[PDF]money

TIMELESS LESSONS ON WEALTH, GREED,
AND HAPPINESS


MORGAN HOUSEL


“Housel observations often hit the daily double: they say things that
haven't been said before, and they make sense.”
—HOWARD MARKS Th


TIMELESS LESSONS ON WEALTH, GREED,
AND HAPPINESS


MORGAN HOUSEL


“Tlousels observations often hit the daily double: they say things that
haven't been said before, and they make sense.”
—HOWARD MARKS rh


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Lhe


Psychology


Money


TIMELESS LESSONS ON WEALTH,
GREED, AND HAPPINESS


MORGAN HOUSEL


Hh Harriman
House


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For
My parents, who teach me.
Gretchen, who guides me.


Miles and Reese, who inspire me.


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Contents


Introduction: The Greatest Show On Earth
1. No One’s Crazy

2. Luck & Risk

3. Never Enough


4. Confounding Compounding


5. Getting Wealthy vs. Staying Wealthy


6. Tails, You Win


7. Freedom


8. Man in the Car Paradox


14. You'll Change


15. Nothing’s Free


“A genius is the man who can do the average thing when everyone else
around him is losing his mind.”


—Napoleon


“The world is full of obvious things which nobody by any chance ever
observes.”


—Sherlock Holmes


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INTRODUCTION:


The Greatest Show
On Farth


Ispent my college years working as a valet at a nice hotel in Los Angeles.


One frequent guest was a technology executive. He was a genius, having
designed and patented a key component in Wi-Fi routers in his 20s. He had
started and sold several companies. He was wildly successful.


He also had a relationship with money I’d describe as a mix of insecurity
and childish stupidity.


He carried a stack of hundred dollar bills several inches thick. He showed it
to everyone who wanted to see it and many who didn’t. He bragged openly
and loudly about his wealth, often while drunk and always apropos of
nothing.


One day he handed one of my colleagues several thousand dollars of cash
and said, “Go to the jewelry store down the street and get me a few $1,000
gold coins.”


An hour later, gold coins in hand, the tech executive and his buddies
gathered around by a dock overlooking the Pacific Ocean. They then
proceeded to throw the coins into the sea, skipping them like rocks, cackling
as they argued whose went furthest. Just for fun.


Days later he shattered a lamp in the hotel’s restaurant. A manager told him
it was a $500 lamp and he’d have to replace it.


“You want five hundred dollars?” the executive asked incredulously, while
pulling a brick of cash from his pocket and handing it to the manager.
“Here’s five thousand dollars. Now get out of my face. And don’t ever insult
me like that again.”


You may wonder how long this behavior could last, and the answer was “not
long.” I learned years later that he went broke.


The premise of this book is that doing well with money has a little to do with
how smart you are and a lot to do with how you behave. And behavior is
hard to teach, even to really smart people.


A genius who loses control of their emotions can be a financial disaster. The
opposite is also true. Ordinary folks with no financial education can be
wealthy if they have a handful of behavioral skills that have nothing to do
with formal measures of intelligence.


My favorite Wikipedia entry begins: “Ronald James Read was an American
philanthropist, investor, janitor, and gas station attendant.”


Ronald Read was born in rural Vermont. He was the first person in his
family to graduate high school, made all the more impressive by the fact that
he hitchhiked to campus each day.


For those who knew Ronald Read, there wasn’t much else worth
mentioning. His life was about as low key as they come.


Read fixed cars at a gas station for 25 years and swept floors at JCPenney
for 17 years. He bought a two-bedroom house for $12,000 at age 38 and
lived there for the rest of his life. He was widowed at age 50 and never
remarried. A friend recalled that his main hobby was chopping firewood.


Read died in 2014, age 92. Which is when the humble rural janitor made
international headlines.


2,813,503 Americans died in 2014. Fewer than 4,000 of them had a net
worth of over $8 million when they passed away. Ronald Read was one of
them.


In his will the former janitor left $2 million to his stepkids and more than $6
million to his local hospital and library.


Those who knew Read were baffled. Where did he get all that money?


