Review on Psychology Of Money – by Morgan Housel

I was gifted the book Psychology of Money by my finance enthusiast friend and was asked to read it before my MBA. But it took an assignment from my course to get started with it. The book caught my attention from the first page itself as it had one of the most brilliant quotes from my favourite character, Sherlock Holmes, “The world is full of obvious things which nobody by chance ever observes”

It’s a feel-good book that encourages trading, by helping you reflect on your family/personal finance story and promotes you to be comfortable in your game of trading. The book doesn’t boast about the outliers such as Buffet but instead pushes you to find your comfort strategy that can put you at ease at the end of the day. Data and Vision will give you an idea of growth prospects for any company, helping you make better decisions. Almost on every alternate page, we have a reference or learning point from Daniel Kahneman, an economist and psychologist behind my all-time favourite novel, “Thinking Fast and Slow”. His mentioned learnings are engaging in aspects, to tell why investors think in a certain way and how their strategy helps them while it might not help others. The book uses multiple examples to portray that one shouldn’t blindly copy-paste or be a copycat of anybody’s investment strategy. One must find their own.

I would like to break the book into different cohorts to summarise what I have learned.

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Psychologyà Why do we behave in a certain way with money??

???? The book touches upon is how your journey isn’t similar to someone else and so your influence on money-handling matters and investing styles will be different from those of others. An educational background, family stature and exposure to different economic climates affect an individual’s thinking and action-taking capacity in the stock market. The study by the National Bureau of Economic Research points out how early exposure to different economic conditions affects investing patterns. These economic climates affect individuals in their formative years and have a long-term time effect on how they think about finance and take financial decisions. Thus, no one should trust the same source of advice as the goals of different people are different and so their method of investing is also different. The author uses stories of WWII to learn how different experiences can lead to vastly different views on topics, thus resulting in investing strategies that aren’t black and white. He again gives college fees as an example that people are now investing to be financially independent, to retire from mundane daily work jobs and to spend time as an individuals will be doing more things they link.?

??? The other unorthodox lesson, the book promotes is the importance of luck in life and the stock market. It makes you realise that you might have all the skillsets and motivations, but if you don’t mind the tiniest of luck, you might be mediocre or lack in some way. The book leaves you to think about whether the dark side of risk can be bad decisions or sometimes being simply unlucky. To promote one’s risk-taking attitude, it quotes John D. Rockefeller not letting outdated laws, come in the way of innovation, telling the reader that it is okay to take advantage of grey areas in business innovations. The writer beautifully mentions that we should leave room for understanding when our judgements fail in the stock market and life and make amends.

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Money à Understanding Wealth and Value

???? The author explains the benefits of compounding, that something big can be stemmed from small changes when invested over time. The author promotes how linear thinking is much more intuitive than exponential thinking, as certain stock hits can be a one-time thing while sticking with certain repeatable tasks is relevant as time goes on! The author says, one can get wealthy in a million ways, but staying wealthy is some combination of frugality and paranoia. The author mentions sticking to a certain (low-mid) cost of living even when earnings increase over time. Keeping money is the opposite of taking risks, you need mental and emotional fitness, to avoid getting fatigued while managing an expanding wealth. By reducing the odds of failures, you’re increasing your chances of survival. The author beautifully mentions being selectively available to people just as to stocks, so that you avoid unrequired influence as good investing decisions are about avoiding screwing up. But what if you fail? Well, your attitude defines how you take failure. Rare but strong failures will come and will make you miserable, but there will also be tail events that can help you win. For example, the launch of Frooti was a game changer for the Parle-Argo company. The reality is that the number game isn’t easier as markets make it look because only 0.5 % of 21000 ventures between 2004-2014 could earn 50x or more, so understand the business and its motivations and the strategies it's built on, not just numbers. It is about sustaining the game, despite boredom and moments of terrible losses. I am motivated to keep track of how much money I lose when I make a wrong decision and gain when I make a right decision.

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Psychology à The biases we have

???? The book preaches that the highest form of wealth available is the ability and control to do whatever you want to. 6 months of emergency expenses at your disposal will allow you to take time off in case you need to find a new job. The book wants you to find your happiness and then align your resources, time and money to doing more of it. The chapter, “Man in the Car Paradox” opens with a one-liner saying- no one is impressed with your possessions as much as you are! – It made me think about my shoe, watch or perfume collection. I started calculating my total spending on it. This leads me to calculate my cost of total belongings and my daily cost to be just present – which includes the cost of my laptop, mobile, clothes, shoes and even skin care broken down to daily usage. I require Rs. 712.41, an amount higher than BPL in India. Thanks to the book, I am constantly trying to bring this value down irrespective of the growth in wealth. I will use my watch and shoe longer than I would have ever thought, while contributing towards my asset building, by sustaining the game longer, and avoiding the aspirational buyer’s bucket list, because wealth is the nice cars not bought.

