The Psychology of Money by Morgan Housel - Notes

 

Today, in this blog I would be talking about a book that has changed my mindset and I have a new perspective now on a lot of things and that is not just about money but life as a whole.

📖Who should read this book?

This book is for everyone. This book talks about how behaviour influences our financial decisions more than logic and it talks about various ways by which we can not only become a better investor but also a better person

✍My Highlights and Notes.

The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave.

He gives examples of two people. One man worked as a janitor his whole life, but he had accumulated a wealth of 8 million dollars after his death. If you ask how he was able to do so, the answer is simple he invested in blue-chip stocks and led a very simple life. Also, there was an engineer who earned a lot of money but he used to spend like crazy and later on his lifestyle made him broke.

The World is too complex to allow 100% of your actions to dictate 100% of your outcomes.

Luck and Risk play a very important role in our consequences. For example, in which family you are born is something which is all about luck. For example, Bill Gates studied in a premier school named Lakeside School and that school had a computer and back then no school in the world.

Also, the risk is something that is not in our hands. Today, the whole world is facing this pandemic situation and vaccination is the only way right now to reduce the risk of getting severe case but last year quarantine and wearing masks wear the only measures to reduce the risk of getting infections. But still, by wearing masks you cannot be 100% safe against the virus. So, we can see that risk is something that is out of our control to some extent

The skill of Warren Buffet is investing but his secret is time.

Warren has been investing since his childhood and for the past 75 years. His investments have compounded over time. The best part is that not out of so many securities only a few of them has contributed to most of his wealth and he has generated most of his wealth in the later years of his life and his wealth is still compounding and we all know that his company, Berkshire Hathaway is the costliest selling share in the world and recently it reached the maximum value of the  NASDAQ and NASDAQ had to update itself to prevent it from crashing.

Getting Wealthy V/S Staying Wealthy

The reason why Warren Buffet is successful and remained wealthy is that he was able to survive in the hard times and did not panic and survived 14 recessions. He changed his strategies over time and did not follow one particular path and got attached to some way of doing business. Also, he did not burn himself out or quit or retire.

Tail events have more influence than other events

Tail events are extra-ordinary events or a few things which account for most of the results. We have read this in Pareto's principle where few resources generate most of the output. Like, for Amazon it's AWS business, for Warren Buffet a handful of shares. The main thing is that you have to invest in these tail events for a long period of time and then you will see the magic of compounding and see the exponential growth.

The ability to do what you want, when you want, for as long as you want to, is the broadest lifestyle that makes people happy.

Humility, kindness, and empathy will bring you more respect than horsepower ever will.

By showing off your money with expensive stuff, you won't be able to win the respect of people. If you buy a luxurious car, people won't focus on you rather they would look at the car. Real respect comes from our attitude towards people. So, instead of wasting money to win hearts, use your time and money in a meaningful way.

The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.

There are tons of people who don't show off their richness by their words or things and there can be people who look show that they are rich but they end up losing their wealth in a lifestyle which they cannot sustain in long run.

I’m better off than you are, despite being a worse investor. I’m getting more benefits from my investments despite lower returns.

You might generate lower returns than others but you can earn more by investing more money and by saving more money and in the long run, you can build more wealth if you are consistent and let time work for you.

A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.

You cannot put all your eggs in one basket. You have to put your eggs in different baskets to stay financially independent. You have to make sure that your income is coming from more than one source. Start saving, invest in various assets and assets are something that works for you and generate more income for you in the future and compound over time.

Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time.

Change is very important especially in this dynamic world where things are happening so fast. Everything gets obsolete, a new technology comes, changes come in the way we think and the way we work. You have to change your methods and your style.

Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence can happen instantly.

This is one of my favourite quotes from this book and I am thinking about this quote since I read this. If you want to grow in long run then stop looking at a single point of failures or pain. You might feel like not doing something as certain things might demotivate you but believe in yourself and have faith in your efforts and be consistent and you would definitely win in the long run.