Book Summary: The Psychology of Money
This book gives a different approach to looking at money. Most of us think of money and investing in financial and economical terms but we forget about the psychological and emotional impact that money has on our life. And in some important ways, to achieve mental satisfaction and freedom in life, investing should be considered from our POV only.
Some key points of this book -
Don’t think of finance as hard science. It is not objective like physics or chemistry. World politics, people’s behavior and emotions, and your current life scenarios are all factors that affect the economy. And the combination of these factors makes finance subjective. So in order to develop the mindset of an investor, think subjectively.
Don’t copy others. Their financial goals are completely different from yours and they don’t want what you want. Rather, learn from them, see how they research, and then think with your mind.
Don’t get overwhelmed by success. Bill Gates said “Success is a lousy teacher. It seduces smart people into thinking that they can’t fail.” Remember that luck and risk are doppelgangers and they are separated only by a thin line. Therefore it is very important to differentiate between them. We attribute most of our failures to bad luck because it provides a nice, cohesive narrative and hence we overlook our bad decisions. Therefore, zoom out and then analyze your position.
Know what you want and what makes you comfortable. Know what your “enough” is. It’s always foolish to risk what you have and need for what you don’t have and don’t need. Social comparison plays with our brains and this is a never-ending cycle. The only way to win this game is not to play the game. “The only way to win in a Las Vegas casino is to exit as soon as you enter”
Compound interest is brilliant. No doubt. You don’t need tremendous force to create tremendous results. Consistency is the secret recipe.
Getting wealthy is all about survival. You need to stick around for a long time and have a survival mentality. Don’t risk and die.
Always keep a sane head because black swan events can make or break you. Napoleon said, “Genius is someone who can do average things when all things around him are going crazy.” So keep on investing. Today can be insane but it will all calm down with time.
The highest form of wealth is to wake up every morning and say I can do whatever I want, wherever I want, whenever I want and with whoever I want. Money buys freedom and this is its biggest dividend. The only way to win the game is to get out of the game as soon as possible.
No one cares about your success so don’t try to impress others with your wealth. Spending money to show people how much money you have is the easiest way to lose money. We tend to judge people by what we see, not by how much money they have in their bank accounts.
Be ready for a surprise because the invisible hand of economics does not like to stay too good or too bad for long. Anything can happen anytime.
Always make some room for error
Remember that you and your needs will change with time. So use that to make sensible decisions today.
People love to be pessimistic because it can be observed in a short term. The optimistic results are only observed in the long term. Growth is driven by compounding, destruction is driven by a single point of failure.