We’re regularly working towards improving our education so that we can help you.
One of the things we did (well Mark and I did) this Christmas holiday was to review The Psychology of Money. It’s a book detailing timeless lessons on wealth, greed and happiness, written by Wall Street Journal columnist Morgan Housel.
The book is full of wisdom and is an enjoyable read. Here are some of the author’s quotes and my takeaways about things that people do, both rightly and wrongly.
“Doing well with your money has little to do with how smart you are and lots more to do with how you behave. This is challenging because “behaviour is hard to teach, even for really smart people”.
In fact, sometimes the smarter the person the more oversight they need. That’s because we’re all a little myopic and thus not always able to see our own challenges. It’s also to do with transference. That’s the likelihood of us to assume that because we’re really smart in some areas, we’re equally capable in others that we know nothing about. It’s why many professionals routinely make poor individual investors and yet another reason the guidance of a professional financial planner is so important.
“Financial success is not a hard science like physics or math, it’s a soft skill.”
But finance is largely taught like math. Eg. Put your data into a spreadsheet and it tells you what you’ll need to save, earn and when you can retire.
If it were only that simple. As we’ve just discussed, how you behave is more important than what you know. And that’s just one of the challenging parts. There’s the inherent assumption that you’re actually going to do it. But without the oversight and regular reviews, there’s realistically very little chance that you actually will do it. Let alone the risk that you may blow up your own retirement in a moment of panic.
The reality is that we think about money too much like physics and not enough like psychology. Money is an emotional issue.
“People from different generations, raised by different parents who earn different incomes, who held different values and different parts of the world, were born into different economies experiencing different job markets with different incentives and different degrees of luck often learned very different lessons”.
Everyone’s got their own unique view on how things work. What we’ve experienced personally is far more compelling than what we’ve learned elsewhere.
Because we’re all stuck in our own perspectives, including about how money works, what might seem crazy to some makes complete sense to someone else. This is why professional oversight is so important.
The bottom line is that there’s a fundamental need to work with somebody that specifically does not think exclusively like you do, in order to optimize our thinking and thus behaviour.
“Investing is not the study of finance, it’s the study of how people behave with their money.”
And behaviour, though we don’t like to admit it, changes over time. Even if we’re able to see our behaviour change, it’s in retrospect which means we can only recognize our mistakes after we’ve made them.
“The first rule of compounding is to never interrupt it unnecessarily”.
Warren Buffett became incredibly successful by repeating the same things over and over. All while letting compounding do its thing for decades. If he had stopped to ‘wait out the risk’ just a few times over the course of the 60 years he’s been at it, he likely would have missed some of the best market gains which frequently occur after a market correction. Perhaps we would not know of Mr. Buffet.
“We’re all anchored in our own history bias”.
We’re all vested in our own personal experience. It makes up most of how we think the world works. But realistically, our own experience is just a tiny amount of what is actually happening.
Success comes to those who are able to build a plan and stick with it through thick and thin. This is because in some decades, the markets barely budge. In others, they skyrocket. That’s why we need a program that keeps us there regardless of what happens.
But nothing comes for free. What was the price they paid? It was patience and uncertainty.
“We all need a clear explanation of how the world works to keep us sane. So we use lessons from our own life experiences to create models about how we think the world should work”.
It can be a problem when things don’t work out as they have in the past. Though we always default to the assumption that they will. Our current investment beliefs depend on the realizations we’ve experienced in the past.
“Real optimists don’t believe that everything will be great. That’s being complacent. True optimism is the belief that the odds of a good outcome are in your favour over time even when there will be setbacks along the way”.
This is a great realization during today’s times as there are no end of things that can and will go wrong in a pandemic. In the end, however, humankind will overcome and new corporations will continue to grow where others fail.
“Under rating the power of compounding”.
Compounding isn’t intuitive. This is because we think about exponential growth in linear terms. This is normal as we live life in a linear world. But that doesn’t change the fact that compounding works.
Albert Einstein once said something to the effect of compounding being the most powerful force in the universe. Perhaps our biggest shortcoming is our inability to understand the exponential function.
“Good investing isn’t necessarily about earning the highest returns because the highest returns tend to be one-off hits that can kill your confidence when they end. It’s about earning pretty good returns that you can stick with for a long period of time”.
Investors love to tell their friends about the great returns they got in one area while refraining from discussing one’s that didn’t perform last year. What they miss is that by focusing on returns vs process they dampen their own enthusiasm when things don’t perform on que and often miss the opportunities because of it.
“Wealth is what we don’t see”.
It’s normal for people to judge wealth by what we observe. But wealth is not the $150,000 Tesla. What that really shows is that you have $150,000 less than you did before you bought the car.
Wealth is really what we don’t see. It’s the cars not purchased, the jewelry not bought. Which is difficult because we can’t always contextualize what we can’t see. Remember that “when we spend money on things we end up with things and not the money.”
“Volatility is guaranteed and normal”.
Yet we treat it as if it’s something that needs to be fixed. Doing so can interrupt the execution of a good plan.
“We have the tendency to be influenced by the actions of other people who are playing a different financial game than we are”.
Marketing wants us to believe that bigger is always better. And it may be to some. But for those concerned with maintaining a great personal and family life, then maybe more is not the answer. Maybe enough is the answer. (Ok, maybe enough plus a little room for a margin of error is the answer).
Remember that the majority of people will likely be doing the wrong thing half the time. So don’t buy into their dreams.
“Remember that no risk that could wipe you out is ever worth taking”.
This one is self-evident.
“We all want to build a clean narrative”.
There’s too much information in the world. We can’t process it all so we filter. So we take in the information which works with the way that we think the world should work.
We hang on to ideas support our world view because it makes us feel good – even when the evidence shows something else. It’s just one more reason we need overwatch.
“We tend to believe that economics follows politics”.
Yet in reality, when we look at the historical rate of stock market growth we see that things do not change significantly along with the political change.
“We all suffer from recency bias. The assumption that we will see more of what has just happened.”
A great example is the market falling by 40 percent in 2008. “Experts” talked about another impending plunge. So rather than taking advantage of the downturn, most investors waited to make sure things weren’t going to get worse. As we know, they didn’t. And yet another opportunity was lost as things recovered.
It’s our human nature to believe that when something happens it’s likely to happen again. It’s actually very often the opposite.
When something does happen, don’t let it impact your plan even though you may be tempted to try and outsmart things.
“Most volatility is short-term. While most goals are long-term”.
That’s why a stable strategy combined with great personalized help is almost always superior.