Delving Into The Psychology of Money
I not only buy books, but I also watch others buy books. At bookstore checkouts, I’m intensely curious about the titles other customers choose. So recently, when I watched not one, but two Bangalore college students pick up “The Psychology of Money,” I was prodded into adding it to my list.
Fortunately, the author prescribes an approach to money and finances that could resonate with many members of my generational cohort. With folks who grew up in the 1970s or earlier, in what was necessarily a frugal nation. After all, many of our parents worked for public sector enterprises, and our childhoods were shorn of the material lures that tug at contemporary consumers.
The cities were bereft of malls, of bars and restaurants, of bowling alleys and gaming spaces. Our holidays were rarely pockmarked by travel in the modern sense. Most trips – by train and in second-class compartments – were to hometowns, to visit grandparents or extended families. When picking careers in that pre-liberalization era, “money” wasn’t an overwhelming driver. After all, there wasn’t much that you could do with it.
Morgan Housel: Conservative About His Spends
So it was refreshing to read about a couple that lives a relatively spartan life in a hyper-consumerized time and country (America). Housel works in finance, and his wife in healthcare, so with their double incomes and a baby daughter, they have the basics covered: a decent house, car and necessary amenities.
But apart from what some of us in the upper-middle strata would consider “essentials”, they are conservative with their spends. As Morgan puts it, “We now live considerably below our means, which tells you little about our income and more about a decision to maintain a lifestyle we established in our ‘20s.”
Since their everyday pleasures comprise of long walks, reading books and listening to podcasts, their needs are, by contemporary standards, austere. They also ensure that their goal posts – in terms of assets or the wealth they need to shepherd in some form – don’t keep shifting.
Housel arrived at his careful approach to his personal finances, after reflecting on his childhood experiences and his expectations of an uncertain future. After all, as Morgan puts it, at some stage we all face unforeseen shocks – a health crisis, a job loss, a natural disaster – which get braided into our material lives.
Housel’s Childhood Experiences With Money
Housel himself grew up facing poverty. His father qualified as a doctor at the age of 40, when he already had three kids. Trying to raise three kids while funding medical school fees meant that the family often had to scrounge on basics. Those years of a hard-scrabble existence left an unforgettable imprint on Morgan.
Later his father became an Emergency Room doctor, which was an exceedingly stressful profession. After two decades at that job, and grueling day and night shifts, his father decided to retire. That decision also stuck with little Housel. He realized that freedom entailed the ability to downshift, to take up work that might resonate with one’s changing physical or mental capabilities. Such flexibility can only be forged if one consciously saves during one’s fitter days.
Why Greed Might Not Be A Salutary Driver
Abjuring the memorable line by Michael Douglas, who plays Gordon Gekko in Wall Street (1987), suggesting that “greed is…good”, Morgan believes that greed is not a healthy driver, and especially when it comes to retaining or growing one’s personal wealth. As an example, he cites the stories of two individuals.
Ronald Jame Read fixed cars at gas stations and was a janitor at JCPenney. When he died, his networth was $8 Million; in his will, he donated $6 Million to his library and hospital. And bequeathed the rest to his stepchildren. Despite his meagre earnings, Read had invested in blue chip stocks and stayed heedful about his spends.
On the other hand, Richard Fuscone seemed destined for millions or even billions. To begin with, he had the right credentials. He had graduated from Harvard, worked at places like Merrill Lynch, been featured on the Forbes 40 under 40. Later in life, after splurging on massive mansions with elevators, see-through roofs and indoor pools, he was bankrupt. The 2008 crisis tipped him well below poverty. As Housel remarks, “Ronald Read was patient; Richard Fuscone was greedy.”
Moreover, there is another lesson one can draw from the above. That finance is one of the few sectors, in which even the uneducated or untrained can outperform the educated. Rather than being a hardnosed field that requires complex wrestling with numbers and befuddling equations, Morgan posits that it’s “a soft skill, where how you behave is more important than what you know.” What counts more than formulaic knowledge or astuteness at trading, is the “psychology of money.”
Diverse Attitudes to Money: “No one is crazy”
Relationships with money are as subjective and varied as relationships between any two individuals. After all, each one has a relationship with money that is molded by specific childhood and adult experiences, so that “what seems crazy to you might make sense to me.”
Our perspectives on money are not just shaped by personal factors – such as a certain upbringing, scarcity or abundance during childhood, parental control or laxity et al. But also by the historic or social upheavals one might have witnessed. People who have lived through severe recessions would be differently scarred; others might be molded by wars, genocides or dot-com booms. Reading about inevitable economic rollercoasters is not equivalent to experiencing them. As Housel puts it, “some lessons have to be experienced before they can be understood.”
Research in the U.S. conducted by economists from the National Bureau of Economic Research (2006) shows that your experiences as a young adult often shape your relationship with money and your risk-taking capacity.
Some social behaviors are counterintuitive. For instance, lowest income households in the U.S. buy the most lottery tickets. They spend an average amount of $412 per year on lottery tickets, a substantial amount for families that cannot cough up equivalent sums during emergencies. On the other hand, this is also totally explicable. As one interviewee put it: “Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted.”
