After reading a number of endorsements and receiving numerous recommendations to read Morgan Housel’s The Psychology of Money, I finally got around to checking it out. I found several concepts in the book important enough that I decided to take the time to write them down and share them.
Three big messages materialized, in my view:
- Investing success frequently requires more time than many investors expect.
- Many investors triumph despite being uncomfortable.
- Practicing humility, checking your ego, and forgiving yourself tend to lead to better investment outcomes over the long term.
Drilling deeper on point #1: without sufficient time the wonders of compounding returns lack the duration necessary to overcome the inevitable interim periods of negative returns. To drive this point home Housel noted that of Warren Buffett’s $84.5 billion in wealth, $81.5 billion came after Buffett’s 65th birthday! Of course achieving $3.0 billion of wealth in the first 65 years is nothing to scoff at, but seeing it multiplied over 28x in the next 25 years truly astounds.
Housel contends that success with money comes at a cost. Treating uncertainty, doubt and regret as fees to be paid rather than fines to be avoided represent to investors the costs of admission to success. Similarly, risk should be embraced as enduring it pays off over time. A key corollary of embracing risk, however: avoid ruinous risk as it prevents investors from being able to incur future risks that likely will pay off with time.
Humility, kindness, and compassion likely will garner investors the respect and admiration they seek much faster and more completely than will allowing ego to dictate investing decisions in search of newer and flashier material possessions. Housel defines savings as the difference between an investor’s ego and their wealth. Likely, investors will sleep better at night practicing self-forgiveness for their investing mistakes and avoiding the extremes of financial decisions that typically plague those looking for more stuff. Managing to avoid the excessive risks that frequently characterize ego-driven investing also likely better equips investors to avoid succumbing to the overly pessimistic storylines that force long-term investors out of winning positions.
While Housel employs the following example closer to the beginning of his book than to the end, it distills the importance of time, humility, and embracing risk. The families of Sue, Jim, and Tom invest $1 per month from 1900 to 2019. Sue’s family invests through thick and thin, feast and famine, dutifully plowing $1 per month into the U.S. stock market while staying fully invested regardless of the prevailing economic condition. Tom’s family is more milquetoast than Sue’s family, though, and only invests $1 per month when there’s no recession, sells six months after a recession sets in, and fails to re-invest and restart their $1 per month investing until six months after a recession ends. Meanwhile, Jim’s family is just flat-out risk averse and only invests $1 per month when times are good, sells everything and keeps their $1 per month in their pocket during recessions, and only goes all-in again and recommences their $1 per month investments once the economy moves beyond recession. While Sue’s family may test its intestinal fortitude remaining invested and continuing to save come hell or high-water, they end up with $435,551 by 2020 while Jim’s family had $257,386 and Tom’s family $234,476. Notably, all three families ended up relatively large winners as only 1,438 months exist between 1900 and 2019, but Sue outperforms Jim by 77.8% and Tom by 95.1%. All too much like the PTA raffle, investors pretty much must be present to win.