Three Things I Learnt From Morgan Housel

Risk is What You Don’t See

Our understanding of risk is understated. There is a great deal of history about catastrophic events and how humans reacted to such events. We are lucky to live in an era where we have an easy access to history. However, we are incapable of assessing how we would react in similar circumstances. We get so used to our normal ways of living that we forget the risk of a bad event. There could be anything like recessions, panics or wars. How the events turn out in the future is not in our hands but how we prepare for it definitely is. We are smart enough to use black box thinking but dumb enough to believe that consequences of events in the future will be similar to how it happened in the past.

When it comes to investing, we turn blind to risk. Whether you invest or not, understanding risk and it’s magnitude is essential. We play with money for which we worked hard to earn. We think that we are equipped enough to beat the markets and get rich quickly. We fail to understand that investing in equities is risky over the short-term. No questions asked. However, it gets less riskier as the time horizon expands. At 10 years, the odds of success are in your favor. And in a 20 year horizon, the odds of failure are minuscule.

There is a lot to learn from the mistakes of others. They screwed up. You have an opportunity not to repeat it. Learn about risk. Vicariously.

What Matters In Personal Finance

Only two things matter in personal finance. Lower costs and rate of savings.

Keep your costs low. Avoid fund managers. Dollar cost average in low cost index funds. Fund managers do not buy products they sell themselves. Skin in the game is overrated.

Focus on rate of savings more than the rate of return. It’s fine as long as your money grows with inflation. What matters is not how much you save but how much you spend. There is a very thin line between what is necessary and what is desirable.

Compounding is underrated and starting early is important to reap it’s benefits.

Half The Battle Is Won By Learning What Not-To-Do

Morgan keeps talking about learning what not to do. It’s the key to living a meaningful life. A small list-

  1. Keep your lifestyle inflation lower than your income growth to accumulate wealth.
  2. Avoid debt. Time and money in hand gives you options (I wrote about it in this post).
  3. Avoid financial products with high costs or those which are not easy to understand.
  4. Avoid forecasting. Do not forecast the returns from equity or the amount of wealth you will have tomorrow. You do not know how the economy will shape up or what bills you might end up paying.
  5. Avoid high risks that yield small outcomes.
  6. Investing is all about avoiding sleepless nights. You win if you are able to sleep well.
  7. Avoid being over-smart. Average is good enough.
  8. Never go out of options in life. Taleb said “If you “have optionality,” you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often.”

“Investing is simple. Focus on the larger things.”


Two books recommended by Morgan –

The Quest of the Simple Life by William Dawson. It completely changed how I think about financial goals.
The Better Angels of Our Nature by Steven Pinker. It made me a permanent optimist.


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