It is rare that you read a book and find yourself nodding in agreement with most of the things an author writes. Yet there I was nodding away while reading The Psychology of Money by Morgan Housel.

The book was a recommendation from Morningstar’s former Head of Manager Research Annika Bradley. And I recommend it to you if you believe that financial outcomes are more a product of how you invest than what you invest in. And if you think that your ability to pick individual investments are the largest contributor to achieving good outcomes, I bet you have a different opinion after reading the book.

The Psychology of Money

This was not a book that challenged my worldview. And that can be a good and bad thing. It is good to be challenged. In all facets of life we get in trouble when we fully retreat into echo chambers that fail to test our thinking. But sometimes we need to reinforce our own beliefs.

The most challenging part of investing is maintaining consistency and patience over the long run. This is especially difficult when we are constantly bombarded with contrasting views of how to be a successful investor. Most investors get in trouble when they deviate from their plan and strategy. This book helped me by reiterating how I approach investing.

Here are my top takeaways from the book. Many of these themes will be familiar to readers of my writing.

Anyone can be a great investor

Early in the book Housel recounts the story of Ronald Read. Read lived in rural Vermont and after a stint in the US Army during World War II he worked at a petrol station for almost 25 years. His next job was as a janitor at a local department store. He got married, purchased a house for $12,000 that he lived in for the rest of his life and collected stamps and coins. Apparently, he enjoyed chopping wood in his spare time. A habit I will not be picking up.

Read had a secret hobby that his friends and family didn’t know about. He liked investing. This hobby was uncovered when he died in 2014 at the age of 92. Surprising everyone that knew him he left an estate of close to $8 million.

You can now find the Ronald Read Pavilion at the Brattleboro Memorial Hospital which he partially funded with a $4.8 million bequest. He also donated $2 million to the Brooks Memorial Library. He liked to go there and read the Wall Street Journal because he didn’t want to spend the money on his own subscription.

These stories periodically pop up. And the media covers them using a tried-and-true formula. Some praise of frugality. A couple quotes from acquaintances describing the individual as a “regular guy or gal”. Housel used this story to illustrate something completely different. Something that I firmly believe. That anyone can be a great investor.

Housel writes about how our perception of successful investing is the way that it is done by professionals. And this perception makes it seem more complicated than it is. Most professions can’t be performed by people without education and / or training. Nobody wants me to try and fix their car let alone perform surgery or defend them in court.

But investing is different. Anyone can do it. You can do it too if you focus your efforts on how you invest instead of trying to execute complex strategies. A high school educated janitor in Vermont is proof. He invested in blue chip shares that paid dividends. He diversified and avoided investments he didn’t understand. He held for the long-term.        

Investing for the long-term

The story of Ronald Read showed the value of patience and a long-term focus. Housel picked this theme up in another chapter about Warren Buffett. Any way you cut it Buffett is a great investor. Unlike Ronald Read he is universally acknowledged as a great investor.

Housel focuses on one underappreciated aspect of Buffett’s success. The value of time. Buffett started investing when he was 11. He is now 93. And over 99% of Buffett’s wealth has been generated after the age of 65. Yet everything we hear about Buffett is how he is a great stock picker. And while that may be true we also need to appreciate the length of time Buffett has held his biggest positions.

He found great companies and didn’t sell them. This may be boring. But it is also easier than the alternative. Constantly trying to find the best investments and identify catalysts at any given moment in time is really, really hard.

Buffett bought Apple in 2016. He purchased American Express in 1995. Coke in 1988. Take a scan through your own largest positions and the date you added them to your portfolio. If you are older do the purchase dates look more like Buffett’s portfolio or are they mostly purchases from the last year or two? If you are younger are you planning on holding them for your lifetime? Many investors are too “smart” for their own good and are constantly positioning portfolios based on short-term factors like the latest – and likely wrong – view on interest rates or the new investing fad.

I speak to a lot of investors. And the ones that tell me about how investing has changed their life often mention getting CBA shares in 1991 or CSL in 1994 when they were listed by the government. I’ve obviously picked winners in the Australian market. But it only takes a couple of winners to make up for the inevitable losers that will be in your portfolio.

