The Psychology of Money by Morgan Housel

Day traders are playing a different game than you and me. They constantly look for short-term gains and Morgan sees them as responsible for various financial “bubbles.” IF an asset has momentum, it’s not unreasonable for short-term traders to assume that it will keep moving up. At some point, they realize that the price is way above the company’s value and the share cost plummets. The 2008 housing bubble worked the same way. As more people bought houses just to resell them (flip), the housing prices went way up due to demand until the market crashed back to realistic prices. The main point is to understand your own time horizon and not be persuaded by people playing a different game.

Optimism is a belief that the odds of a good outcome are in your favor over time. It’s not guaranteed, but it’s the most reasonable bet. (Doug: Studies also show that optimists are happier.) Pessimistic stories get a lot more attention as destruction can happen fast like terrorist attacks, plane crashes, and natural disasters. Pessimism is also seductive as expecting things to be bad is the best way to be pleasantly surprised when they are not. (Doug: Our news media feeds this with its “if it bleeds it leads” approach to journalism.

We all tell ourselves stories to make sense out of parts of the world we don’t understand. This gives us the illusion of control. We all know a lot less about the world than we think we do. Bold people think that their fate is mostly in their hands and they are surely wrong. A lot of your success as an entrepreneur is due to the actions of competitors and changes in the market. Narratives, be they true or false also drive things like markets and elections.

Here Morgan summarizes the previous chapters. You should save so you can better deal with life’s inevitabilities. Seeking to have better “stuff” won’t earn you respect and admiration but kindness and humility will. There is always risk in managing money, but try to avoid risks that cause you to lose sleep. Things will go wrong so expect it. Above all save all you can and invest for the long haul

Here is what Morgan does. He has always lived below he means, which has allowed money to pile up. This allowed him to pay off his mortgage as fast as he could, which allowed him to feel more independent. It may be defenseless on paper, but it worked for him. He keeps about 20% of his liquid assets in cash. You do this and it’s less likely that you will ever be forced to sell stocks. Statistics show that 85% of large-cap active managers didn’t beat the S&P 500 during the last decade. That’s the main reason that Morgan has his money in low-cost index funds. He maxes out donations to retirement accounts and contributes to his kids’ 529 college savings plans. (Doug: I have done all of this and as a result, I tell people that I’m retired and living on a “fixed” income, which means that it’s not broke.)

We end with a brief history of consumerism from the end of World War II to today. This is ideal for students and adults to read so they can understand the path we traveled during this important era.

Morgan is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of the New York Times Sidney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He has presented at more than 100 conferences in a dozen countries. He speaks about behavioral finance and history, using storytelling to explore how investors deal with risk, and how we can think about risk in a more productive way. For availability and more information, email longtermwords@gmail.com and follow him on Twitter @MorganHousel.

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