‘The Psychology of Money’ contains points that could shape you into becoming a better stock investor. (Envato Elements pic)
The book “The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” was written by Morgan Housel, a former columnist with the “Wall Street Journal”.
In it, he discusses emotional aspects that influence how financial decisions are made, which, once identified, allows one to better understand oneself.
There are points in this book that could shape you into becoming a better stock investor. Here are the top five lessons.
1. Getting and staying wealthy are two different things
The book suggests that the mindset and skills for obtaining wealth are vastly different from maintaining it. The former requires an element of risk taking; the latter avoids risks and is driven by a “survival” mentality.
In other words, a person who intends to get wealthy would invest differently from one who plans to keep their wealth in stocks.
Those who wish to get wealthy might emphasise more on returns, leading them to trade stocks for quicker profits, or buy them with leverage such as margins and contracts for difference. Their focus would be on how much money could potentially earn from their trades or investments.
Meanwhile, those who intend to stay wealthy would focus more on the business sustainability of a stock and mitigate downsides from buying it. This would involve them assessing the stock’s financial strength and valuation before deciding on the investment.
2. High savings vs high returns
Let’s say Mr A and Mr B both earn RM10,000 in monthly income. If Mr A saves RM5,000, or 50% of his salary, he would in a year have as much as RM60,000 in capital.
Assume Mr A is an average investor who could earn a consistent return of 5% per annum from his investments, which amounts to RM3,000.
Now, let’s say Mr B saves just 10% of his monthly income, or RM1,000. He would need an investment return of 25% per annum if he wishes to get the same RM3,000 in annual returns from investing RM12,000, which is one year’s worth of his savings.
The lesson here is that …….