Morgan Housel, The Psychology of Money

Morgan Housel believes that building wealth is more about behavior than anything else. Here are highlights;

1. “Doing well with money has little to do with how smart you are and a lot to do with how you behave”

Think about it for a moment. How much do you spend on important things? How much do you spend on things you don’t really need? Are you living below your means? These questions can tell you how you behave with money, and it is far more important than your income in determining whether you will become rich. Fix it.

2. “A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.”

Are you emotional with money? Emotions beat reason. The lesson was apparent: the most foolish way to make financial decisions is using your emotions.

3. “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

What if your business plan doesn’t work? Planning for the plan not to work is an important part of the plan.

4. “Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.”

No one cares that you bought that car as much as you did, no one cares that you bought that shoe as much as you did, no one cares that you bought that phone as much as you did. What’s the implication? Only buy the things you genuinely need; no one is impressed with what you have as much as you are. They can never get the excitement that you get.

5. “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”

Learn this lesson early. The ultimate value of money is that it should lead you to control your time. The financial decisions you make, especially work-related, are guided by this thought. If you can do work that will give you freedom over your time but pay less, you will take it compared to a job that will pay higher but steal all your time.

6. “Saving is the gap between your ego and your income.”

You could save more if you could cut down on the things to which you have attached your ego.

7. Compound Interest. Life is in compound interest. This excerpt on Warren Buffet does justice to this;

More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s.

Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.

Consider a little thought experiment.

Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.¹⁶

What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000?

And let’s say he still went on to earn the extraordinary annual investment returns he’s been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids.

What would a rough estimate of his net worth be today?

Not $84.5 billion.

$11.9 million.

99.9% less than his actual net worth.

Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years.

His skill is investing, but his secret is time.

That’s how compounding works.

Morgan Housel, The Psychology of Money