10 Lessons from The Psychology of Money by Morgan Housel
After reading The Psychology of Money by Morgan Housel, I learned a lot. A full list would be just as long as the book, but we don't have that much time.
So, I narrowed it down to my top 10 lessons learned from the book. As always, I recommend getting the book for yourself, as this short article only scratches the surface of what you can gain from reading The Psychology of Money. Enjoy.
1. Why the U.S. Consumer Thinks the Way They Do.
After WW2, two things became acceptable. You should live the same lifestyle as your neighbour, and a bit of debt is okay. The high earning income of a few resulted in others borrowing more to live the same lifestyle. Debt to income went from 60% in 1973 to 130% by 2007. (stats from the book)
2. Investing is Not a Science
"Investing is not a hard science; it's a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing."
— Morgan Housel, Psychology of Money
Science is based on measurable data. Good luck measuring what everyone in the market is going to do and when they are going to do it.
3. Bad News Sells Better Than Good News
An article published by The Wall Street Journal shortly after the 2008 market crash predicted the USA would split into six different countries by 2010. Alsaka would go to Russia, Canada would take a few northern states, and China and Japan would fight over Hawaii.
Did any of that happen? No, it sure didn't. Refrain from wasting your valuable time with nonsense news and market forecasts that are hardly ever correct. Actually, Morgan suggests you shouldn't believe any market forecast. I believe him.
4. High Savings Rate Over High-Income
You can become wealthy with a low income, but you can't become wealthy with a low saving rate.
"When you define savings as the gap between your ego and your income, you realize why many people with decent income save so little."
— Morgan Housel, Psychology of Money
5. Leave Room for Error
"The purpose of the margin of safety is to render the forecast unnecessary."
— Benjamin Graham, author of The Intelligent Investor
The most significant rule in compounding interest is to avoid unnecessarily interrupting it. Changes in our lives, market forecasts, news, "hot tips," and others may persuade us to buy or sell our investments. Having a healthy cash reserve can save you from some long sleepless nights.
When Microsoft was a young company, Bill Gates had the idea of keeping a year's worth of payroll in cash in case they didn't receive any payments that year.
6. You can be Good at Making Money and bad at Keeping Money
In the book, you will hear the story of Jesse Livermore, a man who came out with the equivalent of 3 billion dollars during the 1929 market crash that ushered in the great depression. The man could make money.
Unfortunately, four years of ego-fueled trading led Jesse to lose everything to the stock market. He went missing for a few days but returned home. Shortly after that, Jesse took his own life.
It's one thing to make money. It's another to keep it, and both are just as important.
7. Luck Always Plays A Part
When he was younger, Bill Gates attended one of the few schools that had a computer. What if the teacher who pleaded with the school to get that computer never bothered, and little Bill had no computer to work on, which later brought us Microsoft?
I don't think Morgan is saying all of Bill Gates's success came from the luck of that computer. Bill Gates is, without a doubt, a very smart man and has worked hard to get Microsoft to where it is today. However, some of his successes should be attributed to his luck.
8. Avoid the Extreme Ends of Financial Planning
"Sunk costs-anchoring decisions to past efforts that can't be refunded-are a devil in a world where people change over time"
— Morgan Housel, Psychology of money
You will change your mind many times throughout your life, whether that be your career, partner, home, etc. Long-term financial planning is important, but don't be fooled into thinking that's exactly how it's all going to work out.
9. We're All Playing A Different Game
Someone day trading and someone playing the buy-and-hold game views the market very differently. You and your neighbour view the market differently because you both have different lives. We're all playing a different game.
An investment that's good for your neighbour or colleague may not be good for you simply because it's currently growing in value.
10. You Remember the Car, Not the Driver
Think back to the last time you saw a really nice and expensive car. You could probably remember quite a bit about the car, right? What about the driver? Do you remember anything about them? Probably not.
We all assume that having a nice car will make us look more powerful or successful, but no one will remember us. We only remember the car.
Final Thoughts
The Psychology of Money is a book well worth your time and money. Its Postscript to The Brief History of Why the U.S. Consumer Thinks the Way They Do is worth it alone. That postscript just sold me on the book. Morgan really did leave the best for last.
This book now ranks third on my recommended list for all money-related books. First is Still Robert Kiyosaki's Rich Dad Poor Dad, because it completely changed how I look at money all together. I continued my financial education because of Rich Dad Poor Dad, as that is one of his biggest lessons in the book.
"Intelligence solves problems and produces money. Money without financial intelligence is money soon gone."
— Robert Kiyosaki
Any questions, tips or book recommendations are always welcome in the comment section. Thanks for reading.
Disclaimer:
This article is my own opinion and should not be taken as financial advice. Everything I've written is for educational purposes only. Secondly, this article includes affiliate links. If you click and purchase something from those links, I will receive a small commission at no extra cost to you.
