book reviews

The Psychology of Money by Morgan Housel

Money as a subject sounds cold, hard and abstract when mentioned as a standalone word. But behind it lies the domineering influence of mental models and psychology that decide how successfully it can be made or retained. The book speaks about it eloquently in layman’s terms, underlining the importance of saving habits, sticking to long-term goals, avoiding the noise in the market and realising that everybody has a unique concept about money and what it means in his/her life. Right from the chapter 1, the author emphasizes how the unique experience of each of us in life determines how we feel about money. That includes at what point we were born and how we have seen the economy fare during our formative years. The role of humility when we are lucky to be able to ride the market trends can never be overemphasized. Conversely, the lack of support from external conditions like prolonged recession or industrial headwinds, often termed as bad luck, can make things difficult even when we do the right things like picking up assets when they are priced cheap.   

The word ‘psychology’ used in the title and elsewhere in the book, largely refers to the conditioning of the mind and habits. It mentions the infamous scandals of Rajat Gupta (ex-CEO of Mckinsey) while he was a director of Goldman Sachs, or Bernie Madoff for his ponzi scheme operations, as pointers to how greed brings down even the most successful, influential and wealthy people. Why it is so important to say that one has “enough” is well articulated in the pages throughout. The book also underlines the value of patience in investing, delineating how more than 90% of the wealth of world’s most successful value investor Warren Buffett came after his 85th birthday. Through experiences and words of wisdom garnered from the most successful investors, the author reminds the reader time and again how the consistency of not making BIG mistakes in investing due to greed or unrealistic expectations is more important than having occasional events of phenomenal success. The other major contribution of time is that – it tends to give most of the gains or losses in very short intervals, which are mostly not predictable. Hence, ‘covering one’s bases’ is important so that a black swan event does not erode wealth accumulated over the years. As is being patient with good investments, which always ends up rewarding with time and sometimes in very short periods, without giving any clue beforehand. There has to be room for error too, which only comes if we accept that everything cannot be planned as future is uncertain. The book says in Chapter 7, “Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you”. Wise words indeed. Seamlessly comes into the chapters, the emphasis on other pieces of investing wisdom viz. keeping emergency reserves so that one does not have to cash on potentially good investments in times of distress; effect of not pursuing expensive lifestyle when going is good; and rational investing in assets that one understands. Towards the end, the author summarises all these learning nicely, which helps to remember the central concept of this book – making or retaining money is more about our behavioural aspects, and less about following a mechanical process.  

I am an investment enthusiast for more than three decades now and have been reading on these topics avidly as one my major pastimes. The book delineates basic but most important roadmaps for dealing with the behavioural aspects of investing in a story-telling style, which is really useful. I wish I had such a thinnish book to read much earlier in life, which could have helped me to understand and hopefully become a better investor today. I think both the greenhorns as well as the seasoned investors would benefit immensely from reading this book.