The Psychology of Money

Housel argues that people focus too much on building wealth and ignore the issue of keeping it, which he says requires “some combination of frugality and paranoia” (54). Jesse Livermore, a stock market trader in 1920s New York, made billions shorting the market during the 1929 stock market crash. This success made him reckless and overconfident—he later became bankrupt due to stock losses and died by suicide. Housel argues that Livermore’s tragic financial failures and subsequent death serve as a warning about how easy it is to lose the money and security one has earned.

The author argues that getting and keeping money require very different skills and traits. To obtain wealth, it is helpful to be somewhat risk-taking and optimistic, while to retain wealth, people should be humble and somewhat fearful. Housel cites Michael Moritz, the leader of Sequoia Capital, as an example of this approach, since Moritz never assumed that Sequoia would always be successful and was careful not to lose business. Housel maintains that surviving setbacks and recessions not only prevents financial ruin, but also ensures that one’s wealth will continue to grow through compounding.

Housel outlines three rules to guarantee financial survival. The first is to never take risks that could wipe out one’s wealth, even if one feels confident of their success, as it is crucial to guarantee oneself some money that can compound over time. The second is to make a financial plan, but to also understand that it will face unpredictable challenges, noting, “a plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality” (60). All plans should allow “room for error” (61), since no one can exactly predict the future. Housel’s third recommendation is to have a “bar-belled personality” that can simultaneously be “optimistic” about the future while remaining “paranoid” about what may prevent or destroy your success (61). According to Housel, maintaining these different outlooks is a worthwhile challenge, as wariness will keep you financially functional long enough to enjoy the benefits of long-term financial investments.

Housel begins Chapter 6 by positing that investors can make many poor investment choices but still become wealthy, since most investor wealth is generated from a small percentage of their stocks. He compares this to collecting art, since the most profitable art collectors have varied portfolios of art that they keep for a long time. Over the course of decades, most of the art has not accrued much value, but the collector only needs a few pieces to become highly valued to make a fortune. Housel points to Walt Disney as another example: By the late 1930s, Disney was deeply in debt and had produced hundreds of hours of cartoons, which only lost the studio money. However, the film Snow White was a huge financial success, which turned the studio’s fortunes around entirely. Housel calls this a “tail event,” another term for a rare occurrence (67).

Since 1980, 40% of all public companies in the J. P. Morgan Asset Management Russell 3000 Index have lost most of their value and never recovered. Nevertheless, the Index’s wealth increased because 7% of their investments were hugely profitable. Housel argues that this is fairly common in markets. For example, the company Amazon alone contributed 6% of S&P 500’s returns in 2017. Housel urges the reader to recognize the importance of not panicking when stocks do not work out, since making money depends on only a few very profitable stocks and all investors experience failure in some investments. The author believes that people do not understand how unusual successful investments and businesses are because “we only see the finished product, not the losses incurred that led to the tail-success project” (74).