The more I learn about the money topic, the more I’m beginning to believe that “Winning at Money is 80% behaviour and 20% head knowledge”. And I can definitely attest to that as well.
I spent a few years as an investment analyst which meant I was full time looking at stocks, forecasting earnings and making buy and sell recommendations. By that definition, I should definitely have head knowledge. But guess what, my money management was not the best then.
It was after a few years after I left the job and began to reevaluate my mindset about money management when I started seeing my financial health dramatically improving; from my emergency fund, growing my investment portfolio and also my ability to handle risk.
So when I came across Morgan Housel’s book “The Psychology of Money” and read this part in the sample “The premise of this book that doing well with money has little to do with how smart you are and a lot to do with how you behave”, I knew I had to read this.
It’s an easy read; finished it in less than a week and here are some of the top things that stood out to me.
1. Chapter 1: Your personal experiences with money make up maybe 0.00000001 of what’s happened in the world, but maybe 80% of how you think the world works.
Everyone has a different experience with money and that experience becomes reality to the individual person even though it’s probably a small percentage of how the world works. Ask someone who has been burnt by credit card debt and it’s likely they will think credit card is evil but that’s not the case for everyone. For me, it was convenient and helped me get a lot of points and cashback.
And it’s not necessary just money experiences. For example, if you experienced a one time bad experience with online shopping, you are likely to conclude that online shopping is not a great experience. While it could be a rare occurrence which happened to you, you would have concluded that it’s the general experience for everyone.
How this resonates
I grew up thinking that property is a good investment and stocks will make me lose money because that was what I learnt at the dinner table. For the older generation, the 1997 stock crash scarred many while the property boom benefitted many. Well at least that was what I grew up thinking.
But what is the truth? Property is no longer such a great investment opportunity in Malaysia currently. And stocks? Put stock picking aside, just investing in the S&P 500 in the last 10 years would have given fairly decent returns
2. Chapter 3: Never Enough
This chapter starts off with two stories of two very established businessmen who threw away what they had because they wanted more; one of them being Bernie Madoff. They didn’t know what was enough and hence took on risks that harmed them which included unlawful activities.
How this resonates
Unless I know when to be satisfied, I will never have enough and feel I’m enough. The world has gotten richer but I do not think the world has gotten more contented and satisfied. Comparison has become a killer for many and that’s why enough does not exist.
3. Chapter 4: Confounding Compounding
$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday and it was the power of compounding. So while Warren Buffett was good at investing, his secret was time. See Warren Buffett started at the age of 10 and by the time he was 30, he had accumulated $1m and his returns was a compounded annually at 22%.
If he had started late and at 30 years old, he had accumulated $25k and stopped investing at 60. Guess what his networth would be at the same returns? $11.9 million. Not $84.5 billion.
How this resonates?
That blew my mind. I tried running the numbers myself – it was not 100% accurate but it painted the same picture of the power of compounding and the consistency. I wished I had started earlier to set time work its wonder but since I can’t rewind time, late is better than never. And I don’t aim for one hit wonders to get the highest returns but to aim for consistent performance.
4. Getting wealthy vs Staying Wealthy
“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up”.
I know about Warren Buffett and Charlie Munger but this part of the book tells me there is a third member of the group, Rick Guerin. He was equally smart but he kind of disappeared because he was forced to sell when the stock market went down almost 70% and he had margin calls.
This line in the book stood out to me: Warren said “Charlie and I always knew that we would become incredibly wealthy. We were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us but he was in a hurry”
How this resonates?
This reminded me of the story of Bill Hwang. If you have not heard of it, here’s the link While he got very wealthy, he’s more well known lately due to losing $20bn in 2 days.
And what it means for me is to always remember to be patient, not get greedy and not leverage what I don’t have.
5. Chapter 6: Tails, You Win. You can be wrong half the time and still make a fortune
A very good example of this is venture capital. It says that if a VC makes 50 investments, they likely expect half of that to fail, 10 to do pretty well and one or two to drive 100% of the fund’s returns.
George Soros once said “It’s not whether you’re right or wrong that’s important, but how much money you make when you are right and how much you lose when you are wrong”. You can be wrong half the time and still make a fortune.
How this resonates
This reminds me that I do not need to be 100% correct EVERY single time when I pick a stock but to DIVERSIFY my portfolio. This really helps every single perfectionist out there.
I can afford to be wrong when I have a basket of investments. So I can have a few wrong calls but if I have a few well performers, it’s all going to work out.
However, if I only have one or two stock pick and that one is wrong, well chances of me losing is way higher. And I have learnt that well – no matter how good my analysis is, life is full of surprises and I do not have a crystal ball so I will not make such bets on just one or two.
6. Chapter 13: Room for error. The most important part of every plan is planning on your plan not going according to plan
This chapter talks about how we can plan for every risk except the things that are too crazy to cross our minds and these. And unexpected unwelcome circumstances do happens at times.
How this resonates?
Covid is a real example of this. No one had planned for it and few had room for error for it. This reminds me that when planning for retirement and investing, it’s important to have that room for error and that it doesn’t hurt to be more conservative. While I can use a historical rate for my future returns, what if future returns are lower, or what if at my retirement date ends up falling in a bear market. And this is a reminder when I plan for my clients too.
7. Chapter 17: Seduction of Pessimism. Optimism sounds likes a sales pitch. Pessimism sounds like someone trying to help you
This chapter talks about how it’s easier to be pessimistic when it comes to money. I mean think about it, how many doomsayers has there been in the saying the market will crash but honestly how many are right about it.
But it is easy to catch on to the pessimism because tragedies happen overnight but progress takes a much longer time and can easily go unnoticed. Reality is, the stock market (referring to US of course) has gone up 17,000 fold in the last century included
How this resonates
I see this ALL the time. People refusing to invest because of pessimism, because they think the market will crash EVERY year. Either it’s from a past event, or it’s from a recent article. I used to be easily influenced but facts helped me to become more objective. I know past data is not indicator of the future but I think it can still hold some lessons. Despite the many crashes, the economy and stock market has proven to be more resilient than we give it credit for.
There are plenty more nuggets which I have not covered so you can pick up the book for yourself. To round it up, I think if there are two very important things that I truly agree with on a personal level as well as for my clients, it will be this. It’s important to make your money decisions based on whether it helps you sleep at night. For some, a higher return is what makes them sleep at night. But for another, it could be lower volatility but in a lower return investment is what helps them sleep. And to each their own. It’s important to know what works for myself as well as my clients. There’s no best product, only what’s suitable for you.