SUMMARY
From the first sentence to the last, this book provides the latest and most up-to-date evidence for financial literacy's wholesome power to enrich your entire life.
The author tells stories to discover financial literacy and living a good life go hand and hand. Most financial books discuss the dominated and respected quantitative side, the sophisticated science, complicated formulas, and mind-numbing statistics.
Reading the traditional personal finance genres
makes people erroneously think investors need to be intelligent and aggressive
to invest successfully.
The Psychology of Money is
courageously different. It is about life first and finances second. Don’t we
want to better understand our behavior, our sense of ourselves and what makes
us tick so we can achieve that vibrant and contented life? I know I do.
The author skillfully separates the easy part of discovering the investing process versus the hard part. This may shock newbies, but understanding the quantitative aspect of finances, such as constructing a diversified portfolio of low-cost index funds, is the easy part.
Look, it is not the little guy or gal versus the massively intimating stock market with the macho goal of beating the average returns. Instead, this book is about understanding our behavior and the decisions we make to achieve a balanced and calm life with accepting reasonable stock market returns.
Now that’s the hard part! But this author
makes understanding our behavior achievable and interesting. He accepts
whatever skills, experience, or knowledge readers bring to the table.
The
author brings up an age-old adage that we have been taught by our elders for
generations—don’t take things so personally! With life's many challenges and
sometimes negative surprises, isn't it about how we react that counts? Instead,
if we respond with wisdom gained from our experiences over the long haul, the
challenge itself will eventually be insignificant.
The author explains that our reactive behavior, whether the sudden death of a loved one, a broken water pipe damaging our house, or a stock market crash, how we respond to each of these vastly different crises is no different.
As a reviewer of this outstanding book, I took the liberty of interpreting the primary theme with my examples. With the death of a loved one, we can blame the doctors, the hospital, and isolate from friends and family, and sob over beers for the rest of your life as a lonely and bitter widow or widower, or you can blame the stock market, your broker, or valueless Wall Street for your portfolio loses. For example, it is well known that millions of investors reacted negatively for over a decade.
They sat out with their two to three trillion of the longest
bull market in history because they lost money in the 2008 financial crisis.
So, no matter what the experience, isn't it always how we react? This book
would help those unfortunate investors pull themselves and their portfolio
together to get back in the market.
To
bring mindfulness to our reactions, the author talked about investors'
emotions, attitude, and temperament. To be successful in this counterintuitive
financial system is to be aware and insightful of this powerful psychological
human potential—your expectation of future returns. The Goldilocks Principle
doesn't have too high return expectations or too low, but somewhere in between.
But what is a reasonable expected return?
The
author reports one of the most significant FACTS of the entire book: The United
States Stock Market Returns 6.8% after Inflation. Allow me to repeat, 6.8%.
According to the author, our United States capitalistic system produces about 6.8% return minus inflation since the 1870s (3.1% average inflation generates a total return of 9.9%). It is the law of averages, and it is powerful if we know how to tap into it and to be 100% satisfied with average returns (It has been researched many times that too many investors fail to get average returns).
Morgan explains how to harness this massive industry and what strategy will get
you the average return. The goal is to earn the average return over many years.
Why? Two reasons:
1. 6.8% return over inflation is a great return!
2. Because our emotions will be spared the negative reactions from the massive
swings (volatility) of the stock market which will set you up to panic and “get
out.”
This book will help you find that "just right" balance of your investments and your mind so you can sleep soundly with confidence and reach your financial goals over long periods of time.
There is no get rich quick scheme. If a
financial adviser or your best friend says that they can beat the averages,
walk away, and never listen to that nonsense.
Housel encourages all investors by debunking one debilitating myth from the
start. All you need to be a successful investor is patience, think long term,
and one tiny piece of mathematics, the power of compound interest over decades.
You do not need an MBA or a high IQ! In fact, for the newbie financial reader
with no financial background or smarts, take heart, you have an advantage. He
wrote: "Ordinary folks with no formal financial education can be wealthy
if they have a handful of behavioral skills that have nothing to do with formal
measures of intelligence."
That's me! I have never taken a financial course in my life. I flunked 2nd grade and I scored a lower than 100 IQ. But I had a huge advantage because I majored in psychology. Knowing how my mind functioned, I mitigated my return expectations of the market and drama during three of the biggest stock market crashes in history.
My expectations for growth and losses are reasonable, balanced between
stocks and fixed because I knew what the world-wide stock market returns since
1870. With my mind disciplined to stay the course forever and to do what I can
do—control the real deal by keeping expenses low and be extremely happy with
reasonable returns. I have perfect control by paying myself instead of some
Wall Street mucky muck's yacht.
For years, seasoned investors poo-poo psychology (read the one and two-star reviews of this book). There is at least one huge exception. One of the most significant financial thinkers of the 20th century and the mentor and professor of Warren Buffett.
