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Financial Planning

The Psychology of Money, Part 2


Richard Barnett, CFA

The Psychology of Money Part 2

In 2021's fourth quarter newsletter, we reviewed the first three chapters of “The Psychology of Money”, by Morgan Housel.  At Highline, we like this book because it is closely aligned with our own investment philosophy.  Here is part two of our book report, which summarizes a few more of the simple yet powerful concepts around money and investing.

The compounding of returns is a powerful force in investing.

The author points out that $81.5 billion of Warren Buffetts’ $84.5 billion net worth came after his 65th birthday.  The accumulation of snow that leads to ice ages on earth is cited as a natural example of compounding, and an apt analogy for money.  Getting back to Warren Buffett, “the real key to his success is that he’s been a phenomenal investor for three-quarters of a century”.  Buffet began investing when he was 10 years old and had a net worth of $1 million by the time he was 30.  If he had started investing when he was 30 and retired at 60, applying the same 22% rate of return, his net worth would have been $11.9 million, and no one would have heard of him according to Housel.

There is a difference between getting wealthy and staying wealthy. 

To stay wealthy, it is crucial to avoid big mistakes. The author gives the example of Jesse Livermore, the greatest stock market trader of the late 1800s.  By the time he was 30, he had an inflation-adjusted fortune of $100 million.  He was short the stock market in October 1929, when others lost their fortunes and Livermore made the inflation-adjusted equivalent of $3 billion.  But the story doesn’t end there. Flush with confidence, Livermore continued to trade, taking bigger and bigger risks, acquiring debt, and eventually lost everything.  In 1933, after being one of the richest men in the world just four years earlier, he committed suicide.  The author says “If I had to summarize money success in a single word it would be “survival”.  Housel goes on to discuss the several keys to financial survival, including avoiding big risks and leverage. 

Investing success isn’t about being right all the time.  

In fact, “you can be wrong half the time, and still make a fortune”.  The German art collector Heniz Bergguren eventually amassed a collection worth over $1 billion.  The investment firm Horizon Investments analyzed his success, and explained it as “The great investors bought vast quantities of art. A subset of the collections turned out to be great investments”.  The art portfolio was broad enough that a few big winners drove the investment value.  Bergguren didn’t have to know in advance which ones would be the big winners.  

A more modern example is Amazon, which accounted for 6% of the S&P 500’s returns in 2017, according to Housel. Amazon’s growth was driven by Amazon Prime and Amazon Web Services. Both services were not part of Amazon’s original business model and could have failed like the Amazon Fire phone and many other experimental projects. 

Wealth should be a means to an end, not the end itself. 

And the end is freedom. The author goes on to describe psychological studies and real-life examples which illustrate that control over one’s time and activities brings more happiness than a big investment portfolio. “Money’s greatest intrinsic value - and this can’t be overstated- is its ability to give you control over your time”.

Hopefully, we won’t wait another year to continue our “The Psychology of Money” summary. If you would like to receive a copy of The Psychology of Money, please contact your Highline advisor.

Source: The Psychology of Money, Morgan Housel, Harriman House Ltd, 2020.
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