The Psychology of Money I: Luck and Risk

Thanks to the Kinokuniya vouchers from my ex colleagues, I bought the book The Psychology of Money in February. For one reason or another, I always have the impression that the book is a classic which I somehow miss reading it over all these years. It was only when I got hold of it that I realised it was first published in 2020, just a mere 3 years ago!

A lazy reader nowadays, I finally completed reading the book after 3 months I bought it! It is an easy read and probably can be completed within 3 days. Oh well, at least I did not take 3 years. Most of the ideas while not new to me, resonated with me and Housel were able to narrate the ideas very clearly with interesting examples.

I decided to share some some of the key takeaways and how I interpret and relate to them from my perspective. I will be doing this in multiple posts over the next few months.

Chapter 2 Luck and Risk

“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort…….They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.”
page 28

We all need a bit of luck and take on some risk in our life. Similarly in personal finance and investing, there is always an element of luck and we definitely need to manage the risk that comes with it.

I believe in making my own luck. There are many things that I can’t control but those I can, I try my best so that the odd of getting lucky increases. Basically I find out as much as I can about the companies that I invest in. By doing so, I invest in companies with good management, potential and financial. And given that there are so many things beyond my control, I have a stake in about 30 companies to improve my odd of getting a strong return from a few of them.

To manage the risk, I typically will initiate a small position before building on it as I get to know the company better. Since I have no income at the current moment, my exposure to equities is only around 50%. It is something I am still trying to get used to, as not that long ago I was about 70% to 80% in equities. My point being risk management is dependent on context and we need to be aware of our own situations and competencies, so that we can be comfortable with our amount of exposure to the stock market.

Therefore focus less on specific individuals and case studies and more on broad patterns”
page 33

There are many successful investors out there that we can learn from but to blindly copy their stock picks or even strategies is unlikely to work. This is simply because we differ in our competencies, dispositions and circumstances. It is like crossing culture. What makes perfect sense in one culture does not work in another. Instead, what I normally do is to adapt the strategies to who I am and adjust it periodically along the way.

Even though I have been in the market for more than two decades, this will always be work in progress. Simply because who I am now is different from who I was in the past and who I will be in the future.

Finally, I thought the above idea can also be used when thinking about stocks and portfolio.

Therefore focus less on specific stocks and more on portfolio management.

If the portfolio performs well, it really does not matter which stock does well or badly in a particular year.


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