Book Review — The Psychology of Money by Morgan Housel

'Tosin Adeoti
8 min readNov 19, 2020

Yesterday morning, I finished Morgan Housel’s The Psychology of Money — Timeless Lessons on Wealth, Greed, and Happiness. Morgan is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal.

For a few years now, apart from observing my thoughts about personal finance, Morgan has to be the other guy I take seriously when it has to do with dealing with money. His articles at The Collaborative Fund blog has blessed me immensely so I was excited when he released his first book two months ago. Two topics impact everyone, whether you are interested in them or not: health and money. Thus, I like to keep myself abreast of them.

The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. But behavior is hard to teach, even to really smart people.

One of the salient points he makes is the irony of life in finance management; it has nothing to do with how smart or educated you are. Geniuses have found themselves in financial disasters, same as professors, while ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.

And this is what makes the finance industry unique. In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections? Yet this happens more often than people realize. A guy called Ronald Read is an archetypal example. He worked as a janitor all his life but when he passed away, he was able to leave $2 million to his step kids and more than $6 million to his local hospital and library. Compare that to numerous business executives and sports superstars who go bankrupt despite making hundreds of millions in their careers.

As much as we try to gloss over it, Morgan reminds us of the role of luck in investing. One of the reasons we like to gloss over it is because it is not easy to pin down. Like Robert Shiller, the Nobel Prize in economics winner said when asked what he wants to know about investing that we can’t know, the exact role of luck in successful outcomes has eluded us. We can’t calculate it.

And because we can’t really pin it down to a percentage, not many like to recognize the role of luck in one’s endeavor. They feel it diminishes their efforts. The media also does not recognize the role of luck. The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happened to get lucky. Both flipped the same coin that happened to land on a different side.

Consider Mark Zuckerberg. He is hailed as a genius for turning down Yahoo!’s 2006 $1 billion offer to buy his company. People say he saw the future and stuck to his guns. But people criticize Yahoo! with as much passion for turning down its own big buyout $44 billion offer from Microsoft. They say, ‘those fools should have cashed out while they could!’

The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face when trying to learn about the best way to manage money.

The roles of luck and risk (two sides of a coin) should teach us a few things. Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. Also, when things are going extremely well, we should realize it’s not as good as we think. We are not invincible, and if we acknowledge that (some) luck brought us success then we have to believe in luck’s cousin, risk, which can turn our story around just as quickly. More important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures. Nothing is as good or as bad as it seems.

One of the most invaluable lessons in the book is that success does not deter greed. Stories of Rajat Gupta and Bernie Madoff reveal how people worth hundreds of millions of dollars would be so desperate for more money that they risked everything in pursuit of even more. How do you stop greed from happening to you? He says your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough. How do you know you have enough? He didn’t say. I do have my theory about how to go about this though.

#DoYouKnow “Historians as prophets” fallacy. Read the book.

He did his best to demystify Warren Buffet. More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. Warren Buffett’s net worth is $84.5 billion. Of that, $81.5 billion came after he clocked 60.

So people miss a key point of his success when they attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. His skill is investing, but his secret is time. In fact, in terms of returns, his 22% compounded is much less than that of Jim Simons who has 66%. But Jim is 75% less rich than Buffett because Jim didn’t find his investment stride until he was 50 years old.

If James Simons had earned his 66% annual returns for the 70-year span Buffett has built his wealth he would be worth — please hold your breath — sixty-three quintillion nine hundred quadrillion seven hundred eighty-one trillion seven hundred eighty billion seven hundred forty-eight million one hundred sixty thousand dollars. (63,900,781,780,748,160,000).

Take a deep breath. That’s the magic of compound interest.

Compound interest is a magnificent counter intuitive concept. The point is that what seems like small changes in growth assumptions can lead to ridiculous, impractical numbers. Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.

#DoYouKnow The End of History Illusion. Read the book.

Chapter 5 where he compared how the United State economy performed over the last 170 years with the incidents that happened within that period put the fear of God into me. You should read that chapter.

Some think getting money is hard, but keeping money is even harder. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

#DoYouKnow Only 27% of college graduates have a job related to their major, according to the Federal Reserve.

Morgan emphasized a salient point I have often wondered about. It is easy for many of us to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden. There are, of course, wealthy people who also spend a lot of money on stuff. But even in those cases what we see is their richness, not their wealth. We see the cars they chose to buy and perhaps the school they choose to send their kids to. We don’t see the savings, retirement accounts, or investment portfolios. We see the homes they bought, not the homes they could have bought had they stretched themselves thin. This is especially true in Nigeria where there is so much prestige attached to looking flashy.

People are good at learning by imitation. But the hidden nature of wealth makes it hard to imitate others and learn from their ways. The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. It’s better to keep this in mind when quickly judging others’ success and setting your own goals.

Then he touched on savings. Several people save for projects and objects. But Morgan argues that you should save for the sake of savings because one of the most important things in life is flexibility. Savings in the bank that earn 0% interest might actually generate an extraordinary return if they give you the flexibility to take a job with a lower salary but more purpose, or wait for investment opportunities that come when those without flexibility turn desperate.

He also cautions against playing all your cards. There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone — not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan. We can look at history and see, for example, that the U.S. stock market has returned an annual average of 6.8% after inflation since the 1870s. But what if future returns are lower? Or what if long-term history is a good estimate of the long-term future, but your target retirement date ends up falling in the middle of a brutal bear market, like 2009? What if a future bear market scares you out of stocks and you end up missing a future bull market, so the returns you actually earn are less than the market average? What if you need to cash out your retirement accounts in your 30s to pay for a medical mishap?

There are however a couple of things I don’t agree with. He believes that people should love their investments, meaning they should be emotionally invested in their investments as that would make it more difficult for them to withdraw their funds when times are bad. I don’t think being emotionally invested is a good call but I understand that he is fighting for compound interest.

I also think that anyone like me who loves the Collaborative Fund blog would find that the book is a rehearse of what he has written in the blog. It’s basically a compilation of his excellent articles. Is that good or bad? I don’t know. I just expected more.

If you read a lot about investments and personal finance, I don’t think the concepts here would be new. They were not for me.

But read if you are new to the world of money. It is excellent in that context.