Book Review: The Psychology of Money by Morgan Housel

In 2020, the best living writer on personal finance published his first book. (No, I don’t mean me, silly. You are just too kind, stop it, I’m blushing.)

Morgan Housel wrote The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness and, of course, I had pre-ordered it from Amazon and yeah, you should read it. 

If you’ve already read dozens of personal finance books (I have!) then I’m not saying you must read this one. But you will be entertained, and you will finish it in less than a day. If you haven’t read many personal finance books before, then this is a really good place to start. And if you haven’t specifically read Morgan Housel before then you are in for a treat.

Each chapter tackles a key aspect of wealth-building. I particularly enjoyed his chapters on wealth, risk-aversion, and narrative bias.

Wealth is not achieved by owning a bunch of expensive stuff. The fast cars, the big houses, the fancy electronics. We often believe people who have those things must be wealthy. Maybe they are, or maybe they just have an appetite for debt. Without checking their bank statements, we usually don’t know. Wealth, Housel argues – I heartily agree – is better measured in terms of freedom. Freedom to spend your day just as you choose, wherever you want, with whomever you want. 

Importantly, a pile of money in the bank can be quite helpful in obtaining that freedom. But equally true, vastly different amounts of money enables emancipation from obligation, depending on the size of one’s wants. 

To the extent the expensive stuff actually diminishes your available pile of money necessary for freedom from obligation, it’s not a stretch to understand that the car, house, and electronics may actually result in less wealth, not more. Wealth, Housel reminds us, is achieved through what you don’t buy. Readers familiar with the classic finance book The Millionaire Next Door will recognize this whole thought process.

Here’s another great point Housel makes. In investing, the price for good returns is often volatility and uncertainty. If you can’t handle either volatility or uncertainty, you can’t afford to be in assets that provide a good return. Most people, it turns out, can’t really pay that price. In behavioral finance, we talk about the related idea of asymmetric risk aversion. This means we suffer from losses much more acutely than we enjoy gains. We focus on the bad and have trouble tracking the good. A pessimistic worldview holds our attention and feels “realistic” while an optimistic worldview feels “unserious” or “unreliable.” Newspapers know this, as captured by the cliche “If it bleeds, it leads.”

Nobel-prize winner Daniel Kahneman suggests this focus on the negative over the positive had evolutionary roots, “This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

Unfortunately, this explains why most people can’t handle the advice to “buy and hold” stocks for multiple decades, despite overwhelming evidence that this is the right way to go.

Like other accessible finance writers, Housel relies on narrative and anecdotes to illustrate his timeless lessons. You will recognize familiar heroes and villains from these stories of wealth and greed, such as Warren Buffett and Bill Gates, Bernie Madoff and Rajat Gupta.

As an improvement on the familiar, Housel devotes a chapter to how narrative can deceive as well as illuminate, when it comes to investing. Behavioral finance teaches us that in the face of uncertainty – and investing is always uncertain – our brains tend to tell us stories that make us feel less uncertain, even when that’s unwarranted. Once we become attached to a certain story – this company always beats its earnings, that industry is crumbling, this entrepreneur achieves engineering wizardry on a regular basis – we disregard the data that doesn’t reinforce our pre-set narrative. We do this in our relationships, in our personal identity, and in our politics. Housel warns that it can be an expensive tendency to stick to the same preconceived narrative in investing. 

One of the most pleasing parts of finishing The Psychology of Money, to me, is that Housel eventually says in the penultimate chapter what he does with his own money and investment portfolio.

 If you always wondered what a careful money knower does with his own money, you may be similarly interested in that question and his answer.

Readers of my stuff over the years will already know how I answer that question. But if you don’t yet know, I am pleased to report that Housel does exactly what I think the right answer is. So you can read his, and my, answer for yourself, in Chapter 20.

But of course we should consider the implicit possibility, which I now make explicit, that maybe I appreciate and celebrate Housel because his narrative about money and investing closely matches my own narrative about money and investing? Perhaps I have fallen prey to the very same confirmation bias that behavioral finance warns us against? Gosh, it’s all so meta.

Addendum

Quick addendum about the best living finance writers. In 2020, The New York Times wrote up a feature on the second-best living finance writer, Matt Levine

Levine writes a column for Bloomberg News called “Money Stuff,” available for free as a daily email. Everyone should subscribe.

He is intellectual, hilarious, and produces in-depth, annotated daily explainers about Wall Street from a guy who used to work on Wall Street, respects the game, revels in the complexity, but who also sees the irony and humor in it all. Levine is like me, but five times as good.

Thankfully the competition is still open for third-best living writer on finance. I’m reserving a spot on my mantle for the bronze medal. So, please, get all your ballots in on time. Is that not what this election chatter I’ve been hearing is all about?

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How’s Inflation Going These Days?

