Thirteenth Floor Read - Week 4: The Psychology of Money by Morgan Housel

Gurur Brahma Gurur Vishnu Gurur Devo Maheshwaraha, Guru Saakshaat, ParaBrahma Tasmai Sri Gurave Namaha

Investing, personal finances, and business decisions are all discussed in "The Psychology of Money." by Morgan Housel. According to Housel, decision-making in the financial field is typically taught as a math-based subject, where data and formulas provide the answer. But unfortunately, a spreadsheet doesn't help people make financial decisions in the real world. So instead, the findings are often made at the dinner table or in a meeting room, where personal history, your unique perspective on life, ego, pride and marketing are mixed up.

The author explores the strange ways people think about money and explains how to make better sense of one of the most important topics in life.

Are we capable of handling money well? When we get our paycheck, do we save some, or do we spend it all at once? According to Morgan Housel, we all need specific skills to handle money, and these skills have nothing to do with mathematical ability or a degree in finance. In researching the 2008 financial crisis, he came up with the idea for "The Psychology of Money." He noticed that the only way to understand this crisis was by looking at it from a psychological and historical perspective. In this book, Housel explains how to manage money and wealth in the best way, so you'll learn how to accumulate and preserve wealth!

The Psychology of Money

Ronald Read grew up in rural Vermont and spent his entire life there. In his family, he was the first to attend college. For 25 years, he fixed cars at a gas station and swept floors at JC Penny for 17 years. Then, at age 38, he bought a house for $12,000. He lived there until his death at age 92 in 2014. At that time, Ronald Read made headlines around the world. Only 4,000 out of the almost 3 million Americans who died that year were worth more than $8 million, and Ronald Read was one of them. Two million dollars went to his stepkids in his will, and six million went to the local library and hospital. The people who knew Ronald Read were baffled because he was a millionaire. According to the investigation, Read had not been the beneficiary of a secret lottery win or inheritance; he had simply saved what little money he had and invested it in blue-chip stocks, waiting patiently until he had amassed $8 million.

Richard Fuscone made headlines a few months before Read died. A Harvard graduate, he had a successful career in finance before retiring in his forties to become a philanthropist. Borrowing heavily to build his 18,000 square feet mansion in Greenwich, Connecticut, which already had 11 bathrooms, two elevators, and two pools were costing him $90,000 a month to maintain. Unfortunately, the 2008 financial crisis hit after Fuscone had borrowed so heavily. In the blink of an eye, he became bankrupt, eventually selling his Palm Beach house and his Greenwich Mansion.

Finance is the only field where someone with little to no education can beat someone with more education. The reason, according to Housel, is that financial success has very little to do with intellect and a great deal to do with luck and behavior. Fuscone, for example, was greedy while Read was patient. Moreover, even the most competent people can have trouble handling money, as Fuscone demonstrates.?The psychology of money is something Housel believes is essential to financial success. However, understanding the technical side of money is not as crucial as developing those soft skills.?

?Luck and risk

Both luck and risk play a role in the world of finance. A good example is Bill Gates. The fact that he is undoubtedly brilliant and technically savvy does not diminish that Microsoft was founded mainly because of luck. Bill Gates was one of 300 children who attended Lakeside High School in 1968 out of the 303 million high schoolers in the world. Nevertheless, the school had the foresight and money to purchase a computer.

Microsoft was founded by Gates and two of his friends, Paul Allen and Kent Evans, who were huge computer geeks. Evans would have been a founding member, but his story provides an example of risk. Evans was one of Gates' closest friends and one of the best students at his high school, but he died in a mountaineering accident before he finished high school. The probability of such an event was one in a million. In contrast, Bill Gates had a chance in a million of having access to a computer when he was a teenager. The two stories demonstrate that luck and risk are part of life. No one's actions will determine the outcome to 100%. In this regard, NYU professor Scott Galloway says: "Nothing is as good or as bad as it seems." When deciding whether you are financially successful or not, keep in mind that much of it results from risk and luck. Remember, you are not invincible, even if things are currently going exceptionally well for you. Hence Bill Gates believes: "Success is a bad teacher. It makes people think they can't lose."

