Timeless lessons on Wealth, Greed and Happiness.

This book is a topic of conversation at any social gathering currently.

Every online book club, blog, bookstagram and book review website and even Twitter was singing the glory of this book. So I decided to give it a go as my second Audiobook on Audible.

Last month I listened to Sapiens: A Brief History of Humankind by Yuval Noah Harari and I loved it.

All the hype surrounding this book is well deserved.

Here I present a summary of the book using quotes by the author, Morgan Housel, from the book.

It has 20 chapters so I will be accordingly summarizing key points from every chapter.

The Psychology of Money by Morgan Housel 

Published in September 2020 by Harriman House

Pages: 252

20 life changing lessons from The Psychology of Money by Morgan Housel

What is The Psychology of Money About?

Two topics impact everyone, whether you are interested in them or not: health and money.

The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave.

Financial outcomes are driven by luck, independent of intelligence and effort.

We think about and are taught about money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).

Financial success is not a hard science.

No One’s Crazy

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

• No amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.
• Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.
• Saving and investing—are based around concepts that are practically infants. It should surprise no one that many of us are bad at saving and investing for retirement, we are newbies at it.

Luck & Risk

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

• Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
• Nothing is as good or as bad as it seems.
• Focus less on specific individuals and case studies and more on broad patterns.
• The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.

Never Enough

There is no reason to risk what you have and need for what you don’t have and don’t need.

• The hardest financial skill is getting the goalpost to stop moving.
• The hardest financial skill is getting the goalpost to stop moving.
• “Enough” is not too little
• There are many things never worth risking, no matter the potential gain.

Confounding Compounding

The amazing thing is how big something can grow from a relatively small change in conditions.

• The big takeaway from Ice Ages is that you don’t need tremendous force to create tremendous results. 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.
• Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.
• His skill is investing, but his secret is time.
• Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated.
• It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period.

Getting Wealthy vs Staying Wealthy

Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.

• If I had to summarize money success in a single word it would be “survival.”
• Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking a risk.
• It requires humility, and fear that what you’ve made can be taken away from you just as fast.
• It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.
• The ability to stick around for a long time, without wiping out or being forced to give up, is what makes the biggest difference.
• More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
•  Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
•  A barbell personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

Tails, You Win

You can be wrong half the time and still make a fortune.

• Longtails—the farthest ends of the distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.
• Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.
• 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.

Freedom

Controlling your time is the highest dividend money pays.

• The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.
• Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.
• Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.

Man in the car Paradox

No one is impressed with your possessions as much as you are.

• People tend to want wealth to signal to others that they should be liked and admired. 
• But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their desire to be liked and admired.
• It’s a subtle recognition that people generally aspire to be respected and ad- mired by others, and using money to buy fancy things may bring less of it than you imagine.
• If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Wealth is what you don’t see

Spending money to show people how much money you have is the fastest way to have less money.

• 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. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.
• Wealth is turning down that treat meal and burning net calories. It’s hard and requires self-control. But it creates a gap between what you could do and what you choose to do that accrues to you over time.

Save Money

The only factor you can control generates one of the only things that matter.

• Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
• The value of wealth is relative to what you need.
• Past a certain level of income, what you need is just what sits below your ego.
• People’s ability to save is more in their control than they might think.
• You don’t need a specific reason to save.
• Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
• That flexibility and control over your time is an unseen return on wealth.
• Having more control over your time and options is becoming one of the most valuable currencies in the world.

Reasonable > Rational

Aiming to be mostly reasonable works better than trying to be coldly rational.

• A rational investor makes decisions based on numeric facts. 
• A reasonable investor makes them in a conference room surrounded by co-workers you want to think highly of you, with a spouse you don’t want to let down or judged against the silly but realistic competitors that are your brother-in-law, your neighbor, and your doubts.
• Investing has a social component that’s often ignored when viewed through a strictly financial lens.

Surprise!

History is the study of change, ironically used as a map of the future.

• A trap many investors fall into is what I call “historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.
• The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.
• History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

Room for Error

You have to plan on your plan not going according to plan.

• “Unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.
• Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties. And almost everything related to money exists in that kind of world.
• The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.

You’ll Change

Long-term planning is harder than it seems because people’s goals and desires change over time.

• An underpinning of psychology is that people are poor forecasters of their future selves.
• Compounding works best when you can give a plan years or decades to grow.
• Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family increases the odds of being able to stick with a plan and avoid re- great than if any one of those things falls to the extreme sides of the spectrum.
• Embracing the idea that financial goals made when you were a different person should be abandoned without mercy versus put on life support and dragged on can be a good strategy to minimize future regret.

Nothing’s Free

Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it.

• The price of investing success is not immediately obvious.
• It sounds trivial, but thinking of market volatility as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investment gains to work in your favor.

You & Me

Beware of taking financial cues from people playing a different game than you are.

• “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.”
• “Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term.”
• Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.

The Seduction of Pessimism

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.”

• 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.
• Pessimism just sounds smarter and more plausible than optimism.
• things make financial pessimism easy, common, and more per- suasive than optimism.
• One is that money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
• pessimists often extrapolate present trends without accounting for how markets adapt.
• progress happens too slowly to notice, but setbacks happen too quickly to ignore.
• In investing you must identify the price of success—volatility and loss amid the long backdrop of growth—and be willing to pay it.

When You’ll Believe Anything

Appealing fictions, and why stories are more powerful than statistics.

• The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
• Investing is one of the only fields that offers daily opportunities for extreme re- wards.
• Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.
• Coming to terms with how much you don’t know means coming to terms with how much of what happens in the world is out of your control.

All Together Now

Go out of your way to find humility when things are going right and forgiveness/ compassion when they go wrong.

• Manage your money in a way that helps you sleep at night.
• If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon.
• Become OK with a lot of things going wrong.
• Use the money to gain control over your time,
• Be nicer and less flashy.
• Save. Just save. You don’t need a specific reason to save.
• Define the cost of success and be ready to pay it.
• Worship room for error.
• Avoid the extreme ends of financial decisions.
• You should like a risk because it pays off over time.
• Define the game you’re playing.
• Respect the mess.

Confessions

The difference between what someone suggests you do and what they do for themselves isn’t always a bad thing.

• It just underscores that when dealing with complicated and emotional issues that affect you and your family, 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 to be checked in a way that leaves you comfortable and sleeping well at night.
• It’s mostly a matter of keeping your expectations in check and living below your means. Independence, at any income level, is driven by your savings rate.
• And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away.
• Every investor should pick a strategy that has the highest odds of successfully meeting their goals.