In “The Psychology of Money”, Morgan Housel presents a shift in finance: doing well with money has little to do with how smart you are and a lot to do with how we behave.
While traditional finance teaches us to treat money like math, where data and formulas dictate actions, he argues that in the real world, people make financial decisions at the dinner table.
The book explores how personal history, pride, and envy shape our views on risk and reward. A primary lesson is the distinction between getting wealthy and staying wealthy; the latter requires a survival mindset.
He emphasizes that the highest dividend money pays is the ability to control your time. By understanding that compounding needs uninterrupted time to work, and that reasonable decisions often beat coldly rational ones, investors can build a sustainable path to independence.
What seems like a reckless investment to one person might feel perfectly sensible to another. The colleague who splurges on luxuries while carrying debt, the friend who hoards cash despite stable income, the family member who chases get rich quick schemes, these choices often strike us as irrational. But they rarely are.
We all arrive at our financial decisions through the lens of our own experience. Someone who grew up during a recession carries different instincts about risk than someone who came of age in a boom. The entrepreneur’s relationship with volatility differs fundamentally from the salaried employee’s. A generation that witnessed their parents lose everything in a market crash will never view stocks the same way as those who watched wealth accumulate steadily over decades.
The truth is, we don’t make financial choices by running the numbers through a spreadsheet. We make them at the intersection of our personal history, our worldview, and the story we tell ourselves about how money works.
When we recognize this, when we understand that what other people are doing seems crazy or irrational, but we understand why they do it, we begin to see the roots of financial behavior more clearly. Our decisions aren’t just about math. They’re about who we are and what we’ve lived through.
Luck and risk are related. They’re nearly impossible to separate, and even harder to measure. When someone succeeds, how much of that success came from skill, and how much from fortunate timing? When someone fails, was it a bad decision, or did they simply land in the unlucky 1% of outcomes where a sound strategy didn’t work out?
These questions are important because we tend to learn the wrong lessons when we ignore them. We study the billionaire who dropped out of college and assume the path is replicable. We avoid the strategy that failed once, even though statistically it works most of the time. Each outcome we observe is singular, but the quality of a decision can only really be judged across many instances, in aggregate.
This is why we should be careful about admiring specific individuals too closely. It’s better to study patterns, broader case studies, the trends that appear again and again across different contexts. The more common the pattern, the more likely it applies to our own situation.
That’s the value of mental models (here). They give us direction and a toolkit drawn from repeated observations, not from the story of one lucky winner or one unlucky loser.
Success and failure are both misleading when we forget about luck and risk. The outcomes we see don’t always reflect the decisions that produced them.
Some people accumulate fortunes and still reach for more, risking everything in the process. History is full of executives who committed fraud despite already being wealthy, investors who overleveraged and lost it all, entrepreneurs who couldn’t stop expanding until the whole enterprise collapsed. They had enough, but enough wasn’t enough.
We don’t need vast sums to fall into this trap. It’s natural for our expectations to rise with success. We earn more, so we want more. We achieve one goal, so we set a harder one. But when ambition grows faster than satisfaction, when we keep chasing higher returns by taking bigger risks, we set ourselves up for ruin.
Social comparison makes this worse. Charlie Munger once responded to a question about why Warren Buffett was far richer than he was by asking, “Why was Einstein much poorer than I am?”. He often called envy the worst of the seven deadly sins because it makes us feel terrible while doing nothing to the person we envy.
There are things we should never risk, no matter the potential reward. Buffett put it perfectly: “If you hand me a gun with a thousand chambers, a million chambers in it, and there’s a bullet in one chamber, and you said, ‘put it up to your temple, how much do you want to be paid to pull it once?’ I’m not going to pull it. You can name any sum you want but it doesn’t do anything for me on the upside and I think the downside is fairly clear.”
Some gambles aren’t worth taking at any price.
Warren Buffett’s fortune isn’t the result of spectacular returns. It’s the result of good returns sustained over an extraordinary length of time.
He started investing when he was young and never stopped. For more than 75 years, he let his money compound steadily at roughly 22% per year, about double the S&P 500’s long-term average.
