Patience, “soft skills” and luck more important than technical side of money?

May 11, 2023

Morgan Housel’s The Psychology of Money makes an interesting, anecdote-filled case that financial success is more about patience, and even luck, than the “technical side of money.”

It’s not, he writes, that the technical how-to advice and education about money is “bad or wrong,” but that “knowing what to do tells you nothing about what happens in your head when you try to do it.”

As an example, he notes that a big factor in success with stocks is when you were born — something we all have no control over. “If you were born in 1970, the S&P 500 increased almost 10-fold, adjusted for inflation, during your teens and 20s. That’s an amazing return. If you were born in 1950, the market went literally nowhere in your teens and 20s, adjusted for inflation.” So people in those two groups will have a different personal history with stock investing, and different levels of willingness to enter the market, he explains.

It’s the same story for inflation, he notes. Those born in the 1960s remember it, those born in the 1990s are experiencing it for the first time.

Next, he notes that those with lower incomes have more faith and hope in lottery winnings than those with higher incomes.

“The lowest-income households in the U.S. on average spend $412 a year on lotto tickets, four times the amount of those in the highest income groups,” he notes. Does that factor correlate with another stat, that 40 per cent of Americans say “they couldn’t come up with $400 in an emergency.” They are, he writes, “blowing their safety nets on something with a one-in-millions chance of hitting it big.”

Looking at retirement, he writes that since the 1980s, “the idea that everyone deserves, and should have, a dignified retirement took hold. And the way to get that dignified retirement has been an expectation that everyone will save and invest their own money.” But, he continues, it is not happening. “It should surprise no one that many of us are bad at saving and investing for retirement.”

In a chapter titled Luck & Risk, Housel notes that Nobel Prize-winning economist Robert Shiller was once asked what he would like to know about investing “that we can’t know.”

“The exact role of luck in successful outcomes,” replied Shiller.

On risk, Housel stresses the concept of having “enough,” and not necessarily needing more.

“There is no reason to risk what you have and need for what you don’t have and don’t need,” he explains. Watch out if “the taste of having more — more money, more power, more prestige — increases ambition faster than satisfaction,” he warns.

A long-term approach to investing can work well, he writes. He notes that famed investor Warren Buffett “began serious investing when he was 10 years old,” and by 30, had a net worth of one million. That has grown to $84.5 billion at the time the book was written, Housel notes.

But if Buffett had been “a more normal person, spending his teens and 20s exploring the world and finding his passion,” and had $25,000 as his net worth at age 30, he would have — everything else being the same — just $11.9 million today.

“His skill is investing, but his secret is time,” explains Housel.

Getting money is one thing, he writes, but keeping it is another.

Buffett, writes Housel, avoided debt, panic selling “during the 14 recessions he’s lived through,” kept his reputation intact and “didn’t burn himself out or quit or retire.”

“He survived. Survival gave him longevity. And longevity — investing consistently from age 10 to at least age 89 — is what made compounding work wonders,” Housel writes.

So, he explains, while planning is important, “the most important part of every plan is to plan on the plan not going according to the plan.”

Rather than focusing on getting big returns, think about survival, and being “financially unbreakable… if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”

Unlike flying an airplane, you don’t have to be right all the time in investing. “If you’re a good investor most years will be just OK, and plenty will be bad,” he explains.

Being a saver is critical, he adds.

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate,” he writes. “Personal savings and frugality — finance’s conservation and efficiency — are parts of the money equation that are more in your control and have a 100 per cent chance of being as effective in the future as they are today.”

He spends time on the of “leaving room for error” with investments. “The person with enough room for error in part of their strategy (cash) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.”

Some concluding thoughts from Housel are that “saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future.”

Manage money in a way that lets you sleep at night, increase your investing time horizon, and “become OK with a lot of things going wrong. You could be wrong half the time and still make a fortune.”

It’s hard to do justice to such a thought-provoking book in a short interview, so consider adding The Psychology of Money to your personal finance library.

The idea of starting retirement savings early is a good one, and as the author notes, not everyone has access to a workplace pension or retirement program. If you’re in that boat, take a look at the Saskatchewan Pension Plan (SPP). Under SPP’s new rules, you can contribute any amount to the plan each year, up to your available registered retirement savings plan (RRSP) limit! And if you are transferring money into SPP from an RRSP, there is no longer an annual limit — you can transfer any amount into your SPP nest egg. Contributing to SPP is now limitless!

Join the Wealthcare Revolution – follow SPP on Facebook!

Housel, Luck & Risk, Morgan Housel, Registered Retirement Savings Plan, Robert Shiller, RRSP, The Psychology of Money, Warren Buffett

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