The Psychology of Money by Morgan Housel
Review & Rating: 8+/10
It took re-listening to Morgan Housel talk about the book about 3-4x on Ted Seides’s podcast, a few friends asking if I’d read it (subsequently recommending it) and a very well-read friend strongly recommending it for me to embark on this book. I was pleasantly surprised. Not by the quality of writing since I’ve enjoyed Housel’s previous essays but by the deliverance of the message.
The writing was quite to the point, which I admire greatly, but the way Housel conveys how we deal with money was very refreshing. I also enjoyed how open-minded he was throughout the book. Most books have a set view the author is arguing in favour of and maybe I missed the overall point being the ability to think with an open mind but that was a refreshing message I felt throughout.
I was also hesitant on reading the book because much of the topics Housel shared in his podcast interviews sounded familiar to other books I had read. It’s true that most ideas aren’t new and we are regurgitating the age-old -isms with modern examples for the most part. But I learned a lot from this book. It put me in long periods of reflection and the book is filled with my eligible writing and blue ink everywhere. I’ve contemplated whether this would be the first book I give friends who ask me how they should start investing. I used to tell them to read Phil Fisher but I think this book may help one to think a bit before learning a strategy (I.e Fisher).
My favourite line from the book was “You plan. God laughs.”
I, naturally, laughed quite a bit after reading the line. Whenever a book can make me laugh, I think it’s a good one.
Book Notes:
“History never repeats itself; man always does.” - Voltaire
Experience is required to truly understand some lessons. How many of us truly understand?
Our views of risk depend on personal history. If one’s parents grew up in a country that had a stock market known for fraud and everyone built wealth in real estate, that might push their biases one way. Alternatively, if one grew up in an era of euphoria in the stock markets, they are conditioned to stick with investing in the markets.
I particularly enjoyed the example in the book of how a Chinese sweatshop worker actually disagreed with American ideals against capitalism. The sweatshop worker would rather be exploited by a capitalist boss than her body as a prostitute. When one wishes to impress his views on the world, he should first try to see how limited/narrow his experiences are and second seek to understand why others don’t think the way he does. The error is in thinking others aren’t as brilliant as the self.
At the time of publication (2020) of the book, index funds were 50 years old and hedge funds were 25 years old. The TFSA was introduced in 2009 and RRSP in 1957 for Canadians. Investing in the stock market is still a new thing for us. Of course, we don’t know what the hell we are doing.
Among siblings, correlation between income is higher than height & weight. It stems from the socioeconomic status of the parents. It leads to similar types of education, but I think it leads to a certain level of expectations of ourselves. I guess it’s not unusual that my brother and I went to the same high school, university, and desire to control our careers as our father did.
A bad outcome isn’t necessarily because of bad decisions. We tend to think that of others whereas if it happens to us it’s merely bad luck because there is “no way” we would make bad decisions. Same for success. It does make me wonder why entrepreneurs breaking laws to grow a business are considered brave and successful instead of negligent criminals. Didn’t Uber break laws when it entered various markets? Look at process over outcome.
Zuckerburg turned down Yahoo’s $1b offer and he is a genius. Yahoo turned down Microsoft’s offer and they are idiots. Not apples to apples in terms of business but without hindsight, hard to say what was luck or skill. Seems the only constant is hutzpah.
Not all success is due to hard work. Same for failure and poverty being a result of lack of hard work. Luck plays a factor. Seek to understand and empathize.
Broad lessons > individual specifics. One truth is that control over one’s own time makes one happier.
Studying the average and broad patterns may lead to greater learning than extreme cases (i.e. success of individuals).
Success and failure can both be shit teachers. Maybe one is better off focusing on improving one’s process so the momentum isn’t lost.
Makes me wonder if infinite games should be played to not lose while finite games should be played to win. In investing, you don’t get to “start over” if you lose your capital. Hence, it’s an infinite game where you don’t want to impair any capital.
One cannot judge the results of entrepreneurs/investors to see if they are worth admiring/praising. Further study of their process is required. Judge the systems that lead to results.
Happiness = Results - Expectation
Find founders who seem to know they have enough. People who play the game for the love of it, not as a comparison game against others. Same for yourself. Ignore what your peers have.
