Jun 5, 2024 9 min read Investing

Morgan Housel's Rules of the Money Game

All credit for this post goes to Morgan Housel. There's a link to the podcast episode below where he discusses his Rules of the Money Game. This is a brief summary of his points.

If you like anything in here, I'd encourage you to check out:

It can happen to you.

If something can happen to someone else, it can happen to you, and given enough time, it eventually will. We don't do ourselves any favours by assuming bad happens won't happen to us. Read less forecasts (what we tend to want to happen), and more history (what actually happens).

No one is exempt from being humbled in life.

Value independence more than anything else out of money.

Instead of looking at money as a way to buy more stuff, look at it as a way to control your time. This translates into an enduring happiness and a more meaningful life, than having another material thing.

The biggest benefit that money provides most people is a sense of independence, and autonomy, and doing what you want; when you want; with whom you want; for as long as you want.

Spending money to show people how much money you have is the fastest way to have less money.

The truth is that no one is impressed by your stuff as much as you are. Just like you are, everyone else is more concerned about their own stuff than someone else's.

The only way to build wealth is to have a gap between your ego and your income.

There's an optimal amount of bullshit in life.

Nothing is perfect, that's just the reality of the world that we live in. Once you understand and accept that, you'll be better equipped to succeed in the real world.

There is a certain level of hassle and nonsense that you have to accept.

Few things are as valuable in the modern world as a good bullshit detector.

The number of people who are evil in the world is very small. But the number of people who will do something evil for the right incentive, might be the majority.

If you don't have a good antenna for those kind of things, it's gonna be very difficult to get ahead financially in this world.

A lot of financial debates are people with different time horizons talking over each other.

Every investor is in a unique situation. No one else will have your exact same financial situation, risk tolerance, goals, timelines, etc. Don't take advice from other people, because they likely aren't playing the same game as you.

So many investors play different games.

You cannot believe in risk without also believing in luck, because they are fundamentally the same thing just in the opposite direction.

We're more likely to view someone else's success as luck, and our own success as skill. But we have to understand that when we're dealing with risk, we're also dealing with luck – no matter whose success it is.

Both of them, luck and risk, are just an acknowledgement that things outside of your control can have a bigger impact on outcomes than anything you do on your own.

Save like a pessimist and invest like an optimist.

Realistic optimism is understanding that things will work out in the long run, but until then, it is a constant chain of chaotic events that you'll need to survive financially. For the future, it’s more important to learn to endure risk than to avoid it. The question isn't how can I earn higher returns, but what are the best returns I can earn for the longest period of time.

Getting rich and staying rich are two completely different skills.

Nothing too good or too bad lasts indefinitely.

The force that creates market highs and the excitement around them, also leads to markets going in the opposite direction. Market crashes create motivation to solve problems which leads to the end of the crisis. The thing that creates it, kills it, because it changes people's behaviour.

Good times plant the seeds of their own destruction through complacency and leverage. And bad times plant the seeds of their turnaround through opportunity and panic-driven problem solving.

Having no FOMO might be the most important financial skill.

Fear of Missing Out causes us to throw out our long-term objectives for, what we perceive to be, short-term opportunity. Someone will always be getting richer than you, and it's perfectly okay. Think long-term, care about your own goals, don't get sucked into bubbles, and you'll do very well over time.

You don't need to be brilliant. If you can just be average when everyone else is going crazy, that's all you need to get ahead.

If your expectations grow faster than your income, you will never be happy with your money, no matter how much you accumulate.

Wealth is a two part equation, but we typically only pay attention to the first part: growing our income and our net worth. The second part, is keeping our expectations in check relative to the first. If you're not happy with what you have, if your expectations are always growing, it will put you in a position of more risk and more work, without end.

The concept of enough just means that you realize and you pay attention to the idea that if your expectations are growing just as much or faster than your income, you will never be satisfied with what you have.

There is rarely more or less economic uncertainty, there are just changes in how ignorant people are to potential risks.

There is always risk, that never changes. What does change is our awareness of it. Figuring out the biggest economic risk at any given time, is to figure out what you'd be most surprised about. Which if you can think of it, and do something about it, it wouldn't be the biggest risk.

Risk by definition is what is leftover when you think you've thought of everything.

An extreme adherence to an investing strategy is dangerous in a world that changes all the time.

How we invest, and the rules that go along with it, are constantly changing. Even the best strategies and grounded theories need to be updated and tweaked in order to stay current in a changing world.

Just drives home the point that having a dogmatic adherence to a single investing strategy that you never change can be so dangerous and difficult.

There are few universally right answers in finance.

There are a lot of shades of grey that happen to work for people's unique preferences and situations. There are things that are better to do than others. But most of the strategy that goes into our finances, really comes down to personal dreams, goals, and appetite.

So many finance arguments happen when people get upset after realizing that not everybody has or wants the same life as you.

Pessimism always sounds smarter than optimism because optimism sounds like a sales pitch, while pessimism sounds like somebody trying to help you.

