The psychology of Money written by Morgan Housel gives timeless lessons on how to interact and have money.
“A genius is the man who can do the average thing when everyone else around him is losing his mind” Napoleon
The author summarizes the book in the introduction, “the premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.”
The right behavioral skills is what can make you rich, not your intelligence or lack thereof. Housel begins the book by talking about a genius, who designed and patented a key component in WI-FI routers. He was extremely successful, but had a childish relationship with money. He would do immature things like give one of his colleagues several thousand dollars to go and buy gold coins. He and his colleague would then throw the coins into the ocean like they were skipping rocks. The genius, years later, went broke.
Morgan Housel, to make a comparison, then talks about a man named Ronald James Read who was a janitor and a very rich man. Ronald James Read lived a low-key life. He “fixed car’s at a gas station for 25 years and swept floors at JCPenny for 17 years.” Ronald died in 2014 at age 92 and had a net worth of $8 million dollars. How was he able to achieve this? “In his will the former janitor left $2 million to his stepkids and more than $6 million to his local hospital and library.” There was no lottery win or secret to his success. Ronald James Read invested in blue chip stocks and overtime they were worth $8 million dollars.
Ronald James Read was patient, in comparison to the WI-FI genius who was reckless. Is investing the great equalizer in life? You can find many stories like this in finance. Finance is the only industry where a person with no education can outperform a genius. “There will never be a story of a janitor outperforming the world’s top nuclear engineers, but these stories do happen in investing…financial success is not a hard science…it is a soft skill, where how you behave is more important than what you know.”
Finance is taught as a math-based field where formulas tell you what to do. It is assumed that you will follow the formula, but many times following the formula can be hard when our emotions tell us to do something different.
Finance attracts the smartest minds coming from top universities, but this has not made us smarter investors. We “are taught about money in ways that are too much like physics (with rules and laws) and not enough about psychology (with emotions and nuance).”
Finance is guided by people’s behaviors. The history of greed, insecurity, and optimism can give you insight as to why people bury themselves in debt and why investors sell out at the bottom of a bear market.
