The Psychology of Money - Morgan Housel

[AleisterCrowley]

http://www.collaborativefund.com/blog/t ... -of-money/
-Interesting article by MH - linked on Monevator (http://monevator.com/weekend-reading-a- ... more-42908)

The section "1. Earned success and deserved failure fallacy: A tendency to underestimate the role of luck and risk, and a failure to recognize that luck and risk are different sides of the same coin" is relevant to some other discussions here.

[BusyBumbleBee]

Thank-you for posting that - well worth the read. Lots of very sound advice wrapped up in good tales.

My particular favourite is

Singer Rihanna nearly went broke after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?

I shall have to read it again and really make sure I don't fall into the traps.

[Lootman]

I have mixed feelings about the emphasis on luck. I certainly agree that skill and hard work don't ensure succes in investing, at least relative to others and the market. You can spend 100 hours a week studying balance sheets or charts and then under-perform. Professional fund managers do that most of the time. Whilst the number of small investors who think all their efforts add value is greater than those who actually do.

But in the broadest sense I think luck is less important. My friend at about age 11 would go to the local tip, take old bike frames and parts, put them together and then sell them as working bikes for a few quid. He was probably always going to be successful. And he was. Some people just seem to have good money sense; others do not.

For what it is worth I think there are maybe six very broad rules for financial success:

1) Career/salary. Necessary unless you are born into money but not sufficient since most working stiffs live month-to-month
2) Buy property early and often.
3) The stock market, ditto.
4) Frugality, or at least the absence of extravagance.
5) Marry well (or don't marry at all, but divorce is a wealth killer)
6) Only borrow to save rent or create income.

[bluedonkey]

Lootman,

Agree with your list. I would add that to become seriously rich by your own actions, one needs to be a big risk-taker.

[AleisterCrowley]

1) Career/salary. Necessary unless you are born into money but not sufficient since most working stiffs live month-to-month
2) Buy property early and often.
3) The stock market, ditto.
4) Frugality, or at least the absence of extravagance.
5) Marry well (or don't marry at all, but divorce is a wealth killer)
6) Only borrow to save rent or create income.

I think (4) is important, as it prevents "most working stiffs live month-to-month" scenarios.

Some people tend to increase their spending in line with their income - ending up with no spare cash to invest, and no real improvement in quality of life, at least beyond a certain point. Worst case is people always living x% beyond their means.
What I find useful is having automatic transfers to savings accounts early every month: that way one gets used to saving first and living on the remainder. Pay goes up? Increase savings by at least 50% of the net rise.

[Dod101]

It depends of course on what Lootman means by 'financial success'. Being the richest man in the graveyard is hardly financial success. I suppose becoming financially independent by say 50/60(pick your age) would go some way towards it. Frugality? Yes but life is for living. Living well within your means would I think be a better way to put it.

In my lifetime property has been a good way to derive capital but it is not always so I guess.

Marry well, and preferably into money. Problem solved.

bluedonkey - one needs to become a successful big risk taker.

Dod

[AleisterCrowley]

I'd only ever marry for love
I semi-agree with property, having missed the boat in 1995... but very much down to timing

[DiamondEcho]

Lootman, Agree with your list. I would add that to become seriously rich by your own actions, one needs to be a big risk-taker.

I also agree with Loots points. Re: the above suggestion I mostly agree though believe such risk-taking needs to be calculated risk/with reasonably certain boundaries esp to the downside.

[DiamondEcho]

4) Frugality, or at least the absence of extravagance.
I think (4) is important, as it prevents "most working stiffs live month-to-month" scenarios.
Some people tend to increase their spending in line with their income - ending up with no spare cash to invest, and no real improvement in quality of life, at least beyond a certain point. Worst case is people always living x% beyond their means.

Yes for sure. There is a tendency for, as they say, 'New money to shout loudest'; witness the parade of super-cars in Knightsbridge during summer.
That kind of wealth doesn't impress me, as money spent is money gone, incl. gone from probably growing materially larger in future. Perhaps why I'm averse to transient major extravagance until such time as I am 101% sure my entire financial future is assured and loosely budgeted for...
I used to work for a major City bank, the contrasting lifestyles people led was an eye-opener. There were traders who spent to the hilt, f-off huge converted Kentish oast-house conversions + fla$h cars + trophy $/wife. I saw more than one of them and their families implode when they got made redundant.

