Morgan Housel’s “The Psychology of Money” fills a much-needed place in a crowded marketplace, offering fascinating insights and distilled wisdom on wealth, happiness and human nature
If you’ve never heard of Ronald Read, you’ll be forgiven. Although Read had a net worth of over $8 million at the time of his quiet death in 2014 at the age of 92, he hardly made the headlines. His life was so modest and everyday that few, if any, would have guessed his staggering financial success.
Especially not if they knew his daily life.
After being the first in his family to graduate from high school and hitchhiking daily to get to campus for college, Read fixed automobiles at a small gas station for nearly 30 years old. He then swept the floors as a caretaker at JC Penney for another 17 years. His friends remember his main hobby, chopping firewood.
It’s not the kind of profile Forbes magazine fits, but as Morgan Housel advises us in his witty book “The Psychology of Money”, often “wealth is what you don’t see. “.
The secret to Read’s success was less the product of “Wall Street wisdom” than the stuff of Depression-era values. Its success is the fruit of patience and prudence.
Housel begins his exceptionally insightful bestseller by contrasting Read’s approach to life and finance with his polar opposite: a Harvard-educated Merrill Lynch executive who, the same year as Read’s death, grabbed the last of his three luxury mansions after going through an embarrassing bankruptcy.
The life of the latter was characterized by greed, that of the former by good, old-fashioned values without excess. Read invested his modest earnings in stocks, sat back and let fate take its course. Its high-wheeled counterpart, however, lived on a knife edge and was always looking for more, never satisfied.
Money, as the title of the book suggests, is as much about psychology as it is about strategy. It is up to us to consider how we think about money, both consciously and unconsciously. In doing so, we will find that our beliefs about money are inextricably linked to our values.
So Housel has a tough job ahead of him, but he’s delivering on the title promise remarkably well. His delightful book, which reads with the narrative fluidity and charm of a Malcolm Gladwell play, is full of memorable characters, startling statistics, and insights no one else seems to have unearthed despite the availability of material.
Housel brings to his study a journalist’s eye for what matters (Gladwell, notably, also started out as a journalist), having written about finance for years at the Wall Street Journal and elsewhere. He also has a gift for storytelling. Each of the book’s 20 chapters is constructed in narrative form, telling a micro-story that adds to a larger, emergent picture of financial foresight.
What sets Housel’s work apart from the surplus of books on how to finance is that it focuses on how we tend to think about money. If you’re looking for advice on which stocks to pick or whether to get a fixed annuity, you’ll want to look elsewhere (however, that’s not to say that some very sound advice emerges at the end of the book). Hence the inclusion of “psychology” in the title of the book.
In this case, the psychology involved is really a matter of perspective. That is, it considers the attitudes with which we view stocks, bonds, inflation, and the whole act of saving. And those habits of mind, Housel explains with refreshing liveliness, are often the product of life circumstances – something quite limited, typically.
For example, Housel shows how, most likely, our view of stock investing is shaped by our birth and formative years, rather than our research and analysis.
If you were born in 1950, you would probably adopt a rosy picture of stock investing – having seen the market soar during your formative years of 13 to 28. If you were born in 1970 and spent your teenage years in young – adulthood seeing a stagnant stock market, you would, naturally, be more likely to invest in stocks. Bonds would probably be your thing.
And the same circumstantial forces, Housel shows, profoundly shape our view of inflation (or, more precisely, how much it concerns us as individuals).
All of this should be sobering for those of us who yearn to make rational decisions about something as important as our hard-earned money.
This ties into a larger point that Housel makes throughout the book and to which comes back masterfully at the end, which is that we are all prone to overconfidence when it comes to money; we are very likely not to recognize the limits of our knowledge or notions. We fall for “seductive fictions”, as he calls them, with alarming ease. We often want something to be true to the extent that we ignore clues or suspicions – or even facts – that might cause us to step back and reconsider our opinions: for example, playing the lottery, getting rich – fast diets, or just not thinking about retirement savings until it’s too late.
But when it comes to a family’s finances, all of this can have disastrous consequences, or at least severely limit our potential for financial freedom and the benefits it brings, which Housel often touts and with good reason.
Housel is both refreshingly modest in his advice and humble in his self-assessments.
One point he makes, and one that resonated with this reader, is that sometimes we don’t always make the most financially sound decision, but it’s okay if we at least make a reasonable one. Housel illustrates this with the decision he and his wife made to buy their home with cash rather than a low-interest mortgage, which would have allowed for more investment over the next 30 years. While it was a tough decision to justify in terms of cold spreadsheet numbers alone, it was the decision the couple felt best about. In the end, it’s worth a lot to be at peace with your decision and get a good night’s sleep. Amen to that.
Likewise, sound advice comes in the form of avoiding extreme financial behavior. (Sometimes behavior akin to financial boot camp can seem justifiable if, say, you suddenly realize at age 50 that you need to start saving for retirement.) Overly proactive measures are, of course, laudable, but Instead, Housel advises a “middle ground.”
The most effective course of action will be one that is sustainable over the long term. And the more extreme a person’s financial drive, even if it is on the frugal end of the spectrum, the less likely it is to be sustained. Burnout is too real a risk.
Many other nuggets of financial wisdom can be found in Housel’s treatise: that wealth has more to do with savings than income; that you have to plan for things that don’t go as planned; that some things just aren’t worth the risk financially; that you cannot rely on the (financial) past to repeat itself. Etc.
Housel’s book therefore joins gems such as John Bogle’s “Enough” in being as much a book of financial wisdom as it is of strategy. It’s a great all-around complement to more in-depth money books, such as Dave Ramsey’s “Total Money Makeover.” Fortunately, both jibe well.
This is the kind of book you would have liked to read decades ago. It’s something you’d love to give to a high school grad, college student, or anyone else.
My only advice: the sooner they read it, the better.