It turned out there was no secret. There was no lottery win and no
inheritance. Read saved what little he could and invested it in blue chip
stocks. Then he waited, for decades on end, as tiny savings compounded into
more than $8 million.


That’s it. From janitor to philanthropist.


A few months before Ronald Read died, another man named Richard was in
the news.


Richard Fuscone was everything Ronald Read was not. A Harvard-educated
Merrill Lynch executive with an MBA, Fuscone had such a successful career
in finance that he retired in his 40s to become a philanthropist. Former
Merrill CEO David Komansky praised Fuscone’s “business savvy,
leadership skills, sound judgment and personal integrity.”! Crain’s business
magazine once included him in a “40 under 40” list of successful
businesspeople.?


But then—like the gold-coin-skipping tech executive—everything fell apart.


In the mid-2000s Fuscone borrowed heavily to expand an 18,000-square foot
home in Greenwich, Connecticut that had 11 bathrooms, two elevators, two
pools, seven garages, and cost more than $90,000 a month to maintain.


Then the 2008 financial crisis hit.


The crisis hurt virtually everyone’s finances. It apparently turned Fuscone’s
into dust. High debt and illiquid assets left him bankrupt. “I currently have
no income,” he allegedly told a bankruptcy judge in 2008.


First his Palm Beach house was foreclosed.
In 2014 it was the Greenwich mansion’s turn.


Five months before Ronald Read left his fortune to charity, Richard
Fuscone’s home—where guests recalled the “thrill of dining and dancing
atop a see-through covering on the home’s indoor swimming pool”—was
sold in a foreclosure auction for 75% less than an insurance company figured
it was worth.


Ronald Read was patient; Richard Fuscone was greedy. That’s all it took to
eclipse the massive education and experience gap between the two.


The lesson here is not to be more like Ronald and less like Richard—though
that’s not bad advice.


The fascinating thing about these stories is how unique they are to finance.


In what other industry does someone with no college degree, no training, no
background, no formal experience, and no connections massively
outperform someone with the best education, the best training, and the best
connections?


I struggle to think of any.


It is impossible to think of a story about Ronald Read performing a heart
transplant better than a Harvard-trained surgeon. Or designing a skyscraper
superior to the best-trained architects. There will never be a story of a janitor
outperforming the world’s top nuclear engineers.


But these stories do happen in investing.


The fact that Ronald Read can coexist with Richard Fuscone has two
explanations. One, financial outcomes are driven by luck, independent of
intelligence and effort. That’s true to some extent, and this book will discuss


it in further detail. Or, two (and I think more common), that financial success
is not a hard science. It’s a soft skill, where how you behave is more
important than what you know.


I call this soft skill the psychology of money. The aim of this book is to use
short stories to convince you that soft skills are more important than the
technical side of money. I’ll do this in a way that will help everyone—from
Read to Fuscone and everyone in between—make better financial decisions.


These soft skills are, I’ve come to realize, greatly underappreciated.


Finance is overwhelmingly taught as a math-based field, where you put data
into a formula and the formula tells you what to do, and it’s assumed that
you'll just go do it.


This is true in personal finance, where you’re told to have a six-month
emergency fund and save 10% of your salary.


It’s true in investing, where we know the exact historical correlations
between interest rates and valuations.


And it’s true in corporate finance, where CFOs can measure the precise cost
of capital.


It’s not that any of these things are bad or wrong. It’s that knowing what to
do tells you nothing about what happens in your head when you try to do it.


Two topics impact everyone, whether you are interested in them or not:
health and money.


The health care industry is a triumph of modern science, with rising life
expectancy across the world. Scientific discoveries have replaced doctors’
old ideas about how the human body works, and virtually everyone is
healthier because of it.


The money industry—investing, personal finance, business planning—is
another story.


Finance has scooped up the smartest minds coming from top universities
over the last two decades. Financial Engineering was the most popular major
in Princeton’s School of Engineering a decade ago. Is there any evidence it
has made us better investors?


I have seen none.


Through collective trial and error over the years we learned how to become
better farmers, skilled plumbers, and advanced chemists. But has trial and
error taught us to become better with our personal finances? Are we less
likely to bury ourselves in debt? More likely to save for a rainy day? Prepare
for retirement? Have realistic views about what money does, and doesn’t do,
to our happiness?


