MONEY MIND GAMES

Book Review: The Psychology of Money by Morgan Housel

                                                                

Morgan Housel’s The Psychology ofMoney is not your typical personal finance book. It doesn’t dwell on spreadsheets, stock market strategies, or budget formulas. Instead, it offers a profound exploration of the human behaviour and psychological biases that underpin our financial decisions. The book’s core premise is that financial success is less about knowledge or intelligence and more about behavior.

A Fresh Perspective on Money

Housel’s work stands out in the crowded field of finance literature because it focuses on the why rather than the how of financial decision-making. He argues that traditional financial advice often overlooks the emotional and psychological aspects of money. This is particularly evident in his observation that people make financial decisions not based on facts or data but on their unique experiences, upbringing, and worldview.

One of the book's central ideas is the notion that "no one is crazy" when it comes to money. Housel asserts that everyone has a rational justification for their financial behaviour, even if those behaviours appear irrational to others.

The Interplay of Luck, Risk, and Perspective

Housel masterfully intertwines stories of real-life figures—Warren Buffett, Richard Feynman, and even Ronald Read, a janitor who amassed millions through patient investing—to illustrate the unpredictable interplay of luck and risk in financial outcomes.

"He challenges the popular tendency to attribute success solely to hard work, emphasizing that luck often plays a significant role in financial triumphs...

This perspective is both humbling and empowering; it reminds readers to approach financial success with gratitude and financial planning with humility.

In one of the most memorable chapters, Housel discusses the danger of misjudging risk. He uses historical examples to show how catastrophic financial decisions often stem from underestimating risks or assuming the past will repeat itself. This theme of uncertainty recurs throughout the book, encouraging readers to embrace a margin of safety in their financial plans.

The Power of Compounding and Patience

Another key takeaway from the book is the extraordinary power of compounding. While the concept is not new, Housel breathes life into it by presenting it as a behavioral phenomenon rather than a mathematical principle. He uses the example of my favourite American Buffett’s success not being rooted in extraordinary investment returns but in his extraordinary time horizon—investing consistently from a young age and allowing compounding to work its magic over decades.

Housel’s emphasis on patience is refreshing in an era dominated by instant gratification and short-term thinking. He explains that the ability to delay gratification and endure volatility is often what separates successful investors from the rest...

The Role of Money in Life

Housel also delves into the broader philosophical implications of money. He encourages readers to define their own financial goals, emphasizing that money should be a tool to support a meaningful life rather than an end in itself. His discussion on the concept of "enough" is particularly powerful. He warns against the dangers of greed and the endless pursuit of more, suggesting that knowing when to stop is an underrated skill in financial planning.

This perspective aligns with his recurring theme that wealth is not about flashy displays of success but about freedom and peace of mind. Housel defines wealth as "the ability to wake up every morning and say, 'I can do whatever I want today.'" This redefinition challenges societal norms and encourages readers to reconsider their own financial priorities.

Practical Takeaways

While The Psychology of Money is not a step-by-step guide, it offers plenty of practical advice. Housel advocates for simple but effective financial habits: living below your means, saving consistently, and avoiding unnecessary financial risks. His recommendation to "save like a pessimist and invest like an optimist" captures the balanced mindset he promotes throughout the book.

Housel also emphasizes the importance of avoiding the pitfalls of comparison. He argues that comparing your financial journey to others’ is not only futile but harmful, as everyone’s circumstances and goals are unique. This insight is particularly relevant in the age of social media, where curated displays of wealth can create unrealistic expectations.

Criticisms and Limitations

Despite its many strengths, the book is not without limitations. Some readers may find Housel’s reliance on anecdotes and stories insufficiently rigorous. While these narratives are engaging and relatable, they sometimes lack the depth or data to fully substantiate his claims.

Additionally, the book’s focus on psychological principles means it may not appeal to readers seeking detailed financial strategies or technical advice.

Whether you’re a seasoned investor, a young professional just starting out, or someone simply seeking a healthier mindset toward money, this book offers invaluable lessons. Housel’s central message is clear: financial success is not just about what you know—it’s about how you behave. And in a world where our behaviors often dictate our outcomes, that is advice worth taking to heart.

GOVT SHOULD APPLY BASIC ECONOMICS TO CAP LENDING RATES

Uganda’s money lenders are appealing to President Yoweri Museveni not to assent to a law that will have government control lending rates.

A few weeks ago parliament passed the Tier 4 Microfinance Institutions and Money lenders Bill, 2024, which among other things, will have the finance minister setting the limits of what money lenders can charge as interest on their loans.

Ever since biblical times the money lender has not been a popular figure. The sin of usury or charging interest for lending money was on the books in medieval times. The church thought all loans should be interest fee, they of course did not factor in the risk to the lender and his right to some compensation for making money available to those who don’t have it...

I suspect too, that the church was being populist, trying to shore up its political muscle at the same time frustrate this new class of capital owners, who were threatening the church’s  power as major landowners.

