This post is part of the 📖 The Psychology of Money series.
Today, I am reading The Seduction of Pessimism chapter from the book The Psychology of Money: Timeless lessons on wealth, greed, and happiness written by Author, Morgan Housel.
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.
The Seduction of Pessimism
Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Optimism is the best bet for most people because the world tends to get better for most people most of the time.
But pessimism holds a special place in our hearts. Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.
The intellectual allure of pessimism has been known for ages.
John Stuart Mill wrote in the 1840s: “I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.”
Money is ubiquitous, so something bad happening tends to affect everyone and captures everyone’s attention.
Another is that pessimists often extrapolate present trends without accounting for how markets adapt.
A third is that progress happens too slowly to notice, but setbacks happen too quickly to ignore.
“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.”
In stock markets, where a 40% decline in six months will draw congressional investigations, a 140% gain that takes place over six years can go virtually unnoticed.
And in careers where reputations take a lifetime to build and a single email to destroy.
The short string of pessimism prevails while the powerful pull of optimism goes unnoticed.
In investing, you must identify the price of success — volatility and loss amid the long backdrop of growth — and be willing to pay it.
Expecting things to be great means a best-case scenario that feels flat. Pessimism reduces expectations, narrowing the gap between possible outcomes and outcomes you feel great about.
Expecting things to be bad is the best way to be pleasantly surprised when they’re not.
That’s it for today. Tomorrow, we will read the next chapter When You’ll Believe Anything, appealing fictions, and why stories are more powerful than statistics.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
Don’t rely solely on history when predicting the future of the economy and stock market.
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.
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.
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.
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.
The Seduction of Pessimism
Pessimism prevails while the powerful pull of optimism goes unnoticed. In investing, you must identify the price of success — volatility and loss amid the long backdrop of growth — and be willing to pay it.
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.
Author(s): Morgan Housel
Part 19 of 23 in the 📖 The Psychology of Money book series.