The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel captured my interest from the start of the book and kept me engaged all the way to the end. The basic idea is that we are too quick to treat money as though it has natural rules and laws like we would with issues of physics or biology and not nearly as interested in applying principles of psychology with all the messy emotions and nuance that it brings. Housel discusses the irrational, human components of money and finance and how they play a far larger role in our lives than we may think. I particularly enjoyed his discussions about the impact of compounding over time, the reason for optimism, and his idea of simply having enough.
Wait, Compounding Interest Does What?
The fourth chapter of the book is all about the power of compounding interest, specifically using Warren Buffet as the primary case study. Housel shows that while Buffet is a good investor, he is nowhere near good enough to be as wealthy as is based on the investment rate alone. Buffet returns about 22% annually in his portfolio year over year, certainly not a rate of return that most of us could achieve and an impressive one especially over the course of decades. Jim Simons, head of the hedge fund Renaissance Technologies has compounded money at 66% annually since 1988. We have all heard about Warren Buffet, how many of us have heard of Jim Simons despite his ability to consistently triple Buffets returns year over year for decades. Why?
Warren Buffet’s net worth at the time of the books release in 2020 was an astounding $84.5 billion. At the same time in 2020 Simons net worth was $21 billion, 75% less than Buffets despite historically receiving triple the returns. The main driver of the difference? Time. Simons didn’t hit his investment stride until he was 50 years old where Buffet has been investing consistently since he was in his teens, over 70 years of compounding. Whats even crazier to me is that Warren Buffets net worth in October of 2023 is $117 billion. In the last three years Warren Buffet made ~$32.5 billion dollars, 1.5x as much as Simons had from 1988-2020.
I am drawn to the idea of compounding because its a tangible moderate path to wealth that doesn’t ask for you to be born wealthy or make millions of dollars. It simply requires consistent moderate efforts over a long period of time. For those of us not attempting to be a Warren Buffet or Jim Simons it means that getting the few million dollars that you need to retire with stability are achievable with little more than consistency in saving the amount we can afford and allowing it to grow.
On the Virtue of Enough:
Housel begins the chapter “Never Enough” with a story that I just can’t get out of my head. Here is a brief excerpt:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds ‘Yes, but I have something he will never have… enough.’
I love this short story, not only does it include Kurt Vonnegut, a personal favorite author of mine, but the message is just so clear. That all the money in the world cannot buy “enough.
Housel describes how their family is able to get ahead by establishing a quality of life that was acceptable in their 20’s, identifying the things that give them legitimate joy and fulfillment, and then agree that they don’t need more. That when the salaries went up, their spending stayed the same because they were happy with what they had. As a young, fresh 26 year old trying ot figure it out, being given the message that I don’t always need more I simply need “enough” was freeing. What does enough mean to you?
Why Fancy Stuff Can’t Make You A Fancy Lad
Housel dedicates an entire chapter to what they call the “Man in the Car Paradox”, the idea that people tend to want wealth to signal to others that they should be liked and admired but that other people often bypass YOU in order to find the things you purchased admirable. The people gawking at your Ferrari as you pull up to the party are admiring the vehicle, very few of them end up admiring the driver. The Man in the Car Paradox is a simple reminder that we often pursue emotional fulfillment through the purchase of stuff to the detriment of the actual emotional fulfillment we are looking for.
Throughout the book Housel will add quotes from the letter they wrote their son after he was born, the quote from this section is my favorite.
You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does – especially from the people you want to respect and admire you.
I encourage you to take a moment and reflect on the big purchases you want in your life, the bigger house or the fancy car. I encourage you to question if you are excited about tangible benefits from that thing, or merely prestige and status. I encourage you to wonder, is what I have actually Enough.
