This Book Will Change the Way You Think About Money

Lessons from The Psychology of Money

I’d like to share a few thoughts from Morgan Housel’s excellent book, The Psychology of Money.

Finances play a crucial role in our everyday lives.

Despite this, there is a lack of conversation and study on the money subject. As a result, over time, various misunderstandings and myths about money have developed. They believe that money is the result of good fortune or that all wealthy people are heirs.

The roundness and universality of money make it a valuable worldwide asset. We all can attain financial independence if we adopt a few wealth-building behaviors and change our mindset. The Psychology of Money reveals how you can immediately improve your financial status.

Don’t be greedy in life.

The book tells the tale of Jesse Livermore, a stock market trader who was born in 1877 and grew up in New York City. He made a bet that the stock market would fall prior to the well-known market crash of 1929.

By the age of 30, he was worth the inflation-adjusted equivalent of $100 million. Normally, this sum would have been sufficient to provide him with a comfortable life but he got greedy.

This winning deal made Livermore feel unstoppable, so it wasn’t long before he lost everything he’d worked so hard for. This abrupt decline pushed him over the edge, and he considered ending his life one night.

The trouble was that his success made him want even more of the cake, despite the fact that he already had far more than the typical person could desire.

In the money market, envy has no place.

The book tells the story of Rajat Gupta, a former CEO of McKinsey who exemplifies this. Despite the fact that he came from humble beginnings and amassed a net worth of $100 million but he wanted to be a billionaire. And he wanted it badly.

Envy motivated him to engage in insider trading, for which he received a lengthy prison sentence.

To put it another way, he let envy get the best of him, and he paid the price thousand times over. Was it all worthwhile? Certainly not. His loss, on the other hand, serves as a useful lesson for anyone wanting to improve their financial judgments.

Be sensible, and when it comes to money, think twice. Always keep the emotional component out of the equation.

Our early financial experiences shape our financial decisions later in life.

Each of us develops in our own unique way. Something that is natural to you might be unheard of to someone else.

Consider the following scenario: Is your childhood similar to that of a person born in the year 1900? 1960? Is it possible to cover the entire twentieth century? Not really!

There are children that are growing up during a financial crisis. On the other side, some people have spent a decade or more in a stocks market. As a result, the two types would have quite different perspectives on what constitutes a successful investment strategy, whether a financial investment should be stock or bond-based, and how much risk is acceptable.

Believe it or not, people invest based on how the economy was when they were young adults. As a result, someone who has experienced significant inflation may not consider bonds to be a good investment, but someone who has encountered unstable stock market conditions may believe the reverse.

It is critical that we recognize our hidden biases and thinking patterns in order to reduce them and make better decisions. In principle, each financial decision should be supported by thorough research, verifiable data, and an open mind to new ideas and constructive criticism.

Furthermore, even if it opposes your inner views, you should focus on your ability to adapt to trends and overcome your fear of new ones.

Rushing into investments can wipe out years of savings, whilst making wise investments can hasten your path to financial independence.

Don’t underestimate the importance of luck.

Yes, luck is important when it comes to making money, because practically any result we’re after, whether it’s making money or anything else, is a combination of luck, skill, and unfair advantages.

Take Bill Gates, for example. He’s obviously gifted, but he was also fortunate enough to attend one of the few high schools in the United States that had a computer. And it was because of this that he began tinkering with code and eventually began working for the business that would become Microsoft.

As a result, Morgan’s theory in the book is that we shouldn’t pay too much emphasis on individuals. We shouldn’t look too closely at what Elon Musk did to become wealthy, or what Bill Gates did to become wealthy.

Instead, we should look at the larger patterns that try to explain why various people become lucky at different times.

Magic of compounding.

Let’s imagine you invest $1,000 in a fund and receive a ten percent annual return. By the start of year two, you’ll have $1,100. You will have $1,210 at the start of year three.

And because this compounds over time, you’re effectively earning interest on interest. And when you combine this equation with the large numbers, earnings will be huge.

Now, Morgan studies Warren Buffet's example book, well-known for his wealth. Warren Buffett’s net wealth was around $84.5 billion at the time the book was written.

$84.2 billion was accumulated after his 50th birthday and received $81.5 billion on his 60th birthday. Warren Buffet was able to make such a large sum of money in part because he started his business when he was young and never quit. He started investing when he was ten years old and believed in the potential of compound interest.

Compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider compounding potential.

The best quote from the book

“The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness — a universal fuel of joy — it’s that people want to control their lives.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”