The Psychology of Money by Morgan Housel

  • Author: Morgan Housel
  • Get the book: Amazon
  • Rating: 9/10

High-level summary

Morgan Housel is a former columnist at The Wall Street Journal and a current partner at Collaborative Fund. He’s the author of some of my favorite articles in the past years. His articles always have insights that go beyond finance and can be applied to other areas as well.

The Psychology of money isn’t different. It’s chock full of ideas that can be applied to other areas of your life.

One thing this book does well is that it gives reasonable advice. Often with books like this ideas can sound completely logical, but totally unreasonable as well. The advice Morgan gives you is easy to implement and it will help you in the long run. From knowing who to study, to how to handle risk, to the importance of room for error.

Highlights

  • “Few people make financial decisions purely with a spreadsheet. They make them at the dinner table.”
  • After spending years around investors and business leaders I’ve come to realize that someone else’s failure is usually attributed to bad decisions, while your own failures are usually chalked up to the dark side of risk.
  • Vanderbilt was wildly successful. So it’s tempting to view his law-flaunting—which was notorious and vital to his success—as sage wisdom. That scrappy visionary let nothing get in his way! But how dangerous is that analysis? No sane person would recommend flagrant crime as an entrepreneurial trait. You can easily imagine Vanderbilt’s story turning out much different—an outlaw whose young company collapsed under court order.
  • Focus less on specific individuals and case studies and more on broad patterns.
  • The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.
  • Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.
  • The hardest financial skill is getting the goalpost to stop moving.
  • The idea of having “enough” might look like conservatism, leaving opportunity and potential on the table. I don’t think that’s right. “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.
  • Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.
  • There are two reasons why a survival mentality is so key with money. One is the obvious: few gains are so great that they’re worth wiping yourself out over. The other is the counterintuitive math of compounding. Nassim Taleb put it this way: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs.
  • A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality. A good plan doesn’t pretend this weren’t true; it embraces it and emphasizes room for error. The more you need specific elements of a plan to be true, the more fragile your financial life becomes. 
  • Long tails — the farthest ends of a distribution of outcomes — have tremendous influence in finance, where a small number of events can account for the majority of outcomes. When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.
  • Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.
  • People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways.
  • Past a certain level of income, what you need is just what sits below your ego.
  • one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.
  • At a 2017 dinner I attended in New York, Daniel Kahneman was asked how investors should respond when our forecasts are wrong. He said: Whenever we are surprised by something, even if we admit that we made a mistake, we say, ‘Oh I’ll never make that mistake again.’ But, in fact, what you should learn when you make a mistake because you did not anticipate something is that the world is difficult to anticipate. That’s the correct lesson to learn from surprises: that the world is surprising.
  • The purpose of the margin of safety is to render the forecast unnecessary.
  • Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties.
  • Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound. So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.
  • I think of my own money as barbelled. I take risks with one portion and am terrified with the other.
  • 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.
  • John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
  • There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
  • Progress happens too slowly to notice, but setbacks happen too quickly to ignore.
  • 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.
  • Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
  • Carl Richards writes: “Risk is what’s left over when you think you’ve thought of everything.
  • 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. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income.
  • If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.
  • Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness.
  • Save. Just save. You don’t need a specific reason to save.
  • Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.
  • Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.
  • You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.
  • Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
  • If I had to summarize my views on investing, it’s this: Every investor should pick a strategy that has the highest odds of successfully meeting their goals. And I think for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.
  • One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results. The reason is because the world is driven by tails—a few variables account for the majority of returns.