When a commentator on CNBC, Zee Business or any other medium, says “you should buy this stock or fund” keep in mind that they do not know who you are and from where you belong to. Are you a teenager or novice trading for fun? Or, an elderly widow on a limited budget?
This is the most important message I want readers to take. Because, while investment advice is very easily distributed, it can’t be generic for a country of 100 million investors in stock markets and mutual funds.
You will find many such simple and useful insights delivered in an inspiringly simple language in Morgan Housel’s book The Psychology of Money.
Let me first share what the book doesn’t do – it doesn’t give you straight answers to the questions you may want to ask – a view on markets, where to invest right now, which sector is hot, which is a good fund, and so on.
Instead, it gives you an approach towards thinking about investing and money.
It helps you in knowing what’s inherently unknowable in investing and hence adds immense value to the reader to become a better investor by killing optical illusions about our overconfidence in investing.
This book also is empowering as it teaches you that you don’t have to be the smartest or numerically inclined to be a successful investor, you just have to make fewer mistakes and use common sense. Ordinary people can be extraordinary with their wealth if they learn few behavioural principles and have the discipline to stick to them.
A few big messages that I loved and used to share –
1. What do you want to know about investing that we can’t know. When asked this, Robert Shiller replied: “The role of luck in successful outcomes.”
(We rarely admit that luck also is important in our results. We attribute success to our skills. It’s important to know luck matters a lot and invest in such a way that we allow luck to play a positive role.)
2. Your personal experiences with money make up 0.00000001 percent of what’s happened in the world, but may be 80 percent of how you think the world works.
This is so deep. We create illusion of our expertise on the basis of a limited window of life experiences we have seen. Markets are longer and bigger than us and a lot of variables play a role in good or bad outcomes. However, we attribute reasons and causes to what fits in our world view basis the 0.00000001 percent of wisdom/knowledge we have achieved. This thought, therefore, makes me always seek knowledge from others and aim to complete my perspectives.
3. More than 2000 books are dedicated to how Warren Buffett built his fortune. Very few pay attention to the simplest fact — not just his investment skills, but being a good investor since he was a child.
Secret is time
(This one line has made deep impact on me in terms of my investing approach – more than the size of returns, it is the length of time that will determine the wealth I will create.)
And how do I apply this – investing tenors lengthen when you live longer (hence respect health) and your portfolio values don’t fluctuate very sharply because behaviourally we don’t like sharp falls.
Housel conveys the role of fluctuations beautifully in another favourite statement: “Good investing isn’t about earning highest returns, because they tend to be one-off hits that can’t be repeated. It is about earning decent returns that you can stick with (means stay invested) and can be repeated for longest period of time. That’s when compounding runs wild.”
This idea is very important to absorb. For increasing the duration of investing – so that compounding runs wild – it’s important we reduce our greed for quick one-off high returns and actually create a robust structure that can keep us alive through market accidents in different asset classes that happen once every few years.
Long Tails
Somewhere in the book, he says a one word summary of money success is SURVIVAL.
Another interesting concept that this book explains with simplicity is the role of ‘Long tails’ where a small number of events can contribute to majority of the result. It explains that most things will fail – whether in investing or business. As long as few things make it big and you survive to let the good things happen to your money, you will be fine.
It’s like a long flight. Hours and hours of boredom punctuated by moments of sheer terror. Our final success will be determined by our behaviour in rough times and not moments of cruise mode.
Control
There is superb example from the universe. There are 100 billion planets in our galaxy and so far we know of only one where intelligent life exists. The fact that you are reading this note is the result of longest tail you can imagine.
Lastly, this book trains you to identify factors in our control and ignore what can’t be Control. This can really shape your attitude and behaviour as an investor. Your annual savings rate is as important as rate of returns you will earn. Market decides fate of returns we earn. But only we decide the savings rate and the time horizon.
Thus, if we create hacks to ensure we increase our savings rate and holding period, coupled with concepts of personalised asset allocation, survival is largely assured and so is wealth creation.
The last message from this book for me is there are no universal truths in an imperfect domain like investing. Context keeps changing. Personal finance is more personal and less finance. So learn what works for you and your family and what allows you to sleep well and survive this race.
I like to believe, among few other books, this book has taught me one important lesson:
Don’t chase five-star funds, instead learn how to become a five star investor for yourself and your family.
Happy reading!
Credit to KALPEN PAREKH