The Psychology of Money
Why should you read this summary?
Do you want to be a billionaire? What does it feel like to earn $ 3 billion in one day? Does having $ 8 billion will finally make you happy? In this book, you will learn how to keep being wealthy. You will learn the true value of money.
Who should read this summary?
– Stock traders
About the Author
Morgan Housel is an investor and author. He is a partner at The Collaborative Fund, an investment fund formed by fourteen people. He is also a former columnist at the Wall Street Journal and author of three books.
The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Which would you rather have a beautiful mansion and $3 billion? Or freedom and a good reputation? Do you think you have enough in life? Do you want to know how to make $84.5 billion? The answer is in this book.
The Greatest Show on Earth
The author Morgan Housel worked as a valet when he was in college. It was at an expensive hotel in Los Angeles. There was once a frequent guest who is a young technology executive.The guy is a genius. In his 20s, he designed and patented a key component in making Wi-Fi routers.The young millionaire started and sold several tech companies. He was very successful. But he had a bad relationship with money.The guy carried a stack of hundred-dollar bills with him everywhere. He showed it to everyone who would listen. He was a bragger and a drunk man. One day, the guy called a valet and ordered him to go to the nearest pawnshop. The valet exchanged his bills for several $1,000 gold coins.
What did the young millionaire do to the gold coins? He tossed them into the ocean. He called his friends and together they threw the gold coins, just like playing with rocks on a lake. A few days after that, the young millionaire accidentally bumped into one of the hotel’s lamps. The manager told him that the lamp was worth $500. The guy made a scene. He took a stack of bills from his pocket and shove it into the manager’s face. He said, “Here’s $5,000. Don’t show your face to me ever again.”Maybe you’re thinking if this was a true story. Maybe you’re thinking about what happened to the young millionaire. Yes, it’s true. You will learn a few more stories like this in this book. What happened next is that the guy went broke. After a few years, the young millionaire had spent every penny he has. All his friends and money are gone.
You see, what you cannot buy with lots of money is good behavior. Here is another story. Once, there was a janitor named Ronald Read. He was born in a small village. He was the first person in his entire family to finish high school. What’s even interesting is that Ronald only hitchhiked to school every day. Ronald’s life is ordinary. He repaired cars at a gas station for 25 years. He cleaned floors at JC Penney for 20 years. Ronald bought a two-bedroom house when he was 38 years old. He bought it for $12,000. He lived there for the rest of his life. Ronald married but he never had children. His wife died when he was 50 years old. A neighbor said that his main pastime was chopping wood.
The day that Ronald made the news headlines was the day that he died. It was in 2014. He was 92 years old. Ronald Read was worth $8 million. He left $2 million for his two stepchildren. He donated $6 million to the local hospital and library.If you search Ronald Read on Wikipedia, you will see that he was a janitor, a gas station attendant, an investor, a philanthropist, and a millionaire.How did this happen?There is no trick here. Ronald did not win the lottery. He did not inherit his wealth. Ronald Read saved money all those years and invested them in blue chip stocks. That’s it. He never took his interest. He just let them compound year after year until they amounted to $8 million at the time of his death.Are you familiar with the concept of compounding? We will discuss it more later.Here is one more story you need to learn from.
Let’s take a look at a man who is the direct opposite of Ronald Read. Richard Fusco is an executive at Merrill Lynch. He earned his MBA at Harvard. He retired at 40 years old. A business magazine listed him as the 40 under 40 most successful person. Richard had an 18,000-square-foot mansion in Connecticut. It had two swimming pools, two elevators, seven garages, and 11 bathrooms. The mansions cost $90,000 a month to maintain. Richard borrowed heavily to fund it. But then a twist of fate happened. The financial crisis of 2008 hit. Richard Fuscone lost everything just like that. He filed for bankruptcy in that same year. What can we learn from the stories of the young millionaire, Ronald Read, and Richard Fuscone?
Financial success is not hard science. Finance is the only field where a simple man like Ronald Read can succeed. A man with humble education and experience cannot be an excellent surgeon, architect, or engineer. But in finance, someone like Ronald Read can be great. Financial success is a soft skill. Anyone can learn. It is a unique field where how you behave is more important than how much you know. This is the psychology of money. No matter who you are and where you came from, money can make your head bigger. You always need to watch out for it. Everyone can be rich. But not everyone can be humble.
The founder of Vanguard, John C. Bogle, once told this story. There was a party at a billionaire’s house. At one corner are Kurt Vonnegut and Joseph Heller. They were talking about the income of their host who is a hedge fund manager. Kurt commented on how the man’s income in one day is more than what Joseph made for his novel Catch-22 throughout the years. Joseph’s reply is truly remarkable. He said that he had something that the hedge fund manager will never have. And that is “enough”.What is your source of income right now? Can you say that you know what is enough? Let’s learn from the story of these two people. Rajat Gupta was a poor boy from Kolkata. He was an orphan. But he became a CEO at the age of 45. Rajat was CEO of McKinsey, one of the world’s best consulting firms. He retired from the company in the year 2007 and took key positions at United Nations and the World Economic Forum.
