Psychology of Money by Morgan Housel

Must read finance book for beginners.

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✨ Rating: 4.5/5

🤔 First Thoughts

These were my first thoughts as I picked this book up:
I chose this book because I’ve recently started learning more about how to invest in mutual funds, the stock market, and how to manage money so I don’t overspend or spend on unnecessary things.
By reading this book, I want to learn how to manage money, how NOT to overspend, how few people become wealthy without being a miser, how to redirect my expenses that brings me joy, and finally, how to save for early retirement.
After I finish this book, I want to apply the lessons I learned from this book to manage my and my family’s finances.

🕧 Halfway Impressions

As I continue to read this book, these are my thoughts about my journey so far:
What I'm loving about this book: - I love that the author summarizes important lessons we need to apply while managing finances using short and real-life stories. - After reading the first few chapters, I now understand why my dad, having degrees in Math, Stats, and Economics, isn’t very interested in investing money and why my mom, without a high school degree, is really keen on saving, investing, and compounding nature of money.
My challenges/difficulties with this book: - There’s SO much good info in this book that I just kept highlighting half of the book. - Few concepts were difficult to relate to because I’m just a beginner but nonetheless, I’m glad I was introduced to them. Going to pick this up again after a year.
Do I want to continue reading or put it down for now? - I definitely want to finish this book.

✨ Top 3 Highlights

My top 3 highlights from this book:
1️⃣ I learned why one should be open to other people’s opinions, feelings, and apprehensions when it comes to investing money. And, how feelings affect financial decisions more than one’s analytical skills.
2️⃣ As humans, we got into investing only recently. We had like 20-50 years of overall experience with investing. I shouldn’t be expecting my parents or other elder people to make smart financial decisions when it comes to investing.
3️⃣ Warren Buffett is not as smart as everyone thinks when it comes to making SMART investing decisions. He had time on his hand. That’s all. $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. His annual returns were approximately 22%. Now, consider Jim Simpons, head of the hedge fund Renaissance Technologies. He has compounded money at 66% annually since 1988. No one comes close to this record. As we discussed before, Buffett has compounded at roughly 22% annually, a third as much. Simons’ net worth, according to this book in 2021, is $21 billion! He is 75% less rich than Buffett. Although his compounding percentage is higher than Buffett. So, you see, although Buffett’s skills lie in investing, his secret is time. Playing the long-term game.

👍🏻 Few short recommendations that can help you make better decisions with your money:

  1. Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.
  1. Less ego, more wealth.
  1. Manage your money in a way that helps you sleep at night.
  1. If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
  1. Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.
  1. It is fine to have a large chunk of poor investments and a few outstanding ones. That’s usually the best-case scenario.
  1. Use money to gain control over your time.
  1. Be nicer and less flashy.
  1. Save. Just save. You don’t need a specific reason to save.
  1. Define the cost of success and be ready to pay it.
  1. Uncertainty, doubt, and regret are common costs in the finance world.
  1. Worship room for error.
  1. Avoid the extreme ends of financial decisions.
  1. You should like risk because it pays off over time.
  1. Define the game you’re playing.
  1. Respect the mess.

⭐ Most Important Takeaway

For me, the most important takeaway from this book is:
Aim to have “independence” as your top goal because being able to wake up in the morning and change what you’re doing, on your own terms, whenever you’re ready, seems like grandmother of all financial goals. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with The Joneses.

💭 Feelings After Completing This Book

After completing this book, these are my feelings:
I’m equipped with amazing insights into how to manage my feelings and behaviour when it comes to making hard and smart financial decisions.

❝ Favourite Quotes and Book Notes (Toggle)

