Morgan Housel – the author of the book – The Psyschology of Money starts with a story of two investors. I’d like to start with a story of my own
Mr L is a well read finance professional, armed with an accounting degree, balanced emotional behaviour and with a decade long track record of identifying stocks several of which have turned out to multibaggers.
Mr V is a humble school teacher – with absolutely no financial background and very little understanding of how markets work.
If I asked you which individual is more likely to generated 100 bagger returns in the market – my guess is that you would lean towards the former.
However by now you would have got the drift of where I am going with this. Mr V beat Mr L by a huge margin. The best Mr L has ever done is a 10X – while Mr V did manage a 100 bagger.
Mr V by the way is my father.
The moral of the story is doing well with investing is not about how much you know but about how you behave.
DO NOT MESS WITH COMPOUNDING
In my case there were a whole bunch of things I did and conversely there were things that my father never did and that was – Messing with compounding.
The reason the stock he picked turned out to be a 100 bagger was that it was left alone to run the compounding engine for over 3 decades. For almost two decades it was nothing but a piece of paper lying in a suitcase (back in the days of physical share certificates).
This and many more gems form the fulcrum of this book by Morgan Housel.
Having read plenty of books on this subject, it wasn’t surprising that I “knew” and had “read” about quite a few of the concepts that Morgan wrote about.
Knowing and doing are however two very different things.
There was few insights in the book – which really hit close to home as they were exactly able to pin-point the reasons for the huge gap between my “bookish knowledge” and “actual investment performance”
I had many take aways from this outstanding book. Some of the most compelling and counterintuitive ones for me are discussed
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Raise your Humility
Past a certain income level of income – what you need is just what sits below your ego
Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.
But spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.
Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. Its to raise your humility.
Frugality was an important reminder to me. Coming out of the pandemic – where most of us were forced to save out of no choice- I had been planning lots of ways to splurge as things opened up in 2021. Few positive cash inflows played their part in fueling these spending dreams. Reading this chapter however made me realise how important it was to distinguish between wants and needs. It’s not that I wont have fun at all – but doing it within reason and not going all out on a spending spree was something I needed to hear and in fact was also lucky to stumble upon through this book at the right time.
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Never Interrupt Compounding
I know about compounding – but I clearly I haven’t implemented it better than my father. Knowledge is dangerous by the way in investing. There are countless examples of portfolios of dead persons being the best performing portfolios merely because no one interrupted the compounding engine. I seen this playing out so close to home and is one lesson I am trying to take very seriously
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The Importance of Cash in your portfolio
While this is not one of the direct stories that Morgan talks about – it’s hidden in the confessions chapter where he speaks about how he actually manages his own money. Morgan mentions that as a family they prefer to keep atleast 20% of their portfolio in cash.
While it intuitively doesn’t make sense – when I reflect on why I personally kept going back an interrupting my own compounders in the portfolio – I realised that that I had never created an emergency fund and was almost always operating on zero cash allocations. So every time I had a blip – I’d had to sell a part of the portfolio. Keeping a reasonable amount of cash – just for a rainy day was perhaps the most important investment decision I never took.
Being good at stock picking pays no dividends if you are unable to let them compound over time.
Inaction was infact the best action. In order to be inactive though on the portfolio what I realise now is that I has should have been robustly diligent about creating the cash cushion around the portfolio for emergencies and other needs.
When I read about Morgan keeping 20% of cash in his portfolio – it looked too large to me to be honest.
However when I rethink about it – the fact that one is willing to forego a few percentage points in portfolio returns was actually counterintuitively responsible for getting better returns on the compounders by shielding them from emergencies
Vision is always 20-20 in hindsight. This was however my single biggest takeaways from the book
Summary
I think this book is full of gems and is a very easy to read book. Different people based on where they are currently in their understanding of behavioral finance will take home different lessons from this book. One thing is for sure though – its not something that you should read once. This book is meant to be savoured many times over- slowly and steadily – connecting the dots of each lesson back to your own personal financial journey to make the best use of this compendium of ideas.
