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What is the highest form of wealth?

As Morgan puts it, “The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” If there's a common denominator in happiness – a universal fuel for joy – it's that people want to control their lives.

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A friend once told me that there are two types of books – the ones that inform you and the ones that challenge you. Then I found that third kind which does both. The Psychology of Money by Morgan Housel is one such book for me.

On Getting Started

Most of us are overwhelmed by just thinking about financial planning and investing. It seems a daunting affair unless we studied finance (sometimes even then ;)). This book does something simple. It does not tell you which stocks to invest in or how to identify those; it tells you that you should invest and do so now. Because in the long run, a few bad decisions wouldn’t matter, but if you don’t start now, you might as well bid goodbye to that dream of being wealthy.

As Morgan puts it,

“The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” If there’s a common denominator in happiness – a universal fuel for joy – it’s that people want to control their lives. 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.” So, the idea is to start now and keep a long term view in mind. An interesting analogy that the book offers is that of the causes behind ravenous winters – It is actually the leftover ice from cooler summers that attracts more snowfall in the winters by reflecting sun’s light. The same is true for wealth. Think power of compounding. A lot of what we read here is what our parents kept telling us all through childhood but we, well, thought that the world has changed and their ways don’t work anymore. But as they say, you grow up the day you realize that everything your mother told you was right! The book can’t stress enough the importance of saving and starting early. You have to suppress some of those impulsive desires today to have more options in the future. It also explains the subtle difference between being rich and being wealthy. While someone driving a luxury car is certainly rich because even to pay an EMI towards the loan you bought it from, you need to have a certain level of income. “But, wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later.” I always understood it intuitively but seeing it articulated so succinctly reinforced my belief.

On Planning for the Unknown and Unforeseen

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“Save Money and Money Will Save You.” – Jamaican Proverb

Now the notion I had that was challenged by this book was about having financial goals before we start investing. Isn’t that what all financial advisors have always told us? Well, not this book. Morgan says that while saving for goals is good, saving for just saving’s sake is better. It gives you the ‘options and flexibility – the ability to wait and opportunity to pounce.’ It’s useless to try to avert risk or time the market by looking at past data, because the events that move the needle the most are things that history gives us no clue about. Thinking COVID? :), yeah me too! The things that help: Having enough room for error and keeping a long term horizon. Waiting for the biggest gains that will occur infrequently over the long term and having enough cash in the bank to survive the lull phase, are things that will yield the most lucrative results eventually. Thinking of market volatility as a fee for earning good investment returns is the key to staying invested.

On Compounding

The Magic of Compounding

Warren Buffett made 99.7% of his wealth after the age of 52! He started saving and investing at the age of 14 and stays invested till today when he is 90! This is the power of compounding. Your money working for you even when you are asleep. We are not wired to think in terms of compounding. It doesn’t come naturally to us. But if there is one thing I want to remember and imbibe from this book, it’s the power of compounding.

In Morgan’s own words,

“Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant. It’s easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent. Optimistic narratives require looking at a long stretch of history and developments, which people tend to forget and take more effort to piece together.“ I want to write more but I also don’t want to spoil the book for you. I strongly recommend you buy it and (more importantly) read it. You can buy it on Amazon. And you can thank me later : )

Be Safe, Be Well and Be Wealthy.

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