Psychology of Money
Lessons from the Morgan Housel Bestseller
Hi,
Hope you are doing well. Over the last year, I have been actively consuming a lot of content on personal finance. The most popular book from last year on this topic was The Psychology of Money by Morgan Housel. As someone starting my career and receiving my first real salary, it was important for me to start saving/investing as soon as possible. At an introductory level, this is a good place to start your savings journey. However, if you are looking for specific actionable advice like valuing companies, figuring out asset allocation, how to determine how much bonds you should own, this is not the right book for you. Here are the main lessons from the book.
Investment and saving is more of a psychological game than a game of skill. It is more important to withstand psychological pressures like risk, loss, volatility, than to find out which stock can give you ten-fold returns.
Our decisions on how we invest is shaped largely by our surroundings. Obviously, you need to cross a minimum threshold before you can save, but whether your youth was in the midst of a recession determines how you invest for the rest of your life.
Do not let your financial goalpost keep moving. If you are comfortable with a 1 Lakh per month lifestyle, do not try and shift to a 2 Lakhs per month lifestyle merely because your colleague or brother in law is doing so.
Compounding is critical. 96% of Warren Buffet’s wealth grew after his 65th birthday. If his investment horizon was shorter by 20 years, he would be worth 11.9 Million USD instead of 85 Billion USD.
Staying wealthy is harder than getting wealthy. It is far more important to not make stupid mistakes than to make smart killings.
It is okay for most of your portfolio to be average at best if your portfolio does well at the end of the day. Tail events with outsized returns are what drive your portfolio (even if you invest in ETF, it is a handful of companies at best which provide brilliant returns. The S&P thrives on 5 greatcos and 495 average-duds).
The best outcome of saving is not an expensive car but owning your time and being able to do what you want, when you want, with whom you want.
Aim to be reasonable, not rational. It is easy to say you will only spend 2000 rupees a month on gadgets. But every once in a while you will splurge and ruin your plans. Its better to accept you are at best a reasonable being who won’t buy a new iPhone every year but not a rational being who will keep the same phone for 7 years.
Plan for your plan failing. Plan for you and your goals changing. Today you might be okay with a 20k INR per month job, but when your child has to go to school, you will need that extra cash. You can never be sure of who you will be and what will happen in the next 40 years.
I hope you enjoyed reading the post. Looking forward to writing to you soon.