The Psychology of Money & How to Become A Better Investor | Morgan Housel on The Reader’s Journey

Check out The Reader’s Journey Episode Page & Show Notes

Key Takeaways

  •  Money may not buy you happiness, but it can buy you freedom
  • If you’re buying expensive things, like a Ferrari, to gain respect or admiration, just know that no one is as impressed with it as much as you are:
    • “A lot of people will think that those fancy things will give you respect and admiration but they actually don’t because people want those because they picture themselves sitting in the car”Morgan Housel 
  • “What we see is what people have spent money on, that’s what’s visible in the world. The cars they drive, the homes they have, the things they’ve spent money on…Wealth though is what you don’t see.” Morgan Housel
  • “If you’re talking about building wealth, it doesn’t necessarily matter how much money you make, it is the difference between what you make and you spend” Morgan Housel
    • It doesn’t matter if you’re making $20,000 or $20 million, if you aren’t saving any of your income, you won’t build wealth
  •  When Warren Buffett was 65, he had a net worth of about $3 billion. Today, he has a net worth of about $90 billion. That’s the power of compound interest.
    • “The gains in the early years are nothing exciting, and then they get better, and then in the later years they just explode” – Morgan Housel
      • “The reason he’s successful is because of time. Like he’s a great investor but his secret is time.”
  • You need to have a concept of enough to avoid getting too greedy:
    • “You have to have a sense of enough. Because if you don’t, you’re going to keep pushing the envelope until you make a relly regrettable decision whether that’s you go bankrupt or you end up in jail.”Morgan Housel 
  • There is 100% chance that there are at least one or more billionaires in the world who made his fortune just from being lucky
    • “There are tens of millions of investors out there. What are the odds that by chance a couple of them are going to end up billionaires, the odds are 100%.” – Morgan Housel

Intro

Books Mentioned

Why People Have Different Experiences With Money

  • Your personal experience with money shapes of you use and view it:
    • If you were born in the 1950s in the US, then during your teens and 20s, the stock market had almost no return
    • If you were born in the 1970s in the US, then during your teens and 20s, the stock market went up 10-fold
      • “That experience that two generations had during their lives, that stuck with them for the rest of their life. They went through the rest of their life thinking a different thing about what the stock market was capable of doing.” – Morgan Housel
  • The people who buy the largest majority of lottery tickets are actually the poorest Americans
    • They spend on average $400 a year on lotto tickets
      • It may seem like a waste of money for other people, but for poor people, it’s a ticket to escape their income bracket and rise up in the world
        • “If you have that view, then buying a lottery ticket is the only time in your life that makes them feel like they have a chance to get to the other side” – Morgan Housel
  • “Everyone has a different view of the world based off of their own experiences and because of that we all think about money in very different ways” Morgan Housel

What Money Can Buy You

  • When people say they want to be a millionaire, most of them mean they want to spend a million dollars, not have a million dollars
    • You can use your money to buy nice cars or a fancy house, but they joy from material items tends to wear off quickly and you become accustomed to them
  • Money may not buy you happiness, but it can buy you freedom
    • ‘It’s using money to control your time and just waking up every day and being able to say, I can do whatever I want today.” Morgan Housel
  • When you have money, you can:
    • Live where you want
    • Retire when you want
    • Quit your job when you want

What Money Can’t Buy You

  • In college, Morgan was a valet at a luxury hotel in LA. People there were constantly driving expensive cars, but Morgan noticed that he didn’t really think the driver was cool but rather he thought to himself how cool it would be to drive the car himself.
    • Morgan calls this the “Man in the car paradox.” In other words, no one is impressed with your possessions as much as you are.
      • “I don’t give a damn about him, I’m not paying attention to him. I’m picturing myself sitting in his seat.” – Morgan Housel
  • If you’re buying expensive things, like a Ferrari, to gain respect or admiration, just know that no one is as impressed with it as much as you are
    • “A lot of people will think that those fancy things will give you respect and admiration but they actually don’t because people want those because they picture themselves sitting in the car”Morgan Housel 

