The psychology of money lessons by Morgan housel

The Psychology of money key takeaways and lessons
The Psychology of money key takeaways and lessons

Have you heard the story about Ronald Read, the janitor that had 8 million dollars in savings when he died in 2014?

Yes, you heard that right. Janitor. $8 millions. And he didn´t win the lottery or inherit the money either. He just saved consistently throughout his life, while letting the wonders of compounding do its thing. The moral is that your

behavior with money is oftentimes more important than how intelligent you are.

Even if you don´t have a diploma from Harvard, or work on Wall Street, you can become rich by just behaving in a sound way. As Morgan Housel puts it:

“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”

~ by Morgan Housel

Spend your next ten to fifteen minutes on this article , and you might excel on the soft skill of investing!

This is a top 5 takeaways summary of The Psychology of Money, by Morgan Housel.

Takeaway number 1: Pay the price

Let´s say you want a new, nice, watch. You go to the store to check out the offerings. You are really after something that will impress your friends and the lovely lady you are dating. You now have a choice: either pay for the watch, or steal it and run. Because you have done your cardio, right? My guess is that you would choose option number one – no matter your physical capacity. You would take out your card and swipe that thing; do the right thing.

The point is that you know that having a new watch comes with a price, a fee. And it’s just the same with investing; it comes with a price too. Throughout the article, there are some reoccurring takeaways for high returns; one of them being a somewhat concentrated portfolio with Peter Lynch perhaps being the exception.

The concentrated portfolio brings with it a characteristic to your performance; it will be volatile. This is the price, the fee, for having high returns in the stock market over the long-term. If you don’t have the stomach to stay the course when your net worth decreases by, say, 20% during a single week, as two of your major holdings report quarterly earnings below what analysts expected, don’t aim to maximize your returns; because the higher the returns, the higher this fee typically is.

Let´s say you already 10 years ago could visualize Netflix’ bright future. You invested a large portion of your net worth in the stock. Well, then you would be quite a rich person today! However, could you afford paying the price for this journey? Netflix has, during this period, had many major downturns. Would you have sat still in that boat during 2011 when Netflix lost tons of customers, and the stock price fell 80% from its peak during the ensuing months? Your portfolio returns would look terrible.

The psychology of money , pay the price , example Netflix stock
Netflix stock price from 2002 till today , Jul 2011 with drop of 80%

What would you tell your spouse and your kids? Could you stomach facing them knowing that you might just have endangered their future? Would you still think that being almost all-in Netflix is a good idea? This is of course an extreme example, but even if you have something less extreme than an all-in Netflix approach to investing, you’ll have to pay the price of volatility nonetheless.

Let’s say that you bought an S&P 500 index fund in 1980. You’d still have to face about 13 years combined when your investment portfolio was down 20% from its high. And about 8 months when it was down 50%. That’s tough! Stock-market investing is a great thing, that enables wealth creation like few other options. But don´t try to fool yourself – it doesn´t come for free.

All investors will experience volatility; and you have to look at it as the price you pay for a brighter future.

Takeaway number 2: Never Enough

“ It’s a very interesting phenomenon that you can hand somebody a $2 million bonus, and they’re fine until they find out that the person next to them got 2-million-1, and then they’re sick for the next year. “


Capitalism is great at doing two things: generating wealth and generating envy. The urge to surpass your neighbours, peers, and friends, can help energize your hard work and strive to really “make it”. And of course, being motivated into becoming more productive and doing meaningful work is a good thing, but social comparison can also cause us to feel like we’re never enough.

Let’s look at some statistics. To belong to the top 1% highest income earners in the US, you’d have to earn somewhere around $500,000 a year. That’s what a highly specialized doctor, let’s call him Bill, earns, and by almost any standard, Bill would be considered rich. He can afford to drive nice cars, go on long vacations to exotic countries, perhaps hire someone to do work which he thinks is tedious, etc.

Bill has been feeling about himself and what he has achieved financially in his life. Well, that was until he bought a vacation home in the Hamptons and realized that he had Stan as his neighbour. Stan belongs to the top 1% of the 1%. He is a CEO of a quite large public company, and earns a staggering $10 million per year.

Now, you’d hope that at least Stan would be satisfied with his financial achievements, but nope! This guy was a childhood friend of Michael Jordan, and this all-time great basketball player is someone who belongs to the 1% of the 1% of the 1%.

And well, compared to Michael’s fortune of about $2b, Stan’s yearly salary of $10m suddenly seems like peanuts. Does it end here? Well no, it doesn’t. Because Michael occasionally attends parties with celebrities where a guy named Jeff Bezos shows up. Bezos is in the top 1% of the 1% of the 1% of the 1% and he increased his net worth by about $75b in 2020, now sitting at something like $200b.

The psychology of money , lesson : never enough , example of top 1% of rich
Wealth comparison of Richest people

There’s always a bigger fish. The type of envy which has emerged from comparisons of this kind has caused a lot of people to do foolish things throughout history. Some have leveraged their portfolios to the teeth in order to move up to a higher pyramid, just to lose it all and then commit suicide.

Some have acted on insider information and lost both their personal reputation and then later their freedom when they’ve gone to jail. Many have forsaken their families and then had their partners leaving them or cheating on them (or both) as a result.

you need to, at some point, accept that enough is enough.

