"The Psychology of Money"
These are my notes on the financial classic written by Mr Morgan Housel
Your relationship with money is not a mathematics problem which can be solved by knowing a few formulae or equations. This relationship depends on how you behave. And according to the author “Behavior is hard to teach, even to really smart people”. So let’s get into what Mr Housel wants us to know about how to deal with money.
No One’s Crazy: We tend to make decisions based on only what we know, which would generally be much less than all of the information available. If you’re a kid whose parents own everything in sight, you will experience a recession through a very different lens than the average Joe. So, you should not judge people’s money decisions quickly, because everyone’s stories and motivations are different.
Don’t underestimate the role of luck and risk: Bad decisions can sometimes lead to good results and good decisions can sometimes lead to bad results. There is no certain route in anything that we encounter in our lives. On one side of risk is victory, on the other is ruin. So you could lose due to no fault of your own, just remember to keep going.
It will never be enough: There will always be a bigger mountain to climb. So you don’t need to chase things all the time, the list of wants has no end. I talked about Madoff here, he had a legitimate business, but still went out and defrauded people, so where does it end? Always think about the risk-reward ratio in the things you pursue.
Let compounding do its thing: Small habits compound over the years to shape your life. Similarly, let your money compound. Compounding makes your money work for you instead of you working for it, so use its full potential.
Getting Wealthy vs Staying Wealthy: These are two very different skills. Getting money requires risk-taking, hard work and optimism. Keeping money is a different beast. It requires you to mitigate risk, avoid greed, and remember that what’s been given can be taken.
Understand the odds: Remember the 80-20 rule: around 80% of results come from 20% of causes/decisions. This is true in investing too, most of your returns would come from a few major bets. The rest would fade away in comparison. So you don’t need to win every battle, what matters is you win the war. You can be massively profitable even after winning less than half of your trades, provided you win more than you lose when you do win.
Define freedom: True freedom means doing what you want, whenever you want, with whoever you want and for as long as you want. Time is the greatest dividend money can pay back.
You would change, and so would the world: There is no way of knowing how much we and our surroundings would change in 10 or 20 years time, so you cannot set a plan in stone. There will be new types of problems and challenges which you would have to fight through. Always keep room for error in your decisions, both financial and otherwise.
Save: As I said, you don’t know what will happen, so save up a bit. Not for things like cars or watches, for you to have peace of mind if something bad randomly does happen. Because on a long enough time scale, odds are something would happen that requires cash.
Stay away from perpetual bulls and bears: Nothing always goes up or down. There are people on both sides of the aisle, who want you to keep buying even at the height of a bubble and those who want to tell you the world is about to end every few months. So you need to use discretion and form reasonable opinions and act accordingly.
Be nicer and less flashy: No one is impressed by your possessions as much as you think. What would probably be more fulfilling is respect and admiration. So be kind and humble, because things don’t and can’t actually make people respect you if you’re not a good person before them.
Well, that’s it for my notes on this book. But there are much more anecdotes, stories and ideas you can take out of reading this book on your own. I’ll be back with notes from more books in later articles. Meanwhile, you can subscribe for free to receive new posts and support my work. And do let me know if you want a specific topic covered!
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