Compounding = Buffett’s net worth was $300m at 50. $81.5b came after his 60s. He started investing at 10. It took him 20 years from there to what would be $9.3m today. If one started with $25k at 30, grew it 22% annually for 30 years, he’d have $11.9m. Time is the secret. So just shut up and wait.
To persevere for a long time, one needs to survive. Always focus on survival when it comes to infinite games like investing, business and career.
“You plan. God laughs.”
Always build in a margin of safety. Black swans may get you and a deep enough margin of safety just might save you. It’s not avoiding risk. It’s about placing bets in your favour given the risks you are willing to take on.
Taleb speaks about the barbell portfolio (i.e. 80% bonds, 20% venture capital), but there is also the barbell personality: paranoid for survival but optimistic for the future. A nice duality to think about approaching one’s career where one is able to take small losses for the sake of long-term growth. The paranoia limits the losses to the point that it won’t make it devastating.
"Tails drive everything.”
Fascinating to think that over 40 years, only 7% of the companies in the Russell 3000 were responsible for the index’s overall returns. Crazy outperformance by a few.
Focus on doing a few important things well.
What you do on the 1% of days during market panics will have a greater impact on your investing than on most days where you should be doing nothing (i.e. not trading). But, the other side is to realize what you do every day is what will let you act on the 1% of days that matter.
A few events/companies/actions/projects drive most of the returns but it’s the system that cultivates persistence every day that allows for it. Think of all the things Amazon failed at whilst building AWS. No one could’ve foreseen AWS coming out of a low-margin reseller business. But it may have been possible to understand the system they built to constantly experiment.
Of the 400-500 stocks Buffett’s owned, he said he made most of his money on 10 of them. It reminds me of the punchcard model he recommends for most investors. Not to obsess on the 20 opportunities but to think about being really selective and recognizing there will only be a handful of great opportunities because tails drive everything. It’s hard to find the tails and being quite picky should be what’s required to succeed mightily. Some may think there is no point picking winners as only a few in the tails drive everything. To that, an index approach allows one to capture the tail results. But another way to look at it is to realize only a few companies have special characteristics about them and most are subpar in comparison.
Control over one’s life leads to happiness. Control over time. Being independent, having autonomy, etc… Money is a mere proxy for control of time and one’s life. To be wealthy is to have control over one’s life. Given the predictability of human nature and the unpredictability of everything else, doesn’t it make sense to find companies that incentivize such behaviour to flourish in their employees? Giving employees choice over their destinies goes against the nature of most companies and this might also lead to how a few will end up outperforming everyone else. I am inclined to believe the few that focus on giving their employees more of this control over their lives are the ones who will prosper. Possibly, the same might be said for companies that provide a service that gives their customers more control over their lives.
“…doing something you love on a schedule you can’t control can feel the same as doing something you hate.” / I agree.
The less you speak, the more you hear.
“Controlling your time is the highest dividend money pays.”
What most people truly want is the respect and admiration of others. The error is in trying to buy that with toys, goods, and experiences one posts on social media.
“People with enduring personal finance success - not necessarily those with high incomes - tend to have a propensity to not give a damn what others think about them.”
Page 109 on flexibility is worth rereading at times to remind myself of the importance of patience and the advantage one builds in one’s mindset. Ignoring what others are doing and not trying to play stupid games of comparison are critical in identifying and attacking one’s niche. It takes time and playing stupid games can make it last longer, or worse…not pursue it at all.
Leaning towards the view of companies treating employees as teammates on a sports team vs. family. Family is about unconditional love and that can be dangerous in the competitive pits of business. Teammates have accountability to one another, a level that’s different from family.
Invest in companies you are interested in and do what interests you because success requires sticking with things. One is less likely to stick with things that make “rational” sense in what the world dictates but that isn’t reasonable for the individual’s own makeup. It’s reasonable to do what draws one’s curiosities because it allows one to stick with things and the world is unpredictable so what may seem rational by everyone else today may not be so in the future. The most important thing isn’t to be rational but to do something that one can stick with. If that is rational, then great, if not, that’s fine.
A sub-optimal portfolio that lets one sleep well at night and keeps one away from touching it is better than a fully optimized one that keeps one worried and checking stock prices every day.
