This post is part of the đź“– The Psychology of Money series.

Today, I am reading You & Me chapter from the book The Psychology of Money: Timeless lessons on wealth, greed, and happiness written by Author, Morgan Housel.

TL;DR! đź’¬

Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.

In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.

Yesterday, I finished reading the 15th short story Nothing’s Free from the book The Psychology of Money.

You & Me

Beware of taking financial cues from people playing a different game than you are.

Investors often innocently take cues from other investors who are playing a different game than they are.

Bubbles form when the momentum of short-term returns attracts enough money that the makeup of investors shifts from mostly long term to primarily short term.

That process feeds on itself. As traders push up short-term returns, they attract even more traders. Before long—and it often doesn’t take long—the dominant market price-setters with the most authority are those with shorter time horizons.

What do you expect people to do when momentum creates a big short-term return potential? Sit and watch patiently? Never. That’s not how the world works.

Profits will always be chased.

And short-term traders operate in an area where the rules governing long-term investing—particularly around valuation—are ignored because they’re irrelevant to the game being played.

That’s where things get interesting and where the problems begin. Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.

A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviours of people playing different games than you are.

A recommended approach could be going out of your way to identifying what game you’re playing and play within those rules.

That’s it for today. Tomorrow, we will read the next chapter The Seduction of Pessimism, where optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.

What we learnerd so far
  1. No One’s Crazy

    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.

  2. Luck & Risk

    Nothing is as good or as bad as it seems. More important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.

  3. Never Enough

    There are many things never worth risking, no matter the potential gain. Knowing when you have “enough” is an invaluable skill. Building a sense for “enough” is remarkably simple: Stop taking risks that might harm your reputation, family, freedom and independence.

    Don’t forget that being loved by those “whom you want to love” is invaluable than risking everything for money.

  4. Confounding Compounding

    Good investing isn’t necessarily about earning the highest returns. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.

  5. Getting Wealthy vs Staying Wealthy

    Good investing is not necessarily about making good decisions. It’s about consistently not screwing up. There are a million ways to get wealthy and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.

    Getting money is one thing. Keeping it is another. If you have to summarize money success in a single word, it would be “survival”.

  6. Tails, You Win

    Gains come from a small per cent of your actions called “Long Tail Events”. You can be wrong half the time and still make a fortune. Remember, tails drive everything. Just do the average thing when all those around you are going crazy.

  7. Freedom

    Controlling your time is the highest dividend money pays. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

  8. Man in the Car Paradox

    If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

  9. Wealth is What You Don’t See

    Wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you choices, flexibility, and growth to one day purchase more stuff than you could right now.

  10. Save Money

    Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.

  11. Reasonable > Rational

    You’re not a spreadsheet. You’re a person. A screwed up, emotional person. When it comes to investing, try to be reasonable rather than rational.

  12. Surprise!

    Don’t rely solely on history when predicting the future of the economy and stock market.

  13. Room for Error

    People underestimate the need for room for error in almost everything they do that involves money. The solution is simple: Use “room for error” when estimating your future returns.

  14. You’ll Change

    Long-term financial planning is essential. But things change—both the world around you and your own goals and desires. The trick is to accept the reality of change and move on as soon as possible. The quicker it’s done, the sooner you can get back to compounding.

  15. Nothing’s Free

    Stock market volatility is a fee, not a fine. Find the price and pay it. Convincing yourself that “market volatility is a fee, not fine” is an important part of developing the kind of mindset that lets you stick around long enough for investment gains to work in your favour.

  16. You & Me

    Investors often innocently take cues from other investors who are playing a different game than they are.

    Understand your own time horizon, identity what game you’re playing and play within those rules and not be persuaded by people’s actions and behaviours playing different games than you are.

Buy or not to buy

If you want to be wealthy and then stay at the totem pole forever, you must immediately read this book. I bought several copies of this book to gift friends and family. It’s an easy read with a lot of anecdotes and real-life lessons. I already implemented several hacks in my life whistle taking investment decisions.

The Psychology of Money

Author(s): Morgan Housel

Short Blurb: Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior … Read more
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Part 18 of 23 in the đź“– The Psychology of Money book series.

Series Start | The Psychology of Money: Timeless lessons on wealth, greed, and happiness - Day 17 | The Psychology of Money: Timeless lessons on wealth, greed, and happiness - Day 19

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