One of the Best Money Books I've Read This Year! | The Psychology of Money by Morgan Housel Summary

financial success is much closer to a soft science requiring soft skills and usually a little luck than the formulaic rules-based physics clone that it often appears to be on the surface this is evidenced in the stories of ronald reed a janitor who retired as a millionaire using little more than a high school education and some patients and richard fuscon a well-connected harvard educated merrill lynch executive and mba who went broke after retiring in his 40s due to the leveraged lifestyle he led which he couldn't maintain during the 2008 financial crisis in short how you behave

is more important than what you know or who you know when it comes to achieving and sustaining financial success that's the basic idea behind morgan housel's book the psychology of money but there's a lot more worth talking about than just that so today that's what we're gonna do let's talk about seven major takeaways i got from reading the book and discuss how they may apply to our life and our money but before we get going be sure to like this video if you haven't already as it really does help out the channel a lot and

subscribe with notifications on for more money related videos like this one every single week and if you want to further support this channel you can check out some of the links i've left in the description below which includes a 30-day free trial of audible and two free audiobooks of your choice as well as a list of some books on money i'd recommend checking out with your free trial the first major takeaway i got from the book is that nobody's crazy our financial decisions good bad or indifferent are all justifiable though not necessarily wise or effective

when we take into account things like personal experiences upbringing and values incentive structures the information we have available to us at the time and the narratives and beliefs that we tell ourselves it's worth noting that first-hand experience is almost always more persuasive and memorable than second-hand accounts someone who grew up in poverty while living through the great depression will view the riskiness of investing differently than i will and potentially even differently than others who lived through it will basically what i'm getting at is people from different generations born into different economies and thus experiencing different

job markets and incentive structures raised by different parents who earn different incomes and held different values in different parts of the world are going to learn different lessons about money the various mental models that are built from this helps us to make financial decisions and actually largely explains why some financial decisions may be crazy to one person but make perfect sense to another it's important to acknowledge this not only because it'll help us be more understanding when dealing with other people's financial world views such as those of a family member a child or a spouse

but also because it lets us know that some of our own views on money may not be the most useful for us and that encourages exploration and learning which can go a long way toward helping us build a better financial future for ourselves and others the second major takeaway i got from the book is that nothing is ever as good or as bad as it seems because luck and risk are unavoidable aspects of our financial reality if you need an example of this just look at how differently life went for bill gates and his friend

ken evans remember that you are but one of some seven or eight billion human players in a game with near limitless moving parts the impacts whether intended or not of actions that are beyond your control can be more consequential than they're often given credit for this lack of credit partly come down to one of our cognitive biases known as the self-attribution bias or the tendency to credit our own decisions and skills for outcomes when things are going right and to blame external circumstances or bad luck when things go wrong we naturally want to believe that

we are the reason for our own success but that desire sometimes leads us to underestimating the role of luck in our successes it's also partly due to our tendency to focus on the unusual or the novel which can lead us to create a somewhat distorted picture of what it takes to achieve success financially or in any other area of life for that matter think about it how often do you come across stories of investors who made wise moves but due to some unfortunate circumstances wound up poor i struggle to think of very many but i

know that there are many people who have experienced exactly that compare this to how often we come across stories of investors who made okay or sometimes even reckless moves but fortune smiled on them and they became stupendously wealthy as a result that's a story that we tend to hear more frequently some examples of this include mark cuban's approach to pouring a ton of his money into a small number of investments or the railroad tycoons of early america like cornelius vanderbilt who were obviously wildly successful and thus well well-publicized but also unconventional cuban's near lack of

diversification was a risky but potentially highly rewarding play just like financial speculation is in the modern day he like many before him had the right combination of intelligence and luck to profit massively off of that unconventional approach however had luck not been on his side his successes would have probably been far smaller he may have even been wiped out entirely as many speculators fortunes have been over the years vanderbilt's lack of regard for the laws of the age helped him to become wildly successful in business in fact his law flouting is often seen by historians

as incredible business smarts or cunning and maybe it is however it's worth noting that had he been taken to task for his law flouting and his company collapsed under court order as a result his story would be viewed very differently because no one in their right mind would view flagrant crime as an entrepreneurial trait with that being said i'm not trying to say that none of our actions matter because obviously our choices play a tremendous role in our successes and our failures what i am saying and what i believe is the lesson to take away

from all this is that understanding context is important because success is not always down to just skill and intellect alone just as failure is not always a pure product of laziness luck plays a role as well those who achieve the insane levels of financial success that we often hear about usually get there through unconventional approaches or executing conventional approaches at unconventional scales therefore we should make an effort to focus on base rates over individual stories and case studies since the base rates are likely to be more relevant and helpful to us when making plans for

