“Investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their well-being, which will make even smart people nervous, greedy and paranoid.” Morgan Housel
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know”, said Morgan Housel. There’s an element of investing, the behavioral side, that exist as the most important aspect. How you think about greed and fear and risk is so much more important than anything that you can know or be taught or learn at university. “Knowing what to to do tells you nothing about what happens in your head when you try to do it.”
“Doing well with money is not about what you know, it’s not about where you went to school or how smart you are, it’s how you behave”, says Morgan Housel, author of The Psychology of Money. “If you don’t have control over your behavior, over your relationship with greed and fear, over your ability to take a long-term mindset, over how gullible you are and who you trust, who you seek information from, you’re not going to do well at investing.”
If you can master or have some grasp over the behavioral elements of investing, that really matters, according to Housel. There aren’t many other fields that are like that. Like, it would be impossible to say that somebody who has no medical training, no medical experience, no backup could perform open heart surgery better than a Mayo trained cardiologist, that would never happen. But the equivalent of that does happen in investing. That an untrained investor can succeed at investing.
The single most important thing that matters to long-term investing success and what separates great investors from investors who do OK or do poorly over time is understanding that volatility in the short run does not prevent or preclude successful long-term returns over time.
Motley Fool’s David Gardener says investing is “…like wearing the home team jersey to your game this weekend. Whether your team wins or loses, you’re going to keep that jersey on, not just through a bad game or a bad season, but for years and years.”
Markets over a long period of time are volatile in the short run. That’s the cost of admission that you have to be willing to pay to do well over time.
Finance is guided by people’s behavior
To grasp why people bury themselves in debt, you don’t need to study interest rates or economic trends; you need to study the history of greed, fear, insecurity and optimism, according to Housel. Everyone has their own unique experience with how the world workds. And what you’ve expereinced is more compelling and predictive than what you learn. No amount of studying or open-mindedness recreates the power of fear and uncertainty.
Until you’ve lived through the fear and uncertainty, and personally felt its consequences, you may not undestand it enough to change you behavior. In theory, people should make investment decisions based on their goals and the characteristics of teh investment options available to them at the time.
“If markets never fell, they wouldn’t be risky, and if they weren’t risky, they’d get really expensive, and when they get really expensive, they fall.” Morgan Housel
Bottom Line
“Whether or not you’re successful with money isn’t about knowledge, IQ or how good you are at math. It’s about behavior. And everyone is prone to certain behaviors over others.” Morgan Housel
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