Luck Is Always Intertwined With Risk
In 1968, Bill Gates was lucky to be attending one of the few American high schools that actually had a computer. He was lucky to be fiddling with those machines along with Paul Allen. He told the school’s graduating class in 2005, “If there had been no Lakeside, there would have been no Microsoft.” There was one more member of their geeky team, a kid called Kent. He too could have been a co-founder of Microsoft. But Kent died in a mountaineering accident before completing high school.
When Housel asked Robert Shiller, Nobel Laureate in Economics, what he would like to know, Shiller said: “The exact role of luck in successful outcomes.” Given that most of us cannot imbibe or mimic the “luck” of another, it’s wiser, in general, to study patterns when guiding our own financial decisions.
When Enough is Not Good Enough
This was a story narrated by John Bogle, founder of Vanguard, who died in 2019. Apparently, at a party thrown by a billionaire hedge-fund manager, the writer Kurt Vonnegut told Joseph Heller, author of Catch 22, that their host made more money in a single day than Heller made over his lifetime with his immensely successful book. Heller said, “Yes, but I have something he will never have…enough.”
As an example of someone who succumbed to the never-enough cult, Housel cites Rajat Gupta, the erstwhile CEO of McKinsey, who had grown up in modest circumstances. Gupta, who wasn’t willing to rest easy with his millions and aspired for billions, was jailed for insider trading after the 2008 crisis.
Before Bernie Madoff started his ponzi scheme, he was running a legitimate market-making business, raking in an honest $ 25 to 50 Million per year. Both these men had no concept of “enough.” As Housel puts it, “It gets dangerous when the taste of having more – more money, more power, more prestige – increases ambition faster than satisfaction.”
Building Wealth Requires Patience
Few people realize that the bulk of Warren Buffet’s wealth – which currently stands at $84.5 Billion – was accumulated after the investor had turned 50. And of that, most of it accrued in his mid-60s — $81.5 Bn. Morgan’s point is that Buffett started investing at the age of 10. At 30, his net worth was $1 Mn ($9.3 Mn in current terms).
Because he started early, and kept going, even in his geriatric years, he was able to build the formidable fortune that he has. “His skill is investing, but his secret is time.”
The best way to mimic Warren Buffet’s strategy would be, according to Housel, to “Shut Up and Wait.” He suggests that should be the title of a bestselling finance book.
Staying Wealthy Requires Self-Restraint
Morgan observes that some people are very good at getting enormously rich, but bad at staying rich. “Getting money is one thing. Keeping it is another.” The reason that the same people are often not good at both behaviors, is that one often requires risk-taking. While the other requires the opposite. “It requires humility and fear that what you’ve made can be taken away from you just as fast.”
Banking on Long Tails
Art dealers like Heinz Berggruen bought vast collections of art, in the hope that at least a few pieces would skyrocket in value. Most pieces in such portfolios do not rise as steeply, but the few that do, inflate the value of the whole collection. This is a concept of the “long tails” – wherein a few events or outcomes hugely alter the value of the whole. This is the logic used by venture capitalists when investing in startups. Most startups fail, but a few succeed so outrageously, they make up for all other failures.
Walt Disney had produced several cartoon movies, all of which were financial disasters till Snow White and The Seven Dwarfs. Those 83 minutes of film wiped out his earlier losses.
Money Can’t Buy Happiness, But It Can Accord You Time
In general, those who gain the greatest happiness from wealth are those in charge of their time. In other words, folks who are leading the lives they want to lead, even if they don’t necessarily own a lot of stuff. This was a finding of a large scale study conducted by Angus Campbell who penned the book, The Sense of Wellbeing in America.
Morgan himself disliked his investment banking internship in his junior year of college for the same reason. Though he loved the work, he resented the manner in which his hours were controlled by the firm and quit after a month.
Freedom And Autonomy Count More than Money
Derek Sivers, who successfully sold a company, was once asked, by a friend, to narrate the story of his riches. Sivers said that in his first job in New York, he was paid $20,000 per year. Since he never ate out and did not ride taxis, he ended up saving $12,000. He then became a full-time musician and managed to survive with just a few gigs here and there. Then he stopped his narration.
The friend, who was asking him about how he became rich, asked him to go on. About the experience of selling his company and really making big bucks. Sivers said he was already “rich” when he became a musician. The subsequent sale of his company was immaterial. “That was just more money in the bank. The difference happened when I was 22.”
Desiring Less Can Lead to Spending Less.
Money in the bank should be used to give yourself flexibility – to try a new career, to learn a new skill, or to acquire a hobby. Moreover, in an increasingly competitive global economy, intelligence is no longer sufficient to be a standout. Instead, Housel suggests that “flexibility” is a competitive advantage: “You can find a new routine, a slower pace and think about life with a different set of assumptions.”
References
Morgan Housel, The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness, Jaico Publishing House, 2020/2022