Interestingly this thinking is what led to the growth of the Jews as controllers of the global financial system.

The kings of Europe and the church, banned them from owning land as punishment for betraying Jesus Christ –antisemitism. The Jews, unshackled by laws against usury, went into finance and the rest, as they say, is history.

Fast forward to the 21^st century money lenders are still getting a bad rap. The arm chair economists complain that lending rates are high and have set aside a special place in hell for money lenders who are unashamed to lend at more than 120 percent a year.

"Government, having forgotten the lessons of the economic reforms of the last 40 years, is jumping behind efforts to arbitrarily cap lending rates. As night follows day, this will only create the very situation they are trying to control, which is high lending rates...

But first some background.

In the late 1980s some central planners in the new NRM government called on government to not only stop landlords from charging rent in dollars, but also put a cap on rent. Government refused at the time, arguing that the “high” rents were caused by a shortage of housing stock. The way to bridge the deficit was to make the sector attractive to investors and by the law of supply and demand, rents will become more affordable.

As a result of this correct application of high school economics, there has been an explosion in the housing sector, which has made not only rents more affordable and stopped most landlords from charging in dollars.

If government had listened to the central planners, the housing market would not have grown as fast as it has and it is not inconceivable that we would now be paying a million shillings for the privilege of living in someone’s garage.

If some landlords are still charging rent in dollars it is often because they borrowed money in dollars to build and are passing on the exchange risk to the tenants. They borrow in dollars because it is “cheaper”.

To lower lending rates government need only enable a greater supply of cash available for lending and voila, lending rates will come down.

Similarly, to lower money lender rates, government just has to look at the demand and supply equation, ask the question how can we increase the supply of credit so even money lending rates can fall?

We have seen this happen in our life time.

The story is told of these money lenders who used to offer credit to market vendors at 10 percent a day. The business model was such that they would lend the vendors money in the morning to buy produce and collect at the end of the day. It made sense for the vendors and for the money lenders.

The money lenders’ dreams of infinite wealth were dashed by the entrance of mobile money lending, which was offering the same money at around 10 percent a month.  Some people would complain that this is still too high, but it was a no brainer for the vendors who can now borrow at 120 percent a year compared to 3,650 percent.

"By legislating to cap lending rates, law abiding moneylenders will take their money elsewhere, lowering supply of credit, pushing the money lenders underground, where prices will be even more unrestrained and collection methods will be more brutal...

A neighbouring country, has seen a reemergence of a black market in forex, the kibanda market, a relic of the pre-liberalised economy days. Their attempts to control foreign exchange flows has created the very situation they were trying to prevent – a shortage of forex.

Increasing the supply of loanable money is what government needs to do. And not by going out and handing money out at street corners, but by creating an environment where capital can see it fit to invest in the sector.

Government might want to start by finding a way to lower its appetite for borrowing from the public.

 

 

UGANDA IS POOR BECAUSE WE ARE WASTEFUL

In September the finance ministry released the first “Report on externally funded projects”, commissioned by the not-so-new secretary to the treasury Ramathan Goobi, to, as the title suggests, assess how we use our loans and grants.

Goobi promises that the report will be released semi-annually and has warned that accounting officers will be liable for the delays to projects they oversee.

First off, one wonders why such a report has taken so long to generate. We have been the beneficiary of donor largesse for the last four decades and we are only getting around to doing this now?

Among other things, a major driver for this report, “There is a problem of poor implementation of the projects,” Goobi says in the Foreword to the report.

“The main concern is around the non-disbursing donor financed projects. The commitment fees are paid upfront yet borrowed funds remained undisbursed for years.”

If you think about it, this is a counterintuitive behaviour. You are a poor man, your friends offer some help in the way of food, but you don’t move to eat it despite the growling in your tummy, allowing it to rot as you watch.

The report, all 370 pages of it, is a litany of criminal project delays, caused by poor planning and avoidable circumstances. As a result the majority of projects – seven out of ten surveyed are behind schedule, leading to expenditure overruns of more than 1000 percent in some instances...

So not only are we not collecting on monies due to us, but when we get the money, we squander it in a way that is mind boggling, and could only be ignored in government where there is an inexhaustible pool of tax payers money to waste.

It is at times like this, in this country that you don’t know whether to laugh or cry.

To illustrate with a few choice projects.

The Karuma  Hydropower project run 60 months or five years behind schedule. The government overspent sh30b due to the delays, a highly understated number, because loan commitment fees and insurance fees were not quantified and when these are made good, should drive the project cost even higher than the planned $1.7b.

The Kampala-Jinja expressway, which was supposed to be a ten year project to begin in 2014 has not begun yet, never mind that a lot of the planned $1.4b project cost is already earmarked. The African Development Bank signed off on $230m loan in March 2021.

And then you have to cry when you learn that €15.6m (sh62b) loan to develop the beef industry has gone begging. The project is way behind schedule --- it was supposed to start in 2018 and end in 2022,  partly because of the lack of a feasibility study, which makes you think these guys must be magicians to get money without a feasibility study. You try it.

