“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”
I have reading of Morgan Housel’s blog on Collaborative Fund for years and was quite excited to read his new book ‘Psychology of Money’ and it did not disappoint.
The book is a very easy read and touched upon themes that we all know somewhat, perhaps intuitively or prudent advice given to us by our parents or grandparents.
I also thought the main themes of the book closely related to our investment philosophy and I thought we’ll dwell on it a bit more.
Why do we invest?
I find financial markets captivating and that’s a big a draw but the number one reason I want to invest is to be financially independent.
Which for the author too is an important objective. He describes it very well that the greatest form of wealth is to wake up everyday and freedom to do what we want.
And I think for many people that’s an important goal.
How do you get to that goal.
Focus less on picking the right stock or investing strategy and more on our behavior.
Whether it comes to our attitude to saving, which the author says is the difference between ego and income, or dealing with volatility or having a long term investment horizon or handling luck or pessimism.
I think a lot of us for instance see a bull market or a stock doubling in a few months and want to get into the action and at that point tend to change from a more disciplined approach.
Or when the market tanks, we panic, take in more pessimism and get more conservative with our strategy without needing to and eventually this hurts our investment performance.
Avoiding emotional and behavioral biases goes a long way in being a better investor.
Everyone is different
Everyone’s investment goal is different. Some want to get wealthy, while others want to stay wealthy and others just want to generate enough income to live a comfortable life.
By controlling our behavior, we focus on what’s important to us and increase our chances of achieving our goal.
For some 30% annual return goal might seem rational because they have a high risk appetite and might have less to lose than someone who’s already wealthy and his main objective will be to preserve it and just earning a return of 8-10% would do.
And everyone themselves will also change. How we invest being unmarried will be different than when you’re married and have kids, it should be different and our investment strategy needs to reflect that.
Long investment horizon to have things work out
It’s important to have long investment horizon because
Long investment horizon makes it easier to stomach volatility.
Allows luck to work in our favor by improving the odds
For compounding to have the 'snowball effect’
Being financially prudent
I think the book goes to a great degree to emphasize the point of being financially prudent, explaining the difference of being rich or wealthy is that wealth is mostly unseen because it’s income that is saved
Or the importance of saving in generating wealth. Saving money can accelerate the compounding process to a great degree, in-fact it can matter more than investment return also.
A lot of things we cannot control but living within our means or not risking what we need for what we want is something we can all strive for.
I recommend everyone to give this book a try and you can get it from here
Here are some quotes from the book that I highlighted
“A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.”
“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”
“Good investing isn’t necessarily about earning the highest returns...It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”
“Getting money requires taking risks, being optimistic and putting yourself out there.”
“Keeping money requires the opposite...it requires humility, and fear that what you’ve made can be taken away from you just as fast.”
“Be optimistic about the future but paranoid about the obstacles to your success. “
“The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.”
“When you see someone driving a nice car, you rarely think, ‘Wow, the guy driving that car is cool.’ Instead, you think, ‘Wow, if I had that car people would think I’m cool.’ Subconscious or not, this is how people think.”
“You can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”
“Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control.”
“One of my deeply held investing beliefs is that there is little correlation between investment effort and investment results.”
“Every investor should pick a strategy that has the highest odds of successfully meeting their goals...for most investors, dollar-cost averaging into a low-cost index fund will provide the highest odds of long-term success.”