Rajat also became a board of directors in five different companies. From the slums of Kolkata, he became one of the richest businessmen alive. In 2008, Rajat was already worth $100 million. But he never became satisfied with that amount. Now that he is a center-millionaire, what he wanted to become is a billionaire. He wanted to be in that circle. Rajat was then a board of directors of Goldman Sachs. He made a move to make himself a billionaire. In 2008, Goldman Sachs was in the middle of an economic crisis. Warren Buffett decided to invest $5 billion in the company to save it. As a board member, Rajat learned about it earlier than the public. The funding of Warren Buffett will surely make the stocks of Goldman Sachs go very high. Sixteen seconds after the board meeting call, Rajat called a hedge fund manager named Raj Rajaratnam. The call was never recorded but Raj immediately bought a total of 175,000 of Goldman shares.
Hours later, the deal with Warren Buffet was announced to the public. The stocks of Goldman immediately went up high. Raj made $1 million in just a matter of hours.The prosecutors reported that Rajat earned $17 million in profit.This is a classic case of insider trading. Rajat Gupta lost all his riches and went to prison.He also lost his reputation.Rajat already had $100 million. Why did he want $1 billion more?He already had wealth, fame, power, and freedom. Yet he threw it all away because he wanted to have more.Rajat Gupta had no sense of enough.We can learn three lessons from this story.
Lesson One. The hardest financial skill is to stop acquiring. The taste of more power, more fame, and more money increase ambition a lot faster than satisfaction. At this point, when you don’t make a move forward, you feel as if you’re falling behind. And the only way to catch up is to make bigger and bigger risks. Modern capitalism is very good at two things. They are generating wealth and generating envy. The person loses the sense of enough. Lesson Two. Social comparison becomes a problem. Imagine a rookie football player who earns $500,000 per year. He is already rich. But if we compare him to Mike Trout, who has a 12-year contract of $430 million per year, the rookie player seems broke. Now imagine a hedge fund manager who earns $36 million. But in 2018, the top ten highest paid hedge fund managers earn at least $340 million per year. $36 million is now low in comparison.
But what if the top ten hedge fund manager earning $340 million per year compares themselves to the top five? The top five hedge fund manager earns $770 million. What if that top five compares himself to the likes of Warren Buffet who got richer by $3.5 billion in 2018?What if Warren Buffet wants to be at the level of Jeff Bezos whose net worth is $24 billion in 2018? See the point is the ceiling of social comparison is very high. No one would ever rich it. When you are at the game of “I want to be rich just like my friends”, you will never win. There is no limit. There is no point where you are satisfied. The only way to become a winner is to not fight at all. Accept that you have enough even if those around you are scrambling for more. A dealer in Las Vegas once said that the only way to win at the casino is to leave as soon as you enter. Imagine yourself at a party in an executive village. You and your friends are discussing who is richest, who has the biggest house, who is most famous, who is most admired. There is no winner.
The one who wins is the man or woman who is content with what he or she has, who is living happily in a small house surrounded by a loving family. Lesson Three. Some things are more valuable than wealth, fame, and power, no matter how much it is. Rajat Gupta said this in his interview with the New York Times after he was released from prison. He was asked what lesson he learned from this experience.“Don’t get too attached to anything. Your reputation, your achievements, any of it. They don’t matter. This whole thing destroyed my reputation. But I have learned not to be so attached with it.”Rajat Gupta wanted to save his face. He is justifying his actions. He is comforting himself that his reputation does not matter to him anyway. But this is wrong. Reputation is priceless. Freedom is priceless. Family and friends are priceless. Loving people and being loved back are priceless. Happiness is priceless. The way to get all of these is to know when to stop taking risks, to know when enough is enough.
Lessons from one field can help us understand another. Did you know why the Ice Ages happened a long time ago? It is quite similar to how compounding grows your money in investment.It was only in the 19th century that scientists agreed that the Earth underwent the Ice Ages. The evidence is too clear to be ignored. We did not only have one Ice Age. The Earth had been through five Ice Ages and we could now accurately estimate the dates.Can you imagine the amount of energy needed to cover the entire planet in ice, melt it, and then freeze it all over again? This happened five times. What could have caused these phenomena to happen?There are plenty of theories as to why the Ice Ages occurred. One said that the movement of the mountain ranges caused the change in the climate. Another said that ice was the natural environment of the Earth and it was only interrupted by volcanic eruptions.
However, these theories can only explain one Ice Age. They cannot stand for the cycle of five. In the early 1900s, Milutin Milankovic, a Serbian scientist, studied the Earth’s position in the solar system. He concluded that the gravitational pull from the sun and moon affected the Earth’s tilt. Milankovic said that there are times when Earth is tilted a little bit more and it gets more solar radiation than usual. This change in the Earth’s hemisphere caused the extreme winters that were enough to cover the planet in ice. Wladimir Koppen, a Russian meteorologist, added a condition to the theory. He said that the unusual tilt caused the planet to have slightly cooler summers. It was the kind of summer that never gets warm enough to melt all the previous winter’s ice. After the summer, there are still areas of the planet covered in ice. That made it easier for ice to accumulate in the coming winter.
