Financial success has little to do with how smart you are and a lot to do with your behavior. Have you ever wondered how a person with many academic achievements ends up with less wealth than other people who don't even have an education? Human behavior is a key variable in financial performance, from something as large as a country's economy to as small as your personal finances. But at the same time, this is the most difficult aspect to analyze and understand. In this summary, I will summarize the most important chapters of the book "The Psychology of Money" by Morgan Housel.
Chapter One: Nobody's Crazy. The idea we have about how the world and money work has little to do with what actually happens in the world and a lot to do with what you believe. What you think about how the world works is highly influenced by your personal experience, and your personal experiences depend on your current context. For example, it is very likely that a person living in a country with an inflationary crisis has very negative experiences with savings and therefore has the need to spend everything in the shortest possible time. However, someone else who lives in a country with a stable currency thinks differently about saving and has a more optimistic attitude towards it. Thus, two equally intelligent people can act completely differently when it comes to how to save and invest money. Every decision people make with their money is justified by the information they have at that moment and is linked to their unique mental model of how the world works. We all seem to do crazy things with our money, but no one is crazy. Our monetary decisions are based on unique experiences that can only make sense to us at a given moment.
Chapter Two: Luck and Risk. If you interview successful business people and ask them about their success, they will surely talk about a lot of work and a lot of sacrifice. This is how they would explain their success. And while this is true for them, the other side of the coin is that there are invisible variables (circumstances) that can be decisive. Two of them are luck and risk. Don't get me wrong, this doesn't mean you don't have to try; it means that effort is not the only ingredient for success. For example, many people talk about Bill Gates' business success and innovation. There are even those who use it as an example to follow. But Bill Gates studied at Lakeside, an elite private school in Seattle. It was the only school with a computer in the 1960s, a Model 33 teletype. It greatly influenced Bill Gates' interest in computing. He was even given permission to skip math classes to pursue his interest in computing. Bill Gates himself admitted that if he could not study at a computer school like Lakeside, there would be no Microsoft. Gates wasn't the only bright student at the school; with him were Paul Allen and Kent Evans. They were friends; anyone would have thought that all three were destined for success. But Ken Evans died prematurely in an accident before graduating. As you can see, there were decisive events in their destiny that were beyond their control. We see the results, but we don't see the complexity behind them. This is also the case with risk. We are unable to measure the risks taken by large investors. We don't know how much risk that investor took with that company that is successful today. We do not know the debts that this businessman acquired by gambling on the future at the beginning of his business. This is not a simple problem; the difficulty of identifying what is due to luck, what is due to skill, and what is due to risk is one of the biggest problems we face when deciding how to handle our money. The author gives three lessons that can help us:
1. Not all success is due to hard work and not all failure is due to laziness. Keep this in mind when you judge others and when you judge yourself.
2. Two, don't look at exceptional cases or take extreme examples; the more exceptional the result, the less applicable it is because it is very likely that the extreme results were influenced by extreme cases of luck or risk.
3. Three, nothing is as good or bad as it seems; assuming the role that luck and risk play in the results we achieve will help us forgive ourselves and leave room to keep trying until the game is in our favor.
Chapter Three: Never enough. When rich people do crazy things. Many people want to become rich, but it is very abstract. How rich do you want to become? How much is enough? An island party organized by a billionaire was attended by two writers, Kurt Vonnegut and Joseph Heller. Vonnegut noted that the billionaire made more money in one day than Heller made from his novel. Hellera replied: "Yes, but I have something he will never have: enough." There is a danger of never having enough. People can have it all: wealth, high value assets and power, but they can also take the risk and lose it all because they wanted more. The author tells the story of Rajat Gupta, who was orphaned during his teenage years, but years later will graduate from Harvard and become the CEO of McKinsey and Company. In 2008, his net worth was $100 million. But Gupti wanted more, and he proved it in 2008 during the Goldman Sachs crisis. Warren Buffett decided to invest five billion dollars in the bank to help it survive. Since Gupti was a member of the board of directors of Goldman Sachs, he received this information before it became public. So he decided to secretly agree to buy Goldman Sachs shares before they rose due to Buffett's investment. Gupti was arrested for insider trading; thus he destroyed his reputation and career, motivated by the greed of never having enough. In this chapter, the author leaves some important lessons: The single most difficult financial skill is to stop a goal from slipping. The goal gets further and further away when the desire for more wealth and power grows faster than satisfaction, and it's a red flag that you're probably about to take on ever-increasing risks irrationally. True happiness is in the contentment of having enough, not in constant expectation. Two, social comparisons are a problem; comparing yourself to others is an unnecessary torture that should be avoided. There will always be someone who achieves better results than you; there will always be someone higher up the ladder; comparing yourself to them will steal your joy. Run your own race. Three, there are many things that are not worth the risk regardless of the potential gain. Reputation is priceless, freedom and independence are priceless, family and friends are priceless, being loved by those you love is priceless, happiness is priceless. If you want to keep all of this with you, you need to know when to stop taking risks that can jeopardize all of these valuable things.
