Among a barrage of personal finance books, there are only a few that stand out. Some give personal finance mantras, while others give some lessons on investments and savings. There is this one that gives greater credit of wealth or the lack of it to the psychology of investors and not entirely to the skills of finance.
Written by Morgan Housel, Wall Street Journal columnist and partner at Collaborative Fund, in September 2020; the book gives a message that doing well with money is not necessarily about what you know but about how you behave – a skill hard to teach, even to smart people.
Through a narrative of 19 stories, the author shares numerous perspectives to look at money, and teaches how to make better sense of it.
Key lessons to learn from the book
1. The power of compounding: "$81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. Our minds aren't built to handle such absurdities," says the author.
It is the power of compounding that matters. A small growth consistently over a period of time seems exorbitant growth after a long period of time. He says a small starting base can lead to extraordinary results that seem to defy logic.
In reference to Mr Buffett, he says, “His skill is investing, but his secret is time.”
2. Get a hang on the right behavioural skills: The author argues that a genius who loses control of their emotions can be a financial disaster. And the reverse is also true. Regular people with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence.
He explains, “Your personal experiences with money make up maybe 0.00000000001 percent of what’s happened in the world, but maybe 80 percent of how you think the world works.” This means, there is a huge gap between firsthand knowledge and how we use those insights into making sense of the world.
3. Prevent bad decisions: It is as important to prevent bad decisions as it is to take the right ones. Be modest and give importance to protection of capital. One should be prepared for unknown events. and make plans accordingly. You should not only prepare for what is likely to happen, but also what may happen.
4. Price of investment: Everything comes for a price. Even social media platforms are not free. They might appear free but you have to pay for them in time and data. Similarly, when you make an investment, the real price is not money but overcoming fear, doubt, uncertainty, greed and regret. This is the fee one has to pay. These are necessary to make money in stock markets.
5. Stop being greedy: Morgan says that continuing to work towards making more money is not healthy and getting complacent with what you have is important.
“The hardest financial skill is getting the goalpost to stop moving,” says Morgan. He explains there is no need to risk what you have, and need for what you don’t have and don’t need.
6. Luck plays its role: The author says that luck and risk are siblings. It is a reality that every outcome in life is guided by forces other than just individual effort. He quotes Scott Galloway, a New York University’s academic, to say, “Nothing is as good or as bad as it seems.”
He explains that luck and risk are so similar that you can’t believe in one without equally respecting the other.
He says that one should not focus on too specific results, and instead on broad patterns. He elaborates that the probability of extreme outcomes is usually very low. So, it doesn’t help to look at the results achieved by the outliers because luck would have played a key role which can't be replicated.
7. Use money to buy time: Money is useful when you can use it to buy time and do what you want to do if you are rich in the real sense. Some people may appear rich but only because of the assets acquired with debt. They are not wealthy in the real sense of the word.
People tend to judge your wealth by your spending capacity. Wealthy people don't actually spend most of their wealth, and it is locked in the form of stocks, fixed assets, etc. The real wealthy people use their money to buy flexibility and time.