Hridoy Ahmed
on June 7, 2022 49 views
The Psychology of Money by Morgan Housel
#book_summary_part_one #Morgan_Housel
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
Mentions Ronald Read who worked as a janitor and acquired money over his life. Surprisingly leaving 8 million dollars when he passed. This compares with Richard Fuscone who was a hot shot Harvard trained investor who became greedy and lost all his money filing for bankruptcy. Education is still important but financial outcomes are driven by luck, independent of intelligence and effort. Argues the difference between these two is a soft skill, where how you behave is more important than what you know..
Interestingly when you are born relates a lot to how you invest your money. If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later in life compared to those who grew up when stocks were weak.
So, perhaps surprisingly, an individual investors’ willingness to bear risk depends on their own personal history - not intelligence, education, or sophistication.
The lowest-income households in the U.S. on average spend $412 a year on lottery tickets, four times the amount of those in the highest income groups. It is of note that forty percent of Americans cannot come up with $400 in an emergency. Therefore, those buying $400 in lottery tickets are by and large the same people who say they couldn’t come up with $400 in an emergency. They are blowing their safety nets on something with a one-in-millions chance of hitting it big.
You may think this is bizarre but buying a lottery ticket is the only time in some people’s lives they can hold a tangible dream of getting the good stuff that (hopefully) you already have and take for granted. In other words paying for a dream, and you may not understand that because you are (hopefully) already living a dream.
Few people make financial decisions purely with a spreadsheet. They make them at the dinner table, or in a company meeting. Places where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together into a narrative that works for you. It’s hard to quantify luck and rude to suggest people’s success is owed to it, the default stance is often to implicitly ignore luck as a factor of success.
Economist Bhashkar Mazumder has shown that incomes among brothers are more correlated than height or weight. If you are rich and tall, your brother is more likely to also be rich than he is tall. Thinking about it intuitively it is true—the quality of your education and the doors that open for you are heavily linked to your parents’ socioeconomic status. Although if you ask two rich brothers it is unlikely they will think the study’s findings apply to them!
When compounding isn’t intuitive we often ignore its potential and focus on solving problems through other means. Not because we’re overthinking, but because we rarely stop to consider the potential of compounding. Whereas, Warren Buffet has been investing consistently for three quarters of a century using compound interest. The tactic is “just shut up and wait”.
Bear in mind Nassim Taleb’s advice: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid ruin. At all costs. Bear in mind 4 in 10 public companies fail over time this is a common story, don’t let this be you.
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