Every passing year, the amount of ice accumulates until eventually there became an Ice Age. See, this is very similar to the concept of compounding. Let’s say that you started investing 10% of your annual salary in an index fund. Your annual interest rate is 10%. So, next year, you will have 10% of your salary x 10% interest rate. Then you add again 10% of your salary for 2022. Every year, you add 10% and every year your 10% interest rate also grows. If you do not take out any of this money for the next decades, you will become a millionaire. The Ice Age happened because of slow accumulation. Compounding interest also means slow accumulation. Did you know that Warren Buffet started investing when he was 10 years old? He never used any of his interests. He just let it accumulate over the years. Warren Buffet already had $84.5 billion when he is 89 years old. That is the result of discipline and 8 decades of compounding.
If you calculate it, Warren Buffet only acquired $84.2 billion of this wealth after his 50th birthday. That is how powerful compounding is.Think about this equation.8+8+8+8+8+8+8+8+8 = 72. That is an addition. But what if you multiply 8 by itself also 9 times? 8x8x8x8x8x8x8x8x8 =134,217,728. See the difference? Warren Buffet did not think of wasting away his money when he was 20 or 30 years old. He did not quit investing even when he was 60 or 70 years old. He just kept on going consistently. He did it for a quarter of a century.There are a lot of books talking about Warren Buffet’s wealth. Again, it’s $84.5 billion.He started investing at 10 years old and stopped at 89 years old. If there is an accurate book about his compounding, it should be entitled, “Shut Up and Wait.”
Getting Wealthy vs. Staying Wealthy
There are many ways to get wealthy. But there is only one way to stay wealthy. Let us learn from the stories of these two investors. Jesse Livermore is one of the best stock traders of his day. He was born in 1877. He became a trader before the world knew that anyone could be a trader. When he was 30 years old, Jesse already earned $100 million. In 1929, the stock market crash that caused the Great Depression happened. It was all over the news. Many stock traders from Wall Street are committing suicide. That day, October 29, 1929, Jesse’s family is waiting at home. His wife and two kids are waiting for him by the door. His mother-in-law was crying inside the bedroom. Jesse came home. He was shocked but not because he was broke. He told the news to his wife. It turns out that Jesse made the bet that stocks would decline and he was right. Because of that, Jesse became incredibly rich that day. He made $3 billion just that day October 29.
When everyone betted that the stock prices would keep going up, Jesse predicted that they would go down and he became a billionaire.A different story happened to Abraham Germany. Abraham was a rich real estate developer. He became a millionaire in the 1920s. Just like most of the traders, Abraham bet heavily that the stock market would continue to go up.A few days after the crash, Abraham went missing. He took his own life.Now let’s go back to Jesse Livermore and continue his story.After the 1929 crash, Jesse was overconfident and unstoppable. He made bet after bet and his bets became larger after every win.Jesse thought that his success would just keep on going.But in 1933, he lost all his money also in the stock market.Jesse also went missing a few days later and he took his own life. The same thing happened to him four years later. He ended up just like Abraham.See, both men are good at getting wealthy. But they are bad at staying wealthy.
Getting money is one thing. But keeping it is another matter. To get money, you need to get out there. You need to take risks. You need to be optimistic. But to keep money, you should be humble. You should always remember that anytime, any second, all your wealth can be taken away from you. Because that is life. Sometimes you’re at the top, sometimes you’re at the bottom. Keeping money also requires thrift. And also accepting the fact that part of your wealth came from luck, no matter how you got it. Always remember that in life, you will not always have success. There is also failure and defeat. Yesterday’s success does not guarantee tomorrow’s good fortune. Let us go back to Warren Buffet and how he kept his wealth for over 70 years.
He invested his money at 10 years old and let it compound as decades passed by. He had $84.5 billion at 89 years old. Warren Buffet is good at investing. He knew the best companies to invest in. He knew the cheapest stocks. He knew the most effective managers. That is how he got his wealth. But this is how Warren Buffet kept his wealth. He did not get carried away. He did not panic and sell his stocks in the 14 recessions that he encountered. He did not risk his reputation. He did not attach himself to one strategy, one opinion, or one passing trend. He did not quit and he did not retire. He kept on compounding even after 65 years old.Warren Buffet survived.
You learned about the young tech genius who threw $1,000 gold coins in the ocean. You learned about Ronald Read, the janitor who donated $8 million. You learned about Richard Fuscone, the Harvard MBA graduate and real estate investor who lost all his money in the 2008 crisis. You learned about Rajat Gupta, the man who had $ 100 million and still wanted $ 1 billion more. You learned about Jess Livermore and Abraham Germany. One man earned $3 billion in one day. One man lost all his money. Both of them committed suicide. Finally, you learned about Warren Buffet. Of all these people, who do you want to be like? Remember that reputation, freedom, family, love, and happiness are more valuable. They are more valuable than any amount of money, power, or fame. Remember that the world is round. Sometimes you’re up and sometimes you’re down. There are millions of ways to get wealth, but only one way to keep your wealth. Be humble. Be thrift. Be content with what you have. Spend time with the people you love the most. They are your greatest treasure.