our own financial future and in addition to that we should always make sure to set up our financial life or just life in general in such a way that we have some breathing room no individual investment snafu or bad purchase or sudden emergency should be able to bury you the third major takeaway i got from the book is that the skills necessary for getting wealthy are not necessarily the same as the skills required to stay wealthy there are a million in one ways to make money and get wealthy but if history has taught us anything

there are far fewer ways to stay wealthy it almost always requires some combination of humility in the sense that you realize some part of your success came down to luck so it would probably be unwise to assume that you could perpetually sustain your success by continuing to take the same risks you did to initially get it frugality and a healthy dose of short-term paranoia as illustrated by the stories of modern day investors like warren buffett and investors like jesse livermore during the great depression the most important and often overlooked key to success as an investor

is not magnitude or the size of your return figures but longevity and consistency or the time you spend in the market according to housel roughly 81.5 billion dollars of buffett's estimated 84.5 billion dollar net worth at the time that household was writing the book was earned after buffett's 65th birthday a simple compound interest chart like this one showing the age net worth and percentage of total wealth generated by decade assuming 10 average annual returns would back up this story pretty well jesse livermore was one of the greatest stock market traders of his day amassing a

personal net worth of 100 million dollars over 1.6 billion in today's money after shorting the market prior to the onset of the great depression which i mean talk about having your best trading day ever following that move livermore was one of the richest people in the world and told his wife that they could do whatever they wanted financially or so he thought overflowing with confidence livermore continued to leverage his investments with enormous amounts of debts in the following years he was making larger and larger bets as time went along and partly due to his risky

approach and partly due to the sec adopting rules that forced him to change up his trading strategies he eventually wound up way in over his head before declaring bankruptcy in 1934 it was the third bankruptcy he had filed in his life he had assets of 84 000 and debts of 2.5 million the takeaway recognize the importance of patience become financially unbreakable and know what to do when things don't go according to plan because if you can do that then you'll almost certainly earn the best returns maybe not on a per year basis in the short

run but in totality over the long run and at the end of the day that's what really matters so pick an approach that works pretty well for you such as index investing and a regular budget don't beat yourself up for the occasional misstep it happens to all of us and play the long game the fourth major takeaway i got from the book is the importance of having a margin for error and being flexible financially the reason for this is simple we live in a world of uncertainty and chance therefore surprises for better or for worse

are possible investing and financial history can be very useful for developing and understanding of broad trends such as how people respond to fear and greed and the pressure of changing economic and market conditions but it tends to be a poor predictor of future results in a more focused way such as predicting the moves of an individual stock or even sector of a market because things change over time and that can influence the incentives and therefore outcomes of an investment and we fail to often appreciate the potential for outlier events such as the great depression which

was unprecedented in american financial history when it happened it was an outlier and a very negative one at that but there's no reason that we couldn't someday experience something even worse or on the other end of the spectrum an unprecedented positive outlier event we often fail to take that reality into consideration when using the past as a source for our best and worst case scenarios which can sometimes lead to inaccurate predictions this is why arguably the most important part of any plan is planning on your plan not going according to plan in other words giving

yourself some margin for error you can do this by among other things hedging your bets by making sure your investments and possibly income streams are well diversified always keeping a healthy emergency fund and ensuring at least to the best of your ability that you always have some semblance of a savings rate it's also important to always leave some flexibility in your plans it may be very tempting to tighten your financial belts as much as possible and get a super high savings rate of like 50 or 60 percent of your income and let me say there's

absolutely nothing wrong with doing that it can be extremely helpful in many ways even if you're just saving for the sake of saving but what we want to avoid doing is assuming that we'll be okay with maintaining those more extreme lifestyle choices for the rest of our lives we might be okay with that but sometimes our situations dreams or goals change which means someday it's possible that we might not be happy to maintain that sort of extreme lifestyle anymore so it's important to make sure we have enough flexibility in our financial plans to allow that

shift without syncing our chances of financial success for our future selves basically do your best to avoid approaches that have single points of failure such as one investment pick going sideways or the assumption of a stagnant lifestyle and you'll give yourself the best odds you reasonably can for achieving and maintaining long-term success not to mention happiness since building this kind of flexibility into your plans allows for greater freedom and personal autonomy which if the many studies on the subject are to be believed are some of the few universal things that bring people lasting happiness in

other words the ability to do what you want when you want with who you want for however long you want is priceless so don't put yourself in a position where your ability to be happy and successful requires you to live within a very limited range of options the fifth major takeaway i got from the book is that it's often more effective to aim to be as reasonable as you possibly can as opposed to aiming to be as rational as you possibly can that may sound a little weird i mean being rational is generally seen as

a good thing in finance but let me explain hazel's logic first you are not a spreadsheet you are a human being and just like every other human being you are beautifully tragically mentally and emotionally flawed we all have cognitive biases like the self-attribution bias discussed earlier and we all have emotional blind spots there's nothing wrong with that it's part of being human but those things should be taken into account when dealing with our finances yes on paper it would be better to be coldly rational when making financial decisions rationality is not a bad thing to

