Personal summary of “The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” (Part 1)
I made a resolution to start reading books again recently (I leaned more on online articles in the last year). ‘The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness’ is the second book I have read since I made that resolution.
I finished the book approximately two weeks ago and decided to summarise the book in my own words for two reasons. Firstly, in order to challenge my brain to recall the various principles I learnt so that they stick better. You know it’s possible to read a book and a few months down the line, you realise you can barely recall anything from it. Secondly, some of us might not be able to read the book for various reasons, so a summary is a good way to get a hang of the book and learn from it as well.
Before I proceed with the summary, I have to give a big shout out to the author, Morgan Housel. Though he seems a bit traditional with some of his investment choices, the principles he dished out in the book are timeless and can apply to various areas of our lives; not necessarily our finances alone.
I will be summarising the book chapter by chapter. Although the book has twenty chapters, the last two are the author’s summary and personal confessions. I will hence, be focusing on the first eighteen. This summary will be split into two parts of nine chapters each. This article will cover the first nine chapters. The summary of each chapter will be short. It is key to remember that they are mostly in my own words, after reading the book just once.
Chapter 1 (No One’s Crazy):
People do crazy things with money, but no one is crazy. As at the time an individual took that financial decision that seems crazy to you, it made perfect sense to them. We all face different circumstances that make what we do with our money seem like the most rational thing in the world.
For example, poor people tend to spend a larger percentage of their income on lottery tickets as opposed to rich people, which leads to them losing a good portion of their already meagre income. That’s crazy, but it makes sense to a poor person who views lottery as their best bet to making a large amount of money in the shortest time possible.
Chapter 2 (Luck & Risk):
A good portion of success is influenced by luck (or grace like I call it) and a good portion of failure is influenced by risk (you can think of it as ill luck). The world is a very complex place, where a lot of things happen outside your control, so it’s impossible for you to be solely responsible for how you end up.
This can help you develop empathy for yourself and others when things don’t turn out very well. It can also give you some level of humility knowing that the success you have is not down to you entirely.
I particularly liked how the author analysed how the odds of Bill Gates being in a high school that was gifted a computer in the 1960s played a huge role in how he turned out. His high school was one of the very few that had a computer in the U.S at the time, let alone in the world. Without that early exposure to computers, the Bill Gates we know today might have never been.
Chapter 3 (Never Enough):
It’s not wise to use what you have and need to try and get what you don’t have and don’t need. You need to keep your ego and your greed in check so that you don’t take on unnecessary financial risk that can lead to your ruin. If you always jump on every money making avenue that comes your way, you might not last very long in the game.
A valid reason why many people always feel that they don’t have enough is that they keep comparing themselves to others. For instance, investment bankers on Wall Street who earn a million dollars every year (which is way more than what most people on the planet earn), might feel like they are poor when they compare themselves to those around them raking in a billion dollars annually.
To be fair, there will always be someone who is richer than you, so recognize when you have enough at a particular time and be content.
Chapter 4 (Confounding Compounding):
Compound Interest should be the eighth wonder of the world. Due to the way our brains work, it is very easy to underestimate the power of exponentiality. Most assets tend to rise significantly over time, so if you are patient enough to hold onto your investments for a long period of time and let compound interest do its thing, the results would be mind blowing.
The author gave an example of how Warren Buffet made most of his money after he turned 65. He held onto his investment for decades (through the recessions and economic turmoil), and it wasn’t until later that the compound interest started to really show. Mastery of time and Patience are virtues that should never be underestimated in investing.
Chapter 5 (Getting Wealthy vs Staying Wealthy):
Getting wealthy is hard, but staying wealthy is where the real difficulty lies. After attaining wealth, it’s easy to feel invincible and this might lead to recklessness, which in turn, leads to financial ruin.
You need to remember that luck played a huge role in your success and everything you have can evaporate just as quickly as you acquired them. You just need to check how many people declare bankruptcy each year or how often companies fall off the Fortune 500 list.
Preserving wealth becomes even more difficult when it is being transferred from one generation to another. Operating with a certain level of frugality and paranoia is paramount in order to preserve your wealth for as long as possible.
Chapter 6 (Tails, you win):
You don’t necessarily need to be right most of the time with the investments you make. You can be wrong more than half of the time and still make a fortune. A small portion of your investments that turn out extraordinarily well can cover up for the losses incurred with the bad investments and leave you with a surplus.
This makes sense, because trying to select only assets that will turn out well is an almost impossible task. This is why portfolio diversification cannot be overstated. For instance, most of the startups that Venture Capitalists invest in end up failing, but the few ones that lead to them getting successful exits are enough to earn them millions or billions of dollars in profits.
The small portion of events that have the biggest influence on the eventual outcome of things is referred to as tails.
Chapter 7 (Freedom):
Having control over your time and your options is the best return you can get from having a substantial amount of money in store. When you have control over your time and your options, you can do things at your own pace, with whom you want and when you want.
You won’t be forced to accept just any offer that comes your way out of desperation. You won’t be forced to continue a job or career that doesn’t give you joy any longer, simply because you have to pay the bills.
You will have the luxury of waiting for the right opportunities to come by before making your move. You can take on a lower paying job that gives you more fulfillment. Those who have this type of freedom have been proven to be generally happier than those who don’t.
Chapter 8 (Man in the Car Paradox):
People don’t really care about you when you are showing off. They only care about the material things you are using to show off. If you decide to buy a lambo so you can be the center of attraction wherever you go, your so called ‘admirers’ will only be concerned about the lambo, wishing they had it for themselves; they are not necessarily concerned about you.
Humans generally want respect and admiration from others. This leads to many of us gathering more material possessions than we need in order to feel important. Any form of respect (more like Arse Licking) shown to someone because of their material possessions is due to what people stand to gain from them.
The best way to get true respect and admiration is to be a person that impacts the lives of other people positively.
Chapter 9 (Wealth is what you don’t see):
There are a lot of people who are wearing the best designer clothes and using the latest gadgets who are not worth much, and there are people who are dressed in the simplest manner and are very wealthy.
We tend to estimate the net worth of strangers we don’t know by their material possessions that we can currently see, but that’s a very flawed way of thinking.
When you are armed with the right mindset, you understand the importance of not looking down on people based on their possessions that you are aware of, because a whole lot of what generally comprises of wealth is not seen.
That will be all for the first part of this summary, the remaining nine chapters will be summarised in the second part (https://tinyurl.com/k9a3ewtd). Let me know your thoughts about the principles discussed so far in the comments section.