Stories and Timeless Lessons From the Book – Psychology of Money

What is the book The  Psychology of Money about?

What kind of book is the Psychology of Money?

How does Psychology of Money differ from other books?

It goes deep into the psyche of investors and decodes the wisdom that creating wealth is more about the behavior of an investor than about intelligence.

A genius can lose his money because of a lack of control over his emotions and a not-so-smart but a ‘humble’ investor can turn out to be extremely successful!

Let’s understand this dichotomy through the stories from the book Psychology of Money!

Table of Contents

1.) RONALD READ – The Man, The Myth, The Legend!
2.) Stories On The Magic Of Compounding
3.) Luck, Karma, and the Story of Bill Gates
4.) Abraham Germansky and Jesse Livermore
5.) Staying Rich
6.) True wealth lies in living frugally.
7.) When To Take Risk?
8.) Do Not Forget To….
9.) Psychology of Money – What it Teaches Us?
10.) About The Author
11.) CONCLUSION

1.) Ronald Read – The Man, The Myth, The Legend!

Ronald Read was a high school graduate. For 25 years, Ronald Read fixed automobiles at a gas station, and for 17 years, he swept floors at JCPenney. At the age of 38, he paid $12,000 for a two-bedroom house and spent the rest of his life there.

Ronald Read passed away in 2014 at the age of 92. At that point, the unassuming rural janitor gained international attention. 2014 saw 2,813,503 American deaths. When they passed away, less than 4,000 of them had a net worth of more than $8 million. Among one of them was Ronald Read! He set aside more than $6 million to his local hospital and library and $2 million to his stepchildren in his will.

A guy who is a normal high school graduate and was doing an ordinary job could create wealth like this for the simple reason that he was saving regularly, investing in equity, and stocks and he was holding his investments.

Ronald Read life story is certainly a life-changing story that can inspire today’s youngsters to use money judiciously. It can also be part of life-changing stories for students to make them become more sensible and responsible in handling their expenses.

This humble rural janitor story about money certainly grabbed the attention of all audiences irrespective of age groups.

2.) Stories On The Magic Of Compounding

.Creating a 10-crore asset is not difficult if we understand the power of compounding. Have you heard of the 15 x 15 x 15 rule? This means a 15% return with Rs 15,000 per month for 15 years will create Rs 1 crore.

It may take 15 years to get 1 crore. If money doubles in the next 5 years, it becomes 2 crore. In the next 5 years, it becomes 4 crore and so on. The effect of compounding becomes much greater. You can create a 10-crore wealth easily, provided you have the discipline of investing and holding it.So this is what the Psychology of money is all about.

How to grow your money creatively? The answer is very simple. Consistency!

The author gives another example. What if Warren Buffet had been a more average guy who had travelled the world in his teens and 20s, only to have a net worth of, say, $25,000 by the time he was 30?

Suppose he continued to achieve the exceptional yearly returns on his investments that he has been able to produce (22% annually), let’s say that he stopped investing at the age of 60 to play golf and spend more time with his grandchildren.

What is the approximate current value of his net worth would be?

$11.9 million. Which is 99.9% less than Warren Buffet’s real current net worth!

So what this money story indicates is that if you want to create wealth, the two most important things are Discipline and Time. That is what will help you to create wealth. But on the contrary, what we always feel is, that we should get a high return to create wealth.So this is what we should learn from this money story.

No! If you have given time and are disciplined enough to make regular investments, you can create wealth with a lesser return. So remove from your mind that I can only create wealth if I invest in very risky investments.

3.) Luck, Karma, and the Story of Bill Gates

The next learning from this book is Luck and Risk. Honestly, you have to be lucky. Your karma decides your return. Of course, you may question it.

Why does the author emphasize this? The example he gives is, that Bill Gates was lucky enough to join a school that had a computer. This school thought about computers and invested in computers. Bill Gates was fortunate enough to join that school. Among one million children, he was lucky to get admission to a school that had a computer and that’s where his interest started!

In the eighth grade, Kent Evans and Bill Gates grew close to one another. According to Gates, Evans was the top student in the class. Kent, Gates, and another friend Allen might have been the founding partners of Microsoft. But unfortunately Before receiving his high school diploma, Kent perished in a mountaineering accident. There’s around a one-in-a-million chance that you may die climbing a mountain while still in high school.

Yes! Luck plays a role. That’s one of the reasons. Always do good karma, you will be taken care of. It’s not saying you have to do karma to get better returns. That is not the inference. The point is, somewhere that luck factor comes in your investment.This is certainly another valuable life lesson paragraph that you should always look to remember.

So, if you ask, how I can become lucky?

The answer to that question is, do Good Karma!

4.) Abraham Germansky and Jesse Livermore

Suppose you may become wealthy, but can you protect wealth? The author gives us the example of Jesse Livermore and Abraham Germanski.