The two traders I most enjoyed working for were Richie, the highest earner of the floor who was head of the US$ bond desk. A young guy, earned millions/pa [back in the 80s], had been a graduate intern with Ford and one time his colleague observed he now earned more than the President of Ford Europe ['how the desk laughed along with that']. He drove a beaten up 10-year old Ford XR3i. I have no doubt he is still wealthy, where ever he is today.
Andy, head of the Retail bond trading desk. He was an old-school 'no qualifications' guy with natural talent who'd previously been a valet parker at the Dorchester Hotel. He'd seen 1st hand what success brought and felt he was up for a slice of the action.
Both were veeery successful; and notably to me, both were probably the easiest, most trusting, least obnoxious, least flashy traders on the floor to work for. I expect there is a moral in that somewhere...

[Itsallaguess]

I think the single and most important bit of financial advice I could give to someone would be to find contentment in a career and lifestyle that means over very long periods, promotional pay-rises and other, more 'natural', pay-rises can mostly be saved and invested, with any great desire to 'use' such pay-rises to the benefit of your regular lifestyle being limited to only a part of such pay-rises.

The above, coupled with a drive to better yourself in your working environment, is likely over many years to mean that savings and investments can be built up as a regular part of your monthly financial process.

Then, allow time itself to do the heavy-lifting with those savings and investments...

Cheers,

Itsallaguess

[DiamondEcho]

Yep^ aka the suggestion to 'Never live up to your pay-rise'. People who find a happy balance therein and invest good chunks of pay rises over the years are the ones who seem to come out at the end having done best.

[Itsallaguess]

Yep^ aka the suggestion to 'Never live up to your pay-rise'. People who find a happy balance therein and invest good chunks of pay rises over the years are the ones who seem to come out at the end having done best.

One important point I didn't touch on earlier is that by living by such an approach, as well as the huge benefit of releasing funds for saving and investment over many years, it also means that when retirement looms, we're not left with a potentially 'high-maintenance lifestyle' that might be difficult to maintain with a given size of retirement fund that might be available at a given point.

It potentially allows a great deal of flexibility in decision-making during the final working years, and opens up a lot of 'choice' options with regards to continuing to work or not, or for how long to continue working, at a time when we might perhaps want to pursue other interests.

Cheers,

Itsallaguess

[tjh290633]

I'd only ever marry for love
I semi-agree with property, having missed the boat in 1995... but very much down to timing

You remind me of one of my contemporaries at Oxford. He said that he would never marry a girl for her money, but he saw nothing immoral in mixing with rich girls until he fell in love with one.

I was told that he achieved his objective.

TJH

[Pastcaring]

I was going to leave it alone but shall we have a laugh at the insanity of the masses.

The answer is given in the first paragraph,hands under her arts end,did nothing,became a multi millionaire.

Leave it alone to compound

There are many versions of this story,the emperors new clothes being a good example.
Make up a story,if it is complicated all the better.

However the story is simple,get everybody to agree and they will be incapable of seeing the obvious.

The short version of the story is three words

Vision

Courage

Patience.

Vision

The vision is being able to see the obvious.Spend 100K tomorrow,compound it at a reasonable growth rate ( say 10% ) ,and in 22.5 years approx you will be a millionaire .Never have the vision to see that.

Courage..

Spend 100K tomorrow and knuckle down over the next 23 years to pay back that loan

LOL,need I say more

Patience

Leave it alone to compound for 23 years,no chance

The first 2 are almost impossible.The third is impossible

How to become a millionaire,and how to avoid it. So easy

[Urbandreamer]

I was going to leave it alone but shall we have a laugh at the insanity of the masses.

The answer is given in the first paragraph,hands under her arts end,did nothing,became a multi millionaire.

Leave it alone to compound

There are many versions of this story,the emperors new clothes being a good example.
Make up a story,if it is complicated all the better.

I confess that I too found the start of the article somewhat irritating. Indeed I wound up looking the story of Varaztad Kazanjian
https://en.wikipedia.org/wiki/Varaztad_Kazanjian
in response to
"There will never be a story of a Grace Groner performing heart surgery better than a Harvard-trained cardiologist. Or building a faster chip than Apple’s engineers. Unthinkable."

You may note that he was performing surgery BEFORE he was trained as a surgeon and was the leading light in his field.