Money. Some have it. Some don’t. Some have mastered it. Many are still running after it. Before proceeding it is necessary to explain that you may have a view that money is all about numbers, spreadsheets and mathematics. But the real financial decisions do not take place within the calculative procedure, in businesses and banks, but at the dinner table, motivated by egos and pride, fear and history.
The money clients and their behavioral patterns.
The fundamental task of money seems thus to be more subtle and complex than the mere mathematics of a spread sheet can indicate and that is fully to embody and engage with human nature. The essence of the financial success is not a measure of one’s financial knowledge but the conduct. As this blog post will show, this insight comes from Morgan Housel’s The Psychology of Money financial book. Alas, let us plunge into the details and the human aspect of the existing money world.
Financial DNA: Generational Differences
You and most of your fellow students are from different generations and your parents have different income levels and different values. Habits regarding money differ from one individual to another depending on age and place of birth and economic system that the person has grown up in.For instance, individuals who were born in 1970 had a positive attitude about the stock market having witnessed the S&P 500 rise ten folds in their teenage and their twenties. On the other hand, the 1950 born group regressed in the same years and this lead to a more negative outlook. Likewise, the awareness and perception of the effects of inflation was rather driven and viewed negatively by those who were born in the 60s unlike 1990 generation who observed reasonable low inflation figures.
The ways in which a person invested or feared to invest during his or her youths by engaging in the bull stock market or inflation seriously influences his or her behaviors towards investing and financially deciding.
Justifying Financial Decisions
They reason every action taking in terms of money based on the available data and the mental map of the world, and personal and parental experiences. Of course, they can be ill-informed or lack information but their actions are fully in line with their life narratives.Compound Kings: The Paradox of the Judgment of Compound Interest
In this current article Warren Buffett, one of the greatest investors, shows how the ability to let your investments work in their own accord is best described by compounding assets. Astonishingly, $81. Five from $84 billion of his own money he gives 5 billion. 90% of the 5 billion of net worth was accumulated after attaining the age of mid-sixties. The great Buffett was buying stocks at the age of 10 and the effect of compounding lasts for decades.Consider this: that to invest $ 1000 at 8% per annum generates $ 80 in a year. If you accumulate this total at the same scale in the next year, you gain $86. Compound interest distinguishes and over a long time the growth of money is exponential.
It is also evident from these facts that the rate of return on investment that Buffett honors owes more to his earlier start and length of investment than to his lagging profitability. On the other hand, Jim Simons who has a higher annual return rate than Buffett, has only $21 billion –three fourths less than Buffett’s – because he began investing seriously at the age of 50 hence, he has less years of compounding.
Pessimism and Money
Optimism is the attitude that no matter the hitches, good things are round the corner and that they will come your way. But when it comes to money it is quite the opposite, where the first inclination and even bias is guarded and pessimistic. Why? Because good things are not made in a day and do not occur in a day.This kind of progress is unseen by the majority while a 40% loss in the stock market will impact a majority within a month. When kept for a long time however, optimism is important as things ussually get better after some time.
The Role of Luck and Risk
Success is a combination of talent and luck. Consider Bill Gates: attending a high school with early access to a computer gave him a one-in-a-million advantage. Conversely, his friend Kent Evans, equally talented, died young in a mountaineering accident, illustrating the role of risk.Luck and risk, like the wind and waves steering a sailboat, influence our lives in unpredictable ways. Acknowledging their roles helps us approach financial decisions with humility and perspective.
The Key to Happiness
‘The problem with wealth,’ Housel says, ‘is that people think that money makes them happy. ’ They do not realize that true happiness is the freedom to do as we please, when we please, with whom we please, for as long as we please. Research indicates that the perception of having control over one’s life is even a better indicator of happiness than the level of pay or house size, or job status.Tail events
It is common knowledge that success in venture financings often depends on one or two ‘big beasts’, to paraphrase the British expression; the rest is more like junk, as evidenced by the case of art dealer Heinz Berggruen who sold most of his art for cents on the dollar but had a few masterpieces that he used to get him where he is today. This is evident in business and investment, whereby a few successes in business or product line account for the bulk of the earnings.A clear example is Amazon that has had significant growth attributed to its ‘prime’ membership services and ‘AWS’ cloud services. As for many other bad shots, these two great surmises have fully paid off for all the failures.
True Wealth vs. Being Rich
Being rich is about your current income and possessions, while wealth is about the financial assets you have yet to spend. True wealth isn’t visible; it’s the money you save and invest, rather than spend. Many people live beyond their means, funding flashy lifestyles with debt. Building wealth requires self-control and restraint, focusing on accumulating and investing assets.
The Real Price of Investing
Investing in the stock market is akin to climbing a mountain. The path is fraught with uncertainty and risk, but these are the price you pay to reach the peak. Successful investing requires accepting market volatility and the emotional rollercoaster it brings. Recognizing and accepting this price is crucial to achieving long-term financial success.
Hedonic Treadmills: Knowing When Enough is Enough
The pursuit of wealth without knowing when to stop can lead to unhappiness. The stories of Bernie Madoff and Gupta, who resorted to crime despite their wealth, illustrate this. Understanding when enough is enough is essential to avoid the never-ending climb up the ladder of wealth, which can become all-consuming and unfulfilling.
The psychology of money involves understanding human behavior, the power of compounding, the role of luck and risk, and the true meaning of wealth. By adopting these insights, you can make better financial decisions, build lasting wealth, and achieve true happiness.
By incorporating these elements into your financial mindset, you can navigate the complexities of money with a clearer perspective and a more balanced approach.