In my list of five best personal finance books, The Psychology of Money by Morgan Housel is one of them.
The Psychology of Money book is actually an extended version of one of the articles he wrote in his blog with the same title.
The Psychology of Money book is full of new sensible perspectives and lessons on money, wealth, and greed – how they are also related to our happiness.
20 Lessons From the Psychology of Money Book
I won’t describe the book in a generic sense. Instead, let me share what I learned reading it – 20 lessons from the Psychology of Money.
Knowing in theory and experiencing ourselves for real aren’t same. When we read books, we know how to have a money mindset – how to invest – how to do stock trading etc.
They give ideas on what happened in the past, like stock market crashes or how some stocks have trended up and to the right valuation over the period of time.
In theory ‘buy low, sell high’ makes sense. Yet, when a stock crashes 40%, only being in real experience can tell if it makes sense and we’ll buy that dips for real.
When I make money during bull market, it’s easy to convince myself that I’m being smart and results are entirely due to my quality decisions and actions.
It didn’t prove right. Some other times, though I make excellent decisions, I still ended up losing money. Luck and risk come in their own terms and there is nothing we can do about it.
You cannot claim 100% credit of positive outcomes just like it’s not 100% your fault for the negative outcomes.
So, be careful whom you admire and whom you down look. There are as many idiots who are successful out of luck as there are geniuses who aren’t successful due to lack of luck.
Keeping money and getting money are two different skills. Everyone can get money but only few know how to keep it.
You can get money from your hard work, fame, value, risk taking ability, positive disposition, and also from lottery.
In other hand, keeping money demands knowing risk mitigation, frugality, humbleness, and having less desire.
There aren’t as many ways to keep money as there are ways to making money. We make far too much money than we keep.
NBA athletes earn in millions. Still, they go broke in few years as they lack the skills of keeping money.
Ap Warren Buffett also would have gone broke long before if he lacks the skills of keeping the money.
Once you achieve your goal, you’ll move to next. In most of the cases, it’s due to comparisons with others.
If the next goal doesn’t make sense for you and to the values you uphold, pursuing it would be like betting with what you’ve for what you actually don’t need.
When it comes to money and wealth, there will be always someone who has more than you, if you do upward comparisons.
If you do downward comparisons, there are millions who don’t have even 1% of what you have and who would gladly shift places with you.
It’s important to learn how to be happy with what you have. It’s when you live below your means, a wealth is created.
However, spending more than what you have and trying to prove you are rich is an indication that you’re merely feeding your ego.
Humility increases savings. Saving is actually a difference between what your ego wants and your income. So, now we know why some high income people don’t save much.
We can save more when we spend less. We will spend less when we care less of what others think of us. We care less of what others think only if we have less ego.
If you are rich, you have a high income but less accumulated income. But the wealth is that accumulation – something we don’t see.
We can judge a person by what we see; luxury cars, big houses, limited edition watches, branded clothes, diamond rings etc. If you have them, you’re rich.
But we don’t see a person’s bank account, stock brokerage account, and his retirement fund. These are wealths. This means not all people who look rich are wealthy.
In this world of consumerism, a person driving a Prado of $500,000 loan is perceived financially successful than a person who has $1 million in his brokerage account.
In true sense, wealth is the money not spent to show how rich we’re. It’s the mental peace of not depending anyone for money and doing things we love without money being the priority.
No one is 100% perfect in investing and you also don’t try becoming one. Past data or projections don’t capture 100% of future.
If you are in investing for long-term, keeping room for error helps you set your financial and emotional tolerance level. It’s what we call a margin of safety.
The best financial plan is about how to win more when winning and lose less when losing.
You can do things just right and still end up losing money and vice versa. Ap Warren Buffett owned 500+ stocks his entire life but only 10 of them gave him this wealth.
When you see a man driving a nice car, you hardly think how cool the man is. Instead you think how cool you would be driving that car while ignoring the man inside the car.
This is the rich man in a car paradox introduced by Morgan Housel in his book The Psychology of Money.
When we want such expensive things, we actually yearn for respect from people. But being kind, humble and empathetic gives you respect and admiration more than your expensive possessions do.
Therefore, no one cares about your expensive cars, big houses, expensive jewelries, compound bow etc as much as you think they do.
When we invest for long-term, we are putting aside our money for at least 15 years never to be touched or spent. This is something many won’t like at least over the period of time.
When we plan our investment, we do as if our principles, behaviors, goals, values, personalities etc are written on a stone. But they change over the time and keeping up our investment plan is hard.
When we are young, we often don’t account for things we might need for future. In due course, we’re forced to amend our plans to accommodate those changes.
Therefore, the best thing is accepting the fact things will change and then keeping room for unknowns.
Nothing is free. Everything has price. But not all prices come in monetary terms like prices of car, watch, or a house. This is the case with investing as well.
Just like we do a thing only if can pay the price, investing also demands price. However, most of its prices too aren’t in monetary terms.
When we invest, time taken to analyze stocks and study companies is a price. We have to accept fear, uncertainties, and stomach market volatilities.
The decline in stock prices is part of the investing journey. Our patience for the recovery and regrets if completely crashes, which is possible, is also a price.
If we have to pay prices for investing at various levels, why invest then? It depends on what price you feel is worth paying for. Personally, I do it all for my financial freedom.
When someone recommends an investment, make sure to know what is the motive. You might be foolishly taken for a ride.
