Several years ago I read Morgan Housel’s “psychology of money” as I was convinced that “knowing the math of investing” was only one element of investing, however more important, much more important in my calculus is the “behavioural management or psychology of money”
If you haven’t read “psychology of money” I have prepared for both you and me, my notes:
Key Takeaways from Morgan Housel’s Discussion
1. Forecasting and Investing Predictions
• Good Enough Forecasts: Instead of trying to predict exact market movements, focus on baseline expectations based on historical trends (e.g., two recessions per decade).
• Stock Market Valuation: Every stock valuation combines today’s numbers (e.g., earnings) with a story about tomorrow, and predicting future moods and narratives is nearly impossible.
• Focus on the Knowable vs. Unknowable: Prioritize evaluating knowable factors (e.g., quality of business, management) over attempting to predict market moods.
2. Timeless Principles vs. Changing Tactics
• Benjamin Graham’s Adaptability: While Graham’s The Intelligent Investor contains timeless behavioral wisdom, he consistently updated his investment formulas in each edition, recognizing the changing world.
• What Changes vs. What Endures: Human behavior remains consistent, while technical details and market strategies evolve over time.
• Voltaire’s Insight: “History never repeats itself, but man always does.”
3. Margin of Safety
• Purpose: A margin of safety eliminates the need for precise forecasts.
• Naval Ravikant’s Perspective: Build a financial strategy that ensures wealth in “999 out of 1000 parallel universes.”
• Humility and Luck: Success often involves a mix of skill and luck, and it’s impossible to know the exact ratio in any given case.
4. Overconfidence and Overactivity in Investing
• Effort Can Backfire: Unlike other fields, harder work and more activity in investing often yield worse results.
• Best Returns from Inactivity: Research suggests portfolios perform better when investors do less trading and interference.
• Role of Luck: High degrees of success are often accompanied by significant luck.
• Doctors and Engineers Example: Intelligent people from other fields often underperform in investing due to overconfidence and overcomplexity.
5. Calm Plants the Seeds of Crazy
• Cycles of Calm and Crazy: Market calm often precedes periods of market chaos, but it’s only clear in hindsight.
• Every Era Feels Unique: At any given moment, you can find reasons to believe the market is unsustainable, yet long-term returns have remained robust.
• Save Like a Pessimist, Invest Like an Optimist: Be financially cautious in saving but confident and optimistic in long-term investing.
6. The Stockdale Paradox
• Balanced Mindset: Be optimistic about the end outcome (e.g., financial success) but realistic about the challenges and timeline to achieve it.
• Embrace Reasonable Optimism: Avoid attaching optimism to specific dates or outcomes; instead, maintain long-term faith in eventual success.
7. Pain is Necessary for Growth
• Value of Setbacks: Pain and failure are critical for learning, both in investing and in life.
• Young Investors in 2021: Many young investors learned hard lessons during the 2021 speculative boom, and it’s better to experience such setbacks early in life.
8. Balancing Happiness and Wealth
• Money Buys Happiness – To an Extent: Money contributes to happiness when used intentionally but can be harmful when it becomes a coping mechanism or endless pursuit.
• Balance in Spending: The balance between saving and spending lacks a one-size-fits-all formula and is more about individual psychology than financial modeling.
9. Leadership and Visionaries
• Visionaries Have Flaws: Highly successful visionaries (e.g., Elon Musk, Steve Jobs) often exhibit behaviors and characteristics that don’t conform to societal norms.
• Accept the Whole Package: Their success and eccentricity often come from the same root, and it’s unrealistic to expect one without the other.
10. Stoicism and Fragility of Life
• Philosophy of Stoicism: Stoicism emphasizes acceptance of life’s fragility and uncertainty.
• Realism Over Blind Optimism: Acknowledging life’s challenges while remaining resilient is key, but stoicism isn’t necessarily a path to happiness.
Key Quotes from Morgan Housel:
1. On Forecasting: “Focus on what is knowable today, and accept the story about tomorrow as inherently uncertain.”
2. On Margin of Safety: “The purpose of a margin of safety is to render forecasts unnecessary.”
3. On Investing Behavior: “Save like a pessimist, invest like an optimist.”
4. On Visionary Leaders: “You can’t expect out-of-the-box thinkers to also follow all the social and professional rules.”
5. On Calm and Crazy: “Periods of calm often plant the seeds of crazy.”
This summary highlights Morgan Housel’s emphasis on humility, adaptability, behavioral psychology, and long-term thinking as essential principles for financial success.
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