JUST PLAIN TALK: Psychology of money, a discussion
For me, a silver lining, just a glint, of the ginormous COVID-19 dark cloud was reading more books. All the news just repeats itself, so find something different. I wish I had done better, but I finished 15 books last year, and my goal is to top that in 2021.
Currently, I am half-finished with Morgan Housel;s "Psychology of Money, Timeless Lessons on Wealth, Greed and Happiness." Over the next few weeks, I'll share some of his insights and my take.
Doing well with finances is about how you behave, not so much what you know. Long-term Capital Management's management team included a pair of Nobel Prize-winning economists. When the firm imploded in the late 1990s, its meltdown shook economies around the world.
Personal finance and investing are math-based, that algebra you never used. But people don't make financial decisions based solely on spreadsheets; instead, personal history, ego, and worldview also influence your choices. Don't overlook slick marketing either (or maybe you should).
Making money is much easier than staying wealthy. Stories abound about people who lost fortunes. In one vignette, Housel points out (and enlightens me) that staying wealthy includes some combination of frugality and paranoia. To maintain wealth, be paranoid but not frozen with fear. He talks about a barbell personality, optimistic about the future, essential to investing, and concern about what the future portends. I prefer a see-saw analogy. As long as you have equal measures on both ends, everyone has a good time.
He shares Jesse Livermore's story, who shorted the stock market just before Black Tuesday in 1929. In a single day, he made the 2021 equivalent of $3 billion. By some
accounts, he was the world's richest man. Livermore kept making larger bets, but eventually, the market turned against him. In less than five years, his fortune was gone, and sadly he committed suicide.
Over the last 170 years, the United States' Gross Domestic Product increased twenty-fold, but frequently there were reasons for concern. We fought nine major wars losing over 1 million men and women. Over 99% of all companies created went broke. Assassins killed four presidents, and one president incited a mob to storm the Capitol. Over 400 Americans died in each of 30 different natural disasters. Before antibiotics, in a single year, 675,000 died in an influenza epidemic.
Thirty-three recessions occurred lasting almost 50 years combined, but 99.99% of forecasts missed them all. Twelve times the stock market lost 30 percent of its value. More than 100 times, the stock market lost more than 10 percent from a new high. Twenty times annual inflation exceeded 7%. "Barely a day went by that lacked tangible reasons for pessimism," Housel notes.
Balancing pessimism with optimism is not easy but critical for long-term wealth creation. However, markets can remain irrational longer than you can remain solvent, and that includes real estate.
You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.