In the 1920s, Abraham Germansky was a wealthy real estate developer. He also enjoyed investing extensively in equities when the market rose. He was destroyed as the 1929 financial crisis developed. And that pretty well signaled Abraham Germansky’s demise.

So if you wish not to inherit the same fate as Abraham Germansky’s, please learn to manage your finances effectively. What this also signifies is that knowing the psychology of money is as important as knowing the art of creating wealth.

Germansky vanished in 1929, On October 24. The New York Times published a brief item in which Bernard Sandler, Germansky’s attorney, requested information regarding his whereabouts.

Interestingly, another investor in the same city later that week had quite the opposite experience.

On October 29, 1929, Jesse Livermore came home to find his wife ready to comfort him and resume a frugal lifestyle after hearing of the day’s historic market drop.

According to Livermore’s biography, his wife asked, “You mean we are not ruined?” He answered, “No darling, I have just had my best trading day – we are fabulously rich and can do whatever we like”. He earned the equivalent of $3 billion in a single day. When the market crashed in 1929, he shot the market and profited more than he had in his entire life before that point.

Opposing stories on a spectrum. Livermore became the richest man in the world while Germansky went bankrupt.

But if you skip four years, the plots are essentially the same. Livermore continued to place bigger and bigger bets before losing everything in the stock market. In 1933, he disappeared for two days out of poverty and embarrassment and his wife went in search of him.

If you can generate wealth, my friend, you have only solved one part of the puzzle, but to solve the complete puzzle you should know how to preserve and retain wealth as well.

The New York Times reported in 1933 that “Jesse L. Livermore, the stock market operator, of 1100 Park Avenue missing and has not been seen since 3 pm yesterday”. When he came back, his course had already been decided. Livermore eventually committed suicide.

Although the timing was different, Germansky and Livermore both concluded that becoming wealthy is only one thing. But the challenge is maintaining wealth!

5.) Staying Rich

In Coimbatore, a husband and wife committed suicide because they lost all their money in the stock market. We often keep hearing this in the newspaper reports.

When we take the case of Germanski and Livermore. The important point to note is that Germanski lost all his money and then he committed suicide because the market went down. But at least we can understand what has driven him to commit suicide.

What we can’t understand is the guy who created $3 billion, became greedy and started taking more risks. Now that led Livermore to lose all his money and commit suicide after four months. This is so ironic, right?Don’t you consider this as a life lessons paragraph?

As this also educates you on how important is for you to know धन का मनोविज्ञान (Psychology of Money).

The role of psychology plays an important part here. Jesse Livermore was lucky to create $3 billion and would have simply sat with it. Instead, he became greedy. He went and took more risks with his investment and he lost everything.

This story about money tells us that no matter what stage of life you are in, you should always be keen in handling your finances properly. So if you wish to handle your finances effectively, the first step to do,  is to avoid taking blind risks.

If you have to beat inflation, you have to take risks. Please understand the difference. But If you have already created wealth, what is important is to maintain it. So therefore you need not take much of a risk. But if you have to create wealth, you have to take risks and also be optimistic.

The more basic question is why do I need money? If I am not going to be there tomorrow, it is only for my family!

If you want to stay wealthy, have a decent lifestyle, don’t take unnecessary risks when you have already created wealth, and be humble. Always say that today you have a lot of wealth because Thank God I am lucky to have this!

The humble rural janitor story that we discussed earlier is a good example of this. Even when he has amazed so much wealth, he was not willing to take blind risks in pursuit of more wealth. There are two key takeaways one should be willing to take risks, and other you should also know when to refrain yourself from taking unnecessary risks.

6.) True Wealth Lies in Living Frugally

If you want to maintain your wealth you have to have a decent living. Be humble. Don’t think that everything is because of you and don’t take risks when it is not required.This is also the key to lead a successful lifestyle.

The point here is, why should you flaunt your wealth?

If you are going for a luxury trip. You should go quietly and come back. Why should you tell the whole world you are going? And these days there is so much noise in social media about living a lavish lifestyle.

So don’t flaunt your wealth because we should keep in mind Jesse Livermore who made 3 billion dollars and committed suicide after 4 Years.Chances are either you get into unnecessary spending or you get tempted by the people around you to take blind risks and lose all your wealth forever.

Jesse Livermore already had $3 billion. Where was the need to go and borrow money to expand it further?

Don’t take mindless risks because the money can go off quickly the way it came. Do you remember those days when people used to say, I made so much money in Bitcoin? Where are they today?

For example, a person who is 60 today, wants to live a Decent Life, somewhere between 2.5 crore to 3.5 crore is the capital he requires. ‘Decent Life’ in the sense that, 1 lakh per month for expenses and some trips here and there.

if you have 3.5 crores, probably you will be very comfortable. if you have 2.5 crore, maybe you can still manage for another 30 years. But, if you have 10 crores, you should be happy and should not worry about anything right? Instead, if you start thinking about how to turn my 10 crores to 20 crores and all that stuff, then you are getting into unnecessary risk. All those thoughts are because of greediness.I think we can all resonate with the old saying that contempt is the key to greater inner peace and happiness

7.) When To Take Risk?

