The Psychology Of Money - Timeless Lessons | Book Summary

 The Psychology Of Money - Timeless Lessons on Wealth Greed and Happiness

No one is crazy

Have you had this experience before? You were reading the biography of someone you respect then came across an incident where they made a bad money decision and you thought they were crazy!

Or, maybe you were told of a relative or neighbor who was once wealthy that lost almost all their wealth in a short time—and got angry at how they couldn't manage their money. Many of us have had such experiences one way or another.

When you see how people handle money, you will be tempted to think some of them are crazy. But no one is crazy. People make terrible money decisions all the time, but it's not because they don't think properly. It's just that when it comes to money, we are all different.

Housel estimates that your experience with money makes up 0.00000001% of what the rest of the world experiences. People born in different generations tend to have varying views of money and this affects everything, including how they invest. For example, if you were born when inflation was low, you're more likely to invest in bonds compared to someone born in the heights of economic inflation.

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.

We have been programmed to believe the results we get are 100% the consequences of our actions. When you fail, it's because you did something wrong. And when you succeed with an investment, you're a good investor. But reality isn't always so. Smart, well-calculated investment decisions have failed, and many profits have been obtained from seemingly unwise ones. Clearly, there is more to success than smarts and hard work.

Luck plays a role. We can't tell how much luck goes into success, but we do know it's undeniable. Success is usually not untraceable to favorable events like meeting mentors or being in the right place at the right time—that's the uncontrollable factor, that's the luck.

It's pride to assume all your successes are direct results of your hard work alone.

The opposite is also true. Some failures are due to unfavorable circumstances. Death, accidents, uncontrollable world events, etc., have shortchanged people and made them appear to be failures. The bottom line is, don't be quick to judge people's finances when you don't know the whole story.

We can do almost nothing about luck and risk and how they affect our finances. But there are other things in our control. And it's wisdom to focus on maximizing the things you can control...let's talk about those things.

Stop Chasing Money

Modern capitalism is a coin with both good and bad sides. On the one hand, it helps you accumulate wealth that can be transferred to your kids after you're dead. That's the good part. The other side of the coin is that it fosters envy. The type of envy that turns you into a perpetual money chaser.

Many people don't realize they're already putting money above happiness. The deception of capitalism is so subtle that it often takes being caught in its dark web before you realize what's happening.

You may think you're working for yourself and the future of your family, but the real reason could be that you're just working hard to earn more than a neighbor.

The problem with this kind of competition is that you may end up risking more important things in your pursuit of money. Things like freedom, time, family, and even your reputation.

How many reputable people have you seen go to jail for stealing public funds? If you don't know any, you've at least seen several in the news. But that's of course on the extreme side of things; what you see more often is people sacrificing time and important relationships for work.

Your happiness can never be compared with money; don't chase money at its expense.

The best way to avoid this trap is to understand that more money doesn't equal more happiness. Determine important things in your life apart from work and money then create a system around your life that enables you to pay attention to them. This may mean working fewer hours to have more family time or refusing to take part in shady business deals that may land you in jail, costing you your freedom. The system will be unique to you, but the point is to create a balance that ensures your life is not just about chasing more money.

Be keen about playing a long-term game

Treat personal and corporate finance as a long-term game and you're more likely to last longer playing it.

Investors who are only interested in short-term gains hardly play long. And it has nothing to do with their skills. It's just that no one can perfectly predict the markets. Things change rapidly. You may think you've gotten a hang of the stock market and can predict where it's going next. But before you know it, sudden changes will surprise you.

Countless investors have taken their lives because of this. They made massive gains at some points in their career, got greedy since they felt they've mastered their chops, only to lose all the money they made and more.

Jesse Livermore, the famed investor of the 1920s is a classical example. Livermore was so good that he didn't just escape the 1929 stock market crash, but made multiple millions from it while most investors lost their fortunes.

Success is a tricky thing. It made Livermore believe he had mastery over the markets. So after that huge win, he kept investing and losing but was relentless nonetheless. His persistence didn't pay off. He lost everything he had and even ran from his family for two days because of shame. Jesse Livermore never recovered from that loss—he eventually took his life.

Your investing skill will bring you money, but you need more than skill to sustain wealth.

