to switch off unlike doing manual labour.
8. Man in the Car Paradox
People tend to want wealth to signal to others that they should be liked and admired.
You might buy a flashy car to because what you truly want is respect and admiration from others.
9. Wealth is What You Don’t See
Bill man - there is no faster way to feel rich than to spend lots of money on really nice things but the way to be rich is to spend money you have and not money you don’t have.
Wealth is hidden, it’s income not spent. It’s value lies in options and flexibility.
You don’t see peoples bank accounts, investments or retirement accounts.
10. Save money
Building wealth has more to do with your savings rate than your income.
One of the most powerful ways to raise your income is to raise your humility ie not chase material things.
Savings is a hedge against life’s ability to surprise the hell out of you at the worst possible moment.
Intangible benefits of money are often far more superior to the tangible benefits of money.
Having money in the bank that gives you the opportunity to change careers is incalculable. And what is hard to measure we often tend to overlook.
Having control over your time and options is one of the most powerful currencies in the world.
11. Reasonable > rational
Making rational decisions around money can be hard to stick to. Aim for reasonable.
12. Surprises
The world is full of surprises that are impossible to predict. Fukushima nuclear disaster occurred because it was built to withstand earthquakes that had happened in the past.
Imagine if people such as adolf hitler, Jospeh stallin and bill gates had never been existed.
Benjamin Graham who wrote the intelligent investor no longer recommends detailed stock analysis which he said just before he died despite his book having lots of formulas that were constantly updated to try to find undervalued stocks. The world changes and you need to change with it.
13. Room for error
Why savings are so important because if you don’t have any you are counting on your expenses remaining at the same level. However, the future is unpredictable. Planning for as many eventualities as possible is key.
14. You’ll Change
At every stage of our lives we make decisions that will profoundly influence the lives of the people we are going to be come and then when we become those people we are not always thrilled with the decisions we’ve made. Young people pay good money to get tattoos removed that teenagers paid good money to get. Middle aged people rush to divorce people who young adults rushed to marry. Older adults work hard to lose what middle aged adults worked hard to gain.
Only 27% of college graduates have a job related to their major (according to the Federal Reserve).
Majority of people underestimate who they will become in the future which has a massive impact on peoples financial plans.
Live life with no sunk costs, anchoring decisions to past efforts that can’t be refunded are a devil in a world where people change over time. Don’t make your future self prisoner to your past.
Financial goals made when you were a different person should be abandoned rather than put on life support.
15. Nothings Free
Everything has a price. The price just might not be tangible. Success has a price it is the time and effort dedicated to the cause.
Stock market returns have a price, which is the volatility of the market. View volatility as a fee and not a fine.
Successful investing looks easy when you’re not the one doing it. It also comes at a price of fear, doubt, uncertainty and regret. Easy to overlook this until you go through it yourself. You don’t get stock market returns for nothing!
16. You & Me
Money chases the greatest possible returns. Momentum attracts short term traders and then its off to the races. This is often how bubbles start.
Long term valuations are irrelevant to short term traders. Remember short term traders have different goals to long term investors. Don’t be sucked in to playing their game. Identify what game you’re playing.
Morgan’s mission statement - I’m a passive investor optimistic in the worlds ability to generate real economic growth and I’m confident that over the next 30 years that growth will accrue to my investments.
With this mission statement you can completely block out what the market did this year and whether a recession is coming because it does not matter.
17. The Seduction of Pessimism
Negativity sells. If you want to get on TV say we are about to go into a Great Depression. If you say we are expected to have average returns you have no hope.
Oil production was supposed to be capped at 85 million barrels a day worldwide. After the US beginning fracking in 2008 they went from producing 5 to 13 million barrels a day. This was crucial to keep up with global demand. Problems adapt, threats to incentivise action.
Progress happens so slowly over long periods of time as a result of compound growth that it’s not sexy. Set backs can happen overnight with the destruction of single points of failure. Why it’s easier to create the narrative of pessimism.
18. When You’ll Believe Anything.
Bernie Madoff took billions from sophisticated investors who wanted to believe that his returns were legitimate.
The bigger the gap between what you want to be true and what you need to be true, the more you are protecting yourself. Biggest risk in investing is that you want a certain outcome to be so badly true that your expectation is not logical.
Hindsight is the ability to explain the past gives us the illusion that the world is understandable.
Unforeseen events control most outcomes which are not forecasted. Risk is what’s left over when you think you’ve thought of everything.
Illusion of control is more persuasive than the reality of uncertainty.
psychologist Philip tetlock- we need to believe we live in a predictable controllable world so we turn to authoritative sounding people who promise to satisfy that need.
19. All Together Now
Wealth is putting off spending today for more options in the future.
Managing your money so that you sleep well at night is crucial. This might mean that some people don’t do what is optimal for their money but life isn’t all about optimising your finances, it’s about being happy.
Time is the most powerful force in investing. The ability to do what you want, when you want with who you want is the real reason to chase money.
20. Confessions
Getting the goal posts to stop moving is key!
Independence is the goal.
Life is about playing the odds.
Little correlation between investment efforts and investment results. World is driven by tails (few variables account for the majority of returns). If you miss the tail events your returns will be poor.