Psychology of Money, Morgan Housel

Short, readable advice book by Morgan Housel
Covers financial thinking, room for errors
Unusually, covers spending within means, understandable “tail risk” stories
Plenty of insights backed up by stories
A focus on the power of stories and narratives
Recommended

Background

I follow Morgan Housel as he writes a readable blog covering investments and wider life and world thinking. He’s also a partner of the Collaborative Fund which is a type of Impact Investment fund (“tech for good”), which readers will know I have a keen interest. So I was intrigued to read what he had to say in longer form.

What I liked

The book is short (I read it in 2 hours). This is a good quality.

While a number of the ideas are already available in some form on his blog, the additional information, anecdotes and further detail are worth it.

Housel covers a few areas of “non-standard advice”. Concepts of:

-“having enough” - setting your own goal (not getting too greedy?!)
-The value of time (although I’d have liked more on the non-financial assets given how he links the two)
-Knowing the Game you are playing
-Room for errors
-”Barbells” in how you might think about money and investing
-That advice is always individual (like an architect or a doctor) so he can’t give you individual advice (I am always saying this too!) even though some principles hold

Morgan’s own investing strategy

He has about 80% in low cost index tracking funds and about 20% in cash. This works for him. The cash part gives his household more flexibility. (This might NOT work for you).

(This excludes his house and I assume investments in his own fund. As an aside, he mentions most money managers don’t have money in their own fund, which I find strange. Most of my wealth is tied up in my own fund and money manager should be expected to have a good amount in their funds).

Interestingly, this turns out to be very similar to what Warren Buffet consistently says to typical savers/investors. Buffet often suggests 90% in a low cost tracking fund (typically S&P500 he mentions, as Buffet bets on America) and 10% in cash.

What I learned

Figure out what “enough” is and stick to it.
Appreciate outliers/tail risks may well drive most of your returns
Be or aspire to be time rich
Spend less than you accumulate/earn to be wealth
Humility, kindness and empathy (over being flash)
Power of stories (both positive and misleading)
Know the game you are playing
Do not risk what you have, for what you do not need

Figure out what “enough” is and stick to it.

(This might move a bit through time) But many people go wrong getting greedy for more (eg ex CEO of Mckinsey) at some point true wealth comes from sticking to your goal.

Appreciate outliers/tail risks may well drive most of your returns

This is very true in venture capital investing or any portfolio idea. A very few unexpected events might drive most of your return (or loss). You should expect this. Also, be OK with being wrong a lot of the time.

In a crossover with arts learnings, he shows that comedians thoroughly test their jokes in small audiences first and only their best jokes survive to their main sets. Although, I’m not sure this says too much about tail risks but more about trial and error and practice in the real world. (It rings a lot with Nassim Taleb who is quoted on several occasions).

Be or aspire to be time rich

TIme wealth is valuable. Housel argues this is under appreciated as both a life goal and a wealth goal.

I would comment, I would have like further detail here on other “non-financial” aspects of wealth. This might not have been the book for it. But as I have written about, I like the idea of offsetting “risk” with what you have in your life in other assets like social, intellectual assets and hedging against your career risk. A very stable career might definitely want equities. A very risky career might want that cash.

Spend less than you accumulate/earn to be wealthy

Giving many stories, he shows that wealth is spending less than your household earns. And that a rich household can then do what it likes if it is earning/spending within its means.

Humility, kindness and empathy (over being flash)

He was a valet and never impressed with the drivers of flash cars even he might have been impressed with the cars.

Power of stories (both positive and misleading)

There is a cross-over in arts and creativity, but we make up stories to explain the past.

Know the game you are playing

Don’t play someone else’s game. No point competing for money for the sake of it or in someone’s other game. Although, there is a point in simply saving.

Do not risk what you have, for what you do not need

In a similar vein, don’t risk for more stuff. Especially if you don’t need that more “stuff” and even more especially if you are risking money you don’t really have (borrowings, leverage etc).

Overall I will end in Morgan’s words and then Buffet.

“…Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks.
Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you don’t see.
...the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.
Become OK with a lot of things going wrong...
Use money to gain control over your time...
Be nicer and less flashy….
...Save. Just save. You don’t need a specific reason to save….
...Define the cost of success and be ready to pay it. Because nothing worthwhile is free.
...Worship room for error.
….Avoid the extreme ends of financial decisions.
….You should like risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time. …
Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
Respect the mess. Smart, informed, and reasonable people can disagree in finance, because people have vastly different goals and desires. There is no single right answer; just the answer that works for you. ….”