Quotes in chronological order:
  1. Doing well with money has 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.
  1. Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measure of intelligence.
  1. Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant. The former janitor left $2 million to his stepkids and more than $6 million to his local hospital and library.
  1. Read saved what little he could and invested in blue-chip stocks. Then he waited, for decades on end, as tiny savings compounded into more than $8 million.
  1. Financial outcomes are driven by luck, independent of intelligence and effort.
  1. Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.
  1. It’s that knowing what to do tells you nothing about what happens in your head when you try to do it.
  1. To grasp why people bury themselves in debt you don’t need to study interest rates, you need to study the history of greed, insecurity, and optimism.
  1. Everyone has their own unique experience with how the world works.
  1. The person who grew up when inflation was high experienced something the person who grew up with stable prices never had to.
  1. That’s not because one of us is smarter than the other, or has better information. It’s because we’ve had different lives shaped by different and equally persuasive experiences.
  1. Studying history makes you feel like you understand something. But until you’ve lived through it and personally felt its consequences, you may not understand it enough to change your behavior.
  1. Some lessons have to be experienced before they can be understood - Michael Batnick.
  1. Our findings suggest that individual investors’ willingness to bear risk depends on personal history.
  1. If you were born in 1960s America, inflation during your teens and 20s-your young, impressionable years when you’re developing a base of knowledge about how the economy works-sent prices up more than threefold. That’s a lot. But if you were born in 1990, inflation has been so low for your whole life that it’s probably never crossed your mind.
  1. What you’re doing seems crazy but I kind of understand why you’re doing it.
  1. It should surprise no one that many of us are bad at saving and investing for retirement. We’re not crazy. We’re all just newbies.
  1. Yet here we are, with between 20 and 50 years of experience in the modern financial system, hoping to be perfectly acclimated.
  1. Luck and Risk are siblings.
  1. Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.
  1. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
  1. “What do you want to know about investing that we can’t know?” “The exact role of luck in successful outcomes”.
  1. Incomes among brothers are more correlated than height or weight.
  1. When judging your failures I’m likely to prefer a clean and simple story of cause and effect, because I don’t know what’s going on inside your head. “You had a bad outcome so it must have been caused by a bad decision” is the story that makes the most sense to me. But when judging myself I can make up a wild narrative justifying my past decisions and attributing bad outcomes to risk.
  1. The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.
  1. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
  1. Just be careful when assuming that 100% of outcomes can be attributed to effort and decisions.
  1. But realize that not all success is due to hard work, and not all poverty is due to laziness.
  1. Therefore, focus less on specific individuals and case studies and more on broad patterns.
  1. The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.
  1. You’ll get closer to actionable takeaways by looking for broad patterns of success and failure.
  1. Gupta and Madoff, they already had everything: unimaginable wealth, prestige, power, freedom. And they threw it all away because they wanted more. They had no sense of “enough”.
  1. There is no reason to risk what you have and need for what you don’t have and don’t need.
  1. The hardest financial skill is getting the goalpost to stop moving.
  1. Happiness, as it’s said, is just results minus expectations.
  1. The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. Which means it’s a battle that can never be won, or that the only way to win is to not fight to begin with - to accept that you might have enough, even if it’s less than those around you.
  1. The only way to win in a Las Vegas casino is to exit as soon as you enter.
  1. Whatever it is, the inability to deny a potential dollar will eventually catch up to you.
  1. There are many things never worth risking, no matter the potential gain.
  1. The amazing thing here is how big something can grow from a relatively small change in conditions.
  1. The big takeaway from ice ages is that you don’t need tremendous force to create tremendous results.
  1. If something compounds - if a little growth serves as the fuel for future growth - a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to. And so it is with money.
  1. [Warren Buffett]’s skill is investing, but his secret is time. That’s how compounding works.
  1. Jim Simons, head of the hedge fund Renaissance Technologies, has compounded money at 66% annually since 1988. No one comes close to this record. As we just saw, Buffett has compounded at roughly 22% annually, a third as much.
  1. Simons’ net worth, as I write, is 421 billion. 75% less rich than Buffett.
  1. Linear thinking is so much more intuitive than exponential thinking.
  1. The danger here is that when compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.
  1. But the most powerful and important book should be called Shut Up And Wait. It’s just one page with a long-term chart of economic growth.
  1. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.
  1. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
  1. In a stroke of genius and luck, he had been short the market, betting stocks would decline. Jesse Livermore made the equivalent of more than $3 billion.
  1. During one of the worst months in the history of the stock market he became one of the richest men in the world.
  1. Getting money is one thing. Keeping it is another.
  1. Getting money requires taking risks, being optimistic, and putting yourself out there.
  1. It requires humility, and fear that what you’ve made can be taken away from you just as fast.
  1. Past success can’t be relied upon to repeat indefinitely.
  1. We assume that tomorrow won’t be like yesterday. We can’t afford to rest on our laurels. We can’t be complacent. We can’t assume that yesterday’s success translates into tomorrow’s good fortune.
  1. He [Warren Buffett] didn’t panic and sell during the 14 recessions he’s lived through.
  1. Compounding doesn’t rely on earning big returns.
  1. Room for error - often called margin of safety - is one of the most underappreciated forces in finance.
  1. Applying the survival mindset to the real world comes down to appreciating three things:
    1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll e able to stick around long enough for compounding to work wonders.
    2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
    3. A barbelled personality - optimistic about the future, but paranoid about what will prevent you from getting to the future - is vital.
  1. Sensible optimism is a belief that the odds are in your favor, and over time things will balance out to a good outcome even if what happens in between is filled with misery.
  1. Long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.
  1. Economies, markets, and careers often follow a similar path - growth amid loss.
  1. Long tails - the farthest ends of a distribution of outcomes - have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