I particularly love Housel’s chapter on being reasonable over rational. I find both to be subjective views but being reasonable is personal and it lets the individual do what makes sense for himself. Life is a wicked environment where there are no absolutes and the idea of rationality can’t be viewed in that manner either.
The question one should ask oneself isn’t whether it makes rational sense but whether one can see oneself sticking with it for a long time. Benefits come from compounding and that requires sticking with it. So one is better off doing something they can see themselves doing for a long time. Loving it is one data point to help see that.
“History is mostly the study of surprising events.”
What happened in the past are not good benchmarks for how bad things could get in the future. If surprises are a constant in the world, the ability to capitalize on surprises would be desirable for many and that seems to lead me to the realm of antifragility.
Consider how different the world was decades and centuries ago. Hence, using historic data that goes too far back in the hopes of seeing the future may be a rather ridiculous exercise as a world without a computer is vastly different from a world where it resides in one’s pocket. Near-term history may be a greater help for seeing the future given the similarity/proximity of environmental conditions. People think more data helps with accuracy but that’s not the case if more data means using it from time periods that are so different from today. Less but more recent data might be preferred so it can also add a dose of humility to one’s analysis.
It can always be different this time around.
“The purpose of the margin of safety is to render the forecast unnecessary.”
“The ability to do what you want, when you want, for as long as you want, has an infinite ROI.” / thus is the case for having a healthy paranoia with one’s capital and the need for a margin of safety.
Taking risks is required to outperform/get-ahead. But one can and probably should be averse to ruin while risk-seeking at the same time. Even if odds are in one’s favour (i.e. Russian roulette), if the downside is complete ruin (i.e. death), then it’s best to avoid such bets. The downside isn’t worth the upside no matter the odds.
“I have no sunk costs.” - Daniel Kahneman
Realize the costs associated with investing. Not just trading fees but costs one will have to experience in volatility. A 2-bagger will probably cost less than a 10-bagger and that will probably cost less than a 100-bagger. One will probably have to go through exponentially more gut-churning situations in the market to hold on to a 100-bagger than letting go after a 10-bagger. Consider the costs you will have to pay for the returns of your investments.
Consider the kind of game you are playing as an investor. All the investors on Twitter or talking on podcasts have their own goals and incentives. Everyone is playing a different game and it’s imperative you figure out what investing game you are playing. Figure out who you are and what investing game you want to play.
Don’t think for a second that other people care about the fundamentals of businesses. Some people play games where it’s all about price action.
Pessimism is fashionable. It’s easier and if you chunk a bunch of data, it can even make one sound intelligent. Matt Ridley brought up the case quite strikingly in The Rational Optimist where pessimists will get Nobel Peace Prizes for showing how we are all fucked while optimists tend to get laughed out of the room for being naive. Bad things are quick instant events and the short-term memory of humans makes it easy to see the pessimism but optimism takes time and people lack the patience for that. But make no mistake that it’s the optimists that move the world forward.
People adapt to correct problems in the world. Pessimists forget that fact of history.
Remember the stages of innovation, first, it is ridiculed, then violently opposed, and then accepted as self-evident.
“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in an instant.”
No such thing as precision in investing. Everything to do with human behaviour is messy. Much like biology. Precision is for physics.
What I realize from hindsight is that most things were not knowable. The arrogance in thinking I should’ve known. We forget that we don’t know what we don’t know. This leads to committing the sin of fooling ourselves as we are the easiest person to fool.
The danger of studying history with all the hindsight bias we have is that we will look for things that confirm our opinion. I think you can try your best to understand individuals but a group of them in the course of the world seems rather impossible. I wonder if this goes to the argument for focusing on the micro instead of the macro. The macro merely being an arena for our exuberance to be at play where people will generalize and seek to be able to forecast a world that isn’t quite forecastable.
When things don’t go well, learn to forgive yourself. Outside of the few things in our control, most things that happen to us are outside our control. Don’t fault the self so harshly.
The market should be messy. If you find you’re conforming to a herd idea, get the fuck out. Learn about yourself through your investing.
Similar to Housel, I like Taleb’s definition of success: “True success is exiting some rat race to modulate one’s activities for peace of mind.”
Pick a strategy that has the highest odds of meeting your goals.
Expectations move slower than facts.
“The more the Internet exposes people to new points of view, the angrier people get that different views exist.” / Denying facts keeps their expectations alive longer.