Is it a mind game?

 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 20^th to 1^st. 😊

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...