Every time I think about my Financial Life, I go through tragic failures and some right insights. There is a constant, however, in the stories I tell and which echo in my mind every time I look at my Investments with detachment. In my first 20 years as an investor, the results achieved were influenced more by emotions and the psychological aspect than by mere technique and the chosen tools. That’s why, in this article, I want to tell you about a book on the subject that I recently read and that struck me. It’s called the Psychology of Money and it’s an essay written by Morgan Housel, Collaborative Fund partner and former Wall Street Journal and The Motley Fool columnist.
Behavioral Finance and the study of the role of emotions in the behavior of investors is a very interesting area that has always interested economists.
It is used to explain crises, financial bubbles, and people’s reactions to market cycles.
The Psychology of Money brings some of these concepts in Personal Finance claiming that the Financial Success psychological aspects are more important than technical skills.
I too have always been deeply convinced of this.
Today even more so, given that the Technique for managing one’s finances is available to everyone, but the results of investors can vary a lot, assuming the forms of amazing performance or resounding blows.
I do not want to summarize the book also because to do so it would be enough to read chapter 19 dedicated to reviewing what has been learned in the previous 18 chapters.
Instead, I want to bring you some food for thought that I will try to bring with me into my life as an Investor trying to remind myself that my choices largely depend on my financial experiences.
In this article
- Luck and Risk
- Compound interest, thrift, and paranoia
- The seduction of Pessimism
- Why Read Money Psychology?
Luck and Risk
Scott Galloway says Nothing is as good or bad as it seems.
Risk and Luck are very difficult to distinguish, but they are two sides of the same coin.
Risk is what happens when you make a good decision and don’t get a good result.
Luck, on the other hand, is the positive result that follows a wrong or otherwise mediocre decision.
In investments, it is difficult to estimate the exact role of Fortune on positive results.
Attributing the success of others to luck makes us seem envious and mean.
Attributing our success to luck can be demoralizing.
It is also difficult to attribute failure to bad luck.
We usually attribute the failure of others to bad decisions, while we elaborate more or less articulated explanations for our failures.
Instead, we should try to distinguish luck, skill, and risk by accepting that the accidental impact of events beyond our control can outweigh the impact of the actions we consciously take.
To try to improve in this process we can start by:
- Be careful to think that the efforts made and the decisions made have a 100% impact on the results;
- Focus less on single episodes and individuals and more on general trends.
Recognizing that luck and risk are part of the game will make you accept that not everything is in your control and will also make you focus on what is in your full control.
Compound interest, thrift, and paranoia
We all tend to think of Warren Buffett as the greatest investor ever and he certainly is.
But it is curious to remember that 81.5 billion of Warren’s 84.5 billion was earned after his 65th birthday.
The mathematics of compound interest shows us that the most important gift for the investor is patience and the ability to obtain good returns that can be maintained for as long as possible.
You don’t need high returns, but it is essential to always have a safety margin and the belief that over time things will settle down even if horrible things can happen in the meantime.
We need short-term paranoia to stay alive long enough to enjoy the fruits of long-term optimism.
This attitude prompts you to save like a pessimist and invest like an optimist, even when everyone around you seems to be losing their minds.
Morgan Housel devotes a chapter of the Psychology of Money to Saving which is something we have control over, even more than we think.
To save, we must desire less and understand that no one is more impressed with our material possessions than ourselves.
You don’t need a specific reason to save.
Predicting what we will use our savings for involves living in a world where we know exactly what our expenses will be in the future.
But this is not possible because our goals and desires are constantly changing and only a sufficient safety margin will allow our financial plan to survive the real world.
The seduction of Pessimism
Progress happens very slowly, while setbacks happen instantly.
Lehman Brothers went from a Time High to bankruptcy in just 15 months and will go down in history as one of the most dramatic failures of recent years.
Surely you remember this story and a series of market crashes, but you tend (often) to forget that the world is much better than what the newspapers say.
In investing, however, it is necessary to identify the price of success, volatility, and loss against the background of long-term growth, and be willing to pay for it.
Pessimism appears seductive in money matters but it is important not to go too far and always remember that pessimism is simply easier, more widespread, and more convincing than optimism.
How many bad choices do we make on the markets in panic or on the wave of negative emotions?
Success in investing comes at a price called volatility, fear, doubt, uncertainty, and regret.
It is not easy to maintain optimism, but if we widen the time horizon it will be easier to bear this cost and be successful in investing.
Why Read Money Psychology?
In this article, I have summarized some interesting insights and original ideas that I found in Morgan Housel’s book.
I often see more or less professional investors reading the market and several people following these insurance tips.
The truth is that everyone is different when it comes to investing and should follow their approach by recognizing the role of risk and luck.
We should also remember that the aspect we can most easily control in managing our money is the ability to save and the approach we have to wealth and spending.
The important thing is not to get rich but to stay rich and thanks to money do what we want when we want and with the people we want.
It is not easy and unfortunately, as Bill Gates reminds us, let us remember that: “ Success is a bad teacher. It seduces intelligent people and convinces them that defeat is impossible.
I hope you enjoyed this article.