Do you believe that the experience you have with money is just about 0.00000001% of what’s happened in the world of money. This post is about the book which I read recently “The Psychology of Money” by Morgan Housel.
Book is not about any technical stuff you don’t understand about money or a quick method to make you rich. It’s how to and how not to handle the money that helps you to manage your Wealth, Greed, and Happiness.
And this will be not like a book review, I haven’t covered completely about this book. I am going to share the things I’m going to use in my life and the beauty of this book is the things shared are not only applicable to managing your money but can also be helpful in most parts of your life (so, read with both views in mind).
Let’s get started.
Take risks when you’re winning
I would like to share two examples from the book about amazon and Netflix in taking risks.
Amazon – In 2014, Amazon launched Firephone which was an utter flop. Jeff Bezos shared with his shareholders after the disastrous launch of Firephone, “ If you think that’s a big failure, we’re working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.”
Amazon was good to fail at that time because they were making a good profit in Amazon Web Service (AWS) so they can offset the fire phone loss with AWS profits.
Netflix – CEO Reed Hastings announced his company was canceling big-budget pictures and added “Our hit ratio is way too high right now. I’m always pushing the content team. We have to take more risks. You must try more crazy things because we should have a higher cancel rate overall.”
Likewise, try to take risks in your investment when you are winning not when you are losing. You’ve got to take risks when you have booked enough profits to compensate for the loss you’re going to make, not in a portfolio that is already in the red.
Stop moving your “Goalpost”
The hardest financial skill is getting the goalpost to stop moving. Let’s say you’d decided to do a swing trade in a stock, and your expected return is 8%, the stock reaches 8% in 1-week and now your greed tells you to go for an additional 2% more since you’ve got in 1 week and by next week the stock tanks to -2% due to any negative news.
If you had a good enough mindset, you will be exiting from the stocks when it hits 8% and not holding for an additional 2%, making a loss and regretting it later.
We all need to have an “enough” attitude in investment as well as in life.
If you’re moving your goalpost every time after reaching your goal it means you’re taking greater and greater risks each step.
Remember, Happiness is just a result minus expectations.
Keep the odds in your favor
Our short-term failure in our investments ( during a bear market) should not affect our day-to-day financial situation.
Investing all the amount in equity without having any emergency fund or savings.
When you need the money at that time your portfolio will be in the red and you’ve no option but to withdraw from it for a loss.
Play safely by investing the amount which you can afford to lose ( the money which you don’t need for the next 5 years) so we can keep on running for a long time until the odds are in our favor (a Bull Market).
Cash is the king – always
No one wants to hold cash during a bull market, everyone wants the extra penny sitting idle in their bank needs to make money during a bull market.
If the money is in the bank, they may give you less than 3% at the end of the year but investing in stock during a bull market can give you 3 to 4 times more returns than banks.
But think of it if all your money is invested, and the market shifts to the bear zone. You got an emergency expense and you’re withdrawing from the stocks for a loss. When you compare the amount withdrawn, your invested amount will be more than that due to losses.
In the same scenario, you’re sitting on enough cash, and you can handle the expense with the cash in hand. Here, cash is the one that prevented you from selling stocks during a bear market.
Now the actual returns you earned from the cash is not less than 3%, it could be many multiples of that. It’s true that cash is king.
Don’t follow extreme examples
We all make a mistake when following people, they will be extremely successful people who are known for their extreme success.
When following extreme examples like the billionaires and the CEOs, their outcomes are also extreme and the chances of using their strategy in your life will be extraordinarily little or sometimes no use to you.
“The man who can do the average thing when all those around him are going crazy.”
There are plenty of people around us choosing average investment options and making wealth, the good thing is they’re accessible to you in the form of PMS (Portfolio Management Services) and financial advisors.
Follow them instead of trying to emulate Warren Buffett or Rakesh Jhunjhunwala investment success pattern, which is hard, because their results are so extreme.
Have no sunk costs
There was a writer called Daniel Kahneman. When authoring his book “Thinking, fast and slow”. He works endlessly on a chapter and completes it. But the next day, he comes with a new final version which will be completely different from the one he finalized the day before.
When asked Daniel, how could you start again like if you have never written an earlier draft and he said, “I’ve no sunk costs”.
Sunk costs mean anchoring to the decisions you made in the past and not changing them. It’s equivalent to a stranger making a major decision for you and you stick to it.
Take your investment, there’ll be many wrong investments you made in your life – it can be picking a wrong stock or mutual fund which is not performing well or like this post “don’t invest your money here”.
A different person (past you) made the decision, but you’ve got to accept that you’re wrong and quit there. Instead, stick to it for sake of being invested there.
Returns are not going to make you rich
Morgan Housel pinpoints the one thing which I already believe – you can’t build wealth with the returns you get from your investment.
I usually don’t mind the return percentage of my investment. Then what? Yes, returns are the reason to invest but my view on returns is different. The Sensex average returns for 30 years are between 13 to 18 %, if I invest in Sensex for 30 years, then my expected returns will not be 13 to 18%, it will be less than 8%.
My controllable variable here is the “Principal” amount which I invest – it should be massive, as huge as possible. Always remember, the principal is the one who is going to make you rich not returns
I didn’t know this at my initial stage of investing. If you have a mindset of becoming rich with your returns from investments, change it now.
Room for error
With my above statement of expecting a Sensex average return of less than 8% for 30 years is the space given to my room for error. We can’t expect the same thing (13 -18%) to happen again, room for error gives the endurance to play the game for the long run with low expectations, and whatever I’m going to get above 8% is a bonus for me.
“The best way to achieve felicity is to aim low,” says Charlie Munger.
Will you be able to face volatility of -30% in your portfolio (speaking of that look at my stock portfolio when it was at -9% ). On paper, you may say yes for -30% but in reality, you can’t handle the mental stress of it. Your confidence goes down, you think you’ve made a mistake and it won’t give you the guts to invest again.
This is where room for error needs to be used, before making such an investment you must ask yourself, “I may feel okay with the loss in digital format, but will I be able to handle the emotional distress if the investment goes wrong.”
These are the few things I’m going to use from the book. I hope my takeaway from the book “The Psychology of Money” will be helpful for you to handle both money and life.
Have a wealthy week,
My fav words from “The Psychology of Money”
- Optimism sounds like a sales pitch, Pessimism sounds like someone trying to help you.
Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.
I can afford to not be the greatest investor in the world, but I can’t afford to be a bad one.
“I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.” —Brad Pitt accepting a Screen Actors Guild Award
Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.”