Just because your friend Wangmo made money in Bitcoin doesn’t mean you must invest in it without knowing anything. Your investing strategies and principles might be different from that of Wangmo.
When Warren Buffett says people to invest in Coca-Cola holding a bottle of coke, know that he’s one of the majority shareholders of Coca-Cola.
I might also write articles on future of Sherza and how its shares will give 10x returns just to push up its price and sell off my holdings at a profit. You never know.
The point is know what game you are playing. Don’t invest base on other people’s opinions and explanations. Keep your lane and values.
If we need optimist to invent aeroplane, we need pessimist for parachute. Both views are important in building our wealth as well.
However, majority of people tend to prefer pessimism to optimism. They equate pessimism to being cautious and smarter but optimism to being just reckless and complacent.
When the stock market goes down, they think it will continue going down and miss the bottom opportunity.
If they’re little bit optimistic, they may not be able to catch the bottom but won’t enter at the peak either.
Ap Warren Buffett said, “be fearful when others are greedy and be greedy when others are fearful”.
The thing is when there is a problem, the universe conspires for changes creating demand for solutions. Nothing lasts forever.
In a business statistics, longtail means the farthest spread of something from its distribution head with multiple occurrences in the middle.
What the psychology of money tries to tell is that your financial success is determined by how long you’re in the market.
When we see a success, we don’t consider series of events that led to it. Ap Warren Buffett is the most celebrated investor of all time.
But did he do an extraordinary thing? Nope. Is he a genius then? Many won’t agree on that either.
What we miss that makes him look extraordinarily genius is how long he has been in the market. He started investing since 10 i.e 82 years in the market. He gained 90% of wealth only after his 65th birthday.
What does it prove?
It proves that if we remain in the market that long, we might also become successful like him. He owned more than 500 stocks in his life but 80% of his wealth is just from 10 stocks.
We shouldn’t depend too much on the stories of past events and lessons we draw. History is the study of sudden change of something – from causes to impacts.
They must have occurred out of random and there is no possibility they will occur again. It can never be used as a map for future.
However, we tend to depend too much on this while investing and often treat historians like prophets.
The psychology of money reminds us that our history never had a guide for the most important economic events.
The fact is anything to do with money and wealth is driven by stories we tell about our preferences of goods and services. But they don’t remain same. Therefore, you can control things is just an illusion.
Some stocks are excellent by technical analysis but won’t make a sense by fundamentals or context.
The psychology of money admits that humans are emotional creatures. It means not all investment decisions should be base on spreadsheets, graphs, charts etc.
Investing has components which won’t be captured when we strictly look at the investment from a rational, numeric, ROI-centric perspective.
In investing and growing your wealth, one of the best things you must do is do nothing. Once your money is invested, if you do nothing basically you’re not getting on the way of compound interest.
It’s how Ap Warren Buffett grew his wealth – do nothing with his invested money.
Currently his net worth is $97 billion. Out of his total net worth, more than $80 billion was gained after his 65th birthday.
He started investing since 10 and did little to nothing with his investment. He is 92. This means he allowed his money compound for 82+ years.
I have shared how our modern banking system is a grand ponzi scheme and money just computer figures and fancy papers.
This means money is just numbers. Unless we’ve a sense of enough or a fixed goal post, we’ll be foolishly running after more and more money as if we’re going to live forever. Because numbers don’t end.
Humans are slaves of hedonic adaptation. Our desires are insatiable and they will stretch infinitely. So, setting a enough point is embracing our life beyond number-centric money.
‘Happiness is results minus expectation.’ I like this quote very much from the psychology of money.
In this world of consumerism, social comparison is killing us. Exhausted people are getting into social movements of ‘lying flat‘ and ‘quiet quitting‘. Unless we have a sense of enough, we too are joining this battle which will never be won.
The most important driver of building wealth faster is saving rate instead of what we believe are income or investment returns.
Saving rate is how much of our income we’re saving or investing. If I earn Nu.30,000/m and my saving rate is 20%, I am saving Nu.6,000.
My friend Wangmo earns Nu.40,000/m. But if her saving rate is 10%, she will be saving Nu.2,000 less than me.
So, a saving rate is more important than investment returns. People who pursue FI/RE will have saving rates as high as 50%.
The fact is we have control over saving rate through living below means, minimalism, humility etc. When our want is lower than our income, the difference is the investable saving.
We have heard, ‘Do not put all your eggs in one basket’, or ‘Don’t test the depth of water with both legs’, or ‘Invest if you can afford to lose’.
What all these are trying to say is all our investment must make us sleep well. If not, we are in a high-risk speculative activity.
This demands every investor to do proper study of investment according to their risk appetite and time.
I invested about Nu.70,000 into cryptos few years back. I’ve lost almost 100% but I didn’t lose sleep because it’s what I can afford to lose.
When I invest in Bhutan Stock Market as well, I don’t put all my money in one stock or two. I spread in the ratio of our BSI index.
Freedom is the highest dividend of money and wealth. This freedom can be in time, location, morale, need for which I wrote Freedom: One Thing Money Can Give You.
Money is the base of all human needs. We make money and build wealth because only after our basic needs are met, we can pursue other needs in Maslow’s Hierarchy of Human Needs.
The ability to do what we want, when we want, with whom we want, for as long as we want, is a priceless thing. It’s the best form of dividend of money and wealth.
Did you read the psychology of money? How did you find its contents? Please share them in the comment.