Investing is a risky game with potential for high rewards. But if you get greedy and shoot to get those big rewards too quickly, you risk losing your money. The masters of this game understand this so they play with the long-term in view. They choose to compound their gains over time rather than quick, unguaranteed profits.

Take Warren Buffet. As at the time of writing this, he's worth $84.5 billion, but $84.2 billion of that only came after his 50th birthday. And he has been investing since he was 10. His secret is compounding. He is a skilled investor, no doubt, but his acumen alone wouldn't have been enough.

When you have a long-term goal and keep compounding on a good annual rate, you stand a better chance of building sustainable wealth than another person who is just in for the quick gains.

The Happiness Code

While researching for his book; 30 Lessons for Living, Karl Pillemer discovered something stunning. He asked a thousand elderly Americans to share the most important lessons they learned over the years. None of them talked about happiness in the way that we see it these days.

Of all the people interviewed, not even one said the secret to happiness was to make more money than the person living next to you. No one said that pursuing a high-paying career for the sake of money and prestige would make you happy.

And if all that is true—which it is—then we seem to be missing something. Many people firmly believe that more money would make them happier people. They hinge all their happiness hopes on an increase in their monthly paycheck and therefore live very unhappy lives.

According to the Americans interviewed, what made them happy was having meaningful relationships, spending quality time with family, and being part of something bigger than themselves. When you realize that several scientific researches support these points, you will want to take them seriously.

Nothing matters more than your happiness!

It's disastrous to anchor your happiness on things—especially things you're yet to have—because you may never have them. But when you give more premium to relationships and causes, you realize that you become a much happier person.

Don't aim to be rich, aim to be wealthy

The difference between riches and wealth is beyond semantics. Riches are what you see as an external observer, but wealth is usually hidden.

Someone living in a house worth $200,000 is rich. Even if they borrowed to get the house, at least they have to be earning a high income to be able to pay their debt. But that's not wealth. Wealth is when you have that $200,000 in cash or asset that you haven't spent yet.

When people say they want to be millionaires, they mean they want to spend the way millionaires do. But if you have a few millions and you blow them all on your wants, who spends millions, not a millionaire.

Wealth is the money you save and invest. It's the assets you own. And that's the thing people don't see. What most people see is the display of riches and anyone can appear to be rich. Matter of fact, many people who look rich are actually broke.

When it comes to building wealth, you have no one to impress.

Don't buy stuff you don't need to show off to people who don't even care about you. The advice is commonsensical, yet people disobey it every day.

The reason people buy fancy stuff they don't need is because they feel it will attract respect and admiration. But guess what? It seldom happens. When people see you driving an expensive car down the street, they don't immediately think about you. They may get the idea that you're rich, but it doesn't translate to respect for you. The opposite usually happens: They use the car you're driving to measure their own success and fuel their drive to achieve more. Put it another way, they're not thinking of respecting you, they're wishing they could be you.

So, it doesn't make sense to impress people at your own expense. Focus on building wealth, not showcasing riches you can't afford.

Conclusion

Uncertainty is the nature of life. We do our best to predict outcomes and outline our actions in lieu of them. But it doesn't mean things will always go our way.

Life happens and we must learn to adjust accordingly. If you made certain projections for your investments and they go as you imagined, great. But when that doesn't happen, it's important to rise quickly and change plans.

This is why investors must have no sunk cost. It doesn't make sense sticking to a portfolio because you've invested too much time and money into it. Be flexible enough to make changes when it's not working.

Remember chapter one—people sometimes make crazy financial decisions, but no one is crazy. We're all limited by our knowledge, experience, and the state of the market we're trading. It helps to seek guidance from people more experienced than you when unsure of a particular move. This person could be a friend, financial advisor, or someone from an investment club you belong to. It doesn't matter. What counts is that they have experience enough to guide you.

Speaking of investment clubs, there are so many of them both online and offline. Find some to join if you're not part of any. You'd have to pay a regular fee for most, but they're always worth the dollar.

Final words. Protect your happiness at all costs: Stay out of shady deals, don't chase money, and always create time for the important thing in your life because in the end, what's the use of the money if you can't enjoy it?

Try this

Join an investment club online or find one in your state that meets regularly.