The Psychology of Money- Timeless lessons on wealth, greed, and happiness
Morgan Housel 2020
Money is one of the most important things that determines our abilities to pursue happiness. By itself, money doesn't bring happiness. But used correctly, it gives you a better chance to create happiness. Most books about money are either boring or full of unrealistic promises and schemes that don't translate well into the real world. The Psychology Of Money takes a different approach in that it examines our feelings about money and how they mess with our heads. The advice in here is simple and straightforward- save, live simply, don't be greedy, and prepare for things to fail.
Morgan Housel is a former columnist for the Motley Fool and Wall Street Journal, and he writes a thankfully jargon-free book here about how to think about money and hopefully get more of it without going crazy. Financial advice is complicated, he says at the outset, so there is no one rule that applies to everybody, and no one strategy that works all the time. His advice is common sense stuff like don't get overconfident when things go right or depressed when things go wrong. If you increase your time horizon (i.e. not expect to make a fast fortune), stay away from extremes of saving or spending, and leave yourself plenty of room for error in life, you will avoid many of the pitfalls that drag others down.
Here are some of the more choice nuggets of advice from this book:
- Don't get greedy. Know when enough is enough and never risk things that you can't afford to lose, no matter how good the odds appear to be.
- Compounding returns is the investor's best friend. The longer you can let your money grow uninterrupted, the better it will do on average.
- Life is full of potential disasters that can potentially derail your plans. Use things like insurance, nest eggs, and backup plans to make sure you survive the next downturns when they happen. Vow to become financially unbreakable.
- If you're right more than half of the time, you can come out ahead. And if you hit a tail event (an outlier that hits the jackpot), you can come out way ahead. You have to be willing to accept some level of risk of failure to enjoy the benefits of a long tail event (think Netflix, Apple, or Amazon).
- History is a guide, but new things that never happened are guaranteed to occur. The world is full of surprises- expect them in your attempts at planning.
- Only 27% of college graduates have jobs in any way related to their college majors. Don't let sunk costs, (investments of time and money from your past that you're clinging to because you've already invested SO much), keep you from moving on when things don't work out. Expect your interests and jobs to evolve as you grow older. Another reason to have backup plans to your backup plans.
- The longer your time horizon, the better your investments will do. Trying for big returns inside of a short-term bubble exposes you to bigger disasters.
- Loss aversion makes doom and gloom predictions on the economy sound more urgent and serious. We pay more attention to bad news than good. Don't give in to pessimism. Be cautiously optimistic that slow progress is inevitable.
- Market and economic forecasters are usually wrong. Beware of false narratives that suck you in to wanting to believe what they say will happen. The financial field is loaded with overconfidence and quackery. People want to sell us the story that they can control for the uncontrollable, and we believe them at our own peril.
- Tactical investing (jumping in at the bottom and out at the top) doesn't work. The price of being in the stock market for the long haul is being able to ride out the rough patches without panicking. This is the price you must be prepared to pay.
- Luck and risk drive many of our opportunities. Bill Gates lucked into one of the only high schools in the entire country with a computer, which gave him a huge advantage going forward. Kent Evans, a classmate and friend of Gates, was destined to join in the computer revolution too, but he died at age 19 in a mountaineering accident.
Probably the best thing I took from the book involved the relationship between money, personal freedom, and time. Money, at its best, gives you control of your time. If you're working paycheck to paycheck in order to pay a never-ending procession of bills, your time is full and your freedom is limited. Once you have enough money to not have to work so many hours, you can control your time and your happiness much more. Many of us are sucked into the endless treadmill of working more and buying more, propping up ever higher levels of lifestyle that look good but destroy our freedom and happiness. To get off the treadmill, you need to figure out what's enough, and value friends, family, and meaning over the next new fancy gadget. Freedom is more important than stuff, especially because it gives you the ability to seize new opportunities when they present themselves, rather than stay stuck in your ruts.
Housel mentions the "man in the car" paradox, where we're all driving fancy cars and waving to others to signal to them how we've made it. The problem is that most of those people we're waving to just don't care about our cars or any of our possessions. They're wrapped up in their own problems. We're only showing off to ourselves, which is kind of pathetic.
Having been in the financial industry for over a decade now as a CPA, I've read a lot about money and finances. This book cuts through the financial buzz-words and gives good, solid, advice. Respect money, but try not to let it rule your life and your time. Expect failures from time to time and put plenty of wiggle room in your plans for the unexpected. There is no get-rich-quick scheme or magic bullet for building wealth, and the lottery will never save you. Much of life is luck, and some is being in the right place at the right time.
Work hard, save your money, live simply and wisely, and enjoy the ride.