Book of the month - The Psychology of Money by Morgan Housel

Hi ladies and gents,

I know it’s not Wednesday, but I am in a giving mood already since it’s the 1st of December and Christmas is a couple of weeks away.

I feel strongly that everyone should be reading books about money and finance, that is why I decided to send out a bonus email. The idea is the following.

Each 1st of the month I will be sending out additional email as a compilation of “Book of the month” section of newsletter, just in case if someone had a rough Wednesday in the past month and didn’t get to the bottom of the newsletter and missed it.

So without further ado, let’s jump into this past month book overview.

The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave.

In the first chapter it talks about how your personal experiences and opinions about money highly depend on factors such as when and where you were born, which create your own unique view of how the world, including money, works. Hence we go through life making very different decisions about money. What seems crazy to you, might make sense to me.

He points out, which I agree with, that human beings are fairly new to the modern financial system (debt, retirement, credit cards etc.). Retirement funds, hedge funds, credit cards are only between 20-50 years old, so it should come as no surprise that we often don’t know what we are supposed to do with money, especially since money is a topic that is highly influenced by emotions, which is something he repeats several times throughout the book.

My favorite story in the book is about two guys at a party and one is bragging about how much money the host of the party made in a single day. The other one simply responded “Yes, but I have something he will never have…enough.”

This chapter continues listing a couple of very useful things to remember:

1. The hardest financial skill is getting the goalpost to stop moving.
   In life we all strive for happiness. But life isn’t happy without having the sense of enough.

2. Social comparison is a problem.
   The ceiling of social comparison is so high that virtually no one will ever hit it. So it’s better not to do compare yourself with others. But it’s hard. 

3. “Enough” is not too little.
   “Enough” is realizing that the opposite - an insatiable appetite for more - will push you to the point of regret.

4. There are many things never worth risking, no matter the potential gain.
   Reputation is invaluable. Freedom and independence are invaluable. So are family, friends and happiness.

Getting money is one thing.
Keeping it is another.

The author says that those are two different skills. The first one requires taking risks, working hard, being optimistic and putting yourself out there. The second one is the opposite of taking risk. It requires humility, fear that it can all go away and acceptance that at least part of it can be attributed to luck.

Fitting to our topic of today’s newsletter - art investing - is one of the stories he tells about Heinz Berggruen, one of the most successful art dealers. He did not pick a couple of artists and their pieces and hoped for the best. He collected hundreds of pieces, held them for long enough time and then made a fortune on a couple of them that made the biggest return.

Moral of the story - a few things in life can give you the greatest return, even if all the other ones are failures. And the power of compounding.

But which return are you looking for in life? In essence, the question is -

His answer is very simple - freedom.

The highest form of wealth is the ability to wake up every morning and say “I can do whatever I want today.” and don’t we all want just that? The best things the money can buy you is the control over your time.

And how do you achieve that? Not by getting rich, but by getting wealthy. 

Rich, he says, is the current income you have. You can spot the “rich” people because you can see them flexing their “richness” in new cars, houses, designer clothes. But wealth is hidden. Is the income not spent. Its value lies in offering you options, flexibility and essentially - time and freedom. 

The problem he sees in modern capitalism is, that it is so ingrained in us that having money = spending money, that we do not often see the restrain it takes to actually be wealthy and since we can’t see it, it’s hard to learn about it.

In which group of people do you fall?

• those who save

• those who don’t think they can save or

• those who don’t think they need to save

Back when I was a broke student I was definitely part of the second group, because what will 50€ put on the side do any good? However, those number do add up over time. First month is nothing, but by the end of month 5, you already have 250€ in your savings that you did not have before. It’s the little things.

When you get better salary or you start building a business, your income goes up and so does you spending. He argues that when that happens, it’s the ego that is the one spending money.

We spoke today about budgeting which is a way to reach certain future financial goal. But you can also save without a goal. You do not need a specific goal to save.

That flexibility and control over your time is an unseen return on your wealth.

And since this entire book is about the psychology, not about math, he points out one very important thing.

You are not a spreadsheet.
You are a person
A screwed up, emotional person. 

And with that we need to accept that we should not aim to be coldly rational when making financial decisions. We should be pretty reasonable, because that is more realistic and you have a better chance to sticking to it for the long run.

When you look at things from that perspective, you also have to count on things not going to plan. You need to leave room for error. You have to plan on your plan not going according to plan. Because the world is not black and white.

Chapter 16 starts with a quote:

It continues to talk about the bubbles that happen in the market. Author says that a very psychological answer as to why they happen is, because people are greedy, which ties to the quote above. Investors are striving for different things in life and therefore should use different strategies on the market. Daily traders only need that the stock price is higher at the end of the day, than it was in the morning. Someone who is investing for the retirement, should definitely use different plan for their investing.

People have problem realising, that rational people can see the world through a different lens than your own and therefore it is hard to grasp that other investors have different goals than us.

And this also applies to spending. So much consumer spending is socially driven - influenced by people you admire and done because you subtly want other people to admire you. The problem is that we only see what people buy - clothes, cars, houses - but we are not able to see what their goals, worries and aspirations are.

This next quote is not from the book but fits right in.

And that is the best thing you can do for yourself, because what you want in life is probably not what your bestie wants, so you should not walk the same road. You need to identify what your wishes in life are and act in line with those, not looking left and right what other people are doing.

Let’s talk about pessimism and optimism a bit. Optimism is the best bet for most people because the world tends to get better for most people most of the time. But for some reason pessimism holds a special place in our heart. Housel says that it sounds smarter and intellectually captivating.

Tell someone that everything will be great and they are likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention. It is the basis for loss aversion theory, which say that the pain of losing is psychologically twice as powerful as the pleasure of gaining.

Another reason why at least in finance people pay more attention to bad news is, that in such connected system we live in, where one person’s decision can affect everyone else, it is very hard for us to imagine that we are the only ones that will not be affected.

In one of the last chapters Morgan lists a bit of a summary of the book, but he starts with saying the following:

I can’t tell you what to do with your money, because I don’t know you.
I don’t know what you want.
I don’t know when you want it.
I don’t know why you want it.

And since I already wrote quite a bit about this book, I will finish it with only one quote from the summary.

Because sleep is important.

It is very hard to convey the lessons from these chapters, so I highly recommend buying this book. Or, if you prefer listening/watching instead of reading - Morgan Housel was recently a guest on a podcast that I love listening to called The Diary of a CEO. You can find it on Youtube or wherever you listen your podcasts to (Apple or Spotify).