The Psychology Of Money

Timeless lessons on wealth, greed, and happiness By Morgan Housel

Book Summary

He was a former columnist at the Motley Fool and Wall Street Journal. Currently a partner at Collaborative Fund an investment firm with a few notable companies you may know about Lyft, Kickstarter and Beyond Meat so he knows a thing or two about money.

He's Morgan Housel, the author of The Psychology of Money: Timeless lessons on wealth, greed, and happiness. The title pretty much says it all and the deep substance of his first book is giving us ideas to reflect on how we perceive this important resource and how to maximize our happiness with it.

Here are the top five big ideas from the Psychology Of Money:

Big Idea #1 - Reflect on your upbringing

Morgan found that our relationship with money stems from a mixture of our family upbringing, financial situation and the economic climate we were raised in. This especially holds true for a specific timeframe as young adults.

Let's say you grew up when the stock market crashed and their was a great depression. That great depression. The one where they reported that over one in five people didn't have a job. Stocks tumbled and in the dumps. However, you were upper middle class with a great family upbringing and relatively stable financial situation. During this time you may feel that saving was the better choice rather than investing your money into stocks or businesses. You would probably live most of your life thinking that stocks were too risky and avoid them.

What if I told you there was this crazy moonshot business around root beer. Would you invest it in? John Willard Marriott did. Two years before the depression he set up a A&W root beer stand. Here's a quick visual reference. Can you believe there were places dedicated for root beer? DELICIOUS!

John eventually opened up a few other food establishments even during the great depression and he kept on investing during this time. 

Here's the plot twist, John had two son's and one of them...guess his name... John Williard Marriott Jr. grew up to be a brave business man himself. So much so, he was one of the main reasons his father went from the restaurant food business into the hotel business. You guessed it, the Marriott empire are these folks!

As you can see from this example, our situational upbringings shape our perceptions and habits. If we take a step back and look at these objectively, we can see why we view money in certain ways which could in turn help us make better financial decisions.

Big Idea #2 - Determine your limits

You can't have money without capitalism. Capitalism creates wealth and, for some, unfortunately envy.

When you find out that Joe Shmo makes 20% more or just bought a new Tesla it can make some think - am I making enough? I am as good as Joe.

Comparing ourselves to those around us is a fools game and we end up on this hamster wheel of always trying to get more. Fine, we blow our brains out making more than Joe Schmo at 10% and we got ourselves two Teslas but then there's Joe goes out and buys a yacht.

Being ambitious is great but for the right reasons. Otherwise, envy will make one do some dangerous things to make more money. This risk is an illness that cripples people's bank account, their relationships and even their health.

The solution? Let's look to eating as an analogy. No two people have the exact same diets, lifestyle and capacity when stuffing themselves. We're all incredibly different. Having the self awareness to understand when you are truly content (not necessarily full) will prevent you from throwing up and getting sick. Know when enough is enough.

Big Idea #3 - Be wealthy not rich

Aww yah. Lambos. Nothing peacocks more than these two hundred thousand dollar machines. While Morgan worked as a valet in his early life he saw more than his share and went on to develop what he would call the Man In The Car paradox.

It makes me smile but here's what it is.

Morgan mentions how he longed to get these cars. Not so much for the performance but rather what other things could come with the car such as perceived notion of status, notion smartness, importance and perhaps how rich they could be are - notice I said rich and not wealthy.

Here's the thing, all we know is how much that person may have spent and doesn't have in the bank account. We don't know if it is a loan or maybe they are just taking it out for a test drive. This is how Morgan differentiates the words rich and wealthy.

Anyone can show they are rich through visible tangible material items or braggy photos of their experiences that could be the easy part.  Wealth is something you can't truly visibly show.

To dovetail from Big Idea #2. Knowing your limit and creating that self awareness around enough is being wealthy. Wealth in terms of what you want to do, when you want to do it and with whom.

It's value is giving you options, flexibility and growth to set yourself up for later and not be squeezed in the current moment. Morgan eventually got over being rich and switched to being wealthy which leads us to the next big idea.

Big Idea #4 - Plan to fail

The sole reason we plan is to win. No one ever plans around failing but I think we can all agree that nothing ever goes according to plan and that's why we need to do our best to cover all of our bases.

Morgan surfaces another great example but this time from World War two. It was the frigid winter and the Germans were rolling out Panzer Tanks, technologically sophisticated machines that were suppose to change the tide of war against the allies. On an important front they strategically placed over 100 tanks to seize position. However, when it came time for the big show to happen fewer than 20 were operable. The others were  left stranded because of mouse eating away the insulation that was covering the electrical system. 

Unreal. There was no way the engineers could have predicted this and created anti-mouse repellent on the electric system. There was no back up for the tanks. It was all on them and it became the German's single point of failure on that front.

We may not be fighting a war but we are finding a way to live. To do this to the fullest don't let any investment become your single point of failure.  This is why savings is so important because it helps to de-risk any misfortunes that will inevitably come your way so you can live to see another day - and it doesn't have to be mice specific.

Morgan simplifies savings by labelling it as the delta between basic needs and your ego what you really want to show off the more savings the more you have in the what who where when and the more you can diversify your risk.

Say you weren't happy with the soul sucking job you're in. With a healthy amount of savings you wouldn't feel pressured to stay in it. You could take it off and find a more suitable fit that could bring you even more money or at the least fulfillment. Or even an unexpected bill which won't derail your financial future.

I am a pretty simple minded guy so let's keep this super basic. Determine your necessities to live like food and shelter. Once you nail that the best way to increase savings is to reduce your ego to avoid spending on frivolous things and to gain more humility in how you live.

Big Idea #5 - Make time your ally

Far too often we want things either now or fast. When it comes to money, it can be especially risky to turn around a quick buck. I'll bet everything on black.

When it comes to growing our wealth, Morgan says we have to make best friends someone who starts with a T. I mean, it could be me but rather it's Time.

As mentioned, we will inevitably hit some rough patches but experience some good fortunes along the way as well. The longer you can wait for your investments and money to grow the better it can ride the ups and downs for sufficient returns.

Take a look at this data from Berkshire Hathaway. It's the S&P 500 annual return from 2010 to 2019. As you can see, if we played the short game by year, our investments would be riding a roller coaster. But if we held out for the last 10 we would be up fourteen percent.

You can't time the market. If you could give me a call.

Looking at our wealth from a very long time horizon can give us a greater perspective and bigger picture of our own happiness. Maybe this also lends itself to the quote, time heals all wounds?