The Psychology Of Money — Part 2

More lessons about wealth, greed and happiness

“The Psychology Of Money — Part 1”: https://namburisrinath.medium.com/the-psychology-of-money-part-1-794af245f058

No one can accurately predict Mr. Market

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong. You can be wrong half the time and still make a fortune.” — George Soros

Forecasting market is very difficult. And there are several occasions where we couldn’t predict huge dips (if we could predict, we would had avoided them right!) Few examples include The Great Depression (1929), Housing Crisis (2008), Dot Com Bubble (2000s), and the recent Corona Lockdown (March 2020).

The reason behind this is fear and greed. In market, fear and greed work in unison. The fear sell (believing that it reached a local max) and the greed buy (believing that it still has potential to rise). Whenever there’s euphoria (all good news around the globe), fear reduces, greed increases and thus markets go up. In a similar way, when there’s pessimistic news everywhere, fear increases, greed reduces and thus markets go down. If this mismatch in supply (fear) and demand (greed) increases beyond a certain threshold (which is very hard to model), it eventually forms a snowballing effect and thus the huge dips and spikes.

And there’re no models that can factor the emotions of crores of investors. While chart analysis might be a good approximation, still it’s far for perfect.

“History never repeats itself; man always does.” — Voltaire

Good investments is not necessarily about making good decisions. It’s about consistently not screwing up.

If you’re a good investor, most years will be just OK, and plenty will be bad. What you do during recessions when others panic is most important and adds much value to your portfolio.

Respect Luck and Risk

Every profit (or) loss associated with your investments has a factor of luck (or) risk which is out of our control. We inherently have a bias that:

If Someone fails , we think → He/she could have avoided it. It’s entirely because of their decision. If You fail , you will think → I took Risk, it’s not in my hands.

If Someone succeeds, we think → Ohh!! It’s pure luck. If You succeed, you will think → I worked hard, it’s entirely because of my decision

The key is not to analyze the luck/risk factor but to respect and realizing that it’s an external/uncontrolled factor.

“Success is a lousy teacher. It seduces smart people into thinking they can’t lose. You have to attribute some percentage of success to luck. Similarly, Failure is also a lousy teacher. It seduces smart people into thinking their decisions are bad and they are born to lose. Again, you have to attribute some percentage of failure to risk.”

Stop comparing with others

The hardest financial skill is getting the goalpost to stop moving. Increased wealth should bring satisfaction; not ambition. (Pic Source: Article)

Happiness = Results (minus) Expectations. Either increase results (income etc; which is very difficult after a certain point) or reduce expectations. And the most effective way to reduce expectations is to stop comparing with others. I’ve to confess that sometimes I do compare myself with others but avoided eventually after realizing the fact that “There’ll be always someone above you in your entire life in terms of money, knowledge, beauty or anything that’s comparable”

“True success is exiting some rat race to modulate one’s activities for peace of mind.” — Nassim Taleb

No one’s observing you. So, be frugal

Imagine a Benz going in front of you. You give more attention to the car rather than the person that’s driving and imagines yourself driving one. If you got lucky in future and are driving a Benz, you expect people to give more attention to you rather than the expensive car. That’s Man in the Car Paradox i.e “Person A buys some object to impress persons B, C, and D. But when persons B, C, and D see person A with that object, they aren’t impressed by person A at all because they’re too busy picturing themselves owning that object and imagining all of the attention that might come from it.”

When you are an observer, you didn’t care about the person who’s driving and the same happens to you when you are driving. (Source: News)

It is applicable for any tangible material i.e house, jewellery etc; So, don’t expect more respect because of your fancy cars or houses because people give more attention to the objects rather than you.

Spending money to show people how much you have is the fastest way to have less money

Save more → Spend Less → Desire Less → Care less about what others think

Everyone will change

One of the reason why long term investing is difficult is because we change. Our expectations change. Our needs change. And eventually our financial planning will change. But no one admits that they will change. That is known as “The End of History Illusion” i.e how much we change in past and underestimating how much we will change in future.

Graph illustrating the “End of History Illusion”. When we are young (towards left), there’s huge difference between our expectations and reality about future. But as we become old (towards right), the gap between expectation and reality reduces, maybe because of realization (Source: Research Paper)

So, acknowledge that you are bound to change and make sure you have a flexible plan.

Rich vs Wealth

There’s a subtle difference between the two. Rich is your current income. Wealth is something you don’t see or experience. Being rich is like doing workout and thinking you deserve to treat yourself to a big meal. Wealth is turning down that treat meal and actually burning net calories.

In short, if your income ~ expenditures, even though you are rich (earning ₹1cr/month), you might not be wealthy in the long run. (Pic Source: Pinterest)

Focus less on specific individuals, case studies and more on broad patterns.

You have to avoid the luck and risk factor when you are choosing your role models.

Eg: If you follow only Bill Gates, you might be misled because he had lot of luck (born in US, access to one of the few schools that has computer…). If you are only analyzing the extreme 1% (the tail-events), it’s highly uncommon thus can’t generalize it to our life. This is also the reason why we shouldn’t just ditto Warren Buffet’s investment portfolio.

The highest dividend wealth can give is freedom

Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy. Not money, salary, home etc; So, thrive for that.

Skin in the Game

When it’s for others, we say something but when it comes to self, we think differently. It’s an inherent bias. So, whenever someone gives an advice, remember that it’s based on their perspective and anchors. If possible, try to know whether they’ll do the same thing if they are in your shoes.

If you want to discuss further, you can contact me on LinkedIn

Personal Website: https://namburisrinath.github.io/