Things that have never happened before happen all the time – Scott Sagan
A book review this time – The Psychology Of
Money by Morgan Housel. It is the only book I have read twice, just because
I enjoyed it so much and there was so much wisdom in it. Must read for
everyone. Let’s look at three stories from the book (out of many) that really
appealed to me and I hope will be of interest to you as well.
Story 1 -
Ronald James Read was an American
philanthropist, investor, janitor and a gas station attendant. He fixed cars at
a gas station for 25 years and swept floors at JC Penny for 17 years. He died in
2014, aged 92 with a net worth of more than $8 million leaving $2 mn for his
stepkids and $6 mn for charity. A fortune made with meagre savings put into
blue chip stocks and being patient.
Richard Fuscone was a Haward educated MBA at
Merrill Lynch and was so successful that he retired at 40 to become a
philanthropist and was on the “40 under 40” list. In the 2008 crisis high
personal debt and illiquid assets made him bankrupt.
Ronald Read was patient, Richard Fuscone was
in a hurry. That is all it took to eclipse the massive education and experience
gap between the two. Only in investing outcomes can a janitor beat the most
qualified people. Financial success is not an outcome of hard science but a
soft skill, where how you behave is more important that what you know. Luck
plays a large part in the final outcome as well.
When things are going well, realise it is not
as good as you think. You are not invincible and if you acknowledge that luck
brought you success then you also have to believe that lucks’s cousin risk is
around the corner and can turn your story around as quickly.
Failure is a lousy teacher too as it seduces
smart people into thinking their decisions were terrible when sometimes they
just reflect the unforgiving realities of risk. The trick when dealing with
failure is arranging your financial life in a way that a bad investment here
and a missed goal there won’t wipe you out and you can keep playing the game
until the odds fall in your favor.
The correct lesson to learn from
surprises is that the world is full of surprises – Daniel Kahneman
Story 2 -
Investment duo of Warren Buffett and Charlie
Munger was actually a trio 40 years ago – Rick Guerin was the third partner. In
words of Warren what happened to Rick “Charlie and I always knew that we would
become incredibly wealthy. We were not in a hurry to get wealthy, we knew it
would happen. Rick was just as smart as us, but he was in a hurry.” What
happened was that in the 1973-74 downturn Rick was levered with margin loans.
And the stock market went down almost 70% in those two years so he got margin
calls. He sold his Berkshire stock to Warren at under $40 a share. Rick was
forced to sell as he was levered. Taleb puts it brilliantly. Having an edge and
surviving are two different things – the first requires the second. You need to
avoid ruin. At all costs.
Success is a lousy teacher. It seduces
smart people into thinking they can’t lose – Bill Gates
Story 3 -
December 29th, 2008. Wall Street
Journal front page. Russian professor Igor Panarin.
Around the end of June 2010 or early July the
US will break into six pieces – with Alaska reverting to Russian control,
California will revert back to form the nucleus of the “Californian Republic”
and will be part of China or under Chinese influence. Texans will be a part of
the “Texan Republic” a cluster of states that will go to Mexico or fall under
Mexican influence. Washington DC and New York will be a part of the “Atlantic
America” that may join the EU. Canada will grab a group of northern states.
This was at the height of the financial crisis
and only in these times a story like this could appear at the front page of the
most prestigious financial newspaper in the world. Pessimism just sounds smarter
and more plausible than optimism. Tell someone that everything will be great
and they will shrug you off or offer a skeptical eye. Tell someone they are in
danger and you have their undivided attention. Assuming that something ugly
will stay ugly is an easy forecast to make. And its persuasive since it does
not require imagining the world changing. But problems correct and people
adapt. Threats incentivise solutions in equal magnitude. That is a common plot
of economic history that is too easily forgotten by pessimists who think in
Progress happens too slowly to notice.
Setbacks happen too quickly to ignore.
The psychology of money is actually our
psychology, which is shaped by many things including our personalities, past
experiences, relationships, outlook of the future and hence as unique as our
fingerprints. Like our other important relationships, our relationship with money is never perfect and evolves with us and (hopefully)
gets better with time.