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Investor, know thyself! The Psychology of Money (Book Review)

Written By | Feb 2, 2021
The Psychology of Money, Money, Book REview

Stock markets at the end of the Trump administration lapped record shores, but the winds of uncertainty are pushing those gains back into turbulent waters. Should we ride the waves and pray for random fortune or retreat to safe harbors to preserve what we have?  The answer to that question (and a few others) depends on how you think about money, Morgan Housel explains in his book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness (Harriman House, 2020).

Perhaps you want to impress your family and friends with your financial accomplishments. (You’ll show them what you’re really worth!) Or maybe your goal is to have the ability to spend unfettered time with beloved family and friends.

Like love and marriage, luck and risk are partners in reality.

  “They are so similar that you can’t believe in one without equally respecting the other,” Housel tells us.  In fact, “the accidental impact of actions outside of your control can be more consequential than the ones you consciously take.”

While it may be possible to weigh the balance of our financial decisions, gauging their wisdom is often so difficult in practice that “we prefer simple stories, which are easy but often devilishly misleading.”

“Savings can be created by spending less. You can spend less if you desire less,” Housel says. “And you will desire less if you care less about what others think of you.”

Discriminating between luck, skill and risk “is one of the biggest problems we face when trying to learn about the best way to manage money.”

We may learn from our mistakes, but

“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 trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.”

In the end,

“There is no need to risk what you have and need for what you don’t have and don’t need.”

Among the

“many things never worth risking, no matter the potential gain” is the esteem that others have for you, whether it be in the form of reputation, freedom and independence, family and friends, or being loved.

A Beatles song tells us that happiness is a warm gun, but Housel posits it in financial terms as “knowing when it’s time to stop taking risks” before they endanger esteem.

“It is not intuitive that investors can be wrong half of the time and still make a fortune. It means that we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.”

Do you want to be wealthy or rich?  The question is more than semantics. As you start thinking about the future, decide which you want.  “Not knowing the difference is a source of countless poor money decisions,” Housel says.

“Rich is current income.”

It is something people see when it’s openly flashed to gain notice.

  • “Look at my giant house and my expensive cars.”
  • “Look at the massive diamond array adorning my bosom.”

But rich can quickly vanish in bankruptcy.

One needn’t be rich to save, but it is saving that creates wealth.
Wealth, on the other hand, is income not spent.
“It is an option not yet taken to buy something late. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now…. Wealth is just the accumulated leftovers after you spend what you take in.”

A high income makes you rich and with it, you can build wealth. But you “have no chance of building wealth without a high savings rate.” So, in that context, which one matters more, income or savings?

One needn’t be rich to save, but it is saving that creates wealth.

Housel, like other financial pundits, cites the example of Berkshire Hathaway CEO Warren Buffett, who today has a net worth of $85 billion making him the world’s fourth-richest man after Elon Musk, Jeff Bezos, and Bill Gates. Buffett, earned nearly all of his wealth, 99.7% by one recent account, after his 52nd birthday.

The magic for Buffett was his disciplined saving and investment over the course of a lifetime. Had he not started both so early, Buffet wouldn’t likely be among the world’s wealthiest men.

“Savings can be created by spending less. You can spend less if you desire less,” Housel says. “And you will desire less if you care less about what others think of you.”
“Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.”

Of course, savings requires perseverance.

“Rather than invest in a promising company you don’t care about…if you’re passionate about a company to begin with — you love the mission, the product, the team, the science, whatever — the inevitable downtimes when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.”

Among the serval pitfalls Housel identifies on the road to generating savings, some of which seem contradictory:

  • Over reliance on past data as signals to future conditions.
  • Believing that in the face of similar circumstances, things are different this time.
  • Not realizing that what can go wrong often will go wrong.
  • Reliance on a paycheck without savings when considering future expenses (the biggest point of failure with money, Housel avers).

Perseverance and patience are especially important for young investors who are too often impatient to be rich. After all, the “The U.S. stock market has returned an annual average 6.8% after inflation since the 1870s,” Housel notes.

However, there’s no place for complacency either. “Progress happens too slowly to notice, but setbacks happen too quickly to ignore…. I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one.” Who can?

Housel’s own investing strategy

“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.”

Whatever your ambitions, “few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.”

History is replete with one important bit of advice: KNOW YOURSELF!

About the Author

—David Alan Coia is an editor, educator and writer based in Arlington, VA.  Read more from David Alan Coia here.


David Alan Coia

David Alan Coia is a journalist, editor and educator based in Arlington, VA.