Book Review: The Psychology Of Money By Morgan Housel
If you are like me, interested in personal finance or investment, you probably would have heard or have said it by yourself that “there is no emotion involved in the investment. It is only a number-crunching game”.
Well, I have changed my perception about this, and you will also after reading Morgan Housel’s stunning book on investment, “The Psychology of Money”.
About the author, Morgan Housel is a partner at The Collaborative Fund and a former finance columnist at The Motley Fool and The Wall Street Journal. Famous for his cohesive writing.
I have recently finished reading his book and can’t wait to share my views with you.
My verdict?
Unlike other investment books, writers explain unnecessary statistics and bland facts making investment the last liberal art. Here Morgan has completely turned the tide in his favour. Morgan has written the novel in under 250 pages, taking in the reader’s time and cohesively crafted the novel, making it easy to read while respecting his USP to explain finance in a fun and easy way.
In the book, Morgan has given more importance to the mental models and behaviour that shape our financial success. The basic premise of the book is:
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.”
In simple words, the books underline the importance of using an Emotional Quotient (EQ) and studying basic knowledge of human behaviors and how they react in a different situation to invest.
Here are some key takeaways, notes, and excerpts:
The Seduction of Pessimism: We as humans are engineered to be cynical. We are always overthinking. Rather than simplifying our actions and approach, we do the opposite and try to make situations more complex. The biggest lesson I learned from the book is to become more optimistic over being too pessimistic. In life and investment, we give so much importance to being the pessimist that we miss the essence of growth. Today lets us be more optimistic and action-oriented rather than brooding in pessimism and missing life.
Time heals all wounds: Again, books like atomic habits or compounding effect have already explained compounding’s importance. Similarly, in investing, your chance of losing and winning money in 1 year is 50/50, in 10 years is 88/12 and in 20 years is 100/0, which means long and persistent players win. To sum it up, give your investment time, let them grow, and believe in the magical power of compounding. Hail compounding.
Man in the car paradox: This is something I am well aware of and even practice it, but sometimes I struggle and like everyone to lose track. Tripping in the glitter of fantasy won’t help you achieve your goals and targets and, most importantly, won’t promise you happiness.
To become financially independent, it is important to save money (it doesn’t mean you to become a miser but yes, be aware of where you spend). The writer pointed out that the biggest reason we lose our financial track is that we become too much engrossed in impressing and getting approval of joneses in our journey.
Being reasonable over being rational:
I am guilty of following this but again, who isn’t. There is a huge difference between rational and reasonable people, but what separates them the most is that reasonable people display social conscious characteristics like kindness, fairness, and honesty. Specifically, they are rich in EQ over IQ. When it comes to investing, the stakeholders are not numbers-crunching induvial. They are just like us twisted beings with complex emotions, humans. We all know this, but when it comes to investing or putting our strategy into action author pointed out that many of us dive towards being rational over being reasonable, which hurt our investment in the long run.
What do you own and why?
Billionaire investor Sandy Gotterman used to ask this simple question when interviewing candidates “What do you own and why?”. He was not interested in complex questions which you expect in interviews like “What do you think about economics condition?” or “What next election will bring out?”. He was only interested in knowing what the candidate does with his own money, which tells more than considering what he would do with others' money. Also, a fun fact many mutual fund portfolio managers don’t invest a dime of their money in their funds.
In the end, the book is filled with many important investment lessons. I loved ❤ the book and will recommend to those who want to be proactive with their finance.
Also if you want to improve your English you can visit this blog where I have pointed out 5 common grammar mistakes that hurt your business.
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