booknotes: the psychology of money
The Psychology of Money should be required reading in both high school and college. It’s rare to find a book with such important, universal implications. Morgan Housel is a gifted communicator, and in this book, he demystifies important financial concepts. Below are (a lot) of my favorite quotes from The Psychology of Money and some commentary from me.
Top 3 Takeaways:
Control your ego to create wealth.
Take risks but avoid ruin at all costs.
Growth is [mostly] a function of time [due to compounding].
control your ego to create wealth
So simple, yet so profound. Modern capitalism exploits the faulty aspect of human nature that leads us to believe that lasting peace and happiness are right around the corner. Our relationship with money is just that: a relationship. In relationships, one’s ego is often what causes the most problems. Understanding (and taming) the ego is imperative if you want to feel wealthy.
“Modern capitalism is a pro at two things: generating wealth and generating envy.”
“The hardest financial skill is getting the goalpost to stop moving.”
“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does–especially from the people you want to respect and admire you…If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.”
“Past a certain level of income, what you need is just what sits below your ego…one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.”
take risks but avoid ruin at all costs
Taking risks comes naturally for me, but I’ve got a new appreciation for what it means to be over-levered after spending the past six months clawing out of the danger zone. Ultimately I believe that my risks will pay off, but only time will tell. The calculus does change when you get married and have a child.
“You should like risk because it pays off over time. But you should be paranoid about ruinous risk because it prevents you from taking future risks that pay off over time.”
“There are few financial variables more correlated to performance than commitment to a strategy during its lean years–both the amount of performance and the odds of capturing it over a given period of time…Anything that keeps you in the game has a quantifiable advantage.”
“There are many things never worth risking, no matter the potential gain. Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them.”
Nassim Taleb: “Having an ‘edge’ and surviving are two different things: the first requires the second. You need to avoid run. At all costs
“An important cousin of room for error is what I call optimism bias in risk-taking, or ‘Russian roulette should statistically work’ syndrome: An attachment to favorable odds when the downside is unacceptable in any circumstances.”
growth is [mostly] a function of time [due to compounding]
Keep trucking, put your head down, stay in the game and let compounding work in your favor. Compounding is not just about interest or investments, it’s also about relationships, knowledge, trust, and credibility. Here’s a great podcast and transcription about the power of compounding in relationships from Naval Ravikant.
“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.”
other great quotes / ideas from The Psychology of Money
“The further back in history you look, the more general your takeaways should be. General things like people’s relationship to greed and fear, how they behave under stress, and how they respond to incentives tend to be stable in time.”
“I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets are good at telling you when the numbers do or don’t add up. They’re not good at modeling how you’ll feel when you tuck your kids in at night wondering if the investment decisions you’ve made were a mistake that will hurt their future.”
“Few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.”
“Does this help me sleep at night?” is the best universal guidepost for all financial decisions.
“Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”
“If there’s a part of our household financial plan I’m proud of it’s that we got the goalpost of lifestyle desires to stop moving at a young age.”
“Avoid ruin at all costs,” was essentially my mantra for six months. Heck, it still is as the dust continues to settle after a tumultuous 2022.
last thoughts
This is a book filled with timeless wisdom. Whether you’re interested in personal finance, entrepreneurship, or investing, I’d highly recommend The Psychology of Money.
