My Summary of "Psychology of Money"
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
There were two books I was recommended after selling my business, “Die With Zero” and “Psychology of Money”.
I have terrible focus, but Pyscology of Money kept me hooked.
The real focus of the book is, “outside of just money, what is wealth?”
If you’ve read the book, these are nice refreshers. If not, here’s what I learned:
Never Enough
Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
The last sentence hits hard. There’s always someone with more, how do you find solace in what you have?
How do you feel comfortable in not progressing to the next thing?
Tricky, as many of us got to this point by being aggressive on what’s next and next and next.
Getting Wealthy vs. Staying Wealthy
Buffett achieved his investment returns: how he found the best companies, the cheapest stocks, the best managers. That’s hard. Less hard but equally important is pointing out what he didn’t do. He didn’t get carried away with debt. He didn’t panic and sell during the 14 recessions he’s lived through. He didn’t sully his business reputation. He didn’t attach himself to one strategy, one world view, or one passing trend.
I’m getting better at adding red flags to “trendy” investments. Trends create bubbles.
More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.
A financially successful mentor of mine said “I sold my first company to feel comfortable, then held onto the rest. Let the value keep growing.”
Tails, You Win
At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”
It’s about the tail end. The few winners that make it up
We should always keep exposing ourselves to opportunities, hobbies, people, and experiences.
We just don’t know where the tail-end ever is.
Freedom
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.
This hits hard. Probably my favorite quote from the book.
Controlling your time is the highest dividend money pays.
Man in the Car Paradox
Humility, kindness, and empathy will bring you more respect than horsepower ever will.
I really like Morgan’s focus on finding fulfillment internally, instead of from others.
It feels good to have outside compliments and validation, but it’s also the shortest form of fulfillment.
Wealth is What You Don’t See
Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
That flexibility and control over your time is an unseen return on wealth.
Options, how do you create more options?
Save Money
Learning to be happy with less money creates a gap between what you have and what you want—similar to the gap you get from growing your paycheck, but easier and more in your control.
When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.
The discipline to self-correct overspending is very hard.
Pretty crazy seeing this in real-time on Ramit Sethi’s new Netflix show.
Reasonable > Rational
If you view “do what you love” as a guide to a happier life, it sounds like empty fortune cookie advice. If you view it as the thing providing the endurance necessary to put the quantifiable odds of success in your favor, you realize it should be the most important part of any financial strategy.
Invest in a promising company you don’t care about, and you might enjoy it when everything’s going well. But when the tide inevitably turns you’re suddenly losing money on something you’re not interested in. It’s a double burden, and the path of least resistance is to move onto something else.
If you’re passionate about the company to begin with—you love the mission, the product, the team, the science, whatever—the inevitable down times when you’re losing money or the company needs help are blunted by the fact that at least you feel like you’re part of something meaningful. That can be the necessary motivation that prevents you from giving up and moving on.
Longer quote, but I love it.
If I could apply this personally…invest in the edge I’ve built around topics over the last 10yrs.
Room for Error
Avoid single points of failure. A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.
We’re seeing this happen live with interest rates.
You & Me
Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to mostly short term. That process feeds on itself. As traders push up short-term returns, they attract even more traders.
Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.
Housing, cypto, NFTs, tech, any others?
The Seduction of Pessimism
Pessimism just sounds smarter and more plausible than optimism. Tell someone that everything will be great and they’re likely to either shrug you off or offer a skeptical eye. Tell someone they’re in danger and you have their undivided attention.
Doom and gloom is more viral. I’ve reduced heavy “breaking news” channels to just WSJ and Bloomberg.
When You’ll Believe Anything
The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.
There are so many financial opinions that once you pick a strategy or side, you become invested in them both financially and mentally. If you want a certain stock to rise 10-fold, that’s your tribe.
Have to always be careful around investments and “wishing” for returns to be true.
We all have incomplete views and want to fill in the gaps with narratives that align with our views.
All Together Now
Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future.
Reduce the gap.
Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the finance world.
When thinking about what I wanted next, part of that conversation was starting a business to sell it for more. I realized I wasn’t ready to pay for that. I didn't want to sacrifice my personal life again.
Wrapping it up:
Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. 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.
I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal.
—-Morgan Housel