By Morgan Housel
This post summarize the book The Psychology Of Money by Morgan Housel and timeless lessons on wealth, greed, and happiness.
1- No One’s Crazy
Your personal experiences with money make up maybe 0.0000001% of what’s happened in the world, but maybe 80% of how you think the world works.
Everyone make decisions, some decisions can seems absurd to someone else but the guy who made them at that time had reasonable reasons to made them.
2- Luck & Risk
Nothing is as good or as bad as it seems.
- Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
- Therefore, focus less on specific individuals and case studies and more on broad patterns.
3- Never Enough
Never enough is when rich people do crazy things.
There is no reason to risk what you have and need for what you don’t have and don’t need.
The hardest financial skill is getting the goalpost to stop moving.
Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
- Reputation is invaluable.
- Freedom and independence are invaluable.
- Family and friends are invaluable.
- Being loved by those who you want to love you is invaluable.
- Happiness is invaluable.
And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
4- Confounding Compounding
81,5 billion of Warren Buffett’s 84,5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.
There are books on economic cycles, trading strategies, and sector bets. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.
5- Getting Wealthy vs. Staying Wealthy
Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.
More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
6- Tails, You Win
You can be wrong half the time and still make a fortune.
Perhaps 99% of the works someone like Berggruen (art’s seller) acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso. Berggruen could be wrong most of the time and still end up stupendously right. A lot of things in business and investing work this way.
“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.
7- Freedom
Controlling your time is the highest dividend money pays.
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. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.
What they did value were things like quality friendships, being part of something bigger than themselves, and spending quality, unstructured time with their children. “Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them,” Pillemer writes. Take it from those who have lived through everything: Controlling your time is the highest dividend money pays.
8- Man in the Car Paradox
No one is impressed with your possessions as much as you are.
If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
9- 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.
10- Save Money
The only factor you can control generates one of the only things that matters. How wonderful.
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.
Having more control over your time and options is becoming one of the most valuable currencies in the world. That’s why more people can, and more people should, save money.
11- Reasonable > Rational
Aiming to be mostly reasonable works better than trying to be coldly rational.
If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.
12- Surprise!
History is the study of change, ironically used as a map of the future.
“Things that have never happened before happen all the time.”
History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.
13- Room for Error
The most important part of every plan is planning on your plan not going according to plan.
For my own investments, which I’ll describe more in chapter 20, I assume the future returns I’ll earn in my lifetime will be ⅓ lower than the historic average. So I save more than I would if I assumed the future will resemble the past. It’s my margin of safety.
It’s fine to save for a car, or a home, or for retirement. But it’s equally important to save for things you can’t possibly predict or even comprehend—the financial equivalent of field mice.
14- You’ll Change
Long-term planning is harder than it seems because people’s goals and desires change over time.
Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret.
15- Nothing’s Free
Everything has a price, but not all prices appear on labels.
“Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing?
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. Few investors have the disposition to say, “I’m actually fine if I lose 20% of my money.” This is doubly true for new investors who have never experienced a 20% decline.
But if you view volatility as a fee, things look different.
Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be $10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for. Same with markets. The volatility/uncertainty fee—the price of returns—is the cost of admission to get returns greater than low-fee parks like cash and bonds.
16- You & Me
Beware taking financial cues from people playing a different game than you are.
Do you have a 30-year time horizon? Then the smart price to pay involves a sober analysis of Google’s discounted cash flows over the next 30 years. Are you looking to cash out within 10 years? Then the price to pay can be figured out by an analysis of the tech industry’s potential over the next decade and whether Google management can execute on its vision. Are you looking to sell within a year? Then pay attention to Google’s current product sales cycles and whether we’ll have a bear market. Are you a day trader? Then the smart price to pay is “who cares?” because you’re just trying to squeeze a few bucks out of whatever happens between now and lunchtime, which can be accomplished at any price.
Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.
Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.
But if you were a long-term investor in 1999, $60 (Cisco stock) was the only price available to buy. And many people were buying it at that price. So you may have looked around and said to yourself, “Wow, maybe these other investors know something I don’t.” Maybe you went along with it. You even felt smart about it. What you don’t realize is that the traders who were setting the marginal price of the stock were playing a different game than you were. Sixty dollars a share was a reasonable price for the traders, because they planned on selling the stock before the end of the day, when its price would probably be higher. But sixty dollars was a disaster in the making for you, because you planned on holding shares for the long run.
These two investors rarely even know that each other exist. But they’re on the same field, running toward each other. When their paths blindly collide, someone gets hurt.
17- The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
If a smart person tells me they have a stock pick that’s going to rise 10-fold in the next year, I will immediately write them off as full of nonsense. If someone who’s full of nonsense tells me that a stock I own is about to collapse because it’s an accounting fraud, I will clear my calendar and listen to their every word.
Assuming that something ugly will stay ugly is an easy forecast to make. And it’s persuasive, because it doesn’t require imagining the world changing. But problems correct and people adapt.
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
This same thing applies to business, where it takes years to realize how important a product or company is, but failures can happen overnight.
The short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.
Expecting things to be bad is the best way to be pleasantly surprised when they’re not.
18- When You’ll Believe Anything
Appealing fictions, and why stories are more powerful than statistics.
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.
There are many things in life that we think are true because we desperately want them to be true.
The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.
- When planning we focus on what we want to do and can do, neglecting the plans and skills of others whose decisions might affect our outcomes.
- Both in explaining the past and in predicting the future, we focus on the causal role of skill and neglect the role of luck.
- We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs.
19- All Together Now
What we’ve learned about the psychology of your own money.
- Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
- Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.
- Manage your money in a way that helps you sleep at night.
- If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
- Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.
- Use money to gain control over your time.
- Be nicer and less flashy.
- Save. Just save. You don’t need a specific reason to save.
- Define the cost of success and be ready to pay it.
- Worship room for error.
- Avoid the extreme ends of financial decisions.
- You should like risk because it pays off over time.
- Define the game you’re playing.
- Respect the mess.
20- Confessions
The psychology of my own money.
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.