The Psychology of Money by Morgan Housel — My quick summary

So, I just finished reading this wonderful book, and yes, about damn time.
This post or note or article or anything it can be, it is just a list of things I learned from the book and something for me to come back to in the upcoming days.

I hope it can be a quick glance of the book for you. Exact words from the book are written in Italic style, whereas my understandings are in normal font style. Similar in semantics, sentences are grouped together.

P.S. I might not have understood a lot of things or even misunderstood many. Let’s start.

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“To get why investors sell out at the bottom of bear market you don’t need to study the math of expected returns; you need to think about the agony of looking at your family and wondering if your investments are imperiling their future.”

So, true and how wonderfully it captures our emotion and panic. What do I do? What if it goes more down, I am already in a huge loss? How long will it take to return back up? Please just give me the principal, I don’t want profit? I am never getting into stock market again, spare me this time? Such thoughts linger, scare you, make you miserable but doesn’t spare you. It cruel, very cruel.

Spreadsheets can model the historic frequency of big stock market declines. But they can’t model the feeling of coming home, looking at your kids and wondering if you have made a mistake that will impact their lives.
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History never repeats itself; man always does.

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People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons.

Learn very different lessons, have different perceptions about money, have different appetite for risk, expect differently and more.

Your personal experiences with money makeup maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.

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Individual investor’s willingness to bear risk depends on a personal history.

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Every decision people make with money is justified by taking the information that they have at the moment and plunging it into their unique mental model of how the world works.

Similar to; Doing what feels right than what is logical, what makes you sleep at night than doing what other investors consider unusual.

Every financial decision a man makes, makes sense to them in that moment and checks boxes they need to check.

What are the boxes that you set yourself compulsory to check? I guess this is what I am seeking to learn. What are the priorities of those boxes? Does all of them needs to be checked (3/5 is enough?) Is long term investment my checkbox?

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Dogs are domesticated 10,000 years ago and still remain some behaviors of their wild ancestors. Yet, here we are, with between 20 to 50 years of experience in the modern financial system, hoping it to be perfect acclimated.

Yet, I am starting now, with aspirations of financial freedom, more of independence, many sleepless nights of FOMO and many more, AM I LATE? I can see a lot of people older than me(some younger and some of same age) with enough riches, good cars, stable happy family and a my kind of desired house, am I jealous of them? Yes absolutely, but I also know that I have time against them, they traded riches for their time, now I have to do the same, only question is can I do sooner and better?

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Nothing is good or bad as it seems.

So having humility at the best time and forgiveness and compassion at the worst time, is the only course of action you should take.

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When judging others, attributing success to luck makes you look jealous and mean, even if we know it exists. And when judging yourself, attributing success to luck can be too demoralizing to accept.

Consider luck and risk equally, both are important and necessary. Same goes for failure, my failure is just bad luck but others failure are an outcome of bad judgement or risk?

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Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

All success if not due to hard-work and all failures are due to laziness.

So, focus more on the broad pattern, not to specifics. Rather than focusing in an individual stock, look at your entire portfolio. If it is still in green, then what the problem?

The trick is to play your hand such that even if you fail here, miss a financial goal there, or have a bad investment, you always have a chance to play the next hand until the odds finally fall in your favor.

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More money might not always equivalent to enough money, When is the money enough?

There is no reason to risk what you have and need for what you don’t have and don’t need.

The hardest financial skill is getting the goal post to stop moving.

I think this means, set a concrete goal or ambition financially. If I earn 20000 with a stock, its enough for me to get out, I will not stop wanting more. Or in more time, a million for my retirement fund, a good comfortable house and a decent car is enough for me, that’s my goal post and it shouldn’t change.

If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting extra effort.

Enough is not too little.

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The ceiling of social comparison is so high, that you will never hit it. Which it is a battle never to be won, so, only way to win it is to not start it, even if you have less than the ones around you.

Set what your “enough” is.

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Linear thinking is more intuitive that exponential thinking. 8+8+8+8+8+8+8+8+8 = 72 but 8*8*8*8*8*8*8*8*8 = 134217728.

Let it compound, the secret is time.

A good investing is not about earning the highest return once or twice, it about earning pretty good returns that you keep earning regularly over a long long period of time. Compounding will do the rest.

Good investing is not necessarily about making good decisions, its about consistently not screwing up. And not irritating the investments again and again, let it rest, let it grow and see the beast it becomes.

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Keeping money requires humility, THE FEAR that it can be takes away from you just as fast as it came in. Be fearful, be paranoid. Try to be financially unbreakable, don’t expect big returns, expect smaller returns in regular intervals.

A barbelled personality — optimistic about the future but paranoid about what will prevent it is VITAL. Short term paranoia, long term optimism.

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Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

Setting a room for error, margin of safety, stop loss. Concept of emergency fund. These all align to each other. Don’t plan for a house, don’t save because you need to save for a marriage, save because they will eventually come a day when the world goes against you, all hell breaks loose and it definitely WILL, then you need to be prepared financially.

