The Psychology of Money by Morgan Housel is filled with gems on personal finance. If you are new to investing, wondering how you should go about “thinking” about your money, this is a book worth buying. It prompts you to reanalyze your financial strategies and question your investments. It makes you sit back and introspect whether you are following your own dream or someone else’s.
Without further ado, here are some of my favorite quotes from the book:
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. The world is big and complex. Luck and risk are both real and hard to identify. Do so when judging both yourself and others.
We all think we know how the world works. But we’ve all only experienced a tiny sliver of it. An investor Michael Batnick says, “some lessons have to be experienced before they can be understood.” We are all victims, in different ways, to that truth.
Every financial decision a person makes, makes sense to them in that moment and checks the boxes they need to check. We all do crazy stuff with money, because we’re all relatively new to the game and what looks crazy to you might make sense to me. But no one is crazy—we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.
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. It makes little things grow big and big mistakes fade away.
Years ago I asked economist Robert Shiller, who won the Nobel Prize in economics, “What do you want to know about investing that we can’t know?”
“The exact role of luck in successful outcomes,” he answered.
I love that response, because no one actually thinks luck doesn’t play a role in financial success. But since 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.
Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, or a downpayment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save.
Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
Failure can also be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.
Define the cost of success and be ready to pay it. Because nothing worthwhile is free.
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have… enough.”
Avoid the extreme ends of financial decisions. Everyone’s goals and desires will change over time, and the more extreme your past decisions were the more you may regret them as you evolve.
There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
Gettng money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast.
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.
Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead you think, “Wow, if I had that car people would think I’m cool.” Subconscious or not, this is how people think.
There is a pardox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.
Spending money to show people how much money you have is the fastest way to have less money.
Academic finance is devoted to finding the mathematically optimal investment strategies. My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes for how well they sleep at night.