Growing your money

In Housel's opinion, we can learn a great deal about money management by studying different ice ages. The origin of the ice age was not known until the early 1900s. They have occurred five times, presenting a cyclical pattern. First, it was considered that the uplifting of mountain ranges caused a massive change in the winds, which may have altered the Earth's temperature. However, Wladimir K?ppen, a Russian meteorologist, discovered what caused the ice ages: cool summer temperatures. The Earth's motion is affected by the gravitational pull of the sun and the moon. The Earth tilts away from the sun at some points during this cycle, which means that one of the planet's hemispheres receives less sun. This process is reversed when the Earth tilts back toward the sun. Something is fascinating about how a thin sheet of ice is enough to trigger an ice age, freezing the entire planet for thousands of years. This is also true in investing.

Money compounds in a counterintuitive way. A successful investor like Warren Buffet, who owns a net worth of $84.5 billion, is an example. Although he is an intelligent investor, most people don't mention that he has also taken a long time to compound his wealth to this point. Only after he turned 60 did he accumulate $81.5 billion of his wealth. Buffet began investing seriously at the age of 10, and by the age of 30, he had amassed a net worth of $1 million. However, imagine for a moment what would have happened if Buffet had been an ordinary teenager and young adult with a net worth of $25,000 at age 30. Had he continued to create the same annual investment returns as he is known for but had retired at 60, he would currently have a net worth of $11.9 billion, 99.9% less than his current value.

According to Housel, "if something compounds-if a little growth provides fuel for a future growth-a small starting point can lead to results that appear unfathomable. Investing can be so counterintuitive that you misjudge what is possible, where growth comes from, and what it can accomplish." Of course, this is the nature of investing: you do not have to make investments that yield the highest returns. But you do need to be patient.

?Getting Wealthy vs Staying Wealthy

It takes very different skills to become wealthy and to stay rich. Take the two investors, Jesse Livermore and Abraham Germansky, for instance. Jesse Livermore made over $3 billion on the same day many other investors lost everything they owned when the stock market crashed in 1929. One of them was Germansky, and he probably committed suicide in the days following the crash. Livermore made the same decision four years later. By overconfidently making larger and larger bets, he had heavily indebted himself. As a result, he ultimately committed suicide. The act of becoming wealthy is one thing, but remaining wealthy is quite another. To stay wealthy, one must combine frugality, humility, and paranoia. In contrast, you must take risks and stay optimistic if you hope to become rich.

Due to compounding's counterintuitive nature, it is so essential to maintain a survival mentality to keep your money. A tree takes decades to grow, just like your asset. Growing for a year won't show much progress, but growing for ten, even fifty years, will make a remarkable difference. However, to reach the point where your money has compounded, you will need to remain persistent and patient; you must be able to ride out all the ups and downs of the market without selling.

?Saving Money

According to the author, people fall into three groups once they reach a certain income level: those who save, those who believe they cannot save, and those who think they don't need to save. Housel, however, believes saving money is the key to wealth. Income or investment returns have very little to do with building wealth, and you can create your wealth by saving more than you spend. This principle applies beyond financial markets. For instance, look at the energy sector. People were worried about oil shortages in the 1970s. It didn't happen partly because new oil resources were discovered and more efficient harvesting techniques were developed. The United States uses 60% less energy per dollar of GDP today than it did in 1950, so it mostly didn't happen due to a reduction in energy consumption.

Money is no different. Try to spend less, rather than earn more. Your ability to create wealth depends on your frugality and efficiency. Furthermore, your wealth's value is always dependent on what you need.

By learning how to be happy with less money, you will automatically save more, and you will get more out of your savings! People only spend money to display their wealth once they reach a certain income level. You should be humble, and instead of celebrating your wealth, you should save it for a rainy day. Spending less money is easy when you stop caring what others think.

To avoid ending up as Livermore or Germansky, start saving for savings' sake as soon as possible. You can gain flexibility, security, and time savings by having savings. In addition to having options available to you when you have money in the bank, you can also choose what you will do with your free time. Being wealthy does not require a finance degree. An essential soft skill called the psychology of money is developing the correct behaviour and mindset. Frugality and humility are vital ingredients to achieving true wealth. You may lose your wealth just as fast as you gained it if you flaunt your wealth and take unnecessary risks.

?You could reduce your spending if you think about it. Does all the stuff you spend money on really need to be there?