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Money à Tools to safeguard and grow your assets

???? While reading the chapter “Save Money” I was transported to 2017, when I was opening my first Demat account when the RM told me, “Spend only 2.5% of your earnings”. I found this extremely difficult to accomplish then, but now I think I can find my ways and means around it by having a minimalist lifestyle. Step 1: Figure out my financial mentality, Step 2: Allocate a budget for saving first, followed by investment and then later to be used for investment. I came up with a rule in 2018, to pay myself first, I called my investment money for education purposes. Having a purpose to save money for, pushed me to save better and that habit has taught me to save even when I don’t have a purpose. We belong to the generation, that believes in options of clothes, shoes and everything materialistic, but well, having the option of aligning your money as per reasonable choices over rational choices is important as it should support your value system and not take it away. We are emotional beings and will make emotional choices, for example, I love travelling, I shouldn’t give up my travelling goals for saving as it wouldn’t bring happiness but at the same time, taking a loan for travelling purposes is illogical- to spend what I don’t have. Instead, I should plan what fits my budget, and keep some buffer amount (my provision for when things get out of control). One should have emotions towards their investment strategies because one can easily stick to their gut feelings for longer. If consistency fails then as emotional humans we must plan for uncertainties. A safety net for self and family is important.

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Psychology à? Think and Plan Longer. Be a marathon runner not just a sprint winner

???? One thing that shocked me in the book was when Morgan mentioned that smart financial decisions are seen in Las Vegas casinos. Maybe places of financial havoc are places where people try to understand what they think will happen, what can happen and how having enough margins to fight another day is important. It will teach you to allocate daily requirements and keep that aside and handle or use only money allocated for that day, thus increasing your survival chances. In case you lose that day, you still have enough to sustain the following day- making room for error. I learnt I should understand my emotional limit as all financial decisions are associated with strong emotions, and knowing when to stop when you are uncomfortable is important. My Health >> Profits on any given day. Berkshire Hathaway said – I will not trade my night’s sleep for the chance for extra profit. While no margin of safety assures 100% guarantee, it helps to cope with systematic and unsystematic errors. The author suggests that one should rewire the thought process to recognize and avoid serious risks, including those never before encountered. It takes me back to my Product Manager days, that after creating a happy journey for a new feature, I would work on negative use cases to avoid the feature breaking, thus safeguarding turnarounds. I should use a similar strategy in my investing game.

?? Long-term planning is harder than it seems because people’s goals and desires change over time. Desperation and desire lead to uncertainties that are more difficult to handle than predicted. Endurance is a must as we accept the reality of changing our minds and how once we thought what would be rosy would now be something tainted. To avoid this Zweig says to have no suck cost. Don’t be a prisoner to past actions and a minimum future regret. While doing long-term planning, one must remember nothing is free. My 10th std, economics teacher, told the class once, “Nothing is free, not in love!”. We can’t comprehend prices of all, but one must remember volatility is real and common and will take something from you. One must be ready for a tradeoff to pay the cost of success rather than escaping the markets when markets are in dip, one must understand their volatility capacity and act accordingly (pay as per your pocket fit).

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Money à Societal and Changing Generations

???? It talks about how one should avoid overreliance on those who have different investment ideologies than yours. Focus on the type of trader you want to be and focus on having personal goals to accomplish the same. Understanding your time horizon is the key to making smarter and more fulfilling decisions. The chapter pushes you to do a self-analysis of stocks and how you should focus on your logic and admire it rather than getting sidetracked by someone else’s success story. Morgan wants to be optimistic about your investments but cover all angles while making decisions. There can be exponential growths and sudden failures and one must be ready to face them gracefully. The author mentions that health issues tend to be individual, while money issues are more systemic and so keep an eye out at the happens of the world to avoid bad things happening to your stock. One should invest for an entire business cycle for a profit while in case of loss more than what you can handle, you should pull out from the market within 6 months. The author pushes you to be curious while telling you the world doesn’t operate the way you think it does. One must understand how the general masses react to the market and study human behaviour in sync with the market to take a better charge.

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To conclude, I want enough money that my decisions aren’t controlled by it, while taking actions that ensure a good night's sleep.??