The Psychology of Money
Stories are a
powerful medium to convey a complicated message and have a lasting impact on audience.
In this blog I am going to discuss and talk about one such book "The Psychology
of Money" by Morgan Housel which is published by JAICO Books in 2020. The book
has caught the mind and attention of readers, academics and practitioner across
the globe from different fields and when you complete the book, you know that
it has done rightly so.
The book
is divided into 20 small chapters with catchy headlines and each chapter has few small stories/anecdotes to draw attention to the main point of the readers. The first 18 chapters
draw the 18 biases and flaws in individuals while dealing with money and personal finances.
The chapters are individual reads, hence can be read wherever ones willing, may
be from 20th to 1st. 😊
The author
introduces that the financial outcomes are not only driven by luck, independent
of intelligence and effort which is only a half truth but more by the soft
skill where how you behave in financial affairs is more important than your
knowledge of finance which he calls as “The Psychology of Money”. In rest of
the chapters, he draws the point that this soft skill is more important than
technical knowledge of money. In fact the book is very apt reading in todays
time when we are facing a looming recession and crushing bear market. He gives
an explanation as to why investors sell out at the bottom of a bear market is
because they look at the agony and pain family when the investments are going
in red and thereby compromising the future of the family.
In chapter 1 "No one’s crazy", Housel gives anecdotes of the great depression and states that
the personal experiences with money are more shaped by their thought process
rather than the happenings in the past. So a person who started in bull market
will never understand the bear market and depression and fear factor even
though he may have read it in academics. He further added that “the challenge
for us is that no amount of studying or open-mindedness can genuinely recreate
the power of fear and uncertainty.” In fact it is very difficult to predict
financial system due to small time frame (yes, even 200 years is a small
timeframe to understand psychology) and evolving nature of it.
In chapter 2
titled "Luck and Risk", the author shares a lesser known fact about Microsoft’s
journey where Paul Allen, Bill gates and their lesser known friend Kent Evans
who succumbed to a hiking expedition and was more skilled than Gates in their Lakeside
school. This drives us to the fact that "luck and
risks are siblings", both are related to each other and yet unknown and unquantifiable. Thus, any of the actions of any person unrelated to you can. The line between “inspiringly
bold” and “foolishly reckless” can be millimeter thick and only visible with
hindsight. And hence, "be careful who you praise and admire. Be careful who you
look down upon and wish to become to avoid becoming." So instead of individual
brilliance, try to see the broad patterns larger picture.
I’ll quickly
compile the best part of the chapter 3 in few quotes verbatim, like stating the
need to limit the expectations, he writes “the hardest financial skill is
getting the goalpost to stop moving” which is when person realizes that it has
enough of wealth to sustain his healthy lifestyle. Further he adds that there
are many things never worth risking, no matter the potential gain as risking them
may lead to losing all of them and its not easy to regain them.
In "Getting wealthy
vs staying wealthy", he gives mantra to stay wealthy by combing frugality and
paranoia in lifestyle and both require different skills set and insight. "Economies,
markets and careers often follow a similar path – growth amid loss."
In rest of
the chapters too he drives very relevant points which are applicable to financial
management at individual level. Housel adds that the greatest benefit of money
is that it helped people to get control of their life and the ability to do
what you want, when you want, with who you want, for as long as you want, is
priceless.
"If respect and admiration are your goal, be careful how you seek it. Humility, kindness and empathy will bring you more respect than horsepower ever will."
In the last 2
chapters, the author has discussed the template for deciding the financial wisdom
one should follow as everyone has unique history, family needs, future
expectations and risk appetite which is also a quick synopsis of the key takeaways
from the book. In fact people may not practice what they preach because your requirements
and his are different so none should be judged on this parameter. Quoting my
favorite “advisor” Taleb, he mentions that "true success is exiting some rat
race to modulate one’s activities for peace of mind."
The timing of
book and this blog could not have been more perfect when stock markets, asset prices
be it gold, crypto is hitting rock bottom amid the global uncertainty. The responses
of central bank in wake of looming recessionary trends has been knee jerk and this
is giving an opportunity to people across to experience the bull run of 2021 and
bear in 2022. When you apply the maxims
of the book in your psychological thought process and decision making for
investment you’ll understand why Housel said that investment decisions are made less on what has happened in the past and more about what will happen in
near term. Individual investors hardly look for technical analysis and
fundamentals of macro economics in play when investing and in withdrawing the
capital by selling in bear market when valuations are deep red. The psychology
out there is save whatever can be rescued from complete wipe out which is
endangering the future retirement plans, kids education corpus etc.
This book
should be a mandatory reading along with with investment classics of Charles
Munger, Benjamin Graham or technical analysis of financial markets. This book alone will save and earn millions
of profit to individual investors and add to their wealth if they follow its maxims.
So rush and buy one and gift to your loved ones...