Chapter Four: Interest Calculation. There are many books on investing, and many of them are very good, such as the one about how Warren Buffett made his fortune through his investments. Buffett's fortune reached 86.5 billion dollars, no doubt, a phenomenal investor. But there is one thing you must not forget: Buffett is not only a good investor, he has been a good investor since childhood. Thus, more than 90 percent of his assets were accumulated after 50 years. Warren Buffett's skill is investing, but his secret is timing. That's how interest calculation works. The lesson the author wants to teach in this chapter is that good investing is not necessarily about getting the highest returns. The highest returns are usually one-time hits that cannot be repeated. A good investor is one who makes reasonably good returns that he can rely on and that can be repeated over long periods of time. And as Charlie Munger said, the first rule of compounding is never to interrupt it unnecessarily. Compound interest is not like planting a tree in one year you will not see much progress; in 10 years you will notice the difference, and in 50 years you will have created something extraordinary. But staying on your feet all that time requires surviving the unpredictable ups and downs of life that we all experience over time.
Chapter Five: Getting Rich or Staying Rich. Many financial gurus talk about how to get rich, which has made this topic boring for many people. But there's something else that's often lost sight of: It's not just about accumulating a certain amount of capital, it's about maintaining your wealth over time. The author claims that there is only one way to stay rich: a combination of frugality and paranoia. Frugality means using resources wisely. Staying rich requires that you have modesty and fear that what you have earned will be taken away or lost.
Chapter Six: You Can Be Wrong Half the Time and Still Make a Fortune. In this chapter, the author tells the story of Heinz Per Gruen, who became famous for his shrewdness in investing in art. He managed to amass a collection of valuable works of art, but the reality is that it was not a pure vision of Gruen, but a large amount of art, only a small fraction of which became valuable art. That means Gruen was wrong most of the time. However, he managed to hit it. If you want to venture into the world of entrepreneurship and investment, you must understand that many things in the world conform to the 80/20 rule, known as the Pareto Principle. Experienced investors in large companies expect that out of 100 of their investment decisions, 80 percent will fail. If you see something that has achieved extraordinary results or become famous and influential, you must understand that it is a one in thousands or millions event. It's the stock market; most will fail, some will perform well, and only a few will bring incredible returns. According to the author, Warren Buffett admitted that he owned shares in more than 400 different companies during his lifetime, but the biggest gain came from only 10 of them. Many large companies understand this reality of life. For example, if you look at all the series that Netflix has produced, you will see that only a few have achieved significant success. Once you understand this, you can accept that it is normal for many things to fail or go wrong.
Chapter Seven: Freedom. The author tells a story about how one day he wanted to become an investment banker because they were making a lot of money, and he thought he would be happy once he started doing that. When he managed to work as an investment banker, he understood from day one why they made a lot of money: they worked harder and longer controlled hours than any human could handle. The author says that although he felt important and well-paid in that job, there came a time when he could no longer stand being a slave to his boss, as he was forced to work every second of the working day. Those were the most miserable days of his life. He was only able to work like this for a little over a month. No matter how much you love your activity, if it turns into something that takes over your time, you'll end up hating it. The highest form of wealth is the ability to wake up every morning and say, "I can do whatever I want today." We hear people all the time saying they want to be happy, but happiness is complex because we are all different. But there is a common vocabulary: the universal fuel of joy is the ability to control one's own life. There are tempting opportunities to make money, but there are many pitfalls that can be difficult to get out of. Don't fall into the endless cycle of making more money at the expense of one of your most precious values: freedom. The ability to do what you want, when you want, with whom you want, as much as you want, is priceless.
Chapter Eight: The Seduction of Pessimism. Have you noticed that many people show great interest in the tragic messages of prophets of doom? It's as if people like to hear that the world is going to ruin. Pessimism is the order of the day. That's because pessimism sounds smarter. The author mentions the time when the Wall Street Journal published an article written by a Russian professor. The article looked like a dystopian movie warning that by 2010 the United States of America would be divided. Alaska would come under Russian control, California would become the California Republic and be under Chinese influence, and other apocalyptic prophecies. This article was published on the front page of a prestigious newspaper. Pessimism is natural and evolutionary because organisms that treat threatening situations as urgent are more likely to survive and reproduce. However, optimism is the best option for most people because the world always tends to be better for most people most of the time. The reality is that the desire to survive in the pursuit of profit drives people to seek solutions in the midst of adversity. In the context of necessity, innovation will emerge because necessity is the mother of all innovation. Imagine you are in Japan a few days after it was defeated in World War II and you read an article that says Japan will become one of the world's leading economies. What would you think? You might believe it, or you might see it as an optimistic cliché. But it came true. Japan managed to recover and become a world power after hitting rock bottom. As you can see, sooner or later, solutions will emerge as a people's response to problems and adversity. It is one of the important drivers of economic recovery and is often ignored by pessimists. Without optimism, it is impossible for people to create solutions to problems.
I hope you found the book summary useful and inspiring.
