“The Psychology of Money” is a top financial book that everyone should read.
It’s different from other financial books such as “Rich Dad Poor Dad” or “The Millionaire Fastlane”.
(Don’t get me wrong, I enjoyed these two books. They changed my life.)
But “The Psychology of Money” talks about the mental and emotional processes behind money and investing.
It’s not a “how to” or “what to invest in” kind of book.
It’s about why and how we think and make decisions about money in different situations.
Here are 8 lessons I learned from this book.
While I was reading, I compared what I was reading with what I’ve done in the past. I also formulated a plan for what I’ll do with my investments in the future.
Let’s get started.
1. No one is crazy
People make different decisions about money because our worlds are different.
We shouldn’t judge people based on our own experiences because we all see the world through a different lens.
We all have different backgrounds, were born in different eras, have different education, and grew up in different places.
So, it’s natural that we see and make decisions about things in different ways.
For example, if you grew up and started investing in the 1970s when the stock market was flat, you might not feel bullish about the stock market. Even today, you might not like investing in stocks or high-risk assets.
That’s because the stock market didn’t generate good returns back then.
But if you started investing in the 1990s, when the S&P 500 increased by 1000%, you might still be very bullish on the stock market and optimistic about it.
Or, if you started investing in the crypto market a few years ago, you may ask, “Why put money in the stock market when crypto can give you far better returns?”
We behave based on our past experiences, so don’t judge people by what you see through your own lens.
2. Luck and Risk are parts of the equation
“Not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.”
Morgan Housel
To me, this is one of the best insights in this book.
It’s easy to convince ourselves that all of our successes are 100% the result of our own decisions and actions.
But the reality is, results are not always based on our decisions and actions. Luck and Risk are also part of the equation.
Here are some examples from the book.
If Bill Gates hadn’t been born in the United States or a student at Lakeside school, he might not have become a remarkably successful tech pioneer.
Gates himself has said, “If there had been no Lakeside, there would have been no Microsoft.”
Why? In 1968, there were around 300 million people of high school age around the world. Around 18 million of them lived in the United States.
Roughly 270,000 of them lived in Washington state, and 100,000 of them lived in the Seattle area. About 300 of them studied at Lakeside School.
Lakeside was the only high school in the world that had a computer in 1968.
Only 300 students out of 300 million worldwide (0.0001% or 1 in a million) had a chance to use a computer back then.
Yes, Bill Gates is a hardworking, visionary, genius. But his life story would have been different if he was born in another country.
Same story, different result: Kent Evans was also a student at Lakeside school. He was Gates’ best friend.
Gate said that Evans was very smart and could have been a founding member of Microsoft. But Evans died in a mountaineering accident before he graduated from high school.
On average, there are around 30 deaths among 5,000,000 North American Climbers per year. That’s less than 1 in a million.
Evans went to the same school as Bill Gates, had a good brain, and grew up in a good environment. But his result was different.
Other students from 1968 were smart and visionary but grew up in other countries and didn’t achieve outstanding results in the tech industry, like Bill Gates did.
As you can see, not all of our actions control 100% of our outcomes. We can’t control Luck and Risk.
So, be humble when you’re successful, and don’t blame yourself or other people when you or they fail.
Bill Gates also once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
3. Compound Interest: The Most Powerful Force in the Universe
I always knew that compound interest is powerful, but I realized that it’s way more powerful than I thought after reading this book.
Warren Buffett has a net worth of around $85 billion, but he earned $81 billion of it after his 65th birthday.
That’s because he’s been investing for a very long time.
When I started learning about investing and money 10 years ago, I read about compound interest and tried to calculate how much I’d make if I put $10,000 into an asset that gave me a 15% annual return for 20 years.
Can you guess what this $10,000 would become over those 20 years?
Almost $164,000.
When I saw that amount, I wasn’t that excited. It’s not nearly enough for retirement. So, I still worked hard to build my business and invest regularly.
I rarely did the compound interest math.
After reading this book, I tried to calculate that first number again but changed the period from 20 years to 30 years.
Can you guess how much $10,000 would become?
$662,117.72!
How about 40 years?
$2,678,635.46!
From five digits to seven digits, without doing anything with your money for 40 years.
Like, say you start selling print-on-demand products and make $10,000 in profit in a year (which is very doable) at age 30.