The moment you think that “I” created so much wealth and it is all because “I” made great decisions, you will fall one day. Why? Because you become greedy!

If you have made money, people will always talk about the positives, not the negatives. That’s where all this false perception comes from. We don’t know what is the fact. Just think about yourself. What is it I need? What is it I should do? That’s all. Don’t even look at others and say he has made so much money and why is that I am not able to make money.

If you have to beat inflation you have to take risks. If you have already created wealth, what is more important is to maintain it. But if you have to create wealth, you have to take risks and also be optimistic. People said in 2020, the world would crash, entire economy would go down. We can say now, nothing like that happened. On that day people would not believe if someone had said nothing would have happened. So in investments, we need to be optimistic.

But at the same time, we should also remember Abraham Germansky before we make those investment decisions.

If you think the world is going to end tomorrow, then why do you need money?

The more basic question is why do I even need money If I am not going to be there tomorrow? It is only for the family! So don’t forget insurance.

And to get wealthy, you have to take risks!

8.) Do Not Forget To….

Psychology of Money doesn’t talk about returns. It doesn’t talk about where you are investing. All it says is saving is the most important thing. If you want to become wealthy, please remember you need to save a lot.

And more importantly, the psychology of money also enlightens you on the importance of preserving what you have already acquired.

when people reach beyond a certain level of income in their career, they can be classified into three groups. What are those three groups?

People who say that yeah I can still save. Some people will still say, even now I am not able to save. And the third category of people who say, there is no need to save.

We can understand this at the initial stage of life. But when you are in that middle age group of 35 or 40, you can’t say I cannot save. Which means something you are doing is basically wrong.

But the key to wealth is saving money. Please remember we always think the other way. We always feel that higher returns will create more wealth. Yes! of course, you need good and decent returns but what is more important is the ability to save & invest more on consistent basis.

You will be able to save more only if you spend less. Otherwise, you will not be able to save. If somebody says I am not able to save means either you are spending on something which is not necessary or you have to ask yourself where this money is going. If you feel that it is going for genuine reasons then you don’t have a choice. You have to see how better you can earn more income.

The most important raw material to create wealth is savings. Because when you have money in the bank account it gives you a lot of options. Say for example, in the USA, a lot of people lost jobs in the IT industry. One is the visa part of it which they will handle. The more important part is, do you have good savings?

Ensure that you have a decent bank balance or a saving. So that you are still able to manage any kind of situation that is not in favor of you. If you have enough savings, then you will have a lot of time to take up another job. That’s where the important message of saving money is and that is what will create wealth. Not returns!

9.) Psychology of Money – What it Teaches Us?

To become wealthy, you don’t need to be a Finance Expert!

Develop the right mindset and behaviour. This is what the Psychology of Money is all about. Your behaviour is what is going to decide whether you will create wealth or you will end up on the losing side.So a good understanding of the psychology of money helps you handle the ebbs and flows of finance.

Behaviour especially when it is against your expectations, and Behaviour when markets crash… this behaviour is what is referred to as the Psychology of Money. Because the book tries to understand Why people behaved the way they did during the 2008 market crash and that’s how this book came into the picture.

Unnecessarily the banks lent money to ineligible people and ultimately it all turned into a loss. People make basic mistakes and that’s where they land into trouble. So the most important point is, that the raw material to create wealth is savings. Because when you have money in the bank account it gives you a lot of options.

10.) About The Author

Morgan Housel has won the “New York Times Sidney Award” as well as the Society of American Business Editors and Writers’ Best in Business Award thrice. Two-time finalist of the “Gerald Loeb Award” for Distinguished Business and Financial Journalism.

He was ranked among the top 50 market influencers by MarketWatch in 2022. He is a member of Markel’s board of directors. Over three million copies of Morgan Housel’s book The Psychology of Money have been sold, and it has been translated into 53 languages.

11.) Conclusion

The book “Psychology of Money” contains Powerful Money Lessons. The key takeaway is to ensure that you have a decent bank balance or a saving. So that in any kind of situation which is not in favor of you, you are still able to manage it. Saving money is important and that is what will create wealth, not returns.

You should be clear about where to take risks when to take risks, and how much to take risks. And if you are a person who spends a lot, ask yourself whether you are spending on the right things.

Let’s end with this final quote of Bill Gates,

“Success is a lousy teacher. It makes smart people think they can’t lose.”

You see more success you feel that whatever I am doing is right.

Investment and creating wealth is a process of constant learning. Investors should never think that they have learned whatever there is to be learned. What is better than books to start your learning process?

Stay Safe and Happy Investing!