The Psychology of Money by Morgan Housel

Published: 2022-03-26

Impressions

I didn't really know what to think of this book before I started reading it. I really like Morgan Housel's blogs and so it was a no brainer whether or not to buy his book when it came out. I was pleasantly surprised with the actionable insights and takeaways for managing money. Though the focus is mainly on the psychology, as you could imagine, it does give some practical tips.

This book would pair well with Ramit Sethi's I Will Teach You To Be Rich. Housel's book gives some psychological factors to think about and Sethi gives more practical advice on how to actually manage your money.

Actionable Takeaways

  1. Just because you say you will do something when everything goes to hell doesn't mean you actually will. It's easy to say you'll buy when the market crashes and there is blood in the streets. But it's a totally different thing to actually do that when your portfolio is down 35% in one day.
  2. Usually when people think about the market crashing 30%, they only think about the market crashing 30%. The problem with that is that when the market actually crashes 30%, it's because there is a massive deadly pandemic or a horrific terroist attack.
  3. Managing money well is all about behavior.
  4. Every decision someone makes, makes sense to them at the time. If you're baffled at how someone is behaving, try to think like they do. No one makes a decision thinking, "This makes no sense to me but I'm going to do it."
  5. Good investing isn't getting crazy high, one-off returns. Instead, it's getting pretty average returns for an absolutely unbelievable amount of time.
  6. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
  7. Saving is as much psychological as it is tactical. Yes it requires you to physically put money away in an account somehow, but it also requires that you spend less. And you can't spend less if you're worried about what other people think of you.
  8. Just because something hasn't happened before doesn't mean it can't happen. No one expected The Great Depression until it did. No one assumed WW2 would break out until it did. Don't use history, or the lackthereof as a predictor of future catastrophes. The future will most likely be much worse.
  9. If you make too little money, you will never be able to retire. If you make too much money, you regret working so hard all of those years. The solution? Stay in the middle.
  10. Not everyone is playing the same game. And one when group of people playing for a certain outcome get their moves and tactics from another group of people playing for a different outcome, the result is catastrophic.
  11. Wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future.
  12. Use the money you earn to buy control over your time. Because the ability to do what you want, when you want, with who you want, is the biggest wealth benefit of all.

Quotes

  • "History never repeats itself. Man always does."
  • "Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming."
  • "Getting money is one thing. Keeping it is another."
  • "“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune."
  • "But doing something you love on a schedule you can’t control can feel the same as doing something you hate."
  • "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."
  • "The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods. Anything that keeps you in the game has a quantifiable advantage."
  • "A good rule of thumb for a lot of things in life is that everything that can break will eventually break
  • "Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another."
  • "Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant
  • "Expecting things to be bad is the best way to be pleasantly surprised when they’re not."
  • "Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control."
  • "Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance."
  • "I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one."

Bonus (Stories, illustrations, & things that made me go wow.)

  • A quote about another partner Warren Buffett did business with and how he wanted to get rich quick: > Warren, Charlie, and Rick made investments together and interviewed business managers together. Then Rick kind of disappeared, at least relative to Buffett and Munger’s success. Investor Mohnish Pabrai once asked Buffett what happened to Rick. Mohnish recalled: [Warren said] “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry.” What happened was that in the 1973–1974 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, so he got margin calls. He sold his Berkshire stock to Warren—Warren actually said “I bought Rick’s Berkshire stock”—at under $40 a piece. Rick was forced to sell because he was levered.
  • > In Pharaonic Egypt … scribes tracked the high-water mark of the Nile and used it as an estimate for a future worst-case scenario. The same can be seen in the Fukushima nuclear reactor, which experienced a catastrophic failure in 2011 when a tsunami struck. It had been built to withstand the worst past historical earthquake, with the builders not imagining much worse—and not thinking that the worst past event had to be a surprise, as it had no precedent.