Book Review of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

Book Review of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

Crudely put, Finance involves Money and Money involves Numbers. And not everyone likes dealing with numbers and hence not many actively manage their finance that leads to jeopardizing their peace of mind. But here comes Morgan, who pushes Numbers to the backseat and instead puts Psychology/Human Behaviour in the driver seat as he lucidly explains in his book ‘The Psychology of Money’ that handling money is more to do with one’s behaviour than it is with mastering the numbers. So, the best part of the book that separates it from other Investment/Finance books is that you will find no fuzzy equations. Cheers to the author!

The book is a compilation of 19 stories, as the author claims, but I found those to be overlapping at few places. Nevertheless, there are clear takeaways which the author wants us to inculcate. At the outset, he describes about his experience as a valet, where first-hand he happened to learn how one’s behaviour could turn a millionaire into a broke and how to manage one’s money well, as at the end of the day, what matters is not one’s smartness but one’s behaviour.

 In lots of places, the author quotes Warren Buffet, the investment guru and Daniel Kanheman, an authority in the field of behavioural psychology. He highlights how Buffet weathered so many ups and downs for almost eight decades, rife with 14 recessions, booms and busts, but still ensured that the ‘compounding’ wielded its power on his investments. This roughly translates into keeping yourself alive in the game despite compelling reasons for you to exit the investment. While we admire and aspire to be as wealthy as Buffet, few of us admire his patience and discipline to allow time for his investments to grow fueled by compounding, for they were the secrets behind his mammoth success.

He also quotes Bill Gates to emphasize on the roles of Risk and Luck in one’s investment journey, as there are many factors that are beyond our control which plays a key role in determining our personal, professional and financial success. Bill Gates is what he is today because of his early encounter with computers, which at that point of time was one of the rarest commodities and he himself acknowledged that it was by sheer luck that his school got one. Thus, it is very important to respect the role of risk and luck and one shouldn’t assume that anything that befalls on him/her, be it a success or a failure, is entirely attributed to one’s knowledge and effort as it is a self-destructive thought process. To draw a parallel, whatever money you had invested in the month of March 2020, even if it’s some crappy stock, you would have still earned a decent return today, not because you chose the right stock, but the market in general has been favourable since September 2020.

Given the amount of uncertainty that looms us, the author advises us to be generous in allowing rooms for error, when we decide our investment strategies, as they will serve as a ‘conservative hedge’ and helps you survive the ups and downs in your financial journey. So, even when few of our decisions go wrong, one wouldn’t be thrown out of the game and the resultant advantage is that we will gain control over our time. This was one of the best advises that I liked - “The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance”. Can’t agree more, as I have personally experienced this; the sense of freedom to decide and take control of things in your life largely depends on the way you manage money, staying frugal with your 'WANTS' (which is different from 'NEEDS'!) and the amount of adequate disposable income in your bank. This ensures that you don’t have to interrupt your long-term investment to meet your short-term and emergency needs.

The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance

You might wonder what’s the use of keeping your money idle in bank account as all of us have an ever-growing wish list. Should we not spend on those? Here’s where the author draws the line between Getting Wealthy and Staying Wealthy and why some are not able to sustain their wealthy position. One reason is that they risk what they have and need to get what they don’t have and don’t need. Simply put, the word ‘enough’ isn’t part of their dictionary and hence they keep moving their goalpost to fulfill their ego.

At the end, Morgan provides us a sneak peek into his investment strategy. Not many practise what he/she preaches but Morgan separates himself from that cohort. He began investing early and made sure, as he prescribes throughout his book, that his saving rate increased with his income and not the other way round. He also prefers staying debt-free and lead a frugal life that perfectly meets his family’s needs with good amount of bank balance not deployed in generating great returns. He underscores the significance of sticking on to what one needs and not getting carried away by what others are doing, as they could be playing a very different game which if you blindly follow might be ruinous to you. Most importantly, he was lucky enough to find a life partner who subscribes to his investment philosophy. This, in fact, is very crucial and hence, a point to be factored in when you choose your life partner. He also ensures that his investment decisions are crafted to let him have a peaceful sleep at night.

Overall, I thoroughly enjoyed reading this book, which is loaded with great wisdom and most of them totally resonated with me, as I found those sensible and not far-fetched. A word of caution- this book isn’t for those who are looking for what stocks to pick, how to invest to beat the markets, and similar ambitious stuffs. This book helps you stay financially strong and unbreakable by helping you imbibe the behind-the-screen values such as importance of saving and staying patient, which are totally in our control, rather the only attributes in our control in this ever-changing VUCA world. 

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