The Psychology of Money
Morgan Housel's book "The Psychology of Money" is one of the clearest written summaries of today's personal financial decisions. It focuses on investing and the emotional decisions we may face. Additionally, it tackles the difficulties around short term trends that may pull us in. Although written before the popular trends of cryptocurrency, it makes me think of the volatility in Dogecoin and other speculative assets.
The idea of saving for a long period of time at a consistent rate of return isn't new. In fact, Morgan explains how the great Warren Buffet doesn't have the absolute best returns. It's his time in the market that has allowed him to build such great wealth. Today's investors are focused on the short term gains of a week or a month.
The impact we perceive our own actions have on outcomes are often overstated. More often, luck is at the core of the better outcomes while risk rears its head for the bad outcomes. Lets take the example of an investment in a local grocery store. If a year later it has made 20%, you may claim to have known all along that the management was great, or the store had good customers. Meanwhile, luck allowed the local government to build a highway straight onto your street, or the larger government doubled the food stamps program which directly increased your customers spending. These types of things often play a much bigger role in the outcomes of our decisions. The unfortunate side effect is that it masks the true risks, or skill of an investment. Say perhaps that same store lost 20%. Was is a bad investment? Perhaps they still had great management and good customers. However, a large flu swept through the town killing 30% of the population. Most wouldn't mark this up to be a bad investment, but just an unlucky break. The reality is that the risk was always present, we just choose to ignore it or reduce the likelihood in our estimates.
The takeaway here is to always put your decisions and outcomes into perspective. Was all the relevant information used for the decision? Was the outcome a success due to skill, or luck? Was the failure due to a lack of perception of risks, or were they properly accounted for?
This book builds on these ideas, and much more. I highly recommend the read.