Buffett himself has said that most of his wealth was accumulated after his 60-th birthday. The first decades built the foundation. The later decades let compounding do the heavy lifting.
We often focus on finding the highest returns, the best strategy, the perfect investment. But the real secret isn’t just how much we earn. It’s how long we can keep earning it. Time is the most powerful variable in the compounding equation, and it’s the one we control least directly. What we can control is staying in the game, avoiding the mistakes that force us out, and giving our money the long runway it needs to grow into something significant.
Buffett’s edge wasn’t just being smart. It was being smart for a very long time.
Building wealth and preserving it require entirely different skills. Getting money demands risk taking, optimism, the willingness to bet on ourselves and on uncertain outcomes. Keeping money requires something else entirely: risk management, humility, and the survival instinct that tells us when not to push our luck.
A few great gains can account for most of our returns, but only if we’re still around to capture them. Furthermore, compounding takes long time to work its magic, and we can’t compound if we get wiped out along the way. Warren Buffett understood this perfectly. He didn’t take on debt. He didn’t use leverage. He didn’t panic during downturns. He didn’t burn down. Essentially, he survived for many decades with consistent returns. That’s the strategy I aim to apply in my own investing.
Planning is important, but the most important part of any plan is acknowledging that it might derail. We need to structure our finances so that when things go wrong, and they will, we’re not forced to sell at the worst possible moment. A good plan must survive contact with reality and leave room for error without collapsing completely. This is the concept of margin of safety, which I explain in detail in my review of “The Intelligent Investor” here.
Margin of safety is different than being conservative. It’s a way to measure the uncertainty in our investing assumptions, whether that’s future earnings, growth rates, or market conditions. It’s the buffer that keeps us in the game when we’re wrong.
Most success comes from the tails of the probability distribution. Berkshire Hathaway’s extraordinary returns came from perhaps ten major positions over decades, while the remaining holdings generated merely average results. Most companies deliver average performance, and only a handful become exceptional. Most of the gains in a portfolio come from a handful of positions, not from the full collection of bets we make.
This is an encouraging news. We don’t need to be right all the time. Investors make mistakes, but they learn from them and keep going. As Peter Lynch pointed out, the downside of any single investment, provided there’s no leverage, is limited. A stock can go to zero, and we lose only the money we put in. But the upside can be 10x, 100x, or more.
The math works in our favor when we understand this asymmetry. We can be wrong most of the time and still do well overall, as long as we’re positioned to capture the few extraordinary outcomes that make all the difference. The important is survival, sufficient capital to stay in the game, and patience to let the tail events work their magic over time.
Money’s biggest intrinsic value is the control it gives us over our own time. Different levels of wealth unlock different degrees of autonomy, but the core principle remains the same. Financial resources can buy us choices, and choices give us freedom.
Even people who genuinely enjoy their work don’t necessarily want to work seven days a week on someone else schedule or project. We like to feel in control of what we do and when we do it. Without that control, even meaningful work can start to feel alienating. Once we realize this, the idea of aligning our money toward a life that lets us do what we want, when we want, becomes quite appealing.
Most jobs today are mental rather than manual. For many of us, work never really ends. We think about projects at dinner, check emails before bed, wake up with solutions to problems we didn’t consciously know we were solving. The boundaries have dissolved. Control over our time has been diminishing, and since controlling our time relates directly to happiness, we find ourselves in a strange position. We’re richer than previous generations by almost every material measure, but we can’t confidently say we’re happier.
Money can’t buy happiness directly, but it can buy back our time. And time, used well, might be the closest thing to happiness we can actually purchase.
Most wealth is invisible. We see the expensive car, the designer clothes, the vacation photos, but we don’t see the bank account. Many people spend most of their paycheck on things specifically designed to be noticed, sacrificing actual financial security for the appearance of success.
We judge wealth by what we can observe, but what we observe is usually spending, not wealth. The person driving the luxury car might be wealthy, or they might be spending money they don’t have, living paycheck to paycheck with a car payment they can barely afford. The way to actually become wealthy is simpler and harder than it looks: don’t spend the money earned. That’s the definition of wealth.
