One topic of Morgan Housel’s “The Psychology of Money” is confirmation bias, this is the idea that we are more likely to look for and agree with opinions that already share our world view. This is definitely one reason I loved this book! It hit on all my favorite topics: investing young, saving, consistency, compounding interest, and not focusing on beating the market.
Morgan Housel is a partner at The Collaborative Fund which seeks to provide capital for business especially ones that are pushing for social good. He is a writer for CNBC and has also written for The Wall Street Journal and Motley Fool. On September 8th, 2020 he published “The Psychology of Money: Timeless lessons on wealth, greed, and happiness”. In the book he talks about finanicial history, how he invests his money, and-of course- the psychology of money.
What is the psychology of money?
Although a lot of talk is about how we think money works through economic factors and modeling, Housel focuses on the individuals relationship with money. He says that in the same way that no two people are the same, their views on money can be drastically different. Some people are prone to saving, others to spending, some to investing.
Luck vs. Risk
My favorite chapters were Chapter 2: Luck and Risk and Chapter 6: Tails You Win. In chapter 2, Housel talks about how much of an investors success is due to luck. It’s a hard thing to hear. We like to imagine that investor is good because they are smarter and more knowledgeable than us, but in reality for each investor that does well, there are many more who do average or worse. In chapter 6 he expands on this idea to explain how many events that drive growth are unpredictable outliers.
We get this great quote from chapter 2:
“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.”
Markets are unpredictable. Most people who tell you otherwise are trying to sell you something.
What I learned from this book
Although I agreed with Housel’s investment startegy, focusing on compunding interest in long term index funds, I appreciated his ability to understand more aggresive forms of investing. I tend to be very harsh on people who try to “beat the market”. My view of day traders is that they are deluding themselves into thinking they are smarter or more omnipotent than they really are. Housel is much more forgiving.
Housel describes day traders simply as playing a different game. While I’m in the long-term game, a day trader is looking for faster returns. Our investment strategies are not comparable as we have different goals. I have trouble talking with day traders about investing because all their terminology and desires are so different than my own. Housel writes, “short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored, because they’re irrelevant to the game being played.”
Although I would still argue with a day trader who argues the supreme accuracy of their predictions or if they argue its ease or if they say everyone should invest the same way, I should be more accepting of the fact that people use their money differently to reach different goals. A day trader has more potential to HUGE upsides than I will probably ever let myself have.
I highly recommend this book, especially for beginners.
Have you ever read a book and known that it would be something you would quote for the rest of your life? That is how I felt reading “The Psychology of Money”. Although it is only 256 pages, Housel puts everything in a way that is easy to understand. He strays away from complicated math and models to focus on relatable anecdotes. The lack of financial jargon, and easy to understand and easy to implement advice makes this book very accessible.
PS: The audiobook narrator is great! And the whole book can be listened to in about 5 hours.
Have you read “The Psychology of Money”? What book should I read next?
Categories: Book Reviews