Ben Graham wrote said in the very first paragraph of his monumental
623 page The Intelligent Investor, "…little will be said here about the
technique of analyzing securities; attention will be paid chiefly to investment
principles and investors' attitudes." (1973 revised, page 1).
The
author had the great wisdom to cite a book titled “Enough” by the legendary
John Bogle. Morgan tells stories of people "hit it big" (IN THE
BILLIONS!). It wasn’t "enough." They want more, and in the end, they
lost it all. Bogle’s most famous quote to get the market averages mentioned
previously is to invest in the “entire haystack, do not look for the needle.”
The author makes an important statement that is long overdue and worth repeating—the qualitative discussions of investing is more complicated than the quantitative discussions.
It is humans that make the decisions and do all the trading on the stock exchanges throughout the world. Last I heard, humans have feelings. Housel says that science is exact and is governed by predictable physical laws. Molecules and atoms do not have feelings! But millions of investors do! Sir Isaac Newton would agree.
He famously lamented after losing his
investments to the South Sea Disaster in the 18th century, "I can
calculate the motion of heavenly bodies, but not the madness of people."
Knowledge of psychology and behavior will help you understand and protect
yourself from the "madness of people."
The author covers a lot of ground because there is a lot of human behavioral
and psychological constructs to explain. Luck vs. skill, attitude vs. math,
being average vs. being superior, uncertainty vs. certainty, and confidence
born from wisdom vs. overconfidence born from recklessness are impossible to
measure and explain.
The author correctly labeled these constructs “soft skills” (Hard skills are the math, statistics, graphs, and tables). Luck, attitude, accepting average returns, uncertainty, long-term horizon, and overconfidence are difficult to explain without emotional pushback from some investors.
Most seasoned investors want to be intelligent, act aggressive,
appear confident, and look sophisticated and soft skills will not get them that
image and beat the market.
We love to think successes originated on skills, knowledge, intelligence, spreadsheets, and math. The most vital reaction to many seasoned investors is downplaying luck to investment success. But Morgan won't have it.
Making money
from stock and bond investing is being smart with the complicated reality we
face, and spreadsheet knowledge will not be enough. That being lucky is part of
the equation. He admits that the luck factor is the question that might not be
answered in our lifetimes.
In the meantime, there is nothing wrong with being lucky. The returns are green too. But most seasoned investors feel insulted. Warren Buffett always reports that he is an incredibly fortunate investor born in the United States.
I am
lucky that I am alive after contracting stage two colon cancer twenty years
ago. Any one of us could have been born in a small village in India in abject
poverty, a shantytown in Lima, Peru, or one of our country's public housing
projects.
Unfortunately,
I gave the book four stars. There was one paragraph that does not belong in the
book. I was disappointed. I agree that I might be petty, but that paragraph
doesn’t make any sense because it doesn’t follow the narrative throughout. On
page 218, I rewrote here for those who use the indexing strategy, especially
Bogleheads:
“That doesn’t mean index investing will always work. It doesn’t mean it is for
everyone. And it doesn’t mean active stock picking is doomed to fail. In
general, this industry has become too entrenched on one side or the
other—particularly those vehemently against active investing.”
Did the Author Lose His “Psychology” for a Moment?
I scratched my head and seriously wondered, has the author lost his mind? What in the world motivated the author had to write this when he shares how he invests, and it’s just like most Bogleheads and myself invest with low-cost index funds? I believe I can speak for most Bogleheads: of course, we are “vehemently against active investing!” It’s expensive and flawed is thoroughly agreed upon by genuine fiduciary financial advisers. Furthermore, there are books, peer-reviewed academic articles, and the Bogleheads’ forum experiences of how successful the indexing strategy has been overactive management.
The author
admits on the following page that 85% of active managers fail to beat the
averages! The active management strategy has been proven dead for decades, and
the author’s stories debunk active management. Over 35 million investors have
their seven trillion dollars with Vanguard and TIAA. We know that active
managers from Wall Street’s big banks and brokerage firms spend a lot of time
sipping martinis on their yachts.
Other than that hideous paragraph, The Psychology of Money is a fine book because it makes a huge contribution to financial discussions and what it means to be financially literate. The qualitative argument of financial literacy is desperately needed in the financial world.
The quantitative argument is appropriate for constructing your
portfolio and understanding how markets only return 6.8% average for 150 years.
I learned a ton by reading those books too. But after that, no amount of math,
sophistication, financial engineering, or science will protect investors from a
bear market. Only what is between our ears will. Investors must get our heads
behind the idea that we are up against a massive industry that wants to use our
money to make money for themselves.
The industry is playing a totally different game, different motivation, and most important different life values—they spend 24/7 in front of their powerful computers trading for two goals only, bonuses and beating the averages.
I have one more example of luck--We are lucky that Morgan Housel wrote this important work. It is not about looking at your finances 24/7, searching for that investment “gem” that will make you rich quickly or to compete.
At the end of the day, it is about doing our part in making the world a better place than it is now, being generous to those in need, be part of something bigger than yourself, and spending quality time with family and friends.
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