Pessimism gets people's attention, it's what sells on headlines. But pessimism doesn't pay off in the long run. It pays to be a long-term optimist.

For reasons I have never understood, people love to hear that the world is going to hell.

Most of what people call conviction is just a willful disregard for new information that might make you change your mind.

Be careful not to believe in something to the point that it makes you blind to other perspectives. If you're right, other perspectives and new information should be welcomed, as it will only strengthen your position.

You could only have an opinion when you can state the other side's position as well as they can.

Your willingness to believe a prediction is influenced by how much you want or need that prediction to come true.

There are many things that we think are true because we desperately want them to be true. Anything forward-looking is subject to being swayed by your desire for a pleasant life, it's how we find comfort and hope in an uncertain world. But there's a big difference between that and it actually being true.

If you tell people what they want to hear, you can be wrong indefinitely without penalty.

Everybody belongs to a tribe and underestimates how influential that tribe is on their thinking.

Our tribes, or the identities that we hold close to our core being, can have a huge influence over our lives, whether their beliefs are correct or not.

So people either willingly nod along with bad ideas or they become blinded by tribal loyalty. This happens so often in money and economic views and political views.

Most financial mistakes come when you try to force things to happen faster than is required.

Most financial misery does not come from bad decisions, it comes from good decisions that you try to make happen faster than they should. Investing in the stock market is great. Investing in the stock market and trying to double your money in two weeks is not. Don't underestimate the timeline you need for good results, the longer we give it, the more the odds come into our favour.

Compound interest does not like it when you try to use a cheat code.

The goal of investing is not to minimize boredom, it is to maximize returns.

The financial media is designed to entertain you. So it might come as a surprise that successful investing isn't entertaining, but often simplistic and boring. Money is a rare field where simplicity tends to offer better results.

Most fields, if you want to get better, you put in more effort. Finance, particularly money and investing, tends not to be like that, tends to be the opposite.

Your personal experiences make up maybe 0. 0001% of what has happened in the world, but maybe 80% of how you think the world works.

Everyone is a prisoner to their own experiences, which are primarily based on things outside of our control like dumb luck and where we were born. Acknowledge that there are so many big things and our world view is often so far outside of our control.

Where and when you were born can have a bigger impact on your outcome in life than anything you do intentionally.

All investing ability is unproven until it has survived a disaster.

When markets are up, everyone looks like a good investor. Don't gauge success based on a single or trending market cycle. When someone's success spans over several decades, you know they are doing something (or a lot of somethings) right.

That is the only time that you can really separate luck from skill is when you see somebody succeeding in multiple different environments.

Past success always seems easier than it was because you now know how the story ends.

It is much easier to quote Warren Buffett, or say we would have also done what he's done, than to actually do it ourself. Hindsight is always 20/20, but investing is emotional, and very seldom does a recession feel like an opportunity at the time.

Every past market crash looks like an opportunity, but every future market crash seems like a risk.

We are bad at imagining how change will feel because there is no context in dreams.

We tend to think about the future in isolation, imaging some aspects while ignoring others. Everyone thinks they have a high risk tolerance when things are going great, but when things turn around it hurts more than they thought. We might see a 40% drop in markets as an opportunity, without fully appreciating the cause and effect as a whole.

So future fortunes are always imagined in a vacuum, but reality is always lived with the good and the bad taken together, competing for your attention.

The best way to teach your kids about money is to make them feel the power of its scarcity.

Understanding the power of scarcity with money can teach the difference between necessary and desirable.

It makes them learn to enjoy what they have and fix what's broken.

Embrace and accept your flaws and build a financial plan around them rather than assuming that you can alter your susceptibility to dopamine and cortisol just by reading a blog post.

Everything we do financially should be based on ourselves. Our situation, our goals, our means, to what matters most. This should all be done in a way that's comfortable and sustainable. We have different strengths and weaknesses, and can build plans that are suited to us.

I think most of the time, however you respond to the last crisis is very likely how you're going to respond to the next crisis.

Emotions can override any level of intelligence.

Ordinary folks with no financial education can be wealthy if they have a handful of behavioural skills that have nothing to do with formal measures of intelligence. Patience, level headed, low ego, those are the kind of things that actually make a difference over time.

A genius who loses control over their emotions can be a financial disaster. And the opposite is true.

Comedians are the only good thought leaders because they understand how the world works, but they want to make you laugh rather than making themselves feel smart.

This really doesn't have anything to do with money, but it is such an important idea of understanding why comedians are so famous.

They are psychological geniuses, but they just want to make you laugh rather than making themselves look good.

The luckier you are, the nicer you should be.

At every given point, it's important to remember that everyone is doing their best. Luck can turn as quickly as it arrived. If you're lucky enough to be lucky, don't take it for granted and show gratitude to those around you.

To me, what's important about this is that it is the only way to protect against entitlement in a cyclical economy is to realize and recognize what you have going for you.

Keep doing things your future self will thank you for.