Morgan Housel has written a short and powerful book about personal finance called The Psychology Of Money – Timeless Lessons On Wealth, Greed, And Happiness. The book might not be related to trading, but personal finance should be a topic of interest for anyone regardless of the profession.
Morgan Housel’s book is minimalistic, but if you ever want to read a book about personal finance, this should be the number one on personal finance. The book requires only about three hours of reading, but that is all you need to understand the main principles of personal finance.
Moreover, the book is enjoyable, and you learn some simple (yet powerful) principles of wealth creation and happiness. Many of Morgan Housel’s ideas are not revolutionary, but Housel is a good writer and proves his points with some very simple and entertaining examples. There are no fancy calculations or numbers, but the book is instead filled up with stories everyone can relate to.
Key takeaways from The Psychology of Money
Morgan Housel describes early on what the book is all about:
The premise of this book ias that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people……finacial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
What are the main takeaways from Morgan Housel’s The Psychology Of Money?
In no order of importance, the book boils down to five main points:
- Make sure you always spend less than you earn. What you have left you invest in profitable assets.
- Know your risk tolerance and make your goals accordingly.
- Play your own game. don’t take advice from other people that might be playing a different game than you do.
- Simplicity trumps complexity. Creating wealth is “easy” if you spend some time understanding yourself and your goals.
- Make sure you live your own life and don’t focus on what others might expect from you.
The modern world is good at generating envy. This makes us buy things we don’t need. Housel argues life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
Quotes from Morgan Housel’s The Psychology Of Money:
Every chapter has a story about why we do silly things with money. All the stories are entertaining, sometimes thought-provoking, and told in the same minimalistic style that has helped Morgan Housel become a frequent name in articles, comments, and podcasts.
Below we have summarized a few quotes taken from the book. This gives you a pretty good idea of what the book is all about:
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When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.
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The real key to his success is that he’s been a phenomenal investor for three-quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him….His skill is investing, but his secret is time.
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But there is only one way to stay wealthy: some combination of frugality and paranoia….Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.
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But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
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A lot of things in business and investing work this way. 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….Anything that is huge, profitable, famous, or influential is the result of tail event.
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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.
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…progress happens too slowly to notice, but setbacks happen too quickly to ignore….There are lots of overnight tragedies. There are rarely overnight miracles.
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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.
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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.
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Everyone has an incomplete view of the world. But we form a complete narrative to fill the gaps.
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Think about market forecasts. We’re very, very bad at them. I once calculated that if you just assume that the market goes up every year by its historic average, your accuracy is better than if you follow the average annual forecasts of the top 20 market strategists from large Wall Street banks.
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Risk is what’s left over when you think you’ve thought of everything.
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I can’t tell you what to do with your money, because I don’t know you.
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If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
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Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
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Being able to wake up one morning and change what you’re doing, on your own terms, whenever you’re ready, seems like the grandmother of all financial goals. Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.
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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.
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Charlie Munger put it well: the first rule of compounding is to never interrupt it unnecessarily.
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One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.
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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. I spend virtually all of my investing effort thinking about those three things – especially the first two, which I can control.
Related reading: Henry Hazlitt – Economics in one lesson
