09 Oct 2020 The Psychology of Money

“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.” 

That’s the premise of Morgan Housel’s new book, The Psychology of Money, which we can’t recommend highly enough (though to be clear we get no compensation for doing so!). It’s a delightful and insightful collection of 19 short stories which paint a compelling but accessible picture of financial health that may be unfamiliar to you, and that is certainly unfamiliar to what is most often peddled in the world of finance. But it’s a picture which rings true in our own experience and in the lives of our clients as we advise them.

What is the picture of financial health that most often gets peddled in our culture? All sorts of books have been written on that question and the scope of this post will barely scratch the surface, but I think three of the main tenets of that picture are this: 

1. 1. Wealth is for show.
   2. The future is forecastable.
   3. Investing is a winner’s game.

Those three tenets of financial health which dominate our landscape are admittedly fun to hold, for awhile, and yet they aren’t the way to financial health at all! Spending a lifetime acting on them will lead to a financial life that is bloated, unstable, and disappointing, and with some help from Housel, here’s why:

1. “Wealth is what you don’t see. Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.” Wealth, at least the financial kind, is essentially invisible. That doesn’t mean that wealthy people don’t have nice things or that they’re all miserly Scrooges; it just means that to build wealth requires you to reject the common notion that you must signal it to others for it to mean anything. For every signal of wealth necessarily reduces the very thing it’s attempting to show.
2. “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” Maybe every investor should have a sticky note on their bathroom mirror that reads, ‘The future is unknowable. The future is unknowable. The future is unknowable.’ The temptation to believe otherwise is part of the human condition, but that doesn’t mean we’re any good at it. However, the antidote to forecasting is not throwing up your hands in nihilistic despair, but rather making a plan that’s based on a world that’s surprising at every turn. To be able to do that requires financial margin, which you get through saving, which you get from remembering that wealth is what you don’t see.
3. “A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.” Charles Ellis is the author of my favorite investing image, in which he compares investing to the game of tennis. Professional tennis played by demigods like Nadal, Federer, and Djokovic is a winner’s game. Those who win are those who hit winning shots, shots that seem impossible to amateur tennis players (because they are). But Ellis makes the case that investing is actually like the game of tennis that virtually everyone but the very best are playing, and amateur tennis is a loser’s game. It’s a game that is lost most often through one’s own errors rather than through being beaten by the virtuosity of the opposition. That means that what sets good investors apart from bad or even average ones is precisely how level-headed they can stay through periods of time like the year 2020. Can you simply keep plodding along in the face of adversity and craziness? Can you be content to do the plain, the average, the regular? If so, you’ll win the loser’s game.

Maybe the year 2020 has you questioning the efficacy of the status quo. Maybe you sense that wealth isn’t for show, that the future isn’t forecastable, and that investing isn’t a winner’s game. How would your life—your emotional, physical, and financial well-being—how would it all feel a bit better, a bit more healthy, if you explored the alternatives? Give us a call and we’ll show you.