The Psychology of Money

Morgan Housel, a venture capitalist and blogger, recently penned a new book to be published next month, The Psychology of Money. In it, he notes, "Money isn't primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.”

Housel relates two stories. One involved a person who made a fortune and who skipped gold coins worth thousands of dollars across waves in the ocean, "just for fun." To him, Housel claims, money was a plaything (he subsequently went broke). The second story involved a modest man whose life work was as a gas station attendant and janitor. When he died at the age of 92, his estate was worth more than $6 million that he gifted to local charities. Housel asks, how did a janitor “with no college degree, no training, no background, no formal experience and no connection massively outperform” many professional investors?

The answer points to one of Housel’s conclusions. You don’t have to be a rocket scientist to be a successful investor. It takes patience and a willingness to defer gratification. You need to be able to withstand market volatility. Housel uses Netflix and Monster Beverage as examples of the benefit of patience. If you invested $1,000 in Netflix in 2002, by 2018 your Netflix stock would be worth $3.5 million. If you made the same investment in Monster Beverage in 1995, by 2018 your stock would be worth $30 million. During those time frames, each stock spent 94% of its time below its all-time high.

Housel considers market volatility a fee for the cost of investing. No one knows that better than Warren Buffet, the Oracle of Omaha, who is regarded as one of the savviest investors of all time. Housel discovered that Buffet accrued at least 95% of his wealth after his 65th birthday. Buffet recently celebrated his 90th. If Warren Buffet had only invested for a 30-year time period, his net worth would be 99.9% less than it is today. Buffet’s “skill is investing, but his secret is time,” Housel writes.

Luck is another major determinant of long-term returns, greatly influenced by your date of birth. If you were born in 1950, between the ages of 13 and 30 your investments earned next to nothing. If you were born in 1970, you would have earned nine times more than those born in 1950 during that same age span. If you are a millennial born in 2000, you will have to save much more than your parents.

Housel makes the distinction between being rich and being wealthy. Rich people make a lot of money. Wealthy people have the freedom not to spend. Many rich people are not wealthy because they feel the need to spend to impress others. Wealthy people don’t care about what others think. What’s important to them is using their resources to control how they spend their time.