The Psychology of Money, by Morgan Housel

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[n.b. I read this a while ago when it came out in 2020, but never got around to writing it up. But I just listened to Housel’s interview with Tim Ferriss which reminded me of the many valuable insights from the book, so I thought I’d spend the time to pull this together. Or you can just go listen to the three hour interview to hear him in his own words.]

Morgan Housel was a long-time columnist for Motley Fool, who now blogs for the Collaborative Fund. I’ve always appreciated his writing as being clear and thoughtful about the human side of investing. A couple articles that particularly stand out to me are:

  • The Three Sides of Risk, where he tells a tragic story that changed his risk tolerance forever. This particularly hit home for me because his story is set in the ski resort where I’ve skied for the past 12 years, so I can visualize it clearly.
  • Lots of Overnight Tragedies, No Overnight Miracles, where he points out that slow-moving positive trends (reduction in child mortality or in deaths from heart disease) are never news, while sudden tragedies (whether loss of life or market crashes) always make the news. Yet because we see the sudden tragedies in the news, we discount the positive trends, even though they lead to much better living conditions over time, whereas tragedies often have no lasting impact.

The Psychology of Money is a short, readable book where he makes several points about money and the accumulation of money that seem obvious, but very few people put into action. I’ll just list a few key points from my Kindle highlights:

  • “An idea exists in finance that seems innocent but has done incalculable damage. It’s the notion that assets have one rational price in a world where investors have different goals and time horizons.” In other words, somebody investing with a thirty year time horizon for retirement has a very different perspective than a day trader trying to quickly flip a stock. Housel recommends “going out of your way to identify what game you’re playing”, so you can be clear on what news and advice to pay attention to, and what you can safely ignore because it applies to people playing a different game (I see this as another form of clarity and focus). One way to identify what game somebody is playing is to ask “What do you own, and why?”
  • “Wealth is financial assets that haven’t yet been converted into the stuff you see. … The only way to be wealthy is to not spend the money that you do have.” What we see from the outside of rich people is what they have bought. We don’t see what they have saved. Housel shares the story of a janitor who quietly invested most of what he made, and left $6 million to charity when he died.
  • Warren Buffett is a great investor. But Housel points out that his annual returns are not that spectacular; his major advantage is longevity. He started investing when he was 10 years old, and never stopped. He made 99.5% of his wealth after age 50, and 96% after he was age 65. If he had stopped at age 65, he would have been a billionaire, but probably not recognized as the greatest investor. Compounding is one critical “secret” to his success.
  • But compounding only works for you if you don’t get wiped out – Charlie Munger said “The first rule of compounding is to never interrupt it unnecessarily.” So Housel advises building a margin for error that is bigger than you think you need. “Few financial plans that only prepare for known risks have enough margin of safety to survive the real world. In fact, the most important part of every plan is planning on your plan not going according to plan.” In other words, you will never forecast everything that happens, and you will always be surprised: “That’s the correct lesson to learn from surprises: that the world is surprising.”
  • “Stories are, by far, the most powerful force in the economy. They are the fuel that can let the tangible parts of the economy work, or the brake that holds our capabilities back.” But stories can be dangerous because “The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.” (this reminds me of Annie Duke’s perspective in Thinking in Bets)
  • “You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes.” Thinking of your investments as a portfolio allows for letting go of “failures”, as a diversified strategy will capture the upside of those “black swan” positive outcomes.

I also appreciated that he shared his own investment strategy at the end, as it illustrates his own biases and what game he is playing. As he notes, “there is no one right answer. There is no universal truth. There’s only what works for you and your family, checking the boxes you want checked in a way that leaves you comfortable and sleeping well at night.” He is focused on independence and the ability to do what he wants, and he doesn’t want to invest the effort to manage his money actively. So he keeps it simple, keeping his costs well below his income, and putting the savings into a few low-cost index funds: “My investing strategy doesn’t rely on picking the right sector, or timing the next recession. It relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades.”

That may not work for you. Many readers criticized him for not having a mortgage, and explained to him why it rationally made more sense to keep the debt and invest the money instead. But one of his points is to value reasonable over rational, and owning his house outright let him sleep better at night, so that’s what he chose.

While you can get most of Housel’s philosophy from skimming his blog posts, I appreciated this book for being a quick and easy read with some valuable takeaways for how I think about money and investing.

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