There is a short list of books that made my head spin in the best of ways (listed at the bottom of the post) — The Psychology of Money by Morgan Housel is now on it.
The beauty of The Psychology of Money is in the way that it’s told. Upfront, Housel informs the reader that the main points of the book come from an article. Housel takes the core lessons and tells them through a series of short stories. I would recommend this book above other popular finance books because the stories are compelling, engaging, challenge your way of thinking, and — I cannot stress this enough — they are short. This book is packed with easily digestible lessons that will make you want to share what you have learned with others.
In the words of Housel — it’s not a long book. You’re welcome.
^^ Thank you, xoxo, Raven
The book begins with the story about a man who had a high-school level of education, worked as a janitor most of his life, yet upon his death bequeathed $2 million to his family and $6 to his community library and hospital. Without a trust fund or a one-in-a-billion lottery win— how did a blue-collar guy become a millionaire?
A core argument of the book is that finance is not a science but a “soft skill,” which can be taught. Highly educated people are just as vulnerable as others are to financial ruin. General intelligence can only get you so far when it comes to money. There is a world of difference between being “rich” (which concerns current income) and being “wealthy” (which concerns money not yet spent). Ronald Read, the man in the story, did not have to be rich to die a very wealthy man. This book provides you with requisite knowledge to better understand money, your relationship with it, and how to manage it to live your happiest (rather than your “richest”) life.
Housel explains that most of what we know about money relates to who we are, where/ when/ how we grew up. Being born into the Great Depression will instill certain lessons about money into you while being born in the post-WWII boom will lend to another. Finance is a somewhat new art. Credit cards only came about in the 1950s, the Roth IRA was introduced in the late 1990s, robo-investing apps only entered onto the scene in the 2010s, and non-fungible tokens were born… like yesterday.
Investing is not a science, as a set of inputs will not yield the same outputs every time. It is riddled with uncertainties and involves risk, aka hazard or, most specifically, that sneaking variable of chance that can make “smart” financial decisions look like bad ones and can make reckless investments look like prodigious foresight. By this, I mean, if you have a 80% chance of success — you have a high chance of success. It’s a safe-ish bet! But, 20 times out of 100, you are likely to fail — however, that does not mean that leaning into the opportunity was stupid (in fact, it was, on paper, safer than most). Conversely, if you attempt a high-risk financial endeavor with a 99% chance of failure. On paper, 1 in 100 people (a dismal rate of success) will still succeed! In short, beating the odds does not make you a financial wunderkind — luck does indeed play a role in financial success and failure (a scary thought when money is on the line!).
If there is one lesson that Housel underscores above all others, it is this — a long time horizon is key to financial success. More specifically, Housel explains the significance of “tail-end events.” A company can produce 99 flop products but the 100th one could be the one that makes literal billions. When it comes to investing, things will go wrong. If you withdraw at the first sign of failure, you will lose — inevitably. By creating a long time horizon, you allow yourself a margin of safety (i.e. “raising the odds of success at a given level of risk by increasing your chances of survival”) to recover over time. Warren Buffet has failed literally hundreds of times and so have many others. You are not Warren Buffet, but if you stay in the game long enough (and are reasonable with your investment strategy), you too will have a better shot of being successful.
Another key point that I took away from this book is about the power of “enough.” We all know by now that too much greed can lead to one’s own personal self-destruction. The author recounts short stories of insider trading and Ponzi schemes that — as you guessed it — went south. However, these criminals and fraudsters were not impoverished beggars, seeking only to meet their own needs, rather these were men with hard-earned millions in the bank who decided that they did not have “enough.”
When do we have enough? According to Housel, we have enough when we can meet our basic needs and also our reasonable wants within our means. With affluence flaunted in the media and Alfa Romeos rolling down the city streets, it can be easy to think that our standards of living are not “enough.” Some people will roll their eyes when others say the key to a happy life is “living within one’s means,” — I understand that. From a financial perspective, it sounds like budgeting, calculating expenses, and forgoing avocado toast — bleh. However, Housel explains frugality as a mindset of appreciating and enjoying what you have rather than an ascetic lifestyle, overflowing with self-imposed restriction.
Nothing of what I am telling you here in this post will blow your mind. This post, as I write it, is so underwhelming to me after having just read the book. I simply cannot stress to you enough how compelling Housel’s writing is.
There are so many worthwhile lessons about life (not just money) that are imparted through tales of the winners, losers, and survivals of our financial system. Regarding our societal expectations surrounding money, this book also gives a quick overview of where we came from — a chicken in every pot and a car in every garage to outrage about high student debt and great disparities in wealth. The stories that Housel retells are just so powerful — gahh… I really just want you to read the book. His perspective is just so compelling.
The Psychology of Money by Morgan Housel — a five-star read. Mic drop.
Looking for other non-fiction reads to knock your socks off? I highly recommend: