The Psychology of Money, Timeless Lessons on Wealth, Greed, and Happiness, by Morgan Housel, uses a simple, but powerful, story-based approach to illustrate key concepts about managing money. This book is more about the behavioral aspects and biases around money – do not expect deep dives into valuation, equations, or stock analysis.

My notes are organized into two parts:

1. 5-things-I-learnt-from-this-book – which is a quick one or two minute read.
2. Summary-of-this-book – a more detailed review / book review summary, which may take a few more minutes to read.

These are the ‘5-things-I-learnt-from-this-book’:

1. Your personal experiences with money colors your view: Understanding your personal experiences and economic background goes a long way in understanding how you view and manage money. Note that 80% of your view on money is formed by personal experiences which may account for only 10^–7% of what all is there to understand about money.
2. Luck and Risk: Be cognizant of luck and its sibling risk. Nothing is as good or as bad as it appears. One should focus on broad patterns rather than glorifying success or looking down upon failure.  
3. The Power of Compounding: Fun fact – Had Buffet invested just between the age of 30 and stopped investing to retire by 60, his net worth would have been c. $12 million and not c. $84+ billion (as of the year of publication 2022). This is attributed to the Power of Compounding, and not just great investment decisions alone. Stay invested for a long time for this power to work.
4. Wealth is What You Don’t See: Understand the difference between being rich and being wealthy. Wealth is income not spent.  
5. Control what you can – Focus on Saving: Recognize that you cannot control investment decisions and returns, but you can certainly try to control what you save. In addition to time, the extent of saving is what you can truly control on your investment journey. In simple words, in the equation A = P (1+r%)ⁿ, you cannot control r%, but you can reasonably try to control P and n.

The book is enriched with a lot of stories and examples to illustrate various points effectively. Examples around Bill Gates, Ronald Read, and many others are very pertinent to the concepts discussed.

Read the following detailed summary to know more.

Summary-of-this-book:

For a more detailed read across, enjoy the chapter-wise summary here.

Introduction: The author says one can understand more about money through the lenses of psychology and history, beyond just finance. He illustrates two examples – one is that of Ronald James Read, a janitor who died with a net worth of US $8 million from savings invested in bluechip stocks that compounded over decades; the other example is that of a top notch tech executive who was a show-off with money and went broke. The author lays out that the objective of his book is to emphasize the soft skill of managing money than the technical side.

No One’s Crazy: The core message here is that your personal experiences determine how you think money works. For example, those who grew up in a high inflationary environment were likely to invest more in stocks than bonds. While one can read a lot of history, the perspective changes when you have to actually live through a major event and face the consequences.  

Luck and Risk: An excellent example is presented to acknowledge that luck and risk are omnipresent in life and to understand that nothing is as good or as bad as it seems. Bill Gates was fascinated with computers because his school had access to a computer – which was a 1-in-a-million chance. Bill Gates’ close friend, who could have been a co-founder of Microsoft had he lived, was just as brilliant, but died in a mountaineering accident – again a 1-in -a-million chance. This drives home the point that two individuals, with almost the same skills, experienced the opposite sides – luck and risk. History seeks to glorify success and deride failure. But, it is best to focus on broad patterns and scenarios instead of focusing on specific individuals.

Never Enough: It is important to acknowledge that there is no reason to be overly greedy. Learn to respect what you have. Avoid social comparisons. Acknowledge that ‘enough’ is not too little and that there are many things not worth risking, no matter the potential gain.

Confounding Compounding: The author points out the examples of Warrant Buffet and computer storage to describe the Power of Compounding. Case in point – Buffet has been investing for three-quarters of a century, and $ 81.5 billion of Buffet’s $ 84.5 billion net worth came after his 65^th birthday.

Getting Wealthy vs Staying Wealthy: The lesson to the reader is that while getting wealthy is important, the way to stay wealthy is a combination of frugality and paranoia. To quote the author – ‘Be optimistic about the future but paranoid about what will prevent you from getting to the future’; ‘Planning is important, but the most important part of every plan is to plan on the plan not going according to plan’.

Tails, You Win: Like in life, in investing too, a few events (tails) drive a significant portion of the returns. Take, for example, venture capital (VC). If a VC firm makes 50 investments, half may fail, 10 may do well, but one or two may yield bumper returns. Similarly, in an index, 40% of the companies were failures, 7% really performed extraordinarily and delivered most of the index returns. Tail events are key to success. It is important to stay the course – you can be wrong half the time and still make a fortune.

Freedom: The core tenet of this chapter is that the highest return money gives is the ability to control time and do what you want.

Man in the Car Paradox: The lesson conveyed in this chapter is that humility, kindness, and empathy is what drives respect – not owning expensive possessions like large cars.

Wealth is What You Don’t See: Much of the message in this chapter is summarized in one line – there are a lot of people who look modest but are wealthy, and there are people who look rich but live at the brink of insolvency. Do not use leverage to become wealthy.

Save Money: The powerful message here is that the easiest thing to do is live within your means and save money. This is much simpler than working many hours a week to add a tenth of a percentage points to your returns. Saving more gives you flexibility in life.

Reasonable > Rational: It is important to note that being reasonable is perfectly ok as compared to being absolutely rational. It is important to focus on minimizing future regret.

Surprise: The author discusses a few examples where a handful of people (such as Stalin, Mao) and  handful of events (such as The Manhattan Project, ARPANET) have changed world history. It is important to note that surprises will occur and history can be a misleading guide to the future. It is important to abstract the generalities and draw your lessons. Specifics should be treated as examples than being the only source of drawing inferences.

Room for Error: The most important lesson conveyed here is that the margin of safety / room for error is very important. It helps one remaining standing and surviving for long enough for your bets to pay off. While you may take risks, one should always be completely averse to the chance of ruin. It is important to be aware of single points of failure.

You’ll Change: The core message of this chapter is that our goals and ambitions change over time and therefore our plans should be updated to be in line with such goals.

Nothing’s Free: It is important to understand that investing success goes hand in hand with volatility of returns – view volatility as a fee and not as a fine. The author illustrates several examples – between 2002 and 2018 Netflix stock returned 35,000%+, but traded below its previous all-time high on 94% of the days. Over the long run, be mentally prepared to see even 20% decline in the market.

You & Me: The author explains the underlying reasons behind price bubbles in markets, driven by the momentum of short-term returns fueling money to shift from long-term to short-term return-seeking behaviors. The author advises to steer clear of one-size-fits-all advice, since different investors have different goals and timeframes.

The Seduction of Pessimism: The primary message here is that pessimism attracts more coverage and eyeballs than optimism. Progress is slow and less celebrated, but setbacks can be fast and well-publicized.

When You’ll Believe Anything: The author cautions that we tend to believe stories that are in line with our expectations. When people do not understand something, there is a tendency to come up with an explanation that is biased by one’s own perspective and experiences, though the same may not be entirely correct. The core message is not to get overconfident in one’s beliefs.

All Together Now: In this chapter, the author summarizes key recommendations that can help people make better decisions with money.  A few of these are called out below:

• Less ego, more wealth.
• Manage your money in a way that helps you sleep at night.
• Time horizon is the most important variable as an investor.
• Save – you do not need a reason to save.
• Worship room for error.

Confessions: The author recounts his personal experience toward savings and investments. The author typically invests money in a combination of US and International Index funds. His overall outlook is based on a high savings rate, and an optimism about the global economy.

Postscript: A Brief History of Why the US Consumer Thinks the Way They Do: This chapter is a very good narrative of the US Consumer behavior since the end of World War II, Household Debt, how rates have moved, and how the nature / structure of the economy has changed, resulting in sentiments around people’s expectation.

Closing notes: ‘The Psychology of Money’ is a behavioral, mindset-based perspective on money, peppered with very interesting examples to drive home the key messages. Happy reading!

Credits: The Psychology of Money, by Morgan Housel.