Invest that into an asset that can give you a 15% annual return rare. You’ll retire at age 60 years with almost $3 million in the bank.
If you keep working and adding more money to your investments, that number will be a lot bigger.
That’s the magic of compound interest.
“The first rule of compounding: Never interrupt it unnecessarily.”
Charlie Munger
4. Take care of your health
After Iearning more about compound interest and Warren Buffett’s story, I realized that I have to take better care of my health.
Warren Buffett is 91 years old, and Charlie Munger is 98 years old. They’re still very strong and their brains still function a lot better than other people of the same age.
As an Internet entrepreneur, I mostly work from home. I rarely walk, and I go to sleep very late (like, 3-4 in the morning).
Since reading this book, I’ve been trying to change my life and do more exercise.
Time is the key to success with compound interest, so we need to stay healthy to reap the rewards.
5. Don’t invest in the high-risk assets
Investing is simple.
It’s just about how long you can invest. Just keep investing small amounts of money for a long time. Compound interest will do the rest.
There’s no need to invest in high-risk assets.
When I read this book, I recall the day I invested my money in assets I didn’t understand: Crypto and NFT.
(I’m not saying they’re bad investments. They’re good, and I’m still investing in them.)
Most of my investments are in private funds that invest mostly in the stock markets of many leading countries.
A fund manager takes care of the investments for me. I just need to work on what I’m good at and keep adding money to this private fund.
Last year, I allocated some of my money to invest in Crypto and NFT because I saw the market was very bullish and many people had made lots of money by flipping those JPEGs.
My goal was to win the Crypto lottery, like earning 10-20x on my investment. It’s as simple as that. I was so greedy!
On my NFT Journey, I made like 4-5x from my first NFT investment. I never hit a home run like that again, even though I made the same decisions and took the same actions.
Because I lacked an understanding of the Crypto and NFT markets, I lost like 70-80% of my investment.
On the other hand, if I just work on what I’m good at and put this money into the private fund and let compound interest do its work, I could make a lot more money.
I’m okay with this. I enjoy investing in Crypto and NFT and I’m still learning more about them.
I still think we should diversify our investments. Who knows? If I’d invested in Crypto and NFT in early 2019, my story might have been different.
Which leads me to the next lesson.
6. Invest in many assets (Long Tails)
Most of the returns in your investment portfolio typically come from a few good assets.
“Warren Buffett once said he’s owned 400 to 500 stocks in his life and made most of his money on 10 of them.”
Morgan Housel
In the money world, you don’t have to always make the right decision.
You can invest in stocks, real estate, or crypto. Just make sure you understand them and diversify your investments. A few of your assets will deliver your greatest returns.
Just like print-on-demand and other businesses.
I have over 100,000 products in my Amazon account, but about 50 of them account for most of the money I’ve made.
When I promote 500+ print-on-demand products through Facebook Ads, only 10-20 of them will generate most of my revenue.
This rule can apply to anything.
7. Saving Money is a MUST
Saving money must be a habit.
We normally think that we’ll save money for something, like a car or house.
We just need to save money for the uncertain times in life.
Life always surprises us with something we don’t prepare for, such as sickness, a bad economy, etc.
These are things we can’t control, so it’s better to make saving money a habit to prepare for them.
Don’t spend money on a big house or fancy car you don’t need. The fastest way to lose your wealth is to buy luxury goods.
8. Design Your Investment Lifestyle
Since we’re all different, we have to design our own investment lifestyles.
We need to understand ourselves. There’s no one-size-fits-all investment.
Some folks might be able to tolerate an 80% loss on crypto and sleep well every night. These people might understand blockchain technology and can hold it until the value of the crypto bounces back.
Others may not be able to tolerate that kind of loss but will be okay with an 8-10% return from an ETF (Exchange-Traded Fund) with a lot lower risk profile.
Or someone might be old and can’t invest in high-risk assets. They might be better off with the 3-5% return rate on government bonds.
There’s no 100% right or 100% wrong decision about money. It’s about using it to do whatever suits your lifestyle.
Just keep saving money, find an investment that allows you to sleep well, and always be humble.
Okay, that’s it. These are the eight lessons I learned from the “Psychology of Money”.
There are lots of details I didn’t mention here, so I highly recommend you read the full book yourself. 🙂
—Bank K.
