10 Takeaways from the Psychology of Money (2 of 2)

Have you ever wanted to learn more about the Psychology of Money? Well, you’re in luck because Morgan Housel recently released a book called The Psychology of Money. In this article, we’re going to go over five more takeaways that I enjoyed from reading this book. If you haven’t already checked out my prior article on the first five points, you’re going to want to do so after you read this article. Along the way, I also share some personal reflections that I had as an entrepreneur, as I read this book.

Point #6: Being reasonable is more important than being rational

The biggest takeaway is that it’s okay to be human when you’re making financial decisions. The author writes several times throughout the book, how decisions are made outside of a spreadsheet. They’re made with other people and factors being considered.

He writes that the distinction between a rational and a reasonable investor is that the former focuses on numeric facts, whereas the latter makes a decision in a conference room when they know that there are co-workers that they want to think highly of them or brothers in law or family members, or even just their own personal doubts to consider when making decisions.

An important point that I liked in this chapter was how the author emphasized the odds of making money in the market and how they change when you expand your time horizon. Over a one day time horizon, you only had a 50/50 shot of making money in the US markets. However, when you extended that to a one-year time period, it became a 68% shot. Then when you took it even further to a ten-year holding period, it became an 88% chance of making money.

And then over a 20 year time period, it was a 100% chance of you making money on your money. This really affirms the old adage that it’s about time in the market, over timing, the market. And I find the same thing applies from an entrepreneurial sense and that a lot of times entrepreneurs don’t give themselves a long enough time horizon in order to see success in their different projects and initiatives.

Housel also talks about how it’s really important that you invest in things that you care about. To illustrate this point, he brings up the example of Jack Bogel.  In case you don’t know, Jack Bogle is the founder of Vanguard, which is very well known for having a lot of low cost index funds, yet despite being the founder of Vanguard, Bogle invested in his son’s hedge fund.

When asked why, Bogle said, “we do some things for family reasons. If that’s not consistent, well, life isn’t consistent.” I really like this point as well as this chapter, because it really aligns well with what Rameet Satie writes about in his book, I Will Teach You To Be Rich. There he essentially emphasizes that life is meant to be lived outside of a spreadsheet, and so it’s really important for you to not just think about things from a purely number sense, but also to factor all the other factors in your life that might impact you when you’re making financial decisions.

Point #7: The World is Surprising

Housel writes about how we typically miss the outlier effects that actually move the needle most in the world.

He cites examples such as the dot-com boost and 911, and I’m sure in a later edition of this book, he will include the global situation going on right now. He also references how massive projects and initiatives such as the Manhattan project or the creation of antibiotics, or even the fall of the Soviet Union had an impact that was magnitudes greater than other events that happen during those times in history.

The lesson that he writes about here is that we can’t use past surprises as guides for future boundaries. But instead, we should just admit that we have no idea what’s going to come next. Housel also talks about how history is a misleading guide for the future of the economy and the stock market. And the reason why is because it doesn’t account for these structural changes that are relevant to the modern world.

He talks about how the 401K is only a few decades old, and the Roth IRA is even younger than that. Or the fact that the venture capital industry hardly existed three decades ago. He also mentioned how tech stocks hardly existed 50 years ago. And yet today they account for at least 1/5 of the S&P 500 Index.

Taking a step back and viewing this from the lens of entrepreneurship and innovation, I think this insight is spot on. The world truly is surprising. For example, who honestly would have thought that a decade ago we’d have so many different ride sharing apps and different gig economies that are so robust today.

Now you can literally call a cab whenever you need it through Uber or Lyft, or you can rent out a room or an entire person’s home through Airbnb rather than paying hotel rates. Even if you think about it from the lens of YouTube. A decade ago, it was way harder to create content whereas now you have content creators popping up every single day on this platform.

This really is only happening because the world is surprising and we’re continuing to find ways to innovate and leverage the scale of the internet.

Point #8: Nothing’s Free

The key takeaway here is how everything carries a price. Even if it’s not a monetary price, there is always some form of a trade-off. This is something that you’ll learn in any economics 101 class. The example, the author cites is how Monster Beverages yielded a 319,000% return between the years of 1995 and 2018, however it traded below its previous high 95% of the time.

The point he’s trying to make here is that most investors view market volatility as a fine, rather than a fee. You have to trick yourself that the market’s fee is worth the price of admission. I think this takeaway transcends just investing. Ultimately nothing is free in life. There’s a famous law of 100, which essentially says that in order for you to get really good at something, you have to get through the first 100 attempts at doing that in order to get through all of your bad takes.