“We will not trade something that we have and need for something that we don’t have and don’t need, even if we’d kind of like to have it.”- Warren buffett

Takeaway number 3: Crazy is in the eye of the beholder

At a first glance, it seems like a lot of people do crazy things with their money. Some spend it in ridiculous amounts on ridiculous items, and others hide it under their mattresses. But the thing to remember is that people come from different backgrounds with different childhoods, different parents, different life experiences and different educations. All this adds up to different perspectives and values.

What seems crazy to you might make total sense for me. Morgan uses the example of lottery tickets in the book:

the lowest income households in the US spend more than 400 dollars per year on the lottery. This is 4 times more than the average in the highest income group. Combine this with the fact that more than a third of Americans cannot come up with 400 dollars for an emergency. Do these people spend their emergency buffer on lottery tickets? Seems crazy, doesn´t it? But again; we don´t have the same perspective as individuals.

Try to see it from their perspective; they live paycheck to paycheck, with little room to save money, they often lack education and thus a nice career trajectory they can´t afford a nice vacation or a new car, and they can´t put their children through college without a mountain of debt.

Buying a lottery ticket is their way of buying into the dream that many of us already live. That is why they buy more lottery tickets than we do.

Not so crazy after all perhaps? So, how does this make you a better investor? For one thing, by acknowledging that we are different, we become less tempted to copying an investment portfolio or strategy which doesn’t suit our own goals.

For example, our own risk-profile might be higher than a billionaire, as our own focus is more on the “getting rich part”, and not so much about “staying rich”. Copying the billionaire’s portfolio might be suboptimal for your goals. Acknowledging differences can also help us to say no more easily to investments that are outside our own circle of competence.

Take Gamestop for example. As I am not a trader, I didn’t participate in this drama at all. It is simply not my card to play. Understanding different peoples’ perspectives, or at least that there are different lenses to see the world through, will help you make better sense of our society and lead you on the path that is yours.

Takeaway number 4: Peek-a-boo:

What does the Great Depression, World War II, the financial crises and Covid-19 all have in common?

  • They were all events which shaped our society,
  • they had huge impacts on the financial markets, and
  • they were pretty much impossible to foresee.

Nassim Taleb, who is one of my favourite authors, would refer to these event as Black Swans. The definition of a Black Swan is that:

  1. It’s an outlier. Nothing that has happened before can convincingly point to even the possibility of the event.
  2. It carries an extreme impact.
  3. It becomes explainable after the fact. Human nature fools us into believing that we should have been able to know it would happen all along.

Imagine it is Black Monday 1987. How would you have reacted to the market loosing almost one fourth of its value in one day? Would you have been one of the individuals that shouted: “SELL! SELL!” or would you have been able to weather the storm, perhaps putting in additional chips which you’ve kept on the side-lines?

The psychology of money, lesson Peak-a-boo , there's always a bad news example of DOW jones return
1987 Dow jones industrial average chart

Here’s an interesting fact: If you invested in the S&P 500 index 20 years ago, but you missed out on the 4 best performing stock market days, you’d have a 164% return instead of 291%. That’s quite a big difference. The moral of this takeaway is that it is more useful to prepare yourself, both mentally and financially, for a disaster which you cannot foresee than hoping that you’re able to react before everyone else.

The psychology of money , takeaway lesson peak-a-boo , negative news vs positive sentiments
S&P500 chart comparison staying invested vs missing only 4 days !

Stop listening to macro projections, the things that will cause big fear among the investment community in the future are the things that are unlikely to be foreseen anyways.

Takeaway number 5: The seduction of pessimism

 If I were to give you a bunch of reasons to why the market will crash later this year, mentioning the gigantic US governmental debt, that stimulus checks may lead to the return of inflation, and perhaps something about new strains of Covid-19; you would most likely be intrigued, and perhaps end up with quite a negative view of where in the market cycle that we are at the moment.

Were I instead to give you examples of why things probably will continue to get better, by showing how life expectancy is rising, how sustainable energy is getting cheaper or how computing power is exploding, you would most likely just shrug your shoulders and not think twice about it.

We all know that the pessimistic person sounds so very intelligent, and the optimist sounds naïve in comparison; why is that?

Daniel Kahneman, the author of Thinking Fast and Slow, says asymmetry towards loss and listening to pessimists is an evolutionary trait;

“When directly compared or weighted against each other, losses loom larger than gains. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

We tend to listen to pessimists more carefully, not only for evolutionary reasons, but also because progress happens much slower than setbacks do. Progress rarely happens overnight, but setbacks often does. Because tragedies and setbacks happen during much shorter time-periods, its much easier to create an intriguing and persuading story around it, and thus it receives more attention.

To create an optimistic story about the future, we must look at longer time-horizons. This often becomes more vague and less dramatic. Knowing that you will perhaps be more fascinated by a pessimist, and less so by an optimist, can perhaps help you becoming less asymmetric towards it in the future.

The world is better than you think, as Sweden’s Hans Rosling would have said.

So. you are not going to get rich in the stock market without paying the price of volatility – Envy is the worst of the seven deadly sins. Never risk what you have and need for what you don’t have and don’t need. – Different perspectives cause different courses of actions to be reasonable or rational.

Instead of trying to foresee disasters prepare yourself mentally and financially so that you can survive them; and – Be careful when taking investment advice. Understand that pessimism appeals more to your survival instincts than optimism does.

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