Think about the periods of time these shareholders held on when everyone said there were better opportunities. Through the GFC when banks were out of favour. Through COVID when CSL struggled to collect plasma. Often the smartest thing investors can do is to do nothing.  

Think about what financial freedom is and arrange your finances accordingly

Housel picks up on the meaning of financial freedom and the definition of wealth in several chapters. He writes that financial freedom is controlling what you do and when you do it. He says that wealth is what you don’t see which enables this freedom. Debt is the opposite of freedom.

I don’t want to take a moralistic tone about debt. There is too much of that. But I also want to be clear that taking on debt is not just borrowing from a bank or a credit card company. Debt is borrowing against your future. That is true if you borrow money to buy a house or put a trip on your credit card that you can’t pay-off.

This of course doesn’t mean that you shouldn’t take out a mortgage. We all need a place to live. But it does mean that you should be thoughtful about your ability to carry the mortgage and how you can pay it off. Financial freedom is not having lots of valuable assets and lots of costly debt. That is a gilded prison of your own making. While financial freedom is incrementally gained throughout life the destination requires saving money, building up assets and paying off debt.

Control what you can control

Housel stresses the importance of saving and says that it is far more valuable than the level of income and returns. Housel says that people fall into three groups: 1) those who save 2) those who think they can’t save 3) those who think they don’t need to save. He thinks everyone can and should be in group 1. His point is that how much we spend and how much we save is within our control after our salaries meet a level of income that covers basic needs. Housel calls additional spending ego spending because it is used to impress other people.

I don’t fully agree with Housel’s view that all spending beyond basic needs is ego spending. But I do agree with Housel’s larger point. If you can earn enough money to generate a surplus over your basic needs you have the opportunity to transform your life through saving and investing. Save a small part of your salary and you can transform your life a little. Save a large part of your salary and you can transform your life a lot. It is up to you.

I also agree with Housel’s point that you should simply focus on what you can control. Although I would expand his list beyond the amount saved. Focus on minimising the fees you pay. The fees to earn the market return are practically zero. For instance, the Vanguard Australian Shares ETF (ASX: VAS) which tracks the ASX 300 and is one of the most popular ETFs in Australia has a fee of 0.07%. I’m not saying you shouldn’t pay higher fees but think about the value you are getting from them.

Taxes are unavoidable but you can focus on minimising them. Get as much money into the favourable tax environment of super as possible. And if you are not holding investments long-enough to get the capital gains discount that is applied after 1 year you are doing something wrong. I know people will disagree with that statement. Those people are wrong. The more people trade the lower their returns. Study after study has showed that. Not only are your returns lower but you pay more taxes. Lower returns and higher taxes is not the pathway to transform your life.

This is a good segue into the last thing you can control. Control your own behaviour. Saving is hard. Controlling your emotions when it comes to investing is harder. The overarching point of The Psychology of Money is that this whole edifice we’ve built around investing with formulas and theories and data is not as important as your own behaviour.

If you can wrap your mind around what is truly important you can transform your life. Stop chasing the hot investment. Stop trying to time the market. Stop rotating your portfolio to take advantage of…well, anything. Just stop. Chances are the more you do the worse your outcomes will be. Understand what you are buying – whether it is an ETF or an individual share. Hold it for a long-time. Keeping saving and investing no matter what is happening with interest rates, the economy, the Middle East or what your mates are telling you.

The upside is worth it. As time passes there is a natural narrowing of choices in life. Some of this is just the inevitable revelation of what was pre-ordained. I was never going to be a professional athlete or rockstar. And some occurs because of the choices each of us make. One way to expand choice and your options for life is to save and invest. It is only through saving and investing that you get control over our life.

If there is one unifying theme throughout the book it is this. Gain freedom by taking back control over your time. You can choose to work. You can choose not to. You can choose to pursue your passion – whatever it is. You can do anything if you get your finances to act as an enabler of your life.     

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