Wealth Is What You Don’t See

  • “What we see is what people have spent money on, that’s what’s visible in the world. The cars they drive, the homes they have, the things they’ve spent money on…Wealth though is what you don’t see.” Morgan Housel
    • You can see someone’s cars, but you can’t see their:
      • Bank account
      • Savings account
      • Brokerage account
        • “It’s invisible by definition” 
  • A person can appear wealthy by buying a big house or an expensive car, but you actually have no clue how much money they have
    • When Morgan worked at a club, there was a member who drove a Porsche, but one day the man drove in with a Honda because he couldn’t afford the payment on the Porsche and it got repossessed
      • “I had so much more wealth then he did. Like he couldn’t afford his car payment. That was like an eye-opening thing for me.” – Morgan Housel

Focus On Your Savings Rate To Build Wealth

  • “The only way you build wealth is by spending less” Morgan Housel
  • “If you’re talking about building wealth, it doesn’t necessarily matter how much money you make, it is the difference between what you make and you spend” Morgan Housel
    • It doesn’t matter if you’re making $20,000 or $20 million, if you aren’t saving any of your income you won’t build wealth
      • It may sound like common sense, but common sense isn’t always common practice
  • You can’t control what the stock market does and you can’t really control how much money you make, but you can control is your savings rate
    • “How much we spend and the lifestyle that we choose to live is much more in our control” – Morgan Housel
  • Here’s a good analogy: Think of working out as your income. If you go and eat a dozen donuts after your workout, the benefits from burning those calories cancel out.
    • The same goes for your wealth:
      • “It’s not necessarily how much money you make, it’s how much money you make and then don’t spend…that’s the variable that really moves the needle over time” – Morgan Housel

50% Of Your Investments Can Fail & You Can Still Get Rich

  • You can be wrong half the time and still make a fortune in the stock market. 
    • “A minority of your events will determine a majority of your results, and it’s true in the stock market as well” Morgan Housel
      • If you look at an index fund over a 30-year time frame, the majority of the individual stocks will have been terrible investments with about 40% of them going down to zero. But, you can still have a positive return from the small minority of stocks that did extremely well.
        • “The majority of your index returns will come from a tiny portion of the investments that you make” 
  • Tail ends drive everything:
    • Apple has experimented with dozens of different products but the vast majority of its revenue came from one product, the iPhone
    • Amazon has also experimented with countless products but makes most of its money from AWS and Prime
    • Warren Buffett has made about 500 investments over his lifetime, but about 10 are responsible for all of his returns
  • If you pick 10 stocks and 4 of them fail, don’t worry, you can still have an excellent ROI:
    • “Coming to terms with a normal loss rate and a pretty high loss rate in what you do is not intuitive and it’s not easy, but it’s a really important part of finance” – Morgan Housel

The Compound Effect

  • When Warren Buffett was 65, he had a net worth of about $3 billion. Today, he has a net worth of about $90 billion. That’s the power of compound interest.
    • “The gains in the early years are nothing exciting, and then they get better, and then in the later years they just explode” – Morgan Housel
      • Warren Buffett started investing when he was 11. The more time you have to let compounding work, the greater results you’ll get.
        • “The reason he’s successful is because of time. Like he’s a great investor but his secret is time.”

Advice For Becoming A Better Investor

  • Have a long time horizon:
    • Compounding works better over a long period of time
    • In the long run, the stock market goes up
      • “The more you increase your time horizon, the more the odds of success in markets fall in your favor” – Morgan Housel
  • If you’re investing in the short-term, the stock market is a casino. But the longer your time horizon, the less it becomes a gamble:
    • “It’s not until you’ve been investing for 5, 10, 20, 30 years, that it’s not a casino anymore. You’re truly putting the odds in your favor.” – Morgan Housel
  • Be aware that volatility is the fee you pay the stock market for great returns:
    • “The cost of investing is pretty obvious over the long term, it’s putting up with and enduring volatility. That’s the entrance fee.” Morgan Housel
      • Realize that volatility is a fee worth paying. Your portfolio may go down 20% temporarily, but it will likely recover in the long run. You’re going to get great returns as long as you hold your investment. 
  • You need to have a concept of enough to avoid getting too greedy:
    • “You have to have a sense of enough. Because if you don’t, you’re going to keep pushing the envelope until you make a relly regrettable decision whether that’s you go bankrupt or you end up in jail.”Morgan Housel 
      • If you get too greedy, you may end up like Bernie Madoff or Rajat Gupta
        • It’s estimated that Bernie Madoff made $50-100 million legitimately before he got greedy and started his Ponzi scheme
        • Rajat Gupta was the CEO of McKinsey and was worth about $100 million, but he wanted to make more so he got involved with insider trading and was imprisoned
  • Save more so that you have room for error:
    • It’s important to have a cushion of money to fall on because you never know when you might need it, like when COVID-19 hit and millions of Americans lost their jobs
  • The biggest events that move the market are the ones no one sees coming:
    • No one saw 9/11, the housing bubble, or COVID-19 happening, but events like those are the ones that have the biggest impact on the market