You plan, God laughs.

Room for error is one of the most underappreciated forces in finance.

Avoid a single point of failure, diversify, distribute. Invest in as diverse number of stocks as you can, think of generating incomes from as number of sources as you can, simplify short term needs, long term needs, dedicate pillars of sources.

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Long tails or tail event or outlier or Farthest ends of distributions or simply luck have tremendous influence in finance.

Fewer things account for more results, Fewer stocks will account for more greenery, so wanting each specific stock to perform well is not the correct mindset. Its not always about being right or wrong. Its about you earning how much when you are right and losing how less when you are wrong is what actually matters.

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Your success as an investor will be determined by how you respond to punctured moments of terror not the years spent on cruise control.

First is, will you let yourself be in a situation where you are so need to money that you are willing to sell your stocks, your savings to remedy? You have already failed. Expect, save.

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Financial Freedom, Independence, FIRE movement, and Controlling your time is the highest dividend your money pays.

The highest form of wealth is to wake up one day and do whatever you want to do. The ability to do what you want to do, when you want, with whom you want, and for as long as you want is priceless.

To have a control of my time, is what money brings in my life.

This is what I want. Buying clothes without looking at the price tag, or ordering food without looking at prices in the menu or having a big house with more number of bathroom as people who live in it, fat purse, prestige in my job, is not wealth for me, for me following my passion, my hobbies without any restrictions and doing it for as long as I can is freedom and I scream freedom.

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Having an emergency fund of 6 months means that you don’t have to fear your boss because you won’t get ruined if you take some time for yourself and find a new job. That sense of peace is what money buys.

This is the life standard I am searching for, that my lifestyle. Do not want wealth to be admired, because once you have wealth people don’t admire you, rather they admire your wealth. Expensive things, Materialistic things will never bring admiration.

Humility, respect and kindness will bring you more respect than horsepower will ever bring.

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Money has many ironies. Wealth is what you don’t see. Fake it till you make it. Wealth is hidden, its income not spent.

What I am not buying now for lifestyle, for entertainment, I am buying options, values in the future.

The value of wealth is realtive to what you need. You need more, you have less wealth, you need less, save it, it will be more in the coming days.

Save More => Spend Less => Desire Less => Care less about that others people think.

Savings = Income — Ego, Higher the ego, lesser the savings

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A rational investor makes decision based on the numeric facts. A reasonable investors makes decision in a room full of coworkers you want to think highly of you, your spouse you don’t want to let down, your brother in law, your neighbor and your personal doubt.

So, What should I do? Be reasonable or rational? Because being reasonable is easy, to think, and to stick with but being rational is not always easy. Think to be reasonable but don’t ignore the rational because sometimes reasons are backed by rationals.

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Its hard to predict what happens in the past because in investing a massive group of people is making imperfect decisions, with limited information and mostly with feelings.

So, it might be difficult to predict the future based on the past. I know, man repeats itself but when, how, where, why are the variables.

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Planning a long term goal is difficult because people change.

People change, competition changes, circumstances changes, life stress takes over, mistakes happen. Its how you handle yourself in the stressful moment is what matters, not on cruise control. Avoid the tail events, go for more holistic approach.

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Everything has a price, find it, be willing to pay for it. Low risk has low price to pay and vice versa.

For long term investment, regular investment, making a stable effort and willing to be associated for a long term is the price.

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You base your decisions based on someone else’s thought and recommendation, but you don’t know how they behave, how they think, how long will they keep on betting, why they invested and more. What you are is stuck in someone’s decision not knowing what you want.

Understand your own horizon, don’t get persuaded by the actions of other people playing different games than you.

Here, the horizon can mean the goal you are aiming for, how long are you ready to play the game, how fast do you want to reach there…

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Pessimism will always sound smarter and more plausible than optimism. Progress happens too slow to notice but setbacks happens immediately and can’t be unseen.

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The bigger the gap between what you want to be true and what you need to be true to have an acceptable income, the more you are protecting yourself from falling victim to an appealing fan fiction.

Higher the stakes, the wider the room for error should be.

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Risk is what is left, when you have thought of everything.

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SUMMARY:

1. Go beyond your way to find humility when things are going right, and forgiveness/compassion when they go wrong.
2. Less ego, more wealth.
3. Manage your money in a way that helps you sleep at night.
4. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
5. Become OK with a lot of things going wrong. You can be wrong half of the time and still make a fortune.
6. Use money to gain control over your time.
7. Be nicer and less flashy
8. Save. Just save. You don’t need a specific reason to save.
9. Define the cost of success and be ready to pay it.
10. Worship room for error.
11. Avoid the extreme ends of financial decisions.
12. You should like risk because it pays off over time.
13. Define the game you are playing.
14. Respect the mess