Book Analysis - The Psychology of Money
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Introduction:
Hey Everyone! Today I will be doing an analysis of The Psychology of Money by Morgan Housel. Something that makes this book excellent for reading is that it has 20 points contained in 20 chapters. I will be giving a brief summary of some chapters that really stood out to me. However, there are many helpful chapters that I won't go over, so I would recommend reading the whole book. My goal for this article is to give you a view of money you have never had, which is something that happened to me after reading this book. So, without further ado, let us get started.
Overview
The U.S. is a consumer-oriented, greedy, no-good, unforgiving, volatile, skeptical, manipulative, nonsensical, impulsive, and unpredictable economy. It's unfair, it's annoying, and it's frustrating. Even worse, the material value of the dollar seems to control it. This controls people's emotions, relationships, and quality of life. I wish it were different. Morgan Housel, thankfully, is changing the name of the game with very deep, yet simple, ideas. As someone who has stomped through the business world, he knows what it's like to feel deprived of hope in a socioeconomic wonderland. “Man, I bet he has a step-by-step plan just like everyone else that is smart with money!” Actually, no. Instead of instructing his readers, he educates them in behavior and thought processes, hence the name “Psychology of Money”. He teaches his readers not to go with the patterns of this world, but instead to go with the patterns of oneself.
Big Idea Book Quotes:
“A genius is the man who can do the average thing when everyone around him is losing his mind” – Napoleon
“The world is full of obvious things which nobody by any chance ever observes” – Sherlock Holmes
Chapter #1 No One’s Crazy
You heard it right. No one is crazy when it comes to money. People may seem crazy, people may make crazy decisions, people may even call you crazy, but no one's crazy. Everyone grows up with a different perspective of money. Housel explains, "The person who grew up in poverty thinks about risk and reward in the ways the child of a wealthy banker cannot fathom." He goes on to state, "Your personal experiences with money make up maybe 0.00000000000001% of what's happened in the world, but maybe 80% of how you think the world works." Experiences feed thought and judgment, but experiences differ; that's the problem being expressed.
Chapter #2 Luck & Risk
Luck and Risk are basically the same thing. For example, a middle-class business owner named Jim decides to sell his business and open up a restaurant. He is short of some cash, so he decides to take out a loan. He knows that if he doesn’t succeed, it will be hard to get moving again. At this point, two things can happen ….
Jim finds a spot in a decent area. He negotiates a fair deal with a lenient realtor. Jim hires excellent staff. He opens up a website/facebook for his restaurant, and it quickly gains popularity. As soon as it opens, people flood in. After a couple of months, however, Jim's restaurant doesn't have all the hype anymore. He is staying in business as usual, but not flourishing like he wants to. 7 years later, the area around his restaurant developed quickly (Offices, Homes, Gym, Stores, hotels ). He doesn't need hype; he has tons of traffic that spot his restaurant and consistently go to it.
Jim finds a spot in a decent area. He negotiates a lopsided deal with a realtor, but he thinks it will pay off. He hires unpredictable staff that doesn't have much passion for their job. His Facebook barely gains any followers. Months later, Jim wishes he could just work without worrying about going out of business. 7 years later, the restaurant location is in a slow-moving part of town with barely any development or hype. He ends up defaulting on his loan and losing the restaurant.
If you just read the paragraphs, you might have realized that he encountered the same events, but ended in a different fashion. Option A includes Jim making decisions that go pretty well, while Option B recognizes the opposite. Pessimists in Option A will say, "Jim just got lucky; he couldn’t do it on his own," while pessimists in Option B will say, "Jim took a risk and just … failed." Housel explains that luck is risk’s cousin; they are proportional. In conclusion… Don’t let anybody tell you that you made it just on luck, but don't tell anybody that you made it just because you "took the risk" or "reached for it all."
Chapter # 7. Freedom
When people look at jobs, they will look for a couple of factors to evaluate them. The one that stands tall, however, is salary. Contrary to popular belief, there is way more to that. Let me give you an example… Investment banking is looked upon as a very lucrative career due to its compensation. But there is one con that is rarely looked upon: time. Per mergersandinquisitions.com, an investment banker's first-year analyst makes nearly $165,000-$225,000 dollars a year. Pretty nice, right? On the other hand, it is expected for them to work 70-80 hours a week or more! This means that, to be available on weekends, an analyst must work 16 hours a day for 5 days straight. Most bankers don't do this, so there is usually some weekend work left behind. When Morgan Housel did an internship at one of these companies, he claimed there was a saying that went around … “If you don't show up on Saturday, don't plan on showing up Sunday”. Weeks later, he quit. In his words, claiming, “Time is the biggest dividend money pays”. Money is a relative number; time is not. Sacrificing a limited resource for a flowing material does not sound very logical.
As a side note, something also interesting: Additionally, Housel made an excellent point in this chapter again when he stressed the portability of a knowledge job. He writes that workers these days can be just as productive on their couch as they can in the office, something rarely exercised by jobs in the 20th century.
Quote: “I wouldn’t trade time for a dime” - Coach Thomas
Chapter # 9. Wealth is what you don't see
A $100,000 car is one hundred thousand dollars spent, but admired by many. A $100,000 401k account is one hundred thousand saved, but admired by no one. In conclusion, wealth is what you don't see. In summary of Housel's words… “It's easy to find rich role models, but hard to find wealthy ones”. Wealth is practicing delayed gratification, or turning down a visible reward in the present moment for a more hidden, but likely more valuable reward in the future. One reason this is so hard is because we live in an immediate gratification world ( Gambling, Junk Food, Doordash etc.). However, if you can crawl out of the scheme of the superficial success of others, a more genuine, intrapersonal awareness of yourself will occur; In turn, fostering growth, grit, and perseverance for a stronger grip on goals.
Example: Warren Buffett has spent decades building wealth, with his best returns coming later in life.
Question: Think for a second… have you ever made a financial decision based on what someone else has done?
Chapter # 11. Reasonable/ Rational
It is extremely hard to be purely rational with money. So, instead, settle for reasonable. Settle for not eating out every night, rather than not eating out at all. Settle for putting some seed money into an investment account, not a percentage every month. Settle for being comfortably reasonable, not uncomfortably rational. You're not a spreadsheet, you’re a flawed human, just like everyone else.
17. The Seduction of Pessimism
The world is full of bad news, making us accustomed to hearing bad news. When there is an absence of bad news, people start to panic. Many would rather hear about something that could harm them than something that could help them. This is called the seduction of pessimism. Which news article would you rather read… “the unemployment rate could double within the next 3 years” or… “The American economy is doing pretty well”. If you chose the first one, then you experienced the seduction of pessimism. So next time when you hear scary news about college debt, AI, or politics, just remember that news outlets make money when they have viewers, worried sick viewers.
Other
This is just a bird's-eye view of the book. To get the best experience, I would recommend reading it.
I hope you enjoyed this issue! Stay tuned for the next one!
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