BOOK REVIEW: The Psychology of Money
Elon Musk is perhaps the most celebrated entrepreneur of our time. If you think of it, it's ridiculously brilliant how a man with a degree in physics and economics founded a software company that he later sold to Compaq for over $300 million. With absolutely no formal training in Rocket Science, his company SpaceX recently became the first to fly civilians to space. Oh, and he also manufactures electric vehicles and intends to install chips in human brains.
Whenever somebody asks Musk how he could become an expert in such a disparate set of industries with no formal education or training, he has a simple 3-word answer "I read books" Well, you may not want to start a civilization on Mars or build self-driving cars like Musk but there is one thing that all of us want - Money.
"Reading is the gateway skill that makes all learning possible" - Barack Obama.
If you aspire to become wealthy, you must start by reading one book. It's called The Psychology of Money by Morgan Housel. Much like investing, the thing about The Psychology of Money is that the sooner you read it, the better it is for you. It is a book that everyone must read in their 20s. If you haven’t, then you must read it now.
The Popular Self-Finance Book doesn't actually talk much about Money
For a financial must-read, one may expect the book to carry Spreadsheet hacks, exclusive investment mantras, secret formulas, a deep understanding of Mutual funds and other financial concepts, right? The book talks about none of them.
In fact, Morgan talks about Disney's Snow White and the Seven Dwarfs, about Bill Gates' genius childhood friend Kent who by his own confession was smarter than him, an orphaned Indian who rose to the echelons of American Business only to fall from grace, about two men - one of whom lost money in the market crash and another who gained but both eventually met a tragic end, and many more such fascinating real-life stories.
Then why is this book still one of the best self-finance books of our time? Morgan masterfully sets the context at the start of the book by citing two contrasting stories - one from his days as a valet operator in a luxurious hotel where he keenly observed a young and reckless tech millionaire frequently visit his hotel who Morgan (accurately) predicted to go bankrupt.
The other example is Ronald Read, a nondescript man who served as a janitor at JCPenney for 17 years but became a national figure after his death. Why? Because it turned out that Read had quietly amassed over $8 Million dollars over his lifetime. With this, Morgan goes on to demonstrate that wealth creation has little to do with knowledge and more with the current attitude and mindset about money.
So over the course of his book, Morgan imparts timeless and classic lessons on the right way to approach money and thus creates an ambience for the reader to progress further in his journey.
A Sneak Peek into some of Morgan’s Lessons from the Book:
You can never control the Outcomes in your life
- In 1968, Bill Dougal, a World War 2 veteran turned High School Math and Science teacher introduced something in Lakeside School that would change the course of the world forever. He petitioned the school to introduce a computer which the school agreed to, thus making it the only High School in the world at that time to have one.
- At that time in the world, there were roughly 303 million High School-age children in the world. If you do the math, the children at Lakeside School had only a 1 in a million chance of being there. This 1 in a million chance turned out to be fairly significant for two of the school’s 13 years olds - Bill Gates and Paul Allen. Both these kids fell in love with the Computer and thus changed world history with the creation of Microsoft. It would be fair to say that if Bill and Paul had been in any other school and not Lakeside, Microsoft wouldn't be there. A 1 in a million chance of luck eventually led to the creation of the 1 trillion-dollar company.
- Morgan also talks about Kent Evans, the third in the trio of brilliant teenagers in Lakeside that included Bill and Paul. By Bill’s own admission, Kent was the smartest student in the class. He too had an equal fascination for computers as Bill and Paul did but oddly enough the world never heard about Kent. Why? In a 1 in a million chance, Kent died in a Mountaineering accident before he could graduate from High School.
- Luck and Risk are close siblings that can govern all our lives. It's important to factor in the role of Luck and risks both while judging our own success and that of others. Remember, you can never control 100% of the outcomes. However, there is something that you can control 100%
Save, Save, and Save
- In 1970, the world estimated that it would run out of oil. The calculation was simple, the amount of oil that was being consumed was unsustainable and there would be none left. Fortunately, for you and me, that didn’t happen. Why? Did we generate more oil? No. We began to save. The US uses 60% less energy per dollar of GDP than it did in 1950. We started building cars, homes, and factories that used significantly less oil than we did a couple of decades ago.
- As we have learnt from the previous example, generating more wealth may not always be in our control but saving surely is. Let's say there are two investors - one with an annual return of 12% and another with 8%. The 12% guy ends up spending as much as he earns and the 8% guy needs half as much money to be happy. Despite being a worse investor, the 8% is way better off
- Remember, building wealth has little to do with your income or investment return rates- it has a lot more to do with your savings rate and it is perhaps the only financial factor 100% in your hand.
- General Electric had been the crown of the US Economy for the longest. In 2004 it was the largest company in the world and then in the 2008 financial crisis, it collapsed like a castle of cards. Its stocks fell from $40 in 2007 to $7 in 2018. The blame was placed on CEO Jeff Immelt who said something insightful at the time of leaving “Every job looks easy when you are not the one doing it”
- When we look at other people's jobs and success, it looks easy because we often miss the price the person has paid to get there. Even in investing one common piece of advice, you will receive is “to hold your stocks for the long run” but hardly do you know what it costs to do that. Markets can be very volatile and one bad day can cost you an entire week’s sleep. So, in the course of your investment journey, if you are having an unpleasant experience, consider it as a fee and not a fine. It's a price you have to pay for your success as in life nothing comes free.
On that note, as much as we would love to summarize the entire book for you, we would encourage you to purchase the book and read it now because everything comes at a price and nothing comes free. We wish you the best in your journey as an investor and hope you lead a wealthy and fulfilled life.