Episode 32 – The Psychology of Money : 7 timeless lesson on wealth, greed and happiness

The premise of the novel is the first of its kind – that in real world, we make business decisions not in a spreadsheet but at dinner tables with our own unique and flawed perspectives of the world

“This book says things that haven’t been said before, and they make sense’

says the back cover. Can’t agree more

It that lays the fundamentals required for investing without delving into jargons. Precise and lucid with a lot of understanding of the psychology of an individual average human looking at building a solid financial future

The book I am talking about is The Psychology of Money – we’ll talk about 7 timeless lesson on wealth, greed and happiness.

With its understated  brilliance that shines across the 19 stories exploring strange ways in which we think and handle money, the author Morgan Housel teaches us much more than money in this short book.

This is my favorite anecdote from the book –

Ronald Read’s wiki entry reads that ‘he was a American philanthropist, investor, janitor and gas station attendant. He fixed cars for 25 years and swept floors at JC Penny for 17 years. When he died in 2014 at the age of 92, he left behind a inheritance of 8 million USD.

Where did it all come from? There was no lottery – he just saved what little he could and invested it in blue chip stocks and then he waited.

For decades — until the tiny savings compounded to the 8 million!

“A genius is the man who can do the average thing when everyone else around him is losing his mind”

Here are 7 of my favorite stories from across the book –

No One’s crazy 

Everyone has an unique experience by which they look at the world. People do not make investments based on goals alone but is heavily anchored by their experiences – if you grew up when inflation was high, you tend to invest lesser in bonds.

My parents, both of whom worked government jobs, ensured we saved more than 70% of their incomes towards our future – and that is what I do even if I can afford to spend more.

The role of Luck and Risk – in investing and in life

“What do you know about investing that we can’t know?”, a economics Nobel prize winner was asked. “The exact role of luck in successful outcomes”

Since it is hard to quantify luck and rude to suggest that it played a role in people’s success, the default is to ignore the role it plays

We praise Mark Zuckerberg as a genius for turning down Yahoo’s 2006 $1B offer and at the same time criticize Yahoo for turning down the buy-out offer from Microsoft.

Don’t we judge our decisions by their outcomes?

So how do you identify what is skill and what is luck and what is risk?

• Realize that not all success is due to hard work and not all poverty is due to laziness, he says.
• Focus less on specific individuals and case studies and more on broad patterns. Instead of emulating Warren buffet’s investment strategy, realize that people who have control of their time are happier

Never Enough

I remember my grandmother telling me the story of this king who kept invading kingdoms because ‘it was never enough’.

“There is no reason to risk what you have and need for what you don’t have and don’t need”. The hardest financial skill is to get the goalpost to stop moving

Compounding

$81.5 B of Warren Buffet’s $84.5B net worth came after his 65 birthday. We underestimate the power of compounding. None of the 2000 books on Buffets strategies talk about how the guy has been ‘investing consistently for 3/4th of a century”

Getting wealthy vs staying wealthy

Good investing is not necessarily about making good decisions. Its also about consistently not screwing up.

There are a million ways to get wealthy – but there is only one to stay wealthy.

A combination of frugality and paranoia – one we don’t pay attention to much

Tails you win – you can be wrong half the time and still win.

Tails drive everything. 2.5% of investment by VCs make 10X to 20X – it also happens across investing. 

“Your success as an investor will be determined by how you respond to punctuated moments of terror and not the years spent in cruise control”

Freedom

Controlling your time is the highest form of freedom. Being able to wake up and say ‘I can do whatever I want today’.

People think become wealthier makes them happier – but the common denominator of happiness is that people want to control our 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 paid

I loved it so much that I gifted it to everyone on my team. I think it’s a copy every single person should own. Such a short and enjoyable read!