How’s inflation going these days?

It was the talk of the town 6 months ago and 10 months ago. The most recently published April 2023 Consumer Price Index rise (the most commonly quoted inflation rate) was 4.9 percent annual, down from the peak 9.1 percent annual rate in June 2022. 

Morgan Housel

Even as the world panicked last year about rising inflation, I will now share with you a teensy confession. I didn’t really see it. Or if I did see it, it felt fine, temporary, non-threatening. I know this is heretical and borderline obnoxious to say.

This week I came across a comment on inflation from the finance writer Morgan Housel, who is one of the very best at what he does.

“What I think is really interesting is that everyone spends their money differently. So no two people have the same inflation rate,” he said in an interview in September 2022. “There is no such thing as the inflation rate. It’s just your own individual household.”

Housel’s insight explains my reaction when compared to the collective freakout I noticed elsewhere. My experience of inflation is different from yours, and yours is different from everyone else’s.

Falling Prices

Now in the latter-half of my intended century on this planet, I could settle gently into the “kids, when I was your age, that used to cost a nickel” phase of my life. But as I look around, that story isn’t particularly true in many areas.

In July 2013 I purchased an Apple Macbook Pro laptop computer for the retail price of $2,499. This past week, the monitor died and I returned to the Apple store in the North Star mall and bought another Mac Pro laptop. In my mind, 10 years for a laptop is a good run. It lived a good long life as far as electronics go and it was time to buy a new one. I paid $1,999 retail for the new one with improved graphics, larger memory and a decade worth of incremental feature improvements compared to the 2013 version.

inflation_airline

Last week I booked a round-trip flight to New York City in June for the all-in price of $517.80 (including taxes, travel booking, and airline fees). How much was this flight to New York City 33 years ago? I can’t compare the exact flight but The Department of Transportation reports that the average domestic airline fare from Texas in 1990 was $253.41. Meanwhile the average domestic round trip fare in Texas all-in was $314.75 in 2021.

Depending on the reference years, the average domestic flight costs the same, a little more, or a little less, over the past 40 years. This is actually incredible.

This past winter the internet lost its mind over the price of eggs, which had doubled. (Avian flu had wiped out the hens.) Our collective hive mind pointed to the rising cost of a carton of eggs as if that were some sign of inflation end-times. The price for a dozen large brown cage free eggs from HEB is $2.78 as I write this in mid-May 2023. Pretty much unchanged over the past decade.

I mention computers, flights, long-distance phone calls, and eggs because we notice the rise in prices but rarely their fall. So that’s one piece of the puzzle.

Inflation that we welcome

If you are a capitalist, inflation maybe hits differently. In my own capitalist way of thinking, the rise in both stock market values in my retirement portfolio over a decade and in the value of my home over that same decade are forms of inflation. Benign forms, from my perspective, but inflation nonetheless. Future purchasers of my shares or my home are negatively impacted by that inflation. Still, I’m personally glad for it.

Bloomberg News has run stories this year about companies that engage in “excuseflation.” That means firms that use bad news, like supply-chain disruptions or shortages or war – those were the top 2022 excuses – to raise prices. Companies that can raise prices and keep them high when normalcy returns – without losing market share – then have the opportunity for higher profits. 

Investors, in turn, seek to purchase shares in companies that prove they can hike prices and expand margins. This is another way in which inflation hits differently depending on who you are. For owners of capital, price hikes by companies are a sign of strength and an incentive to invest. For homeowners, price hikes are a path to long-term wealth.

MacBook
Deflationary

Inflation I don’t notice

I’m never going on a Caribbean cruise, where prices are up 14 percent since last year. I work from home, so I am not hurt much when gas prices hike the cost of a daily car commute. I don’t rent my home, so I’ve avoided one of the most brutal rises in costs in recent years.

Now, you’ve probably noticed I have conflated three ideas. First, prices are flat or falling in many areas over the past 30 years. (televisions, computers, long distance telephone calls, plain t-shirts and socks). Second, I benefit from some price hikes (my real estate, stocks in companies that have pricing power to use inflation as an excuse to hike prices and increase their margins.) Third, some price changes I don’t stress about because they hardly affect me directly (gasoline and diesel fuel, cost of caribbean cruises, home rental prices.) 

I’m not saying inflation isn’t real. I’m saying our experience of inflation is unique to each of us. There is no objective inflation since we all buy and own different stuff.

My inflation experience is about to get worse

One of the worst areas of inflation over the past 30 years has been the rising cost of higher education. Since I will be paying for this over 8 of the next 9 years for my daughters, you can expect near-constant whining in this space about tuition inflation. It’s going to be brutal. For me to experience and for you to read about.

A version of this ran in the San Antonio Express News and Houston Chronicle.

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Book Review: The Psychology of Money by Morgan Housel

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