“Your mind is your best friend and it is your worst enemy.”  

Bhagwad Geeta

Understanding the way money works has been one of the many mysteries in this world for a large number of people. Many gurus and financial savants have explained the concept of how money works in their way, which is often complicated or convoluted. 

Morgan Housel, in this simple book, ‘Psychology of Money’ shares some timeless lessons on the subject. In this context, ‘Money’ is just a concept; a mental construct, and ‘Psychology’ defines the state of your financials like all other aspects of your life. 

Here are important learnings from the book: 

Learn the role of ‘luck and risk’

“The illusion of control is more persuasive than the reality of uncertainty.”

Outcomes in your life are the product of your decisions, actions, and external factors beyond your control. All success cannot be attributed to hard work. Similarly, poverty shouldn’t be connected with laziness. ‘Luck and risk’ should be accounted for in any outcome – good or bad.

It’s difficult to replicate the outcomes of successful individuals and avoid the ruins given that the factor of ‘luck and risk’ in their lives may not be known to us with certainty.

Always evaluate the outcomes in life in the light of your decisions (controllable factors) and uncertainty (non-controllable factors). Being kind to yourself when you end up on the wrong side of the risk is a valuable life lesson. 

Know how much is enough

“There is no reason to risk what you have and need for what you don’t have and don’t need.

Warren Buffet

The ‘desire for more’ has been the reason for the progress of humanity. However, at some point, you need to drop comparisons and let go of FOMO and say – ‘I have enough.’ Furthermore, never trade a few things such as reputation, freedom, happiness, and integrity, irrespective of the size of the potential monetary gain. 

Compounding is powered by time

“As I write this Warren Buffet’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.”

Buffet’s skill is investing, but the secret of his wealth is time. Compounding is deceptively powerful in the long run. Unfortunately, people pay too much attention to the rate of return and too little on the horizon of their investments. Here’s what Buffet didn’t do to survive in the long term:

• Didn’t get carried away with debt.
• Didn’t panic and sell during the 14 recessions he has lived through.
• Didn’t attach himself to one strategy, one world view, or one passing trend

Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for a long period – especially in times of chaos and havoc – will always win.

Behaviour in punctuated moments matter the most

“Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.” – Morgan Housel

The decisions that we make on a small number of days when there is a massive downturn matter the most. Your behaviour during events such as the dot com boom-bust, the crisis of 2008, COVID-19 pandemic, determine most of your long-term success as an investor. 

Rewards of Financial Freedom

“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.” – Morgan Housel

Financial freedom is all about choice in all walks of life – you choose to do something or not to do something. However, the freedom that you achieve as a reward is having control of your time to do what you want and how you want it. That is true financial freedom.

Wealth is always invisible

“Spending money to show people how much money you have is the fastest way to have less money.”

If you spend money on things, you will end up with things and not the money. Wealth is financial assets that haven’t yet been converted into stuff. That’s not how we think about wealth because we can’t contextualise what we can’t see. 

Wealth is an action not yet taken to buy something later. Its value lies in offering you options of flexibility and growth to, one day, purchase more stuff than you could right now.

Surprises will continue

“The correct lesson to learn from surprises is that the world is surprising.”

We tend to form our narratives around past incidents. Those stories make us think that the world is understandable and makes sense, even when it doesn’t. However, quite often, what happened may have been completely random. 

Acknowledge that uncertainty and randomness are ever-present in life. As you have to survive to succeed, you have to program yourself to recognise and avoid serious risks including those never before encountered. As Carl Richards stated, “risk is what is left over when you think you have thought of everything.”

The price of investing

“Everything has a price but not all prices appear on labels. Price of investing is volatility, fear, doubt, uncertainty, and regret – all of which are easy to overlook until you’re dealing with them in real-time.” 

Businesses go through ups and downs; just as it does with the prices of businesses (shares) in the marketplace. Periods of uncertainty, volatility, fear, and self-doubt could be quite painful and emotionally draining. This is to be treated as fees for investing.

The only way to deal with this market fee is to accept that it exists and to be willing to pay the price. You need to live through short term pessimism to exploit long term optimism.

We can’t stop bubbles

“Every decision made sense to people when it is made.”

Why do bubbles happen? Why do they keep happening? Why can’t we learn our lessons from past bubbles? The answer to all these questions is that people are greedy and markets go through cycles of excess and contraction.

How can assets have one rational price in a world where market participants (investors and traders) have different goals and horizons? People in the market have their motives and distinct perspectives causing constant alterations in the market. 

Pessimism is persuasive

“Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.“

Pessimism often sounds smarter, intellectually captivating, and more persuasive than optimism. But, what matters, in the long run, is ‘Optimism’.

Remember, most people in the world get up in the morning to make things a little better. Yes! Optimistic narratives require looking at a long stretch of imagination and developments, which may take significant efforts. For example, building a reputation may take a lifetime. 

Summary

The Psychology Of Money imparts essential insights on the way to perceive money and understand the psychology behind the way it works. Our life decisions are based on our actions and compounding doesn’t necessarily mean big returns only. Our behaviour sets the tone for the kind of life we will lead. All in all, it boils down to us and our notions of life that decide our fate, financially and otherwise.