12.03.18 | The Psychology of Money

Smart Steve: 2008 investment portfolio so defensively oriented that it totally avoided that year's market crash; stupid Steve: maintained said portfolio and thereby totally missed the entire three-times equity gain during the ensuing ten years. The story of man and money, and the degree to which intellect intersects with emotion, is the subject of The Psychology of Money. The report describes the twenty flaws, biases, and causes of bad behavior when people deal with money. You will wince or smile knowingly.

It all opens with a rather dramatic illustration of what Einstein labeled the the eighth wonder of the world i.e. the power of compound interest -- he who understands it, earns it; he who doesn't, pays it. The lesson is one for the ages, especially for those in the earlier stages of an investing career. 

Easier said than done as, like the other twenty head trips chronicled, investing is not the study of finance but the story of how people behave with money: the role of luck and risk; cost avoidance syndrome; paradox of wealth; forecasting future desires; own-history bias; over-reliance on past data; seduction of pessimism; under-appreciating power of compounding; isolating crowd behavior; seduction of academia; ostentatious pseudo-wealth; maintaining consistency; margin of safety; avoiding undue outside influence; boring is good; respecting the downside; forming a clean narrative; ignoring politics (!); minimizing extrapolation. 

Be not afraid. These elements may sound intimidating but each is readily understandable by one with a high school education. Following them, however, may be a different story. Let us share our respective experiences. 

I'll show you mine if you show me yours. 

Steve SmithComment