Key Takeaways from the book, "The Psychology of Money"

Morgan Housel’s The Psychology of Money is a timeless book about wealth, greed and happiness. Below are 9 key takeaways from the book.

1. “Success is a Lousy teacher, it seduces smart people into thinking they can’t lose”

In the case of things going your way, you may be wrong if you are overconfident and believing that success is only a result of your efforts. In many of our life events, chance and risk play a major role.

2. “The hardest Financial skill is getting the goalpost to stop moving”

Humans will never be satisfied. As of today, I may consider retirement if my portfolio reaches $10 million. As soon as I achieve it, I might start thinking of growing it even further so I can achieve something even bigger.

There is a problem of social comparison: a big sportsperson earning 350k a year might compare his income to a fund manager who makes 10 million a year on his fund, who might compare his income to Warren Buffet who made billions on his portfolio.

3. Power of Compounding

Nearly 96% of Warren Buffet’s wealth was acquired after his 65th birthday. The key to building wealth is to think of it as running a marathon and not a 100m sprint. Buffet started investing in his early twenties and has been following the art continuously ever since. Although his returns are lower than many hedge fund managers, he has been there for longer.

Growth of wealth at a rate of 25% for 50 years is superior to growth at a rate of 60% for 30 years. 1.25⁵⁰ > 1.6³⁰

4. Applying Survival Mindset

Don’t focus on big returns but focus on being financially unbreakable. If you will be unbreakable you will eventually get bigger returns as you will witness power of compounding.

Planning is important but the most important part of the plan is to plan on the part of the plan not going according to the plan. Read it once again, I am sure you will get it. Keep room for errors.

Be optimistic about the future but paranoid about what will prevent you from getting to the future.

5. Wealth is what you don’t see

Being wealthy and being rich, are two different things. Spending money to show people how much money you have is the fastest way to have less money.

6. Freedom is the highest form of wealth

Money is most effectively measured by comparing it to how much control you have over your time. People earn money to be happy, which is subjective. But a common denominator has been to take control of your life.

7. The Seduction of Pessimism

Pessimism sounds smarter and intellectually captivating, and gets more attention. But the world is designed to evolve towards betterment and growth.

8. Less ego more wealth

Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more options in the future.

9. Keep room for errors

Endurance is what makes compounding magic over time. Room for error looks like a conservative hedge, but if it can keep you in the game, it can pay you many times over!