Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He has created a masterpiece in the form of 'Psychology of Money', which emphasises that doing well with money has little to do with how smart we are and a lot to do with how we behave. But behavior is hard to teach, even to really smart people. According to Morgan, success with money isn't determined by knowledge, IQ, or financial skills; it mostly comes down to the behavioral pattern, and once an individual is conscious of their own pattern, they can use the power of their mind and thoughts to control their pattern to truly transform their life.
The writer explains a good rule of thumb which will be important for the rest of our lives. Anything that may break will ultimately break. He highly encourages his readers to keep more than one stream of income and skill set, because a single source of income will possibly lead to a verge of financial disaster. The pandemic has been a huge lesson to us, companies and industries. The ones with no alternative source of income faced financial disaster, except for the ones in the field of e-commerce.
Real prosperity is something we cannot see. We see extravagant and flamboyant lifestyles on social media, but that is half the truth as the writer explains. It is easy to compare, feel miserable, or overwhelmed, but what is unseen and unknown is to ponder upon - whether they are renting the material items, whether they are on loans, or whether they are actually putting their fruit of their labour to maintain the lifestyle they showcase. Morgan teaches us not to be swayed by other people’s display of wealth, but rather to be more interested in how they acquired them, so that we can apply those lessons to our situation. It is easy for many of us to find rich role models, and it’s even harder to find wealthy ones because by definition their success is more hidden. There are, of course, wealthy people who also spend a lot of money on material items. But even in those cases what we see is their richness, not their wealth.
Morgan educates us that an effective strategy to improve our savings is to increase our humility, rather than our income. History has always proved with mankind that ego is an enemy. Ego leads to the belief of deserving praises, rather than being financially cautious, so taking ego out of any decision will be wiser in the future, especially if it results in the accomplishment of a long term goal. One of the salient points he makes is the irony of life in finance management; it has nothing to do with how smart or educated we are. Geniuses have found themselves in financial disasters, while ordinary people with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of education and intelligence.
Morgan connects money’s essential worth with time, as it provides more power and leverage with the control of time. Unspent assets can provide more flexibility in terms of what can be accomplished and when it can be accomplished. Therefore, controlling our time yields the biggest return on investment.
He goes on to unravel that we can be wrong half of the time, and yet make a fortune. This may sound counter intuitive once again, but he illustrates the example of Warren Buffet, who once at a shareholder meeting revealed that many of his ventures did not work out. However the ones that did well, paid off for all the bad investments. So the takeaway from here is to continue to invest and be patient with finances. However, planning is necessary. But the most crucial aspect of any plan is to plan on a plan rather than acting according to a plan. Nothing happens as planned, yet many of the planned plans appear to be rigid. Essentially it would be preferable to possess NASA precision to ensure that our plans hit the mark and not fail, but in reality we should hope for the best possible outcome and leave room for error, or worst case scenario, since the fate of the plan would be uncertain. Morgan identifies the roles of luck and risk (two sides of a coin) and teaches us a few things, since these are some difficult factors to recognise, when trying to learn about the best way to manage money.
Failure can be a lousy teacher, because it lures smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. Also, when things are going extremely well, we should realize it’s not as good as we think. We are not invincible, and if we acknowledge that (some) luck brought us success then we have to believe in luck’s cousin, risk, which can turn our story around just as quickly. More important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures. Nothing is as good or as bad as it seems.
Morgan expounds the powerful force of compound interest. He mentions Warren Buffet’s investment success throughout his book, since he has been investing for decades. He goes on to compare Buffet with Jim Simmons, founder of Renaissance Technologies, a quantitative hedge fund based in New York. In comparison to Buffet, Jim is a superior investor. He started late in his 40s and grew incredibly wealthy. But Buffet, on the other hand, is regarded as a legend, since he started at a much younger age, and took advantage of the compound interest, which yielded him an advantage over a long period of time. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. His skill is investing, but his secret is time. In fact, in terms of returns, his 22% compounded is much less than that of Jim Simons who has 66%. But Jim is 75% less rich than Buffett because Jim didn’t find his investment stride until he was 50 years old. And such is the magic of compound interest. It is a magnificent counter intuitive concept - what seems like small changes in growth assumptions can lead to ridiculous, impractical numbers. Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that we can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.
But just because Warren Buffet invested in xyz companies and got wealthy, or Jeff Bezos read certain books, it doesn’t guarantee being rich and powerful. There is much more to them than meets the eye - hard work, connections, failures, discipline and luck are such. Housel guides his readers not to be overly impressed with the Forbes list, rather praise and applaud their successes, focus on the story of their successes, and the journey of their successes instead of the destination. The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side. Mark Zuckerberg is hailed as a genius for turning down Yahoo!’s 2006 $1 billion offer to buy his company. People say he saw the future and stuck to his guns. But people criticize Yahoo! with as much passion for turning down its own big buyout $44 billion offer from Microsoft.
The book also explores how our capitalistic system has made our lives simpler than ever, providing us with abundant opportunities of wanted or unwanted items to purchase. Housel raises this issue metaphorically, and cites getting the goal post to stop moving is one of the most difficult skills in the world - teaching us to be satisfied with what we have. Money is only a tool, and we have full control how we decide to use it. One of the most invaluable lessons in the book is that success does not deter greed. Stories of Rajat Gupta and Bernie Madoff reveal how people worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more.
Every financial choice we make is justified by putting the information we know at the time into our unique mental model of how the world works. The writer throws light on spending patterns and impulse purchases. If we find ourselves purchasing things on a regular basis, that we desire, but didn't need, we have acted against our better judgment to fulfill a sudden craving. It comes down to mental conditioning, how we have been raised and the environment we live in. For instance, when we grow up with a family and a social circle that impulse shopped all the time, we will continue the same pattern, and the cycle will continue till we reach a certain point of age. The book helps us to realise the stem of impulse purchases, and by that we are going to adjust that behavior and mental model for a financially better future. Morgan compares money with a magnifying glass. It makes us more of who we are. The more generous we are with people, the more we will be with money; vice versa, the more rude and self-centered we are with people, the more ruder and self-centered we will be with money.
Morgan’s work is a game changer and can reshape our financial perspectives. The book explores strange ways people think about money, and teaches us to make better sense of one of life’s most important matters. He wrote this sensation of a book with graceful clarity, and shed light on subjects that have never been touched upon.