"You’re not a spreadsheet. You’re a person. A screwed up, emotional person. Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable"
I'm always dazzled by the number of publications focused on money management- mostly in the US. While I usually find them boring and capable of doing nothing other than stating the obvious, Housel's book is different. I even ended up gifting it to many friends and relatives. It's different because it mostly discusses the relationship between money and happiness. While I strongly recommend you to read it, I am sharing four of his insights in this post.
“The hardest financial skill is getting the goalpost to stop moving.“
The main issue with money is that most people will never have enough.
They will never be satisfied, even if they already belong to the group of lucky few. Think about the French fraudster Madoff. He was a highly respected entrepreneur running a successful business before starting his Ponzi scheme. He could afford virtually anything people desire. When the public discovered his wrongdoings, his son suicided and his life was ruined. He risked and lost everything to marginally increase his standard of living.
This hunger for more is driven by social comparison. There is always a bigger fish to catch up with. Millionaires want to become billionaires. According to Housel, we should define a financial goal and stick to it. As he puts it “enough is realising that the opposite - an insatiable appetite for more - will push you to the point of regret. (...) There is no reason to risk what you have and need for what you don't have and don't need."
“The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today’”
The psychologist Campbell underlined in his 1981 book, The Sense of Wellbeing in America, that having a strong sense of controlling one’s life is the most important predictor of happiness. As Housel says, "More than the size of our house. More than the prestige of our job. Control over doing what we want, when we want to, with the people we want to, is the broadest lifestyle variable that makes people happy."
In this regard, money can be a superpower. Unspent assets gives us the freedom to stop working for some time, choose a work we like more but pays less, or quit a job with a toxic manager. This is what Nicolas Taleb describes as the "Fuck you money". With a healthy bank account, we are less susceptible to have to compromise with our values or experience unwanted constraints.
This is why jobs such as investment bankers or consultants makes us miserable. Every second of our time is enslaved to the whims of a manager or client. There is little to no autonomy. Only the self-deceiving feeling of importance can make us stay.
“One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.”
Two conflicting impulses drive our desire for wealth.
The first one is the appeal for the freedom and flexibility large sums of money grant, as described above. We want to do whatever we want, whenever we want, with whoever we want.
The second impulse is appreciation. We want to be admired, loved by others, thanks to the social status we exhibit. The problem is that these very markers of social status - expensive cars, fancy houses - do the opposite of making us wealthy. They detract money from our bank account on a regular basis. This is why quite often our lifestyle - and thus expenses - scales with our revenue, and we don’t save. The reason is simple: most people want to show off in front of others, signal their success.
Here lies the contradiction. Freedom requires us not to spend our money, while our hunger for appreciation pushes us to burn it for symbols of social status. People buy fancy cars - actually making less poor and reducing their freedom - because they want to be admired and loved. But no one is respected or appreciated for their money. Humility, empathy and kindness make people love us.
“When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.”
“Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. (...)
Morgan Housel explains two staple concepts, essential for a good understanding of finance, and money by and large.
Compound interests explain why investments tend to grow exponentially instead of linearly. Imagine we put $1000 on a Livret A or blue chip stock that grows 5% per year. At the end of year 1, we'll end up with $1050 (+$50 year over year), $1102.5 (+$52.5 yoy) at the end of year 2 and $2653 (+127$ yoy) at the end of year 20. Our annual gains increase. If we want to better understand it, read this article. The central idea applied to personal finance is to be patient and reinvest gains instead of cashing them out.
Long tail is a probabilistic concept at the centre of Nicolas Taleb Black Swan theory, largely quoted by Housel here. The "tail" of a probability distribution represents the most unlikely events. The idea of Taleb is that most impactful changes in our modern economies are hard to predict and unlikely, they belong to this "long tail" part of a probability distribution. Think about Covid 19, the war in Ukraine, etc.
Venture capital returns are tail-driven. Investment firm Correlation Ventures did the maths. Out of more than 21,000 venture financings from 2004 to 2014, 65% lost money and 0.5% - about 100 companies out of 21,000 - earned 50x or more. That’s where the majority of the industry’s returns comes from.
Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome.
A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. That’s a single point of failure.
We underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.
An important cousin of room for error is what I call optimism bias in risk-taking, or “Russian roulette should statistically work” syndrome: An attachment to favorable odds when the downside is unacceptable in any circumstances.Nassim Taleb says, “You can be risk loving and yet completely averse to ruin.” And indeed, you should.
