Introduction
“Money is everywhere, it affects all of us, and confuses most of us” — Morgan Housel (MH)- the author
In this article and many more articles to come, I would like to discuss what I have learnt from the book “The Psychology of Money”. I would like to keep these articles short, crisp and to the point. Happy reading.
Let me start with a story
A genius who had designed a key component in the Wifi router and patented it, made a lot of money from it. Enough to buy multiple $1,000 gold coins to toss it over the lake in the game of skipping stones. He liked to show off his stack of dollar bills to people who wanted to know more and to those who didn’t.
You may think for how long this behaviour of his could last, and the answer is “not long”. He went broke few years later.
Another story of a Harvard-educated Merrill Lynch executive with an MBA named Richard Fuscone who retired in his 40s, he was in his prime termed as “business savvy, great leader, had sound judgement and a person of integrity”. He was included in Crain’s business magazine in 40 under 40.
You would think this person did what you are dreaming to do one day, but then — like the gold skipping tech executive, everything fell apart.
In mid 2000s, Fuscone borrowed heavily to expand and 18,000-square foot (you read that right, 18,000) in greenwich. It had 11 bathrooms, 2 elevators, 2 pools, 7 garages and had a maintenance cost of $90,000 per month. Then the financial crisis of 2008 hit and rest is history.
“I currently have no income”, he allegedly told a bankruptcy judge. His homes were seized and property was sold for 75% less value that expected.
It is impossible to think of a situation where an average person does a better job than an expert, designing a building superior than a trained architect or flying a rocket better than NASA. There will never be a story where a Janitor out performed a F1 race champion. But these stories happen in investing.
“Ronald James Reed was an American philanthropist, investor, Janitor and gas station attendant” — Wikipedia
Reed was the first graduate in his family, he fixed cars at a gas station for 25 years and cleaned floors for rest 17 years of his professional career. Bought a 2 bed room apartment at 38 for $12,000 and lived there for the rest of life. His main hobby was chopping firewood. He died in 2014.
Out of 2,813,504 Americans who died in 2014, less than 4,000 had a net worth over $8 million, Ronald reed was among those 4000.
He left $2 million to his step kids and $6 million to his local hospital and library. Where did he get the money from? Those who knew Reed were baffled.
As it turned out there was no secret, no lottery wins, no inheritance. Reed saved whatever he could and invested in blue chip stocks. Then he waited for compounding to happen. (We will discuss compounding in detail in later articles, until then a quick google search may help you). That’s it , from Janitor to philanthropist.
Ronald Reed was patient, Fuscone was greedy. That’s all it took to close the gap of better education and more experience.
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach, even to really smart people. Financial success in not hard science. It’s a soft skill where how you behave is more important than what you know. Knowing what you do tells you nothing about what happens in your head when you try to do it” — MH
To understand why people do what they do, we have to understand the psychology behind their decision. Why people bury themselves in huge debt, we do not have to study interest rates but the history of greed, insecurity and optimism. To understand why an investor sells at the bottom of the market, we don’t need to understand the math of expected future returns but the agony of a person who is scared about, what their investments would do to their family.
“History never repeats itself, man always does.” — Voltaire
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Chao !!
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