As a part of #2bookamonth challenge, this is the second book of the year.
I picked this book out of my interest in behavior finance. And as the name suggest, this book doesn’t disappoint in this context. Unlike most of the books on investing, this is a short book of approx. 230 pages, not exaggerating too much on any topic. The best part is that the book is divided into small chapters and each chapter consist of stories, anecdotes conveying the message for better understanding. The author has not shied away from even sharing his psychology towards the money he owns towards the end of the book.
As per my understanding, the key message is that doing well with money has less to do with the smartness of the person and lot to do with the behavior. There are a lot of learnings one can take-away from the book, my top 6 are as follows:
- Manage your money in a way that allows you to sleep at night: I guess, this is the best punchline Morgan has put in this book. He explains that managing the money well is different from getting a highest package or getting high returns on the investment. People tend to lose sleep even when they are earning highest returns. There is a difference in getting wealthy and staying wealthy. So, the fundamental question we should ask ourselves before making any financial decision is – Will this help me to get sleep at night?
- Respect the power of luck and risk and be humble: We should be careful when assuming certain outcomes are only based on our 100% of actions. There are other factors that also have a role to play (luck and risk). We often forget to take it into consideration when calibrating someone’s success or misfortune. Morgan wrote a letter to his son when he was born and stated- “Not all the success is due to hard work and not all the poverty is due to laziness. Keep this in mind when judging people including yourself.” Further, another great advice that Morgan mentioned in the letter was “No one is impressed with our possessions as much as we are. We may think we need flashy possessions but deep inside what we want is respect and admiration from others. And these pricy possessions never bring that- especially not from the people we want to respect us.”
- Don’t narrow your focus on individual patterns: Morgan emphasizes on focusing on broad patterns. As it so happens that when we focus on individual investments, ones which are doing well look to us as winners than they are, and the losers appear to be more regrettable than they should be. One must understand that it is not possible that all the things go right all the time. We can be wrong half the time and still make a fortune because of the 80-20 principle. As per Morgan, it is fine to have large chunk of poor investments and few outstanding ones.
- Make ‘time’ and ‘patience’ your best friends: The single most powerful thing that any investor can do is – increase the time horizon. The ones who understand the power of compounding understand the role of ‘time’ in investing. He points out one fact which makes the point so relevant - $81.4 billion out of $84.5 billion net worth of Warren Buffet came after his 65th birthday. His secret in investing is time. His close friend and business partner Charlie Munger were quoted saying – “The first rule of compounding is: Never interrupt it unnecessarily.”
- Define the cost of success and be ready to pay it: There are no free lunches. The problem is that for a lot of things the price tags aren’t visible. When we experience them first-hand, then the price becomes apparent. He uses the statistic that the S&P 500 increased 119-fold in the 50 years ending 2018. Imagine, if someone would have invested a lump sum and just watched it compound over years. But not many have done it. Because there is a ‘fee’ for these incredible returns which are fear, uncertainty, regret, panic as stock markets plunges at regular intervals. This is the price we must learn to pay to enjoy the returns.
- Define the game you’re playing: We often commit mistake of making our financial decisions on someone else opinion (be it experts’ advice, stock market news, some industrialist’s portfolio, and other mediums). A teenager, an elderly person, and a hedge fund manager- all will have different goals. And the hard reality is that another person, whom we are blindly following, doesn’t know our end goal. We follow a decision that may be right for them and disastrous for us. Hence, it is important that as an individual we realize our game to avoid getting distracted and off-track by others’ decisions. This is no single right answer in this mad world of investing. We just have to find out the answer that works for us.
There are many books on investing, but this book provides a fresh look on the human biases we have, in crisp manner and using simple language. One is bound to gain awareness on our psychological behaviors to navigate better with the money matters. Let me warn you , there is no math-based logic displayed in the book to tell you where to invest, best ways to invest rather Morgan has dived into the grey area on showcasing how people make financial decisions in real world.
I would recommend this book to anyone who doesn’t have the appetite to go through thick detailed books on psychology yet wants to learn about behavior and money decisions. It will help you to make your own mental approach for money.
As always, please don't forget to leave your comments in the comment box below and share what are you reading currently. Happy Reading!