The psychology of money is the last decade’s highest-rated and best-selling personal finance book.

And what will surprise you is that there isn’t a single piece of tactical investing advice.

You need to know no formula for pricing stocks, recommended portfolio balances, or tax efficiencies. As the book title suggests, instead, Morgan focuses on the soft skills of building wealth.

Here are the top 10 lessons from the book that will significantly improve your wealth-building ability.

 • 90% of the notes below are in Morgan’s words. I’ve edited slightly for clarity.

Luck And Risk

Nothing is as good or bad as it seems.

Luck and risk are siblings.

Bill Gates went to one of the only high schools globally that had a computer. At that time, the only one in America. Bill and 300 other students who went to Lakeside school had a significant advantage over the 303 million other students.

Paul Allen, the co-founder of Microsoft, also went to Lakeside school. And another boy named Kent Evans. Kent was the smartest of the three and had the entrepreneurial spirit that Paul and Bill to some degree, didn’t.

One in a million high school students dies on a mountain each year. Kent was one of them. He never graduated Highschool.

We are one person in a game with seven billion others. It’s not possible that 100% of our actions dictate 100% of our outcomes.

The accidental impact of actions outside our control is often more consequential than our conscious actions.

When successful, we attribute our skills. When unsuccessful, we attribute bad luck. In reality, on average, we are equally affected by the same amount of luck and skill. But individually, some of us are significantly more lucky than others.

The best indicator of a child’s economic success is the socioeconomic status of their parents. Studies have shown that income among brothers is far more correlated than height or weight.

Never Enough

When rich people do crazy things

At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, “Yes, but I have something he will never have … enough.”

Bernie Madoff is the world’s most infamous fraudster.

But what most of the world doesn’t know is that before, he conned people out of $65 billion. His business was making $25 – $50 million a year in profit. Bernie was hugely and legitimately wealthy, owning one of America’s most profitable privately owned businesses.

He had more wealth, freedom & power than most people can even dream of. Yet he threw it all away because it wasn’t enough.

There is no reason to risk what you have and need for what you don’t have and don’t need.

Few of us will ever have that kind of money. But most of us at some point in our lives will earn enough money to cover every reasonable thing we need and often a lot of what we want.

The hardest financial skill is getting the goalposts to stop moving.

If we always want for more, we’ll never have enough. Getting more will not satisfy us. And striving for more, as in Bernie’s case, can also lead us to lose everything.

Getting Wealthy Vs Staying Wealthy

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

There are many ways to get wealthy, but only one way to stay wealthy. Frugality and paranoia.

If I had to summarise money success in a single word, it would be “survival.”

Like Warren Buffet says. The number one rule of making money is ‘don’t lose money.

Many people make a lot of money but far fewer keep that money. Keeping money is a very different skill from making money.

You acquire money by taking a risk. You keep it by being scared that you can lose it. That requires humility. It requires knowledge that at least some of your success is attributable to luck. So past success does not mean you’ll continue to be successful.

To earn the rewards of compounding results, you need to stay in business, stay invested, keep playing the game. Most of Warren Buffets’ success can be attributed to the length of time he’s played the game.

Many of us chase big returns only to lose everything. Instead, patience and earning average returns over long periods of time builds generational wealth.

The trick is short-term paranoia that you can lose it all on any given day and long term optimism that the longer you play and the more likely you are to see outstanding results.

Staying wealthy is arguably much harder than getting wealthy.

Freedom

Controlling your time is the highest dividend money pays

The highest form of wealth is the ability to wake up and say, ‘I can do whatever I want today’.

People want to become wealthier to increase their happiness. But happiness is a complicated subject because we’re all different.

One universal contributor to happiness, though, is control. Humans want to be in control of their destiny.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

As noted by Angus Campbell’s 1981 book The sense of wellbeing in America.

“Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of wellbeing than any of the objective conditions of life we have considered.”

Money’s greatest value then is its ability to give you control of your time.

At the top of Maslow’s hierarchy of needs is self-actualisation. At the top of the money pyramid, in that case, might be autonomy.

Morgan shares a story about interning as an investment banker to back up this point. He loved the work and enjoyed working hard but realised doing something you love on a schedule you can’t control can feel the same as doing something you hate.

Man In The Car Paradox

No-one is impressed with your possessions as much as you are

When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car, people would think I’m cool.” Subconscious or not, this is how people think.

There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality, those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their desire to be liked and admired.

Explained another way via a letter Morgan wrote to his newborn son.

“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. You want respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.”

The lesson here is not to abandon the pursuit of wealth. Or even fancy cars. I like both. It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goals, be careful how you seek them. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Save Money

The only factor you can control generates one of the only things that matter. How wonderful

Past a certain level of income, people fall into three groups: Those who save, those who don’t think they can save, and those who don’t think they need to save. This is for the latter two.

