Morgan Housel pens The Psychology of Money. He aims to show that the soft skills of managing money are more important than the technical side of money. This book was recommended in an investment blog. At first, I was wondering whether this book is related to investing at all. After reading it, I found some investing lessons in the book and decided to share my review here.
Layout of The Psychology of Money
The Psychology of Money contains an introduction, 20 chapters and a postscript.
Chapter 1 to 18 are the stories that showcase his points.
Chapter 19 is the summary of the book.
The last chapter describes the author’s own investing style.
Highlights
The author emphasizes the role of luck and risk in life. In investment, we have to appreciate these two components. We need to accept that what happens in the world sometimes is out of our control, including both successes and failures.
I like his advice on dealing with failures. We should make sure that a bad investment here and there won’t wipe us out so we can keep playing until the odds fall in our favour. Thus, we need the margin of safety or room for error. By having room for error, it also means to have a gap between what we can technically endure versus what is emotionally possible (rational vs reasonable). Room for error raises odds of success at a given level of risk by increasing chances of survival. The most important part of every plan is to plan on the plan not going according to the plan.
Investing has a social component to it which is often overlooked. We are always comparing results with others. However, others might be playing a different game than we are. For example, traders versus investors. Thus, understand your own time horizon and avoid being influenced by the actions and behaviours of people playing different games than you are. In investing, we must treat volatility and loss amid the long backdrop of growth as the price of success and be willing to pay it.
The author thinks that bubbles are the symptoms of time horizon shrinking as more short-term traders enter the playing field rather than about valuation rising. It is a different view on bubble that has its own wisdom.
The author believes that there is little correlation between investment effort and investment results, thus he chooses passive investing through index funds. It is up to each person to decide, as the author says, “to each their own”.
Conclusion
The Psychology of Money is primarily a personal finance book. I am only sharing what I find related to investing here. I think the most important things that this book has is about having room for error to fight for another day. This will ensure that we would not be wiped out due to a few investing mistakes.
Furthermore, the idea of treating volatility and loss as the price to get better returns, rather than something to be avoided is also a very good advice. Volatility and loss are unavoidable in investing, and if we treat them as something to be avoided at all cost, it would not be possible. On the other hand, by accepting volatility and loss as part and parcel of investing, it will let us focus on finding good investments.
As usual, I will end with some quotes from the book.
“We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.”
“Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.”
“There is no reason to risk what you have and need for what you don’t have and don’t need.”
“Anything that is huge, profitable, famous, or influential is the result of a tail event – an outlying one-in-thousands or millions event.”
“A good rule of thumb for a lot of things in life is that everything that can break will eventually break.”
“A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.”
Recommended book
If you are interested in The Psychology of Money, you may get the book through the link below*.
Get the book here from Kinokuniya Malaysia
