Indian YouTuber, entrepreneur and author Ankur Warikoo 's views on the book, ThePsychology of Moneycreated a lot of curiosity in me. Based on his endorsem*nt on YouTube, I bought this book at the Hyderabad international airport during my trip from India to Bahrain, hoping to gain new perspectives on managing my investments and spending behaviour. I was not disappointed.
The author, Morgan Housel, is a behavioural finance expert and a former columnist at The Motley Fool and The Wall Street Journal. Morgan has delivered speeches at over 100 conferences in a dozen countries apart from various webinars. He talks about people's behavior with money and its spending, from a people's psychology perspective. He uses storytelling techniques to convey messages to consumers (audience) about investment risk, helps them become more productive with their investments, and emphasizes long-term quality investments to get substantial compound benefits.
The Psychology of Money is one of the best books I have read on money management and has key financial management lessons a layperson can also understand. Housel tells about how finance is taught in the form of basic mathematical equations, whereas, in real life, people make financial decisions based on emotions and intuition. They don't make decisions on a spreadsheet, but usually while sitting for dinner at the dining table, or in a meeting room where their ego, pride and thoughts about the world are all scrambled together.
I observed that this book provides a good perspective on money and its value to be perceived in reality. It starts with a simple anecdote:earningandmanagingmoney are two different premises. While one may be an expert in their field, earning a hefty paycheck, the person can still be good at staying rich in the long run. To stay rich, money management is the key.
In the pursuit of money
He starts the pursuit of money talk with the story of Ronald Read, the janitor with 8 million dollars in savings when he died in 2014 . He didn't win the lottery or inherit the money either, and he just saved consistently throughout his life while letting the wonders of compounding do their thing. The moral is that our behaviour with money is often more important than how intelligent we are.
Even if we don't have a diploma from Harvard or work on Wall Street, we can become rich by behaving soundly. Everyone can become rich with consistent, disciplined investment.
He explains the importance of staying wealthy compared to getting wealthy with the story of Jesse Lauriston Livermore, how the American stock trader became wealthy during the Great Depression in 1929. Liver, at the time, was one of the wealthiest people in the world. And, over the years, sadly, he lost his entire money, became bankrupt, and committed suicide in 1940.
The role of luck and risk
The author also explains the role of luck and risk with the story of Bill Gates, how he became a billionaire, and his schooling at Lakeside school. The Lakeside school was the only one with advanced computers, which even graduate schools did not have. He says the world is big and complex, and luck and risk are real players in our financial journey.
He also shares an interesting insight around the relationship between money and time, which is also very precious. "Money's greatest inherent value—and thus can't be overstated—is its ability to give you control over your time," he says.
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Managing savings for a rainy day
People often spend their money on various things to show status and pride in society. Based on external appearances, we can't assume that the person is wealthy, as we are unaware of their financial status. They may have other debts with the bank or huge home mortgages. If one gets into debt trap and loans, they usually have little savings for emergencies and independent living. One must be better at managing their expenses economically, which leads to a happy, debt-free life with sufficient cash reserves and the ability to manage any crisis. Such a person truly knows how to be rich.
Avoiding unhealthy comparisons
The author says that the pursuit of becoming wealthy is a never-ending journey if we compare ourselves to others, as there are always people who can do better than us. The comparative analysis causes envy to generate wealth and work hard, which may lead to unsuitable investments and financial decisions. It's always more reasonable to know and define our stop limit. That is, it's enough earnings and satisfaction with what you have rather than getting into the never-ending journey of earning money.
In this book, the author compares the investment styles of billionaires James Harris Simons and Warren Buffet. Simons delivered 66 % CAGR (Compound Annual Growth Rate from his investments), much higher than Warren Buffett's CAGR of 22%. Simons' net worth is $22 billion, which is 75 % less than Warren's. Simons started his real investment at 50, whereas Buffet began to investment at a very young age. The success behind Warren Buffet is not 22% CAGR; it is the long period of the investment. The secret behind Warren Buffet's success is the magical investment time period and not 22% CAGR.
Developing the right discipline
The author cites that financial equations are comprised of two factors: things within and outside our control. Investments and trading on the stock markets are largely beyond our control.There is no guarantee that a given investment strategy will work, as the stock market may not cooperate with our interests, and the uncertainty of tomorrow can wipe out our investments. For example, during the 2007-2008 Global Financial Crisis (GFC), Millions of investors' money was washed out and USA's fourth largest invest bank Lehman Brothers, went bankrupt in this crisis. Savings and financial frugality, are entirely within our control and are habits that will make a big difference in our life.
Lastly, the author narrates his own story about money and how he manages and invests his income. He says he puts his money where his mouth is and invests his earnings into savings that yield him a higher interest rate. He is optimistic about economic developments, strongly believes in long-term investment, and waits patiently for compound returns.
I found this book was very insightful and thought-shaping in redefining my perspective on money, spending and saving. I redefined my financial goals and objectives and re-adjusted my investments.
This book provides excellent life advice on managing money, being satisfied, and living a happy and financially independent life. While it may not be for beginners planning to invest after reading this book, it providespractical adviceon managing our money and living an independent financial life.
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