Psychology Of Money

2023, Mar 23

I was surprised to find out that the Psychology of Money was published only in 2020. The way people talk about it - like it is a must read for financial knowledge - made me assume that it must be a very old, time tested book. But the book was written in the first lockdown during the Covid-19 breakout.

However, the book promises to teach us about the timeless knowledge about money and investment. I quite like the simple style of narration in the book. In fact, you could read the whole book in one sitting. It is not too data heavy and not too technical. The author makes it very much clear at the beginning of the book that it is his intention to prove that the soft skills related to finances is more important than technical aspects of it. So that's what he talks about throughout the book.

If you have read the book, here are some of the refresher learnings from it.

The number one mistake we do is to blindly follow what another successful investor does/did. However, most successful investments are specific for that period of time and are not repeatable. Also, a person's investment is a very personal choice depending on their style of living and when they were born. People make choices that seem reasonable to them though they might not be the most rational decisions.

Greed is another aspect that investors need to keep in check. Stopping when they have enough and not making unnecessary expenditure outside their financial capacity can save them from ruin.

It is not about getting the highest return on investments. It is about getting pretty okay returns for a long period of time. As they say, the time in market is more important than timing the market.

Once you make money, you need to have a small amount of paranoia about losing it to actually keep you from losing it all. A little bit of frugality is recommended here. To remain wealthy, all you need to do is "survive" the market. Understanding your risk profile and allowing room for error in your investments is important to let your money grow while keeping it safe. You will always lose money in the market. But, you need to be careful about how much you can lose.

Being rich and being wealthy are different things. Owning a fancy car can make you look rich even though you are buried under debt to pay for it. Being wealthy is when you can wake up in the morning and say, you can do whatever you want today. That is financial freedom.

The most common reason for failure is relying on paycheck to pay for your wants with no savings to gap the future needs.

Less ego. More wealth. That's the mantra.

Warren Buffett later put it: To make money they didn’t have and didn’t need, they risked what they did have and did need. And that’s foolish