"Mind Over Money" - Insights from the Psychology of Money

It has been 4 weeks of being under the tutelage of Andrew Alli , one of Africa’s finest in infrastructure financing & development, learning the ropes of africapitalism. Before meeting him, I knew Andrew was a man of books and I was very eager to get a book recommendation from him. Psychology of Money by Morgan Housel was the first.

Today, I share a review of the salient points from the book with you (with personal notes)

Why do we keep making bad money decisions even after all the “self-evident money truths”? Why do high-income earners go broke, and folks of modest means retire “rich”?

Financial success is not rocket science. It is a soft skill where how you behave trumps what you know. That soft skill is called the psychology of money.

I’d give an example from the book:

History never repeats itself; man always does. The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty.

I was head smart about portfolio diversification and all that jargon, but once the stock market rout & other macroeconomic disappointments hit, I quickly adjusted my portfolio for aggressive safety. One of my portfolios, Risevest, quickly went from this to that.

Fixed income is closer to 85% of my entire portfolio. Perhaps I need an encouragement call from Buffett before I seriously reconsider rebalancing.

Personal History

• Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works. The way someone born into wealth thinks and interacts with money is different from one born into financial want.
• An individual’s investor willingness to bear risk is not dependent on intelligence or education. Just the sheer luck of when and where you were born.

“We are all new to this thing”

• We are not crazy. We are all newbies. We’re winging it. It took dogs 10,000 years to get domesticated. The author believes we should give ourselves a break instead of trying to be perfectly acclimated to the modern financial system we were introduced to 50 years ago. Morgan argues that concepts like retirement savings are fairly new concepts.
• Most things are harder in practice than they are in theory. This is partly because we are overconfident (Dunning-Kruger effect)

On Contentment & True Wealth:

• The hardest financial skill is getting the goalpost to stop moving
• The highest form of wealth is the ability to wake up every day and say, “I can do whatever I want today.” Interestingly, doing something you love on a schedule you can’t control can feel the same as doing something you hate. Psychologists have a word for this feeling: reactance.
• No one is as impressed with your possessions as you are.

On Warren & Wealth through Investing:

• Warren Buffett’s skill is investing, but his secret is time. Buffett has been investing actively for 80 years & has lived through 14 recessions.

• Good investing is about earning pretty good returns that you can stick with, and which can be repeated for the longest period of time. That’s when compounding runs wild. Compounding only works when you give an asset years and years to grow.
• Merely good returns sustained uninterrupted for the longest period of time — especially in times of chaos and havoc- will always win.
• My mentor, Andrew, remarked that a longer time horizon is the edge a twenty-something-year-old like me has over him when it comes to money matters.

On Savings:

• You don’t need a reason to save. It is future leverage for foreseen events and a safety net for unforeseen events.
• Morgan puts it better, “ saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Most events in my life have been reaping the dividends of paying a passion premium or taking a passion discount upfront. In my career, I was able to shoulder all the costs related to my unpaid internship which set the tone for my career. Next, having savings helped me take a job I loved that paid less than my allowance as an undergrad. I would soon come to earn >700% more (7x) in ~15 months on the same job. Now, being in NUTM means taking a step back from full-time income. Having savings helped soften the blow to my finances. Hopefully, the investment pays itself soon enough. When my health emergencies started getting too frequent, having decent savings helped me weather two out-of-pocket costs in a single month. Just save.

I plan to make my career a portfolio of pursuits. I plan to study law/economics at 40 for the fun of it, and intern in unfamiliar industries along the way. I save so I get the chance to live out my most creative & flourishing self.

On Unexpected Events & Bubbles:

• Historians are not prophets. outlier events drive the needle — COVID-19, et al. The implication of this truth is for you to:
• allow room for errors in your financial plans. Plan for a -30% write-down.
• Bubbles aren’t so much about valuations rising, it is about time horizons shrinking. When a critical mass of long-term players start playing short-term games, bubbles happen. What financial game are you playing?

The Psychology of money houses some timeless wisdom I highly recommend.

#Money #Mentorship #Personalfinance #bookrecommendation