Sunday, March 14, 2021

The Psychology of Money - Morgan Housel

 I thought he would tell 19 short stories but Morgan tells more than 19 - though in a format that I expected them in. But the ideas and wisdom are worth their weight and we shall stay with them. Morgan talks of how creating wealth or making money is a behavioural thing, more than something to do with being smart or intelligent. In fact, those qualities might get in the way of making money. The themes are simple - understand the power of compounding, keep investing, don't break the chain, be patient, save what you can, don't spend what you generate on unnecessary things, know what's a good enough lifestyle for you and stay there - and in some time, you will be sitting on a pile. He says - sit on it and keep doing what you have been doing. Don't blow it all away. Maintain your relationship with money in a healthy way.



He starts with the story of a techie who would come to Las Vegas and splurge his cash like there was no tomorrow - throwing wads of money around, buying gold coins and throwing them into water and stuff like that. He ran out of money in a few years. On the other hand, there was this janitor Ronald Read (philanthropist, investor, janitor, gas station attendant) who lived a small life until he was 91 and then gave away his 6 million to his children and charities. What Read di was simple - he found out what he needed in life, invested his tiny savings regularly and waited as they compounded.

The 19 chapters have a lesson each.

1. Our personal experience with money is only 0.00000001% of what happens in the world. But we think that 80% of the world thinks like how we think. So our financial decisions are made on the bias of our personal stories with money and that leads to our never getting started at all.

Don't go by your personal story - find out from experts and follow the principles.

2. No rich story is as good as it seems and no sad story is as bad as it sounds. Everyone has their capacity and are happy where they are.

Two suggestions he gives which holds good for us  - be careful who you praise and admire and be careful who you look down upon and wish to avoid becoming.   

Focus less on specific individuals and more on broad patterns.

3. If you know what's 'enough' for you, you are in a great place. Like they say, the richest man is the man who is content.

The hardest financial skill is getting the goalpost to stop moving. Avoid social comparison and stop trying to outdo the neighbours.

Enough is not too little. There are many things not worth risking, whatever the gain.

4. The law of compounding - 81.5 billion of Warren Buffet's networth of 84.5 billion came after his 65th birthday. he had been investing since he was ten. (If he had stopped investing at 60, he might have stopped at 11billion)

It's important that your investment lasts. Shut up and wait. It will compound and zoom at one stage.

5. Getting wealthy and staying wealthy are two different things. Hold your money. Stick around. Avoid ruin at all costs by making hasty decisions.

Recommends a barbelled personality =- be optimistic about the future, but paranoid about what will prevent you from getting there.

6. Tails you win - Remember, you win some and you lose some. But the few things among your losses are the ones, the tails, that hit big time and make all your money. Disney made 400 cartoons before Snow White and the money that 83 minutes made, made up for everything.

Anything that is huge, profitable, famous or individual is the result of a tail.

Creativity works like that too - the more you do things, the better are your chances at getting a masterpiece.

'The man who can do the average thing when all else around him is going crazy is a military genius' - Napolean.

Tails drive everything!

7. Freedom - Controlling your time is the highest dividend money pays. The highest form of wealth is to be abe to say - I can do whatever I want today.

Happiness - is being able to control your life.

'Having a strong sense of controlling one's life is a more dependable predictor of positive feelings of well being than any of the objective conditions (money, work, others) of life we have considered. - Angus Campbell, Sense of Well Being of Americans

What seemed to make them happy were quality of friendships, being part of something bigger and time with children.

8. Man in car - People buy cars thinking it will make them appear rich, but the fact is others only look at the car ad not the person behind the wheel. For earning respect - humility, kindness and empathy are better.

9. Wealth is what you don't see - Spending money is the fastest way to have less money. Being rich is about current income. Wealth is income not spent. For example, exercising could be equivalent of rich, and denying that rich meal is creating wealth.

10. Save money - Building wealth has little to do with income or investment returns - it has everything to do with your savings rate.

Savings can be created by spending less. You don't need a specific reason to save. Flexibility and control over your time is an unseen return. having more control over your time and options is one of the most valuable currencies of the world.

11. Between being rational and reasonable- choose reasonable. 

12. Surprise - Be open to surprises. Things change. Allow room for error. Plan for things not going according to plan. Build in a margin of safety - aim low.

Take risks wth some, hold on to some.

13. Long term planning is hard because we change and our goals change. Be flexible with your goals, with yourself.

Compounding - never interrupt it unnecessarily

-Avoid extreme ends of financial planning - stay in moderation. Understand the reality of changing minds.

14. Nothing's free -everything has a price, be willing to pay it

Money gods don't look highly upon those who seek a reward without paying the price, Volatility is always fee, not a fine.

15. Don't take financial cues from people playing a different game. Write a personal mission statement and be guided by it.

16. We have an intellectual allure for pessimism. Progress happens too slowly, setbacks happen too quickly. Pessimism reduces expectations, narrows gap between possible outcomes and outcomes you feel great about.

17. The stories we tell ourselves create the reality of our life. what you want to be true you will believe. we complete the narratives with stories and fill the gaps. Its ok not to know.

18. Find humility when things are going right and forgiveness/and compasison when things are going wrong. Less ego, more wealth. Saving money is the gap between your ego and income. Manage money so it helps you sleep at night.

19.
To do better as an investor, increase your time horizon.
Be ok when things go wrong- you can be wrong 50% of the time and still make a fortune.
Use money to gain control over your time
Be nicer and less flashy.
Save without specific reason.
Find the cost of what you want and pay for it.
Have room for error.
Avoid extreme financial decisions.
Risk pays off over time.
Define the game you are playing.

Simple stuff, well explained. Save, let it compound, aim low, be patient, stay in the game, spend less, find out what you need, keep your ego in check, start early. Good one!

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