Quite comfortably the best investor psychology book of the year in my opinion has been Morgan Housel’s’ The Psychology of Money – Timeless lessons on wealth, greed and happiness.
We keep buying more and more copies in the office to give away as the lessons in this book are so important especially to the generation still trying to accumulate wealth and sometimes finding it very tough.
Much of what is below is taken from the book and also from dialogue in a podcast I recently listened to where Sam Harris; an American philosopher, neuroscientist and author interviews Morgan as part of his podcast series called Making Sense.
The theme of the article is the interesting contrast between being rich and being wealthy. To start off with, Morgan Housel gives his own definition of rich and wealth.
Rich
Being rich is having enough money to pay your monthly bills to live the lifestyle you want to live. You can pay your bond, car payment, school fees etc. You have the monthly cash available to do this.
Wealth
Wealth is completely different – it is the money you have not spent. It is money that is saved up and invested, sitting around and you are not doing anything with it. That is what wealth is. It is a very different concept.
The biggest reason we should differentiate these things is that rich we can see. We can see the car you drive in, the house you live in and the clothes that you wear. It’s all visible. Wealth you cannot see. We cannot see you bank account, your retirement fund or brokerage account statement. We have no idea how much wealth you have.
Morgan says we go through life with a very flawed and skewed sense of rich and wealth because we only make judgements based of what we see. So you see someone driving a Ferrari and you assume that person must be rich. Maybe they are rich in the sense that they can make the monthly payments on the Ferrari but they might have zero wealth, zero money saved up that’s going to give them independence and room for error and the ability to endure a recession. They might have zero! The world is filled with people who look modest but are actually wealthy and people who look rich but live at razor’s edge of insolvency
Morgan said he only understood this concept when he worked as a valet early on in his working life and got to know some of these people driving in with those fancy cars and learning after he got to know them that some of them weren’t actually very successful. They were like mediocre successful people that spent half of their income on their Rolls Royce lease payment. All of his assumptions of these people were completely skewed and on the flip side of that some of the people who were very successful and wealthy you would never know because you couldn’t measure this on their outward appearance. He said once you have seen enough of these examples – I thought you were X but you’re actually Y, you realise we are so blinded by the view of richness when actually what we deep down aspire to be is wealthy, because what wealth does is that the unspent money that you are not spending now and rather investing on a monthly basis gives you independence and autonomy. You have that level of net worth saved up to be autonomous. It is money to give yourself a better life rather than a tool to buy more things. This is what we actually aspire to but always what people are measured against in this world is how rich we are or aren’t.
People (usually young men) think that outward projections of wealth (nice car, nice house, fancy clothes) will give them a sense of happiness. What this actually leads to is a lot of depression, a sense of emptiness when they actually get all these material possessions. If you are poor and depressed, you can always say that what will fix it is more money but if you are rich and depressed, you can’t say this anymore. We might all like nice clothes, cars and a nice home but Morgan thinks we absolutely overestimate the happiness that comes from these things.
It’s not that money won’t make you happy. Money will make you happy if you can use it to give yourself independence, autonomy and control over your time. That’s something for a majority of people will bring a lasting level of contentment and benefit to their life that is often overlooked. Someone can say in this scenario, if they have level of savings that they can take a lower paying job because they prefer that job, or move to a house that has a smaller commute or endure a medical setback without falling into a cripplingly high level of debt. If you can remove these worries because you have a level of wealth and independence that surely is what gives people a better life?
What’s also interesting in Morgan’s insights is the answer that most Americans gave to the question asked of what was the best period economically for them. Most have said the 1950’s. This was the golden age in America of middle-class prosperity. But what is interesting, by almost any measure Americans are better off today and it’s not even close. So why this nostalgia to the 1950’s and why remember it as the greatest period if it actually wasn’t? One explanation is the rise of media and especially social media over the last 20 years which inflated everyone expectations to such a degree Maybe incomes have doubled since the 1950’s but expectations have more than doubled. Everyone judges how they are doing in the world compared to everyone around them. When your judgement around those around you is opening up Instagram and Facebook, it’s very difficult to be happy in your own circumstances. Expectations are so high and are rising higher than the reality on the ground. Current success doesn’t feel like success because we have this false view. For young men and young woman this is so distorting on where they should be in the world and how they anchor their success.
I love the graphic below and it really represents beautifully the similar but different concepts of being rich and being wealthy.
The concept in the book fits very nicely into our philosophy of return on life which says yes, as your advisors we are trying to get you the best possible return within a level of risk you are willing to take but we are also trying to help you get the best life possible with the money you have so it’s about money and it’s about life. We are here to try help you bring meaning to your means.
I would really suggest reading the rest of the book as there are more important themes that Morgan takes one through. If you are at our office and would like a copy, please just ask!
Regards
Adam