For example, when you’re first creating a YouTube channel, your first 100 videos might really suck. I’m still in my first 100, and so I’m gradually getting better. However, over time you get to be better. Because you get more comfortable with talking to the camera, you get more comfortable with writing video descriptions, tags, and so on. And so, you ultimately start to develop taste.

What you realize over time as you surpass bigger milestones, like your 150th video or you’re 250th video is that the first 100 were simply the fee to play the game. It wasn’t necessarily a fine. I’ve commonly found in different endeavors in my life that finding the price that you’re willing to pay and paying it is critical for your long-term success.

Point #9: How We Play Different Games

The takeaway here was how we are quick to group ourselves from the lens of others, rather than define the game that we are playing for ourselves. For example, Housel writes about how in the .com boom, you might’ve FOMO’ed into buying a stock at $60 because some analysts were talking about it.

But what you may not have realized was that the analyst was operating off a different time horizon than you. So maybe the analyst was just talking about it from holding it from a lens of one week versus five years or even 10 years. Time horizons were different. Just like how the games we’re playing are also different.

When Spotify stock had a grant, it could be either incredibly overpriced or undervalued depending on what time horizon you’re operating under. So it’s really important for you to take a step back and think about the time horizon that you’re working under as well as the game that you’re playing. I agree with this, from the context of entrepreneurship. With several of my side projects, I found that it consistently takes more than 12 months in order to hit a traction point.

Each time I’ve had shade thrown at me because someone that’s close to me thinks I’m crazy for devoting so much time into a project. But what they fail to realize is that I’m not operating off a three-month horizon or even a one-year horizon. I’m operating off a multi-year horizon. As a result, I get a longer runway for me to truly define what success is for that project and give it enough opportunities to have both timing and luck come into the picture.

By doing this, it gives me a longer runway for framing what success looks like for a particular project or initiative, and it also allows me to execute a much more long term vision versus a short term vision. This was the same approach that we took when we were scaling our company’s revenues from just a couple hundred thousand dollars a year to several million dollars in sales.

We understood that the real value of the business was in the recurring revenue model that we were creating, because we knew that as long as we could keep our existing customers, that that would create the baseline revenue for the following year that we could continue to stack onto over time.

Point #10: The Seduction of Pessimism

I love this chapter because I felt like it was throwing low-key shade at CNBC the entire time. If you’ve never been on CNBC in the opening 30 minutes at the market, you should do so just for pure entertainment.

What you’ll notice as you refresh the homepage is you’ll see that they changed the headline based on whatever’s actually happening in the market. And they’ll come up with some sort of reason as to why the market is up or down that day. Similarly, Housel writes about how human nature tends to latch onto stories around pessimism, over optimism.

He says, we tend to view optimism as a sales pitch whereas pessimism is like someone is trying to help us out. He also talks about how progress often takes way too long to notice whereas setbacks happen too quickly to ignore. Growth is driven by compounding, which naturally takes time whereas destruction is driven by single points of failure.

So the point that he makes here is that you have to define the price of success. You have to take note of the volatility and the backdrops over the long period of growth and whether or not you’re willing to pay that price. A perfect example on the seduction of pessimism can be seen in what happened in early 2020, the markets immediately tanked, and everybody thought that it would take multiple years for things to recover in the markets.

Yet that’s not what happened. Going back to point number seven on the world being surprising, the Fed intervened in a way that it never has before. They printed unprecedented amounts of money and committed to this policy on a multi-year horizon, and as a result, things rebounded quickly.

Many digital companies that would be traditionally viewed as super pricey, became the darlings of the market simply because of the scalability of their business models in a digital world.

Big takeaways

There are two things I want you to remember from this article:

  1. The first one is that you should focus on being reasonable over being rational. Personally, I struggle with this at times because I’m naturally an over-analyzer. However, it’s important for you to stay in touch with your human tendency.
  2. The second big takeaway is to know what game you’re playing. You have to stop comparing yourself to other people and just focus on where you’re at today. What are you good at? What would you like to get better at? What are you not good at? Just because another person is further ahead in the game than you doesn’t mean that you can’t get started and start getting better.

If you found this article helpful, be sure to check out my YouTube channel to get new videos every single week. I’ll help take you from zero to self-starter as you grow your business, get more customers, and hone your business acumen. Feel free to share this with anybody that you think might also benefit from learning more about our psychology around money.

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