Book Review: Psychology of Money by Morgan Housel
We are often asked for ideas on good books on investing. Sometimes people are asking for ways to learn about specific investment approaches. Yet, most of the time people are really confessing: “My nest egg just hasn’t grown as I would like.” Or, “I am frustrated with myself or my financial advisor.”
Psychology of Money
What most investors won’t accept is that investing isn’t about picking the next winning stock. Instead, it’s about having a well-designed plan and a commitment to it. Wealth doesn’t happen overnight for 99.9% of us. It is a process of savings, diversification, time, and saving again. It is about denying current consumption in the favor of allowing your investments to compound over time and through the inevitable ups and downs. It’s about knowing your biases, your limitations, and having patience when things don’t feel or look right.
While most of us know this, few of us really practice it. Morgan Housel’s new book, The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness, is an informative, fun, and reader-friendly reminder of how to build wealth over time. He cleverly describes what he sees as the biggest issues affecting investment success – our own psychology and human nature.
A Summary of Housel's Advice
Housel combines memorable illustrations, historical stories, and compelling statistics to highlight the strange ways that people think about money and wealth. Through colorful and poignant stories, he lays out his investment “secrets.” What is the answer according to Housel? Here is my summary capturing his salient advice.
Saving is the first step to building wealth. “ Just save. You don’t need a specific reason to save.”
If you can lower your living standard, you can save more money. “Live on less than you make.” “Go out of your way to find humility.” “Less ego, more wealth.” “Be nicer and less flashy.”
You really need to understand risk, apply it correctly, and allow it to work for you. “Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune.” “You should like risk because it pays off over time.”
Wealth building takes time. “If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. “
Wealth building takes a plan. “Manage your money in a way that helps you sleep at night.” “Define the cost of success and be ready to pay for it.” “Avoid the extreme ends of financial decisions.” “Define the game you are playing.”
Don’t be too hard on yourself along the way as everyone makes mistakes. Just learn. “Worship room for error.” “Respect the mess.”
And, life isn’t about money but money can be an effective tool. “Use money to gain control over your time.”
That’s it!
Reflect on Your 2020 Investing Behavior
We all make mistakes and we all learn from our mistakes – but if you made investing mistakes in 2020 that you regret, you want to learn from your mistakes the right way. Now is the perfect time to self-reflect on your investment habits.
If you want to decrypt this quick list of advice, and you are looking for a good book to re-orient your thoughts around investing and saving as you go into 2021, we recommend you read this insightful read. And for another perspective on the book, read Laurence Siegel’s review, “Twenty Rules for Life: Morgan Housel’s Antidote to Financial Chaos.”
