Book Review: The Psychology of Money – Morgan Housel

Book is called ‘The Psychology of Money – Timeless Lessons on Wealth, Greed, and Happiness’ and it is by famous author Morgan Housel. Book is on investing and managing personal finance.

If I have to summarize the approach of book or author then let me mention quote from Napoleon with which book starts – A genius is the man who can do average things when everyone else around him is losing his mind.

Book Layout

When I read books on finance, investments etc, I have habit to read small and digest it. So layout of The Psychology of Money is to my personal liking. There are 20 chapters with most upto 10 pages length. Some exception of course.

I prefer to read a topic, make some notes and digest it before moving ahead. So it was good for me to go through this book chapter wise.

Flow of Book

The Psychology of Money starts with making us aware of how we see the world through lenses. Our experience drives our views about the world or money where as there could be some much more impactful things there that we did not experience.

Then it talks about luck – hard work, failure – laziness to drive point to look at broad patterns and not specific individuals.

Next Morgan touches on importance of stopping goalpost from moving else there is never a thing like enough. You reach one level and desire next.

Power of Compounding

Then comes power of compounding. We all may be aware of it by now but author does drive a point that if we can stick long term, we need not get best returns. Even reasonable returns are good enough. Anyone chasing best mutual funds without know their risk tolerance, should read this chapter multiple times.

Next author explains how one can make good money even if things go wrong at times. How it about minimizing losses when you are wrong.

Freedom

Author explains his view about wealth and money. What it means to be wealthy. It’s one can do whatever he/she wants every day. It is not about big house, big cars or best gadgets but getting freedom to work on something one loves. Without worrying for bills.

Show off

Author touches upon pitfalls of show offs. Explains in fact wealthy is other way round. Wealth is what people don’t see. We don’t realize it but two people with same income – one with high end car and other with may be Maruti Alto. We think former is wealthy but in reality its later one (assuming he is saving and investing remaining money).

Then he goes on to drive home point how we can control saving and that just one factor enough to generate wealth.

Reasonable is better than Rational

This is for people who spends hours or days thinking whether to repay housing loan or invest that. They do all the calculations and try to find which is profitable merely from number perspective. Good to read why its okay to be reasonable and listen to your heart and take decision to be more peaceful.

Surprises

An eye opener for me. Why despite so many stock market crashes, why life would find a new way to surprise us. How important to expect something that did not happen yet (Corona?) and how should we plan future. How important is to keep room for error.

Changes

Author explains why it is inevitable that our goals will keep changing over the time. It is important we correct our plan as soon as we realize change than dragging it.

There is chapter on why we can behave differently and not get persuaded by actions of other people. They could be playing different game than you.

Author also explains why we should be cautious of pessimism as we tend to feel its smarter and safer. I could connect quickly with example mentioned. If someone tells us of tip of multi bagger in a year, we quickly write off. But if someone tells us about a stock likely to collapse in a year, we listen carefully.

Story vs Statistics

Book goes to guard us against believing what we want to believe. We have tendency to pick and chose which supports our belief system.

Chapter 19 – Summary

This is basically summary of book. Once you go through it and any time want to revise in quick time, you can refer this chapter and learn things fast.

In last chapter, Morgan talks about his own money. What his family thinks about savings and will let you read through it yourself.

Some of the quotes that I liked and my view on them

  • The first rule of compounding is to never interrupt it unnecessarily – Don’t stop your SIPs based on market conditions
  • Use money to gain control over your time – Being wealthy is able to let me do what I like doing. It’s definition ends there.
  • Manage your money in a way that helps you sleep at night – Invest based on your risk tolerance.
  • Room for error often looks like a conservative hedge but it keeps you in game you can play many times over – Have diversified asset allocation
  • Risk is what is left over when you think everything is covered – We all experienced it in Corona crisis. But we should be mentally ready for some surprise that we don’t know what will be.
  • Failure can be lousy teacher, because it seduces smart people into thinking their decision were terrible when sometimes they just reflect the unforgiving realities of risk
  • Some lessons have to be experienced before they can be understood – I realized my risk tolerance well when things started going bad in March 2020.
  • There is no need to risk what you have and need for what you don’t have and don’t need – Don’t take un necessary risks just to make huge profit if your goals can be met with less risky investments.
  • Good investing is not necessarily about earning the highest returns, because highest returns tend to be one-off hits that can’t be repeated. Its about earning pretty good returns that you can stick with and which can be repeated for the longest period of time – Everyone should invest as per their risk tolerance and should not chase high returns if your risk profile does not suit that volatility. Staying with fund with lesser volatility and getting 1-2% less is better than invest in a fund whose volatility you can not handle and quitting it in crisis period.
  • Important Financial decisions are not made in spreadsheets. They are made at dinner table. They often aren’t made with intention of maximizing returns but minimizing chances of disappointing a spouse or child – Reason for holding on my earlier previous instead of selling it off and investing in equity is because there is emotional connect of family with same.
  • Good decisions are not always rational. At some point you have to chose between being happy or right – If you want to repay home loan, do it. It’s okay even if calculation tells to invest same money in equity instead. If you feel relax and happy, that is important too.

My View on book

Personally I liked “The Psychology of Money” a lot. Period. I would recommend you to read or listen it at lest once. It gives you a different perspective for looking at money and wealth.

If you are however looking for tips to quickly get rich or how to select financial instruments like stocks, Mutual Funds, etc, that is not this book is for. It focuses on how to do ordinary things in disciplined manner and be wealthy. No shortcuts here.

It is soothing to know that it is fine to take decisions that suit us individually rather than just follow calculations and excels. This would be one the books that I would like to give to my clients.

Link for free audio book of The Psychology of Money is here. You can listen it free.

Caution : Since book has a dedicated chapter on “Nothing is Free”, if you don’t mind paying a little of your savings, you can check out price and buy from below link.

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