Some learnings from the book - 'The Psychology of Money' by Morgan Housel

Long post !!! Sorry for that. Well to be honest am not an avid reader of books. You can say that is a shortcoming for me. So, this year wanted to change my habit. Just finished my 1st book of the year. It is “The Psychology of Money” by Morgan Housel. Financial independence has become a common term nowadays and post pandemic has become even more relevant. While everyone aspires to reach there one day very few achieve that goal. It is tough but achievable. This book revolves around the psychology behind our financial weaknesses. Author reflects any ordinary person can be wealthy if they have a handful of behavioural skills. Highlighting some of the key lessons that one can ponder on with some personal opinion of mine. Nothing is financial advice ?? –

·???????Everyone has unique experiences of investing – It is critical that one must start investment decisions based on one’s own goals and investment options rather than others experiences and thought process. While past experiences of others may influence your decision, in an ever-changing world relying on past experiences means one will get biased on decision making on knowledge of a different world. Personally, I believe everyone have their own path and getting influenced or copying someone else’s path may not be fruitful.

·???????Luck Vs Risk – Luck and risk are critical components of the financial journey. There are infinite moving parts in this world and beyond your control. Some of them may impact you and can have a greater influence on your path then just your own hard work. One should work hard & take risk, but luck cannot be ruled out. Can’t agree more. Even if there is a 1% luck factor, it can have an impact.

·???????When ‘enough’ is ‘enough’ – While there is no end to wealth creation, recommendation is to stop somewhere. Author gave numerous examples of individuals who became millionaires but had a crash fall as their want was never satisfied. One should stop if he has enough otherwise sometimes you may have to regret. The problem is human beings are always having hunger for more. To have control on greed is a skill by itself and it has to be practiced.

·???????Power of compounding – its about how long you have been invested. Author gave the example of Warren Buffet who started investing at an early age but made his 99% of his wealth post the age of 50. It is not about the highest returns but good returns which you can stick to for a longer period of time. I would agree to this but some instruments like crypto investments may give you huge returns in a very short period of time. But this is my personal opinion only. Do your own research.

·???????Have a margin of safety – While there is no harm in focusing on big returns it will be prudent to make one financially unbreakable before trying to be financially independent. There can be a chance that your investments may not go as per the plan. This is when margin of safety helps to overcome the crisis. Start establishing your margin of safety day one. A simple instrument is to put a monthly budget in place and stick it to it. Small savings over a period time can work wonders.

·???????Law of average prevails – Even the smartest investor in the market have loss making investments. It is fine if you have a huge chunk of poor investments and a few outstanding ones. That’s the norm and how things work. Always have the full picture of the portfolio rather than only focusing on the individual investments.

·???????Freedom the ‘highest dividend’ that money pays – quoting from the book ‘ Control over doing what you want, when you want, with the people you want to, is the broadest lifestyle variable that makes people happy’. It’s a choice that people have to take. Do something different to earn the wealth and take control of your time or go with the traditional path of 9-5 and slog for the rest of your life. This is a big statement and is the toughest to achieve.

·???????Wealth & popularity are not synonymous - ?There is a fallacy among people that if you are wealthy, you will be admired and liked by others. Humility, kindness and empathy are the features that will bring you respect than the million dollars or the Ferraris. The earlier you get this the better it is.

·???????Don’t judge people’s wealth by what you see – Often we see people take conclusion of someone’s wealth based on the car he/she is driving or the house where he/she is staying. There is a fundamental difference between being rich vs being wealthy. While being rich is what is shown in the external world, being wealthy is a hidden attribute. Wealth’s value lies in the power of offering you options, flexibility and growth to purchase more stuff than you could do right now. Sometime rich looking people may be deep in insolvency. So be careful before you judge.

·???????Save, Save, Save – Often people equate wealth to high income & high investment returns. But savings play an equally crucial role in wealth build up. So have your savings plan now and stick to it. Also don’t have any specific need/reason for saving. Just save. The earlier you start the better it is.

·???????Being reasonable over rational – While investments are driven by hard facts and numbers it is equally important to have a balanced approach. Every financial decision need not be rationally driven. Having a reasonable and realistic mind frame about the financial investments is a better approach and sticking to that plan over the long run will yield better results.

·???????Don’t be over focused on historical data – Innovation and change is a continuous phenomenon. While historical data may have some relevance in the future but too much reliance on that will be bad decision. Investment world is going through structural changes constantly and historical data has less relevance to that.

·???????Market volatility has a fee - ?Every market goes through volatility. It often happens that you invest in a stock and within a month the stock goes down by 20%. In the crypto world it can go by as low as 90%. Natural phenomena of the markets. One can get a serious shock and sell those at a huge loss or remain calm during those fearful days and hold on. Obviously, there is no guarantee that it will go back to its original buying price and go further high. But the trick is convincing yourself that this volatility is the fee that you are paying in order to reap returns down the line. It’s a choice that you have to decide whether you are willing to pay that fee.

·???????Beware of getting financial advice – There are lots of gurus available in the market and there is a constant information being emitted on how the stock markets will behave and what to buy & sell. Whether it is channels in the TV or YouTube. It is critical to evaluate your goals and the other person’s goals who is recommending something. More often the goals may not match & hence the advice may not be fruitful. Lot of financial bubbles have happened because people have blindly followed advices.

Well, author has provided numerous examples of the last 100 years and how it has shaped the financial world. Definitely worth a read. Hope it provides some value. Let me know for any comments. To be financial independent, it is critical to understand the building blocks. ??????????