Building wealth has little to do with your income or investment returns and lots to do with your savings rate.

Investment returns can make you rich. But whether an investing strategy will work, how long it will work for, and whether markets will cooperate is always in doubt. Results are shrouded in uncertainty. Personal savings and frugality—finance’s conservation and efficiency—are parts of the money equation that are more in your control and have a 100% chance of being as effective in the future as they are today.

If you view building wealth as something that will require more money or big investment returns, you may become as pessimistic as the energy doomers were in the 1970s. The path forward looks hard and out of your control. Destiny is clearer if you view it as powered by your own frugality and efficiency.

Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income but have no chance of building wealth without a high savings rate, it’s clear which one matters more. More importantly, the value of wealth is relative to what you need.

Past a certain level of income, what you need is just what sits below your ego.

Reasonable Or Rational

Aiming to be mostly reasonable works better than being coldly rational

Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic, and you have a better chance of sticking with it for the long run, which is

Academic finance is devoted to finding mathematically optimal investment strategies. Morgan’s theory is that, in the real world, people do not want the mathematically optimal strategy. They want a strategy that maximises their ability to sleep.

Morgan argues being reasonable rather than always rational leads to better investment decisions over the long run.

He argues lacking emotions about your strategy or the stocks you own increases the odds you’ll walk away from them when they become difficult; what looks like rational thinking becomes a liability.

The reasonable investors who love their technically imperfect strategies have an edge because they’re more likely to stick with those strategies.
There are few financial variables more correlated to performance than a commitment to a strategy during its lean years—both the amount of performance and the odds of capturing it over a given period of time.

To back up that point, consider these statistics. The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods.

Surprise

History is the study of change ironically used as a map of the future.

Stanford professor Scott Sagan once said something everyone who follows the economy or investment markets should hang on their wall: “Things that have never happened before happen all the time.”

History is mostly the study of surprising events. But it is often used by investors and economists as an unassailable guide to the future. Do you see the irony?

“Historians as prophets” fallacy: An overreliance on past data as a signal to future conditions in a field where innovation and change are the lifeblood of progress.

Experiencing specific events does not necessarily qualify you to know what will happen next. In fact, it rarely does because experience leads to overconfidence more than forecasting ability.

Investing is not hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, making even smart people nervous, greedy and paranoid. Richard Feynman, the great physicist, once said, “Imagine how much harder physics would be if electrons had feelings.”

The most important driver of anything tied to money is the stories people tell themselves and their preferences for goods and services. Those things don’t tend to sit still. They change with culture and generation. They’re always changing and always will.

Two dangerous things happen when you rely too heavily on investment history to guide what’s going to happen next.

1. You’ll likely miss the outlier events that move the needle the most.

2. History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes relevant to today’s world.

An important nuance: The further back in history you look, the more general your takeaways should be.

Room For Error

The most important part of every plan is planning on your plan, not going according to plan.

History is littered with good ideas taken too far, which are indistinguishable from bad ideas.

The wisdom in having room for error is acknowledging that uncertainty, randomness, and chance—“unknowns”—are an ever-present part of life. The only way to deal with them is by increasing the gap between what you think will happen and what can happen while still leaving you capable of fighting another day.

Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. Morgan’s favourite summary of his theory is this “the purpose of the margin of safety is to render the forecast unnecessary.”

The margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties.

Forecasting with precision is hard. This is obvious to the card counter because no one could know where a particular card lies in a shuffled deck. It’s less obvious to someone asking, “What will the average annual return of the stock market be over the next ten years?” or “On what date will I be able to retire?” But they are fundamentally the same. The best we can do is think about odds.

People underestimate the need for room for error in almost everything they do that involves money.

Harvard psychologist Max Bazerman once showed that most people estimate the project will run between 25% and 50% over budget when analysing other people’s home renovation plans. But for their projects, they estimated that renovations would be completed on time and budget.

Nothing’s Free

Everything has a price, but not all prices appear on labels.

Everything has a price, and the key to a lot of things with money is just figuring out what that price is and being willing to pay it. The problem is that the price of many things is not obvious until you’ve experienced it.

“Hold stocks for the long run,” you’ll hear. It’s good advice. But do you know how hard it is to maintain a long-term outlook when stocks are collapsing? Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret—all of which are easy to overlook until you’re dealing with them in real-time.

Like a nice car, you can pay this price, accepting volatility and upheaval. Or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car. Or you can attempt the equivalent of grand theft auto: Try to get the return while avoiding the volatility that comes along with it.

Many people in investing choose the third option. Like a car thief—though well-meaning and law-abiding—they form tricks and strategies to get the return without paying the price. They trade in and out. They attempt to sell before the next recession and buy before the next boom.

But the Money Gods do not look highly upon those who seek a reward without paying the price. Some car thieves will get away with it. Many more are caught and punished.