The Psychology of Money

The Psychology of Money

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel is one of those rare personal finance books that has something for everyone.

Ths book not only provides insights for new investors to consider at the start of their investing journey, but it also shares insights into how everyone, all of us, interact with money differently. Through a series of short stories, fact-tips collated under specific chapters, author Morgan Housel shares what he considers are the most important and often counterintuitive features of the psychology of money. 

Before I offer up my personal copy to one lucky reader, in the book giveaway later below, let’s take a comprehensive look at some key chapters about what you can expect including some of my favourite takeaways and quotable moments from this well thought-out book.

The Psychology of Money

Throughout this book, Morgan’s main objective is to teach you the consequences associated with money saving and spending in terms of behaviour. This is because unlike the science of medicine so often referenced in the book, expertise (and often success) with saving, investing and finances requires a deep understanding of human psychology. As humans, we are flawed, full of attitudes and irrational patterns. These patterns manifest themselves into our decisions with money so influenced on emotions over math – that sometimes these decisions are very hard to explain or rationalize. But these decisions exist, they happen, because we all make decisions everyday based on our own unique experiences and what we think is relevant to us at the time.

Let’s explore some of these subjects now in those key chapeters to see what might reasonate for you!

Chapter 2 – Luck & Risk

Housel reminds us that “luck and risk are siblings”, citing Bill Gates’ early success with computers as an extreme form of luck: “one in a million high-school-age students attended the high school (Lakeside) that had the combination of cash and foresight to buy a computer.”

This means when it comes to money, luck and risk can be considered doppelgangers – it’s almost impossible to know only in hindsight when someone has been incredibly bold or completely reckless with any given outcome. 

As such, Housel suggests when it comes to money management you “be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”

If you are successful, then part of your success was likely due to luck. On the flipside, risk can play a major role in a situation where you or others don’t achieve success.

Chapter 3 – Never Enough

Citing more examples in the book, including the Ponzi scheme managed by corrupt investor Bernie Madoff, Housel reminds us there is no reason to risk what you already have and need for what you don’t have and don’t need.

This makes one of the hardest financial skills to master is determing “your enough” number. This “enough” is not in the mathematical sense (as in how much to save for retirement), rather, to avoid increasing your lifestyle too much as financial expectations rise over time. To put it more bluntly:

“The hardest financial skill is getting the goalpost to stop moving.”

Chapter 4 – Confounding Compounding

Here is a financial nugget to remember about the power of compouding. At the time Housel wrote this book:

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.”

The key point here is that while Warren Buffet is often cited as one of the best investors of our time, it’s actually time that Warren Buffett has invested that has been his superpower.

The lesson for you and me is clear: if you want to grow your wealth, the longer you can invest your money, earning good returns over time, that’s when compounding runs wild.

Chapter 5 – Getting Wealthy vs. Staying Wealthy

It sounds so obvious but it’s worth calling out: good investing is not really about making amazing investing decisions – although that certainly helps!

You don’t have to be a perfect investor. Getting wealthy and staying wealthy is “about consistently not screwing up.”

This means when it comes to money management, you should consider becoming “financially unbreakable” over time. 

I like this concept a lot and it’s something borrowed from what Warren Buffett and Charlie Munger recently posted in their latest Berkshire Hathaway shareholder letter to investors – the concept of being “financially impregnable” when it comes to explaining why Berkshire holds so much U.S. Treasury Bills. 

Reference: https://www.berkshirehathaway.com/letters/letters.html

“Berkshire’s balance sheet includes $144 billion of cash and cash equivalents (excluding the holdings of
BNSF and BHE). Of this sum, $120 billion is held in U.S. Treasury bills, all maturing in less than a year. That stake leaves Berkshire financing about 1⁄2 of 1% of the publicly-held national debt. Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well.

But $144 billion?

That imposing sum, I assure you, is not some deranged expression of patriotism. Nor have Charlie and I lost
our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago, on March 11, 1942, when I purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings. (The Dow Jones Industrial Average that day closed at 99, a fact that should scream to you: Never bet against America.)

After my initial plunge, I always kept at least 80% of my net worth in equities. My favored status throughout
that period was 100% – and still is. Berkshire’s current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for longterm holding. 

Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are
never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital. Read on.”

What. A. Gem.

In Chapter 5, Housel will explains that keeping cash is a hedge against any unknown future with any plan. 

“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

The strive to become financially optimistic for the future yet somewhat paranoid about it at the same time will help you immeasurably over time. 

Chapter 7 – Freedom

“Controlling your time is the highest dividend money pays.”

Indeed. I’m striving for that. I suspect you might be too!

Housel references the work of gerontologist Karl Pillemer who interviewed a thousand elderly Americans looking for the most important of life’s lessons to share with others. Pillemar concluded from those interviews:

• Not a single person said you should try to work as hard as you can (to make money) to buy things you want.
• Not a single person said it’s important to be at least as wealthy as the people around you – to define your success.
• Not a single person said you should choose any work based on your desired future earnings power.

Instead, consider things that offer more value in life: quality friendships, being part of something bigger than yourself, and spending quality, unstructured time with others including your children. 

Chapter 9 – Wealth is What You Don’t See

Although you can absolutely decide to spend your money on things or possessions, The Psychology of Money highlights that long-term wealth is something that people don’t see.

In this chapter, you’ll find prominent examples of people that have over-leveraged themselves (to create an appearance of wealth) when it’s really the role models that don’t share flashy assets is what you are looking for.

“There are, of course, wealthy people who also spend a lot of money on stuff. But even in those cases what we see is their richness, not wealth. We don’t see the savings accounts, retirement accounts, or investment portfolios.”

A reminder…

“The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.”

Chapter 10 – Save Money

Chapter 18 – When You’ll Believe Anything