But in this project, like many others, delays meant a depreciation of the shilling led to a substantial loss – sh3b, which meant the project had to be adjusted with a reduction in planned targets.

There are numerous other tear jerkers, its 370 page report after all, which goes a long way to explain why we are now back in the high indebted poor countries fold and clearly with little value to show for the debt burden we are shouldering.

The survey only sampled 82 projects, but we all know they are probably hundreds of projects over the last 40 years. Imagine if they had all been brought in on time and on budget, where this country would be?

The haters of liberal economics want government to take back the commanding heights of the economy so that Ugandans can benefit more. It is hard to see how that can be, given the government’s record on projects now...

Are they labouring under the asinine impression that with access to more money we will do better?

It’s a rudimentary tenant of money management, that money does not make you a bad person, it just amplifies who you are.

I would hazard to say that if the liberalized economy is not spreading the benefits of its wealth creation around, we should look to government for answers not the private sector.

The private sector is doing what it is supposed to do which is create wealth,  the failing is on government’s side, because it is not doing what it is supposed to do, which is distribute the benefits of this wealth creation efficiently and effectively.

I also worry for Mr Goobi. This scandalous wastage has been going on for ages – I am not sure he was in school yet by the time it started, the interest groups that have coalesced around this waste – it is not happening by mistake, are powerful, determined and ruthless. They will not let their bread slip away without a fight.

But then I am sure he has learnt that by now.

THE USE CONTINUES TO BE UGANDA’S BEST KEPT SECRET

A report last week by brokerage firm, Crested Capital on the Uganda Securities Exchange (USE) showed 2024 is proving to be the exchange’s best year in almost a decade with index rising 33 percent, suggesting a recovery in the general economy from the covid pandemic and concerns about the war in Ukraine.

"Its best local movers since the beginning of the year, have registered total returns – dividends and price appreciation, of between 15 and 73 percent...

If you had bought a share of Quality Chemicals at the beginning of the year, January 2 at sh52.50 not only would you have earned 10.36 percent or sh5.7 but also seen the share price appreciate to sh55.

On the other side of the scale if you had bought Stanbic bank shares at the beginning of the year at sh32.03 you would have earned sh8.2 per share or about 25 percent and benefitted from a share rise to sh52 or a 62 percent increase in value by the end of October.

Of course some shares had a torrid time, with Uganda Clays which suffered a share price loss of 30 percent, being the worst performer.

The bad performers notwithstanding, investing on the USE is proving a lucrative opportunity for those involved.

This column has sung over the years, that that there are only two ways to spend your money, you either consume it or you invest it. Oftentimes people complain that they have too little money to invest, investing in their heads is about committing millions and even billions to an endeavour with the hope of future returns.

"The beauty of the USE is that with as little as sh10,000 you can buy shares and start your investing journey...

This is important because whether you invest or not, time passes and your financial health will suffer for not having invested when you could. They say the best time to invest is 20 years ago but the next best time is today.

What many of us don’t know or never learn, is that building wealth is about accumulation, it’s not how much you earn, but how much you keep of what you earn that makes you wealthy. Obvious to a few, but to the majority this simple fact totally passes over their heads.

The proof of this is that about 10 percent of the population own 76 percent of the wealth globally according to the World Economic Forum (WEF). This is not by mistake.

The wealthy have over time shifted their spending towards investment, away from consumption and that is why they own almost everything. The rest of us mere mortals are content to enjoy the adrenalin rush that comes with spending money, especially if people around us can see us doing it. And then to further salve our egos we convince ourselves that the wealthy are sad with all their money and will not even finish it anyway, by the time they die. This thinking, prevalent among the broke 90 percent, would be funny if it wasn’t sad.

We need to shift our mindset towards wealth creation and away from consumption. Because before anything happens, first a thought.

The difference between the wealthy and the rest of us, is down to a difference in the way they think about money. Of course it is nice to think they are lucky and you are not, but that is not it.

You don’t have to look very far to see this. If you were given sh100,000 now, out of the blue, what would be your first thought? For 90 percent of us, we would think about how we are going to buy food or new shoes or clothing, basically eat the money. For the remaining 10 percent they would be wondering how to deploy this money to give themselves the chance of returns sometime in the future.

The problem for most of us is that wealth creation is boring. You cannot show it off on Instagram or snapchat. The results – a better standard of living, is what is attractive, but it takes too long to show this off, so why not fake till we make it? The problem is, if you continue faking it, your chances of making it are minimized.

Since the beginning of the year the USE saw trading in shares of about sh61b or about sh1.5b a week. Bank of Uganda reported that in the 12 months to June this year, mobile money transactions of over sh200trillion were recorded on all platforms.

Using a rough comparison, essentially that the USE turnover was only 0.03 percent of all mobile money transactions. By extension this suggests that the beneficiaries of the USE current rally or wealth creation are less than three hundredths of a percent of the population.

If I did not know better even I would think the USE’s beneficiaries are lucky.