I’ve seen no compelling evidence.


Most of the reason why, I believe, is that we think about and are taught about
money in ways that are too much like physics (with rules and laws) and not
enough like psychology (with emotions and nuance).


And that, to me, is as fascinating as it is important.


Money is everywhere, it affects all of us, and confuses most of us. Everyone
thinks about it a little differently. It offers lessons on things that apply to
many areas of life, like risk, confidence, and happiness. Few topics offer a
more powerful magnifying glass that helps explain why people behave the
way they do than money. It is one of the greatest shows on Earth.


My own appreciation for the psychology of money is shaped by more than a
decade of writing on the topic. I began writing about finance in early 2008. It
was the dawn of a financial crisis and the worst recession in 80 years.


To write about what was happening, I wanted to figure out what was
happening. But the first thing I learned after the financial crisis was that no
one could accurately explain what happened, or why it happened, let alone


what should be done about it. For every good explanation there was an
equally convincing rebuttal.


Engineers can determine the cause of a bridge collapse because there’s
agreement that if a certain amount of force is applied to a certain area, that
area will break. Physics isn’t controversial. It’s guided by laws. Finance is
different. It’s guided by people’s behaviors. And how I behave might make
sense to me but look crazy to you.


The more I studied and wrote about the financial crisis, the more I realized
that you could understand it better through the lenses of psychology and
history, not finance.


To grasp why people bury themselves in debt you don’t need to study
interest rates; you need to study the history of greed, insecurity, and
optimism. To get why investors sell out at the bottom of a bear market you
don’t need to study the math of expected future returns; you need to think
about the agony of looking at your family and wondering if your investments
are imperiling their future.


I love Voltaire’s observation that “History never repeats itself; man always
does.” It applies so well to how we behave with money.


In 2018, I wrote a report outlining 20 of the most important flaws, biases,
and causes of bad behavior I’ve seen affect people when dealing with
money. It was called The Psychology of Money, and over one million people
have read it. This book is a deeper dive into the topic. Some short passages
from the report appear unaltered in this book.


What you’re holding is 20 chapters, each describing what I consider to be
the most important and often counterintuitive features of the psychology of
money. The chapters revolve around a common theme, but exist on their
own and can be read independently.


It’s not a long book. You’re welcome. Most readers don’t finish the books
they begin because most single topics don’t require 300 pages of
explanation. I’d rather make 20 short points you finish than one long one
you give up on.


On we go.


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1.
No Ones
Crazy


Your personal experiences with money
make up maybe 0.00000001% of what's


happened in the world, but maybe 80% of
how you think the world works.


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Let me tell you about a problem. It might make you feel better about what
you do with your money, and less judgmental about what other people do
with theirs.


People do some crazy things with money. But no one is crazy.


Here’s the thing: People from different generations, raised by different
parents who earned different incomes and held different values, in different
parts of the world, born into different economies, experiencing different job
markets with different incentives and different degrees of luck, learn very
different lessons.


Everyone has their own unique experience with how the world works. And
what you’ve experienced is more compelling than what you learn second-
hand. So all of us—you, me, everyone—go through life anchored to a set of
views about how money works that vary wildly from person to person. What
seems crazy to you might make sense to me.


The person who grew up in poverty thinks about risk and reward in ways the
child of a wealthy banker cannot fathom if he tried.


The person who grew up when inflation was high experienced something the
person who grew up with stable prices never had to.


The stock broker who lost everything during the Great Depression
experienced something the tech worker basking in the glory of the late 1990s
can’t imagine.


The Australian who hasn’t seen a recession in 30 years has experienced
something no American ever has.


On and on. The list of experiences is endless.


You know stuff about money that I don’t, and vice versa. You go through life
with different beliefs, goals, and forecasts, than I do. That’s not because one
of us is smarter than the other, or has better information. It’s because we’ve
had different lives shaped by different and equally persuasive experiences.


Your personal experiences with money make up maybe 0.00000001% of
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