practice but being reasonable is more realistically achievable and sustainable over the years than consistent cold robotic rationality for most people as a result hausel argues that those who are focused on being as reasonable as they possibly can tend to outperform those who are trying to be as rational as they possibly can in the real world for instance those who have an itch to be an active trader and allow themselves to day trade with a small portion of their funds are being kind of irrational day trading is generally seen as a difficult strategy to implement successfully

especially over extended periods of time but at the same time given their proclivity for trading you could argue that they're being more reasonable than they otherwise would have had they used their entire nest egg to day trade or tried and likely failed to adopt a 100 passive investing approach those who are leveraging all of their investment dollars when they're young and theoretically able to withstand being wiped out due to their longer time horizon are some would argue anyway being completely rational but probably not very reasonable precious few among us will be able to legitimately see

our entire retirement accounts wiped out due to a sudden market crash that we were leveraged up in and then pick ourselves up dust ourselves off and get right back into the markets with new leverage positions as if nothing had happened the vast vast majority of us would at the very least look to switch up our strategy if not abandon investing entirely for a while or even forever and in the end either of those outcomes would leave us worse off than had we just done the reasonable thing from the start basically by being reasonable we're giving

both our emotions and our thoughts a conscious part in the decision-making process but without letting them control us in a damaging way this generally leads to us being more likely to stick to our plans in the lean times and history suggests that those who can stick to their plans over the long term tend to do better than those who switch strategies mid-stream again time in the market beats timing the market more often than not and remember the majority of warren buffett's wealth is attributable to the fact that he's been investing for an eon and a

half the sixth major takeaway i got from the book is that you can be wrong the majority of the time and still be wildly successful so long as you get the big things right this is because the influence of events at the end of long tales of a distribution in other words the high leverage events and decisions such as the decisions to sell or not sell during market crashes have such a disproportionately large impact on the eventual outcome whether that be your average returns net worth or your budget that so long as you get those

things right you usually wind up okay this is basically the pareto principle in action want to control your spending don't focus on the latte at least not at first focus on your housing or transportation situation since they're usually bigger line items with more room for sustainable optimization want to increase your investment returns don't focus on individual companies buy the whole darn market and guarantee that you'll invest at least some of your money in the biggest winners because as we covered in previous videos on this channel one of the reasons why stock picking rarely works over

the long run is that the returns of the market as a whole are skewed towards a small number of companies in fact jp morgan asset management once published a study that looked at the russell 3000 index and found that from 1980 through 2014 nearly the entirety of the index's overall returns came from just seven percent of the component companies while the median stock in the index underperformed the market as a whole by 54 during that period and 40 percent of the stocks within the index had negative absolute returns so in other words during that time

an investor trying to pick stocks in the russell 3000 index had a roughly four in 10 shot of losing money outright if they picked the stock that performed in the middle of the pack they'd have a net worth roughly half the size of a regular index fund investor during that time and if they were really lucky and picked one of the biggest winners of the index and held it they'd have done really well for themselves but given that the chances of picking one of those stocks during that time was roughly 1 in 14 or so

not to mention that again you'd have had to hold it during its rough patches it should come as no surprise that most people don't manage to beat the markets when pursuing these types of strategies over extended periods of time the more broad-based approach of index investing tends to lead to outcomes that while not theoretically the best one could achieve are usually good enough and better than the realistic expectations associated with most alternative approaches the seventh major takeaway i got from the book is the idea that stories are the most powerful force in the field of

economics and investing why because it's the stories that we tell ourselves that influence how we perceive market movements and help us to make decisions like whether to buy or sell own or rent go on a vacation or keep that money in the bank and so on and so forth these narratives are often backed up by hard data but in a world where you can often find data to back up multiple sides of almost any narrative it's often the best most alluring stories that tip the scales it's worth keeping that in mind the next time an

alluring narrative or appealing fiction as hazel puts it takes hold in the markets this is especially true when we come across a narrative that we want to be true such as an investment that we hold or are thinking of buying rising rapidly in value because we're often more likely to believe in narratives and data that overestimate the odds of something that we want to be true actually coming to pass keeping this idea in mind we can at least take a step back and ask ourselves before making any decisions if anything tangible actually changed for the

long term or if the event is largely being driven by a narrative that will eventually lose steam and fade from public consciousness this process alone can help lower the likelihood that we'll do anything dumb and wind up ruining ourselves financially so those are seven takeaways i got from morgan housel's new book the psychology of money have you read it if so what were your takeaways let me know in the comments section below but that'll do it for me today once again if you enjoyed this video be sure to smash that like button if you haven't

already subscribe and hit that bell next to my name so you'll be notified of all my future uploads i generally upload every single monday and if you have a friend that would be interested in this kind of content be sure to share it with them let's really get this information out there and start our own financial revolution