Luck & Risk

  • Luck and risk are two sides of the same coin
    • Risk is a huge topic in the finance world, but you barely hear about luck even though it plays just as an important role in finance. Companies here risk managers but they don’t hire luck managers.
      • “Luck and risk are pretty much the exact same thing. They’re both just this idea that there are things that can happen in the world, outside of your control, that will have a bigger impact on outcomes than anything you intentionally did.” Morgan Housel
  • The issue is that you can’t actually measure luck
    • Additionally, it’s rude to accuse someone else of being lucky
      • “We tend to ignore luck even though it is as prevalent and as powerful as risk is” – Morgan Housel
  • There is 100% chance that there are at least one or more billionaires in the world who made his fortune just from being lucky
    • “There are tens of millions of investors out there. What are the odds that by chance a couple of them are going to end up billionaires, the odds are 100%.” – Morgan Housel
      • George Soros has said in the past that he’s made a ton of money because he knows the market is going to go down when his back starts hurting

Investment Advice Is Personal

  • Investment advice is person-specific. It depends on the individual’s goals and needs.
    • “Good advice for one person can be a disaster for another person, depending on who you are.” – Morgan Housel
      • Be careful about taking financial advice from people who are playing a different game than you. If you’re a long-term investor, don’t take advice from a short-term trader.

What Is Going On With The Stock Market?

  • A few possible explanations for why the stock market is so high during the COVID crisis:
    • 1) We’re in a bubble
      • “Maybe it’s crazy, maybe this is just the next bubble and there’s no way to justify any of this and it’s all going to come crashing down” – Morgan Housel
    • 2) Tech stocks make up a huge portion of the market and COVID has increased business for them
      • Facebook, Amazon, Google, Microsoft, and Apple make up more than 25% of the S&P 500
      • “The market is reflecting these five companies”
    • 3) The Federal Reserve is pumping up the market
      • “There’s just a ridiculous amount of support from the Federal Reserve right now. They’re just blasting trillions of dollars throughout the economy.”
    • 4) Money is just shifting around
      • Travel and movie theaters are making no money, but home improvement and tech companies are doing amazing. Retail spending is actually at an all-time high.
      • “It’s just been shifted around a lot in a way that masks this dichotomy of so many businesses struggling but so many businesses and the stock market thriving” 

Morgan’s Own Investment Strategy

  • Morgan dollar-cost averages into Vanguard index funds and he’s paid off the mortgage on his house
    • “That’s it. That’s what we do with our money.” – Morgan Housel
      • If you can dollar cost average into index funds and hold them for 30-40 years, your investments will do great

Morgan’s Favorite Books

  • The Big Change by Frederick Allen
  • The Quest of the Simple Life by William Dawson
    • The author writes about what actually matters in life and what goals are worth pursuing
    • “It’s so well written and so thoughtful that had a big impact on how I think about goals in life and what really matters…I loved it” – Morgan Housel
  • The Half-Life of Facts by Samuel Arbesman 
    • The book talks about the raw science of facts and how the things we call facts sometimes turn out to be not true
    • “Facts change, like the things we think are facts. That had a big impact on me, of just thinking about the world with a greater level of humility” – Morgan Housel
The Reader's Journey : , , , ,
Notes By Alex Wiec

More Notes on these topics

Top Insights and Tactics From

31 Best Podcasts of All Time

FREE when you join over 12,000 subscribers to the
Podcast Notes newsletter

No Thanks