Key Points
- Morgan Housel’s latest book “The Psychology of Money” delves into the behavioral aspects of investing.
- Understanding greed and fear is crucial in investing.
- Timing and compounding play significant roles in investment growth.
- Risk can be what is unforeseen and unprepared for, emphasizing the importance of being prepared for unexpected events.
- Frugality and paranoia play a role in both creating and preserving wealth.
- Real optimism means acknowledging short-term challenges while maintaining long-term growth.
Morgan Housel’s much-anticipated new book, The Psychology of Money, begins with a quote from Arthur Conan Doyle’s Sherlock Holmes:
“The world is full of obvious things which nobody by any chance ever observes.”
It is a fitting introduction to a work from the Sherlock Holmes of
financial writing.
Like the famous fictional detective, Housel observes seemingly obvious things about human behavior. Just in his case, he applies these observations to solving mysteries about investing, not crimes.
“Investing is not the study of finance,” he explained in “The Psychology of Money,” a recent CFA Institute webinar moderated by Blair duQuesnay, CFA. “Investing is the study of how people behave with money.”
Understanding Greed and Fear
Housel’s interest in understanding and applying human behavior to investing began in 2007 when he started writing about finance full time, coinciding with the global financial crisis. The crisis raised questions about human behavior, learning from mistakes, and whether they would be repeated in the future.
Housel, now a partner at the Collaborative Fund, found that the answers to these questions weren’t confined to finance or economics textbooks; he had to delve into other disciplines such as psychology and sociology. This exploration revealed valuable insights into people’s relationship with greed and fear and their ability to maintain a long-term mindset, which are crucial in investing.
The Significance of Timing and Compounding
Housel emphasized the importance of compounding by sharing a story about the ice ages. He highlighted how seemingly insignificant changes over time can lead to extraordinary outcomes, drawing a parallel to investing. Additionally, he emphasized the value of long-term investing, citing Warren Buffett’s investment journey starting at age 11 and the significant portion of his net worth accumulated after his 50th birthday, demonstrating the power of compounding over time.
Risk Perception and Preparation
Housel discussed the concept that the biggest economic risk is often what is not being discussed or prepared for, citing the global coronavirus pandemic as an example. He advised approaching risk in a way similar to how California prepares for earthquakes, always being prepared, even in the absence of immediate signs of risk. He also mentioned the difference between getting rich and staying rich, highlighting the need for a combination of optimism about the market’s long-term potential and caution about short-term challenges.
Frugality and Paranoia
Housel emphasized the need for a balanced approach to wealth creation, combining optimism about the market’s long-term potential with caution about short-term challenges. He defined real optimism as acknowledging short-term challenges while maintaining confidence in long-term growth. He further expressed the necessity of frugality and paranoia in combination to create and preserve wealth.
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