  1. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.
  1. Anything that is huge, profitable, famous, or influential is the result of a tail event - an outlying one-in-thousands or millions of events.
  1. If you want safer, predictable, and more stable returns, you invest in large public companies. Or so you might think. Remember, tails drive everything.
  1. A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything.
  1. The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
  1. But doing something you love on a schedule you can’t control can feel the same as doing something you hate. Psychologists call it reactance.
  1. We’re constantly working in our heads, which means it feels like work never ends.
  1. But if your job is to create a marketing campaign - a thought-based and decision job - your tool is your head, which never leaves you.
  1. It feels like you’re working 24/7.
  1. Compared to generations prior, control over your time has diminished.
  1. Your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them.
  1. Controlling your time is the highest dividend money pays.
  1. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever well.
  1. We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos.
  1. “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?”
  1. When most people say they want to be a millionaire, what they might actually mean is “I’d like to spend a million dollars.” That is literally the opposite of being a millionaire.
  1. Wealth is turning down that treat meal and actually burning net calories. It’s hard, and requires self-control.
  1. But it is so ingrained in us that to have money is to spend money that we don’t get to see the restraint it takes to actually be wealthy.
  1. If wealth is what you don’t spend, what good is it? Well, let me convince you to save money.
  1. The first idea - simple, but easy to overlook - is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
  1. The world grew its “energy wealth” not by increasing the energy it had, but by decreasing the energy it needed.
  1. Personal savings and frugality are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.
  1. You can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.
  1. More importantly, the value of wealth is relative to what you need.
  1. Past a certain level of income, what you need is just what sits below your ego.
  1. People with enduring personal finance success tend to have a propensity to not give a damn what others think about them.
  1. And you don’t need a specific reason to save.
  1. But the intangible benefits of money can be far more valuable and capable of increasing your happiness than the tangible things that are obvious targets of your savings.
  1. That flexibility and control over your time is an unseen return on wealth.
  1. And have more leeway to find your passion and your niche at your own pace.
  1. Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run.
  1. The main work that concerned Wagner-Jauregg throughout his working life was the endeavour to cure mental disease by inducing a fever.
  1. A one-degree increase in body temperature has been shown to slow the replication rate of some viruses by a factor of 200.
  1. Normal fevers between 100* and 104* are good for sick children.
  1. One is that “minimizing future regret” is hard to rationalize on paper but easy to justify in real life.
  1. Realizing the future might not look anything like the past is a special kind of skill that is not generally looked highly upon by the financial forecasting community.
  1. The correct lesson to learn from surprises is that the world is surprising.
  1. The further back in history you look, the more general your takeaways should be.
  1. You have to give yourself room for error. You have to plan only our plan not going according to plan.
  1. The purpose of the margin of safety is to render the forecast unnecessary.
  1. The grey area- pursuing things where a range of potential outcomes are acceptable - is the smart way to proceed.
  1. One is volatility. Can you survive your assets declining by 30%?
  1. But what about mentally? It is easy to underestimate what a 30% decline does to your psyche.
  1. Having a gap between what you can technically endure versus what’s emotionally possible is an overlooked version of room for error.
  1. The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking.
  1. The result is we systematically underestimate risk.
  1. The ability to do what you want, when you want, for as long as you want, has an infinite ROI.
  1. The most important part of every plan is planning on your plan not going according to plan.
  1. People are poor forecasters of their future selves.
  1. “All of us are walking around with an illusion - an illusion that history, our personal history, has just come to an end, that we have just recently become the people that we were always meant to be and will be for the rest of our lives.”
  1. Gilbert’s research shows people from age 18 to 68 underestimate how much they will change in the future.
  1. We should avoid the extreme ends of financial planning.
  1. But the downsides of those extremes not able able to afford retirement, or looking back at a life spent devoted to chasing dollars become enduring regrets.
  1. We should also come to accept the reality of changing our minds. Some of the most miserable workers I’ve met are people who stay loyal to a career only because it’s the field they picked when deciding on a college major at age 18.
  1. The trick is to accept the reality of change and move on as soon as possible.
  1. I have no sunk costs. Sunk costs - anchoring decisions to past efforts that can’t be refunded - are a devil in a world where people change over time.
  1. The main thing I can recommend is going out of your way to identify what game you’re playing.
  1. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.
  1. Pessimism just sounds smarter and more plausible than optimism.
  1. Tell someone they’re in danger and you have their undivided attention.
  1. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.
  1. Extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.
  1. Growth is driven by compounding, which always takes time.
  1. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
  1. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.
  1. To what extent will the outcome of your effort depend on what you do in your firm? 80%.
  1. They are surely wrong: the outcome of a start-up depends as much on the achievements of its competitors and on changes in the market as on its own efforts.
  1. They know less about their competitors and therefore find it natural to imagine a future in which the competition plays little part.
  1. Financial advisors are the same. There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances.
  1. I did not intend to get rich. I just wanted to get independent.
  1. Being able to wake up on morning and change what you’re doing, on your own terms, whenever you’re ready, seems like grandmother of all financial goals.
  1. It’s mostly a matter of keeping your expectations in check and living below your means.
  1. Independence, any income level, is driven by your savings rate.
  1. And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away.
  1. Independence is our top goal. A secondary benefit of maintaining a lifestyle below what you can afford is avoiding the psychological treadmill of keeping up with the Joneses.
  1. I’m saving for a world where curveballs are more common than we expect.
  1. Consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound.
  1. 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.


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