There’s a difference between being rich and being wealthy. Rich is about current income. Someone who buys an expensive car or lives in a big house very likely are rich. They’re earning a lot and spending a lot. Wealth is different. Wealth is income not spent. It’s the money we kept, the options we preserved, the flexibility we built for later. Wealth grows quietly in the background, compounding over time, eventually allowing us to purchase more than what’s possible today.
It’s easy to see rich people and take them as role models. Their lifestyle is visible, their choices are obvious, their path seems clear. But it’s much harder to see wealth because it’s hidden by definition. The truly wealthy often look ordinary. They drive reasonable cars, live in modest homes, and their financial success is invisible to outsiders. This makes it difficult to imitate them, difficult to learn from them, difficult to find our own way toward what they’ve actually achieved.
Building wealth has little to do with income or investment returns, and everything to do with saving rate. Good returns can make us rich, but the timeframe is unknown and largely out of our control. Personal savings, on the other hand, are something we control completely. Wealth is simply the accumulation of what’s left over after everything else is spent.
A high saving rate means keeping expenses low. Once basic needs are covered, everything else is optional, and each of us defines optional differently. Saving itself is valuable because it’s a hedge against the surprises life inevitably delivers. The flexibility and control over our time that wealth provides is one of its greatest returns.
Having money in the bank opens doors we can’t always predict. It means we can change careers if the current one stops working, or can wait patiently for investment opportunities that appear suddenly and disappear quickly. In a connected world where information spreads instantly, intelligence is less of an advantage than flexibility. Money gives us the option to wait for the right opportunity rather than taking the first one available. Saving is buying options we don’t even know we’ll need yet.
Making purely rational financial decisions is nearly impossible because we’re not machines. We have emotions, biases, histories that shape how we think about money. But we don’t need to be perfectly rational. We just need to be reasonable.
A rational investor makes decisions based solely on numerical facts, optimizing every choice for maximum expected value. A reasonable investor might consult with family and friends, choose a strategy that feels sensible rather than optimal, and prioritize peace of mind alongside returns. The difference is important because there’s a higher likelihood we’ll stick with a strategy we consider our own, one we actually believe in, maybe even love a little. And statistically, sticking with a strategy for a long time is itself a winning approach.
When we’re emotionally attached to our investments, whether that’s a specific company or a particular strategy, it becomes easier to hold on during bad times. We don’t panic and sell at the bottom because we’re not just following numbers. We’re following something that makes sense to us personally.
I don’t particularly like the social aspect of investing and at this point in life, I tend to make decisions by myself. But being reasonable means acknowledging that sticking with a low cost index fund, consulting with others, and choosing simplicity over optimization is also a perfectly legitimate choice. I’m not applying that approach now, but I might decide to in the future.
New events happen all the time, technologies evolve, preferences shift, and the economic landscape transforms in ways we can’t anticipate. This makes it a mistake to use the past as a precise guide for future expectations. Investing isn’t a hard science with fixed laws. It’s a social phenomenon, a collection of people making decisions with incomplete information in constantly changing circumstances.
Experiencing specific events doesn’t qualify us to predict what happens next. History rarely repeats itself exactly. More importantly, the most significant events in history are the big outliers, the tail events that nobody saw coming. A handful of people and occurrences in the 20th century shaped the world more than all the remaining billions combined. The problem is that we often take the worst events from the past as our worst-case scenario for the future. This isn’t a failure of analysis, but a failure of imagination. The correct lesson isn’t to study past crises more carefully, but to accept that there will always be events that can’t be forecasted.
Historical data about investing only goes back a few decades. The current menu of investment instruments has no real precedent and keeps expanding. Things change. I’ve read “The Intelligent Investor” several times and wrote a summary of the key concepts here, but while Benjamin Graham’s ideas remain valuable, the specific methods he used to evaluate companies are no longer valid today. Graham himself changed his valuation approaches across different editions of his book.
In investing, there’s a phrase used: “It’s different this time”. The joke is that people always think the current situation is unique, right before it collapses like every other bubble. But here’s the nuance. While patterns do repeat, there’s always something genuinely different from previous occurrences. General concepts remain valid, but we need to pay attention to what’s changed, what’s new, what makes this moment distinct from the last one that looked similar.
We’ve spoken previously about the concept of margin of safety, an idea central to Benjamin Graham’s investment philosophy. It’s a cushion designed to deal with the uncertainty inherent in forecasting future events. The world isn’t accurately predictable, so margin of safety accounts for our inability to make exact forecasts and tilts the odds in our favor.
Howard Marks, another investor I take as a model, said it perfectly: “If you take care of the downside, the upside will take care of itself”. Margin of safety is how we take care of the downside.
Room for error lets us endure a range of potential outcomes without being forced out of the game. Volatility is something many people think they can handle until they actually experience it. Seeing our portfolio decline 50% might look manageable on a spreadsheet, but it feels very different when it’s real money disappearing in real time. Or returns might lag the historical average for years, testing our patience and conviction. In these cases, margin of safety provides a buffer. If results are worse than expected, there’s still room before unpleasant consequences arrive, before we’re forced to sell at the worst moment or abandon a sound strategy.
Leverage is the ultimate risk I’m unwilling to take. Borrowing money to amplify returns pushes risk to the point where total ruin becomes possible. We’ve already mentioned that Warren Buffett would never play Russian roulette, no matter how low the odds or how high the payout. One way to guard against catastrophic damage is to avoid single points of failure. Build redundancy into the system. Expect things to go wrong.
Most of planning is planning for what will go wrong, not what will go right.
Our imagination of the future is often nothing like the reality. Many people enter university dreaming of a specific career, only to discover years later that the job they landed isn’t what they imagined at all. Sometimes it’s better. Sometimes it’s worse. Usually it’s just different.
This creates a paradox for long-term financial planning. Planning is important because we don’t know what the future holds, but we also don’t know what we’ll want when we get there. Dreams change. Needs evolve with age and experience. People of all ages consistently underestimate how much they will change in the future. The person we are today makes plans for a future version of ourselves who might have completely different priorities.
Many successful investors built wealth not because they had a perfect plan, but because they never stopped the compounding engine. They stayed flexible enough to adapt while maintaining the core discipline of saving and investing. This suggests a middle path. We should avoid the extremes of financial planning, neither ignoring the future entirely nor optimizing every detail for a life we might not want.
A moderate saving rate, free time, and time with family is a good starting point. These create flexibility without requiring us to predict exactly what we’ll value decades from now. We should also accept that when circumstances change, our needs change with them. A job that felt right at 25 might feel stifling at 45. A lifestyle that worked before children might not work after. It’s not just acceptable to change decisions we made previously. It’s necessary. The goal isn’t to stick rigidly to a plan made by a younger version of ourselves. It’s to build enough margin that we can adapt when the time comes.
In investing, different people operate on different time horizons, and this shapes everything about how they approach the market. A day trader isn’t interested in fundamentals or long-term prospects. They only care about what the price will do in the next few hours, so valuation is irrelevant. Someone investing for a few years might focus on industry trends and what competitors are doing. A long-term investor looks at fundamentals, discounted cash flow models, intrinsic value, the actual business beneath the ticker symbol.
When people have different time horizons, a price that seems appealing to one group can look outrageously expensive to another. They’re playing entirely different games.
In the short term, momentum investing tends to work. What goes up keeps going up. What goes down keeps going down. The process is self-feeding. This helps explain how bubbles form. Prices rise, and long-term investors start ignoring their own rules and valuations. They begin acting like day traders, pushing prices even higher to unrealistic levels, swept up in irrational optimism about the future. Other people see prices rising and jump in, chasing profits, pushing prices higher still.
Bubbles happen when traders and long-term investors converge, when people forget which game they’re playing and start imitating strategies designed for a completely different time horizon. It’s not easy to understand that others have different goals because it requires seeing investing through a lens other than our own.
This is why it’s important to know what game we’re playing and what matters to us. That’s why I wrote down my investment principles here. I read them regularly so I know what rules I need to follow and can adapt them over time as I get older and my priorities shift. Everything not in that document, day trading, leverage, momentum strategies, sector rotation, is a game I’m not playing. I can safely ignore it, no matter how well it’s working for someone else.
First, we should define optimism properly: it’s not blind hope or wishful thinking, but is the belief that, over the long run, positive outcomes are more likely than negative ones. It’s a reasoned expectation based on evidence, not faith.
Yet in markets, pessimism gets far more attention than optimism. This might stem from how we’re wired as humans. We’re risk averse. Losing a certain amount of money creates more negative emotion than gaining the same amount creates positive emotion. This asymmetry comes from our nature itself. Organisms that responded immediately to threats survived.
In investing, this means pessimism makes more headlines than optimism. We pay immediate attention to bad news, even when it doesn’t directly affect us, and we tend to extrapolate it into the future without considering that markets adapt to negative developments faster than we expect. We assume the worst will continue or worsen, forgetting that companies adjust, industries evolve, and economies find new equilibrium.
Progress happens slowly and quietly. On average, markets increase over time, compounding gains in ways that feel unremarkable day to day. Setbacks, meanwhile, happen quickly and demand immediate attention. A market crash unfolds in days or weeks. The recovery takes months or years and feels like nothing is happening at all.
This creates a distorted picture. We remember the crashes vividly and the long climb upward barely registers. But the climb is what matters for long-term investors. The key is recognizing this pattern in ourselves and not mistaking pessimism’s volume for accuracy.
In investing, as in life, we tend to believe people who confirm what we already think. The more we want something to be true, the more we believe stories that overestimate the odds of it actually being true.
We have an incomplete view of the world, so we construct narratives to fill the gaps. Our minds crave coherent stories more than they crave accuracy. This is why I find it important to build a set of mental models, some of which I use here, to try to describe the world in a repeatable manner. I can’t claim objectivity, this is still my view, but having frameworks helps me attempt a more detached analysis, one less driven by feelings and emotions in the moment.
We make financial decisions based on how we think the world operates. There’s no guarantee that’s actually how it operates, or that it will continue operating that way in the future. We don’t know what we don’t know. A vast portion of what will happen is outside our control.
Like Howard Marks, I don’t believe in forecasts. Not because forecasting isn’t useful in principle, but because forecasts are only valuable when they predict tail events, the surprises that actually move markets. The problem is that people who correctly forecast a tail event once usually do so by chance. They’re either forecasting tail events constantly, even when nothing dramatic happens, or they get lucky once and we remember only the hit, not the hundreds of misses.
Yet there’s enormous demand for forecasts in media and the financial community. People need to believe we live in a predictable and controllable world. The illusion of control is more satisfying than the reality of uncertainty. We’d rather have a confident forecast, even a wrong one, than sit with the discomfort of not knowing what comes next.
Investing is complex. There’s no guaranteed path to success, no formula that works for everyone in all conditions. This is why it’s important to focus on what we can control and acknowledge the role of luck and risk in outcomes we can’t. Having role models matters, observing the behavior and patterns of people whose approach resonates with us. I consider myself a shameless clone, learning from those who’ve succeeded over long periods.
Wealth is created by choosing not to spend today in order to have more options tomorrow. It’s the deliberate sacrifice of present consumption for future freedom. We should build an investing strategy that lets us sleep well at night, and that looks different for each person. There’s no single right answer. One of the best ways to become a better investor is simply to expand our time horizon. Compounding is an incredibly powerful force when used properly, but it requires patience and survival.
Many things will go wrong. That’s fine. Without leverage, the downside is limited. A stock can only fall to zero. The upside is unlimited. A small number of winners can make up for many losers, as long as we’re still in the game when those winners appear.
Money should be used to gain control of our time, to do what we want when we want. This is the ultimate financial freedom, more valuable than any specific purchase or achievement.
We should define the cost of success and be willing to pay it, whether that’s volatility, patience, or forgone consumption. But we should also build in a margin of safety, a cushion that accounts for events outside the range of forecast outcomes. Plans will fail. Markets will surprise us. Having room for error keeps us alive long enough to benefit when things go right.
We should gather as much information as possible, make informed decisions, and avoid extremes. Balance caution with ambition. Stay flexible. And remember that the game we’re playing is our own, not someone else.
HOUSEL, Morgan, 2020. The Psychology of Money: Timeless lessons on wealth, greed, and happiness. Petersfield: Harriman House. ISBN 978-0-85719-768-9.