The book explains in detail the role of human biases in investment decisions. The rational economic man exists only in spreadsheets and text books. Awareness of your own emotions will help you to take a more informed decision. Decision to invest in an asset class and how much to invest is in your control whereas returns are not. The role of risk, leverage, compounding and luck in investment returns are explained in a very lucid manner.
The concept of wealth being defined not in terms of bank balance but independence, is something which I really liked. All of us want to be wealthy but what wealth means to us is a question we need to answer ourselves.
The book can be summarized in one line – Be frugal. Spend less than what you earn. If you do this, sooner or later, you will become financially independent. That’s all. This is what my mother taught me when I was a kid. Save early, save more, don’t borrow. Only thing is she did not know equities and asset classes. Her instrument of choice was RD Recurring Deposit in bank or Post office near our home. When you read the book and introspect – you will realize the impact of upbringing and early investment experience. (Read SIP by SIP: Is there hope?)
The other variable is time invested. As Housel says, "you can be wrong half the time and still make a fortune". Maximize time, hence if you start early and save more, you have two variables, that are in your control to work in your favor. Asset returns cannot be predicted, so don’t waste your time and energy trying to do that. Over long periods of time, asset returns tend to give average returns and so you if you invest for long term, you will smoothen extremes. (Read Plenty of safer ‘options’ to create wealth)
What is long term? This is not defined. It depends on your perspective. When I started my career, most equity investors used to talk of long term as being one year or more. This was also in line with Indian Income Tax rules. In the late 90s, long term became 3 years and it remained there for over a decade. In the recent past, definition of long term has changed to maybe 5-7 years. The reason being Nifty returns in 3 years are not looking good on spreadsheets. In my opinion, if you are an equity investor, you should be prepared to hold for ten years or more.
He also talks candidly about making a financial plan that you are comfortable with and not what’s most logical as per your financial advisor. The plan is made by a spreadsheet but executed by a human being. Little surprise that human beings are joyous when their portfolio does well and crib when it does badly. I can give you countless examples of people who become small and mid-cap experts in a bull market. When the market turns, then they blame brokers / corporate/ corporate governance/ regulators for their problems but never their greed. Everyone wants 100% equities in a bull market and 100% debt in a bear market. Unfortunately, only God knows and can predict bull and bear markets with accuracy, which brings up the importance of Asset allocation. It is important to do asset allocation you are comfortable with.
Don’t compare. If you avoid the comparison trap, you are on your way to being wealthy. Comparison leads to ruin because you never get to see the full picture. The person driving the fancy Ferrari may be over-leveraged. The person standing next to you in a local train might be crorepati.
When I was new to Mumbai, I have once traveled from Chowpatty to Fort in Bus No. 123 with Chandrakant Sampat who was the original investor and believer of MNC brands like HUL, Gillette and Colgate. He was related to a friend of mine. He was frugal (the Gujju friend used a different Hindi word), invested for the long term and was a millionaire many times over. I am sure Morgan Housel would have loved to meet and discuss psychology of money with him.
The author of this article is Mr. R. Venkataraman, MD, IIFL Securities